nama explained in laymans terms

lucky-colm

i've read a thread on here some where where everyone is giving out about how nama is going to save the bankers and the developers the investors the speculators (which in my opinion drove the price of property and oil through the roof in the last 3yrs of the boom)and the government namely FF. i can't say that i blame these people because they are partly right and these people have alot to answer for.

but the other side of the coin is that we are now going down the preverbiable creek without a paddle and the time for finger pointing has long passed and we are now in the time for action, the truth is if the banks don't start lending money soon we will end up sinking in the aforesaid creek so enter nama.

nama in my opinion is the best of a bad lot not brilliant but it might do the job. so iam going to try to explain it (i'll probably make a fool of myself here and end up with a heap of posts saying "you moron we allready knew that" and the likes) so here goes

objectives:
the pros:
1; to take "bad" loans from the banks
2; restore the banks balance sheets to good level
3; restore the banks AAA+ credit rating(this enables cheaper interbank lending)
4; free up lending to sm&e
5; free up lending for mortages

how nama will achieve this:
nama will "buy" the "bad" loans from the banks at a reduced price somewhere between 50-70% of their original value. they can't pay to much for the loans as the assets that are gauranteeing these loans have reduced in value, neither can they buy them for their current market value as this would value them to low and this would seriously under value the assets that are gauranteeing the banks remaining loans (point 2 above). this restores the banks balance sheet allowing the bank to borrow more money freely and loan money more freely (sound familiar). nama will pay for these loans by issuing govt bonds to the banks in return for the loans these bonds can then be cashed in with the ecb.
the final cog in the nama wheel is selling the property gauranteeing the loans hopefully the market will be after improving and when they sell the properties "nama will make money for the taxpayer"

the cons:
1; the banks will be left short of money on the loans when the transfer them to nama:
i surmise the customer is going to get stung here to pick up the shortfall by way of higher interest rates and extra charges.
2; what if the ecb comes to cash in the bonds(not to sure how many years these bonds are for) and the property market has not recovered
again there could be a shortfall here and who will be there to pick up the pieces? the taxpayer.
3; while the loans are in nama the developer/builder is expected to make repayments on these loans to cover the interest being charged on the govt bonds
again if the builder can't pay the interest now how will he pay it next year in nama, again the taxpayer to the recue here.
4; eventually nama will have to offload all its property to pay back the bonds(the taxpayer will not be able to pay for this in its entirety) you better hope the property market is after peaking again or else. yes youv'e guessed it your's truly is going to end up in bed with a big black guy called BUBBA and an industrial size jar of vaseline
5; if nama eventually does make a profit out of its property portfolio you can be rest assured that we will not see asingle penny of it as there will be a list of people that will have to be paid for their "services rendered" while the whole nama thing was going on. we will probably be lucky here if a loan isn't taken out to repay all these nice people for their "work"


don't get me wrong here i'am not a champion for nama and there is a bigger chance of this thing going wrong than there is of it going right. but leaving the banks sink or being nationalised is not a good idea. nobody wants to lend money to a bank that had to be nationalised(it speaks for itself);)


feel free to add more as i'am not claiming that everything above is correct or i may have left out something (which i'am quiet sure i did:D)

SLUSK

Ever heard of the concept "moral hazzard"? Why should banks act responsibly when they get bailed out every time they make mistakes? It is not acceptable to have a system where profits go into private pockets but the losses are paid buy the taxpayers.

lucky-colm

SLUSK wrote: »

Ever heard of the concept "moral hazzard"? Why should banks act responsibly when they get bailed out every time they make mistakes? It is not acceptable to have a system where profits go into private pockets but the losses are paid buy the taxpayers.

i'am not on the banks side here nor am i on the govt side. but it's a fact of life that the little guy will allways get screwed.

Purple Gorilla

I don't agree with the "It's a baliout for Developers" argument. They still owe the money. How is that a bailout? If they don't pay up, they lose their developments and that becomes the State's land. The banks aren't exactly getting off easy either..they'll be taking a significant hit by this.

lucky-colm

i agree gorilla the banks and the developers are not getting away scott free but i do think that the banks will hit its customers with extra interest charges and the likes its allready happening with permanent raising rates in order to cover its losses elsewhere in the mortage market

SLUSK

You could let the banks fail and then let their competitors buy up their assets. This is a bailout as it allows the developers to continue with their activities instead of going bust. Using government intervention to prevent builders from going bust is in fact a bailout. I hate to say it but this country is rotten to the core.

lucky-colm

SLUSK wrote: »

