It Depends on What the Meaning of “Cashflow Generating” Is

Here‘s an interesting article from the Irish Times by Simon Carswell in which NAMA’s senior officials squirm about their changed assessment of the quality of their loan portfolio, blaming most of it on the fragile psychological state of our bankers last Autumn (poor dears). The highlight:

Mr McDonagh said some loans – on top of the 25 per cent that were generating income – were yielding some, if not all interest due, but Nama was still assessing this.

“Twenty-five per cent is cashflow generating – the rest has some cashflow generating,” he said.

It brings to mind our friend Maurice O’Leary’s favourite quote:

“When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.”

20 thoughts on “It Depends on What the Meaning of “Cashflow Generating” Is”

  1. Maybe “income generating” means the cashflow exceeds the cost of funds incurred by NAMA for that particular loan?

    It sounds like the banks are cherry-picking loans and forcing borrowers to liquidate in circumstances where NAMA is relying on income. It is interesting that Bank of Ireland has been most successful at this.

    Bank of Ireland is in a good position to tell borrowers that it will be the only game in town in a few years time when they are trying to get back on their feet or refinance their way out of NAMA. However, is that in the spirit of their deal with NAMA when NAMA needs cashflow?

    “Financial institutions have also taken advantage of an uplift in the UK property market and pressed borrowers to refinance or repay loans by selling the underlying properties in advance of the transfer of the loans to Nama.

    For example, one institution said it had valued a property backing a Nama-bound loan for €70 million last November when loan values were assessed for the agency. The same property is now worth €110 million and the lender has said it is pushing for a sale before the loan moves to Nama.

    Before the Nama loan transfers began last March, a large number of loans at Bank of Ireland earmarked for transfer were repaid, sold to third parties or refinanced to other lenders, many of which were investment property loans generating interest income.

    Nama had initially planned to buy about €16 billion in loans from Bank of Ireland last September and this has since fallen to €12.2 billion. This would also have contributed to the lower level of income-generating loans being purchased than first estimated.”

  2. @ KW,

    I don’t know how many projects I can recall, where this sort of slippage, where vocabulary is used liberally and to mean different things at different times, has cause wasted energy and resources later, in trying to argue differences of a hair’s breath. So much of that effort as the project or endeavour reaches its developed stages would be best employed not trying to argue meanings, but in trying to execute and if needs be selectively alter strategies so as to achieve more desireable outcomes. Richard Bruton’s statement on the brief Prime Time panel discussion last night being a case in point. Deputy Bruton admitting squarely that we are saddled with the NAMA legislation, and there is no going back. But he did suggest a number of ways in which improvements could be made to our direction that would still increase protection of taxpayers and more broadly speaking, any sort of ‘recovery’ that Ireland may hope to enjoy.

    Finally, lets not aim all of the blame for liberty with meaning and vocabulary on the NAMA organisation itself. But lets also include some reporting done by the national press. From the Irish Independent article linked below, Banks had told NAMA that about 40pc of those loans were at least attracting full interest payments. However, NAMA has found that just 25pc of the loans are actually garnering full interest payments. In my very humble view, that particular paragraph attributed to Ms. Laura Noonan is a little sloppy in its reporting. I don’t recall NAMA ever stating anything about ‘full interest payments’, or full anything. To employ a phrase, even a field with some goats grazing on it, is producing a cashflow. Where did all of this stuff about ‘attracting full interest payments’ suddenly spring out of? BOH.

    http://www.independent.ie/business/irish/nama-chief-disturbed-as-bank-data-fails-to-stand-up-2248442.html

  3. If this was a liquidity crisis, then the banks are doing what they should by dumping as much illiquid non-cashgenerating assets as possible into NAMA and then NAMA will do what it might have been supposed to do and use/convert the assets into cash.

    NAMA will make a loss, there was the off chance that it might be cash-generating for a while but I believe there is no chance that it will generate cash on an operating basis. Best to hope for in cashgeneration will be sale of assets (in this case that might be the operating cashflow?).

