NAMA Rip-Off Exposed

The legislation that will be speedily passed through Leinster House in order to set up the National Assets Management Agency (NAMA) has been published by the Dublin Government. The documentation failed to provide details of the scale of the rip-off it will enable - that is to come later following much discussion but already the legislation is causing much debate in the media.

Not that the media disagree with the notion of the tax-payer bailing out bankers, their debtors and shareholders - all of whom justify their profits in good times by the risks they took on - but the debate is on the scale of the cost involved and its effectiveness in helping other capitalists make more profit.

Socialism or Barbarism considers that the media has purposefully obscured what is really happening with NAMA in order to cover up for the Government. We hope to expose the real agenda in this post.

What's at stake is the nationalisation of €90 billion of bad debt held by the banks. One third of that is held in land (as collateral), one third in property and one third is construction in-hand (i.e. unfinished). The full-scale of the bailout needs to be understood to be believed. This debt that the government is willingly absorbing (unlike any other government in the world at this stage) is bigger than the capitalisation of any single property company in the world. If the debt goes bad then there is realistically no chance that the state will be able to repay it. It'll be IMF here we come and privatise everything including the kitchen sink!

So what's the story? The hope is that the property market will recover sufficiently in 5 or 10 years time for Government to recoup the costs it has indemnified.

While details are scarce, it appears that the debts are to be bought off the banks with state guarantees which are then cashable with the ECB in Brussels. In other words, the Government will borrow euros from the ECB to underwrite the loans. There is little consideration of the cost of this loan and what interest rate is applicable - we must hope that the Government will not only recover the value of the assets taken on but sufficient to repay this interest.

Media Coverage

The media debate has been framed by the fact that currently all parties agree in principle with the concept of the state bailout. That this represents nothing less than a massive transfer payment from the working class to the richest in our society with nothing but an undated IOU in return seems to hardly concern them in their splendid fervour to express themselves as the best friend of the small businessman.

As such, most media have concerned themselves with the value at which the distressed assets are to be purchased and the net cost to the taxpayer. The Irish Times, the scion of the liberal establishment, concludes that "all that is known so far is that the Government will pay 'significantly' less than the loans' book value". However, the same article then goes onto state that Minister Lenihan admits that "some assets will be valued at their current market value or over this value, at 'a long-term economic value'". The paper notes that this latter factor would be based on a range of factors including "demographics, demand and supply, and future economic growth".

Now, on this point alone the papers raise their concern. They argue that there is no guarantee that the Irish property market will recover a value (in present terms) equal to that it held when these loans were taken out. If they were to be purchased at market value on today's calculation then it is likely that the government might even make a profit *on the NAMA investment alone* (more on that later). The statement, however, indicates that the Minister might up the value paid to allow for future profitability. This would result in a lower loss accruing to the banks but would expose the taxpayer to more *under NAMA*.

The debate is, therefore, on the valuation of the assets bought by the state and this is the level of debate between all political parties. The problem is that there is an implicit sleight of hand at play.

Economic Double Jeopardy

The problem for this approach is that it forgets that not only is the Government proposing to buy the bad debts off the banks but it is also pumping in money to maintain their liquidity. Furthermore in a decision backed by all mainstream parties (including Sinn Féin) but rejected opportunistically by Labour, the Government has guaranteed all liabilities held by all six main financial institutions in the state.

The reason this is important is that the state loses either way. If properties are valued lower (i.e. at current market values) then the banks will make a greater loss now and they will require greater liquidity and possibly partial or full nationalisation all of which will cost the state more money. If properties are valued higher (i.e. above their current market value) then the banks will lose less and the state pay less directly to the banks but will risk more through NAMA. It is a zero-sum game since 100% of the debts are underwritten by the state - it is simply a matter of whether it will be paid now to the banks or guaranteed by NAMA and possibly paid in the future.

So why then does the state even need NAMA? Firstly, it is the presumption of the state that the market will improve dramatically as the economy pulls out of recession. In that context, letting the properties go at today's market value would maximise the hit taken by the banks and probably necessitate nationalisation across most if not all major institutions. The hit would be immediate and maximal from the ruling class perspective.

On the other hand if NAMA can hold onto the properties and the state overvalue them relative to their current value then the least they hope will happen will be to lose more eventually (when they will be better able to afford it). And if the property market performs very well they mightn't lose anything under NAMA while minimising their losses to the banks now.

So what's wrong with that? The problem with this is that this is all okay *provided* the economy pulls up significantly (i.e. at a rate above the average interest rate charged by the ECB on the loan). If the economy does not pull up, disposing of the properties now - as low as they are - might actually save expenditure lost later through NAMA. Moreover, overvaluing the property maximises the potential loss to the state as it gambles twice - both today and tomorrow.

