NAMA: A TRAGIC FARCE

The sceptics have been proved right, as NAMA is on course to becoming one of the largest debt forgiveness programmes ever devised, writes Bill Hobbs

When first told, the NAMA story was of a benign fairy godmother that would sprinkle pixy dust on banks and get them working again. In its second telling, the story was the tax payer stood to make a profit. In its third telling this week, what began as a fairy tale ending is morphing into a tragic farce.

It is clear the pixy dust has not worked and the naïve belief that banks had come clean on their losses was mere wishful thinking. Sceptics who considered NAMA’s Hollywood “feel good” ending grossly optimistic have been proved right. NAMA is on course to becoming one of the largest debt forgiveness programmes ever devised. Politician’s assurances of pursuing people to the ends of the earth to recover debt flies in the face of one brutal post-boom fact, most borrowers are bust – their wealth was tied up in property. Unless NAMA can miraculously squeeze blood from stones, it is almost certainly going to have to agree to writing off debt.

Some say the combination of NAMA and bank recapitalisation programme will cost the state over €30bn in today’s money, which will have to be borrowed and repaid from future tax revenues. Most of this borrowed money will be burnt on the funeral pyres of two rogue banks, Anglo Irish and INBS. A new Anglo plans to rise phoenix-like from the ashes and fly again as a good bank. Flying pigs may be more apt, as its first plan for becoming a banking phoenix was shot down by the EU. Its plan, like NAMA’s first version, appears to have been full of optimistic, woolly assumptions.

NAMA believes it may pay 50c in the euro for €81bn in loans it plans to buy from the banks. So far it has bought €15bn of the top 100 borrower’s loans who owe €50bn. The balance of €31bn is owed by 1400 others. Some of the loans are worthless or near worthless, some barely ticking over and others fully functioning. The problem for NAMA is there are a lot less good ones then it planned for. Only one in four are good, the rest are a heady mix of loans financing fallow fields, partially complete buildings and thousands of unsold or untenanted finished properties. The fear is the smaller loans will present any even worse profile than the bigger ones.

NAMA says in its best case scenario it will turn a “profit” of €3.9bn. Its worst case projection shows it making a loss of €800m after cashing in €2bn through its soft landing loan loss insurance -a claw-back from the banks of money paid by it for their loans. Unfortunately worst case scenarios have a nasty habit of becoming far too optimistic as real outcomes in Irish banking illustrate. One leading economist estimates NAMA losses of over €14bn.

Long on hope and short on experience NAMA’s trying to project profits in 2019. In business, predicting anything beyond two or three years is a bit like trying to hit a moving target in the fog while blindfolded.

Imagine borrowing €500,000 to buy a house worth €450,000 whose tenants haven’t paid rent in years in the hope that in nine years time you will be able to sell the house for a sum equal to everything you will pay over the nine years, including legal costs in evicting the tenants, finding new ones, maintaining the property and covering all fees, insurance and other costs.

This is how NAMA will work with completed occupied buildings. As it deals with the unfinished stuff, it might demolish it, mothball it, sell it off or pay someone to finish it off. Farmers who made millions selling land at boom time prices will be able to it buy back at agricultural prices.

It might possible to fool all of the people some of the time, but we are beyond fooling. The cleverly spun story that launched NAMA as a costless way to get away with having to pay for one of the largest bouts of wealth destruction ever, has ended.

Most developers are quite simply broke. They will not be able to repay what they owe no matter how inventive NAMA’s predictive arithmetic is. The sums do not match up and no amount of wishing will make them do so.

The fact is banks recklessly lent money at levels that could only have been repaid in boom time economic conditions, which will not be repeated. They lent money on a borrowers’ net equity, their personal wealth, which in most cases was based on inflated property values. Once values collapsed so too did people’s ability to repay. Negative equity is not solely a homeowner malaise, many of NAMA’s clients are hopelessly insolvent.

One reality is the only people to profit from NAMA’s day to day operations will be its host of professional advisors. Instead of letting the banks pay for cleaning up the mess they created, NAMA will pay, at least €1.6bn.

Nearly two years into the banking crisis we have one bad bank, NAMA, two failed banks, Anglo and INBS and four zombies. The final story will not be just be about NAMA’s debt recovery loses or the billions burnt on two rogue banks’ funeral pyres. It will include the profits made by those who pick up cheap property assets.

A new form of carpetbagger/investor will emerge. They will kick the tyres in NAMA’s forecourt and select the best – many will undoubtedly partner with experienced professional developers. There will be many phoenix-like property developer resurrections. Debt forgiveness is always the first step on the path to recovery. But there won’t be bodies swinging on NAMA’s gibbet. Instead its people and advisors will get on with the business of doing deals and publishing annual accounts demonstrating value for the tax payer.

Predictions based on optimism almost always disappoint. There is no point saying the glass is half full when there is still a hole in the bottom as property values that underpin NAMA’s loan values continue to decline.

A version of this article appeared in the Irish Examiner Saturday July 10th 2010, Analysis Section