Labour Party Analysis of Draft NAMA Legislation Post author By Karl Whelan Post date September 8, 2009 The Labour Party have released an analysis of the draft NAMA legislation. Link here. Categories In Banking Crisis Tags NAMA 67 Comments on Labour Party Analysis of Draft NAMA Legislation ← Banking Regulation in Ireland and Spain → New FT economics blog: “The Money Supply” 67 replies on “Labour Party Analysis of Draft NAMA Legislation” Very good – albeit it written from a lawyer perspective. I love the way they point out the role of the existing state Valuation Office which would be the ideal mechanism for valuing all these NAMA properties if we are forced down the NAMA road where valuation is everything – I would love to see someone challenge Minister Lenihan on this. I do however wish they would tell us what would happen to our favourite subies in their alternative nationalisation process. Are my eyes deceiving me – or did I see the word “privatisation” used non-pejoratively in a Labour Party document? Having read the NAMA draft legislation, the Labour Party 12-pager is a good synopsis of the shortfalls in the proposed legislation. Their point that unprecedented new ministerial powers would be granted to the Minister for Finance, whilst retaining traditional Irish opaqueness that is unique to this country when it comes to property matters is the most important aspect. Arguning about discounts and ‘haircuts’ is merely an exercise in futility in a market where Supply > Demand and NAMA (as-is) will likely exacerbate this problem. At least Labour managed to produce a readable synopsis of the flaws in the draft NAMA legislation unlike other political parties. A pity they did not point to the funding risks in the conclusion. The observation that” NAMA appears to be a cuckoo in the NTMA nest” is telling. I am sure Dr. Somers will be anxious to kick it out of his nest asap, given his remarks at PAC. @podublain There are no funding risks of nationalizing the banks it is just a poor excuse not to nationalize 1. “The bad property loans are written down or transferred to an asset recovery vehicle – an Asset Recovery Trust – and the bank is then recapitalised. ……… Loans would be transferred to the proposed Asset Recovery Trust at market value, not at ‘long-term economic value’.” This is a welcome clarification of the Labour Party position on the valuation issue when loans are transferred to the Asset Recovery Trust. 2. “What information does the Minister have in relation to the validity, robustness and soundness of the securities held by the lending institutions? Is there any possibility that NAMA will be taking unsecured debts or debts where the securities are demonstrably invalid, inoperative or “bogus”, as in the “Lynne” cases? Has an audit and evaluation of securities as distinct from debts been undertaken?” Very important set of questions. A thorough audit of the loans will probably disclose prima facie evidence of fraud. It is absolutely essential the fraudulent loans are excluded from any favourable treatment at the expense of taxpayers and citizens. I was wondering about the Valuations Office. I mean, it’s their job to value and they do it all the time. Why are we paying consultants when there are professionals already in the pay of the state? @Sarah Carey We have a lot of seriously under-remunerated estate agents. NAMA is a Fas scheme for these deserving people. Kathleen Barrington also offered an interesting forensic analysis of some articles of the NAMA legislation in the SB Post on Sunday: http://www.sbpost.ie/post/pages/p/wholestory.aspx-qqqt=THE+INSIDER-qqqs=themarket-qqqsectionid=3-qqqc=22.214.171.124-qqqn=1-qqqx=1.asp @Maurice O’Leary Brilliant! Should we insist that their pay is capped at Fas rates? Input from the valuations office might be worthwhile though. on Valuations Office. Like many other state bodies, it may have been wound down by not employing the kind of specific professional know-how and insight that it had accumulated. Can anyone say if this is true? Sometime during the last 40 years, some farmers challenged the basis on which they were being charged rates. If I remember correctly, they won the court case, as the valuations assigned were shown to be completely out of date. (Is this a recurring theme of Irish public discourse?) In short, the state’s Valuation Office was not doing what it was supposed to be doing ie. keeping the valuations up to date as a key means of keeping the tax base (in this case rates which went to local government) up to date. Once rates on residences were abolished during the 1970s, why keep the Valuation Office up to speed? No reason why that service cannot be revived – in preparation for the kind of rebalancing of the tax system that the Commission on Taxation has proposed. But it does mean building up specialists in the public service – something that appears to be difficult to do. On the one hand, you get the private sector saying we can do that (e.g the road building programme) and on the other, you get those who believe that taxes should be cut, thus implying a reduction of public services. The first to have resources limited to them are obscure services like the Valuation Office. Of course, we need a proper modern property registration service too – something that other posters have sought in other threads. More taxes/charges/fees to pay for public servants!!! It is interesting to speuclate on the direct up front cost of stress