The Joint Committee met at 2 p.m. MEMBERS PRESENT: Deputy Noel Ahern,  | Senator John Hanafin, | | Deputy Chris Andrews, | Senator Marc MacSharry, | | Deputy Seán Barrett, | Senator Feargal Quinn. | | Deputy Richard Bruton, | Senator Liam Twomey. | | Deputy Joan Burton, | | | Deputy Frank Fahey, | | | Deputy Terence Flanagan, | | | Deputy Michael McGrath, | | | Deputy Kieran O’Donnell, | |
In attendance: Deputies Tom Kitt, George Lee, Finian McGrath, John McGuinness, Arthur Morgan, Pat Rabbitte and Alan Shatter, and Senators Paul Bradford, Ivor Callely, Paul Coghlan, Shane Ross and Mary M. White. DEPUTY MICHAEL AHERN IN THE CHAIR. The joint committee met in private session until 2.10 p.m.  Draft NAMA Legislation: Discussion with Minister for Finance.
Chairman: The purpose of the meeting is to have an exchange of views between the committee and the Minister for Finance on the draft National Asset Management Agency legislation published on 30 July in advance of the Second Stage debate on the Bill on 16 September. I welcome the Minister and his officials and thank him for providing this opportunity for the committee to discuss this important legislation. I will ask him to make an opening statement which will be followed by statements by Opposition spokespersons. Deputy Joan Burton: Before the Chairman does that, I would like to raise an issue for members of the committee who will take part in its deliberations. I refer to the issue of interests members may have relating to banks, development or loans. Will the Chairman ensure declarations of interest are fully delivered to the committee in respect of anyone contributing, as required under ethics legislation? Chairman: Yes, I will take note of that matter. I am sure members who have interests will declare them before they make a contribution. Deputy Frank Fahey: I ask that the two Opposition spokespersons be given an opportunity to outline and brief the committee on their alternative proposals to NAMA. Chairman: I thank the Deputy. Deputy Joan Burton: I ask the Chairman for clarification because this issue has arisen previously in regard to important committee proceedings. Should members who have interests in bank shares or development and development loans or, in some cases, have impaired loans and assets make declarations at this time? It is important in the interests of clarity under ethics legislation governing both Houses of the Oireachtas and its committees. Chairman: The Deputy has raised a fair point and it is up to members who have interests to make them public. I call on the Minister to make his opening statement which will be followed by statements by Deputies Bruton and Burton and a general question and answer session. Is that agreed? Agreed. If the Minister’s officials make a contribution, perhaps he will introduce them at a later stage. Minister for Finance (Deputy Brian Lenihan): I will introduce them in the course of making my statement. I have no interests that I require to disclose to the committee, unless a loan on one’s principal private residence qualifies. I am pleased to discuss the Government’s legislative proposal to establish a national asset management agency and to debate the draft consultative legislation with Deputies and Senators. The Government first announced its intention to establish NAMA in the supplementary budget in April. Draft legislation was published at the end of July to enable Oireachtas Members and the public to examine the proposal in detail and contribute constructively to this important initiative. I acknowledge the contributions received from both Fine Gael and the Labour Party and the comments received from other interested parties. I intend to deal in detail with some of the issues raised later. I would like to deal briefly with some of the key aspects of the draft legislation. It is evident from the huge attendance at today’s meeting that the legislation has already been the subject of a significant amount of study. To assist the committee in dealing with its time constraints, I do not propose to read the section of my speech that sets out the provisions of the draft legislation in detail. I will answer members’ questions later in the meeting. I am accompanied by officials from the Department of Finance, by the interim managing director of NAMA, Mr. Brendan McDonagh, and by Mr. John Mulcahy, who has extensive experience in the property business and is on secondment to NAMA. If the Chairman does not have any objections, I may ask Mr. McDonagh and Mr. Mulcahy to speak on certain technical issues. It is obvious that policy is a matter for me, as Minister for Finance in the Government. It is clear that my policy on some issues is capable of being adapted, having regard to what I hear today. I will set out the context for this debate before I deal with the substantive issues in the legislation. As I have noted, the draft legislation was published last month to provide for a detailed process of consultation. In July, I said I intended to bring the NAMA Bill to the Dáil on 16 September as part of a wider debate on the future of the financial sector. The significance of this proposal cannot be underestimated. The Government intends to have a substantial debate on the NAMA Bill and to accommodate constructive proposals. As part of this consultative approach, I