NAMA Does Not Borrow from the ECB

One of the really strange things about economics reporting in Ireland is that once a politician has said something with enough authority, it becomes repeated as truth time and again by our financial journalists, no matter how untrue. An incredible example of this is the idea that NAMA borrows money from the ECB.

During the long tedious NAMA debates of 2009, every government politician was sent out with a spin line about NAMA involving the government getting cheap money from the ECB. Even though it was untrue then, the idea has remained amazingly popular. Now, as rumours of some form of NAMA 2 (perhaps for mortgages) start to circulate, our financial journalists are still busy misrepresenting the basic transactions at the heart of the original NAMA.

Today’s Sunday Times (not on the web as far as I know and I don’t think it would be free even if it was) contains the following two examples. First, we have Brian Carey and Tom Lyons:

The difficulty is who will fund the establishment of Nama 2. Nama is current funded by the European Central Bank.

Then we have Damien Kiberd:

The Irish state has accepted responsibility for both sides of the several banks’ balance sheets. It has done this by providing guarantees that cannot, in extremis, be honoured and by purchasing distressed bank assets using money from the European Central Bank.

Unfortunately, this is not at all how the government, in the form of NAMA, purchased distressed bank assets. The reality is that NAMA purchased the assets by swapping them in exchange for Irish government-backed bonds. There – that’s how it was done. Not so hard to understand really. In fact’s it’s hard to misunderstand. NAMA is funded by you and me.

Of course, one can – if you want – discuss the idea that NAMA bonds can be repo’d with the ECB, if the mood is on them. (And indeed, from the last time we discussed this, I know there are people who comment on this site who have the ability to twist words in such a way that they can satisfy themselves that somehow saying “the ECB funds NAMA” makes sense – but frankly I think those folk are having a laugh.) But that doesn’t change the basic reality of the NAMA transactions.

Given the importance of NAMA as well as the important role the ECB is playing in propping up the Irish banking system, it is really unfortunate to see the roles played by these organisations being misrepresented in this fashion.

36 thoughts on “NAMA Does Not Borrow from the ECB”

  1. @ Karl

    Ok, Round 2 (or is it 100)

    Actually I am much closer to you now. The fact is that the funding of NAMA is totally irrelevant. NAMA is is not a liquidity play; it is about cleansing the balance sheet. Funding is about liquidity.

    NAMA is funded by the banks themselves; they lend the money to NAMA to buy its toxic assets. NAMA then gets its liabilities guaranteed by the government and so the banks have replaced toxic assets with sovereign guaranteed assets.

    In terms of funding there has been no action at all. No need for the government or NAMA to go to the markets or to the ECB or to the IMF, it is all an internal swap between the banks and NAMA underpinned by a government guarantee.

    Thus far there is absolutely no need for ECB approval or anything like that, I agree with you there.

    Now a secondary aspect but not at all essential to the main objective of balance sheet cleansing is that the ECB will accept the NAMA bonds as collateral for Repo. However, I agree with you that’s no big deal.

    In short I have come round to your view that NAMA is not a great munifescence of the ECB to Ireland. I am still a great supporter of NAMA, in fact its main attraction from an Irish taxpayer’s point of view is that it has forced banks to lend to it at very low rates.

  2. I thought Brian Woods II (and Frank Fahey) explained it quite well a few months ago.

    NAMA issues bonds to the participating banks. So, technically the banks are funding NAMA. But the banks are using these bonds as collateral to obtain funds from the ECB.

    So while technically the banks are funding NAMA. In substance it is the ECB which is the ultimate provider of funds.

    Frank Fahey might (only might) be accused of being disingenuous. Some people might think that the word “funding” means that the ECB is giving free money. It is not. NAMA (i.e. the Irish State) has a liability.

    Funds can be obtained “free”; they can be obtained on credit; or in the form of shareholder funds. In this case NAMA (i.e. the Irish State) is obtaining the funds on credit from (in substance) the ECB.

    I have two things to say about this. Firstly, in the current environment obtaining funding even on credit is not to be taken for granted. The funding is being obtained more cheaply than it would be obtained by the State directly from the markets or from the IMF/EU. Secondly, the liability does not appear on the State’s balance sheet even though it is a liability of NAMA.

