Will Enda meet promise to open Nama 'secret society'?
Is Nama part of the solution or part of the problem? Ronald Quinlan and Daniel McConnell investigate claims that it has failed to remove uncertainty
Published 06/03/2011 | 05:00
'THE dog's dinner.' That's what the venture capitalists say they've come for when they roll up in their chauffeur-driven Mercedes S Class limousines to Nama headquarters on Grand Canal Street.
Fresh from private jets that await their return with engines running at Dublin airport, the faceless, foreign money men come laden down with cash and devoid of emotion, looking for the dog's dinner.
Asked to explain the macho terminology of the financial vultures pouring into Nama HQ at a rate of 50 per week, a highly-placed insider at the agency tells the Sunday Independent: "For these people, distressed property portfolios are the dog's dinner. It might look like crap at first. Look hard enough though, and you'll always find something good enough to eat."
Let's hope the money men are right. Because when you stop to think about it, and when you talk to people who know a thing or two about finance, you could very quickly come to the conclusion that Nama -- the agency Taoiseach -in-waiting Enda Kenny has dubbed the 'secret society' -- has made a dog's dinner of our entire economy, and jeopardised our recovery.
For while the State's so-called 'bad bank' may well have achieved its initial objective, and removed development loans totalling €71.2bn from the books of Ireland's broken banks in a bid to restore their liquidity, the knockdown €30.2bn price Nama paid for those 11,000 loans presents the Irish taxpayer with another, more immediate problem.
Former NTMA (National Treasury Management Agency) chief executive Dr Michael Somers, for one, is horrified by the €40bn hole that has been blown in the balance sheets of the Irish banks as a result of the average 58 per cent 'haircut' applied by Nama to the development loans it has taken over to date. The speed with which the agency has moved on the banks' loan books is also of concern to him.
"I would have gone slowly about it rather than doing everything in one fell swoop, which crystallised massive losses for the banks, and effectively wiped out their shareholders. Then we [the State] had to move in to recapitalise them, putting more of our cash in with them," he told the Sunday Independent.
Commenting on the level of discount imposed by Nama, Dr Somers added: "The problem was the huge size of the haircuts Nama imposed on the loans. The original [proposed] haircuts were something less than 30 per cent because they were supposed to relate to the long-term economic value of the property, rather than the current market value which is obviously very much depressed.
"If those original haircuts had been imposed, the banks probably could have survived as independent entities rather than just becoming semi-state bodies. Also, it would have involved the State putting in an awful lot less by way of capital."
Unsurprisingly, Nama chairman Frank Daly's assessment differs from that of Dr Somers. Speaking to the Sunday Independent at the launch of The National Asset Management Agency Act 2009 -- A Reference Guide in Dublin's Mansion House last Wednesday night, Mr Daly defended Nama's valuations.
He said: "I have heard the commentary. The first six months of our existence, people were saying, you have paid the banks too much.
"I've heard recently we're not paying them enough. We pay them exactly what's in the [EU] regulations. That's the way we operate as a public body," he says.
"One thing that has emerged is that the Nama valuation has been credible. One of the things that has bedevilled this country is that there hasn't been credibility around the losses or the provisions in the banks' books. If you imagine the situation where we had not adhered to those valuation regulations, and the EU or IMF came over and examined them as they did and found we hadn't, I think we would be in an even more difficult position."
But while Mr Daly might believe Nama is fulfilling its remit, Dr Peter Bacon -- the economist tasked by Finance Minister Brian Lenihan with the agency's design -- strongly disagrees.
"The role, the central hypothesis of Nama, was to remove uncertainty. It has failed utterly to do that. That hasn't happened," he says.
Dr Bacon believes that rather than limit itself to loans relating to land and development, Nama should also have taken on the commercial property loans of the banks.
He says that he recommended this in his report to the Finance Minister back in March 2009.
He says: "€158bn was the amount of land and development and commercial property lending at the six banks. What the government decided to take into Nama was the land and development, and not all investments.
