Key Post A simple guide to NAMA and the banking crisis

Brendan Burgess

Founder
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47,305
This post is aimed at people who don’t have the time or the inclination to study NAMA in detail but who do want to understand the basics of the present crisis. You should get a grasp of the issues by reading the first post. You can go into further detail by reading later posts or following the links.

We are in a mess. There is no easy solution. Whatever approach we take will put the taxpayer and the country at huge risk. If someone tells you that the solution is simple and risk-free, don’t listen to them. Every proposal has its advantages and disadvantages. They have to be analysed and teased out.

We are in a mess and we have to find a way out. We might be angry at the government, the banks, the regulators, the property developers and at ourselves. But we can’t let that anger prevent us from finding a solution.

We might resent having to bail out the depositors, the bankers and the property developers, but if we decide that we need to do this to get the economy working again, we will have to do it.

The problems
Irish banks have lent €90 billion to property developers and investors. Around 50% of these loans are in serious arrears and are unlikely to be repaid in full.

If the government did nothing, the banks would have collapsed -



  • ordinary savers would have lost their deposits
  • the payments system would have collapsed and the economy
    would have ground to a halt
  • confidence in the government would have collapsed and the
    government would have been unable to pay for the running of
    the country – schools, hospitals, pensions & social welfare

Even if the banks had managed to survive without government support, they would take years to recover and would not lend to Irish businesses and home buyers, so the economy would take years to recover. This is what is meant by “zombie banks”.

The solution
The government has guaranteed the deposits for everyone up to September 2010
The government has invested €10 billion (?)share capital in the banks.
The government, through NAMA, is proposing to buy the bad loans from the banks.

If this works, the banks will have enough capital to start lending again. This does not mean that they will start lending again soon, but they certainly won’t lend again if they do not have enough capital.

But this is a huge risk to the taxpayer
It looks as if the government will be forced to pay more than the loans are worth. Instead of the banks and their shareholders losing money on these loans, the taxpayer will pay for the losses. Of course the banks and their shareholders have taken huge losses so far.

It looks like we will pay around €60 billion for the loans. The government says that this is a fair price, but no one can know the true value.

We can reduce the risk to the taxpayer by nationalising the banks
If the government nationalises the banks, then it does not matter if we pay too much for the loans. Any overpayment will be reflected in the value of the banks when the government eventually sells them off.

But nationalising the banks is risky as well…
It is argued that if we nationalise the banks, the international community will stop lending money to the Irish banks and, possibly, to the Irish government. Even if they don’t stop lending to us, they will push up the price we pay for these loans.

This point is hotly disputed.

Can we reduce the risk to the taxpayer without nationalising the banks?
Yes, instead of paying €60 billion for the loans, we can pay them €50 billion now and hold the balance of €10 billion until we see how NAMA works out. This approach does have its downsides in that it does not remove most of the risk from the banks.
 

Brendan Burgess

Founder
Messages
47,305
The main criticisms of NAMA as currently proposed

The banks and their shareholders are being bailed out at the expense of the taxpayers.

The government is investing tax payers’ money in the banks directly and indirectly. The shareholders stand to benefit. Without this help, the shareholders would have been wiped out.

We are bailing out the property developers.
But NAMA supporters say that NAMA will be as determined, or even more determined, in pursuing the property developers to repay their loans.

These criticisms have some validity. But we are really baling out the whole system – the depositors, the banks and the property developers for the benefit of the whole economy.

There is no guarantee that recapitalised banks will start lending again.
The banks are in trouble because of bad lending. They will be very careful before lending again.

NAMA is artificially propping up the property market
The propery market will stay depressed while NAMA holds around €60 billion worth of property which it wants to dispose of.
 

Brendan Burgess

Founder
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47,305
The other solutions

[broken link removed] is proposing to set up a good bank and to let the main banks look after themselves.
Fine Gael is proposing to set up a good bank which would lend to Irish businesses. The other banks would be given one year to get their house in order and would be nationalised or allowed to fail if they don’t do so.

While the good bank idea is worth considering, the rest of the proposal has no support at all from anyone outside Fine Gael. Even two former leaders of Fine Gael dismiss it as unworkable. It is very worrying that the plans of the party which is most likely to win the next general election has no support outside its own party.

Nationalisation without NAMA
The Labour Party is proposing some system but it seems to me to be the same as the current proposal but with the nationalisation of the banks. Maybe I don't fully understand this.


Let the banks and property developers fail as you would do any business.
[broken link removed] believes that the economy won’t get going again until the banks and their property developer clients are all allowed to fail and prices crash to their true level.

This is not really feasible. It would have been possible to allow one bank e.g. Anglo Irish Bank to go under although there would have been huge pressure to protect the depositors. But it’s not possible to allow AIB and Bank of Ireland collapse.
 

Brendan Burgess

Founder
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47,305
Conclusion
The vast majority of commentators agree that we need good banks for the economy to get going again.

The main dispute is whether to nationalise the banks or not.

There will probably be some compromise where the banks will get only part of the cash up front and a deferred payment depending on how NAMA works out.
 

mf1

Registered User
Messages
4,410
Brendan

Thank you for that - I'm afraid my eyes tend to glaze over when NAMA comes on, even though I know how important it is, so it was good to get an overview in BIG LETTERS of what its all about.

mf
 
R

reserved

Guest
Hi Brendan,
I am new at this, but I was wondering when NAMA will commence? When will they fund the banks? Any idea?
Thanks, Donal.
 

dewdrop

Registered User
Messages
1,298
Brendan...it is reported in the media that the banks will be happy to keep the bonds they are getting for ever. how does this tie in with the expectation that they would be in a position to extend credit when they got the bonds. I thought they would use the bonds as security for raising credit for on lending in Ireland. I must be confused.
 
