Back to the Future: NAMA Freezes Prices at November 2009

Today’s Sunday Times carries an important story from Sarah McInerney and Stephen O’Brien. Many people had been thinking that the market valuations applied to loans being transferred to NAMA would be less than had been assumed a few months ago because property prices are still falling.

However, it turns out that this isn’t necessarily the case. In an answer to a Dail question from Fine Gael TD Deirdre Clune on March 10, Minister Lenihan said the following:

Section 73 of the NAMA Act sets out that NAMA may set a date by reference to which the market value of a bank asset or property is to be determined. NAMA have set this date as 30 November 2009. It follows that any property decreases or increases after 30 November 2009 will not be reflected in the NAMA market valuations.

So, NAMA no longer cares about the current value of the assets it is acquiring. Even though no assets have yet being transferred and the transfers will take place in a drip-drip fashion over the next year or so, NAMA will not bother calculating the actual market valuations for these assets. Instead, NAMA is adopting a Marty McFly approach to asset pricing: Let’s just go back to November 2009, when things weren’t quite as bad as they are now.

This decision raises a number of questions:

  1. Who made this decision? The Sunday Times indicates that Minister Lenihan has made this decision. The Minister’s Dail answer suggests that “NAMA have set this date.”  So was this a political decision or one made by a NAMA official? Since the figures for asset transfers are so huge, even relatively modest changes in property prices since November 2009 would result in a reduction of billions in the amount of taxpayer money being used to acquire these loans. When a decision of this magnitude is made, the public deserves to know who made it and to have the rationale explained.
  2. When was this decision made and why was it announced in such a low-key fashion that it wasn’t reported in the national media until eleven days later? NAMA’s webpage contains plenty of material. Why wasn’t this decision explained?

As regular readers will know, I have always been sceptical of the NAMA pricing process. We have known from the start of this process that transfer prices close to what these assets are really worth will result in the banks being insolvent and probably being nationalised, an outcome that the government has consistently stated that it does not want. So, even before the details of the bill was released, there were clear signals that the process was unlikely to ever really be about finding the true value of these assets and more likely to be about paying a high enough price to prevent insolvency.

However, the strictures of the European Commission have required a formal approach based on paying market value plus a potential LTEV adjustment. And falling market prices have had the potential to drive the banks into insolvency, even under LTEV pricing.

This appears to be where the November 2009 decision comes in. At one stroke, falling prices in the current market don’t matter. With one leap into the silver DeLorean (an Irish car!) we no longer need to worry about trivialities like what the assets we’re acquiring are actually worth. And sure nobody will notice if we barely tell them.

Finally, I note from the Sunday Independent that part of the reason for the delay in the transfer of assets is that “At least two institutions are said to be digging in their heels on the valuations.”

So here we are, an asset sale with only one buyer, acquiring assets from sellers who are insolvent if the assets are sold for their market value. However, the buyer has committed to paying the sellers more than market value. And rather than being grateful, the sellers are “digging in their heels” on valuations. You couldn’t make it up.

86 thoughts on “Back to the Future: NAMA Freezes Prices at November 2009”

  1. Karl,

    I don’t know why I remembered this quote the other day. No particular reason I suppose, but it is worth reflecting on it today maybe?

    March 7th 2009, Saturday Interview in the Irish Times newspaper with Nick Leeson, The original rogue trader.

    “The thing is, we would all expect the banks to act out of self-preservation. But the Central Bank is the guilty party here in allowing the banks to get so far out of line. That is true across the world, but in Ireland, the way that the top tier managements in banks have been able to get involved is just incredible. I mean, I hear tell of numerous episodes of bank managers buying into land deals for 50 million. A f***ing bank branch manager! How does that happen? Another guy made so much commission in one month that he didn’t really have to work for a year. And all he was selling was debt.

  2. @Karl Whelan

    Stay skeptical.

    As discussed previously, the Bill allows the Minister carte-blance. Any possibility of Mr McDonough sustantiating this date? … or a rationale for selecting this date? … and who signed off on it? The Minister? After all the effort around here trying to figure out the cute-heuristic LTEV – we are now simply presented with a diktat and a date … absolutely frightening … where is the opposition?

  3. Why the Nov 30th date? I’m not great on conspiracy theories, but could it possibly have something to do with the ECB liquidity operations?

    If the banks used some property related assets as collateral for ECB operations in December (the last round before the ECB starts withdrawing exceptional liquidity) then would writedowns based on today’s lower prices adversely affect collateral valuations for the banks when they need to roll over the assets (and perhaps cause difficulties with maintaining the currents repos)?

    Possibly not though. Another idea is that the property price statistics in this country generally tend to be about 5 months behind current market prices, so perhaps the best data available is from the end of Nov. Though now that I look at it, this argument is weaker than the first.

    Perhaps I am looking for logic where there is none to be found…

  4. @LorcanRK

    I’m at the end of my tether in ‘looking for logic’ – you are probably correct – ‘there is none to be found’ – as Karl puts it above ‘You couldn’t make it up’. And on Corporate Governance & Boards – the Kleptocracy are entrenched – and if anything as strong as before their bubble briefly burst – watch the nominees as non-execs to Anglo-Irish coming up …

    I’d be as well off in a well-stocked Trappist monastery trying to figure out the Third Secret of Fatima – but maybe the Minister has trumped me on that one as well in the NAMA Bill. Tora_Bora anyone?

  5. @ Karl

    “And rather than being grateful, the sellers are “digging in their heels” on valuations. You couldn’t make it up.”

