Articles on NAMA

It is amazing how honest people can pinpoint the problem with NaMa. Yet the people who created the land valuation bubble want NaMa. They really want it. Liquidation and bankruptcy are good for the little people, but not for land developers and banks.

What is hidden in the banks? Why do the Irish government with a history of corruption at the very top, and from the bottom up on land rezoning, not require a commission of permanent investigators to combat corruption?

Pat McCardle writes:

“The quotation marks are used because the Government will not pay anything to the banks. Instead, it will issue them with IOUs the banks can use to get funds from the European Central Bank.”

By the same argument, UCD doesn’t pay me either. It just issues me pieces of paper with pictures on them that I’m able to use to get stuff in shops.

@ Pat Donnelly @CM, @ Osama bin Whelan, it is interesting that, sometimes, the moment you know a writer’s affiliation, you’re fairly sure what angle they will take on almost any issue.

The following shouldn’t be intended as an *ad hominem* attack on Mr McArdle in any sense, but, to provide a little context, a quick browse through the Irish Times archive for Mr McArdle is instructive.

Monday 11 December 2006 and Wednesday 03 January 2007: Mcardle predicts a soft landing for the construction sector. http://www.irishtimes.com/newspaper/finance/2006/1211/1165221809649.html
http://www.irishtimes.com/newspaper/finance/2006/1211/1165221809649.html

No need to increase banking regulation, writes McArdle on Friday, May 29, 2009: http://www.irishtimes.com/newspaper/finance/2009/0529/1224247655514.html

Banking sector welcomes decision to set up asset agency,

http://www.irishtimes.com/newspaper/finance/2009/0408/1224244216705.html

Mr McArdle does make one very good point in his article,

“The National Treasury Management Agency, in effect Nama’s parent organisation, and the Department of Finance have been going through the books of the banks for more than nine months now and the results indicate that the average LTV for the six banks involved is 75 per cent, according to the Minister for Finance.

The academics dismiss this, assuming that the 25 per cent equity was borrowed from other banks. You either believe the Minister, who has access to the information, or the academics, who do not. One side is making a major error.”

This is a testable statement, and one which, like many of Mr McArdle’s other statements, may prove to be incorrect.

Rearding LTV’s (as was discussed on Prime Time and with Brian Lenihan last night) there is a certain scepticism 1) as to whether banks actually received deopsits / title to assets as they were obliged to by regulation and 2) whether this number is 25% as asserted.

I understand from discussions in London in the insurance and reinsurance market that there is fear of systemic loss arising from undertakings given by solicitors on behalf of developers in favour of lenders with regard to collateral. This is potentially developing into a significant problem with regard to professional indemnity cover for Irish solicitors.

This leads directly back to the issue of LTV’s. Apparently solicitors were taking it upon themselves to ensure to lenders that collateral in the form of “to be completed” developments (i.e. site purchased, building not started, but a proportion of the once completed development would be accepted by banks as long as the solicitor gave a “Letter of Undertaking”). These Letters of Undertaking were contractual relationships between the solicitors and the lenders.

Consequently it is possible that collateral that is currently being referred to is actually in the form of promisory letters from solicitors on still undeveloped sites – so not collateral at all, but maybe accounted for on banks balance sheets as collateral. This may be a small thing or a a big thing, but if big then very significant within the valuation debate.

Any Deep Throats in BOI or AIB like to comment?

I’m having issue with Pat McArdle’s point that NAMA will break even or turn a profit because:

“This is because the income it will receive from the loans it takes over – about half of them are being serviced by borrowers – should outweigh the cost of the six-month Euribor interest rate – currently less than 1.5 per cent – that it will pay the banks on the IOUs.”

Firstly 6M EURIBOR is very low currently, go back three years it was north of 5%. So lets make the fair assumption that EURIBOR does increase over the life of NAMA:
The fixed rate loan repayments will no longer cover the (higher) EURIBOR rate bring paid on the IOUs, so no profit there.
Secondly, the floating rate loans, which presumably pay a spread over LIBOR/EURIBOR will see a huge increase in their repayments. If “about half of them are being surviced” now, what will that amount be when EURIBOR increases. Will they be profitable overall?

