Archive for January, 2011

Consider the following scenario: you’re one of the 10-odd non-NAMA banks nursing bad property loans in the State and let’s say you advanced a development loan on a few acres in Bandon, Co Cork. Like many development loans advanced during the boom, the loan went bad with the collapse in property values. Today you are effectively left with a field and you are trying to maximise the value of the field so as to minimise your losses on the loan. A common enough scenario, I would have thought.

But why Bandon? Because local “environmental engineer and member of Cork County Council’s strategic planning committee”, Declan Waugh is advocating that NAMA property be given, according to the Irish Times, “priority to having these lands developed or construction completed prior to further zoning so there would be “orderly development””

Declan points out the priority of NAMA to deliver a return to the taxpayer and that is perfectly publicly-spirited. But should NAMA be given preferential treatment by local authorities, treatment that might disadvantage other non-NAMA banks? And NAMA is, for better or worse, part of the fabric of our banking sector. Should NAMA’s recovery of loans be given priority over the recovery of loans by a non-NAMA bank? “Damned right, they should, it’s our money that’s at risk!” might be the initial response but if NAMA acts in an uncompetitive manner, either through its own actions or actions by the State, then there is a risk that non-NAMA banks might seek legal redress. The EC Decision approving the NAMA scheme was careful to consider the market-distorting effect that the agency might have in the Irish market and NAMA’s powers were trimmed to some extent (eg the power of NAMA to demand information from the tax authorities, the Revenue Commissioners).

And given that these non-NAMA banks are nursing €50bn+ of property lending (from recollection BoSI has €30bn, RBS/Ulster Bank has €25bn, NIB has €10bn and there will be others) in the State, they might be tempted to fire a warning shot over NAMA’s bows sooner rather than later.


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I must say that for myself, I am beginning to seriously doubt Senator Mark Daly’s claims of wrong-doing at NAMA, something covered extensively on here last week (part 1 detailed the interview on the Pat Kenny show and part 2 examined the issues) following claims made by the Senator reported in the press and which formed the basis of a 20-minute interview on the Pat Kenny radio show. Over the weekend, the Senator was present in the Seanad for the debate on the Finance Bill and again raised his claims that NAMA was selling property below value and not following its own code of practice.

The reason I doubt the Senator’s claims is that he was challenged on at least three occasions to provide details of the transaction. Three times –  by Minister for Finance, Brian Lenihan who was present in the Seanad to guide the vital Bill on its way and by senators David Norris and Jerry Buttimer. Yet Senator Daly demurred and made the laughable claim that  he was not a Garda and that he hadn’t evidence of “wrong-doing”, just bad commercial practice. He said he would provide details of the alleged transactions to NAMA but didn’t explain why he hadn’t already done this (though he plainly had time for self-promotion last week including a 20-minute stint on the Pat Kenny show). It is beyond me why he did not respond to the challenges and provide details of the transactions under privilege. It seems that with the dissolution of the Oireachtas tomorrow that the opportunity to provide details using privilege might have passed.

Below is the transcript of the exchange in the Seanad, it ends abruptly and the Senator did not speak again, but as you can see he made the allegations again and refused point-blank to divulge details to the Seanad under privilege which could then be verified. You can draw your own conclusions – personally I think it is irresponsible for those in positions of authority (even if they might be out on their ears in 30 days) to make claims which undermine trust in public institutions and then refuse to pursue the claims. Senator Mark Daly is a 34-year old Fianna Fail senator who was an auctioneer “in a former life”.

Senator Mark Daly: As Senator Leyden said, we should make declarations about this and I, as an auctioneer, was involved in selling section 23 properties.

Senator Shane Ross: Shame.

Senator Mark Daly: I felt at the time that some of these tax exemption sections were quite good, such as the section dealing with nursing homes, but the holiday home exemptions went on for too long. Senator Ross is right about that. They should have been closed off in many areas.

In my home town there were a number of planned developments and we were lucky they did not go ahead. If, however, the section was taken out, people who rented out a business such as a shop using section 23 relief to shelter the income from the shop would now be in a situation where the rent from the shop would no longer be sheltered and they would have to use what was left from the after tax income from the shop to pay off the section 23 mortgage because none of the section 23 properties would provide any income, not even enough to pay off management fees. We would then be left with a situation, especially for section 23 holiday homes, where the estates would not be managed properly because there was no income and they would deteriorate.

I agree with the thrust of the recommendation but it is a shame the Labour Party did not allow for more time, perhaps three months. The idea is good and the Minister is looking at the situation. I raised concerns previously about the selling off of these estates. There was a case in Kenmare where the auctioneers were involved in a fire sale. The Irish Examiner property supplement published a headline reading “Fire sale in Kenmare”. The auctioneers were telling their friends they should buy these because they are bargains. Auctioneers are supposed to achieve the maximum price, not sell bargains. The loans were held by Anglo Irish Bank – the taxpayer – which told the receiver to maximise the value of the properties, who then told the auctioneer to sell the property and the auctioneer told his friends they were bargains. They were selling them below the market rate. We told those auctioneers they were selling below the market rate, that we had sold six similar properties in the last six months and we estimated that the price being asked would cost the taxpayer €1 million.

Senator Paddy Burke: How does Senator Daly know the market value?

Senator Mark Daly: If that loss were extended to cover other fire sales in similar properties, including section 23 properties, the cost to the taxpayer would be in the hundreds of millions, if not billions, of euro. If section 23 relief is withdrawn unilaterally, there will be a double crash.

I raised a related point during the week that NAMA was not following the legislative provisions in the selling of properties under its control. It is not even following the code of conduct for State bodies. When it comes to the sale of section 23 properties and other properties by liquidators, we need transparency. Legislation provides for that but NAMA, in the case of numerous properties being sold on its behalf by the banks, is not following the provisions laid down. People have come to me disgusted that the guys who had borrowed the money originally are buying back their own debt for 50% or 75% less, knowing well that the properties were undervalued. I will speak against my profession in this regard. The valuers undervalued the property initially, because most of their valuations were desktop valuations. They undervalued it and the banks took a haircut of 40%. In the case I came across the original loan was €12 million and the haircut was €6 million, while the actual value of the property was €9 million. The developer went back and arranged for a buddy to buy the property at the haircut price of €6 million and sold it on for €9 million, costing the taxpayer.

An Cathaoirleach: We will be debating this until 12.30 with the way Senators are making speeches.

Minister for Finance (Deputy Brian Lenihan): The Senator should supply the details of that transaction to NAMA.

Senator Mark Daly: I will.

Deputy Brian Lenihan: The Senator has not done so to date.

Senator Mark Daly: I have not. I am not an investigator, but NAMA is not following the code of conduct. It says it does do not have to. Transparency is the key factor in this matter, but NAMA is not following the code of conduct.

Deputy Brian Lenihan: The Senator is under privilege in this House, but he should provide whatever information he has.

Senators:  Hear, hear.

Senator David Norris: The Senator is a public representative. He should name and shame.

Senator Jerry Buttimer: The Senator should give the Minister the information.

Senator Mark Daly: As I am not a member of the Garda, I cannot do that. When I have information of wrongdoing, I will put it before somebody.

Deputy Brian Lenihan: The Senator has not suggested wrongdoing, just bad commercial practice.

An Cathaoirleach: We are on recommendation No. 1. The Senator has made his point well.

Senator Mark Daly: NAMA has turned around and said it does not have to follow the code of conduct for the sale of State assets. I maintain these are State assets because we provided the money. NAMA owes us the money. I do not care whether NAMA follows the code or not, but there is no transparency and there are bad practices going on. I do not want to be doing a post mortem here in a year’s time when it has cost the taxpayer hundreds of millions of euro.

Deputy Brian Lenihan: We would all agree with that, so please give me the information

And that’s where this exchange ended. The transcript and context is available from the Oireachtas website here.

UPDATE: 8th March, 2011. In what might be his swan song in the current Seanad, Senator Mark Daly has repeated claims that NAMA is breaking what RTE describe as “the spirit of the law” . Further it is reported that Senator Daly has written to the Attorney General Paul Gallagher asking him to investigate NAMA for alleged breaches of the law. The senator is still referring to what RTE describes as “a scam, whereby the original borrower of the loan would buy back their own loan book for less than the current market value.” The senator has yet again failed to provide any details which might be investigated. Whilst there is no evidence that the senator is continuing to make these allegations in order to raise his profile in the forthcoming Seanad nominations, it is indeed puzzling why he has not provided details of the “scam” using the privilege  accorded to him in the Seanad. The Fianna Fail senator – try finding a reference to Fianna Fail on his website! – has published an exchange in the Seanad where the senator asks for a debate on the NAMA legislation. He makes no reference to the fact that he has been challenged on numerous occasions to provide details of the alleged scam.

UPDATE: 9th March, 2011. The transcript from yesterday’s business in the Seanad is now available here and the relevant extract involving Senator Daly is reproduced in full here. There is no further context in yesterday’s exchanges.

