Exchequer Cost of NAMA and the Social Dividend

If the unions have complaints about the level of social infrastructure provision, one would have thought that the social partnership process in the boom years would have been good way to pursue them. They’re a bit late to the game now.

@Brian Woods
I think to be fair brian that theres a fair amount of extra-box thinking evidenced here. Its Merrion Street that is boxed in

@ jl

‘Ma, get me my shears, there’s a taxpayer needs fleecin’

haha brilliant,

@ Colm

With respect to a debt induced economy, NAMA’s principles and goals could be far more of a task to get positives from.

The initial ideas from NAMA is right ‘taking debt burden and dispersing it over time with a view to profit……….’ Can this actually happen in a debt induced economy? and will the outputs be efficient and worth the taxpayers time and money?

When you think about the inputs (.i.e. myself and yourself), approx 20,000 from each tax payer over 7-10 years and compare them to outputs, outputs that will be unknown until maybe 2015.

its actually ludicrous…on many levels.

It is a bit late now Colm McCarthy et al, to say that you can only do this or that with “valuable” assets backing these “toxic” loans.
How did they get to be toxic? Excessive lending. So we preserve the excessive lenders, of course!
How did the assets get to be valuable? By planning permission in a crony crapulist economy.
How did these valuable assets get into the hands of the kiddies? Why the government of the crapulist economy took them over and then lost rthe next election. Waves of unemp,oyment were then reversed as building started again, no funding necessary, the state already owns them! I llok forward to more leaky olympic sized swimming pools as the years pass by. Oh, there are no pension funds left so taxes are zooming now!

HAHAHAHA!!!!
You economists are SO FUNNY!

@Anton,

I thinlk it works like this
NAMA buys loan of 10m from XXX at 70c in Euro.
Security for loan is a field in midlands plus a personal guarantee from Builder. NAMA concludes you can’t get blood from stone.
Personal guarantee is worthless because builder has no money.
Field will never be developed as favourable demographics have reversed in area due to resumed emigration.
NAMA repossess field
Only solution is to sell field for agricultural value @5k per acre until local community group steps in and demands swimming pool/community cenre/GAA pitch etc. Field given to group along with 2m grant to develop.
Area now has brand new facilities costing 9m.
Repeat endlessly all over the country.
The main problem is not with building “social infrastructure” it is with overpaying for the loans in the first place

But just think of it: we will have all those wonderful bank branches and toxic debts and over valued assets.

What a lovely gift to posterity!

Remember Easter Island!

Colm,

I think you have identified the remaining key element of the political tactics that will be used to sell this economy-destroying fantasy. I simply couldn’t see how the Government envisaged selling this excessive bank bail-out and life support system for developers to the ordinary punter in the street. Frightening people with the implications of a collapse in the banking system has a limited shelf-life as a political tactic, but bribing people using their own money (tax payments) and that of future taxpayers will never fail.

And how will Nama decide on the “market value” of any of its assets. For example how much is the infamous “Irish glass bottle ” site in Ringsend now worth.
Very little , I would say. And less than it was worth yesterday.

Disposal of assets at less than best commercial value is a direct cost to the Exchequer, € for € as costly as excess payment for those assets on acquisition. There may well be a case for improved provision of schools, sports facilities, health centres, and indeed lots of other things, but it is an illusion to pretend that the State’s imminent acquisition of an enormous property portfolio at enormous cost somehow relaxes the overall Exchequer constraint.

But us buying the bloody things in the first place (via NAMA) is OK, of course? Forgive me if I’m more than a little sceptical about Johnny-come-latelys to worrying about the costs of NAMA – once the State looks to deliver some benefit to us the taxpayers who’re paying for all this, of course.

If completed or nearly completed housing units are repossessed, one worry I would have is that, towards the end of the boom, the build quality of housing would appear to have fallen. In order to lessen the apparent losses resulting from NAMA, it may be decided to use these repossessed houses for social housing rather than selling them on at a discount reflecting the poorer quality. Whilst the govt. would point to X new houses provided to the poor, we would ignore very poor conditions in which people would live [I suspect some of these houses will be in a very poor state 15 years from now..]

I also wonder whether there is a substantial number of individual houses which NAMA will deal with [or is it almost exclusively developers?]? I would wonder whether the govt. faced with the prospect of evicting large numbers of people will instead be forced to accept reduced rents

[As an aside, does anyone know if it is possible to find average house price decomposed by year the house was built? It would be interesting to see whether there is a quality premium – although it may not show up fully in an average, or may be a delayed effect…]

The State has had some experience of trading property through its lucky-bag decentralisation “plan.”

