Scope of NAMA

Much has been written about the pricing of the NAMA loan purchases and the consequences for shareholders (including by myself in tomorrow’s Sunday Business Post), but less on the scale and scope of the proposed purchases.

The announced plan is that

“The eligible land and development loans of each bank involved will be transferred – that is the eligible loans secured on development land and property under development. In addition, the largest property-backed exposures of all the banks in the scheme will be transferred.”

Ignoring, for a moment the undefined word “eligible” — which allows an attractive degree of flexibility — what about the two other distinctive features of this proposed scope of purchase:

First, it is not limited to non-performing or impaired or problem loans. Second, it excludes a large swathe of property-related and other loans, including problem loans.

Inclusion of performing loans
I can see that it is an attractive simplification for NAMA’s management to sweep in all of a clearly-defined category of loans, not least because that way you are sure of covering even those loans that have not gone bad yet.

I am less impressed by the argument that including performing loans is good for the taxpayer because they will be serviced. The inclusion of performing loans increases the gross scale of the NAMA operation, and with it the size of the National Debt. It may also, I suppose, complicate the operation inasmuch as both the banks and their non-delinquent borrowers may be very unhappy to be separated.

Exclusion of non-development-property loans
If the goal is to end up with unquestionably clean bank portfolio, should one not also be considering inclusion of other non-performing loans, given the deterioration in the overall economic prospects?

At this stage, I am not sure what to conclude, except that the scope of the purchased assets is an important issue. Clearly, that word “eligible” could come in very handy as the scheme moves towards statutory definition.

Meanwhile, another question worth considering is whether NAMA needs to wait until it has identified all of the loans to be purchased. Here the answer seems clear: best to go ahead with an initial purchase of the most problematic loans as soon as the agency is up and running (assuming, of course, all of the pricing & financial restructuring,  governance and transparency issues also sorted).

13 thoughts on “Scope of NAMA”

  1. At the risk of sounding like Brian Lucey, is there a political consideration in including the entire bank portfolios of certain types of loan in the NAMA?

    For example, if (when) the NAMA is perceived to overpay for the loans from the banks, the politicians are allowed use the line: “not all of the loans purchased are impaired, in fact some are expected to pay in full.”

    The whole thing does bring to mind the kind of financial engineering that occurred in the US when bad loans were mixed with good loans, and the whole thing was rated AAA.

    I might be cynical in highlighting the irony that we (who apparently never engaged in any of the american financial shenanigans) are now going to package good loans with bad and then label the lot as ‘bad’ (to save the banks) and, at the same time ‘not so bad’ (to save the politicians).

    But then, I might be cynical..

  2. Patrick your final point on best to go ahead without waiting – could this be the rationale behind the Lenihan Levy ? Taking the etire book on board good and bad means NAMA will have to in part work normalised banking relationships – could it possible the intention is to use the state’s mini-Nama(Anglo) as the “banking” bit – appears to me that if you buy loans you must have the banking system to migrate the loans onto unless you leave them on the banks system and do an outsourced loan administration deal – still would take one hell of an MIS to manage the sheer volume of loans purchased – unless that is what we are seeing is a gigantic securitisation programme with recourse via the Lenihan Levy to the originating banks.

  3. I should add that, when I say going ahead without waiting, that does not include injections of new state equity capital — that should only be done after the full necessary write-down is completed.

    @LorcanRK — very intriguing parallel you draw with the blending of loans of differing quality in US securitizations.

    @Bill — I think the levy idea is just a shorthand for “desire not to find we have overpaid”. I feel that my alternative on that is much better.

  4. @Lorcan…would that be bad, to be luceyesque? 🙂

    It seems to me that this is a “if twere done, tis best twas done quickly” approach. Taking the good the bad and the ugly is simple (not as simple, imho as nationalising and transferring to BadBank) but weakens the banks rather than strengthening then (as per my comments in the tribune today) so its purpose is not at all clear.

    @PatrickH : Elaine Hutson alluded to this misson-creep potential in a comment last tuesday evening ; as mortgages, car loans, credit cards etc go sour, there is now a mechanisim to take then all on board, good bad and indifferent. In the limit, we could end up with state-isation of lending… The laws of unintended conseqences are still in action.

    @Bill, PatrickH : NAMA if it is NOT to be a toxic bank then must concentrate on workouts and distrissed asses valuation. These are NOT the same skills as relationship banking where someone is tipping along and needs careful nurturing and watching in a recession : not all development and land loans are sour or will be sour, so there is a danger of babies and bathwater here.

