Economics 06/10/2009: A stockbrokerage strategist on Nama

And so it comes to my attention that last week in a local Chamber of Commerce hosted a debate on Nama. Per my contacts, “a number of issues arose that may be of interest”.

These issues are important because they largely outline main arguments about Nama made by the proposal supporters out there.


1) Nama supporter (NS) was keen to distance himself and Nama supporters from ‘theoreticians’ and ‘academics’ who exclusively populate the Nama critics land. It is important to note that many of the people who signed the letter of 46 economists, as well as other members of the critics camp are actually practitioners of the same fine art of finance as NS. Many.

How many? Well, just a quick run through

• myself – former business editor who brought finance coverage to the most respectable Irish business magazine, former director of research at NCB, currently head of research and strategy with an American brokerage.
  
• Greg Connor – former director of research for Barra, Fed employee.
  
• Karl Whelan – former Fed employee.
  
• Other members of 46 run options desks, have been bond traders, worked in central banks and finance ministries... you get the picture.
• Brian Lucey - former employee of the Central Bank;
• Ronan Lyons - former economist wit one multinational company and also chief economist of Daft.ie; and so on.
  

NS might think we in academia are just performing random walks in various universities’ squares, but no, we actually advise governments, international organizations, businesses and have some relevant experience in the real world.


2) NS contended that the main problem with Irish banking sector was that after 2001 we had "over competition" from (guess who?) the foreign banks. One assumes he means Rabo and KBC, for the British banks were here before 2001 and in addition we had our banks in their countries as well, aggressively lending to… yes, you’ve guessed it again – property developers there. So the foreign banks, thus, caused a property boom in Ireland. And the foreign banks forced our banks to issue 110% mortgages. And the foreign banks assured that most of our lending has gone to finance property deals of one variety or the other. Of course, it was the foreign banks that made sure that IL&P and Nationwide made strange dealings with Anglo. Why wouldn’t NS read Noel Whelan’s treatise on the crisis (see my comment here) – he might find out that in addition to the foreign banks, 46 economists also caused the crisis.


3) NS also allegedly claimed that as foreign banks leave Ireland, Irish banks will take a "more prudent, even oligopolistic approach to rebuilding their balance sheets". Oligopolistic? I hope the Competition Authority is reading this, plus the folks at the EU Commission. But for those of you who wonder what this means, let me explain. In the case of oligopolistic competition, banks would earn near monopoly profits by charging their customers (aha, you and me) excessive near-monopoly rents. Happy times, folks. A stockbroker calling for oligopoly? Surely not. Though it might happen if our regulators continue sleeping at the wheel. What’s next? Markets for shares becoming too efficient, so NS will call for regulated trade in equities? Incidentally, courtesy of Anglo, we already have had bans on shortselling - an activity that actually has been proven to aid price discovery in the markets.


(4) Per NS, the main aim of NAMA is to get credit flowing. If this turns out to be a problem in a recessionary economy, the profit motive of the banks will induce them to lend after NAMA. Ahmmm, ok, I have one question – why would they seek profit opportunities in Ireland?

• Because our margins are so high? Nope, they are low, Bloxham, Davy and other Irish stockbrokers said so. Can banks raise these margins? Yes, but only at the expense of already strained households, which will mean that their loans books will suffer more defaults. Surely NS wouldn’t call that an improvement in financial stability?
  
• Will the banks have an incentive to lend post-Nama because our lending bears lower risks? No, we are among the worst performing economies in Europe.
  
• Because the banks will simply have excess of cheap cash after Nama? Oh, no – they will still face some €130bn in interbank loans to repay (pricey stuff) (here).
  
• Maybe because they can’t get better returns anywhere else than in Ireland? Well, they can get higher returns pretty much anywhere else other than in Ireland, given our domestic economy will be contracting through 2010.

