FT: NAMA, SPVs and Other Irish Magic

Here‘s an interesting column on NAMA from the FT’s Alphaville.

31 replies on “FT: NAMA, SPVs and Other Irish Magic”

Does this column not, like so many other supposedly well informed articles, conflate the two distinct ideas of loan value and underlying asset value? There’s no September value of the loans – it’s September value of the ASSETS? And similarly it’s the ASSETS that have to appreciate by 10%?

If FT columnists can’t understand it what hope do the public have?

It was actually an exceptionally well informed article and very up to date as well. Yes there was the slip-up you mentioned above but it was an honest mistake, and that’s very important.
As for the 10% asset appreciation, independent property loan expert Peter Mathews has analysed the figures.
Given these are property loans we will be buying the price of the underlying assets will have to go up by 100%!
And that I believe is if our recession is as bad as the UK’s in the nineties was for Barclays property loans – things are looking much worse for Ireland now.
I think Mathews’ analysis showing a probable NAMA loss of €20 Billion is now optimistic.
We are now verging on a depression. And you don’t get 100% property rises in depressions!

I don’t doubt it was an honest mistake but I also don’t think it’s pedantic to point it out; the error was made twice in a presumably fairly rigorously checked article which suggests confusion rather than a typo. I wasn’t querying the 10%/100% asset rise – if we can’t even expect accuracy on the actual terms of the NAMA plan, we’re speculating based on false assumptions to begin with?

I didn’t read much new in the FT link, though now that I’ve started typing ;)…. below is an area I like to hear some views on…

For NAMA to offload its assets, it will require massive private sector investment in property. (it’s reasonable to assume that much of this “investment” would be in the form of debt).

At present, it appears that NAMA will be joined by some private sector distressed debt funds which intend to buy loans from foreign owned banks (Duffy’s ARC etc). It also seems that most foreign owned banks don’t want future Irish credit risk (I’d assume deposits will be welcome over the phone and internet). And it’s probable that 1 or 2 existing Irish banks will cease to be.

The remaining Irish banks will still require funding from abroad for their existing balance sheets. Selling NAMA bonds would help, but I’d wager they’ll stay on their balance sheets.

So, will remaining Irish banks lend the amounts NAMA will need? What will their balance sheets look like? Will credit to enterprise suffer? In short, where will the money come from and will there be enough?


NAMA’s own documentation and various statements by the Minister for Finance have all equated the value of the loans as being the same thing as the value of the underlying property assets. (Commeter Zhou has pointed this out in a number of occasions.)

As such, I’m not sure it’s fair to pick on the FT for discussing the figures in the same terms as the NAMA people do.

@Karl Whelan
point taken – if a little amazed – sorry if this has been considered but do you think that that’s civil servant sloppiness or something more deliberate?

@Karl Whelan
Mr Constantin Gurdgiev had a new post on NAMA yesterday:


And there was one a few days ago as well:

While on the subject of property price falls the Irish Times has some good news:

It looks like the bottom has been reached in the housing market, just in time for NAMA and a little above the LTEV predicted by Minister Lenihan.
How convenient. A 40% fall from peak – that’s it, it’s going no lower.
Looks like we’ll be paying the full €54 Billion.


It is interesting because it means we still don’t know what the mark up from MV loans to LTEV loans is.

The ECB opinion said “In particular, it should be ensured that the assumptions to determine the long-term economic value of bank assets will not involve undue premium payments to the participating financial institutions to avoid creating inappropriate incentives from their side as regards the use of the scheme.”

How can we determine if there is an undue premium if we do not know the market value and therefore the premium?

If a market value for properties exists then how can there be no market value for the loans? If it is because the loans are complex (and they shouldn’t be as the banks have standard suites of documents) then why are we referencing the market value of the properties? If we at least knew how LTEV of property related to LTEV of the loan it would help.

The EU Commission Communication seems to allow more latitude: “The determination of the real economic value for the purposes of this Communication (see Section 5.5) should be based on observable market inputs and realistic and prudent assumptions about future cash flows.”

However, the EU guidelines do suggest that you need to know the market value of loans and to assess them from time to time: “The valuation method to be applied to eligible assets should be agreed at the Community level and could vary with the individual assets or baskets of assets concerned. Whenever possible, such valuation should be re-assessed in reference to the market at regular intervals over the life of the asset.”

Considering that we have not referenced the MV of the loans but that we do have a business plan it would appear that we are following this method.

