We love the blame game in Ireland, and perhaps over the summer break, we might have gotten out of practice, so here’s something that might refresh the rage.
The question “is NAMA working” is frequently asked, and in truth, the jury is still out as we monitor how NAMA is managing its assets.
But we can say at this point that the NAMA scheme, or the NAMA design, has failed.
Because of the very high haircuts imposed on loans acquired by NAMA, both Anglo and INBS – which represented the sources of 60% of the loans acquired by the Agency – have become unviable as financial institutions and are being run-down.
As for the other three NAMA financial institutions – AIB, Bank of Ireland and EBS – the €30bn of loans acquired by NAMA were such a tiny fraction of those institutions’ €250bn loan portfolios, that the NAMA process has made diddly-squat difference to their risk profiles. What NAMA actually did was made a bad situation worse, and in all likelihood contributed to the circumstances in 2010, when the market lost faith in our banks, which ultimately led to the Troika bailout.
What is unforgivable is the reckless absence of validation of true loan values before NAMA was formed in 2009, validation which would have shown that the NAMA design couldn’t work. What is sinister is the Wikileaks evidence that there was some private validation which showed the loans were in worst condition that publicly acknowledged, but that validation was never published. “True” loan values will be a moveable feast of course, and as the property market declined, so did the value of those loans, but there doesn’t appear to have been any consideration in 2009 of the consequences of the loans being so badly impaired that even after the NAMA process, the banks would fail and would need massive bailouts.
We saw last week with the publication of the half-year accounts for IBRC – the name of the company formed from the merger of Anglo and INBS – that even after NAMA had extracted €44bn of loans from Anglo and INBS, what remained at IBRC were over €28bn of loans, mostly commercial property with a staggering 66% of the loans impaired. IBRC is closing its residual INBS branches, is not generating any new business and is winding down its loans and operations before 2020. As far as IBRC is concerned, NAMA has done nothing but hasten its descent into its zombified state. In fact, if NAMA hadn’t existed then we wouldn’t have run up eye-watering legal and other professional fees in valuing loans and transferring them from IBRC which after all is 100% state owned, to NAMA which is also 100% state owned. IBRC’s €44bn of loans transferred to NAMA represent 59% of NAMA’s total loan acquisitions.
AIB transferred €19bn of loans to NAMA for which it received €9bn. According to the AIB annual report for 2009, AIB had a total loan portfolio of €123bn. EBS, which has now been merged with AIB, transferred just €0.8bn of loans to NAMA for which it received €0.4bn. According to the EBS annual report for 2009, EBS had a total loan portfolio of €17.2bn. Bank of Ireland transferred €10bn of loans to NAMA for which it received €6bn. According to the Bank of Ireland annual report for 2009, Bank of Ireland had a total loan portfolio of €106bn.
In other words, €30bn was transferred from AIB, EBS and Bank of Ireland out of a total loan portfolio of €246bn. NAMA carefully valued these loans and paid €16bn for them. So the banks received nice clean cash equivalent funds but they had to crystallise large losses. If NAMA had not existed, these banks would be managing those loans today, would be obtaining cash advances from the ECB secured on these loans and would be offering them for sale and generally working out the loans. What NAMA has done is impose a massive administration and cost burden on these banks, forced them to crystallise losses now and deprive the banks of a portion of their stock-in-trade to generate profit and cash flow. If NAMA had not existed, it is hard to see how the operations of these banks would have been disadvantaged today.
It is a fact that deposits at AIB and Bank of Ireland, and non-NAMA bank Permanent TSB, have stabilised and since July 2011, in fact have gently grown. But would depositors have been deterred by AIB/Bank of Ireland having €30bn of property development loans of doubtful value in the context of nearly €250bn of total lending? Given the mortgage crisis that intensified after the NAMA transfers, and the fact that AIB and Bank of Ireland are both heavily exposed to mortgage lending, you would have to challenge the notion that it was the removal of the fraction of loans that went to NAMA, that stabilised the banks and inspired the confidence amongst depositors to stop withdrawing funds. The evidence suggests that it was in fact the stress-testing of the banks in March 2011, followed by massive recapitalisation and the intensive oversight by the bailout Troika, particularly the ECB that boosted depositor confidence. Not the NAMA process.