am happy to engage with the Joint Committee on Finance and the Public Service today. I am aware that the members of the committee are familiar with the events of the past two years. The effects of the difficulties in the financial markets are now being felt in the real economy. Members are also familiar with the Government’s efforts to stabilise this country’s financial system. The banking system is unique. Its proper functioning is critical to the smooth running of the economy and the supporting of economic recovery. Therefore, it must be protected by the Government. Nothing is more fundamental to our return to the road to recovery than the repair of the banking system. The Government has taken a number of successful measures to stabilise the banking system and to protect depositors. It has guaranteed certain bank liabilities, including deposits, recapitalised Allied Irish Banks and Bank of Ireland, and nationalised Anglo Irish Bank. These measures have allowed the banks to raise the funds they need to support their operations. They have ensured that citizens and businesses can go about their daily business in the knowledge that their funds are secure. By taking the actions I have mentioned, we have managed to stabilise the financial system. In addition, financial benefits have accrued to the State from the annual fees related to the guarantee and income has accrued to the State from the 8% preference shares in Allied Irish Banks and Bank of Ireland. The State holds warrants, or options, to acquire a 25% shareholding in Allied Irish Banks and Bank of Ireland. The shares in question are increasing in value. However, we must do more. The ongoing concern about the impact of risky loans on the banking system is continuing to create funding difficulties for the banks and to restrict the flow of credit, as banks focus their resources on these troubled loans. Every euro loaned by a bank to a customer must be drawn from deposits or borrowed by the bank from somewhere else. Irish banks rely heavily on institutions abroad for funding. Uncertainty about the scale of losses on banks’ balance sheets has made this liquidity more difficult and costly to attract. If banks remain unsure about the losses that will eventually result from these loans, and nervous about the adequacy of their capital, they will not provide the credit that is needed to support economic recovery. There is a general consensus that a resolution is urgently needed. Our economy will be hampered if we do not have a banking system that is capable of providing credit to viable businesses and households as the recovery kicks in. Following an assessment of the options available to deal with these risky assets and the recommendations of skilled advisers, the Government decided that the establishment of an asset management agency was the best approach. This model has been supported and recommended by banking experts across the world. In the past, it has been used successfully in many countries as part of the work-out process of problem loans. The proposal to establish NAMA has been widely supported internationally by bodies such as the IMF and the OECD. Since the announcement of the establishment of NAMA in April, bond spreads above the German benchmark for Irish sovereign debt have halved — from almost 3% over ten-year German bonds to just 1.5%. Irish ten-year bond yields are now 4.8%. We are used to thinking of interest rates as being imposed on us from outside, but in current market conditions the interest rates that Ireland pays on its debt will be heavily determined by the maintenance of appropriate fiscal and financial market policies. It is important to note that Ireland is not the only country that is developing a policy solution to deal with the uncertainties surrounding certain asset classes. If I were to make one criticism of the public debate on NAMA to date, it would be that we appear to be living in isolation from the wider world. The Irish experience has been mirrored in the United Kingdom, Germany and the United States. These countries have all put forward schemes to deal with impaired assets, which are tailored to the specific problems faced in each country. In Ireland, the problems associated with land and development based lending are best addressed by transferring these assets to an asset management agency. Since April, when the announcement to establish NAMA was made, detailed preparatory work has been undertaken both in the preparation of a legislative basis for the agency and in advancing the practical preparations necessary to ensure NAMA is up and running as soon as possible. We are also in ongoing detailed consultation with the European Commission and have sought the opinion of the European Central Bank. The NAMA legislation has not been drafted in isolation and reflects the input of a number of international organisations and specialist advisers. I will pass over the section of the speech, as circulated, which deals with the key parts of the legislation because I assume the Bill has been examined by the members present. I indicated I would return to the issue of valuation, which is the issue drawing most attention in the public discourse. The draft legislation provides a framework for the valuation of loans which must be approved by the European Commission. Commission