NAMA: The wrong solution to the wrong problem.

I’ve been talking with friends, some SME owners or senior within SME’s, some in finance and others outside of these groups, about NAMA.

Now, I’m not a big fan of government intervention, and even less of government support for failed organisations, regardless of the short term economic impact, but more and more I am convinced that NAMA is the wrong solution to the wrong problem.

First off, yes, we do need a functioning banking sector, but as has been pointed out on this board, a functioning banking sector does not need banks to have the word “Ireland” or “Irish” over their doors, nor do they need to be head quartered here. Neither should we confuse a functioning banking sector with individual banks, regardless of their domicile. Indeed, the removal of delinquent banks from the banking sector improves the banking sector.

As far as I can tell, the core predication of the Bacon plan which recommend NAMA is that the problems that currently face the banking sector in Ireland are within the within banks and are identifiable and removable while retaining the current institutions and their structures, namely; ‘toxic’ loans on the banks balance sheets which are, it is believed, preventing the banks getting access to international lending and thus preventing them lending to commerce in Ireland. The arguement is that by removing these blemishes from the balance sheets the banks become attractive to international lenders, will magically get access to funds and will, with more government help, lend to business across the country again.

This, IMHO, is to completely misdiagnose the problem. The problem is not the toxic loans within the banks balance sheets. The problem is the banks themselves, their structure, their management, their culture. They have managed their affairs ineptly and, as with any commercial organisation, that is a one way street to extinction. Based on the reports from both the US and UK on how banks there are reacting to government assistance and using all available cash to shore up their balance sheets rather than lending, the core tenant of the Bacon plan is flawed.

We hear reports of SME’s here in Ireland being squeezed by their banks, on overdrafts and invoice discounting (short term credit based on their outstanding payments due, a kind of 30-60 day rolling bridging loan), even to the extent of having these facilities removed. The banks, like their US and UK counterparts are not lending to business.

The government claims it wants the banks to lend to SME’s, who are after all the cornerstone of the real economy, yet they are doing nothing in reality to support them.

The solution; the government on behalf of the State should divert at least some of the proposed NAMA funding to short term credit lending to SME’s for such facilities as invoice discounting or overdrafts, perhaps even extending to capital investment programmes up to a limit.

The State has already underwritten deposits in the banks, so businesses and individuals have their profits and savings guaranteed. We can easily allow the dysfunctional “Irish” banks to die, as they should be, while at the same time working to attract, demonstrably well behaved, international banks to establish a presence here.

Beyond the hype being generated about “Look, the government is doing something” NAMA will not help SME’s. NAMA will not help the economy. NAMA will not do anything to help secure your job (unless you work in an ‘Irish’ bank). If it succeeds in anything NAMA may facilitate the banks to hoard cash, but nothing else.

NAMA is a bad idea, and IMHO solution based on a compete misdiagnosis of the problem.

Blue Horseshoe

This is a classic case of “Politicians doing the wrong thing at the right time” don’t you agree?

BTW I think you have a very strong and valid analysis.

This is, of course, the biggest flaw. NAMA is tackling the symptom, not the underlying problem.

Imagine a chain smoker who has been forced to give up due to having one lung riddled with cancer.
Now imagine they come up with a novel appoach to their problem - remove the bad lung, so as to allow them to get back on the smokes in the belief that no further cancer can occur.

Mmmm, NAMA is, I believe, the right solution to the wrong problem.

It is a solution to the construction bubble bursting and taking the banks down with it. It saves the banks at the expense of both the taxpayer and future profits of the banks (one in the short-term, the other longer). It lets the government to continue borrowing domestically to fund the budget deficit.

But the problem is the property bubble. The problem is the level of debt that people and businesses are in. This is what is dragging confidence down - they can’t see any way that they can maintain spending given debt levels and reduced income, never mind increase spending. This, I believe, is the problem in an economy that is mostly consumption - people are not consuming.

We can argue about whether the consumption is ever going to return to the levels it was at, so consumption based employment (construction for example) increases and consumption taxes increase. I don’t think it is, at least not in the short-term, until the debt overhang has been worked off. But this is the problem the Irish economy faces.

Right on the money Blue Horseshoe (pardon the pun :smiley: )

How do we stop the government from crippling several generations with a huge national debt?
All govt services are going to suffer - that means many vital public services like hospitals
It means when the world economy picks up we will lose big numbers to emigration
It means some who are lucky to have jobs will end up in poverty when they retire.
You can write off pensions in my opinion

So in the face of such madness what do we do? And its no longer being a doom monger - even the ESRI say 17% unemployment AVERAGE for anyone reading who thinks Im being over the top.

