No Frank, NAMA is Not Being Funded by the ECB

On RTE radio this morning (on Today with Pat Kenny with, em, Myles Dungan) Fianna Fail TD Frank Fahey said:

I stand by what I said about NAMA from the very beginning. NAMA is being funded … the bonds are being funded by the European Central Bank.

Now I know that language is a flexible thing and perhaps philosophy graduates could spend all night debating what the meaning of “being funded” is. But, I would suggest that the only reasonable interpretation of this statement is that it implies NAMA are receiving funds from the ECB.

This is not at all true. The ECB has no direct relationship with NAMA at all. NAMA bonds can be used by the banks that have received them as collateral for loans from the ECB but that’s it, that’s the full extent of the ECB’s involvement in relation to NAMA. Furthermore, AIB and BoI executives told the Oireachtas last year that they had no particular plans to use the bonds in this fashion.

The NAMA bonds are fully backed by the Irish government. They are a liability of the Irish state, albeit one entered into at the same time that it acquired some property assets that may or may not yield enough to pay off the bonds.

It is long past time for government politicians to stop misleading the Irish public that NAMA somehow involves the state getting money from the ECB. I would plead with any journalist interviewing Deputy Fahey or any other commentator making this claim in the future to point out to them that it has no grounding in fact.

101 thoughts on “No Frank, NAMA is Not Being Funded by the ECB”

  1. So no free money after all?

    Don’t you think we could at least get Trichet to buy a prize bond? Fabulous prizes to be won each week, Jean-Claude!

  2. Deputy Fahey is their NAMA soldier…

    Trying to get a TD out to explain something coherently, (even if untrue) must be hard these days.

    Fair play to Frank!

    Especially when he will parraphrase his interviewer or opponent in a way that has no grounds in what the other said, and then run out the clock explaining why his parraphrased statement is either wrong, dangerous, or stupid.

    “If Prof Whelan is saying that Namabond is inferior to other rapid set adhesives, then he is wrong, and he also should know that Namabond is approved by the EU”

    Etc

    Maybe some of these devalued assets were put together with namabond

  3. Failing that perhaps we could get Governor Honohan to run a rigged table quiz for ESCB big wigs.

    I can just see Axel Weber in the back of the pub on the Sports round, indignantly shouting “Zis is not fair, Patrick, all of ze questions are about ze GAA!”

  4. Since the national media has no desire to properly interrogate TDs, it’s time to ask the BBC to send Paxman over to do a Newsnight special from Dublin.

  5. @ Karl

    between this and the whole Moodys hoo-ha you’ll have us believing its all an RTE conspiracy! But you’re right, it’s depressing that they’re still making these quite clear and obvious mistaken/deliberately simplistic/misleading (pick as you see fit) comments. I know it requires a little bit of nuancing around the whole ECB-Bank-NAMA triangle (please, no pyramid scheme jokes…), but you’d think they could come up with a simple straight explanation for the layman by this stage…even something along the lines of “The ECB, by taking in the NAMA bonds as collateral, is providing funding for the Irish banks” should be enough to generate a pass mark.

    Relatedly, i believe from talking to some people in the markets that, contra to the AIB/BOI comments in front of the Oireachtais last year, NAMA bonds are indeed mostly finding their way to the ECB repo window.

  6. Sadly, Pat Kenny is unlikely to a) know very much b) pull Fahy up even if he did know. Paxman doing a special from Dublin (or John Humphries) is a good idea Mark but they would run a mile.

  7. @ Joseph

    To be fair, Pat Kenny wasn’t presenting Today with Pat Kenny. Just like you won’t see Marian Finucane this summer on The Marian Finucane show. It’s an RTE thing …

  8. I resume Karl Whelan will still be moderating on the Website or will Anton Savage stand in

    Al
    “Trying to get a TD out to explain something coherently, (even if untrue) must be hard these days.”

    A bit unfair on the 162 other TDs and doubly unfair on Frankie boy. He understands the concept of NAMA bonds. He is just choosing to er “mislead” the public.

  9. With the coupon NAMA is paying probably cancelling out the ECB repo rate and Irish govs heading towards 5% and while the ECB keeps the window open and is happy to keep rolling them over, this is nice little risk-free earner for the banks. And probably sets the risk-free opportunity cost of lending to anyone else.

  10. Fahey isn’t the only big property landlord in the Oireachtas.

    RTE reported from the 2008 Register of Members’ Interests that Fahey owned seven apartments in Ireland and the US and part-owned another 22 in Ireland, France and Belgium.

    The Galway based TD also declared seven houses in Ireland and Dubai as well as an interest in a construction company and a share portfolio.

    Fine Gael TD Dr James Reilly declared a portfolio of commercial and agricultural property including two farms of 80 and 150 acres each.

    Dr Reilly also had a 25% interest in a Co Tipperary nursing home and owned a commercial building in Lusk in north Dublin.

    His party colleague Alan Shatter jointly owned some 15 properties in Dublin, London and Florida and also declared a portfolio of shares and investments.

    It is of course hardly a surprise that solicitors or doctors would have the funds for such investments.

    The public sector is their biggest benefactor.

    As with farmers, who wouldn’t wish to be an Irish socialist!

  11. For those who missed the acrimony between Deputy Fahey and Banker Peter Matthews in the May Joint Committee on Finance and the Public Service hearing (the link to the transcript is below) they may get a chance again tomorrow from 12 midday because Banker Matthews will again be the guest of the Committee and the theme is “NAMA and the banking crisis”

    Given that the Dail didn’t debate the revised NAMA Business Plan which made a travesty of state financial accountability in this country, it is now the turn of the Joint Committee to fail in its oversight of NAMA – instead of demanding NAMA CEO Brendan McDonagh to attend and explain his agency’s plans, there will be just another quasi-informed bashing of NAMA by people whose views we know. What we needed was detail and constructive oversight – don’t look to the Joint Committee for those qualities.

    http://debates.oireachtas.ie/DDebate.aspx?F=FIJ20100505.xml&Node=H2&Page=3

  12. Assuming that deputy Frank isn’t simply lying a hole in a pot then he is deeply confused and unable to take on board factual information.

