Archive for December, 2010

NAMA in 2011 – Ten Predictions

This blog is neutral on NAMA. In principle the agency is one feasible way of helping deal with a banking catastrophe by clearly valuing, and then removing loans of doubtful value from banks’ balance sheets in return for nice crisp NAMA bonds, then nursing those loans at the bottom of the cycle and hopefully generating a profit as prices recover. In practice over the past year NAMA has been outflanked and indeed swamped into irrelevance by the size of the losses crystallised in the banks, the loss of liquidity with a mighty bank run that is still ongoing at year end and a property market that has, in the main, continued to dive – all in the context of a credit drought especially for Irish property.

And in 2011, the prediction here is that it will be no different. In Quarter One of 2011 under the watchful eye of the IMF, the banks are required to do a bottom-up (and top-down) review of non-NAMA loans and off balancesheet exposures (derivatives in my book, but there are others). And I predict we will find more losses but am unsure as to the scale but wouldn’t be surprised to see another €20-40bn of losses. Credit unions are beginning to appear more significant on the radar and the betting is that a bailout will be needed to cover bad loans there also. At some point all of those against default may change their minds as the scale of the losses explodes. Who knows – perhaps Olli Rehn might even remember that the other pillar of financial probity in the Stability and Growth Pact is that debt:GDP should not exceed 60%.

However, more bank black holes might in themselves be rendered insignificant by the emerging spectre of a full-scale bank run. Corporate deposits have been fleeing out the door in recent months. And it is clear that the IMF and EU bailout has not put a stop to the flight. Despite Minister for Finance, Brian Lenihan’s assertions that as an island we will not see deposit flight, how long will it be before there are queues outside the six Irish banks to withdraw nearly €100bn of personal deposits and place the spondoolicks under the mattress or in non-Irish financial institutions? And what happens if the ECB stops shoring up the flight of deposits? And how much longer can we continue with the miracle that is the Central Bank of Ireland creating funding (backed by a State guarantee, natch) to replace fleeing deposits? Yes indeed, NAMA may well be insignificant in 2011, but let’s examine its prospects anyway – here’s what I think will be the Top 10 NAMA stories in 2011

(1) Bank of Ireland’s haircut – 42% according to NAMA in September, 2010. 40% according to Minister for Finance, Brian Lenihan in Octobr 2010. To me it just looks unrealistically low because (a) it is so out of line with other NAMA Participating Institutions (AIB 60%, Anglo 67%, EBS 60% and INBS 70%) and (b) the only publicised losses on Bank of Ireland development loans concerned McDaid Developments which saw 85% lossses  and (c) credible claims reaching this blog suggest that BoI was no better than other Participating Institutions with their credit practices during the latter stages of the boom. Deeper losses in BoI loans may be confirmed as NAMA undertakes a granular review of due diligence and loan by loan valuation in Quarter One. Will BoI need more capital? Will the State be the only source of capital? We already own 36.5% of BoI and if the February 2011 dividend on our remaining preference shares is paid in ordinary shares in lieu of cash then we just might end up with 50%+ and that is before we are called upon for any additional capital injections (€2.199bn needed in total by the end of February 2011)

(2) Just as Gerry Gannon and the missus stuffing the ample bootspace of the Range Rover with Brown Thomas shopping bags is likely to become an iconic image of the phoney impoverishment of developers, I think the sight of the first bulldozer demolishing the rotting fruit of the Celtic Tiger will also be memorable.

(3) Fianna Fail might be prepared to protect the confidentiality of NAMA’s operations but FF is unlikely to be in government after the general election (though I wouldn’t be surprised to see the election take place far later than is currently assumed. UPDATE 13th February, 2011. Cabinet member, Mary Hanafin admits that it was FF’s hope to “get the year” but blames the Green Party for pulling the rug from beneath the coalition). Neither Labour nor Fine Gael is expected to make dramatic changes to NAMA but they might effect some transparency measures that they have been vociferous about in opposition. Sinn Fein (riding in the mid-teens in the polls) would scrap NAMA and you would have to say there is an outside chance they will be in a coalition with Labour. Of course Fianna Fail might also end up as junior partners in a Fine Gael administration. The mind boggles but regardless, it is fair to say we have political uncertainty and certain political outcomes might change NAMA.

(4) Third party suppliers – and NAMA has engaged armies of them – should throw up a scandal or two during the year. NAMA’s “master loan service provider”, for example, is Capita and in the UK, the Capita parent has been a rich source of cock-up and intrigue. And despite NAMA’s claims about value for money, expect a few stories on what might be considered outrageous fees, conflicts of interest and traditional shenanigans.

(5) It can’t be emphasised enough that NAMA has only 100 staff, 42 of which are dedicated to managing loans. With an estimated €90bn of loans at par value en route to NAMA, the agency can’t possibly cope even with the assistance of teams at the five Participating Institutions and Capita. NAMA will be directly managing 175 developers representing some €50bn of loans at par value. It’s ludicrous and NAMA is setting itself up for failure. Expect frustration at NAMA’s slow decision making and possibly a tale or two of NAMA selling assets well below value.

(6) The NAMA Act anticipated that NAMA would have up to €5bn of funding available for, essentially, finishing out projects. NAMA launched its funding programmes in September 2010 but as far as I can tell they have been scrapped through presumably someone thought of mentioning the need for NAMA development funding to the IMF/EU in November? Both the securing of development funding and divvying it up amongst household-name developers in 2011 is likely to be newsworthy.