Politicians would surely love to be involved in supporting “good causes” but 12 years after a public tribunal began investigating planning corruption, reform of the corrupt land rezoning system, is not on the political agenda.

http://www.finfacts.ie/irishfinancenews/article_1014307.shtml

In Nov 2004, Minister for Finance Brian Cowen said that 28% of the average price of a new housing unit was accounted for by taxes and public levies.

Research published by Chambers Ireland in 2006, revealed that income from development contributions had risen from €110 million to €550 million between 2000 and 2005 and then represented 13.6% of local government expenditure.
 
A total of €1,636 million was paid out by the State on rent supplements in the six-year period 2000 to 2005 inclusive.  Annual expenditure on rent supplements increased from €151 million in 2000 to €369 million in 2005, according to a report by the C&AG.

RTÉ’s Prime Time programme highlighted in November 2007, the involvement of elected representatives in the land development and property business.

A total of 22% of councillors dealt in or developed land through their day jobs as estate agents, landowners and builders. In Mayo, that figure rose as high as 45%; in Offaly it was 44% and in eight other counties it was 33% or more.

Prime Time found that in Clare, declarations of interest show that 97% of elected members have no beneficial interest even in their family home. In ten counties, two-thirds or more of the councillors have not declared an interest in the family home.

The concept of conflict of interest is not something that the Irish can easily grasp.

Last March, a ventriloquist for the Director General of the Irish State broadcaster RTÉ, refused to comment on the appropriateness of the station’s top paid journalists being supplied with free cars by the German carmaker BMW and gave the lame excuse that its top earners were “contractors” – – meaning a different standard applied to the lower-earning wage slaves.

In recent years, up to two-thirds of Irish shares have been held by overseas investors such as hedge funds.

Many are short-term gamblers and when the crisis passes, there will be others who would invest even if existing shareholders were wiped out

 @Tony
“…the build quality of housing would appear to have fallen.”

It was reported in 2006, that new and existing house sizes differed significantly in a international survey. The average new house size in Australia and the United States was about 2,200 square feet, Canada and New Zealand 1,900 square feet and both the United Kingdom and Ireland an extraordinarily low 815 square feet and 930 square feet respectively. New British housing was only 15% larger than the former East German slab developments, of which one million have been vacated, since the reunification of East and West Germany.

http://www.finfacts.com/irishfinancenews/article_10004604.shtml

2009: Despite the Irish housing boom, Ireland still had worse housing conditions than other countries with similar living standards, with floor areas per person of around a fifth less than the western European average, even though a large number of dwellings (45%) are detached houses.

http://www.finfacts.ie/irishfinancenews/article_1016135.shtml

Is Ireland short of land for development?

http://www.demographia.com/db-intlualand.htm

The decision next Tuesday by the Supreme Court in relation to Liam Carroll’s debts will surely be the biggest test of the independence of the judiciary in living memory.

If they overturn the High court ruling without a solid reason based on law then surely we can assume the decision is to “support” Nama and therefore the position of the current government?

@Brian Lucey. Point taken re Box Thinking. My comment is in the context of: –
More informed discussion about the economic ‘growth’ models people are assuming. They use the growth term constantly, but none pauses to explain what they mean by growth – that it might mean MORE debt!. Also, if the current crisis IS in some manner, related to the exponential growth in debt, then this increases, by some orders of magnitude, the timescale (in years) by which future incomes have to be ‘brought forward’ in order to pay back the borrowed principal and to pay down the accrued interest.

Paying down debt is the extinction of money. This loss translates into reduced – whatever. I do not sense that this matter of ‘brought forward’, future (virtual) income is being given the serious attention it deserves.

My other concern, which I have alluded to several times, is that of diminishing energy availability – that is, relatively inexpensive energy. This problem will capsize any assumptions about future ‘growth’ and incomes if the assumptions are based on the current Permagrowth (Business-as-Usual) paradigm. Building out an alternative energy infrastructure is fraught with all sorts of difficulties. Absent inexpensive energy – ungrowth! Quite worrisome.

Your IT contribution was v-good!

Brian P

Brendan,

I agree with concerns raised here and elsewhere at the danger that the State will overpay for bank loans. I have written elsewhere that if the State pays 75% of face value of €80b for assets that are really worth only 25% (as per Liam Carroll court assertions) then the public would be hit with an unjustified financial burden of €40b.

But the actual movements in Irish bank shares do not support my earlier assertion that the scale of over-valuation might be so high.

Before NAMA, the low value of the Irish bank shares was €0.5m not minus €20b. Another factor mitigating the NAMA effect in explaining the subsequent rise in Irish bank shares is that since early March, shares globally have experienced a sharp rally, led by financials. So, based on current values, we’re talking about €4b at worst.