testing, nationalising and transferring the assets to an AMC at market value ( using JB estimate of a 50% mark). This would involve a write down in AIB & BOI of 20billion and a recap requirement of about 15billion (to 5% core tier 1). Prresuably Anglo would still require its 5billion or so as well. Obviously, there would be some scope to offset this with sub debt buy backs and asset disposals. Then we have to discuss the thorny issue of funding & liquidity. Would the AMC be able to access the ECB repo window? Overall, it is an addition to the debtae but I thinl it needs work. @Michael Harvey: “Input from the valuations office might be worthwhile though”. Yes, even if to only act as some form of quality control/comparison valuation to make sure that those consultant boys (and girls?) on FAS wages (as if!) are within a reasonable tolerance. Not bad from Labour but I’m not happy they are also advocating buying at current market levels. I wish there was the train of thought in this whole debate that current market value is probably not the floor for property. And in any case when the sellers are distressed and you are the only buyer in town, you bid down for assets, not the market price and certainly not anything higher. @jl “( using JB estimate of a 50% mark)” I would just like to clarify my remarks at yesterday’s press launch which have been reported as a Labour estimate or demand for a 50% discount / ‘haircut’ on loans transferred to NAMA. Firstly, I deliberately avoided giving a precise estimate as to the likely or necessary discount as we simply do not have access to the sort of information essential for making any such judgement. Even giving an estimate would require close scrutiny of each bank’s loan book. Secondly, I did cite the example – which I have used before – of AIB bankcentre which was advertised for sale some months ago at a discount of some 50% from its peak value. Thirdly, I challeneged the Government to publish a detailed, consolidated statement of the 4 banks’ (the four that are set to participate in NAMA) development loan books including details of exposure to individuals (although not necessarily named – this could be in the form of developer ‘a’ or property company ‘2’), the extent of personal guarantees, the nature of collateral, the level of cross-collateralisation and the true extent of each borrowers’ equity / ‘skin in the game’ on secured assets. Fourthly, in the absence of such information, and given that commercial property is now at least 50% of its peak, I did say that “If the discount is less than 50 per cent we will need chapter and verse as to the reasons why.” Although this is not a demand for a 50% discount, my explanation may have caused a degree of misunderstanding. Finally (although this was not discussed at yesterday’s press launch), given that the Minister has indicated that he envisages some degree of risk-sharing being contained in the revised NAMA legislation, as suggested by Patrick Honohan, it may not be entirely unreasonable for the up-front payment element of a Honohan-style two stage payment plan to be somewhere in the 45%-55% range, with a later top-up payment if the value recovered (using a suitable discount rate, of course) from the assets exceeds the initial up-front payment. @CM “Not bad from Labour but I’m not happy they are also advocating buying at current market levels. I wish there was the train of thought in this whole debate that current market value is probably not the floor for property.” That we may not yet have reached the floor of the property market is a valid point which should not be discounted. None of us have the benefit of a crystal ball, unfortunately. The Japanese commercial property market, for instance, bottomed out only in 2005, some 75% off its 1991 peak. How do you value something in the absence of any transactions on which to base the valuations? Also one suspect data from the VO is a lagging indicator and if used would lead to overpayment. @ Joan Burton Thanks for response, I was not taking issue with the mark. As you say it is tough to come up with an estimate in the current environment give the disclosure by the DOF. We have loads of assumptions and hunches but few facts. That said, using your “assumption” of 50%, it implies a gross investment of 15bn for AIB & BOI and probably in excess of 5bn for Anglo, on my numbers. I notice Bloxhams are talking about 20billion. This is before any sub debt buy backs. Do LAbour disagree with these numbers? @ Joan Burton, Labour’s bank resolution document is a valuable contribution to the debate. It is ironic that the party with the least chance of being a dominant player in government appears to have the best outline bank resolution plan. One question. When it comes to privatisation does Labour envisage flotations or trade sales or a combination? @ Joan Burton, Useful clarification of your position. Very reasonable remarks. On the size of the haircut, the point is surely that if we nationalise (temporarily), the exact size of the haircut becomes less important, because even in the event of a slight overpayment, the residual value will be recouped for the taxpayer via the profit the govt makes on the share flotation of the new (cleaned up) banks. @ Joan Burton Very good document. Based on the draft Nama legislation, the Minister for Finance will effectively control a €90 billion property empire. As several individuals of different political hues (i.e FG or Labour) could fill