Senator Mark Daly: I will be brief in my contribution. Like other colleagues I welcome Senator Darragh O’Brien to the House and congratulate Senator Prendergast on her elevation to the European Parliament. It was the intention of the outgoing Government to bring in an amendment to the National Asset Management Agency Act. I have written today to the Office of the Attorney General to ask it to investigate NAMA for breaching the law and the intention of the NAMA legislation as passed by this House in the disposal of assets under its control. There is no transparency in the current process being pursued by NAMA. This lack of transparency has been confirmed to me by people who were asked to become involved in a scam whereby the original borrower of the loan would buy back his own loan book for less than the current market value thus causing a significant loss to the taxpayer. I have sought legal opinion from the Law Library on the matter, which has confirmed my suspicions that not only has the spirit of the law been breached, but also the law and its intent as passed by this House. Sections 2 and 10 of the National Asset Management Agency Act provided that the taxpayer must be protected, but this is not the case.

Senator Paul Coghlan: There has been no proof.

Senator Mark Daly: If it continues the taxpayer will incur losses of hundreds of millions of euro, which is why I have asked the Office of the Attorney General to investigate NAMA and the way it is selling the borrowings and the loan book.

Senator Paul Coghlan: The Senator’s allegations have been refuted.

UPDATE: 2nd June, 2011. Somehow or other Mark Daly has gotten back into the new Seanad. He wasn’t nominated by Fianna Fail leader, Micheal Martin but he’s back regardless. And today he seems to have repeated allegations in the Seanad that NAMA is up to no good in some instances. And as far as the reporting so far is concerned, YET AGAIN the Kerry senator has declined to provide details under the privilege provided by the Seanad to allow any investigation.

UPDATE: 23rd June, 2011. Senator Daly was in action again on 21st June in the Seanad, capitalising on Enda Kenny’s gaffe last week which seemed to give credence to Senator Daly’s allegations. The Senator said on Tuesday that his sources were willing to meet with the Taoiseach; he said “my sources are willing to meet the Taoiseach to explain how this is going on but I am sure the Taoiseach is well aware of it. My information comes from a confidential source. We often get information from sources who ask that their identities remain undisclosed. It helps us to do our job because, if we disclose our sources, people will not trust us with information.” Why it is that the Senator has declined to provide the address of the property in question is not clear, because presumably that would not identify his specific source. But even if it did, it is not clear why he does not provide details in confidence to NAMA. What is disconcerting is the impression that the Senator seems to be getting support in his allegations in the Seanad, with senators Jim Walsh, Labhras O’Murchu and Fidelma Healy Eames also using the claims as a basis for demanding better transparency and accountability from NAMA. These latter demands all seem well-intended and soundly based but they might be tarnished by being associated with Senator Daly’s claims which he has not evidenced in public using privilege or in private.

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I see that it will be next Tuesday 1st February, 2011 when the Central Bank of Ireland releases its data for December 2010 which will show how deposits fared since the announcement of the IMF/EU bailout at the end of November, 2010.

For those of you expecting a massive inflow of deposits in December as euro deposit holders finally found religion and became confident enough to leave their money in highly regulated, stress-tested on a ferocious scale, high interest paying Irish banks will be disappointed to see that data released by the ECB yesterday showed that deposits fell €6.8bn in December (compared with a fall of €5.9bn in November). So the rate of flight which was already at an elevated level increased. The ECB does not break its figures down between the five NAMA Participating Institutions (AIB, Anglo, BoI, EBS and INBS), the six State-guaranteed institutions (the five NAMA PIs and Irish Life and Permanent) or the 20 domestic institutions (including An Post, the credit unions and foreign banks providing domestic banking services) – we do know that it excludes the 430-odd IFSC companies (MFIs) who had an additional €459.2bn on deposit. So we don’t know if an internal flight from the six “Irish” banks to local foreign subsidiaries is ongoing as anecdotally suggested – I’d be willing to bet it was.

For information, the deposits in the 20-institution-strong domestic Irish banking system totalled €201.1bn at the end of December 2010 compared with €207.9bn at the end of November, 2010 and €213.8bn at the end of October, 2010.

Of course it is emergency assistance from the CBI and ECB which is replacing these lost deposits and we would hope to get a better picture on Tuesday next of what has happened to these but we already know CBI emergency liquidity assistance for December 2010 stood at €51.1bn, up €7bn from November. ECB short term funding is less clear though it was suggested two weeks ago that it had fallen by €4bn to €132bn at the end of December compared with the end of November 2010. It seems that there is a maximum of €201bn left in deposits in the Irish banking system. Has the ECB and CBI pockets deep enough to replace these deposits?

UPDATE: 30th January, 2011. The Irish Examiner confirms the continuing flight of deposits from Irish banks, though to stress the point – we know the loss of deposits from the 20-odd banks that serve the domestic economy was €7bn in December 2010, but it may be that the internal loss from the six State-guaranteed banks has been much more than this (it could theoretically be less but that would be counter to anecdote). The Irish Times reports on the third phenomenon propping up Irish banks (the first two being ECB and Central Bank of Ireland emergency liquidity operations) – the State has just guaranteed the issue of €20bn of euro bonds created by Irish Life and Permanent, AIB, Bank of Ireland and EBS. I must admit that I read the Irish Times article a few times and still don’t know if this is €20bn of new guarantees or merely an exchange of guarantees on foreign currency denominated bonds to euro bonds.  Elsewhere Richard Curran at the Sunday Business Post reports on the unease towards the elevated levels of Emergency Liquidity Assistance (ELA) provided by the CBI (€51bn at the end of December 2010, up some €7bn from the end of November 2010 – will end of January 2011 show a further leap? We’ll find out on 11th February, 2011 when the CBI publishes some of its statistics for January). Apparently a Citigroup report considers the €1.5bn capital base of the CBI to be at risk with the €51bn ELA exposure being secured by domestic bank assets which the ECB wouldn’t deem acceptable. And finally, Bloomberg report that it is Citigroup’s view that ELA should be added to gross national debt which Bloomberg put at €148bn and which excludes cash on hand at the NTMA. Let’s hope the rating agencies don’t come around to that view – otherwise with S&P’s view, for example, that our national debt should include NAMA bonds, Ireland’s gross debt including ELA would touch the €240bn mark (€148bn gross debt + €40bn NAMA debt + €51bn CBI ELA).

UPDATE: 1st February, 2011. The Central Bank of Ireland has issued its Money and Banking Statistics report for December 2010 which confirms the continuing decline in deposits but also confirm a welcome reduction as expected in ECB special operations. The chart below shows (1) borrowings by Irish based banks from the Central Bank as part of Eurosystem monetary policy operations (2) borrowings by the 20-odd domestic financial institutions (State-guaranteed, An Post, credit unions, foreign banks which serve the domestic economy) and (3) Emergency Liquidity Assistance provided by the Central Bank of Ireland to the Irish banking system. In overall terms the increase in support from the ECB and CBI in December 2010 was minimal (€0.2bn) but that is likely to disguise the support given to the six State-guaranteed banks. Remember in December, the State shoveled €3.7bn into AIB and €0.5bn into EBS and God knows how much into INBS and Anglo. The deposit outflows confirm the ECB data from last week that deposits fell some €7bn during the month (€3bn Irish residents, €4bn non-Irish)

UPDATE: 2nd February, 2011. It hardly comes as a surprise that S&P has downgraded Ireland’s sovereign debt by yet another notch from A to A- with negative outlook and another review expected in April 2011. S&P say that Ireland is almost entirely dependent on the ECB at present. Well yes and Emergency Liquidity Assistance from the Central Bank of Ireland (to the tune of €51bn at end December 2010 and likely to be several €bn more at the end of Jan 2011 – will be confirmed on 11th February, 2011).  At A- we remain investment grade, for now.

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Simon Carswell at the Irish Times bring us a story today which begs some basic questions about the future of Irish banking. He reports that AIB (that’s the zombie bank which we legally 49.9%-own at present but in reality we own 92%+) has recently lobbied the Department of Finance to change the policy on NAMA acquiring sub-€20m loans from that bank.

You’ll recall that up to last September 2010, NAMA was to take over all €5m-plus AIB land and development loans (and any associated borrowings). In September 2010 the Minister for Finance, Brian Lenihan raised the threshold from €5m to €20m but following the intervention of the IMF/EU in November, 2010 it was decided to not only restore the threshold but to encompass ALL land and development (and associated borrowings) at AIB, including the sub-€5m exposures.

It is reported that AIB has complained that NAMA taking over these loans will severely impact the bank’s operations and threaten its headcount (a sensitive issue in a country with an official 13.5% unemployment rate) and indeed the future of some branches. AIB claim that these loans will have substantial associated borrowings and encompass a sizeable proportion of Irish small and medium-sized business lending. AIB further claimed that NAMA didn’t have the wherewithal to handle these loans and even if they did, AIB would be better placed to work-out the loans. And lastly the bank was concerned that the transfer of these loans would create an even bigger capital hole for the State to fill with additional bailout funding.