(7) So far NAMA has successfully sought a judgment against Paddy Shovlin and the Fitzpatrick brothers. Apparently 22 other actions have been initiated by the Participating Institutions on behalf of NAMA. But as the Prime Time Investigates programme before Christmas showed, NAMA will have its plate full with pursuing assets and unravelling corporate and legal structures designed to protect wealth. And of course NAMA will be liquidating and foreclosing – already NAMA has appointed receivers to Bernard McNamara companies and just before Christmas to Paddy Doyle and Paddy Burke companies. Pierse and the Whelan group are in liquidation and NAMA is a key creditor to both and in early January we will find out McInerney’s fate where again, NAMA is a key creditor.

(8) Paddy McKillen, the developer valued at some €75m by the Sunday Times in 2009 sought the help of the courts in stopping NAMA taking over his loans. He comprehensively lost in the High Court here in November and the betting is that he will lose his appeal at the Supreme Court which is due to issue a judgment early in the New Year. Will he appeal to Europe if he loses? More importantly why on earth has NAMA not already quickly moved to absorb his loans. Of course should Paddy see some success from his appeal, it may have ramifications for NAMA’s general operation.

(9) My prediction is that the Irish residential prices will drop 5% this year (unemployment, falling wages, increased taxes, upward pressure on mortgage rates, repossessions and distressed sales, emigration, overhang in supply, anaemic GDP growth, stamp duty for first time buyers, a continuing mortgage drought more than offsetting a decline in new build, reduction in stamp duty for movers, wealth and income in some pockets of the economy). I predict commercial will drop 10% as capital values catch up with the blindingly obvious fact that rents dropping like stones will drag capital values down. Residential prices in the UK will remain stagnant with minor growth in London and a 5-10% decline in Northern Ireland. I expect UK commercial to grow by less than 5% though London’s growth may skew the average which might see stagnation across much of the UK. So NAMA which has a target of reducing its loans by 40% by 2013 will have its work cut out in planning how to manage loans and prioritising disposals.

(10) The unknown unknown in Donald Rumsfeld’s parlance. With €90bn of loans, 100-odd employees, political administration, short-term rollover funding of NAMA bonds which depend on the ECB for continuing support, global property assets, poor transparency, €5bn of development funding, annual operating costs of €200m and crises elsewhere in the domestic economy and in Europe, there is more than enough scope for something spectacular.


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The Nationwide Building Society has this morning published its UK House Price data for December 2010. The Nationwide tends to be the first of the two UK building societies (the other being the Halifax) to produce house price data each month, it is one of the information sources referenced by NAMA’s Long Term Economic Value Regulation and is the source for the UK Residential key market data at the top of this page.

The Nationwide says that the average price of a UK home is now GBP £162,763 (compared with GBP £163,398 in November and GBP £162,764 at the end of November 2009 – 30th November, 2009 is the Valuation date chosen by NAMA by reference to which it values the Current Market Values of assets underpinning NAMA loans). Prices in the UK are now 12.5% off the peak of GBP £186,044 in October 2007. Interestingly the average house price at the end of December 2010 being GBP £162,763 (or €189,476  at GBP 1 = EUR 1.1596) is only 4.64% below the €198,689 which the Permanent TSB/ESRI said was the average nationally here at the end of September 2010.

With the latest release from Nationwide, UK house prices have risen by just one pound since 30th November, 2009 the date chosen by NAMA pursuant to the section 73 of the NAMA Act by reference to which Current Market Values of assets are valued. The NWL Index has declined to 911 meaning that average prices of NAMA property must increase by a weighted average of 9.7% for NAMA to breakeven on a gross basis.

The short-term outlook for UK residential remains modestly negative.  Last month, the newly created Office for Budgetary Responsibility (OBR) issued its latest forecast and predicts the UK economy to grow (by reference to GDP) by a respectable 1.8% in 2010, and sees 2011 growth at 2.1% and 2012 at 2.6%. Unemployment is forecast to peak at 8% in 2011 and property will drop by 2.7% over the next 12 months. Mortgage approvals are dropping off with confidence at the low and middle market in the doldrums with reasonable supply (boosted by the abolition of Home Information Packs (similar in part to our BERs) in June 2010) and anaemic demand dampened by the prospect of public sector job cuts, VAT rises and an €81bn fiscal adjustment.

The EU bank stress tests published at the end of July 2010 suggested a base case of no change which is almost spot on with the 0.41% increase for the 12 months ending December 2010.

The Nationwide has also released its quarterly series which shows the performance of different regions within the UK. Over the past year Northern Ireland has been the worst performing region with a drop of 8.9% (seasonally adjusted) and the best has been East Anglia with a rise of 3.8% and London has risen by 2.7%. The regional breakdown of NAMA’s British assets is not known though Sean Mulryan has significant residential developments in London and NAMA’s most expensive asset, the Battersea Power Station site which has a residential development element, is also in London. It is estimated on here that 20% of NAMA’s British assets are residential with the remaining 80% commercial. NAMA has an estimated €4bn of assets in Northern Ireland.

