Why Larger Losses on NAMA are Likely

Day 2 of the new NAMA business plan and I’m sure people are already a little tired of it as tolerance for all things NAMA has dwindled for most of us. For those still interested, Constantin Gurdgiev has a number of useful calculations in this post.

I’ll conclude on this issue for now by making a few simple points as to why I think the outcome for the taxpayer is likely to be worse than indicated by the plan’s “worst-case scenario’’ of an €800 million loss to be recouped via a levy.

1.  Dubious Valuations and the AIB Lower Bound: Every time NAMA look more closely at the portfolio, it gets worse. Given these trends, it is perfectly possible that once they have assumed ownership of the first tranche and looked at future tranches, which have more land and less investment property than the first tranche, the valuations set out yesterday will prove optimistic. Prices paid may also turn out to be lower than listed in the plan. However, the first tranche has already been paid for and the desire to keep AIB out of full nationalisation is likely to keep prices paid up to a certain level.

2. Lower Recovery Prices: The current market valuations are dated as of November 2009. The government’s own restructuring plan for Anglo conceded (see note 41 in the Commission’s response) that property prices would fall in 2010 and 2011. If the value of these properties fell another 25 percent from late 2009, then obtaining the 10 percent long-term economic value “uplift” would require an increase in values of almost 50 percent from the bottom of the market (calculated from 1.1/.75 = 1.47 but you can fill in your own figures.) The business plan’s base case assumes that NAMA will realise the full long-term economic value on all properties. In practice, it seems more likely that NAMA will gradually sell off properties over the years: This may involve the average realised property price being less than the November 2009 value, a scenario not considered in the plan.

3. Derivatives: NAMA has taken over €14 billion in derivatives positions, mainly interest rate swaps, entered into by developers. My understanding is that these swaps are largely contracts that developers entered into in which they agreed to pay fixed rates in return for the counterparty paying their variable rates. With variable rates having remained unexpectedly low, these fixed rate contracts have proven to be really bad deals and represent a further undermining of the financial positions of these developers. The seniority of these claims is generally such that a bank or asset management agency selling off the underlying property would have to first pay out on the “break costs” to the counterparty in the swap. There seems to be little chance of upside in these derivative positions and a decent chance of a nasty downside. Information in the business plan on this would have been nice but alas there is none.

4. Rising Euribor rates: The previous business plan showed NAMA paying out more in interest than it took in from loan repayments. The current business plan doesn’t bother showing us this information but it appears that this is still the case. When the ECB eventually tightens, this will raise interest payments from NAMA because these are linked to Euribor. With so few borrowers repaying, there is unlikely to be as large a response from interest payments into NAMA. It is possible that the business plan calculations have fully factored this in to their calculations but, again, we just don’t know.

5. The Levy: But sure, won’t we recoup it all with a levy, I hear you say. Don’t bet on it. The Irish government needs to unwind its ownership position in the banks in the coming years. If there is a threat of a potentially large levy hanging over the banks that could potentially deter private investors. If the losses start piling up, I see the levy as something that will likely be shelved. Note, my opposition to a post-dated levy isn’t new. I said in April 2009 that it was “a pretty terrible idea” and also wrote at length about it in October.

That’s my read on it. Arguments running to the contrary welcome as always.

54 replies on “Why Larger Losses on NAMA are Likely”


1. Lower valuations from future tranches – well said. It seems inexcusable from a financial process point of view for NAMA not to have sampled loans/assets from the 1400-odd smaller borrowers not captured in the first three tranches and for NAMA to assume the same profile of performance/LTVs/recovery prospects for the small guys as the multi-billion euro borrowers. Such sampling might reveal a better position than tranche 1 but the fear is that it would show a worse position.

2. The Levy – the Business Plan yesterday still predicts Anglo will transfer €36bn of the €81bn total and according to the NAMA Act says 225(4)

“(4) The aggregate tax by way of a surcharge to be imposed on
participating institutions on their respective profits (within the meaning
of section 4 of the Taxes Consolidation Act, 1997) if any— …….
(b) shall be apportioned to each participating institution on
the basis of the book value of the bank assets acquired
from each participating institution concerned as a proportion
of the total book value of the bank assets
acquired from all of the participating institutions,”

In other words, the majority of any levy will need come out of a bank that won’t exist without several bn more from the taxpayer that we will never get back. It is really just rhetoric to say we’ll impose a levy, because unless we pump more bns into the Anglo (and to an extent INBS) black-holes then there will be no bank to effectively claw back the loss.