  13. Massive amount of RTE bashing going on in these parts these days btw, first Richard Tol on the Dutch election reporting, then Karl ripping them a new one for the Moody’s and Frank Fahey faux pas’, then Brian Lucey giving a nice little shout out to Newstalk…where’s the love gone folks…

  14. I look forward to the day when an Irish interviewer asks a clever follow-up question and presses for an answer.

  15. @Eoin
    “Relatedly, i believe from talking to some people in the markets that, contra to the AIB/BOI comments in front of the Oireachtais last year, NAMA bonds are indeed mostly finding their way to the ECB repo window.”
    Bankers or politicians… the opposite of the “daddy or chips” dilemma?

    I agree with your characterisation [The ECB, by taking in the NAMA bonds as collateral, is providing funding for the Irish banks”]; I’d probably add an ‘extra’ before the funding… Given that I can’t find a bank ECB-eligible bond (some of which is surely bank senior debt, all of which is guaranteed in the same way by the state) with a haircut of less than 6.5%, then we can probably quantify the level of the digout.

    If only I could do the sums!

    Given that NAMA is only buying loans that are not otherwise eligible collateral for ECB repo, there is a lot of elbow grease coming from the ECB for the polishing.

  16. Fahy’s statement is closer to the truth than not. So who is funding NAMA? In fact what does funding mean – it means who is at the other end of its liabilities? Who owns its bonds?

    In the first instance NAMA is funded by the banks themselves, that money went straight back to them to buy their dodgy assets. If the banks pass these bonds onto the ECB then it becomes the ECB who are providing the funding. The whole point of NAMA is that the ECB are prepared to do this.

    The alternative of NAMA getting its funding from the markets was both highly impractical and any funding it would have got would have been at a multiple of the current price and would have made the deficit funding immensely more difficult and costly.

    I note some smart ass comments on this thread paraphrasing Fahy as saying the ECB are giving us a gift of 40Bn. Nobody believes that but they are doing us an immense favour to try and get us out of this hole.

    The bottom line is that ito the extent that the ECB are not funding NAMA then it is the afflicted banks who are doing so. The ECB are funders of last resort.

  17. Put another way, if Fahy had said that NAMA was getting its funding from the banks themselves he would have been technically correct but it would have been disingenuous. It is the ECB as funder of last resort that really makes the thing work.

  18. @ BL

    I know you are fairly weak on basic accountancy but who in your opinion is holding NAMA’s bonds, i.e. funding it?

  19. BWII
    I think you still haven’t ‘got’ repo.

    It is the banks that are being funded, not NAMA. The ECB doesn’t care whether NAMA lives or dies. It is the banks and the banking system that it cares about. NAMA is purchasing loans from the banks with promises. The ECB has decided that the promises can be swapped for money.

    NAMA is being ‘funded’ by the state:
    1. The guaranteed nature of the promises is what makes NAMAbond sticky.
    2. The cashflow from the loans (bought with the state’s promises to pay coupon and to pay principal).
    3. The cash to turn the loans into completed developments.

    The state is swapping new lamps for old with the banks. It is overpaying for loans that would be worth less (worthless?) on the open market. It is paying with IOUs as cash is a little tight at the moment…

  20. Funding=who pays inend. Previous poster has it nailed. But hey, keep the faith. We need one contrarian here…even one as persistently wrong as you!!
    Greetings from montebussone btw…

  21. @ Hog

    I do get repo now, but it has been slow. So technically, in the accounting sense, it is the banks themselves that are funding NAMA. The ECB has promised the banks that they will lend on foot of this funding if necessary – i.e. they will fund the banks to fund NAMA.

    I think its expecting a bit much of Frank to go into this detail and his shorthand – “the ECB is funding NAMA” will do for me.

    Of course if NAMA assets are worseless, the funding, whoever it is coming from will have to be paid by the taxpayer but nobody seriously believes that the ECB are gifting us 40Bn and Fahy was not implying that.

    NAMA very very good – but only possible with the munificence of the ECB/Germany. I think its a WWII gilt payback thing for the Germans.

  22. @BL

    30 degs here on the French Riviera, what temperature in Monte, be careful not to get sunstroke.

  23. It seems like a forgivable over-simplification to me. Then again like most people I’m not an economist so I do need things simplified.

  24. Accepting something as collateral for a loan is similar to purchasing that thing. “I won’t buy your car but I’ll lend you the purchase price and accept the car as security”. The car owner now has a put option to swap his car for the loan amount.

    At the time NAMA was forged, the ECB had a policy of not purchasing government bonds so this was a workaround whereby the Irish state could issue 50bn of debt through its pet SPV and know that the ECB would set a floor price for that debt by accepting that debt as collateral for real money.

    The Bacon report proposing NAMA makes it clear that getting the ECB to agree to this deal was a prerequisite for the scheme.
    Rom the Bacon report:

    “23. The acquiescence of the ECB as to the issue of a bond of the stated face value should be procured before any decision is taken by Government to proceed with the recommended approach contained in this report.”

    Presumably the ECB then agreed with the govt the terms of how NAMA would work in exchange for its support.

  25. @ the Brians

    I am sure that with a little imagination, the south of France could be more interesting than this blog. Place your smartphones in the hotel safe until the end of the holiday.
    Bad enough we are at it back home…

  26. @Ossian Smyth
    “At the time NAMA was forged, the ECB had a policy of not purchasing government bonds so this was a workaround whereby the Irish state could issue 50bn of debt through its pet SPV and know that the ECB would set a floor price for that debt by accepting that debt as collateral for real money.”

    They didn’t purchase government bonds at the time but they have always accepted government bonds as collateral for repos.

  27. @ BW, Hogan, Signor Lucey

    as Ossian notes, NAMA is not being funded by the ECB, but without ECB agreement to its formation, consultation alongside its formation, and acceptance of its collateral in both scale and structure, NAMA would not have been set up. Without the ECB, NAMA would not be able to operate anywhere near its current scale (or even bigger originally suggested scale), if at all.

    While Faux Fahy has got what is a nuanced but not unbelieveably complex point wrong yet again, you cannot look at NAMA without understanding the role the ECB has played in all of this and will continue to play for most of the next decade. Saying “the ECB has nothing to do with the funding of NAMA” is as effectively incorrect as Fahy’s comments. Its like saying that large scale bank lending did not create a farming millionaires. The banks didn’t give money to the farmers in return for their land, after all, did they? No, they gave it to some random developer! What he did with the money afterwards does not matter, right, cos they are two completely seperate transactions? Its a clumsy analogy, but you get my point. Easy funding for one party enabled the riches of another.

