NAMA National Asset Management Agency
Irish Government announces National Asset Management Agency (NAMA)
There has been much debate about NAMA since its announcement by Brian Lenihan, the Irish Minister for Finance in an emergency budget last week. The Irish government must be applauded for its decision to tackle the banking crisis head-on even if the plan lacks detail.
Much of the focus has been on the impact on the banks and on the public finances. The impact on the banks property customers is more difficult to gauge at this early stage. It is fair to say that the tone of the presentation of NAMA gives very little sympathy to the property investors and developers who were courted for so long by the present government and the banks.
If one casts an eye back less than a couple of years, there were banks out bidding each other to finance a property industry which was generating handsome exchequer revenue for a very satisfied government. No-one was complaining then, when the talk at dinner parties was about the price the house two doors up fetched at auction and the best place to buy an overseas holiday home.
Fast forward to today and the banks have all but collapsed, the property developers and investors face financial ruin and the government plays Solomon and determines who pays – the taxpayers, the banks or the developers.
The success of NAMA will be in the detail. NAMA must be prepared take a very commercial approach. The better and more experienced property developers must be incentivised to bring the sounder projects to fruition. There is mention in the small print of using of Special Purpose Vehicles (SPV’s) to properly exploit the commercial potential of the many viable but incomplete property projects will be the key factor.
The SPV’s can tap into private equity funding, putting no further strain on the banks of the taxpayer. Otherwise NAMA will fail and become another costly state-owned bureaucracy. It must allow good property projects to flourish and retire the bad ones.
Brian Weakliam, Bankhawk, 16 April 2009
This post has 4 comments
April 19th, 2009
Whatever its merits, the proposed National Asset Management Agency (NAMA) imposes an extremely high and unquantifiable risk on the Irish taxpayer.
There is an alternative way to repair the banking system which does not involve risking taxpayer funds to such a significant degree – by reorganising the individual banks into bad bank / good bank structures.
This is how a bad bank / good bank reorganisation could work:
Each of the six banks (the bad banks) would form wholly-owned subsidiaries (good banks) to which their physical assets (buildings, computer systems, etc), cash, non-toxic loans and other good assets, as well as liabilities to depositors and savers, would be transferred. The toxic loans would remain behind in the bad banks, as would the interests of the banks’ debenture holders and shareholders.
Each bank would now be split into two entities: a bad bank and a good bank.
The bad banks would own 100% of the share capital of the new good banks and would receive income in the form of dividends from the good banks.
The new good banks would have solid balance sheets and therefore good credit ratings, enabling them to undertake normal banking functions, ie, lend money to businesses and consumers on the usual commercial terms, and make normal banking profits. Should they require additional capital, as they surely would, they could raise it through the financial markets in the usual way or the state could take equity positions in the form of ordinary shares in these banks.
The six bad banks would now have balance sheets consisting of (on the assets side) their investment in their subsidiaries and their toxic loans and (on the liabilities side) their obligations to their debenture holders and shareholders. The bad banks would receive dividends out of the profits of the good banks. As each bad bank would wholly own its good bank subsidiary, it would control its dividend policy.
The bad banks would now proceed to liquidate their toxic assets, taking their own time about it. Should the bad banks need to raise cash, they could do so by selling their shares in the good banks to institutional investors or on the stock exchange. This would be necessary when the bad banks need to pay off their debenture holders as they would not be able to avail of last September’s government guarantees of banks’ debts as long as they have immediately realisable assets. Eventually shares in the good banks would end up in the hands of the government, financial institutions and small-time investors.
Reorganising Irish banking along the lines of the bad bank / good bank structure would, besides restoring the Irish economy with a solidly-based fully-functional banking system, have major advantages for both the taxpayer and the government:
[1] There would be a much reduced risk to the taxpayer. Compared to the NAMA scheme, the Irish taxpayer would not be investing funds in toxic assets. Should the good banks require government funding, this would be in the form of state-owned ordinary shares and the taxpayers’ risk would be no more than the risk taken by any investor in a properly regulated and prudently managed commercial bank with a sound balance sheet.
[2] There would be no doubling of the national debt as expected under the NAMA scheme.
[3] A further deterioration in the government’s ability to borrow externally would be avoided as there will be no requirement to fund NAMA through the issue of Irish government debentures.
[4] A better return will be obtained on the toxic loans. The bad banks best know the ins-and-outs of these loans and would be in a much better position to renegotiate them. Indeed they would most likely get a higher realizable value out of them than NAMA and there would be no need for NAMA to negotiate the price it would pay (ie, the discount it would achieve) to buy these loans, avoiding the risk to the Irish taxpayer that this would involve.
[5] Moral hazard would be avoided. The consequences of the bad decision-making that got the Irish banking system into the mess it is in would remain squarely on the shoulders of those who made those atrocious decisions and the shareholders who voted them into office. Indeed the transfers of assets into the good banks would provide shareholders in the bad banks with the information they need to deal appropriately with their boards of directors.
[6] Political hazard would be avoided by Fianna Fail et al. By instituting a scheme to reorganise the banks into a bad bank / good bank structure the government might avoid being perceived as bailing out its banking and property associates with taxpayers’ funds. For the current government this might be a vital advantage.
April 21st, 2009
http://www.nationalassetmanagementagency.com
Website/Country for sale!
Regards,
James
April 22nd, 2009
Interesting read. Difficult to see how NAMA will be able to manage the changeover of loans from the banks. We wait with bated breath…
November 6th, 2009
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