NAMA From Heaven?

Fianna Fail Deputy Sean Fleming appeared on RTE’s Six-One News last night and said the following:

There’s a lot of confusion on this. NAMA … The banks … This money is being borrowed from the European Central Bank. The taxpayer is not contributing any of this money tomorrow. The European Central Bank is providing all the money and all that has to happen is that during the ten years of NAMA or thereabouts, they will repay those loans back.

Today, Minister Willie O’Dea appeared on Morning Ireland and said:

The ECB have undertaken to make these bonds available to NAMA at one and a half percent.

Appearing on the same program, Fine Gael’s George Lee objected to this statement as being false, so Minister O’Dea rephrased his position as:

The ECB has agreed to give NAMA money … If the ECB disagreed so fundamentally, as George Lee suggested, with the plan, then they wouldn’t be prepared to come up with the money.

I suggest to our readers that the following are facts:

  1. NAMA will purchase loans from the banks with bonds backed by the Irish taxpayer.
  2. The Irish government, in the form of NAMA, will be paying interest on these bonds to the Irish banks at an initial rate of approximately 1.5 pecent.
  3. The ECB is not lending NAMA money at 1.5 percent.
  4. The ECB is not lending NAMA money at all as to do so would violate the EU Treaty’s prohibition of monetary financing of government. (Click here and read Article 101.)
  5. The ECB’s current operating rules mean that it will lend to any bank that has eligible collateral and government-backed bonds are eligible collateral
  6. The taxpayer is contributing the money to pay for the NAMA assets because the taxpayer will have to pay the interest and the principle on these bonds.

I would be interested in finding out does any contributor to this site think that any of the above statements are not facts. Anyone wanting to read an earlier description from this site of the relationship between NAMA, the banks and the ECB can click here.

(Beyond facts, I would point out that to argue that the taxpayer is not contributing money to buy NAMA assets is equivalent to arguing that the taxpayer is not liable for the public sector pay bill because this is being paid for by IOUs.)

Now ask youself. Are Deputy Fleming and Minister O’Dea (both highly trained accountants) unaware of these basic facts about the operation of the most important government financial decision in the history of the state? Or are they aware and deliberately peddling inaccuracies about how NAMA will work?

Then ask youself: Which scenario are you more comfortable with?

52 thoughts on “NAMA From Heaven?”

  1. @Karl
    You’ve just described Misinformation Vs Disinformation. The former represents technical incompetency, the latter entails deliberately making false statements. Why didn’t the Greens insist on a Sarbanes-Oxley Act type legislation as part of the Bill?

  2. ad of course Frank Fahy on newstalk was saying the same thing today
    They are selling the steak, not the sizzle….

  3. Ministers may or may not be aware of reality. It doesn’t matter.

    The purpose of a ministerial media appearance is to peddle a line that will protect the governing party. This line may or may not be in any way related to reality. It doesn’t matter.

    This is not about debate, it is not about economics, it isn’t even about Nama. It’s about politicians peddling a line, getting out of a tricky corner. Sufficient unto the day . . .

  4. @ Karl

    i think that, accountants or not, people are confused about the exact role of the ECB in all of this. To simplify, i would suggest that the ECB is underwriting the entire process, while the Irish taxpayer is underwriting the NAMA bonds themselves.

    It’s a very important nuance, but one that is easily, and forgivably, lost on many people. The ECB is taking on much of the credit risk via the repo operations, and they’re lending the liquidity back via this same process. They’re taking some risk, and they’re providing all the actual liquidity. They’re holding the bonds, and they’re giving us the cash. Therefore in many people’s eyes the ECB is lending us the actual physical cash via the banks. As such, i can see where and why people are going wrong.

  5. Ah so the 1.5 is interest being payed to the Irish Banks. I suppose the reason they world it the other way, is because this again would outrage the public. The view being, we are aleady saving their asses by overpaying initially, but on top of that, we have to pay them 1.5% interest for the priviliage of doing so.

  6. @Eoin
    a rude word, indicating the male reproductive organs. Come on. This is politics, not economics. SF and WoD well know, as do FF, the reality. They are trying to throw dust in the eyes.

  7. Can anyone clarify to what extent this cunning plan is predicated on the ECB maintaining their unlimited fixed-rate tenders? Because these will roll off in due course. What is the plan envisaging at that point?

  8. @ Karl

    do you think that most members of the Dail actually understand how this process will truly work?

    If i said that a 10 yr bond, issued by the Irish state, at libor +50bps, via NAMA, to the Irish banks, held on balance sheet at par, on a hold-to-maturity basis, and repo-ed at a current rate of 1%, with a small haircut, to the ECB, via their open market operations, essentially amounts to a clandestine attempt at quantitative easing, by the EU and the ECB, what percentage of the Dail do you think would still be following me after the word “par”?

    Unfortunately our political class is shamefully under educated as a result of the job for life assumptions many of them take on when they enter the political world.

