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What if Nama beans aren't magic?

Date: 18 Aug 2009

Published: Sunday Tribune Business

Author: Dr. Elaine Hutson

I want to tell you about a scene I observed on a bus last week. A middle-aged man in a pin-striped suit and a little girl get on the bus and sit down. He begins reading his newspaper.

Girl: Dad, what's Nama?

Man: Well, um… we have some banks that are... okay, an analogy... Imagine there are some very sick people. They're not just sick; they're also carrying big, heavy suitcases. And the sick people aren't able to carry the suitcases any more, because… because they're very heavy and the people are, well, sick. Nama is the rescue team. Nama is going to buy the suitcases from the sick people, and lighten their load so they can get better.

Girl: So the sick people might have died?

Man: Yes, I guess they could have died if Nama hadn't offered to buy the suitcases.

Girl: That's good. So where does Nama get the money to buy the suitcases?

Man: Umm… from us, I guess.

Girl: (wide-eyed) You and me and Mummy have to pay for the suitcases?

Man: Well, yes we do, along with all of the other people in Ireland.

Girl: Why?

Man: Oh dear… ummm (he scratches his head and grimaces)… the banks… I mean the sick people, they thought the suitcases had gold in them, but it turns out that they were wrong. They contain only… beans… and…

Girl: Like in Jack and the Beanstalk? Are they magic beans?

Man: Yes, like in Jack and the Beanstalk! The Nama will plant the beans. And then after a while the beans will germinate, and gigantic beanstalks will grow, all the way up to the clouds! (He is on a roll now). And then the Nama will climb up the beanstalks and get the bag of gold coins. And then we will all get our money back.

Girl: Wow. That's great.

There's a lull in the conversation. The girl stares out the window, deep in thought. The man, highly relieved, gets back to his newspaper.

Girl: Dad?

Man: Yes, sweetheart?

Girl: What if the beans aren't magic?

Unfortunately at that point I had to get off the bus, so I can't tell you how the story ended. But that little girl has a point. What if the beans aren't magic? What if property prices don't recover in the next 10 to 15 years? The plan to impose a levy on the banks if Nama ends up making losses is risible; the consensus amongst economists is that it's unworkable. What bank is going to countenance a levy in 15 years' time? If the beans aren't magic, the current plan to rescue the banks will simply be a massive transfer of wealth from the public to the private sectors. The expression 'privatise the benefits and socialise the losses' will never have been more apt.

Most of the Irish banks are insolvent, their assets worth less than their liabilities. And what does balance-sheet insolvency mean for shareholders? It means that share value equals zero. And yet Irish bank shares are racing ahead. AIB, for example, has risen, Phoenix-like, from a low of 76 cent in early March to around €5.75. This rise of over 600% reflects the likelihood that Nama will proceed as anticipated: AIB will be rid of the most toxic of its property-related loans within the year, in return for bonds to the value of 70% to 75% of the book value of the loans, which as we know is way in excess of the loans' current value.

The important point is that any value for bank shares represents a transfer of wealth to bank shareholders from the put-upon Irish taxpayer. Economists have suggested several remedies to this iniquitous situation – various approaches to 'risk-sharing'. But here's a simple one. The government takes an ordinary equity stake in Irish banks, so that the taxpayer participates in the future wealth-generating capabilities of the cleansed banks.

Not full nationalisation, of course. Brian Lenihan has repeatedly told us that this is not going to happen. If the government's objection to nationalisation is because they want to avoid holding a controlling stake, why not limit the stake to just under 30%? Takeover law says that a shareholding of greater than 30% confers control.

One reason that Lenihan has been so unyielding on nationalisation is that he has always held out hope for private interest in recapitalising the banks. This had looked unlikely until last week's news that a couple of Canadian banks are sniffing around AIB. If the cleansed banks do indeed become attractive to foreign banks or other investors, then it becomes less likely that further government equity injections will be required. If partial government ownership is no longer inevitable, then it is even more important that a stake in the banks is taken by the government as part of the Nama purchase process. Just in case the beans aren't magic.

Dr Elaine Hutson is a lecturer in banking and finance at UCD

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What if Nama beans aren't magic?

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