NAMA Draft Business Plan

October 16, 2009

http://www.irishtimes.com/newspaper/finance/2009/1016/1224256787403.html

http://www.nama.ie/Publications/2009/Business_Plan_13OCT09.pdf

NAMA draft business plan makes interesting reading. Its interesting to observe that the very reason financial institutions across the world will not touch paper debt based on toxic assets is the fear of what lies under the covers. There’s no fear here, no claim to due diligence that the financial projections that will follow later in this document are verifiable following due diligence sight of even a sample cross section of the toxic loan portfolio, we’ll go blindly where no no one has gone before. Its a bit like setting off on a long journey without checking whether there’s petrol in the car; or if in a boat, whether there’s a big hole just below the waterline.

There would appear to be a large section of the document missing. Each of the items under ‘KEY RISKS FACING NAMA’ are set out as headings without much elaboration. At least they get in there!

While on the subject of risk, the document ends with the following ( my own comments to follow in italics, noted also “The party (Fine Gael) also called for Nama’s business plan to be referred to the Comptroller and Auditor General for audit and scrutiny” in http://www.irishtimes.com/newspaper/finance/2009/1016/1224256787403.html above) This is not sufficient, Project Risk Assessment is a Science e.g http://www.dast.gov.ie/pdfs/feasibility/campusappendix8a.html . There are many disciplines involved in arriving at a professionally evaluated risk assessment especially of a project of this size, the few lines below fall far short of any objective professional evaluation and Risk Assessment of the gambles outlined below.

However, it should also be said any fair minded individual presented with the scenario of  risk taking below should be warned off NAMA as a risky enterprise the taxpayer should be well protected against! :

” KEY RISKS FACING NAMA

 Many of the key risks faced by NAMA are outlined below. The NAMA Board and its Risk Committee will monitor these risks and ensure that appropriate risk management policies are in place.

1. Protracted valuation process – due diligence obligations, legal challenges and/or lack of preparation by institutions. The risk that the transfer process takes significantly longer than currently projected and that, therefore, the injection of liquidity into the banking system and the corresponding flow of credit into the economy is delayed, in turn impeding economic recovery. Restoration of the availability of credit is a necessary precondition for the recovery in real estate prices required for NAMA to break even and, more generally, for an early recovery in economic conditions in Ireland.

Agreed, also outlined in earlier posts here

One source of risk is that institutions will not be sufficiently prepared in terms of data collation and this could lead to delay and disruption of the acquisition timetable. A further risk is the prospect of legal challenges to NAMA’s business operation which may delay and impede it in achieving its objectives.

 Agreed, also outlined in earlier posts here

2. Valuations outside expected range

 The risk that the bank asset valuation and acquisition process produces an outcome which is significantly different from current expectations with respect to the major parameters and assumptions set out below and used in the analysis to date:

In other words,  the intended result based on assumptions below could be wrong. Most certainly true!

The market value of the underlying property assets (€47 billion)

 Yep, that market value most certainly is not correct. Zoe’s experience in the courts show this. So NAMA is ludicrously still going ahead based not on risk but on KNOWN false assumptions.

Interest rollup (estimated €9 billion)

 Yep, another ridiculous assumption that interests rates based on the loan will not increase!

Actual aggregate average LTVs (average of 77%)

 

The proportion of acquired assets which are cashflow-producing (40%)

 Oh, this is a huge gamble as well! For example the recent falls in the value of Sterling should impact the UK portfolio!

Margins on income-producing assets (2%)

Default rate (20% assumed)

 Much has been said of how ridiculous this figure is. Justice Kelly in the ZOE case chased ridiculous and crazy figures like this out of court. If the default rate was only 20%, we wouldn’t need NAMA.

3. Economic risk

 The risk that, notwithstanding the availability of credit, economic growth in Ireland will remain sluggish for a protracted period in response to the impact of the budgetary tightening that began in 2008 and is likely to continue for the foreseeable future. The ESRI forecasts GDP contraction of 7.2% this year and 1.1% in 2010; the latter incorporates the effect of a moderate pick-up in economic activity from the middle of the year onwards. Over the period of NAMA’s expected life span, moderate annual growth rates would be required in order to stimulate the demand for commercial, retail and residential property that would be necessary for NAMA to achieve its target of breakeven or better.