On the levy.

Anglo & INBS (if memory serves) account for 50% + of the loans being acquired. And these are probably the least reliable in terms of recovery.

Both institutions are beyond bankruptcy.

They can’t pay and won’t pay a levy.

Lenihan conveniently ignores this.

@ Karl

re derivatives – aren’t the “break costs” covered by the ‘nil consideration’ being paid to the banks, ie the banks transfering the derivatives to NAMA are taking the hit already (they are the Irish banks taking part in NAMA). Im struggling to understand what remaining exposure there is for NAMA to incur a loss from???

Also, the line “they agreed to pay fixed rates in return for the counterparty paying their variable rates” confuses the situation. The swap involves a bank paying the developer a variable rate and the developer paying the bank a fixed rate, but they are typcially the only two counterparties involved in the transaction. Once the derivative goes to NAMA, NAMA subsitutes into the equation instead of the bank.

@ Eoin

The paragraph above on derivatives is speculative in that basically no information has been provided on the derivatives in the plan. However, my understanding (and I’m not claiming it is in any way authoritative — I’d really like to see more information) is that “the bank” involved in the swap deal doesn’t have to be the original bank that granted the loan or any of the NAMA banks. Indeed, we’d expect it not to be. Why wouldn’t they just offer a fixed rate loan in the first place rather than offer a variable rate and then do a swap deal? (I’m happy to have this explained to me if this is indeed the usual case — perhaps the answer is they get a nice fee for doing this.)

But as I say, we’ve little information on this, I’m just flagging it as one of a number of reasons to potentially be concerned about it. Ideally, we’d get enough information from NAMA to lay concerns about this to rest.

KW says: (I’m happy to have this explained to me if this is indeed the usual case — perhaps the answer is they get a nice fee for doing this.)

The fee earning theme, seems to be the unifying factor. I should think, it is the trail of bread crumbs, the bank inquiry should pursue. A probable list of professions who bear culpability, in greater or lesser part:

– Valuation professionals.
– Risk managers.
– Auditors.
– Due diligence officers.
– Swap derivative traders.
– ? ? (All suggestions welcome)

If there are no skeletons in your closet, why wont you let us look inside and see for ourselves?

From the Business Plan:

Furthermore if, for whatever reason, information comes to light after transfer of an asset by a participating institution to NAMA which indicates that NAMA has overpaid for an asset, there is scope, under Section 93 of the Act, for the amount of the overpayment to be subsequently clawed back by NAMA from the institution.
The EU Commission is conducting a tranche-by-tranche review of loan transfers to ensure that valuations conform to the scheme approved by the Commission in February 2010.

So, if as NAMA say they were mis-led for whatever reason about the loans in Tranche 1, why don’t they go back and adjust the discount applied?

@ Karl

re fixed rate vs swap – well few reasons, most of them are documentational:

1. i have a 100mm loan, but i only want to hedge 20mm of it now. Rather than have two seperate loans, including legal fees, bulky loan and security docs etc, i have one loan and a far easier ISDA based swap.
2. i draw down loan in 2004, but only hedge at a later date. Loans stays intact, simply attach a swap to the overall facility.
3. facility could be complicated in terms of tranches, differing maturities, different payment terms etc, but i want to put on a hedge which covers them all. Far easier to do this than try and get a new all-encompassing loan doc.
4. i have a more proactive hedging policy, where i can put hedges on and take them off as market moves.
5. very easy to value the swap in place, potentially move to another bank if required, tear up, restructure etc, without moving the loan as well.

It’s relatively common to draw a loan in full first, and then mess about with the hedging later on, and then change the nature of the hedging later on again. Typcially these are done without the need for fees, documentation, solicitors, taxes (stamp?) etc etc.

You’re right that the lending bank doesn’t have to be the derivative bank (although this type of ancilliary business was often a key reason to take on the original loan), but at no stage has it been suggested that the derivative is being taken on from a non NAMA bank, has it? For all the suspicions about what NAMA is taking on, at no stage has anyone suggested that they are paying out large amounts to take on the derivatives, knowing that they are not being performed on, is there? These derivative positions would be subject to the same haircuts as the loans if the underlying credit is impaired.