I’m not sure if im missing something, but his logic seems very off…

Pat McArdle says “Unlike the banks, Nama has no previous relationship with developers and no incentive other than to act in the best interests of the taxpayer and recover the maximum amount.”

One comment, one question. Comment: Aren’t the NAMA loans going to be administered by the banks? They may be on NAMA’s balance sheet rather than the banks but because of a ‘lack of expertise’ but the administration remains with the banks. Therefore, the ‘relationship’ between the banks and the lenders will continue. McArdle’s statement seems a little confused, or else I’m a little confused..

Question: How will NAMA go about this recovery? Just hypothesising here, but take, for example, a developer with €1bn worth of loans secured against property worth (when finished) €1.35bn at 2007 prices.
Allowing a 50% price fall means the finished properties would currently be worth €675m, leaving a €325m shortfall.
But, and here is the crux of the situation, what does NAMA do? Does it (a) take the asset from the developer and sell it (in a depressed market) and then pursue the developer for the rest of the money? Or does it (b) take the property and hold it until (if) the ‘long-term economic’ value is realised?

(b) seems to be the route NAMA is going for, but if NAMA chooses this option then surely this stops NAMA pursuing the developer for any money at all beyond the property the original loan is secured against. If the first claim of the loan is on the property and NAMA refuses to establish a value on this, then it cannot work out any other claim it might have against the developer.

If I was a developer and I heard that my loan was moved to NAMA I would stop making any payments on it immediately. Precisely because NAMA would not be in a position to sell my properties in the short term and therefore would not be in a position to work out (and therefore pursue me for) the amount of negative equity there is in my properties.

Like I said, all very hypothetical, but I would like someone to show me where I am wrong.

Anthony Leddin raises the issue that if and when we clean up the banks they may be subject to a takeover. This certainly could apply to AIB with the M&T and Polish stakes. However badly our native bankers performed, being at the mercy of foreign bankers would leave us in a vulnerable position. This has been demonstrated by some of them looking for their money back and seeking to exit the country when things go wrong.
If Prof. Honohan’s NAMA 2 was incorporated into the legislation then it could have the effect of not only protecting the taxpayer but providing a ‘poison pill’ to guard against this real danger.
On another note I see that the Greens are to be provided with a new draft bill ahead of their convention on the 12th.

It would be good it we had a version number ready for the legislation to be put to the Greens. NAMA 1.1 if it doesn’t have staggered payments and NAMA 2.1 if it does?

@ zhou_enlai

Perhaps another issue should be added to your list-
How will the Gov ensure that the primary purpose of NAMA (credit flowing) will become a reality.
The reports of bank actions in other jurisdictions are not encouraging –
“Sept. 4 (Bloomberg) — Royal Bank of Scotland Group Plc and Barclays Plc, two of Britain’s biggest banks, cut lending even after promising the government to give more credit to borrowers and help revive the economy.

RBS and Lloyds Banking Group Plc, the two biggest banks bailed out by the government, and Barclays Plc reduced lending globally by 165 billion pounds ($270 billion) in the first half, according to company filings. RBS and Barclays reduced loans by about 11 percent, the most among Europe’s largest banks. ”
THE German finance minister said recently that the banks had resorted to their old ways -Gambling.
It would seem wise to insert some sort of a statutory provision to ensure compliance with the stated objectives of NAMA.

Cheers.

This question about forcing banks to lend came up at the oireachtas committee but it seems to me that ultimately it is a red herring. Politicians have to agree with it but ultimately they know that if the bank is well capitalised it will lend to projects the bank thinks will work. The bank cannot act in a non-commercial way

Am I wrong? Can we force or incentivise the banks to lend to SMEs and still retain the market’s confidence?

@zhou_enlai
“Am I wrong? Can we force or incentivise the banks to lend to SMEs and still retain the market’s confidence?”

If the German finance minister is correct when he said that the banks were not lending and had resorted to gambling on the securities markets, is there any reason to believe that our guys will not behave likewise and take ECB money at 1% and get 4.8 yield on Gov. Bonds.
With Governor Honohan’s lock in N.2 version it must be possible to include a statutory provision to make them deliver on the stated primary purpose of the legislation. The days of self regulation, nods and winks are overor should be.

