NAMA: What’s Wrong?

So whats’s wrong with NAMA?
There are many things, here’s the first:

NAMA Loans Losses
Summary Projected Alternative Realisations Outcomes

NAMA original Loans value 77.00 bn Purchased by NAMA 54.00 bn
60% Non-performing: 46.20 bn
40% Performing: 30.80 bn
Let’s look at immediate / present situation, assuming that all Performing
Loans can be 100% recovered:-
Recovery rate on Performing: 100% X 30.80 bn = 30.80 bn
Recovery rate on Non-performing: 25% X 46.20 bn = 11.55 bn
Total recoveries 42.35 bn
NAMA loss: €11.65 bn

But let’s suppose that over time we get to (which experts believe will be best case):
Recovery rate on Performing: 80% X 30.80 bn = 24.64 bn
Recovery rate on Non-performing: 40% X 46.2 bn = 18.48 bn
Total recoveries 43.12 bn
NAMA loss: €10.88 bn

Now let’s suppose that instead we get (which experts believe will be likely case):
Recovery rate on Performing: 60% X 30.80 = 18.48 bn
Recovery rate on Non-performing: 20% X 46.20 = 9.24 bn
Total recoveries 27.72 bn
NAMA loss: €26.28 bn

So let’s look at what needs to happen for NAMA to Break Even:

Let’s set some parameters, make some assumptions
You can’t make more than 100% on a loan.
Current recovery rates are 25% (we’ve seen this in Zoe and now Fleming and also IGB site)
All the loans that are currently Performing stay Performing.
In the break-even case, therefore, assuming full 100% recovery on the Performing loans, then the recovery rate for Non-performing loans has to improve from the current 25% to 50%, explained as follows:-

NAMA original loan value 77.00 bn
60% Non-performing: 46.20 bn
40% Performing: 30.80 bn
Price paid by NAMA 54.00 bn
Break-Even = €54.00 bn – €30.80 bn = €23.2 bn Recovery in Non-performing
Recovery Rate required on Non-performing = 50% (i.e. 23.2 / 46.2 X 100/100%)

NAMA requires the prices of underlying assets to go up by 100%, i.e. 9% a year, compound, every year for nine years, not simply a 10% uplift over ten years.

Proof:- Bank Book Value of Non-performing Loans 46.20 bn
Recovery @ Current empirical 25% rate (Zoe Fleming IGB etc) 11.55 bn
50% Recovery of Non-performing Loans in order to Break Even (B/E) 23.20 bn
Increase in Recovery from Current empirical (25%) to Break Even (50%) 11.65 bn
Increase in Non-performing Recovery rate from 25% to 50% = 100% implies the prices of underlying assets increase by 9% pa compound for 9 years.

Conclusions:-

  1. NAMA assumption that there will be 100% recovery on the €30.80 bn Bank Book Value of Performing Loans is completely wishful, bordering fanciful (in light of current empirical evidence)
  2. NAMA assumption that there will 50% recovery of €46.20 bn pre-NAMA Bank Book Value of Non-performing Loans is completely fanciful.
  3. Requiring that both (1) and (2) above happen together is doubly completely fanciful,
  4. All other direct costs of setting up NAMA and managing and administering NAMA and related bureaucracy establishment costs and then further operational inefficiencies costs and indirect costs of a new “albatross” over-shadowing the economy and confusing and delaying price corrections etc and all indirect costs, express and not so obvious, in addition to birth of a new NAMA “culture” in this small parochial country would be enormous.
  5. To proceed with NAMA, experts have concluded, would be financially unjustified, illogical and quite reckless..
  6. To over-pay the Banks at €54.00 bn for Bad Loans doesn’t make sense.
  7. To hope to Levy the Banks at a future date for an over-payment by NAMA and to expect the Banks not to pass on the Levy to their customers (the Taxpayers) is naïve, bordering fanciful. Past evidence shows that Levies on Institutions always get passed on to Customers (Citizen Taxpayers).
  8. If NAMA proceeds, against the best advice, further write-downs of 10% – 20% on the Banks’ €77.00 bn Bad Loans should be charged to the Banks before Sale of the Bad Loans to NAMA. This would increase the Bad Loans write-offs in the Banks’ books by a minimum of €7.70 bn from €23.00 bn to €30.70 bn. (applying a 10% additional write-down) or by €15.40 bn to €38.40 bn (applying a 20% additional write-down)
  9. (7) above highlights and strongly supports the argument that the Banks are in urgent need of immediate re-Capitalisation of the full minimum write-down amount of €30.7 bn

Summary:-

Experts agree that the NAMA result with highest reasonable probability is:- 65% recoveries on “Performing” Loans and 35% recoveries on Non-performing Loans. That reasonably forecasts the losses on NAMA Loans Recoveries as follows:-

Purchase Price of Total NAMA Loans (Pre NAMA book values €77.00 bn) €54.00 bn
Recoveries Performing Loans 65% X €30.8bn = €20.02 bn
Recoveries Non-performing Loans 35% X €46.2bn = €16.17 bn
Total NAMA loans Recoveries €36.19 bn
Total Estimated NAMA Loans Recoveries Losses [ignores other costs at (iv) above] :- € 17.81 bn
This implies an additional write-down requirement of 23% on €77.00 bn [i.e. 17.81/77.00%],
a marginally higher additional write-down % than the 20% mentioned at (vii) above.

  1. beeno67
    March 10, 2010 at 11:51 am

    I was discussing this article on boards.ie Here is my contribution.

