NAMA’s draft business plan has many bizarre aspects. Chief among them, however, is the claim that only 20% of the loans purchased by NAMA will default, with the other 80% of loans eventually paying off in full. The plan justifies this as follows:
Over a five year period in the early 1990s, one UK bank experienced a default rate of less than 10% on its whole book. Given the concentrated nature of the prospective NAMA portfolio and the risk of a prolonged recession, a 20% default rate assumption has been made.
Fianna Fail TD Frank Fahey on Morning Ireland stated that the UK bank in question was Barclays and that this comparison means that the 20% default rate assumption was “prudent” and “conservative” and “much bigger than it needs to be.”
So the argument here is that because the default rate on Barclays’s total loan book in the 1990s was less than 10%, this means that it’s ok to assume that the default rate on NAMA’s assets will only be 20%.
I think this is perhaps the most odious comparison we have heard yet in the NAMA debate. The Barclay’s loan book being referred to (its “whole book”) included all sorts of loans with low average default rates. However, the NAMA loan book is a selected class of assets—property and development loans—specifically chosen because the losses on these loans are so large they are threatening the solvency of the Irish banking system.
The reasoning underlying the default rate assumption is akin to asserting that because only 10 percent of men are taller than six foot, it’s reasonable to assume that no more than 20 percent of a basketball team will be taller than six foot.
The fact is that NAMA only exists because this particular class of assets is performing so badly that a radical state intervention is being planned to save the banks that made these loans. Perhaps I missed it, but I don’t recall such interventions being planned in relation to the total loan books of UK banks in the 1990s.
The bottom line here is that it is patently clear that far more than 20% of these loans will fail to be paid back in full. That this claim can be released to the public in the expectation of being taken seriously is an indication that we have really moved into cloud-cuckoo territory.
As an aside, I’d note that Fahey also stated that the banks “were borrowing the money at 1.5%”. This is the famous 1.5% that is the initial interest rate that the government is paying to the banks. Yet again, we see another example of government spokesmen who don’t even understand the basic mechanics of NAMA in the sense of who is lending money to whom and at what rate.