this role over the life of Nama, the legislation must include safeguards to ensure that they cannot use Nama for pet projects at variance with its original purpose. For a recent example of this, look at Nama’s sister body, the National Pension Reserve Fund which was set up to develop an international investment portfolio over a twenty-year horizon. Suddenly, at the direction of the Minister for Finance, it has been stuffed with €7 billion of Irish bank shares amounting to a third of its total assets. As requirements that finance ministers account for Nama to the Oireachtas offer absolutely no solace, I think that Labour should ensure the final legislation is strengthened to include overarching controls that ensure Nama cannot ever become a ministerial sweet shop with offerings similar to benchmarking, decetralisation and so on. @ Graham & Joan the only positive difference i can see between a nationalisation (labour) and a 70-80% govt stake (likely under NAMA as is) would be (a) the 20-30% equity not remaining in private ownership (obviously) and (b) some slight increase in the ability to pressure sub debt holders on the buy-back levels. However, i still don’t see how this adds up to more than €1-2bio in total, and thats before even accounting for the cost of shareholder compensation, regardless of whether this is in cash or something else like warrants. While this couple of billion would be a significant amount, it would also have to be set against the likely damage that the headline “Irish banking system nationalised” would have on foreign investor perceptions of the country as a whole. Other than this, what benefits does the nationalisation approach bring to this? We’re still going to have to recapitalise the banks, and there’s very little ‘true’ risk capital left to erode in the banks to offset against this. Also, in the same way the Labour is worried about the huge powers given to NAMA and the MoF, wouldn’t there be a danger that the nationalised banks never get re-privatised (“the timing isnt right”, union veto etc) and remain as an inefficient tool of the govt? @Paul Hunt The next Minister for Finance is very likely to be a Labour Minister for Finance. @Joan Burton You were quoted in the national media a few days ago as forecasting that over half a million people will emigrate from Ireland in the next year. If you were misquoted and did not actually say that, then I apologise unequivocally for raising the matter and please ignore the rest of this post. If, however, you did say that, then perhaps you’d answer the following: (a) Do you expect anyone who makes such a ludicrous forecast to be taken seriously when they pronounce on any other matter that requires a modicum of numeracy? (b) Did you make the forecast deliberately to further damage the housing market? (c) Will you resign in a year’s time when the forecast turns out to be the most inaccurate demographic forecast ever made? @John Is the above post 1.necessary 2.relevant or 3 does it add any value to the discussion on LAbour’s position on NAMA? @Vincent Byrne I think its very relevant indeed. It impinges directly on Joan Burton’s credibility. I have allready said that, if she was misquoted and didn’t say what the media said she said, then I apologise unequivocally and ignore my post. But, if she did say it, then I don’t see how she can have any credibility and I’d question her motives. But, I’m happy to let her speak for herself. @ Eoin, First of all, I am not convinced it is possible to say that anything is “likely” under Nama, certainly not a 70 – 80% ownership stake in the banks. Such a scenario would seem to fly in the face of everything the Minister is currently saying and doing to keep the banks in private hands. The point about Nama, as currently is, is that the Minister has the ultimate discretion over the size of any and every haircut applied, and that there is no transparency concerning the nature of the loanbooks. Given the dizzying campaign of misinformation already engaged in by the pro-Nama crowd, one does not have to be a cynic to assume that they will lie, dissemble and misinform every step of the way in order to ensure as small a haircut as possible. Even IF the govt has the best of intentions, the fact that they will be up against a private banking sector that has every incentive to cheat them on every Nama loan (hanging the axe of collapse over their heads every time) suggests that it will be impossible for them to negotiate a good deal for the taxpayer. And there is nothing to assume the govt has the best of intentions at the present moment. Secondly, I do not follow your math, even if your assumption is correct. Who says 1 -2 bn is all we would get for that 30 to 40% of the clean banks? This is certainly a lot less than the market valuation before the crash, never mind the bonds. Finally, even if “all” we got out of nationalisation was €2 bn – that’s still alot of hay, Eoin! It’s enough to build a metro line to Blanch. You are also forgetting a not-so-insignificant detail concerning another advantage of nationalisation: It gives the Irish govt the power to toss out the clowns who ran the system into the ground in the first place. These are very bad people, who have done the country and their shareholders a very bad turn. They deserve to join the dole queues. @John I just hope that your anonymous posting doesn’t deprive the rest of us of further contributions from Deputy Burton. @John: Care to post a link