    In fairness, some of the bank directors/management possibly feel they have to put up a fight on the valuations from the point of view of doing their duty in terms of getting as much value as possible for their shareholders, lest some shareholders later take legal action against them for not doing so.

  6. @Eoin

    Wotcha bin smokin tonite Eoin? Duty free?

    I need a break – off to watch Sharah Phelan on F0x Newz spouting off about the hard-left SOOooo-Shaal_EEsts followers of Offaly_Man denying consumers the right to invest in their own health-care portfolios – as Mairt_een Feld_steen put it ‘if the poor serfs would simply fe*k off and die my equations would work out perfectly’ – at least I can figure out this lot.

  7. @ Karl,

    Have you considered the precarious nature of the reputations of countless respectable professionals living and working on the island of Ireland? What is that they say about humanity under estimating the impact of technology in the short term, while over estimating its impact in the long term. It is the same kind of thing with the professional elite in Ireland. In the short term, their reputations are still intact (barely). But I think history will judge them with less clouded vision. BOH.

    http://designcomment.blogspot.com/2010/03/leading-charge.html

  8. Lenihan’s NAMA never cared about making logical valuations based around formulae. The preternaturally self-confident Mr. Lenihan did not make financial decisions per se, he has consistently applied political judgments to the financial data. Others have sought to deny this and have tried to divine formulae to fit his latest pronouncement. This is to deny the modus operandi of the minister, the facts speak for themselves.

    Just as the Regulator’s prior knowledge will be construed as consent negating all criminal charges, so too, will Lenihan’s rule by diktat be used as an excuse by all those who slavishly acquiesced to his judgement when he is gone.

  9. http://www.independent.ie/national-news/29-property-suicides-leave-state-unmoved-2106256.html

    Noel Smyth, a canny solicitor and property developer is trying to put pressure on “the state” to do something. A pity he did not do this before the bubble?

    The toll is bad and will worsen. This capital destruction shortens lives. By trying to inflate values Lenihan and the rest are keeping the torture going for as long as possible as the market, eventually distorted by the government, will only begin again when prices stop falling and the higher they are the longer it will take for them to fall. NAMA will be under pressure from the property developer clique who ran the state, to withold land until it realizes the value given to it.

    I think the state is lucky that Lenihan did not choose an even more bizarre valuation date. Presumably he was given a range of dates by the EU who are running this game, choosing the earliest. The legislation, as we know, allows anything to happen without disclosure to the public. Bizarre!

    While Eoin is theoretically correct, no shareholder is going to throw good money after bad chasing the directors for this hypothetical peccadillo. They might be as I have said before, be much more concerned at the over inflation of values caused by extraordinary borrowings from “foreign sources” which are still unidentified.

    I predict that the properties concerned rather, will be shown to have problems with security etc and if any third party has an interest it will be the borrower, who alleges that the security be imperfect. That is, the borrowings are not as secured as the bank has alleged. This sort of matter will eventually require a High Court hearing that “the property be well charged” before NAMA will be able to proceed. False signatures of a spouse, poor title, forged solicitors assurances. That sort of thing. Complicity by a bank employee is not out of the question.

    A Mare’s nest is the technical legal term for such a situation. Not. The delay should have been and probably was anticipated. The delay is useful to some or all of the parties. Amen.

  10. Robert Browne

    The regulator’s prior knowledge cannot excuse breaches of the law and may implicate him and his officers, depending upon the facts. More importantly, it brings knowledge closer to TPTB.

  11. Karl,

    NAMA had to choose some date, otherwise you get endless disputes about what has happened very recently. It choose November 30th and given Mr Lenihan’s “floor of the market” comments which you can enjoy again here http://www.youtube.com/watch?v=pWlz1IKWfw4 is NAMA to blame?

    However to answer Deputy Clune’s question property prices (residential and commercial) have probably dropped by 10-15% since last September 2009 according to the ESRI/Permanent TSB (residential to December 2009) and IPD (commercial). I think the Sunday Times is over-egging it with €5bn but it would be in that order for changes since November 2009 alone and there would also be €2-3bn of falls from September 2009 to November 2009. ESRI suspended its monthly index from January though December 2009 alone saw a 3.6% fall in residential property.

    If NAMA can set a date, can they change it? s73 doesn’t prevent them from doing that. The immediate consequence would be delaying the first tranches and rest of the plan (recap, “third force”, regulator cap reqs) but for the sake of a say, a 2-month delay, would NAMA not consider it – after all the over-riding objective was to protect taxpayer’s investment and if there is the probability of saving close to €5bn (the lion’s share of the 2009/2010 budget cuts to illustrate the scale of what is being discussed) then why not do it?

    Of course the likelihood is that the LEV has not changed since last September 2009 and is still somewhere close to €54bn (slightly reduced by the EU but slightly increased by the NAMA loans going from 77bn to 80bn) so all this talk about MV may be moot and the truth is that we are probably paying close to €15bn of LEV, not €7bn. This jeopardises one of the key aspects of the NAMA business plan, the 10% rise in property in 10 years becomes more like 30% (unless of course NAMA are correct with their 20% default rate – don’t even get me started on that, if you compared NAMA’s default rate with Barclays in the period 1990-1994 it’s not that you’re comparing apples with apples, or apples with oranges, you’re comparing apples with the concept of existenialism).

