Comptroller and Auditor General’s review of NAMA – what was its purpose and what did it conclude?

Having read the 174-page (many of the pages are blank it should be said) report from the Comptroller and Auditor General (CAG) a few times now, I am still puzzled as to the purpose of the report. As to its conclusions, I can only find reference to one judgment by the CAG which specifically relates to “systems and structures to assist it to govern and manage its operations” and concludes “while these are evolving, the steps taken to date are reasonable and will be kept under review in the course of financial audit”. Whilst the report does contain many snippets of fascinating information not previously available, as a whole it is unstructured and lost. This entry examines the report which was made public by NAMA on 2^nd November, 2010 together with an accompanying “summary of findings”

At the outset I must say that I have seen more than my fair share of audit reports in my lifetime, financial and systems. They have all set out terms of reference – what they set out to achieve. The terms are usually quite clear because auditors love to restrict their exposure so as to avoid blame (and liability) for matters outside their remit. And after the terms of reference, you usually get the audit approach followed by results and conclusions. Against these standards, what the CAG has produced is reprehensibly poor because

(1) It is unclear and muddled as to what it sets out to achieve

(2) It doesn’t disclose the approach taken to the work to achieve whatever it thinks the objective is

(3) It is fair to say that there are “results” but they seem haphazard and without structure or context. The report is bizarre in the amount of uncontextualised detail it provides.

(4) There is nothing worthy of the term “judgment” or “conclusion”. There are a small number of ad-hoc comments.

(5) There are no recommendations for improvement or tightening of procedures

(6) There are no timescales, either for the work done or future references

At the outset the report says that “its purpose is to give an early account of the process [asset acquisition process] based on documentation examined by my Office of the structure, systems and procedures put in place by NAMA.” The report does tell us what it is not addressing “the systems and outturns are currently being audited as part of the financial audit of the first accounting year of NAMA.”

So that’s it – to give an “account”, to tell a story. Well it has probably succeeded to that extent because what follows is a meandering ramble that touches on aspects of the acquisition process and concludes with the equivalent of the short story ending “and then I woke up and found that it was all a bad dream”. What I extract below are snippets which I think you might find interesting and which contained new information – there’s no particular order or hierarchy to these, pretty much in keeping with the structure of the report.

(1) The Participating Institutions (PIs) at NAMA are as follows

(a) Bank of Ireland and each of its subsidiaries except Bank of Ireland (UK) plc

(b)  Allied Irish Banks and each of its subsidiaries except Bank Zachodni WBK S.A.

(c) Anglo Irish Bank Corporation Ltd and each of its subsidiaries

(d) Irish Nationwide Building Society and each of its subsidiaries and

(e) EBS Building Society and each of its subsidiaries

This is the first time I have seen this list of exceptions. Bank Zachodni should certainly have some NAMA eligible loans which probably aren’t suffering to the same extent as property loans here. However I note that AIB’s operations in the UK which that bank has being trying to flog (unsuccessfully) is not an exception.

(2) Up to May 2010 (why May? No idea) five loans had been referred to the expert reviewer following protests by PIs claiming the loans were not NAMA eligible. There is no information given on the outcome of these reviews.

(3) NAMA engaged a consultancy in 2009 called London Economics to assist with setting out a framework whereby long term economic value could be measured and this firm figures “that the range of implied property price changes (in nominal values) for the period 2010 to 2016 for a combination of commercial and residential property was  Ireland – 17.7% to 28.8%,   UK – 14.7% to 20.3%,   US – 10.5% to 23.7%.” It is not clear when in 2009 the firm was engaged. Following 10% falls so far in 2010 in Ireland’s commercial and residential property markets with the bottom some way off I would have said, that 28.8% upper limit looks ambitious.

(4) Moneys advanced to developers after April 2009 seem not to be subject to haircuts “it was the Minister’s policy intention that no further discount would be applied on the transfer of loans to NAMA in respect of any moneys advanced after 7 April 2009, provided that it could be established to NAMA’s ultimate satisfaction that the moneys were advanced as part of normal commercial banking arrangements” and “Following review of claims and supporting documentation for the loans transferring in the first tranche, NAMA accepted claims totalling €299 million. In accordance with the direction from the Governor of the Central Bank and the Financial Regulator in May 2009, no discount is applied to advances after April 2009 and the full advance is treated as an asset. The amount by which the advances element of the loan balances was reduced by the application of the loan discounts, €126 million, was added back”

(5) Discount rates used to value current market values based on future cash flows ranged from 2.25% to 15.89% depending primarily on loan to value ratios. In simple terms this means that NAMA pays far less for loans which have high loan to values.

(6) Payment of interest on NAMA subordinated debt is only to be made if NAMA has achieved certain unspecified objectives. The interest rate payable on subordinated debt which makes up 5% of consideration is the 10-year bond rate plus 0.75% (a total of 8.42% as I write this). The first interest payment on subordinated debt is due in four months on 1^st March, 2011.

(7) NAMA will pay €1.6m over a 10-year period just to have its €5bn development pot lending rated. Even though it is State-guaranteed. This looks like a complete waste of money as the debt would presumably have the same credit rating as State debt.

(8) Possibly the most useful inclusion in the report (apart from some cost figures) is the sample valuation of a loan shown in Annex A on page 50. This calculation introduces some new concepts like the valuation of state-aid, payment for derivatives and adding back haircuts on advances made after April 2009. This calculation will be the subject of a separate entry.

(9) If Euribor rises to 3.8% then NAMA will have negative interest income (ie the amount it pays out on its bonds and subordinated debt will exceed what it receives on performing loans). This is after NAMA has entered into interest rate swap agreements, without which the tipping point would be 2.22%. To buy this security NAMA forgoes some interest receivable below 2%.

(10) Over 10% (85 out of 766) of loans in Tranche 1 were disputed by NAMA and were subsequently valued upwards. This despite the PIs’ valuers having a duty towards NAMA. 20 of the 766 loans were valued downwards.

(11) Sums paid to third parties will be the subject of a separate entry.

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