NAMA: Successful or failure

Joey the lips

I have been following all the wheeling and dealing on Nama at the moment and have to say I am under the opinion that it will not work! How do I come to this conclusion! The jist of Nama is to create a toxic bank right! Will my biggest problem is that there is only a small number of developers that own a large proportion of wealth and these developers are not being guaranteed that its a way out additionally whats to stop the same developers taking advantage of the system? Does it not all seem a bit ad-hoc to other readers, a bit like the bertie bowl! More importantly, why are developers like harry crosbie opting out? Is it becuase the bad press of developers being aided by Nama will prevent investment! You see it all seems a bit shady to me!




Owen O’Callaghan: Dublin developers mainly at fault

By Eoin English
Saturday, May 23, 2009
ONE of the country’s largest developers blamed a handful of Dublin-based builders "who lost the run of themselves" for some of the current financial crisis.
Owen O’Callaghan, of O’Callaghan Properties, said this core group of about six developers was assisted in some cases by the banks.

He believes NAMA, the agency that will take over banks’ bad debts, will not work and bad press abroad is not helping the economy.

"Developer is a dirty word at the moment. There are a half a dozen developers in the country, I must admit mainly in the Dublin region, but not all in the Dublin region, who really lost the run of themselves, and got us in to all kinds of problems, I’m afraid assisted in some cases by banks," the Cork-based developer said.

"That’s just a small amount of developers. The rest of us, ourselves, for example, who have been in business for the past 40 years – and there are quite amount of developers like ourselves who have been in business for a long time and who are still in business – these people haven’t made the mistakes that these new-type developers made over the past couple of years. We haven’t been spending silly money and charging silly prices for various projects. There are a lot of those developers around, and they are still around and I believe they will still be around."

Mr O’Callaghan was speaking to Newstalk radio yesterday after announcing plans for an €80 million private hospital in Cork city.

He said the residential element of his business has effectively stopped. But if the latest ESRI forecast, which predicts economic recovery in about two years followed by some growth, is correct, people should look to the future with confidence.

"We are a right shower of knockers, really and truly," he said. "When we are going down, we keep kicking ourselves down and keeping ourselves down."

Mr O’Callaghan expects his two multi-million retail projects at Half Moon Street and the nearby St Patrick’s Street retail centres in Cork city to be fully let and open for business by Christmas


Read more: http://www.irishexaminer.com/ireland/owen-ocallaghan-dublin-developers-mainly-at-fault-92460.html#ixzz0GPWhyNLY&B



Irish Times Tuesday, May 12, 2009
Nama's political clout does not bode well for solving bank crisis

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OPINION: The Government’s banking policy is being driven by politics not rational economics – maybe only external forces can change that, writes BRIAN LUCEY
THE MOST important debate, declaration of war aside, in which the members of Dáil Éireann will ever participate is this week. The debate is the decision whether to bring the banks under the auspices of Nama or to nationalise them.
At stake is €90 billion of taxpayers’ money – three years’ tax revenue – the international reputation of Ireland as a haven of cosy crony capitalism, the cost of international borrowing and the future health of the economy.
However, calling it a debate is wrong. Debate implies a sequence of informed speeches designed to sway the Opposition towards one’s own position. The Dáil discussion’s outcome is as predetermined as the course of the stars, with whipped vote fodder on all sides reiterating existing party positions before trooping loyally through the “Tá” or “Níl” gates, regardless of their own perspective or how persuasive they found the other side.
As an Oireachtas member noted to me last week on another issue: “I will always vote with Fianna Fáil, regardless of my conscience.”
The debate on Nama, the proposed National Asset Management Agency, and nationalisation has been ongoing for some time. My position is well-known – that temporary nationalisation is a superior approach to the banks being under Nama’s auspices on a semi-permanent basis.
There are as yet no serious, independent economic commentators in Ireland that have come out on economic grounds against temporary nationalisation. Where independent commentators have demurred it has been on the basis of managerial concerns regarding the politicisation of lending. Note that here I stress independent commentators – bank and market employees are not, and cannot, be expected to be independent, and their comments should be weighted accordingly. This is not to ignore or denigrate these views, merely to contextualise them.
Nama, we are told over the weekend, is facing legal challenges, as was forecast. It has been warmly greeted by the Green Party and by commentators on the left who have suggested that the State as a significant landowner-landlord would allow direct State intervention in these markets. Thus those who oppose nationalisation on grounds of political interference find themselves sharing space with those that propose Nama as a vehicle for political interference.
We are also told that were it a private entity, Nama would require upwards of 700 specialist staff to operate, while plans suggest a staff of 30-40. Finally of course, there is the fact that any realistic asset management agency will require recapitalisation of such magnitude that the State will become the owner of at least 80 per cent and possibly much much more of the banks.
A persistent assertion against nationalisation is that nationalised banks will not gain access to the international interbank markets. The argument is logically flawed, but if true, contains the most dire portent of economic failure ever issued by a finance ministry. Banks, like all large operations, place and receive funds daily to smooth out peaks and troughs in their own financial requirements.
The Department of Finance asserts that a bank that is nationalised (as opposed to one that is merely 90 per cent State-owned) would simply be refused such funding from the international markets. There is no evidence or research findings that I or others can find that indicates that this is necessarily so.
Empirically, we find state-owned banks operating with interbank liquidity funding. Funds flow to the highest yielding lender for a given level of risk, the risk being the risk of the ultimate backer of the entity doing the borrowing. In a nationalised situation, this is the State. Banks also borrow to enable them to extend more funds than their deposits alone would allow.
This latter business model, of funding one’s operations via wholesale money markets, is one that is no longer possible and to defend it is to defend as a model for the future banks such as Anglo, Northern Rock, Depfa and others who have failed. A version of the argument suggests that nationalisation, by imposing losses on the second-tier capital, bondholders, will cause them to shun banks seeking liquidity. Again this is asserted, not proven.
In any case, this second-tier capital is trading at a low percentage of face value, with many investors therein having already realised significant losses and being thus potentially amenable to accepting a mild premium on existing value to exit the market.
The only logical situation wherein a nationalised bank were to find itself unable to source interbank liquidity is one where the markets were doubtful of the repayment capacity of Ireland. We are also told that the only way in which the banks can operate at present is that they have the de facto backing of the State, de jure via the bank guarantee.
How nationalisation can weaken this situation is not clear. Apart from a treasury manager from a large international bank stating “we will not lend to nationalised banks come what may”, we must take this argument as being at best unproven. If, however, the department has had such advice, then that is equivalent to the international markets calling bankruptcy on the State, as they would be saying that they did not consider that the State could, with nationalised banks, meet its ongoing obligations. And we know that the State will have to in effect take on the banking system. So where does that leave us?
In my view, the economic arguments against nationalisation are not as strong as those in favour. However, it is clear that we have moved from the economic to the political realm in this debate.
Regardless of the economic arguments, it is clear that the Government feel that they have such political capital invested in Nama that to retreat from their position now would be to show weakness. This does not bode well as it implies that politics will override economics when we are in an economic crisis.
Perhaps implementation of rational economic policies will have to await external forces with no political allegiance to the present State.