    As regards NAMA’s publication of the valuation date, let me remind you we still don’t know how many banks signed up for NAMA by 19th Feb (believe it’s 5 but was never confirmed) though thanks to sources we know NAMA has exceeded its legal budget this year, we know the new loan amounts (Anglo €36bn), we have a fair idea of haircuts, we know NAMA will make a profit of €25bn on due diligence this year because the banks have to pay a min of €125m and we get blow by blow updates from select media outlets. That’s NAMA for you, a secretive organisation that leaks like a colander.

  12. I for one am shocked….arent we glad that the crash is over? Who said legislative price fixing never worked. No, this is genius at work, the same logic as the Alabama State Legislature setting pi=3 for ease of calculations. Thankfully, that was soon exposed as an april fools joke but this time the joke is on us.

  13. Last point from me for now, the 30th November 2009 date had to be chosen before the banks produced their first valuations (which was between Christmas and 10th January 2010). It is likely that 30th November 2009 was chosen either shortly before the end of November or shortly after but certainly before Christmas.

    NAMA don’t do public updates. Though if you believe the snippets that appear in select media, they do a roaring trade (no implication of financial impropriety whatsoever intended) in leaks.

  14. Although the decline in property prices since Nov will be significant, far more significant will be the lower recorded quality of the loans since Nov.

    Just looking at the level of downgradds on AIB loans from the latest accounts shows how quickly things are getting worse.

    If we are going to pay the banks based on the quality of loans in Nov then we will be significantly over paying now, and even more as loans are purchased over the next 12 months.

    Hard to quantify but I think a €5bn over payment could be a low estimate.

  15. Maybe we can fix the flex capacitor and go back to 2002, regulate LTVs, bring in a res. property tax and – I think I can remember a lightning bolt striking a cowshed in Drumshanbo – still get safely back to 2010 without having to relive Henry handball…

  16. @Karl Whelan,

    Many congratulations on your election to the RIA.

    On “You couldn’t make it up”, it is being and will be made up. Eoin is right. The bank directors have a fiduciary responsibility to shareholders. In the context of the guarantee and in the absence of an effective bank resolution process, the DoF has to find a number for the value of the loans being transferred that (a) won’t wipe out the existing shareholders, (b) won’t impact on senior bondholders and (c) will keep the resulting bank recap manageable in the context of what’s available in the NPRF and of the projected fiscal deficit.

    I expect there’s a very simple Excel spreadsheet in the DoF that back-solves for the NAMA transfer value that will square this circle. Irish citizens are a long way behind shareholders in this calculation.

  17. Quite incredible!

    Did he give a time on the 30th November? or is it business hours? or a 24hr period?

    We’ll need to pay top dollar for this type of expertise. 😀

  18. @ Paul

    “fiduciary responsibility”

    That was the word i was trying to get to, but my rugby-induced Sunday night haziness prevented me from doing so! Thanks!

  19. And doesn’t the government have a fiduciary responsibility to citizens? Or at least it should? Immoral.

  20. This is worse than it looks at first glance. The deeper the trough, the lesser the recovery form a lower starting point, the greater the loss.

    I think it is worth recalling that one of the bases for going with LTEV was that property prices typically rebound 80% from trough in crashes. John Mulcahy said that was generally the case though it was not being used as an assumption in this case. Accepting Mr. Mulcahy’s statement to be true, as I have not heard it contradicted, this means that if a property sinks to €10m then it will recover to €18m. How if it drops to €7m it will only recover to €12.6m. A drop in €x market value should lead to a drop of €1.8*x in LTEV.

    I cannot see any justification for this beyond balance sheet trickery (in splitting debt between the deficit and NAMA). The more trickery there is the less effective the rearrangement of the balance sheet will have in terms of market sentiment. The only benefit will be its treatment by Eurostat for the purposes of the growth and stability pact. I think the EU needs to step up and not let its rules be the cause of unjustified subsidies to shareholders.

    Also, I am not aware of any requirement for the Minister to set one date of valuation to apply to all assets. I would expect the first tranche to be valued at a date when the valuers looked at them which is probably be Nov 2009 for the first tranche. However, there is no reason why this should apply to other tranches. I would actually have expected the date of acquisition in the acquisition schedule for each loan to be the date of valuation. Perhaps this date relates to the first tranche only? In any event, if it is easy to adjust the valuation after all due diligence is done then it should be adjusted to reflect the value on the day and that should be fed into the model.

    I also worry that things have got a bit rocky in the first quarter of 2010 but we are stuck with end of 2009 economic predictions in assessing LTEV.

    I am further concerned that bubble years up to 2005 are included in calculating long term trends.

  21. Who are the private investors that are going to put their millions into the NAMA SPV? Where is their profit?

    This is a serious question. What kind of motives do people have who sink their millions into what looks like a loss-maker?

    Who other than the banks could possibly contemplate such a deal? If the banks take the shares then how will they use their shareholding?

  22. Why should we be surprised. Can I refer you to the following document published by the Department of Finace at the same time that it published the Nama Bill. Look at Section II dealing with property yields.
    http://www.finance.gov.ie/documents/speeches2009/sfbl034suppfinaldoc.pdf

    It states that property yields (rents as percentage of prices) are higher in Dublin (7.25 percent) than in other major European cities and that Dublin’s yield is well above its 20-year average of 5.6 percent. It then states that as “yields move towards their long term average this would indicate an increase in property prices”. To re-enforce this view, it expects the exceptionally large difference between property yields in Ireland and key euro interest rates to narrow as a result of rising interest rates or rising property prices!!!