    These are benefits which should not be taken for granted.

  3. I am only new to this website and am astounded by the lack of knowledge of this matter despite the endless commentary in the press.

    NAMA is funded indirectly by the ECB via the banks using Nama bonds as collateral. This liquidity is provided at rates much more beneficial than Ireland could obtain on its own and is essentially a subsidy to the taxpayer by Europe. However losses in Nama are for the account of the Irish taxpayer. This is the difference between funding and capital which seems to be endlessly mixed up. This is the only benefit of Nama. For everything else it has failed.

  4. @Karl Whelan
    I think you are suffering from Namatosis. It’s a serious condition where people are driven to the edge by the sheer insanity/massive theft that is NAMA. I’ve had it bad myself. I noticed namawinelake going down with it a few weeks back when he contemplated the taxpayer larceny of the AIB recapitalisations. Fortunately he rallied.

    In a strange sort of a way there may be a larger truth to this ECB meme. If the FF plan is that the ECB write off Ireland’s debts to it – and it looks like it is – then much of the bondholder/developer rescue will be ECB/EU funded. I hope no European journalists start looking at how their ordinary taxpayers are likely to be gouged to protect the fortunes of the still massively rich Irish bondholders and megadevelopers, as well as their own bondholders of course.

  5. The following is an extract from Frank Fahey TD’s contribution to the Finance and Public Services Committee on 21 July, 2010.

    Before I ask my questions, I want to comment on the misunderstanding to which Mr. Mathews referred. NAMA is paying the banks for the toxic loans that are being transferred to it. Those payments are being made in the form of bonds which are being financed by the ECB at an interest rate of 1.5%, or being underwritten by the ECB.

    Mr. Peter Mathews: No. The Deputy is incorrect.

    Deputy Frank Fahey: I ask Mr. Mathews to let me finish. The interest rate is 1.5%. If the ECB was not underwriting these loans to the Government at a rate of 1.5%, we would not be able to transfer these loans to NAMA. That is my understanding.

    With respect, these suggests that the Deputy is confused as to the operation NAMA. Even on the most generous interpretation of what “funding” might mean, it surely does not involve the ECB underwriting NAMA.

  6. Speaking of NAMA bonds, if memory serves me they are at the six-month euribor rate (though my memory may be failing me again). That rate appears to be ticking up?

    http://www.euribor-rates.eu/euribor-rate-6-months.asp

    What does a 20% increase in rates do to NAMA’s sums? When’s the next reset date? Hoocudanode that having a floating rate tied to euribor might be risky…

  7. @ Hoggie

    ja, 6mth euribor flat is the coupon. I think someone (Jagdip or Karl if i was guessing) did the maths on how high Euribor would have to go before NAMA’s cashflows got into trouble (based on X% of loans being cash producing), but can’t remember the exact details. But i’m gonna take a stab at it and say it was something like 2% or 2.25% when things became problematic.

    @ Karl

    Frank Fahy doesn’t understand, or doesn’t want to, the whole Bank-NAMA-ECB process. However, that said, i don’t think its as simple as saying NAMA has nothing to do with the ECB either. As the ECB’s recent alleged threats to cut off the repo window to the Irish banks showed, the entire NAMA process could not function without the ECB repo window. I think that is the important thing to take out of it, rather than, as you say, trying to twist words around ‘funding’, ‘providing liquidity’, and ‘underwriting’ (thats the really stupid one) technical terminology.

  8. I’m now with Karl on this one. The ECB is very peripheral to the NAMA thing. It is not about eligible repo stuff, though that is a nice offspin.

    It is about replacing toxic assets with government secured assets. The government secured assets are costing the taxpayer a ridiculously low interest rate and that is very good news for the taxpayer, bad for the banks, but then if the taxpayer owns the banks it is all pretty irrelevant.

    But Karl is, I think, right that this is not coming courtesy of ECB munificence. He is also right to criticise government spokespersons for suggesting that a great deal has been extracted from the ECB.

    NAMA is still a wonderful thing from the taxpayers point of view but it has nothing to do with the ECB. It is a secondary matter that ECB accepts NAMA bonds as collateral but that is no big deal.

