Nama and asset pricing

IMF, ECB & many world reknowned economists have been together in saying that government should not pay above market value prices for the assets in bank bailouts.

Almost everyone in the country is saying the same thing except the Fianna Fail. The two opposition figures who supported Nama have been proven to have links to banks and hence are biased in their views.

That makes me wonder how sincere is Brian Lenihan when he says his Nama proposals are in the best interest of the country.

I am certainly not convinced for following reasons:

1. Current market value is an estimate. There is no guarantee that if the asset is put up for sale , it will get sold for exactly what it's estimated value is. One may argue that the plus and minus over a big number of transactions and all the properties together will get a price close to the estimate. Well, that is correct in a normal situation. But on a situation where there is huge over supply, it is likely the difference between estimate and actual price will be negative most of the time. Those have sold their properties or have them up for sale in the past year or so will vouch for this. My own house is up for sale and the offers I have got have been less than 80% the estimate I got from estate agent. Estimates can easily vary by +/- 20% even in normal situation. In a situation like this it will be more like -20%. But let us be optimistic and assume a -10% difference i.e property valued at €48billion can as well turn out to be worth €43 billion. Remember swathes of development land worth 20% of the price paid for it and you will realize this is a very real risk. Who will be taking on this risk ? Not the banks but the public. This itself puts a big question on the assumption Nama needs just 10% increase in property values to not make losses.

2. Brian Lenihan has said that interest for ECB loan taken for this purpose will be serviced by income from the properties. He has not said that this income will cover any principal repayments. So that means at 1% interest rate, interest payments match income(€540million) What about increase in interest rates? For every 1% increase in interest rate, state will have stump up half a billion euro. Assuming interest rate averages at 1.5% over the 10 years (again optimistic), the bill for addl interest we will have to foot comes to €2.7billion.

3.Brian Lenihan has been giving himself too much power with respect to Nama. While this itself is leading to lack of transparency in Nama affairs, there is also a question mark on his competency to be holding such decision making power. He seems to have caved in to the fear mongering with the I'll thought out bank guarantee scheme. That forced us into the nationalization of Anglo-Irish . He promised a "orderly wind down" of the bank after nationalization. But is still pumping money into it from annual exchequer funds and will only result in cut backs in public services or tax increases next year. When it came to Nama he has again been overly dependent on the brainstrusts of the banks rather than economists, blundering his way into it - proposing to pay over the odds to the banks and not asking for any guarantees to lend. It was only the pressure from Greens which made him add elements which make banks share the risk, that too minimally. Being a lawyer he is very forceful and convincing at the surface. But I believe he lacks sound knowledge and reasoning in economical matters like, say, Richard Bruton and most of the time comes across as a bully. He has also not done himself any favors with his reactions & statements in the cases of Rody Molloy ("it is a normal procedure", he said) and John O'Donoghue . Such concentration of power in his hands is a worrying.

Even with an optimistic view, common sense dictates that it is likely state will have bear an additional burden of €7 billion for Nama if we go with what we have today. If things don't go as planned it will be much more.

How about doing this instead of Nama:
- Banks revalue their books and write down losses due to non performing loans
- State will step in and assist banks in two ways 1) recapitalize to the extent that they will still remain private 2) provide additional finding through soft loans on the same terms as ECB lending.

I am hoping Greens will bring more diligence into Nama exercise.

If not then I hope ECB will step in and block over payment to the banks.