    This is the mindset that is driving Nama. I commented on this last October in more detail at
    http://www.planware.org/briansblog/2009/10/who-are-government-nama-trying-to-fool.html

  23. @Eoin,

    No problem. And I think this applies equally to sum up your long-running opposition to the knee-jerk reaction to burn bondholders. Law and economics are not as entwined in these Anglo-Saxon influenced jurisdictions as they are in the US – some might consider this a good thing!, but there is a long-standing judicial and democratic aversion to “taking without due process”. I suspect many people do not appreciate the difficulty of enacting bullet-proof legislation that would alter, retrospectively, the terms and conditions on which these bondholders invested.

    On top of this, senior bondholders hold a potential trump card. Burning one set of bond investors while expecting all others to keep buying sovereign debt is fraught with risk.

    That is why I have consistently called for an early general election. Bondholders might be prepared to engage realistically with a new government reflecting the settled will of the Irish people. While this Government reamins in office, they have every incentive to hold firm, as they know it will sacrifice the interests of Irish citizens to secure its politcial survival.

  24. @Zhou,

    “Who other than the banks could possibly contemplate such a deal?”

    Does anyone see the poetic irony of Anglo allegedly bed-and-breakfasting its loans hiding its position in its annual report and the government creating an SPV which in all but name is a government organ specifically to get the €60bn cost of NAMA off the Eurostat national debt stats together with the reported likelihood that the 51% investor in the NAMA SPV will be the banks who are less interested in its €51m investment in the SPV which is chickenfeed compared with getting €80bn of loans off their books.

  25. @ Karl,

    “You couldn’t make it up.”

    Perhaps I’m just being picky but isn’t that precisely what they are doing.

  26. @ Zhou

    1. John Mulcahy actually said they rebound by 88% from the low point
    2. From the Irish Times earlier this month…”A group of fund managers, including the asset management units of AIB, Bank of Ireland and Irish Life & Permanent (IL&P), is expected to invest some €74 million, matching a €26 million investment by the State in the SPV.”

  27. @Eoin

    Thanks for the correction on the 88%. I didn’t take the time to look it up again. Obviously, the greater the rebound, the worse the effect on LTEV of a drop in MV.

    Don’t the private investors get 51% of the SPV for their investment? If the banks are buying the shares then it appears to be something of a sham operation. I wonder how will they use their shareholding.

  28. @ Robert Browne

    “Lenihan’s NAMA never cared about making logical valuations based around formulae”

    Indeed. All smoke and mirrors. Pseudo mathematics designed to achieve a predetermined outcome.

  29. Paul Hunt
    I agree and you make an excellent point. I have been posting all along with one eye on the creditors, all of them. Some deserve to be burned, others do not, but will be, while others will not be damaged much at all. The sorting process will take lawyers unless as you say, some dealing is done by persons we can trust.

    Ay, there’s the rub! While all this dodging responsibility goes on, the longer this “realistic agreement” will take.

    But as I have said before, delay now is possibly a good thing. Some creditors will not be extant after more time passes. This is like a roller coaster.

    Time must pass. Doing something, (anything!) is unnecessary. But the Gardai must do their duty, without fear or favour.

    Why were they restrained from investigating any of the tribunal recipes? Who restrained them? The time for such restraint is over, given the massive amounts at stake.

    As I said before, legal challenges wull be fruitless. The time for those was before the legislation was passed.

  30. @ Zhou

    not sure if its 51% or “at least 51%”. They key thing is that it will therefore be technically privately owned, even if NAMA itself will have broad ranging veto and appointment power over the management of SPV.

    I always said back in the day that it would probably be the banks themselves that became the private investors, or in this case the asset management arms of the banks. Its a sham in many senses but undoubtedly its ok with the EU/Ecofin etc.

  31. I will remind everyone that this is not a recession. This is a depression and there will be a climb back after an overshoot. It is at least a decade away, possibly two. For the rebound to happen to 188% of the minimum value, I think two decades.

    I am merely the messenger. I have been consistent and I have not seen any sensible argument to the contrary. There may be a need for a debate on this.

  32. @ Paul Hunt

    “The bank directors have a fiduciary responsibility to shareholders.”

    Which is one reason why we (as Citizens) would be better protected were the majority shareholders the State, Anglo excepted.

  33. @ Pat Donnelly,

    “I will remind everyone that this is not a recession. This is a depression and there will be a climb back after an overshoot.”

    Yes. The most worrying thing about NAMA is the (religious?) belief that we just went through a cycle and we are on the cusp of the new and improved cycle.

    The possibility that the wash, rinse and repeat of credit (money) creation might have reached its nadir is heresy, even to macro economists critical of NAMA.

  34. @Zhou
    John Mulcahy “statistic” was based on 1 observation in the Irish property market.

    The circumstances were entirely different and the bubble we have just had dwarfs anything that went before it.

    The “statistic” has absolutely zero credibility IMO!

  35. @D_E

    John Mulcahy said it was an average across international property busts. I don’t know if he is right or wrong. The point I am making is that the more the average recovery from trough is, the greater the damage is done by the trough being lower / fixing MV above the trough.

    In any event, Rogoff & Reinharts study suggests there is more to come in terms of the duration of the falling prices. I cannot see where this crucial factor is provided in the LTEV Regs save that the predictions of the ESRI and others in 2009 as referenced might deal with it.

  36. @ Brian Flanagan,

    “Whilst acknowledging that property prices have fallen by almost 50% in the past few years, the document completely ignores the possibility that the exceptional yields may be anticipating a sharp decline in rents.”

    Pretty much the point. While, I recall, it was commented on here and elsewhere it is now almost entirely forgotten.