  9. OK I get it , I think – the NAMA vehicle was a mechanism to expand the Irish money supply without the direct use of ECB high powered money ? and therefore saving face for the ECB as they are loath to admit that they can fund goverments.

    But the ECB holds Irish Mortgage collateral on the asset side of its balance sheet ,yes.
    Is this the result of the seperate need for cash to fill the recent deposit hole or is there also NAMA related paper also on the ECB assets ?

  10. @bw2

    “It is a secondary matter that ECB accepts NAMA bonds as collateral but that is no big deal”

    Given the deposit situation ant the banks and the fact they were almost out of >bb- to repo I think it might have been a big deal.

    @Karl, you are surprised that when something is repeated lots of times it becomes true?!!!!! How long have you been doiing this 😉

  11. A simple, but probably stupid question: previously, when the Irish domestic banks were deemed solvent and chockful with performing, but highly illiquid, property loans and required some additional liquidity, were they not in a position to use the ECB repo facility (or similar ECB liquidity support facility) using some of these loans (illiquid assets) with an appropriate discount as collateral? If that were the case, all NAMA has done in this context is to takeover and to write-down a huge percentage of these illiquid property loans (primarily using non-performance or the expectation of non-performance as the key criterion) and to issue short-term, publicly-backed bonds to the banks in exchange for the estimated, longer-term, recoverable value of these loans. And the banks can repo these bonds at the ECB.

    The principal difference then in terms of the banks securing liquidity support from the ECB is that the banks have a smaller pool of assets to use as collateral at the ECB, but the valuation of these assets and the calculation of any discount applied is probably more straight forward and greater and more rapid liquidity support may be secured.

    Therefore, if I’m on the right track – big if – the ECB is not funding NAMA. NAMA has taken on a big pot of all sorts of performing and non-performing illiquid assets in exchange for a smaller pot of better quality assets that may be used more readily as collateral for ECB liquidity support.

  12. @ Paul Hunt

    the difference is that the banks previously could not repo these loans with the ECB without first packaging them up into some sort of securitisation or covered bond vehicle/structure – this is what creates the “eligible” aspect to the collateral. Although they used this process on much of their loan books, there were limits to the amounts and types of loans they could structure in this way even in the good times, and it would have started to become impossible once the crisis hit. So the NAMA process has managed to essentially find a way to make these illiquid and impaired assets become liquid, albeit with large haircuts in between.

  13. @Eoin,

    Thank you. You have succinctly and elegantly captured what I was trying to express. Wouldn’t it be wonderful if this could become part of common knowledge?

    I think the issue for me about NAMA all along is that it’s principal benefit has been to provide a very useful vehicle to secure liquidity, but at the cost of large haircuts. What seems to have fuelled the interminable NAMA-related debates here is the way these haircuts on the asset-side has been matched (or not) by haircuts on the funding side.

    It took me a while to cotton on, but I have recognised for some time that the type of haircuts across the entire funding structure that many people have been demanding are impossible without an EU-wide resolution mechanism and EU/IMF sovereign funding support. We finally have the latter, but we don’t seem to be any closer to the former.

    Forcing Ireland – and the other peripherals – to sweat it out until something forward-looking is in place (which by definition won’t provide any relief) will have serious political implications in terms of democratic stability.

    I’m relying on your colleagues (?) in the sovereign bond market to force the pace. Have they the appetite for a bit of arm-wrestling with the EU’s Grand Panjandrums?

  14. The legal niceties are becoming important.

    The importance of the repo facility and the consequences for Ireland and for the EU of the facility being withdrawn and how this might be done should be understood.

    However, the repo issue is distinct to the NAMA funding model. If the ECB will not accept NAMA bonds then others may accept them (albeit at a discount). This is particularly so where the bank asset acquisition haircuts have been high. Whilst NAMA bonds and ECB repo are interlinked at the moment, that is not to say that the ECB is irreplaceable in the equation.

  15. @ B_E_B, Paul Hunt

    Everything you say there is technically correct but I think it reveals a big misconception which has tricked many of us, including myself.