  4. @KW

    Could it be time for a group of people, ie you and Jadhip, to come together and create a document that outlines NAMA and the objections thereto.

    The document could detail

    1 What NAMA is and what NAMA does

    2 Problems and risks asscociated with the NAMA project

    3 Problems with how NAMA is being implemented to include the lack of information being supplied about how it plans to operate.

    4 Recommendations – to include a list of pieces of information which ought to have been but have not been supplied – such a list would allow journalists to specifically quiz NAMA / DofF officals and the minister as to why the pieces of information have not been supplied. The more granular and specific the question the better.

  5. @ Jesper,

    Nice post. It occurs to me, that we will only begin to understand the portfolio of assets, and it’s underlying collateral of dirt/concrete, as we begin to work on it. What is worth bearing in mind though, are the points made by both Brian Lucey and Ronan Lyons on the short piece on Prime Time yesterday evening. Namely, there are so many unknowns attached to NAMA-bound property loans, that it is sure to generate massive uncertainty within the market, on the island. I would still argue, that NAMA does perhaps transform what was a very dis-organised mess, into a somewhat more organised one. Is there any comfort at all to be gleaned from such a thought?

    There is one issue I want to raise. From my basic observations, I have notice there are two parties that ‘NAMA’ as a functional entity, is designed to interface with. NAMA in the minds of many economists I have observed, is a functional entity, which is set up to deal with insolvent banks. NAMA in the minds of the current government, on the other hand, is an organisation set up to deal with [a few large] insolvent borrowers. I do not believe that level of concern with [a few large] borrowers, is shared equally by the economists who contribute to the Irish Economy blog. Economists, it appears do focus more of their concerns with the banking institutions. Perhaps Irish economists feel they have little interaction with large borrowers, and the threat posed by insolvent banks feel more personal to them. I haven’t analysed it much beyond that. But it is a question – do [a few large] insolvent borrowers or insolvent banks present more danger to the economy? Can one divide one’s concerns equally, or in greater/lesser portions? The architecture of NAMA it seems to me, is designed to deal with a few large borrowers – and perhaps, is not optimum for dealing with a few insolvent banks. BOH.

    http://www.rte.ie/news/2010/0708/primetime.html

  6. Is there anybody on the board of NAMA now that had been a public interest director of any of the banks last Autumn?

  7. Tull says: Is there anybody on the board of NAMA now that had been a public interest director of any of the banks last Autumn?

    Fair point I guess. I recall the suspicious it provoked at the time of announcement of the board of NAMA. If we rewind the clock back to early 2009, the chairman of a development authority, right in the midst of property scandals in Dublin was taking the job of chairman of Anglo’s board – where the same public interest director you refer to, was installed. There was a lot of substance in deputy Richard Bruton’s suggestion on PrimeTime which I linked above, to cease movement of loans from Anglo to NAMA – because the moment we do, it simply crystallises the losses, and triggers further re-capitlisation out of the taxpaper’s purse. It is also worth bearing in mind, that any levy imposed on Anglo in the case a loss to NAMA, will also come out of the public purse. And also, deputy Bruton’s point, in the case of any levies on BOI or AIB, it will still come from banking customers (that is every person on mainstreet in Ireland also). I would contend, it is this kind of silly logic, which gauls many Irish economists so much. I accept the fact, that NAMA is a real opportunity to deal with insolvent borrowers. But with regards to risk investors in Irish banks, NAMA does seem to lack bargaining capabilities. BOH.

  8. @ Brian

    “I don’t recall NAMA ever stating anything about ‘full interest payments’, or full anything.”

    From the cover letter attaching to the business plan

    The percentage of loans which are “income producing” (i.e. loans which are at least paying the interest due on the monies borrowed) is, at 25%, significantly less than the 40% level indicated by the Participating Institutions last October. This has had a significant impact on the updated NPV figure.

