The Irish Independent today makes clear something which has been alluded to in previous reporting but which has hitherto been shrouded in vagueness. Emmet Oliver claims that the Independent has seen a “document” (presumably a letter) written in May 2009 by the Central Bank of Ireland governor, John Hurley (Patrick Honohan’s predecessor) and the then-acting CEO of the Financial Regulator, Mary O’Dea.
According to the Independent, the letter to the banks gave an undertaking that new lending from April to November 2009 which was NAMA-eligible (remember that NAMA was only supposed to take loans created before 31st December 2008 and additional advances on those original loans eg to complete projects). The letter hamstrung NAMA by compelling the agency to accept this additional lending, estimated at €1bn, without applying a haircut. In the event NAMA succeeded in rejecting half of the €1bn because of unacceptable security. If NAMA had applied its average discounts so far then it would have acquired the €500m of loans for €210m – an implication from the Independent article is that NAMA overpaid by €290m.
The background to this episode was that banks were fearful of making additional advances in 2009 if these advances were to be subsequently acquired by NAMA at a discount and the Central Bank/Financial Regulator wanted to avoid a liquidity crisis with existing developer loans by giving the assurance of “no haircut”.
The previous reporting on this matter was in the Comptroller and Auditor General’s (CAG) first report on NAMA in November 2010 which said “following direction by the Governor of the Central Bank and Financial Services Authority of Ireland and the acting CEO of the Irish Financial Services Regulatory Authority, no discount was applied to advances made by banks to borrowers after 7 April 2009 provided that it could be shown that the moneys were advanced as part of normal commercial banking arrangements. For loans that transferred in the first tranche, NAMA accepted that €299 million of those loans, issued after 7 April 2009, qualified for payment in full.”
The EU gave approval to the NAMA project in February 2010 and the published decision described NAMA’s valuation methodology in some detail. There is no reference whatsoever to any letter or commitment to ignore the valuation methodology for certain loans. Presumably a commitment to pay in excess of the loan’s value (using NAMA’s own valuation methodology) would constitute additional state-aid and would necessitate EU approval.
The EU has given its approval to the valuation of NAMA’s Tranche 1 and 2. Tranche 1 included €299m (according to the CAG report referred to above) so presumably the EU has given ex-post approval to the additional state-aid but shouldn’t that approval have necessitated something more formal and public, particularly since NAMA seem to have departed from the terms of the approval given by the EU in February 2010?
The Independent refers to an exchange between NAMA’s CEO, Brendan McDonagh and Minister for Finance, Brian Lenihan in June 2010 (the Independent refers to June 2010, not June 2009) where Brendan reportedly said “there are certain monetary consequences arising from implementation of this direction”. You would have to ask why NAMA didn’t invoke section 84(1) of the NAMA Act which states “NAMA is not obliged to acquire any particular, or any, eligible bank asset of such an institution on
any grounds.” The NAMA Act provides for the Minister issuing directions to the agency and such a direction could include an instruction to acquire certain loans but no such direction appears to have been issued (NAMA published ministerial directions in October 2010 and they were the first such published directions)
So two questions emerge from this affair – why didn’t the EU flag this extraordinary state-aid and why did NAMA not invoke its right to reject this lending on which it was forced to pay an additional premium?
With respect, a third question emerges:
Who got the money and what was done with it? Even in the normal course of business, €1bn is not chump change.
Hi Yogan, it’s a good question and it seems that Anglo may have gotten the bulk of it – in terms of quantum the undertaking by the Central Bank/acting Financial Regulator reportedly related to €1bn. Of this, one half was rejected by NAMA because of inadequate documentation. On the remaing €500m, NAMA might have been expected to apply a 58% haircut (the weighted average for tranches 1 and 2) so the implication is that unauthorised state-aid of €290m (€500m * 58%) has been paid by NAMA.
While the receiving bank is interesting, I was more thinking about the borrowers? Who got the bn in loans, what did they spend it on, how much was salaries and emoluments or paying off loans to their spouses or overseas companies or any of the carry-on? (‘Carry On Looting’ as it will be called…).
Even more shocking in light of another article by the author: http://www.independent.ie/business/irish/inbs-hit-by-4-receivershipsin-handful-of-loans-for-2010-2487703.html
Together with this anecdotal evidence and your own tracking of the property market in Ireland and abroad, NAMA is 100% funding ‘dead money’. It is this and other issues such as the lack of disposals that will cause NAMA to be a catastrophe not just for the agency but the economy in general….
I agree with yoganmahew. The question that jumps off the page for me is
who?
loans from Anglo to who?
