However, even that would require there to be an error in that cashflow projections should take account of the risks to cash-flow and should even themselves out across the various loans (unless there is a further general disturbance in the market such that the individual projections are no longer independent of each other.)

On that, it seemed to be pretty clear from Michael Soden’s interview with Sean O’Rourke on RTE radio yesterday, that the Irish banks were in fact not pursuing borrowers as they normally would do - because of their fear of a domino effect being set off - the domino effect of course, resulting in a new bottom level being set to the price of their assets and associated dirt/concrete etc. Clearly, it is not a question of ‘if’ there might be dependencies in the market - but, it is all unavoidably dependent, and that is the biggest difficulty the Irish banks did face. I guess, that is why they become known by the term zombie. Still walking but dead. BOH.

http://www.rte.ie/news/news1pm/player.html?20100707,2783562,2783562,real,209

“3. NAMA asks for written response on 101 questions.
With me so far?
Remember NAMA took 4eva to take on the first tranche. So they had all the time in the world.
Each loan had/has a unique record of its financial history.
It’s called BOOKKEEPING zhou.
The record has DEBITS and CREDITS.
If there are no credits there is no positive cash flow.
Simples.”

That’s the way I see it too. NAMA looks at the cashflow disclosed by the questions and the discount for the value for cost of funds is based on that. No overpayment.

The only problems arise where, as Karl Whelan has pointed out, where cashflow stops. However, even that would require there to be an error in that cashflow projections should take account of the risks to cash-flow and should even themselves out across the various loans (unless there is a further general disturbance in the market such that the individual projections are no longer independent of each other.)

Given that Nama will be taking over loans amounting to almost half of Ireland’s GDP, its business plan should, at a minimum, have included “scenario-based” P&L statements and balance sheet projections as well as cashflow forecasts for the ten years. These would have given a fuller picture and facilitated analyses which might have helped anticipate problems identical to those being experienced by the banks that Nama is seeking to rescue.

Good paragraph, good post also. BOH.

Sorry zhou, it is perfectly obvious.

Let me break it down for you.

1. NAMA sets out to acquire loans.

2. The banks provide a list of loans they intend transferring.

3. NAMA asks for written response on 101 questions.

With me so far?

Remember NAMA took 4eva to take on the first tranche. So they had all the time in the world.

Each loan had/has a unique record of its financial history.

It’s called BOOKKEEPING zhou.

The record has DEBITS and CREDITS.

If there are no credits there is no positive cash flow.

Simples.

A stroppy teenager could be trained in 30 minutes and finish the job in a week for a new pair of trainers.

Thank God we have experts working on this.

It is most certainly not a business plan as it contains no proforma financial projections or detailed financial picture. Maybe, Nama learnt from last year’s draft business plan that the few the number supplied the better.

Given that Nama will be taking over loans amounting to almost half of Ireland’s GDP, its business plan should, at a minimum, have included “scenario-based” P&L statements and balance sheet projections as well as cashflow forecasts for the ten years. These would have given a fuller picture and facilitated analyses which might have helped anticipate problems identical to those being experienced by the banks that Nama is seeking to rescue.

Nama is adopting an accounting policy (page 18) which “considers expected cash flows, not contractual cash flows, on loans. This means that the Profit & Loss account will reflect what is happening in reality in cashflow terms, rather than taking income to the Profit & Loss account that is not cashflow-based e.g. NAMA will not accrue interest rollup to its Profit & Loss account. It reflects an accounting approach which values the loans by taking the “actual” initial value plus future expected cashflows less potential impairments.” This means that Nama will be burying loan and interest write offs over the next ten years. These could amount to, think of a large number, €30-50 billion.

Given the “Business Plan” has the DoF’s imprimatur, let’s see what Michael Noonan and Joan Burton are made of. Another 46-signature letter? A complaint to the EU?

I have listened to the debate and discussion at the Irish Economy blog, the broadcast media, the Oireachtas, the newspapers and at professional seminars of various kinds for well over a year now. I am fairly current with a lot of the debate, objections and concerns expressed by many quarters. However, the ‘business plan’ is probably an unfortunate label, because as long as the government can swing a majority in the chamber, we aren’t really trying selling this ‘business plan’ to anyone. The ECB has published its guidelines for government interventions at member state level, on foot of the international financial crisis. As long as the NAMA demonstrates a compliance within those parameters, who is going to mount a meaningful, well informed objection?

