Do We Really Need a NAMA?

While much of the recent media discussion about our banking problems has been framed as NAMA versus nationalisation, this has not been a fair reflection of the debate between economists. My four-point plan and the gang of 20 article explicitly allowed for the idea that a NAMA-like vehicle be used in conjunction with nationalisation.

That said, I’m a little worried now that the public may perceive the case for a NAMA as a slam dunk. My own preference for this approach came from thinking about the alternatives and deciding that the balance of the arguments were in favour of using an Asset Management Company (AMC) in conjunction with nationalisation. Since the NAMA proposals have been introduced, I’ve been getting a bit less enthusiastic about the idea, so I thought I’d write up what I see as the competing arguments for and against an AMC.

Before that, though, let me spell out that while I’m in favour of nationalisation and have written about how a NAMA could work in conjunction with nationalisation, it is not necessary that nationalisation has to be combined with a NAMA vehicle. Rather than take all the bad loans out of the banks, these loans can be simply written down to fair market value and funds are provided to re-capitalise. The banks are then left to recover as much as possible from these bad loans.

I’ll compare these two methods (nationalisation with NAMA and nationalisation without NAMA — note I’m not discussing the NAMA with overpayment) under a number of headings: Ability to achieve a quick turnaround of the banking system, economies of scale in managing the property portfolio, specialist skills, breaking crony capitalist links, problems related to complexity and bureaucracy, and political economy concerns that may affect the extent of losses for the taxpayer.

1. Quick Turnaround

This is the factor that I have always thought most favours an AMC approach. Potential investors in Irish banks know that the banks are sitting on huge losses but are unsure what the scale of these losses are. Moving the losses into a NAMA vehicle will eliminate this uncertainty and, once recapitalised, the property losses cease to be a concern for private investors, thus facilitating a quick turnaround and re-sale of the banks into private ownership.

However, the approach of not having a NAMA could work if the write-downs were sufficiently steep so that potential private investors would not see further downside risk stemming from these loans remaining on the books. While the 1990s Swedish approach of AMCs working in tandem with a couple of nationalised banks has been widely (too widely?) cited, it is worth noting that the write-down approach with no AMCs was successfully adopted during the corresponding Norwegian banking crisis. I’d score this point for a NAMA but it’s not necessarily a major issue.

2. Managing a Large Property Portfolio

One of the key traditional arguments in favour of AMCs is that they can take advantage of “economies of scale” when dealing with bad loans, putting together a large expert team to get the best return back for the taxpayer. (See page 6 of this review of AMCs.) However, economies of scale have their limits. Diseconomies of scale also exist (otherwise every market would be dominated by one firm) and, as Patrick Honohan emphasised before the Public Finance committee last week, the envisaged scale of NAMA is unprecedented, and the sheer size of the task may make it difficult for one single organisation to undertake.

Already there are signs that the NAMA job probably is too big for NTMA to undertake. We have repeatedly heard in recent weeks that NAMA may function as a slim operation which carves out property loan department’s from the covered banks—with staff essentially “on secondment” to NAMA—and has them continue to manage the property loans that they made, with NAMA officials undertaking regular reviews.

3. Specialist Skills

One argument for NAMA is that its staff will have better specialist skills in dealing with bad loans and, when necessary, managing the collateral put up for the loan (in our case, property projects at various states of completion.) Peter Bacon’s report makes it clear that he sees this as an important argument in favour of a NAMA. He notes that the Irish banks are not skilled in recovering bad loans and that most of the projects used as collateral will have to be taken off their current owners. Bacon characterises the issues as follows:

They are loans created and secured by property assets (i.e. development land, work in progress, completed but unsold residential stock and under-performing property investments), which are now worth significantly less than was envisaged by the loan. There is not a great deal banking skills can do to resolve this dilemma. Moreover, the property development companies involved in these transactions are almost entirely privately owned, championed by entrepreneurial characters and mostly without equity or recourse to equity markets, and in many cases do not have the depth of management skills to engage in the kind of portfolio sales and work-outs which ultimately are required to resolve the impairment issue.

Bacon’s report—commissioned by NTMA—then goes on to recommend the NAMA “should be carried out under the governance, direction and management of the NTMA.” However, it is worth noting that the NTMA has no history whatsoever in managing large portfolios of bad property loans. The proposed “credit committee” approach appears to be a covert admission that, contrary to Bacon’s report, those currently managing the loans are perhaps in the best position to manage these portfolios in the future.

