National Asset Management Agency
Encyclopedia
The National Asset Management Agency (NAMA; ) is a body created by the Government of Ireland in late 2009. It is in response to the Irish financial crisis
and the deflation of the Irish property bubble
.
NAMA will function as a bad bank
, acquiring property development loans from Irish banks in return for government bonds
, primarily with a view to improving the availability of credit in the Irish economy
. The original book value
of these loans is €77 billion (comprising €68bn for the original loans and €9bn rolled up interest) and the original asset values to which the loans related was €88bn with there being an average Loan To Value of 77% and the current market value is estimated at €47 billion.
NAMA is controversial, with politicians (who were in opposition at the time of its formation)
and some economists criticising the approach, including Nobel Prize-winning economist Joseph Stiglitz who has said that the Irish government is "squandering" public money with its plan to bail out the banks.
Two years after NAMA's establishment the Irish government was compelled for other but similar reasons to seek an EU-IMF bailout in November 2010, the outcome of which will have considerable effects on NAMA's future operations.
due to debtors experiencing acute financial difficulties. Both factors have led to a sharp drop in the value of these loan assets.
If the banks were to recognise the true value of these loans on their balance sheets, they would no longer meet their statutory capital requirements. The banks therefore need to raise further capital but, given the uncertainty around the true value of their assets, their stock is in too little demand for a general share issuance to be a viable option.
The banks are also suffering a liquidity crisis due, in part, to their lack of suitable collateral for European Central Bank
repo loans
. Along with their capital requirement problems, this is limiting the banks' ability to offer credit to their customers and, in turn, contributing to the lack of growth in the Irish economy.
, Allied Irish Banks
, Anglo Irish Bank
, EBS
, Irish Life and Permanent
and Irish Nationwide. Other institutions, such as Ulster Bank
, which are not covered may choose to join the scheme.
The Minister for Finance
, Brian Lenihan
, said the banks would have to assume significant losses when the loans, largely made to property developers, are removed from their books. If such losses resulted in the banks needing more capital, then the government would insist on taking an equity
stake in the lenders. Economist Peter Bacon, who was appointed by the government to advise on solutions to the banking crisis, said the new agency had potential to bring a better economic solution to the banking crisis and was preferable to nationalising the banks.
The assets will be purchased by using government bond
s, which may lead to a significant increase in Ireland's gross national debt.
The Bill provides that NAMA will be established on a statutory basis, as a separate body corporate with its own Board appointed by the Minister for Finance and with management services provided by the National Treasury Management Agency
.
The Bill envisages that NAMA will arrange and supervise the identification and valuation of property-backed loans on the books of qualifying financial institutions in Ireland, but will delegate the purchase and management of these loans to a separately created Special Purpose Vehicle (SPV).
on how NAMA and the SPV would be classified in national accounts.
NAMA will arrange and supervise the identification and valuation of property-backed loans on the books of qualifying financial institutions in Ireland, but the purchase and management of these loans will be the responsibility of the SPV. The SPV will have a majority of private equity
. It will fund the purchase of the loan books from financial institutions by issuing securities, most of which will be backed by a guarantee from the Irish Government.
According to the details provided to Eurostat, the Master SPV would be a separate legal entity and would be jointly owned by private investor
s, who would own 51% of its equity and therefore have the majority vote, and by NAMA, which would hold the remaining 49%. The subscribed capital of the Master SPV would be €100m. Although the SPV would have its own Board, NAMA will retain a veto
over all decisions of the Board that could affect the interests of NAMA or of the Irish government. The Master SPV would be run with the objective of making a profit on the purchase and management of the assets it purchases.
The private investors in the Master SPV would be entitled to the following economic return: the equity investors will receive an annual dividend linked to the performance of the Master SPV; On winding up of the Master SPV, the equity investors would only be repaid their capital if the Master SPV has the resources; they would receive a further equity bonus of 10% of the capital if the Master SPV makes a profit; All other profits and gains of the Master SPV would accrue to NAMA.
former Finance Minister the late Brian Lenihan
believes that pension fund
s could be the most appropriate investors in the SPV. The annual dividend, should one be paid, is to be capped at the 10-year Irish Government bond yield at the time the dividend is declared. Lenihan says he is confident that the €51m can be found from suitable investors, because of the similarity of the SPV investment to a government bond
.
In its analysis the Central Statistics Office (CSO) requested that NAMA be classified as a Government Entity and the Master SPV as a Financial Institution. The likely impact of this classification could be that the debt issued by the SPV, guaranteed by the Irish government, would not be classified as part of the national debt of Ireland by Eurostat.
In a letter dated 16 October 2009, Eurostat gave a preliminary view. The letter stated that NAMA is to be treated as part of the government sector, the type of assets to be purchased cannot be expanded without approval of the European Commission
, that it be a temporary scheme and that the size of potential losses be small relative to the total liabilities. Eurostat noted that the Minister for Finance will examine at the end of 2012 whether NAMA has met its objectives and decide if its continuation is justified. It suggested that a rather detailed analysis has to be carried out, especially of the guarantee arrangements. It made no judgement on the draft NAMA business plan but stated that the presence of market investors is reassuring to it (those providing 51% of the equity in the SPV). Their preliminary conclusion is that the Master SPV may be classified as a financial corporation
. However, this is a prelimiary view and subject to revision.
Each provided €17m for a total of €51m of NAMA's initial capital of €100m. NAMA then geared up
way above typical EU banking limits
, taking on debt 35 times its paid-up capital. The reason given for this is that the loans are temporary; have bought other loans at a discount (see below); will be repaid on property sales; and are subject to continuous review. They are similar in function to bridging loans
.
The purpose of NAMA's quasi-independent legal status is to remove its debts from general Irish government debt. This is the position of the government, the International Monetary Fund
and Eurostat
.
But, as the three private investors are bank-run pension fund managers, whose parent or major-shareholder companies had been all but nationalised by 2011, and as the 2010 Credit Institutions (Stabilisation) Act allows the government powers to apply to the courts to restructure any financial body in any way in secret at any time, and as a general guarantee to protect the parent banks remains in place (see the covered institutions below), the international rating agencies
consider NAMA's debts to be a part of Irish government debt. Besides, NAMA's directors on the SPV board "will maintain a veto over all decisions of the Board that could affect the interests of NAMA or of the Irish government."
published details on NAMA in a press release dated 8 April 2009. The draft bill was published on 30 July 2009 for public consultation. Following the consultation process, the National Asset Management Agency (NAMA) Bill 2009 was published on 10 September 2009. The bill was debated in the Irish Parliament, and passed, on 15 October 2009 by 77 votes to 73. The committee stage of the bill started on 22 October 2009. Following the passing of the bill in both houses of the Oireachtas, the President, Mary McAleese decided to sign the bill into law on 22 November 2009, despite calls from the Labour Party
to seek advice from the Council of State
regarding its constitutionality
.
, estimated at about 30% of book value, and in exchange the banks will be given bonds to sell to raise cash. The 30% discount to the €77bn book value outlined by NAMA includes circa €9bn of unpaid interest. The current value of the assets will not be based on their estimated market value
, but on a higher notional "long-term economic value". This higher value is ultimately based on the share prices of Irish banks, which were low in March 2009 but have risen since.
Critics say that this is a circular argument; were the expected discount 50% or more, the banks' share prices would have collapsed. In early September 2009 Minister Lenihan pointed to this rise in share prices as positive news: "... markets have assessed that information in the context of their current share price and rating agencies have used it in their assessment of these institutions." Should an independent NAMA valuation be too low, Lenihan said: "I can give directions to NAMA to have a valuation reconsidered."
In addition, critics also pointed out that the use of the term, often capitalised, Long Term Economic Value which was popular in the press around the time of the establishment of NAMA, often as the acronym LTEV, gave the impression that it was a well-known or accepted term in economics. It was pointed out that, in fact, the acronym did not appear on any internet page before 2009, with the full term appearing only shortly before, with the concept of LTEV being invented primarily to give political cover for paying from taxpayers' funds, a price in excess of the market value of assets.
Problems relating to paying the notional long-term economic value (rather than market value) for the loans to be transferred to NAMA were highlighted by the difficulties of Liam Carroll
's Zoe Developments. In July 2009, Zoe Developments, a large property development company, made an application to court seeking the appointment of an examiner
. The appointment of an examiner would have allowed it protection from its creditors. Zoe Developments was estimated to have €1.2bn of loans with a likely deficit of €900m in a liquidation scenario. The €1.2bn of loans included debts of €489m to AIB and €113m to Bank of Ireland. In addition to Zoe Developments, Carroll's overall liabilities, including other businesses are estimated to total €2.8bn On 10 September 2009, the High Court refused to appoint an examiner to Zoe Developments despite the support of AIB and Bank of Ireland for such an appointment. Receivers have been appointed, after a Supreme Court appeal failed. A deficit of €900m versus loans of €1.2bn if realised would imply a market value of 25% of loan value for Zoe Developments.
On 9 September 2009, Philip Lane of Trinity College, Dublin
published a paper on Estimating Long Term Economic Value. Using economic theory and formulae, Lane describes the long-term economic value being a function of both nominal price levels and the real (inflation-adjusted) economic value of property. The real economic value of property is further defined as a function of numerous factors including, but not limited to: real disposable income per capita; the level of long-term interest rates; the size of the population, and; the demographic structure of the population. On implementation of long-term economic value, Lane highlights the concerns over price levels. In particular, given the debate on domestic competitiveness versus other countries, Ireland may experience real-exchange rate depreciation, which could have a drag effect of nominal property value. He said, "it is important that the NAMA process to recognise the inevitability of such uncertainty in the determining of long-term economic values". As a result, he favours a two-part payment system.