    Yet it is absolutely essential to the NAMA funny numbers.

    Pseudo mathematics designed to achieve a predetermined outcome.

  37. @Greg
    “Yet it is absolutely essential to the NAMA funny numbers. Pseudo mathematics designed to achieve a predetermined outcome.”

    The problem is more fundamental than playing with numbers, I’m sure that you’ll agree. What we are seeing, in slow motion and great secrecy, is barefaced theft and corruption organised by by a small mafia and funded by the taxpayers. By the end of the month, the heist will be complete. Can nothing be done to stop it, even at this late stage. Where is the Opposition?

  38. It is worth reminding ourselves that we have not been told how the MV of a loan relates to the MV of the underlying assets on which it is secured.

  39. @Zhou
    “John Mulcahy said it was an average across international property busts”

    No he was just referring to the Irish market Zhou.

    http://www.rte.ie/business/2009/0901/nama7.html
    “The data we have on the Irish market date back to about 1971. There has always been a recovery in the property market, although sometimes it has been more vigorous than in others. In general, the commercial market has recovered over a seven-year period to an average of about 88% of where it was in the trough. These figures are from the Department of the Environment, Heritage and Local Government.”

    In any case the current Irish property bubble was bigger than most of the international bubbles and the dependence om construction for the economy was far higher.
    We aren’t going to have a “normal” recovery.

  40. @ Brian Flanagan,

    “By the end of the month, the heist will be complete”

    Can’t say I disagree with the sentiment.

    Attributed to Mayer Amschel Rothschild.

    “Let us control the money of a nation, and we care not who makes its laws”

    The Minister can make all the laws and regulations he desires. Neither he nor the Governor of the Central Bank of Ireland controls the supply of “money”. They think they do but they don’t.

    If they had had control of the supply of “money” we would not be in the position we are in now.

    As banks globally shrink their balance sheets (reduce the money/credit supply) we will enter the “second leg”. It will be worse that the first because Governments will have run out of ammunition. We are already in ZIRP.

    Now the genius Bernanke suggests that banks don’t need reserves.

    http://www.federalreserve.gov/newsevents/testimony/bernanke20100210a.htm#fn9

    “Given the very high level of reserve balances currently in the banking system, the Federal Reserve has ample time to consider the best long-run framework for policy implementation. The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

    Good on ya Ben. We can’t have costs and distortions “imposed” on the banking system. That would be just terrible.

  41. @ Pat Donnelly,

    Can’t see it catching on here.

    Banks accepting 60% losses on residential mortgages?

    😯

    Of course in many States in the USA residential mortgages are noon-recourse.

  42. @Dreaded_Estate

    Thanks for the correction. I went back to the committee debate of 31 August 2010 to look again and you are right. There was some more interesting stuff there:

    Mr. John Mulcahy: There seems to be a view abroad that the market will not recover and that NAMA will look at values on the basis of this recovery that will not happen. I accept that we cannot foresee the future. However, I have indicated the results of an analysis of every cycle I can find, without any forcing of the data. On the basis of every trough I can identify — a trough is defined as minus 50% from the peak, which I suspect we are currently at — the net result after advancing seven years is plus 88%. There have been instances where the market has been higher or lower than that, but this is the average. I can find no evidence of a period when there was no recovery following a trough.
    ….

    The data we have on the Irish market dates back to about 1971. There has always been a recovery in the property market, although sometimes it has been more vigorous than in others. In general, the commercial market has recovered over a seven year period to an average of about 88% of where it was in the trough. These figures are from the Department of the Environment, Heritage and Local Government. For residential property, the market has recovered in seven years to a figure of about 96% of where it was in the trough. I am only saying this is what that set of data has shown, but the important point is that markets always recover. The one exception is Japan. The reason the Japanese market did not recover was that they never marked down asset values. The banks decided to take the write-down figure year on year; that is why it took so long. They never revalued their assets. The other seminal work was produced in the United Kingdom where researchers looked at property cycles dating back to 1921. They found that recovery in the United Kingdom took between four and seven years and that the marked recovered to an average of about 66% of what it was in the trough.

    We need to look at when these 7 years start! I son’t know what seminal work Mulcahy is talking about but Rogoff & Reinhart appears to be the seminal study du jour. It says housing market downturns typically g on for 4 to 6 years. Therefore, does Mr. Mulcahy’s magic seven years start in 2012 or in 2009 as he thinks?

    Furthermore, Mr. Mulcahy has referred to trough as being defined as 50% below peak. Does this mean that the 88% recovery is measured from lows that were never actually reached in cycles since 1971?? I agree D_E that this “statistic” isn’t worth the paper it is written on. Perhaps I should be more relaxed then about the current decline in MV because it is unlikely to have the large effect on LTEV that Mulcahy’s “statistic” refers to.

    BTW, is Mulcahy referring to his own work as the first seminal work???

  43. Apologies – that post should have distinguished the quoted text as follows:
    @Dreaded_Estate

    Thanks for the correction. I went back to the committee debate of 31 August 2010 to look again and you are right. There was some more interesting stuff there:

    Mr. John Mulcahy: There seems to be a view abroad that the market will not recover and that NAMA will look at values on the basis of this recovery that will not happen. I accept that we cannot foresee the future. However, I have indicated the results of an analysis of every cycle I can find, without any forcing of the data. On the basis of every trough I can identify — a trough is defined as minus 50% from the peak, which I suspect we are currently at — the net result after advancing seven years is plus 88%. There have been instances where the market has been higher or lower than that, but this is the average. I can find no evidence of a period when there was no recovery following a trough.
    ….

