OPINION:It would be unwise to endorse the National Asset Management Agency until a few queries are addressed, writes JUSTIN O'BRIEN.
WRITING IN The Irish Timeson Friday, Taoiseach Brian Cowen claimed victory in a battle yet to be fought. "Irish business is strong. We have strong companies with strong products and strong markets," he argued (see 'Budget will restore confidence and hasten economic recovery', The Irish Times, April 10th), saying "we must do everything we can to get them the cash they need to invest and grow".
The sentiment and conviction may be laudable – the proposed solution less so. The creation of a National Asset Management Agency (Nama), which transfers potentially up to €80-90 billion in property-related assets into State ownership, is an audacious gamble. Similar schemes to address systemic banking liquidity and solvency crises have been contemplated and, for now, rejected in both the United Kingdom and the United States.
Mr Cowen assures us that the complicated banking recapitalisation “will isolate this problem and stop it from contaminating the entire economy”. Unfortunately, assurances from the Taoiseach have as much currency as equity in the Irish banking system. In short, they are worthless.
The credit downgrade of the banking system by the rating agencies in the aftermath of the announcement of the agency’s creation reflects this reality.
The problems are being magnified by three avoidable communication failures.
Firstly, there is a lack of transparency in how the portfolios are to be priced.
Secondly, no detail is provided about what accountability mechanisms are to be deployed.
Thirdly, the Government has not indicated how it intends to fund, on an ongoing basis, multi-billion euro liabilities.
Unless and until these interlinked accountability and transparency deficits are addressed, it is unwise to endorse an untested and potentially unworkable plan. Not surprisingly, the rating agencies have also downgraded the State’s own credit rating.
It is essential that the Government transfers oversight to an independent panel of experts, with a mandate to provide monthly reports on expenditure. Here, fortunately, a model already exists.
The Congressional Oversight Panel (Cop) was established as part of the Emergency Economic Stabilisation Act (2008) to administer the Troubled Assets Recovery Programme (Tarp) in the United States. Chaired by Elizabeth Warren, a law professor at Harvard, the panel has performed a critical function in bringing the US Treasury to partial account.
The Cop’s first report, for example, demanded that treasury “articulate its vision of the problem, its overall strategy to address that problem, and how its strategic shifts since September 2008 fit into that strategy”.
In other words, the panel saw no vision, no strategy and no coherence. For Prof Warren and her colleagues, while the “Treasury [has] broad authority to set the conditions under which companies may receive aid . . . the public has a right to know to what extent conditions have been imposed on financial institutions receiving public funds, and if not, why not”.
It remains deeply sceptical.
A second report issued in January complained bitterly that “it is critical for Congress and the public, including participants in the banking industry, to understand exactly what the criteria are for receiving money under the Tarp programmes, what the strategic intentions of the criteria are, if any, what the strategic effects of the criteria are, and how the criteria advance the purposes of the Act”.
Most recently, Prof Warren has highlighted profound differences in how the Treasury treats its charges on Wall Street from the equally discredited auto-barons in Detroit. Its most recent report, released on the same day as the Supplementary Budget in Ireland, contained a prescient warning for policymakers in Dublin.
For the Cop, “the debate turns on whether current prices, particularly for mortgage-related assets, reflect fundamental values, or whether prices are artificially depressed by a liquidity discount due to frozen markets – or some combination of the two”.
It cautions, however, against basing policy on belief in the former, rather than on evidence that the latter has been falsified.
“It is possible that [the] Treasury’s approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth.”
If this proves to be so, the report warns, the strategies adopted are counter-productive and pave the way to a more serious crisis.
Although the panel does not have the authority to overrule decisions taken by Treasury in the administration of the Troubled Asset Recovery Program, it has undoubtedly enhanced disclosure and, as a consequence, the appearance of probity.
The issue is not whether the Cop has a better-informed judgment or is in a position to second-guess the administration’s motives. Rather, it is whether the administration has provided sufficient evidential basis for its chosen policies. Here the evidence, like the success of Tarp itself, is mixed.
It is essential that an exercise of similar clarity and detail be conducted with specific reference to Irish economic and political realities. As the debacle in February over the release of the PwC report into the stability of the Irish banking system demonstrated, confidence can be eroded rather than enhanced by highly selective presentation.
As I noted at the time ('Government must reveal all it knows', The Irish Times, February 23rd): "If Anglo Irish was an outlier, why was a blanket guarantee or recapitalisation required? Was the calculation solely on the basis of an evaluation of the Anglo accounts? If only to protect the other major Irish banks from criticism and suspicion, the Government needs to publish the rest of the document."
That disclosure has now become an imperative.
If the Government is serious about the need to gain public support for its latest attempt to avoid outright nationalisation, we must have access to the evidence. If it refuses, then the scepticism of international markets about Ireland Inc remains warranted.
The Taoiseach may save the money to be spent on sending teams to Frankfurt, London and New York. In that scenario, not only the battle but the war will be lost.
Justin O'Brien is professor of corporate governance at the centre for applied philosophy and public ethics in Canberra. His book on the credit crisis, Engineering a Financial Bloodbath, will be published next month by Imperial College Press