If this is indeed how NAMA is going to work, I would suggest that it would be better to not have a NAMA at all, and simply to write down the loans and have a specialised unit working within each bank to recover as much as possible.

One reason for this is that maximising the return from these loans will, in a number of cases, require extending the developers additional credit to get their projects finished. Bacon’s report mentions the possibility of NAMA raising outside capital to provide these funds but doesn’t provide information on how this would work. Keeping the loans inside banks, but written down to low values, will allow those who made the original loans to decide which projects are worth providing with further capital and which are not.

At this point, based on current information, I’d be inclined to score this one against a NAMA approach.

4. Crony Capitalism

Some argue that it is best to get the loans out of the banks that made them because there are long-standing links between the lenders and the builders. Certainly, despite opposition claims that it will be a bail-out for developers, it appears clear that NAMA will be tougher with property developers than the banks have currently been. (Note how the developers are united in their dislike for the NAMA proposal). I think this is undoubtedly true but the main reason for this is almost certainly that the banks do not want to admit the full scale of their bad loans.

However, a nationalised and recapitalised bank under new management should have the same (and perhaps better) incentives to minimise the loss on impaired loans as a NAMA. Certainly, it’s hard to see how the “credit committee” approach with supervision from NAMA will necessarily break the crony capitalism links better than supervision from management in nationalised-and-then-privatised banks.

5. Complexity and Bureaucracy

There is little doubt that the NAMA process will require complex legal issues to be clarified and will set up a new bureaucratic quango. I don’t want to overstate these complications. For instance, many have written about how builders may legally challenge their loans being transferred to NAMA. I doubt if this really is a big legal issue. Banks buy and sell the right to streams of loan payments all the time—this is what the market for securitised assets relies on. Still, there may be some legal complexities here that I’m not aware of and, most likely, a NAMA bill will have legislation to deal with this issue.

On the bureaucracy front, NAMA will have staff, management, board of directors, chairmen, offices and all the other costs that go with all the other quangos that we know and love.

The nationalise-without-NAMA approach will have none of these issues, so score this one against NAMA.

6. Political Economy Concerns

Economists that have advocated a NAMA, whether as part of nationalisation or not, have generally emphasised that it should be run as a commercial operation with the sole mandate of recovering as much for the taxpayer for possible. However, I am concerned that concentrating all the bad loans in one single agency will make achieving this outcome very difficult. This is because lots of other interest groups will target the agency in an attempt to make it act in their interests.

I can point to 3 such interest groups already gunning for NAMA:

  1. Green Interests: The Green Party have been very enthusiastic supporters of NAMA. They haven’t been shy in admitting that they see a multi-billion property investment portfolio as something that can be used to address past deficiencies in planning and zoning. This suggests, for instance, that they would be happy to take valuable zoned land and keep it as green fields, essentially writing the loans down to zero. I am very sympathetic to the Green Party’s concerns about bad spatial planning in Ireland but I think the way to resolve this issue is through better planning in the future, rather than through having the taxpayer take huge losses though NAMA.
  2. Left-Wing Interests: Suggestions have been made that NAMA should address social issues such as homelessness and social housing. Again, I am sympathetic to these goals, but they are better addressed through normal government capital spending.
  3. The Builders: Today’s Sunday Tribune reports “High-profile developer Seán Dunne has invited his fellow property developers to join a powerful new organisation which will seek to dictate how the controversial National Asset Management Agency (Nama) will operate in relation to developer’s loans and assets.” Why a bunch of bankrupt developers should be “powerful” or “dictating” to anybody is unclear to me. But the point is that NAMA provides a single focus point on which the builders can focus their lobbying efforts. The Tribune also contains an article written by Tom Parlon directly lobbying NAMA on behalf of the building industry.

The combined impact of these interest groups is likely to have a far larger effect in increasing losses if we have a sigle NAMA on which they can focus their efforts than if we have a number of temporarily nationalised banks preparing themselves for privatisation.

Two last thoughts. First, I have focused this discussion as “Nationalisation-plus-NAMA” versus “Nationalisation-without-NAMA” because I see these as the two best options. However, all the various drawbacks and advantages of NAMA still carry through to the case where limited private ownership of the banks is maintained.

Second, political reasons are likely to require a NAMA be part of the solution. This is because nationalisation without a NAMA requires a clear and quick admission of the scale of the problem while a NAMA vehicle can allow the full admission of the losses to be delayed for years. For this reason, I fear we are stuck with a NAMA whether we like it or not.

29 thoughts on “Do We Really Need a NAMA?”

