Thanks to management consultant and regular commenter on here, Brian Flanagan, it seems as if NAMA is to open up its books and provide far greater information. The concession which Brian has campaigned for – through writing letters to the national press, the Committee of Public Accounts, NAMA and the EU – is that NAMA will provide additional “shadow accounting” for the €74bn of loans the Agency has acquired from the banks. At present NAMA accounts for the value of the loans and interest receivable and paid, all based on NAMA’s acquisition value and an interest calculation which is by no means straightforward – just ask Fellow of the Institute of Chartered Accounts, Fianna Fail Deputy Sean Fleming. What NAMA will do in its 2011 Annual Report (due for publication over the summer, July 2012 probably) is it will show a separate, additional accounting of the loans and interest based on original values. This will enable the public to see how much debt has been effectively written off by NAMA – some might call this debt forgiveness, but NAMA will tell you that the full amount of the loan remains due from the developer even if NAMA writes down the value of the loan in its books.
So to illustrate – if NAMA acquires a €100m from Anglo and pays €30m for it, then NAMA currently shows the value of the loan in its books at €30m. It seemingly calculates annual interest, primarily by reference to the €30m. And that’s how NAMA presently presents its accounts.
In future, we expect NAMA will provide a separate set of accounts which will show the loan at €100m, a provision for loss of €70m and a current carrying value of €30m. In addition we expect to see interest calculated on the €100m original value of the loan less a provision for loss to give us the actual interest booked. In this way, we can see how much NAMA has provided for losses, and if these losses are eventually written off, then we can see how much debt forgiveness or to use more commercial language, “loan impairment losses”, have occurred.
I recommend you read Brian’s own account of his campaign and the results. The letter from NAMA to the public accounts committee confirming the changes is here and reproduced below. Well done to Brian for winning greater transparency in NAMA’s accounts! And remember before you suggest jokes around the theme of “shadowy accounting”, that this transparency provides both accounting to general accounting standard PLUS accounting to provide the public information on just how much debt is being written off.
Well done Brian Flanagan and more power to your elbow. It’s not over till the Fat Lady sings.
@BF congrats you must be one few people to receive/mentioned in a letter from NAMA and not need a stiff drink,well done Brian.
Well done Brian.
I take it you are a Dub
http://wp.me/28tG9
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Born, bread and buttered.
Well done Brian!….and thanks!
Congratulations, Brian on your doggedness. I’m not sure what you have achieved. We all know what the original amount was. it would be more revealing and helpful if they marked the assets underlying their loanbook to market on an annual basis. Then we would really know what the ongoing losses were.
I am not surprised that NAMA has agreed this because initially, and for the next couple of years, the figures will make the agency look good. It has been selling the cherries and the few borrowers who are able to do so have been paying their loans in full. So it is an optimum time to show that NAMA is performing well. I would believe that at this point it is showing in excess of a 65% return on the par value of its loans. It’s an illusion. The issue is with the loans that it still holds.
@WSTT, NAMA will be able to claim an operating profit regardless of the concession reported yesterday, so if NAMA buys a loan that had a par value of €100m and pays €30m for it, and then sells the loan for €35m, then pre-yesterday NAMA would have been entitled to show a €5m profit. What yesterday’s concession should mean, is that NAMA provides a separate, additional statement which shows the €100m par value of the loan and the fact that a €65m (€100m-€35m) loss has been made on it by reference to its par value.
People like TD Sean Fleming (and indeed the rest of us) will get a better idea of how NAMA calculates interest. So the “shadow accounting” should show interest of say 4% on €100m being contractually due by the developer, but then NAMA will show say €1m being booked because it calculates interest primarily on its acquisition value.