Finally, there is no sense of the opportunity cost of all of this. The state never had to guarantee these debts in the first place. So even the best case scenario represents a huge loss to the taxpayer.

How much is at stake?

One of the lies the Government are telling is that the equity of the developers will be lost first in the process. That would be okay if the equity of the owners was real, liquid assets e.g. cash. The problem is that this itself is likely to be equity obtained in the form of a personal loan elsewhere or equity on the basis of other collateral itself which is undervalued - and in any case - underwritten by the banks and through them the government and the taxpayer. The reality is that a good proportion of the equity discounted here will be paid out to the banks.

If €90 billion is the value of the assets bought by the state then you can bet your bottom euro that the net exposure is likely to be very much higher than the €24 billion recently quoted and reported by ourselves previously. And what's worse, this €90 billion is necessary to provide the banks with sufficient liquidity to survive - but if their overall asset base is €440 billion (and this is the distressed asset-based element) just what is happening with the remainder? The figures coming out of the USA and Britain would point to massive defaults throughout the credit card and personal loans sectors - will these too need a bailout?

Saving the Banks to Provide Credit to Business

Another related issue which exercises the great and good in our polity is the failure of government injections to meet the shortfalls in banks' liquidity to accelerate the rate of credit going out into the business sector. Once again, all our politicians and all the parties seem to jostle on this issue to be seen as the most effective advocates of business.

So what's this about? Surely we should hammer the nasty bankers and give money over to the small business class?

Well, no actually. There are few reasons banks aren't extending credit to businesses. The first and most obvious is that the banks simply don't have the resources to do so. Irish banks are close to insolvency - that's the only reason the government is giving them this money (otherwise they would avoid this measure as it rattles the global equity markets). So the money we're giving them isn't available for loans but is filling holes elsewhere (that demonstrates the extent of the problem).

Secondly, the banks are exposed with inadequate capitalisation. They will need to build up their asset base to meet more stringent standards to be imposed in Europe and around the world. They need cash to do that.

Thirdly, the banks aren't lending this money because they need to secure a higher rate of return on their money than they did previously. This is because they have lost a lot of money and need to make some to make up for this.

Lastly, the banks aren't lending because they know many of the businesses who are baying for this money are only doing so because they're in trouble themselves. They are looking for money to roll-over debt. Other businesses are looking for money for expansion which just is not justified in the current climate. Throwing more money at these is likely to result in an even greater bill in the end up.

And as we noted earlier, when it comes down to it - the Irish taxpayer will pay for all these bad debts (given that the banks are really insolvent). So it is in our interests that they don't give out money hand after fist. If money is to be given out it should be invested in developing a productive industrial base. Unfortunately, given the craven opportunism of all political parties it is likely that this is precisely what they will do and, as a result, the Irish taxpayer will pay even more to subsidise a short-term recovery in the operation of business (and the luxurious lifestyles of the business-class).

But there's no alternative!

Maggie Thatcher became known as the 'Iron Lady' because of her dogmatic approach to monetarist economics. There Is No Alternative (TINA) was her slogan and if the damage that her ideology did to the working class in Britain and in the North of Ireland was a tragedy then the second coming of such ideology from the mouths of so-called revolutionaries in Sinn Féin is indeed farce.

The logic is that without the banking system, the big property developers, the shareholders and the big businessmen (all of whom might be exposed in a generalised collapse of the capitalist system), the working class of Ireland could not survive. So the state must, therefore, accommodate to their needs. This is nothing less than dyed-in-the-wool class collaborationism! Fie for shame that it spews forth from the mouths of those who deem themselves socialists!

Instead of pouring tens of billions of pounds into maintaining the rich in our society and preventing the hidden hand of Adam Smith justifiably levelling them for gambling at high odds, we should allow the collapse and then step in to buy up the assets at rock bottom prices. Imagine with all those houses, few would be homeless. The scale of the money being wasted on the banks would also allow us to invest in publicly-owned and worker-managed facilities to develop renewable energy sources along the west coast. We could be investing it into the green energy and waste recycling sectors and into high-value organic farming. We could be paying the unemployed to rebuild our rail network and water distribution systems adequate to meet the challenges of global warming and the differential rainfall patterns that will emerge. Heaven knows we might even create an industrial base building on our core competencies and competitive advantage!

But those who argue thus have already enslaved themselves to ideology of the market. Once you worship this false god you must obey the edicts of privatisation, cutbacks and taxation of the poor but not the rich in order to retain his pleasure.

In their prostration to this superhuman myth, mainstream politicians remain obstinately blind to the better alternative that is socialism. Worse still they remain compliant in the face of mounting catastrophy; whether that be in the third world, in the environment or even on our doorsteps. It is time the people woke them up!