approval is an absolute prerequisite to the operation of this aspect of the legislation. The basic premise of the valuation framework is that NAMA will pay significantly less than that at which the bank values a loan. The value to be paid has been defined with regard to EU guidance as the long-term economic value and strikes a balance between providing support to the banking system and minimising any potential risk that NAMA will make a loss. The success of NAMA is not based on any assumption of a return to the recent bubble prices for property. It is a myth that has gained some currency during the summer that there is some intention that the amount NAMA will pay will compensate the banks for a recovery in values back to the unsustainable peak property prices of 2007. This is not correct, is nowhere near correct and has never been proposed by the Government. Perhaps it is a reflection of wishful thinking among interested parties. Using the valuation methodology in this legislation, it would be a long number of years before Irish property values would return to the peak of late 2006 and early 2007. Such an approach would not be countenanced by the Government and would not pass muster with the European Commission whose approval for the valuation process is required. NAMA will not pay anything other than current market value for certain assets where this is the appropriate approach. I will run through the process for the valuation of an asset to assist an understanding of the Government’s proposals. It is important to remember that, based on information supplied by the financial institutions, our assessment at this stage is that a borrower typically provided about 25% of the purchase price for the underlying asset and borrowed the other 75%. In the event of a repossession, prices have to fall by more than 25% from the peak of the market before the bank makes any loss in terms of the security. While we are all aware prices have fallen more than 25%, the first 25% decline in value is borne by the borrower. This fact has been lost in much of the commentary by some contributors to the NAMA debate because the percentages which are envisaged as reductions are reductions in the value of the money loaned by the financial institution rather than in the underlying value of the collateral which secures the loan. As I indicated, from our analysis of the bank books to date, typically about 25% of the purchase price for the underlying asset was provided by the borrower. The person who is most at risk is the developer who is in default because clearly, given the fall in property values, this initial investment is wiped out by virtue of the operation of NAMA in the context of a borrower who is in default. The valuation process will operate as follows. First, independent valuers will value the security for the loan. Often, the value of the security may be greater than that of the property purchased. Valuation will be in accordance with recognised red book valuation standards, European valuation standards or international valuation standards, as appropriate. The security will, therefore, be valued first. The security or collateral for the loan only comes into play where there is a non-performing loan. Where a performing loan is taken by the State under this exercise, it has attaching to it its book value because it is performing. Following the valuation of the security and in line with Commission guidance, NAMA will adjust the value to reflect the fact that while the market for this security is currently illiquid, it will not remain so. This recognises that these assets are at crisis values and that the fundamental long-term value, having regard to cash flows and longer time horizons, is appropriate. There is nothing unusual in this. In much of the public debate the suggestion has been that there is some form of conspiracy between the Government and the banks to enrich shareholders. In fact, this is the basis on which all assets in United States banks are currently valued under the accountancy standards that apply in that jurisdiction. The adjustment will be based on a detailed assessment of market indicators such as the Department of the Environment, Heritage and Local Government’s housing statistics bulletins, as well as broader macro-economic statistics from sources such as the Central Statistics Office and the Central Bank. It will have regard to data relating to property yields and capital value movements. I reiterate, in having regard to past data, that evidence relating to the recent bubble must be excluded. This property valuation information, as adjusted, will form the basis for the calculation of the loan value. The loan will be valued based on current market pricing to establish its current market value. The loan will be priced by reference to NAMA’s cost of capital to calculate its long-term economic value. The overall value will be adjusted by reference to adjustment factors and expert reports as set out in sections 58, 59 and 63 of the draft Bill. I thank the Opposition parties for the detailed comments received on the draft legislation. I propose to deal up-front with several of the issues raised and I am sure some of them will be covered in more detail during the question and answer session. For the sake of the general political system, it is worth