    NAMA was NOT primarily about easing the way to securing ECB liquidity support. In fact the pious hope is that ECB support will someday soon become a fallback facility like it was meant to be all along whilst NAMA is here for keeps.

    The primary purpose of NAMA was to de-tox the bank balance sheets so that credibility could be restored and the banks could once more secure liquidity including deposits from the market without State/ECB intervention.

    There was no external funding required by anybody in setting up NAMA. It was simply a hiving off of part of the banks’ balance sheet. The fairy dust came in the form of the Government guaranteeing the liabilities of the hived off entity. This required no recourse to the markets, the IMF, the EU or the Pension Reserve Fund.

    It is seemingly painless but clearly the EU doctor must be consulted on the appropriate use of this anaesthetic, after all when we waken up in 10 years time it might have gone horribly wrong.

    It seems the doctor has now changed tack and wants the patient to face up to its illness by putting hard money NOW into the banks and that is where we do need funding from any or all of the above sources.

    Back to topic. Karl is absolutely right that the two quoted references to needing ECB funding for NAMA are in error. But my guess is that we certainly do need EU permission to once more tap into that anaesthetic.

  16. @Jane

    “I am only new to this website and am astounded by the lack of knowledge of this matter despite the endless commentary in the press.”

    Perhaps you meant “because of the endless commentary in the press”?

  17. Karl is correct. But because NAMA bonds aren’t worth face value, it creates a big problem for the banks’ balance sheets. The size of the problem depends on what the bonds are worth. Ideally, if the nama bonds were traded, we could take this price. In the absense of being able to mark to market, we could look at benchmarking against coupons of Irish sov debt etc. T

  18. (oops, managed to post comment before I was finished) cont’d

    …Though we’d need to adjust this for factors such as the ‘auto-replacing nama bond'(seems that you can repay NAMA bonds with nama bonds) and as NAMA bonds are asset backed, apply an expected value to these recoveries. Given 10yr Irish debt is c.9% yield and NAMA bond coupons are at 6m euribor (c.1.25%), any calculated discount will be very high.

    At the time, I was surprised that the NAMA coupon was so low. It really meant that the recipients would have to hold them. Who decided (and who was involved in approving) the coupon on NAMA bonds? Did they seek any input from the ECB? It seems extremely incompetent to plan to issue multi-billions in bonds, that couldn’t be funded by the banks’ resources, without ensuring the ECB were on board.

  19. @BWII,

    Again, no disagreement with your take, but, even if access to increasing amounts of ECB liquidity was a trigger for the entry of the Troika, the key issue remains the extent to which the pain of detoxing the banks’ balance sheets was spread across the funding structure. Laying a lot of it off on the taxpayer (outside the existing funding structure) impairs the future ability of the sovereign to service debt. That, for me, is the key pressure point.

  20. What was the annual interest payment for Nama last year? Just wondering cos don’t we need to add that to the deficit to get the real deficit number?

  21. @ BWII

    it depends on how you view what took place privately and what took place publicly.

    The original stated purpose of NAMA was mainly to allow access to liquidity, as this was considered by the government to be mainly a ‘liquidity crisis’. So taking illiquid loans off the books at relatively modest discounts made sense for all parties. Little bit of pain for the banks, government warehouses the loans for 5yrs.

    However, by the time the loans were actually transferred, it had at that stage become a “solvency crisis”, and the haircuts were now fairly severe and destroying so much capital as to imperil the overall solvency of the banks. As you said, given that we were guaranteeing both NAMA itself explicitly as well the banks implicitly, the taxpayer was left holding the can for the whole lot.

    As you say, NAMA itself does not need any ECB funding, nor will it ever require it. However, for the process to work properly, the securities issued by NAMA must be acceptable by the ECB (or others) as collateral with which to access liquidity, otherwise the banks have simply taken a severe haircut and are back to square one with a ton of illiquid and low-yielding assets on their books.

  22. @Karl

    Would you go along with “Nama can be viewed as a device to allow the banks to get additional liquidity from the ECB, which also had the effect of prompting the need for said liquidity”?

    BTW, my own objection to Nama centred around the idea that it was a warehouse to take supply off the market and prevent clearing prices. Zombie stuff. We were then told it would not engage in speculative hoarding of real estate (which seemed to be exactly what it was for).