I find this story a little sinister because (a) AIB will be paid the current value of the loans plus a long term economic value of some 10% so why should there be an even bigger capital hole – we know the formal accounting rules allow the banks to understate loan losses but surely the Financial Regulator has been getting accurate estimates of loan losses? (b) although NAMA is taking over the sub-€20m loans it is handing them back to the banks for day-to-day management so why would that mean a reduction in headcount let alone the closure of entire branches (c) it seems a little late in the day to claim that banks can manage the loans better than NAMA – after all NAMA has absorbed €71bn of loans at par value and these smaller loans at both AIB and BoI are understood to be worth less than €16bn at par value (d) AIB is a zombie that is effectively 90% + owned by the State and will depend on the State for a €4.7bn Core Tier 1 capital injection in 30 days time.

The Irish Times claim that “it is estimated” that these smaller loans will bring some 4,000 additional borrowers into the NAMA net (on top of the 850 €20m+ borrowers). These borrowers may represent the solid middle class spine of the country and many are understood to be “amateur” developers whose day jobs were in the professions. NAMA always claimed one of its prime advantages was its ability to deal impartially with developers absent the cosy relationships that had built up between local banks and long-standing customers and which contributed to reckless lending decisions and abysmal paperwork. NAMA has previously claimed that it will work to ensure the original credit officers are removed from dealing with the loans at the banks when the loans come under NAMA’s control – a Code of Practice in this area would be helpful. You would have to wonder if the true motivations of AIB in lobbying the Department of Finance have more to do with the protection of future careers at AIB or the protection of a sheltered segment of Irish society. At times like this, it is good to know the IMF will be involved in any decision-making, though I think even the IMF will be a little frustrated that it took the Department of Finance two months to draft an amendment to the NAMA Act to fast-track the absorption of sub-€20m loans and only then when the passage of the legislation was rendered impossible by political developments.

UPDATE: 31st January, 2011. Without naming sources or basis, John McManus in the Irish Times today writes as if the treatment of NAMA’s sub-€20m loans is a fait accompli. He claims that banks have successfully lobbied to keep associated lending.  He claims that the NAMA Bill published last week stops NAMA taking over associated lending – there’s no mention of a change in this area so God knows what the Irish Times is on about this time.

UPDATE: 5th February, 2011. Simon Carswell returns to the AIB-lobbying-NAMA-2 theme in today’s Irish Times where he claims that the Department of Finance conceded a vital point in what is being described by the Irish Times today as serious concerns about the plans to suck an estimated €16bn of sub-€20m exposures out of AIB and Bank of Ireland. The lobbying was led by AIB’s new executive chairman, David Hodgkinson (the former HSBC banker from the UK that took over last November 2010). The vital point which Simon Carswell claims was conceded was that associated borrowings by the same borrower whose sub-€20m loans are to be absorbed by NAMA will now not transfer. Remember that NAMA is supposed to apply the same discount (aka haircut) that it applied to the larger expsoures, to these sub-€20m exposures. So omitting the associated lending (that is, the non-land and development eg commercial property, share portfolios, fine wines, non-development residential property in Ireland and abroad) is likely, in my view, to reduce the value of core sub-€20m land and development loans. That’s why this reported concession is important. It will be examined by the next government so it would be helpful if the political parties could set out their stalls on the matter. Of course it will be the EU that examines any new valuation method but they don’t seem to be too bothered that NAMA stuck with the November 30th, 2009 valuation date or were acquiring loans using a 10-year bond rate that had skyrocketed – the EU are “big picture” observers it seems and may not change what the DoF has apparently decided.


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There are two surveys out this week that, on first glance, paint a contradictory picture of prices of residential property in the State. This morning saw the publication of the long-running EBS/DKM survey on affordability (with press release here) which concluded that we are today spending a smaller proportion of our net income on new property purchases than any time previously (at least since 1988). And earlier in the week, we had the latest Demographia International Housing Affordability Survey for Q3, 2010 which ranked Ireland (Dublin) as “seriously unaffordable”. So what are we, more affordable than ever or seriously unaffordable?

The DKM study examines the percentage of net income (that is income after tax and statutory deductions) that is needed to fund a new property purchase. They concluded that the amount now needed by an average First Time Buyer (FTB) couple each month to fund a 90% mortgage paying 3.87% interest over 25 years buying a property for €159,500 “has more than halved to monthly repayments of €639 or 12.6% of a couple’s net income”  12.6% average monthly income at €639 infers net €60,857 annual income. This is for a FTB couple. Although there may be some tax variations between couples, a net annual income of €60,857 (that is after tax, PRSI and Universal Social Charge) would infer gross annual income of €82,000. (using the PwC tax calculator for 2011). DKM don’t show the “affordability” over the past few decades but they do confirm that at the peak of the property boom in late 2006 the equivalent monthly % needed to fund a new purchase was 26.4% and DKM claims that the present % is lower than any time in the past 25 years including previous lows of 13.8% in Q1, 1995 and 13.4% in Q2, 1988.

The Demographia survey examines the median house price divided by gross annual median household income. Anything below 3.0 indicates affordability, 3-4 indicates moderate unaffordability, 4-5 serious unaffordability and above 5 severely unaffordable. Ireland (Dublin) was at 4.8, that is the average house price divided by the annual gross salary was 4.8. Where does the magic number 3.0 come from as the borderline between affordability and unaffordability? From pre-1990s experience of what folk back then paid. Is that a decent measure today of affordability? That’s a difficult question. The report states “Ireland: Housing in Ireland was moderately unaffordable with a Median Multiple of 4.0. Housing was generally affordable in Ireland as late as the middle 1990s. Dublin was the least affordable market with a Median Multiple of 4.8 and along with Cork (4.1) was seriously unaffordable. Three of Ireland’s five markets were moderately unaffordable, Waterford (3.2), Galway (3.6) and Limerick (4.0). Ireland had no severely unaffordable markets and had no affordable markets.”

So what are we, affordable or unaffordable? Both it seems. Demographia believe that a return to long term multiples of three times gross median income is “correct” whereas DKM examine proportions of income over a period of time for new purchases and conclude we are today at a low-point.

Of course, none of this really helps purchasers in a market where prices are still apparently declining according to the latest Permanent TSB/ERSRI house price series with declines accelerating in Q4, 2010. Affordability might be less a consideration than availability of credit or views on prices in the short term or wider economic considerations such as weak growth, increased taxation, reduced state spending and interest rate.

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This is the second entry to deal with the allegations made in the last couple of days by Fianna Fail senator, Mark Daly, including allegations made in an interview with Pat Kenny on RTE yesterday morning. The allegations were of shenanigans involving loans acquired by NAMA. There is a full transcript of the interview with Pat Kenny in Part 1 but I extract here what I believe to be the relevant remarks. I have merged some parts of the exchange and you should consult the full transcript to see the sequence of precisely what was said.

Mark Daly:  It’s not so much an allegation as a fact. In one particular case that I have come across in the UK the original loan was €12m, the haircut was €6m, but the asset itself was undervalued and was worth €9m really and the guy, the original borrower of the loan said to his friends “you pay the banks €6m, they’ll be happy and we’ll sell it for €9m” and they made a nice €3m profit. There’s a lot of shady behaviour going on here. The obscenity of it is that on top of this is that the banks are once they’re quite happy to get the money they owe NAMA, aren’t going to go after the borrowers, the original borrowers for the balance of the money. The original borrowers that have been brought to my attention are arranging for their friends to put in the bids. Nobody else is aware that this place is for sale because no-one else knows that this asset is in trouble, is for sale. This is a scam of monumental proportions

Pat Kenny: NAMA had responded that it had addressed this extensively at the Public Accounts Committee.

Mark Daly: The problem here is that you need smoking guns you need evidence of emails, phones, cheques, money going. This is all quietly, quietly little chats in a corner over a pint. And the guy who came to me on this one was approached at a dinner party to be the third party to buy a property in the UK and he would then be given a cut. And he came to me because he was so disgusted, that the same people who got us into this trouble in the first place are now doing the same thing again.

Emmet Oliver: I don’t have any evidence and unlike Mark there I don’t have the benefit of privilege in the Oireachtas to say these things. So he does have in the dying days of the Oireachtas the opportunity to put names into the pubic domain.

Mark Daly: And in the next six months the guys who caused all the trouble are still going out there and they’re going to make billions, millions, hundreds of millions, billions off the taxpayer because they’re buying property at less than the asset because they’re arranging for their buddies to put in false bids and thereby buying it for less than the market value –

This entry examines the following
(1) The allegation

(2) NAMA’s codes of practice and the NAMA Act

(3) Banks’ codes of practice and the NAMA Act

(1) The allegation

The loan, the senator claimed, had a par value of €12m and related to a property in the UK. NAMA paid €6m for it. A party related to the developer (“friends” according to the senator) acquired the loan for €6m from NAMA. The underlying property is today worth €9m.

To investigate the allegation further, the Senator needs to identify the transaction. It seems that it was the loan that was sold by NAMA or the bank, not the underlying property. So we probably need more than just the property address because the new buyers of the loan may not have registered a loan charge that is publicly accessible and if they were friends of the borrower and wanted to keep the transaction hushed up then that is all the more likely. It seems to me that probably the only parties that can fully investigate the allegation are (1) NAMA or (2) the bank but if the Senator puts the following information in the public domain then the media can conduct some investigations

(a) The address of the property – the media can then identify the owner, the loan charges on the property, the price paid for the property and can probably have a stab at valuing the property today.

