NAMA Bill Post author By Philip Lane Post date September 10, 2009 The NAMA Bill is available here. Categories In Banking Crisis Tags NAMA 29 Comments on NAMA Bill ← Designing NAMA-contingent claims → Subordinated NAMA Bonds = Equal Sharing of Risks? 29 replies on “NAMA Bill” Full credit to those who led the public debate in forcing the changes, which have been made so far. What had most of the 216 person membership of the Oireachtas to say on this crucial issue? @MH Did you watch the Finance Committee debate? Fine contributions by Joan Burton, Pat Rabitte, Sean Barrett, Alan Shatter, Richard Bruton, Tom Kitt and, last but not least, Brian Lenihan. I would echo Michael H’s comments. It cannot be denied that the efforts made by key contributors to this site, the debates they sparked among other posters and the contribution to public understanding in their media contributions have encouraged increased transparency and the modifications being proposed. John FitzGerald is reported (http://www.independent.ie/national-news/economist-hits-out-over-nama-fuss-1882412.html) as being critical of those who made a “fuss”. Despite the, perhaps, false interpretation of his remarks (or the sub-editor’s ethusiasm to craft an eye-catching strap-line) he is reported as making a valid point about the bank guarantee. He is reported as saying the bank guarantee decision was unfortunate. The gist of his remarks seems to be that, once that decision was made, a number of options (presumably including nationalisation) were ruled out. The bank guarantee addressed liquidity which was merely a symptom of the underlying insolvency. It took the Government, the banks and the developers almost six months to cease denying this reality. So we are where we are and we’ll have to see if the proposed NAMA reforms (which FF has graciously credited to the Greens) will get us any closer to making a silk purse out of this sow’s ear. @Michael Hennigan Agreed…..Credit where credit is due. I would also agree with your take on the Oireachtas. We will see more of the same on Lisbon Can I also join with Michael Hennigan regarding the role played by the Economists, initially the 20, then the 46. I watched Brian Lucey last night on the VB show, and can I say the gentler style suits him 🙂 Certainly got the better of the debate with Robbie Kelleher of Davy’s. http://www.tv3.ie/shows.php?request=tonightwithvincentbrowne Also, heard Karl this morning with another Dayy’s spokesperson and I thought won the debate hands down again. Specially the LTEV analogy regarding LTEV, goods priced at €5, but were €10 at some point in the past, and may be worth €8 at some point point in the future. Only fair to pay the shop-keeper the €8 now. Yeah Right !! http://dynamic.rte.ie/av/209-2607444-396-0-t.smil So, the 46 have not gone away, you know, to coin a phrase. You, and this Blog, have done the State some Service, in giving the ordinary Joe the ability to be able to critically evaluate and understand this extremely important piece of legislation. BTW, Michael Hennigan, with Finfacts you have been an Internet pioneer yourself. Section 47 (on page 44 of the Bill) providing for the issuance of sub-ordinated debt (i.e. the risk-sharing section) is worth quoting (below) and discussing at length. While subsection (1) would appear to be a significant improvement on the original draft legislation, this is fatally undermined by subsections (3) and (5). In subsection (3), it is made clear that the return on sub debt will be determined on the basis of the overall financial performance of NAMA, rather than the performance of the performance of instsitution specific asset portfolios. In subsection (5), and this is critical, the junior-senior split is to be pro rata between the institutions, meaning – if I understand correctly – that if the proportion of sub-debt decided on by the Minister is to be say 40%, then it will be 40% for all institutions, i.e. for INBS’ portfolio as much as for that of BOI. Either BOI would be penalised by a higher proportion of sub-debt, or Anglo/INBS would benefit from a lower proportion. 47.—(1) NAMA or a NAMA group entity may, whenever and so often as it thinks fit, create and issue subordinated debt securities of 10 such class or type as it specifies— (a) bearing interest at such rate as it thinks fit, or no interest, (b) for such cash or non-cash consideration or deferred consideration as it thinks fit, and (c) subject to such terms and conditions as to repayment, sub- ordination, repurchase, cancellation or redemption or any other matter as it thinks fit. (2) Subordinated debt securities issued under this section shall be used only for the purpose of providing part of the consideration for the acquisition of bank assets in accordance with section 89. (3) To the extent that the terms and conditions of the subordinated debt securities (including the terms of subordination) are referenced to or based on a measure of financial performance, the measure shall be the financial performance of NAMA in totality and not any part or parts of the acquired portfolio. (4) Subordinated debt