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.