You could let the banks fail and then let their competitors buy up their assets. This is a bailout as it allows the developers to continue with their activities instead of going bust. Using government intervention to prevent builders from going bust is in fact a bailout. I hate to say it but this country is rotten to the core.

leaving the banks fail is not an option these are 3 of the biggest banks in the country you would be writing off more money in share value/savings/pension schemes than what the bank is owed think of all the money that would leave the economy as a result and the knockon effect that would follow when everyones savings would simply "dissappear" like what happened with the anglo shares when it was nationalised

SLUSK

In Sweden failing banks were nationalized and the shareholders left with nothing, then when the problems were solved they were put back into private ownership. Not the best solution, I would prefer that they went bust instead but it is better than a bailout. Why do you believe government intervention is better than the free market? History shows us that government intervention is disastrous to the economy.

tlev

I can see how the banks MIGHT get back their AAA rating if they are holding no bad debts but surely the rating agencies will say hmmm Ireland is now holding 90bn of debt and with no certainty that the properties they hold will go up in value. Ireland as a country may be downgraded or at least put on outlook:negative/cautious making it harder for the country to borrow. Since the banks are being financed by the country it makes it irrelevant if they can borrow since the country can't.

Purple Gorilla

SLUSK wrote: »

This is a bailout as it allows the developers to continue with their activities instead of going bust. Using government intervention to prevent builders from going bust is in fact a bailout. I hate to say it but this country is rotten to the core.

How though? There is literally no difference in the situation except the developers now owe money to the state. How, in anyway way does this facilitate developers continuing with their activities instead of going bust? They still owe the same amount of money. If they don't pay up, they lose their land to the state.

I really am failing to see how this makes life easier for developers? Surely if anyone has anything to gain from this it's the taxpayer and the banks.

tlev wrote: »

I can see how the banks MIGHT get back their AAA rating if they are holding no bad debts but surely the rating agencies will say hmmm Ireland is now holding 90bn of debt and with no certainty that the properties they hold will go up in value. Ireland as a country may be downgraded or at least put on outlook:negative/cautious making it harder for the country to borrow. Since the banks are being financed by the country it makes it irrelevant if they can borrow since the country can't.

That's why the government is buying the debt at heavy a discount, to account for falling house prices. At the least, we'll break even. But more than likely the taxpayer should benefit from this. If a developer doesn't pay up, their land becomes the State's land. That will give the State an advantage because they can develop it or sell it on for a higher price. CIE and some other companies have expressed interest in buying land from the State if it seizes any. If it's a development they seize, I believe NAMA has around €10 billion to finish the development if it believes it could be a profitable development.

On the topic of our debt, I don't think it should effect us too much. The EU is currently adjusting it's books on Ireland to account for the €90 billion just to show it isn't government debt technically. I'm sure the Ratings Agencies will do the same

blinding

As I understand it nama is a system where the goverment transfers as much of ordinary taxpayers money to their fellow crooks in the banking sector.

And of course they tell the ordinary decent taxpayer armageddon will ensue if the ordinary decent taxpayer does not allow the theft to go ahead and in fact the taxpayers should be grateful that the goverment is giving as much assistance as possible with the theft.

SLUSK

NAMA as I understand it will give the developers years to sell of their assets, under normal market conditions they would have gone bust. If you can't see that FF are bailing out their buddies in the banks and their developer buddies you are blind. This country is a banana republic.

lucky-colm

Purple Gorilla wrote: »

On the topic of our debt, I don't think it should effect us too much. The EU is currently adjusting it's books on Ireland to account for the €90 billion just to show it isn't government debt technically. I'm sure the Ratings Agencies will do the same

also don't forget that ireland has i am not to sure of the figure but i think it is in the region of €80 billion in cash stashed in banks and other institutions around the world:D happy days

lucky-colm

SLUSK wrote: »

NAMA as I understand it will give the developers years to sell of their assets, under normal market conditions they would have gone bust. If you can't see that FF are bailing out their buddies in the banks and their developer buddies you are blind. This country is a banana republic.

i don't think so,
but lets take your option and leave the banks go bust
what happens then?
when you go to the hole in the wall and you suddenly realise that all the money is gone. not to worry yousay i'll just get the boss to give me cash next week, oh no when the boss went to the bank to get the cash the doors were broken down all the windows were broken all the furniture was thrown around and smoke billowing out from the back offices, inflation is gone through the roof a loaf of bread is €1000 if you are lucky.

cos lets face it if your govt dosn,t see any sense in saving the banks what outside bank(as you have mentioned already) would be interested in stepping in. a state without a banking system is on the verge of anorchey and lawlessness. we only have to look at africa to see what it is like when a state has no money

Purple Gorilla

SLUSK wrote: »

NAMA as I understand it will give the developers years to sell of their assets, under normal market conditions they would have gone bust. If you can't see that FF are bailing out their buddies in the banks and their developer buddies you are blind. This country is a banana republic.