In his speech to the Dáil on 16 September 2009, the Minister of Finance Brian Lenihan indicated that alternatives to NAMA that did not use long-term economic value would lead to the need for fresh equity
to be injected by the government into the financial sector of between €4 and 7 billion. Coincidentally, the upper end of this figures is equal to the difference between the € 54 billion estimated "long-term economic value" and the €47 billion "current market value". Lenihan noted that the additional € 4-7 billion would be an incremental investment in the banks rather than a higher payment for the loans.
Enterprise, Trade and Employment spokesperson, Leo Varadkar
, said of NAMA: "(Fianna Fáil
and government minister) Willie O'Dea
and Peter Bacon, the architect of NAMA, both accept that this is a massive gamble. Taxpayers are right to ask why Fianna Fáil is so keen to gamble with their money without asking the banks, bondholders and institutional investors to take their fair share of the pain. In dealing with the banking crisis, the objective must be to minimise the risk to taxpayers and to get credit flowing to businesses and homebuyers. NAMA achieves neither of these objectives. It won't get credit flowing and it exposes taxpayers to all of the risk." Fine Gael instead proposed a 'national recovery bank'.
Labour Party
Enterprise spokesperson and former Finance Minister Ruairi Quinn
accused the Government of "proposing to establish the biggest property company in the world and asking taxpayers to foot the bill and bear all the risk." He stated that "this Bill will be one of the most important pieces of legislation ever to have come before Dáil Eireann. There will be enormous consequences for the taxpayer if the government get it wrong." Labour instead has proposed the temporary nationalisation of the banks.
A commentary signed by leading academics also questioned the NAMA strategy. They wrote in The Irish Times
that they saw
The criticisms are disputed by the Government. The Tánaiste
and Minister for Enterprise, Trade and Employment
Mary Coughlan has defended the creation of the agency saying it was not a bailout for the banks, one of the charges made against it.
On 7 October 2009, Professor Joseph Stiglitz, winner of the Nobel Prize
in economics and former chief economist of the World Bank
, speaking at Trinity College Dublin criticised NAMA. He said, "Countries which allow banks to go under by following the ordinary rules of capitalism have done fine. The US has let 100 banks go this year alone, as did Sweden and Norway in their crises." As well as commenting that in Ireland, "this bank bailout is a simple transfer from taxpayers to bondholders, and it will saddle generations to come. The only thing that might give you solace is that, as chief economist of the World Bank, we see this type of thing happening in banana republics all over the world. Whenever a banking crisis happens, the financial sector uses the turmoil as a mechanism to transfer wealth from the general population to themselves. I’ve been very disappointed to see that it has happened, not only in banana republics, but in advanced industrialised countries."
On 21 October 2009, ahead of the International Financial Services Summit (IFSS) in Dublin on 5 November 2009, two leading economists expressed caution on NAMA. Professor Nouriel Roubini
, Professor at New York University Stern School of Business
said that: It is essential that the bad assets are taken off the balance sheets of the financial institutions and that the Government separates the good assets from the bad assets to
clean up the financial system.... But if it does it in such a way that implies it is buying these assets at overpriced prices that does not reflect the underlying value, then it is giving a big subsidy to the bank shareholders and the unsecured creditors." Professor Willem Buiter
, Professor of political economy at the London School of Economics
and former member of the UK Monetary Policy Committee, said: the Irish Government should have, in principle, gone for a good bank, not a bad bank.... The bad bank is always a bad idea because it means that the Government underwrites all the creditors and creates moral hazard." Other participants at the IFSS include Martin Wolf, Chief Economics Commentator, Financial Times and Philip Lane, Professor of International Macroeconomics at Trinity College Dublin.
In February 2010 Brian Cowen
defended his claim that the NAMA will increase the supply of credit into the economy despite the International Monetary Fund
(IMF) saying it would not lead to any significant increase. “People should contemplate what level of credit accessibility we’d have in this economy without NAMA,” he said. “It’s not just sufficient in itself obviously for credit flow, it’s certainly an important and necessary part of restructuring our banking system, of that there’s no doubt, in terms of improving as a location for funding of banking operations,” said Mr Cowen. He previously said that the Government’s objective in restructuring the banks through NAMA was to “generate more access to credit for Irish business at this critical time”. In September 2009, Lenihan expressed a similar view, saying it would lead to more lending for business and households. Cowen was responding to reports published on 8 February that the IMF had told Lenihan in April 2009 that the NAMA would not lead to a significant increase in lending by the banks.
The comments, which appear in internal Department of Finance documents released under the Freedom of Information Act, were made by senior IMF official Steven Seelig who will join the board of NAMA in May 2010. Minutes of a private meeting at the department between Brian Lenihan
and IMF officials on 29 April 2009 last state that the “IMF (Mr Seelig) do not believe that Nama will result in significant increase in bank lending in Ireland”. The Government has maintained that NAMA's purchase of bad loans from the banks with State bonds would increase the flow of credit in the economy since the plan was unveiled April 2009. Speaking at the publication of the NAMA legislation in September 2009, Mr Lenihan said it would “strengthen and improve” the funding positions of the banks “so that they can lend to viable businesses and households”. The IMF estimated in their published report the domestic banks would face losses of up to €35 billion, though the department pointed out this would be partly funded from operating profits and provisions already taken against some loan losses.
In addition to the supplementary data document, the Department of Finance published incremental data on 13 October 2009 in a Draft NAMA Business Plan.
Within the Supplementary Data Document there is data on the financial ratios of the six covered banks. Adding up the Tier 1 capital
of the six covered institutions, as reported in the Supplemental Data document leads to total Tier 1 capital of €29bn. This compares to combined risk-weighted-assets of €363bn, and a Tier 1 capital ratio of 7.9%. Basel II
recommends a minimum ratio of 4% capital requirement
.
According to the Supplementary Data Document, the long-term-economic value of the loans to be transfers to NAMA is estimated to be 15% higher than the market value. NAMA applies statutory adjustment factors to estimate the valuation of €54bn. The document also notes that asset prices would need to increase from current market values by 10%, for the government and taxpayers to avoid any loss, taking into account subordinated debt. The difference between the 15% uplift to get to €54bn and the need for a 10% uplift for the taxpayer to avoid a loss, is explained in the Draft NAMA Business Plan. This analysis takes into account the expected part payment in subordinate debt to the six covered institutions of €2.7bn (circa 5% of the €54bn transfer value). This subordinated debt holders may receive none of the proceeds in a scenario where the taxpayers are exposed to a loss.
Assuming the transfer value was at the market-value estimate of €47bn, not €54bn, then Tier 1 capital could fall by €21bn not €14bn. Risk weighted assets could be €342bn and Tier 1 capital €8bn, with a ratio of 2.2%.
However, this analysis looks at the aggregate data provided in the Supplemental Data Document. For a clearer picture, NAMA would need to give a breakdown of the loans to be transferred, by institution, as well as the book value and market value of each. Some additional information was provided on 13 October 2009 in the Draft NAMA Business Plan, indicates that the six covered institutions have taken €7bn of provisions in the last year against loan impairments and giving the split of the €77bn of prospective loans for transfer to NAMA. However, the data point of the current net book value of the loan portfolios and the prospective transfer price for the portfolios by each of the 6 covered institutions was omitted.
agreements are used. If interest rates fall, the borrower does not benefit, as he/she must pay the saving to the counter-party of the swap agreement. Given the decline in interest rates over the last 2 years (e.g. the US Federal Funds Rate was 0.25% in late Sept 2009 versus 5.25% in August 2007), there may be a significant liability relating to the €14.7bn derivative portfolio. The Draft NAMA Business Plan does not elaborate on the magnitude of this liability, however, it states: "These derivatives change the interest rate structure of the underlying loans and their mark-to-market value will be incorporated into the valuation of the loans".
The Draft NAMA Business Plan indicated that the potential loans for transfer to NAMA of €77bn book value (including rolled-up interest) is divided into €24.1 billion from AIB, €28.4 billion from Anglo-Irish Bank, €15.5 billion from Bank of Ireland, €0.8 billion from EBS, and €8.3 billion from Irish Nationwide.
The document states "that about 40% of the loans are estimated to be cash-generating". This indicates that €46 billion of the loans are not paying interest. Of the €31 billion that are cash-generating, there is no indication in the document if they are paying the full requirements under the terms of the loan agreements. The €31 billion is divided into €28 billion of commercial loans and €3 billion of land and development loans. This compares to a breakdown of the € 77 billion of €28 billion of commercial loans, €21 billion of land and development loans, and €28 billion of associated loans.
Additional data on the size of the underlying loans in also provided in the Draft Business Plan. Of particular note is that the 10 largest underlying loans have a projected book value of €16 billion (i.e. 20% of the overall €77 billion), with an average loan size of €1.6 billion each. The top 100 underlying loans total € 38 billion, equivalent to 49% of the overall.
In July 2010 after the a revised business plan was published it was revealed that it is now predicting a possible profit of €1bn, with the possibility of losses of up to €800m, after an initially projection of more than €4bn in profit. The plan published today updates and revises the interim business plan published in October of last year which was prepared on the basis of information supplied at that time by the five participating institutions (Anglo Irish Bank, AIB, Bank of Ireland, EBS and Irish Nationwide) and in advance of the detailed examination of any of the key loans by NAMA. Finance Minister Brian Lenihan
has denied that the Government got its sums wrong on NAMA.
