NAMA Meeting at Dail Finance Committee

Now that the transcript is available, it’s clear that lots of interesting stuff came up at yesterday’s Oireachtas Comittee meeting on NAMA, most of it unreported by the press.  Here’s a collection of statements I found interesting.

1. McDonagh on what assets NAMA would take:

Key exposures identified by the market and the credit rating agencies include all the land and development loans of the eligible institutions of approximately €60 billion. In addition to these, there are loans interconnected or linked with land and development loans estimated to be an additional €20 billion to 30 billion. NAMA will, therefore, acquire both performing and non-performing loans.

Does this explain the inclusion of so-called good loans in NAMA?  Interconnnections? Can we hear more about these interconnections and linkages? How “good” are these performing loans?

2. McDonagh:

In return, the institutions will receive Government bonds issued by the NTMA and they may use these bonds as collateral to avail of ECB funding.

I’d like to see a full explanation for the constant focus on the use of the bonds as collateral for ECB funding.  My understanding is that to be eligible collateral for ECB operations, the bonds would have to be marketable assets.  In that case, the banks can just sell them on the open market.  But this raises the question of whether there is secondary market demand for €60 billion in Irish government bonds.  Does the government envisage the banks signing some legal agreement not to sell the bonds for the next few years or to only sell them gradually?

3. McDonagh:

In the absence of a market value, the EU Commission has indicated that it would consider a transfer value reflecting the underlying longer-term economic value of the assets to be an acceptable benchmark as a basis of valuation methodology ….. How this EU guidance paper on valuation methodology is defined for the purposes of property assets in the Irish context is one of the core and central issues currently being discussed by the steering group and has already formed part of initial discussions with the EU Commission.

4. My favourite moment. McDonagh explaining why the post-dated levy on the banks can’t be included in the NAMA legislation:

If there was a clawback within the NAMA legislation affecting the balance sheets of the banks, they would not be able to reduce the assets transferred to NAMA because effectively there would be an unpriced option in terms of what the clawback would be in the future. One cannot do this because it would not be possible to take risk weighted assets off the balance sheets of the banks if the levy was imposed in the NAMA legislation.

This perfectly explains the problem with the levy idea.  If properly accounted for, the levy wouldn’t in any way reduce the banks exposure to these loans. This is why many commentators have felt from the introduction of the NAMA proposal that whatever levy was eventually introduced would fall a long way short of making up any shortfall. The current proposal is that they’ll introduce the levy in a Finance bill in the distant future in some way that won’t scare off investors from the banks today.

5. Lenihan on Bank of Ireland:

However, regarding its capitalisation, it may well be the case that when the NAMA proposal is implemented, it will not require fresh capital.

This gives us an insight into the Minister’s ideas about how big the writedowns will be.  Davy Stockbrokers recently estimated that, with a 15% writedown, BOI would require extra capital from the state that would imply 69% state ownership if a 6% core tier 1 ratio was required. So, one could interpret the Minister’s comments as implying the possibility of a much smaller writedown than 15%.

6. McDonagh on development loans:

The banks’ loan books is that the land and development book generally included a feature that for two years loans had rolled-up interest. Therefore, a loan of €10 million on which the interest was 10% per annum, effectively became a €12 million loan at the end of the two-year period. If at that stage the asset had metamorphosed from land with rezoning to land with planning permission – once a certain element of risk was gone from the loan – it was refinanced or sold on.

Isn’t this a fantastic way to increase bank “assets”?

7. McDonagh:

The valuation methodology will have to be agreed with the European Commission, which has set down clear guidance on impaired assets in a paper which is on the NAMA website, www.nama.ie.

Take a look at these EU guidelines youself and decide whether you think they are clear.

8.  Deputy Sean Barrett:

I understand Dr. Bacon’s point. If we pay too little, there will be a bigger gap for recapitalisation and if we pay too much, there will be less of a gap. However, one way or the other, it is the taxpayer who will pick up the bill.

Baconian equivalence wins another convert!

9. And finally, an interesting exchange on valuing green fields:

Deputy Kieran O’Donnell:      Much of this land will never be built on.

Dr. Peter Bacon:  Some of this land will never be built on.

Deputy Kieran O’Donnell:      It will end up as agricultural land again.

Dr. Peter Bacon:  There is no argument about that.

Deputy Kieran O’Donnell:      How will the taxpayer get a return?

Dr. Peter Bacon:  The taxpayer will not get a return but neither will the taxpayer be paying above that. It goes back to the point—–

Deputy Kieran O’Donnell:      Is Dr. Bacon saying that some development land will be acquired from the banks at approximately 80% discount?

Dr. Peter Bacon:  At current value, depending on the loan to value ratio. The Minister made the point that the loan to value ratio is the key. If a person has acquired an acre of land that will never be worth more than the value of agricultural land—–