(b) The buyer of the loan – this wouldn’t be required and would be clear if the new buyer of the loan registered a charge against the property. But if they were being cute they mightn’t have done this. So the Senator may need to identify the buyer of the loan.

Only NAMA and the banks will theoretically know how much the agency paid for the loan – the Senator says €6m. But if the Senator puts (a) and (b) in the public domain, and as Emmet Oliver said yesterday, the Senator has the advantage of providing details using his privilege in the Seanad, if he does make this information available then the media can have a stab at verifying the allegation and NAMA and the bank should be in a position to comprehensively judge the allegation (see below).

If, on the other hand, the Senator does not put the information in the public domain, then all we have is an allegation and we must ask how credible this Senator is, and for what reason he does not make the information available given his Seanad privilege. Like informed commenter, Who_Shot_The_Tiger (see comment on Part 1), I am a little sceptical about the claim. This blog has a reasonable audience within the property development (and associated professional services) community and receives quite a volume of confidential messages through the contact form on different aspects of NAMA/the banks and there hasn’t been any message that would confirm the allegations made by the Senator. But given that the Senator is one of 200-odd people in the State that can make this information public under privilege, why doesn’t he?

Now NAMA apparently responded to the Pat Kenny show and claimed that this matter was dealt with “exhaustively” at the Committee of Public Accounts (CPA). NAMA has only twice come before the CPA – on 18th November, 2010 and 13th January, 2011. The transcripts for both appearances are available and there is no reference whatsoever to the specific transaction but in general terms the issue was examined in the following exchange between Labour’s Roisin Shortall and NAMA’s Chairman, the hawkish Frank Daly in November:

Frank Daly: On the second part of the question on the phoenix situation, there is a provision in the Act that we are not allowed to sell back properties to the people who are debtors in the first place. We are very conscious, both at the board and in the executive, of the sensitivity of that and making sure it does not happen. I cannot come to the committee and say that somewhere down the road someone will not come back and set up a company or work through a relation, for example, to buy back some properties. It is almost impossible for NAMA to give a 100% guarantee that that will not happen. We are alive to it and we will do our utmost to make sure it does not happen.

Deputy Róisín Shortall: If an outstanding debt is attached to an individual, is there anything stopping that individual from starting up a new development or construction operation?

Mr. Frank Daly: If there is an outstanding debt against an individual that debt is going to be chased up by NAMA and there will be a charge against it. We will use every means to recover it.

Deputy Róisín Shortall: But is there anything stopping one of those individuals from setting up a limited company, for example?

Mr. Frank Daly:  I do not think there is anything. I bow to legal advice but I do not think there is a provision in company law to prevent someone from setting up a company simply while he or she has a debt outstanding somewhere else.

Deputy Róisín Shortall: Would Mr. Daly see that as a weakness in company law?

Mr. Frank Daly:  The Deputy is getting into an area where in the nature of things people have debts and they cannot repay all their debts at once. To have something like that in company law could appear to be draconian. I am not talking about the developers we have in NAMA. I am talking about ordinary business people who might get into trouble. If one prevents such people from ever setting up another company or going into business, one is in danger of becoming too draconian and of stifling entrepreneurship. I emphasise that I am not talking about the NAMA people.

Deputy Róisín Shortall: But Mr. Daly has said that those individuals would not be able to buy back properties.

Mr. Frank Daly:  Yes.

Deputy Róisín Shortall: But could companies with which they are associated buy back those properties?

Mr. Frank Daly:  That is the point I was making, namely, we are precluded from selling the properties back to the individuals who are debtors with NAMA.

Deputy Róisín Shortall: But NAMA could sell them back to companies where the principal is a developer?

Mr. Frank Daly: That is the point I am making. We are very sensitive to that. We will do our damnedest to ensure we do not do that. It is unfair to ask—–

Deputy Róisín Shortall: NAMA doing its damnedest is one thing, but—–

Mr. Frank Daly: That is all we can do within the law.

Deputy Róisín Shortall: Well, I am asking about the law then. Is the law sufficiently robust in this area?

Mr. Frank Daly: That is a different discussion. It goes back to the point—–

Deputy Róisín Shortall: It is an quite important question. What happens in the coming years and the extent to which the people in question honour their debts comprise a critical aspect of Mr. Daly’s work.

Mr. Frank Daly:  It is a quite valid question. One would have to come up with a law that targets particular individuals. One would have to relate it to the NAMA debtors or borrowers. If one tried to come up with a law that applied the principle that if there is debt outstanding, one cannot set up a company or engage in business, that would probably be a much wider issue. This is not a decision for NAMA but a wider question.

Deputy Róisín Shortall: I expect Mr. Daly to have a view on it.

Mr. Frank Daly: I am sure I would.

(2) NAMA’s codes of practice and the NAMA Act

First let’s be clear that NAMA can potentially control two assets – the loan and the underlying property. When NAMA first takes over a loan it doesn’t have full control over the property just like your mortgage company controls your loan but it is your name on the title albeit with a charge registered in favour of the mortgage company. Just as your mortgage company may foreclose on your loan and repossess your asset, NAMA may also do this but Paddy Shovlin/the Fitzpatrick brothers apart (possibly) this has not yet happened though NAMA is in the thick of five receiverships (Michael McNamara & Co, Radora, Paddy Doyle companies, Paddy Burke Builders and from last week John McCann and the betting would be that McInerney later today will become the sixth) and two liquidations (Pierse and the Whelan group). So NAMA doesn’t really own any real property at present and the sales that NAMA recently referred to (€2bn last year and an expected €200m in Q1, 2011) will take place under NAMA’s auspices but it is likely to be the developer that actually sells the property.

Most of us can identify with the sale of property and at some point in our lives will actually be at either side of a transaction. On the other hand few of us get involved in the sale of loans, that is where our bank sells our loans to another party. But this is not uncommon with commercial loans though in the past it has been more popular in other jurisdictions, particularly the US. Loans are referred to in the NAMA legislation as “bank assets”. It seems to me that the subject of the Senator’s specific allegation was the sale of a loan, not the underlying property, but that doesn’t take anything away from the potentially scandalous consequences.

NAMA’s operations are governed by the NAMA Act (section 172 appears particularly germane), two Regulations (eligible assets and long term economic value) and one Order (the NAMA commencement date), two (one and two) directions (both associated with the accelerated transfer process announced in September 2010) and the five NAMA Codes of Practice (the Disposal of Bank Assets is the most relevant to the questions here). The Disposal of Bank Assets (aka loans) makes reference to the disposal of property and states that NAMA will abide by the terms of the Code of Practice for the Governance of State Agencies 2009.
Sections of the NAMA Act referred to by Senator Daly yesterday:

Section 18

18.—(1) There shall be a Board of NAMA, whose functions are as follows:

(a) to ensure that the functions of NAMA are performed effectively and efficiently;

(b) to set the strategic objectives and targets of NAMA;

(c) to ensure that appropriate systems and procedures are in place to achieve NAMA’s strategic objectives and targets and to take all reasonable steps available to it to achieve those targets and objectives.

(2) For the purposes of the Board exercising its functions under subsection (1), and without prejudice to any of its powers at law, the Board may provide for the performance of any such function by an officer of NAMA.

(3) In performing its functions, the Board shall act in utmost good faith with care, skill and diligence.

Sections 23 and 25 refer to the appointment of board members and the remuneration of the Chairman of NAMA and seem to be irrelevant to the allegations. I think the Senator meant to refer to section 35 which stipulates “Within 3 months after the establishment day, NAMA shall prepare codes of practice for approval by the Minister” which NAMA did and those codes were published in July 2010 some three months after the Minister had received the.

The assertion by NAMA’s chairman at the November 2010 appearance before the CPA, where he said “there is a provision in the Act that we are not allowed to sell back properties to the people who are debtors in the first place.”  Presumably refers to section 172 of the NAMA Act which says at subsection (3)

“A person who is the debtor in relation to an acquired bank asset, who is a person referred to in any of subparagraphs (i), (ii), (iii), (v) or (vi) of section 70(1)(b) or who is a person on whose behalf the debtor or the person referred to in one of those subparagraphs acts as a nominee or trustee in relation to an acquired bank asset shall not, if any of those persons is in default in relation to any acquired bank asset, acquire from NAMA or a NAMA group entity, any legal or beneficial interest in property comprised in the security forming part of any acquired bank asset in relation to which the default has occurred.”

However this section refers to property. What the Senator was alleging related to the sale of the loan (aka a “bank asset”) and the relevant section of the NAMA Act is, I believe, 139 which says

“NAMA may validly transfer, assign, convey, sell on or dispose of an acquired bank asset to any person notwithstanding—

(a) any restrictions on such a disposal at law or in equity,.

(b) any contractual requirement, or any requirement under any enactment, for the consent of, for notice to, or for a document from, any person to such a disposal, or

(c) any provision of any enactment that would otherwise prohibit or restrict such a disposal.”

So I think that NAMA can sell a bank asset (that is, a loan) back to the developer as long as NAMA complies with its own code of practice for the disposal of loans. And its own Code of Practice merely says that the NAMA board will develop a procedure but that it will be guided by the principle of maximizing income and if the loan is worth less than €100m will be independently reviewed by one appraiser and if more than €100m by two. In fact the Code of Practice is a dreadful piece of work in that it lacks meaningful detail.