So, the banks won’t be rushing to lend here. And, incidentally, there won’t be many borrowers rushing in to borrow either – the households will be scrambling to deleverage in the next two years, not to borrow more. What is most likely is that the banks will use our taxpayers’ cash to repay some of the interbank loans, plus buy some discounted debt of which they had €103.8bn worth of senior bonds and €17.7bn in subordinated bonds as of June 2009.


5) Per NS, Nama provides asymmetric exposure to risk to the benefit of the taxpayer as the subordinated Nama bonds will take 1/3 of the risk. As far as I recall, the actual plan was to issue 5% of the Nama disbursed funds in the form of these bonds. Even if the risk weighting on them truly reflects the risk of Nama generating an end loss, this translates into just 5% of risk being shared. Of course, since we have no exact legally defined and enforceable criteria as to what constitutes ‘success’ or ‘failure’ of Nama, any future Government can ‘fudge’ whatever outcome achieved to be called ‘success’, so effective risk-sharing under subordinated bonds is NIL.


6) Allegedly, NS claimed that current commercial property yields are at 6% nationwide and are heading UPWARDS. These numbers were presented as facts in contrast to the ‘nonsense’ figures being quoted by some economists. (See Ronan Lyons on this one: here).

Of course NS explained that higher yields will come about as economy is now in imminent recovery mode and that we will see a positive q-o-q growth in Q2 2010. Thus, Davy’s Rossa White, for example, is a pessimist compared to NS who was not sure what Rossa White forecasted for Irish economy just a day before this event. Hmmm…

Now, Nama is apparently about Irish economy. Which of course is about GNP – in case NS did not know. In this context, I don’t think anyone really expects the yields to go up to 7% or to even 6% any time soon. And, in addition, I presume NS is unaware of such things as lags – it takes time to work through the surplus properties out there in the market, and it takes time before that to get consumers spending again. So Q2 2010? More like Q2 2011 for consumption to uptick significantly enough for yields to start stabilizing.

Suppose NS is right and the yields are heading for North of 6%, say towards 8%. Does he believe that these yields improvements will be driven by rents increases? In the current economic environment, even if there is some nominal growth in 2010 of say 0.5% in GDP, this an unlikely scenario with vacancy rates in commercial sector of 21% plus, and in residential sector with some 200,000+ properties unoccupied. So the only way yields can hit 8% is by price of property dropping further, and dropping by more than 20%. What does this mean for the ‘haircut’ applied under Nama? It means the haircut is too low. Significantly too low. If the yields were to firm up, per NS’s assertion, property prices will have to drop and Nama will instantaneously be overpaying even more than it already does.

And, folks, there is no arguing against this point for the yield is, by definition, a ratio: rent to price movement ratio. Ratio can rise either if the numerator rises (rents) or denominator drops (prices).


7) The good thing is that NS is at least more committed to some sort of accountability in Nama than the Government is. Per NS, allegedly, we will know if NAMA works within months, perhaps as little as three to six, as the restoration of credit would tell us that. And if not? What would NS do if Nama fails to deliver? Surely all stockbrokers have standard stop-loss rules to prevent reckless or rogue trades? Nama does not – and it always was a major part of my criticism of the current legislation. Surely NS would be familiar, therefore, with the need for a strategic Plan B? He is. And…


8) … of course – Plan B is to buy equity in the banks post-Nama – the Government already admitted this much. Which might lead to nationalizing of the banks or at least nationalizing a large chunk of them. But for NS this won’t work, as he said, allegedly, that people who advocate forcing the banks to face up to the losses are in fact advocating that not only should the equity holders bear the losses but also that the depositors should be expropriated. Of course, no one I know of in the debate on Nama has suggested that, not even unreformed socialists did. Furthermore, as far as I am aware, in every country where the banks were forced to face up to their debts – US, UK, Sweden, Denmark, Spain,... you name it – depositors remained intact.