What use is it? The general public will better see what has happened with NAMA, what debt writedowns and forgiveness there is and it will remind people that it is NAMA’s objective to maximise income and recover as much as possible of the original loan and not the written down value. I see Brian gets well-deserved mentions in the national press today.
http://www.independent.ie/business/irish/nama-to-reveal-more-about-actual-losses-on-toxic-loans-2997186.html
But the point WSTT makes, that NAMA is not revealing its real position because it won’t restate the values of all loans by reference to current values of underlying security, is important. Current accounting rules allow NAMA to avoid recognising such losses as long as the loan is being serviced for example, and the loss booked is very subjective. NAMA will tell you it can’t book notional profits either, for example if the value of the asset has increased, but when you look at NAMA’s portfolio, you’d wonder if such unrecognised gains would be significant.
I would make some other points:
1. Suppose Nama acquires a €100m loan for €30m and is ultimately repaid €30m in principal and interest. Arguably, it has discretion as to how it allocates the sum received between principal and interest. For example, it could say that it has broken even on the loan and ignore the loss of interest. If shadow accounts are created it would have to explicity account for BOTH the capital loss (€70m) and interest written off say €12m (€100m at 4% for 3 years) making a total loss of €84m. Henceforth, we could see headlines indicating that while Nama might report breakeven using its accounting standard it will have incurred a massive loss in the shadow accounts. This loss would not be Nama’s fault and could be largely attributed to the bankers, borrowers, politicans and administration but it would be a wakeup call to all concerned.
2. The accoumulated loss shown in shadow P&L accounts would encapsulate the full extent of the bailout (by my reckoning it could ultimately exceed €50bn including interest lost). Most of this bailout can be attributed to a few hundred borrowers and, if memory serves me right, it would be equivalent to about 60% of all outstanding household mortgages held by hundreds of thousands. This begs the question as why the Government and banks have been so supportive of the bailout of a tiny number of mega borrowers while being so slow and reluctant to assist, at much lower cost, the much more numerous mortgage holders who are in deep trouble.
3. In response to WSTT, the reporting of the huge losses based on the shadow accounts will serve to hightlight the need for Nama to recover the absolute maximum amounts from borrowers and to play the market successfully when disposing of assets. This will put pressure on Nama and borrowers to perform to the maximum and might, just might, result in a lower eventual loss.
@Brian, The interest argument is farcical. How long do you continue charging imaginary interest on loans that you can’t collect? In perpetuity? When do you stop? When its sold or when NAMA is wound up? In either event, the point is moot. The loss has already been identified. Fictitious interest on zombie loans? It’s irrelevant. An uncollectible interest charge that is meaningless. It would be more relevant if NAMA would confess to the real losses that it continues to carry on its book.
@Brian, The result of this is that NAMA will now puff its chest out and announce completely misleading distorted percentage recovery data – because it sold the best and highest value investment property first in the easiest markets.
@WSTT
If I have a mortgage and can only pay back the principal, does what you say mean that the bank ignores the interest payable???? You bet your life they won’t – they’ll even charge interest on the interest.
@Brian, Correct….. but it’s imaginary interest – a fantasy.
As Jerome Lawrence said: “A neurotic is a man who builds a castle in the air. A psychotic is the man who lives in it.”
(P.S. This quote is not directed at you, but at those that believe such interest levels are capable of being recovered. Like the ECB when they talk about the Irish and Greek debts, or the illusion that referring to delusional interest makes it real.)
@WSTT
Sure the interest may never be recovered and in that sense it is fantasy.
What is NOT fantasy or an illusion is the interest being paid by taxpayers on the capital needed to offset the banks’ huge losses which have been incurred because some mega borrowers are failing to repay or even service all their loans..
@BF “This will put pressure on Nama and borrowers to perform to the maximum and might, just might, result in a lower eventual loss.”
All indications are too much stick not enough carrot.
@Brian, That’s a different calculation. What you have asked for merely allows NAMA to fudge the figures for the next couple of years. It received assets at a huge discount to their face value. The only relevant question to NAMA is “Can you make a profit on your purchase cost? And if so, how much?” Anything else allows NAMA to manipulate how it is measured. It’s a simple balance sheet “How much profit have you made on your sales to date and what is the current value of your remaining assets?” The rest is chimera.
