SPV’s Special Purpose Vehicles – NAMA Cloaks

November 1, 2009

The ludicrous levy proposed by the Greens and FF lampooned here in this blog recently has been u-turned by Brian Lenihan “necessary to ensure the balance sheets of the banks are not infected with a contingency that’ll devalue them”. Instead, according to the Irish Times, Oct 31, p8, there will be amendment at report stage next week “to provide for the future introduction of a future levy in the form of a tax surcharge on the participating institutions in the event of NAMA making a loss”.

This little trick pivots the levy on the profits the banks will make in the future for which they will be liable to pay corporation tax. For the banks to pay, NAMA will have to make a profit. But consider this, the damage NAMA will do to the economy in making a loss will inevitably mean the banks, who also depend on our economy, will also make a loss. In this scenario, no way will the banks have to pay a penny. At the same time, investors will still consider the banks hobbled by a future levy on profits.

I initially considered making bank shareholders the topic of this blog because there has been so little media attention and focus given to them in the current crisis. While the media have focused on developer loans and bankers in a name and shame campaign rightfully demanding the polluter pays, ‘shareholders’ has become an obscure catch all phrase to avoid delving too deeply, perhaps out of respect for their losses. We have no published lists of the major shareholders of AIB, BOI etc. Who are the larger shareholder investors in the Irish banks? However, we do know that many of the major shareholders of the Irish banks have been institutional investors representing pension funds. It would have been interesting to have been a fly on the wall of meetings between Brian Lenihan TD and their representatives who believed their investments in Irish banking shares were on a bankers’  bonfire of share values. 

NAMA was put through more committee stages leading to its passing into legislation this week. Ireland through NAMA in not following the good bank model proposed by Stiglitz and Buiter (previous post) notably enacted  in the UK this week, a Stiglitz/Buiter solution announced by Browne and Darling for Northern Rock  will prove fascinating for economists to study to compare it to the nationalization model favoured by US/UK and Sweden, equity for investment models.

This week NAMA pulled another rabbit from its bag of toxic tricks, this was the ‘Special Purpose Vehicle’ announced by Lenihan. The crazy thing about the SPV is that those who float this believe that private investors will share their views that NAMA will make a profit and that they are almost charitable in allowing private investors a stake in their profits. Its interesting from the viewpoint that  pension funds are mentioned as some of the major investors in the soon to be SPV’s. Other questions arise as to the legality or morality of allowing banks to speculate in share dealing with pension money. Surely such investments should only be made into guaranteed Government bonds and not have any element of exposure to the vagaries of  stock market plundering.

Let’s have a look at this,( my italics as comments ):

Basically the idea is this, in order to take away the €54 billion from the Governments balance sheets where otherwise it would have to appear as a debt that would provide difficulties in obtaining Government loans from the financial markets, we hide away the debt. (SPV’s were made notorious by Enron executives who used them to bury debt and loss.) http://www.chron.com/disp/story.mpl/special/enron/1228645.html
The Enron people would bury some assets inside an SPV, the assets would be tied to debt, hiding them inside the SPV meant they were off the Enron debit books. Then a loan would be raised against the asset but Enron would mark down the loan as a profit on its books. Such schenanigans may yet befall NAMA unless rigorous scrutiny is put in place to oversee its operations and protect taxpayer money. Manipulation of the market place was a key component of the Enron strategy and it looks as if NAMA will also interfere with the market place in just a negative way.

The strange thing is the support of Europe for the SPV. Its rumoured Germany demanded their use in managing its debt so they had to give the same leeway to Ireland. The truth is these shady SPV’s have contributed in large part to global economic collapse and new regulatory rules should have them banned!

“The mechanism will allow the Government to exclude Nama’s €50 billion-plus liability from the national debt, and avoid a serious breach of the EU’s stability and growth pact, which limits the amounts that euro-zone states can borrow relative to the size of their economies.”

PRIVATE INVESTORS will own more than half of Nama’s (National Asset Management Agency) property loans, but the taxpayer will guarantee 95 per cent of their purchase price, under the scheme that the Government intends using to keep the €50 billion liability off the State’s books.

Once it is established, Nama, the agency that will take control of Irish banks’ property-backed loans, will create a separate company – known as a special purpose vehicle (SPV) – to buy and manage the debts.

Private investors will own 51 per cent of the SPV in return for a €51 million investment. Nama will own the remaining 49 per cent in return for investing €49 million, giving the SPV €100 million in capital……

Private investors have to own more than half the SPV – and thus its assets – in order to comply with EU guidelines that will allow the Government to exclude Nama’s liabilities from the national debt.

It is not clear just who the private investors will be, but the department indicated yesterday that the cash is likely to come from the financial markets. Its spokesman said that it is not possible to say whether any group, including the Irish banks who will benefit from Nama, can be specifically included or excluded.

Large Irish pension funds could be among them plus the crucial dividend returned not clear as yet but if its tied to ‘returns from Irish Government bonds’ why would any investor make the ludicrous decision to invest in this scheme with its associated risk and not just invest straight in Government Bonds? Why are Irish pension fund investments not restricted to investment in Government bonds in the first place?

If the property loans can be managed profitably, then Nama and the private backers will be paid a yearly dividend, tied to returns from Irish Government bonds. Once the entire operation is finished, the SPV will be wound up. The Government’s memo says that the investors, that is Nama and the private backers, will only be repaid their €100 million if the resources are there.

If the loans are ultimately profitable, they will be repaid their capital plus 10 per cent – €10 million – once the SPV is wound up. This means that the private backers will be repaid their €51 million, plus €5.1 million, plus any dividends they will have received along the way. Any further profits over and above these amounts will be returned to the exchequer.

Large institutional shareholders could be attracted to the guaranteed annual return plus the possibility of the windfall return at the end. The trick here for any private investors is to keep NAMA alive for long enough to return  your investment plus make a profit on it. This could be seen as payback to shareholders for losses incurred by large institutional pension fund investors. Of course all this comes from taxpayers money.

However, if the property loans are not profitable, Nama and the private investors will lose their €100 million.





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