Is NAMA operating ultra vires by investing in Irish government bonds?

NAMA is awash with cash at present. Having overseen the disposal of a reported €2.7bn of loans last year – the loans were either disposed of by the banks themselves under NAMA’s auspices or redeemed by developers; and some of the proceeds went to non-NAMA banks – the agency is reportedly sitting on a cash mountain of €1bn. But the NAMA staff are not frolicking in baths filled with €500 notes (I hope) – the cash is presumably in some bank. If NAMA is still regarded as a private sector company then its €1bn of cash will captured in the Central Bank of Ireland’s reporting of private sector deposits in Irish banks. At the end of February, 2011 there were €165bn of private sector deposits in all Irish banks (including those in the IFSC that don’t service the domestic economy); there were €154bn in domestic Irish banks (including foreign banks that service the Irish economy) and there were €109bn in the six State-guaranteed banks. That’s some prospect to consider : NAMA might comprise 1% of all private sector deposits in State-guaranteed banks.

Of course we don’t know at present which bank has been selected by NAMA to receive its deposits or if it uses the treasury management services of the NTMA which would spread its deposits amongst various risk-assessed banks. It may even be the case that NAMA doesn’t use Irish banks at all for its deposits. And since NAMA needs only pay just over 1% interest on the NAMA bonds it gave the banks in return for the loans, there is presumably no point in using the cash to redeem its bonds at this point in time when it might be able to get 3%+ from depositing the cash in retail euro accounts.

But according to a report by Simon Carswell in yesterday’s Irish Times, NAMA “has invested about €50 million in short-term Irish Government bonds”. It is not clear what is meant by “short-term” debt, but the Irish Times does provide some details for debt ranging from six months to 10 years. The Irish Times does however use the term “invested” and given the elevated interest rates and likelihood of default, these instruments must indeed be considered “investments”.

So where was it suggested in the conception of NAMA that the agency would invest in risky debt instruments? I thought the agency was there to acquire land and development (and associated) loans from the five financial institutions, manage these loans, foreclose in some cases, invest in finishing out projects and deliver a profit. Where is it written that NAMA will invest in high-risk debt securities? Aah you might say, why are Irish bonds “high-risk”? To which the response might be that it is not for nothing that these bonds are trading at a substantial premium to German bonds and there is a risk of sovereign default assumed by the market which tends to be fairly sharp in these matters.

Of course there is something novel about NAMA, which is effectively a branch of government, despite righteous protestations to the contrary, buying government debt at the same time as the ECB must advance cash on NAMA bonds which lie unredeemed and which pay just over 1% interest. I don’t think the European Commission had contemplated this situation when approving the NAMA scheme.

The sums involved are relatively small. €50m is only 5% of NAMA’s cash balance. But it is the principle that is troubling. Irish government bond investments today, oil futures tomorrow and a dot com venture selling skinless balloons on Tuesday – where might it end?  “Ultra vires” is a legal concept, meaning “greater than the powers”. You will sometimes see it when limited companies engage in activities not provided for in their memorandum and articles of association and when a company deals in a way not allowed for, in its constitution, then that company can lose its limited liability. More importantly though, is NAMA now operating in a way not contemplated by its masters in government?

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