Welcome to Casino NAMA!

September 13, 2009

It seems best estimate of next Wednesday’s figure for NAMA’s loan discount is now 30%. A report in the Irish Times, Saturday, 13 September, gave a revised Davy Stockbroker estimate at around the 25% mark, that kite was way off the mark, a figure of hope. Bearing in mind the figure next Wednesday, see last post, is a guesstimate and can be revised upwards for individual loan estimates when these are finally adjudicated by NAMA, lets examine the figure of 30% a bit more.

The Government has announced Amended Legislation stating banks would also be partly paid by way of subordinated bonds, which will only be paid back if the value set against the loan performs better over its lifetime than its value set at the time of the setting of the discount. The  ‘risk-sharing’ measure is supposed to protect taxpayers from overpaying for the loans. Its unclear how this will work over the lifetime of a loan but its believed this withheld payment will amount to approx a mere 5pc – 15pc of the total payment. Add this to the fact that not all loans will be covered, that the figure representing loans to be covered could also be as low as aprox 5pc – 15c and its clear the change to the legislation is a smokescreen and minimal to the extreme. Its obvious this ‘risk-sharing’ is a band aid plaster designed more to shore up the Greens than stop the haemhorrage of any loss to the tax payer.

So what does the 30% above refer to? See previous ‘Pig in a poke’ post. Because the loans taken over  by NAMA are both good loans and bad loans, we take it this 30% guesstimate is an overall figure. We do not have audited figures on the performance of good loans because the Government has not required the banks to furnish this information and make it public. We’ve also to wait until Wednesday for the precise logic, figures and maths underlying this figure to be given by the government, that is, if given!

Lets assume figures on these loans given Business, P4, Sunday Times, sourced from NCB are correct and we get the following picture. Development based loans located in Ireland total between AIB, Bank of Ireland, Anglo, INBS and EBS amount to 34 billion. Investment total for this group comes to 20 billion. Total of these development/investment loans come to 54 billion. A conservative estimate given property prices have dropped by 60% over the past year, with commercial and development land even higher, and given that these figures represent a  stockpile of residential property and development loans that are enough to serve Ireland Inc’s needs for at least the next 10 years, then a market value discount of 70% would be on the conservative side for the value of this portfolio given the state of Ireland Inc’s fiscal state at the moment. Based on these figures the market value loss on these loans is 54 * 70/100 = 37.8 billion loss giving their present market value worth at 16.2 billion.

Lets say foreign based loans are good loans(not necessarily at all a likely scenario in all cases)!  The total of UK based loans from above group is 26 billion with another 5 billion based further overseas.  Firstly, lets acknowledge we are stretching it to allow that 26 + 5 billion, nearly a third of the total portfolio of 85 billion given in these figures, are performing well in the current global climate, but let’s say they are! OK, lets be generous and give them a return of 20%.

These loans at current market value taking in the profit made by them at 20% gives a return of 31 * 120/100 = 37.2 billion. Adding the final market values of the home and the foreign loan portfolios together gives us 16.2 billion + 37.2 billion, total, 53.4 billion. The original tally of 85 billion less this ‘market value’ figure is 85 – 53.4 = 31.6 billion which represents the discount. As a percentage of the total, this is 31.6/85  * 100 gives me 37%.  Given the government figure forecasted for the discount is 30%, the  conservative figure of 37% makes the government overpayment for these loans at almost 25%. In all likelihood, a discount of at least 50% should be in order.

You may say the above figure estimates of  the value of loans based on market value are off the mark. You might also say that the government will incubate its portfolio over time to nourish a profit by fiddling the market over time. But the real point of this exercise is for me to illustrate:

1. NAMA is not giving us the financial information relating to loans upon which more accurate deductions than the above can be made. NAMA gives a cheque book to its valuers, they then look at the loan, guesstimate its value based on parameters that may differ from one portfolio to another, will almost certainly overpay as they try to avoid risk of challenges in the courts, then park the assets upon which the loan is based for another muddled and extended exercise. When, how and at how much those muddled assets will be sold off will complete the exercise before which we cannot know the ultimate loss to the tax payer.

2. But even 1. is a guesstimate. We are not told how NAMA is going to work. There is no business plan, no schedules, no targets set, no requirement that even 50% of the asset loan base be cleared in a timeframe of 5 years or 50 years.

3. The longer NAMA is involved with its market distortion the longer and more extensive the damage to our economy.

4. NAMA is a poor vessel unworthy of a modern european economy, a patchmark of loosely cobbled together vague concepts based on unnecessary risk taking.

5. In a loopy way, the Minister’s announcement of his discount figure next Wednesday given the NAMA valuators have not even begun their work, is like someone colour blind told there are multi coloured balls in a room, being asked to guess the number of red balls as a percentage of the balls in the room, with the light turned off!

NAMA(Not Another Mess Again) is nothing to be proud about! Its a Trojan horse filled with the remnants of Ireland’s financial industry’s efforts to pick the bones of our previous boom, the biggest mess of all.  Its a fantasy of stock brokers, bankers and not the kernel of a recovery based on proper regulation, transparency, openness, good practice and solid business sense.

Its bad for good developers as well as bad developers. By tarnishing good loans with bad loans, its failure to describe its methods, its failure to release information upon which its accounts are based, its absence of regulatory involvement, its failure to deliver an achievable and guaranteed  return to good banking in the short term, its risk based gambling, its loading of toxic debt and huge borrowing, NAMA is more nemesis , rather than salvation for the Irish economy! Its a recipe for Ireland to build its own Lehmans!

Its hard to see how it will improve Ireland’s economy in the short to medium term.

NAMA is a very good way to throw good money after bad!

next up

the chips are down




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