Guest Post from James Nix (Green Party)

James Nix from the Green Party has written the guest post below.

Like every other Green Party member planning to go to the RDS on Saturday, I have to make up my mind on NAMA. Beginning with a simple question, I sought to find out how many loans will NAMA.

Back in July the Department of Finance said there were 10,000 loans relating to property development. In late August the figure changed, increasing to 18,000. A significant leap you might say.

Then came 16 September when Minister Lenihan spoke for over 20 minutes in the Dáil on the subject as well as publishing additional information. There are, according to the mid September data, “approximately 21,500” developer-related loans. But the 16 September figure excludes all loans under €5 million. How, at the same time as the category of loans is contracting, can the total number of loans rise?

More recently, the figure of 23,000 loans has been reported. Clearly, the number of loans to be bought by NAMA is following a steep upward curve. There appears to be no ceiling and the legislation doesn’t set any. With such a flexible definition of what constitutes a NAMA loan, a drop in values over the coming months can very conveniently be compensated for by growth in the number of loans. So we don’t know how many loans we are buying through NAMA, only that it is growing, and quite rapidly. 

What do NAMA loans comprise? The loans, we were told in July and August, divide in thirds, with 33 per cent in finished buildings, the same number again in partly-finished buildings and the final one-third in development land. Those figures were quietly dropped on 16 September. Now, 28 per cent of the loans are in a category called “development” while 36 per cent are in “land”, with the balance of 36 per cent in “associated loans”.

What do “associated loans” comprise? Any loans that can’t be fitted into the “development” category, which presumably includes construction finance, are troubling to say the least. So what were the loans for? “Associated loans” is a bit like naming a category “unidentified”, which might be amusing if it did not carry a loan burden to taxpayers of €19.4 billion. On 16 September there was to be greater clarity but in the case of the loans, the situation became worse, not better.

So, to summarise so far: we don’t know how many loans are to be bought and we have really no idea what close to €20 billion of the loans are for, but that they don’t fall into categories titled “land” or “development”.

Will the plan work? The aim is to release finance to businesses so, for example, the overdraft period of creditworthy companies can be extended, given that customers are currently taking longer to discharge debts. Are clauses due to be attached to the NAMA bonds to place parameters on how the banks can use the money? No. Nothing has been put forward is the simple answer. The banks are free to pay down inter-bank debt and leave Irish businesses high a dry, which is presumably what they will do because that’s what makes most financial sense, and since and nothing has been drafted to ensure they do otherwise.

Will the plan ensure that NAMA loans are properly treated? The best way to look at this is to take an example. Let’s say the loan on an empty office building on a street corner is bought by NAMA, so indirectly that loan is then owned by you, me and every other taxpayer. However, the bank still handles that loan and, under the legislation, is paid an agency fee for dealing with something it doesn’t own. A few months later, the same bank (having sold the loan on the corner building) decides to grant a new loan for the refurbishment of a competing office building a few doors up from our corner office block.

The bank knows its new venture will be far more attractive and that repayments on the corner building, held under a NAMA loan, are probably going to cease because it will be empty for years. “It is necessary to ensure clear functional and organisational separation between the beneficiary bank and its impaired assets, notably as to their management, staff and clientele” according to EU rules on buying loans from banks. Eight months into designing NAMA, these rules don’t yet seem to apply in Ireland.    

To avoid conflicts of interest, the Green Party secured a ban on lobbying NAMA. The Department of Finance accepted the amendment but sanctioned a near-useless penalty of 6 months in jail or a €1,000 fine.

The real problem with all the above is that, with a little work, they could be resolved. The set of loans could be fixed, and a definite number released. Research and diligence could break down “associated loans”. We all know there are helicopters, horses, Iberian hide-aways and yachts stuck in the NAMA category but we do not know the proportion that they make up: in advance of finding out, is it responsible to vote for a proposal where €20 billion of the purchase material is unidentified? 

The stated purpose of NAMA is to ensure facilities are extended to creditworthy businesses: without bond clauses that do this – even in draft form – what’s the point in voting on elaborate legislation?

We’ve seen where failure to avoid conflicts of interest has got us in the past. Given the sums at stake, the penalty for lobbying NAMA would need to be €2 million fine and/or 12 years in jail, not €1,000 or 6 months. Anything less won’t act as a deterrent, and so won’t work. Is it right to give the thumbs up to repeating the mistakes of history?    