Two more things come to mind here. Even post-Nama NS, taken at the face value of his argument, won’t stand for nationalization no matter what – in other words, should the banks need more capital he would, I presume agree to simply give it to them once again, with asking nothing in return. And also that post-Nama, when the banks ask for more cash we might be expropriating the depositors?

Is this for real? Is he suggesting that fully guaranteed depositors might face loss of their funds? Personally I think this is completely out of line scaremongering.


9) NS, allegedly, also stated, per my contact who noted it down as the meeting concluded for tea and buns, that NAMA will make a profit as the bonds will be euribor+50bps while the loans (apparently all) will be yielding at euribor+200bps. So the 44% of loans that are performing can easily take the strain of those that are not performing. Well, not so quick.

Assume for a second that NS is right. Banks pay the cost of managing the loans, so euribor+200bps is more like euribor+125bps once cost of managing loans is taken out. State pays the cost of issuing bonds, so euribor+50bps in bonds face value is more like euribor+65bps in gross cost to the state. Now, at 44% weighting, the average loans portfolio yield becomes euribor+55bps, which is below euribor+65bps. Nama makes loss even under NS’s rosy assumption of all performing loans paying euribor+200bps on average.

But here are two additional kickers:

(a) If interest rates increase, and NS should know this, more loans will go into non-performing category, plus, as I explained above. If NS’s assertion of 8% yield in near future is correct, again, more loans will go into non-performing category. Thus 44% of performing loans today, might drop to, ough say 35% or 30% tomorrow. This is what is roughly called interest rate sensitivity – as the cost of loans rises, more loans fail.

(b) NS’s assertion on euribor+200bps and on 44% performing loans rests on the assumption that the due diligence on these loans is straightforward, so Nama won’t make mistakes in buying up ‘performing’ loans. Again, any error, driving either 44% down or euribor+200bps margin down will hammer Nama bottom line figures.

10) NS asserted over some answers to specific questions, that there is a ten year property price cycle, in nominal terms. If he really did say this, this now provides yet another bogus ‘benchmark’ for property markets recovery – first there was a 7 year to 80% correction statement from one property specialist in the Dail, then there were 5 year turnaround time estimates from the Government advisers circles, now it is 10 year nominal recovery number from one of the stockbrokers.

Clearly NS is unaware of the long-term results for property market busts, and he is unaware that combined shocks to property market, plus to broader financial markets yield much deeper contractions than what his statement implies. I did some actual estimates based on OECD and IMF data and found that past busts across the OECD with an average magnitude being lower than that of expected Irish property prices contraction average 18 years in nominal terms. But what is even more surprising is that a stockbroker would care about nominal, not real, returns. Surely that is not what his usual client advices is based on, one hopes.

Economics 16/05/2009: NAMA delayed

Retail sales... Per CSO today: "The volume of retail sales (i.e. excluding price effects) decreased by 17.0% in April 2009 compared to April 2008. There was a monthly increase of 2.3%. The large year on year retail sales decrease in April 2009 is primarily due to the large decrease in the motor trades sector. In April 2009 motor trades decreased 50.1% on the same period last year. If Motor Trades are excluded the volume of retail sales decreased by 7.1% in April 2009 compared to April 2008 and the monthly change was +0.5%. The value of retail sales decreased by 20.5% in April 2009 compared to April 2008 and increased by 2.0% in the month. However, if Motor Trades are excluded, the annual decrease was 11.2% and the monthly change was-1.2%Published by the Central Statistics Office, Ireland."

Of course, if you are a retailer in Ireland, it is the value that you care about. The rise in core (ex-Motor) sales in April (+0.5%) was the first m-o-m increase since September 2008. But in terms of value, m-o-m rates were:Is this a 'dead cat bounce' or a real sign of stabilization? My gut feeling that May-June figures might come in with a moderately positive rebound (weather and recession-fatigue effects will drive people into shops), but the real test will be September-October. Notice, however core value rates staying below the waterline - signaling continued jobs pressure in the sector into the summer months.

Also telling - a look at the actual indices of activity:
Core value index still heading South and a mixed picture in other measures... Again - wait and see...


