NAMA appeared before the Oireachtas Committee of Public Accounts on 26th October, 2011 where it faced some robust questioning from across the political spectrum over aspects of its operations. Sean Fleming, the Fianna Fail TD from Laois and Fellow of the Institute of Chartered Accountants in Ireland was particularly keen to understand how NAMA was accounting for interest owed on loans to developers. Remember NAMA has acquired loans with a face value of approximately €74bn and even at 3.5% per annum would be booking €2.6bn in interest each year if all the loans were performing and all required the annual payment of interest.
It seems Sean was unclear about how NAMA was calculating interest due on loans to developers, and that further, Sean was concerned that NAMA might be engaging in the sort of discredited practices that led to our banks getting into hot water from 2008 onwards, allowing the roll-up of interest for example. This was the exchange on 26th October.
SEAN FLEMING : In regard to the interest charges to debtors, I note in page 78 of the annual accounts that interest on loans and receivables was €447,860 million. That is what NAMA charged on interest. How much of that €447,860 million was received by NAMA by 31 December 2010. That amount is in the accounts as receivable. How much of that had NAMA received?
BRENDAN McDONAGH: Under IFRS accounts one applies income into P and L, based on what is called an effective interest rate, which is the same as an internal rate of return over the life of the asset. That effective interest rate generates a return of just over 5% per annum. One has to compare that against the total cash receipts – the principal and the actual interest that is coming in. In the 2010 accounts, more than €1 billion in cash was received which would include both principal and interest receipts. If the Deputy looks at the footnote on page 62 of the accounts, he will see that it includes loan cash receipts of €375 million for the proceeds of collateral against loans and receivables of €363 million. Of the €734 million in cash, receipts from borrowers and acquisitions – that is in the cash flow statement – €371 million of that came from the sale of collateral, which effectively is the sale of the property against the loans.
SEAN FLEMING: I am back to my first question. The €447 million includes loans and interest. What was the interest figure NAMA included in its financial statement given that it did not break down the interest it charged on its debtors for the financial year 2010?
BRENDAN McDONAGH: The interest receivable is €525 million, which is in the profit and loss account of our income statements, and a total of €447 million of that has been accrued on the back of the loans.
SEAN FLEMING: That is the figure I asked about initially. How much of that was received at the end of the year?
BRENDAN MCDONAGH: If the Deputy goes back to the cashflow statement on page 62, it is approximately €370 million.
SEAN FLEMING: Is Mr. McDonagh saying that approximately €80 million of interest that was charged is included in the accounts for the end of 2010 on interest and loans from debtors which was not received by the year end? Is Mr. McDonagh carrying on the practice of the bad old banks which used to roll up interest on debts? Does Mr. McDonagh roll up interest on debts as the banks used to do? He indicated that almost €450 million of what is on the books is receivable, but €80 million of that was not actually received that year. It obviously came through this year or perhaps it will be next year. Am I correct in saying that the sum of €80 million was not received by NAMA in the year and it is effectively rolled up?
BRENDAN MCDONAGH: No, because if one looks at the top of page 62, the first line refers to value dates to transfer dates received, which is note 1. That effectively is cashflows between the valuation date and the transfer date from the banks. We got €196 million worth of cash in that period.
SEAN FLEMING: What does that mean?
BRENDAN MCDONAGH: When we were valuing the loans – let us say for argument’s sake that we valued the tranche 1 loans by reference to 31 January 2010 valuation date – they transferred to us between the end of March to mid-May 2010, so any cashflow that came in on those loans between 31 January and May 2010 was claimed back from the banks. That has been picked up. That happened in subsequent tranches depending on the valuation date we used. We picked up the income from the loan valuation date, the restructured valuation and when the loan transferred across legally
SEAN FLEMING: I do not wish to refer to the loans. I refer to the interest only. Despite our complicated conversation due to which we might be losing people, am I correct in saying that Mr. McDonagh has a figure in his accounts for 31 December 2010 in respect of loan interest receivable from debtors, €80 million of which was not received by the year-end? Is that simple statement true or false?
BRENDAN MCDONAGH: I do not think it is entirely true.
SEAN FLEMING: Mr. McDonagh should tell me what I said wrong. I am interested in hearing the answer.
BRENDAN MCDONAGH: Some of that interest has been picked up in what we call in note 1 in the footnote
SEAN FLEMING: Could Mr. McDonagh give me the figure? They are his accounts. I am trying to extract information. I can quote three or four other notes on the topic as well. Mr. McDonagh should tell me how much of the €447 million that he has billed as receivable was not received at the year end. It is up to him to him to provide the figure, not me.