@ Pat the American

original loan values 115bn
current book value 50bn

loss on original loan value 65bn
this is split 30bn from developers (25% equity stake) and 35bn from banks (write off on transfer to NAMA)

but govt paying 60bn for the loan book value of 50bn, so subsidy of 10bn to banks.

so real loss to banks of 25bn.

So of 65bn ‘real’ loss in original loan/asset values, developer takes 30bn, banks take 25bn, and govt takes 10bn (but could break even in long run if values rise). 30bn:25bn:10bn = 46.1:38.5:15.4%

Not saying i agree with these figures, just how he gets to them…

Do we know who the members of the valuation committee are likely to be?

This might turn out to be a key decision

@Zhou
Agree your questions were good.

I would add one more:
Minister Lenihan – the financial regulator in the UK has forbidden the RBS from using money they received from the taxpayer to pay off subordinated bondholders.
Why have you done that with Anglo Irish Bank which you fully control and why have you allowed BoI to do it and AIB to announce they will do it?

All these two articles illustrate is how both those in favour of NAMA and against NAMA can make credible – well, credible to the everyday Joe Soap – arguments to support their views.

McArdle’s claim that ‘one side is making a major error’ could be amended to read ‘AT LEAST one side is making a major error’.
Parties seem to be disputing the very facts of the case on which a decision is to be made, unable to agree on foundations of the issue.
Can anyone tell me the most surefire way of determining the price that NAMA should be paying for these loans? Because its starting to feel like I’m watching the world’s longest rally in a tennis match…

Pat McArdle says: “The difference between the initial value of the projects funded, €115 billion, and the current market value of €50 billion is split 45:40:15 with the borrowers losing €30 billion equity, the banks taking a hit for €25 billion and the Government putting up €10 billion.”

The point that McArdle misses is that the developers have *already* lost their €30 billion supposed equity, by virtue of their projects collapsing in value.

This loss has occurred *regardless* of whether the government goes ahead with NAMA, or indeed any other bail-out scheme, or even if it sits on hands and does nothing.

To present this €30 billion as the developers taking their share of the NAMA cost is disingenuous in the extreme. That equity is already gone up in smoke, if indeed it ever existed.

podubhlain makes a good point – offer some of the loans
for sale on the international market – plenty of liquidity
out there in the global markets – then we will know what they are worth.

Apologies, that final sentence should have read, “It is highly likely that NAMA will fail one, if not all of these criteria.”

LorcanRK
You are right to expect gaiming of NaMa but the situation is likely so dire, that it really will not matter. I tried to identify this months ago saying that who and when they get attention from NaMa is a crux issue for the results and has a dramtic im pact on the results of the exercise. Court action can be expected whenever a developer thinks the land has gone up enough or when he thinks what NaMa is doing on other collateral, is impacting his collateral. Assuming there is any equity at all in the collateral of course!

Stephan Kinsella
Thanks! I have not read much of McArdle’s stuff and stuff it is!

Can anyone clarify the following please.
If the Irish banks got the original “€90 Billion” which they loaned to developers etc. from foreign banks. When are these loans going to be repaid.
Normally the capital is repayable on completion of the development or as sales are made. Surely a lot of these loans are already overdue.
My understanding is that when NAMA gets underway the Irish banks will have government bonds to offer as security to offset against the original loans and for potential further loans.

Will NAMA be buying the assets or buying the debt?
If NAMA buys the assets then it will be left to the banks deal with the original debts. How do we know that this will be done to our satisfaction so that we don’t end up with a backlash.
If NAMA buys the debt they would do a deal with the original lenders using long term bonds, defining liability and deferring settlement.
NAMA would then deal with the assets which they take from the banks in the most cost effective manner and settle with the original lenders in an agreed time frame, still risky.