    Also, given the danger that a large scale NAMA loss, suggested by some regulars on here, would have on the Irish state, i would think its rather incorrect to say that “the ECB dont care if NAMA lives or dies”, if the death is spectacular. Hence them making sure that NAMA has constantly revised down the consideration paid to the banks in exchange for the loans.

  28. @ BW2

    I think what’s going here that some people need to bend over backwards and play word games to get from a statement that’s obviously false to stuff that’s closer to true and then declare the original statement ok.

    So let’s try again, shall we?

    1. NAMA are purchasing a very large amount of property assets.

    2. Who is “funding” this exercise? In other words, who is providing NAMA with the resources to acquire these assets?

    3. Answer: It is being paid for by securities fully backed by the Irish government.

    There we go, NAMA’s funding sorted out without any need to confusing things by mentioning the ECB.

    The ECB are willing to accept the bonds as collateral. But, as has been stressed by the bankers themselves, the bonds may also be accepted as collateral in private repo operations. Are private investors willing to accept NAMA bonds as collateral also “funding NAMA”?

    Really Brian, I don’t know what you’re going on about. “The ECB has promised the banks that they will lend on foot of this funding if necessary – i.e. they will fund the banks to fund NAMA.” But the banks don’t need funding to get their NAMA bonds — they’re getting them in a swap for property assets. And NAMA has been funded before the ECB ever gets involved.

    Your argument doesn’t make any sense at all to me.

  29. @BWII
    “I do get repo now, but it has been slow. So technically, in the accounting sense, it is the banks themselves that are funding NAMA. The ECB has promised the banks that they will lend on foot of this funding if necessary – i.e. they will fund the banks to fund NAMA. ”
    NO! That is backwards!

    The state is funding NAMA (promising the assets (NAMABONDS) are worth something). NAMA is funding the banks (given them good assets for bad ones). The ECB turns the government’s promises into cash for the banks by recognising them as gold-plated. NAMA is a middle-man. Nothing more. It hopes to make money by being a middle-man, but if it does not, it is the state that will pony up to pay the principal and the coupon on the NAMABONDS.

    @Eoin
    “Saying “the ECB has nothing to do with the funding of NAMA” is as effectively incorrect as Fahy’s comments.”
    And I did not say that nor, to be fair, did anyone else.

    “its rather incorrect to say that “the ECB dont care if NAMA lives or dies”, if the death is spectacular.”
    But, as you point out, the ECB have made sure that the death, such as it is, is limited to around 40 bn. The ECB have accepted the November valuation dte, so I don’t think it is fair to say they have constantly revised down the consideration, just that they poked the state with a stick and made sure NAMA was not a total giveaway. As I’ve also already said.

    At this stage, the ECB have limited the damage that NAMA can do (short of some inventiveness of our very dear own), so I stand by my remark. If it doesn’t cause contagion to the banks, they don’t care. The fact that NAMA making big losses would be bad for the banks is neither here nor there – it is the banks or “instabilities in the property functioning of the monetary transmission mechanism” that they care about.

  30. @ Ossian

    Your citing of Bacon (and BW2’s reference to munificence) seem to suggest that there was some major decision for ECB is letting NAMA bonds be eligible collateral. There wasn’t. The ECB accept government bonds as collateral. NAMA are government bonds.

    This stuff about “Presumably the ECB then agreed with the govt the terms of how NAMA would work in exchange for its support.”

    we saw tons of this last year. But it wasn’t true then either. There was no special deal done.

  31. @ Hogan

    i think “they dont care” is a rather big stretch. Saying “the ECB isnt particularly uncomfortable with the situation whichever way it goes” is a different way of looking at it. If NAMA crashes and burns, then the ECB can still be on the hook for large scale losses. And for the sake of Eurozone stability, they also have a vested interest in making it work. I just think “dont care” is a bit too definitive to their position, at the very least.

    @ Karl

    if the Greek government said “we’re issuing 500bn in government debt to the Greek banking sector” tomorrow, do you think they’d still accept Greek debt as collateral? The ECB didnt change their rules, but they saw the same loophole that everyone else saw, and let us drive NAMA straight through it without attempting to close it. Im not talking about a special deal done behind closed doors, but if either NAMA or the ECB were a private counterparty, the loophole would not have been left there. I think its bizarre to not assume that someone in the DoF or Central Bk had a discussion in Brussels along the lines of “will we be allowed to do this?” (and potentially even “this is what we think the Irish should do”) and a nod was given in their direction.

  32. @Eoin
    Fair enough.

    @Karl
    The NAMA SPV is a private company issuing bonds backed guaranteed by the state. It is not sovereign debt, as such, though it may rank with it in the ECB collateral makeup. The ECB haircut on the bonds is only 1.5% (down to duration and floating rate), but the haircut on any of the bank issued guaranteed debt is at least 6.5%

    I think they are being categorised as sovereign debt, even though they are not. It is another nail in the coffin of the ECB’s credibility, IMO, much as you’ve already identified WRT eligible assets and debt purchases.

  33. @ Eoin

    I never said that DoF\CB didn’t check with ECB about the bonds being eligible collateral. But while NAMA is huge relative to our economy, it’s not that big relative to the huge expansion of ECB lending that took place. An ECB decision to explicit leave out Irish government backed bonds would have constituted a huge change to the collateral framework. Frankly, it was never going to happen.

    So, the truth is the opposite of the “special deal” negotiations we endlessly hear about. The truth was that the ECB’s status quo was maintained.

  34. @ hogan

    The Irish govenment’s insistence on the whole SPV business to keep it off the balance sheet (thereby fooling no one) was the only step along the way in which there would have been even the tiniest doubt about NAMA bonds being available for repo as government bonds. Thankfully, the whole thing about NAMA being privately owned is such a transparent nonsense and the government backing for the bonds is so copperfastened that it didn’t matter for ECB eligibility.

  35. @Karl
    I agree, to a point – the point being if the ECB was not being accommodative, they could have changed the designation of the NAMA bonds. Which would have changed the economics of NAMA, but not in a way that benefitted anyone. Except perhaps ECB credibility!