BRENDAN MCDONAGH: I will come back to the Deputy on that.
And true to his word, the NAMA CEO Brendan McDonagh did write to the Committee with a further explanation. The letter was received on 15th December 2011 and is available here (there is another earlier letter dated 23rd November, 2011 here, but it doesn’t really add anything to the interest issue)
There are three important points on interest payable in this letter:
1. Banks engaged in a practice whereby they advanced a loan (let’s call it Loan #1) to a developer for say €100m. They then advanced a second loan (Loan #2) for €11m, and the purpose of advancing Loan #2 was to enable the developer to pay interest on Loan #1 and Loan #2! And because the interest on Loan #1 was being paid as normal and in accordance to the loan agreement, the bank was able to say the loan was performing! SurelyIreland’s banking regulator wasn’t aware of such practice…
2. NAMA repeats that it is using IFRS (International Financial Reporting Standards) to calculate interest income in its financial statements. Further, the Agency says that it calculates interest income by reference to the consideration paid by NAMA for the loan and expected future loan repayments, though it still theoretically pursues the debtor for all the interest payable on the loan. So the loans in total have a face value of €74bn, and NAMA has paid approximately €32bn for them, and it is by reference to the €32bn and expected loan repayments that NAMA calculates the interest income shown in the accounting statements, but in practice NAMA pursues the debtor for the interest on the €74bn
3. In 2010, €770m was the interest payable by developers on loans by reference to NAMA’s acquisition value – remember the €74bn was acquired during the year so a full 12 month’s interest would not apply in 2010. NAMA reported interest income of €448m in its accounts, NAMA received €734m in cash from developers in 2010 and the first €448m was applied to NAMA’s calculation of interest and the remainder was applied to paying down the principal.
I know there will be some in the audience on here that will share Deputy Fleming’s concern. I certainly do. I also do not understand why the accounts cannot show the full interest payable (€770m in 2010) and a provision to recognise the fact that much will not be paid (presumably €770m minus €448m, or €322m). This would preserve the integrity of NAMA’s accounts by reference to IFRS but would enable NAMA’s wider audience to see the estimate of debt write-off (subjectively called “debt forgiveness” sometimes).
Also it remains unclear why the cashflow would suggest that €370m was received in interest. And the €525m referred to by the NAMA CEO doesn’t seem to have any relevance.
Finally, there is a weakness in the presentation when NAMA does not show the level of loss on loans following the disposal of assets securing the loans. In the above case, NAMA received €734m in cash from developers, part was interest and part was the repayment of principal, but presumably once the property securing the loan has been disposed of, then NAMA is very much exposed to the balance outstanding on the principal unless the developer has enforceable personal guarantees or other assets or income that can, or could, be applied to the remaining balance of the loan. These projected losses are presumably included in NAMA’s impairment calculation, but it just exacerbates the information deficit in NAMA’s accounts.
Unless NAMA lifts the standard of its presentation of its accounts so that a Fellow of the Institute of Chartered Accountants like Sean Fleming can understand what is presented, then these questions and concerns will remain.
NAMA Wine Lake 
This was reason for loans to Paddy Kelly and Liam Carroll as written about in the Tribune at the time, it was common enough even before the banking crisis to roll up the debt and then roll it all into a new loan, even better the bank thought if another asset could be bought to make it an even bigger loan. They’d book the profits when they gave the loan, even before any repayments were made.
@Neil, rolling up interest is one thing, and that has been previously reported. Granting an entirely new loan to a debtor so that they can pay interest on the first loan and have the first loan classed as “performing” is another, and I have not seen that specific practice reported before, though I stand to be corrected – I don’t suppose you have a link?
“I also do not understand why the accounts cannot show the full interest payable (€770m in 2010) and a provision to recognise the fact that much will not be paid (presumably €770m minus €448m, or €322m). This would preserve the integrity of NAMA’s accounts by reference to IFRS but would enable NAMA’s wider audience to see the estimate of debt write-off (subjectively called “debt forgiveness” sometimes).”
I second that and, while doing as you suggest, Nama should also show how the €74 billion at par value is being written down/off. As you know, I have written to the C&AG and PAC about this. The latter has asked Nama and the DoF for their comments on my concerns. See http://www.planware.org/briansblog/2011/11/namas-accounting-methods.html
Good post. Hard to understand what McDonagh is saying.