[I must say that when I started writing this post I thought I would find quotes to say that LTEV must be linked to current MV. The above extract in the commission communication suggests that is not the case. This appears to be why the Govt is assessing the LTEV of loans directly from the MV of the security. The MV of the loans plays no part in the calculation.

The confusion possibly arose from commentators being criticised for referring to property values rather than loan values. People logically thought loan values should be referenced based on such criticism. That appears not to have been the case however.]

The question then arises as to whether a more detailed version of the NAMA Business Plan exists and whether it makes detailed assumptions about cash flow and provides for prolonged international recession.

In this regard the Commission Communication stated: “Whatever the model chosen, the valuation process and particularly the assessment of the likelihood of future losses should be based on rigorous stress-testing against a scenario of protracted global recession.”. If LTEV is to be assessed for each loan on the basis of cash flow etc then we need to know how individual loans will be stress tested and a protracted global recession will be factored in.

In any event, it is peculiar that we do not have an MV for loan assets now given that We know that the market value of the loans will be assessed on an ongoing basis and that the coupon on the “subordinated” NAMA bonds will depend on the valuations. Brian Lenihan said: ” In the end, we settled on subordinated debt because having issued subordinated debt NAMA can withhold payment of coupon if there is a depreciation in the asset value and can withhold the payment of the principal sum at the end of the term if there is a substantial depreciation in asset values”.

It is of course possible that we do have an MV for the loans but that it is not being discussed as it may be too unpalatable for the public.


While I am here, I want to comment on the coupon payable on NAMA “Subordinated” Bonds. The Minister repeatedly stated that the bonds had to have a substantial coupon because they were “subordinated”. This is nonsense which is belied by the fact that the legislation as initiated specifically provided for a possible zero coupon: “S.47(1) NAMA or a NAMA group entity may, whenever and so often as it thinks fit, create and issue subordinated debt securities of such class or type as it specifies—
(a) bearing interest at such rate as it thinks fit, or no interest,”

The constant remarks that high coupon must be paid because that is what “subordinated” means reminded me of the Homonymy debating trick in Schopenhauer’s the Art of Controversy. “Subordinated” NAMA bonds (SNBs) are not the same as “subordinated” bank bonds where investors give the banks money at risk and get a higher return.

NAMA is the one giving money, not the banks. The Minister says, “Nobody advances a principal sum without taking a substantial coupon for the risk inherent in the advance of the sum on a subordinated basis.” However, the banks are not advancing a “principal sum”. NAMA is taking the bank’s risky assets. The bank is not taking NAMA’s risky assets. the risk inherent in the SNBs is the risk in the assets owned by the banks which the Govt is paying bonds repo’able for hard cash.

It is the bank’s risk and they are getting a coupon on it!! If they were called NAMA “contingent” bonds then would we have the same debate? “Subordinated” is clearly a homonym on this case. I note the Minister could not say Prof. Honohan endorsed or was enthusiastic about his plan. The view that the valuations (of what? of LTEV) was “not disproportionate” was not encouraging.

Also it is appears that the NAMA coupon will be paid annually if the MV of the assets increases annually (based on what valuation methodology we do not know). I will quote the same line from the Minister which indicates that only the principal is withheld at the end if there has been substantial depreciation in asset value:

“In the end, we settled on subordinated debt because having issued subordinated debt NAMA can withhold payment of coupon if there is a depreciation in the asset value and can withhold the payment of the principal sum at the end of the term if there is a substantial depreciation in asset values.”

This suggests that the coupon will issue annually. Bizarrely, it also seems to suggest that asset values may not need to appreciate from current MV for the banks to get their principal back!!

It is irreconcilable for the Minister to say on the one hand to say that all gains must be socialised and should not accrue tot he bank when he is paying a high coupon on these SNBs.

The logical conclusion is that a high coupon is being put on the SNBs to help in the economic relief to the banks. If that is the case and not even 5% risk sharing within hold to maturity values can be accommodated then it is hard to be confident that the banks are actually solvent. It is also hard to have faith in the valuation process as it begs the question as to what the Minister/NAMA will do if the LTEV’s are trending 5% lower than expected? Will he be tempted to tack on an extra 5% to preserve the haircut level at 30% (assuming book value will not vary too much) to keep the banks in private ownership and to save the warrants??? The evisceration of the risk sharing by allowing high coupons on SNBs does not bode well in this regard.