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

    Also from the Quarterly Accounts for the 2 days that the 1st Tranche EBS and INBS loans were accounted for, 58,000 interest has been reflected in relation to 371m loans (140m performing and 231m of various grades of non-performing). This equates to an overall interest rate of 2.85% on all loans (NAMA Value).

  9. @ Scarab,

    Thanks for the response. I wouldn’t mind engaging in some proper analysis of NAMA – how it is supposed to operate, given all of those ‘unknowns’, professor Lucey and Mr. Lyons spoke about on the PrimeTime segment linked above. I dug up an old article to re-read today. It was something by Tom Dunne of the school of real estate at DIT, which looks at market behaviours in Ireland. It is interesting that in one point in time (not very long ago) in Ireland, we seemed to be very sure about cause and effect relationships in property markets. How much that has changed in a very short space of time. BOH.

    http://constructireland.ie/Vol-3-Issue-5/Articles/Design-Approaches/Exposing-myths-about-house-prices-the-costs-of-energy-efficiency.html

  10. The strangeness just got stranger. Some possibilities:

    A. NAMA was meant to hide this problem for a decade – while transferring it to citizens -by when it would have reduced in size relative to national income. Now it’s being challenged to actually live up to it’s title, which the government never intended.
    B. The Government should have hired the Swedes. Instead they’ve created the HSE of property loan recovery.
    C. Both.

  11. tull mcadoo,

    “Is there anybody on the board of NAMA now that had been a public interest director of any of the banks last Autumn?”

    You?

  12. @ Hogan,

    So prior to Christmas 2009 was he part of a cabal bent on pulling the wool over they eyes of NAMA and in 2010, was he part of a bunch of wilting violets who did not spot that they were being fooled?

    @ Greg,
    Alas no, although I would not mnd getting my snout into the end of the trough.

  13. Well NAMA was always an establishment conspiracy. Keeping the overwhelming number of senior bank board members and staff, paying an LTEV after a bubble while declaring prices would return to 88% of peak within seven years, declaring the bottom was reached etc. So there is another option:
    (D) This is just part of the plan. NAMA and the banks were always going to coordinate things so the banks would be overpaid for the loans and NAMA would “discover” this AFTER the transfer. If no action is taken against the banks over willfully giving gigantically wrong information we will know this was part of the agreed scheme. The dark establishment conspiracy will have gotten even darker.

  14. @tull
    “So prior to Christmas 2009 was he part of a cabal bent on pulling the wool over they eyes of NAMA and in 2010, was he part of a bunch of wilting violets who did not spot that they were being fooled? ”
    You tell me. You asked the question.

    I’ll ask a question back – could the oversight capabilities of the public interest directors be entirely fictional? Do bank structures mitigate against non-exec directors having any capability to have oversight? Is there any point in having non-execs at all?

    Does anyone know if there are laws covering the information that company executives give to non-executive board members?

  15. I am quite intrigued by Minister Lenihan’s announcement that the banks will have €12bn to lend to Irish industry prioritizing the export sector. Wondering how many of these will be multinationals with Irish offshoots? I am trying to square the emergence of this sum with the black hole that NAMA is quietly sculpting for itself. On the one hand, it seems that an investment of €80bn by the state in NAMA will make a loss while on the other the state can ‘magic up’ €12bn for depression affected companies – was this figure in the budget? One wonders whether some of this money couldn’t be used to buy NAMA assets?

  16. Isn’t this €12bn supposed to come from the banks themselves rather than the government? Quite where they are going to find it though…..

  17. The whole “Cashflow generating” thing was a silly red herring from the beginning. If the loans were generating cashflow, the banks wouldn’t have been illiquid. the whole point of NAMA was to get rid of bad loans.

    The fact that they threw in a few good ones was just another smokescreen. More numbers to fiddle to bamboozle the taxpayer and drag the debate out endlessly.

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