    The data we have on the Irish market dates back to about 1971. There has always been a recovery in the property market, although sometimes it has been more vigorous than in others. In general, the commercial market has recovered over a seven year period to an average of about 88% of where it was in the trough. These figures are from the Department of the Environment, Heritage and Local Government. For residential property, the market has recovered in seven years to a figure of about 96% of where it was in the trough. I am only saying this is what that set of data has shown, but the important point is that markets always recover. The one exception is Japan. The reason the Japanese market did not recover was that they never marked down asset values. The banks decided to take the write-down figure year on year; that is why it took so long. They never revalued their assets. The other seminal work was produced in the United Kingdom where researchers looked at property cycles dating back to 1921. They found that recovery in the United Kingdom took between four and seven years and that the marked recovered to an average of about 66% of what it was in the trough.

    We need to look at when these 7 years start! I son’t know what seminal work Mulcahy is talking about but Rogoff & Reinhart appears to be the seminal study du jour. It says housing market downturns typically g on for 4 to 6 years. Therefore, does Mr. Mulcahy’s magic seven years start in 2011/2013 or in 2009 as he thinks?

    Furthermore, Mr. Mulcahy has referred to trough as being defined as 50% below peak. Does this mean that the 88% recovery is measured from lows that were never actually reached in cycles since 1971??

    After further consideration, I agree with D_E that this “statistic” isn’t worth the paper it is written on. Perhaps I should be more relaxed then about the current decline in MV because it is unlikely to have the large effect on LTEV that Mulcahy’s “statistic” suggests?

    BTW, is Mulcahy referring to his own work as the first seminal work???

  44. @Z
    “I went back to the committee debate of 31 August 2010 to look again and you are right.”

    It might be worthwhile seeing the video of this. When watching it at the time, I thought that a cat was being let of the bag and Lenihan’s reaction to this contribution was not very positive.

  45. You can access average Irish residential property prices from 1975 onwards from the CSO/DEHLG at http://www.cso.ie/px/doehlg/database/DoEHLG/Housing%20Statistics/Housing%20Statistics.asp

    I have no idea what John Mulcahy is talking about in terms of residential property recovering to 96% of trough value within 7 years. Although the statistics are broken down by new and second hand homes, it appears to me that prices have ALWAYS risen year on year since 1975 until 2007. That tells me there is no precedent for our present situation within the State. It’s a germaine point that NAMA has defined in the recent Regulation the relevant period for review for the purposes of determining LEV at 1985 to 2005 (ie before the bad recession of the early 80s, the anemic 1970s and the 2007- crisis).

  46. @Brian

    I recall Brian Lenihan being at pains to say that the 88% recovery was not an assumption that the NAMA LTEV would be based on. The transcript appears to back that up. The 88% caused a lot of confusion for no good reason.

    It was something of a red herring save that it suggested, to my mind f not to the committee, that misjudging the trough could have serious consequences.

  47. The UK seminal report seems to probably be: The UK Property Cycle—A History From 1921 to 1997, London: The Royal Institution of Chartered Surveyors, January 1999.

  48. It appears to me that the main reason in setting the MV (at a certain date) is to ensure that the transfer value of the loan ensures that in the eyes of the EU the Bank Restructuring is indeed that and not a subsidy scheme which distorts competition (i.e. illegal state aid).

    The transfer value of the loan is set using the LTEV and not the MV (remembering that the purpose of NAMA is to help the banks restructure) and this transfer value cannot be greater than the multiple of MV indicated in the valuation SI. So NAMA does not care about the current value (except in relation to not giving illegal state aid).

    Given the delays 30th Nov doesn’t sound like a unreasonable date to have put the line in the sand.

    It would be quite useful for NAMA to put a worked example on their website outlining all of the steps from initial loan value to MV to LTEV to Loan Transfer Value assuming say 2% p.a. increase in sales price/rental level etc.

    Of more and upcoming importance will be the terms of any potential bank recapitalisation (which appears pretty certain) and how the State can structure the recapitalisation to get a return on that investment.

  49. @All

    Returning to ‘regulatory capture’ – and translating to ‘legislatory capture’ – pause – how many legislators does one need to capture to bring this deeply flawed cute-heuristic agenda to a halt? IMHO – A handfull would do it. Can we find, convince, cajole a handful of patriotic legislators to act, IF ONCE, in the interests of Joe and Joan Citizen? If not, we are in even deeper trouble than yet contemplated and we deserve the serf_dom that this flawed administration is subjecting an entire generation to.

    SHOUT STOP.

  50. Any chance of getting another letter from you guys? This time send it to the powers that be in the EU. Aside from a snap election; European intervention is all we can hope for.

  51. Personally, I think this is good news. Bits of NAMA will break even, at least in gross terms. Its function is to reduce the amount that select borrowers have to pay, so that the great and the good of society don’t go totally bust. They get to refinance their loans at a 40% discount, pay up and on they go. Some of them will no doubt be paying off the loans with the fees they are earning from NAMA itself. Others will have to rely on their quango positions.

    Beyond a certain point pumping capital into the banks is a less than zero sum game. The banks will be beyond the position where they can ever pay this capital back. The EU has already says if this is the case the banks in question should be wound down. Only through some finessing can the EU be seen to allow the Irish banking system stay in Irish hands.

