Acceptance of NAMA's softer approach comes down to trust
Six years after it all began, the Irish economic collapse still keeps throwing up new words. The latest addition to the crash lexicon is "debtor fatigue".
It surfaced last week. It wasn't used to describe hard-pressed overstretched consumers. Nor was it used to encapsulate taxpayer exhaustion with the financial demands of the troika and austerity. No, it was the phrase used by NAMA to express concerns about property developer clients who are heading in their droves to Britain to declare themselves bankrupt. Around 65 of them have done it so far.
NAMA is worried that if these guys won't stick around and continue to work through their difficulties with the agency, it will lose the benefit of their experience in maximising the return for the taxpayer.
Furthermore, if they head over to the "dark side" of UK bankruptcy, NAMA loses the big stick it might have had in pursuing them for as much money as it possibly can.
On one level, it looks like pandering and is galling - nauseating even. These are developers who collectively borrowed a total of €77bn and cannot pay back around €40bn of it. NAMA is talking about increasing the incentives it provides to clients who co-operate fully with the agency.
It wants to increase profit shares with borrowers who help turn developments into a success. It may increase the salary they are allowed to take from the business. It is even talking about assuring developers who co-operate fully with the agency that it will not bankrupt them.
NAMA has always had to try to operate within the two tricky pillars of fairness and pragmatism.
One option is to just shut them all down and nail them for everything they have got. However, not only might that be vindictive - except in cases where they have blatantly flouted the law - but it might not even make financial sense.
NAMA has already appointed receivers in around one third of cases and is selling the assets to the highest bidder. In cases where the developer has co-operated fully, he/she is making a valid point. "If I work extremely hard to deliver as much back as is humanly possible to this agency, it can still come after me for the shortfall long after it has finished its work."
Understandably, developers are looking to the exit. In some cases, this might be to try to start again. In other cases, they are simply getting old and don't want to keep working into their seventies only to be made bankrupt at the end of it all anyway.
Even taking into account these genuine factors, there are still two major concerns here. Firstly, there are far too many grey areas as every case is different. Secondly, NAMA clients are being treated differently to other bank borrowers.
Nama has said for a long time that it is providing a financial incentive to co-operative clients who can meet or beat certain profit targets on projects. Let's say Developer A owed the banks €100m. NAMA bought his loans for €50m. The taxpayer takes a hit of €50m and hopes that NAMA can at least get its €50m back.
Developer A has given personal guarantees on some of these loans, totalling €15m. He signs a deal with NAMA that if he co-operates and works hard he can earn €200,000 in salary per year but he must forfeit personal assets that are not pledged on borrowing. NAMA has recovered around €800m from such unencumbered assets.
Developer A signs a deal that if a particular development is completed and profit targets met or exceeded he can have 3pc of the upside. There is absolutely no point in NAMA giving him a cheque for, let's say €200,000, only to take it back off him again to help him further reduce his debt. This means the personal guarantees he has given are at least partially off the table. Have they been cancelled by NAMA?
It appears that, subject to a wider deal about what he is allowed to keep, they have. That brings us to the second issue. Are mortgage lenders incentivising borrowers in this way? Of course they are not.
Many struggling homeowners argue they would be happy to hand back the keys of the house if they thought the bank would not still come after them for whatever the loan shortfall might be. Banks do not appear to be giving those kinds of guarantees.
Owner managers of businesses outside of property, are getting some write-offs on their debts, but banks are not expressing concerns about "debtor fatigue" in those cases.
Someone who owns a business employing 10 or 20 people, and who is in trouble with his boom-time loans, is not having profit share agreements dangled in front of him.
NAMA is in the recovery business. There is something about property development projects where, in a rising market, they can yield good profits. The agency clearly feels that some of its most co-operative clients need to be given assurances that they will not be pursued after they have played ball with the State agency.
There has to be a degree of fairness in a bizarre and unnatural situation where ordinary citizens ended up picking up the tab on stupid investments that had nothing to do with them.
Yet, what could be fairer than for NAMA to make sure it gets back the maximum amount of money that it can for all of the citizens. It is regularly accused of being too soft by some and too tough by others.
With so many grey areas, fundamentally it boils down to trust. Can we trust the agency to pursue the best possible avenues to maximise returns for taxpayers? Trust would be easier if there was more transparency.
As things stand, we don't really have any choice in the matter.