Business and leadership magazine

NAMA must not be rushed, says Lenihan

18.05.2009
The Minister for Finance, Brian Lenihan TD, has said that the Government is taking its time in implementing the newly established National Asset Management Agency (NAMA).
Speaking on RTEs’ Morning Ireland today, the Minister acknowledged that “enormous practical difficulties” will be faced in getting NAMA up and running, but said that it is “not a decision that can be implemented overnight”, and “not something to rush into”.
“We can’t have a lawyers’ bonanza, and that’s another reason why we have to get this right,” he said, noting that whatever legal arrangements are put in place will be robust and will resist legal challenges.
Responding to the comments made by the head of the National Treasury Management Agency (NTMA), Dr Michael Somers, to a Dáil committee last week that his agency, which has been given responsibility for NAMA, does not have a clear brief for NAMA, the Minister said that there is “absolutely no disagreement between Dr Somers and myself on the need to establish NAMA”.
He also said that Brendan McDonagh, who has been appointed as the CEO of NAMA by the Government, has been in constant contact with the Minister’s officials, and there have been regular meetings to work up the proposal.
At present, what has been arrived at is an agreement in principle on NAMA, the Minister explained, but a precise corporate structure has yet to be established.
Although he would not indicate when legislation for NAMA might be ready, Minister Lenihan said that a high-level tech group to work out the finer details of this proposal is being formed, and that this proposal will then be turned into legislation, noting that by next Monday, the NTMA will have returns to proposals for tenders in relation to legal advice, valuation advice, proper management advice and financial advice in how to implement NAMA..
The Minister insisted that that when it comes to whether large developers will be allowed to fail under NAMA, the question of their failure would depend entirely on whether they can viably repay their loan, not on whether people should feel sorry for them.
He also said that there is nothing new in what the Government is doing with NAMA, saying that it has been done before in Sweden and now is being done in Germany.
He said that he wanted to scotch the idea that there are huge risks to taxpayers in the valuation process because the Government has said it does not want to go down the route of nationalisation.
The argument of nationalisation has become an ideological one, the Minister suggested, and repeated his concerns that wholescale nationalisation would diminish Ireland’s ability to attract funds from foreign investors.
Commenting on his recent visits to London and Paris to communicate to international investors the steps the Irish Government is taking to stabilise the economy, Minister Lenihan said that Ireland has a very positive story to tell and that the investors he met with were very impressed by the corrective actions taken by the Government.
He also insisted that despite rumblings from the Green Party there is no friction between the party and Fianna Fáil, and said that a general election would be economically damaging because of the uncertainty created, and would weaken international confidence in an Irish Government’s capacity to govern and make the decisions to safeguard the economy.

Darragh29

The whole NAMA thing is a joke. In fact we have learnt absolutely nothing after this economic calamity. Only this week I heard Cowen on Newstalk talking about a return to "Rapid Growth" possibly next year. The pursuit of rapid growth is exactly what has us in this mess!

So as if it isn't bad enough that NAMA is going to try to clean the mess left behind after a decade of rapid growth, Cowen says we'll be chasing rapid growth again next year.

Forget NAMA, all that is required is for the banks to deal with this toxic debt in the same manner that they would deal with any other bad debt. Call in the loans and the securities if the loan is in default, no need for NAMA or any more bullsh*t government quango's. Just do what it says on the tin without fear or favour.

It's funny how this government are always an agency, a committee, a forum, a meeting, a taskforce or an advisory group away from resolving a problem...

In my view AIB and BOI should be nationalised.

It's not a statement of socialism to do so like it would have been when both banks were healthy and the world economy was normal.
It's a temporary corrective measure thats needed.

It's a very important principle in my view.The morasse has been caused by bad banking world wide. So really they can't expect states to come to the rescue without a huge profit to go to the state and a miniscule amount to them untill such time as the cost of the correction is paid for and the state gets a return that allows it to do all the things it should do like improve the infrastructure/health service etc etc.

I've very little confidence in the capability of Lenihan/Cowen to make educated decisions on a nationalised set of banks though and it would need oversight from professionals capable of acting in the tax payers interest.From our experience,theres very few of them knocking about.
I'd be hiring that Russian fellow from Trinners for a start..along with a capable team of post grads under him from that college.

Nama will be a disaster.

Darragh29

I'd go a step further and argue that the banks shouldn't even be nationalised, just leave them where they are and let them go bust.