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A Review of NAMA in 2010

It was Dr Michael Somers, the former head of the NTMA that highlighted a flaw in the Irish character in his speech at the MacGill Summer School in beautiful Donegal in July this year – the flaw being that we tend to focus on process in this country at the expense of objective. It would be unfair to say that NAMA has not achieved its objectives yet. After all this year was mostly going to have been about establishing the agency, recruiting staff, setting procedures and of course valuing and acquiring the target loans from the financial institutions. With loan acquisition, NAMA missed its target (set out in the draft NAMA Business Plan in October 2009) of transferring the first tranche in December 2009 (actually transferred on 10th May, 2010) and to have completed the transfers of €77bn of loans in July 2010 (€71bn of loans have been transferred to date, though only 60% have been subjected to granular due diligence and valuation).  But overall NAMA has transferred a colossal volume of loans, €27bn of which have been agreed by the EU and with the loan acquisition process being described as “reasonable” by the Comptroller. NAMA has paid banks some €30.2bn of bonds (presumably 5% are subordinated bonds which will only be honoured if NAMA makes a profit) which are exchangeable for cash equivalent and can be made available for lending to the wider economy. Although up-to-date numbers are not available, it is likely that NAMA has spent close to €200m on professional fees in 2010 having conducted massive procurement exercises. The agency has an estimated headcount of 100 at the end of the year. The curious legal case involving Paddy McKillen was comprehensively beaten at the High Court and the betting is that the appeal to the Supreme Court will not be successful for Paddy. The NAMA CEO and Chairman have spread NAMA’s message positively from Belfast to Kerry, from Galway to the committee rooms of the Oireachtas (here and here), from the BBC to RTE (though it was the Economist that gave NAMA the greatest leg-up by saying “In the long run Ireland’s response is the better” in August 2010). And all in all, the agency has avoided scandal during its first 12 months of operation. So as processes go, the acquisition phase of NAMA’s existence can be judged a qualified success.

And the acquisition phase is important to NAMA’s success – the oft-repeated rule for the house flipper – “you make your profit when you buy” – is relevant to NAMA also. But it is the next phase, the management and disposal of assets, that will determine NAMA’s overall success and the early indications are not good. Bear in mind that the first tranche had started to transfer in March 2010 and was completely absorbed by the agency on 10th May, 2010 – that’s nearly eight months ago. Information reaching here suggests that not one of the first 10 business plans has been agreed, that is, signed by both the developer and NAMA. So much for NAMA’s claim that developers need submit plans within 30 days of their loans being acquired and that NAMA would determine in less than three months how to proceed with the borrower. And remember that in this phase NAMA controls practically all of the cards, unless the Construction Industry Federation wakes up to its responsibility in providing a united voice for developers. In the next phase, NAMA will be operating alongside the mighty beast that is “the market”. And whilst markets can be irrational, exuberant and dysfunctional they tend to be objective driven in terms of financial bottom lines. And that may well be the story of 2011 – the process-driven agency versus the objective-driven market. But that will be the subject of another entry.

Meanwhile, I give you yet another end-of-year review of NAMA, more comprehensive than most (if not all) and penned by a blog which focusses on the agency.

NAMA month by month
January 2010 – A quiet month for NAMA with the application for EU approval being submitted just before Christmas 2009, the valuation panel being appointed in December 2009 and loans being valued. Irish Times property pundits suggest that residential property would drop by 10% in 2010 with a pick up in prices in the second half. We’ll get to see how accurate they were when the limited Permanent TSB/ESRI house price series for Quarter 4, 2010 is produced at the end of January 2011.

February – Despite the best efforts of FG’s Senator Eugene Regan, the man from Brussels says “yes” to NAMA with the redacted decision published in April. News from the commercial court that a field in Athlone valued previously at €31m was now worth €600,000 – although far more difficult to index Savills claim later in the year that on average, development land has fallen 75-90% from peak.

March – the first tranche begins to transfer by 31st March (just about  with only €0.37bn of loans from EBS and INBS transferred). We learn that NAMA is to acquire €36bn of loans from Anglo, up €8bn from a few months before and indeed that €36bn may well grow now that NAMA is considering acquiring Anglo’s land and development exposures of €0-5m. The publication of the NAMA Long Term Economic Value regulation tells us that NAMA is prevented from using data produced after 10th January, 2010 when assessing LEV – oh dear. Information continues to leak from NAMA to selected media outlets. Hopes for NAMA developer, the John J Fleming group flounder as a judge characterises its examinership plan for survival as “an aspiration based on hope”. We ended the year with news that John Fleming himself was seeking bankruptcy from his current base in Essex in the UK. The third of three major studies into vacant housing concludes we may have 350,000 of vacant homes, more than 150,000 than we should have. The Ghost Estates review published in October 2010 suggests that there are some 30,000 vacant new homes on certain estates.

AprilNAMA at the Oireachtas – we’re all very impressed with Brendan McDonagh. Information Commissioner Emily O’Reilly is the latest to demand that NAMA be brought under the umbrella of the Freedom of Information legislation – demands thus far rejected by the Minister for Finance. NAMA issues details of the bonds and subordinated debt it is giving to banks in exchange for loans – the interest rate on the subordinated debt is tied to the rate on the 10-year bond rate (9% as of today) – nasty. Spousal transfers come into focus – not for the first time nor the last. The image of bulldozers reversing the construction boom hoves into view as NAMA confirms that some developments will meet their fate with a JCB. News that Grafton Street rents have fallen by 44% in one year, though they are still falling by 20% per annum. Brian Lenihan tells us that we can now buy homes with confidence with prices being realistic.

MayTranche 1 completed. NAMA Chairman, Frank Daly forced to clarify comments in a speech to the Association of Compliance Officers – he didn’t mean to suggest NAMA would stop pursuing developers once it had recovered the amount NAMA paid for the loan. It costs €500 a year to maintain the NAMA website – really, that much? NAMA given a €250m recoupable working capital buffer advance which it manages to repay in October. Former IMF bigwig, Steven Seeling, joins the NAMA board.  Developer Simon Kelly tells the Independent that there’s no point in NAMA taking back developers’ cars because they’re a drop in the ocean compared with the amounts owing – and judging by the wheels on show in December’s Prime Time Investigates, NAMA agrees with him. NAMA makes some friends in Belfast.

