NAMA – A “Helicopter” Perspective

The following opinion piece was published in the Sunday Independent on 25th November 2012

The NAMA construct was mooted and presented to the people of Ireland by the last government in its supplementary Budget of April 2009.   It was “sold , incorrectly, by that Fianna Fail led government and its intensive PR propaganda machine, as the “only show in town” which could resolve the Irish Banking Sector’s financial collapse in late 2008.

That Fianna Fail led government, in collaboration with a complacent, often arrogant, establishment comprising political, departmental, regulatory, administrative and professional (accountancy, legal and banking) vested interests circled their wagons in collaboratively defensive mode, stubbornly refusing to acknowledge or admit to the Tsunamai scale of the financial collapse.   The collapse of Lehmans was their first headline excuse.   The lock-down of international inter-bank credit markets was another universally mentioned reason why Irish Banks were only experiencing an exacerbated liquidity problem.    

The failure by the last government and Ireland’s establishment to recognise and admit to the massive scale of the insolvency of the Irish banks has been so costly to the people of Ireland that it is essentially unforgiveable.   That Fianna Fail led government and unfortunately Ireland’s professional establishment too were completely lacking in courage to admit early to the scale of the disaster.   For far too long they would only reluctantly admit that the banks, apart from Anglo Irish Bank which had been hurriedly nationalised in early 2009, had, at most, only a potential, strictly limited, but easily manageable, solvency problem.   Just as Anglo was being nationalised the last government was paying PricewaterhouseCoopers (PwC) hefty fees to carry out a detailed review of the Property Loans Portfolios in the 6 Irish owned Banks / Building Societies.   This detailed loans review became the measuring-out exercise to set financial parameters for the NAMA construct.

In September 2009 the NAMA construct was presented.   The NAMA Bill was steam-rolled through both Houses of the Oireachtas and signed off by the President in early November 2009.     The 6 Irish owned banks would off-load about €77bn of property loans to NAMA for a price of about €54bn which would be paid for by the issue of €54bn in NAMA Bonds underwritten by the State, that is, the people of Ireland.   The figures built into the NAMA construct implied that the 6 banks would realise immediately losses of €23bn (i.e. €77bn less €54bn).   In turn, the banks would require replacement capital of a similar amount. At that level, it looked like the 2 main banks, AIB and Bank of Ireland would just about remain outside State majority control.   This suited the establishment.   The thought of State owned banks was a no-no!

To summarise €¦.on the one hand the banks would be off-loading their illiquid, increasingly unrecoverable, property loans, replacing them with liquid NAMA Bonds, while on the other, NAMA would earn interest income from the loans acquired, owning and managing them for its own benefit.   We were told that the transfer of €77bn loans to NAMA would leave the banks in a position to continue to provide credit to Irish businesses and households.

Events turned out entirely differently.   Tranches of loans from the 6 banks were lined up in 3 transfer tranches during 2010.   The transfer prices were struck by reference to underlying property valuations done in November 2009.   The November 2009 valuations meant that the actual transfer prices were far below the indicative transfer prices used when presenting the NAMA construct.   This meant that the banks were forced to recognise far higher losses than the €23bn originally estimated.   In fact the total losses arising from completion of transfers of loans to NAMA rose to over €40bn.   In turn, this forced an almost doubling of the recapitalisation requirement for the Banks.   The whole NAMA construct revealed the whopping original mis-calculation of the banks’ losses and their re-capitalisation and rehabilitation requirements.   The banking re-capitalisation debacle (an article for another day) is one side of this messy story.   Suffice to say that the overall messy outcome has resulted in semi-comatose, limp-along, main survivor banks, patently addressing their own interests and repair of their balance sheets to the cost and detriment of their customers’ genuine business needs and requirements.

On NAMA’s side, although the November 2009 valuations reduced the purchase price of the loans transferred by the banks, they still proved too high, resulting in NAMA paying considerably above market prices for the loans.   We know this because market realities showed clearly that property prices continued to fall well into 2010 and 2011.   Which leads to the next reality that NAMA will almost certainly report a loss over its lifetime of not less than €5bn.   And this is even after allowing for a very low 3 month LIBOR ( 0.7% at present) cost of the NAMA Bonds, much lower than NAMA’s expected cost of funding at the outset.   This is in stark contrast to being told by the last government in November 2009 that NAMA would earn a profit of about €5bn over its 10 -12 years lifetime.

€10,000,000,000 wrong!!!     200% wrong!!!     And probably rising!!!