That money that was used for recapitalisation should have been lent to small businesses directly. The government should have by-passed the banks as a key part of the problem here and started dealing with businesses directly.

The whole banking system has now been recapitalised and still we are seeing no lending to small businesses. What we need is something that will work quickly and effectively and NAMA certainly isn't going to do that.

Another thing about NAMA is the cost of running it. WHo's paying for it??? You guessed it, the broken spirited taxpayer!

We can't afford a NAMA! This is before it even gets into court, how much is that going to cost both in terms of time and money, both of which we don't have???

truebluedub

Black Briar,
The man you are thinking of is Constantin Gurdgiev he used to start his lectures with Tax = Theft, he used to teach in NUIM.

He edits (or used to) Business and Finance he's also a founder of the Open Republic Institute a research body with personnel links to Libertas, Gurdgiev himself is a former member of that group before the owner of Business and Finance (Ian Hyland) had issues with his magazine being aligned to Euro-skeptics.

Ideologically he would probably suggest not interfering with the banks and letting the market decide.

However perhaps sicking one of ORI or ESRI (both of them established so just pay them the cost of the tender rather than founding a new body) on the banks would be a good idea, they could suggest a reform policy.

Borstal Boy

It's difficult to judge the impartiality of some of the commentators on NAMA right now because there are a number of elections happening. I certainly wouldn't be listening to the opinions of any developers on the issue. Their partiality is beyond doubt.

But there are two certainties:

1) Debt is clogging the economy. It has to be removed from the banks books before they can start doing what we desperately need them to do, start lending again. I understand the arguments for nationalisation, but history shows that it won't make things better. It will just create more problems for the economy.

2) The NTMA have been successful in all their endeavours to date and have some of the most competent and experienced talent in Ireland available to them.

Of course there is a chance that it might not work. But there hasn't been any substantive evidence of that yet. Nobody will really know what the story will be until the NTMA tell us.

ionix5891

Borstal Boy wrote: »

they can start doing what we desperately need them to do, start lending again..

that's one thing im having trouble with understanding

why do BANKS have to lend?

why cant a government set up a lending body to do just that? and let the banks wallow in their own **** that they pooed

Borstal Boy

ionix5891 wrote: »

that's one thing im having trouble with understanding

why do BANKS have to lend?

Banks lend because they equate risk with profit. Governments could never do that. Lending by governments would be conservative, costly and ineffective... not to mention politically influenced.

Joey the lips

The problem with Nationalising banks is it prevents them getting international investment! This is the core of the banking system!

So if we nationalise we get no international investent! If we dont we get no goverment support! Which is the better!

Who is less risky to us!

ionix5891

Borstal Boy wrote: »

Banks lend because they equate risk with profit. Governments could never do that. Lending by governments would be conservative, costly and ineffective... not to mention politically influenced.

good points

what about spending them billions of local credit unions instead? these usually lend locally and their main aim is not profit but enriching all members

or some sort of a similar concept to credit union on a national scale? where any citizen can buy shares in this bank and get a dividend on any profits depending on how many shares are issued, Norway's sovereign wealth fund springs to mind

.

truebluedub

In order to cope with dismal economics a number of states in the US have nationalised banks at a state level, long before the current economic crisis, in order that they can give out loans - Vermont is the best example of this.

P. Breathnach

Darragh29 wrote: »

I'd go a step further and argue that the banks shouldn't even be nationalised, just leave them where they are and let them go bust.

What happens to the money in my account?

That money that was used for recapitalisation should have been lent to small businesses directly.

Well, it wasn't.

The government should have by-passed the banks as a key part of the problem here and started dealing with businesses directly.

And if a decision had been made to go down that road, who would have been there to decide which loans were a good prospect, and which were not? Because I suppose that you would not advocate giving loans to businesses that are likely to fail, and pay nothing back.

The whole banking system has now been recapitalised and still we are seeing no lending to small businesses.

I think what we are seeing is not much lending to small businesses. Yes, I agree that is a problem. But I don't see an easy fix.

What we need is something that will work quickly and effectively and NAMA certainly isn't going to do that.

Agreed.

Another thing about NAMA is the cost of running it. WHo's paying for it??? You guessed it, the broken spirited taxpayer!

The actual running cost of NAMA are likely to be small relative to the risk exposure that it might be taking on. That's the question that worries me: what loans it takes over, and at what price and on what terms.

We can't afford a NAMA! This is before it even gets into court, how much is that going to cost both in terms of time and money, both of which we don't have???

You might be right, but it might also be that we can't afford not to have something like a NAMA. Rock and hard place, devil and deep blue sea; Scylla and Charybdis -- pick your metaphor.

SkepticOne

What worries me is the sort of conflicting arguments that are being put forward for NAMA. On the one hand we are told that banks are in too cosy an arrangement with developers and the banks are unwilling to foreclose on bad loans. On the other hand we are told that one of the benefits of NAMA is that will avoid foreclosing on bad loans since doing so would depress the value of development land and further weaken the position of other loans.

If the first argument was correct then the simplest solution would be to enact legislation to force banks to forclose on bad loans and dispose of underlying assets at whatever the market will pay, then look to recapitalising the banks appropriately. I suspect the reason this won't happen is because the banks are in so deep that the money simply isn't available to recapitalise them if they did this at current market rates.

I suspect the second argument is closer to the truth, that the banks are beginning to close in on developers and this is exposing the precarious position of the banks. Therefore NAMA will kick the whole thing into touch. Instead of the banks taking the hit, the tax payer takes an enourmous punt that things will pick up in a few years. If it fails, the bankers and the politicians that set the thing up will be long gone and drawing their pensions.

