In their recent presentations to the Cantillon School of Economics and the Fianna Fail gathering (the one that suffered from such poor optics, though that had nothing to do with NAMA), a common theme addressed was what NAMA called misconceptions about its operation. Four areas were explored (pages 29 & 30 of Frank Daly’s presentation in Galway set them out as NAMA intended). This entry examines these four misconceptions.
1. NAMA is going to be a borrower bailout. NAMA says “No”! and that borrowers will continue to owe 100% of their debt. Furthermore NAMA may be better than banks because NAMA is more rigorous and impartial than the banks. And that some borrowers are “unlikely to survive” (don’t think NAMA is going to have them whacked!).
My response: Of course it is early days for NAMA relative to the 7-10 year NAMA lifespan. So far NAMA has taken legal action against Paddy Shovlin, though it seemed to give notice last weekend that it was contemplating legal action against 12 more developers who owe a total of €300m. High profile developers from the boom still maintain what for most people would be rich lifestyles (by reference to their residences and personal/leisure transport). Beyond telling developers that excesses will be not be looked on kindly, it is not clear what else NAMA can do at this stage – their role is to maximise the return from the assets they’re buying, not to moralise or persecute (unless they can make money out of it). Banks certainly built up what many would characterise as cozy relationships with certain developers and it may come as a severe shock to developers not have your word taken on trust by NAMA’s management. NAMA should not have any relationship with developers which might compromise the impartiality of their actions and that will remain a concern because NAMA needs employ people from an industry that will have some degree of familiarity with some developers. That needs to be policed vigorously by NAMA. It would have helped if NAMA’s accounting methods made it clear that the gross value of the loan remains outstanding with accrued interest and also the level of write-down that take place. So overall, too early to say.
2. NAMA is going to be a bank bailout. NAMA says “No”! and adds that valuations are stringently assessed, that the 5% subordinated debt element of the consideration to banks will not be honoured if NAMA makes a loss and that a surcharge can be levied on banks for any residual losses when NAMA is wound up.
My response: This is a weaker area for NAMA. NAMA has not apparently sought to change its valuation date from 30th November, 2009 despite the fact that in NAMA’s main market, Ireland, property prices have continued to decline. NAMA is letting performing loans slip through its fingers (at AIB through the sale of its UK operations and possibly through the sale of Bank Zachodni, at BoI where €4bn-odd of loans are no longer going to NAMA and Anglo where €1bn-odd of NAMA-eligible loans are seemingly being sold by Anglo with NAMA’s agreement). As regards the 5% subordinated debt, it is certainly the case that banks are expecting to see some value looking at the latest bank balance sheets but it is basically a clever aspect of the NAMA model that 5% of consideration may in fact not be paid. It should however be noted that the interest rate payable on the NAMA subordinated debt is nasty – it’s the 10-year Irish bond rate plus 0.75%, that’s over 6.75% this morning. With 10 years of payments at that level, banks mightn’t be so concerned with not having the value of the subordinated debt honoured. The levy is laughable though it was included in the NAMA Act. Anglo and INBS are terminal basket cases and will not (in all likelihood) be around to absorb any levy. Serious professionals like Frank Daly and Brendan McDonagh belittle themselves when they still continue to refer to the levy.
3. Scale of property market recovery: NAMA says “Not impossible” and that only a modest recovery is required to break even.
My response: This is dealt with in some detail in an earlier entry. In short NAMA needs a recovery of about 10% in prices from today to break even at a gross level (ie acquisition value of loan less sale value). There is risk of further price declines hampering NAMA’s operations and NAMA needs to be careful to ensure its operating costs and interest payable are fundable from interest receivable and cost allowances that are deducted from NAMA loans.
4. NAMA is a goldmine for advisers: NAMA says “No”!, that costs on advisory services have been low to date (no quantification given), that there was competitive and public procurement for valuation and due diligence services to drive prices down, that 100% of due diligence costs are recouped from the banks and that the taxpayer needs to ensure that loans are correctly valued.
