Stiglitz claims taxpayers and banks will lose out

NOBEL PRIZE-winning economist Dr Joseph Stiglitz has claimed the interests of Irish taxpayers, the banks and property investor Paddy McKillen are all “likely to be injured” by the transfer of his loans to the National Asset Management Agency.

In an affidavit to the High Court supporting Mr McKillen’s action against transfer, Dr Stiglitz also said that while the Government is implementing elements of the “standard process” for addressing bank insolvency, some of the distinctive aspects of its response “represent deviations from best practice” and raise concerns.

“For the Government’s process to work well, it is crucial it focuses on identifying loans for which principal and interest is not being repaid and where there is “a significant risk,” of non-payment, he said. Nama’s role should be confined to paying for bad loans at fair market value but its incentive and ability to underpay banks for good assets was “highly problematic” and would leave the banks weaker and the taxpayer no better off, he said.

Dr Stiglitz said material about the role and operations of Nama indicated “considerable confusion” about how the banking sector works, the economically appropriate process for addressing bank insolvency and the role Nama can play in addressing bank insolvency.

Having examined material about Mr McKillen’s €2.1 billion loan portfolio, Dr Stiglitz said the economic benefits of moving Mr McKillen’s loans to Nama “are questionable at best” and there were “compelling arguments” against transfer.

In an affidavit, Matthew Webster, head of real estate finance with HSBC Bank, financial adviser to Nama, rejected Mr McKillen’s claims that transferring the loans would have a seriously detrimental effect on the value of the assets involved. In this economic climate, the diminution in asset values may be “more properly regarded as resulting from changes in the market environment generally” and so considerable care must be taken in approaching any claim that seeks to identify Nama as a discrete cause, Mr Webster said.

Mr McKillen was “postulating a gulf” in ordinary banking practices and the operation of Nama “that has no basis in reality”, Mr Webster said. The fact is certain banks which had provided refinancing facilities do not currently have the capacity to roll loans forward “without jeopardising their own longevity”. The affidavits are among substantial materials before the three-judge court for the action by Mr McKillen and 15 of his companies aimed at preventing the transfer of €211 million of their Bank of Ireland loans to Nama. The total loan portfolio of Mr McKillen and his companies exceeds €2.1 billion, including some €800 million loans with Anglo Irish Bank.

The case is the first challenge to the Nama procedures. Nama is acquiring land and development loans and associated investment property and other loans totalling €73 billion from five banks.

During yesterday’s hearing, Michael Cush SC, read letters of June 2010 to Nama from Anglo chief executive Mike Aynsley taking issue with suggestions that Anglo had not objected to the loans transfer. Mr Aynsley described Mr McKillen as a high net worth individual who could “actively participate” in Ireland’s recovery. Mr McKillen was very disillusioned with Nama’s actions as he took the view he had not contributed to the economic crisis, was repaying his loans, had 35 years of good banking relationships and Nama did not concern him, counsel said.

When Mr Cush said Nama does not operate “like a bank” but is rather a work-out vehicle, president of the High Court, Mr Justice Nicholas Kearns, said counsel was talking about how banks used to operate before Lehman brothers collapsed and the events of the last few years.

Mr Justice Frank Clarke remarked, if there was no Government intervention Anglo would be insolvent and Mr McKillen would be left with loans from a bank that could not continue in business.

Mr Cush said not all his client’s relationships were with wholly insolvent banks but all of his banking relationships were being taken by Nama. Earlier, John Gleeson SC, also for Mr McKillen, argued that the court should restrain the transfer of the McKillen loans because it was outside the scope of a European Commission decision approving the Nama scheme.

Mr McKillen is not an “impaired borrower” and the commission decision of February 2010 clearly confines its approval for the Nama scheme to the acquisition of loans of impaired borrowers, counsel argued. The case continues.