Yeah lets cleanse their balance sheets of the €400 million to buy the Irish Glass Bottle site in Ringsend and the €360 million for a couple of underperforming hotels in Ballsbridge with no planning permission and the thousands of other examples of hare brained/stupid/greed fueled idiocy that collectively bankrupted the Irish banks.

Let’s cleanse them so the same clowns can do the exactly same thing all over again, whilst lining their pockets with more bonuses for their shrewd risk taking prowess :neutral_face:

While I agree with the sentiment in general, I think that the SME sector is looking at bank lending through the same glasses that mortgage applicants wore in the past few years.

Firstly, the banks have, as you rightly state, mismanaged their affairs and have brought themselves to the brink of extinction. Again as you state, this is not unique, banks everywhere have done so as have other corporates. However, I think your next sentence misses the point of NAMA. The banks are using all available cash to shore up the balance sheets precisely because they still have all the bad loans on the balance sheet. NAMA removes the bad loans and is presumed then to remove the need for balance sheet shoring up.

The SMEs may still not see any improvement in lending because their view of lending is coloured by what has happened in the last decade. The sorts of credit available to SMEs allowed certain business models to flourish, now those models need to adjust rather than complaining that the banks aren’t helping. The banks will deleverage because the world’s investors are more careful with their money and won’t lend it to the banks at previous rates. The banks **will **be more careful with their money because we’re in a global recession and they don’t wish to incur more losses.

The problem is not NAMA, it’s the lending practices that led to NAMA…oh…and the bling und tat economy.

While this is true to an extent, one of the major problems facing many Irish SME’s is that, in general, Irish companies are very poor at being on time payers. Many SME’s delay payment because as a result of their capital positions they are playing off one creditor against another. Many larger companies, delay payment to SME’s because they can get away with it.

Ask any qualified or part qualified accountant who isn’t Irish, or who has worked abroad, who now works for an Irish company, and they will tell you how appalled they are by the payment practices of Irish companies.

As a result, many Irish SME’s, whose business model would otherwise be viable, who, are “cash positive” and at the end of their financial year show a profit, are left in a situation that in order to maintain a working capital position from time to time during the year, must resort to short term credit such as overdrafts or invoice discounting. The loss of facilities such as this will close businesses that would otherwise continue to trade.

Yes, there are some companies out there who, given the current economic landscape are probably attempting to delay the inevitable by looking to borrow in the hope of a quick recovery. I suspect that many in that position are already facing the reality; that the recession will be long and that the banks aren’t open for business. The sad fact is, that many healthy and viable Irish SME’s, at regular intervals even during the boomiest of days of the boom had to rely on credit lines from their banks just to survive blips in cash flow and the loss of these credit facilities, especially in the current climate will, not could, or maybe, but will be fatal to a large proportion of those companies with a resultant significant loss of jobs.

That, IMHO, is why NAMA is the wrong solution. It does not address the problem of in the short to medium term getting funding to viable businesses in the economy. It certainly may allow the banks to borrow internationally (but they already have a State guarantee on their borrowings). It may save the banks from the fate of begin nationalised. It may even save a few jobs in the banks and retain institutions who have an historical link to this island reflected in their title. But it will not, in and of itself achieve the objective of helping businesses or protecting jobs outside the banks.

Blue Horseshoe

The problem is both, I think, but you are correct to say that NAMA (i.e. removing the toxic loans) won’t solve the banking problems by itself. Much fanfare about the recent top-level “retirements” should not divert us from the need for reform. The appointment of outsiders to the top jobs is the only way to secure a fresh beginning. Richie Boucher’s appointment is the precise opposite: it is an effort by the old guard to protect itself from prying eyes.

I have added a chart to my blog which shows what share of these loans each bank is responsible for. All the banks are in trouble but, relative to its footprint in our economy, Anglo’s exposure to developers is in a league of its own but AIB has a bigger portfolio in total.

Ireland, England and America have all followed the same route: de-industrialise, deregulate and substitute for industry with property and service based economies. Ireland bought into it more than most. The NAMA solution will increase our national debt and leave finance costs impossibly high. This will translate into higher finance costs for commercial businesses and crazy repayments on the national debt.
NAMA is a magnification of the problem, not a solution.
The loan insurance model makes more sense, with a twenty year insurance policy at a fixed premium. The extent of the writedowns necessary far exceed people’s worst nightmare.
With the current debt to GNP ratio so high, to have the government commit to the NAMA approach makes no sense.We are on the road to nowhere.