The original business plan estimated a profit of €4.8bn based on a rise in assets value of 10%. Today's revised figures say that if they recover the full value of the loans plus 10% it will result in a profit of €3.9bn.
NAMA chairman Frank Daly said the plan confirmed that the five institutions covered by NAMA had not disclosed or had been unaware of the extent of the financial crisis afflicting their borrowers. He said the banks had shown 'remarkable generosity' towards their borrowers, adding that NAMA had no intention of maintaining that approach. 'To say the least we are extremely disappointed and disturbed to find that, only months after being led to believe that 40% of loans were income producing, the real figure is actually 25%.
, a professor of International Financial Economics and Development at Trinity College Dublin, and shortly afterwards to be appointed head of the Central Bank of Ireland, stated on 21 July 2009 that "Unless the loans are valued at unrealistically high prices, the NAMA process will leave the banks with insufficient capital. This is especially true considering the additional loan losses in non-property lending that are inevitable given the depth of the recession and which will have to be provided for." Professor Honohan was appointed Governor of the Central Bank of Ireland and Financial Services Authority by the Minister of Finance in late September 2009.
On 5 October 2009, the Irish Independent reported that European banks need to raise substantial equity capital, including AIB and BOI. The article quoted a report by the bank JP Morgan which estimates that the AIB and BoI need to raise a combined €11bn, €7bn for AIB and €4bn for BoI.
On 8 October 2009, Brian Lenihan
Minister of Finance said that even after selling real-estate loans to the government's NAMA, that the country's biggest banks may need further money. Additional funding from the Irish government was highlighted, with Lenihan recognising that it would be difficult to raise funds on the stock market.
On 10 October 2009, the Irish Times reported that Bank of Ireland and AIB could need to raise a combined €9bn as a result of write-downs associated with the transfer of assets to NAMA. The article quotes a Merrion Capital report that estimates that AIB and BoI's equity Tier 1 Capital ratios would fall to 3.3% and 3.5% in 2010/11.
In the Draft NAMA Business Plan published on 13 October 2009, it states that: "After the transfer of their L&D and associated loans to NAMA, it is likely that some institutions will require additional capital in order to absorb the consequent write-downs on the book value of their assets. The Government has indicated that it expects institutions to seek private
sector capital in the first place but to the extent that sufficient capital cannot be raised independently or generated internally, it remains committed to providing institutions with an appropriate level of capital to continue to meet their requirement."
The concept of subordinated debt holders receiving no return on their loans, is raised in the Draft NAMA Business Plan, where the subordinated debt issued to the covered institutions, could receive nothing in a scenario where the Irish taxpayer incurs a loss on its investment in NAMA. 5% of the €54 billion purchase price is forecast to be paid in sub-ordinated loans.
for the euro. Given a percentage of the loans are cash-generative this €16 billion may be partially offset by an estimated €12 billion of interest received. The Draft business plan expects a default rate of 20% on the €77 billion of principal, and repayment of €62 billion. The €15 billion of defaulted loans is forecast to be sold for €4 billion (i.e. circa 27% of loan value). Fees and running costs of NAMA are estimated at €240m per annum, i.e. circa €3 billion over 11 years. Taking all of these cash-flows together leads to a cumulative positive cash flow of €5 billion.
The Draft Business Plan looks at sensitivity analysis, indicating that if short and/or long-term interest rates rise, there would be an erosion of the €5 billion positive cash flow to NAMA. Similarly, if the default rate increases, this cash flow would be eroded. The document states that an increase of the default rate to 31% would erode in full the net present value of the positive cash flow.
The Draft Business Plan does not attempt to match the €62 billion of principal repayments and €4 billion of asset recovery (of the estimated €15 billion of defaulting loans) to the €54 billion "long-term-economic value" expected to be paid for the NAMA loan portfolio. Nor is there any analysis comparing the forecast €15 billion of defaults relative to the estimates 60% of loans, i.e. €46 billion, that are not cash-generative.
A part of the Draft Business Plan that is mentioned but not modeled in the document, is the ability of the NAMA to borrow an incremental €5 billion to pursue its "asset development/enhancement objectives". In particular, NAMA may invest in projects that are deemed commercially viable. NAMA shall inherit with the loans, undrawn commitments of €6.5bn to the borrowers.
On 9 October 2009, the two parties of the Irish government, Fianna Fáil and the Green Party agreed a "Renewed Programme for Government". In this agreement, it states "Should NAMA make a loss over time, a levy would be imposed to recoup the cost to taxpayers". This proposal is not in line with the preferred option that Professor Honohan highlighted in May 2009.
In the letter from Eurostat to the CSO dated 16 October 2009, it is noted that in addition to the 5% of the purchase price paid in subordinate bonds, that reduces the potential losses of the Irish taxpayer, that an amendment to the legislation that shall be introduced means that the participating banks shall have to pay a tax surcharge on their operating profits until the loss of the Master SPV, related to NAMA, is recouped.
(ECB). The banks' losses of €42 billion written off on these sales, and their other losses, were met by Irish government cash or loans that were advanced or ultimately guaranteed by the ECB. €3.9 billion-worth of sales both in and outside Ireland had been approved by NAMA in a difficult market, given the late-2000s recession.
In that the main purpose of NAMA was to remove bad debts from the six banks and to recapitalize them, it was hard to see how it had made a difference in the short term. The plan relied upon an early worldwide recovery from recession, which did not occur. Government support for the banks continued separately from NAMA and had risen to 32% of GDP by September 2010.
In turn, the government's support for NAMA itself was quantified in July 2010 by the IMF as "more than 25% of GDP in 2010". The financial markets concluded that Ireland could not support the cost of the banks as well as NAMA, and run a budget deficit, and they sold Irish bonds at the time of the renewal of the two-year state bank guarantee in September 2010, causing yields to rise. It became impossible for the government itself to borrow from the bond markets. The drop in value of Irish bonds also had an immediate effect on the balance sheets of Irish and foreign banks' capital requirement
s.
As a result, in November 2010 the Irish government was itself obliged to seek a €67 billion net "bailout" from the ECB and IMF and undertook in return that the sale of the six banks' remaining assets outside NAMA would be "expedited"; part of the money was to cover future losses incurred by buyers of those assets. By early 2011 the six banks' liquidity needs were being supported by a further €150 billion from the ECB. Despite all the efforts to save them, in April 2011 the six banks' credit ratings were reduced to junk status by Moody's
.
In April 2011 NAMA announced that it will commence selling home mortgage
s to private investors on the basis that the investor pays equity of 30% of the asking price of the loan, with NAMA providing financing for the balance.
In September 2011 the Irish Office of the Commissioner for Environmental Information determined that, in regard to those seeking information on the environmental impact
aspects of properties controlled by NAMA, NAMA is defined as a "public authority" under the relevant Act, and is obliged to provide that information to applicants.
2008–2009 Irish financial crisis
The 2008–2011 Irish financial crisis, which had stemmed from the financial crisis of 2008, is a major political and economic crisis in Ireland that is partly responsible for the country falling into recession for the first time since the 1980s...
and the deflation of the Irish property bubble
Irish property bubble
The property bubble in the Republic of Ireland began in 2000 and peaked in 2006, as with many other western European countries, with a combination of increased speculative construction and rapidly rising prices....
.
NAMA will function as a bad bank
Bad bank
Bad bank is a term for a financial institution created to hold nonperforming assets owned by a state guaranteed bank. Such institutions have been created to address challenges arising during an economic credit crunch wherein private banks are allowed to take problem assets off their books...
, acquiring property development loans from Irish banks in return for government bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
, primarily with a view to improving the availability of credit in the Irish economy
Economy of the Republic of Ireland
The economy of Ireland has transformed in recent years from an agricultural focus to a modern knowledge economy, focusing on services and high-tech industries and dependent on trade, industry and investment. In terms of GDP per capita, Ireland is ranked as one of the wealthiest countries in the...
. The original book value
Book value
In accounting, book value or carrying value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or Impairment costs made against the asset. Traditionally, a company's book value...
of these loans is €77 billion (comprising €68bn for the original loans and €9bn rolled up interest) and the original asset values to which the loans related was €88bn with there being an average Loan To Value of 77% and the current market value is estimated at €47 billion.
NAMA is controversial, with politicians (who were in opposition at the time of its formation)
and some economists criticising the approach, including Nobel Prize-winning economist Joseph Stiglitz who has said that the Irish government is "squandering" public money with its plan to bail out the banks.
Two years after NAMA's establishment the Irish government was compelled for other but similar reasons to seek an EU-IMF bailout in November 2010, the outcome of which will have considerable effects on NAMA's future operations.
Background
As a result of the collapse of the Irish property market, Irish banks have property development loan assets secured on property with a market value significantly below the amount owed. Many of the loans are now non-performingNon-performing loan
A Non-performing loan is a loan that is in default or close to being in default. Many loans become non-performing after being in default for 3 months, but this can depend on the contract terms....
due to debtors experiencing acute financial difficulties. Both factors have led to a sharp drop in the value of these loan assets.
If the banks were to recognise the true value of these loans on their balance sheets, they would no longer meet their statutory capital requirements. The banks therefore need to raise further capital but, given the uncertainty around the true value of their assets, their stock is in too little demand for a general share issuance to be a viable option.
The banks are also suffering a liquidity crisis due, in part, to their lack of suitable collateral for European Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
repo loans
Repurchase agreement
A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively...
. Along with their capital requirement problems, this is limiting the banks' ability to offer credit to their customers and, in turn, contributing to the lack of growth in the Irish economy.