June – Minister for Finance, Brian Lenihan tells the Oireachtas that despite the decline in values of Irish property since November, 2009 (the NAMA valuation date), the fact that NAMA’s portfolio includes other national markets means the effect of property value changes since November 2009 on NAMA’s loans has been “broadly neutral”. NAMA’s importance to the hotel sector is becoming apparent and indeed it seems that NAMA will have control over some 90 hotels in the State when it is finished with acquiring loans. Paddy McKillen’s Maybourne assets (Claridge’s, the Connaught and the Berkeley hotels in London) come into focus with reports that he is seeking to refinance the group and avoid NAMA – still no update as of today with debt repayment due by the end of December 2010. The IMF urges NAMA to begin disposals sooner rather than later – that was during a routine visit, what’s the IMF position now that they control the bailout? The Sunday Tribune claims NAMA CEO, Brendan McDonagh is on €500,000 a year. The RICS describes NAMA as a “thunderous cloud that overhangs the property market”

July – NAMA publishes its Business Plan – is that it? Dr Michael Somers, former head of the NTMA, attacks NAMA at the MacGill Summer School – NAMA is “bizarre” says Michael. The Mail on Sunday publishes story about NAMA’s Head of Portfolio Management, John Mulcahy, allegedly accepting hospitality on the yacht of the former owner of the Glass Bottle site, Paul Coulson. Paddy Kelly sticks the boot into John at the MacGill Summer School when he reveals that John valued Burlington Plaza at €350m in 2007. Deputy Frank Fahey entertains us all with his grasp of how NAMA bonds operate. NAMA publishes Quarter 1 accounts – loss of €7m. NAMA publishes Codes of Practice. Willie O’Dea suffering fierce stress worried that he might break NAMA’s anti-lobbying rules.

August EU approves Tranche 1. Tranche 2 complete. Northern Irish Finance and Personnel Minister, Sammy Wilson, gives NAMA a thumbs-up. Top 10 developer, Cosgrave, gets planning permission for 1,500 dwellings in Dun Laoghaire. Suggestion that Dr Peter Bacon has been appointed as an adviser to NAMA, having been one of its conceptual architects. Start of the saga involving Top 20 developer, Paddy Kelly’s BMW 745i, repossessed by ACC, then returned with an apology only to be taken again in December. Sean Dunne, the Bane of Belle Haven, secures planning permission on land bought for €197m an acre in Ballsbridge.

September – NAMA at Cantillon and Galway. NAMA launches €5bn funding  programme which now seems to have been abandoned. Big Bang announcement for the future of Irish banking sees NAMA abandon €5-20m exposures at AIB and BoI (later reversed by the IMF) and NAMA provide estimates of final discounts (67% for Anglo, 60% for AIB yet only 42% for BoI). The massive scope of NAMA’s operations in Northern Ireland is laid out. Both the Credit Review Office and the Irish Small and Medium Sized Enterprises Association report better credit availability. NAMA abandons Tranche 3. More details on the investors in the NAMA Special Purpose Vehicle as we find out that counter staff at AIB have put part of their pensions on the line. Rumours about NAMA’s first British sale with Derek Quinlan’s Mayfair carpark (understood to have stalled but is likely to be sold in 2011). Irish bond rates skyrocket which pushes up the price NAMA pays for loans. Liam Carroll’s Anglo HQ finally secures planning permission.

October – NAMA gets into hot water over developer salaries and seems to clarify that it doesn’t pay more than €200,000 per annum. NAMA’s under-resourcing is criticised by McDonalds chief. NAMA pays just €38m for the €288m loans in respect of the Glass Bottle site. NAMA obtains judgment against Paddy Shovlin and the Fitzpatrick brothers. Ratings agency Fitch say that NAMA may break even because of the deep discounts it is applying to loans. The court case of the year gets underway as Paddy McKillen seeks to have NAMA’s treatment of his loans reviewed. Paddy loses his case comprehensively though he has appealed to the Supreme Court and a decision is expected in January 2011.

November – NAMA at the Committee of Public Accounts. CIF commission report that is nasty to NAMA and NAMA responds in kind.  EU approves Tranche 2. IMF bailout extends NAMA scope to include €0-20m exposures at AIB and BoI. NAMA lawyers up with the appointment of insolvency practitioners. Bernard McNamara’s property empire starts to implode with NAMA appointing receivers to Michael McNamara construction and Radora. Comptroller and Auditor General’s haphazardly produced report on NAMA judges the agency “reasonable” in its loan acquisition phase. Liquidator appointed to the Pierse group. NAMA’s Q2, 2010 accounts produced which show a year to date loss of €1m but should have shown a loss of €600m. NAMA repays €250m advance from the government. NAMA’s most valuable asset, the Battersea Power Station site, gets planning permission.

DecemberNAMA announces that it has acquired €71.2bn of loans at par value and paid €30.2bn in consideration. The NAMA CEO’s comments about the banks at the Committee of Public Accounts promise to develop legs in the New Year amidst apparent claims by the Committee that it was misled. Blackstone gives us a taste of the sort of characters NAMA will need engage with in 2011 and beyond. The Whelan Group is liquidated but we need wait until early January 2011 to find out what will happen to McInerney.