securities may be subject to different terms and conditions for different classes or types of those securities. (5) The total amount of subordinated debt securities issued under this section shall not exceed a percentage of the aggregate total portfolio acquisition value specified by the Minister by order. Such securities will be issued to the participating institutions pro rata. (6) Where the Minister proposes to make an order under subsection (5)— (a) he or she shall cause a draft of the proposed order to be laid before Da´ il E´ ireann, and (b) he or she shall not make the order unless and until a resolution approving of the draft has been passed by Dail Eireann. A question for the experts here… I keep hearing about NAMA now paying shareholders or someone money if NAMA makes a profit? How will we know if NAMA makes a profit? Is it an operating profit? Who decided what the profit is? Is NAMA now publishing audited accounts? Genuine question (though its been a hobby horse of mine)… I wouldn’t celebrate just yet. I’ve taken a quick look at section 47. Although the inclusion of a subordinate structure is welcome, details are lacking. My initial thoughts are that subordinate bonds need to relate to the SPV (in this case NAMA). The senior NAMA bonds seem to be gov bonds. Losses assigned to sub. debt need to be defined precisely. Such detail is not provided in this document. In order to assign an on-going value, it would also require much more frequent and detailed reporting. Something that the minister seems to be against. Maybe, they intend these to be some odd form of gov debt? It’s also interesting that bank X might get hit for bank Y’s losses. So, aside from my doubts about how these work, more importantly how much suborinated debt will be issued? The draft suggests an upper limit (what is it?), but no lower limit. Will it be a token amount? @ Garry (6) A bi-annual report shall include the following information for the relevant half-year: (a) the number of all loans outstanding and the condition of those loans, categorised as between performing and nonperforming loans; (b) non-performing loans categorised as to the degree of default, distinguishing where default has occurred on capital payment as well as interest payments; (c) the number of loans being foreclosed or otherwise enforced during the relevant half-year; (d) the number of cases where liquidators and receivers have been appointed in the relevant half-year; (e) a schedule of any finance raised by NAMA in the relevant half-year; (f) sums recovered from property sales in the relevant halfyear; (g) other income from interest-bearing loans owned by NAMA; (h) an abridged balance sheet of the assets and liabilities of NAMA; (i) a complete schedule of income and expenditure in the relevant half-year; (j) an updated schedule of all information described in subsections (2) and (3) of section 52; (k) any other matter directed by the Minister. 55.—(1) NAMA shall submit its accounts to the Comptroller and Auditor General for audit within 4 months after the end of the financial year to which they relate. (2) NAMA shall present a copy of the accounts as audited to the 10 Minister as soon as may be and the Minister shall cause a copy of the audited accounts to be laid before each House of the Oireachtas. @ Vic re your concerns about the senior/sub split, and the sub bonds being paid out of the ‘totality’, ie being subsidised by the seniors. Surely this is only a concern if NAMA generates a profit over the life of the total venture? Given that we’ve been told by all and sundry here that this simply will not happen, then surely it shouldn’t be a concern? Also re “Either BOI would be penalised by a higher proportion of sub-debt, or Anglo/INBS would benefit from a lower proportion”. Given that Anglo is nationalised and INBS is going to be a very junior element of NAMA, isn’t this again a good example of the private AIB and BoI being forced to risk-share in the total venture? From the taxpayers point of view, essentially we’d be making privately-owned AIB/BOI pay for any obligations from a state-owned Anglo? @Ahura Mazda Says: “I wouldn’t celebrate just yet. I’ve taken a quick look at section 47.” I wouldn’t celebrate at all. According to David Murphy (RTE News) the subs will relate to development land. Anyone know the proportion of the 90 billion attributable to development land? Given the windfall profit tax then the lands will be unsellable as anything other than farmland. Davy website this morning claims that only between 5 and 15% of the banks loans will be affected by the risk sharing proposed in the bill. If true, NAMA is still a scam. @ podubhlain is the windfall tax related to previous agricultural land re-zoned as development, or current agricultual land that will in future be re-zoned as development? I thought it was the latter, but there’s no exact wording etc that i can find. Are most of the landbanks/development land already re-zoned, or are they awaiting such? Can currently zoned land be de-zoned? (Not asking you as an expert, just throwing these questions out there!) From the IT: “The Minister also announced that a windfall tax of 80 per cent on profits gained from increases in land value due to rezoning decisions would be introduced as a committee stage amendment to the Bill to ensure that land speculation was not rewarded in the future”. @eoin i refer you to section 54, subsection 3 (below) which applies a condition of confidentiality on the same information as is to be included in the section 53, sub-section 6 (above) bi-annual reports on the condition of loans. it seems odd that sometimes performance figures are confidential, sometimes they are not, then again maybe the drafters were just in hurry… i’d also refer you to section 55, sub-section 3 (below) which you appear to have neglected to include above. 