NAMA delay - predictable stuff of governance... So Brian Cowen (June 17th, Dail comments) thinks that the vote on NAMA might happen as late as in September and other decision-makers (e.g DofF) are indicating that even that might be an optimistic deadline. And, of course, going by the Government record on decision-making - the latter are right:

• Unemployment increases onset - November 2007. Problem acknowledged - July 2008. Policy solutions proposed - still waiting;
• Fiscal deficit onset - Fall 2007. Problem acknowledged - July 2008. First steps taken to raise taxes - October 2008. First (real) steps taken to reduce public spending costs - February 2009;
• Currency crisis onset - on exports side - January 2007. First acknowledged - Summer 2008. First steps taken to address - still waiting;
  
• Competitiveness (using HCI) crisis onset - around 2002. First acknowledged - around 2004. First (real) steps taken to rectify - still waiting;
• Cost of public services crisis onset - around 2002. First acknowledged - still waiting;
• It took the Government less than 3 months to draft and implement sweeping tax cull of our incomes (July-October 2008), but it took the same Government the same 3 months (since April 23rd) to reduce redundant Ministerial/TD pensions by a miserly 25%. It will now take at least 3 years before we can see a real change in the way our politicians pay themselves.
  

In this environment, why do the markets still listen to our political leaders? They promised NAMA to be in place for July vote. After all, in the case of NAMA delays there are real risks to the equity markets:

• banks, absent NAMA clarity, are constrained in raising own capital;
• banks might be facing much higher rates of interest in raising funding in the latter months;
• political risk of the Government bailing out (partially or wholly) of NAMA has now risen as well;
• political risks are now amplified by the fact that NAMA costs are going to play-out coincident with 2010 Budget;
• development projects and investments are now placed under a new round of uncertainty;
• banks valuations are now being impacted by the post-August detailing of the NAMA exposures; and so on.
  

These and other are real costs to the stock market prices and thus to the real risk-adjusted returns to investors.

And on related issue: Davy's note today contains an interesting discussion of Minister Lenihan's statement in the Dail on banks capital. Quoting from the note: "Regarding the suggestion that there was a danger in raising capital ratios, the UK raised them to give confidence to markets in respect of the banks. We did not follow suit, keeping with the minimum capital ratios. I do not propose to change that because I agree ... that if one raises capital ratios too high we will inhibit lending. We must have a minimum and that must be adhered to'.

Davy's analysis: "This would seem to confirm our suspicion that the Irish government is not planning on setting the capital bar particularly high for the Irish banks post-NAMA. Instead it
plans to let the preference shares help offset a slightly lower level of equity tier 1 (maybe 5%+) versus UK peers. In Ireland, the minimum capital requirement is a core tier 1 of 4% whereas in the UK the new FSA requirement is 4% but after a severe stress test. The market will of course make up its own mind on this but it is inevitable that ALBK and BKIR are going to need to do rights issues at some point if they are (a) going to pay back the government preference shares, and (b) want to lend again rather than be focused on reserve building."

My analysis, in addition to agreeing with Davy's: Minister Lenihan is consciously trying to alter the issue of post-NAMA capital adequacy of the banks by not imposing strict test-linked capital bounds. The whole exercise has nothing to do with actually freeing banks funds for increased lending in the economy, as, per Davy analysis, the banks will still face constraints in paying (a). Instead, it is about reducing, artificially, the demand for government recapitalization funding post-NAMA and making it palatable for the banks to accept slightly higher discount rates for assets transferred to NAMA. Investors will have to face a choice in this case:
Option 1: banks accepting the deal and running with lower capital reserves, exposing themselves to the downstream risk of emergency recapitalization should financial conditions deteriorate further in Fall 2008-Winter 2009;
Option 2: banks raising adequate by international standards capital outside state recapitalization scheme, undermining future profitability, but compensating for the above risk.