The somewhat relaxed and flexible approach to these sorts of derivatives is not how the banks would operate now (hopefully) but it would have been fairly common place to do this at the peak.

@ All,

There is a comment I wish to add here. There are a number of broad strategies worth taking an overview of today. You have:

– Nationalisation of the banks,
– Transfer of loans,
– Nationalisation of the property deeds, title, lease of borrowers.

Which of those broad strategies enables the government to extract the maximum amount of information about borrowers (never before assembled in one institution), and confirm what we already suspect about Irish lending institutions, with the minimum of resources and time? Answer: the second option. The transfer of loans. Lets look at the first option. We have seen with a nationalised bank such as Ango Irish bank, it has taken the request of a high court judge to obtain certain documents. Even where we own the bank, it wants to operate independently on its own. After declaring huge losses, the nationalised bank is free to hire and award bonuses as it deems fit, without intervention of the minister for Finance. Lets look at the third option. The trouble is you are automatically declaring insolvency of borrowers and institutions, and going through a huge amount of administrative work, compared to the second option. But for what extra gain? There seems to be huge difficulties with any other strategy, other than the middle one, the transfer of loans. BOH.

@Gavin S

“So, if as NAMA say they were mis-led for whatever reason about the loans in Tranche 1, why don’t they go back and adjust the discount applied?”

My impression of it is that NAMA is a type of emperor’s new clothes exercise where the vehicle takes over loans at a discount that is just enough to cover the modesty of the banks but no more . If the true value of the loans were to be taken into account the banks would have no clothes. If they were to revisit the whole mess today would they settle on a NAMA? I doubt it. The worst case scenario has consistently come to pass and NAMA was not built for such days. NAMA was about getting back to the sunny uplands ASAP. An archaeologist from Iceland was quoted in the FT recently as saying that future generations of Icelanders will never understand how the country turned into a massive financial speculative vehicle at the end of the 20th century. The same will probably go for Ireland. NAMA was built on the thinking that brought the boom. New thinking needed now.

@ MH,

Colm McCarthy on CNBC today, on NAMA and cutbacks:

I am surprised they didn’t need walkie-talkie’s to speak to one another in that TV studio, it is so cavernous. It seems like the opposite to the Prime Time studio, where Willy O’Dea had almost climbed on top of George Lee’s side of the desk, the last time I saw them being interviewed. Remember when former minister O’Dea was the spokesperson for NAMA? BOH.

5. The Levy.

Banks don’t pay levies, people do. Any levy will paid through a combination of:

a. reduced dividends for shareholders (all of us)
b. reduced interest rates for depositors (some of us)
b. increased charges and interest rates on customers (some of us)
c. reduced renumeration for employees (some of us)

I think you have missed the point completely. NAMA is going to lose vast amounts of money and the State will have to pick this up. Everybody knows this including NAMA and the government. However, there has to be an accounting fiction that it will make money or break even. Why? Because if NAMA is recognised as a non-commercial, money-losing venture, the entire write-off will have to be recognised as a loss. With NAMA, it will still have to be recognised as a loss, but the loss will be recognised over a long period, rather than all at once.

More worrying in practice is the news that NAMA may sell on the loans. This means that it could sell the loans back to the original developers at (say) 40 percent of their value if they decided that this was the best prospect for the loan. This would effectively be a write-off in favour of the developers. This is an enormous moral hazard.

NAMA is also in a position of strength as a financier with bottomless pockets and this is another hazard to a free market. It will basically be impossible for non-NAMA developers to do anything in Ireland for years to come, because lenders will not want to be involved in developments which are in competition with NAMA.

All this doom and gloom talk is so 2009, we’re now the fastest growing economy in the EU.

Get a grip on yourselves!

AO’L says:

More worrying in practice is the news that NAMA may sell on the loans. This means that it could sell the loans back to the original developers at (say) 40 percent of their value if they decided that this was the best prospect for the loan. This would effectively be a write-off in favour of the developers. This is an enormous moral hazard.

Excellent post, Antoin. It is what I referred to as the counter attack, is a recent post, where I envisioned myself as a Brazilian football manager, just to add drama. BTW, I noticed Spain closed down Germany quite well this evening, and that deadly counter attack never got a chance to work. NAMA management, take full observation. BOH.