For what it is worth, the issue of NAMA selling property back to the original developers was examined on here in a “moral dilemma” way back in September, 2010. And the conclusion was that this mightn’t be a black-and-white area because if the original developer can pay the highest price for a repossessed asset and has the unencumbered financial wherewithal to fund the purchase then on balance it might be better to sell back to the original developer. Take a look at the entry and you might see sincere arguments on both sides of the table.

(3) Banks’ codes of practice and the NAMA Act

Now this is an area which has been the subject of disquiet on here before eg here and here). Although the NAMA Act provides for NAMA to be involved in decisions affecting NAMA-bound loans, it is not at all clear how that involvement has been effected.

The NAMA Act states at section 71

“(1) A participating institution shall, until it has been served with a completion notice or NAMA directs otherwise—

(a) administer, service and deal with all of its eligible bank assets in the same manner as, and with the same level of professional skill, care and diligence as, a prudent lender acting reasonably would so administer, service and deal, and

(b) so act in relation to those bank assets in good faith having regard to the purposes of this Act.

(2) A participating institution shall not without the prior written approval of NAMA—

(a) deal with any of its eligible bank assets otherwise than in the ordinary course of its business,

(b) deal with any of its eligible bank assets in such a way as to prejudice or impair NAMA’s prospective interests or priorities in relation to such a bank asset,

(c) compromise any claim or release, vary, relinquish or otherwise take or omit to take any action if its doing so could reduce, lessen or impair any security, right, obligation, ranking or priority held or enjoyed, directly or indirectly, in connection with such a bank asset, or

(d) amend or vary any contract relating to such a bank asset unless contractually obliged to do so.

(3) NAMA may issue guidelines or policy statements in relation to the kinds of transactions that it is likely to be prepared to approve under subsection (2).”

To me this section seems quite loose and is capable of abuse. And it may indeed be the laxness of this section that might have allowed this alleged transaction to have taken place.


The allegations by the Senator give rise to at least two concerns

(1) NAMA (or NAMA banks) is selling loans for substantially less than they’re worth

(2) NAMA is selling loans to parties associated with the original borrower with the implication that the borrower is profiting from the bank crisis to the tune of €3m on this one transaction alone

According to the Code of Practice for the disposal of loans, NAMA is required to get at least one independent valuation for loans worth less than €100m. You would expect the banks to adopt a similar code but that is not mandatory and the NAMA Act is vague on the precise steps to be taken by banks when disposing of NAMA-bound loans. So if it was the bank that sold the loan, there may not have been an independent valuation but NAMA should have been consulted on the sale. If NAMA didn’t demand an independent valuation, then I think there is a prima facie argument that someone at NAMA was negligent. If an independent valuation was obtained that suggested the loan was worth €6m and it later transpires it was worth €9m then I think the valuer would have questions to answer, though it should be remembered that valuation is an art, not a science (though it’s not astrology either so there should be a clear basis for any valuation).

It seems to me that there is no bar on NAMA selling loans to either the debtor or an associated party. Whilst the NAMA Act seems to bar sales of real property to a debtor or associated party, there doesn’t appear to be any such bar on the sale of bank assets (aka loans). That would appear to be a gap in the NAMA approach and it is surprising that the Minister passed NAMA’s Code of Practice without making reference to this provision that applies in the case of real property disposals.

So in conclusion

(1) We need the Senator to reveal details of the alleged transaction

(2) If the allegation is well-founded, NAMA needs investigate how the loan was valued

(3) NAMA needs review its Code of Practice in relation to the disposal of loans and specifically whether the bar on sales of real property to the original borrower should extend to sales of loans

(4) NAMA needs to tighten up the procedures used at banks to dispose of loans, to ensure that banks adhere to the same standards as contained in NAMA’s Code of Practice

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This morning on RTE radio, a 34-year old Fianna Fail senator, Mark Daly, an auctioneer (Irish term for a profession that frequently encompasses the roles of valuer and estate agent) alleged that he was aware of shenanigans involving loans (that is, more than one) acquired by NAMA. The one he outlined related to a property in the UK. The loan, he claimed, had a par value of €12m. NAMA paid €6m for it. A party related to the developer (“friends” according to the senator) acquired the loan for €6m from NAMA. The underlying property is today worth €9m. These were the facts relayed by the senator which, on the face of it, give rise to two concerns

(1) NAMA is selling loans for substantially less than they’re worth

(2) NAMA is selling loans to parties associated with the original borrower with the implication that the borrower is profiting from the bank crisis to the tune of €3m on this one transaction alone

A further concern was that NAMA was acquiring loans from the banks for less than they were worth, thereby imposing increased losses on the banks which are giving rise to capital holes being filled by the taxpayer. This is less of a concern on here because NAMA is valuing loans at a specified valuation date -30th November, 2009. And although property values have plummeted more than 10% in Ireland since that date, in the UK commercial values are up 10% and indeed in some micro-markets eg London West End and City there is evidence to suggest commercial values are up 20%+. There is still a difference between €7.2m and €9m but it would not be a huge concern. The other two concerns enumerated above would remain however. Here is the transcript of the interview and the ball would appear to be in Senator Daly’s court to provide details using his privilege in the Oireachtas so that the claims can be verified. If the claims are correct then NAMA will have some serious questions to answer. There will be a further commentary on the claim that NAMA is not following its own rules tomorrow.

Pat Kenny: Good morning and welcome, today is it possible that NAMA, wittingly or unwittingly, is selling assets back to the former owners at a discount (PK then introduces other stories in his radio programme). It has been claimed that people that owe hundreds of millions of euros to the banks are buying back their debt at rock-bottom prices through third parties and offshore companies. Fianna Fail senator Mark Daly whose family is in the auctioneer business claims some property is being sold back at virtually nothing to the original owners and that NAMA is not following legislation enacted by the Oireachtas. Mark daly joins me now along with the deputy Business Editor of the Irish Independent, Emmet Oliver, good morning to you both. Emmet is on the phone and Senator Mark Daly is with me in the studio. Mark Daly, exactly what are you alleging?

Mark Daly:  Well it’s not so much an allegation as a fact, that under the NAMA legislation under section 23 or 25 of the Act, NAMA had to prepare a code of conduct for the disposal of bank assets within three months of the passing of the Act which it did. And within three months it did this and said that sale of properties and assets including bank loans would be governed by the Code of Conduct for the Governance of of State Bodies which was passed in 2009 and in that, section 18 said that any asset that might be sold, so all the bank loans would have to be sold by public auction or competitive tendering process.

PK: So we don’t know about it?

MD: So we don’t know about it but the competitive tendering or public auction would obviously involve a huge amount of advertising that we would see in all the property supplements but this doesn’t appear to be happening either. And what appears to be happening is that people in the know, the same people who were in the know who got us into all of this trouble are aware through the banks, through the receivers what these assets can now be bought at, the haircuts. In one particular case that I have come across in the UK the original loan was €12m, the haircut was €6m, but the asset itself was undervalued and was worth €9m really and the guy, the original borrower of the loan said to his friends “you pay the banks €6m, they’ll be happy and we’ll sell it for €9m” and they made a nice €3m profit. And that type of thing is happening wholesale because the problem is that there is no transparency –

PK: But why would NAMA want to do that, if the thing was worth €9m why wouldn’t they sell it for something approaching that?

MD: Because no-one is trying to maximise the value because once the bank get the haircut that NAMA imposed on them, the €6m –

PK: But of course if NAMA imposed a haircut and said that this asset is effectively only worth €6m but it’s actually worth €9m. If they’ve done that then they are exposing themselves to having undervalued the property which means that they’re not being very professional in what they are doing.

MD: Well there’s a lot of shady behaviour going on here and if they followed their own rules as set out in the NAMA legislation and had a competitive tendering process or public auctions then it maximises values but what is actually happening here is and the banks and receivers have admitted this to me that the banks say that “once we get what we paid for it, the haircut from NAMA, we are happy”

PK: This is utterly, utterly dishonest if that’s what NAMA are it, if NAMA  and I’m only saying “if”, is applying a haircut that is greater than the haircut that the market would suggest it should have then NAMA is not doing its job properly.

MD: Well, I’ll actually blame my own profession, the auctioneers and the receivers, the banks as well. All they want to do is pay back NAMA the money that is owed. Maximising the values is not really their concern –

PK: As a tax payer it is –

MD: As a taxpayer it is our concern which is why the transparency that I am looking for. First of all the rules would be followed, the law would be followed –

PK: It would by public tender or public auction

MD: Exactly. And all the banks and the receivers would go through this process but they’re not even doing that. As you can see you are not looking at papers full of advertising saying “NAMA property for sale”.

PK: What interests me more and that is some and that is something they should be doing now that you have pointed this out and I’ll get to that in a moment or two. What is more sinister is that if they applied a haircut that is too severe rather than the medium term or long term economic value of the asset which they would be in a position to hang onto because that was the idea, they could hold it in a way which the banks couldn’t because of their balance sheets, NAMA could hold it longer but if they’re just dispatching stuff to get the cash in to show how well they’re doing for instance, how well they’re doing. But they applied too severe a haircut which means that the taxpayer had to put more money into the banks which we didn’t need to do and that is the obscenity, if it’s true?