54.—(1) The Minister may require NAMA to report to him or 40 her, at any time and in any format that the Minister directs, on any matter, including— (a) the performance of its functions under this Act, and (b) any information or statistics relating to the performance of its functions. (2) NAMA shall comply with a requirement of the Minister under subsection (1). (3) The content of a report provided to the Minister under this section shall be taken to be confidential information. 55.—(1) NAMA shall submit its accounts to the Comptroller and Auditor General for audit within 4 months after the end of the financial year to which they relate. (2) NAMA shall present a copy of the accounts as audited to the Minister as soon as may be and the Minister shall cause a copy of the audited accounts to be laid before each House of the Oireachtas. (3) The Minister may omit from a copy of accounts laid before the Oireachtas under subsection (2) any matter that would disclose confidential information. If the Minister omits such matter from such a copy, he or she shall insert in its place a statement that matter has been omitted and a general description of the omitted matter. @ahura, etc as has been laid out in other threads on this forum, it doesn’t really matter what form the subbie’d bonds take. the banks know they will be paid above the odds in the first place so it doesn’t matter what form the bonds they will never get to call on take. also, BOI know that if they want their 15billion cake, they’ll have to swallow the AIB/Anglo/INBS rescue pill. @ Fixit the query i was answering was related to how we’d know if NAMA, at an overall level, was turning a profit, would there be audited accounts etc. The sections of the legislation you are referencing would appear to me to be related to any additional information which might have detail on individual assets sitting in NAMA. This doesn’t seem particularly unusual to me. The danger, obviously, would be that somehow the government decides to designate certain information as ‘confidential’ even if it didn’t fit my decription above, but i think we should at least look at this with an open mind for the moment. @PR Thanks. Say 10%. So 9billion in land now worth 10% of original value (zoned, unzoned and subject to 80% tax). So about 8b in subs. @eoin… thanks for this… I guess then this is net profit after NAMA has completed its work? @ Garry well the NAMA profit (or loss) seems to only be an issue in regard to the subordinated debt, the State would be the sole shareholder, though it would also have regard to any future levy on the banks in the event of a ‘loss’. The language is vague on this: “the financial performance of NAMA in totality”. Not sure what that will or won’t include. Assume it would have to include funding costs and asset price sales, but may not include operating costs/expenses etc. Still, either way, the vast majority of whats at stake would be dependent on the funding/asset parts of this, and not the operating costs. Among the many changes in today’s Bill, I found this one a little odd/amusing. 77. (2)(a)(viii) – (top of page 62) states: (with reference to the long_term value calculations) “any analysis by the Minister for Communications, Energy and Natural Resources in relation to the potential rise in energy and other costs due to the long-term decline in non-renewable resources” Ok, it is obviously a sop to the Greens. But, if the minister is going to consider the long term effects of peak oil etc, then isn’t this going to be a serious weight on the long term value of property? Unless all the stuff NAMA is taking on are super-efficient buildings with good public transport links? Windfall tax From the IT: “The Minister also announced that a windfall tax of 80 per cent on profits gained from increases in land value due to rezoning decisions would be introduced as a committee stage amendment to the Bill to ensure that land speculation was not rewarded in the future”.This is designed as a way of effectively implementing the Kenny report of the 1970s which recommended that development land should be worth no more than 25 per cent more than agricultural land. If it relates to land that is currently zoned for agriculture use, I would speculate that this is no more than a good sound bite to appease Green party members. Such a so called windfall tax would require