  5. @Brian I agree NAMA will need in part to operate as a bank if it is taking on both good and bad loans. Relationship banking skills will be requied as will an ability to fund workout proposals etc. One could argue that a significant portion of private banking is being nationalised by the nama process.

  6. @Brian Lucey, if only I had your youthful good looks and your charm..

    That said if you ever decide to run a post-grad course in Luceyism, I’ll sign up for it. Get my MA in BL..

  7. Still working my way through the Sunday papers. I don’t know if it’s just me, or just the *Sunday Times* journalists Mark Paul and Brian Carey, but their article “Economist sees asset management agency as developers’ best chance” suggests that NAMA is not intended to be a bad bank: it’s a bad developer.

    I can’t find the article online (the ST site seems to cover only the UK edition), so here are some extracts:

    ===begins=====
    Once established, Nama will raise substantial risk capital from private-equity investors, specialist property-investment funds, private individuals and other property-investment companies. Its sheer scale, plus government backing, will attract such equity, Bacon says. Nama would then play the lead role in developing and managing the property assets. […]

    Once capitalised, he expects, with large developments, Nama will establish special purpose vehicles (SPVs) to carry out the projects. Controversially, Bacon believes that the original developers who borrowed from the banks to buy the assets may participate in the future profits of the SPVs. In many instances, these are the best individuals to develop the schemes, he says, because they have the requisite expertise amd are familiar with the projects. […] The agency is also likely to be led by a property professional rather than a banker. […] In effect, Bacon’s plan is to nationalise or part-nationalise virtually the entire property-development industry in Ireland.
    ===emds=====

    Maybe I’ve been missing the important stuff, but I thought we had to rescue the banks because of their systemic importance. I see no reason to rescue builders, property speculators and developers, who should rather be put to cleaning public toilets or other such useful work. I can see that the property “assets” will have to be managed, but I’d have thought of that as subsidiary to saving banking. This article — and it may be just the authors’ way of framing it — seems to suggest that the focus is on saving the property industry. Have the builders some special relationship with the government or something? Surely not!

    I haven’t worked through the Turbine, SBP or Observer yet; maybe enlightenment lurks elsewhere.

    bjg

  8. It is the likes of B.Goggins perspective on this which worries me the most. Not that I do not share your frustration about potentially saving the development industry which was a very big player in our ultimate downfall.

    However the reality is whether we like it or not, as has been said above and elsewhere on this site, the best way to maximise recovery of these troubled loans (which we are pregnant with) is by working with the borrower in the first instance – this is the norm in corporate recovery. So this might mean writing off part of the loan, switching debt for equity, tearing up worthless personal guarantees ALL politically and morally difficult actions. But sadly it is essential if we want to fully maximise loan recovery! Otherwise just sell the loans now at fire sale prices and avoid all the trouble of a NAMA.

    As someone else has said here, I question whether the NAMA guys and galls will have the balls to take these work-out measures perceived to be helping developers in the full glare of the media and a public which just wants blood from bankers and developers!

  9. @JohnD I have to say I echo most of your concerns on NAMA. It it is talk of many in the local and international financial industry and all the feedback I have received has been negative – albeit in some cases linked to ideology.

    We should not be surprised by this negative reaction because what has been proposed is nothing more than shifting bad loans from one state controlled entity (de facto the irish banking system) to a new one, NAMA.

    Furthermore it is not really achieving the stated aim of ‘cleansing’ the banks because (a) if it all goes wrong NAMA hit them with a claw back levy and (b) the economic situation has deteriorated rapidly since (and is continuing) which will mean that new toxic loans of every description will quickly replace those taken off the banks. I also agree with you that the banks after having been rescued will be even more nervous about lending.

    So NAMA is nonsense as per the detail released to date. For example, how are Dr Bacon and his colleagues going to fix these stressed loans? Do they really believe the political rethoric that the “developers will be pursued to hell” and that this policy will be the best chance of maximising loan potential? Nice fantasy, but from a corporate recovery perspective, this is actually the best way to ensure you get nothing back and spend years trying.

    So does NAMA have the political stomach to be seen to ‘bail out’ developers?

    The reason I ask is that I agree with some of the contributors above that in any loan work-out scenario, in most cases write downs are rarely avoidable, other outcomes include debt for equity swaps and nearly always done working closely with the original developer/borrower – this is not an Irish phenomen it is universal and is frequently the best way to maximise recovery. I wonder will the media and the public see it that way though?