The only affirmative vote I could give on NAMA is a yes to coming back on the last weekend of October. It simply doesn’t make sense to further debate a scheme where the basic parameters are becoming murkier rather than clearer and where there is no enforceable mechanism to achieve the primary objective.

jamesjnix@gmail.com James Nix stood as a candidate for the Green Party in the last general and local elections. He holds a masters in real estate and is also a barrister.

30 replies on “Guest Post from James Nix (Green Party)”

Excellent post. You might also wonder about the derivatives that NAMA will purchase and how the ‘value’ of them is being guesstimated.

Maybe the derivatives come under the category “Associated Loans”. Plenty of room for a bit of derivative exposure in €19.4Bn of unidentified loans.

@ James

Don’t see any mention of the €5Bn which NAMA can raise on its own account for “finishing out” purposes. This is also guaranteed by the State.

NAMA can then borrow any amount above that, but without the guarantee.

My guess is that if NAMA borrowed €5Bn + another €10Bn we be on the hook for that as well. There’s no way NAMA can default guarantee or not.

@ James

“Are clauses due to be attached to the NAMA bonds to place parameters on how the banks can use the money? No. Nothing has been put forward is the simple answer.”

As you say the banks can pay down their own borrowings rather than lend to the real economy.

AIB & BOI have vast amounts to refinance in the next two years.

Anglo Irish alone will absorb about €20Bn of initial NAMA funds. There isn’t a hope in hell of one cent of that money making its way out of the black hole that is Anglo.

The same could probably be said for Irish Nationwide, €4Bn give or take.

James, nearly have the money has already been earmarked to pay of foreign banks probably including the ECB.

I think your office block metaphor is a good example of the “Principal-Agent Problem”. The agent is this case being the bank has every incentive to game the relationship for its own benefit. No amount of oversight can get over this as the overseers will be “captured” in the relationship.

There is also an information asymmetry issue. The nature of the relationship between NAMA (as principal) and the Bank (as agent) leaves NAMA at an insurmountable disadvantage in terms of the information it has, and on which it will make decisions, as that information will largely be provided by the Bank (agent).

In short, James, once NAMA is up and running who will be pulling whose chain? Which will be the dog and which will be the master?

@ James,
thanks for your work. I have followed Nama from early on. I didn’t think I could still be shocked but I am. I am very, very sceptical that banks, of all people, would not be keeping good information on loan categories. I would allow for some variation. But to go from 10,000 in July to 23,000 in September, while additionally excluding all loans under 5m, which are the ones most likely to be missed, is simply suspect. For one thing we have owned Anglo for a long time, and there has been no clearout of AIB and BOI top management so one must assume Lenihan thinks they have been cooperating fully.

How does this steady increase in the number of loans square with what Brian Lenihan said in an interview with The Irish Times on Feb 11:

” “We are at a great advantage that many of the larger (European) states have very extensive loan books and it is very difficult for them to do the type of comprehensive trawl through their banking system that we have been able to do,” said Mr Lenihan, who noted that a lot of the toxic assets held by European banks related to commercial paper, which was much harder to value than the property-based debts held by Irish banks.

He said the Government had an estimate for the amount of toxic assets held by Irish banks but he preferred not to release it. It had been stress tested against the expected downturn in economic activity this year and fed into the bank capitalisation scheme.”

As a long time observer of the minister I am not surprised by this. Just surprised that he has revealed the information to you.

I do not want to turn this discussion into a personal attack on the minister:
Brian Lenihan as a politican can actually be very truthful.
He can also be very misleading.
But what he does absolutely consistently is say whatever will get him out of a corner at a particular time, even if it is misleading. I am sure if we put the above statements to him he could produce a plausible answer, but I am not sure if it would be his final answer. But one of them could well be true.

God himself could not fix Nama in these conditions.

“The real problem with all the above is that, with a little work, they could be resolved.”

I differ with you on this James.

The real problem with all of the above is that there was never any intention of “resolving” the problems.

In that respect NAMA is very similar to Hank Paulson’s original TARP proposal to Congress, which was “Give me $750Bn to buy toxic assets or the economy gets it”. That was TARP 1.0.

TARP 1.0 is what Brian Lenihan thinks was implemented and successful. It wasn’t and it wasn’t.

Paulson changed tack when he realised it wasn’t going to work and decided to invest the money directly in the banks for on terms that gave the taxpayer some upside. That’s TARP 2.0. So far it has worked and some of the banks have repaid funds.

Brian Lenihan is completely wrong on this.

Ask yourself, what is to stop the State providing “liquidity” directly to the banks and insisting that that liquidity is ring fenced for the purposes of dealing with the toxic debt.

I guarantee you James AIB & BOI will need substantial sums in addition to NAMA, maybe €15Bn.