pointing out that a substantial amount of work took place during August on both the Government and Opposition sides in regard to this proposal. The timing of today’s meeting reflects the fact that the holiday periods of the various spokespersons and mine did not coincide. However, an amount of work has been done on this proposal in the course of this month by all of the parties. Much of the public debate in recent weeks has revolved around requiring losses to be distributed among shareholders and bondholders. I have stated on numerous occasions that if, after the introduction of NAMA, the banks require capital, this capital will be in the form of an equity stake. This will dilute the current ownership of shareholders. We are all aware that share prices in the Irish banks have fallen significantly from their peak prices in early 2007. Many shareholders have already lost vast sums, in some cases as much as 90% of the peak value, and are likely to lose more if their shares are diluted further. With regard to bondholders, a large amount of subordinated debt has been bought back by the banks in recent months at a significant discount with the result that bondholders took substantial losses relative to the face value of the bonds. This was organised in such a way that there was no event of default. The bondholders were given a choice and they took it. Buy-backs by the three largest banks have resulted in losses of almost €4 billion on face value for these bondholders but resulted in accounting gains for the financial institutions which have increased their core capital. It is important to note that the bulk of the bonds in issue by Irish banks are not subordinated debt but debt of a far more fundamental character. They are ordinary senior debt bonds entered into by the banks. There is a perception in the media that senior bondholders are natural risk takers, aiming to achieve high rewards for taking high risk. That is not the case. Senior bondholders are usually and typically pension funds, insurance companies and other long-term providers of debt. I have pointed out in recent days that they also include credit unions. These bondholders provide loans for viable entities on the basis that they are senior to other creditors and are secure. In other words, they are in the same position as depositors. These same senior bond debt investors also buy Government debt and are an important source for keeping the economy funded. These senior bondholders are guaranteed under the Government guarantee scheme. Any suggestion these parties should be invited to consider a reduction in the amount repayable to them would have catastrophic effects for the banking system, the funding of the State and the wider economy. Many of these senior bondholders are trading companies in Irish commercial life with substantial numbers of employees. This is the key criticism of the set of proposals made by one of the Opposition parties. Fundamental to its proposals is a threat to default on significant levels of bank debt. This would have a severe detrimental effect on the remaining banks and the State’s ability to fund itself. The Government does not accept that the best interests of the State would be served by allowing a culture of default or potential default to develop. This would undermine financial stability and result in the need for further action to rescue the banking system. I have already made it clear that the Government considers that these proposals are not workable and lack sufficient detail for serious examination. The Irish banking system, like all other banking systems, must continuously replenish its funding. Deposits, short-term commercial paper, note issues, short and long-term bonds must all be refinanced on a regular basis. The scale of this refinancing is far greater than the scale of refinancing in which the State must engage. The ability to do so depends on a fundamental belief on the part of the investor in the viability of the investment and the stability of the institution concerned. Who would invest at a rate of 5% or 6% if they felt there was any serious risk of default? Who would invest in Irish financial institutions at a rate of 5% if they were advised that the institutions were being stress tested for another year, and that at its conclusion, consideration would be given to defaulting on these instruments? What are the collateral risks to the State? We need to work together on this problem for the sake of the country. While we can make constructive proposals and work with them, I do not believe that defaulting on senior debt should be on the agenda. Some ambiguous comments were made about this by the Fine Gael spokesperson, and he took issue with the fact that I waited for a number of days to reply to him. I did so because I brought the matter to the attention of my colleagues in the Government, looked very carefully at what he said and tried in every way to put the best possible construction on it. We cannot have this question of default on our agenda in this banking debate. The reality is that the spreads on Irish bonds have dramatically narrowed over this summer, and that is a mark of the confidence which investors around the world are seeing in the determined, decisive, aggressive action that is being taken to correct our financial problems and