How NAMA will work
The National Asset Management Agency Bill 2009, in its present format, covers the six financial institutions which are covered by the Irish government's deposit guarantee scheme. Those institutions are Bank of IrelandBank of Ireland
The Bank of Ireland is a commercial bank operation in Ireland, which is one of the 'Big Four' in both parts of the island.Historically the premier banking organisation in Ireland, the Bank occupies a unique position in Irish banking history...
, Allied Irish Banks
Allied Irish Banks
Allied Irish Banks p.l.c. is a major commercial bank based in Ireland.AIB is one of the so called "big four" commercial banks in the state. The bank has one of the largest branch networks in Ireland; only Bank of Ireland fully rivals it. AIB offers a full range of personal and corporate banking...
, Anglo Irish Bank
Anglo Irish Bank
Anglo Irish Bank was a bank based in Ireland with its headquarters in Dublin from 1964 to 2011. It went into wind-down mode after nationalisation in 2009....
, EBS
EBS Building Society
EBS Limited was a financial institution in Ireland and was the country's largest building society. EBS has more than 400,000 members and distributes its products through a branch and franchised agency network. It handles direct business by telephone and the Internet...
, Irish Life and Permanent
Irish Life and Permanent
Irish Life and Permanent, Plc or IL&P is a provider of personal financial services in Ireland. IL&P enjoys limited liability....
and Irish Nationwide. Other institutions, such as Ulster Bank
Ulster Bank
Ulster Bank is a large commercial bank, one of the Big Four in both Northern Ireland and the Republic of Ireland. The Ulster Bank Group is subdivided into two separate legal entities, Ulster Bank Limited and Ulster Bank Ireland Limited...
, which are not covered may choose to join the scheme.
The Minister for Finance
Minister for Finance (Ireland)
The Minister for Finance is the title held by the Irish government minister responsible for all financial and monetary matters. The office-holder controls the Department of Finance and is considered one of the most important members of the Government of Ireland.The current Minister for Finance is...
, Brian Lenihan
Brian Lenihan, Jnr
Brian Joseph Lenihan was an Irish Fianna Fáil politician and barrister who served in the government of Ireland as Minister for Justice, Equality and Law Reform from 2007 to 2008 and as Minister for Finance from 2008 to 2011...
, said the banks would have to assume significant losses when the loans, largely made to property developers, are removed from their books. If such losses resulted in the banks needing more capital, then the government would insist on taking an equity
Equity (finance)
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
stake in the lenders. Economist Peter Bacon, who was appointed by the government to advise on solutions to the banking crisis, said the new agency had potential to bring a better economic solution to the banking crisis and was preferable to nationalising the banks.
The assets will be purchased by using government bond
Government bond
A government bond is a bond issued by a national government denominated in the country's own currency. Bonds are debt investments whereby an investor loans a certain amount of money, for a certain amount of time, with a certain interest rate, to a company or country...
s, which may lead to a significant increase in Ireland's gross national debt.
The Bill provides that NAMA will be established on a statutory basis, as a separate body corporate with its own Board appointed by the Minister for Finance and with management services provided by the National Treasury Management Agency
National Treasury Management Agency
The National Treasury Management Agency is the agency that manages the assets and liabilities of the Government of Ireland. It was established at the end of 1990 to borrow for the exchequer and manage the national debt...
.
The Bill envisages that NAMA will arrange and supervise the identification and valuation of property-backed loans on the books of qualifying financial institutions in Ireland, but will delegate the purchase and management of these loans to a separately created Special Purpose Vehicle (SPV).
Master Special Purpose Vehicle
In a letter from the Central Statistics Office of Ireland (CSO) to Eurostat, dated 22 September 2009, details are provided on the suggested creation by NAMA of a Master Special Purpose Vehicle (SPV) known as National Asset Management Ltd and controlled by the holding company National Asset Management Agency Investment Ltd. The CSO sought guidance from EurostatEurostat
Eurostat is a Directorate-General of the European Commission located in Luxembourg. Its main responsibilities are to provide the European Union with statistical information at European level and to promote the integration of statistical methods across the Member States of the European Union,...
on how NAMA and the SPV would be classified in national accounts.
NAMA will arrange and supervise the identification and valuation of property-backed loans on the books of qualifying financial institutions in Ireland, but the purchase and management of these loans will be the responsibility of the SPV. The SPV will have a majority of private equity
Equity (finance)
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
. It will fund the purchase of the loan books from financial institutions by issuing securities, most of which will be backed by a guarantee from the Irish Government.
According to the details provided to Eurostat, the Master SPV would be a separate legal entity and would be jointly owned by private investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...
s, who would own 51% of its equity and therefore have the majority vote, and by NAMA, which would hold the remaining 49%. The subscribed capital of the Master SPV would be €100m. Although the SPV would have its own Board, NAMA will retain a veto
Veto
A veto, Latin for "I forbid", is the power of an officer of the state to unilaterally stop an official action, especially enactment of a piece of legislation...
over all decisions of the Board that could affect the interests of NAMA or of the Irish government. The Master SPV would be run with the objective of making a profit on the purchase and management of the assets it purchases.
The private investors in the Master SPV would be entitled to the following economic return: the equity investors will receive an annual dividend linked to the performance of the Master SPV; On winding up of the Master SPV, the equity investors would only be repaid their capital if the Master SPV has the resources; they would receive a further equity bonus of 10% of the capital if the Master SPV makes a profit; All other profits and gains of the Master SPV would accrue to NAMA.
former Finance Minister the late Brian Lenihan
Brian Lenihan
Brian Patrick Lenihan was an Irish Fianna Fáil politician, who served in a range of cabinet positions, most notably as Tánaiste , Minister for Foreign Affairs and Minister for Justice....
believes that pension fund
Pension fund
A pension fund is any plan, fund, or scheme which provides retirement income.Pension funds are important shareholders of listed and private companies. They are especially important to the stock market where large institutional investors dominate. The largest 300 pension funds collectively hold...
s could be the most appropriate investors in the SPV. The annual dividend, should one be paid, is to be capped at the 10-year Irish Government bond yield at the time the dividend is declared. Lenihan says he is confident that the €51m can be found from suitable investors, because of the similarity of the SPV investment to a government bond
Government bond
A government bond is a bond issued by a national government denominated in the country's own currency. Bonds are debt investments whereby an investor loans a certain amount of money, for a certain amount of time, with a certain interest rate, to a company or country...
.
In its analysis the Central Statistics Office (CSO) requested that NAMA be classified as a Government Entity and the Master SPV as a Financial Institution. The likely impact of this classification could be that the debt issued by the SPV, guaranteed by the Irish government, would not be classified as part of the national debt of Ireland by Eurostat.
In a letter dated 16 October 2009, Eurostat gave a preliminary view. The letter stated that NAMA is to be treated as part of the government sector, the type of assets to be purchased cannot be expanded without approval of the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
, that it be a temporary scheme and that the size of potential losses be small relative to the total liabilities. Eurostat noted that the Minister for Finance will examine at the end of 2012 whether NAMA has met its objectives and decide if its continuation is justified. It suggested that a rather detailed analysis has to be carried out, especially of the guarantee arrangements. It made no judgement on the draft NAMA business plan but stated that the presence of market investors is reassuring to it (those providing 51% of the equity in the SPV). Their preliminary conclusion is that the Master SPV may be classified as a financial corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
. However, this is a prelimiary view and subject to revision.
NAMA's private investors
The three investors owning 51% of the SPV were revealed by the Minister of Finance in April 2010, and in NAMA's June 2010 business plan:- Irish Life Investment Managers, a part of Irish Life and PermanentIrish Life and PermanentIrish Life and Permanent, Plc or IL&P is a provider of personal financial services in Ireland. IL&P enjoys limited liability....
; - New Ireland Assurance, a part of Bank of IrelandBank of IrelandThe Bank of Ireland is a commercial bank operation in Ireland, which is one of the 'Big Four' in both parts of the island.Historically the premier banking organisation in Ireland, the Bank occupies a unique position in Irish banking history...
; - Clients of Allied Irish Banks Investment Managers, a part of Allied Irish BanksAllied Irish BanksAllied Irish Banks p.l.c. is a major commercial bank based in Ireland.AIB is one of the so called "big four" commercial banks in the state. The bank has one of the largest branch networks in Ireland; only Bank of Ireland fully rivals it. AIB offers a full range of personal and corporate banking...
Each provided €17m for a total of €51m of NAMA's initial capital of €100m. NAMA then geared up
Leverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...
way above typical EU banking limits
Capital Requirements Directive
The Capital Requirements Directive for the financial services industry will introduce a supervisory framework in the EU which reflects the Basel II rules on capital measurement and capital standards....
, taking on debt 35 times its paid-up capital. The reason given for this is that the loans are temporary; have bought other loans at a discount (see below); will be repaid on property sales; and are subject to continuous review. They are similar in function to bridging loans
Bridge loan
A bridge loan is a type of short-term loan, typically taken out for a period of 2 weeks to 3 years pending the arrangement of larger or longer-term financing.-Description:A bridge loan is interim financing for an individual or business until...
.
The purpose of NAMA's quasi-independent legal status is to remove its debts from general Irish government debt. This is the position of the government, the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
and Eurostat
Eurostat
Eurostat is a Directorate-General of the European Commission located in Luxembourg. Its main responsibilities are to provide the European Union with statistical information at European level and to promote the integration of statistical methods across the Member States of the European Union,...
.