My preference would be to set up a Good bank (SIB), not a Bad one (NAMA).
Leave all debts where they are and where they belong without imposing any risk to the government / taxpayer.
Scale the main banks down in size to an equivalent of the proposed NAMA and let them deal with the proper disposal of assets, repayment of loans, and enforcement of contracts which they agreed with developers / borrowers.. If NAMA could do it then so can the banks. They should not carry on any other banking business.
The Irish government should set up a new State Irish Bank (SIB), put €20 billion worth of bonds into it and float it. Capital would soon arrive.
This new bank could lease as many bank premesis as needed from the main banks and hire staff and the best senior management required from the redundant bank staff.
Any mortgage holder / borrower who is not in arrears and who passes a new stress test set by the new bank could be allowed to transfer their loan. All new customers would either deal with this bank or the other banks which were not going to be part of NAMA.
In time debt free banks could be allowed to buy in or buy out the state if it was profitable for the government / taxpayer.
Would this be a risk free way to get money moving through the economy again and what would be the drawbacks?

@Derek Brawn
Many thanks for your clarification.

Some further thoughts on the matter.
I may be making an incorrect distinction here but I see a difference between buying the debt (which you would buy from the lender) and buying the assets, or worse still buying the loan, but I don’t think we are doing this, I think the banks are being left with the respossibility for the loan contracts. I thought the proposal was to buy the assets in order to provide the banks with funds to continue doing business which includes repaying the loans. If this is the case I don’t see the banks raising enough money to fulfill their commitments on these loans as they stand. I would like to see some projected figures and a cost plan because some simple figures done in my head don’t show this working. These loans need to be re-negotiated to reduce the size and lengthen the term, before the government agrees a price with the banks for the assets. I don’t think anybody knows the sale value of these assets, but it would be safer to assume that the values would follow the sale values of recent property which has been sold, minus a further 10 to 15% to allow for further falls rather than to pay more. For example this method would show that if original debt was €90 billion and estimation of assets was in the region of €45 billion then there is a shortfall of €45 billion. We therefore need to re-negotiate the loan value down to ideally €45 billion or less, otherwise we end up with an unpaid balance of the remaining €45 billion which is still repayable under contract. If the original lenders are not willing to negotiate this amount and demand full repayment of the €90 billion then we should be told this now, otherwise some people may feel they were being treated like mushrooms.
This is why I am suggesting that either NAMA or the Banks define the outcome now, before they commit to anything, and fill us in. I think it is the governments duty to ensure that this happens, especially, as you have reminded me that they have guaranteed these loans, otherwise they are signing an open ended mortgage on our behalf without our blessing.
The best way to do business is to know your legal and financial liabilities and obligations, your capacity resources and costs, and your potential profit/loss exposure/risk and include for contingencies. Then you decide if it is worth proceeding, otherwise if you enter this contract and you subsequently find it to be a loss maker you end up screwing everyone you can to try to minimise your loss.
If the Minister for finance is seeking new powers then maybe it should include one which allows him to go after the recipients of the billions of euro charged for the development land which we suspected and now know was more than it was worth.
These are just some of my thoughts, am I way off the mark?

For the sake of clarity should anyone ever look back at this chain (?) my previous comments (09.01 AM Sept 4th) can now be seen to be crystalizing. I quote two pieces before providing the full text.

“after it (the firm of solicitors) failed to comply with undertakings given when the loan was made”

“but in all circumstances the firm was liable for the full amount of the loan and the interest due.”

Still no Deep Throats at AIB / BOI willing to divulge what collateral really exists before you and I, as taxpayers, get buried for overpaying for NAMA??

I belive that there will be many, many cases of “ghost collateral” and there will be ramifications from the cost of PI cover to solicitors. In addition there are implications regarding the premise of LTV’s within the Government’s calculations used as a basis for pricing NAMA. Alan Hynes / Seamus Maguire & co. will be the tip of the iceberg and letters of undertaking will become a thing of infamy in Ireland.

From Today’s (21 Sept) Irish Times ;

“Solicitors ordered to repay €3m loan to AIB

A FIRM OF solicitors has been ordered by the High Court to repay a loan of €3 million plus interest to Allied Irish Banks (AIB) after it failed to comply with undertakings given when the loan was made by the bank to one of its clients.