  9. I don’t think there’s any dispute to be had here: if Willie O’Dea and Sean Fleming set out the basic facts of the bonds as simply as Karl just has, NAMA would be defeated immediately and the two debates hung, drawn and quartered.

    It’s interesting that neither of the main opposition parties have brought up the fact that the government will pay the banks interest either. Labour probably don’t know what a bond even is, but FG’s silence is more interesting.

  10. @ Eoin

    What if you said that we were going to buy loans from the banks by giving them government bonds and they could use these bonds to get loans from the ECB? Would that really strain their brains?

    And if you knew that these government representatives were going on the national broadcaster to explain this plan to the public, wouldn’t you sit down with them for whatever length of time it took to get this into their brains?

    But, look, as I indicated in the post, neither scenario is particularly good. And I’d agree with your concluding statement.

  11. @ Karl Whelan

    Sadly I think Eoin is probably correct and the vast majority of our elected politicians (of all stripes) have no clue what they are discussing today. No doubt there is a huge element of spin going on but, even under a lie-detector secenario, I very much doubt any of the Government ministers could accurately describe the NAMA process.

  12. @ Karl

    sorry, completely agree with your second paragraph, there’s lots of poorly prepared and informed public representatives who think they know more than they do. Particularly when it comes to financial and economical matters.

    Re “they could use these bonds to get loans from the ECB”. My girlfriend still cant figure out what a bond is. She thinks its some sort of deposit. Luckily she’s pretty. Most of the Dail are definitely not…

  13. btw

    can we just clarify what exactly is going on in the Dail today? They’ve just voted on the order of business, and now they are discussing/debating the 2nd stage of the NAMA Bill, which should last a few hrs and then voted on tonight/tomorrow for progression to the next stage (committee stage?)? Correct?

  14. @Brian, either I’m misunderstanding the whole thing, or I’m very surprised people aren’t making more out of this funding mechanism relying on temporary ECB programs. Presumably once these emergency liquidity programs roll off, then Irish banks can join the queue for funds, but the ECB won’t be providing anything like that amount. We will then see a tsunami of NAMA bonds hitting the street, with obvious implications for funding costs.

  15. Today is the second stage. They will then vote to put it forward to committee stage (or not as may be). That should be tomorrow I think.

  16. @ Andy

    you’re correct to an extent. They will have to go for competitive tenders after the unlimited supply is turned off. However, these were, historically, very stable and predictable tenders. The rate was generally widely known beforehand and the amount you needed was generally easy to get. May not be like this going forward, of course.

  17. @Andy
    “We will then see a tsunami of NAMA bonds hitting the street, with obvious implications for funding costs.”
    duh……But thats only true if a) it is shortterm as we suspect and b) its something you have thought of and care about.

  18. @ Karl
    A plague upon radio and tv interviewers for facilitating this nonsense.

    You should go on radio and partner up with… George Hook etc to interview the politicans.

    Media presents boths sides, and up til now that is what has been tried. perhaps it would be better to be the interogator??

    Dont use the George Hook smiley!!!

    Please
    Al

  19. @Eoin

    OK, I just looked it up. Before things got a bit sticky, ECB were injecting ~300bn EUR via their main refinancing operation.
    Now who knows what this number will be in future. But now we’re looking to earmark ~60bn just for NAMA bonds. And it’s not as if we’re the only ones with rubbish to fund.
    So I can see a situation where Europe normalises much faster than Ireland (this is pretty much baked in the cake), and our liquidity needs are perhaps far out of step with the Eurozone in aggregate….and then…as BL says, it’s someone else’s problem, ie your’s and mine.

  20. Eoin
    History is dead, haven’t you heard? 😉

    This depression is about to get worse and yet there is little urgency with regard to borrowing so much, that will have to be repaid at a time when the country recalls 77% rates of tax were once felt fashionable and the economy is to be like a perished rubber band.

    Still, if you are all content, what right do I have to complain? Seems the Dept of InJustice has been caught out, over on Gavinsblog. Business as usual then?

  21. Let me get this straight. we buy the loans off the banks, using NAMA bonds that yield 1.5%. Given that 60billion (Approx) in bonds will be issued.. We the tax payer will have to pay 1.5% interest to the Banks, or 900m/Year!
    900 MILLION to the banks every year in interest. Is this correct?

  22. @Karl

    “6. The taxpayer is contributing the money to pay for the NAMA assets because the taxpayer will have to pay the interest and the principle on these bonds”

    FF and other commentators are suggesting that the taxpayer will not have to pay interest (initially anyway) as NAMA is supposed to be self-funding i.e. interest on conforming loans will subsidise the non-performing ones. Plus they’re going to arb the yield curve as Dowling of DKM put it

    In addition, the proposed Bill allows for the issuance of Zero’s (obviously subject to a discount at the ECB window – BL has made this point before), which could be rolled-over and redeemed at par by increasing ever-increasing amounts of more Zero’s – ultimately redeemed by NAMA by sale of property assets. Tenuous I know, but surprised Fahy et al haven’t stumbled upon this ruse yet.

