Here’s the link; http://www.independent.ie/business/irish/driveby-valuations-blamed-for-additional–nama-loan-discounts-2031319.html

NAMA is buying time and that is it.

Keep posting!

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

What makes it interesting from the laymans perspective is that it shows the courts ability to bring a case similar to ‘Lynns’ activities to task, albeit the solicitor. It shines a light on developer/banking relationships in the dread-noughties. How many more banks and their loans are based on (insert your favorite words here) valuations from reputable RICS valuers not to mention others. Leaving the legal issues mentioned in this judgment aside the chronology would be comical were it not real.

Worryingly from a NAMA perspective does this case represent some of the tricks of the (developers) trade and is this more common out there but not yet heard of? Is collateral not just market shaved by 70-80% but halved again as it is counted twice? Do the banks really know what their loan ’securities’ are? not just the figure entered on the book but the real security?

Economic discussions aside, just how bad a state are we in?

http://www.courts.ie/Judgments.nsf/597645521f07ac9a80256ef30048ca52/a0c24e7369dadcf98025762d004c7e69?OpenDocument

“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.

The politicians rationale behind NAMA is to remove all loan contracts from Banks balance sheets that are development land/property development related, so that international bond investors will lend to these banks again -senior LT unsecured lending.

This is the reason that non-impaired loans (so called ‘good’ assets) will be included too. So that there can be no element of doubt.

NAMA is not buying property/land but are taking over the loans and will only end up with said property if & when developers default.

Banks have been unwillinmg to foreclose on developers. NAMA will be willing (or so Frank fahy & Willie O’Dea constantly remind us).

Your point about loan modification & restructuring may take place between NAMA and the developer borrowers at some point in the future, hence NAMA legislation includes the provision for NAMA to borrow additional EUR 10 billion to fund-out part completed projects.

Therefore NAMA is speculating on property as final sale value is ????

NAMA have already seen these loan contracts and have been working with Irish banks on this for last 3 months.

Everyone keeps asking the same question that NAMA should examine these loans in detail and should not commit etc. etc. But NAMA is politically motivated - NAMA is a fait accompli - it has already been decided that NAMA is only show in town by Cabinet and they rule the roost until a new government comes along.

NAMA has gone ‘Sale Agreed’ with final contracts to be decided this month, and the final price = what will keep the banks afloat wrt Capital Adequacy or thereabouts. It is both a tautology and a farce

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?

The banks will repay these loans periodically as they progress through their funding programme (ongoing process) - check the BkIR or AIB group homepage websites under “Investor Relations” and look at their debt outstanding and when the maturities fall due. Much of their recent funding expires before Oct 2010 when the govt g’tee ends e.g. AIB 3.625% 9/2010 which is a 2bn EUR deal, or AIB 3% 8/2010 which is a US$1bn bond, plus they have larger FRNs e.g. one AIB Medium-Term-Note (MTN) programme is 7 billion. In essence they are repaying and re-issuing, periodically at the same time (how the bond market works - as long as investors willing to lend).

With respect to your 2nd question - they are buying the ‘Debt’ off the banks based on current loan size (not original i.e. if developer borrowed 100 million and didn’t pay any interest/capital for last 2-years -quite common - then NAMA will be negotiating on the current loan value of say 110 million). They will then haircut this, as this is the impaired loan on the bank’s balance sheet.

The ‘good-bank’ scenario although appealing is not currently relevant as we have to deal with the bad banks as they are presently Sovereign-Guaranteed, that makes them Quasi-Government i.e. if they fail pre-October 2010 it would be a Republic of Ireland default and not a BkIR or AIB one!

If the 3 Brians, Pat, John & Eugene had not met on Sep 28, 2008 and the contingent liabilities guarantee on the 7 domestic Irish banks (everyone forgets PostBank Ireland) had not come into effect on midnight of that date, then your suggestion could be debated. As it stands, we are stuck with that fateful decision, at least until October of next year. However, the Minister for Finance has sought new powers to extend this deadline, and as this is Oirland you can guess what will likely happen.

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?

May I be the first to congratulate you!

I have a relation who has a field, can we meet?

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

This is the only the cost of overpaying for the assets. The total cost of NAMA to the state will be significantly higher.

Take Anglo as an example . It will be transferring about €30bn of loans to NAMA and if the haircut is 30%. We will have to put about €10bn of additional capital into Anglo as it has zero equity.
We get nothing additional for this investment it is just a sunken cost.

While we absolutely have to clean up the banks it is incorrect to say the cost of doing so is only €10bn over 5 years when it will be €30bn or more over the 5 years.

Now this cost may be justified to help the economy get back on its feet, but the €10bn extra cost just for overpaying certainly isn’t IMO.

It seems obvious that, the creation of NAMA would guarantee that no other company or individual in the state would be able to compete on level terms.

The European Commission’s Directorate General for Competition is responsible for ensuring that competition in the EU market is not distorted. Under EU state aid rules State aid can only be authorized if

(i) it is aimed to facilitate a restructuring process that will facilitate the the return to long term viability (ii) the aid is limited to the minimum necessary to finance such restructuring (iii) the aid does not create undue distortions in competition

It is highly likely that NAMA will be fail one if not all of these criteria.

Thanks. I think that could have been a bit more clearly explained in the article.

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.

The simplest way of valuing the loans destined for NAMA is to offer them for sale on the international market.

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…

I was in the habit of writing €10,000,000,000.00.
I got no reaction.
But I think some people think I was SHOUTING.

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?

The question is what are the relative costs to the exchequer and to the real economy of the various options and how can we fund/bear those costs.

This might turn out to be a key decision

Some people seem to have lost sight of how much money €10bn is!

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…

in fairness there is a very strong argument, even an assumption, that lending from the likes of RBS and Lloyds would have been cut a lot further without the government intervention, so you can’t just look at the nominal year-on-year figures without taking into account what the effect of the credit crisis would have been on them sans intervention. Also, im not sure i’d be in favour of basically ‘forcing’ the banks to lend into the economy, possibly at the expense of adequate credit policy (i know, i know, its not like they could do worse tghan before you say, but the point still holds…).

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.