By coincidence, this morning I was studying a Bacon report on the Irish hotel sector published in 2009, when news broke of another Bacon report being published today. Economic consultant and darling of the previous political administration, Dr Peter Bacon has today produced a report on NAMA and the wider economy which is sure to generate some debate. The report is titled “A Contribution to the Debate on National Economic Recovery” and is available here.
The fact that immediately raises eyebrows is the report is commissioned by Treasury Holdings which is (a) supposed to be massively insolvent, according to NAMA and (b) engaged in numerous and colossal legal battles with NAMA. Of course, just because Treasury Holdings controls the purse-strings attached to this report doesn’t inherently take away from the report’s content but Peter Bacon’s standing may suffer from what would appear to be a curious patronising relationship. For those of you unfamiliar with Peter Bacon, he is an economist and economics consultant who is generally held in high regard – his report on the hotel sector mentioned above is typical of the well-researched and fairly incisive material produced by him and his company in the past. A separate report on asset management companies produced in 2009 was seen as giving the economic and academic green-light to the subsequent foundation of NAMA. His company is called “Peter Bacon and Associates” and I note that it is Dr Kevin Hannigan who is shown as the author on the PDF details of the report published today.
There might be some people who will claim this report is little more than a thinly-veiled attack on NAMA with added padding on the wider economy to give it a veneer of respectability, and some of those people might suggest Peter Bacon is nothing short of shameless for accepting a commission from an organisation that has colossal legal battles ongoing with NAMA, legal battles which appear to have personal overtones.
This morning’s report doesn’t call NAMA a bunch of poopy-heads but it does make comment and recommendations which might be considered unhelpful or indeed hostile by the Agency. This blogpost examines the NAMA elements of the report:
(1) The Bacon report had access to the Comptroller and Auditor General report published on 24th May, 2012. That report said “NAMA faces considerable challenges in achieving this income goal [of generating enough over its lifetime to breakeven on its loan acquisition and operating costs]” which is fair enough. This Bacon report says “it is hard to disagree with C&AG’s assessment that NAMA will struggle to meet its minimum target”. Hmmmm, the C&AG didn’t say quite say NAMA would “struggle” and indeed none of us has a crystal ball to foretell property prices in the second half of this decade. And it is general property prices that will ultimately determine NAMA’s final result – with residential property, NAMA has limited impact on this market, with commercial more so, but both property markets will depend on how the wider economy performs. It looks bleak in June 2012, but the hope is that Ireland can recover as it progresses through NAMA’s one decade life-span.
(2) I started to lose confidence in this report when it said “when combined with the intention of reducing its loans by 24 per cent by end 2013 it seems inevitable that NAMAs losses are set to rise – significantly, especially considering that credit availability in the domestic market for property is so poor.” NAMA will tell you it has already paid down €1.25bn of NAMA bonds and €300m of other debt and that it is presently sitting on a cash mountain of €5bn, or at least it will be if and when Bank of Ireland shareholders agree the Anglo Promissory Note “deal” on 18th June. So paying down €7.5bn in the next 18 months doesn’t look so daunting if you just need generate another €1.25bn in cash to add to your existing cash mountain of €5bn and €1.25bn already repaid. And remember the 25% debt pay-down by the end of 2013 is a NAMA internal target, the target “agreed” with the bailout Troika is to dispose of 25% of NAMA assets by the end of 2013, and on that score, NAMA has already approved sales of €9bn which if realized will mean that “agreed target” is met. So to meet this target should not mean a fire sale or suboptimal economic decisions by NAMA.
(3) The report says “In addition, the lender-borrower relationship, which is evolving, has become adversarial it would appear, in a significant number of cases. Such an environment is not conducive to achieving the maximum long term value for taxpayers. Where dispute is unavoidable it is recommended that mediation would be a more cost effective means of resolving issues in dispute rather than court proceedings and accordingly should be used where possible” No-one is suggesting here that the author of the report formed this view through anything other than the application of their own expertise, but there is a strong echo in the above statement and the recent statements by Treasury’s Ireland managing director, John Bruder who said “Or the third way is we collectively find an investor who is prepared to do a deal with Nama that Nama is prepared to agree and hopefully work with us with a view to getting us off their balance sheet.” The credibility of this report might have been strengthened if disclosure of the fact that its commission was from a company currently at extreme legal loggerheads with NAMA.
(4) The report recommends a review of NAMA and its strategy. It’s almost as if the author was aware of Minister for Finance, Michael Noonan’s announcement of such a review, which is in any case provided for in the NAMA Act and which must take place before the end of 2013. The report recommends that such a review will examine NAMA entering into “international joint ventures” – the report doesn’t identify any potential international partners by name, but – by happy coincidence, no doubt – Treasury was developing relations with CIM, Hines andMacquarie before NAMA decided to pull the plug in January 2012 and appoint receivers. The report suggest such joint ventures might be a means of managing its assets and also making the assets more liquid as interests in joint ventures might be more readily disposed of, if need be, compared with disposals of the underlying property.
(5) The report criticizes NAMA for both its approach to relationships with developers and for its lack of progress in restructuring the businesses with which it is dealing -“replacing one provider of debt finance with another will not result in any restructuring of balance sheets that would enable the long-term value of assets to be realised. Indeed, it is noteworthy that, after NAMA’s three years in existence, the C& AG notes that it has ‘completed relatively few loan restructurings’ never mind achieve an appropriate balance of capital liabilities, which includes equity. In addition, the lender-borrower relationship, which is evolving, has become adversarial it would appear, in a significant number of cases. “
The bulk of the report deals with the wider economic challenges facing the country and it provides a decent overview of the historical perspective, including in particular the housing market. There are diverse recommendations which range from forming a dedicated state-controlled mortgage bank to forcing banks to ‘fess up to the mortgage crisis.
But somehow, I got the impression that this report was aimed at NAMA and the lingering curiosity is why Treasury has philanthropically entered the macro economic research arena at this juncture. The suggestions that NAMA will “struggle” to break-even and should pursue international joint ventures are unlikely to be well-received at NAMA HQ.
This week, one of the NAMA v Treasury court cases, this one involving the so-called TAIL transaction was transferred to the Commercial Court division of Dublin’s High Court this week and is set to be “mentioned” again in October. It is one of the many pieces of litigation ongoing between NAMA and Treasury at present. NAMA is declining to comment on the report at this point.
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