The downside of this second approach, however, is that many developers may have used the same asset as security on multiple loans with different banks. They will be exposed when their loans are transferred to the single NAMA entity. Strong secrecy legislation will need to be enacted for this to happen and I think this is one of the things delaying NAMA.

Joey the lips

NAMA: rock-solid foundation or house of cards?
Developers – even those with loans in arrears – are jittery about the possible consequences of state intervention in the property market, says Neil Callanan




It will be the end of the traditional property business in Ireland. It makes property development a monopoly for the state


Developer Simon Kelly, who has seen a number of companies he was involved with go into liquidation, speaking to the 'Sunday Tribune' on NAMA


It's still only sinking in with developers that every single land and investment property they own which has outstanding debt could end up in the new National Asset Management Agency (NAMA). Numerous developers late last week were still surprised to be told by the Sunday Tribune that even where they have paid all the bills, their loans could end up in NAMA. "Fecking bastards," was the reaction of one, who questioned why the banks would sell their performing loans. Because they will have no choice, is the answer. The government is to introduce legislation shortly that will give them mandatory powers to acquire the assets.


So what is involved in the €80bn-€90bn loans that are to be transferred? The department says loans for the purchase of land for development and associated work-in-progress arrangements will be included. That means the half-completed 'ghost' estates around the country will be transferred to NAMA. In addition, "certain property investment loans, especially where associated with the largest borrowers" will be transferred, albeit the exact assets are to be considered further.


Sources said that the reason NAMA wants the property investments is that during the term of an investment loan, the rent is generally paid to the bank as part of the repayments. That will give NAMA an income – one source speculated it could be as much as €2bn per annum – helping to fund the interest on the bond it will have to issue to finance the transfer of the loans from the banks to NAMA. The loans are to be transferred with existing terms and conditions, but NAMA will review these.


Solvent developers will have little or no choice in the matter, but the Department of Finance has offered a fig leaf. "Generally speaking, it is not the intention of that the individual borrowers will be able to opt out", but details and legislation have yet to be worked out. That's a chink in the door for those who don't want to be involved. Using the courts, though, offers less hope.


Solicitor and developer Noel Smyth said that banks might be able to challenge the introduction of mandatory powers to acquire loans, on the basis that it is an infringement of rights. However, he feels developers have less grounds to challenge any loans being moved into NAMA. "If a bank wants to assign the benefit of contract to a third party, there's nothing in law to stop that. If they decide they want to sell off the loan, there's no reason they can't," he said.


One major developer, who asked to remain anonymous, expressed fear that the banks would no longer provide working capital for sites until NAMA officially comes into being. "This could take another 12 to 18 months. Why would the banks give more money in the meantime when they might only get 80% of that back. If that happens, we could all go bust," the clearly worried developer said.


In his opinion, there are a lot of developers slightly underwater "or at the break-even point, but at least they know what they're doing. A lot of the syndicates that got involved don't have a clue."


However, economist Peter Bacon, who drew up the NAMA?plan, does not agree with the developers saying that most of the property development companies involved "do not have the depth of management skills to engage in the kind of portfolio sales and work-outs which ultimately are required to resolve the impairment issue".


A second fear is what happens when the loan term ends? Most banks loaned for development and investments on a three-year basis, with new facilities then put in place. NAMA however will not have a banking licence. Will the loans have to be repaid as soon as the facility ends?


A number of experts also expressed fears about the availability of construction finance. "NAMA will have the title and the mortgage charge on the land, so why would anybody loan money to allow something be built without that security," said one senior development land expert.


Bacon has long-fingered that, stating that, while "many of the impaired assets will be capable of achieving higher values if they can be worked out rather than disposed", this shortcoming in their ability to raise finance "cannot be put right now and it represents a significant impediment looking forward to resolution of the impairment issue".


A developer with retail, office and land interests predicted that the models used by the Dublin Docklands Development Agency will be used. When a developer has gone bust and ownership moved to NAMA, it could seek planning permission on the site and then invite tenders from developers to acquire the land. In other cases, a joint development structure could be used with a split-security structure and with profits being divided between the sides.


Others believe schemes will be built using licences, meaning a builder comes in and builds out the site without ever technically owning it. They would be paid a set percentage of the profits as part of the deal. Building on licence was supposed to be banned in 2007, but then Minister for Finance Brian Cowen did not sign off on it and the legislation was eventually put on ice.


So how long could NAMA exist? Ten to 15 years seems to be accepted in the property industry, meaning it is no short-term fix. Numerous people in the industry are wondering where the employees will come from, what inevitably shiny office NAMA will rent and just how the land will be valued before its transfer. The consensus seems to be that the government will overpay, that NAMA will lose the state significant amounts of money, but the government will hope to drag back the difference from the banks in levies afterwards.


April 12, 2009

Joey the lips

AN AMERICAN NIGHTMARE
Sunday, May 24, 2009 By Richard Curran</SPAN>
‘Empty shopping centres, abandoned office developments, bankrupt apartment complexes in suburbia and land which has been bought and sold a dozen times, but now can’t be given away.”

So began a 1989 article in the Washington Times, at the beginning of a clean-up in the US in the wake of the savings * loans (S&L) debacle of the late 1980s.

The Resolution Trust Corporation (RTC), set up by US President George Bush snr in August 1989, has many similarities with the National Asset Management Agency (Nama) that Brian Cowen and Brian Lenihan are putting their faith in. The RTC began its work in 1989, and closed its doors in 1995. It took on $465 billion of property assets and sold them off, resulting in a total cost to the American taxpayer of $90 billion.

A similar level of loss on the size of the proposed Nama loan book of €80 billion to €90 billion would see the clean-up costing the Irish taxpayer around €20 billion to €22 billion.

Supporters of the American RTC project said the losses were much less than expected at the beginning of the process. Critics said the actual cost of funding the bailout, with interest over a 30-year period, would leave the total cost of the exercise at closer to $400 billion.