Concubhar O’Caolai

Half a million unemployed.

Some will be lucky to keep a grip on their sanity.

@ Greg,

If there is one thing that has seen us through this far, is the remarkable level of sanity (if that is the right word to use) displayed by many Irish people. I have been impressed by what I have seen in everyday life from Irish people in their ordinary lives. Whatever the government is up to, there is one thing for sure, they would not be allowed to get along with it, without support from a people who have shown as much courage as the Irish have, through all of this. BOH.

Apologies, might be wrong. Judging by the eye story it looks like it has but I didn’t see it yesterday.

A question for the economists.

Is the official fiction that decoupled NAMA from sovereign debt finally exposed or is there a bit more mileage in this farce?

The Alchemist says:

Is the official fiction that decoupled NAMA from sovereign debt finally exposed or is there a bit more mileage in this farce?

Good question, I can’t remember if the NAMA special purpose vehicle did its job or not. I.e. Has met with ECB approval. Perhaps the conclusion that economists at IE blog have arrived at is, markets are more than capable of doing some basic maths for themselves and arriving at a good estimate of Ireland’s soverign debt exposure. I would like to pull in a couple of more issues if I may. I do recall reading a number of Boone and Johnson blog entries about Ireland – I mean, they are a couple of influential voices within the economics community, who can give a really good view from the outside of this island. Does a blog entry by such outside economists reflect in any way the views held by the large international debt investors? It will be interesting to re-visit those external assessments of Ireland, in future years to see how accurate or otherwise they were.

Wasn’t it the re-capitalisation of Anglo Irish bank, which had to be included as part of the sovereign debt? In terms of NAMA, someone can correct me if I am wrong, but the economists here strenuously argued from the get-go, that NAMA is about the Irish sovereign issuing more debt to the international markets. The issue arising out of that is, does the international market know how to distinguish between NAMA bond, sovereign bond, or Paddy bond auctions held at alternate monthly intervals? To what degree will one influence the other? Then I guess, the whole issue of PIIGS and fiscal instability of the Eurozone in general becomes part of the whole problem. BOH.


The Government or NAMA doesn’t have to issue debt in the international markets in relation to NAMA and there are no NAMA bonds trading on the open market (and unlikely to be any) so there is no funding competiton between NAMA and the State.

@ Gavin S,

So who are the Irish banks going to sell their NAMA bonds to? And how are buyers of the same, going to establish providence for what they are buying, except to tie it back to debt issued by the Irish sovereign? Granted, it may become one or two steps removed, and we will have virtually no control over what type of instruments the NAMA bonds will eventually become mixed up in. Especially, if/when the Irish banks with their nice new cleaned up balance sheets are maybe re-sold to foreign institutions. BOH.


They are not going to sell the bonds. The banks get NAMA bonds in exchange for the loans. They will hold these bonds on their balance sheet but use them in repo transactions with the ECB to get cash. Technically as far as I know the NAMA bonds can be traded but that’s not going to happen. You will never see them being offered on the open market.

The MoF has the lonely and impossible job of trying to reassemble Humpty Dumpty. What was done on the fateful night in September 2008 was what had to be done. The banks and the DoF said what they had to say in all of the circumstances. Groupthink and disclosure light. Too many oppportunities to exit the casino had been missed, so the motto was, and remains, belt up and motor on.

NAMA is meant to be a black box, but thanks to the genuine expertise (not mine) in the blogging community, a bit of light is getting in. Even for the lay public, the act is less and less convincing. Is the purpose to ‘save’ our banking system, or to shore up property values blindly ?

One way or the other, the NAMA/Anglo punt looks like bankupting our state in a definitive manner. That painful reality leaves us with a semi-detached FDI sector, a deflating, technically weak domestic economy and a poorly managed public sector. Absent a reset, employment prospects have to be dire.

We are back to the fundamental unresolved problems of our economic development. Meanwhile, the public are quietly awaiting a return to the economic ‘normality’ of the last 30 years, or at least for better emigration prospects. It seems to me those buses may not come. Wherever we are headed, it will not resemble the Ireland, or the global economy, we have known recently.

@ Gavin S,

Technically as far as I know the NAMA bonds can be traded but that’s not going to happen. You will never see them being offered on the open market.

