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Nama could become toxic dump

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The Government set up Nama to help rescue the banks and get credit flowing. We were assured that it would make a profit for the taxpayer without disrupting or distorting markets or bailing out developers. Nama's short history suggests that it is unlikely to achieve these objectives because it is paying well above market rates for loans; the proportion of performing loans is much lower than projected; banks are transferring fewer good loans; and discounts are far higher than expected due to poor security and documentation.

For these reasons, Nama could become an expensive toxic dump rather than a well-balanced asset recovery vehicle as originally envisaged and it would become part of the problem rather than the hyped solution.

To head off this possibility, the Government should immediately introduce a bank resolution scheme. Once in place, Nama should hand back all its loans to the originating banks and bondholders and let them jointly deal directly with borrowers without involving long-suffering taxpayers.

In contrast to the Government's tip-toe approach, the hand back should be accompanied by focused guarantees, selective defaulting and debt-equity swaps leading to the creation of "good" banks and work-out institutions.

Letter published in the Sunday Business Post on 19th September 2010.

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Roll-bank, unwind, offload, retreat from position, re-privatize the public external debt.

I agree this is sound advice. Brian how could this hand-back of loans happen?

How can the government (if we can call it that) step out of the way and let the private sector tear each other apart for the scraps of meat left on the bones of the dead property speculators etc...?

How can it do this with the IMF there to protect foreign banks? How can it do it without being taken to court in the ICSID for example?

Is there an unwind clause in NAMA?

Legally speaking this will be delicate. I suppose the government will have to be declared illegitimate", incapable or legally beyond their brief for having involved the public sector.

NAMA is definitely a mechanism for taking private debt public which is out of control. De-privatizing debt onto the public is something commonly done in Latin American dictatorships to buy friends in the private sector by loading private foreign debt on the books of these companies with foreign financial creditors (in this case AIB/BOI etc...) onto the public. There is even a term for it in Spanish: "estatizaciĆ³n de la deuda privada", it happened here in Argentina in 1982,83, what Obama did in the US was essentilly that too.

Usually this is hard to unwind but there are some ways this can be done, one is "odious debt" see http://www.projectallende.org/deuda/www-deuda/ for some examples (The dictatorship's first Minister for Economics, Martinez de Hoz, is currently on trial here for mucking around in this sort of thing) but I doubt Ireland qualifies under this strict debt clause.

One thing about declaring debt odious is that it doesn't disappear it reverts to the private owners of the debt; in this case the banks and their speculators.

Interesting times, let's hope some experience from Argentina helps you out up there!!

TONES: http://www.projectallende.org/archives/2010_11.html#000160#more

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This page contains a single entry by Brian published on September 20, 2010 11:55 AM.

Economic Recklessness was the previous entry in this blog.

Moral Hazard with Justice is the next entry in this blog.

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