Jim Stewart: The Green Party will this Saturday make what are likely to be historic decisions in relation to a programme for Government. Key amongst these decisions is the proposed NAMA legislation.
Irrespective of the degree of State involvement in the ownership of Irish banks (from minority shareholding to full ownership) the policy of the current Government is to establish NAMA. This is agreed by the ECB and the Commission, and may indeed be required by both institutions. There are many risks and uncertainties in this process. Some of the risks that are of concern are moral hazard type risks. Those involved in the process may act in their own self interest to the detriment of taxpayers and society. These risks could be reduced.
(1) Banks whose loans are transferred to NAMA will be required to provide extensive information, but will also be entitled to a fee for services provided. The Bill does not state how this fee may be calculated and banks whose loans are transferred have an incentive to maximise these fees. There is no discussion of penalties where services provided are found to be inadequate or poor. One solution would be to (a) state how fees will be calculated and (b) put a cap on these fees.
(2) Costs involved in the NAMA process could be extremely high. NAMA will realise any value on assets after costs. Risk due to high transaction and other costs could be reduced if fees were capped, for example for liquidators/ receivers. In addition a State service in relation to liquidators/receivers could also reduce costs.
(3) Options could be introduced to encourage arbitration rather than court action and give incentives to avoid expensive court action as in the Zoe/ACC case.
(4) Fees could be deferred until final outcomes are more certain.
(5) The draft Bill does not deal with the difficult issue of how value may be realised from assets financed or under the control of NAMA. A requirement for local community consultation could help ensure better use and value from assets held by NAMA. The recent Comhar Report should be required to inform NAMA policy in this area
The Details of the Bill
The Bill only applies to participating institutions which are defined as the credit institutions which are “systemically” important to the financial system in the State (section 65 a). Not all assets of participating institutions may be acquired for example if the institutions disagrees (s. 82 (3)) and more generally NAMA has the authority to omit or add any asset or to change the acquisition value (s. 86 , (2)).
The Bill gives considerable powers to NAMA to collect information from participating institutions. For example:- The bill provides that “an applicant credit institution” must provide all relevant information required (s. 62) and certify that this is accurate and complete (s. 62 (3)). Before transfer the applicant credit institution must administer and service all bank assets with the same level of skill as a “prudent lender” (64 1 (a) and 69 I (a)). There must be full disclosure ((66 2 (a)) and prompt co-operation (66 2(b)). An applicant credit institution may be required to provide NAMA with a report or certificate or both. NAMA can also require an explanation from an officer or staff member of any “information, documentation book or record” (s. 80 1).
The Bill does not discuss or allow for any payment for those services.
Difficulties may arise in relation to foreign assets. The Bill states that the participating institution must do everything required by law in the country where the asset is located, and if the law does not permit the transfer of assets the participating institution must “do all that the participating institution is permitted to assign to NAMA the greatest interest possible”. The problem is that it is likely that the participating institution will decide what is possible. Difficulties with assigning foreign assets may be one reason why Anglo-Irish is reported to be selling its US loan book (Sunday Business Post 20/9/09).
One issue is that the value of assets to be transferred is uncertain (although a global figure of €54 billion has been estimated). For example, NAMA may exercise discretion in relation to assets acquired. In addition the Bill (s. 131) allows “an adjustment to the portfolio value”. The same section also allows for the payment of performance fees and the reimbursement of costs where NAMA has arranged for the provision of services in respect of a bank asset acquired by NAMA (s. 129, (2)).
Furthermore even though the institution must supply all information required by NAMA, the participating institution must also continue to “perform relevant services” for which they will be reimbursed (128, 2).
This raises an issue of moral hazard because of conflicts of interest. Banks whose loans are transferred to NAMA will be required to provide extensive information, but will also be entitled to a fee for services provided. The Bill does not state how this fee may be calculated. If it is on the basis of cost plus, banks whose loans are transferred have an incentive to maximise these fees. There is no discussion of penalties where services provided are found to be inadequate or poor. Unless adequate controls are established participating institutions could earn very substantial fees in carry out tasks required of them. One solution would be to publish details as to how fees will be calculated and (b) place restrictions on the size of fees that may be paid.
The Bill refers in several places to liquidators and receivers (s. 53, s. 15 (d), s. 144- 147) and while s. 145 (6) states that a statutory receiver shall take all reasonable care to obtain the best price, there is no obligation to minimise costs or fees.
There are several avenues of appeal included in the bill in addition to legal proceedings generally. For example an applicant institution could appeal against an asset being included (s. 78 (3)). If NAMA still wishes to acquire the asset an expert reviewer is appointed (s. 82 (3 b)). The cost of this appeal will be borne by the participating institution and if agreement can not be reached the costs will determined by the taxing master of the High Court (s. 115, (3)).
If a participating institution wishes to appeal the values assigned to a portfolio, they may appeal to a specially appointed valuation panel, and the participating institution is liable for any costs incurred. Appeals on cost of an appeal may be made to the taxing master in the High Court (124, s. 3).
What all these procedures mean is that costs involved in the NAMA process could be extremely high. NAMA will realise any value on assets after costs. Risk due to high transaction and other costs could be reduced if fees were capped, for example for liquidators/ receivers. A State service in relation to liquidators/receivers, as recommended by the McCarthy Report (Volume II p. 184) in relation to litigation in medical expenses, could also reduce costs. Further options could be introduced for arbitration and incentives provided to avoid expensive court action as in the Zoe/ACC case. Co-operating institutions outside the NAMA process should be allowed participate in any savings/increase in value added through ‘an agreed policy approach’. Finally fees could be deferred until final outcomes are more certain.
As noted by the de Larosiere Report (p. 35) in relation to solving the financial crisis in banks, agreement on burden sharing is more difficult to achieve after intervention unless “one can rely on predetermined, ex ante arrangements”
The Bill (s. 203) also gives broad powers to control and restructure participating institutions, for example to restrict growth in balance sheet assets, prevent the take over of other institutions and to require mergers or consolidation within the participating institutions. It is not clear if merger or takeover by a non-participating institution would be allowed. The Bill also gives powers to require a restructuring plan and a business plan and to amend both (s. 205). Proposals made under this section would require careful analysis. However there is no requirement to make public any reports that participating institution may be required to produce, or to publish the rationale underlying any proposed restructuring.
The draft bill does not deal with the difficult issue of how value may be realised from assets financed or under the control of NAMA. This is an urgent issue - the longer real assets such as buildings remain unused the greater the risk of further loss due to neglect and vandalism. The quicker assets are put to use the greater the return. A requirement for local community consultation could help ensure better use and value from assets held by NAMA. Recently the Council for Sustainable Development (Comhar) issued a report arguing that NAMA should use assets to further the Green New Deal (2009). These and other issues should be part of an urgent initiative as to how best the highest value, broadly defined, may be obtained from the assets NAMA may acquire.
Council for Sustainable Development (Comhar) (2009), Towards a Green New Deal for Ireland.
De Larosiere Report (2009), The High-Level Group of Financial Supervision in the EU, Brussels, 25 February 2009, available at http://www.eubusiness.com/Finance/de-larosiere-report.09/view.
Dr Jim Stewart is Adjunct Associate Professor at Trinity College Dublin. His research interests include Corporate Finance and Taxation, Pension Funds and financial products, Financial Systems and Economic Development.
He is widely published and his titles include Mutuals and Alternative Banking: A Solution to the Financial and Economic Crisis in Ireland (2013), Choosing Your Future: How to Reform Ireland's Pension System (co-author, 2007) and For Richer, For Poorer: An Investigation of the Irish pension system (2005).