a constitutional amendment. Windfalls, by their nature, are limited events. If they are proposing a limit going forward to prevent land speculation, then an amendment to the Nama legislation is not the way to achieve it. @ Michael Harvey “Such a so called windfall tax would require a constitutional amendment.” Are you suggesting anything other than the most comprehensively approved constitutional amendment ever? Farming communities would no doubt oppose it, but other than that im sure it’d pass by 70-80%. Would placing a windfall tax on one ‘type’ of land not push up the value of other types of land? Who would benefit from that? I wonder? @ Joseph somebody else mentioned this i think? Assuming that the windfall tax will only affect rezoned in the future (as i do, but not everybody seems to agree on), you could argue that land currently zoned as development land would have a significant tax advantage over the to-be-zoned variety. Given that NAMA will own plenty of the former, i suppose the developers, and so the taxpayers owning their loans, should be the primary beneficiaries. Owners of existing agricultural land would be losers i guess. The windfall tax idea needs fleshing out. A – If it is farmer owned agriculture land and subsequently re-zoned. Do we think that farmers are not clever enough to realize the effects of an 80% tax? All they will do is demand more. As we have seen over the past few years, if developers believe there is demand and they want to develop, they will pay inflated land prices. End result….more expensive houses and commercial/industrial premises. The only solution to that is legislation to introduce a 25% cap as suggested by the Kenny report. Maybe someone can help me with this, but am I right in thinking that Local authorities already have this power re compulsory purchase orders? B – If the land is zoned for agriculture, but currently owned by a developer. Who is going to value it if it is rezoned to the developers advantage? Logic would dictate that the developer would have to sell the land on before an 80% tax would kick in. Even if there is some mechanism to establish a value if the developer retains the rezoned land, and an 80% tax kicks in, what effect would that have on property prices. Does anyone believe it will actually keep prices stable? If the developer has been stung 80% on an assumed profit margin on land, all he will do is pass that on to the end user in higher prices. They will want to maintain their margin. Cleaned up banks will want to lend again eventually, do you think they are likely to refuse on mortgages just because property prices are rising at 10% a year? Past evidence gives us that answer. This is a poorly thought out tax. @ Michael Harvey i don’t think that the tax was brought in to control prices, but simply to reign in speculative purchasing of agriculturally-zoned land banks, which obviously put a fairly high floor under prices of land generally. With the gains from a simple purchase-and-flip land purchase now significantly decreased, i think it’ll be difficult for farmers to look for high prices on any of their lands, unless a development was well thought out, structured and ready-to-go. At the moment there is ample agriculturally zoned land that is available to meet the likely demand for it (ie low) over the coming years. There is also ample supply of finished-but-vacant housing in many parts of the country, enough to probably last a few years. As such, i don’t think the pricing power rests with the farmers and developers. @Michael Harvey “This is a poorly thought out tax.”. …and I presume I would be free to sell you the piece of land for €1 (pay my 80cents tax) and flog you the plants growing on it for €15 million at no tax? @Eoin The commission on taxation considered this, presumably in a more measured manner than the knee jerk reaction of the Greens. There recommendations were……. Tax on windfall gains We are recommending that the windfall gains that arise from increases in land values due to rezoning should be subject to an additional capital gains tax charge. We consider that the ‘betterment’ which arises to land-owners from decisions made for the common good, such as land rezoning or the provision of physical infrastructure, should be subject to an increased level of taxation. Note they only recommend and additional CGT Recurrent tax on zoned development land We are proposing a recurrent tax on zoned development land where such land is not being developed. This will be a useful policy tool to address the hoarding of land-banks and help to ensure that land is utilised in accordance with its planning categorisation. Now that does make sense. I take your point on the current and near term outlook on land prices. However that is likely to eventually correct itself. When it does, we need a better thought solution in place to control land prices. @Joseph You think I am that cheap….I will not take less 20 million. Yikes Their rather than there! @ Michael agree on the recurrent tax, would make developers think twice about sitting on land for 5-10 years. Comments are closed.