The Irish Economy & NAMA

[daithi81]

Ok, the legislation for NAMA was published today, and I'm tired of making a new thread everytime something to do with the economics of the recession pops up, so I'm going to put everything in this thread from now on.

I'm about to hit the hay, so I will read the legislation tomorrow and comment. Here it is:

http://www.nama.ie/

For those who don't want to read the jargon:

http://www.rte.ie/news/2009/0730/banks.html
http://www.irishtimes.com/newspaper/breaking/2009/0730/breaking1.htm

Also, keep an eye on:

http://www.irisheconomy.ie/

for more erudite interpretations of the legislation by actual economists.

This is the most important legislation this country has ever seen, imo.

 

[slick fingers]

By reading that draft it appears that Nama are going to purchase the bad loans at a discount from the banks (maybe 60%) What happens if the value of these assets continue to fall and not recover? Like should the government take such a risk? Ok, the banks are going to suffer with the massive write-downs, but their still being rescued. Its said that its going to cost the taxpayer around 90billion initally, what is it REALLY going to cost though?

 

[daithi81]

Ok, legislation skimmed over and I am none the wiser. The fact that NAMA can borrow €10bn to finish developments is worrying. Will this mean that NAMA (we) will borrow money to finish other peoples projects and then sell them back to them at a discount, based on 2006 prices? Seems like a sweet deal for developers.

According to the nature of the model, the banks do indeed look like that they will make considerable losses, but their RWA will be vastly improved. However, unless the discounts are kept at a certain level, the banks capital ratios will be in danger of falling below 8%. But this may mean that we cannot apply the correct discount to what may be worthless assets. This again, makes me wonder why temporary nationalisation is so abhorant to the government. I have heard the arguments against this action, and they all seem to be based on doctrine and ideology, not reality.

By reading that draft it appears that Nama are going to purchase the bad loans at a discount from the banks (maybe 60%) What happens if the value of these assets continue to fall and not recover? Like should the government take such a risk? Ok, the banks are going to suffer with the massive write-downs, but their still being rescued. Its said that its going to cost the taxpayer around 90billion initally, what is it REALLY going to cost though?

If you look at the model:

http://www.nama.ie/Publications/2009/Nama_Prospective_Business_Model.pdf

It should explain how NAMA aren't working on a knife edge, wrt breaking-even. They have some room for manovuer. However, it shouldn't cost us €90bn initially. There are €90bn worth of loans to strip out, but these will all be discounted. Of course there is the potential €10bn that NAMA has to play with, should they see the need. I reckon €70bn is a more likely figure, unless some curveball comes into play.

 

[How bad boy]

60% write down is better than i had expected.

Improves the chances of making a profit substantially, IMO.

 

[daithi81]

60% write down is better than i had expected.

Improves the chances of making a profit substantially, IMO.

If you treat NAMA in isolation, then yes. However, if the write-down substantially affects the equity ratio of AIB/BOI, then the government will have to step in. This will cost more money. If NAMA made a €10bn profit, but ended up costing the govt €12bn in saving the banks from insolvency due to the haircut, it's a loss.

In otherwords, NAMA cannot be treated in isolation.

 

[hemlock666]

This thing is going to be a protracted and massive waste of money. The taxpayer pays through the nose yet again. I can forsee this crashing in the flames of government scandal & mismanagement in a year or two while the property developers and banks get a nice easy ride in spite of bringing the country to the brink of bankruptcy. Then the vastly overpaid politicians at that time will blame their predecessors, who will of course splutter their way through the oh so familiar politicspeak about having no other choice and the great Irish circle jerk will continue. The government (and a succession of govts) cuts a deal with child abusers and throws money at fraudsters and monopolies.
Im emigrating in the coming years before they bring in walking tax or the like.

 

[johnmcork]

excuse my ignorance but;

would i be right in saying that a developer that is in trouble will have his loan transferred to NAMA in order to free up the banks to give MORE credit to said developer so he can buy his own land back at a discount?

is this even a remote possibility because if it is......

 

[daithi81]

excuse my ignorance but;

would i be right in saying that a developer that is in trouble will have his loan transferred to NAMA in order to free up the banks to give MORE credit to said developer so he can buy his own land back at a discount?

is this even a remote possibility because if it is......

No. The developer owes the money to NAMA, and not at the discount rate.

Example:

So, Mr.Developer had toxic property of €100, and he owed 100% of this to AIB. He cannot meet his debts, so AIB are fucked. NAMA comes in to buy the property debt for €60 and gives €60 of government bonds to AIB. Mr.Developer still owes €100 to NAMA. If he wants to, he could feasibly get a loan of €60 from AIB and buy the land back. But now he would owe €160.

 

[How bad boy]

If you treat NAMA in isolation, then yes. However, if the write-down substantially affects the equity ratio of AIB/BOI, then the government will have to step in. This will cost more money. If NAMA made a €10bn profit, but ended up costing the govt €12bn in saving the banks from insolvency due to the haircut, it's a loss.

In otherwords, NAMA cannot be treated in isolation.

I've not had a good thought about this, as you know more than I do, how can the sale of poorly performing loans reduce the equity ratio? Surely it would boost the capital available to the banks, as the government have to pay for the loans?

 

[Lostmeringtopaddypower]

If you treat NAMA in isolation, then yes. However, if the write-down substantially affects the equity ratio of AIB/BOI, then the government will have to step in. This will cost more money. If NAMA made a €10bn profit, but ended up costing the govt €12bn in saving the banks from insolvency due to the haircut, it's a loss.

In otherwords, NAMA cannot be treated in isolation.

Still though - the government now also have major stakes in both banks who - in about 3 to 5 years could (should) be up massively on their current price.
So a NAMA loss could be offset, to an extent, with this dosh.

NAMA is still inflating the value of the distressed property way beyond current market valuations, though.

This has the effect of giving the taxpayer a double whammy of expecting him to finance it and in the process, artificially price the property out of his range or if he can actually still get a mortgage for it, make him pay way more for it over a 30 year mortgage cycle.

And this is FF's idea of a good solution.

They are The Property Developer / Banker Party.

Always were and always will be.