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?