It’s a little surprising that NAMA’s results for Q3,2012 which were published yesterday have not been reported on RTE or in the Irish Times or Irish Examiner, and there is scant reporting in the Irish Independent. NAMA is the biggest state agency and we – that’s us all – are exposed to it to the tune of €27bn still because we have guaranteed the IOUs it used to buy the loans off the banks in 2010 and 2011. But, not a dickey bird in most of the Irish media which might be a reflection of the cut-backs and shoestring budgets now imposed on the traditional media, but it might also be a reflection on how opaque NAMA’s accounts have become, This blogpost examines the latter proposition, and sets out why at this stage, we can’t really tell a lot from NAMA’s management accounts and report.
Before examining the subject, it’s worth saying that NAMA should be a relatively simple organization to monitor. It bought loans from the banks using IOUs. It collects interest on those loans. It pays interest on the IOUs. It collects repayment of principal on the loans. It forecloses on certain loans, appoints receivers who maximize the value of the loans and the underlying property. It advances new loans to developers to manage their property or to develop it. It keeps a close eye on the sale of underlying property. Okay, NAMA started out managing €74bn of loans which it had bought from the banks for €32bn, but in principle, what NAMA does is not very complicated.
So why can’t we tell how the Agency is doing from its management accounts?
(1) The “effective interest rate” (EIR) of calculating interest income means that NAMA’s reported profit includes an estimate of interest that NAMA will in future earn on a loan, but which hasn’t been received in cash yet. How good are NAMA’s estimates? Historically not great, at least when it came to its overall business plan. So can we believe a €141m profit.
(2) Profit on disposals. NAMA is prevented from accounting rules, it says, from recognizing the profit on the disposal of certain properties because NAMA must wait for the conclusion of the entire relationship with a developer before it can recognize such profits. Sound complicated? Take this example, John is a developer with two loans, one for €10m and one for €15m, with the first secured on an office block in London and the second on a shopping centre in Dublin. The office block in London is sold for €12m which means that NAMA will 100% recover the €10m loan and will have an additional €2m to apply to the €15m on the property in Dublin. But even though NAMA has made a “profit” on the first sale, it will not recognize this until the loan on the Dublin property is ultimately dealt with. NAMA has over €1bn of such profits. NAMA recognized €1,819,000 profit on loans in Q3, a relatively paltry sum.
(3) Derivatives. Most people glaze over when you mention “derivatives” but in simple terms, they’re insurance policies to guard against interest rate changes and changes to foreign exchange rates. But they dominate NAMA’s accounts. Interest income on derivative instruments came to €20,343,000 in Q3. Interest expense on derivative instruments came to €7,366,000. Interest expense on derivative instruments where hedge accounting is applied came to €29,505,000. Fair value losses on acquired derivatives came to €22,093,000. Fair value losses on other derivatives came to €11,877,000. What does this all tell you about NAMA’s performance? Confused? Join the club.
(4) Foreign exchange profits and losses. NAMA had €92m of foreign exchange gains in Q3. That’s a massive figure and has nothing to do with NAMA’s underlying performance, that’s how rates between different currencies moved in the quarter. On the other hand, NAMA had foreign exchange losses of €117m, an even bigger number. But what has either number to do with NAMA’s underlying performance, even though the profit for Q3 would have been €25m more if there had been no foreign exchange gains or losses.
(5) No breakdown of expenses. How much is NAMA paying its staff, what pension provisions are made, have bonuses been paid, what’s the average salary. Forget it, you’ll see that the NAMA salary bill was just under €7m for the quarter but you don’t get anything else, not even a headcount so that you can work out average salaries. Quarter three was when NAMA had in internal investigation of the Enda Farrell purchase of a property from a NAMA developer which widened out into an investigation into an alleged leak of confidential information. How much did that Deloitte investigation cost? Not a chance that you can extract this sort of detail from the accounts. NAMA spent €1,488,000 on “other administrative expenses” in Q3,2012 – no detail whatsoever is provided.
(6) Capitalisation of costs. We learned late last year that NAMA has a little trick which might come back to bite us all on the bum. When NAMA spends money on court cases and lawyers’ fees, it generally doesn’t regard these outgoings as expenses. No, what NAMA does is assumes that most will be recovered from the developers that it is suing. So NAMA “capitalizes” the legal expenses and adds them onto the loan liabilities in its balance sheet. The recoverability of some of these expenses looks dubious. Do we seriously believe that NAMA is going to recover its legal costs of pursuing the Dunnes in the United States, remembering that Sean Dunne has a €185m judgment against him in favour of NAMA, and a €164m judgment in favour of non-NAMA banks. NAMA thinks it will, and that is presumably why it has capitalized the McCarter and English LLP legal fees.
(7) Disposals. We get figures for disposal of NAMA properties but we can’t tie these to the accounts because NAMA announces disposals and it can take months and even years for the cash to land on NAMA’s desk. Also a property might be sold, on which loans are owed to both NAMA and other banks. NAMA tells us that €1.3bn was received in cash from borrowers in Q3,2012 but this will comprise disposals and normal loan repayments.
(8) Impairments, NAMA now calculates impairments twice a year, in June and December. “impairments” are supposed to represent the deterioration in the value of a loan because of a decline in value of the underlying property or because of a decline in NAMA’s estimate of what the loan will generate in cash. Yesterday’s Q3,2012 accounts don’t contain any provision for impairment for Q3,2012 – the last impairment calculation was in Q2.
(9) Out of date, year end update. Yesterday’s accounts will be obsolete to many because NAMA has released an end-of-year update for the 12 months ending December 2012 which provides in a clearer, friendlier form, a summary of what the Agency is doing. So why bother wading through detail that is already three months out of date, when you have a clearer summary of the full year performance.
(10) No plans or objectives to measure actual results with. NAMA is largely a metric-free zone. They hate it when you try to tie them down to figures and dates. Remember the €2bn investment announced last May 2012? NAMA didn’t want to give a schedule of when it expected to spend that investment, and it took the IMF in December 2012 to reveal to us that NAMA was back-loading the investment. So, we don’t have any plans from NAMA against which we can measure the results yesterday, so we can’t conclude if NAMA is meeting its internal plans or not.