This is an entry on here yesterday which summarises the results provided by NAMA yesterday in respect of its performance in the third quarter, 1st July – 30th September, 2010. This entry will examine the detail of the reporting and cast an accountant’s eye on what is contained in the reports.
The NAMA accounts pack is quite difficult to unpick. The accounts are quarterly accounts so NAMA might expect some indulgence whilst we wait for what will presumably be more detailed end of year reporting, which is due from NAMA in less than four weeks. That said it seems incredible that the NAMA balance sheet does not balance because it omits retained losses, there are a few boo-boos like the claim that €249m was repaid in October to the central fund when the Exchequer Statement says it was €250m. NAMA has also cut the amount of detail given so we cannot see how many loans were acquired with a nil haircut. This is a special category of loan because it represents loans advanced after April 2009 which NAMA agreed it would not discount because otherwise funding would freeze up for developments until NAMA had acquired the loans. Was there unscrutinised moral hazard or other shenanigans during this post April 2009 period? Who knows but what we no longer know is how many loans were acquired with no haircut. And to the detail itself:
(1) Directors fees – the NAMA board has nine members including the CEO Brendan McDonagh and chairman Frank Daly and the NTMA CEO, John Corrigan. €425,000 was paid to the seven board members excluding the NAMA CEO and chairman (including the NTMA CEO by the way). (Note 4, page 8). Former IMFer, Steven Seelig joined the NAMA board on 26th May 2010 and the others were appointed on 22nd December, 2009. That means that seven board members worked a total of 60.2-man months (6*9.33 plus 1 x 4.2) which means the average director fee per month is €7,060 which equates to just under €85,000 per annum. But hang on a second, I thought they were earning €50,000 each per annum. When did they get a 70% pay increase (and remember this is on top of the 35% increase in March 2010 when the fees were increased to €50,000)?
(2) Investments and loans from the Department of Finance to NAMA. There is still some suspicion on here as to why DoF changed the classification of the €49m investment/loan made to NAMA in March 2010 which allowed the State to own 49% of the NAMA SPV. Regardless NAMA classifies the €49m as a loan and in addition NAMA received an advance of €250m in May 2010. NAMA was able to repay the €250m (not €249m as incorrectly shown in Note 9 on page 9 of the NAMA accounts) advance with interest of €1,065,625 (confirmed by DoF on 3rd November – equating to 1% per annum) in October, 2010. According the February 2011 Exchequer Statement published yesterday the remaining €49m has also been repaid.
(3) There is now a cash flow included in the accounts (page 18) which shows during the quarter NAMA paid suppliers €32m, advanced €126m to developers, received €420m from developers for loan repayment and a further €56m from derivatives (see below) and paid out interest of €30m on NAMA bonds. All told NAMA generated net cash of €278m during the quarter.
(4) NAMA’s internal operating costs which include its employee salaries, accommodation and facilities came to €4.1m in the quarter. The NAMA CEO has indicated that a full year’s costs will now be in the order of €25m. Alongside the internal costs, NAMA spent another €8.8m on third parties which is not reimbursable, mostly with Capita/banks (€5.7m) and for financial advice (€1.3m). On top of that, NAMA spent €8.4m on due diligence and valuation which is reimbursable by the banks.
(5) In presentational terms, NAMA’s accounts are beginning to be dominated by derivatives and hedging, which make examination of the performance of the agency difficult because we don’t really have a sense of exposures on the derivatives which some have suggested may be very toxic and might expose the agency to billions of euros losses. Against that, we know that NAMA engaged a specialist company, Societe Generale Securities Services to value derivatives on acquisition so we should have some confidence in the acquisition value of the derivatives. What is worrying is that we have little indication of future exposures, though it should be said that the NAMA chairman Frank Daly said that the next quarter reported, Q4, 2010, should see some reversal of the losses so far incurred on derivatives.
(6) The real story with NAMA’s business is that the agency is having huge problems with the loans it has taken over. €420m in cash was received in the quarter from developers and another €73m was received by banks in respect of NAMA-bound loans which will be passed onto NAMA. So the total cash generated on the entire NAMA portfolio (the loans transferred in tranches and the NAMA-bound loans still waiting in the banks) was €493m for the quarter which equates to almost €2bn for four quarters. But in the context of €71bn of loans you can see that there is huge underperformance of loans in the sense that they are not being repaid. These problems are hinted at with the notes in the NAMA report, in particular the following:
NAMA’s cash flow at the minute looks wonderful because it is being repaid some interest and capital but the agency only has to pay out interest at just over 1% on the bonds used to acquire the loans and also of course its not insubstantial operating costs. If NAMA had to repay its bonds today it would be grossly insolvent. And that insolvency is being hidden by the temporary cash surplus. Is it not incumbent upon the NAMA chairman to at least allude to this fact?