Developers will have the exact same amount of time to pay off their loans as they would if they owed them to the banks. There is no difference.

blinding wrote: »

As I understand it nama is a system where the goverment transfers as much of ordinary taxpayers money to their fellow crooks in the banking sector.

And of course they tell the ordinary decent taxpayer armageddon will ensue if the ordinary decent taxpayer does not allow the theft to go ahead and in fact the taxpayers should be grateful that the goverment is giving as much assistance as possible with the theft.

Here's how NAMA works-
NAMA will take the riskiest segments of each bank's loan book up to €90 billion. Working with the EU, the value of these loans will be discounted to account for the fall in residential prices and things like that. So lets say the government pays the banks €60 billion (Not the actual figure, I'm just assuming) for those €90 billion worth of loans. That means that the taxpayer will benefit to the tune of €30 billion from this.

The banks will be issued with government bonds which they can cash in at the ECB. This will technically add to our government debt, but the EU and presumably other ratings agencies will record this as "off-the-book" debt so it shouldn't effect the country's ability to borrow. The banks however will have to take a pretty big hit as collectively, they have just made a €30 billion loss. This will make the banks smaller than they were but it will however mean they will be safe banks again. Having none of that bad debt, they can access the liquidity markets easily and they are attractive to investors. This in turn means that businesses and people have access to credit which will promote new business and the sustainability of existing businesses which will help us out of this recession.

Developers will still owe the same amount of money in the same time frame. If they don't pay up, NAMA will take their land/developments and sell it on or if it's a development, they can finish the development and then sell it so they make a bigger profit.

herya

Purple Gorilla wrote: »

Here's how NAMA works-
NAMA will take the riskiest segments of each bank's loan book up to €90 billion. Working with the EU, the value of these loans will be discounted to account for the fall in residential prices and things like that. So lets say the government pays the banks €60 billion (Not the actual figure, I'm just assuming) for those €90 billion worth of loans. That means that the taxpayer will benefit to the tune of €30 billion from this.

How will the taxpayer benefit? Do you believe that full 90 billion will be recovered if developers are going bust right left and center and the land their loans are secured against is worth much less than it was valued for and will go down even further?

NAMA will pay (hypothetical) 60 bln and recover (hypothetical) 30 bln. 90 bln is just an empty figure now. Where's the gain for the taxpayer?

lucky-colm

Purple Gorilla wrote: »

Developers will have the exact same amount of time to pay off their loans as they would if they owed them to the banks. There is no difference.

Here's how NAMA works-
NAMA will take the riskiest segments of each bank's loan book up to €90 billion. Working with the EU, the value of these loans will be discounted to account for the fall in residential prices and things like that. So lets say the government pays the banks €60 billion (Not the actual figure, I'm just assuming) for those €90 billion worth of loans. That means that the taxpayer will benefit to the tune of €30 billion from this.

The banks will be issued with government bonds which they can cash in at the ECB. This will technically add to our government debt, but the EU and presumably other ratings agencies will record this as "off-the-book" debt so it shouldn't effect the country's ability to borrow. The banks however will have to take a pretty big hit as collectively, they have just made a €30 billion loss. This will make the banks smaller than they were but it will however mean they will be safe banks again. Having none of that bad debt, they can access the liquidity markets easily and they are attractive to investors. This in turn means that businesses and people have access to credit which will promote new business and the sustainability of existing businesses which will help us out of this recession.

Developers will still owe the same amount of money in the same time frame. If they don't pay up, NAMA will take their land/developments and sell it on or if it's a development, they can finish the development and then sell it so they make a bigger profit.

exactly

SLUSK

How the hell do you think nama can bring profit to the taxpayers? If the developers can't sell their stuff at a profit now, why should nama magically profit 3 years from now, or even 30 years from now? Just let the incompetent banks go bust and competent bankers perhaps from germany and other countries will by up their assets and we start all over. In Sweden failing banks were nationalized and sold to the highest bidder, why could this not work here? I can't even begin to tell you how morally obscene it is to bail out these bankers with taxpayers money. The whole FF leadership should be put under criminal charges for this. I guess you Irish accept corruption because that is the only thing you know. No wonder why this country sucks so much as, no wonder the best and the brightest always leave. Keep on voting FF you morons, see where it will lead ya!