so that we know that you aren’t just spreading false rumours? @John If you fail to post a link, I would urge the moderators to remove the offending post. Good document from the Labour Party Joan has been a more articulate opponent of NAMA than the other main opposition party perhaps because Labour dont have to look over their shoulders to see what the vested interests think. I’m not a labour supporter and I actually own 1000 shares in AIB but I think temporary nationalisation is the only fair solution. @all Here is the link: http://www.independent.ie/national-news/exodus-is-expected-among-all-levels-of-society-1879556.html And her comments have been widely debated on sites like Property Pin and Politics.ie for several days. I allready conceded the possibility that she was misquoted. If she didn’t say it, all she has to do is post here that she didn’t say it, and the matter will be instantly dropped. @ John, We are way off topic and your attack on Dep Burton is politically minded and irrelevant to any of her points. Classic Ad hominem stuff. @jl “That said, using your “assumption” of 50%, it implies a gross investment of 15bn for AIB & BOI and probably in excess of 5bn for Anglo, on my numbers. I notice Bloxhams are talking about 20billion. This is before any sub debt buy backs. Do LAbour disagree with these numbers?” We have not made any “assumption” on the numbers for reasons outlined above. I think it’s important to distinguish between the cost of over-payment (through NAMA), which is dead money, and the ‘cost’ of investment which, while it may need to be funded in the hear and now, is not a ‘cost’ at all but an investment on which one would expect a return on top of the principal. Bloxham have not provided any data or back-up for their numbers (which they put at €21.5bn – €12bn for unspecified increased funding costs and €7bn, €7bn capital injection – which as stated above, is not in fact a ‘cost’ – and a further €2.5bn which they didn’t account for.) @ Paul Hunt “When it comes to privatisation does Labour envisage flotations or trade sales or a combination?” There is no reason why either approach should be ruled in or out at this stage. @ Graham Stull “On the size of the haircut, the point is surely that if we nationalise (temporarily), the exact size of the haircut becomes less important, because even in the event of a slight overpayment, the residual value will be recouped for the taxpayer via the profit the govt makes on the share flotation of the new (cleaned up) banks.” Exactly. “@John I just hope that your anonymous posting doesn’t deprive the rest of us of further contributions from Deputy Burton.” I have to second Vincent Byrne on that comment John. I’ve noticed your posts over the past few days and they all seem very political and motivated by goodness knows what bitterness. Believe me, having a direct contribution from Deputy Burton on these subjects is far more interesting and informative than reading your posts. Let’s either get back on topic or get off the board. @ Graham/Joseph/Garo steady on lads. He’s made a claim, backed it up with a link, and asked for clarification on the quote. Given that the fairly serious claim is being made by a potential future MoF, i don’t think that unreasonable. Remember, the government has told us that population trends will be at one of the key factors for the so-called ‘long term economic value’, so its not that irrelavant. As they’d say in court, “it goes to credibility your honour”. @Graham Stull So, if a TD, who seeks to be in the next Government, comes out with a scaremongering claim that would disgrace the intelligence of a 4-year-old, we shouldn’t be allowed to question her on it? Very democratic. I notice she hasn’t denied saying it in her latest post. @Joseph I don’t see that ‘John’ is any more anonymous than ‘Joseph’. @ Graham i understand that there’s lot of ifs etc involved in almost all the NAMA and anti-NAMA plans, but go with me on this – IF we did get a 75% holding in both banks, thereby retaining their place in the private sector but with a clear majority State ownership free to replace the management, would this not be a better situation than the entire domestic sector being nationalised? It would certainly increase the chances of the government being able to quickly dispose of their holding when the market had stabilised. Share buybacks or rights issue could be used to dilute their holdings over time rather than having to be wipe out all existing ordinary shareholders. And as for the pre-boom value of the banks, does anyone ever see us returning to anywhere near those levels in the next decade? Unless thats the length of time you’re considering keeping the banks in public ownership? As for the bonds, i keep saying this, we cannot get near the outstanding subordinated debt without first wiping out our own preference shareholdings first, which, again, i assume we are not considering doing??? John, I don’t know how smart your kids are, but population projections are way beyond any 4-year-old I know…sorry, couldn’t resist. Half a mil seems like a high number to me, but then again, if back in 2006 you confronted anyone with 2009 data, they would accuse you of scaremongering too. But the real point is that it is off-topic. Joan Burton’s main point about the “numbers” is that we don’t know, because it is being kept under wraps. And she is right in saying this. The real point about numbers is you have to have them. We don’t