But, as the three private investors are bank-run pension fund managers, whose parent or major-shareholder companies had been all but nationalised by 2011, and as the 2010 Credit Institutions (Stabilisation) Act allows the government powers to apply to the courts to restructure any financial body in any way in secret at any time, and as a general guarantee to protect the parent banks remains in place (see the covered institutions below), the international rating agencies
Credit rating agency
A Credit rating agency is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves...
consider NAMA's debts to be a part of Irish government debt. Besides, NAMA's directors on the SPV board "will maintain a veto over all decisions of the Board that could affect the interests of NAMA or of the Irish government."
Timetable
The National Treasury Management AgencyNational Treasury Management Agency
The National Treasury Management Agency is the agency that manages the assets and liabilities of the Government of Ireland. It was established at the end of 1990 to borrow for the exchequer and manage the national debt...
published details on NAMA in a press release dated 8 April 2009. The draft bill was published on 30 July 2009 for public consultation. Following the consultation process, the National Asset Management Agency (NAMA) Bill 2009 was published on 10 September 2009. The bill was debated in the Irish Parliament, and passed, on 15 October 2009 by 77 votes to 73. The committee stage of the bill started on 22 October 2009. Following the passing of the bill in both houses of the Oireachtas, the President, Mary McAleese decided to sign the bill into law on 22 November 2009, despite calls from the Labour Party
Labour Party (Ireland)
The Labour Party is a social-democratic political party in the Republic of Ireland. The Labour Party was founded in 1912 in Clonmel, County Tipperary, by James Connolly, James Larkin and William X. O'Brien as the political wing of the Irish Trade Union Congress. Unlike the other main Irish...
to seek advice from the Council of State
Council of State (Ireland)
The Council of State is a body established by the Constitution of Ireland to advise the President of Ireland in the exercise of many of his or her discretionary, reserve powers...
regarding its constitutionality
Constitution of Ireland
The Constitution of Ireland is the fundamental law of the Irish state. The constitution falls broadly within the liberal democratic tradition. It establishes an independent state based on a system of representative democracy and guarantees certain fundamental rights, along with a popularly elected...
.
Defining "long-term economic value"
The assets will be taken on at a discount, referred to as a haircutHaircut (finance)
In finance, a haircut is a percentage that is subtracted from the market value of an asset that is being used as collateral. The size of the haircut reflects the perceived risk associated with holding the asset...
, estimated at about 30% of book value, and in exchange the banks will be given bonds to sell to raise cash. The 30% discount to the €77bn book value outlined by NAMA includes circa €9bn of unpaid interest. The current value of the assets will not be based on their estimated market value
Market value
Market value is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with open market value, fair value or fair market value, although these terms have distinct definitions in different standards, and may differ in some...
, but on a higher notional "long-term economic value". This higher value is ultimately based on the share prices of Irish banks, which were low in March 2009 but have risen since.
Critics say that this is a circular argument; were the expected discount 50% or more, the banks' share prices would have collapsed. In early September 2009 Minister Lenihan pointed to this rise in share prices as positive news: "... markets have assessed that information in the context of their current share price and rating agencies have used it in their assessment of these institutions." Should an independent NAMA valuation be too low, Lenihan said: "I can give directions to NAMA to have a valuation reconsidered."
In addition, critics also pointed out that the use of the term, often capitalised, Long Term Economic Value which was popular in the press around the time of the establishment of NAMA, often as the acronym LTEV, gave the impression that it was a well-known or accepted term in economics. It was pointed out that, in fact, the acronym did not appear on any internet page before 2009, with the full term appearing only shortly before, with the concept of LTEV being invented primarily to give political cover for paying from taxpayers' funds, a price in excess of the market value of assets.
Problems relating to paying the notional long-term economic value (rather than market value) for the loans to be transferred to NAMA were highlighted by the difficulties of Liam Carroll
Liam Carroll
Liam Carroll is a property developer in Ireland whose Zoe Developments group became well known during the Celtic Tiger years of 1990s and 2000s for residential and commercial property construction projects. Carroll is known in business circles for his legendary thriftiness and is considered a...
's Zoe Developments. In July 2009, Zoe Developments, a large property development company, made an application to court seeking the appointment of an examiner
Examinership
Examinership is a process in Irish law whereby the protection of the Court is obtained to assist the survival of a company. It allows a company to restructure with the approval of the High Court....
. The appointment of an examiner would have allowed it protection from its creditors. Zoe Developments was estimated to have €1.2bn of loans with a likely deficit of €900m in a liquidation scenario. The €1.2bn of loans included debts of €489m to AIB and €113m to Bank of Ireland. In addition to Zoe Developments, Carroll's overall liabilities, including other businesses are estimated to total €2.8bn On 10 September 2009, the High Court refused to appoint an examiner to Zoe Developments despite the support of AIB and Bank of Ireland for such an appointment. Receivers have been appointed, after a Supreme Court appeal failed. A deficit of €900m versus loans of €1.2bn if realised would imply a market value of 25% of loan value for Zoe Developments.
On 9 September 2009, Philip Lane of Trinity College, Dublin
Trinity College, Dublin
Trinity College, Dublin , formally known as the College of the Holy and Undivided Trinity of Queen Elizabeth near Dublin, was founded in 1592 by letters patent from Queen Elizabeth I as the "mother of a university", Extracts from Letters Patent of Elizabeth I, 1592: "...we...found and...
published a paper on Estimating Long Term Economic Value. Using economic theory and formulae, Lane describes the long-term economic value being a function of both nominal price levels and the real (inflation-adjusted) economic value of property. The real economic value of property is further defined as a function of numerous factors including, but not limited to: real disposable income per capita; the level of long-term interest rates; the size of the population, and; the demographic structure of the population. On implementation of long-term economic value, Lane highlights the concerns over price levels. In particular, given the debate on domestic competitiveness versus other countries, Ireland may experience real-exchange rate depreciation, which could have a drag effect of nominal property value. He said, "it is important that the NAMA process to recognise the inevitability of such uncertainty in the determining of long-term economic values". As a result, he favours a two-part payment system.
In his speech to the Dáil on 16 September 2009, the Minister of Finance Brian Lenihan indicated that alternatives to NAMA that did not use long-term economic value would lead to the need for fresh equity
Equity (finance)
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
to be injected by the government into the financial sector of between €4 and 7 billion. Coincidentally, the upper end of this figures is equal to the difference between the € 54 billion estimated "long-term economic value" and the €47 billion "current market value". Lenihan noted that the additional € 4-7 billion would be an incremental investment in the banks rather than a higher payment for the loans.
Academic and political criticism
The proposed agency has been the subject of major criticism in both politics and academia. Fine GaelFine Gael
Fine Gael is a centre-right to centrist political party in the Republic of Ireland. It is the single largest party in Ireland in the Oireachtas, in local government, and in terms of Members of the European Parliament. The party has a membership of over 35,000...
Enterprise, Trade and Employment spokesperson, Leo Varadkar
Leo Varadkar
Leo Varadkar is an Irish Fine Gael politician. He has been a Teachta Dála for the Dublin West constituency since June 2007. He is currently the Minister for Transport, Tourism and Sport, being appointed on 9 March 2011....
, said of NAMA: "(Fianna Fáil
Fianna Fáil
Fianna Fáil – The Republican Party , more commonly known as Fianna Fáil is a centrist political party in the Republic of Ireland, founded on 23 March 1926. Fianna Fáil's name is traditionally translated into English as Soldiers of Destiny, although a more accurate rendition would be Warriors of Fál...
and government minister) Willie O'Dea
Willie O'Dea
Willie O'Dea is an Irish Fianna Fáil politician and a Teachta Dála for the Limerick City constituency. He served as the Minister for Defence from September 2004 until 18 February 2010, when he resigned from his post due to controversy over a defamation case.-Early and private life:O'Dea was born...
and Peter Bacon, the architect of NAMA, both accept that this is a massive gamble. Taxpayers are right to ask why Fianna Fáil is so keen to gamble with their money without asking the banks, bondholders and institutional investors to take their fair share of the pain. In dealing with the banking crisis, the objective must be to minimise the risk to taxpayers and to get credit flowing to businesses and homebuyers. NAMA achieves neither of these objectives. It won't get credit flowing and it exposes taxpayers to all of the risk." Fine Gael instead proposed a 'national recovery bank'.
Labour Party
Labour Party (Ireland)
The Labour Party is a social-democratic political party in the Republic of Ireland. The Labour Party was founded in 1912 in Clonmel, County Tipperary, by James Connolly, James Larkin and William X. O'Brien as the political wing of the Irish Trade Union Congress. Unlike the other main Irish...
Enterprise spokesperson and former Finance Minister Ruairi Quinn
Ruairi Quinn
Ruairi Quinn is an Irish Labour Party politician who has been Minister for Education and Skills since March 2011. He is currently a Teachta Dála for the Dublin South East constituency. He was Minister for Finance from 1994 to 1997, and leader of the Labour Party from 1997 to 2002.-Early...
accused the Government of "proposing to establish the biggest property company in the world and asking taxpayers to foot the bill and bear all the risk." He stated that "this Bill will be one of the most important pieces of legislation ever to have come before Dáil Eireann. There will be enormous consequences for the taxpayer if the government get it wrong." Labour instead has proposed the temporary nationalisation of the banks.
A commentary signed by leading academics also questioned the NAMA strategy. They wrote in The Irish Times
The Irish Times
The Irish Times is an Irish daily broadsheet newspaper launched on 29 March 1859. The editor is Kevin O'Sullivan who succeeded Geraldine Kennedy in 2011; the deputy editor is Paul O'Neill. The Irish Times is considered to be Ireland's newspaper of record, and is published every day except Sundays...
that they saw
The criticisms are disputed by the Government. The Tánaiste
Tánaiste
The Tánaiste is the deputy prime minister of Ireland. The current Tánaiste is Eamon Gilmore, TD who was appointed on 9 March 2011.- Origins and etymology :...
and Minister for Enterprise, Trade and Employment
Minister for Enterprise, Trade and Employment (Ireland)
The Minister for Jobs, Enterprise and Innovation is the senior minister at the Department of Jobs, Enterprise and Innovation in the Government of Ireland.The current Minister for Jobs, Enterprise and Innovation is Richard Bruton, TD...