@Brian, P.S. Just answer me one question “How long to you continue calculating and adding interest onto uncollectible interest?” 20 years…. 40 years …… how long? Because the figure becomes meaningless. Actually it already is.
There are bank borrowers other than the mega borrowers who can’t (or won’t) service their loans. Many of them have home loans that are underwater, some bought “investments” etc. The fact is that none of these borrowings should have been socialised. To create fantasy accounts, add to them and dream of what should be rather than what is actually real – is delusional
@WSTT
How is the interest not real?
A bank borrows funds at, say, 3% and lends at 5%.
The 3% cost of doing business is a very real cost.
The extra 2% may never be realised – but that doesn’t mean you ignore the 5% in total.
The 3% never recovered is most definitely a loss.
@BF, BTW, I agree with John. Many of NAMA’s borrowers are considering “walking”. I don’t believe that the showing shadow accounts puts further pressure on the borrowers and NAMA. It enables NAMA to cook the books in the early years and is irrelevant to the borrowers. What it does do is feed the media to enable them to write further ill informed comment. Having said that, I do welcome any transparency, but I note that the real transparency that would reveal the true picture – the value of NAMA’s retained assets – is withheld.
@WGU, It’s not real because it will never be collected. It’s a fiction. Add interest on fictional interest annually and you have a fantasy. Continue doing it into perpetuity and you are delusional.
@WSTT
Yes – but the interest on the NAMA bonds is real – and that is money NAMA borrowed, backed by the State, to buy the loans from the banks.
Are you proposing that NAMA write off any interest accruing – thus converting all outstanding debt into interest-free loans?
I’m pretty sure you know the quote – but here it is again anyway:
@WSTT
“How long to you continue calculating and adding interest onto uncollectible interest?”
Until repaid or written off – could be immediate, three years or whatever.
Remember, when you lose capital, you also lose its earning capacity. I think Warren B or someone similar said that the first rule of managing finance is to preserve the capital base and second rule is to remember the first rule.
A good number to reveal is the interest on additional funds.Are new funds used to pay interest on any current borrowings,specifically to non NAMA Institutions to keep the patient alieve.How does NAMA decide this additional funding,based on what ?
Regarding calculation of interest,if the loan has penalty rate for covenant breach should that apply too.
@BF, When is it written off, Brian? Does that mean that the longer a loan is held by NAMA fantasy interest continues to accumulate on it because they won’t sell it at market value, thereby increasing the loss; whereas the fantasy interest clock stops on the loans that they do write down and sell?
@BF “Remember, when you lose capital, you also lose its earning capacity.”
We have already lost the capital. Why do you think that that lost capital’s earning capacity (the interest) should continue to be registered as though it was real – when by your own formula above you accept that it isn’t?
The only rational reason to keep the interest rate clock ticking ,is if the borrower has resources.
Big judgement numbers against borrowers sates the apetitate for vengance or revenge,but are useless.
@WGU, You can accrue interest until the cows come home, but if it’s uncollectible, it’s just an illusion. The bogus calculation of “what might have been” the interest is risible. It’s not real and never will be.
@WGU.”.Are you proposing that NAMA write off any interest accruing – thus converting all outstanding debt into interest-free loans”
The vast majority,mobile today,but if memory serves me 70% are classified as imapared or non-performing.Not only are they going to write off any interest accurred,they probably won’t get back what they actually paid for them.
Could easily be a further 10billion hit when all said and done.
@JG, according to NAMA’s management accounts for Q2,2011 some 77% of the loans being managed were impaired though that includes loans which are being serviced in accordance with the loan agreement but on which interest is contractually – according to the original loan contract with the bank – rolled up.
The Irish…. looking in on NAMA as it fights with its borrowers over a pool of assets that grows smaller by the day.