Just another question if I may – to what extent would the same NAMA bonds, be in some sort of common ECB format – which might simply affairs and legal arrangements later on, say if another large European bank was to merge itself with one of the Irish banks? You know what I am saying? Are there other countries under the ECB’s jurisdiction, which will be operating along the same lines as Ireland is? Though of course, the details of every rescue, asset management effort, will vary from country to country. Maybe you don’t know this, but it would be nice to have the bonds in some format that might make the Irish bank attractive to another buyer. BOH.

(NOTE TO ED: Please zap previous comment)

Wallets Full of Blood: Roscommon Death Trip

‘The injustice of time – rendered obsolete.’

Rain falls on the snow. The Contagion has taken hold. Ghosts from the old Dead Republic are emerging everywhere as the day of judgement approaches.

On Black Tuesday a guilt ridden political functionary runs from his job burying bodies in the city. He is tortured by voices of reproach as he journeys towards home. He recounts the history of his dealings with Fingers – a boss ‘who made the old boss look like Mother Teresa’.

Meanwhile, back in the city, amid the spiraling negativity, Fingers and his acolytes lay the foundations for a new Easter Rising.

‘Roscommon Death Trip’ is the final installment of the ‘Wallets Full of Blood’ trilogy. The previous installments were ‘Houses on the Moon’ (2009): http://www

and ‘Zombie Banker Blues’ (2009): http://www

@ Gavin/Brian

NAMA bonds are definitely not for sale, however they will be used in both ECB repos and private repo’s/collateralised transactions.


I can’t see anything that would make the NAMA bonds unattractive to a potential suitor for an Irish Bank and that would make it a deal breaker. Better than having millions of euro worth of development loans in Leitrim and Longford (no offence to either location!)

One way to avoid fire sales of property by NAMA would be to have a scrappage scheme for old sub-standard housing whereby owner-occupiers could, with financial incentives, trade in their old, inefficient, home for one of the new Nama-owned homes. This would keep the speculators out and maintain some kind of price floor while moving a significant number of people into modern, energy efficient, homes.

@ Gavin S,

Point taken, tanx.

@ Irish Muffin,

Very interesting point. I was reading BRE (Building Research Establishment) SAP 2005 website today, going through some of the release notes to their software for energy ratings. It appears as though, there are exemptions from paying of Land Value Stamp Duty in the UK, if you are willing to participate in some kind of energy upgrade works. I don’t know a lot about this. But I guess, the point about Ireland is that we never had any form of property tax to begin with – making it impossible now to provide ‘stimulus’ or ‘incentive’ to that sector, by creating exemptions, which homeowners might avail of – along the lines you have suggested. BOH.

@ Irish Muffin,

The other side of the coin, if you talk to people who live in other parts of the world, where property tax was based on retail value of property – it had a depressing effect, in that people were incentivised not to maintain their properties, and have lower property taxes. I spoke to a real estate agent from one of the holiday resort islands, who was telling me about it. A badly implemented scheme is very depressing to investment. I don’t know enough about the nurse working in Boston who has a holiday home in Ireland, instead of Massachusetts, to comment, but certainly it does appear there are imbalances regarding property taxation in Ireland versus abroad. It didn’t stop ex. Anglo bankers I guess. But taxation policy has focussed a lot on imbalances on labour tax, between Ireland and abroad. I haven’t read much in relation to property tax. BOH.


Are you there? NAMA are now changing historical documents. Specifically they have changed the key tranche 1 data document.


I recall getting headaches trying to work out how NAMA had calculated the LEV and CMV of the property and then how that related to the LEV and CMV of the loans and the consideration paid. Well NAMA have now gone and changed the figures and if you were being unkind you might suspect that they got the calculations or headings wrong.

Lucklily the record of what this document said is contained in debates on these pages – NAMA said the LEV of property in the first tranches was 10.44bn and the CMV 9.44bn (ie a difference of 11%). Take a look at the changed document on NAMA’s website and you will see that the CMV is 7.45bn and LEV property is 8.27bn (still an 11% difference).

Does either the unpublicised change in an historical document or the fact that NAMA did not highlight the change in its recent Business Plan raise serious issues as to the integrity of NAMA’s methods?