“The stated purpose of NAMA is to ensure facilities are extended to creditworthy businesses”

James, that may be the stated purpose but what makes you think it is the actual purpose?

“The only affirmative vote I could give on NAMA is a yes to coming back on the last weekend of October.”

Your leadership won’t risk that. You get one shot at this James, just one.

Aim well. Don’t be distracted by all the smoke and mirrors..

The thing about the lack of discosure is that if any of this information strengthened the case for NAMA, it would be disclosed.

@James
“To avoid conflicts of interest, the Green Party secured a ban on lobbying NAMA. The Department of Finance accepted the amendment but sanctioned a near-useless penalty of 6 months in jail or a €1,000 fine.”

I have no property interest, but if I did, and enough was at stake, I’m sure it would briefly cross my mind. How many people are in jail for corruption in Ireland at this moment?

“the penalty for lobbying NAMA would need to be €2 million fine and/or 12 years in jail”

I’d say we’ll be given 10,000 fine and five years. They’ll get 3, 2 suspended, out in 8 months. It will still be worth it lobbying.

“EU rules on buying loans from banks. Eight months into designing NAMA, these rules don’t yet seem to apply in Ireland.”

Again it is rather startling how often we seem to accidentally forget to do things like this, or fail to ever bring a case to court.

“balance of 36 per cent in “associated loans”.”

On Nama, we are always one step away from getting our questions answered. What will it be like when Nama comes into operation? To paraphrase a famous Briton this is the information they are giving when they are trying to woo us, just wait until they get us into the harem.

“in advance of finding out, is it responsible to vote for a proposal where €20 billion of the purchase material is unidentified?”

The real question is why we still don’t know basic things like this. The headline on The Irish Times article from 11 Feb 09 was:
“Lenihan says Government will consider setting up ‘bad bank'”
Here we are 9 months later still begging for basic information on the biggest financial decision in the history of the state.
With the Green Party in government?

“The stated purpose of NAMA is to ensure facilities are extended to creditworthy businesses”

Like Greg I’d be sceptical. The goal of banks it to make profits not to lend money. When Nama was first mooted the objective constantly stressed was to make the banks solvent. It was only later that supplying credit to began to be stressed. The absence of even token obligations to lend from the draft legislation speaks volumes.

@ James Nix

A welcome post here … and I have real sympathy for the ‘difficult political decision’ facing the Green Party later today. Do the right thing, in my view, and can NAMA in the thrash can ….. and your political party will struggle in a snap election … but a good few Senate seats surely can be negotiated with Labour/Fine Gael for your place in the next administration and with ministerial profiles ……… and you come back stronger in the following elections. Cut the deal. Saving the future Irish citizen takes precedence over saving the planet in this case.

@ James

propose whatever motion the anti-Nama side can agree on. Better to delay this & try to improve it than take a stand and have it pass. But don’t concede too much. I’m sure you’ll get the balance right.

Here is what I suggest as a much better process than what we have had:
Ask to convene a meeting of all our academic economists & the ESRI.
Have them elect a panel to review the state of our banks.
Get the panel to draw up a proposal and put it to a second meeting of the above.

Give them a month so that axe grinders can’t say it is an unaffordable delay.

Then look for cross-party approval.

Good luck tomorrow. Speak for Ireland.

@ James Nix

What the Greens have to remember later today is that the document called the “New Program for Government Part II” is not the issue facing the Greens, it really is a smoke screen for NAMA

Fianna Fail are in such a mess they would have promised to sign up to literally any Green wish-list. But that is precisely what it is a wish-list because it will never be delivered and FF’s signature may as well be the signature of Patrick Sarsfield it will be broken before the signatures are dry. FF have made it crystal clear all along not just what they want, but what they need….NAMA.

Once that is over the line, FF will no longer care if they are in or out of government. They will stumble along haphazardly until someone steps on one of the many land mines then they will say “Greens we tried”.

One of the biggest property developers in Ireland announced on the Late Late Show that he had a “private meeting” with Mr. Lenihan and told him you must ” hold your nerve on NAMA” Right there, that tells you everything you need to know! Otherwise, a number of Irish property empires built up assiduously over the last 20 years will flop.

I sincerely hope that the Greens are not fooled by a sheaf of paper that Gormley and Ryan will hold up tomorrow declaring “Peace in Our Time with FF”. Unfortunately or fortunately depending on your viewpoint Stiglitz is correct overpaying for loans is a transfer of tax payers money to banks, bondholders and these people that have property empires.

So NAMA is really a Pantied-pig with Lipstick after all. Well, well. Who would have guessed?

