Apparently Frank is now making an offer which you might find difficult to refuse if you’re a developer. This worked example would seem to be how the deal works.
You are a developer with a €100m loan on a development.
NAMA bought the loan from your bank for €42m
NAMA gets your business plan and together you work out a plan whereby the development will be sold for €45m
The development actually sells for €50m
NAMA will give you a cheque for €300-450,000, just for yourself.
The above is based on Emmet Oliver’s article in today’s Independent in which he claims such deal terms are now on offer from NAMA. The “Frank” is Frank Daly, the NAMA chairman. The claim is that NAMA is offering a 6-9% bonus to developers on any excess value received on a development, above the value agreed between NAMA and the developer in the business plan. It is reported that NAMA will not put the bonus into a legally enforceable agreement but it will be in the memorandum of understanding, and the deal is conditional on co-operation and a full disclosure of assets by the developer. Apparently NAMA is not in a position to confirm the details, but it does have a ring of credibility about it.
Of course, if you’re a developer, the trick will be to convince NAMA in the above example that the best the agency can possibly get for the development is €40m, so when it comes in at €50m you’ll get double the bonus. Or if you’re a really tuned-in developer, you might be able to find out what NAMA paid for the loan and pitch the base sale value at that level, since NAMA is going around telling everyone its primary objective is to recover what it has paid for the loan.
Will the bonus be used to offset the balance of €58 million owing on the loan and all the rolled up interest ?
Surely, the prospect of a €58 million forgiveness is the real bribe.
Ignoring the practicalities (which are at best marginal), this is immoral. And in the current circumstances, moral hazard is very important.
The first thing Daly needs to get his head around is that NAMA should try make a large profit. The cost to the taxpayer isn’t just a case of NAMA breaking even. The second thing Daly needs to understand is that he’ll need some big wins to offset some of the hopeless cases that will remain in his portfolio. Better assets can exit the portfolio earlier, so over time the quality of the remaining assets is lower.
Recourse to additional collateral is important.
So back to the example, and I’ll modify it a little to suit myself. Let’s say the loan was from Anglo and the developer has 20m in personal wealth, then:
Initially taxpayer via anglo recapitalisations takes a loss of 58m. Assuming development sells for 50m, creating an excess of 8m of which they pay the developer a 300k bonus, funding costs of 500k (assume 1yr at 1.2%) and an unknown amount of NAMA costs (wages for NAMA lawyers, estate agents etc;). Let’s assume these costs total 3m. So 5m remains which can be deemed as profit on the transaction.
Results:
Taxpayer loss: 58m – 5m = 53m cost
Developer gain: 50m (debt forgiveness) + 300k = 50.3m gain
Developer’s personal wealth: 20m + 300k = 20.3m
Alternative approach – aggressive workout
Replace developer and pursue all potential recoveries. Assume development sells for 45m, recourse to developer assets yields 18m and additional workout costs of 2m.
Results:
Taxpayer loss: 58m -3m (sale price less acquisition price)+ 5m (workout costs) – 18m (additional recoveries) = 42m cost
Developers loss: 18m
Developers personal wealth: 2m
Loss to taxpayer reduced by 11m and moral hazard applies.
At a time when the country is f*cked and many private citizens are struggling to repay debts, it’s important that everyone is treated equally.
At last Nama has realized like all other real estates collapses worldwide, its a partnership approach that can only deliver a greater return. The carrot is now a sensible approach to adopt rather than the hereto forth stick, by Frank Daly.
Its about time this country got a grip on moral hazard, what do people want public hanging or a economic recovery. We had better accept that ya the lending was bananas, the borrowing crazy and the losses huge on the tax payers, but letting Nama as a government agency to run the biggest property portfolio in the western world without assistances from the developers.
May i suggest that that readers examine the Saving and Loans Scandal in US in which at 1st the developer where removed but over time the realization that to extract maximum returns they returned in the workouts. The question is who would you rather have negotiate a deal, a developer who may have some skin in the game or a Nama appointed executive who will get his fee either way.
Finally the losses are the losses and we better get our economy back to some level soon or its a decade of this gloom. The developers who has stayed and committed to Nama should be applauded and rewarded in there enterprise to maximize Nama’s return.
@Ahura M: There are a couple of misconceptions in your theory. First – most developers don’t have €20 million left. If they had, NAMA would have already taken it as part of their business plan. If they didn’t part with it, NAMA would pursue them.
Secondly, the developers are the cheapest “receiver” that NAMA will get and having established that they probably have nothing left, NAMA needs to incentivise them.
I mentioned some two months ago, in relation to Anglo Irish Bank in Boston, that the other incentive being used was the forgiveness of personal guarantees in return for the borrowers achieving certain targets (hurdles if you like). While not rewarding them with bonuses, it does let them off the hook going forward.