@ paul quigley

We are back to the fundamental unresolved problems of our economic development. Meanwhile, the public are quietly awaiting a return to the economic ‘normality’ of the last 30 years, or at least for better emigration prospects. It seems to me those buses may not come. Wherever we are headed, it will not resemble the Ireland, or the global economy, we have known recently.

The New York Times had an article yesterday where a World War II vet advises his unemployed graduate grandson to emigrate to Europe.

It appears that Ireland has yet to get to grips with the reality of what some in the US is called the ‘new normal.’

Today Batt O’Keeffe said Enterprise Ireland supported companies will create 60,000 jobs in the next five years.

They lost 19,000 jobs in 2009 to close the year with 134,000 jobs.

The magic of the 60,000 figure is that there may not be any additional jobs by 2015 and still the minister could not be accused in a strict legal sense, of being economical with the truth.


The IDA has a target of 105,000 new jobs by 2014.

Removing the spoof of indirect jobs, the total for direct jobs is 62,000. Again, there may not be any additional jobs.

In the boom years of 2004-2008, IDA Ireland companies added an average of 11,000 new jobs annually, with 60 per cent in financial services and software. It lost an average of 9,600 annually.

It’s easy to set targets.

WRT the IRS, I think the issue is not that they were transferred at zero value, but that the potential for them to have deeply negative values has been ignored.

Supposing they are mostly paying fixed in return for floating, set up in 2007 when interest rates were rising. This would be a natural hedge for the bank to suggest to the borrower, no? (“Fix your costs at x%, no chance it’ll cost you more”).

The result could be that Anglo are paying a fixed rate, receiving no income (because the loan is not performing) and also paying for the money they used to give the loan in the first place (either through bonds or deposits). So they could be paying 5% fixed, with a cost of money of 4.25% (big institutional deposit) and receiving 1.25% in return (euribor plus a bit). 8% payout on 14 bn a year is 1.12 bn…

Some questions:
1. Is that a likely scenario?
2. Do we know the nature of the derivatives that are being transferred? I recall seeing that they were hedges and not from the trading book, is this still the case?
3. Any idea what the fixed and floating margins are? (i.e. the difference between current rates or ten year swap rates?)
4. I presume that NAMA, in transferring the swaps at zero value, is betting that they will come back into the money – that interest rates will rise in future to levels that make them worthwhile?
5. Do we know who the counterparties to the Anglo IRS were? (I still think that derivatives are the reason Anglo is systemic – the question is to whom…).


I have the old document and will email it to you.

Some interesting stats:
EBS now transferring much less in first three tranches (0.8bn -> 0.4bn).
AIB now getting 42% haircut instead of 43%.
Anglo haircut up to 55% from 50%.
€0.7bn of Anglo loan moved from T1 into T2.
Substantially more UK assets (38%) included than previously expected (30%).
More land (15% -> 28%) and residential property for resale (5% -> 14%) included. Less investment Property (65% -> 53%) now included. [Does this part-explain less cash-flow?]

NAMA must not agree with the banks’ classification of loans. The €0.7bn moved into Anglo’s T2 does not explain it.


Thanks for that – if they were going to change historical documents, you’d think they’d start with the draft Business Plan 🙂

Email address is jagdipsingh2008 at hotmail dot co dot uk

The best is the ratio of Anglo property CMV to loan balances.
It has gone from 58.5% to 41.7%. That is massive.

Am still analysing the revised first tranche document but for me the most significant aspect of the new Business Plan is that applying the final haircuts in Tranche 1 to the remaining balances at the financial institutions pushes NAMA’s consideration up from €40.5bn to €41.7bn – NAMA cocked up because they applied 50% to every single loan which does not reflect the individual banks’ haircut in tranche 1. It is not clear that any increased consideration would have an increased revenue so there exists the possibility that the corrected consideration which is €1.2bn up from previously would wipe out the €1bn in the base case NPV.

Because there is no P&L, BS or cashflow by year, it is not possible to be clear about the situation but NAMA have cocked up the calculation of consideration to be paid.


Not at all, in fact it was when checking tranche 1 again that I noticed that they changed the numbers! And that’s when I thought of yourselves, especially zhou on this one.

What I find frustrating is that an increased €1.2bn cost to NAMA might have an increased revenue but because there is no P&L, BS or Cashflow and indeed the calculation of consideration payable, as you have pointed out many times, is still shrouded in mystery.

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