This risk would be compounded if the main European economies were to experience strong economic growth over the coming two/three years and Ireland simultaneously remained weak. Under this scenario, ECB interest rates would rise at a time when the Irish economy might be poorly placed to absorb the deflationary impact of higher interest rates. The key issue, therefore, is the extent to which the deflationary impact of budgetary tightening could be offset by the stimulatory effect of the stronger economic performance of Ireland’s main trading partners.

Frankly its a foregone conclusion that European interests rates will rise over the short to medium term. NAMA low interest rates ludicrously predicate the success of NAMA and this is a false assumption as interest European interest rates will rise and the taxpayer will be saddled with the shortfall and added debt that this will bring. The phrase above, ‘moderate annual growth rates would be required in order to stimulate the demand for commercial, retail and residential property that would be necessary for NAMA to achieve its target of breakeven or better’, should be read with a profound sense of forboding as the reverse is happening right now in our economy and all projections are that our economy has plenty more to decline before it gets into shape for a new growth cycle.

  4. Risk of prolonged property market depression

 An associated risk is that the market values of real estate assets underlying loans acquired by NAMA will fall significantly after the reference valuation date and recover only slowly over the early years of NAMA’s operation. NAMA would not wish to be in a position for a protracted period where the aggregate value of its assets was less than the consideration it paid for them. If economic conditions do not improve, there may be some public pressure on NAMA to begin disposing of assets and start the process of reducing its debt earlier than currently envisaged.

This goes to the heart of the crazy approach of NAMA, outlined already in earlier posts. Here we have NAMA lying offshore as a leaking ship with a cargo of bananas.  Suddenly it sends in a longboat with a load of bananas to sell in the local market place.

There’s little money around as most goes on paying for the ship full of bananas.

Everybody in the market place knows there’s lots more bananas offshore just waiting to be dumped! Its hard to sell bananas! They go off as well. You have to spend billions keeping them fresh, paying for extra security, etc.

As against that, many informed observers are of the view that prices/yields are close to the bottom of the cycle, particularly as far as UK property is concerned.

Nope, watch sterling, values getting so low of late, could be a devaluation!

NAMA’s portfolio will be diversified (33% outside ROI) across different regions and sectors and, as such, is unlikely to be synchronised in terms of market recovery. As such, default rates are likely to differ and opportunities to dispose of assets are likely to arise earlier in some markets than others.

Another ridiculous assumption! Its a worldwide global economic crisis as well as a local economic bonus economic crisis for Ireland on top of that. Prices/share values especially in property are falling right across the world.

 

5. Market risks, including risks arising from the acquisition of foreign assets.

 

NAMA will have significant exposure to interest rate risk and will need to manage this intensively by reference to the Euro and Sterling interest rate cycles in particular. Due to the potential costs involved, interest rate risk is a key exposure for the NAMA Board to assess. NAMA will have a substantial loan (and potential property) portfolio in the UK, US and other jurisdictions with currency, foreign tax and foreign law risks inherent in overseas investment. As about 30% of the assets are denominated in currencies other than the euro, exchange rate fluctuation will be a key risk for NAMA. It will create accounting volatility in the P&L which will be potentially difficult and potentially costly to hedge, particularly in relation to assets which do not produce cash flows.

 6. Business Strategy

 Strategic business decisions which would be perceived as involving policy errors or misjudgements on the part of NAMA and its Board:Well NAMA is already a gigantic misjudgment, so welcome to The Banana Republic.

 Credit and Risk strategy: decisions as to which borrowers to support and the extent of such support.

This  should open a hornets nest with endless possibilities for corruption. Can I suggest a mini version of the Lotto, or a raffle. Maybe we could do it on Pat Kenny, have developers plead their case, and the public text in their votes for the most compelling arguments, after all, its public taxpayers money!

High profile insolvency and enforcement cases.

Zoe beset with ACC or similar breakouts from NAMA?

Strategic views taken of various markets and market sectors.

 Its all free taxpayers money, so we can gamble away with it! Its not as if they can put you in jail if you make a mistake!

Asset management strategy: the timing and pricing of asset disposals and decisions relating to investment, etc.

Here NAMA has to be careful not to rock the boat around election time and be careful of political interference!