  1. @Brian Lucey. Three more words. It’s too late.

    Karl does well to highlight the potential problems with the NAMA idea, but as he points out in his final paragraph, there is too much political capital invested in the idea now to turn back now. NAMA is here to stay, in whatever form it might take.

    As far as it being perceived to be a slam dunk, the idea still has no meat on its skeleton. The bank guarantee was easy to understand and implementing it took little more than a statement from the minister. NAMA is going to be a much harder fish to fry. The devil most certainly is going to be in the detail.

  2. Excellent article and comments.

    It is opposed by developers. Yes…. cute hoors aren’t they? So if they welcomed it it would be a bad idea? Their opposition to this idea, which originated with their cronies, is predictable. It may be a sham. Horrifying thought, eh?
    With only 90 Bn at stake people might employ tactics and lies to manipulate public opinion. Gosh it’s enough to make one skeptical!
    As I said before the NAMA is designed to fail and just whose security will be sold first?
    Will all the bank records be trawled for secret cross security involving other identities and foreign accounts? I doubt it. Strving it of staff is an excellent step to make it impossible!
    And then when it breaks, NAMA can be blamed. Just like the Regulator.
    Talk about being led around by the nose!

    It will not work. It is designed to be an heroic failure. It postpones the evil day for all involved at the expense of a banking system.

    We need a clearing system. The assets left with the banks that were associated with the NAMA debts will leave the banks and disappear, possibly witth their owners, abroad. This is a way of letting the cronies off the hook.
    Is there anyone who can confirm that this is likely to happen given the methods used by banks?

  3. “these loans can be simply written down to fair market value and funds are provided to re-capitalise”

    There is no functioning market to set a price and “fair market value” is a non-existent and meaningless concept.

    “I am sympathetic to these goals, but they are better addressed through normal government capital spending.”

    No they’re not. If Nama (or whatever body gets the job of disposing of the toxic debt) does not have an option for disposing of these debts other than selling the assets on the market, it will receive very poor prices. Vendors who are obliged to sell their assets are in a terrible negotiating position vis a vis buyers. If Nama had the option of disposing of their assets through “normal government capital spending” – ie state investment – then it would immediately be in a better negotiating position. Forced deleveraging is always disastrous vis a vis prices.

    The idea that the pools of money that the state controls should be siloed off from one another is voodoo economics that amounts to an insistence that the state should operate in the market with one arm tied behind its back. The state has a unified command structure and should, obviously, take advantage of this in terms of integrating its various goals. In this case, the possibility of retaining the assets as inputs for various other state goals is the key competitive bargaining advantage that the state can take advantage of in the market.

    This is without even getting into the non-trivial problem presented by the fact that any realistic “write-down” or “recapitalisation” would have a disastrous effect on state solvency.

  4. Karl, I find your political economy analysis very weak. Many of the interests you label “left-wing” or “green” come across more as pet dislikes of yours rather than any actual attempt to actually engage with the power of vested interests in society. Might I suggest that NAMA is as much under threat from capture by politicians in mainstream political parties – not just those on the fringe that you outline in your piece. Might I also suggest that you look at a wider range of societal groups that have a vested interest in influencing NAMA decisions (trade unions, property owners/landlords vs renters etc…). Otherwise I agree with much that you have to say.

  5. @Karl: Your list does not include the chief benefit of NAMA, which is its impact on the bank’s marginal risk-return preferences. With a huge overhang of “bad” assets with very uncertain value and risky cash flow streams, a private bank will have no appetite for making additional risky commercial or real estate loans. Rather the bank with such an asset base will try to shrink its others assets (to increase equity coverage) or select new assets that are as risk-free as possible. So reasonable commercial loan applications and mortgage applications will be refused or delayed (there is circumstantial evidence that this is happening now). Removing the overhang of risky “bad” assets from the banks (noone knows exactly how bad these assets are, including the banks) and replacing them with cash equity will change entirely the marginal risk-return preferences of the banks. Afterwards the banks will be naturally incentivized to lend again in the normal manner.

  6. “Afterwards the banks will be naturally incentivized to lend again in the normal manner.”

    Do the current people in charge of lending in banks (and that goes way beyond the board of directors – they didn’t lend money to anyone. It was further down the line that did that) know how to lend in a normal manner.

    It would be good to see a bank with a brand new untainted management team (below director level as well). Or indeed a brand new Irish bank.

    Whatever comes out of this lending will not be normal in the sense that money will not flow freely again as per the last 5 years. Credit is going to be a lot tighter (quite rightly) so still expect to hear businesses screaming they can’t get money. It’s because they shouldn’t get it!