Purple Gorilla

herya wrote: »

How will the taxpayer benefit? Do you believe that full 90 billion will be recovered if developers are going bust right left and center and the land their loans are secured against is worth much less than it was valued for and will go down even further?

NAMA will pay (hypothetical) 60 bln and recover (hypothetical) 30 bln. 90 bln is just an empty figure now. Where's the gain for the taxpayer?

If the developer goes bust, NAMA gets their land. Like I said, NAMA will then sell that developer's developments on to recover the cost. NAMA can also sell the land on. Many international companies have expressed interest in joint ventures for developments/land that NAMA acquires.

I said in my post that NAMA is buying these loans at a heavily discounted rate. The government has been looking at residential trends as far back as the 1970s for indications on where the property market will go and the EU and HSBC will also be advising the government. Mr. Lenihan has said they will be valuing all loans based on what they will be worth in the long term.

Here's a basic example, lets say NAMA takes a loan from the bank that the developer took out in 2006 to build one house. The loan is worth the €240,000 it cost to build it. NAMA buy that at a 30% discount so they buy it at €160,000 and then sell it at cost so they make an €80,000 profit.

That's how it benefits the taxpayer

Purple Gorilla

SLUSK wrote: »

How the hell do you think nama can bring profit to the taxpayers? If the developers can't sell their stuff at a profit now, why should nama magically profit 3 years from now, or even 30 years from now? Just let the incompetent banks go bust and competent bankers perhaps from germany and other countries will by up their assets and we start all over. In Sweden failing banks were nationalized and sold to the highest bidder, why could this not work here? I can't even begin to tell you how morally obscene it is to bail out these bankers with taxpayers money. The whole FF leadership should be put under criminal charges for this. I guess you Irish accept corruption because that is the only thing you know. No wonder why this country sucks so much as, no wonder the best and the brightest always leave. Keep on voting FF you morons, see where it will lead ya!

:rolleyes:
NAMA can sell developments at cost and still make a profit. Developers are still putting a mark-up on properties because they need to make a profit. NAMA doesn't need to do that.

And great, let the banks fail! Depositors don't need their money anyway...

Bank of Ireland and AIB are still viable banks but the global credit crunch has led to a tightening in the global credit markets. Ireland isn't the only one propping up it's banks. Nearly every western country is in some way supporting it's banks

SLUSK

Nothing wrong with a bank run. Most countries also have a system to protect depositors, it is called a bank guarantee. You on the other hand seem to be hellbent on bailing out shareholders of the banks. I wonder how much money they contribute to FF. Probably alot.

herya

Purple Gorilla wrote: »

Mr. Lenihan has said they will be valuing all loans based on what they will be worth in the long term.

Valuing with a crystal ball most likely?

Purple Gorilla wrote: »

Here's a basic example, lets say NAMA takes a loan from the bank that the developer took out in 2006 to build one house. The loan is worth the €240,000 it cost to build it. NAMA buy that at a 30% discount so they buy it at €160,000 and then sell it at cost so they make an €80,000 profit.

That's how it benefits the taxpayer

You make one big assumption that NAMA will be able to sell it for €240,000 while the market is down so much and heading down still. If the developer was not able to sell it for €240,000 some time ago (if they could they obviously would have) how will NAMA sell it for the same price when these prices are no longer around? What if they can only get €120,000 for it? Where's the benefit for the taxpayer?

herya

SLUSK wrote: »

Nothing wrong with a bank run. Most countries also have a system to protect depositors, it is called a bank guarantee. You on the other hand seem to be hellbent on bailing out shareholders of the banks. I wonder how much money they contribute to FF. Probably alot.

Exactly. Other countries have deposit guarantees in place which existing banks have to pay into (it's compulsory - like a bank insurance), but they do not guarantee any bank's existence. If a bank falls, other banks buy its assets & deposits are safe. Shareholders take a risk, this is what shareholding is about.

Purple Gorilla

herya wrote: »

Valuing with a crystal ball most likely?



You make one big assumption that NAMA will be able to sell it for €240,000 while the market is down so much and heading down still. If the developer was not able to sell it for €240,000 some time ago (if they could they obviously would have) how will NAMA sell it for the same price when these prices are no longer around? What if they can only get €120,000 for it? Where's the benefit for the taxpayer?

