June 2010 Archives

Property Tax and House Prices

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If the mooted property tax is value-based, how can taxpayers value properties in a volatile market in the absence of reliable data? For example, my home was worth about €900,000 at the peak; is worth €650,000 by reference to local asking prices; is worth €360,000 based on a multiple (15x) of local rent levels; and valued at €175,000 based on a pre-boom multiple of five times current average earnings.

Leaving valuations aside, how collectible is a property tax given that over 4% of mortgages are more than 90 days in arrears, many more mortgages are interest-only, thousands more are receiving mortgage interest supplements and over 300,000 households are moving into negative equity having possibly paid substantial stamp duty on their purchases?

Letter published in the Irish Times on 28th June 2010.

Moral Hazard

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The Honohan Report said there was a ''moral hazard'' involved in the blanket bank guarantee, ''though this argument does not appear to have been made''.

The chairman of Nama and the Financial Regulator have recently suggested that it would not be possible to assist people with distressed mortgages, due to ''moral hazard''.

So where is the moral hazard for the politicians, administrators, bankers, developers and related professionals who created the financial crisis, but continue to hold positions of power, draw huge pensions, operate insolvent businesses and get massive bailouts, courtesy of taxpayers?

Letter published in the Sunday Business Post on 27th June 2010.

Fine Gael Leadership

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So, a second rate-leader with a first-rate front bench is going to end up with a new second-rate bench. Hardly, a recipe for electoral success.

Letter published in the Irish Times on 19th June 2010.

Nama's Mission Creep ?

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Recent comments by Nama's Chairman suggest that it is moving the goal posts and is no longer going to do what it was set up to do, namely, to recover as much as possible of the loans transferred to it from the banks.

Instead, it appears that Nama is going to only recover what it is paying for these loans plus its expenses and that it intends to wrap up this process in seven to ten years instead of the original ten to fifteen years.

On this basis, Nama could be writing off, or forgiving, about €30 billion of debts as well as substantial unpaid interest.

Letter published in the Sunday Business Post on 20th June 2010. See also, the Open Letter to Nama's Board which discusses this matter in greater detail.

Open Letter to Nama's Board

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I've sent this Open Letter to Nama's Board expressing concern that Nama appears to be scaling back its original mission at a potentially enormous cost to the taxpayer. Basically, it appears that Nama may be moving the goal posts and engaging in mission creep.

While I fully accept that no plan "survives first contact with the enemy", the Nama concept and its original business plan were prepared following extensive studies commissioned by the Minister for Finance into the loan portfolios of the banks. It appears that these expensive studies all missed the fact that loan documentation was poor, security was not properly charged, debt/equity ratios of many borrowers were ridiculously high, assets were being pledged as security on multiple loans, loans were being restructured or interest only. Also, where were the banks' internal/external auditors, non-executive directors and legal staff/advisers during this carry on? It is very hard to accept that no one had any insights into the real condition of the banks' property-related loan portfolios.

If Nama's mission is to be changed, I think that, in the light of changed circumstances, it must  toughen its approach to securing repayment of the €80 billion of loans being taken onto its books instead of watering down its targets and reducing its life span at great cost to the taxpayer, economy and society.


The Chairman of Nama has, when speaking at the CPA's Annual Conference on 4th June 2010, sought to clarify Nama's core objectives in the following terms:

NAMA's core commercial objective will be to recover for the taxpayer whatever it has paid for the loans in addition to whatever it has invested to enhance property assets underlying those loans. This objective has not been determined by NAMA; it has, in fact, been set for us by the legislature under Section 10 of the NAMA Act. There has been some comment that the consequence of this objective is that NAMA, having recovered its outlay, will then absolve borrowers of their further obligations. This is absolutely not the case. Borrowers, as both I and NAMA's CEO Brendan McDonagh have already said on a number of occasions, will continue to be liable for the debts that they have incurred.

He also says that "NAMA is expected to have a lifespan of seven to ten years and when, in the view of the Minister for Finance, it has made sufficient progress towards achieving its overall objectives, it will be wound up." His full speech is here.

The Chairman spoke of reserving the right to recover arrears if a borrower regains the capacity to repay debts. It may be appropriate for Revenue to follow this route in respect of a tiny proportion of its clients but in Nama's case arrears could amount to half of all borrowings! This highly qualified, weak-kneed approach simply confirms the perception that Nama does not really intend to pursue borrowers for all their debts. It would be interesting to know whether the business plans being prepared by borrowers are intended to explain how all borrowings are going to be repaid or merely enough to enable Nama recover its costs. If the latter, then it is clear that Nama expects to write off huge debts (€30 billion or more) at the expense of the taxpayer. Finally, all the signs are that any economy recovery is going to be extremely slow and consequently Nama, by foreshortening its life by up to eight years, could miss an upswing in the property market at great loss to the taxpayer and gain for its delinquent borrowers.

Notwithstanding the Chairman's clarifications, I still take issue with Nama's core objective as being too limited and too short term as stated in my open letter to the board. 

Section 10 of the Nama Act dealing with the purpose of Nama was mentioned by the Chairman. It refers back to Section 2 which states that the Act's purposes include protection of the taxpayer and contributing to social and economic development.

Maybe, to make things crystal clear, Nama should state that maximising payments of all debts, over and above the cost of acquiring loans and recovering its expenses, is an explicit objective under Section 10 Subsection (2) (c). This would help minimise any misunderstandings amongst taxpayers or Nama's borrowers and ensure that Nama is not wound up by the Minister for Finance as soon as it breaks even or that borrowers' business plans merely target Nama's breakeven point.

Moral Hazard is only for Little People

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The Irish Times reported (26th May) that the Financial Regulator has said that there were no "silver bullets" to assist people with distressed mortgages due to "moral hazard".

Where is this moral hazard for all the politicians, administrators, bankers, developers and related professionals who created the financial crisis but continue to hold positions of power, draw huge pensions, operate insolvent businesses and get massive bale-outs courtesy of taxpayers?

To my mind, the Financial Regulator has crossed a line by destinguishing between "moral hazard" for developers/bankers (not needed) and for "the little people" (needed to teach people lessons) and thereby seems to have aligned himself with the former happy campers in the Galway tent.

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