But the judgment that was drawn in my report was that at that time the quality of the commercial property portfolio was deteriorating very rapidly," he says.
While Mr Bacon remains of the view that the €158bn figure "was too big to chew" for the Government, the Sunday Independent has established that ECB president Jean Claude Trichet told an Irish delegation consisting of the then Central Bank governor John Hurley, the then NTMA chief Michael Somers and current NTMA chief John Corrigan in a meeting in Frankfurt in March 2009 that Nama should confine its transfer of the banks' loans to land and development (excluding commercial property), then estimated to be worth €78bn.
But if Monsieur Trichet believed Nama would be the solution to Ireland's economic meltdown (a meltdown which many economic commentators now agree was driven by the historically low ECB interest rates set by Trichet himself), he has so far been seriously mistaken.
Nama, for its part, claims to have provided the Irish banks with €30.2bn in liquidity as a result of its purchase of development loans. Crucially however, that €30.2bn went to the banks in the form of Nama bonds.
According to Mr Somers, Nama bonds don't impress the markets.
"As I understand it, the credit rating agencies don't give any credit to the assets that back these Nama bonds. They just toss them all in as part of Ireland's gross debt. That's one of the reasons we're frozen out of every market that there is," he says.
Asked about the liquidity Nama claims to have given the banks, he adds: "You may have given them liquidity in terms of giving them these Nama bonds -- for which to me there is no market -- to get money from the ECB. That's why our ECB and Central Bank funding is now up at €150bn."
Another of Nama's most vocal critics, UCD economist Karl Whelan, still holds to a view he first expressed in April 2009 that the Government should have nationalised all the banks, rather than follow the asset management agency model.
Speaking to the Sunday Independent, Dr Whelan said: "At that time we could have bought the banks off the stock market for less than €1bn. We should have nationalised them, sorted them out, recapitalised them and started again. We had an opportunity to move quickly to fix our banks. Instead we went for this protracted, overly-legalistic and overly-complicated process which has left the banks screwed and the market all but dead."
So ineffectual do many people believe Nama to be, there have even been suggestions that it was one of the key triggers to the arrival of the EU and IMF here last November.
Nama chairman Frank Daly strongly disagrees.
"Nama is one player, and part of the solution to this whole process. I think you have to look much wider. You have to look at the causes of the difficulties in this country. Nama was not around for the causes. Nama is the solution," he says.
Whatever kind of solution there will be, there is no doubt that it will be an expensive one for the taxpayer, judging by the jaw-dropping figures emanating from the agency.
Indeed, an examination of Nama's latest quarterly accounts released last Wednesday reveals massive costs and spending in the period up to September 30 last.
In terms of its use of legal and accounting firms alone, several of the usual suspects are there, including lawyers Arthur Cox, and accountants Price Waterhouse Coopers and KPMG. A calculation by the Sunday Independent of the sums paid to these and others indicates Nama is handing over upwards of €100,000 per day for professional services.
To make matters even more unpalatable, many of the legal and accounting firms now retained by Nama previously acted for the very developers whose loans now sit on its books.
The same report further shows that Nama received an eye-watering €299m advance from the Central Fund (ie. the taxpayer) in tranches of €49m and €250m in March and May of last year respectively.
And while Nama states that it repaid €250m of this last October, the figure still pales alongside the €592m the agency has agreed to lend developers to date to complete developments.
Where that money is being spent, and which developers are spending it, remains a mystery. Indeed, such is the level of secrecy surrounding the agency, in the final leaders' debate of the election, Enda Kenny dubbed it the 'secret society'. Only time will tell whether Mr Kenny is willing, or indeed capable of uncovering Nama's secrets.
According to Mr Daly, Nama will work with "whatever mandate" the new government gives it, leaving the ball firmly in the new Taoiseach's court it would appear.