As the Irish government works on drafting the legislation which will set up Nama later this summer, its critics are lining up against it. Small developers are concerned that they will be taken to the cleaners. Some taxpayers fear that really big developers won’t be hit hard enough. Economists and opposition parties believe an alternative structure should be sought. Much of the detail of how Nama will work is either not yet disclosed or, more likely, not yet decided.

The experience of the RTC in the US in the early 1990s provides some sense of how tough the road ahead for Nama will be, and the kind of obstacles it will encounter. There are significant differences between the RTC and Nama, which should be kept in mind.

The RTC was set up to take over several hundred busted S&L businesses, which were like small banks. Its role was to recover as much money as possible from borrowers of these businesses, to safeguard depositors and to investigate and prosecute those who had committed wrongdoing in their dealings with the S&L operations.

As part of that process, the RTC sold more off more than $360 billion in assets, including 120,000 properties. It closed or merged 747 savings and loans operations, and protected 23 million depositor accounts across America.

Like Nama, most of what the RTC took under its control was mortgages, although this included residential units, not just commercial property loans. Actual properties made up less than 10 per cent of the holdings, equal to around $35 billion.

But most of the publicity and controversy surrounded the sale of the $35 billion-worth of properties. Because the RTC took over busted S&L operations, many of these minibanks had already seized properties from collapsed developers, so the RTC inherited the actual property, and not just the property loans.

In the case of Nama, it will purchase loans. When these developers fail to pay back their loans and default, it will fall to Nama to take them to the High Court seeking possession orders for properties they will have to sell. This means that Nama will be a major player in the property market for years to come.

Much of the concern about Nama has been around the possibility of legal challenges to its very existence. However, the US experience suggests that it is more likely that Nama will end up taking actions for possession of property every week for years to come, as developers fail to pay up. This will lead to what NTMA chief executive Dr Michael Somers recently described as a ‘‘courts bonanza’’.

In the case of the RTC, it hired a team of 9,000 staff to oversee its operations, investigate wrongdoing and sell properties. Nama will pay the existing banks - which hold the loans - to administer them.

The banks will have to be financially incentivised to perform this process vigorously. It means Nama will not end up with thousands of staff.

The RTC had a shaky start, illustrating the difficulty of setting up a model which can get to work quickly. At least two smaller previous organisations failed to do the job. Under its initial rules, it refused to deal with the developers who caused the loss in the first place or their connected parties when it came to selling off assets.

It eventually had to relent and change the rules. ‘‘Everybody who was anybody would have been unable to do business with the RTC,” was how one US lawyer described the early phase.

Even before the RTC had hired any employees, it was handed 262 failed S&Ls and responsibility for disposing of their $114 billion in assets - loans, real estate and securities. Under pressure to move quickly, the RTC borrowed leadership from other agencies and hired William Seidman, then chairman of the Federal Deposit Insurance Corporation as chief executive. ‘‘The job combined all the best aspects of an undertaker, an Inland Revenue Service agent and a garbage collector,” he later wrote in his 1993 autobiography.

RTC employees struggled to operate in the real world of commercial real estate, and there were allegations of sweetheart deals and buyers looking to pay for properties with suitcases full of cash. RTC staff were supposed to ensure they got the best price for everything, whether they were buying or selling. But the minutely-detailed rules backfired, causing delays and aggravation. The act that set up the RTC called for heavy use of the private sector, but only after a lengthy bidding process that favoured minority firms and was designed to weed out con artists.

The RTC ended up signing 163,272 contracts for everything from data processing to real estate sales, from paperclips to legal representation.

The decision to leave the banks in charge of the administration of property loans for Nama here should take some of that bureaucratic burden away. However, some of the other challenges faced in the US may also surface. The RTC was initially criticised for moving too slowly in setting up its rules and in selling properties. The government is facing similar criticism here from some property interests.

Then the RTC was criticised for moving too quickly in offloading properties and settling for prices that were bargain basement. In some places, the RTC was overwhelmed with foreclosures and an enormous workload, and ended up selling properties for a lot less than it might otherwise have got. Inevitably, there will be controversy.

The sale of properties i n the US by the RTC prompted a lawyer in Texas, where many of the RTC properties were, to describe it as the ‘‘greatest transfer of wealth, outside armed rebellion, in the history of the country’’.

Much of the language around Nama here has been about ‘‘work-outs’’ of developers’ loans, meaning that, in some cases, Nama will work with large developers to bring projects to fruition and thus try to safeguard taxpayer cash.

It will be possible to work through some projects, but the excessive overbuilding that has taken place in Ireland will not suddenly go away when Nama is set up. In reality, as with the RTC, there will be an imperative to move relatively quickly to take control of some properties from defaulting developers, and then sell them off to bring in cash.

In the US, the rapid transfer of properties brought huge opportunities for buyers. In Travis County, Texas, the RTC collected just $489 million for the 2,837 houses, office buildings and development land it controlled. Its original assessment of their value was $1.3 billion.

After initially seeking to realise the assessed values of properties (the value placed on them by the RTC when it took them over), the market and the need to sell quickly dictated that it flogged bundles of properties together, good mixed with bad, at much lower prices.

The rapid sale of properties dragged real estate prices down further in these areas for a number of years. Here, international investment institutions may also circle in search of bargains.

If they can afford to wait for a return, they may do well. Several international institutions are believed to be gearing up for Nama asset purchases. As well as Irish properties, Nama may move to sell off foreign property assets sooner to avoid heavier administration and to bring in early cash. This could see properties being sold in Britain, the US, Bulgaria and elsewhere in continental Europe, reflecting the boom in Irish financed property development worldwide in recent years.