Mary Coughlan has defended the creation of the agency saying it was not a bailout for the banks, one of the charges made against it.
On 7 October 2009, Professor Joseph Stiglitz, winner of the Nobel Prize
Nobel Prize
The Nobel Prizes are annual international awards bestowed by Scandinavian committees in recognition of cultural and scientific advances. The will of the Swedish chemist Alfred Nobel, the inventor of dynamite, established the prizes in 1895...
in economics and former chief economist of the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
, speaking at Trinity College Dublin criticised NAMA. He said, "Countries which allow banks to go under by following the ordinary rules of capitalism have done fine. The US has let 100 banks go this year alone, as did Sweden and Norway in their crises." As well as commenting that in Ireland, "this bank bailout is a simple transfer from taxpayers to bondholders, and it will saddle generations to come. The only thing that might give you solace is that, as chief economist of the World Bank, we see this type of thing happening in banana republics all over the world. Whenever a banking crisis happens, the financial sector uses the turmoil as a mechanism to transfer wealth from the general population to themselves. I’ve been very disappointed to see that it has happened, not only in banana republics, but in advanced industrialised countries."
On 21 October 2009, ahead of the International Financial Services Summit (IFSS) in Dublin on 5 November 2009, two leading economists expressed caution on NAMA. Professor Nouriel Roubini
Nouriel Roubini
Nouriel Roubini is an American economist. He claims to have predicted both the collapse of the United States housing market and the worldwide recession which started in 2008. He teaches at New York University's Stern School of Business and is the chairman of Roubini Global Economics, an economic...
, Professor at New York University Stern School of Business
New York University Stern School of Business
The Leonard N. Stern School of Business is New York University's business school. It was established in 1900 as the NYU School of Commerce, Accounts and Finance. In 1988 it was named after Leonard N. Stern, an alumnus and benefactor of the school...
said that: It is essential that the bad assets are taken off the balance sheets of the financial institutions and that the Government separates the good assets from the bad assets to
clean up the financial system.... But if it does it in such a way that implies it is buying these assets at overpriced prices that does not reflect the underlying value, then it is giving a big subsidy to the bank shareholders and the unsecured creditors." Professor Willem Buiter
Willem Buiter
Willem Hendrik Buiter Willem Hendrik Buiter Willem Hendrik Buiter (born September 26, 1949]] was a member of the Bank of England's Monetary Policy Committee from June 1997-May 2000. He joined the London School of Economics as a chair in the European Institute in September 2005....
, Professor of political economy at the London School of Economics
London School of Economics
The London School of Economics and Political Science is a public research university specialised in the social sciences located in London, United Kingdom, and a constituent college of the federal University of London...
and former member of the UK Monetary Policy Committee, said: the Irish Government should have, in principle, gone for a good bank, not a bad bank.... The bad bank is always a bad idea because it means that the Government underwrites all the creditors and creates moral hazard." Other participants at the IFSS include Martin Wolf, Chief Economics Commentator, Financial Times and Philip Lane, Professor of International Macroeconomics at Trinity College Dublin.
In February 2010 Brian Cowen
Brian Cowen
Brian Cowen is a former Irish politician who served as Taoiseach of Ireland from 7 May 2008 to 9 March 2011. He was head of a coalition government led by Fianna Fáil which until 23 January 2011 had the support of the Green Party and independent TDs.Cowen was also leader of Fianna Fáil from 7 May...
defended his claim that the NAMA will increase the supply of credit into the economy despite the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF) saying it would not lead to any significant increase. “People should contemplate what level of credit accessibility we’d have in this economy without NAMA,” he said. “It’s not just sufficient in itself obviously for credit flow, it’s certainly an important and necessary part of restructuring our banking system, of that there’s no doubt, in terms of improving as a location for funding of banking operations,” said Mr Cowen. He previously said that the Government’s objective in restructuring the banks through NAMA was to “generate more access to credit for Irish business at this critical time”. In September 2009, Lenihan expressed a similar view, saying it would lead to more lending for business and households. Cowen was responding to reports published on 8 February that the IMF had told Lenihan in April 2009 that the NAMA would not lead to a significant increase in lending by the banks.
The comments, which appear in internal Department of Finance documents released under the Freedom of Information Act, were made by senior IMF official Steven Seelig who will join the board of NAMA in May 2010. Minutes of a private meeting at the department between Brian Lenihan
Brian Lenihan
Brian Patrick Lenihan was an Irish Fianna Fáil politician, who served in a range of cabinet positions, most notably as Tánaiste , Minister for Foreign Affairs and Minister for Justice....
and IMF officials on 29 April 2009 last state that the “IMF (Mr Seelig) do not believe that Nama will result in significant increase in bank lending in Ireland”. The Government has maintained that NAMA's purchase of bad loans from the banks with State bonds would increase the flow of credit in the economy since the plan was unveiled April 2009. Speaking at the publication of the NAMA legislation in September 2009, Mr Lenihan said it would “strengthen and improve” the funding positions of the banks “so that they can lend to viable businesses and households”. The IMF estimated in their published report the domestic banks would face losses of up to €35 billion, though the department pointed out this would be partly funded from operating profits and provisions already taken against some loan losses.
Supplementary Data and Draft Business Plan
On 16 September 2009, NAMA published Supplementary Data Document that contained high level statistic on NAMA, data on property yields, and information on the six covered institutions. The supplemental data indicate the book-value of the loans expected to be transferred to NAMA by the six covered institutions (Bank of Ireland, Allied Irish Banks, Anglo Irish Bank, EBS, Irish Life and Permanent, Irish Nationwide) is currently €68bn. The suggested transfer value is €54bn, with the estimated market value at €47bn.In addition to the supplementary data document, the Department of Finance published incremental data on 13 October 2009 in a Draft NAMA Business Plan.
| Total, € billion | |
|---|---|
| Assets value at origination | 88 |
| Approximate average LTV | 77% |
| Net Original Balance excluding Interest roll up | 68 |
| Potential decline in property prices approximate estimate | 47% |
| Estimated current market value of underlying asset | 47 |
| Interest Roll up Estimate | 9 |
| Potential total book value for transfer to NAMA | 77 |
| Haircut on loans | 30% |
| Price NAMA could pay for loans | 54 |
Within the Supplementary Data Document there is data on the financial ratios of the six covered banks. Adding up the Tier 1 capital
Tier 1 capital
Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It is composed of core capital, which consists primarily of common stock and disclosed reserves , but may also include non-redeemable non-cumulative preferred stock...
of the six covered institutions, as reported in the Supplemental Data document leads to total Tier 1 capital of €29bn. This compares to combined risk-weighted-assets of €363bn, and a Tier 1 capital ratio of 7.9%. Basel II
Basel II
Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision...
recommends a minimum ratio of 4% capital requirement
Capital requirement
Capital requirement refers to -The standardized requirements in place for banks and other depository institutions, which determines how much capital is required to be held for a certain level of assets through regulatory agencies such as the Bank for International Settlements, Federal Deposit...
.
| Institution | Date of report | Risk-weighted asset Risk-weighted asset Risk-weighted asset is a bank's assets or off-balance sheet exposures, weighted according to risk. This sort of asset calculation is used in determining the capital requirement or Capital Adequacy Ratio for a financial institution... s, € million |
Tier 1 Capital, € million | Tier 1 ratio |
|---|---|---|---|---|
| Allied Irish Banks Allied Irish Banks Allied Irish Banks p.l.c. is a major commercial bank based in Ireland.AIB is one of the so called "big four" commercial banks in the state. The bank has one of the largest branch networks in Ireland; only Bank of Ireland fully rivals it. AIB offers a full range of personal and corporate banking... |
30 June 2009 | 131,327 | 10,249 | 7.8% |
| Bank of Ireland Bank of Ireland The Bank of Ireland is a commercial bank operation in Ireland, which is one of the 'Big Four' in both parts of the island.Historically the premier banking organisation in Ireland, the Bank occupies a unique position in Irish banking history... |
31 March 2009 | 105,377 | 11,026 | 10.5% |
| Anglo Irish Bank Anglo Irish Bank Anglo Irish Bank was a bank based in Ireland with its headquarters in Dublin from 1964 to 2011. It went into wind-down mode after nationalisation in 2009.... |
31 March 2009 | 80,175 | 3,120 | 3.9% |
| Irish Life and Permanent Irish Life and Permanent Irish Life and Permanent, Plc or IL&P is a provider of personal financial services in Ireland. IL&P enjoys limited liability.... |
30 June 2009 | 21,619 | 2,006 | 9.3% |
| Irish Nationwide | 31 December 2008 | 14,825 | 1,394 | 9.4% |
| EBS EBS Building Society EBS Limited was a financial institution in Ireland and was the country's largest building society. EBS has more than 400,000 members and distributes its products through a branch and franchised agency network. It handles direct business by telephone and the Internet... |
30 June 2009 | 9,984 | 769 | 7.7% |
| Total | 363,307 | 28,564 | 7.9% |
According to the Supplementary Data Document, the long-term-economic value of the loans to be transfers to NAMA is estimated to be 15% higher than the market value. NAMA applies statutory adjustment factors to estimate the valuation of €54bn. The document also notes that asset prices would need to increase from current market values by 10%, for the government and taxpayers to avoid any loss, taking into account subordinated debt. The difference between the 15% uplift to get to €54bn and the need for a 10% uplift for the taxpayer to avoid a loss, is explained in the Draft NAMA Business Plan. This analysis takes into account the expected part payment in subordinate debt to the six covered institutions of €2.7bn (circa 5% of the €54bn transfer value). This subordinated debt holders may receive none of the proceeds in a scenario where the taxpayers are exposed to a loss.