our banking problems. We must maintain that momentum. We cannot fail to resolve this issue. I am more than available to provide whatever confidential briefing the Opposition leaders and their finance spokespersons may require. I am more than willing to put our investment advisers at their disposal to work through whatever proposals they have, but these are important issues and we should not be distracted from what is a highly complex, technical area, where we have to create public confidence in what we do as well as confidence from markets abroad. In such circumstances, there is an onus on all of us to work together on this problem. Of course, it is the absolute duty of the Opposition to hold the Government to account, and to critically evaluate any proposals that are submitted before them. The Labour Party has put forward a proposal which I think involves the nationalisation of the entire banking system. I do not want to criticise the party in too much detail, because I am not quite clear on the exact scope of the nationalisation proposed. Though not suggested by the Labour Party itself, there are many under the illusion that nationalisation will address the problems facing Irish banks in some kind of cost free way. This is clearly not the case, as the troublesome assets will have to be dealt with in either event. The shareholders in the two main banks would have to be compensated before the State sets about putting additional capital in to resolve the capital deficiencies from dealing with the impaired assets. However, a policy of total nationalisation of the banking sector contains other risks. It may impact negatively on financial institutions’ own funding and on sovereign funding, because it could affect market sentiment towards the banks and towards Ireland. The concentration risk would dictate that investors would draw funds from certain banks if they are effectively owned by the same owner. In simple terms, counter parties cut credit lines to nationalised banks. Anglo Irish Bank provides an example of the challenges faced by nationalisation. Nationalisation did not fully address the bank’s funding difficulties. The Government was still forced to inject almost €4 billion to date in capital, following serious losses on the loans. Nationalising the entire banking system would inevitably result in Ireland’s sovereign credit rating being downgraded from AA. This would result in increased debt service costs on the national debt, which the country can ill afford when it has so many other pressing calls on its resources. I would draw the attention of the committee to the words of President Obama last April, when explaining his opposition to blanket nationalisation. He said that “Pre-emptive government takeovers are likely to end up costing taxpayers even more in the end and....are more likely to undermine than create confidence.” He went on to say that “Governments should practice the same principles as doctors: First, do no harm.” So that is what President Obama thinks of the policy of blanket nationalisation. That view is shared by many countries around the world and is the view of the Government. Furthermore, I believe strongly that in so far as is possible, the banking sector should have a presence in markets and should operate within market disciplines and constraints. The key objective of meeting the lending needs of the real economy is best met by achieving this in a commercially focused banking system. However, as I already have noted and as the IMF pointed out in its report on Ireland, some institutions may need capital after they have transferred loans to NAMA. This will increase the State’s ownership in such banks and in some cases may result in a majority shareholding. While I have made it clear I have no difficulty with this, this proposal is a far more discriminate and effective policy than blanket nationalisation. It always has been the Government’s policy that some form of risk-sharing mechanism would be included in the NAMA process. I have stated from the outset that should NAMA be faced with losses down the line, consideration must be given to the imposition of a levy or some equivalent measure. While I expect NAMA to make gains over its lifetime, I am open to examining other risk-sharing mechanisms. Proposals made to date include giving banks equity in NAMA. This proposal has difficulties of its own, including how it would be valued on bank balance sheets, which could indirectly necessitate further injection of State capital. This proposal also would give banks access to the upside at the expense of the taxpayer. However, the risk-sharing proposals merit further consideration and I would welcome and evaluate any proposals the Opposition may make in this regard. Although all these aspects are under review at present, in the final analysis, NAMA must lead to a cleaner and less risky bank balance sheet. If it does not so do, it will not achieve its key objective. I wish to make a final point by addressing the constant inaccurate commentary which proposes NAMA as a bailout for borrowers and developers. Nothing could be further from the truth. As NAMA will have acquired the loans at a significant discount from the banks’ book value, the agency will be in a position to be far more aggressive with borrowers if it deems it necessary. The