17 September 2009 Edition
Sinn Féin submission to the Government on the banking crisis and NAMA
SINN FÉIN has been consistent in its call for banking sector reform. For over a decade now, we have called for a state bank, which would play a dual role of stimulating enterprise through credit provision and investment, and providing secure and affordable mortgages and loans for ordinary customers.
Sinn Féin played a central role in the 2005 Oireachtas Committee Report into malpractice in the banking sector and has repeatedly called for a strict regulatory regime for the sector.
Sinn Féin is opposing the NAMA proposal.
In legislative terms, the Government proposal is seriously flawed.
Its plan to pay the banks long-term economic valuations for bad loans as opposed to current market value is a bad deal for the taxpayer.
The additional recapitalisation needed subsequent to NAMA means the taxpayer will pay twice for the bank crisis and still have no real control over the sector. Then, when the bad loans are taken off the banks’ books, there is no guarantee that banks will begin lending ‘normally’ into an economy starved of credit. Historically, banks are quick to lend in a boom, but slow to lend in a recession. Taking losses for the banks without ensuring an element of control in banking practice thereafter, is utterly irresponsible.
However, the main reason for our opposition to NAMA is the fact that this is a plan to rescue banks and developers. It does not help ordinary homeowners and businesses facing repossession and economic hardship the length and breadth of the state. They must continue to pay their debts, while developers’ bad loans are nursed indefinitely by the state.
Sinn Féin believes the only way to deal with the current crisis is to nationalise the two main banks, AIB and Bank of Ireland, with the potential of turning these two banks into a state bank. This will offer far greater security for the taxpayer. Bad loans can be dealt with in the context of nationalisation and the state can make informed decisions about whether these loans should be foreclosed or managed. We may need to set up a ‘bad bank’ to deal with the toxic loans within the nationalised system. The Government can then decide on a process of recapitalisation and restructuring, and deliver the management control that will ensure resumed lending.
We believe the remaining three banks – EBS, Irish Nationwide, and Irish Life and Permanent – should be examined to see if they can cope with recapitalisation alone or have to have their business wound up and merged into the two main banks.
The restructured banking sector envisaged by Sinn Féin goes far beyond just restoring normality to the system.
There was nothing normal about a sector that systematically overcharged customers, was complicit in tax evasion and routinely withdrew access to financial services from working-class and rural areas because of profit pursuit.
As well as intense regulation of the sector, Sinn Féin wants to see a banking system that contributes to the greater good of an economy that serves society as a whole.
We also want to see all those who participated in and encouraged the practices that brought about the current crisis held to account and criminal convictions pursued.
NAMA: The National Asset Management Agency
Sinn Féin believes legislation as hugely important as NAMA should not be allowed to proceed without the mandate of the public. There is a strong argument for NAMA to be put before the people, who will be paying for it for decades, by way of a referendum.
Paying over the odds
The problems with the draft NAMA legislation are numerous.
The focus point for many has been around the price NAMA will pay for toxic loans it transfers from the banks onto the taxpayers’ balance sheet. The moves by ACC bank against the developer Liam Carroll have actually done the Irish taxpayer a huge service. After being dragged to the courts, Carroll had to admit that if forced to repay his loans, he would only be able to repay a quarter of their worth, based on the firesale of his properties at their current market value.
The economist Karl Whelan, NAMA’s most outspoken critic, has pointed out that this long-term economic value benefits only the banks’ shareholders. Whelan also sets out other reasons why the long-term viability of these loans is seriously in doubt: (i) We have an over-supply of property to work through and (ii) Much of the ‘value’ of these loans was so over-inflated to begin with, it will never again be revisited.
The Government is taking the NAMA route to prevent having to recapitalise excessively, but we suspect that the level of recapitalisation needed after NAMA will ensure a majority stakeholding in the banks – how is all of this cheaper than nationalisation?
This transfer of risk to the taxpayer also creates a real danger of ‘moral hazard’ in the future – that is, engaging in risky lending behaviour because there are no consequences.
NAMA is incapable of meeting the twin objectives of achieving the best value for the taxpayer and exposing the taxpayer to the least risk possible. The debt to which NAMA is exposing the taxpayer could be anything in the region of €70 billion plus (almost half of our GDP). This far exceeds the bank-related debt taken on by Sweden in its bad loan management in the 1990s (8% of its GDP). This will have implications for our sovereign credit rating (we have already been downgraded by several ratings agencies) and will incur increased debt servicing costs (potentially in the region of billions annually).
The recent half-hearted attempts by the Green Party to amend the legislation with a ‘risk-sharing’ element do very little to ensure risk is spread. The subordinated bonds that will make up the NAMA payment to the banks will account for very little of the total payment. While all the sums are still in the speculative domain, it is apparent that, however you add it up, the taxpayer is paying over the odds to the banks.
The legislation contains numerous problems, such as:
- A reliance on the banks acting in ‘good faith’ to give all the information on the loans to NAMA.
- The ability of NAMA to ‘work with developers’ to finish projects, potentially lending them taxpayers’ money to do so (NAMA also has compulsory purchase order powers to help developers complete projects if there are ‘ransom strips’/contested land in the way).
- Power seems to be allocated to the Minister for Finance to overturn ‘independent’ valuations of loans made by NAMA.
Sinn Féin believes that the NAMA proposal is fundamentally flawed.
The Government has put forward NAMA as an alternative to nationalisation. Almost all commentators are agreed that, even after NAMA, nationalisation might still be the outcome. That is because, even after the loans are taken off the books of the banks, there is nothing to guarantee against more loans becoming impaired as interest rates increase or as property values decrease further.