    Mathews says the book cost of the loans in NAMA is 77 billion but NAMA is goingto pay 54 billion for it. (now I think we can all assume the cost is going to be less than 54 billion but lets leave it at that for the moment)

    Now he says the performing loans make up 30.8 billion of this original 77 billion. Lets assume for the sake of argument that NAMA pays 85% of their book value for these loans (obviously you pay more for performing loans than non-performing) That means the cost of these 30.8 billion of performing loans is 26.18 billion.

    That means NAMA is going to pay 27.82 billion for the non-performing loans (54 billion minus 26.18 billion). The book value of these non-performing loans is 46.20 Billion. So NAMA pays 27.8 billion for loans with a book value of 46.20 billion. All OK so far?

    However Mathews is saying that these loans are only worth 25% of their original Value or 11.55 billion. So if they are only worth 11.55 billion and NAMA is doing valuations as we speak why does he believe NAMA will value them at 27.82 billion? That is his basic mistake.

    You have to assume if the loans have a current value of 11.55 billion as he believes then that is the valuation NAMA will put on them.

    • rorourke
      March 12, 2010 at 8:41 am

      It’s important to remember the purpose of NAMA as articulated by Brian Lenihan and how he articulated it would work when he proposed it: to clean up the banks’ balance sheets without nationalisation to get credit flowing in the economy again. In order to achieve this a 30% discount was proposed on the loans based on long-term economic value (LTEV). While the reality always was that it wouldn’t clean up the banks balance sheets sufficiently to get credit flowing again and would still leave them requiring recapitalisation, it could have avoided nationalisation.

      The process has taken so long, and because of the actions taken by non-NAMA banks, which has revealed the extent to which property prices have fallen, and, in fairness, something Brian Lenihan had always said, as each loan was valued as it went into NAMA, it now appears – and that’s the new information – that NAMA is using similarly severe valuations. Although it’s not clear to what extent they are taking in LTEV. However, a more severe approach means that the recapitalisation needs of the banks will be even greater, I’ve heard estimates of another €15bn, which amounts to nationalisation if the State becomes the source of those funds, likely.

      In which case we get the nationalisation that the government has gone to extraordinary lengths to avoid, despite it being proposed from several quarters as the only rational response to protect both the economy and the tax-payer, while protecting the principle of moral hazard. As predicted, we’re now heading for the worst of all possible worlds, a very expensive exercise to avoid nationalisation (making a joke of moral hazard and even greater fools of the Irish public) that has failed.

  2. adrem
    June 16, 2010 at 5:18 pm

    Is there not 2 basic flaws here??

    1) You can get more than 100% on a loan. The loan is being purchased at a significant discount to the original loan entered into. The developer is however still “on the hook” for the full amount of the original loan NOT just the cost of that loan to NAMA. Whatever about your beliefs – it is disingenuous to state as fact an assumption that isn’t actually true

    2) Nationalisation and majority ownership of the shareholding in a public company are 2 completely different things. Suggesting otherwise indicates a serious lack of understanding !! Lenihan repeatedly said that he was looking to avoid nationalisation but had no problem if he ended up as majority owner of the banks for a period of time. Indeed that would provide a potential return to the State in time if the bank recovered post recap etc.

  3. Donal Jackson
    July 26, 2010 at 10:01 am

    All this talk is wonderful but its notional value(insured?)Why should any entity purchase a non performing loan? When buying the performing ones did anyone look at the reason why they were performing and compare? There has been no logical reason given for the bailout other the the fear of systemic failure? Who are the bond holders in these Banks? Any investor in any product or market is a gambler by profession and is aware of the pitfalls and backing a looser? We can start to get the picture and the maybe a solution backed by the people paying for it all if we know who we are paying it for??? There is never going to be agreement on this issue until we know who they are. We have economists all over the place arguing with each other but none of them willing to sit and show how they are backing up their expert opinion??????? 1+1=2 lets start there and show the people how we are going to recover. There is a Halo of corruption over the current Government and we cannot trust them. Bertie suggestion of suicide for people asking questions was a real insight. But we won’t go there. The McCarthy report. How did he get that job done in such a short time. That’s a more important question than one might think?? Stop talking Mr O Rourke no one can predict the future and because of our Government’s action our Children’s hang in the balance. Mr Mathews is a concerned Citizen first and expert then. We need more of his likes..I’ll leave out the photo.

  4. david walsh
    July 29, 2010 at 6:04 pm

    Adrem – on your two points above

    1 – Its not really possible to get more than 100% recovery on your loans. There are two categories of loans, performing and non performing. Performing loans are just that – they are meeting repayments and full recovery is expected. So these loans are not marked down to a lower value in the books. Non performing loans are the ones that may have been subject to a write down already but in reality (as covered by the level of discounts in transferring to NAMA) they are still over valued on the books. Do you think that if the loans were worth more than NAMA is paying for them then the banks would be screaming about it from the rooftops.

    2. Not too sure on the difference between majority ownership and nationalisation. From the company’s point of view the majority shareholder (Government) would have control over the bank and so it would effectively be equivalent to a nationalisation. I do agree though that if the majority ownership (but this really depends on how much capital is required by the banks to be invested by the Government and so will be decided in the valuation of the bank at the time of investment etc) would be useful as it would keep the bank listed on the stock exchange which would ensure more transparency than a full Government ownership. It would also allow the Governmenr to sell off its shareholding in drips over a number of years when the banks recover.

  1. November 4, 2009 at 11:41 pm
  2. January 14, 2010 at 6:33 pm
  3. March 30, 2010 at 4:07 pm
  4. June 26, 2010 at 11:37 am

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