    The acceptance of transparent nonsense by both the ECB and Eurostat is, IMO, damaging to both institutions.

  36. @ Hogan

    btw, Karl above goes through NAMA funding model and ends with “without having to mention the ECB”. Told ya so. 😀

    @ Karl

    the Irish state has created, in terms of GDP, the biggest bank bailout AMC in history, and used the ECB repo window to restore liquidity (in theory) to the Irish banking sector. I think its an heroic call to say that this constituted business as usual for the ECB! Not a special deal, but sometimes inaction is just as unusual as action.

  37. @ Karl

    “Your argument doesn’t make any sense at all to me.”

    Then I must be very poor at communication.

    Let me ask the straight accountancy question; “who is funding NAMA?”.

    Restated: “Who is accepting NAMA bonds at face value?”

    Answer “the banks”

    Okay the banks are not the ECB so technically Fahy is wrong.

    But a trick like this: “banks lend to NAMA, NAMA buys bank dodgy assets” just doesn’t work UNLESS there is some really big guy prepared to underwrite it. Enter the ECB. NAMA is a trick. A very clever trick. Only possible with ECB connivance.

    Why can’t copntributors in this space accept the obvious that NAMA is wonderful, and all the more wonderful as its payment for assets falls from 51Bn to 40bn and lower. Lots of other things to criticise like the bail out of Anglo and INBS but NAMA is trully a stroke of magic for this country.

  38. @Eoin
    😀

    Anyway, I reckon the NAMA bonds will be more used at the Irish NCB, than at the ECB (as it winds down its exceptional measures).

  39. @BWII
    But the banks are not lending to NAMA!

    Look, if I (NAMA) give you (A BANK) a Department of Finance stamped IOU of a fiver for an empty crisp packet, because I think that’s the LTEV of slightly salty shiny paper with a picture of Bertie on the cover, who is funding whom?

  40. @Hog

    Dissapoined with you who has taught everything I know about repos. At the end of this process the banks will own 40bn of NAMA bonds. If that doesn’t mean the banks have lent 40bn to NAMA then I obviously don’t understand what bonds are.

  41. @ BW2

    Have to agree with hoganmayhew here, Brian. “banks lend to NAMA” just isn’t true no matter how one attempts to twist the words.

    Could this be BW2’s deposit-selling moment?

    😆

  42. @ Eoin

    “Not a special deal, but sometimes inaction is just as unusual as action.”

    We’ve been over this one before. You view the ECB’s maintenance of its existing collateral rules as somehow an heroic victory on behalf of the DoF mandarins and\or exceptional action on the part of the ECB.

    I view the idea that they would have singled out NAMA bonds as an exception to their normal collateral rules — and at a time when they were loosening up these rules — as a bizarre counterfactual not worth wasting further time on.

    Either way, NAMA are not funded by the ECB, which was the original point.

  43. I don’t understand all the confusion.

    IMO NAMA is 100% funded by the Irish state.

    The state is simply giving NAMA €40bn of Irish government bonds. That is the funding stage.

    NAMA is purchasing loans from the banks and is using these bonds to pay for them.

    What the banks do with the bonds after that is almost irrelevant to the functioning of NAMA.
    The banks can either choose to keep them on their balance sheet, repo them with private counter parties or they can repo them with the ECB.

  44. @Karl

    Hold on, banks hold 40bn of NAMA bonds and you argue they are not lending to NAMA!! The day I get as confused as BL about assets/liabilities is the the day I sell this computer.

    Tell me who you think is funding NAMA. Put another way, who do you think owns the NAMA bonds?

  45. @ D_E

    Sorry, D_E, I am not an accountant but NAMA is 100% funded by the banks. Funding of any organisation is who is on the other side of the liabilities. That is the banks.

  46. @BWII
    “@Hog

    Dissapoined with you who has taught everything I know about repos.”
    I see your problem there…

    If you buy something from a shop, the shop is not funding you. NAMA is buying loans from the banks. It is paying over the odds by its own admission (LTEV).

    The transaction, at this point is complete until the next maturity date. Then the banks will go back to NAMA and say, hey, wait a sec, these bonds you’ve given me have expired. Give me my loans back. Whereupon, NAMA will say, oh here, have another bond… see you in a year.

  47. @ Karl/Hogan/BW

    doesnt BW have a point? Funding goes on the liability side of the balance sheet. Whats on the liability side of the NAMA balance sheet? NAMA bonds, now owned by the banks. Whats on the asset side? Loans to developers, plus some capital.

    NAMA is now the de facto funder of the developers, and the banks are the de facto funder of NAMA, and the ECB is potentially funding the banks through the repo window? Yes, its done via a messy swap as opposed to cash, but funding doesnt have to occur via cash, does it? (honest question)

  48. @BWII
    “Funding of any organisation is who is on the other side of the liabilities.”
    Yes!

    “That is the banks.”
    No!

    NAMA is on the other side of the liabilities. The banks have NAMA bonds; that means that every six months NAMA pays them a coupon. After a year (the maturity) NAMA pays them a cash sum or another NAMA bond with a new coupon.

    NAMA owes the banks money. The banks owe NAMA nothing.

  49. Or think about it like this.

    NAMA gets capital. Issues bonds to banks in return for cash. Banks now have bond assets, but have lost cash asset. NAMA has cash and capital, but bond liabilities.

    NAMA uses all that cash to buy existing loan assets off banks, so banks lose loan assets, but gain cash assets back.

    So NAMA has capital plus loan assets on one side, funded by bonds issued to banks on liability side. Banks have bond assets, no longer have loan assets, and are cash neutral on this.

    Ergo, banks have funded NAMA purchase of loan assets. No?

  50. @ DE

    hmmm, no, imo.

    NAMA does not “owe” 40bn to irish state. It has been given a free funding guarantee backing its own bonds. That the guarantor is its main shareholder (or 100% shareholder? do we ignore the SPV structure and just look at the top?) is meaningless, its just in the shareholders interest for NAMA to be able to issue liabilities in its own name, albeit guaranteed?

  51. @Eoin
    “Ergo, banks have funded NAMA purchase of loan assets. No?”
    Eh, no. There’s no market intermediation in NAMA bonds. They are issued and spent as money. They are not sold on the markets first to raise cash.