  52. @ All & The Minister

    CAG Criticises Regulators

    The Minister: “The financial regulatory reforms will address the problems identified by the Comptroller and Auditor General and respond as appropriate to his recommendations. This is an important element in a comprehensive programme to put in place a domestic regulatory framework for financial services that meets Government objectives for the maintenance of the stability of the financial system, provides for the effective and efficient supervision of financial institutions and markets and safeguards the interests of consumers and investors.”

    http://www.irishtimes.com/newspaper/breaking/2010/0322/breaking25.html

    Eh – Minister! No mention of Citizens here? 1st The Financial System, 2nd Financial Institutions a short head in front of The Mawrkett in 4th, the neo-liberal Consumers in 5th, and the Investors in 6th position. Er … do citizens not count in ‘financial services frameworks’? Have Irish Citizens been written out of all the cute-heuristic equations that you now have the power, via the NAMA Bill, to make up as you go along? Mirabile dictu! – perhaps the citizens of this state do not have to pay for all this – Oh Well done Minister.

    Minor point: In my definition of a Repubic – the Citizenry comes first. Cicero does not approve of this carry-on!

  53. @ Brian Lucey,

    I for one am shocked….arent we glad that the crash is over? Who said legislative price fixing never worked. No, this is genius at work, the same logic as the Alabama State Legislature setting pi=3 for ease of calculations. Thankfully, that was soon exposed as an april fools joke but this time the joke is on us.

    I am not actually that shocked at all. The irony hasn’t escaped me, of the fact I was transferring what few deposits I had saved into An Post savings accounts, while at the same time in employment for Zoe developments! But here is the thing okay, at the time I wasn’t able to connect one, my need to protect my own savings, with the other, the employer I was working for. Thankfully, with the assistance of some informed debate and discussion which this blog has provided – to simple people, such as myself – I am not a little bit wiser. Thanks all, and congrats again to Karl Whelan on his RIA appointment. BOH.

  54. I suspect the EU will still supervise the valuations, although we may not get to hear about it.
    Anyone know anyone high up in TPTB in EU?

    I note that the Japan exception to the bounce “rule” got no comment even thogh Chow posted it twice! The only way to mark to maket is to sell some of the land. The sooner the better. I suggest that they will choose the most desirable plots, near the NIMBY areas, to try to force out capital from those who hath. To reassure us all on the valuations issue.

  55. Where is John the Optimist these days? I miss his comments …. … it was always soothing to hear incompetence and thievery reclassified as genius and probity. 🙂 🙂

    My heart isn’t in it but sure I’ll have a go. Every economics blog should have an official optimist..

    November 2009 was six months after the end of the recession (I should remind people JTO predicted this well before anyone else… why some of us had the gall to suggest this could possibly be a depression). Yet again Lenihan has outsmarted the naysayers by cleverly orchestrating delays in NAMA to buying at the very bottom of the market just in time for the recovery. In time this will be seen as a bold move striking just the right balance between saving the banks and getting a great deal for the taxpayer.

    I nominate Pat Donnelly to deliver the next ray of sunshine. None of that depression talk. Down with that sort of thing.

  56. @ Garry

    given that JTO has flagged to everyone that he’ll be in sunny California for the next 6 months, and not commenting on this website, im not entirely sure if it’s fair to have a sarccy go at him when he’s not around to defend himself.

  57. I was looking at Rogoff and Reinhart last night.

    Some more things which arise form their comments:
    1. “Bail-out costs” were a very small proporation of the overall costs to the economy in cases of a banking crisis combined with a recession.
    2. The 4 to 6 year period for property prices to bottom out generally related to post-war crises, although property prices didn’t fall hugely after the great depression. In postwar crises, which were not global, it generally took about 4 years for GDP per person to recover to pre crisis levels. In depression crises it generally took about 10 years to pre crisis levels.
    3. Ireland’s property bubble from 2002 to 2006 is not unusual compared to other countries which had property bubbles in the same period.

    The LTEV is calculated based on a 7 year period according to Mulcahy to the Dail Committee on 31/8/09. That seven year period presumably starts on the date of valuation. It might even assume the date of valuation to be the trough. This is all very questionable in light of Rogoff and Reinhart’s analysis.

    Another day’s work: Is all this being done to support Irish private pensions (bank shares, bonds and deposits)? If Irish private pensions’ interests in Irish banks were totally burnt, what would be the consequences for the State long term? Have the Irish private pensions been wearing the Green Jersey and are we relying on them to continue to do so?

  58. @Zhou
    “Another day’s work: Is all this being done to support Irish private pensions (bank shares, bonds and deposits)? If Irish private pensions’ interests in Irish banks were totally burnt, what would be the consequences for the State long term? Have the Irish private pensions been wearing the Green Jersey and are we relying on them to continue to do so?”

    The equity component of their investment would be negligible at this stage as the total market cap is only about €2bn.

    I don’t think anyone has ever suggested that the deposits and bonds should be totally burnt just that they should share some of the losses

  59. The gov’t does not have the resources to carry through the NAMA scheme to a successful conclusion. Outside forces will be called in to put the train back on the track. Let us hope they will exhibit mercy, compassion and understanding. Watching the Germany/Greece debacle does nothing to alleviate any anxieties I am having about our predicament.

  60. @All

    … and as mentioned on the Congratulatory thread on Karl’s election to the RIA (Royal Irish Academy) – and we were looking for mere logic ……… and somebody mentioned Schrodinger as a member of the RIA … and the penny dropped ……. any Quantum Physicists around?

