Having let the National Asset Management Agency (NAMA) debate sink in overnight, there are some areas worth looking at more closely – especially in light of the news that Irish bank shares surged 30% on the New York Stock Exchange (NYSE) last night. The headline on the internal NYSE news service was: “Nice gift of Irish taxpayers’ futures converted into the present as a present to shareholders in the Irish banks.”
The Minister for Finance, Brian Lenihan, said that we will buy €77 billion of loans that are now valued at €47 billion and that we will overpay, paying €54 billion for them because they have ‘long term economic value’ i.e. he hopes that they will be worth more than that in the future – which is quite a gamble anyway.
Leaving aside how anyone, especially a government minister, can say we will use taxpayers’ money to overpay for something and leaving aside that the assets behind those loans may still continue to decline in value as property and land prices have not stopped falling yet, let’s take a look at what’s actually inside that figure of €77 billion. The breakdown is interesting: land 36%; development 28% and ‘associated loans’ 36%. That’s about €28 billion in ‘associated loans’.
It would appear that €9 billion of these associated loans is simply rolled up interest. Approximately 60% of loans are ‘non-performing’ i.e. the developer is not paying any interest on them and probably hasn’t for some time (of the other 40%, you can expect more to stop paying interest on them as interest rates rise next year). So it appears that we are also paying a premium on rolled up interest that developers haven’t paid and will probably never pay. This interest will continue to roll up, causing further declines in the real value of the loans.
Now ask yourself the question: “If €28 billion minus €9 billion equals €19 billion, what is that other €19 billion of associated loans made up of?”
The pro-NAMA spin machine has been putting it around in the lead up to this debate that the loan to value ratio is about 75/25% i.e. that the banks lent 75% and the developer put up 25% of the development costs. This is where this all becomes a deck of cards (a bit like some of their houses!). They are trying to make out that the developers had 25% ‘skin in the game’.
The reality is that most of them never did because, for example, they would go and borrow the 75% from e.g. AIB and then go to another Irish bank and borrow the 25% they were supposed to be putting up. So the upshot is that a lot of these loans have cross-dependencies across the various banks. It was the banks that had all the skin in the game and now it’s the taxpayer because we will soon be buying all those loans.
This is one of the reasons that the Irish banks have been fighting ACC Bank over the Zoe court case recently. They know that if one of them falls, there will be a ‘domino effect’ across the Irish banking sector.
To add insult to injury, we will pay for these loans by issuing ‘NAMA bonds’ to the banks because the government simply doesn’t just have €54 billion in spare change in their pocket. The banks will then go to the European Central Bank (ECB) and borrow real cash from them at knock down interest rates, using the NAMA bonds as collateral – if the banks don’t repay those loans to the ECB for any reason, it’s the Irish taxpayer who’s on the hook to ultimately pay.
This means that we will also be paying the banks several hundred million Euros in interest on those bonds every year until we eventually give them the cash (allegedly, from the proceeds of selling off the land and property in these loans that the minster hopes will go up in value over the years).
This is where it gets really interesting and puts away the lie that implementing NAMA will get the banks lending into the real economy again. With the cash from the ECB, the banks will buy Irish government debt at interest rates of 4% or better, thereby getting money coming in from the Nama bonds and money coming in from the debt bonds. This will also prop up the governments debt crisis by getting these bond issues away if there are any problems with Ireland’s credit status in the future and international investors decide we might be too risky to lend to.
The banks need to rebuild their balance sheets and the quickest way to do this is to sit back and let both those income streams go straight to their bottom line. Lending that money out to the real economy is far to risky. As we have already seen, they might not get some of it back!
Now let’s look at the Green party and how they have been saying what a great success they have had persuading the minister that the banks should “share the risk”. It is clear that they are only going to share 5% of the risk based on the figures in the statement yesterday. How is the Green party going to square that one with the public?
The last point is about the supposed haircut of 30% (and we don’t know what % applies to which bank yet). If you only take the €9 billion of rolled up interest away from the loan value of €77 billion (= €66 billion) and NAMA will pay €54 billion, the haircut is more like 18%. If you take all of the ‘associated loans’ of €28 billion from the 77 billion you end up with 49 billion. The figures suddenly get silly………….. and you wonder why the shares surged 30% last night?
Actually, there is one final point. When the shares come off their peak (because a load of people having a quick punt unloaded and made a tidy profit), as they may have done in New York last night, I hope the financial regulator is going to interview everyone who sold at or around their peak but only bought the shares within the last 1-3 weeks
Does anyone smell a rat?