Thursday 24 May 2018

You win some, you lose some - how Ireland's bad bank measured up

Protesters opposed to the proposed Nama legislation march through Dublin city centre in 2009. Photo: PA
Protesters opposed to the proposed Nama legislation march through Dublin city centre in 2009. Photo: PA
Donal O'Donovan

Donal O'Donovan

The Nama Act of 2009 laid out the key reasons for setting up the agency. How has it measured up to that original benchmark?

The Act said Nama was set up:

A: To address the serious threat to the economy and the stability of credit institutions in the State generally and the need for the maintenance and stabilisation of the financial system in the State.

How did it do?

OK. When Nama took over loans from the banks back in 2010, it paid in bonds, or IOUs. This all happened at a time when the banks were literally in danger of running out of cash. Armed with the Nama bonds, the banks were able to borrow against them from the European Central Bank, keeping cash flowing through the system.

That didn't fundamentally transform banks' smashed balance sheets, but it did give them some breathing room either to start to repair themselves, which happened with AIB and Bank of Ireland, or manage orderly shut-downs, the ultimate fate of Anglo Irish Bank.

And (i) to facilitate the availability of credit in the economy of the State. Badly, but arguably through no fault of Nama. The late finance minister Brian Lenihan pushed for the creation of Nama on the basis that stripping crappy developer loans out of the banks would free the lenders up for a return to actively lending into the economy.

It was a hopeless idea, based on a total misunderstanding of the Irish banking crisis. If the problem in the Irish banks had been reckless borrowing by a relative handful (800) of builders and developers, the idea might have had merit. But it wasn't. The problem in the Irish banks was reckless lending, to all kinds and classes of borrower, from developers and SMEs to home buyers and buy to let investors.

All of those other crappy loans were, indeed in many cases still are, sitting on banks' balance sheets. On top of that, the Troika insisted in restricting banks' ability to lend right at the worst period of the crisis, a policy that left banks sitting with bad loans and in many cases not allowed to make good ones. Restoring credit in the Irish economy has been slow and uneven.

(ii) to resolve the problems created by the financial crisis in an expeditious and efficient manner and achieve a recovery in the economy.

Nama did well here. Success has many parents, while failure is famously an orphan. The economic recovery, which has been real and sustained since the middle of 2012, has been helped to a significant degree by investors' confidence in the State's finances. That was not a given. In 2010, rating agency S&P downgraded Ireland's credit worthiness to junk status, partly because it reckoned the €74bn of loans taken over by Nama were worthless. With taxpayers on the hook for €32bn of Nama debt, the situation appeared hopeless. Unlike the banks, which came out of the crash like rabbits in the headlights, Nama got to grips with the scale of its task early. Critics can argue Nama sold off some loans too early and too cheaply, but it has whittled the original €32bn of debt taxpayers were on the hook for to less than €6bn. That went a long way to shoring up confidence in the Irish exchequer.

As things stand, Nama will be able to pull the shutters down in 2019, within its original 10-year deadline.

(iii) to protect the State's interest in respect of the guarantees issued by the State pursuant to the Credit Institutions (Financial Support) Act 2008 and to underpin the steps taken by the Government in that regard.

Meaningless. Nama's creation can't really be separated from the bank guarantee. If the guarantee hadn't tied the State's finances to the losses in the banks, Nama would never have been needed.

(iv) to protect the interests of taxpayers

The €32bn question. By and large Nama, has functioned efficiently. We will never know definitively if it got the best price on individual deals. Common sense says it didn't get the best price on every deal. There are big questions over the Project Eagle sale in particular, one of Nama's biggest ever. More generally, the policy of selling off loans in tranches of hundreds of millions, and billions, of euros may have been the wrong one. It was a boon to vulture funds with the scale to buy in. Exchanging that speed and efficiency might ultimately have netted more for the agency.

But Nama timed the broad thrust of its sales extremely well. By deciding to sell off its oversees loans first, the agency managed to flog a fortune in development land in parts of London right at the top of the market. Crucially, it now has almost no big UK exposure left at a time when the market there has taken a battering from Brexit and the collapse in sterling.

Lots of developers think Nama got out of London too early, but that misses the point that private developers are in the business of taking risk, while Nama's explicit mandate was to reduce it.

Waiting longer to sell in the Republic was probably the right call too.

(v) to facilitate restructuring of credit institutions of systemic importance to the economy

Nama bonds helped keep the least worst of the Irish banks from death's door in 2010 to 2012, but no more.

(vi) to remove uncertainty about the valuation and location of certain assets of credit institutions of systemic importance to the economy

Not good. The idea that investors would be convinced there were no more hidden losses lurking in the banks after Nama took their developer loans proved wrong.

Nama paid less than the banks were expecting when it took over their loans in 2010, but it has never been clear about what was paid for each loan. Equally, when it sold the loans, it never revealed the individual price or the profit or loss on the trade. The agency claims it would be mad to tell prospective buyers what it originally paid for loans. But markets tend to be more efficient the more transparent they are, which is why we now have a property price register, for example.

(vii) to restore confidence in the banking sector and to underpin the effect of Government support measures in relation to that sector (see above), and (viii) to contribute to the social and economic development of the State

Tough to measure. Nama did engage with social housing agencies and county councils, offering housing units, but with limited success. Some communities around the country managed to secure socially useful land, for sports and recreation use, from the agency. It spent money cleaning up a large number of ghost estates.

On a larger scale, Finance Minister Michael Noonan has relied fairly heavily on Nama as a quick fix for issues as they've blown up. It has underwritten construction of office and residential land in Dublin when others were out of the market, for instance, including providing water infrastructure in the Dublin docklands - something that Irish Water or city authorities should really have taken responsibility for.

Irish Independent

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