The RTC achieved different prices in different parts of the US. For example, it ended up selling large chunks of real estate for around half the value of the loans that had originally been raised on the properties.

In Texas, Louisiana and Mississippi, the sale of assets with a book value of $76 billion generated cash of $55 billion, or 72 cents on the dollar. When it closed its doors in 1995, the RTC had just $7 billion in unsold property.

Nama is expected to take longer than six years to complete its business, with some estimates saying that it could take a decade or more.

But things could move along quickly, because the government may not be comfortable with the idea of still trying to get back money from developers in 2019.

ART6

I am not an economist. I am simply a director of a small company that is struggling to find inventive ways to maintain a client base while finding equally inventive ways to pay increasing taxes and deal with a blizzard of regulation. So excuse me if I am being naive.

Will MAMA succeed? If it takes over the bad debts from the banks then it must value the assets that supported the loans. Who is going to value them, and on what basis bearing in mind that the situation is changing daily? If it says "we will take your debts at fifty cents on the Euro" will that be too much or will the banks go to the courts (using public money to do so) for more on the basis that the valuation is unrealistic on the day? If NAMA then pursues the developers etc for the debts, which valuation will they use? The one that was placed on the asset in the first place or the current one? If it pursues a developer that has €2 billion in debt and assets with a current value of €100 million, how is that developer going to pay? Bankrupcy will not recover the debt. There is no purpose in suing someone who can't pay if he loses. So, will NAMA succeed? I can't imagine how it could possibly.

Should the state nationalise the banks? Would you really want the current crop of (part time) politicians from all parties trying to run a commercial bank that deals in billions? Would you really want the Civil Service running a commercial bank when it has managed to bungle just about every major capital project it has ever undertaken?

Should the state guarantee the debts of the banks? Well, they don't guarantee any debts my small company builds up, but then we don't have any international clout. We just provide the funds that the government and the bankers squandered.

I still lean towards the idea that if the public have to fund a rescue, then it's money should be used to set up a good bank. That bank should establish a board of directors from the finest international economic brains and pay every last one of them a couple of millions a year in salaries. They could then (as I would) wait for the AIB, BOI etc to call in the receiver and buy their assets and debts from him. No recource for the developers there! A thousand acres of building land valued at €100 millions? We will offer €1 million. OK, it's another quango, but if it was independant as quangos are supposed to be, then it could tell incompetent and meddling ministers to go play with the traffic. If it was established with half the money that the government has committed so far, and if that money was guaranteed, then I suspect it might just work.

blucey

No link online so heres the article from myself and Constantin Gurdgiv (who never taught in NUIM, always TCD...) in the sunday times last sunday

Like a cartoon villain kept alive by the forces beyond the control of the rational, NAMA refuses to die. Despite not a single independent commentator lending it his support, and despite Michael Somers of the NTMA not knowing the nature of what is being put under his organization’s umbrella, NAMA rolls on.

Any responsible Government, undertaking a gamble involving tens of billions in taxpayers’ funds will start by publishing an exact cost-benefit assessment of the proposed scheme. First, the assumptions, then the results. To date, the Irish Government has failed to do this.

So let us attempt our own estimation of all NAMA costs and returns.

To calculate the impact a venture such as NAMA requires estimates of various costs net of the potential streams of income discounted over time. In our calculations we assume inflation of 3%, as consistent with the historic averages for the countries similar to Ireland. We take 15 years as an estimate of the life of NAMA. Other assumptions are also crucial.

In the case of NAMA the main costs are threefold: the cost of borrowing billions to take the toxic assets off the banks, the face value of the bonds, and the operating cost of running NAMA. Income to NAMA is the yield that can be achieved on the toxic assets, plus the value of assets at realisation.

Using similar inputs, two weeks ago, Davy stockbrokers suggested that NAMA could yield a profit of some Euro6 billion. Earlier this week, in his Irish Times article Alan Ahearne has simply asserted that “Nama’s assets and liabilities will roughly match”, without providing any estimates to support his assertion.

It is our contention that these claims represent a significant overestimate and that the true cost of NAMA is more likely to be in the order of losses of tens of billions Euros to the taxpayer.

A key question for NAMA is the price that will be paid to the banks for the Euro90b loans to be transferred. Unfortunately this key question is almost unanswerable until NAMA completes its purchases. In effect, under NAMA, the taxpayers can be compared to a blindfolded consumer buying an unknown quantity of an unidentified object for an unspecified price. Discussions have suggested “haircuts” of between 15 and 30% that is to say that the state would pay between Euro76.5b and 63b to the banks for these assets. This would of course mean that the banks would be left nursing losses of some Euro13.5b to Euro27b.

The key issue here is the extent to which the assets underlying assets have deteriorated. Figures upwards of 40% declines have been recorded on some such assets already. Our baseline scenario is that the NAMA assets will be purchased by the state at a 20% discount.

The amount paid for the loans determines the amount that will be required to be reinjected into the banks. As realised losses are offset against capital, the balance for the government is between overpaying for the assets (say a haircut of 15%) and thus giving taxpayers money to the banks through NAMA, versus a too severe haircut (say 60% for illustration) and causing them to require massive recapitalisation after NAMA. Irish banks total capital stands at approx Euro35b. As there is little room for the banks to absorb losses, we assume that 1/3 of the write downs they will take under NAMA will be reinjected back as capital. Our baseline scenario implies that some Euro6b will be required to be injected back as capital.

Once the assets are taken over from the banks, the entire face value of the assets will not be fully recoverable. At present the banks are taking 3-5% of assets as bad debts, which is low given the experience of OECD economies in previous property crashes even without a coincident credit crisis and global recession. Our baseline scenario is that 10% of the assets transferred will be worthless – in line with the historical records from the OECD economies.