Market response
On Thursday 17 September 2009, the day after the estimated cost of NAMA was announced, shares in AIB and Bank of Ireland rose in value. On the ISEQ Index, shares in AIB rose by 30% and shares in Bank of Ireland rose by 17%. Shares for both banks were also up on the U.S. stock markets.Analysis of the data
Based on the information presented in the Supplementary Data Document, if the €68bn book value is transferred at €54bn to NAMA, the covered institutions could be a write-down of both their Tier 1 capital and Risk-weighted assets of €14bn in aggregate. Assuming a 1-for-1 write-down of €14bn in the risk weighted assets and the same of the Tier 1 capital, the new ratio would be 4.2% with risk weighted assets of €349bn and Tier 1 capital of €15bn.Assuming the transfer value was at the market-value estimate of €47bn, not €54bn, then Tier 1 capital could fall by €21bn not €14bn. Risk weighted assets could be €342bn and Tier 1 capital €8bn, with a ratio of 2.2%.
| Risk-Weighted-Assets, € billion | Tier 1 Capital, € billion | Tier 1 ratio | |
|---|---|---|---|
| Aggregate, 6 Covered Institutions | 363 | 29 | 7.9% |
| Suggested Transfer Value to NAMA | 54 | ||
| Estimated Book Value | 68 | ||
| Potential Write-Down | -14 | -14 | |
| Aggregate, 6 Covered Institutions, Adjusted | 349 | 15 | 4.2% |
| Additional Right if use Estimated Market Value of € 47 billion | -7 | -7 | |
| Aggregate, 6 Covered Institutions, Adjusted | 342 | 8 | 2.2% |
However, this analysis looks at the aggregate data provided in the Supplemental Data Document. For a clearer picture, NAMA would need to give a breakdown of the loans to be transferred, by institution, as well as the book value and market value of each. Some additional information was provided on 13 October 2009 in the Draft NAMA Business Plan, indicates that the six covered institutions have taken €7bn of provisions in the last year against loan impairments and giving the split of the €77bn of prospective loans for transfer to NAMA. However, the data point of the current net book value of the loan portfolios and the prospective transfer price for the portfolios by each of the 6 covered institutions was omitted.
Transfer of derivatives portfolio to NAMA
In addition to the potential loan book transfer to NAMA, the Draft NAMA Business Plan outlined the existence of over 1,000 derivative positions attached to the commercial loans. These loans are expected to transfer to NAMA as well. The nominal value of this derivative portfolio is €14.7 billion. Developers and other borrowers in real-estate transactions are often required by lenders to enter into derivative transactions as part of a loan agreement, as a mechanism to fix the interest rate on the loan. Typically, interest rate swapInterest rate swap
An interest rate swap is a popular and highly liquid financial derivative instrument in which two parties agree to exchange interest rate cash flows, based on a specified notional amount from a fixed rate to a floating rate or from one floating rate to another...
agreements are used. If interest rates fall, the borrower does not benefit, as he/she must pay the saving to the counter-party of the swap agreement. Given the decline in interest rates over the last 2 years (e.g. the US Federal Funds Rate was 0.25% in late Sept 2009 versus 5.25% in August 2007), there may be a significant liability relating to the €14.7bn derivative portfolio. The Draft NAMA Business Plan does not elaborate on the magnitude of this liability, however, it states: "These derivatives change the interest rate structure of the underlying loans and their mark-to-market value will be incorporated into the valuation of the loans".
Post transfer
The information provided in the Supplementary Data Document also includes analysis of the total loan books of the covered institutions. In particular it identifies, €27bn of watch loans (low quality), €31bn of vulnerable loans (past due) and €29bn of impaired loans. That is a total of €86bn of loans, at net book value. This is in excess of the loans expected to be transferred to NAMA. Following the potential transfer of loans with a book value of €68bn to NAMA, the six covered institutions would still have an aggregate of €18bn of loans that are watch loans, vulnerable, and/or impaired. This exceeds the €15bn of Tier 1 Capital within the six banks, after the NAMA transfer.| Institution | Date of report | Net loan book, € million | Watch loans / lower quality loans, € million | Vulnerable loans / past due loans, € million | Impaired loans, € million |
|---|---|---|---|---|---|
| Allied Irish Banks Allied Irish Banks Allied Irish Banks p.l.c. is a major commercial bank based in Ireland.AIB is one of the so called "big four" commercial banks in the state. The bank has one of the largest branch networks in Ireland; only Bank of Ireland fully rivals it. AIB offers a full range of personal and corporate banking... |
31 December 2009 | 130,000 | 12,120 | 8,604 | 17,453 |
| Bank of Ireland Bank of Ireland The Bank of Ireland is a commercial bank operation in Ireland, which is one of the 'Big Four' in both parts of the island.Historically the premier banking organisation in Ireland, the Bank occupies a unique position in Irish banking history... |
31 December 2009 | 134,700 | 3,300 | 5,400 | 13,400 |
| Anglo Irish Bank Anglo Irish Bank Anglo Irish Bank was a bank based in Ireland with its headquarters in Dublin from 1964 to 2011. It went into wind-down mode after nationalisation in 2009.... |
31 December 2009 | 72,100 | 6,200 | 8,700 | 34,600 |
| Irish Life and Permanent Irish Life and Permanent Irish Life and Permanent, Plc or IL&P is a provider of personal financial services in Ireland. IL&P enjoys limited liability.... |
31 December 2009 | 38,639 | 2,877 | 3,208 | 828 |
| Irish Nationwide | 31 December 2009 | 11,132 | 1,721 | 6,464 | |
| EBS EBS Building Society EBS Limited was a financial institution in Ireland and was the country's largest building society. EBS has more than 400,000 members and distributes its products through a branch and franchised agency network. It handles direct business by telephone and the Internet... |
30 June 2009 | 17,035 | 603 | 697 | 407 |
| Total | 403,606 | 26,821 | 26,609 | 73,152 |
The Draft NAMA Business Plan indicated that the potential loans for transfer to NAMA of €77bn book value (including rolled-up interest) is divided into €24.1 billion from AIB, €28.4 billion from Anglo-Irish Bank, €15.5 billion from Bank of Ireland, €0.8 billion from EBS, and €8.3 billion from Irish Nationwide.
The document states "that about 40% of the loans are estimated to be cash-generating". This indicates that €46 billion of the loans are not paying interest. Of the €31 billion that are cash-generating, there is no indication in the document if they are paying the full requirements under the terms of the loan agreements. The €31 billion is divided into €28 billion of commercial loans and €3 billion of land and development loans. This compares to a breakdown of the € 77 billion of €28 billion of commercial loans, €21 billion of land and development loans, and €28 billion of associated loans.
Additional data on the size of the underlying loans in also provided in the Draft Business Plan. Of particular note is that the 10 largest underlying loans have a projected book value of €16 billion (i.e. 20% of the overall €77 billion), with an average loan size of €1.6 billion each. The top 100 underlying loans total € 38 billion, equivalent to 49% of the overall.
In July 2010 after the a revised business plan was published it was revealed that it is now predicting a possible profit of €1bn, with the possibility of losses of up to €800m, after an initially projection of more than €4bn in profit. The plan published today updates and revises the interim business plan published in October of last year which was prepared on the basis of information supplied at that time by the five participating institutions (Anglo Irish Bank, AIB, Bank of Ireland, EBS and Irish Nationwide) and in advance of the detailed examination of any of the key loans by NAMA. Finance Minister Brian Lenihan
Brian Lenihan
Brian Patrick Lenihan was an Irish Fianna Fáil politician, who served in a range of cabinet positions, most notably as Tánaiste , Minister for Foreign Affairs and Minister for Justice....
has denied that the Government got its sums wrong on NAMA.
The original business plan estimated a profit of €4.8bn based on a rise in assets value of 10%. Today's revised figures say that if they recover the full value of the loans plus 10% it will result in a profit of €3.9bn.
NAMA chairman Frank Daly said the plan confirmed that the five institutions covered by NAMA had not disclosed or had been unaware of the extent of the financial crisis afflicting their borrowers. He said the banks had shown 'remarkable generosity' towards their borrowers, adding that NAMA had no intention of maintaining that approach. 'To say the least we are extremely disappointed and disturbed to find that, only months after being led to believe that 40% of loans were income producing, the real figure is actually 25%.
Raising new equity capital
If there are further substantial write-downs within the Irish banking industry post-NAMA this could lead to further financial difficulties. Patrick HonohanPatrick Honohan
Patrick Honohan is an economist who was appointed Governor of the Central Bank of Ireland in September 2009. Among his main tasks are the challenge of helping to resolve the 2008–2010 Irish banking crisis. He is married with one son.-Education:Honohan graduated with a B.A...
, a professor of International Financial Economics and Development at Trinity College Dublin, and shortly afterwards to be appointed head of the Central Bank of Ireland, stated on 21 July 2009 that "Unless the loans are valued at unrealistically high prices, the NAMA process will leave the banks with insufficient capital. This is especially true considering the additional loan losses in non-property lending that are inevitable given the depth of the recession and which will have to be provided for." Professor Honohan was appointed Governor of the Central Bank of Ireland and Financial Services Authority by the Minister of Finance in late September 2009.
