NAMA - What is it all about?

NAMA - What is it all about?
07-Aug-09
NAMA, the National Assets Management Agency being put forward by the government as a panacea to all of the nation's economic and banking woes - what is it, how does it work, and what are the implications?

A step by step analysis of NAMA and how it works is given here:

The government sets up a new bank called NAMA. Capitalises it (gives it money to spend) with government bonds (promises by the government to repay at a future date).
NAMA values loans based on the underlying asset and how far the person that took out the loan can be pursued (presumably they had to put up collateral for the loan) and gives the bank a percentage of that loan value, with or without profits/interest. This valuation process is approved by the EU.
NAMA buys loan books from banks and pays with Government Bonds
The banks (bank of Ireland AIB etc) take Bonds to the European Central Bank and exchanges them for cash
Bank now has cash based balance sheet and can borrow new money with lower risk premium
Cash flow problems in the economy are removed and lending/spending starts again
If someone owes money on these commercial development loans, they pay NAMA but:
The bank is paid to manage the loans, so there is no effective change in management as far as the person owing money is concerned
At the end of 10 to 15 years, any loans that defaulted get paid back by the banks to NAMA
ECB gets repaid in full, no cost to the taxpayer.

All well and good you say, not too bad so far, so whats all the furore about NAMA? The scheme outlined above is workable, in fact it is based on schemes that have worked in the past for other countries. However our own government isn't implementing the scheme above.

What they are doing is making the loan valuation process (step 2 above there) secret. No harm you say, the EU has approved it. The catch is that the valuations will then be subject to adjustment for future potential value, above and beyond what the EU thinks it might reasonably be worth.

Okay so, not so great, but that doesn't matter since the banks will repay any shortfall in the second last step there?

Thats what we are being told.

But its not in the legislation, and its not going to be in the legislation. Proponents of NAMA tell us that at some undefined point in the future, when the minister making these promises is long gone from his job, a levy will be applied to the banks to make up the difference. It will in no way be guaranteed by the legislation.

This is apparently because it would make the banks less competitive and less able to get loans, wth a liability like that hanging over it. But if the banks intended to value their loans correctly they wouldn't have to pay back anything, therefore no liability. Thus the loans will be overvalued and at the end of the day its Irish citizens who will be paying for this blank cheque.

Or you could take the minister's word for it, if you like.

And the icing on the cake? When all is said and done, there are no guarantees this will cause the banks to start lending again.

You'd think if you were going to spend €90 billion you'd at least get a warranty.

On the proposed levy:
1. Apparently it can't be put into the legislation because it would undo NAMA's work.
2. We have to trust that a future goverment will actually implement it.
3. Will only work if the losses are relatively low.
4. Will reduce the amount banks can lend in future years.
5. Has no relationship to the actual individual bank losses, with those banks not even being involved in NAMA having to pay.
6. The levy WILL be passed on to bank customers through higher charges. Essentially it will be another tax administered by the banks.
7. Existing shareholders and bondholders get off very lightly.
8. Increases the inital cost to the taxpayer in comparison to the other options.

The operating profits from all of the six major Irish banks, excluding property boom influences, rarely exceeded €2 billion. How then will they be able to repay levies which might easily surpass €40 billion? By handing over all of their profits for the next twenty years? But surely that would defeat the purpose of NAMA, which is to make the banks attractive for investors. Which means that the taxpayer will be called upon to pay the tab for these private for-profit companies, all in the name of liquidity which might not be restored regardless.

In the popular media, NAMA is already being recognised, and indeed put to music.

We recommend until these issues are dealt with, that you forward this image via email to as many people as possible, just right click, save as, and forward.