I would also like to make a point on the ordinary NAMA bonds with 6 month re-sets. It appears that the Govt has found out that no such bonds can be issued. What we will be issuing will be ordinary 6 month treasury bills, as per the Minister:

“However, in the case of the six-month treasury bills which are the nature of the bonds which we will issue as consideration for the assets…”.

“….On Deputy Burton’s question as to whether the banks could collectively flood the market with all the six-month treasury notes in one simultaneous operation, while anything is theoretically possible, it is difficult to believe that banks which are systemically involved in the economy would have any interest or incentive so to do.
….Deputy Lee noted that interest rates are historically at a very low level and therefore some increase in interest rates is inevitable. What are the implications of this in terms of the six-month notes that are issued? The implication is that the notes are issued at the applicable rate from time to time. It is almost in the nature of a floating rate note that the State is issuing and it will vary depending on the applicable rate during the six-month period….”

How do we know how long the bills can or will be rolled over for and what is the mechanism? If it is linked to the SPV and it will hold the bills and pay cash then what will happen with the SNBs? The fog of economic war!

Following on from the above, a net point seems to be that NAMA LTEV of bank assets is based on projected cash-flows and values. the EU guidelines say that these should be based on rigorous stress-testing against a scenario of protracted global recession.

Accordingly all such projections should be disclosed and open to public scrutiny now and during the lifetime of NAMA (as the Commission communication appears to suggest).

If (i) the NAMA Supplementary Documentation and (ii) the submission to EUROSTAT and (iii) the draft NAMA business plan is the extent of our projections then we could be in a spot of bother.

On an ongoing basis, one would like to see a form of schedule detailing the metrics/assumptions/market values/cashflows which will be produced on a regular basis in a timely manner.

I was too hasty. Most of the price falls admitted to in the article were nearer 50% & all the locations mentioned were in the Greater Dublin area, where the overhang is claimed to be much smaller.
Still it is verbal evidence of a market when prices are reduced enough.

@ zhou

Hate to be cynical but there is zero chance of transparency as long as FF & GF are at the wheel.

@Ahura Mazda
“For NAMA to offload its assets, it will require massive private sector investment in property. (it’s reasonable to assume that much of this “investment” would be in the form of debt)”.
NAMA is a deepening of the partnership between the Irish state and bankers and developers. We are now engaging in a joint venture with them with the aim of propping up the property market.
They said that Prussia was an army with a state. We have got the relationship similarly wrong. We are now a property industry with a state.
The government now has a giant vested interest in keeping property values high.
Peter Mathews says that NAMA will lose €20 Billion, and in the worst case €29 Billion. The government now has a giant incentive to gerrymander the property market i.e. keep rents & property prices above what they should be and delay the reform of personal bankruptcy. There are reports that NAMA is already having this effect. I believe that BOI may only lend a minimum of €150,000 in mortgages, that should help too.

“So, will remaining Irish banks lend the amounts NAMA will need? What will their balance sheets look like? Will credit to enterprise suffer? In short, where will the money come from and will there be enough?”

The Irish state and it’s banks are now one giant property investment fund.
We now have one balance sheet. Enterprises involved in property will get plenty of credit. The state will want to encourage other enterprise…to pay for property and to pay workers to pay for it.
Once the state has removed enough unemployed immigrants it will start seeking to bring them in again: low cost labour for the building industry and they can live in the houses they build and use up the vast number of empties.

“For ever and ever, rezone and build without end, Amen.”
Property is our new religion.
Recovery in property prices is the new dogma. Now you know why they hate Morgan Kelly so much – he’s a heretic!

I am a layman when it comes to economics but as a taxpayer I am very interested in the NAMA debate. From my understanding of the whole debacle we are overpaying for assets (property) and in effect the state will become the biggest owner of property in the country.

From my point of view it would have been a lot more beneficial, nevermind common sense, to the country if the banks were nationalised. We are always being told that the banks are systematic to the running of the country so why would the state want to hold the asset of property instead of an asset like a bank? Surely an asset that is systematic to the country would be worth more to the state and hence make a larger profit (or less of a loss) when it is privitised again than the asset of property!!

If I am right in my analysis, then is the reason that NAMA will more than likely go ahead due to the state not wanting the cost of nationalisation showing up on the balance sheet hence increasing our debt or is it due to the vested interests and relationships between banks, developers and political parties??


The article states: “The book value of these loans may be Eur77bn, but as of September and according to comments by Lenihan, the market value of the portfolios was closer to Eur47bn.” (my emphasis). This is just about as accurate as anybody has called it. She didn’t say the loans were valued at Eur47bn but rather the portfolios.