    They do indeed appear to be hoarding, and keeping the failed developers salaried in the process. Its a bit like a reverse meritocracy.

  23. NAMA was and is just another game of pass the toxic parcel. They are moving deeds from one branch of the government the banks to another the secrative NAMA HQ at huge cost to the taxpayer. Why. We all know that the banks repoed some of the bonds but this cash has not been used to generate credit as this has not happened. NAMA is just about paying a bunch of lawyers and “financial experts” in a vain attempt to recreate pre-glasnost russian bureaucracy. None of this messing is or will work it just makes the overall cost of doing anything real in this economy higher. Having a bunch of lawyers, politians and “economists” arguing about who ends up with a pile of deeds at huge cost to the real economy when the shareholders, the taxpayer, are not even allowed to enquire how much these “experts” are charging is another amazing example of what is now widely become known as Irish guide of how to destroy a modern Economy and alienate people.

    If NAMA is such a sucess why don’t we NAMA NAMA and set up a final NAMA to take the deeds off NAMA – now thats an idea.

  24. @ B_E_B

    We are not a million miles apart but you state “…are back to square one with a ton of illiquid and low-yielding assets on their books.” The difference is that these assets are not toxic i.e. they will not explode in your face (parking the possibility of sovereign default).

    Thus, so the argument went, I think, potential funders including depositors would say “well at least my money is safe”. The write downs of course had to be supplemented by recaps in this process.

    Back to topic – Karl has exposed the myth that ECB funds NAMA (I admit that I was partly seduced by that myth). Was that myth propagated disineguously by both FFs? It is a complex picture, certainly ECB acquiescence was needed IMHO but in their eagerness to counter the overwhelming negativeness, much uninformed, directed against NAMA, they did overstate the level of ECB input.

  25. Modern finance is far too complicated for most modern journalists. As Colm McCarthy said, more or less, not too long ago, sensible people only trust the numbers from 2 journals- the FT and the Racing Post. The rest are useless.

  26. Are we forgetting that there is “funding” (and roll-over funding) associated with the 80 bn. of assets transferred to NAMA? The banks need to access funding in order to replace maturing debt. NAMA was to provide that facility thru government-guaranteed bonds which could be used to access this funding, when needed.
    The problem is that the NAMA bonds are not tradeable. The ECB is the only possible acceptor of them and it is now obvious that the ECB never agreed to fund Irish banks for an indefinate period of years (until NAMA eventually paid the banks for the property it took from them). In other words, the State (NAMA) took real property (of enormous value) from the banks in return for effectively worthless bonds. That’s why the banks are smashed, by a scheme that was presented as a means of supporting them !. (I refer to the main banks)
    Actually, NAMA replaced “illiquid” bank assets with even More illiquid government guarantees!. The Term Sheets of the bonds do not even categorically state redemption dates!. And, in return for the use of banks assets as they are liquidated, the taxpayer is taking no risk and paying an interest rate that costs the banks c. 10 bn. in opportunity cost (the difference between what is being offered to the banks and what should be paid as interest, as per the original NAMA business plan repayment schedule)
    NAMA now owes tens of billions to the banks in Ireland…When will it ever pay? Maybe never. So, they should pass back the assets and get out of the banks hair. NAMA has been a catastrophe for the (better) banks.

  27. @Brian O’D
    “NAMA has been a catastrophe for the (better) banks.”
    There are no better banks. There are only worse ones. Whichever one you look at today, that’s a worse one…

  28. As a matter of interest, what is the total nominal value of the loans which NAMA is now manated to acquire form the banks? It must be substantially greater than was previously envisaged with the lower thresholds being reduced.

  29. @zhou
    Aren’t the lower thresholds only reduced back to where they were originally? Originally it was going to be all land/development/racehorse/yacht/lifestyle of the famous loans over 5million. That’s now the case again? Or have a missed a step?

  30. @zhou
    Ta. I vaguely remember something about that. Sometime between “manageable” and “IMF”, wasn’t it? Or was it between “good bank/bad bank” and “liquidation”?

    Do you reckon they’ll go into NAMA 1 or NAMA 2?

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