According to reports earlier this year, NAMA was demanding 1,000 separate items of data for each individual loan transferred to the agency. The banks complained but NAMA held firm even though this resulted in delays to the process as due diligence was carried out on loans. It also resulted in NAMA applying higher than expected discounts to loans – the record thus far has been the 72.4% applied to INBS’s tranche 2 and overall NAMA has applied an average discount of 52% to the tranches considerably up from the 30% envisaged in October 2009 (according to Anglo’s interim report for 2010 last week, a significant number of loans were indeed acquired for nil value).
NAMA did signal at the conclusion of tranche just over 2 two weeks ago that it might relax somewhat the data requirements for future loan tranches. And today the Independent is suggesting that Anglo’s remaining loans might be acquired at a “block discount” so that the Financial Regulator can report Anglo’s capital needs in October. If true, these reports could herald a panic-prompting recklessness and could put the NAMA project at risk.
The EC is ultimately approving the valuation of loans from the five financial institutions to NAMA. They took three months to approve the first tranche. Their approval of the second tranche is not at all guaranteed as a result of continuing declines in the property market and a seemingly higher proportion of non-performing loans which might give rise to a need to increase the enforcement provision NAMA is entitled to charge the financial institutions.
If NAMA acquires the remainder of Anglo’s loans (€20bn at face value approximately making up ¼ of the entire NAMA portfolio based on face values) at a block discount without undertaking the necessary due diligence then this will mean there will be a risk the EC reject the valuations and NAMA has to go back and do the work “properly”. The EC might also get a little fed up with the notion of NAMA being an independent body yet plainly reacting to a political expedient. The Department of Finance has exhibited several signs of uncertainty and panic this week as they grapple with a hammering of Ireland’s financial system (exemplified by the rise in borrowing rates) and the EC’s rejection of the second Anglo restructuring plan. The announcements on Wednesday had the whiff of panic, and these new rumours of fast-tracking Anglo’s loans don’t seem thought out. At a minimum if the loans are fast-tracked at a “bulk discount” then whatever resultant capital requirement declared by the Financial Regulator will be understood to be dependent on EC approval. It will also at a minimum undermine confidence in NAMA as there will be suspicions that the loans have been acquired at too low a discount – many commentators are speculating that the discounts will increase as progress is made through the tranches as there is a feeling that the smaller borrowers will have more toxic loans. So if the objective of the Financial Regulator’s exercise is to give “absolute certainty” on the cost of Anglo, plainly fast-tracking loans without due diligence which will then be subject to scrutiny and revision by the EC will not accomplish that aim.
The seas being navigated by the Department of Finance today are stormy even by the standards of the past two years. All the more reason for a steady hand at the tiller and for the ramifications of any changes to NAMA’s method of operation to be carefully considered.
NAMA Wine Lake 
It was going to be impossible to do due diligence within the imposed time limits on 15,000 loans in any event, but this is the first major crack in the dam and if this happens it will be exactly as you say. Nama’s credibility will be lost because as the loan examination gets down to the lesser loans, the diagnosis is getting worse – not better. A block discount will underestimate the real discount that Anglo should be taking on these loans.
A further question arises – Will this block discount be “full and final” settlement? Will Nama drop the future “loss recourse” to Anglo as well?
I’d hope this is no more than kite-flying by a shaken DoF. If they stop and consider what a block discount will mean they should recognise it will not give absolute certainty to the cost of Anglo. And I don’t think the EC will let NAMA operate without a loss recourse and I also think they would shoot down a plan which saw the abandonment of due diligence.
By the way, I notice that a lot of commentators are predicting the loans in the remaining tranches – accounting for some 1450 borrowers will suffer higher discounts. I really wonder if that’s the case – won’t the bigger operators have been re-financing every week as the boom became boomier whereas smaller developers might have better LTVs and there might have been better due diligence at the banks before granting loans. This may be tosh but I don’t see why there seems to be confidence that the haircuts will get worse (remembering also NAMA has a fixed valuation date of 30th November 2009)
You make a good point and you are quite right about the weekly refinancing. This applies particularly to Anglo, who even “bundled” loan packages for certain borrowers and then lent the perceived equity in these bundles as an “equity release” . This method was even used for partnership equity in multi-syndicate situations.