In a case that will have implications for future cases and for the professional indemnity insurance of all solicitors, Mr Justice Michael Peart found that the solicitors were liable for the full amount of the loan, obtained on a property valued at €3.9 million in May 2007 and now considered to be worth no more than €620,000.

The Co Wexford property at the centre of the case, known as Moongate, was owned at the time by a syndicate, with a mortgage of €2.2 million from Anglo Irish Bank.

Two members of the syndicate, accountant Alan Hynes and his wife Noreen, sought to buy the property and borrowed €3 million from the local branch of Allied Irish Bank, where they were well known. The bank accepted a valuation of €3.9 million from CBRE.

Séamus Maguire and Co Solicitors acted for Mr and Mrs Hynes, while a long-standing employed solicitor in the firm, Fergal Dowling, was directly responsible for dealing with the couple.

He completed a form of undertaking sent by the bank, had it signed by a partner in the firm and returned it. This document undertook to apply all the funds exclusively towards the purchase of the property. The €3 million, minus administration charges, was released to the solicitors.

The next day Mr Dowling obtained a bank draft for €2 million on this account and sent it, not to Anglo Irish Bank to discharge the mortgage on Moongate so as to have it transferred to Mr and Mrs Hynes, but to another firm of solicitors, Taylor and Buchalter.

These were acting for the vendors of a totally different property in Dalkey, Co Dublin, valued at €20 million, which a company controlled by Mr Hynes was also engaged in buying. The €2 million was a deposit on this property.

Mr Hynes’s firms went into examinership at the end of 2008.

Neither Mr Hynes nor Mr Dowling gave evidence in the case and Mr Justice Peart said: “Only they know between them what, if any, conversations took place between them in relation to the pressures mounting in relation to the deposit on the Dalkey site.”

However, he said he was entitled to conclude that the fact that the Moongate money was not paid to Anglo on drawdown was deliberate and not through oversight.

He said he had sympathy for the situation in which the defendants found themselves in as a result of the actions of an employee, but in all circumstances the firm was liable for the full amount of the loan and the interest due.

Jack, many thanks and really interesting to read your comments. I also read in today’s Irish Times (5th October P. 4) the following; “in previous and unrelated proceedings, Mr. Justice Kelly last March ruled ACC Bank was entitled to summary judgement for some €2.3m against Mr. Butler over his failure to honour undertakings aimed at ensuring the bank had security for the unpaid development loans in that sum….”. I think the insurers are probably right believing that there may be a lot more where that came from. I also think you are right that it will be common but I wonder whether NAMA will keep this under wraps and never disclose the true extent of this double counting. They’ll hope to blag it through, and hope that there will be enough time for this to all go away.

My hunch is that we are not at the bottom of the market for house prices and that NAMA will not create a false floor to the bottom. I think residential yields already point to this as refernced by Ronan Lyons. This is worse than a can of worms because there are so many flawed assumptions in the proposals. The detail is simply not being disclosed, and letters of undertaking are just one more part of it.

Will keep this thread alive if I get any more info.

Regards,

Henry

So, 16B shaved to 8B into NAMA on 100 odd loans by 10 odd developers… I wonder what is the security on the 8B public spend? I wonder if any other assets of the 10 odd developers have been subsumed into NAMA, what is the value of these, will the day come when these working assets are sold and “spun” as ‘a recovery’.
The big developers may have working assets in the mix, will this be the case from the big developers down to the mythical 5M NAMA entrance mark, and more worryingly still the loans below this amount that the banks hold for example put AIB or Bank of Ireland into the courts search engine for ’09 and 2010 – it’s fair to assume there is a bit of legal activity out there.
We knew before yesterday that Anglo was bust, I think we found out yesterday that AIB is effectively bust.
2% 28year old tax on insurance levies because of PMPA could morph into 10% tax increase on everything for 50+ years because of the tyger.

Today it appears that AIB LTV’s were fundamentally wrong. Lenihan suggests the wool was pulled over the eyes of regulators. 1) Any criminal acts? 2) This site highlighted this a year ago. Was no one from government either listening or thinking about it. As the FT says today, the situation was allowed to fester. That is a disgrace and has cost us all a year in terms of dragging us out of this mire.