Nama or the national asset management agency was passed into legislation in November 2009. It is now a legal entity and its activities will be the responsibility of generations to come. (in theory) The purpose of Nama is to free up capital for the banks so they can begin to lend to the economy again. The questions is has the government put enough legislation in place to ensure its success.
The nuts and bolts of Nama are that it is set up as a legal entity, basically a company. They have used what is called a special purpose vehicle (SPV), without getting into the intricacy of an SPV it was structured in this way so that the government did not have to carry the debt on the government’s balance sheet.
The fact that the government don’t have it on their own balance sheet is important for two reasons; firstly Europe has rules around how much we can borrow as a country and secondly the more we owe the more we will have to pay for new borrowings.
Some people may believe that the Irish taxpayer is coming up with the money to fund Nama. This is not the case. The Irish Taxpayer is effectively borrowing the money to pay for Nama and the Irish taxpayer will be responsible for paying it back. The simple fact is the government don’t have €54 billion to invest in anything right now let alone Nama.
The government/tax payer will give the banks an IOU for €54 billion. The banks in turn can use this as security to borrow from the European Central Bank. So effectively Europe is providing the capital but the taxpayer is providing the guarantee.
This financing of Nama through the European Central Bank was one of the main drivers behind the scheme. Effectively the banks have been given €54 billion at a time when if you went to the stock market you could have bought all the shares in all the banks for about €10 billion. The problem was the government did not have €10 billion and even if they did they would still be buying a “broken” business carrying a bundle of loans that could go sour and would most certainly need more cash.
When Brian Lenihan did make the decision to go ahead he sent a message internationally that Irish banks would not fail. This was important. It also left them with another problem. If Nama paid too much for the assets they were buying from the banks there would be a political back lash and if they paid too little it would mean that they would have to recapitalise the banks (again) to ensure their survival.
You guessed it when a bank is recapitalised (given fresh money) the government have to pay for it out of their own pockets or in our case out of the national pension reserve fund.
This fund was set up effectively as rainy day money for our ageing population. It has been raided recently to give the banks money in order to ensure they continue to operate. As an investment the returns are not bad, provided the banks survive.
So, the Irish taxpayer is giving the bank an IOU and the bank is using that IOU as security to borrow money from the European Central Bank. But what is the taxpayer getting in return. Hopefully Nama will manage the loans in such a way that the loans are repaid in full or the assets are sold off in order to repay the loans. The banks are taking a 30% haircut so if all the loans were paid in full the taxpayer would get this 30% (ignoring interest between now and then).
The government are buying approximately €77 billion worth of debt for €54 billion. The developers however still owe €77 billion but now they owe it to Nama instead of the banks. Who gets the haircut here is unknown yet, when all is said and done will Nama get most of the loans repaid either directly or by selling assets or will the banks be laughing all the way to the ….. well you know.
We have established that Nama will not be funded by the tax payer. it will merely be guaranteed by them, we have established that the banks are taking a hit by selling there loan book for 30% less than it is currently worth, but this is quite simply a good bet. We have established that the developer is still responsible for the debt and therefore should be pursued for the repayment of the loan. So where is the downside to Nama.
There are several difficulties with the structure. The purpose of it was to save the banks and let them get on with lending money in order to boost the economy. By taking over these debts it will allow them to borrow from the ECB but will also allow them to borrow on the inter bank market.
The difficulty is there is nothing in the legislation forcing them to start lending, in fact how could you legislate for it. As we seen in my article last month “easy money” banks now have lots of ways to make money and they no longer have to depend on lending to consumers. We will have to rely on the banks reacting to government pressure and market forces. I’m not sure I am happy with our odds.
The banks have also been tied into a levy structure. Over the 10 years that Nama plans to operate they hope to be able to turn these loans into profit for the taxpayer, If however they fail to achieve a profit the banks will be forced to pay a levy to cover the losses.
This in my opinion is counter productive, yes I believe they need to be held accountable for losses, but by imposing a levy it instils fear in the markets and may restrict there ability to borrow from other banks. It is like saying we are going to take the problem away from you and sort it out but if we have any problems sorting it you’ll have to foot the bill. When international investors, that the banks depend on heavily for investment, see this levy they could be spooked by it and not invest.
The levy also causes another problem. It is believed that when the €54 billion is paid banks will still require a further injection of cash from the government. Now that the government are committed to saving the banks they will have to do this. However if an international buyer were to buy one of our banks the likelihood of the need for a cash injection would be reduced. If you were an international bank would you buy a bank that had this potential levy somewhere on the horizon?
The other major flaw with the Nama project is that it has a life span. It is expected to run for 10 years. If Nama went out in the morning and forced all of it’s new customers to sell whatever assets they had there would be a flood of property and land onto the market. This would dramatically reduce sales prices and could destroy our chances of selling anything for years. They need to systemically dispose of property when the time is right in order to maximise returns but as an investor in property would you not be tempted to wait for the closing down sale in 10 years time.
When they do sell property who do you think will buy it and who do you think will give them the loan to buy it, are we all going to be here again in 20 years time with Nama 2?
About the Author
Eoin McGee is the owner of Prosperous Financial Services, an independent firm regulated by the financial regulator as a multi agency intermediary and mortgage intermediary. He has over 10 years experience giving advice to both individuals and companies in relation to their finances, he can be contacted on firstname.lastname@example.org, 045 841 738 or 087 6 44 55 33.