What yield can realistically be expected from these loans? Historically the average yield from real estate in Ireland is of the order of 5-6%. If we assume that 2/3 of all assets yield this and the rest nothing we get an average yield of 4% on the basket of NAMA assets for our baseline scenario. This assumption is erring on being optimistic.

A major input into any analysis of a bond-financed asset purchase scheme is the cost of funding. Earlier this week Euro1bn of ten year bonds was issued at 5.2%. It is inconceivable that tens of billions of sovereign backed paper will be issuable at no strain on the spread.

Our baseline scenario is that NAMA bonds will be issued at 5-year maturities – consistent with the maturities of the majority of state-issued bonds over the last year. These will be issued at an average of 6% over the 15 years. This average is close to the current financing rate of 5.2% and thus represents a conservative assumption.

Another cost is that of running NAMA. The NTMA, NAMA’s parent organization, is a fantastic place to work where the average remuneration, including expenses, works out at over €166,000 per annum for 2008. NAMA will have perhaps 30-40 staff overseeing the bank property managers, so our baseline scenario has a running cost of approx Euro6.5m per annum. This can reasonably be expected to increase by 2-3% per annum – an extremely optimistic assumption given the past rates of increases in public sector pay.

Under these baseline scenarios we find that the present value of the cost of NAMA is of the order of a loss of Euro20b, after all income is factored in. This is equivalent to about 9 months total tax revenue or 13% of GDP.

This cost as a percentage of GDP is actually at the lower end of relative costs. World bank and IMF estimates of the costs of the Asian financial crises of the 1990s range towards 35% of national income.

If we take a more pessimistic perspective on yields, and cut the average to 3% while at the same time assuming that an overpayment occurs and the haircut is only 15%, with actual default on loans reaching 15%, the costs rise towards the Euro40b mark, still far below the relative cost of the Asian crisis.

In the end, there is no plausible combination of assumptions on NAMA costs and income that can yield a zero loss to the scheme from the taxpayers’ perspective. This may be the reason as to why to date the Government has not disclosed any specific calculations as to how it expects the NAMA to work.

Instead of pricing NAMA risks, Government officials are focusing their attention on comparing NAMA with the proposed German model for banks rescues. Such arguments are fallacious, as German plans are not designed to tackle the same problems that NAMA is aiming to address. Neither the scope, nor the actual debt instruments involved, nor the associated risks are the same for two plans. The only relative comparison that can be made between German and Irish plans relates to the present value of the haircuts applied to the securities transferred to each ‘bad bank’, as shown in the table below.

On the net, whether the German plan is better or worse than NAMA is moot point. After weeks of keeping the NAMA on life support tubes of propagandistic declarations, the Government should pull the plug on this cartoonish villain of public finances.

Niall Keane

I still lean towards the idea that if the public have to fund a rescue, then it's money should be used to set up a good bank. That bank should establish a board of directors from the finest international economic brains and pay every last one of them a couple of millions a year in salaries. They could then (as I would) wait for the AIB, BOI etc to call in the receiver and buy their assets and debts from him. No recource for the developers there! A thousand acres of building land valued at €100 millions? We will offer €1 million. OK, it's another quango, but if it was independant as quangos are supposed to be, then it could tell incompetent and meddling ministers to go play with the traffic. If it was established with half the money that the government has committed so far, and if that money was guaranteed, then I suspect it might just work.

I agree a good bank is the way to go. Transfer all deposit accounts to this bank, in effect same as state guarantee, then let the current guarantee run out and let the banks fail. There will be plenty of international banks waiting for a chance to enter into Ireland's financial market, we won't really be without banks or finance as the paranoid suggest.
Also many of those in the consumer economy who are currently in negative equity or suffering large debt may find that their mortgages and loans disappear with the banks. Imagine the potential for economic and employment growth with all those households having €1000 extra a month to spend? A fresh start!

P. Breathnach

Niall Keane wrote: »

... Also many of those in the consumer economy who are currently in negative equity or suffering large debt may find that their mortgages and loans disappear with the banks. Imagine the potential for economic and employment growth with all those households having €1000 extra a month to spend? A fresh start!

Are you serious? The loan books are the major assets of the banks. Do you think that any loan that is recoverable will be abandoned?

drunkmonkey

The Government should not interfere with the property market, if somebody made a bad gamble let them suffer the failure.
Let the market correct itself, some banks will boom some will go bust, developers will have their cars, homes, even holiday homes taken away, so be it. It's the only way for the market to correct itself.

I'm with Darragh on the small business, I can't even get a pencil out of the enterprise board. The government is not looking after the people it should be. It's a disgrace.

Niall Keane

Are you serious? The loan books are the major assets of the banks. Do you think that any loan that is recoverable will be abandoned?

If they go out of business they cease to exist, and their assets go into receivership. The creditors will be paid off with first the liquid assets then cash from sale of the non-liquid assets, i.e. properties. They state that they have more than enough to cover their debts, just not enough liquidity right now. I can well imagine that their debts could be honoured and then longer term loans and mortgages would still be on the books, but owed to a nonexistent entity. And so disappear so yea, I'm serious this is possible.

P. Breathnach

Niall Keane wrote: »

If they go out of business they cease to exist, and their assets go into receivership. The creditors will be paid off with first the liquid assets then cash from sale of the non-liquid assets, i.e. properties. They state that they have more than enough to cover their debts, just not enough liquidity right now. I can well imagine that their debts could be honoured and then longer term loans and mortgages would still be on the books, but owed to a nonexistent entity. And so disappear so yea, I'm serious this is possible.

I think you need to learn a bit more about receivership and liquidation. In your improbable scenario that there are indeed sufficient current or readily realisable assets to cover creditors' claims, then other assets will be realised for the benefit of shareholders.

Niall Keane

I think you need to learn a bit more about receivership and liquidation.