    Speaking of Schrodinger, methinks Karl’s favourite – The Minister – could be next in line for elevation to the RIA: It appears that Schrodinger’s cat is simultaneoulsy both still alive and still dead within The Minister’s unopeable NAMA Box_bank, for which The Minister has the only availabe unusable key, a key which changes its shape each time he observes it. Surely The Breakthrough Cute-Heuristic Equation in Quantum Finance of the Century deserves to be honoured?

  61. @ Eoin,

    given that JTO has flagged to everyone that he’ll be in sunny California for the next 6 months, and not commenting on this website, im not entirely sure if it’s fair to have a sarccy go at him when he’s not around to defend himself.

    Agreed.

    I intend to make the break myself this week, as other stuff demanding of my attention comes on stream. I would definitely like to think the IE community treats those who have left, accordingly. BOH.

  62. “I would definitely like to think the IE community treats those who have left, accordingly”
    You betcha 😉

  63. @BO’H

    Turn off the lights on the way out – the most recent ‘well bought’ GP directive. Enjoy the ‘enjoyment’ – the other recent FF directive.

    @All ‘Left’
    Pls don’t come back – today’s FF/GP directive.

    @The Minister
    .

  64. Can any of you explain what the consequences would be of getting at least the subordinated debt holders to share the losses.

    Why would the bond market get the jitters just because a bank cannot pay its creditors. Why is there such a systemic risk?

    Maybe a naive question but I can’t still fathom why we are going down the NAMA road which will stultify growth for years. Why are we not going for a big bang solution where some deal is made with the bondholders so they absorb most/a good chunk of the losses.

    It seems to me that the solution needs to be quick and clean so that we can get up and running again.

  65. Jan, without wanting to reopen the old and much-much-much discussed arguments, and i really dont, but by what mechanism are you hoping to enforce losses on the sub-debtholders?

  66. Sorry, am a bit late to the ball game and way behind on the learning curve but would be interested in any links to stuff already discussed, especially the consequences of the bondholders having to accept some losses.

    I don’t understand why insisting the bondholders absorb the losses will lead to contagion and systemic risk for the country. Anybody willing to rehash some argument from the past that illustrates the effects of such a move?

    As for a mechanism: my thoughts would not be much different from what has already been put forward by various people.

    When the guarantee is up, let the shareholders and bondholders absorb some of the losses. All the toxic loans should be put in a ‘bad’ bank or SPV. Sell(or give away) the banks to some relativly stable international banks(do we need national banks?), say HSBC or BNP Paribas. Senior bondholders could be offered equity in the the banks that are taking over. Any profits from the the ‘bad’ bank could be routed back to the Gov/bondholders. Banks would be ‘clean’ and could start lending again.

    This would be quicker and cheaper than NAMA, which is, as seen from the discussions above, intransparent and doesn’t do what it says on the tin.

    NAMA is not resolving the issue of banks being freed up to lend. More funds for recapitalisation will be needed. This drip feed approach, I fear, will lead a Japanese style lost decade where zombie banks are restricting growth, not to mention all the fees and costs involved in this approach.

    Why is it that other countries like Sweden managed to sort out their meltdowns in a much shorter timeframe than we can.

    Anyway, probably stuff that has been debated back and forth for ages on this site, so apologies if it is boring.

  67. Jan,

    The list of categories to the right gives you access to archive threads.

    http://www.irisheconomy.ie/index.php/category/banking-crisis/

    You will see differing views and polite 😯 debate.

    Haven’t read your entire comment, but I am definitely in the “liquidate” the subs camp. Actually that might be a camp of one.

    I also would like to see Anglo Irish Bank euthanized before it gives birth to “Son Of Anglo”.

    Things will get interesting as Anglo (finally) delivers a set of accounts and Brian Lenihan sets out his stall on recapitalisation. By mid April you will know just how much of a slave you have become in the bail out of your betters.

  68. @ Jan,

    “Why is it that other countries like Sweden managed to sort out their meltdowns in a much shorter timeframe than we can.”

    Emm, though one that.

    Maybe it’s because Fianna Fail don’t have a Cumann in Stockholm. 😀

    Could be wrong. Frequently am.

  69. Re: http://designcomment.blogspot.com/2010/03/krakozhia.html

    That’s exactly what’s likely to happen in 2010. There’s strong indication of devaluation of the $US this year. Many US states are like Ireland and worse. The US healthcare bill is cripplingly expensive, and the US is flooded with immigrants in the southern states (many of which are near bankruptcy already).The immigrants are entitled to health care. A devalued dollar (>40% devaluation is likely this year) would adversely effect OPEC countries as prices have to increase, and this is cyclical. There is a strong possibility of an OPEC country getting into significant economic difficulty like Dubai did. This can be exacerbated by it being an OPEC country that is vested in the credit farce. Saudi Arabia would be very problematic.

    There should definitely be a strategic oil reserve as a necessity, at least for the short term, and only for emergencies.

  70. @Greg

    Go easy on Jan – he appears still sane, sees the commonsensical pragmatic approach and has yet to realise that serfdom probably awaits – we need more of his sound ilk.

    Read on Jan – you will find that ‘time’ is a central construction around here …

  71. @Karl
    “It follows that any property decreases or increases after 30 November 2009 will not be reflected in the NAMA market valuations.”
    I ‘m afraid I haven’t read all the responses on this but I didn’t see from the original post how exactly the November the 30th valuations were arrived at, and I was not aware that there was some kind of frozen lookup table of valuations for various assets somewhere.
    Anyybody got an idea how they managed to caclulate values at an arbitrary date like that?

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