  52. @ Hogan

    but whats the difference? I’ve just fleshed out what has actually occurred. Looking simply, NAMA has to have its liabilities funded by someone, either via cash or via an asset transaction (which is all cash is, right?). We’re not talking about liquidity funding here, we’re talking capital funding, ie assets vs liabilities. And who is therefore funding NAMA liabilities? They are issued in its own name, and owned by the banks (again, via a messy arrangement regarding rollover, but in theory its not different to an ordinary bond). Didnt people say “what if the banks dont rollover the bonds” way back when, which would force the Irish state to issue general govt debt to fund NAMA instead???

  53. @Eoin
    I think you’ve been at the liquidity funding…

    The state is funding NAMA liabilities, as it is the one who has promised to pay the bills. That is what gives NAMA bonds their value. Or indeed the excellent loans they bought from the banks which any day soon, Rodney, are going to make us all rich.

    As you say yourself, the bank is cash neutral and holding an asset at the end of the exchange. The only people who owe anything are NAMA (and behind them the state). The banks is owed, but does not owe. Therefore it is not funding anything.

    It is NAMA that is funding the banks as it has given them extra (above current market value) for the loans. At best you could say neither of them are funding the other since it was an exchange rather than a gift or a loan.

  54. @ Hogan

    ok, aren’t we mixing up the use of the word “funding” here. In fairness, its not a perfect technical term, which may explain that. You see “funding” as the person picking up the bill, i see “funding” as the person owed the money. In this case, the banks, eventually, will be owed 40bn in cash. The state will not be owed anything, but will receive the proceeds (a positive or negative value) of NAMA, ie its asset sales minus its 40bn in liabilities. As you have noted yourself, NAMA is itself issuing the liabilities, its not the State giving bonds to the banks and then NAMA owing the state for these assets.

    Look at it more simply. A bank gives you 100k (no reason required) and your dad goes guarantor. The bank has funded you, you owe the bank 100k, but your dad might end up having to shell out if you blow it. Some people would claim your dad has funded you, but he didnt write you a cheque for 100k, which would have been a direct funding. We wont know til later on if it’ll indeed cost him anything. Like i said, its the interpretation of “funding” that is the issue.

  55. @ Hogan

    you could view the State guarantee as a permanent incalcuable equity call. Its never repayable or “owed” to the state, like a shareholder is never “owed” his equity back, but the state is entitled to the profits of the NAMA venture as a result of this permanent equity.

  56. @Eoin
    Fine. But the bank wouldn’t have given me 100k if me Da wasn’t standing over the repayment. As many Das who went guarantor over their children’s property loans are finding out. From that point of view, he is funding me, though it is a contingent funding. He acts as the enabler to me getting the loan.

    I don’t see the confusion. In the example you give, there is no chance of you saying I am funding the bank by taking the loan from them? That is what you are saying with NAMA when you say the banks are funding NAMA…

  57. Implicit prediction in original post about people who could “spend all night debating what the meaning of “being funded” is” has been born out.

    Even I couldn’t have predicted, however, the extreme silliness of the arguments that people would dream up in order to defend Deputy Fahy’s delusions. Congratulations lads, you’ve outdone yourselves!

  58. @ Hogan

    “In the example you give, there is no chance of you saying I am funding the bank by taking the loan from them? That is what you are saying with NAMA when you say the banks are funding NAMA…”

    No, in my example, Im NAMA (i have a cash asset and a loan liability) and the banks are the banks (they have a loan asset and thats it) and so they are funding me. My dad, as you said, could be considered to be a contigent funder. But there is no way, from a technical perspective, as opposed to ‘moral’ or whatever, he could be considered to be “the funder”.

  59. @ Hogan

    we have Banks, Developers, NAMA and the Irish state.

    At the end of this whole sorry mess, who will owe and who will be owed.

    Banks will be owed 40bn.
    Developers will owe 70bn.
    NAMA will be owed 70bn by the Developers and will owe the Banks 40bn.
    The state will not owe anyone anything, unless NAMA generates a loss, where it will owe the banks. If NAMA generates a profit, it will in fact be entitled to the proceeds of NAMA. It may just come out flat on everything here. So its a potential secondary or contingent funder, but it may not end up owing anyone anything. Unlimited liability shareholder perhaps?

  60. But NAMA doesn’t have a cash asset. It has some dodgy loans. For which it has agreed to pay the banks more than they are worth. Just as soon as it gets a few bob together… “Dad, any chance you could sub me a fiver? It’s a rollover weekend…”.

    @Karl
    We’ve gone way beyond Mr. Fahy. He thinks the ECB is doing the funding…. silly man.

  61. @Eoin
    “Unlimited liability shareholder perhaps?”
    Yes, that’s why I said contingent. But, as I say, without it being there, the NAMA notes would be the usual rubbish SPV paper. They would trade on the market value of the loan assets (not the LTEV) and on the cash flow produced.

    PS it’s not just developers; it’s solicitors, accountants, doctors, teachers, gardai…

  62. @ KW

    could it be your deposit selling minute?

    NAMA has acquired the loans -there are NAMA’s assets on the LHS or top of its B/S.
    NAMA has issued the famous bonds. They are liabilities of the NAMA on the RHs or bottom of its balance sheet. The balance sheet is balanced by the equity in the NAMA SPv.

    On the banking system balance sheet the dodgy loans have been replaced on the asset side by the shiny NAMA bonds. On the liability side is deposits, whoesale funding, collatoralised borrowing from th ECB & equity.

    So NAMA has been financed by the banking system & the banking system has been financed in turn by the ECB and or the private repo market.

    What Frankie boy leaves out of the equation is that if NAMA unwinds itself at say less than 40bn it still has to pay back the 40bn in borrowing to the NAMA bond holders. these will probably still be the banks. You and me will provide the funds for the shortfall .

    Then of course it goes cap in hand to the banks & levies them for the shortfall.

  63. @ Hogan

    i agree the LTEV portion could be considered funding. But the market value part cannot. NAMA has a loan asset, doesnt matter that its not cash.

    Example #76: Bernard McNamara gives a personal guarantee to his own subsidairy “Bernie Mc Construction”, and the bank lends it money. Is he funding himself?