Performance against objectives (NAMA doesn’t have formal objectives so what follows is subjective)
(1) Facilitating lending – difficult to say because there are a number of factors that affect lending and the needs of the wider economy (demand for lending) is arguably more important than banks’ ability to lend (supply). The Credit Review Office and the Irish Small and Medium Enterprises Association (ISME) both support the proposition that lending conditions for businesses are improving. That said, the economy has suffered a severe contraction, is likely to have stagnated in 2010 and with a prospect of marginal growth in 2011 (0.9-1.75% growth in GDP according to the EU/IMF/government) so demand for credit is subdued. And the outlook might make NAMA irrelevant – if Irish banks have to deleverage by cutting lending by €90bn in the next three years and if deposits continue to flee to perceived safer havens, then NAMA may be of only marginal significance to the factors affecting lending.

(2) Making a profit for taxpayers – too early to say. But NAMA is likely to have made a loss of €1bn+ in the first year which is concealed by NAMA not revaluing its loans (valued by reference to November 2009 and uplifted by an average of 10% for “long term economic value”). The hope must be that conditions improve over NAMA’s lifetime and that NAMA judiciously manages its vast portfolio so that a profit can be returned to the taxpayer. I would have said that it is too early to have an informed opinion on NAMA’s profitability prospects but I would be cautious. As indicated by the NWL index at the top of this page, the markets in which NAMA operates need increase in value by a weighted average of 10% (from 912 to 1000) for NAMA to break even at a gross profit level.

(3) Creating certainty about banks balance sheets – again NAMA has done its job reasonably well with valuing some 60% of the €71bn of loans it has acquired at a granular level and with some 40% of the valuations of the €71bn being approved by the EU. The difficulty is that, even after NAMA has completed its acquisitions (land and development and associated loans), banks will still have some €70bn of commercial property loans on their books and another €70bn of non-property commercial lending plus €120bn of personal lending including mortgages. And don’t mention off balancesheet exposures like derivatives. So no, there is not certainty in the banks’ balance sheets but that is not NAMA’s fault. I have some faith in the IMF-mandated exercise to examine non-NAMA loans and off balancesheet exposures in the first quarter of 2011.

(4) Stabilising property/construction sector – a flaw in the NAMA concept and one not apparently considered by Dr Peter Bacon, one of NAMA’s conceptual architects, was that the property market may not be at the bottom or indeed close to it. Property prices in Ireland have continued to decline this year (gradually according to the very limited Permanent TSB/ERI house prices series, more so according to the commercial indices). Looking forward, it is hard to see any recovery in house prices in the short term and despite the brave assertions of the commercial sector, rents are plummeting (20% per annum) and that presages capital values continuing to fall (already 60% off peak values). Yes other markets where NAMA has 33% of its assets show a mixed picture, increases in the UK, Far East and US, falls in Europe, Middle East and some exotic locales like Cape Verde. But in Ireland the picture has been almost universally negative. NAMA has arguably interfered with the natural trajectory of prices and stalled firesales but it has not halted the underlying decline in prices as the country responds to what is a depression.

So there you have it, 2010 reviewed. There will be a further post on NAMA’s prospects and challenges in 2011.

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One of the most puzzlings acts of omission by NAMA in 2010 must be the agency’s decision to refrain from absorbing Paddy McKillen’s loans following NAMA’s success in Dublin’s High Court at the start of November. Instead NAMA has said that it will refrain from acquiring Paddy’s estimated €2.1bn loans from NAMA Participating Institutions pending the outcome of Paddy’s appeal (decision expected in January but will Paddy seek an appeal in Europe if he is unsuccessful at the Supreme Court?).

Meanwhile life goes on in Paddy’s businesses and in the past month, the City of Westminster Council has renewed planning permission to extend Paddy’s 5-star Claridge’s hotel in London’s West End (though Paddy would probably correctly claim it was Mayfair). The development work is expected to start after the 2012 Olympics and the plan is to build an extra 40 bedrooms onto the existing 203-bedroom hotel.

The planning permission carries some conditions including the commitment by Paddy’s company in the first instance to contribute GBP £4,786,530 to social housing in Westminster, GBP £33,800 for local council CCTV (the British have some fetish about being the most filmed people on Earth), GBP £162,240 for the so-called Crossrail project which will see rail facilities crossing from east to west London, GBP £226,460 for local environmental projects and not less than GBP £200,000 for public art. Bank of Ireland is also a party to the planning permission agreement and should BoI take possession of the property then BoI will assume responsibility for Paddy’s contributions. And since BoI’s loan is NAMA-bound and Dublin’s High Court has confirmed that NAMA can take over the loan, then it is NAMA that ultimately assumes responsibility here. So that’s how NAMA has made a commitment to potentially spend substantial sums on improving London’s environment.

But wait a second, doesn’t NAMA control the actions of the Participating Institutions with respect to NAMA eligible loans even before they are transferred to NAMA? Indeed it does via section 66 of the NAMA Act and the implication is that NAMA will need to have been consulted and to have approved entering into the agreement which might see BoI or NAMA ultimately having to make the contributions referred to above. There is no suggestion that Paddy’s company is unable to meet its loan obligations to BoI though the recent court case has revealed that although Paddy is able to meet interest repayments, there would be challenges in repaying the principal.

What may further confuse you is that the State owns 36.5% of BoI’s ordinary share capital, that BoI would in all likelihood not be able to survive without the State-guarantee and that BoI needs €2.2bn of new capital by the end of February 2011. So why is BoI facilitating a borrower by underwriting additional financial commitments when that borrower is fighting the State tooth-and-nail to keep his lending outside NAMA? It is not clear from the signature on page 43 of the Planning Department’s documents who at BoI signed the agreement but had they NAMA’s approval to enter into the commitment?