(7) There will be all sorts of conspiracy theories as to why the Minister for Finance waited over 70 days to publish the report and accounts which were delivered to him on 22nd December, 2010 (the date on the covering letter accompanying the report and accounts) and whether there was an attempt to suppress bad news during an election campaign. The accounts produced are worrying, not because they show a €35m loss for the quarter but because they show the dreadful state of the loan portfolio (and remember that in most of NAMA’s markets, conditions deteriorated during the past five months since the accounts period end so the condition today is likely to be worse). NAMA overpaid for loans by reference to values today, the estimate on here is that the overpayment was in the order of €2bn+. NAMA is a ten year project and the hope is that markets will recover more than the carrying costs of these loans. In 2009 that was probably a decent bet but today with the IMF in the country, an arguably unsustainable national debt and even a threat to our participation in the euro, it is not at all probable that there will be a sufficient recovery in NAMA’s main market, Ireland by 2020. And remember that the IMF and others are pressing NAMA to release property into the market now. Given the unquestioning acceptance of the report and accounts in the mass media yesterday and today, perhaps Minister Lenihan shouldn’t have been all that worried. But if I was Patrick Nulty the Labour candidate eliminated from the Dublin West constituency count which then meant Brian Lenihan was the only Fianna Fail candidate to retain a Dublin seat, I would feel a little aggrieved that I was not able to say on the doorsteps that NAMA had made a loss of €35m so far and that it faces a hitherto-unrecognised challenge with recovering loans which are mostly delinquent. And not that it makes a huge amount of financial difference but saying that the NAMA board members were apparently given undisclosed 70% pay-rises wouldn’t have hurt either.
Below is the presentation of the P&Ls and Balance Sheets for the main NAMA companies using what I think are clearer headings than those used by NAMA. They still look messy, but I hope they are of some help to some of you.
(Click to enlarge)
(Click to enlarge)
NAMA Wine Lake 
Hi,
This is my first post although I’ve been reading this blog for months. All I can say is: why on earth are journalists in RTE and elsewhere getting paid high salaries and producing such poor investigative journalism on NAMA and banking in general? Truly this website performs a major public service with informative, incisive and intelligent comment (“That which I say thrice is true”, Lewis Carroll ‘The Hunting of the Snark’?). The more I read the more I think both Morgan Kelly and David McWilliams are correct. DMcW called NAMA a bailout for the professional classes and it is looking more like that every day. Anyway, I’m loving (as the fashion writers say) this blog – even the recipes for burgers! One small (pedantic) point for contributors: one should always say ‘in’ the circumstances rather than ‘under’ the circumstances. As my old teacher would say “circumstances are around one, therefore one is always ‘in’ the circumstances”.
@Bunbury, many thanks for the feedback. I’m not sure your old teacher was correct, and indeed consulting a copy of Fowler’s English Usage here, it seems that old Henry Watson F was particularly upset at people who insisted on “in” rather than “under”. “Puerile” he called them which seems harsh. What would he have said in this internet age of immediacy and the meaning trumping the strict rules of grammar and spelling? He’d probably LHAO ROFL!
I’ll stick with “under” too, but only sometimes. I’ll have a look at my Onions, if I can find it. I believe that you “operate” under circumstances, you don’t operate in them, as the only circumstances that matter are the ones that are onerous… “In” the circumstances that pertain, however, suggests that “circumstances” is used as “evidence” rather than “situation” where evidence is neither of itself good or bad.
Excellent work as usual.
With ~2bn in income on 71bn of loans, this puts NAMA in the enviable position of ~3% return. The bubble is alive and kicking…
I can’t help but feel that there is little point in using the different delinquency levels for loans. The difference between a 30-day+ and a 120-day+ is a matter of reality, not of risk. There is no real chance that a 30-day+ loan is going to magically become performing…
@Yogan, the vast majority of the estimated €2bn NAMA generated in cash per annum is principal repayment and is of the low hanging fruit. In a couple of years that may slow to a sub €500m trickle. That is the real story from NAMA’s Q3 numbers, the loans are really underperforming and absent a recovery NAMA is line for a substantial loss.