  64. @Eoin
    “Example #76: Bernard McNamara gives a personal guarantee to his own subsidairy “Bernie Mc Construction”, and the bank lends it money. Is he funding himself?”
    😆 He certainly was. See how well it worked out for the banks there 😆

    Okay, we’re getting somewhere. How about the market value in November 2009 compared with today; does that constitute funding too? (Given that both asset prices and loan performance have declined in the interim (and, yes, it’s really about the performance of the loans)).

  65. @ Hogan

    i’d describe it more as a massive subsidy than funding, as NAMA is not entitled to the difference back. Like i say, you’ve got a joe public/’how people will see things’ view of funding (we gave them money) and ive got a technical view of it (who owes who what). I believe your view of “funding” to be more like equity or capital or a permanent subsidy.

    Funding is in financial theory sitting on the liability side of any entities balance sheet (ie the entity to be funded), while you almost see it on the asset side (capital/equity), if anywhere at all (gift/non refundable subsidy).

  66. @ hogan

    I strongly recommend not feeding the trolls on this one.

    We’ve started here from a basic pont — NAMA are not getting any money from the ECB despite FF from FF’s repeated claims that this is the case — one which everyone including Eoin agrees with.

    And we’ve ended up with a load of nonsense about “banks lending to NAMA”. Extending this thread will just give onlookers the impression that perhaps Deputy Fahy was correct.

    To be honest, I find it depressing. If I wrote a post called “No Mister Lenihan, the Grass is Not Yellow, It’s Green”, I’d have a bunch of characters on here musing about how perhaps if you mixed yellow with blue ….

  67. This has to be one of the most bizarre threads in a long time. Can’t believe a comment from someone like Frank fahy would have so many people getting worked up. The people in france and Italy should enjoy the sun. The rest of us should just calm down. The role of the ECB is not what is going to make Nama a success or failure.

  68. @ Karl

    tad harsh to rock out a troll comment there.

    NAMA has bailed out the banks. No question. However what we are left with is the Irish banks owning a load of Irish government obligations. As such, its entirely accurate to say they have lent, albeit involuntarily, to the Irish state, in that they are owed money by the irish state. If thats not lending, what is? However, this is good news in their eyes, as they were previously lending to a bunch of potentially insolvent developers. So they have been forced to continue lending money, but now have a far better credit, and one which can be more easily used as collateral.

    Saying the Irish banks have NOT lent to the Irish state is categorically false from a pure technical viewpoint. Equally so, not including the rest of the context about an improved credit/collateral is categorically unfair on the other side of the argument. However, i’ve never said that the banks weren’t being bailed out, but you have said the Irish banks are not lending to NAMA (“its nonsense”). But yet im the crazy troll…

  69. The pro-NAMA lobby has a darker side though:
    “THE DEPARTMENT of Finance has denied trying to have a senior economist sacked from his job in the commercial sector because he criticised public policy.

    Chief economist with the Friends First building society Jim Power told the MacGill Summer School that the department had sought to have him dismissed.

    “I dared criticise the Department of Finance 18 months ago and they made a formal complaint to my employer and tried to get me sacked. So you dare not criticise the Department of Finance.”

    http://www.irishtimes.com/newspaper/ireland/2010/0720/1224275075177.html

    Opus Dof strikes again! Thankfully Power dodged the albino assassin. What does it say though when the government is adopting McCarthyite tactics against the honest while simultaneously spreading misleading nonsense through its spokespeople?

  70. Please, this is getting ridiculous. I am glad Jim has such high opinion of himself but please give me a break. Let’s hear from his boss to see what exactly the department said.

  71. @ Eoin

    I dunno, perhaps the trolling word was harsh.

    Still, when someone posts at 3.55pm

    http://www.irisheconomy.ie/index.php/2010/07/20/no-frank-nama-is-not-being-funded-by-the-ecb/#comment-60759

    “you’re right, it’s depressing that they’re still making these quite clear and obvious mistaken/deliberately simplistic/misleading (pick as you see fit) comments.”

    but, by later in the evening, they’ve decided to adopt some strange argument about how these mistaken/simplistic/misleading comments are actually, in some sense, a deeply correct insight into what’s going on, well it doesn’t look too good to me.

  72. I don’t know what Frank Fahy is at. Does he think this is a bit of spin that will redound to his credit in the future? I think it is more likely that he has succeeded in fooling himself rather than fooling anybody else.

    There are a lot of people in Ireland who have recently learnt exactly what a guarantee is. Frank Fahy must be one of the slow learners. It baffles me that the Fianna Fail leadership allow him to go out and muddy the issue.

    The right policy is to tell it as it is as the Minister For Finance has done all along. There is no point in sugar coating it or pretending risks don’t exist. That only leaves you open to people saying you really made a hemse of it when circumstances turn against you.

    The ECB has assisted Ireland in providing a mechanism for Ireland to fund NAMA’s purchases. It is not that complicated. Suggesting that NAMA bonds are being funded by the ECB is crap-talk even if it is in some technical sense correct. Ultimate liability for the debt lies with one set of tax-payers only, the Irish tax-payers. Lenihan has been straight up all along.

  73. Also, I don’t know how heavily Frank Fahy has invested in property but there is a perception that he owns a significant amount of property. Without casting aspertions on his bona fides, Fianna Fail should consider the optics of allowing him to bat for the party on the NAMA issue on the national airwaves.

  74. @Gavin S
    “Please, this is getting ridiculous. I am glad Jim has such high opinion of himself but please give me a break. Let’s hear from his boss to see what exactly the department said.”
    -1
    Power isn’t the only dissenter the establishment have knifed, this is an all too familiar pattern. And (back then anyway) he was a supporter of NAMA too! If the government rang up your boss to complain about comments you’d made you’d be outraged. It’s deeply disturbing. A small country can’t have a healthy public life if the (often very small) amount of debate that takes place is being strangled by the government or other interests. This national secrecy mania must stop.

  75. Interesting debate.

    This is the way I like to explain this (I’ve had to a few times already today)

    Basically the ECB is the Pawnshop for the banks. They get an asset (NAMAbond) from NAMA. They need a little cash, so go to Mr Trichet’s Pawnshop and pawn the bond there, with a promise to buy it back off him at some stage in the future.