"Certainly, we want to be as transparent as we can, but there is an issue about confidentiality. First of all, there is banking confidentiality which people who transfer loans to us have an entitlement to. There is data protection legislation which constrains our capacity to talk about any individual, and there is the issue of our commercial remit. We have to get the best possible outcome from this for the taxpayer," Mr Daly says.
But as well-intentioned as the Nama chairman might be, it's the kind of talk that makes the public uneasy.
Adding to a sense that there is something wrong with Nama's modus operandi are the newspaper reports of the lavish lifestyles still being enjoyed by developers.
For whatever Frank Daly might have said about making developers offload the "jets, the yachts, the Bentleys" to reduce their indebtedness, the trophy homes and the boomtime baubles are still there for everyone to see.
Asked about this, a highly-placed source at Nama insists that the developers' yachts and jets have been financed by foreign banks not covered by the agency.
"A lot of these guys would have borrowed from Lombard & Ulster [a subsidiary of the Royal Bank of Scotland] to buy the yacht. We called Lombard and told them this is making us look bad.
"But they won't take the yacht, even if the payments aren't being made, because the asset depreciates much quicker if it's mothballed," the source explains.
But what about the trophy homes that weren't financed by foreign lenders? How can developers afford to live in them still?
It could have something to do with their pay.
The Sunday Independent has established through highly-placed sources at Nama that several of the country's biggest developers are currently in receipt of salaries of €200,000 to assist in the management of their property portfolios. Additional sums of €200,000 are being given by Nama to the same developers to employ "key personnel", whom one Nama source described as "often far more useful" than the developers themselves in terms of their knowledge of the business.
Not that the developers always realise this. According to the same Nama insider, one developer attempted to claim for the €100,000 salary of a key executive despite having made that individual redundant. The ruse was quickly detected by Nama officials, the source insists.
Asked why a coterie of developers should be in receipt of six-figure salaries given their role in destroying the economy, the source explains the agency's rationale.
"The way we see it, Nama could bring in a receiver to deal with a portfolio. Say the portfolio is €100m. The receiver will want a 1 per cent commission to handle that or €1m from the off. Once you appoint him, the same receiver may well come back and admit he's only an accountant. Then you're looking at engaging property advisers etc. So if we can get a developer to work for us for €200,000, and get his team for another €200,000, at €400,000 that's a good deal for us and the taxpayer," he says.
Perhaps it isn't a lot of money to Nama chief executive Brendan McDonagh, or his senior officials. Indeed, Mr McDonagh -- who cut his professional teeth as an accountant with the ESB before joining the civil service -- is paid €430,000 a year, and has an entitlement to a performance bonus of 60 per cent of that figure, should Nama make a profit. The Nama chairman, meanwhile, is paid a relatively more modest €170,000 a year. Asked if he believed it appropriate that Nama's top man could potentially earn more than the €500,000 limit set down for the chief executives of banks covered by the government's Deposit Guarantee Scheme, Mr Daly said: "Well, I think all the staff of Nama are, in effect, employees of the NTMA, so I really can't comment on that, but I mean that is the package that was set."
But Mr McDonagh and Mr Daly will have earned their money if they manage to get the better of the predators arriving at the Treasury Building with bottom-dollar offers for assets that were purchased at a premium during the boom. A Nama insider offers a telling insight into the speculators' modus operandi.
"They started coming in last year offering us 20 cent in the euro for loans we had already discounted by between 35 and 58 per cent in the first transfer from the banks. Think about that. On a €100m loan for which we might have paid €42m, they wanted to take it off us for €8.4m for a total discount of nearly 92 per cent!"
Having assured their prospective buyers there would be no deal at that price, Nama officials managed to haggle upwards to more realistic levels. The arrival of the IMF last November saw everything come undone again, however.
"They were right back in the door shouting about Ajai Chopra, the IMF and the dog's dinner and offering 20 cent in the euro," the Nama insider says.
Nama: The dog's dinner. Look at it long enough and you will find something good enough to eat.
Right now though, it's damn hard to swallow.