Somers lays down the law on Nama
17 May 2009Dr Michael Somers is not usually a man who speaks off the cuff. After a decade and a half at the head of the the National Treasury Management Agency (NTMA) - the high-powered state agency which manages the state’s debt and pension fund - Somers is one of the most powerful public servants in the state. The man known throughout the public service as ‘the Doc’ rarely speaks publicly and, when he does, he chooses his words carefully.
Last week, Somers gave evidence at the Oireachtas Public Accounts Committee, at which deputies questioned him about the government’s plans for the National Asset Management Agency (Nama) to manage toxic debt transferred from the banks, the NTMA’s role in overseeing the scheme and Ireland’s funding position on international markets.
Some of his answers were extraordinarily frank and revealing about the state of relationships between the agency, the Department of Finance and the government, as well as about the continuing challenges of raising funds on international markets.
His answers also raised questions about the state of preparation of Nama - though government sources insisted this weekend that plans for the agency were advancing, that the Attorney General was deeply involved in preparing legislation and that Somers and his own staff had been central to this process. One would not have thought so, however, from Somers’ answers to the committee.
While Minister for Finance Brian Lenihan announced that Nama would operate under the aegis of the NTMA - indeed, senior NTMA director Brendan McDonagh has been appointed as interim chief executive - Somers was vague about the plans.
‘‘I am still not sure how the proposed Nama operation would interact with the NTMA," he said.
‘‘Government statements have said it would be under the aegis of the NTMA." However, he said it would depend on how the legislation was framed.
He suggested that, if it were up to him, he would prefer management of the debt to remain with the banks, where there was experience and expertise in dealing with it. The NTMA could then oversee their operations.
However, he said that ‘‘I am not sure what our position is at the moment’’.
He painted a picture of uncertainty at the heart of government and the senior public service in dealing with the toxic debt issue.
‘‘The preference of the NTMA, if it had a lead role in setting up the agency, would be to establish a small group of 30 to 40 people and leave much of the leg work to the banks. I have no idea whether this would work, because we have no experience of bank restructuring or the whole new area which is coming our way, and we will be on a very steep learning curve."
Asked by Fine Gael deputy Jim O’Keeffe whether it was the case that he had ‘‘no clear brief’’, Somers said: ‘‘That is correct." There was great potential for legal actions bogging down the new entity, he said.
Somers also highlighted how the NTMA had avoided placing large cash deposits with Anglo Irish Bank and stashing large amounts of exchequer cash towards the back end of 2008,because of expectations that money would be difficult to raise this year.
Though the agency has no role in supervising banking, it places billions of euro on deposit with banks. Prior to the credit crunch, the NTMA would place €200 million to €300 million with Irish banks.
However, it placed much smaller sums on deposit with Anglo, because of its nervousness about the bank’s exposure to a single sector - property. Anglo lobbied it to review the practice. The NTMA refused.
Somers also said that the agency ‘‘saw trouble coming, and we built up a huge pot of cash towards the end of last year because we did not know what we were facing into this year’’. By the end of 2008, the NTMA had €20 billion in short term cash in the bank. The NTMA’s judgment proved correct.
Somers was frank about the difficulty in raising money from the bond markets to finance the day today spending of the state. Asked by deputies why Ireland had to pay such a premium to attract purchasers of its bonds, he said: ‘‘Because we are bad news everywhere. There is nothing but bad news out of Ireland and fear of what might happen here."
This has meant that Ireland has had to pay a premium to raise funds on international markets. However, the NTMA has continued to raise sufficient funds on the bond markets, and Somers said it was ‘‘as confident as we can be’’ that it would raise all the money it needed this year.
Regarding the funding problems facing Ireland, Somers said that the massive foreign borrowings undertaken directly by the banks - and then recycled as property loans - were at the core of the problem.
‘‘The banking system in Ireland borrows a huge amount of money - between €100 billion and €200 billion - from outside the state," he said. ‘‘To put it colloquially, this was borrowed from Fritz, Gunter, Heinz and so on, and now they want their money back - and this has put the squeeze on us."
He said Germans were nervous of the money lent to Irish banks, and annoyed that their Irish government bond holdings had fallen in value.
‘‘We found ourselves in the situation where the Irish banks borrowed all the savings of Gunther, Fritz and Heinz, and Gunther, Fritz and Heinz said, ‘OK, you guys, you have had a good enough time, now we want our money back’. I was at the IMF World Bank meetings last autumn and we got quite a lot of flak, particularly from Germans who were very annoyed over the Lisbon Treaty.
‘‘They said, ‘You guys were prepared to take what you could get out of the rest of us when it suited you and now, when it looks as though you are going to have to pay something in, you give us the thumbs down and you have messed us all up.’
‘‘They also complained about the fact that we guaranteed the six Irish institutions and forgot about everybody else, and they were very annoyed about Depfa. The Germans were always very supportive of us but we got this hot and heavy [treatment] from them at the meeting.
‘‘These people would be major purchasers of our bonds and, because they are still holding our bonds, they are also not best pleased to see that the spreads against Germany have widened - which means, of course, that the capital value compared with other bonds has gone down. We are trying to sell our bonds into this market - I do not want to call it a hostile market, because it is not, but they are not as well disposed towards us as they used to be."
Somers gave an indication about his feelings about some other state bodies, particularly the civil service. Asked if the agency ‘‘has enough on its plate’’, given the ‘‘horrendous vista facing us in Nama’’, he said: ‘‘The short answer is yes."
Later, referring to other tasks and the role which had been assigned to the agency, he said: ‘‘It does say something about the state of public administration in the country that this outfit -which was set up originally as a boutique, if I may use the word, specifically to deal with the national debt, borrowings and such - has become involved in a range of activities which the committee has heard about."
He also gave an indication of relations between the NTMA and the Department of Finance. Asked about earlier hearings with secretary general of the department David Doyle and the committee’s concerns about the department’s ‘‘ability . . . to deal with the major challenges’’, he said: ‘‘I do not want to drop Mr Doyle into it, and I would prefer not to comment." Not exactly a ringing endorsement.