No need to be patronizing, ask around, a lot of businesses fail and the debts owed to them die with them. Why do you think so many businesses are currently not paying their debts? I see it daily with contractors and sub-contractors, they’re hoping they may never have to.

MrMatisse

The Irish banks are one of the main buyers of Irish government debt. They then bring these debt securities to the ECB where the exchange them for cash.

The government is basically being bailed out by the ECB at the moment. Nobody wants our government securities at anything near an affordable rate. If we nationalsie the banks we will loose the option outlined above. Thus it will then become clear that the governement is being bailed out by the ECB and the market for our government debt is fake.we are being bailed out by the ECB using the Irish banks as middlemen to cover the true flow of funds from the ECB.If we get rid of or nationalise the banks

1) Yields on Irish government debt will spike and borrowing will become VERY expensive

2) The wider population in Europe will become aware of this and what the same treatment or want stringent fiscal conditions imposed on us.

eamonnm79

Really-Stressed wrote: »

The Irish banks are one of the main buyers of Irish government debt. They then bring these debt securities to the ECB where the exchange them for cash.

The government is basically being bailed out by the ECB at the moment. Nobody wants our government securities at anything near an affordable rate. If we nationalsie the banks we will loose the option outlined above. Thus it will then become clear that the governement is being bailed out by the ECB and the market for our government debt is fake.we are being bailed out by the ECB using the Irish banks as middlemen to cover the true flow of funds from the ECB.If we get rid of or nationalise the banks

1) Yields on Irish government debt will spike and borrowing will become VERY expensive

2) The wider population in Europe will become aware of this and what the same treatment or want stringent fiscal conditions imposed on us.

Regarding point 2. The EU anounced that it had done some quantitive easing to the amount of 60 Billion last week. It now seems a lot of it was for Irelands benifit. My question would be why would they do it for us?

Regarding the main point, I think that not enough people know about this and that it needs to be editorialised in the national media.

Some economists were saying one of the disadvantages of not having our own currency is that we could not participate in quantitive easing (printing money) At the time I was actually releaved. However to realise that they are doing it through a shady backdoor underhand way is disgraceful. The Irish people need to know about this.
I would wonder if even senior opposition TD's are aware?

BTW re the Nama question - socialisation of the debt of the established elites, generational poverty (according to an Earnst and Young report) for the rest of us.

P. Breathnach

Niall Keane wrote: »

No need to be patronizing, ask around, a lot of businesses fail and the debts owed to them die with them. ...

That's simply wrong.

Nody

Niall Keane wrote: »

No need to be patronizing, ask around, a lot of businesses fail and the debts owed to them die with them. Why do you think so many businesses are currently not paying their debts? I see it daily with contractors and sub-contractors, they’re hoping they may never have to.

The loan books of the banks would be sold on and the new owners would then chase up those outstanding loans and could also quite possibly increase the interest/demand full repayment on the spot.

Niall Keane

The loan books of the banks would be sold on and the new owners would then chase up those outstanding loans and could also quite possibly increase the interest/demand full repayment on the spot.

Well, I disagree, the loans are based on contract, so would fall under novation rules if that should happen, i.e. taken on under the same terms. Who wants to buy negative equity over 30-40 years? Also the other party to the contract may be required to agree to such a change, would they? The legal knots are rife in this situation.
So the liquidator would more quickly dispose of the banks real property etc. Once the banks debts are paid, end of the bank and end of the receivers role.

P. Breathnach

Niall Keane wrote: »

Well, I disagree, the loans are based on contract, so would fall under novation rules if that should happen, i.e. taken on under the same terms. Who wants to buy negative equity over 30-40 years? Also the other party to the contract may be required to agree to such a change, would they? The legal knots are rife in this situation.
So the liquidator would more quickly dispose of the banks real property etc. Once the banks debts are paid, end of the bank and end of the receivers role.

Who would be buying negative equity? That's an issue for the borrower, not the lender. In Ireland, mortgage lending for home purchase is with recourse, so the fact that the property might be worth less than the outstanding loan is in most cases irrelevant.

If I had some millions available, and was offered a bundle of Irish mortgage loans at a good price, I'd certainly look into it as a possibly good investment.

Niall Keane

so the fact that the property might be worth less than the outstanding loan is in most cases irrelevant.

Exactly where have you been and what do you think this entire economic crises is about?
In the US - sub-prime where there was no recourse, over here landbanks etc, and 100%+ mortgages where there might be officially recourse but most recognise that you can't get blood out of a stone.

In any case what stops the government instructing the receiver to leave mortgage debt alone when winding up the companies. Its one hell of a way to kick start the economy, instead of bailing out developers and banks (who will not subsequently invest in our economy - once bitten and all) and inpovrishing our grandchildren, why not let the few fail to free the public who will consume and invest in our economy not hotels in Beijing?

P. Breathnach

Niall Keane wrote: »

Exactly where have you been and what do you think this entire economic crises is about?

And you admonished me for what you saw as a patronising tone! The economic crisis is not particularly about difficulties existing mortgagors have in servicing their debts. There is some damage in that area, but it's not the core of the problem.

In the US - sub-prime where there was no recourse, over here landbanks etc, and 100%+ mortgages where there might be officially recourse but most recognise that you can't get blood out of a stone.

The rate of default on home loans is relatively low.

In any case what stops the government instructing the receiver to leave mortgage debt alone when winding up the companies.

The shareholders in the banks, backed by the courts and the constitution.

Its one hell of a way to kick start the economy, instead of bailing out developers and banks (who will not subsequently invest in our economy - once bitten and all) and inpovrishing our grandchildren, why not let the few fail to free the public who will consume and invest in our economy not hotels in Beijing?

Not only do you need to learn more about receivership and liquidation, but you might also need to learn some more about economics.