Good luck to anyone pricing the difference in two Options...


Minimum Wages... ETUI Policy Brief Issue 2/2009 titled "European Economic and Employment Policy Minimum wages in Europe: new debates against the background of economic crisis" provides an inetresting set of comparative charts and tables on minimum wages in Europe. Here they are:
In the above, don't let Luxembourg's numbers deceive you - Lux is a country where national accounting produces vast distortions in per capita incomes and earnings that make it irrelevant for comparisons with other EU states.
In the above, PPS adjustments in Lux and Belgium are distorted by large shares of external transfers into the economy, while the UK PPS-adjusted wage is adversely impacted by the strength of Sterling in 2007. Another issue not reflected above is the tax impact on minimum wage earners.It is worth mentioning here that while the levels of minimum wages are a problem for Ireland, the rate of growth in minimum wages over 2000-2008 is relatively modest, especially once we control for purchasing power.

Economics 16/05/2009: NAMA Week & Irish Banks

Having been up to my ears in planning for next week’s trip to Moscow, I missed the excitement of the NAMA finally imploding on Thursday and Friday. So here is a recap (for those of you who are in the know already – my analysis is below).

This note is structured as follows: first, I cover Michael Somers' very revealing and honest testimony to the PAC, then I review Friday Davy note on NAMA, lastly, I provide complete estimates of expected losses for NAMA.

Michael Somers - some fresh air on NAMA
On Thursday NTMA ceo Michael Somers told the Public Accounts Committee that putting valuations of the bad loans will present “an enormous dilemma”. Of course in logic, ‘dilemma’ always leads to two undesirable alternatives – in other words, it cannot be resolved within the same logical reasoning chain that leads to it. In layman’s terms, this means that the only way to resolve NAMA problems is to dump the idea alltogether.

So what is this ‘dilemma’ that the country has learned about only this week?

It turns out to that "there will be arguments down the courts if we don’t get it right. The implications of this thing are enormous and the legislation will be very complex,” Mr Somers said. Hmmm… this is hardly new. This blog and many well publicised articles, some written or co-written by me plus a massive wave of media reports that certain big developers are preparing to challenge NAMA - all were well ahead of Mr Somers. But Mr Somers’ testimony is so news worthy now because it is no longer the dirty scoundrels in media and academia who are beating up Lenihan’s dream baby, but one of the Golden Public Circle’s own.

Mr Somers also said that he believed up to 5,000 officials in the main banks “were currently examining bad loans. …At the moment, we really have no feel for how Nama will operate. But my preference would be a core group of between 30-40 people.” Now, wait a second. 5,000 banks officials cannot get the loans right, but 30-40 NTMA/NAMA folks will? This is after Mr Somers admitted that NTMA has not experience in managing distressed assets whatsoever. Of course, Mr Somers was saying 30-40 NAMA officials on top of 5,000 banks officers already in place will manage NAMA, but in such a scecnario, any final cost of NAMA will have to include the cost of those 5,000 bankers as well...

Mr Somers said the NTMA paid its 170 staff a total of €19.4 million in 2008 – “an average of almost €90,000 per person” as Irish Times puts it. Well: 170 staff at €19.4mln is €114,118 per person in pay. Including secretaries and other auxiliary staff, NTMA is now the best paid state entity on the record – ahead of ESB. But hold on, further €8.9 million was paid out in expenses. So total compensation (inclusive of expenses) came to €166,471 per head.

The 30-40 people that Mr Somers would like to have for NAMA is about 20-times smaller than normally is required to run a €90bn fund. Now, given that NAMA will be a distressed assets fund with less active management, say 600-700 people specialising in asset management, portfolio structuring, risk pricing etc would suffice. If the NTMA wage bill were to apply (and there is absolutely no reason as to why it won’t) – we, the taxpayers, are looking at paying something to the tune of €100mln in wages and expenses for these ‘servants’ of the state annually.