“Banks engaged in a practice whereby they advanced a loan (let’s call it Loan #1) to a developer for say €100m. They then advanced a second loan (Loan #2) for €11m, and the purpose of advancing Loan #2 was to enable the developer to pay interest on Loan #1 and Loan #2! ”
The alternative to interest roll-up is new to me. If the second loan we set up at the same time as the initial loan, (it’s not ideal) but not too different to roll-up loans. If the second loan was set-up when the first loan got into trouble, then it seems criminal.
Also what happened these “Loan #2’s”? Did they transfer to NAMA? If so, wouldn’t this reduce the real discount applied to assets supporting loans.
Serial lending is the norm rather than the exception, there is little or no return on most investments because these are designed as collateral enterprises rather than remunerative enterprises..
Collateral values are increased by the amount of loans taken out against them in a self-amplifying ‘virtuous’ cycle. This is what propels booms/asset bubbles. Series of asset price bubbles are what make up industrial economies and have since James Newcomen.
If loans aren’t taken on against collateral by individual borrowers, loans are taken on by the governments against the public in the form of sovereign credit extended to institutions or currency.
Debt is a substitute for output which does not exist. Commercial/industrial activity is non-productive, non-remunerative, Industrial enterprises consolidate and cannibalize existing forms of output. These enterprises destroy value and devour capital.Profits for for the enterprises’ owners are removed from the community as a whole which is burdened with the enterprises’ costs which are distributed in the form of debt retirement and externalities such as pollution and blight.
If one group of people on Planet Earth should understand this one would think it would be the Irish, who have been abused by Brit industrialists in this manner for centuries. Sad … never learn. Now the Irish are abused by the Eurozone masters.
:(
This is a very interesting thesis. However, the banks did expect return in the form of interest paid. In Ireland some “real” profits in the early 2000s provided the collateral that went seeking more returns, on an even larger scale, in the mid 2000s. It was the failure to find those returns, and the fact that the value of the collateral collapsed due to oversupply, that led to the crash. I guess that some of this collateral is still sitting over valued in our banks. Anticipated profit thus became unrepayable debt.
There are downward pressures on the average rate of profit from industry. I would like to see any figures that you have to show that this is globally zero, or less.
The banks expected nothing other than their performance related bonuses for shovelling loans out the door. In Ireland, this in itself does not appear to be an action deemed fraudulent or prosecutable by the DPP.
Likewise, these “rollup loans”, despite being deemed unacceptable even by Nama, are likewise not seen as fraudulent by the Central bank, Financial regulator, director of corporate enforcement of the DPP. Maybe these people took one such during the boom, convinced themselves it was all above board at the time and never looked back. Or maybe they’re all just still asleep at the wheel.
Given the indolence of the authorities on this issue, I suspect the banks are still engaged in this practice. Why wouldn’t they if they never have to face any penalties?
This is not going to stop. None of this is going to stop until someone spends the night in Mountjoy.
[…] alive and well in the banking sector: NAMA reveals new practice in Irish banks : give a borrower a loan, give the borrower a second loan t… After decades of gombeenomics, the Irish think this kind of stuff is normal. […]
A couple of things. This was the practice in Anglo, and to my knowledge, not in any other bank. It started in 2007 and was specifically designed to cover up the fact that loans were non-performing. All the account managers in Anglo were focussed on issuing second loans on all non-performing or development accounts to ensure that they were “in order” and could be classed as performing.
The loans were in general, short term (about 12 months) with the intention of being rolled over thereafter. Despite the substantial pressure placed on borrowers to complete these loans, Anglo were not able to process them all as a number of borrowers refused to sign up, as many of the offer letters sought to tighten up personal and cross guarantees in the same document.
There were further efforts at skillful deception in Anglo that have not surfaced publicly yet. When revealed, some of the legacy of this deception will impact on NAMA’s accounts as successor to the Anglo loans………. watch this space.
Brendan’s explanation regarding the interest makes no sense. If I read what is reported above correctly, he is saying that:
€770 million was paid on €74 billion of loans. If was averages the €74 billion and assumes that it was paid out over a 12 month period that only represents an interest rate of 2% per annum – less than 50% of NAMA’s current rate of 4.5%.
If only €370 million was received in interest, then there is a shortfall of €400 million in interest payable but not received.
€400 million shortfall in interest, would indicate about €19 billion in non performing loans at NAMA’s purchase price (about 56% of its loans) or €38 billion at par.
It’s the usual BS baffles brains…. or more NAMA spin.
@WSTT, thanks for that – I think we’re all waiting to see if NAMA will uncover any (further) discrepancies in historical interest charges by Anglo, and errors that might have continued as the loans were transferred to NAMA.
