NAMA IN BRIEF Tony Foley DCU Business School Sept 2009 The problem The banks have made large amounts of loans to property developers and builders which will now not be paid back as planned if at all because of the economic recession and the collapse in property prices and activity. Industrial and commercial buildings remain empty. Rural and urban sites acquired with borrowed money are not worth building on. Unfortunately this money was obtained from depositors and the wholesale financial markets and they want it back. There are only four groups of potential providers of money to cover the bad loans. Shareholders (they could provide more equity), depositors (could agree to let the banks have a portion of their deposits (not very likely), lenders who loaned money to banks (already used to some extent) and taxpayers. The taxpayers are the most likely because the state has access to resources, the state has a vested interest in the effective functioning of the banks, the state can take a different time perspective than private investors. NAMA The Governments solution is NAMA. This agency will buy the bad loans and some good ones from the banks at a price which reflects the current low value and an adjustment for the likelihood that property prices will increase over the next 10 years. The big issue is the price to pay. If it is too generous to the banks it is unfair to the taxpayers. If it is too hard on the banks they suffer very large losses and need Government capital to survive or else they go bust in some form or other. Ideally we would not have the problem but it is there and regardless of the type of response, NAMA, nationalisation, bad bank/good bank the problem of the bad debts remains and the need for an effective banking system remains. The Governments estimate of the loans valuation This week the Government announced that it would buy €77b worth of loans. This includes €9b in unpaid interest and €68b other debt. This €68b was associated with land/property assets of €88b. Assuming a decline in property prices since then of 47% these assets are worth €47b. Allowing for an increase of 15% in property prices over the next 10 years the assets would be worth €54b in the long term. This is the price which the Government will pay for the loan book of €77b, a discount of almost 30%. A small part of the payment (5%) will be held back until we see if NAMA avoids a loss. The Government figures are an aggregate estimate. NAMA will assess each of the over 20k loans individually and the final figures may be very different from those presented in the Dail. Assumptions The price of the loans is very sensitive to our estimates of current property prices and expectations of immediate future trends in prices. On the Government figures the taxpayer will break even and could make a profit. A worst case scenario is possibly that prices will have decreased by 70% from peak (including an additional drop from Sept 2009), equity backing the loans is 15% and there is only a 5% increase in property prices over the next decade. In that case we should be paying only €25B and not €54 as intended by the Government, an possible loss to the taxpayer of €29b. However, this is the worst case scenario and we have to put these huge figures into current perspective. On current trends €29b is equivalent to about 18months of government borrowing. In addition, taxpayer support of business is a regular feature of economies eg grants to enterprises, subsidised training, export support, cheap or fee advice through development agencies. Assessment We have a broken banking system. Whatever we do will cost the taxpayer. The Governments figures look optimistic to me in terms of the critical 47% drop in property prices but we are getting the money at a low interest rate which might not be the case if we nationalised and because time is of the essence and a significant portion of the land/property is in the UK/USA which will recover quicker than us I would now be inclined to support the NAMA approach. This is mainly because the alternatives also have critical downsides and time is tight. Ideally we would not have the problem but that is sadly not the case.
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