Does the Minister need to write another letter, this time to BoI, to remind that bank of the support it is receiving from the State? Why is NAMA underwriting additional financial commitments to Paddy at the same time as defending itself against an action which might jeopardise the agency?

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Perhaps he is more pre-occupied with plans for spending the €308,000 he is expected to be given from the public purse next year, having announced his decision not to seek re-election, but Minister for Justice and Law Reform, Dermot Ahern has failed to fulfil the commitment he made in August this year to introduce legislation to give effect to a House Price Database (you can confirm this failure by examining the Amendments Notice, Amendments Tabled and Amendments Made pages from the Oireachtas website). The Minister’s commitment – reproduced in full below – was to introduce an amendment to the Property Services (Regulation) Bill 2009 which would put in place the foundation for the HPD. And the commitment was to introduce the legislation “in the next Dail session” which ended just over a week ago. The commitment was, to use the Minister’s own recent untruthful words, “a fiction”.

Called for at least as long ago as 1973 in the Kenny Report, you might have hoped that the Site Valuation Tax which the government has undertaken to put in place in the next three years under the watchful eye of the IMF, might necessitate a HPD. Not necessarily and there might be other ways of introducing a site tax without a public HPD.

In addition to providing basic transparency in the residential property market, a HPD would help counter unlawful transfers, something pre-occupying the media at present even if RTE was careful to emphasise that the transfers covered in its Prime Time Investigates programme last Monday were not alleged to have been unlawful.

Why has Minister Ahern failed to fulfil his commitment? You can speculate but it is certainly a curiosity about Ireland’s modern administration that successive Fianna Fail, Fine Gael, Labour administrations have all failed to put in place a register which they all ostensibly support. Why has Minister Dermot Ahern specifically failed to introduce the legislation now? There certainly isn’t any legislative issue – witness the passage of the controversial and deeply undemocratic Credit Institutions (Stabilisation) Bill though the Dail and Seanad in hours.

Of course the information required by a HPD is already held by the Revenue Commissioners (Irish tax authorities) and is presumably held by estate agents who might officially be prevented from sharing the information but this is not a country known for keeping watertight secrets.

There is a dedicated page for tracking progress, or lack thereof, here.

The Minister’s announcement on 10th August, 2010

“The Minister for Justice and Law Reform, Dermot Ahern, T.D., announced today the establishment of a new property database reflecting market trends and house prices.

The Minister said statutory responsibility for publishing property sales prices would be allocated to the Property Services Regulatory Authority which is based in Navan, County Meath.

Minister Ahern said  he would table amendments to this effect to the Property Services (Regulation) Bill 2009 – which will establish the Authority on a statutory basis – during the next Dail session, and would also bring forward any necessary amendments to the Data Protection Acts to facilitate the publication of sale price data by the Authority.

The Minister said that his proposals would give effect to a commitment in the renewed Programme for Government to facilitate publication of property price data in order to improve market transparency and early detection of market trends.

The Minister said: “I am very aware of the need for reliable and up to date data on house prices and other property. The Property Services Regulatory Authority will be in a position to ensure timely publication of this data as soon as the legislation is enacted later this year”.

The Minister added that, in accordance with the Programme for Government, the Department of the Environment, Heritage and Local Government would create and maintain a House Price Database in which the details of residential and commercial property sales will be maintained for statistical purposes.”

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Happy Christmas from NAMAwinelake

The run-up to Christmas 2009 saw a frenzy of activity with NAMA and the banks (NAMA incorporated 19th December, NAMA board appointed 22nd December, first NAMA board meeting on 23rd December, unreported unlawful written financial undertakings by Minister for Finance Lenihan in respect of INBS and Anglo on 22nd December – unlawful because the undertakings constituted unauthorised state-aid though both undertakings were subsequently approved by Commissioner Almunia with diplomatic slaps on the wrist)

This year has been no different with a cluster of NAMA developer plans awaiting approval (that is, by both the developer and NAMA in writing – NAMA might have a different definition of “approval”) and the conclusion of Paddy McKillen’s appeal hearing at the Supreme Court on Wednesday but it has been the banks that have taken the headlines – AIB’s transfer of €9.3bn of loans last Monday to NAMA which will have created a massive capital hole, Sr Almunia’s approval of further injections into INBS, Anglo and AIB on Tuesday, the Council of State meeting and President McAleese’s decision that the Credit Institutions (Stabilisation) Bill was constitutional (and for those that think Mary was playing the cute hoor by refraining from referring the Bill to the Supreme Court thereby allowing certain passages of the Act to be challenged  in future, that is not our president’s remit) and then on Wednesday we had a low point in Irish jurisprudence as a judge, Ms Justice Maureen Clark, acquiesced to a demand from the government to exclude witnesses – journalists and a solicitor for an interested party – from a key hearing on the recapitalisation of AIB, €3.7bn taken from our pension reserve and pumped into a bank with little prospect of a practical return, all agreed to, away from the public gaze. That didn’t stop speculation about bank runs, undeclared loan losses and derivatives landmines.

So despite the holidays and Christmas, St Stephen’s Day and New Year there will be some activity to keep things alive on here but it will be quieter for the next week, though there might be a review or two of the year.

During the past week, there were quite a few visitors on here from a German finance forum, wert-papier.de and on their forum someone had posted a Swiss-produced seasonal image of a Christmas tree. Sadly for copyright reasons I am unable to reproduce it directly here – pity because I wanted to add the caption

Greek bird to Irish bird “Is it true your Minister for Finance says this is snow?”

You can view the cartoon here (you need scroll down the page)

I wish you all a safe, peaceful and happy Christmas.