Another dilemma, clearly of unresolvable variety, is that NAMA “is expected to pay for the bad loans through the issue of Government bonds to the lenders.” (Quote per Irish Times). Apart from not being new (first disclosed back in April) and being banal (the state has to borrow cash and issue bonds to pay for its day-to-day spending, let alone NAMA), this claim is rather sterile.

In reality, the Government hopes that it will be able to borrow directly and at reasonable terms, but of course, it might run into some tight spots asking the markets to lend money

• to a half-backed bad bank to be run by 30-40 inexperienced staff;
• mired up to its chin in the mud of court challenges in our notoriously costly and slow legal system;
  
• operating under the umbrella of our Guinness-serving bond issuing authority;
  
• in a country whose Government cannot balance its own books;
  
• with economy managed so poorly, that we are now presented internationally as the worst case scenario possible; and
• the Government so grossly clientelist that it can't even manage its own employees without having to run crying to the 'mommy' of the Social Partnership;
  
• add to it that NAMA has no popular or political support; and
  
• that the same Government is doing everything possible to make certain Irish private economy will not come out of this recession with any strength left
  

and you really have to ask a question: Are they eating some magic Amsterdam brownies in the land of NTMA/Irish Times/DofF and the rest of the ‘policy’ circle when they claim that this Government/NTMA will be able to borrow cheaply to finance NAMA? (see more on this below).

Irish Times also told us that “Profits from the eventual sale of the loans will be given to the state which may be used to service the €54.2 billion national debt.” Ok, what national debt do they have in mind? €90-110bn or more debt we will have once Mr Lenihan ends his current deficit financing of the public sector employees lifestyles? In fact, the same Irish Times reported as a comment from NTMA chief that he expects Irish debt to top 100% of our GDP in 2010 (see below). So, does anyone in the Times editorial have a calculator at hand?

It's all down to the cost of NAMA
“However if Nama makes a loss, the Government said it will apply a levy on banks to recoup the shortfall.” Ireland’s stockbrokers decidedly focused on this statement much more than on anything else that Mr Somers said. Why? Because this is the real unknown unknown for banks shareholders. This is, of course, ultimately the question of how big the loss will be.

So let’s do some counting of the beans… shall we?

First what the financial markets analysts say: per Davy note assumption, “costs for NAMA will be covered by interest income from the performing loans. Taking a conservative view that only 50% of the €30bn investment loans to be transferred are performing, this could generate initial income of c.€1.2bn as yields are currently at 8%. This would cover the coupon (assumed to be in line with the borrowing rate on ECB liquidity facility) of the bonds issued to the banks in return for their €80-90bn of loans transferred to NAMA. Income will likely be higher because the investment loans to be transferred to NAMA are not bad loans in themselves but are selected due to cross-collateralisation with development loans. An investigation of staff costs as a percentage of properties under management for large real estate trusts suggests that staff costs will be covered, especially given the greater operational leverage due to NAMA's size. Legal costs are less certain as the legality of the agency is one of the greatest obstacles to its performance.”

... And then, the pigs are soaring high in the sky…

Suppose that NTMA goes out to the markets with two suitcases worth of bonds – government bonds and NAMA bonds. Do you think they can price NAMA debt:

1. at a discount to current public debt issues (a scenario that Davy suggests); or
2. at a rate that is equivalent to Government bonds, say ca 4.5%; or
3. at a rate that is higher than Government bonds, say a premium of 20% to Government debt – for 5.4%, while the Government debt remains priced at 4.5%; or
4. as the markets look at two piles of paper, they tell NTMA: “Ok, we’ll take Government bonds at a premium to previous issues to account for vast number of these things being floated in the market – say 5%, and NAMA bonds at a 20% premium on that – at 6%”?
   