My response: In the NAMA draft Business Plan, the projection was for almost €200m of costs in the early years which would presumably be paid to third party for services. The accounting in the first quarterly accounts doesn’t help much with seeing what is being spent because some costs are taken to the Profit and Loss account whilst others are aggregated and capitalised. However it was clear that some €2.45m was spent with Pricewaterhouse Coopers on “secondment fees” which were not subject to public tender. Due diligence costs are relatively minor, there’s a 0.25% deduction that NAMA can make to loans being acquired for due diligence. Of more concern is that NAMA is entitled to deduct 5% for future enforcement costs based on the fact that average enforcement costs for defaulting loans are reported to be 15% and that less than 1/3rd of loans will default. NAMA is also letting performing loans slip through its fingers and the upcoming Paddy McKillen case which apparently involves €2bn of performing loans may further reduce the proportion of performing loans in NAMA’s final portfolio and NAMA may end up spending vast sums on enforcement not covered by this initial 5% allowance. The last point about NAMA’s duty to the taxpayer is valid and NAMA will be reminded of that should any attempt be made to acquire Anglo loans at a block discount. A related point concerns recent revelations on salaries and benefits at NAMA, though presumably NAMA will say it needs the best people.
NAMA Wine Lake 
“It would have helped if NAMA’s accounting methods made it clear that the gross value of the loan remains outstanding with accrued interest and also the level of write-down that take place. ”
This is absolutely fundamental and is the basis of my 3-page letter of complaint being sent today to the EU Commission.
For an armchair economist NAMA is an intense feast, like the world cup, only comedy. Professionals have a part of their brain that can deal with risk and huge unkowns. I do not. I cannot fathom the value of a half built office block in the midlands, or the number of zeros in the ultimate legal fee, or the secrecy of fund flow.
Professional do not have a part in their brain that can take the abstract and ultimately dangerous trajectory of public indiffernce and shape it constructively. Lack of rigorous public debate is bad. Debate is stunted not by what we know, but what we don’t know. Someone needs to lay bare all the unkowns, in one place. Like in a classroom full of confused kids, the silence will turn to chaos, unless someone turns the light on pretty quick.
How much do we really not know ? This is a question that needs answering, then the public might wake up and realise it’s not just them.
Brian,
I do not know what you are writing to Europe, but as a student of mathematics (and I stress the student!), the probability of the gross loans being repaid (with or without interest) is zero.
What is the point in living and dealing with fantasy and rolling up loans and interest that will never ever be paid? It is a fiction.
Reality needs to be faced. That has been the problem with the banks for the last two years – they have fed us fiction and look where that has got us… bond rates at an unsustainable 6% plus.
Sorry, got to go…. I hear the IMF knocking on the door!
WSTT
The probability of *ALL* the gross loans being repaid (with or without interest) is zero. BUT, as much of these loans as possible must be repaid.
Every extra billion that can be prised from the borrowers is a billion saved for the country. I don’t want to see the lives of borrowers destroyed (to any greater extent than the damage that they and their banking and political friends have inflicted on the country) but they must be brought down to earth and, in so far as legally possible, repay their borrowings. Having lived in a virtual casino for several years, they need to face reality, accept their game is over and pay their gambling debts.
Personally, I would prefer the more socialist EU to be knocking on the door rather than the capitalist IMF. Maybe, we need both.
To respond to sf writer,
Donald Rumsfeld’s most remembered quote was:
“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.”
There are many unknowns, not the least of which is the actual losses in the big two banks. These are being, and have been, covered up by the Department of Finance. If you read Peter Mathews’ blog you can get a sense of the unknown (except for Mr. Mathews) unknowns.
http://bankermathews.com/
An example of the obfuscation being practiced relates to a Nama bound loan where one of the big two banks and Anglo were joint funders. Anglo’s Nama haircut on the loan was assessed to be much greater than that of the other bank, in the same proportion and for the same loan! If you talk with a disgruntled Anglo executive over a pint, you will discover that this was not an isolated incident.
To me, the only logical reason for such action is an attempt by the DoF to minimise the perceived losses in the big two in a desperate survival ploy, while using Anglo as the dustbin for as much as possible.
Put it together with Peter Mathews and you’ll find at least one the underlying unknown agendas.
BTW/ sf ca not sf irl.
Years abroad have changed my perception of freedom of information.
I have visited the blogs, crunched the numbers, read the reports and scratched my head. All roads lead me to 2 conclusions:
1. The taxpayer was hurried into a deal so complex, evevn the experts cannot get their heads around it. That is unreasonable.
2. Nama requires a denial, in the existence of the potential for corruption, that is so unreasonable as to be rediculous.
We can cruch numbers till the cows come home. But as an amateur and migrant I have to say these are two show stoppers.
As they say around here ” homie don’t buy that BS… two times”….
If the goal is information, then, ‘ it’s all getting a bit technical ‘ and they are famous last words. Especailly as the technical arguement has already been lost. To finish on a poetic note, think red posters on your bedroom wall in the seventies.
Don’t get me strated with the poetry…