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Well this story may well develop legs. On 18th November, 2010 NAMA’s CEO, Brendan McDonagh and three of his colleagues appeared before the Committee of Public Accounts (CPA). There were a few testy exchanges and then the Fianna Fail deputy Michael McGrath launched into a surprisingly eager line of questioning about the information provided to the banks (the transcript and context of the exchanges are here). This is an extract of what I think is the relevant section:

Deputy Michael McGrath: It seems to me that there was a clear pattern of false and misleading information being fed into NAMA by the main banks in Ireland during 2009. That has to be investigated. I do not know who has the function to refer that information to the Garda, the National Bureau of Fraud Investigation or the Office of the Director of Corporate Enforcement, but it needs to be done.

NAMA CEO, Brendan McDonagh: I do not disagree with anything the Deputy said

What happened subsequent to this was that the Committee wrote to the Financial Regulator, Matthew Elderfield “to ask it [Financial Regulator as an agency] to inform the committee of the appropriate action it proposes to take”. I haven’t seen that letter but the response from Matthew is available and here’s what he said on 26th November, 2010:

There was then a second letter from Matthew Elderfield to the Committee on 6th December, 2010 which is as good an example of backside-covering as you are likely to find anywhere, and sets out Matthew’s understanding of the allegations and next steps.

And then last week, the Irish Times and Independent reported on the Committee being very upset at the NAMA CEO for having “misled” them. The Committee was angry about a number of matters relating to NAMA but there wasn’t very much detail reported last week as to why the Committee felt NAMA has “misled” it.

But today, finally, the Irish Times reports of a third letter from Matthew Elderfield dated 17th December, 2010 to the Committee which apparently says “Nama’s letter informs us that it does not have a valid basis to suspect that there has been any criminal offence or other contravention of the Nama Act” (the third letter does not yet appear to be available from the Committee’s document access webpage). I have not yet seen this third letter but from what has been reported about its contents, it is easy to see why the Committee would feel it was misled. Indeed you might go further and characterize the NAMA CEO’s response to Deputy McGrath as a lie – would you disagree?

NAMA celebrated its first birthday last Sunday and I must say I have been amazed that during the past twelve months NAMA has avoided major cock-ups. Indeed during the loan acquisition phase it has been pretty successful – yes the transfers took longer than expected but the agency has accomplished a monumental feat in transferring €27bn of loans in a way which has secured EU approval, and has transferred a further €43bn which is still either subject to EU approval or final due diligence/valuation in Q1, 2011. John Mulcahy’s alleged sojourn on a sometimes-developer’s yacht, the revision of the NAMA plan and the pathetic level of detail published, NAMA salaries, developers’ transfers to spouses and criticism from many quarters including financiers, politicians and developers not to mention the general public – NAMA has survived these slings and arrows. But now we have the NAMA CEO arguably lying to a Dail committee. On record.

For a variety of reasons the Committee won’t let this matter, ahem, lie.

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In what seems like a low point in Irish jurisprudence, the Irish Times reports a judge at the High Court this morning agreed to exclude two journalists from the Irish Times from a hearing which saw some €3.7bn taken from the pension reserve and injected into a bank with little prospect of a return. The judge, Ms Justice Maureen Clark not only acquiesced to the Minister for Finance’s legal representative’s demand to exclude the two journalists but she then refused to entertain any notion of the exclusion being challenged/appealed. All because we are told the matters at hand were commercially sensitive. Whilst some matters may have been sensitive, surely not all of them were. Furthermore there is a reasonably sound history of journalistic integrity in this State when a judge bars reporting on proceedings but that doesn’t mean journalists are excluded from hearings.  Simon Carswell at the Irish Times was one of the two journalists excluded and he reports of at least one other exclusion – a solicitor with a watching brief on behalf of an interested party.

The Irish Times reports on the judge’s determination where she agreed to a scheme which sees the State taking a 49.9% interest in AIB today with frankly jiggery pokery whereby the State’s proper ownership of AIB (put at 92.8%) is deferred until AIB disposes of its 70.5% interest in the Polish Bank Zachodni WBK.  AIB’s shares are to be de-listed and transferred to a grey exchange so they will still have value. There is no news on AIB’s €4bn of subordinated debtholders. There will be fuller analysis on here later.


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You couldn’t fail but be impressed by the delicate choreography to ensure NAMA’s bonds (which it trades for land and development and associated loans at the five Participating Institutions) stayed off the official national debt figures. That of course was back in 2009 when there was some dim hope that we might have contained our official debt:GDP at 60% (the official limit imposed on us when we joined the Euro and took on the terms of the Growth and Stability Pact – GSP). I blame Olli Rehn for us mostly forgetting the 60% limit because he seems to be talking exclusively about the other pillar of the GSP – the 3% deficit:GDP limit. The cynic in me thinks Olli is being selective because if he were to insist on the 60% debt:GDP limit, that would mean a partial default on debts owed to other European banks.

And the choreography to keep NAMA’s debt off the nation’s balance sheet was rewarded in October 2009 when Eurostat issued a preliminary view on the treatment of NAMA debt and declared that because NAMA was an independent entity, Ireland didn’t need regard NAMA’s debt as sovereign debt.

Eurostat reached its view after considering NAMA’s profitability and ownership. NAMA’s profitability has always been contentious – in particular it seems farcical now that NAMA can recoup any losses from a levy on the banks. But as regards ownership Eurostat was assured that the State would own 49% of NAMA and the remainder would be independently owned. The difficulty was that no-one outside of Ireland wanted to invest in NAMA and even in Ireland, the State could only drum up interest from three State-guaranteed banks, Bank of Ireland, AIB and Irish Life who each bought 17% of NAMA. Somehow Eurostat accepted this and felt that the State’s ownership at less than 50% was good enough to mean that NAMA debt wasn’t State debt (never mind about the fact that the State could veto all of NAMA’s decisions).