The problem with the smaller loans is that many of them were made against land and development sites in small towns and even villages in rural Ireland. I feel unqualified to comment on their current values, but I the recovery amount will depend on the “remainder” value of a lot of this type of lending.
Another problem with the remaining book value at Anglo will concern the “shenanigans” in the Treasury Department. As loans were “rolled over” their base rate was related to the daily fix of LIBOR. Depending on the rate (if the rate was favourable to them) Treasury would notify the loan management of it and the interest rates were rolled on it. If the rate was unfavourable, it was fudged and the previous day’s rate might be used.
This, of course, favoured the bank and lead to “profits” from the Treasury Department – the flip side being that the clients lost money. This has not been “outed” yet, but it could lead to major claims against the bank depending on the frequency of these trades and how vigorously their clients will pursue the losses caused to them.
You’re not referring to the €50m-odd overcharge that Anglo are presently investigating on pre-2004 loans?
http://www.irishtimes.com/newspaper/finance/2010/0901/1224277974094.html
EDIT: 13th September, 2010. The Independent is now reporting that it the pre-2004 overcharges may be as much as €100m.
http://www.independent.ie/national-news/customers-overcharged-by-up-to-euro100m-admits-aynsley-2334622.html
Apologies, I did not realise that it was in the public domain. I don’t agree with either the timing or the amount though. It is played down. The practice was endemic over a longer time period.
Absolute certainty seems to be just shy of €40 billion if we are to believe Alan Dukes who, in a moment of weakness, finally ‘fessed up to a €39 billion loss for Anglo on Vincent Brown on Thursday 9th September.
http://www.tv3.ie/shows.php?request=tonightwithvincentbrowne&tv3_preview=&video=26853
His excuse for not being up front with the Irish people before now effectively was that he could only be “economical with the truth” because of accounting rules!
The big surprise for me was that this was not even commented on in the national press today. I wonder why?
Thanks for the link. I must say that Vincent Browne is one of Ireland’s treasures and his offbeat style of presentation is refreshing. A shame he’s not on the €600k Pat Kenny ticket at RTE. Sad to see he’s selling the family home. As regards the programme
Vincent Browne: What is Anglo going to cost us?
Alan Dukes : the latest ministerial announcement requires the Central bank and the rest of us to come up with by the end of this month the best forecast we can make of what the total expected losses will be in Anglo. And that requires us to have foreknowledge of the kind of haircut on the assets that are going be transferred into NAMA and a corresponding judgement /assessment of the losses that we can expect on that part of the remaining loanbook in Anglo that is in problem (sic) and an estimation of what we would have regarded as the base for the good bank of whether those loans will continue to perform as we think.
What followed was a like a good old wild west shootout with Vincent, Peter Mathews and Alan Dukes firing figures at each other like crazy, mixing up billions and millions, rounding in an unconventional way (€38bn became €30bn) and attributing different meanings to the same terms (performing loans pay interest according to Vincent, Alan says they comply with the loan agreement which of course might permit rolled up interest). Now the precise derivation of the €39bn was 60% of €40bn (reverse calculated by taking €70bn of total loans and deducting Alan Dukes’ rounded down €30bn for non-NAMA) plus 50% of the non-NAMA €30bn. From the €39bn you would presumably deduct the €6bn of Anglo capital giving you a net bailout of €33bn. I think the costs will be over €30bn and could on a vanilla windup be as high a €35bn and that excludes any nasties lurking in Anglo’s derivatives.
I must say that I had sympathy for Alan Dukes. Part of his presentation was calculated no doubt – gone was the leather jacket and pretence that everything was gonna be alright. And in its place I think there was someone honestly seeing the writing on the wall and in the main striving to be as open as circumstances allow. He did take a €100k cut to his €250k fees. And comparatively speaking you’d have to say that the State is getting its money worth and more. Of course Peter Mathews has become a one-man media brand in the last two years and it seems the official estimates are tending towards Banker Mathews’ own numbers – very frustrating for the man himself no doubt.