€240,000 is the cost price. In 2006, he would have put a huge mark-up on that price. So while he would have a €240,000 house, he would have sold it for around €300,000/€320,000. That is the price that is falling. That is why NAMA will be able to sell property at cost price, because it's still much less than what the developers would have sold it for. In this case, it's upto €80,000 off the original price so therefore it's in line with falling property values. And considering that NAMA only bought the loan for €160,000, it still has room to drop the price further if needs be.
Worst case scenario is NAMA breaks even which is unlikely as developers have to still pay interest on those loans too but I believe a portion of the interest is being used to fund NAMA.

Even if NAMA only breaks even, the indirect benefit to the taxpayer is a quicker end to this recession and easier access to credit to get the economy moving again.

SLUSK wrote: »

Nothing wrong with a bank run. Most countries also have a system to protect depositors, it is called a bank guarantee. You on the other hand seem to be hellbent on bailing out shareholders of the banks. I wonder how much money they contribute to FF. Probably alot.

We do have a system to guarantee deposits upto €100,000. And you think that the state having to borrow tens of billions to pay these deposits back, is the way to go?

SLUSK

Seems cheaper for the irish government to repay the depositors than this whole nama business. and also government should not do a damn thing to get a country out of a recession. There are excesses which have to be addressed and a recession is needed. The boom was the sickness, the recession/depression is the cure. After you can start over with more sustainable growth.

herya

Purple Gorilla wrote: »

€240,000 is the cost price. In 2006, he would have put a huge mark-up on that price. So while he would have a €240,000 house, he would have sold it for around €300,000/€320,000. That is the price that is falling. That is why NAMA will be able to sell property at cost price, because it's still much less than what the developers would have sold it for. In this case, it's upto €80,000 off the original price so therefore it's in line with falling property values. And considering that NAMA only bought the loan for €160,000, it still has room to drop the price further if needs be.

Why doesn't the developer sell it at a cost then if it's so quick & easy? It would take the bank off his back and the 2006 thinking is long gone?

herya

Purple Gorilla wrote: »

We do have a system to guarantee deposits upto €100,000. And you think that the state having to borrow tens of billions to pay these deposits back, is the way to go?

The system is wrong then if it doesn't fully protect depositors, but does bad loans and shareholders. In a good system the state doesn't need to borrow anything as banks are obliged to keep reserves (a certain percent of their assets) for this purpose.

Purple Gorilla

SLUSK wrote: »

Seems cheaper for the irish government to repay the depositors than this whole nama business. and also government should not do a damn thing to get a country out of a recession. There are excesses which have to be addressed and a recession is needed. The boom was the sickness, the recession/depression is the cure. After you can start over with more sustainable growth.

AIB alone has a deposit base of €155 billion, 996 million.

Yep. Much cheaper than NAMA

Purple Gorilla

herya wrote: »

Why doesn't the developer sell it at a cost then if it's so quick & easy? It would take the bank off his back and the 2006 thinking is long gone?

Because Property development is a business. They aim to even make a small profit to offset their losses. They are gradually lowering their prices to see if they hit the sweet spot. There's no point on immediately dropping the price to €240,000 if you can gradually do it and possibly sell it for more.

herya wrote: »

The system is wrong then if it doesn't fully protect depositors, but does bad loans and shareholders. In a good system the state doesn't need to borrow anything as banks are obliged to keep reserves (a certain percent of their assets) for this purpose.

The system isn't just an Irish one. Ireland is offering one of the highest guarantees in the EU to depositors by guaranteeing up to €100,000. Other countries like Greece have followed our example and upped their guarantee.

herya

Purple Gorilla wrote: »

Because Property development is a business. They aim to even make a small profit to offset their losses. They are gradually lowering their prices to see if they hit the sweet spot. There's no point on immediately dropping the price to €240,000 if you can gradually do it and possibly sell it for more.

If the developer in question qualifies as a "bad loan" (only such loans are bought by NAMA) I guess he's well past the looking for sweets spots stage. I find it hard to believe that NAMA will easily shift hard to sell assets and still make a profit while working against time and falling prices.

lucky-colm

if the banks go bust then the state has to act on the gaurantees given to the depositors so therefore the taxpayer is still going to have to fork out
and just incase you can't remember when the govt here announced the gaurantee scheme alot of foreigners placed money in irish banks covered by the state gaurantee
so not only will your tax money be bailing out the developers but also people who never even set foot in the country or ever contributed to the economy
and why would any other "competent bankers from germany or other countries" even be bothered to step in if the whole country is in such a bad financial state