MD: Well the obscenity of it is that on top of this is that the banks are once they’re quite happy to get the money they owe NAMA, aren’t going to go after the borrowers, the original borrowers for the balance of the money. They’re just not going to do it. And receivers talking to the banks have admitted that to me. Now the problem with this Pat is that I’m not an investigator, I’m not the Guards but then again we know of plenty of cases where it’s taken two years to take people to court for very obvious corporate governance issues –

PK: Let’s point this out carefully. NAMA, we expected to turn a profit. That’s part of the whole thing that at the end of the day, it might turn a small profit. That’s at THE END OF THE DAY. It was not expected to turn a profit in the short term. It was supposed to hang onto assets and realise their value. If it’s selling them at below market value disposing of them just to get cash in. then it’s not doing the job it was supposed to hang onto assets and realise their value. If it’s selling them at under the market value, disposing of them, just to get …

MD: Lets be clear on this. When the banks are appointing auctioneers and the receivers to realise the money, the fault lies with them in that they’re not advertising the property at a very minimum the property for sale and saying that this is what is available and this is the current bid on it . The transparency is required because first of all the citizens and the taxpayer are entitled to know that the assets that at a minimum advertising the property for sale, the assets which they currently own through NAMA are being maximised in value and that is not happening.

PK: And NAMA if it wants to, like in any commercial auction or tender, they can have a reserve. If it doesn’t meet the reserve, in other words, if they feel that they are being scammed in some way, if they think people are trying to get it for nothing, for example all potential bidders have a chat and decide to keep the tenders low –

MD: What is actually happening is the guy, the original borrowers in these cases is that the original borrowers that have been brought to my attention are arranging for their friends to put in the bids. Nobody else is aware that this place is for sale because no-one else knows that this asset is in trouble,is for sale. This is a scam of monumental proportions

PK: Before I go to Emmet Oliver, NAMA has responded to you, to the claims that you made. It says that NAMA had responded that it had addressed this extensively at the Public Accounts Committee. We would ask any other person to advise of incidents where this might be happening. A spokesman for the Agency said for our part, NAMA is keen to avoid such developments insofar as it can within the law as passed by the Oireachtas. So what’s your message to them?

MD: Now that’s not exactly encouraging is it? “please come to us with a file that we can pass to the DPP”. What we’re talking about here is the transparency that is required and they’re not even following section 25 or section 35 of the NAMA Act to say this must be open, this must be transparent but the concerning part of all of this is in the next six months the cherrypicks, the best property is going to be bought up by the scavengers and the vultures.

PK: Now you have not gone public with the particular deals that you are aware of . Have you gone to the Gardai with it?

MD: Now the problem here is that you need smoking guns you need evidence of emails, phones, cheques, money going. This is all quietly, quietly little chats in a corner over a pint. And the guy who came to me on this one was approached at a dinner party to be the third party to buy a property in the UK and he would then be given a cut. And he came to me because he was so disgusted, that the same people who got us into this trouble in the first place are now doing the same thing again.

PK: Emmet Oliver, what do you make of this contention?

Emmet Oliver: Well I have great misgivings for the transparency of NAMA myself but in a different way and I’ll come to that in a second. It’s actually on the other side of the operation where they’re actually lending out money rather than what they’re doing in relation to property that are being disposed of. Two things that come to mind based on what the senator is saying – first of all, just because you auction off property at an auction which is what he seems to be advocating doesn’t necessarily mean that you are going to get the highest price. I mean the largest office block developments in the world generally don’t get sold by auction, they get sold by private treaty sale. If someone comes along to you like a private equity  company and let’s say that that’s who buys the largest property holdings they want to do that in private. They don’t want to disclose what they’re buying. They’re buying hundred, possibly thousands of properties. If they say to you “ I’ll give you €200m and you go to public auction they’re only willing to give you €150m, I don’t see what the problem is, you know, solely because you hold a public auction doesn’t necessarily mean you’re maximising the price – that’s the first thing I would say. Secondly, the problem is where are these people going to get the money to buy these assets… I don’t know what bank is going . Let’s say that developer A comes on the scene, goes to an auction and sets up a shell company or acts as a shadow director which is what the senator is trying to suggest there. I don’t know what bank is going to lend the money to these people because they’re already in massive negative equity, they’re already massively indebted and they’re breaching their loan covenants all over the place. So people are not going to advance credit to these people. So I don’t know where that happens. But there is a danger, there is a vulnerability that we’re heading into a world where  smaller loans are going to start moving into NAMA. You’ll see a story that I had myself this morning that 20,000 smaller loans are going to move so I would be I ould be worried then that at the local level where you would get the kinda carved-up deals that he’s talking about. So there is a vulnerability there, there’s absolutely no doubt about that. I don’t have any evidence and unlike Mark there I don’t have the benefit of privilege in the Oireachtas to say these things. So he does have in the dying days of the Oireachtas the opportunity to put names into the pubic domain.

PK: Isn’t the whole business of NAMA somewhat flawed that the bigger the haircut applied to the loans at the banks, the smaller amount of money that they gave the banks in terms of the bonds underwritten by the ECB which means that the taxpayer has to find more cash to put in. I mean it’s a mad system really?

EO: As we said at the time the money has to put in at one end of the pipe or the other, but it has to go in. In other words, if they over-do the haircut the banks have a bigger capital hole which has to be filled . Equally if they pay too much for them, we have to pay because they won’t make a profit either. So essentially the money was going to have to be found somewhere so yes, you’re absolutely right but this debate was had extensively back last year in the Dail and this was the system decided on. That horse has unfortunately bolted.

PK: But the principle that you have to hang onto assets, that’s what they [NAMA] were told to do. Now some assets will never have a value, certainly not in this decade or even the next. But other assets would eventually, as markets improve, have significant uplifts in their value and that was the whole idea, that NAMA would hang on. And work those assets if they could and do what the banks couldn’t afford to do. But which banks do normally in better times. They don’t necessarily foreclose on everybody on their books because it would cause chaos.

EO: Yes but the problem here is that the assets here are not performing. They’re not covering the interest bill so there’s accounting rules which won’t let you sit on them and let the compound interest effect take hold. You’ll have to takle an impairment on your books. So you can’t do that.

PK: But that’s what NAMA was told it was supposed to do –

EO: No but what I mean was it was the banks that were told that they couldn’t do that. And the only other way for relieving those assets from the banks balance sheets was to put them into another vehicle which isn’t as governed by those accounting rules which make you take the write-down. That’s why the banks weren’t left to sit on them until they recovered their values. If the interest isn’t coming in, the actual asset has to be written down in value.

PK: Look, if this scandal as Mark Daly seems to believe is there. If that’s real, the people who are culpable, if these things are being sold to private equity funds or whatever, the valuers are the corrupt people because they’re saying this thing is worth €6m to NAMA and it’s being sold on at €9m?

EO: Well the problem is, I mean. Two valuers won’t agree. No valuers will agree. So I’ll go out and view an asset Pat and so will you. You’ll say “who is the tenant, how much is he paying a month, will he last, will he survive, could we get him another rent review through, and increase the rent, what is the depreciation of the property et cetera”. I don’t necessarily agree with you. So this isn’t –

PK: So it’s not an exact science?

EO: You can be out in some cases hundred of millions of euros on the larger properties. So you know there is a problem there. But the real transparency problem is actually money that’s being lent out by NAMA. People don’t think of NAMA as a bank but it does operate like a bank. It does lend out millions and millions of euro in working capital to finish off projects which it says is a better way because better finished than not finished. But we don’t know who has received what is effectively public money. And we don’t really know what the criteria are to advance that money. So I think that –

PK: Are you saying that developers who owned particular assets which are then, those loans are NAMAised, that those self-same developers are getting loans from NAMA to finish off the assets so that it will actually be worth something rather than worth nothing half-finished?

EO: Yes that’s what is happening but the problem is we need to know who is getting the money because (1) there’s a large amount of it and (2) we need to know was one case more deserving than another –

PK: In other words the criteria that they apply. I mean you can take personalities into account but that shouldn’t be the criterion. The criterion should be about maximising value for the taxpayer irrespective of whether it appears to be doing some developer or other some sort of favour. That’s not the point – the point is to maximise value for the taxpayer.

EO: Well what’s happening is Mark and myself come together if they reveal the auction results and who bought the property, guys like myself can go off and research the company who purchased the property. Equally if they revealed and published a list of who got working capital, again the company name that would be sufficient to iron out a lot of these problems and I don’t understand why they don’t do that.

MD: Yes, I agree with Emmet there but like, what he is talking about there is, and being a valuer myself in a former life, I realise that in some situations sales by private treaty would be a better way to go but that’s not the point. The legislation says that you can’t do that. You must have an auction, you must have a tendering process. And therefore it is now illegal to now be selling any asset, the disposal of all these assets, the €2bn that have been disposed so far hasn’t been done properly. That’s the first issue. And like, this practice is apparently so widespread that when I was talking with a member of an embassy staff, I had mentioned the possibility that this was going on and THEY had heard it. So I mean it is in the dinner-party circuit around Dublin and elsewhere. It is quite well known that there are developers who are cutting deals –

PK: Well that’s not good enough to stand up in court, in law. It’s not good enough for Emmet to print in his newspaper. We talk about this but we cannot really point the finger until we have chapter and verse.