    If NAMA is not prepared to recognise this reality it would be better for the banks to sell the loans into the market now at their fire sale value (which obviously be less than prices currently being bandied around) and spare us, the tax payers, the expense and frustration of another useless government quango.

    What is ideally needed is third party/private investment, otherwise we are just rearranging deck chairs. In other words some new money which can genuinely share the risk with the tax payer – this possibility is missing as far as I can see at the moment. As at least two major obstacles need to be cleared first (1) the risk/reward will have to be sufficient to attract expensive foreign capital and (2) it will be difficult politically. You can almost visualise the media frenzy trying to see if there is any link between the new investment and Irish developers.

    Maybe JohnD from a related thread is correct, it may not be the best or sexiest option, but it could be the least risky and easiest option i.e. we just WAIT and see how the US and others fix their systems. While we are waiting as you suggest just leave the loans with the offending banks and possibly ring fence them in a way that lossess can be minimised and the at least the banks will remain accountable. At least this will show the markets that we havent given up and so on….

    At the end of the day we are kidding ourselves if we believe that we don’t already own the banks or their risks at least.

  10. Guys, it’s interesting detail above but I think its appropriate to step back and consider not how NAMA works but whether it’s a really practical idea. In some senses the difficulties highlighted suggest that it is not a simple proposition, and remember that when the civil servants (and their consultants), the bankers (and their consultants) and the developers (with their advisers) sit around the table just who is the smartest, most hard working and with the most to win or loose.

    A simple truth
    You can’t buck the market

    Our political leaders have been in denial for some years as to the direction of the Irish economy and even now are playing ‘pass the parcel’ with the present difficulties.

    The Government was responsible for financial regulation but chose not to legislate and enforce sound but unpopular governance. That’s their job.

    The Banks, without sound governance, raced to the bottom.

    Anglo’s model ensured high returns in good times but when the market moved were dangerously exposed.

    The other Banks had to follow suit to make comparable shareholder returns but were not nearly as exposed as Anglo.

    Yet back last Sept we were told that all the Banks would fail without Government intervention – hence the Bank guarantee. Hmmmmm. Not so sure about that.

    The simple fact is that Banks are responsible for their lending and Governments are responsible for the wisdom or largesse of public spending. In term of competencies and responsibilities, each to their own.

    The Banks should be left with sorting out their bad debts. That is their responsibility and area of competency, without capital from Government.

    The Government should be left with sorting out their excess public expenditure over tax revenue. That is their responsibility and theoretically area on competancy – however brutal that adjustment.

    If you think that the Tribunals took ten years at HUGE legal cost to protect some business and political reputations and a few miilion of undeclared tax / offshore accounts etc consider how this pales into insignificance in comparison with the 80-90bn monies being discussed.

    I have no doubt that the market will decide that the responsibilities and competencies have been inappropriately assigned.

    Come on – deep down you kinda know that.

    Their is simply no way that NEMA can work. SIMPLES

  11. @John Cobh: “It is the likes of B.Goggins perspective on this which worries me the most. Not that I do not share your frustration about potentially saving the development industry which was a very big player in our ultimate downfall.”

    But you see, at the moment the loans to developers are not my problem, nor that of most citizens: they are the banks’ problem. Now, if the banks need a few quid to help them out, why, as a Concerned Citizen, I’m happy to help, as I would any fellow-citizen. But when they want a few gazillion, and a claim on my income and my children’s income for many years into the future, I begin to question whether the current banks are quite as important to me as all that — and how likely it is that the NAMA idea will work. That’s quite apart from my asking “Cui bono?” (and I don’t mean the Great Pontificator).

    I suspect what I’m doing, along with many other citizens, is a bit of unofficial cost-benefit analysis. And at the moment alternative solutions, possibly involving tumbrils, are looking cheaper and with better payoffs.

    bjg

  12. John, David, Brian: I think you are all saying the same thing but a different way?

    There does seem to be common denominator at least = NAMA is daft.

    I agree.

    But like each of you I have my own qualification/slant, which is no matter what happens you cannot let any of your banks sink or else you will all sink. I lived through something similar in Sweden, it ranks, it sucks, but it has to be done and it can be fixed. Have hope 🙂

  13. I would add to the point made above, if you are determined to go with NAMA, get ready for politics and media to kill any chance of getting your money back on those loans, unless you are prepared to workout the loans with the developers themselves. That sucks too, but gotta be done otherwise forget about.

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