As one who joined the PIN for advice (and is eternally grateful), but also one who would not fully undertsnad much of the financial stuff discussed here, can someone put in plain terms WTF NAMA really is?
As I see it, some €90bn is owed by developers to Irish banks (much of it to Anglo). This money is, in turn, owed to International Banks (I presume). So it is owed to someone, somewhere. AND HAS TO BE REPAID.
We hear the Government talk about buying loans ‘at a discount’ throUgh NAMA, and ultimately (years and years down the road) this may benefit the taxpayer, through their resale.
By that I presume the Government takes into ownership the land banks and ghost estates - which nobody has the money to buy. So the taxpayer is caught for the ongoing €90bn. All the time, these 50 developers owe this money, and nobody’s doing anything about reparations.
Surely borrowing that €90bn was a massive gamble that didn’t pay off - so THEY are liable for it not us (the taxpayer).
I would point out that the post above is what everyday Irish people with little knowledge of how the finacial world operates (myself included) think is happening at present. Are we right, wrong, or misguided?
The NAMA proposal is to take development loans in excess of €5 mn off the banks books, whether performing or not and associated cross collateral up to a loan value of €90 bn.
The presupposition are:
the loans were originally issued at an LTV of 70%, that is 70% of the value of the asset was covered by the loan and collateral at time of issue
the government will be able to issue bonds directly to the banks without having to price them in the bond markets, so there won’t be a flood of bond supply.
it is possible to disentangle the cross-collateralisations.
both performing and non-performing assets will be taken, so NAMA will be largely self-funding.
the loans will be taken at a markdown to book value (the loan value) so the banks will have to take losses.
if the banks need to be recapitalised as a result of the writedown, the government will do this in return for common equity in the banks. (It is not clear if this is through directly issued bonds or whether the bonds will have to be sold and cash given to the banks).
NAMA holds on to the assets and disposes of them in a leisurely manner allowing the market to recover and preventing a firesale which would have implication for other assets the banks retain.
if NAMA makes losses, the government may impose a levy in the future to recoup those losses.
what price to pay for the assets?
A high price means a lower capitalisation and a lower government stake in the banks, so no nationalisatin (note, the current preference shares give the government 25% voting power, they don’t confer any ownership).
A high price means that NAMA is likely to make losses, leading to levies in the future and continuing impaired banks, so the banks are left with a contingent liability that will weaken them into the future.
A low price means effective nationalisation of the banks, as has happened in the UK, with the result that ordinary shareholders lose out. As we saw from Anglo, aside from pension funds and insurance companies, many small investors are, eh, ‘insufficiently diversified’.
Because of the guarantee, the government is on the hook to pay senior bondholders regardless of NAMA.
The expectation of NAMA has increased the price of government debt for the deficit.
The LTV of 70 % is nonsensical (David McWilliams has an excellent example of this in his book The Generation Game).
It’s not clear if some of the loans that NAMA takes on will have any worth at all, some may even have negative worth (cost of demolition and clean-up of partially built sites).
The only thing to add is that there is alot more flesh to come before we know what the NAMA proposal is exactly but it’s along the broadstrokes YM has outlined and could be an answer to rehabilitating our bad banks or is a project of such machiavellian evil brilliance that it boggles the mind.
I tend towards the machiavellian interpretation.
One other thing, is of course, we have to hand over immediately the cash for whatever % of the 90bn to the banks.
That’s one fucking mahoosive hit coming shortly. And then a probable further recapitalisation of some or all the banks will be necessitated.