MD: But the issue here is transparency and how do you get it? First of all, the rules that are there, the laws that are there, should be followed, [sales] should be done by tendering or by public auction. And secondly as Emmet has suggested, a website, the NAMA website should have all the assets and the loans that are up for sale, what they were originally bought for, what the current bid is and no asset should be sold within four weeks of it going on the website. That way, even if a guy gets the greatest bargain ever, no-one can turn around and say there was a scam, there was a deal done.

PK: So a bit like Amazon [ Ebay, Pat?] , on you go and you can see exactly what the current bid is and the closing date is the 4th March or whatever it is –

MD: And then, I agree we mightn’t maximise the price because private funds would prefer a sale by private treaty but that’s not what the law says. We can change the law if we think that’s better but at the moment, we’re not even following the law that’s there.

PK: Finally Emmet on that, irrespective of what is wise – private treaty versus public auction, to get big investors involved in these things, they don’t want to necessarily go public. But the law is the law and they’re not adhering to the law at the moment according to Senator Mark Daly –
EO: Well, I think that maximising is the key thing. If the current legislation has to be amended, so be it. All I’m interested in as a taxpayer is that we get the best price, whatever they need to do to do that. I think that the idea of a website and disclosure would be a great idea. I mean this is public money. What NAMA is saying is “oh well this is the property market and none of these things are publicised” but we’re not talking about a normal property market, we’re not talking about a normal structure. NAMA is an asset management vehicle funded by the Irish state and guaranteed by the Irish government. I think in that context it’s perfectly possible to set up NAMAbay or Ebay-type service to find out who is getting the credit because in that situation NAMA is holding all the trump cards. Because they say to Johnny Ronan or Derek Quinlan or whoever is looking to finish a project, “if it doesn’t go public you don’t get the money” and I think that would pretty rapidly solve that problem.

MD: I mean it’s public confidence is the important thing in this and if people can see what an asset was worth originally and what is being paid for it now, there can be no quibbles about it. The next six months, knowing how the property market works, they’re going to be cherry-picking and deals done and the taxpayer ultimately will be picking up the [indistinct] bill [?]

PK: In an Oireachtas Finance Committee after an election, Emmet, it might be worth a look at what exactly NAMA sold and what it turned for the third party that sold it on because I am concerned obviously that NAMA paid too little for stuff, you know that the haircut was too extreme and if that’s the case it has cost the taxpayer money and not the way that the business should have been done.

EO: No, I mean there is a danger because NAMA, Brendan McDonagh is a director of the company, he is going to be judged on the success or failure of NAMA in its own isolated way. He’s not going to be judged by how much the banks have to be recapitalised. You have a reasonable point there. He’s going to give himself a good head-start by applying a very deep discount. Having said that they do have the Comptroller and Auditor General on premises. They are an organisation that make public quarterly reports and very few other state bodies do so. So this is only going to be all revealed in time. It will be years before we know if NAMA has made a profit or not. It’s also as I said earlier a lot of argument about what the value of assets are – you’re never going to get two valuers to agree. So it is going to be difficult but I do think that NAMA could deal with the transparency point at very little cost which would give disclosures about the working capital advances and also as Mark says the sales that went on.

PK: Final word, Mark.

MD: I mean the problem with the Comptroller and Auditor General is that’s like the post mortem, this is how it went wrong. What we need to look at now is how we make sure that it doesn’t go wrong. And in the next six months the guys who caused all the trouble are still going out there and they’re going to make billions, millions, hundreds of millions, billions off the taxpayer because they’re buying property at less than the asset because they’re arranging for their buddies to put in false bids and thereby buying it for less than the market value

PK: A number of people would say “where would they get the money, they’re supposed to be broke”

MD: Their friends, the third parties, are arranging the loans.

PK: [reading texts] they drifted the money offshore before the bust so of course they can buy back for a song, they’re not going cap-in-hand to the banks. Mark Daly should read the list of NAMA sales into the Seanad record, a windfall tax would claw back the gains made by quick buck merchants in this country, why is there  a reluctance to introduce this tax? A lot of stuff wondering how the could actually afford to do it. Fair parties, pals, whatever, it may be happening. BUT we do need chapter and verse, so if there is anybody out there that can give us that we’d love to hear from you.

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NAMA’s valuation methodology for sub-€20m loans after the abandonment of loan-by-loan due diligence and valuation. The %s used are illustrative.

A couple of weeks ago on here I bemoaned journalism standards in Irish media and it is a topic with which I introduce an analysis of an aspect of the NAMA (Amendment) Bill published yesterday evening. Now I suppose you can forgive Caroline Madden at the Irish Times for getting some of the facts wrong in a piece created for the online version of that paper a couple of hours after the NAMA Bill was published. She (still) writes that “originally Nama was to acquire all land and development loans valued above €16 million from Bank of Ireland and AIB, but this was increased in September to €20 million” though she thankfully changed the line “it was estimated at the time of EU/IMF agreement that the additional loans to be transferred to Nama would amount to about €16 billion” – at least it now says €16 billion and not €16 million. For the record, here are the thresholds that have applied to NAMA:

So the “original threshold” for BoI and AIB was €5m and that was raised to €20m at the Big Bang announcement by Minister for Finance, Brian Lenihan on 30th September, 2010 and then reduced following the arrival of the IMF in November, 2010. But that is a detail, though I still believe that professional journalists should be more careful with the accuracy of their reporting and indeed editors should ensure that reporters are sufficiently briefed on a subject’s context before writing any old shyte on that subject. But there is a more serious criticism of established journalists and their reporting of the new NAMA Bill.

There seems to be a focus on the Bill enabling NAMA to take over loan exposures of €0-20m at AIB and BoI. Emmet Oliver’s piece in the Independent today would be typical of that penned by the Premier League of finance reporters. But as stated on here numerous times, there never was a threshold for any NAMA loan enshrined in legislation. The NAMA Act defines in some detail eligible loans and there is a NAMA regulation that further expands on the topic. There were two ministerial directions in October 2010 aimed at accelerating the transfer of loans. But never has there been a mention of thresholds, be they €5m, €20m or anything else. NAMA simply decided for its own operational reasons to impose thresholds on AIB, Anglo and BoI (by the way, with respect to Anglo the claim was that there was practically no sub-€5m land and development exposure there – before Christmas there were suggestions that NAMA might revisit their assessment of Anglo’s sub-€5m loans).

The principal reason for this NAMA Bill is to enable NAMA acquire these smaller exposures without valuing them on an individual basis, either before or after acquisition. This will plainly accelerate the acquisition of these loans. According to press reporting NAMA will use the experience gained in the past year of undertaking due diligence and valuing larger-value loans to produce haircuts that will populate the matrix shown at the top of this entry.

So why doesn’t this new method of operation by NAMA make sense, let alone justify the claim on here that it is lunacy?

(1) THEN – NAMA was set up to provide certainty to the value of a certain class of lending in Irish banks which was underpinned by a type of property which had collapsed in value. NAMA was supposed to value each loan on an individual basis and in so doing the banks would exchange a generally toxic class of loan on its balance sheet with nice crisp NAMA bonds which could be exchanged for cash at the ECB (in simple terms). NAMA found appalling loan documentation and NAMA’s initial estimate of the average discount (haircut) to be applied to the loans being acquired increased from 30% in September 2009 to 58% today. The EU gave approval to the NAMA project on the basis of it undertaking individual loan due diligence and valuation (either before, for the larger-scale loans or after for the smaller-value loans)
NOW – NAMA is to acquire €13-17bn of sub-€20m loan exposures on a “portfolio basis” and apply a general haircut based on the agency’s valuation experience of large-value loans. Banks will be paid for the loans with consideration that comprises NAMA bonds (90.1%) and NAMA subordinated debt (9.9%). Although details of the new NAMA subordinated debt have not been released, the existing subordinated debt is issued on condition that it will not be honoured unless NAMA breaks-even over its lifetime. So banks replace uncertain loan values with approximated values and will apparently risk 9.9% of the consideration not being paid in 10 years time. So much for certainty, either for the valuations or for the consideration.

(2) THEN – NAMA was to protect the financial interests of taxpayers (or citizens as Vincent Browne would correctly claim) by ensuring NAMA only paid what the loans were worth plus a small state-aid premium in the shape of the long term economic value premium. NAMA would claw back any overpayment and at the end of NAMA’s life a levy could be applied to banks if a loss was made.
NOW – NAMA is acquiring loans on a portfolio basis without individual valuation. NAMA is applying haircuts to the smaller-value loans based on the experience of valuing the larger-value loans. There are those who have claimed that smaller-value loans would have fallen more in value than larger-value loans. I tend to agree with that view because (a) I am personally aware of many €1-3m transactions where a field was bought outside an urban area (especially provincial towns) for the purpose of building 5-15 properties and today I pass many of these fields which have practically returned to agricultural use with a value some 98% off the value at peak with development potential (b)  there was a mad dash at the peak of the boom to lend money for property development and many “amateurs” decided to participate and I expect these “amateurs” will have made poorer purchasing decisions than the larger-scale “professionals” (c) I expect loan documentation for smaller value loans to be of a poorer standard than the higher value loans if banks were giving priority to higher-value transactions. So I believe there is a good case for arguing that haircuts to be applied to smaller-value loans should be higher than those that applied to higher-value loans. I might be wrong of course but it will now be NAMA that takes the downside risk (if NAMA undervalues, then it seems that NAMA must pay an additional sum to the banks at a subsequent stage).

