At times you have to have sympathy for NAMA. As an asset management agency whose main assets are properties located in Ireland, the agency has really been up against it to achieve success since its inception in late 2009. The collapse in banking and credit, the deflation of an incredible property bubble, the abolition of Upward Only Rent Review commercial leases for new leases and the threatened retrospective abolition for old leases, an economy which has shrunk or at best is growing anaemically, the absence of confidence – it really has been a toxic environment for a business whose main purpose is to make money out of property and property-related loans and you can’t blame NAMA for much of the above.
And like a King Midas in reverse, mostly everything touched by NAMA has so-far turned into something less valuable. To be fair, there have been some minor exceptions like the sale of the Montevetro building to Google, but in the main it’s been a bit of a disaster as evidenced by its €1.485bn provision in 2010 for losses on its loan portfolio revealed last week.
But NAMA expanded its remit and operations in April 2011 when it was reported to have invested €50m in “short-term Irish Government bonds”. This news raised some eyebrows because, given the elevated pricing on Irish government debt, that class of investment was seen to be risky with a substantial probability that an investor wouldn’t get all their money back. There was also the question as to why NAMA, an agency set up to manage property and property-related loans was making a foray into so-called fixed income investments – was NAMA operating ultra vires? The accounts for Q1, 2011 reveal that NAMA had in fact made the investment some time before it was first reported by Simon Carswell in the Irish Times on 8th April, 2011.
Take a good look at the above note above to the accounts published on Super Thursday last week (when we also saw the NAMA 2010 annual report and the list of foreclosed properties). The note says
“Financial assets available for sale comprise Irish government bonds acquired in the quarter for liquidity management. These are highly liquid assets that are readily convertible into cash”
Rarely will you read such bullshit in a set of accounts.
“Liquidity management” has a nice sounding ring to it, but what does it mean? Most of us know that our assets can be illiquid (like property, a car, jewelry, art) – in other words, takes some time to convert into cash. At the other extreme we have liquid assets (like immediate access deposit accounts or cash in our wallets). In between we have assets which might not be immediately liquid but we can have the cash in a matter of days (shares, notice deposit accounts, prize bonds). There is a ready secondary market in Irish government bonds so these bonds can be converted into cash in days. But in what sense would you invest in Irish government bonds for “liquidity management”? If “liquidity” was your main concern, then might you place the money on deposit?
And nowhere is it explained why NAMA invested in risky Irish bonds when it might just as well have invested in nice safe German bonds (like our Minister for Finance, Michael Noonan does according to the December 2010 Register of Interests – Michael is no reckless eejit, he doesn’t invest in Irish government bonds, in fact none of the last Government did).
What NAMA decided to do was to gamble on a risky investment. It is unclear how the investment sits with NAMA’s remit nor if NAMA’s board was made aware of the investment. But if the aim was to invest excess funds in an instrument which paid more than a straightforward deposit account, NAMA could surely have found safer alternatives.
We mightn’t be even talking about NAMA’s investment in Irish government bonds were it not for the fact that NAMA will presumably record a stonking big loss at the end of Q2, 2011 in respect of its investment. We don’t know exactly what length of maturity the bonds that NAMA bought were, but we do know that NAMA booked interest income of €767,000 in Q1, 2011 in respect of “financial assets held for resale” which presumably represent the €49.6m of Irish government bonds (though you probably can’t exclude the possibility that NAMA has invested in oil futures or taken an option on magic beans). So we can probably conclude that the bonds were bought well before the end of the quarter which recorded a closing 10-year bond high of 10.22% on 31st March 2011. On 30th June, 2011 the benchmark 10-year bond closed at 11.95%. Might NAMA be therefore looking at a 20% decline in the value of its investment, a loss of €10m? Today the 10-year bond is back to 10.6% though it reached a peak of 14.1% in July 2011.
NAMA is unable to respond to the query about current losses on its investment in Irish government bonds at present due to annual leave. And NAMA might have disposed of the bonds before they rocketed into the stratosphere during this summer before returning to calmer levels after the EU summit in July 2011. Hopefully NAMA didn’t panic and sell at the peak though. There is bad luck, there is NAMA’s bad luck with its foray into Irish government bonds but it would be terrible luck if the bonds were sold at peak. Perhaps we’ll find out in the coming weeks how
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NAMA Wine Lake 