Full text of Oireachtas debate on NAMA is available here. But for some commentary-worthy passages, consider the following:
Deputy Brian Lenihan: …The bad bank solution means that the person with the impaired asset takes a very substantial loss, and a substantial loss is also taken by the bank. Looking at it in terms of this particular approach, the first 35% is the equity value of the developer or the owner of the land, and if he or she is not in a position to pay off the loan, then clearly that is wiped out in this exercise. The key question in valuation is not about the wipeout of the initial landowner’s equity, but about how much of the banks’ equity should in turn be wiped out as well, as we are insisting on the banks taking a loss. Therefore, the taxpayer is third in the queue rather than first. There is a risk and the reason we are focusing so much on valuation is to ensure that this risk is minimised as much as possible. In a frozen or illiquid market, it is not possible to place an exact valuation on the loans, but a long-term commercial valuation can be made. That is what we will have to do... It is a long-term economic valuation…
I am not sure I understand the Minister. Take a loan of Euro65 on a bank balance sheet. Suppose the value of the asset underlying the loan at the time of the loan issuance was Euro100, so 35% of the project was the equity accruing to the developer at the time. Assume that the value of the project has fallen 40% since then, so the market value of the project itself is no Euro60. NAMA buys the loan at, say 20% discount on the face value of the loan – it now has Euro52 loan on hands against the project currently valued at Euro60. What will the balance sheet of NAMA look like?
If NAMA can sell the underlying asset today for Euro60, it makes profit of Euro8, but presumably the bank could have done the same without NAMA. But suppose it does go for NAMA. The bank used to have a loan of Euro65 against an asset with Euro60 value, it got back Euro52 from the Government and has new capital demand of ca Euro6. The bank takes the hit and the developer takes a hit. This is a non-flyer for NAMA politically, but in this case NAMA would make a profit of Euro2 on the entire transaction.
If NAMA cannot sell the project, it has to finance the purchase of the loan at say 5.5% pa on a termed bond issue of, say 5-years and face value of Euro52, so total cost of financing is Euro15.96. It has to plug bank’s capital hole – same Euro6, and it has to incur operating cost for the loan – say 0.5% of the loan value pa for 5 years at Euro1.36. Against this, NAMA will receive income stream on average of ca 3-4% pa, or Euro14.37. Assuming the value of the underlying asset remains the same, we have a net loss to NAMA of Euro0.95.
So applying all pain to developer (example of quick fire sale) will yield profit, going NAMA route and soaking the ‘third in line’ taxpayer as Minister Lenihan puts it will make a loss…
However, regardless of how the numbers come out, Minister Lenihan is confusing two things. The developer has already taken a hit, and guess what – I don’t care if he did. Tough luck, mates. But the banks are yet to take a hit. And in part, they have delayed taking a hit because of NAMA promise of rescue. This does not look like NAMA puts taxpayer third in the firing line. It looks more like the taxpayer is next, right after the developers. Except, personal bankruptcy laws protect the developers, but not the taxpayers. Which means that in real world, taxpayer is the first in the firing line and indeed he is the only one in the entire firing line.
Mr. Brendan McDonagh: …about rolled-up interest. I was a member of the due diligence team that worked on Allied Irish Bank and Bank of Ireland. I have also had access to information in terms of reports compiled by the Financial Regulator in regard to the other institutions. What I have seen in the banks’ loan books is that the land and development book generally included a feature that for two years loans had rolled-up interest. Therefore, a loan of €10 million on which the interest was 10% per annum, effectively became a €12 million loan at the end of the two-year period. If at that stage the asset had metamorphosed from land with rezoning to land with planning permission - once a certain element of risk was gone from the loan - it was refinanced or sold on.