Suboptimal refinancing – timing and rates.

Casino NAMA open for business

Possible conflict between NAMA’s commercial mandate and other mandates or considerations e.g. transparency, social dividend mandate, administrative law requirements and market-making functions.

Enough said! 

Distortion of competition.

This I find the most interesting risk of the lot. Not much said about it apart from those 3 words! NAMA corrupts the property and development land market with its own forces of unfair competition as it attempts to groom property and development land prices in Ireland by withholding supply, then dumping on the market with a desperate attempt to sell before its assets go to rack and ruin in NAMA LAND. This amounts to an extra form of hidden taxation on the doomed future property buyer’s of Ireland. They will be saddled with NAMA’s inflated property values as it attempts to screw us all to pay for its crazy support of banks and shareholders and developers!

7. Reputation risks

 One of the sad consolations of opposition to NAMA is the certainty that history will give judgment on NAMA’s supporters and those who had a role in its misguided creation. Prepare for terms like clown, idiocy, misguided, mismanagement, criminal waste of public money!

 That NAMA would not be perceived to be carrying out its mandate in a commercial manner; that it would be considered cumbersome, bureaucratic and subject to excessive regulation and oversight; that it was incapable of responding with agility to market opportunities.

 Yes it will go the way of government quangos. Its government dabbling in the commercial market place. Its worse than nationalisation. NAMA has more to do with Putin, Stalinist economics than it has to do with capitalism and the free market place.

 Hard cases: NAMA, while acting commercially, might be perceived as being strong-armed in its dealings with some borrowers. NAMA, as soon as possible after its establishment, will compile and maintain a comprehensive Risk Register which will enumerate the various risks to which it will be exposed and the controls and risk mitigation measures that will be in place to address them. Other than those outlined above, significant risks to be addressed will include IT risks (e.g. unauthorised access to NAMA systems and data, data integrity, personal data and customer confidentiality etc.), treasury risks (interest rate and currency exposure) and various operational risks such as banks and service providers not carrying out their functions in an agreed manner.

The one major risk not dealt with in the above list is the Time Factor. This is a whole chapter missing from this document. There are no timescales other than a loose timescale to acquire the toxic assets. Its the disposal of these assets and the projected timescales, processes and methods for doing so that have to be set out here. Hitherto, we have nothing of that! The longer NAMA goes on, the more the taxpayer is exposed to risk and the deeper the potential disaster that is NAMA. The only way to reduce this risk is to end NAMA asap and as Poulson, Browne and Darling have done in the UK and US, gone away from a toxic asset relief programme project such as in the NAMA project and instead go for an equity based investment scheme as outlined in earlier posts.

Otherwise, its welcome to the Banana Republic of Ireland!

It is important to emphasise that much of the information regarding the prospective NAMA portfolio included in this draft Business Plan is based on aggregate data which has been provided by the various institutions. The interim NAMA team has not had direct access to individual transaction records and loan files and will not be in a position to verify the integrity of the data until it carries out its own due diligence on each of the loans proposed for acquisition. Given the unavailability, as yet, of the detailed asset information required for strategic planning and given that the Board has not yet been appointed, this interim plan focuses more on the operational planning required to ensure an efficient asset valuation and transfer process and the establishment of the NAMA organisation and its key governance structures.”

Crazy NAMA, ‘focuses more on the operational planning required to ensure an efficient asset valuation and transfer process and the establishment of the NAMA organisation and its key governance structures’ but won’t tell you how the toxic assets will be disposed of? This NAMA Business Plan according to the url given at the outset http://www.irishtimes.com/newspaper/finance/2009/1016/1224256787403.html was the fruit of hundreds of people working over months. 25 pages? Implicit in the above risk analysis is the undermining of all reasonable logic NAMA depends on for us to give it a snowballs chance in hell of ever achieving what it sets out to do. Its NAMA forever, they’ll take years to dispose of a single banana! NAMA will make of Ireland the same basket case as Iceland. Incidentally, treat your self to:

LESSONS ON THE WORLD FINANCIAL CRISIS
FROM A SMALL BANKRUPT ISLAND

MELTDOWN ICELAND
ROGER BOYES

BLOOMSBURY 2009

 

cheers

 

Colm

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