cause the banks are hiding them, whilst begging for billions of tax payers money for free (!) Then, you have to have a structure in place which allows you to crunch those numbers without the kind of intense lobbying and axe-over-head-hanging that private interests are always going to engage in. Nationalisation provides that kind of space for the govt to work in. Nama does not. @Eoin Why would 75% “increase the chances of the government being able to quickly dispose of their holding when the market had stabilised”? Share buybacks do not dilute holding but do the opposite. Rights issues also do not dilute in general. And what is wrong with “having to wipe out” all existing ordinary shareholders? The banks are insolvent. So existing ordinary shareholders deserve zero. The preferred do make wiping our subordinated a difficult issue. But if the banks are nationalised it does not matter. The preferred goes back to the government. By aggressively ruling out nationalising, the government is simply weakening its hand and driving up subordinated debt prices which makes any eventual purchase of these more expensive. @John “I don’t see that ‘John’ is any more anonymous than ‘Joseph’.” It’s not the anonymous nature of it, it’s the content and tone. My 2-year-old daughter can adopt a more professional demeanour. As for my name, I’m just too lazy to type everything. Nothing to hide here. Joseph Morgan Eoin, I guess my basic position is that recapitalising AFTER the haircut is putting the cart before the horse, because it always provides the banks with a huge incentive to flog the loans off too cheaply (every € they squeeze out of Nama is a € less in current shareholder value dilution). Thus, saying: Run Nama in its current incarnation and hope the valuers do their job and we end up owning 75% via ex post recap, is just not the way to spend our grandchildren’s tax money. It might work, but it probably won’t. Instead, nationalise and then buy up the bad loans in peace and quiet. As for refloating the banks after the clean-up, I don’t see a problem in doing this. Irish financial IPOs are small fish in a big sea of eurozone capital. Plus, nothing says we have to float NewAIB and NewBoI etc at the same time. We can float one after the other, to avoid ‘river log congestion’. As for the legality of getting at the subordinated bondholder debt, I cannot pretend to be an expert in how these markets work. It seems to me they are just another party that has a claim on a company which is worth nothing – so their claim should be worth nothing. The fact that we threw some bad money into the banks already is not a reason to throw more bad money into them. @ Garo declaring for certain that the irish banking system is insolvent is a very dangerous assertion to make, and this is exactly what would happen if the shareholders got zero. Not subjectively speaking, but factually and legally thats what we’d be saying to the rest of the world. I do not think this is a good idea. Nations with insolvent banking systems tend to get a knock on the door from the IMF. Rights issues would dilute the governments holdings if the government didn’t take up their rights and either existing or new external shareholders did instead. On the share buybacks you’re probably right in that i don’t think it’s legal to focus a share buy back on particular shares, i imagine there has to be a ‘blind’ purchase element to it. My bad. By having a 75% holding, and still a public listing, disposing of the shares could be done in the space of a few days (i’m not suggesting that they’d necessarily have to do it all at once). Re-listing, trade sale etc would be far more cumbersome to do (possibly not massively so, but the principal still holds). @Deputy Burton, Many thanks for your response. I raised the query for two reasons. Firstly, I recall meeting Minister Ryan at a conference in April 2007 and, partly in jest, quoted David Steel’s exhoratation to the Liberal-SDP Alliance in 1982 “Go back to your constituencies and prepare for government”. Secondly, I realise that is politic for you and Labour to hedge your bets, but, when it comes to temporary nationalisation, the exit strategy is probably as important as, if not more important than, the entry strategy. The possibility of allowing the existing vested interests to have any hope of a return to “business-as-usual” runs the risk of scuppering the entire exercise, as they will plot and plan to turn this hope into a reality. Flotations will be expensive and time-consuming and will only make sense if there is a through cleaning out of the stables. Trade sales are much less costly and may be effected quickly, but they, almost certainly will result in external control of the remaining Irish banks. My view is that, given their performance, the existing boards and senior managements do not deserve to be allowed to run a whelk stall. Is Labour prepared to take that position up-front? There is one major issue that I don’t think has been addressed fully by any proposal: What is the timeframe for the disposal of the assets that might end up being seized? The argument for a long period is that it might be possible to recover more money. The cost of capital compared to the asset appreciation/depreciation. The current value is difficult to know, the asset appreciation/depreciation is even more difficult to guess. There are suggestions to not have a deadline for winding up the asset management vehicle. My opinion on