Nama: a ghost of a chance?
17 May 2009 By David Clerkin, Markets CorrespondentIs the bad bank in trouble already?
Those who had cautiously welcomed plans for the National Asset Management Agency (Nama) were on the back foot last week, as the proposed solution to the catastrophic exposure of Ireland’s banks to the property meltdown began to lose its gloss. Just a week after Brendan McDonagh was appointed as its interim chief executive, whatever positive sentiment existed towards the new agency showed early signs of fading.
While the Nama concept was originally seen as innovative - if extremely risky - the devils that lurk within the details is now causing problems. This leaves Minister for Finance Brian Lenihan short of options, and shortens the odds on the outright nationalisation of the banks in deepest trouble.
Nama, still in fragile embryonic form, was shown little delicacy by National Treasury Management Agency (NTMA) head Michael Somers when he appeared before an Oireachtas committee last Thursday.
With the NTMA, the state’s expert funding arm, being charged with responsibility for the new agency, Somers’ frank remarks on the uncertainty surrounding the workings and potential effectiveness of the newcomer signalled an alarming lack of confidence in the project and the NTMA’s relationship with it.
His statement caused some irritation in political circles, where sources insist it is all systems go for Nama, but his comments clearly point to the logistical challenge that lies ahead.
Within 24 hours of Somers’ unexpectedly downbeat intervention, Lenihan’s public demeanour had changed. Content in the past to play the wait-and-see card when pressed for details on precisely how Nama would work, Lenihan gave the impression that the task at hand would be even more complex than originally envisioned. Though part of what he was trying to do was undoubtedly to avoid an all-out row with Somers.
There would, the minister said, be problems with staffing Nama; legal problems if banks or borrowers did not like the details; valuation problems, as the agency would be in uncharted territory in attempting to figure out how much each bad loan was really worth - a conundrum that even the banks have admitted is beyond them in the current climate.
However, senior political sources insist that, despite these challenges, Nama will go ahead. And they express some puzzlement at Somers’ intervention, given the NTMA’s central involvement in planning the project.
Lenihan’s statement, however, reflects the logistical challenge which is already leading to difficult negotiations between senior officials and the banks on how the whole thing will operate. There are also political challenges.
This newspaper reveals today that the plans for Nama include a likely agreement to protect the country’s largest developers from being put into receivership or liquidation, on the basis that the shock to the system presented by the failure of a heavyweight developer could be too great a burden to bear.
Officials, worried about the potential knock-on effect of a single developer going under, are opposed to forcing so-called ‘‘fire sales’’ of assets in a depressed market.
Concerns have been expressed that complex relationships among developers, which involve joint projects and cross-collateralisation of security, could mean that forcing one developer to the wall runs the risk of taking others with him.
They also fear that pulling the trigger too quickly on individual developers would result in Nama scrambling to find a buyer - any buyer - and sell their assets for whatever cash could be put on the table in a hurry.
Instead, they think that a more orderly approach, involving less aggressive management over a period of ten years or more, would reduce the likelihood of the taxpayer crystallising losses by selling assets at an unattractive point in the economic cycle.
The proposed Nama approach hopes to buy time to wait for an upswing in land and property values, improving taxpayer returns and keeping developers afloat to harness their knowledge, in an effort to get the most out of each asset on Nama’s books.
However, political sources say that developers will remain liable to repay all they borrowed and that, inevitably, some will not survive financially.
The complexity does not end there, however. Nama is also being lined up to act as a bank in its own right, providing finance to certain developers in limited cases where a project is stalled for want of finance.
If Nama takes a view that the taxpayer return would be improved by providing the necessary finance, the developer in question will be granted a loan by the agency.
While economist Peter Bacon suggested that this could be a possibility when preparing his recommendation to the government on establishing Nama, such a role would add even greater complexity to an organisation that is expected to be relatively low on staff numbers.
Early suggestions that Nama would recruit specialist staff with experience in credit management have given way to outline plans for so-called ‘‘outsourcing’’ arrangements with participating banks. While Lenihan has stressed that lenders who were responsible for granting problem loans should have no place in helping to work them out, the optics of a bank continuing to manage a bad loan - even after the downside risk has been transferred to the state - are not very appealing.
Attempts to neutralise this are likely to include mechanisms to force banks to redeploy staff, so that new faces from other parts of the organisation are charged with helping to clean up the messes caused by their colleagues’ lending decisions. But the solution is more complex, and less cut-and-dried, than the initial suggestion that Nama staff would directly manage the loans.
Nama’s role appears to have evolved into one that will see it act as a credit committee in many cases, supervising work carried out on an agency basis by the banks.
This will likely involve some incentive to the banks to manage the loans effectively and the ‘‘embedding’’ of Nama staff within the banks.
In addition, the appointment of Brendan McDonagh, finance director of the NTMA and one of Somers’ lieutenants, may have come as a surprise to those who had expected an external appointee with forensic banking experience.
McDonagh may easily argue, however, that any such concerns are misplaced, and that the forthcoming appointment of a chairman for the agency - expected to be a prominent figure with an international business background - will boost its credentials.
Lenihan, meanwhile, attempted to deflect the worst effects of Somers’ bombshell by reporting a positive reaction from investors in Britain and on the continent to the steps being taken by the government to stabilise the banking sector and the wider economy.
But he also urged his audience to be patient, stressing the need to get the structure of Nama right at the first attempt, and saying that the government should not rush into a course of action that might not turn out to be appropriate.
Somers’ comments, however, suggested that that point may have already been passed, and that the government was now committed to a strategy that one of the state’s heaviest financial hitters appeared to frown on.
This weekend, Lenihan may feel he is stranded between persisting with a difficult solution and a major climbdown, whose effects on international investor sentiment he can only guess.
It is a lonely place in which to find himself. After such high-profile efforts to engineer a clear out at the top echelons of Irish banking in recent months, it will be painful indeed to realise that, while most of the top bankers who caused this mess are beginning to enjoy their retirement, their problems have fallen to Lenihan.
Far from easing his headaches, the bad bank may be about to cause yet more.