Well, a recovery or substantial short sales of debt…
(i.e. short on book value, above NAMA purchase cost).
You know by now this is my view of why NAMA was set up and it is structured to only allow this to be possible.
Hi NWL, You wrote: “NAMA has also cut the amount of detail given so we cannot see how many loans were acquired with a nil haircut. This is a special category of loan because it represents loans advanced after April 2009 which NAMA agreed it would not discount because otherwise funding would freeze up for developments until NAMA had acquired the loans. Was there unscrutinised moral hazard or other shenanigans during this post April 2009 period? Who knows but what we no longer know is how many loans were acquired with no haircut.”
I am not sure that NAMA acquired any loans for a nil discount (unless they were valued at that). My understanding was that all the loans were acquired at valuation and that where there was a formal commitment by the PI to complete development on the sites underlying those loans, those development funds were provided at 100%.
Of course, where possible, many of those commitments for provision of future development funds were reneged on, mostly for very spurious reasons – but reneged on nevertheless. It was only when there was no way out, or it was in the best interest of recouping the loan were they provided (for instance – Montevetro).
@WSTT, what I was referring to above is what the Auditor and Comptroller thus described in his report last November 2010 (link below)
“Following direction by the Governor of the Central Bank and Financial Services Authority of Ireland and the acting CEO of the Irish Financial Services Regulatory Authority, no discount was applied to advances made by banks to borrowers after 7 April 2009 provided that it could be shown that the moneys were advanced as part of normal commercial banking arrangements. For loans that transferred in the first tranche, NAMA accepted that €299 million of those loans, issued after 7 April 2009, qualified for payment in full.”
https://namawinelake.wordpress.com/2010/11/04/comptroller-and-auditor-general%E2%80%99s-review-of-nama-%E2%80%93-what-was-its-purpose-and-what-did-it-conclude/
A ‘substantial short sale of debt’ as mentioned above is not the devil it may seem. Maybe some years ago, but now it can be seen differently.
People recover only after restructuring or debt forgiveness. Then they contribute to the all illusive ‘growth’.
It happens over and over in some parts of California, where banks write off debt, the family recovers, then they hire local realtors to find a new place, buy furniture,shop for luxuries they had given up before the release. It works. In fact it might be the only way. In Ireland’s case it’s maybe immaterial if this is applied to commercial or home mortgage situations. Debt forgiveness. As many of us have said since 2009.
As an American taxpayer it is good to see Banks give to the community, (and no they are not saints by any stretch of the imagination), but they got bailed out too, so they have to give some back.
Somehow implementation of this whole debt forgiveness concept seems linked to a communities ability to grasp reality.
PS…first contribution to the pot for the above concept comes from the multi millions that was originally intended to pay a failed governments pension. That might cover all the distressed families in several counties.
PPS… and no it is not painless, post people lose the home, and any good credit they had. But the monkey is lifted from their back. They look only at growth, not despair. Don’t cloud this with talk of moral hazard. Morals are subjective. Debt is reality.
Glad you clarified that. I don’t think it is what will happen in Ireland.
Imagine if Bernie Madoff was allowed to buy back the assets of Madoff and Co. for a dime and a huge write-down in the debt. That’s what will happen in Ireland…
@Y
I dont think that call cards in the Joy extend much above a euro so I wouldn’t worry.
@WSTT
Why would Nama renage on its committments for future development funds – especially if its borrower is current ? The only reasons I can think of are “cutting losses”, avoiding “following good money after bad” or “first loss is best”. Just a taxpayer’s perspective.
@NWL, I still think that it may relate to some or all of “work in progress” element on developments where the “land” loan was earmarked for NAMA.
It would be interesting to know if payment for the work done on site prior to the earmarking was all paid at 100%.
I doubt it though…. probably just the amount paid after it was confirmed “going to NAMA”.
Or, could it be the amount paid after the site and WIP was valued for NAMA?
@Brian, NAMA didn’t renege. The banks did – wherever they could and passed the problem to NAMA.
The banks normally had an expiry date on loans to coincide with the end of a development. These were always pretty arbitrary as builders sometimes didn’t finish on time. The development loans were taken out by an earlier verbal promise of long term finance or a sale. When the manure hit the fan, the shutters came down whether or not a development was complete. The conversation was usually very short and one-sided, viz…. “P*ss off and tell it to NAMA.”