With respect to the figures, no, €770m was what Brendan said was *payable* on the €74bn and given that most of the loans were acquired in a lump in October/November 2010, that doesn’t look too odd.
But yes, as regards the rest, it still looks unclear to me. And it really shouldn’t be this convoluted, and you will see from the transcript reproduced above that even Brendan McDonagh seemed to be tangling himself up in figures. And IFRS and Effective Interest Rate calculations are being hoisted as shields which act to prevent understanding of NAMA’s operation.
Salaries NAMA pay to their accountants / portfolio managers are not commensurate with the quality of information presented.
Lending to developers pay interest on “interest only” loans was common throughout the boom.
I had occasion to meet Mr Fleming recently in a particular capacity. He is very impressive and would have made an excellent detective. You can’t BS him.
@bunbury, I don’t jnow about that. CJH managed to do it very well when Sean Fleming was Secretary of the FF National Fundraising Committee.
Original question was how much interest was actually received from borrowers.The letter states total receipts of 734,sales proceeds are 363 and ‘other’ is 371.Does ‘other’ include say penalties for late payment,it was a pretty simple question.Shame they can not answer it.
@John, absolutely agreed, it was a simple question. Whilst the answer needs take account of contractual obligations and accounting standards, I think Sean Fleming will find it challenging to understand what is going on – I certainly am.
@NWL i have read,re-read it actually printed it out,still working on it.
Brendan in his original answer got the math mixed up,he states ‘371 of that came from sale of collateral’ the letter states that ‘sale of property was 363 and other loan cash receipts was 371’.
But more importantly ‘sales’ are one off non recurring events why are they booking that as interest.
Receipts were 734 from borrowers-why book 448 as interest if you did not receive that. Appears that,sales proceeds were utilized to inflate the interest number.
@John, what you say is potentially true. The Effective Interest Rate looks at NAMA’s projections of loan repayments and if those later turn out to be optimistic then yes, NAMA has overinflated interest, and may need take a hit in future years if those projected repayments turn out to be over-optimistic.
If NAMA had said that the interest contractually due was €770m, NAMA received €x in cash interest, NAMA accrued €y in interest which it has good reason to believe it will receive and NAMA booked a provision of €z for that which is contractually due but unlikely to be received, then Sean Fleming (and the rest of us) would understand what was going on.
Instead we have some occluded Effective Interest Rate calculation which might be conservative, hare-brained or realistic. Who knows? I’m pretty sure Sean Fleming doesn’t (and that is with respect to the man and his standing as a Fellow of the ICAI)
nama — now we’re not talking Oligarch, Buffet, Gates combined– but NAMA, funded by Irish taxpayers, paid 32 bill for 74 bill of loans.
So I guess you guys as purests are effectively arguing over the exact shape of the shards that flew from the iceberg.
My view( recently morphed a bit) is that this energy would be better spent building a whole new boat, and just tossing this guys in jail.
And thanks mainly to JG, my cynical eye is evenmore cynical and the shyster component of my formula for Ireland’s demise is recalculated upward. Above stupidity, below entrenched masochism.
@jg, still awaiting fedex with my doggie bag from french laundry.
yes they should have the figure, but it is the stuff of an autopsy, not a future.
@NWL still working on it,perhaps they are applying sales proceeds from borrowers assets to interest owed on other assets,cross collateralized or pooled concept,but NAMA can not answer how much interest the portfolio generated.
Difficult to plan without that number,what has IRR got to do with how much interest was received from borrowers or Effective Interest Rate,maybe the borrowers those few that are current,should send in two checks,one for interest and one for principal.
@SF sorry was working on this ‘brain teaser” as a avid and addicted scrabble, crossword type playing around with the numbers. The question was very very simple,how much interest comes in the answer was just weird.
Have a signed Keller book the chef at F.L. for you!
@JG
should I take a spin out there? always glad of an excuse to see some Nama, ooops, napa
@SF The French Laundry is almost a religious experience,the High Church of American cooking,well worth it but not to everyone’s taste,involves some pomp and ceremony.Trying to find the original broadcast of the committee hearings and transcript,also the NAMA accounts.
NWL is absolutely correct,an elected TD who is a Fellow of the ICAI can not get a straight answer from NAMA,on how much interest they received.
An internal rate of return is a ‘metric’ or measurement to compare alternative investments,assumes an ‘event’ in this case that event is payment at maturity in full of any outstanding loan balance.