The only party which the NAMA organisation really needs to impress its intentions upon, is the borrowers it is set up to deal with. From that point of view, if I was a borrower, I would be whimpering today. The holiday period of unreality is entirely used up and over. Apart from getting real with the borrowers whose plans never had a chance, the NAMA approach also has the advantage of throwing up many of the schemes and projects, which do have a reasonable chance of proceeding, even in today’s climate. That is welcome news for many of the more responsible borrowers who will now deal with NAMA. It was no fun at all, for many of the more genuine, intelligent and responsible borrowers to operate in Ireland for the last decade. When they knew that every action the bank took in flogging out more loans, was simply driving the costs of everything up, and general competitiveness down. You can see it right across the country at the moment, NAMA has began to turn the tide of un-reality, which pervaded almost every sector of Irish society for nearly a decade. Sorry if I do sound like a cheerleader, but it is worth putting forward some counter arguments for the sake of some degree of balance. BOH.

There is no P&L, no Balance Sheet, no Cash flow, no definition of performing loans, no estimate of default never mind a definition, no indication when NAMA will dispose of assets, no estimate on demolitions, no plan for the spending of development money, no explanation of interest rate assumptions, no geographical spread of the assets, no plan as to future profiles of property prices, no indication of salaries (in any decent PLC you would have the compensation packages of the directors), no indication of future cash requirements from the state (like the €250m advance in May 2010). This is not a Business Plan.

Given the “Business Plan” has the DoF’s imprimatur, let’s see what Michael Noonan and Joan Burton are made of. Another 46-signature letter? A complaint to the EU?

“It’s perfectly obvious that it was not known (or if known, kept hidden in order to overpay).”

It is not obvious at all. There is no evidence that individual loans which were not producing cashflow were valued on the basis that they were producing cashflow. On the contrary, it is more likely that cashflow problems were disclosed during due-diligence.

My initial reaction looking at the business plan, is it speaks to any borrower whose loans are moving to NAMA, that this is a well resourced machine. This is not the kind of opponent like the typical Irish lender, with a Seanie or a Fingers sitting at the helm. This body, who now owns all of their Irish-based loans is not one, which you can pull the wool over. If that was the desired effect that NAMA wishes to achieve, then I can say they have succeeded in that much. This is a crucial factor I believe, and wanted to include this comment into the mix. The borrowers in future will have to face their endeavours in a much less care-free manner, than they got away with for the last decade. BOH.

Er, didn’t they tell us recently that the smart/green/shiny new/NAMA-led/enterprise economy was going to create something like 120,000 jobs by 2014? Not much point in trying to look at doing a PhD after my studies then

I had better go and get a real… Oh… There aren’t any. Any cheap tickets out of here? I need to join the exodus (I’m far too modest to call it a ‘brain drain’).

http://www.nama.ie/Publications/2010/NamaBusinessPlan30June2010.pdf

http://www.nama.ie/Publications/2010/Section55QuarterlyReport31March2010.pdf

“(107) The Commission notes that […] have not provided a detailed business plan for New Bank or Old Anglo, whether under the base case or the adverse case. It is therefore not possible for the Commission to assess to which extent the business plans of both entities are credible and rely on prudent assumptions. Accordingly, the Commission would need to receive a stress test of the New Bank.
(108) […] in particular submit that in 2014 New Bank will generate profits of approximately EUR […] billion, whereas Old Anglo will generate losses of EUR […] million only. This means that that the total profits of Old Anglo/New bank together would amount to EUR […] million. That profit would be equivalent to the profit generated by Anglo in […], ([…]), i.e. at the top of the commercial real estate cycle. Considering the level of impairments in Anglo, the projected reduced size of New Bank and taking into account that it intends to develop activities in areas in which it has no previous experience, the Commission doubts that such an objective is achievable under prudent assumptions and with reasonable risks.”

I recommend everyone takes a look at Mr Almunia’s letter regarding the Anglo restructuring plan (which as Colm says is a business plan) published yesterday and available here.

http://ec.europa.eu/competition/state_aid/register/ii/doc/NN-12-2010-C-11-2010-WLAL-en-31.03.2010.pdf

Not only does it conclude that Brian Lenihan broke State-aid rules in December 2009, it gives a damning criticism of the shoddy piece of work that was the Anglo restructuring plan in November 2009. It made me cringe.

When you read about the assumptions on the property market (average drop from peak to trough 47% - worst case 69% and base case falls in values in 2010 and 2011 before stabilisation in 2012), you might want to ask if there has been an outbreak of multiple personality disorder in the DoF.

“I’m curious as to whether the faith of those who blog here day in and day out in their own free time (as I could not possible conceive of anyone being paid to do this) in support of the Government’s approach on NAMA has been even slightly ruffled by Commissioner Alumnia’s views on the quality of the Anglo business plan.”

…. and dismayed by all the indications that the senior managments and advisers in the banks have been either grossly incompetent or lying through their teeth.

It’s perfectly obvious that it was not known (or if known, kept hidden in order to overpay).

It doesn’t matter what way you look at it. If the discount factor was reduced to take account of positive cash flow on 40% of the book and it subsequently emerges (shock horror) that only 20% of the book was positive cash flow generating then NAMA overpaid, even by its own methodology.

