Patrick Honohan recommends an amendment to allow for a two-part pricing schedule in today’s Irish Times: you can read it here.
Category: Banking Crisis
While there has been a lot of discussion of the draft NAMA legislation’s definition of long-term economic value, there has been very little attention paid to its clause discussing current market values.
There are two interesting aspects to the discussion of market value. First, there is the fact that it is being discussed at all. We know that there is a very limited number of transactions in the current market for development and investment property, so it might have been expected that the government would fall back on the claim that there was no market as a justification for moving straight to the dreaded long-term economic value. (And indeed, the Minister for Finance, did mention illiquidity on Morning Ireland despite its absence from the legislation.)
Second, there is the wording of what is meant by current market value. The legislation defines it as
the estimated amount that would be paid between a willing buyer and a willing seller in an arm’s length transaction where both parties acted knowledgeably, prudently and without compulsion
This sounds eminently reasonable doesn’t it? The parties are acting knowledgeably. They are being prudent. Presumably, then, they are aware of the stuff discussed in the long-term economic value definition—that the current crisis will abate and the financial system will become stable—and are factoring this into their decisions.
Here’s a couple of issues relating to the property loanbooks of the banks that will have some bearing on interpreting the average discount paid by NAMA, but which I don’t have good handle on yet.
There’s been a flood of recent commentary on NAMA from opinion columnists, editorial writers and broadcast journalists. Unfortunately, much of this discussion has been premised on an incorrect but apparently appealing idea.
This is the idea that it doesn’t really matter which approach we take to resolving the banking crisis because the costs to the taxpayer are going to be about the same no matter what happens. We’ve guaranteed the liabilities, these people will argue, so basically we’re on the hook no matter what. And since all the plans are going to expose us to lots of risk, let’s just get on with the plan the government has.
Advocates of this position often explain the pricing decision facing NAMA as follows: Over-pay and the taxpayer loses, under-pay and the state has to recapitalise the banks, so the price tag is the same come what may. I first remarked on the prevalence of this line of thinking in the media back in March. However, I started to get really worried about it when Peter Bacon regularly made this point during his post-NAMA-proposal media blitz, at which point I named the proposition after its most noted advocate.
In this guest post, David O’Connor and Odran Reid make the case to use NAMA as an opportunity for better spatial planning: you can read it here.