But an effective annual interest rate is simply the interest rate factoring in compounding on a monthly basis,no relationship to IRR.
http://www.investopedia.com/terms/i/irr.asp#axzz1ickS6HcR
http://www.investopedia.com/terms/e/effectiveinterest.asp#axzz1ickS6HcR
What on earth do IRR and Effective interest rates have to do with the actual amount of interest received,they are NOT related but simply ‘tools’ or metrics.
@JG, You are absolutely correct. IRRs and Effective interest rates have nothing to do with the actual amount of interest received. I commend Sean Fleming’s doggedness. These accounts are designed to be anything but transparent and Brendan is twisting in the wind, struggling to obfuscate. More NAMA fudge and spin. Can you imagine what’s going to happen in a couple of years, when we get to the hard core losses that will have built up in the belly of this particular beast? The omens are not good.
@NWL, It goes beyond interest rates and borders on fraud. Actually, let’s call a spade a spade – it was fraudulent. And when I consider the fact that these practices – and others – were signed off by auditors and accountants, it makes me think that they need to be dusting off their negligence policies!
@WSTT, what amazes me is that we have had the Honohan report, the Regling and Watson report, the Nyberg report and several Oireachtas committee hearings, and this is the first time that I have seen in black-and-white confirmation of the practice of giving a second loan to a borrower so as to service a first loan, and to classify the first loan as performing.
@WSTT I admit to having very little faith when tuning into the Committe. hearings,I thought they did a fantastic job.
The simple question is often the most effective,how much interest did NAMA receive.
@JG, The simplest ones are the hardest John, if you want to deceive.
Anglo used another wheeze when they wanted to bolster an account to make it look good and put it in the “performing” category. If a borrower had percentage interests in several different partnerships, they would bundle the interests together and irrespective of the borrowings of the overall partnerships, would create an ancillary “top up” loan to the shareholding which would then be cross collateralised. This loan would be out of kilter with all the other partnership loans, but it would loosen up funds to be applied against the interest shortfalls of a particular holding so that the partner’s loans in question could be declared “performing”.
As Tommy Cooper would say, as he waved his magic wand “Just like that!”
@NWL, As Randy Bachman wrote…..”You ain’t seen nothing yet!”
if you ask me ( and you have not ) , NAMA is a lot of smoke and mirrors , to give the impression of the Gov actually doing something, but in reality they are doing nothing , and furthermore , I would say that what will emerge when NAMA has run its course will be even more devastating than the original crises
This explains the skeptism of many outsiders towards the loan loss provisions when the market turned.
So long as the market continued to rise,it lifted all boats,poor underwriting,overly optimistic assumptions were commonplace,but never came across a second mortgage,designed specifically to disguise a first mortgage as performing.
There were lots of excellent questions on receivables,NAMA appeared to include a considersble amount of interest as a receivable,they should release an aged receivables report or AR.
@Joe they are so secretive and give long winded answers to straight questions,it does bring out the skeptic in most people.
Talking of overcharging by manipulating interest rates, I notice that everyone I know that had a loan from Anglo Irish has received a cheque in the post over the last month or so. The largest one I have seen so far was for approximately €50,000 – a not insubstantial sum. However, I would caution against “Greeks bearing gifts”. The paid cheque may actually be a way of trying to “cut the posse off at the pass” (mixing metaphors here) and settling an issue on the cheap that they realise could cost them a lot more in the courts.
@WSTT, are these recent cheques in settlement of the €100m reported in September 2010, or something different?
https://namawinelake.wordpress.com/2011/03/08/overcharging-by-irish-banks-simple-errors-or-something-more-sinister/
@NWL, I believe so, although no detailed explanation was forthcoming. It just cited “overcharging”.
…. but €100 million just doesn’t come close to covering what went on.
Speaking of overcharging IT today reports that Ansiey pulled down just under 1 million for babysitting.
@John, indeed, this entry has the details of his package for 2010 – €974,000 in total
https://namawinelake.wordpress.com/2011/03/31/a-stressful-day-–-running-commentary/
He’s worth four times as much as Stefan Gerlach at the Central Bank.
//www.stefangerlach.com/
Twice as much as Corrigan at NTMA.
This has been going on for years – I have been in receipt of these loans and not lending I asked for , this I was told by AIB in particular the only way they could continue unless I wanted all my loans called in.
Why the surprise on here – all BANKS were doing it prior to / during NAMA set up to improve the books and it is still going on in the shape of overdrafts being upped to allow the debit through to keep a loan performing on paper.
Another ball of crap the government are missing but hey they love to believe the Banker , why listen to the borrower.