Category: Banking Crisis

I have been publicly critical of the idea of a “bad bank” plan in which the government overpays for bad assets since a number of months prior to the publication of Peter Bacon’s report. I have consistently objected to the plan on the grounds that it is a bailout of bank shareholders by the government, involving a large direct transfer of funds from the taxpayers to shareholders.

However, at no point have I suggested that NAMA would be a bailout for developers. I have always believed the Minister for Finance’s assurances that the developers who owed money to the Irish taxpayer would be followed to the Gates of Hell in order to get the money back. This, from the Minister’s appearance in August at the Oireachtas Committee on Finance and the Public Service, would be a pretty typical assurance:

The draft legislation also contains a number of provisions which will assist NAMA in its dealings with developers and ensure that every last cent due to the taxpayer is pursued vigorously.

Now, however, we find out how vigorous this pursuit will be. In its draft business plan, NAMA has told the public, and thus property developers, that it expects this vigorous pursuit of the €77 billion that NAMA will be owed to yield principal repayments of €1 billion in 2010 and 2011 and €2.5 billion in 2012. Only in 2013 does NAMA expect the vigorous pursuit to start making real inroads because, at that point, as if by magic, €7.5 billion per year in principal repayments start to pour in.

What this draft plan means is that the developers who owe us €77 billion have just been told that we have no plans to recoup this money any time soon. Effectively, the developers have been told that they can start paying back the money in 2013. Now we’ve been told that NAMA will haul in the developers and look for business plans and the like. However, in light of NAMA’s own business plan, it will be pretty hard for them to quibble with a developer who offers them a plan of “I’ll wait until 2013 and sure things will be grand then.”

It is with great reluctance, then, that I have to say that it’s now pretty hard to see this plan as anything other than a deliberate decision to show extreme forbearance to the property developers who got us into this mess in the first place.

Also, the following is now a fact. This government has told developers that as long as its in office (the latest date for an election is 2012) they will barely have to pay back any money. Interpret this fact how you wish.

From page 2 of the draft NAMA business plan:

It is important to emphasise that much of the information regarding the prospective NAMA portfolio included in this draft Business Plan is based on aggregate data which has been provided by the various institutions. The interim NAMA team has not had direct access to individual transaction records and loan files and will not be in a position to verify the integrity of the data until it carries out its own due diligence on each of the loans proposed for acquisition.

So have any of the famous forms requesting 300 pieces of information on individual loans been filled out? And if they have, where are they? When is whoever is keeping them planning to hand them over to NAMA?

NAMA’s draft business plan has many bizarre aspects. Chief among them, however, is the claim that only 20% of the loans purchased by NAMA will default, with the other 80% of loans eventually paying off in full. The plan justifies this as follows:

Over a five year period in the early 1990s, one UK bank experienced a default rate of less than 10% on its whole book. Given the concentrated nature of the prospective NAMA portfolio and the risk of a prolonged recession, a 20% default rate assumption has been made.

Fianna Fail TD Frank Fahey on Morning Ireland stated that the UK bank in question was Barclays and that this comparison means that the 20% default rate assumption was “prudent” and “conservative” and “much bigger than it needs to be.”

So the argument here is that because the default rate on Barclays’s total loan book in the 1990s was less than 10%, this means that it’s ok to assume that the default rate on NAMA’s assets will only be 20%.

I think this is perhaps the most odious comparison we have heard yet in the NAMA debate. The Barclay’s loan book being referred to (its “whole book”) included all sorts of loans with low average default rates. However, the NAMA loan book is a selected class of assets—property and development loans—specifically chosen because the losses on these loans are so large they are threatening the solvency of the Irish banking system.

The reasoning underlying the default rate assumption is akin to asserting that because only 10 percent of men are taller than six foot, it’s reasonable to assume that no more than 20 percent of a basketball team will be taller than six foot.

The fact is that NAMA only exists because this particular class of assets is performing so badly that a radical state intervention is being planned to save the banks that made these loans. Perhaps I missed it, but I don’t recall such interventions being planned in relation to the total loan books of UK banks in the 1990s.

The bottom line here is that it is patently clear that far more than 20% of these loans will fail to be paid back in full.  That this claim can be released to the public in the expectation of being taken seriously is an indication that we have really moved into cloud-cuckoo territory.

As an aside, I’d note that Fahey also stated that the banks “were borrowing the money at 1.5%”. This is the famous 1.5% that is the initial interest rate that the government is paying to the banks. Yet again, we see another example of government spokesmen who don’t even understand the basic mechanics of NAMA in the sense of who is lending money to whom and at what rate.

NAMA has released a draft business plan. It is a truly extraordinary document. To summarise, those who thought that NAMA would largely be a property fund—closing on delinquent developers and selling on the assets—are wrong. It appears that NAMA’s game plan is to wait a few years and then the vast majority of the developers will be able to pay back their loans in full.

Among the highlights:

1. NAMA is assumed to make a net profit of €5.48 billion by the end of its anticipated lifetime of ten years.
2. However, contrary to the million times that we have been told that NAMA will “wash its face” on an ongoing basis, it is projected that NAMA will pay out €16 billion in interest payments on its debt but will receive €12 billion in interest income on the loans acquired.
3. In addition, fees and expenses will add up to €2.64 billion over ten years.
4. The profit of €5.48 billion stems from NAMA recouping payments of €66.1 billion from loan repayments and asset recoveries to pay off the €54 billion in loans issued.
5. Interestingly, from Table 5’s cash flow projections, the only year in which NAMA is not projected to lose money on an income flow basis is 2010 when an interest outflow of €1.3 billion will be offset by interest income of, em, €1.3 billion. Table 7’s “budget projections” attempts to show that NAMA will make a profit in 2010-2012. The difference between this and Table 5 is “The interest income projections in this table include the impact of contractual rolled-up interest on land and development loans in addition to interest income from cash flow-producing assets.” So any “profit” reported will be of a phantom variety.
6. From Page 10: “The projections assume that, of the €77 billion nominal value of loans acquired, €62 billion will be repaid by borrowers and that loan defaults or debt restructuring will occur on €15 billion (a rate of 20%). Over a five year period in the early 1990s, one UK bank experienced a default rate of less than 10% on its whole book. Given the concentrated nature of the prospective NAMA portfolio and the risk of a prolonged recession, a 20% default rate assumption has been made. It is also assumed that €4 billion will be realised from the sale of underlying assets secured by the defaulting loans of €15 billion. These are conservative and prudent assumptions.” Yes you read that right. 80% of the loans will be repaid in full.
7. The 80% who pay back their loans will be in no rush to do so. Repayments will be €1 billion next year and the year after, €2.5 billion in 2012. Then in 2013 (after the next election!) the loan repayments will start arriving in buckets—€7.5 billion every year.
8. What if more than 20% of the loans can’t be paid back? The document tells us: “Stress-testing of this assumption indicates that the default rate would have to increase to 31% to erode in full NAMA’s projected Net Present Value gain of €4.8 billion.” Feel better now?
9. NAMA will acquire €14.6 billion in derivatives positions, mainly interest rate swaps.
10. By the turn of the year, NAMA will only have taken on 10 loans with a total value of €16 billion.
11. NAMA’s potential new lending: “NAMA will inherit any commitments entered into by the banks as far as the drawdown of funds is concerned; it is estimated that undrawn commitments on loans transferring to NAMA are of the order of €6.5 billion.” This exceeds the €5 billion limit placed on it in the legislation. The document says “the limit can be adjusted by order of the Minister and Resolution of the Dáil, thus ensuring parliamentary accountability for borrowing levels.”

Anyone in the Green Party up for a revote?