that is that it is the worst possible alternative. If there is a deadline, the employees of the vehicle know they have to do their best before the deadline. If there is no deadline, then the only certain thing is that no-one, employee or politician, will have any urgency of exiting the market. The worst that could happen with a deadline for the winding up of the asset management vehicle is that an auction might need to be held when the deadline is up. The bidders might collude to get low prices, but I find that unlikely. The shorter the time that the vehicle can operate, the more likely it is that more losses will be realised. Some might say that some of the losses might be realised unnecessarily. The benefit of the short time would be that capital will be allocated quicker to more useful economic gains. The benefit of the longer timeframe would be smaller recognised losses but capital tied up for longer. I see the resale of the banks as the easy part, dealing with their impaired loans is more difficult and the most difficult part about how to deal with the impaired loans is how long time it can be allowed to take. Are there any economic models for estimating what might be the best timeframe? Will the timeframe for dealing with the impaired loans be debated next week? (NAMA or some other vehicle?) Jesper, You are right, this is an important issue. But it shouldn’t be debated now, because disposal of impaired loans will have to happen with or without nationalisation. In other words, while its important, its not important in terms of the current Nama debate, which is all about the allocation of losses resulting from the cleanup process(i.e. who owns the clean banks onces the toxic loans are off their books.) And given the public’s very limited ability to focus on the core issues, the less red herrings are swimming about, the better. I expect a post is imminent, but Karl W’s presentation to the Labour Party is at: http://www.labour.ie/policy/listing/1252503685996593.html Excellent, as usual, but, imo, a bit light on the exit strategy. @Eoin Irish banks are insolvent and everyone knows it. Why would they still need a government guarantee a year after the Lehman crisis and when things like the TED spread and Libor are back to pre-crisis levels. There is no shortage of liquidity in the market now. So the only reason why they need the guarantee is that they are still insolvent. Find me one bank that is willing to give up the guarantee tomorrow if they are still solvent. If 75% works, 95% would also work, no? The listing would be maintained a la AIG and Fannie and Freddie. @ Paul Hunt “My view is that, given their performance, the existing boards and senior managements do not deserve to be allowed to run a whelk stall. Is Labour prepared to take that position up-front?” Labour has consistently called for sweeping changes at board and senior management level at Irish banks. I would draw your attention, in particular, to a document we published back in February of this year: http://www.labour.ie/download/pdf/a_clean_break_from_business_as_usual.pdf Graham, I agree that NAMA is the central debate now. I believe that the value of the loans also depends on what is going to be done with the loans and when it is done. What I’d like to highlight is that NAMA could theoretically possibly be justified by extending the timeframe indefinitely. Hope springs eternal and the LTEV combined with NAMA is hoping for a recovery in the property market. Zoe claims to be solvent in 3 years time (I don’t believe that but that is another matter) but also claim they are not solvent if wound up today. If they are to be believed then the value of their loans depends on the timeframe. I believe that NAMA is probably the worst possible publicly presentable solution to the current banking crisis. The proponents of NAMA is asking for numbers, if timeframe affects price I’d like to know their timeframe. It’s nice to see that some politician’s have copped on to the power of the “interweb”. Well done Joan Burton TD. During the last Lisbon referendum Libertas ran a very effective Internet advertising campaign. You could visit any number of blog’s, and numerous sites where libertas advert’s on “vote no to Lisbon” popped up. Do you not think that Labour’s money would be better spent on a similiar campaign? @ Joan Burton TD One aspect of the NAMA debate that has gone unnoticed is the fact that many of these impaired bank loans are in fact what is known as “negative amortisation” loans e.g. developer borrows €160 million off BkIR for a development say hypothetically on N11 in South County Dublin. No interest or capital repayments have been made since 2006 and the loan amount is now closer to €200 million. NAMA will purchase the ‘loans’ at a discount. Please ignore the discount for a moment. Alan Ahearne et al have written in the newspapers recently that the average developer LTV was 75% (an assumption) and then they’ve grossed-up these existing non-performing bank loans to suggest that the €90 bn was lent on asssets that originally cost €120 bn (assumed) and that if NAMA today pays only €60 bn that they are paying half-price! This is the ruse being utilised by proponents of NAMA. Equally assuming that LTVs were closer to 90%, and taking account of “Negative Amortisation”, the €90 bn of bank developer loans could actually relate to a similar OR smaller original loan amount given that devlopers paid interest rates based on 5-year bank-swap