Further she says “…the loans that will be bought by Lenihan need only appreciate by a “very modest” 10 per cent….”. Is that the part you think she confuses asset and loan values? I think she is right in that it is the loans that need to appreciate (although I don’t buy Lenny’s maths). The loans usually have a close correlation to the underlying assets but they are not perfectly correlated. Loan prices globally have increased significantly in the last few months but the underlying assets are largely unchanged. Therefore it is more accurate to speak about the value of loans rather than the value of assets.


Think you are spot on in your LTEV reasoning. The loan price will always be at a discount to the underlying assets. For example short term loans to top tier borrowers with no perception of default risk, trade anywhere between a 2-7% discount (I am generalising). I strongly believe that if the value of the underlying portfolios is Eur47 billion (and how confident are we on that?), the value of the loan portfolio would be at most Eur30 billion ie that is the amount that willing buyers would pay in a normal market today, taking account of possible future uplifts in property values etc.

So LTEV, smoke and mirrors, PR and spin, civil servants who have never been in the real world and garbled politics have brought the Irish state to overpay for loans by between Eur20-30 billion. And to answer your question, there is no LTEV price of loans. There is market value and off market value.

Speaking of Irish magic, I am not an accountant but wonder how is it that BOI does not have to provide for the virtually certain loss it will take on the Nama transfer. At Eur16 billion of book value loans transferring and assuming an extremely modest haircut of 20% there will be a loss of Eur3.2 billion rising to Eur4.8 billion at a 30% haircut.

What accounting regulation allows a bank not to write down loans where there is a virtual certainty of losses crystallizing within months?

It occurs to me that perhaps none of the 5% of the SNBs should go to Anglo and that the entire 5% should be divided between BoI and AIB. This may well be the government’s intention and it would increase risk sharing somewhat. Like many have said before, a one size fits all approach is not appropriate.

Has anyone thought that maybe instead of using the banks to protect a lot of construction companies that we might be better off pumping that money into the banks by reducing the average mortgage debt in the country. So the government could still pump x. billion into the banks, but this would be used to take a bit of my mortgage, say 20 percent. This would leave me with less debt, more money to spend in the real economy, the banks would get the capital injection they probably need (though why we couldn’t just protect the retail side of these banks, the bits we care about and let the rest go bankrupt is beyond me). In return the government could take an equity stake in my house, so that it can collect should property prices rise. The banks will still have these large debtors in the propert development area, but they would then be able to go after them without fear, and it might then get us close to the real market values of these debts. At least this wat the economy could start to grow (from a lower base sure), but it would be better than muddling along for years of uncertainty.

Nama has little chance of succeeding. Without population growth (and retention through employment) in the country it has no chance of repaying much of the 54,000,000,000 Euro and the additional interest costs of 20,000,000,000 or so. The increasing rates of unemployment suggest that this is unlikely to happen without stimulus and the country can only afford to stimulate developers and banks.

The President has the option of recognizing the arguments put forward in this blog, other blogs and the Dail. Then she may dissolve the Dail and the people can elect those who favour Nama or those who do not.

Are you still a fan then? 🙂

The problem now is that there is a widespread recognition that NAMA is going to lose money everywhere except the government and the public utterances of the banks. In a sense, this is not really a problem, it is what bad banks are supposed to do. However, they are not supposed to bankrupt the state in doing it. The state is supposed to be able to claw back its losses through equity ownership (thereby making the scheme unattractive for some bank shareholders who instead pony up for equity raise). Fitch, in its downgrade statement, put the national debt as rising to 110% (80some% excluding NAMA). The important thing is the way around they put it. They didn’t put the figure including NAMA in brackets after the headline figure – it was the headline figure.

By mid next year when it is clear the budget has failed to deliver and NAMA is a gaping wound, the scope for borrowing money will be all but gone.


I certainly have many more misgivings about NAMA now than I had a couple of months ago.