This may not have been particularly successful as who wants to be in bondage for the foreseeable future when, if you have nothing more to lose anyway, the easy way out is a quick bankruptcy.
@ who_shot_the_tiger,
We won’t bridge our difference of opinion. I am not of the school of thought that would leave Sean Quinn in charge of his insurance company because he knows how it works.
On the two issues you raise:
a.) The developers are broke – are they? We were told they put everything back into their businesses. Separately we discover banks were effectively lending 100%. It’s remarkable that none managed to make and extract profits over the past decade. A cursory review of their wealth will not discover all monies and assets.
b.) They are the cheapest receivers. This is not necessarily true. There is little evidence that they knew how to operate efficiently in the first place. There are operation risks as it opens the possibility of fraud. A separate issue I’d like to see teased out is that if developers’ companies are kept in business and owe money to other creditors, will recoveries have to be shared with these creditors?
Let us make one thing very clear when we throw words around like “profit”. In the above example there is absolutely no profit unless the property goes for more than 100 million, period. What NAMA is suppose to do is reduce the “loss” to the taxpayer. There is no real profit in NAMA, nor will there ever be.
If the state, or whomever, is so interested in phony profits, why did they not “sell” the property to NAMA at 10% face value instead of around 50%. That way they would have an even bigger “profit” when it is sold for a loss.
This is what happens when you socialize private loss in a crony capitalist system. The state and their cronies make up the rules and values and the little guy pays for them.
@JW
Agree absolutely. Said this last November:
Nama’s use of creative accounting effectively buries about €50 billion of losses comprising €40 billion of loan write offs and €10 billion of uncollected rolled up interest. This has two significant implications as follows:
# It becomes much easier for Nama to report an illusionary “profit” when wound up. It also made it possible for the Irish authorities to claim that Nama was the best solution to Ireland’s banking crisis.
# With the stroke of the pen, Nama is effectively forgiving about €50 billion of debts. Where is the “moral hazard” and justice in this when, based on Nama’s creative accounting, every billion euro of discount on the loans being acquired is immediately written off to the benefit of borrowers?
Repeated suggestions by the Minister for Finance and Nama that it will pursue debts to the “greatest possible extent” must be taken with a pinch of salt as they don’t even appear in Nama’s balance sheet or form part of Nama’s core objective.
Why is Senator Mark Daly at???
http://www.rte.ie/news/2011/0602/nama.html
Either he must bring NAMA the specific example of the incident(s) or he must shut up. He is starting to sound like Harold Camping.
I also like the NAMA spokesperson saying NAMA doesn’t own any properties so it has not sold any properties. Not according to your Chairman and CEO’s speeches in Cork and Dublin recently….. “In 57 cases we have been left with no choice but to enforce against borrowers or approve enforcement by participating institutions”
@BR, there is a detailed set of entries on Senator Mark Daly including this one where today’s developments were reported in an update.
http://namawinelake.wordpress.com/2011/01/31/senator-point-blank-refuses-to-provide-details-of-alleged-nama-wrong-doing-in-seanad-debate/
NAMA has approved the disposal of €3.3bn of loans/properties, though practically if not all were disposed of directly by the developer under NAMA’s auspices, as I understand it.
I was more referring to the fact that they don’t own property (yes I guess you could argue that the properties are in receivership so not directly owned by NAMA but they are in essence acting as Mortgagee in possesion).
Also as we all know €3.3bn of approved disposals does not translate to €3.3bn of sales and while I am on that point does the €3.3bn refer to loan amount (i.e. €3.3 of the €77bn) or realiable value as in assets are for sale with an asking price of €3.3bn?
But also Mark Daly’s comments are again bizarre, no? I assume someone told him he was re-elected to the Seanad so he doesn’t need to grandstand anymore…
It is as unspeakable as it is predictable…
http://www.thepropertypin.com/viewtopic.php?f=50&t=27290
@Ahura M
Sean Quinn created huge employment in an area of the country that didn’t have an a*se in its trousers. His mistake was in trying to take over Anglo with a massive gamble in CFDs. Who runs the insurance company is probably irrelevant. More relevant is keeping the employment locally.
Yes, the banks were lending 100% (and more), but that was in the latter stages of the boom and does not mean that the developers did not lose money. It just means that they already had all their own money invested and were over-leveraged.
The asset receivers appointed by NAMA and the banks have their desks piled high and in the main have no idea what to do with the rubbish that has landed there, other than collecting rent where they can – and they are even finding that difficult.
Everyone plays the whinging game with receivers. Just ask John Corcoran’s friends. And that just doesn’t apply to tenants either. When a property is being sold by a receiver you can write its value down by at least 20%.
