In a year-end interview with Jody Corcoran in the Sunday Independent, the Taoiseach answered questions about NAMA. The relevant passage is below the fold.
Tag: NAMA
A busy day at the Department of Finance as desks get cleared before Christmas. The Department has released its regulations regarding the determination of long-term economic value for assets. These regulations formalise draft regulations that were released here in September. Much of this was published before. One new bit is that the September draft said that assets would be valued using a discount rate such that
“NAMA discount rate” means the Irish 10 year Government Bond rate at the establishment date plus * per cent;
Today’s regulations tell us what the mysterious * is:
“NAMA discount rate”, for bank assets denominated in euro, means the Irish 10-year Government Bond Irish Stock Exchange quoted closing yield at the establishment date plus 0.8 per cent;
For those unfamiliar with asset pricing formulae, the lower the discount rate used, the higher will be the estimate of the asset value. I always suspected that a low discount rate would be part of the NAMA pricing strategy. For instance, just before the draft NAMA legislation was released I wrote:
My point here is that it will be very easy for any NAMA official who wanted to do so, to pluck out an appropriate set of assumptions about the future that will end up delivering whatever haircut is deemed desirable. In particular, I suspect it is possible that the valuations will completely ignore the risk premium element in pricing these assets and will make highly positive assumptions about future cash flows.
Interestingly, the Department’s new best friend, Mr. Seelig from the IMF had suggested to the Department of Finance that they use market rates for property investments or adjust NAMA’s cost of capital to reflect the risks associated with the assets being acquired. The 0.8 percent adjustment is, by any reasonable assessment, well short of the appropriate risk adjustment.
Mr. Seelig would undoubtedly approve of the masterful vagueness of the rest of the document, which is full of stuff about NAMA taking into account “in such manner as it thinks fit, by reference to such of the following as it considers relevant” various factors, i.e. doing whatever the hell they feel like.
One bit I didn’t understand was the following. Having defined the NAMA discount rate, page 6 then states:
The standard discount rate that NAMA shall apply in the calculation of the long-term economic value of all bank assets shall be 2.75 per cent to provide for enforcement costs, and 0.25 per cent to provide for due diligence costs, incurred or likely to be incurred by NAMA over its lifetime in the discharge of its functions.
I couldn’t figure out when this rate would be applied rather than the NAMA discount rate defined above.
Simon Carswell reported last Saturday on an email from Steven Seelig, who holds the position of Advisor in the IMF’s Monetary and Capital Markets Department, to the Department of Finance commenting on the draft NAMA legislation. The Irish Times obtained this email, along with other communications on NAMA, via a Freedom of Information request and there has been some discussion of it in the comments on this site.
Because the newspaper article only partly reported the text of the email, I asked Simon Carswell would he be willing to pass it on and he has kindly agreed. So here’s the full text of the communication. (Here’s the draft of the legislation he was commenting on )
For conspiracy theorists, the apparently blacked-out word on the second page is “excellent” – Simon had highlighted it in the copy he scanned.
Here‘s an opinion piece I wrote for the today’s Irish Times. I’d add three points. First, I’d note that back in February, prior to Peter Bacon delivering his report recommending a National Asset Management Agency, I wrote the following about the idea of a bad bank or NAMA as it became known:
In addition to being unfair, it is questionable whether the bad bank proposal could achieve its goal of properly re-capitalising private sector banks. There may be limits on the price the Government can pay for impaired property loans under EU state aid rules. Banks may still have to write down their assets. It is easy to imagine a scenario where banks struggled with weak capital bases even after a bad bank scheme has been put in place.
I am in no way happy to report that it looks like this scenario is exactly what appears to be coming to pass. Indeed, I wrote the article—my first ever for a newspaper—because I hoped that some solid arguments expressed in public may prevent it from happening.
Second. I’ll freely admit that the article comes across as somewhat angry in relation to the government’s misrepesentation of the role, if any, of the ECB in NAMA. What I find amazing looking back on the period during the Summer and early Autumn when NAMA was being heavily debated in the media is the fact that Irish business journalists happily accepted the “free money from ECB” line and peddled it regularly in their columns and in the broadcast media. The Irish public would have been better served if it had even a few journalists willing to research this issue a little bit further, perhaps via a few Google searches.
Third, it seems that there is little appetite out there among journalists for admitting the true state of the Irish banks or for preparing the Irish public for what may be necessary to stablise the situation in the coming months. This may be related to the second point above.