    While it might appear on the surface to the less financially astute that Mr. Trichet is funding something, all he is really doing is providing a market for an asset that the bank holds. The asset comes from NAMA, so therefore so does the funding.

    Unfortunately for the banks, Mr Trichet’s pawnshop is the only one in town, and he can get a little moody sometimes. He can be good to go to in a pinch, but should not be relied on in the longer term..

  76. Our government can guarantee what it likes, the fact is, our government has no money after it tries to pay its bills. They only have what the NTMA has managed to borrow in advance, which is enough to finance the deficit for a few short months.

    NAMA bonds are not worth the Irish government paper they are written on accept for the fact that the ECB will accept them and turn them into cash. The useless fiat bonds of the Irish government are backed by “real” ECB money otherwise I don”t that even Anglo would be silly enough to accept them.

    How many people on this site would give up their little nest egg in return for NAMA bonds if only Irish government “guaranteed” them?

  77. One of the most extraordinary threads on here ever – when I was going to bed there were no comments and when I wake up there are over 80 (mostly) semantic, concentric circles.

    Step back and ask if all of the NAMA purchased properties go splat, who pays – ECB or Ireland? So the State takes the risk and not the ECB.

    FF’s constant reference to ECB funding gives the impression to most lay people that the ECB involvement equates to taking the risk. Intentional or not I don’t know but misleading it is.

    @Jagdip

    FF’s probing of P Mathews’ credentials may have been particularly apposite. What has he done in 12 years that makes him an authority on this crisis? Could be one particular hole worth digging.

  78. For reference: Frank Fahey’s comment begins around 14:21 on the RTE website’s recording of Tuesday’s Today with Pat Kenny, which begins a bit earlier than the show itself. He was responding to an earlier remark by Fintan O’Toole around 6:05 :

    We would have believed all this rubbish. We would have believed, for example, Frank Fahey himself on RTE, last summer, telling us that the money going into NAMA wasn’t taxpayers’ money so we didn’t need to worry about it.

    .

  79. @Pa Bandit

    I don’t really have a view one way or the other on Banker Matthews – he has spent a lot of time in the past year addressing the public and not unlike some other economists he has predicted NAMA will make a considerable loss. He has a career in property-related banking which seems relevant to the present crisis. Again you can find the very bad tempered exchanges between Frank Fahey (there’s an “e” in the surname) and Peter Matthews at the May Joint Committee on Finance and the Public Service in the link below.

    And again from 12 midday today, Wednesday, Peter Matthews will again be the sole guest of the Committee on the subject of “NAMA and the banking crisis”. There’s unlikely to be much of interest – why on earth the Committee didn’t summon Brendan McDonagh to explain his agency’s Plan is beyond me.

    http://debates.oireachtas.ie/DDebate.aspx?F=FIJ20100505.xml&Node=H2&Page=3

  80. @ Karl

    its as simple as this. Who’s providing the funding – the banks. Who’s taking the risk – the State. I’ll meet you halfway and say that the banks are providing the resources, but the State is ultimately creating them. I have never disagreed with that, but that still doesn’t mean we should confuse the two terms, or else we all run the risk of doing a Frank Fahy (or having a deposit selling moment…). If you want to break down the simple balance sheet of NAMA, the funding of it is quite clearly being provided by the banks. But balance sheets are often completely lacking in any context, like, for instance, that of an underlying government guarantee, or the rather one way nature of the credit exposures facing the different parties to the balance sheet. This is why we have notes to a balance sheet.

    I have never tried to say that Frank Fahy was making sense, merely noting the part that the ECB is playing in all of this, which i think is less straight forward and inert than you give credit to (if the ECB provided 1000% of GDP in liquidity to Ireland, would you say it was straight forward?), and also defending the very correct, from a technical viewpoint, that BWII had that NAMA is being funded by the banks themselves. The risk is on us the taxpayer, but we have ultimately not had to put up anything against that risk yet. Im talking accounting, balance sheet, technical view of funding. From a more straight forward understanding, NAMA would not exist operationally without (a) state guarantee and (b) the ECB repo window, and ultimately it is the taxpayer that is taking on all the negative risk (and all the theorethical upside too). But this doesn’t deny that the banks themselves have 40bn in funds locked up in NAMA for the next decade, which isnt exactly yielding them very much (though they can access liquidity via use of collateral). Quite why you cannot admit that this is the legal accounting structure of NAMA, whilst also taking into account that we all admit that the risk underlying NAMA is bourne by the state and the taxpayer, is beyond me. Instead of saying “though technically right, thats far too simplistic…” im being told that “its nonsense” and “you think Faux Fahy has a deep and correct insight”. I can understand why people would not want the phrase “banks are funding NAMA” to become a talking point, but if you’re going to call it “nonsense” then you better be able to explain why.

    When we had the whole “deposit selling” fiasco, you admitted that you never liked the very incorrect technical terminology of “selling” a deposit book. It confuses me know why you take such umbrage with my very correct terminology now, even when it is backed up completely with the necessary context. If someone in one of your exams said “NAMA funding is being provided by the banks” and then gave ALL the necessary context, would you give them a bad mark on it because you dislike the use of the word funding???

    @ Pa Bandit

    pls see above. You are talking about risk. Im talking about funding a balance sheet. They are different issues, ones which can quite easily be mistakenly (or differently used, at the very least) used in a discussion about NAMA (or similarly with deposit selling), as i discussed with Hogan above. You can technically fund someone and have zero risk if the security in place is strong enough (ie a State guarantee). I have never suggested that the banks were doing us a favour by funding us. We’re quite clearly doing them a favour in all of this.

    This messy end to the debate arose from a technical query by BWII which he was told he was completely misunderstanding, but which he actually got 100% right. Indeed, his original statement which seemed to cause so much angst on here:

    “So technically, in the accounting sense, it is the banks themselves that are funding NAMA.”

    He’s right.

  81. Insofar as the Government’s spin doctors pay attention to the heat and light generated here – and I suspect they might as some of the sharpest criticism of NAMA and all its pomps has come from this parish – I wouldn’t be surprised if they were drafting more gnomic utterances (a la Deputy Fahey’s) for Government politicians to insert into future media appearances.

  82. NAMA bonds can be used by the banks that have received them as collateral for loans from the ECB but that’s it, that’s the full extent of the ECB’s involvement in relation to NAMA.