  7. John Shaw at the IPAV has thrown in his two cents worth in today’s Irish Times.

    http://tiny.cc/05AEZ

    Apparently the government is being unjust and unfair, and may be unethical and improper..

  8. Will NAMA actually do anything to make the banks more liquid? Surely it will just be swapping one asset (a loan book) for another lower-valued asset (government bonds with a lower value than the loan book)? Will that actually make any difference to the banks’ ability to lend money? It will give the banks some liquidity, sure, but will it give them any more capital? I thought a shortage of capital was the problem, rather than shortage of cash per se?

  9. Karl is right to raise the issue of the wisdom of an asset management agency for Ireland. Seeing NAMA as a done-deal, we have all been understandably, if a bit lazily, focusing on the question more open to persuasion.

    Karl’s analysis takes nationalization as given, and compares the cases with and without an AMA. But, as he notes in the first of his concluding comments, we can also compare the cases of publicly traded banks (with probable majority government stakes) with and without an AMA.

    My concern about an AMA parallels my concerns about full nationalization—it potentially makes political control by politicians less costly and thus more likely. Karl nicely captures the political risks associated with an AMA under his Point 6.

    In the no-nationalization/no-AMA box we should not forget about the Obama alternative: stringent and publicly reported stress tests to reduce uncertainty and determine capitalisation requirements, followed by capital injections to ensure the banks are adequately capitalised. This could also meet Greg’s critical point about lending incentives.

  10. How can NAMA work? There was a very interesting pie chart in the AIB report sent to shareholders, giving a breakdown of their loan portfolio. Approx. 10% of the loan book was for productive purposes, with the balance split between builders & developers, personal & house mortgages and leasing (i.e. all the cars being auctioned off at present).

    To date we have seen a grudging acceptance that there might be a problem with some of the property loans, yet no one has provided any degree of the analysis of how many of these properties have been cross guaranteed, with second and third charges. Paying much more than the going rate of 30c in the € would seem mad. This of course will require a huge degree of capital replacement in the form of State shareholdings.

    After the development loans we are going to have the personal loans crisis which may end up as bad. It should be remembered that the deposit for many of the houses bought to rent came from the remortgage of family homes. How do we deal with this problem – NAMA 2?

    Robbie Burke late of Eurokabin got around his finacial problems by treble leasing the same prefab or forklifts, signing lease agreements with different banks for the same item. This is perhaps the best metaphor for Irish banking.

    I would also agree fully with Paddy Donnelly’s point above. It will not be in the banks’ interests to spill the beans regarding their clients’ hidden foreign assets, which were the real collateral for the loans. Once the loans are gone to NAMA, they have are off the hook, unless Paddy’s former staff in the Revenue catch them!

  11. @Niall
    Elaine Hutson has already flagged, in broadcast media, the potential for exactly the mission creep you note.

  12. NANA is a scam – pure and simple, which is why so many are being misled. Most people cannot accept (believe)- even when told, that its THEIR (taxpayer’s) money that is to be used by the financials to get their creditors off their backs. Its to ‘save’ the financials as private companies, NOT to save the financial system – we had a 10 week bank-strike some time back, and we are all here still. How incredulous can people be? As I asserted in a previous post on this gigantic, prospective theft – the financials must be thrown to the market wolves. The state can set up its own banks – free of debt. Politically + legislatively tricky, but entirely possible. “But sure why would we give up on a successful failure? That would be mad entirely!” “Yes, and sure its not our money anyhows!” Please write to your TDs (as in a real letter, not an e-mail)- I have, and will do so again. Better yet, turn up at their clinics, I have – this does get their attention. This NAMA business is outrageous beyond belief – it must be stopped.

    Brian P

  13. @LorcanRK: “Three more words. It’s too late.”

    Given the number of times that government and banks have recently changed their minds or their stories, I suggest it may not be too late. In particular, if “Down with NAMA: nationalise now” were explicitly a factor in FF’s defeat in the forthcoming elections, FF might change its mind on this issue too.

    bjg

  14. @Karl Whelan: while I appreciate your analysis, it omits the option that the government has chosen: NAMA without nationalisation, which may be what you call NAMA with overpayment.

    What I’m not clear on is the costs of NAMA without nationalisation compared with those of nationalisation with or without NAMA. It seems possible that the first option will cost considerably more, money that the government hasn’t got — and, perhaps more importantly, money that might be put (if alternatives could be evaluated) to better use.