  23. @ Martin

    ….in return for all the interest on the 90bn of loans. At an average rate of 3.5-4.0%. So 3.375bn in interest paid to the taxpayer. Even if only 30% of the loans were actually paying interest then NAMA will pay for itself.

    I’m not declaring this to be the case, or that this is a good deal given the credit risks, but it would be unfortunate if all people read was “we’re paying the banks 900mio a year”…

  24. @ Brian Lucey

    If taxpayer pays cpn on Nama bond, whilst Nama receives interest on performing loans (good assets) => Nama highly profitable….. so at what point does Nama give cash back to State?

  25. Derek – AFAIK its whenever its wound up. Dont have the bill to hand….I suspect that that wont be an issue however.

  26. @Brian
    @Eoin
    Thanks for clearing that up.
    How many loans are performing???
    What if the ECB raises intrest rates, or would this affect NAMA?

  27. @ Martin

    we’re assuming (me anyway!?) the NAMA bonds will be floating rate coupons. As ECB rates rise, so will NAMA coupons, but so too should the interest payable on the loan assets.

    No idea on performing loans. Will hopefully get an idea of that today.

  28. I agree with KW’s statements.

    The following statement is slightly inaccurate but close to the truth:
    “The ECB has agreed to give NAMA money … If the ECB disagreed so fundamentally, as George Lee suggested, with the plan, then they wouldn’t be prepared to come up with the money.”
    It is inaccurate because the ECB won’t be giving NAMA money but will be giving cold hard cash in return for NAMA bonds. It is nearly accurate because the ECB would not agree to repo the bonds at par if they were not happy with the plan. However, it is not clear yet that they will be repo’d at par. All very unsatisfactory.

    I didn’t know Willie O’Dea was “highly” trained. He is known for “straight talking”. Politicians will always deliver the message in the way they think people will understand it. Willie was not directing his comments at economists and finance experts. Personally, I have not been impressed by his contributions on NAMA to date, especially his over-blown promises of how much credit will be available post NAMA, and I thought that he had been sidelined for that reason.

  29. Interesting that the minister is still selling the 80% windfall tax on rezoned land.

    So the only game in town for those wanting to buy development land will be NAMA.

    No market distortion here, nothing to see. Move on…

  30. Am I the only one that finds it odd that rte cut off coverage before any of the other parties have an oportunity to respond to it? Sure they are continuing to show it on their website. But what % of the population will or can follow it on the internet?

  31. NAMA report goes on about yields in S. 2 but this is only in respect of offices, retail and industrial property sector. The report is silent on resi. Why? Because yields are still low = prices are still too high.

  32. I guess yeah. I did want to see how to boil an egg on the afternoon show!

    One thing I find hilarious is, 10 minutes after it goes off the air, 80% of the ministers had left the dail.

  33. @Noel “rte cut off coverage before any of the other parties have an oportunity to respond to it”

    You have no idea how hacked off I was when they cut TV coverage 10 seconds into the first response and then I couldn’t find wifi on my laptop and couldn’t switch to the web to continue to watch it.

  34. @eoin
    The notion that Nama will trade at a profit is not that certain. Yes it will have positive cash flow from good loans and it may cover its operating costs initially. But good loans will (a) go bad (b) be repaid (c) be sold off
    The duration of the good loan book is unknown and unless all are interest only loans, interest income will decline as NAMA’s costs escalate.
    What price will be paid for good loans? Is it their face value? or does LTEV apply adjusted for default risk? If it is the latter then this reduces net interest income….

  35. Ok this may be a stupid question but why should we pay €54 billion for loans that are worth according to the same report €47 Billion. Are we feeling generous or something? I don’t see why we just did not use our bankruptcy laws to resolve our failed banking system and maybe even put a few bankers in the dock for acting too recklessly while in charge of OTHER PEOPLES MONEY…

    This is an example of why we do not live under free market capitalism, it shows that when push comes to shove private financial institutions are more important than either the market they work in or more fundamentally our own taxpayers. They have failed so we must pay the price. What happens when they do this again as they will as they have broken already the unenforced (possibly unenforceable) regulations under which they are supposed to function.

    Inverse reinforcement is not a way to try to change a system that is non-functional on the most basic level. You would not give a dog a bone after he peed on the carpet saying don’t do that again. If we live in a free market let it judge who succeeds and fails not political entities. Free markets work, they are frequently not fair or equitable but they do what they are designed to. When an external force attempts to “fix” a problem with a market they invariably create effective oligopolies at best and private monopolies at worst, neither of these is in the public interest so a state should not get involved.

    This is unfortunately a long post but this thread has not looked in truth at the core problem with NAMA, that it benefits those already in the market for their “mistakes” and thus prevents fresh blood from entering and creating the necessary changes to have a properly functioning financial service sector.

  36. Roj “What happens when they do this again “.

    They always THOUGHT that if there were problems, governments would step in and bail them out. Now, they KNOW that they will. That makes the situation even more dangerous.

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