I wonder just what level of incompetence is required to fail in the most simply of due diligence checks.

NAMA “Mr Banker is the loan producing cash flow?”

Mr Banker “Sure it is begorra”

NAMA “Excellent. Now prove it”

Not if the lack of cashflow was known at the time of the valuation as I assume it was.

Which means insufficient discount was applied on the first tranche.

“(as I could not possible conceive of anyone being paid to do this)”

You forgot to use the sarcasm off indicator.

“/sarcasm”

It just means they are not complete basket cases.

€6.5bn to €10bn of finishing out costs.

What’s the probability of that being recovered?

What’s that I hear? We’ll get that back through LTEV.

We will in our backsides.

LTEV was and is a lie (an EU one at that).

We will get the market value at some future date. There is no such thing as LTEV. There is only market value either now or in five/ten years time.

With the austerity measures being imposed throughout Europe the Pollyanna view of LTEV should be revisited.

Expect the propaganda like the unpaid interest to roll on and on.

I know this isn’t the right thread to discuss it, but to qualify a few things for the benefit of readers. I am aware there is a difference between ‘big R’ research and development funded by SFI, and ‘big D’ of the same, which may take place in the mainstream knowledge economy in Ireland. Each require a different sort of mentoring from public and private investors, to allow maturity times to be reached. In the meanwhile, any form of R&D has finite capacity for employment creation. There are pertinent questions to do with ROI for low level research and university spin off type models. This has been discussed at length already on the IE blog. I like blue sky thinking, personally. But I have to admit, there is a large segment of small and medium entreprise, which doesn’t require either ‘big R’ or ‘big D’, investment. It requires a basic funding stream from somewhere, and that segment of the economy is employment intensive enough to make a real dint in the live register figure. I am talking about economic activity which depends on competitiveness in terms of business processes and exploitation of available resources, talent, etc to provide value to a wider European market. What ever happened to those movies which used to be made in Ireland. Remember Saving Private Ryan, Braveheart, and so on? Have those all gone now to New Zealand, with the associated support industries in post-production and so forth? It would be nice to see some ideas like that receiving attention again, even at some small scale. BOH.

Hopefully this will be shoved down the throat of the next politician to come out and talk about the smart economy and how it was going to save Ireland.

Very disappointing story to read in this mornings Irish Independent newspaper. Nice to know we have our priorities in Ireland all wrong as per usual. The protestation from minister Conor Lenihan is very welcome on this. BOH.

http://www.independent.ie/national-news/blow-to-smart-economy-as-950-research-jobs-face-axe-2247188.html

Because its US, Polish and UK banking interests have value. If you deduct their combined value from AIB’s market capitalisation, then you shares have a minuis value!

A commercial building owned by a foreign company where the loan can be serviced would be we well worth holding onto and let NAMA go hang.

Agreed. That is the situation our island nation finds itself in today. We are on a large empty bus, but with no bus driver up front. The last few remaining passengers are headed for the edge of the cliff, and there isn’t much one can do. It is like being in a bad grade ‘B’ movie. I am sure the developers knew they occupied the important position, in the grand scheme of things, for several years. They became the ‘captains’ of the Irish economy. Their egos’ did expand to fit that job description. Instead of trying to mitigate that, we fanned the flame, we lionized them in the broadsheets and tabloids.

Every great racing team, no matter how sophisticated and well kitted out it may be, is somewhat dependent on the human driver at the end of the day, in order to win a race. Ireland’s racing drivers, all had building and development projects attached to them. You couldn’t be a hero, if you didn’t lay one brick on top of another - at any level in Irish society. It was up to ourselves to alter the rules of the game, during the Celtic Tiger years, to ensure we did not depend on a sub-section of the entrepreneurship class. We didn’t act fast enough as we should have done, and we have to suffer the stark consequences of that. BOH.

Others have answered the question of subbies. Basically these have had to share losses through coupon suspensions and sales back at par. Whether this is enough is moot.

As to the seniors, well you know the issues there. They are not capital providers. Maybe they could have been negotiated with, maybe that was not a runner in the context of the times.

So bottom line, I do not agree with your characterization that risk capital in the banks was not to be burned.

I would not be confident that Irish banks and building societies have legally enforceable charges over many ‘foreign’ properties. In many cases developers (their companies in some shape or form) raised capital to fund foreign acquisitions based on their Irish assets. Locally registered companies would then undertake the development and management of the development using funds advanced by an Irish registered entity. This was convenient for Irish banks who didn’t want to be drawn into litigation in other jurisdictions.

As an aside, at some point in time during the rolling autopsy of the present economic crisis, the actual structuring of loans approved to developers should be scrutinized. I was surprised that the recent reports didn’t drill down into this issue, i.e. were intermediate management companies involved siphoning money into rainy day vehicles?