Is it really complex to find out, or is it just really secret.
The people who paid for these loans (taxpayers) should demand to know – but it appears the taxpayer has no voice in Nama-world.
When Nama pays, someone else gets away without paying…no matter how much NAMA deny that fact. For a billion dollars, we should know who.
Possibly loans such as this:
http://www.irishtimes.com/newspaper/frontpage/2010/0203/1224263660295.html
“a senior source describe the transaction as complex and sophisticated”
You can’t make this stuff up!
interesting loan Frank: you can’t make this stuff up because the plot would loose credibility…come on…interest free loans to buy a distressed asset in mid crisis, come on now….. next it will be finance your landlord, move out, foreclose…come on now, that would never happen…
SF CA Writer,
I can’t believe it was even reported in the press in such an open and frank manner. It’s like the journalist didn’t smell anything. Ireland is so bizarre!
The payments were made from Anglo to some of their clients to whom they had commitments outstanding under the terms of their loan agreements. NAMA funded these payments at par.
Anglo argued to NAMA that the money payable should be made available to them (Anglo) at par as the loan (and the underlying asset) already had its value reduced in the revaluation process, and that the payments should therefore be made in full. NAMA accepted this in some (about 50%), but not in all cases. They did not accept the argument when the payments did not add value to the loan (asset), commensurate with the payment made.
The payments made were made against fees and construction costs only and had to be fully certified with back-up invoices.
In many cases NAMA made these payments via Anglo (or the relevant PI) directly to the third party concerned (i.e. the architect or builder) rather than to or through the developer.
Hi WSTT,
“commensurate with the payment made” – was that euro for euro commensurate? Anglo is supposedly expected to incur a 67% haircut overall. So these additional advances must have been very special indeed if the value added equalled the amount of the additional advance. Almost incredibly special.
It was euro fo r euro commensurate but don’t believe that it was that scientific. They were just payments that had to be made to developers (mainly for construction, consultants’ fees etc.) under loan agreements after the properties were transferred to NAMA. Those payments were honoured by NAMA through the banks. No discounts were applied to the payments between NAMA and the banks.
P.S. NWL, maybe I should re-state that. Monies that had been committed by the banks to the developers for completion of work or consultants’ fees, were, post loan disposal, generally paid to the banks in full by NAMA.
The argument was that it added to the base value of the assets. However, that may not be a justification for paying the PI 100%. (I am not an apologist for NAMA – they need to answer for themselves)
My understanding is similar to WSTT’s – this was working capital used to help complete or progress developments. We wrote at the time it was happening but didn’t realise it was just Anglo doing so.
Actually, this took place because the banks (in particular Anglo) lobbied NAMA for 100% repayment of any payments made to developers above the NAMA purchase level. NAMA agreed to this. The question is why?
In most cases these payments were as Neil states working capital used to complete the developments. They were generally made prior to the actual transfer of the loan, but where the loan had been earmarked for transfer and where NAMA approval was necessary. The banks paid out and then reclaimed from NAMA.
Hi WSTT, no doubt these payments gave rise to many difficult dilemmas. But just to illustrate, if Developer A had a loan of €100m at par value that on average would receive a payment from NAMA to Anglo of €33m (representing a 67% haircut which is the latest available forecast for that bank) and in addition to that €100m loan, Anglo advanced €20m in the circumstances described in the above entry, then the undertaking given by the Central Bank/Financial Regulator was that NAMA would pay €20m for that additional advance. You say the €20m advance was more or less commensurate with the value added to the original €100m loan which I must admit looks iffy as a proposition to me if the original loan is attracting a 67% haircut. If the value of the additional lending was commensurate with value added as at 30th November 2009 (NAMA’s valuation date) then all the other questions become irrelevant.
But the suspicion though is that these €500m of additional advances were not worth €500m and that (a) NAMA should have invoked its right to reject these loans as is NAMA’s right pursuant to s84(1) and (b) the EU should have made a specific declaration of this additional state-aid which it seems to have accepted through its acceptance of tranche 1 and 2 (tranche 1 had €299m of these loans according to the Comptroller and Auditor General). NAMA might make a statement on the subject. Or someone might ask EC Competition Commissioner Almunia to identify where approval was given to this additional state-aid.
HI NWL,
You have an admirable analytical mind and I have to be careful with loose statements!
The excuse for making these payments were that they added value to the asset and / or were necessary. Did they add value on a euro for euro basis? – That’s a moot point.
Do payments to architects , engineers, security personnel, landscapers, lawyers and for insurance premia and rates add to value? I don’t know. The whole issue is arguable.