The NAMA process has transferred an additional €5.6bn in state aid to the banks, state-aid which is mostly represented by the long term economic value premium which the NAMA scheme involved. We, the public are on the hook for this state aid which is additional to the €64.1bn pumped into the banks. NAMA’s early years are proving challenging with loans declining further in value, and you would have to say that in 2012, we cannot be confident that NAMA will break even by 2020, the short to medium term outlook in particular is challenging. The NAMA scheme may have removed a modicum of doubt over the value of the banks, but there has been a transfer of doubt onto the shoulders of the nation, as we wait to see how NAMA performs.
So who do we blame? The late Minister for Finance Brian Lenihan was the minister who approved the NAMA scheme and it was he who led the legislation through the Oireachtas and then defended the Agency from its inception in December 2009 until his departure from government in February 2011. A man for whom there is justifiably a lot of regard, the fact remains that NAMA and the preceding bank guarantee are his legacies. And whilst Brian Lenihan might have sadly shuffled off this mortal coil, his boss, Brian “we are not fucking nationalising Anglo” Cowen deliberately vanished from the national stage in February 2011 but the buck stopped with him.
We can certainly blame the Secretary General at the Department of Finance during 2009, David Doyle and his deputy Kevin Cardiff (picture above) who was subsequently promoted to Secretary General in February 2010 where he clocked in until his ignominious exit/glorious promotion at the start of 2012. Kevin Cardiff might be best remembered for being at the helm when the €3.6bn error in the national accounts was uncovered, but far more serious was the Wikileaks revelation/claim that he had hinted to the US ambassador to Ireland, in early 2009 that the ultimate discount on loans transferred from the banks to NAMA might be 50%, instead of the 30% that was publicly discussed. With a property market still tanking some months later at the end of 2009, it should have been obvious that the discount would have been nearer 60%, at which point, the banks were mostly rendered zombified and in need of substantial further bailouts. And consequently, the NAMA scheme could not have worked.
We can probably blame Minister Lenihan’s special adviser from March 2009, Dr Alan Ahearne (picture above), who, after his adventure at the Department of Finance, returned to lecturing at the National University of Ireland in Galway, and at the same time was ennobled with an appointment to the board of the Central Bank of Ireland. Earlier this year, Dr Alan penned an article for the Independent in which he attacked critics of NAMA, accusing them of moving the goalposts, which was rich when that is precisely what Dr Alan does by advancing as his main justification for NAMA, the saving to the State of working out €75bn of loans over a longer period of time than would otherwise have been allowed under the Troika-mandated deleveraging targets. The problem with Dr Alan’s contention is, back in 2009 when NAMA was conceived, there was no Troika, it only arrived on the scene in November 2010. Dr Alan deserves to be stoned if he is suggesting he had the prescience in 2009 that the country would enter a bailout programme in late 2010 which would involve the mandatory sale of bank of assets. Furthermore it is eminently arguable that it was NAMA’s crystallisation of losses in the banks in March to May 2010 when the first tranche was transferred, which ultimately forced this country into a bailout. Instead of 30% haircuts, we had 60% haircuts and the markets were justifiably spooked with concerns about the remaining loans, particularly commercial property.
And lastly we can probably blame Peter Bacon, the economics consultant who was the darling of the last administration but more recently seems to have fallen from favour, with his Treasury Holdings-sponsored report not doing anything to recover his fortunes. In April 2009, Peter produced a report “Proposal for a National Asset Management Agency” – note that just the abridged version of the report is in the public domain – which addressed €80-90bn of lending in the banks, but failed to address the difficulties that would be caused if the discount on the loans was too severe. Peter’s report did recommend that all doubts be removed on the capital adequacy of banks but only dealt with a quarter of the extant lending, and we now have issues with the residual property lending that NAMA left in the banks, not to mention the residential mortgage books. Of course hindsight is a terrific advantage but looking back at the report today, it is still surprising that no consideration was given to the depth of the hole that NAMA could leave behind in the banks after crystallising losses.
The distinction between the NAMA project and the organisation NAMA should be made. The NAMA organisation has done the job assigned to it in the NAMA scheme, though the jury is still out on how well it is doing that job. It is the NAMA scheme that was wrongly designed, and the singular failure was not validating the loan losses at any early stage. If NAMA had not existed, then we would have avoided colossal administrative costs and time, there is strong evidence we would have avoided a bailout and consequent deleveraging of banks at the behest of the Troika, we would not have the risk of the NAMA operation on the nation’s finances and we would have banks whose expertise was in loan workouts, managing the loans today.
The NAMA design or NAMA scheme did not work.