    Am I correct in assuming that the NAMAbonds for a given tranche are paid to the banks at the same time that the banks hand the property in that tranche to NAMA? If so, can we be sure that no NAMA bonds were among the Irish government debt slurped up by the ECB on the secondary market? Though indeed it’s probably not that important: because there was no indication at the time the NAMA legislation was passed that the Eurosystem was about to start purchasing Eurogroup sov. debt, because it intends to stop again shortly, because the repos we have always with us.

  83. @ Karl Whelan,

    I plan to come back and have a good read of the discussion above at some later date. Thanks for investing the time and effort, to try and unpack some of the different issues in the entire mechanism, for the benefit of us all. I thought this paragraph in particular had some value from my point of view: The NAMA bonds are fully backed by the Irish government. They are a liability of the Irish state, albeit one entered into at the same time that it acquired some property assets that may or may not yield enough to pay off the bonds. I think it is an important paragraph and underlines some of the real truth in the current situation. Namely, that one has to manage the NAMA portfolio of loans properly, in order to extract any value of them at all. Liability is one word, one could use to describe it. There may be other words also, which can serve to invest a little more meaning in the task facing us. Eoin above, has spoken about context in relation to balance sheets. I don’t know if people in the financial world talk about context in relation to asset portfolios, but there is a point I would like to make. The context in which the NAMA portfolio of loans was created, was very different to the context in which it finds itself today. The NAMA portfolio might have made some degree of sense in 2006. In the same way Operation Barbarossa, might have made to Germany’s generals in 1942. Dr. Sonke Neitzel published a book based on MI-19’s secret recordings of captive German generals at Trent Park in North London. The book is called, Tapping Hitler’s Generals: Transcripts of Secret Conversations, 1942-1945. What was interesting, was the generals who had supported the invasion plans so strongly in 1942, tried to disassociate themselves from the same, later in the war. The NAMA portfolio of 2000-2007, is more or less the same as Operation Barbarossa. It is an orphan child at this stage, and nobody wants to have association with it. That is the new context, in which we must view the balance sheets and NAMA portfolio. BOH.

  84. Jayz! Glad I gave this one up after the vin, otherwise I would be looking at some “deposit selling” moments.

    Let me have the last word (some chance) – the taxpayer is underwriting the solvency of NAMA, the ECB is underwriting its funding. Fahy was near enuff and anyway the sheer size of this thread will give pause to Gene Kerrigan before having a go at Frank. Yes, I think Gene, while tempted, will give this one a miss.

  85. @ Karl

    I think you have ensured that “deposit selling momenet” will stick with us like GUBU. Poor BL will never be able to forget now.

  86. I don’t agree with Frank Fahey making statements about NAMA bonds being funded by the ECB because it is likely to create a misapprehension of the facts in the mind of the public, being the target audience to a day-time Radio One show.

    However, as Eoin has said, technically it may be correct (subject to one ignoring what a repo operation is).

    I would explain it by analogy with a bank funding a building project.

    The bank provides funds on security of the land and buildings. The funds are paid to the borrower’s creditors. The borrower and any guarantors remain ultimately liable to the bank.

    In the case of NAMA bonds [not NAMA itself], the bank [ECB] is providing funds on the security of the NAMA bonds. The funds are paid to the borrower’s creditors [the Banks]. The borrower [NAMA] and any guarantors [Ireland] remains ultimately liable to the bank [ECB].

    Thus one might say that ECB if funding the NAMA bonds [again, not NAMA itself] in the same way that a bank might fund a business project.

    As somebody who has probably dealt with banks in relation to property, I expect Frank Fahey understands it in those terms. People always percieve the world within the framework of theri own experiences.

    Again, before anybody tries to hoist me on a gibbet, I don’t think Frank Fahey should make such statements on the national airwaves as his statements are almost guaranteed to be misconstrued.

  87. WE ARE WHERE WE ARE.!! Please could you esteemed ,well qualified and in general well intentioned contributors put your effort into helping to map the future rather than continuously raking over the ashes—may allow one to score POINTS but we really need GOALS !!

  88. @ Karl

    hilarious. Just had a conversation with my boss, an incredibly smart guy who has a clear understanding of NAMA, basically about this (he brought it up coincidentally!), and i kinda started talking about the funding model of NAMA. His exact words were, “well the ECB is funding NAMA”, and i said, “no, no, wait, its not”, and he replied “well, it kinda is, through the repo, if you know what i mean”. I shizzle you not. You don’t have to be thick or a FF gombeen to see it this way, even if you admit that technically its incorrect but effectively somewhat correct. And no, before you ask, Frank Fahy is NOT my boss… 😀

  89. Let’s conclude this discussion.

    When Frank Fahey says “the ECB are funding NAMA” I believe he is stating that the ECB are providing the resources for NAMA to purchase property loans. I believe that this is what everyone at home believes he means also. However, it is false. NAMA is being provided with government-backed bonds to acquire the assets and it has no financial relationship with the ECB.

    BW2 and Eoin want us instead to believe that Frank Fahey’s thought processes are as follows:

    “1. Think of NAMA as like a bank, with a balance sheet with assets and liabilities.
    2. Now use a terminology from banking where people refer to liabilities – the money the bank owes to people – as the “funding” of NAMA.
    3. Because NAMA’s liabilities are the bonds that it has to pay out on to the banks, we can then say that the banks are the source of NAMA’s funding.”

    They will then waffle extensively to maintain that this is the correct and reasonable way to interpret what Mr. Fahey said, even though he didn’t actually say anything about the banks funding NAMA and this is not how anyone listening will have interpreted what he said.

    Then, our friends Eoin and BW2, add the fact that the banks (like every bank in the Eurozone) can, if they wish, use government-issued securities as collateral in repo operations with the ECB, to take some sort of flying leap to now argue that, even though they admit it’s wrong, the idea that the “ECB is funding NAMA” is somehow not so incorrect.

    All parts of this are feeble. It seems to be intended to deliberately mislead people.

    I think when BW2 argues that the “length of the thread” may deter others from criticising the original statement, we get closer to the truth. If you dissemble and play semantic games for long enough, then folks may think you might possibly have a point, even if they don’t exactly understand what it is. Not wishing to extend something that is an exercise in misleading people, this thread is hereby closed.

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