rates + a spread of between 0.75% to +1.25% resulting in developer loan rates that were around 4.5% to 5% during 2006/7. So 10% of these developer loans could easily be “deferred capital interest” @Derek Brawn Minister Lenihan speaking to the Committee on Finance and the Public Service: “Deputies O’Donnell and Burton both referred to the loan to value ratio. Deputy Burton is concerned that 75% is a very low level and that there were 100% arrangements. Clearly, if that emerges in the statutory valuations, it will be very serious for the institutions concerned. I am imparting to the committee the information I have amassed to date which suggests a 75% level. That information is provided in due diligence exercises and the PricewaterhousCoopers report. It is not new information established in the last few weeks. We must always guard against the over-optimism of financial institutions. That is why one must have a statutory process to undertake evaluations.” The Minister has made it clear time and time again that the purpose of the statutory process is to examine each loan to see if the banks have telling us the truth. There is no “ruse”. @Zhou_enlai The PWC report has not been published and is not public knowledge I personally know of developers who borrowed 90% on amounts in excess of €80 million on sites in N.Dublin, who then “re-geared” up their loans as construction began and house prices were rising. They took their equity back out (and more sometimes). The PWC 75% is an aggregate level over an extended period of time, assuming rising values (the V in L-T-V). LTVs change daily/weekly etc. I don’t doubt the aggregate figure, but accounts take a snapshot view based on information provided to them, need mention Ernst & Young and Anglo Irish bank (how much did Seanie owe on the day the auditors were in?). Furthermore, high profile court cases have shown that loan amounts have grown in the absence of debt servicing, plus developers (e.g. Mick Wallace on Prime Time end-March ’09) have admitted to not making loan repayments. A Director of one company told me in May’07 that the development bank loan was €165 million, and then at a social gathering in July’08 a staffer from the developers head office admitted that the same loan to the same bank was now €183 million. Two other sources confirmed these figures to me. What is the loan amount today? Given that the development has many unsold units according to a leading Sunday newspaper. What is clear is that the €90 bn of loans (both performing and non-performing) includes “rolled-up” interest. Irish banks were never in the business of providing 0% loans. My point is that the €90bn figure relates to “Original” loan amounts that were ‘smaller’. The NAMA discount should be haircut further to account for this. @Deputy Burton, Many thanks, once again, for your response. It doesn’t quite answer my question, but I can understand your reticence and I have no entitlement to push this any further. Let us hope that the Minister will provide more evidence that will help to quantify the risks involved in NAMA. I am also hoping that some one of the contributors to this site finds the time to do some quantitative analysis to estimate the additional economic costs of NAMA, of its variants and of other proposals when compared to Labour’s proposal which, imo, with some fleshing out appears to be emerging as the most efficient solution. The devil is always in the detail From RTE site “This means, in the case of a small proportion of the loans, the banks will not get all the money immediately.” Are the Greens buying an eviscerated NAMA2 and selling it as the Prof. Honohan solution. I posted this on another thread. Perhaps Deputy Burton could comment. @Derek Brawn Your anecdotal evidence may be more typical than is anticipated. That is precisely why the Govt is setting up a statutory process to examine each loan individually to ascrertain what the situation is. Don’t forget that the core reason we are having a bad bank solution is because the credibility of our banks’ balance sheets is in question. If we take over the loans without examining them carefully then the nation’s balance sheet will be in question. That is the case with nationalisation too. Transferring assets to an AMC/NAMA/Asset Recovery Trust is not risk free if the amount we get back for the refloated banks does not reflect the riak we have taken on. It could possibly be as bad as overpayment if we recap too high and refloat but then find we are left with a toxic sludge which nobody is sure of and which nobody will trust us to self certify. Doing it the NAMA way with two self interested parties on either side (viz, (a) the State and (b) the Banks) enhances the credibility of both parties. It also gives us more time as the period which it will take to do a thorough NAMA acquisition process is much longer than the temporary period of nationalisation which others recommend. The longer the period of nationalisation, the greater the risks and the harder it becomes to manage the organisations. @ Zhou Surely there is a lack of stick concerning bank management staff in the whole process? There should be a serious consequence for misleading/ misdirecting or general incompetence when it comes to statements of account from bank officials! Misleading/ Misdirecting etc should be a 10 year prison sentence. I believe Mountjoy would be closest so that friends could visit. Incompetence should be a ban, EU wide if