@ WSTT
“These were always pretty arbitrary as builders sometimes did’t finish on time.”
That is fair enough, I coined the double-double-half rule i.e double time, double cost and half revenues, to help set “worst case” scenarios when business planning. I’d subsitute your “sometimes” by “usually” !!!!!!
Surely, in the circumstances being discussed, the banks were simply passing the parcel as they couldn’t/wouldn’t deal and Nama was really in charge. CORRECTION: We now know that Angela, Olie, Jose, Ajai and Jean_Claude and co are really calling all the shots (and they don’t care a sh*t about Ireland so long as they win their elections, resue their reputations etc.).
Re-reading that it may be a bit confusing. What I was trying to say was that when the loan expiry date arrived, regardless of the status of the development the loan was called. No extension. No negotiation.
@WSTT, to use the wording from the Comptroller and Auditor General the nil discounts were applied to loans which “were advanced as part of normal commercial banking arrangements”. That’s pretty loose and may lend itself to situations other than you describe. And if there was a project which was clearly in negative equity, there appears to have been no bar on the banks advancing further funds. This is a vague area of NAMA’s operation and I would not be surprised to see shenanigans because banks were apparently insured against losses on loans.
@Brian Flanagan
“I dont think that call cards in the Joy extend much above a euro so I wouldn’t worry.”
Erm, who precisely do you think has been put in the Joy? Who do you think will be?
Perhaps the Tan Man might be a better example? You’ll know when you’ve been Tan-go’d.
Totally lost. I googled “tan man” and found http://www.thetanman.com/
Not sure this is what you mean!!!
Ah, sorry, Angelo “The Tan Man” Mozillo late of Countrywide Financial. Charges against him were dropped last week…
Still wondering who you think will end up in jail for the Irish mess…
Sorry, yes if you had said Countryman I might have copped on to this. My ignorance/slowance.
Short answer – no one will end up in jail (we don’t do jail for mega theft or ponzi in Ireland).
Here is what I suggested (without naming them) back in Sept last year – clearly a waste of time by me!
http://www.planware.org/briansblog/2010/09/economic-recklessness.html
I cannot understand why perjury, reckless trading and and fraudulent preference are not being aggressively pursued by/through the courts, DPP, OCE etc.
Brian,
The answer is simple – Ireland is an extremely corrupt country. I’m talking African levels of corruption. It amazes me that Irish people don’t seem to care about it.
Every time I visit Ireland and talk to regular people, they know all about world politics, Iraq and Afghanistan, George Bush, Lehman Bros, etc. Yet, they either know nothing about or don’t seem to care about what’s going on in their own ‘backyard.’
Where are the patriots? Why are the citizens asleep?
@Frank, whilst not taking away from the fact that Ireland has some corruption, I do not think it fair to say the country is extremely corrupt. On the Transparency International index, we rank 14 out of 180 countries for the absence of corruption. As I say, that does not mean that Ireland is a 100% corruption-free country but perhaps we beat ourselves up more than most because we tend to know more about our neighbours than other countries. Yes we have insiders, brown envelope-accepting officials in planning, we need reform of political donations, more transparency in government tendering and spending and public servants to be held more accountable for the service they provide but overall we’re not bad, and better than the UK, US and Germany, at least on the TI index, which is pretty well regarded.
http://en.wikipedia.org/wiki/Corruption_Perceptions_Index
NWL,
With respect, the key word to focus on in the Corruption Perception Index you reference is ‘perception.’ The point that I’m trying to make is that the citizenry don’t seem to perceive the country as being corrupt.
I think a better way to measure corruption than the index you reference would be to ask yourself the following question: if one were to commit a white collar crime, pull a stroke, inside trade, take a ‘back hander’, etc. in Ireland, what’s the likely hood that one would go to jail? You may be able to prove me wrong but I believe that one would be less likely to go to jail in Ireland than in most other first world countries.
@Frank, I agree wholeheartedly with you that white collar crime is perceived as unpunishable. I’m not sure if it is the legislation, the police or judiciary or maybe all of them but delays in certain investigations – we need be careful in describing events here in the context of criminality and ongoing proceedings – have caused frustration and anger across a large section of our society and I would go further and say undermined confidence in the justice system.
Nama is perfectly designed to keep taxpayers cash flowing around the Dublin 2 and 4 ‘professional’ advice pit.
Locating it where the 2 and the 4 meet is sheer genius :)