Reality check – NAMA will not borrow at ECB liquidity facility rates, so (1) is out of the window.
For (2): at 4.5% pa (a very optimistic scenario), buying €90bn worth of loans at 15% discount (as Davy suggest) on their face value will cost us €3.44bn annually in coupon payments. But wait, let’s also look at the downside scenarios: (3) implies €4.13bn price tag, and under scenario (4) the cost of annual NAMA financing alone rises to €4.59bn, or ca 15.3% of the entire Exchequer tax revenue in 2009...

Hmmm... back to that 'country whose Government cannot balance its own books' bullet point above, anyone?

Per debt financing assumptions, Somers said Ireland would be “lucky” to hold on to its sole remaining top AAA credit rating, as its low debt levels could surge to more than 100 per cent of GDP next year, from about 41 per cent in 2008, after the State completed the transfer of the banks’ bad loans. Hmmmm… remember that Irish Times statement that NAMA can be used to pay down €54.2bn debt quoted above? Apparently, NTMA chief expects the debt in excess of €170bn by the end of 2010 - somewhat higher than Irish Times journos do. And, apparently, he does not expect to price any debt (Government or NAMA-issued) at ECB discount facility rates (as Davy assume).

Of course, it is a trite statement to say that NAMA will be able to cover its staff costs, so no dwelling on this, but as far as legal costs uncertainty goes, despite Davy's rather neutered murmurs on this, there is no downside protection for the taxpayers. In other words, once committed to the transfer of a loan, NAMA implicitly assumes that no matter what the legal costs might be, the loan will be moved.

Somers was lethal on this last week: “I see great potential for arguments down in the courts if we don’t get this right,” saying further that he heard “people down in the courts were delighted” about the setting up of NAMA as they were in line for “a bonanza”. He said there would be “eating and drinking” at the committee for decades over the set-up of NAMA. But Davy folks didn't listen, apparently.

Davy goes on to pour more fuel on the NAMA pyre: “…the fear of the unknown has also led developers to call for consultation with the government over NAMA, with many saying that they can be part of the solution. Engagement with developers would arguably help reduce legal challenges and secure buy-in. The NTMA itself has stated that it lacks sufficient skills for setting up NAMA, but many developers will be both skilled and, more importantly, incentivised to work out their projects/loans under NAMA.”

Indeed, NAMA is at a severe risk of getting into bed with developers. Not because developers are ‘evil’ (I certainly do not believe this), but because NAMA should be independent from developers interests and free from their influences. And yet, Davy does not even see the lunacy of its own suggestion that NAMA should engage developers in the management process. This is really worrisome.

Doing the final sums on NAMA cost
Davy’s “simple NAMA model shows that taking our 15% haircut assumption for the sector and assuming no profits on disposal of NAMA assets across a 15-year work-out period implies a present value loss of €4bn. Apportioning this fee on an annual basis over 20 years (similar to Insurance Corporation of Ireland) implies that this fee would be only c.3-4% of normalised profits. However, given the long-term nature of the agency, there is every chance that it can turn a profit similar to that which we have seen in past banking crises such as in Sweden. A more positive outlook, with greater performance from investment assets under NAMA and a 5% profit in aggregate across asset disposals, would result in a present value profit on wind-up of €3bn to the taxpayer from NAMA.”

I do not have Davy’s model at hand to see what assumptions they force into it to get these numbers. Judging by their assumptions on pricing NAMA bonds (above), I have no confidence in any of their numbers. Their concluding scenario in the quote above is so far out there, that the aforementioned Amsterdam brownies come to mind again.

But my own simple model goes as follows (with my assumptions listed transparently for all of you to see and to challenge, unlike Davy):

So, net impact is a loss of €33-68bn.

Remember, Mr Somers said he was “aghast” at the scale of development loans advanced to a small number of borrowers which emerged after the NTMA reviewed the banks’ books. He called the review “a huge eye opener for us”. This is not a statement from a man who expect loans losses to be in 5% category (as my ‘Near Davy’ scenario above assumes).

So turning back to that original concern that investors should have about NAMA - what share of these losses can be recovered through a 3-4% shave on future profits of the banks?