In fact, while the argument rages about whether property values will recover enough for NAMA to break even, very few people seem to have considered the prospects of property values falling further. What we overpay for the bad loans this year might be even more ludicrously off the mark next year. Further liquidity problems may arise, so the state will go down the route of equity capital shares that may be so large that banks are nationalised by proxy.
The Government also says that cleaning out the banks via NAMA will bring about a return to normal bank practice and lending, therefore we need NAMA for the economy to return to normal and anybody anti-NAMA is either politically and economically naïve, anti-patriotic, or both. But this rests on the assumption that private banking practice is interested in restoring our economy through providing credit and not just its own shareholders’ interests.
Will banks lend when they manage to get their hands on cash via the NAMA-issued transfer bonds? In economist Michael Taft’s words:
“If they are to operate on commercial criteria (and what else could a private sector concern do without state subsidy?) they will not lend to businesses they consider ‘risky’. Doing so might create another set of dubious assets that would impair the loan books. And that’s what NAMA is trying to rectify.”
Historically, banks lend too much and too easily in booms and lend too little and too cautiously in recessions.
NAMA does not provide any positives that could not be delivered through nationalisation.
It might have had the potential to be a state property management company, as pointed out by economist Colm Rapple, but it is in fact out-sourcing the property management aspect to private development firms, an ironic twist given its genesis.
Had it been used as a property management company, the state could have utilised land seized on defaulted loans for vital infrastructure, social housing provision or tourism development. We now have the crazy situation where people throughout the country are sitting in homes and business premises in negative equity and, worse, are being evicted as their property is repossessed.
The property managed by NAMA should be available to local authorities to house people evicted as a result of banks moving against them. However, the NAMA-owned property, paid for by taxpayers, is to be managed by private development companies - tenders have already been put out to attract such companies. This revelation is highly suspicious and will lead many to believe that the taxpayer is again being deceived and robbed by the Government, banks and developers.
The Green Party’s ‘social dividend clause’ is sketchy and probably likely to amount to nothing more than its other amendments – weak measures designed to keep party members on board, not improve the legislation.
NAMA has nothing to do with improving Irish society. The ultimate point of it is to socialise debt and privatise profit.
Sinn Féin’s proposals
- Abandon the proposal for the establishment of NAMA.
- Nationalise the two main banks (AIB and BoI).
This will include a financial outlay for the state, however, nationalisation of the banks under the guarantee scheme is preferable to a repeated recapitalisation, which is excessively costly for the taxpayer, yet leaves the government with no real say over how those banks are run. It also deals with any potential losses that could be incurred by the taxpayer from leaving the banks private but buying the bad loans off their balance sheets. Nationalising now offers the best value for money for the taxpayer. EBS, Irish Nationwide and Irish Life and Permanent must be examined to see if they can function with recapitalisation and the state taking a stake alone or if they need to have their business wound up and potentially transferred to the other two banks.
- Sinn Féin would protect shareholders by ensuring that no cuts are implemented on state pensions or other social protections.
The issue of ordinary shareholders is a delicate and sensitive matter. While many of these shareholders benefited quite well during the boom period for the banks, many reinvested dividends in order to secure their future and have lost much of their pensions. The most appropriate way to protect vulnerable shareholders/pensioners is to ensure that no cuts take place to state pensions or other social protections and that the state pension is increased.
The issue of bondholders is separate. The majority of bondholders consciously engage in risk, which is the very nature of their investment.
Sinn Féin believes that, under the banking guarantee scheme, the Government may have to examine the possibility of honouring bonds that mature before the guarantee runs out in September 2010, so as to avoid allegations of sovereign default. However, subsequent to that, the Government may have to default on these bonds. There is a limited amount of money to deal with the banking crisis and bondholders must take the fall-out of the gamble that they pursued.
- Protect ordinary bank employees
Nationalisation and the creation of a state bank may well have an impact of the staffing numbers at the banks. While a clear-out of those at the highest levels of the banks whose reckless mismanagement brought about the current banking crisis will be required, Sinn Féin recognises that the vast majority of bank employees played no role in the corruption and bad management that pervaded the sector. After nationalisation the government should work with trade unions representing these workers to ensure any employee losing their jobs receives proper redundancy packages and the opportunity to retrain.
- Allow the current guarantee scheme to lapse.
Sinn Féin opposed the Financial Measures (Miscellaneous Provisions) Bill 2009 which sought to grant the Minister for Finance the power to extend the guarantee beyond 2010. A blanket guarantee is not the way forward for the banking system.
- Task the Oireachtas Committee on Public Accounts with carrying out a full investigation of malpractice in the Irish banking system over the last decade.
Its findings should inform better regulation of the banking sector. Malpractice and even criminality by the banks led to this crisis. Yet there have been no arrests, no fines, no admissions or findings of guilt. All those responsible must be investigated and prosecuted where the evidence warrants.
- Introduce whistleblowers legislation to cover workers in the financial services and banking sectors.
- Intensify regulation of the banking sector and make it independent.
- Enhance the role of credit unions through reform of legislation to allow them to expand their work as community-based not-for-profit services supporting social and economic development.
- Legislate for the right to a bank account, as has been done in the Netherlands, France and other states, to enable people without a bank account to open an account at a financial institution of their choice.
- Enable An Post to provide basic banking services, including a basic bank account. Basic bank accounts are simple, low cost, ‘no frills’ current accounts designed for those who are financially excluded.
- Provide greater support to MABS to deal with the increase in personal debt and those seeking help in addressing personal financial crises.
Sinn Féin TD halts Dáil in NAMA row
Editorial: NAMA - Government seeks to rob the people