    But maybe I’ve missed the point.

    bjg

  15. Karl,

    One possibility with NAMA is to put the toxic assets into an spv and structure it as a NPL securitisation. Even in the current environment (and hopefully with a little ecb help) it may be possible to find purchasers for the most risk remote notes at a low coupon. For example (and using very loose figures), SPV buys 90bn of toxic debt for 50bn, then structure the debt that the government buys 30bn of subordinate debt and we hopefully find investors for 20bn of risk remote debt. The benefits of this is that the government issues less debt, the banks get some cash rather than purely Irish bonds and an spv would be less open to political interference.

  16. Hi Karl, I agree with michael, there are a lot more vested interests than those three and I would have put the green interests at the bottom of a much longer list. Here is another obvious interest group from todays times. http://www.irishtimes.com/newspaper/finance/2009/0511/1224246255571.html

    I agree with your major thesis however, we would be better off without NAMA. However unless there is major political outrage I think they will go ahead with it.

  17. Could a reason not to nationalise be that the government wants to retain the option of cutting a bank loose and letting it fail.

    Perhaps with nationalisation there is a risk that a bank or banks could bring the whole country down with it whereas if there is no nationalisation the Government would retain the option of revoking or patially revoking the guarantee and letting a bank fail.

    Perhaps non-nationalisation is the government being conservative.

  18. @FPL : the govt could do this: It could cut one loose, call it NationVile for instance. And not nationalise it….

  19. @Brian Lucey & @FPL

    letting a company actually close because it made lots of bad decisions and wasn’t well run?…..damn… sounds like capitalism?

    i like it.

  20. The problem is that the government has adopted a “no bank left behind” strategy and are sticking to it dogmaticly. If that is the case then nationalisation would be a bad idea.

    Are there are any reasons why certain banks are not being allowed to fail?

  21. @ Karl D…. I know. its radical, but hey, strange times… As FPL says we are moving at the pace of the slowest in the herd here.

  22. Strikes me that the banks have significant liabilities to their employees that appear not to be covered under the guarantee scheme, and it may be worth real money to the State to keep these at arms length. I’m thinking particularly of pensions.

    Having enough of its own already, the State may also have an interest in keeping the banking sector’s industrial relations challenges at arms length.

  23. Why is the FG policy of burning the subordinated bond holders, a mere 15-20 billion from memory, before the taxpayer has to pay up receiving so little attention?

    After all, it is not as if Richard Bruton was a total economic illiterate!!

  24. The short answer is No!

    ELEVEN YEARS after tribunals of inquiry were set up with the idea of “expeditiously” reporting back to the government and the people we have still have NO final report and no end in sight! Michael Somers is aware that this would be a legal nightmare without any parallels in the history of this state.

    We have a legal system that is supposed to be “self regulatory” but which convulses itself at the mere idea that a judge may not be fit for office. The dysfunctionality of the legal system alone means that NAMA could never succeed. Most judges to remind people are political appointees!

    Mr. Somers mentioned the word “bonanza” this prompts two questions. Firstly, a bonanza for whom? Secondly, Who pays for the bonanza? It is the taxpayer that will pay for the toxic assets and likewise, is it the taxpayer that will pay for the legal bonanza!

    What this country need is a system of healthy banks which have not been zombified by developers, many of whom, despite what we were told, were actually hopeless business people who deserve to go bankrupt. Our government has no money to throw away and is in huge debt itself. Yet, It wants to borrow this money on our behalf, in order to throw it at the toxic assets. Fact is, the tax payer cannot afford to bail out the golden circle. The golden circle cannot be put on the taxpayer drip on this occasion.

    If the government fails to listen to the people of this country, they do so at their own peril and may well find themselves, in the not to distant future, being held accountable by a courts of Justice. I believe that our democracy will triumph over the government in the end. This government with no mandate cannot impose a millstone called NAMA on the Irish people. Our sons are our daughters are not emigrating this time round and they are not staying unemployed for the rest of their lives, as a government and public service that squandered their future draws down pensions. All this, so that a beast called NAMA can live and a golden circle survive?

  25. the truth is now emerging
    nama was a con on the irish people to protect the golden circle
    the way it was drafted was to fail so the good assets of the developers would be kept by them and the rubbish given to the irish tax payer
    we are now the joke of europe and the best way for it to be played is bankrupt the nation and start again
    leave the hedge funds that have government bonds to take the hit because they caused the mess in the first place
    with their greed and their corrupt polititions ireland is finished as a credible nation

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