I still think the banks will end up being nationalised as:
(i) the Taylor Rule indicates we should have interest rates of -5%. Overly high interest rates will be a major economic headwind in the coming decade further driving down property prices just as they were a major tailwind in the last decade;
(ii) bank losses on residential mortgages will be very large if unemployment exceeds 15% and prices eventually fall (as I expect) to 20-30% of peak values.

Hello,

Maybe some of you guys can help me understand something. If the politicians etc are talking about using some of this land for social/community projects. How can they obtain this land, as someone pointed out above, Nama are only buying the loans and not the land itself.

With cross-collaterlization, personal guarantess etc, I dont understand how Nama can liquidate the loan (in order to get access to the development land) without getting into legal/corruption tangles.

If developer A owes 100 m, secured agains the following
Personal guarantee
20 acres of development land
1 apartment block almost finished

The government wants hold off the development land, there will have to be a transfer off the land, which means that the 100 m loan is no longer secured against the dev land. But once it is liquidated it needs to sold at a realistic price. In some cases it might originally have been secured at a value of 50 mill, but might now be only worht 1 mill. What I dont understand is how you are going to partially liquidate a developler, especially when personal guarantees are involved. If it is to be done properly and to avoid future litigation it needs to be put on the market? thus flooding the market, which nama was set up to avoid

@ Cormac,
Market participants do not know the scale of the overpayment any more than we do. The lowest value of €0.5bn could still mask a (perceived) negative NAV of huge proportions. As share prices cannot be less than zero, there is unlikely to be a linear relationship between expected NAV and market cap, especially at the lower end.

Regarding future losses, I believe this is the real elephant in the room. The assumption appears to be that this is as bad as it gets, that economic recovery will bail us out the rest of the way. This is by no means assured or even highly likely. A further wave of credit losses (and associated property repossessions) could quite possibly lead to a repeat of the banking crisis.

Bearing this in mind, I would insist on a clawback measure whereby NAMA losses are recoverable from future banking profits. There is nothing in the legislation to cover this, but it is essential in my view. It could be structured in such a way that it didn’t become payable (appear as a liability or count as negative capital) until such time as it was payable. Yet the taxpayer could be assured that if the entity survived, it was repaid its losses before equityholders took any benefit.

Profits has to be earned and comes from providing service profitably to customers. The Irish banks have mostly Irish people and Irish companies as customers. When suggesting that the banks should be allowed to earn themselves back into profit and pay back the cost of NAMA the reality is that the banks customers will be charged (some might say overcharged).

So, with NAMA I see it happening two ways:
-Pay through the tax bill & the state.
-Pay through higher rates on borrowing from banks and lower rates on deposits to banks (& of course some nice fees). Direct transfer. Of course this might be disrupted by new banks not encumbered with bad loans offering better terms.

The bondholder knew they were taking a risk when they bought the bonds, the shareholders knew they where taking a risk when they bought the shares.

The losses will not go away. Those that invested were happy to take the profits, why should they now be protected from the losses?

An even easier way than using NAMA would be to have the banks liquidate insolvent borrowers with non performing loans. Auction out their securities & then making a bid according to their pricing model. If the pricing model is accurate it should be a nice transparent way of transferring cash to the banks. Investors who believe the securities are worth more can of course offer more at the auction.

Just to be clear, I do not believe that any pricing model that exists before the crisis has passed will be accurate.

Why is nationalisation and then a negotiation about haircut imposed on bondholders not an option? If the negotiation fails, then default where possible.

“There has been understandable focus on what NAMA will pay for distressed assets, and the risk of over-payment”.
Some assessments of the proposed haircuts appeared in the press over the weekend which are truly astonishing.The Sunday Independent reported Davys as expecting 20% for AIB and 16% for BOI with Goodbodys at 17% for AIB and 13.5% for BOI.
No wonder the share prices of banks are rising – if accurate then this will be the biggest wealth transfer to shareholders ever.
The same report demonstrates new house and apartment prices dropping by 40-50%.
This gets worse – the social dimension issue pales in comparison to the initial proposed ripoff.
The capital of the banks is also addressed with Richard Curran reporting on an NCB analysis suggesting that AIB would end up with a Tier 1 ratio of 2.9 next year after taking a 6b haircut (20%).
This would leave AIB as a zombie bank unable to raise funds or fulfill the stated NAMA objective.
The MD of EBS in an interview Saturday stated the international investors now required a Tier 1 ratio of 7.5.
These numbers are inexplicable and seem to suggest that the game plan is being made up as they go along.
Another reported gem is that the NAMA bonds will carry a 1.5% coupon. How could that work?

@ Michael Hennigan

Yes. I am glad to be elsewhere. You persist in giving us indisputable facts. Yet everyone ignores them in their responses.

Liquidations are needed of the banks and the developers. And the public service too!