But later today the State is set to increase its ownership of AIB from 18.6% to 90%+ (possibly 100%). And when it does it will control the 17% investment by AIB in NAMA’s SPV which means that the State controls 66% of NAMA. What on earth will Eurostat say?

Of course no-one in the real world has regarded NAMA as anything other than a State-controlled agency from the start. The ratings agencies have all regarded NAMA debt as sovereign debt despite the whining of John Corrigan and others. The effect of owning NAMA would mean that some €30-40bn (€30.4bn has so far been issued by NAMA but there is some €19bn of loans at par value remaining to be absorbed by the agency) goes onto the State’s books which will increase debt:GDP by 18.75-25% (based on GDP being €160bn). Wow!

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RTE transmitted a capable current affairs programme last night which examined the wealth and lifestyles of several top NAMA developers who owe the agency an average €1-2bn. As a close follower of NAMA, I must say that it was the first Prime Time programme on NAMA where I haven’t found myself shouting at the TV screen at the mistakes voiced by presenters, journalists, junior ministers and commentators, and all in all it was an interesting insight into some of the residual private and commercial wealth enjoyed by NAMA developers such as Bernard McNamara, Michael O’Flynn, Gerry Gannon, Seamus Ross, Joe O’Reilly, Sean Mulryan, Derek Quinlan, Paddy Kelly & family and the Treasury duo – Messrs Ronan and Barrett. I couldn’t dispute any of the details.

The programme gave a fascinating insight into the wealth (particularly property wealth) enjoyed by the developers and notably their wives – no interior shots of the houses but the opulence of the properties wasn’t in doubt and RTE made full use of camera masts to provide elevated images of the properties. Transport was also on show – be it Gerry Gannon’s 4-year old silver Range Rover (reg 06-D-7884, shouldn’t RTE be pixelating developer number plates?) and his wife’s red 2008 SL Mercedes (UPDATE: 26th December, 2010 now apparently for sale), Bernard McNamara’s newish S-class Mercedes or Johnny Ronan’s old Maybach (worth about GBP 100k in the UK today where there is a second hand market). And speaking of second-hand values, Michael O’Flynn’s AgustaWestland 8-seater helicopter was valued at €3.5m+ by RTE.

All in all though,I found it difficult to understand the point of the investigation. That developers still have access to immense wealth? That developers made substantial transfers to spouses? That developers still collect impressive rents on their properties? That developers employed offshore companies to manage risk in their businesses? All with an over-arching implication that developers are stiffing NAMA (and by extension the nation). None of this was really new and we didn’t need what looked like expensive covert filming or vaguely threatening background music , not to mention what is now the usual imagery of wealth, the upturned Bollinger champagne bottles, the crystal cut glass champagne flutes, cognac glasses and a bunch of well-fed developers playing Monopoly on the top floor of an unfinished office block – no we didn’t need any of this to confirm what has been reported elsewhere in detail. It is just about noteworthy that 12 months after NAMA finally came into being, developers whose debts are now owned by the State, still enjoy fantastic wealth whilst the citizens have contributed billions to recapitalizing the banks after losses on these loans.

So you would have expected the programme to have given NAMA a hard time, particularly since the NAMA chairman Frank Daly did provide an interview. But for whatever reason the questioning was pretty light, for example

(1) Yes NAMA may have initiated the voidance of the transfer of €130m of property (are those peak values or today’s by the way and are those properties subject to substantial non-NAMA mortgages and liens?) by three (yes, just three!) developers out of 850 developers whose loans have been absorbed. The value of this property is not to be used to set off against the debt now due though, it is to be used for future development. And by the way the €130m of property hasn’t all been transferred back yet – how long does it take to execute a conveyance? Seven days? Prime Time say there was “no evidence” of property being transferred to avoid creditors or NAMA.

(2) NAMA has taken action against one developer (Paddy Shovlin’s partnership with the Fitzpatrick brothers). One action?

(3) On the other hand NAMA is reported to have taken over all the rent rolls it can. The programme made much of the fact that NAMA occupies Treasury Buildings in the centre of Dublin and pays rent to its landlord (Treasury Holdings/Paddy McKillen) but is NAMA not using that rent to offset debts owed to it by the developers. Ditto with the Office for Public Works buildings including those owned by Liam Carroll and Bernard McNamara. The programme’s implication was that developers were still pocketing substantial rent whilst debts to NAMA went unpaid. But is that really the case?

(4) And Prime Time could certainly have dug on the question of business plans. My information is that none have been signed by NAMA *and* the developer. NAMA say that 30 have been “approved”. What does that mean?

Possibly the most newsworthy segment of the programme and it was over in a flash was a comment by Simon Kelly, son of Paddy Kelly who said (35:30 in to the recording)

“I suppose I personally owe the banks about €200m on all the properties that have gone into NAMA. The Kellys will be, you know, €900m so like again under half of that portfolio, just under half of that portfolio will be on our combined shoulders. It’s a vast amount of money. We signed for the loans personally and that’s meant now our day of reckoning has come.”

With NAMA taking over loans at an average 58% haircut, the clear implication is that the developers feel they are in debt to NAMA for what NAMA paid for the loans and no more. Perhaps that was the real revelation from last night’s programme but alas it went unexamined.

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