Some things that concern me are:
1. The decoupling of NAMA and nationalisation.
2. The lack of any assessment of the MV of loans or their likely/possible MV.
3. The lack of any progress on a bank special resolution regime as recommended by Honohan and the IMF.
4. The use of 6 month treasury bills for long term debt with no clarity as to legal right to roll-over the debt. It looks like there won’t be NAMA debt and it is not clear to what extent access to ECB repo operations will be required or available.
5. The evisceration of risk sharing through subordinated debt. This suggests a deeper poblem as to the real state of banks’ balance sheets and the State’s willingness to support them.
6. The lack of any clear and effective incentivisation measure for the individual banks to maximise loan recoveries.
7. The lack of clarity as to how foreign banks are to be dealt with in the context of Zoe et al. It appears we are farming this seemingly intractable problem to the Board of NAMA without any legislative powers to assist them. I am not aware of any provision for the necessary payments to foreign banks.
8. The introduction of legal complexity and uncertainty through the SPV and the shareholders’ agreement.
9. The introduction of opaqueness through the SPV.
10. The lack of clarity as to periodic reporting.
11. The lack of clarity as to how banks’ entitlement to the annual coupon and/or administrative costs will be assessed.
12. The sloppy production of DoF papers to date.
13. The lack of correlation between the paper sent to Eurostat and the published bank information.
14. The lack of any clarity as to what condition the banks’ balance sheets will be in after NAMA. The idea of a bad bank is to create clarity and credibility. If we don’t achieve that then we have failed.

“It looks like there won’t be NAMA debt and it is not clear to what extent access to ECB repo operations will be required or available.”
It does look that way. NAMA will sell treasury bills and gift cash to the SPV, which will then gift cash to the banks.

ECB repo is finished as a NAMA concept.

Looks like there’ll be a lot of rollover weekends coming up…

@ YM and Zhou

“4. The use of 6 month treasury bills for long term debt with no clarity as to legal right to roll-over the debt. It looks like there won’t be NAMA debt and it is not clear to what extent access to ECB repo operations will be required or available.”

Huh? why wouldn’t this be allowed to be used in the ECB repo’s? Debt doesn’t have to be long term in nature for it to be used in the ECB repo, AFAIK.

@Zhou and YM,

If as you suggest ECB repo operations either may not be required or available (Zhou) or will not happen (YM), does this not kick away one of the major supports for NAMA? And does it not expose this effort to keep NAMA bond issue off the Government’s books – which neither the ratings agencies nor the markets appear to have bought – as a piece of fiction? And, finally, does this wholesale issue of treasuries by NAMA not have a detrimental effect on the ability and credibility of the NTMA to perform its statutory role?

The ECB have as much as said that they will be pulling unlimited repo. The danger with NAMA bonds is that they will crowd out the 40-odd bn the banks already have on repo. So my guess is that the government will sell t-bills and ‘invest’ cash in the SPV. The SPV will owe the government, and buy assets from the banks with what they really need – cash, not some magic IOUs that become increasingly hard to trade.

Ah, maybe you’re right. Maybe the t-bills will be gifted to the SPV which will then sell them. Either way, I reckon the banks will get cash…

AFAIK the SPV will be issuing the bonds with state backing. That should still be repoable (is that a word?) but at a higher haircut.

Somewhere deep in the bowels of the Derivate Death Star a creature awakes from its slumber and mumbles….

“Is somebody tinkering with my international legal rights, trying to dilute my contracts. Hmmm, let’s see who really runs the Debt Machine”

Constantin intercepts and interprets the message from the Death Star.


Looks like Brian Lenihan has some weekend reading.

@ yoganmahew,

Could they be getting worried about not being able to collect on the €6bn unrecognised losses? And as you point out that’s only one bank. If the “contracts” are split between the banks & Nama does that mean some of the NPV of future Cash “Losses” crystallise and have to move from the Notes to the body of the balance sheet?

On the same. From the FT.

“I think that trying to make safer credit default swaps is like trying to make safer asbestos,” he writes in a recent letter to investors, adding that CDSs create “large, correlated and asymmetrical risks” having “scared the authorities into spending hundreds of billions of taxpayer money to prevent speculators who made bad bets from having to pay”.


@ Eoin

“Huh? why wouldn’t this be allowed to be used in the ECB repo’s?”

I told you before.

The ECB wants their money back.

What is it you don’t understand about the fact the Ireland is incapable of money printing (QE).

Why do you persist in thinking that Ireland has any control?

Do I have to explain the loss of money sovereignty to you again?

Come on Eoin. I know you are a shill for the bond.

But you don’t have to take everyone for an idiot.

@ Greg

your post made absolutely no sense. The question was why 6-mth rolling T-bills couldnt be used in the ECB repo’s. YM supplied a rational reason for this. You just supplied a rant that seemed personalised for my benefit and that had something to do with QE, or a lack thereof. Try harder.

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