(3) THEN – NAMA was to share some risk with the banks by holding back 5% of the purchase price (the subordinated debt) which would only be honoured in 2020 if NAMA broke-even.
NOW – NAMA is apparently paying nearly 10% interest on these subordinated bonds (10-year sovereign bond rate, 9.05% this morning plus a 0.75% premium) so over 10 years at present levels the banks will receive over 100% of the value in compound interest if bond rates remain at present levels. NAMA is proposing now to pay 9.9% of its consideration in subordinated debt (up from 5% at present)

(4) THEN – If NAMA made a net loss over its lifetime, a levy would be applied to the NAMA banks to recoup the loss.
NOW – of the the NAMA banks – AIB, Anglo, BoI, INBS, EBS – only BoI has a  prospect of continuing outside State control (and I would have said that with an imminent preference share dividend of €214m due on 20th February, 2011 and a challenging €1.5bn capital raising target by 28th February, 2011 that the chances are high of the State increasing its stake from 36.5% today to over 50%). So if NAMA makes a loss how will the State subsequently apply a levy to the banks. INBS and Anglo should be no more than a distant unpleasant memory in 2020. EBS is being sold today but what buyer will want to take on a substantial contingent liability? AIB is likely to be put up for sale but again what foreign bank will want to buy AIB if it has a large contingent millstone around its neck. And as for Bank of Ireland, well let’s see if it remains outside State-control in the coming weeks. All in all, this levy provision looks nonsensical though it is confirmed in the present Amendment.

(5) THEN – NAMA was to undertake valuations and due diligence on a individual loan-by-loan basis and not depend on the banks’ own valuations
NOW – although bank employees may face 10-year stretches in jail for providing inaccurate information on sub-€20m exposures (the same standard term for murder in the State by the way), we must remember the recent claims by NAMA that the banks seriously misrepresented the value of their eligible loans to NAMA in 2009. Indeed these recent serious claims are presently being investigated by the Financial Regulator, Matthew Elderfield because there may have been misrepresentation to the stock exchange. NAMA claims that it can’t act on the inaccurate information provided by the banks because (conveniently) the information was provided before NAMA formally came into being at the end of December 2009.

(6) THEN – NAMA was to manage the loans itself to ensure the cosy relationships that had built up between banks and developers did not compromise the future work-out of the loans in a way which financially disadvantaged the taxpayer. Of course it was always the case that NAMA was only going to directly manage the larger value loans itself (the top 170 worth some €50bn at par value) and the remainder was to be managed at the original institutions under the aegis of outsourcing specialist, Capita.
NOW – It seems that these smaller-value loans are to be managed entirely by the original banks.

So in a nutshell what this Amendment does is put a highly approximate value on €13-17bn of loans at the banks, allows the banks to continue to manage the loans, forces the banks to accept uncertain consideration, exposes the taxpayer to higher losses and puts a high store of trust in the banks providing accurate information (which they didn’t in 2009). Lunacy.

Although the NAMA Bill was referred to by the Taoiseach and then Fianna Fail party chief, Brian Cowen, last Saturday at his resignation speech, as one of the two vital pieces of legislation needed before the dissolution of the present Dail (the other piece of legislation being the Finance Bill which now looks practically certain to pass by Monday next), the NAMA Bill is not likely to be dealt with this side of a general election. It seems that it will be March 2011 at the earliest before it gets enacted by which time, it is likely to be either Joan Burton or Michael Noonan at the helm at the Department of Finance (though it could theoretically be Pearse Doherty, Brian Lenihan or a Green party deputy). Because Michael Noonan became the FG finance spokesman last summer after the failed heave by former finance heavyweight, Richard Bruton against party leader, Enda Kenny, we don’t know a great deal about Michael Noonan’s stance on NAMA. Joan Burton’s stance is fairly well established and it would seem difficult to reconcile her support for NAMA transparency and value for money with the provisions as presently drafted.

And I leave you with the depressing fact that regardless of the name on the Minister for Finance’s office door come March 2011, it will still be the same civil servants that effect the implementation of policy.

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(UPDATE: 3rd March, 2011. Now that this transaction has been formally announced, there is a more comprehensive post dealing with the transaction here)

It was reported last week that Google was seeking to buy its present accommodation at Gordon House on Barrow Street in central Dublin and temporarily relocate across the road in Treasury’s Montevetro building whilst Gordon House was being retrofitted to bring it fully up to Google’s standard. But now it seems that the internet giant has decided to buy the 200,000 sq ft Montevetro building from Treasury. And sources claim the deal struck is €450 psf valuing the Treasury-led venture at €90m, a major deal much needed in Ireland’s beleaguered commercial property sector. CB Richard Ellis last year acted extensively for Google in rental transactions at East Point and Grand Canal Plaza in Dublin and on behalf of Grattan Property in its letting to Google at Grand Mill Quay.

If the deal goes through in its present form, it will be good news for Treasury and perhaps more importantly NAMA who are understood to presently manage the loan underpinning the building. The ESB (UPDATE: 21st February, 2011. Correction, the CIE) is understood to own the site with  Derek Quinlan also in the frame as an investor in the venture. The sale should yield NAMA a small profit on the price the agency paid for the underpinning loans.

Two weeks ago, NAMA CEO Brendan McDonagh indicated that there would be 2-3 major sales in quarter one of 2011 with two sales to foreign companies and one to a domestic party. It would seem these sales are now beginning to be realised.

UPDATE: 17th February, 2011. NAMA has this morning confirmed the sale of Montevetro to Google. Elsewhere Propery Week says the purchase price for the 210,000 sq ft 15-storey building opposite an existing Google site on Barrow Street, was €99.9m. The purchase price (€99.9m which is over €450/psf) represents a substantial premium on a recent sale of an albeit dated, though more prestigious office building just around the corner on Clare Street where a price of €283/psf was achieved. With the political party likely to be at the centre of any next government after the general election on 25th February, promising a retrospective review of rents in 2011, you might wonder if Google got value for money at Montevetro.

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Not that developers can expect any great outpouring of sympathy but in recent days there have been suggestions (for example here and here) that NAMA is actively sharing information with the Revenue Commissioners to “identify any tax implications arising”, according to Neil Callanan at the Sunday Tribune.

It should be remembered that NAMA is effectively a bank and when granting approval to the NAMA scheme, the European Commission was careful to consider NAMA’s position with respect to other banks to ensure there was no distortion of competition. The EC specifically considered a proposal originally made for the NAMA project, that NAMA would be able to access records from the Revenue Commissioners on developers. NAMA’s powers in this area were set out under section 204 (3) of the  NAMA Act:

“Notwithstanding any other enactment, the Revenue Commissioners shall disclose to NAMA information in relation to a named relevant person that, in the opinion of the Revenue Commissioners or of NAMA, is required by NAMA for the purposes of the performance of its functions under this Act, and that is in the possession of the Revenue Commissioners, or of which the Revenue Commissioners have knowledge.”

The Commission acknowledged the undertaking given by “the Irish authorities” that this provision of the NAMA Act would not be used. The Commission had nothing to say on the preceding sub-section of the NAMA Act, section 204 (2):

“Notwithstanding any provision of this Act or any other enactment—
(a) the Revenue Commissioners may, for the purposes of the performance of their functions under Part 42 of the Taxes Consolidation Act 1997 and any regulations made under that Part, seek from NAMA information in the possession of NAMA, or which NAMA has knowledge of, in relation to a named relevant person, and
(b) where NAMA is in possession of, or has knowledge of, the information referred to in paragraph (a), NAMA shall provide it to the Revenue Commissioners.”

You would now have to ask if NAMA is engineering a subversion of s 204(3). The Sunday Tribune refer to the significant fact that NAMA’s chairman is former chairman of the Revenue Commissioners, Frank Daly and a casual observer might infer that there was a two-way exchange between the Revenue Commissioners and NAMA which effectively gives NAMA the ability to question a developer’s business plan by reference to tax records  through the effective use of the Revenue Commissioners to investigate the contents of the developer’s business plan .

It would however be difficult to defend a developer in such circumstances – after all if the developer has not been honest in disclosing assets then most people would expect the most draconian investigations and penalties. However it seems that NAMA is stealing an advantage over non-NAMA banks operating in the State. Will the Revenue Commissioners actively engage with National Irish Bank, Ulster Bank, KBC, ACC or Rabobank and others with a view to assisting those banks maximise recovery of debts?

UPDATE: 21st April, 2011. The Revenue Commissioners report for 2010 is now available. Reporting today states that so far, the Revenue has “received data” on 108 cases from NAMA.

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