There are several fundamental problems with the proposed NAMA legislation. One is valuation, in Section 58, and the second is the awesome powers given to the Minister for Finance in the Bill. As reported in the Irish Times, he Labour Party has set out a comprehensive critique of NAMA and outlined its public ownership alternative in ‘Protecting the Taxpayer’,

Citizens need a clear statement from the Minister of the loans and the assets to be taken over. We need a consolidated statement of the position of each of the top 100 developers whose loans are proposed for transfer to NAMA. While the identities of the individuals need not be revealed, we need a clear picture of the state’s potential exposure. This statement should set out the nature of collateral, level of cross-collateralisation between developers, the extent of the use of derivative instruments and personal guarantees.

While this information is of a complicated nature, it essential that it is made public so that we can have a breakdown of what the NAMA loans are likely to consist of and how much is likely to be recovered. It is quite possible that this information could render dubious the value that can be recovered from these loans, and taxpayers deserve to be told what the Fianna Fáil Government intends to sign up to on their behalf. Such disclosure is fundamental to the functioning of a transparent and accountable democratic process.

The most critical NAMA problem is the valuation of the distressed loans.

The State has a wealth of valuation experience and advisors. The Valuation Office/Commissioner of Valuation (property advisors to the Government) has access to all property transactions in the State and would be in a far better position to advise on valuation issues than any other expert. One recent case, Gillen & Farrrell v Bray Town Council, 1st August 2008 (see note below), in which the valuation was appealed to the Valuation Tribunal is instructive.

The higher the discount set, the greater the losses the banks must record and the more their capital is eroded. Since higher losses mean the state having to re-capitalise the banks, and since this will increase the share of the banks owned by the state, the Government’s determination to avoid nationalisation makes it highly likely that NAMA will over-pay for the loans.

The remarks of Minister Lenihan to the Finance Committee confirm that this is what he intends no matter what assurances he gives to the contrary.

He was asked about the operation of long-term value and how he could be so sure that the write downs of loans would maintain bank solvency. His answer was revealing. He knew this because of the current value of bank shares. The market, he asserted, was showing through these share values that it had confidence in bank solvency even after NAMA ‘haircuts’. Minister Lenihan was effectively defining long term value as that which would maintain the value of the banks’ equity capital and hence he was asserting he would exercise his valuation powers under the Bill to secure that result.

This is an absurd Alice in Wonderland situation. The stock market is working on the assumption that the NAMA process will secure the banks’ and accordingly the current share value reflects this underlying Ministerial assurance. Then the Minister uses those same share prices as the basis of setting valuations. The Minister believes the stock market and the stock market believes the Minister.

It is a truly astonishing way to make policy and to avoid, at enormous cost, the only alternative that could get banks back into business again; that is temporary nationalisation.