Z

z107

Guest
Thanks for that Brendan.
Irish banks have lent €90 billion to property developers and investors. Around 50% of these loans are in serious arrears and are unlikely to be repaid in full.
This is incredible. €90 Billion worth of loans, from a country the size of Ireland? How can this happen?
Did the banks in all the other European countries (like Greece) do the same?

The money must surely have ended up somewhere, so where is it?
 
B

brehon

Guest
Hi Brendan, could you explain to me why Nama have to pay off the complete/partial loan just because developer can't make repayments?
Why can't government just pay the repayments on its original payment schedule? Surely this would be much cheaper?
Also in long run 20-50 years the government would own alot of valuable land and property they could get rent from to pay for pensions for example?
Once repayments are made isn't the loan then viable?
 

Gulliver

Registered User
Messages
479
Brehon
The fundamental basis of bank lending in normal times is that a bank makes a profit on lending because they have so arranged the repayments to ensure that the value of the future repayments is greater than the outstanding amount of the loan. So it will never be cheaper to "just pay the repayments on the original payment schedule"

Furthermore, the nub of the problem is that a lot of the "valuable land and property" is not nearly so valuable as might have been inferred at the time the loan was granted, and in many cases, the documentation is reportedly so deficient that any land/property which was the subject of the loan might not eventually come into Nama ownership.
 
B

brehon

Guest
Thanks for response. Maybe I wasn't clear. My understanding is that loans that are not functioning are being repaid in full for their knocked down price or haircut. Say 50%. So a loan that was given for a housing estate of €100m is now worth €50 million. Nama has taken that loan and wants to sell the property to recoup the €50m within next 5-10 years. The bank has taken a full loss of €50m but better than the whole €100m as the developer can't meet repayments. The reason the banks can't loan money is because they have not got access to funds from external or internal to give credit out to business.

Now imagine a different scenario. The government underwrites the full amount of the loan, and repays the non-functioning loan, taking ownership of the land/property the loan was based on. The repayment schedule was probably initially over 5 years anyway. Based on a business model of build houses, sell houses, pay back bank loan, keep profit. Now if government says okay we'll pay off that loan in full, the banks get back their money and are free to lend again. The government pays off the loan not over 5 years but 15-20 years. The banks would not have to be recapitalized because they are getting the full repayment for the loan. The developer goes bankrupt. The state gets full ownership of land it can decide to sell or keep for rental income in 10-15 years. The state does not have to come up with €100m in short space of time to repay loan. They pay it off over 20 years which means lower repayments annually. Just like a person remortgaging over longer period. Less stress on taxpayer in short space of time. As landlord the government could extract ground rent on the leaser of the land for 1000 years. Thus providing a steady income for the State.

Well its all academic now anyway!
 

Ethan 1

Registered User
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88
The problems
Irish banks have lent €90 billion to property developers and investors. Around 50% of these loans are in serious arrears and are unlikely to be repaid in full.

Hi Brendan,
Can you explain what the significence is now, that the true figure as reveled by Dr. Peter Bacon last Friday morning on Newstalk's breakfast



part 3 from 08:30

should have been €158 Billion, as he presented in his report of the 21/03/2009, and the discounts applied since then by NAMA seem to be much larger.

Does this mean that things are very much worse than reported ?

Ethan 1
 

Brendan Burgess

Founder
Messages
47,305
Hi Ethan

I haven't looked back at the source of these figures and what Peter Bacon has says now.

But, yes, things have got a lot worse since Sept 09

Property prices have fallen further
The security has turned out to be a lot worse in terms of paperwork, % Loan to value etc.

NAMA has imposed a higher haircut that was first envisaged, which has meant that the bank's capital is a lot less than was expected.
 

Threadser

Registered User
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308
We do have bankruptcy and insolvency legislation to allow people get a fresh start.
What happened within NAMA went well beyond this legislation. It is impossible to sue an company that no longer exists. This applies to most of the developers of these defective apartment blocks.
 

Threadser

Registered User
Messages
308
Interesting how the "bail out" for the little guys seems to bother you Brendan but no difficulty with the state offering assistance to the "big guys" to avoid responsibilty for their shocking dereliction of duty in constructing apartment blocks to a reasonable standard.
 

NoRegretsCoyote

Registered User
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4,049
Interesting how the "bail out" for the little guys seems to bother you Brendan but no difficulty with the state offering assistance to the "big guys" to avoid responsibilty for their shocking dereliction of duty in constructing apartment blocks to a reasonable standard.
The bailout was nothng to do with build quality and everything to do developers having over-borrowed and over-paid for development land and their subsequent inability to sell units to cover their costs.

Nama had plenty of faults, but it was a lot more efficient than appointing receivers on a huge scale. It made sense to retain existing owners and managers who were best placed to maximise residual value.
 

Threadser

Registered User
Messages
308
Nama had plenty of faults, but it was a lot more efficient than appointing receivers on a huge scale. It made sense to retain existing owners and managers who were best placed to maximise residual value.
This may be true but the fact remains that no one will ever be held accountable for the reckless manner in which some of these developments were constructed and signed off. I am in receipt of a recent surveyors report on one of them and it is an absolute scandal.
 
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