possible, on directorships, etc, for financial institutions, etc. We cannot incentivise behaviour and not discipline it. And we can end all the BS normally involved: dail commitees, tribunals, investigations etc etc. Al @Al “We cannot incentivise behaviour and not discipline it.” Where is the incentive in your proposal? @podubhlain In fairness to Joan Burton TD, Labour have commented on the legislation as published and have called on the Minister to provide additional specific information. She is entitled to see any amended draft legislation and draft statutory instruments before giving any further views. @eoin i think the primary objective, and benefit, of ‘nationalisation’ of the financial system is that it will allow competent persons to be appointed to negotiate directly with the holders of irish debt, on behalf of those of us who will end up paying for it, the irish taxpayer. i don’t however, happen to agree with the concept of ‘nationalisation’ which sees the department of finance, nor even worse, the minister for finance (already the second most powerful position in the fianna fail party), running the irish (any?) banking sector. i’d presume that most of the subsequent refloatation would already be negotiated (debt-for-equity swaps, existing shareholder coupons, citizen share schemes;-) long before the audit process was even complete. besides which, refloatation would be a chance for a big party, to celebrate being ‘clean’! @zhou i think the problem is transparency. i don’t trust the bankers, i don’t trust the government. why, in the name of anything you care to believe in, would i trust either of them to solve this mess, in a smoke filled back room, where they make up the rules as they go along, and they don’t even have to tell us what the rules are!!! barry. The VO wer understaffed up to the launch of self assessment or self exemption as we cynics called it. Then their staff needs were much reduced as we in Revenue examined very few capital transactions. They also valued the estate of deceased persons and the CAT yield shows some increases there! They have probably been allowed to run down since then but they were able to access the ST 21 or particulars delivered return of every land transaction, so whoever is there would be very much in touch but their basic problem is that there is a genuine doubt about market value, made worse by the false market in land since NaaMaa came onto the scene. Given the amounts involved a few dummy transactions could seriously distort the “market” and be rigged by a cartel of developers now active in support of NaaMaa. It is what I would advise! @fixit I agree that transaprency is one of the biggest issues. The Govt and the banks have no right to ask the nation to “trust” them. The way to prove they are trustworthy is to provide for proper oversight in the legislation. One benefits of the NAMA plan is that it does not preclude the Labour plan down the line. Indeed a lot of the preparation work for NAMA is the same as would be done for nationalisation. For this reason I think Labour should offer to give it their support in the Dail if the Govt undertakes to call a general election by the end of January. The Govt would of course reject this offer but it would show the international community that our opposition parties are going to be pragmatic. @ Zhou Sorry about that Could have made it clearer Nama etc creates a peverse incentive for banks to milk the public pursue beyond what is needed. If one can milk a purse…. Al @Al If you want the banks to behave correctly you have to create an incentive. The carrot and the stick are usually used to the same end. You have suggested a stick to stop the bankers doing the wrong thing. What is the carrot to motivate them to do anything at all? @Zhou, On carrots and sticks: Please correct me if I’m getting this wrong, but I would have thought the establishment of Nama itself is the ‘carrot’ in that it’s designed to solve the banks’ related problems of (a) toxic assets, and (b) liquidity and get them back into a position where they can start trading profitably again, which is in their interests, as well as in the interests of all the rest of us, our economy and our society? The ‘stick’ arises in Section 7 of the published Bill, for an institution that supplies false or misleading information to Nama in its dealings with an asset or their valuation of €5k on summary conviction or up to €20m on indictment; and for individuals involved €5k or 12 months imprisonment or both or on indictment, €5m or up to 5 years imprisonment or both. Section 16 also applies prevention of corruption legislation etc. By the way, I don’t think a cynical Faustian pact between Labour and the Government on the date for a GE at end January 2010 in return for Dail support on the Bill would do much for the electoral fortunes of any of the parties involved. Would probably ensure an overall majority for FG though! @Veronica There is a carrot and stick in NAMA alright. I think I got confused thinking Al was suggesting that there be no NAMA and there be punitive laws against bank officials. Now I think I got the wrong end of the stick… which has left me in a sticky situation…. I’ll get my coat Under the section VALUATION it says “the future value of property is reflected in the current market value”. This is fundamentally wrong. The future value of property is reflected in its ‘intrinsic’ value – quite different to market value. Comments are closed.