In relation to the fraud element – Could you perhaps explain how that might happen? Because to my knowledge NAMA has introduced various obstacles to prevent that.
Of course creditors should share in recoveries – if NAMA will allow it. However, to date, they have not adopted a particularly (what I would consider) moral or generous attitude towards creditors of NAMA clients.
@WSTT
“Sean Quinn created huge employment in an area of the country that didn’t have an a*se in its trousers.”
I’ll do that too if you give me 3.6 billion euro. Just don’t ask for anything to show for it at the end of the day (2.8 bn in loans, 800 million in underreserves in QI). Except for my helicopter and princely lifestyle, of course.
Gambling……
What is wrong with a man sitting around a kitchen table playing a game of 45 with dear friend’s. Nothing to loose other than a couple of matchstick’s. The sheepdog basking in the glow of the turf fire. No sign of “CFD’S” around here.
The Bliss of Irish rural “Lifestyle”.
That’s our money!!!
NAMA might have paid €30 billion for €70 billion of loans but the State made good the €40 billion hole the transfers left in the banks’ balance sheets with Promissory Notes and Capital Injections. NAMA should not be trying to get back €30 billion. They have to try and get back €70 billion. They will fail, but they have to try.
I can see the theory of the incentives in this scheme but they are rewarding the developers for making a loss.
@yogan: He didn’t have €3.6 billion when he started. He had a digger and a truck. Want to start with that?
The Mystery of the vanishing Paddy…..
“GARDAÍ searching for a developer who owes more than €28 million in unpaid loans have been unable to find any trace of him.”
http://www.examiner.ie/ireland/developer-vanishes-owing-28m-loans-156658.html
@WSTT
Lots of fellows start with a digger and a truck. I know a good few. They employed lots of people too. Most of them are also bust, but not to the tune of 3.6 bn euro.
@wstt – why is the business of Quinn so important? We all start off small, sometimes with just an idea – not even a digger or shovel.
Or, don’t jobs in retail matter in NAMALand? Quinn’s a hero – all the rest are whingers?
@yogan:That’s not the point you made. You said “I’ll do that too if you give me 3.6 billion euro.” I pointed out that he didn’t have €3.6 billion when he started.
Quinn employed lots of people in a particularly disadvantaged area of the country – a lot more than most.
@WSTT
And you said he started with a truck and a digger – that’s not employing lots of people. The lift-off in employment came as a result of debt financing.
@yogan: He did employ lots of people. Have you ever visited the Cavan/South Fermanagh area?
It is irrelevant how the lift off in employment came. It came. Most businesses in Ireland expanded as a result of debt financing.
The stockmarket here is a joke and was dominated by the banks in any event. If the locals wanted to raise equity they went to London.
@ WSTT,
Insurance companies take money in up front and pay claims at some point in the future. A rogue insurer can take in a lot of cash but not keep adequate reserves to meet future liabilities. It appears that Quinn was writing a lot of underpriced business to generate cash for his immediate needs. This, coupled with the unusually risky asset investment strategy of Quinn Insurance, meant it was too dicey to leave SQ in charge. Next time you insure your car and see the new levy, spare a thought for Sean.
On receiver recoveries: It’s no great surprise that receivers are busy, but I don’t see any reason why a developer would achieve higher prices in the current climate. Any discount to market values achieved by receivers isn’t because a receiver is the seller.
On potential for fraud: anywhere you have desperate people and large transactions are open to abuse.
@Ahura M:
Quinn Insurance – Accepted. But that is why we have Regulators.
Receiver recoveries. It is generally accepted in the industry that receiver sales always generate lower returns. They are perceived as “distressed” sales. In the current market, there are developers out there adding value. Most receivers do not have either the knowledge or the inclination to do that. They just want to hold, collect their fees and sell when they can.
Potential for fraud: There always is. However NAMA is doing its best to prevent it. It may not be enough (and I doubt that it will be) but they are trying.
@WSTT
You said he built the business up himself. I said I could do the same if I had that level of debt financing and didn’t have to pay the debt back. That’s all there is. Even allowing for the 2.2 bn punt on Anglo, there is 1.4 bn missing.
@yogan: What you said was “I’ll do that too if you give me 3.6 billion euro”, implying that he commenced his business and created massive employment in an underprivileged area on the back of €3.6 billion. He didn’t.
Until he started gambling on Anglo shares with the premia from the insurance business, he appeared doing OK. His concrete and blocks business was his core business and was very profitable over the years and he started that from a small farm on the border. There are assets against his total borrowings. They include the core building products group, leisure industry holdings and the insurance company.
Where did I say that “he built the business up himself”? No-one can build a business that size themselves. They need financing. What I said was that he “created huge employment in an area of the country that didn’t have an a*se in its trousers.”