Reason for NAMA:

IT prevents a severe property value deflation – massive loss of asset value to ALL property owners, domestic and commercial. Totally unacceptable both politically and economically. NAMA will of course ‘save’ the developers and the financials since their losses will be disguised. The government (aka FF) guarantees to debt holders is backstopped by the sheeple (aka the taxpayer). So its Happy Days!

The faux deflation we are experiencing is a ‘temporary little arrangement’. The current deflation is due to continuing job losses and falling incomes. In past times we could use devaluation of currency to pull us out of recession. However, we cannot unilaterally devalue the Euro, so we must inflate- very slowly! This has to be done ‘under-the-blanket’ lest it spook the Euro bond holders. Hence NAMA and those stimuli!

This economic downturn has a long way to run. Its not the game you need to pay attention to, but the subversive actions on the side-lines!

Brian P

Last weekend I wrote to all TDs and senators requesting that the Nama legislation should include provision for a whistleblowers’ charter to cover staff within Nama, covered institutions, debtors, advisers and service providers so as to help ensure that these parties all operate to the highest professional and ethical standards. This would complement proposed provisions covering corruption, acting in bad faith, conflicts of interest, lobbying as well as failures to comply with obligations.

Maybe I’m old fashioned but I find the fixation on banning lobbying bizarre. It implies that there is no faith whatsoever in those who will run NAMA.. While I have little faith in the whole thing I think to be attacking peoples’ right to lobby a bit bizarre and extreme.

NAMA is a joke but the no lobbying rule is also a joke as you seem to admit.

@ BW No.2. We’ll have to stop meeting like this! I switch my ID to B P Woods. OK?

Brian P (No.1)

Ciaran Daly Says:
October 10th, 2009 at 12:26 pm

Ciaran,

“Maybe I’m old fashioned but I find the fixation on banning lobbying bizarre.”

There’s nothing wrong with being old. Personally I don’t do fashion.

So I’ll take it you mean, when you say “old fashioned”, it is a meme which suggests let the same old be same old.

I don’t think I have to explain the Principal/Agent problem or the pitfalls of information asymmetry, you need look no further than a couple of comments above.

So, tell me this Ciaran with €60Bn on the table are you seriously suggesting that “lobbying” could be beneficial?

@ Ciaran

“It implies that there is no faith whatsoever in those who will run NAMA”

Who will run NAMA and why do they deserve my faith?

Is NAMA a Religion?

@ Ciaran

“While I have little faith in the whole thing I think to be attacking peoples’ right to lobby a bit bizarre and extreme”

Ciaran, I don’t wish to be inconsiderate of your thoughts here, but do you not think that saying on the one that “I have little faith” and on the other “right to lobby” might be a contradictory proposition?

Also, and I do have to make a point here. There is “no right to lobby” in the Constitution or in Statute.

@ Ciaran

“NAMA is a joke but the no lobbying rule is also a joke as you seem to admit.”

Ciaran, I’m not sure I understand this. You say that NAMA is a joke.

OK,

How can “lobbying” not be a joke if NAMA is a joke?

“as you seem to admit”

Is that a general assertion or is it directed at me?

Help me out on this, I don’t understand.

@James Nix

OK James – you tried – and democracy is respected. Now within the GP keep up the focus on Naa-Maa and how to ‘tame this monster’ ….. in the upcoming Dail sessions etc ………. and maintain this ‘dissident voice’ ….. all we got at the mo is an upcoming BadBadBad-Bank …………

From the State Car Extension Agreement, preface para 1:

“(FF) and (GP) have worked well together over the past two years providing good government for country (sic) during a period of unprecedented global turmoil”

falsum in uno, falsum in omnibus

The excerpts are quite telling:

“Will the plan work? The aim is to release finance to businesses so, for example, the overdraft period of creditworthy companies can be extended, given that customers are currently taking longer to discharge debts.”

“The stated purpose of NAMA is to ensure facilities are extended to creditworthy businesses: without bond clauses that do this – even in draft form – what’s the point in voting on elaborate legislation? ”

The objective of NAMA shouldn’t be to “ensure” anything is extended.

The policy objective here is to remove the short-term impedements to banks to consider providing lending or lending facilities.

It sounds the same, but it isn’t.

There is too much supply is many areas of the Irish economy, be it construction, retail, car distribution etc. etc. Within these industries are plenty of “good businesses”. The unassailable fact is that there are too many businesses, period. Many still will fail. It is an unavoidable fact. No policy shuld be directed at supporting supply, be it via balance sheet support through the banks, or subsidies or direct debt and tax financed public expenditure.

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