On 5 October 2009, the Irish Independent reported that European banks need to raise substantial equity capital, including AIB and BOI. The article quoted a report by the bank JP Morgan which estimates that the AIB and BoI need to raise a combined €11bn, €7bn for AIB and €4bn for BoI.
On 8 October 2009, Brian Lenihan
Brian Lenihan
Brian Patrick Lenihan was an Irish Fianna Fáil politician, who served in a range of cabinet positions, most notably as Tánaiste , Minister for Foreign Affairs and Minister for Justice....
Minister of Finance said that even after selling real-estate loans to the government's NAMA, that the country's biggest banks may need further money. Additional funding from the Irish government was highlighted, with Lenihan recognising that it would be difficult to raise funds on the stock market.
On 10 October 2009, the Irish Times reported that Bank of Ireland and AIB could need to raise a combined €9bn as a result of write-downs associated with the transfer of assets to NAMA. The article quotes a Merrion Capital report that estimates that AIB and BoI's equity Tier 1 Capital ratios would fall to 3.3% and 3.5% in 2010/11.
In the Draft NAMA Business Plan published on 13 October 2009, it states that: "After the transfer of their L&D and associated loans to NAMA, it is likely that some institutions will require additional capital in order to absorb the consequent write-downs on the book value of their assets. The Government has indicated that it expects institutions to seek private
sector capital in the first place but to the extent that sufficient capital cannot be raised independently or generated internally, it remains committed to providing institutions with an appropriate level of capital to continue to meet their requirement."
Capital from a debt-for-equity swap
The August 2009 open letter by 46 academics reported in the Irish Times, suggests that the Government is in a strong position, if it chooses, to negotiate with bondholders to engage in some debt for equity swaps. The information provided in the Supplementary Data Document shows an aggregate of €20bn of sub-ordinate debt at the six covered institutions. Assuming all or part of this sub-ordinate debt is converted into equity could play a role in improving the Tier 1 ratio of the industry.The concept of subordinated debt holders receiving no return on their loans, is raised in the Draft NAMA Business Plan, where the subordinated debt issued to the covered institutions, could receive nothing in a scenario where the Irish taxpayer incurs a loss on its investment in NAMA. 5% of the €54 billion purchase price is forecast to be paid in sub-ordinated loans.
The Draft Business Plan
The Draft Business plan assumed a life of 11 years for NAMA from 2010 to 2020 with full repayment of the €54 billion loans issued by NAMA/Irish Government by the end of 2020. Cumulative interest on the loans is forecast at €16 billion, using the forward Swap rateSwap rate
Swap rate is the fixed rate that makes the market value of a given swap at initiation zero. They are the borrowing rates between financial institutions, usually with credit ratings of A/AA equivalent. Swap rates are calculated using the fixed rate leg of interest rate swaps. Swap rates form the...
for the euro. Given a percentage of the loans are cash-generative this €16 billion may be partially offset by an estimated €12 billion of interest received. The Draft business plan expects a default rate of 20% on the €77 billion of principal, and repayment of €62 billion. The €15 billion of defaulted loans is forecast to be sold for €4 billion (i.e. circa 27% of loan value). Fees and running costs of NAMA are estimated at €240m per annum, i.e. circa €3 billion over 11 years. Taking all of these cash-flows together leads to a cumulative positive cash flow of €5 billion.
The Draft Business Plan looks at sensitivity analysis, indicating that if short and/or long-term interest rates rise, there would be an erosion of the €5 billion positive cash flow to NAMA. Similarly, if the default rate increases, this cash flow would be eroded. The document states that an increase of the default rate to 31% would erode in full the net present value of the positive cash flow.
The Draft Business Plan does not attempt to match the €62 billion of principal repayments and €4 billion of asset recovery (of the estimated €15 billion of defaulting loans) to the €54 billion "long-term-economic value" expected to be paid for the NAMA loan portfolio. Nor is there any analysis comparing the forecast €15 billion of defaults relative to the estimates 60% of loans, i.e. €46 billion, that are not cash-generative.
A part of the Draft Business Plan that is mentioned but not modeled in the document, is the ability of the NAMA to borrow an incremental €5 billion to pursue its "asset development/enhancement objectives". In particular, NAMA may invest in projects that are deemed commercially viable. NAMA shall inherit with the loans, undrawn commitments of €6.5bn to the borrowers.
Risk-sharing v ex post levy
On 6 May 2009, Professor Honohan, presented his views on NAMA to a committee of the Irish parliament. In particular, he raised the idea of a two-part payment to the banks, part debt & part equity, as a mechanism to reduce the risk to the taxpayer of overpaying for the loans. He specifically identified this mechanism as being superior to an ex-post levy on the banks. An additional advantage of paying part-equity for the loans, that Professor Honohan mentions in his paper of 6 May 2009, is the benefit of having some private shareholders within NAMA, given "the extensive international evidence showing that Government-owned banking systems serve their economies poorly."On 9 October 2009, the two parties of the Irish government, Fianna Fáil and the Green Party agreed a "Renewed Programme for Government". In this agreement, it states "Should NAMA make a loss over time, a levy would be imposed to recoup the cost to taxpayers". This proposal is not in line with the preferred option that Professor Honohan highlighted in May 2009.
In the letter from Eurostat to the CSO dated 16 October 2009, it is noted that in addition to the 5% of the purchase price paid in subordinate bonds, that reduces the potential losses of the Irish taxpayer, that an amendment to the legislation that shall be introduced means that the participating banks shall have to pay a tax surcharge on their operating profits until the loss of the Master SPV, related to NAMA, is recouped.
Operations in 2010-11
NAMA published its 2010 accounts and summarised its more recent achievements in July 2011. In round figures it had acquired loans of €72 billion for €30 billion. To buy these it had issued bonds worth €30 billion that buyers could sell to the European Central BankEuropean Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
(ECB). The banks' losses of €42 billion written off on these sales, and their other losses, were met by Irish government cash or loans that were advanced or ultimately guaranteed by the ECB. €3.9 billion-worth of sales both in and outside Ireland had been approved by NAMA in a difficult market, given the late-2000s recession.
In that the main purpose of NAMA was to remove bad debts from the six banks and to recapitalize them, it was hard to see how it had made a difference in the short term. The plan relied upon an early worldwide recovery from recession, which did not occur. Government support for the banks continued separately from NAMA and had risen to 32% of GDP by September 2010.
In turn, the government's support for NAMA itself was quantified in July 2010 by the IMF as "more than 25% of GDP in 2010". The financial markets concluded that Ireland could not support the cost of the banks as well as NAMA, and run a budget deficit, and they sold Irish bonds at the time of the renewal of the two-year state bank guarantee in September 2010, causing yields to rise. It became impossible for the government itself to borrow from the bond markets. The drop in value of Irish bonds also had an immediate effect on the balance sheets of Irish and foreign banks' capital requirement
Capital requirement
Capital requirement refers to -The standardized requirements in place for banks and other depository institutions, which determines how much capital is required to be held for a certain level of assets through regulatory agencies such as the Bank for International Settlements, Federal Deposit...
s.
As a result, in November 2010 the Irish government was itself obliged to seek a €67 billion net "bailout" from the ECB and IMF and undertook in return that the sale of the six banks' remaining assets outside NAMA would be "expedited"; part of the money was to cover future losses incurred by buyers of those assets. By early 2011 the six banks' liquidity needs were being supported by a further €150 billion from the ECB. Despite all the efforts to save them, in April 2011 the six banks' credit ratings were reduced to junk status by Moody's
Moody's
Moody's Corporation is the holding company for Moody's Analytics and Moody's Investors Service, a credit rating agency which performs international financial research and analysis on commercial and government entities. The company also ranks the credit-worthiness of borrowers using a standardized...
.
Recent developments
In February 2011, the Supreme Court delivered judgment in an appeal taken by Paddy McKillen against a purported decision to acquire loans taken out by Mr. McKillen and companies controlled by him. The court found that the decision had been taken by a group of senior managers before NAMA had been formed and accordingly there was no decision of NAMA to acquire the loans.In April 2011 NAMA announced that it will commence selling home mortgage
Mortgage
A mortgage is a security interest in real property held by a lender as a security for a debt, usually a loan of money. A mortgage in itself is not a debt, it is the lender's security for a debt...
s to private investors on the basis that the investor pays equity of 30% of the asking price of the loan, with NAMA providing financing for the balance.
In September 2011 the Irish Office of the Commissioner for Environmental Information determined that, in regard to those seeking information on the environmental impact
Environmental issue
Environmental issues are negative aspects of human activity on the biophysical environment. Environmentalism, a social and environmental movement that started in the 1960s, addresses environmental issues through advocacy, education and activism.-Types:...
aspects of properties controlled by NAMA, NAMA is defined as a "public authority" under the relevant Act, and is obliged to provide that information to applicants.
See also
- 2008–2010 Irish financial crisis
- 2008–2010 Irish banking crisis
- Irish emergency budget, 2009Irish emergency budget, 2009The 2009 Irish emergency budget refers to the delivery of an emergency government budget by the Government of Ireland on 7 April 2009, its second in six months. It was also the second overall budget to be delivered by the ruling Fianna Fáil party's Brian Lenihan as the country's Minister for Finance...
- Toxic assetToxic assetToxic asset is a popular term for certain financial assets whose value has fallen significantly and for which there is no longer a functioning market, so that such assets cannot be sold at a price satisfactory to the holder...