John FitzGerald: Despite controversy, Nama has served us well

The Project Eagle loss isn’t real, but rather the difference between two hypotheticals

Fears that Nama would help out the banks at the taxpayers’ expense proved groundless. Photograph: Cyril Byrne

Fears that Nama would help out the banks at the taxpayers’ expense proved groundless. Photograph: Cyril Byrne

 

In the court of public opinion, when the constitutional spending watchdog is pitted against a State agency born in controversy and whose remit is in the murky world of high finance, property development and bad loans, it’s no contest.

But while the Comptroller and Auditor General raises issues of real concern that merit further scrutiny about the governance on Nama’s sale of the Northern Ireland-owned assets, the Comptroller’s assertion that the sale of Project Eagle cost the taxpayer about €200 million seems to be wide of the mark, and has a spurious precision.

This isn’t a real actual loss, but rather the difference between two different hypothetical valuations about what the Project Eagle portfolio was worth, based on two separate sets of assumptions. Neither a property portfolio, nor bundles of loans linked to property, have a fixed value. Rather, at any given time, they are worth what the market is prepared to pay for them.

The C&AG has suggested that the sale of these Northern Ireland loans resulted in a substantial loss to the State compared to what might have been realised if Nama had disposed of them slowly over the rest of the decade. However, the C&AG’s estimate of a possible loss doesn’t take account of the higher risk for Nama in holding sterling assets when its liabilities were denominated in euro.

Since the sale, sterling has declined by 7 per cent and Brexit has almost certainly affected the value of Northern Ireland assets. Thus, if Nama still held the portfolio today, the State could actually be looking at a loss compared to what it received for the Northern assets in 2014.

The fall in sterling also makes Nama’s rapid disposal of its UK assets look like a good decision.

Furthermore, the Nama Act requires it to realise the value of its portfolio as expeditiously as possible, not to be an investor or property developer. Indeed in the early years, exceptional pressure was put on by the Troika to speed up sales.

The warehousing of bad loans in a “bad bank”, to get them off the books of the commercial banks, was successfully used after Sweden’s bank crash 25 years ago to enable the rebuilding of a collapsed banking system. In the recent crisis, Spain, Germany and Italy also went the “bad bank” route.

Two weeks ago the EU Commission published a study of the performance of Nama, and its Spanish and German equivalents. The study showed that Nama has played an important role in the recovery in the national banking sector, as has Spain’s bad bank Sareb, while progress by the German FMB has been less satisfactory.

They say that Nama has been well run and very effective with the sale of assets – the most advanced of the three asset management agencies.

They also suggest that Nama’s success was helped by new legal powers enabling it to collect payments due on loans more effectively. While this may explain the unhappiness of many former property developers with Nama, it should also provide confidence to taxpayers that their interests have been protected.

When Nama was set up in 2009, there were fears that it might pay too much for the banks’ bad loans and help insulate the bank’s shareholders from the cost of their negligence. There were also fears that they might provide succour to the property developers who had gambled so much of what proved to be the State’s money and lost so heavily.

However, when Nama took over the bulk of the bad loans from the banks in 2010, they applied a very steep discount, reflecting their expectation of future losses on the loans.

Because the discount was even bigger than had been expected, the losses that were crystallised in the banks were so large that Ireland needed a bailout. The shareholders in the banks were wiped out. Fears that Nama would help out the banks at the taxpayers’ expense proved groundless.

In 2010 Nama estimated that when it had completed its work, the outcome could be somewhere between a loss of €800 million and a profit of €3.9 billion for the State. Today, six years after Nama paid €32 billion for the loans, it looks as if it will return a profit to the State of about €2.5 billion.

Whatever other failings may be proven, it seems clear that Nama has substantially delivered on the task set for it in legislation: to expeditiously recover for the State as much as possible from the wreckage of the banking collapse.

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