draft legislation also contains a number of provisions that will assist NAMA in its dealings with developers and will ensure every last cent due to NAMA will be pursued vigorously. I have been amazed to hear in public debate that the purpose of acquiring the aforementioned loans is to reduce the amount borrowers owe. Borrowers will continue to owe the full amounts on foot of the loans and this legislation contains nothing that changes this. Equally, I have been shocked to hear from some quarters that when enforcement proceedings are taken, NAMA will acquire the assets, that is, the collateral which backs up a loan or in other words will repossess the property and that in some way the agency then will hand it back to the delinquent borrower a few years later. Again, that is not the case in this legislation. While all members of this joint committee are aware of this, the public is not. This illustrates how important a collective responsibility members have in this debate to ensure the facts are put before the public in order that they can make a fair judgment on them and that members can have a debate of that character. The proposal for the agency is designed to cleanse the balance sheet of Irish banks in order that they will focus their resources on doing the essential job they should be doing, namely, the provision of credit. This is essential if this economy is to embark on the road to recovery. The draft legislation reflects detailed consideration of how NAMA will need to operate to protect its investment and generate a return for the taxpayer. I am anxious to hear all views on this significant policy proposal and I believe the draft legislation will benefit from today’s engagement at this committee. Deputy Richard Bruton: First, I wish to declare that all my interests are set out in the public declaration of interests. They include being the owner of bank shares, which is on the public record and is not news to anyone. I welcome the Minister’s appearance before the joint committee and it is the first time members have had an opportunity to engage in an exchange of views. I share his sense that we are in a grave situation. This has been brought about by a property bubble that was fuelled by bad decisions, including decisions by the Government, as well as by an unwillingness to confront the problems and at times a contemptuous dismissal of those who questioned whether this was based on sound economic fundamentals. This is accompanied by a public finance crisis of enormous proportions whereby effectively the Government spent money based on revenues drawn from an unsustainable property bubble. In the process, we have destroyed our economic competitiveness, as was illustrated just last week. I have no illusions about the gravity of the challenges we face. Our approach has been that the solution to the banking crisis must be effective in order that we see credit flowing as one of the consequences; it must be the least costly way of delivering an effective solution to the banking crisis and it must be fair. These are the principles that underpin our alternative. As we come to this debate we do not yet know the cost. I am surprised the Minister has not commented on his cost calculations because I understood they were to be available to us within a fortnight and I thought we would be learning something of them at this stage. The effectiveness of the proposed NAMA in getting credit flowing has been the source of considerable doubts for many people more learned than me. Again, it is surprising that neither the Bill nor the Minister offers any guarantees on how the NAMA process, with all of its attending cost, will deliver credit to small businesses at a time when they are clearly struggling to gain access to credit. Its potential to be unfair is enormous; that goes to the heart of much of the debate, as the Minister acknowledged in his contribution. Today’s debate is not primarily about our solution; rather it is about NAMA. Our approach would be to tackle the immediate credit crisis first. That is why we believe a national recovery bank would have a significant role. It would be our preference to have one playing a role now in getting credit flowing immediately. We have a record of having such banks. There is an EU model as covered asset banks have been used elsewhere and the ECB has backed them. We also believe that essential to any solution is that those who made investments in the banks must continue to share both the risk and the responsibility for working out these solutions. That is why we have sought a two-phase proposal. My first point on NAMA concerns what is wrong with it in our view. We are worried about it and it is not out of political opportunism. We are seriously worried that under the Bill, as drafted, NAMA has the potential to be a disaster for Ireland. The taxpayer is being asked to pay a hope value which is substantially above market value. The Minister has outlined how he intends to calculate that hope value. Those who invest will bear no risk or responsibility in the work-out; there is no risk-sharing mechanism as the legislation is constituted. There is no clarity whatsoever on the tough rules of engagement that might apply to developers. Certainly NAMA will have powers but there is no clear policy on how this will be done. |