So let us revisit the figures provided above… if NAMA cannot sell the project, it has to finance the purchase of the loan at say 5.5% pa on a termed bond issue of, say 5-years and face value of Euro42, so total cost of financing is Euro15.96. It has to plug bank’s capital hole – Euro8, and it has to incur operating cost for the loan – say 0.5% of the loan value pa for 5 years at Euro1.36. It has a capital loss now instead of gain of Euro10. Against this, NAMA will receive income stream on average of ca 3-4% pa, or Euro7.88. Assuming the value of the underlying asset remains the same, we have a net loss to NAMA of Euro27.44. Ouch…
But this, incidentally, does not cover the cost of outsourced functions – and NAMA plans to have loads of outsourcing if it will run a fund requiring 400 staff with 30-40 employees…
Mr. Brendan McDonagh: Bespoke means something has particular features. Usually a loan document with standard terms and conditions is drawn up by an institution when, to give a simple example, it extends a mortgage... It is not a question of quality. It means that if one wants to value these loans which we will be required to do, the terms and conditions of each loan will have to be examined to ensure account is taken of any particular feature... It will not [take years to work these loans out]...
I am puzzled – it will not take years to price individual bespoke loans even with a staff of 30-40 or is Mr McDonagh implying here that the existent banks staff will do pricing?
Senator Feargal Quinn: It is not easy to keep quiet for two and a half hours without asking questions. I was surprised that Mr. McDonagh spoke about a timeframe of ten to 15 years because I had investigated what had happened in the United States in the establishment of the Resolution Trust Corporation in 1989. This corporation only lasted six years but the figures were considerably different. It took in $465 billion and the cost to the taxpayer when the assets were sold was $90 billion. The equivalent cost for us would be €20 billion. Mr. McDonagh spoke about a staff complement of 30 to 40. The aforementioned operation in the United States involved 9,000 people. This scares me because it seems we are not very good at sticking to budgets and timeframes in Ireland.
Note that Senator Quinn’s estimate of NAMA net loss of Euro20bn based on the US RTC experience is exactly the same as my and Brian Lucey’s estimate in last week’s Sunday Times. We arrived at this figure without a reference to RTC, so the fact that the two estimates coincide does suggest that the figure is about right…
Deputy Burton spoke about transparency. Freedom of information provisions will not apply to NAMA, although they were applied in similar contexts in Sweden and Finland. It would be of considerable help if citizens and taxpayers had access to information.
Deputy Brian Lenihan: …one of the most difficult tasks relating to NAMA will be drawing the line as to where the agency must or where it should not enforce. A spectrum of borrowers will be hopelessly insolvent; receivers and liquidators should be installed and NAMA will become the property management company for them. That is one side of the spectrum. Clearly, on the other side, because the agency will take performing loans, there will be a category of borrowers who will pay their debts, trade and discharge their obligations as they fall due. In the middle, the agency will have the most difficult commercial decisions to make in terms of the potential viability of the middle category of borrowers.
I am again at a loss as to what NAMA can and cannot do, what enforcement actions it can or cannot take and so on… Does the Minister have a clue himself? Is his own staff and that of NAMA have a clue?
Mr. Brendan McDonagh: Unfortunately, part of the problem is that people have given personal guarantees. If the banks are placing values on personal guarantees as partial security, that is a consequence of what NAMA will be about. If NAMA has to pursue personal guarantees it will do so. I am sure all members are aware that a number of major borrowers, because of the multi-bank nature of their loans, have offered personal guarantees to five or six banks. A personal guarantee can cover only one loan. It cannot cover six. When valuing a loan from a particular institution, we will have to take account of the collateral offered to each institution. One cannot look at this matter in the context of an individual bank or in a vacuum. One must take account of the all the circumstances which can be determined.
Indeed, as I mentioned in the earlier post on this debate, this adds an entirely new and at this stage completely unpriceable risk. NAMA will simply spend the next 5 years tied up in courts with other banks and developers dealing with the issue of who gets which guarantees… Good luck to all involved.
Mr. Brendan McDonagh: With regard to the percentage of foreign assets, …based on the analysis of the loan books of the six institutions which was carried out after the guarantee scheme by PWC for the Financial Regulator, the value of foreign assets of the banks’ portfolios was somewhere in the region of about 35% and most of that would be UK assets... That 35% was of the total loan portfolios of the banks, of the six institutions. I do not have the figures analysed yet as I only received the questionnaires last night.
In other words, we are talking about roughly 35% of the Euro386bn in assets of just BofI and AIB, or Euro135.1bn…
Why exactly do we not buy the good bits -those of systemic importance- and pay the market value. The multiple of PROFIT for that area. Then allow the market to value the rest. Why on earth are we taking on risk through NAMA when these banks have limited liability. Why are we moving to a position of absolute liability.
What am I missing.
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