INSIDE THE WORLD OF BUSINESS

Could Nama need bailout for itself?

FURTHER DECLINES in property values mean the National Asset Management Agency (Nama) will have to book another impairment charge on €31 billion of loans for 2011. Come late February or early March the loans agency must sit down with its auditor, the Comptroller and Auditor General, and decide the extent of this charge.

Nama posted operating profits of €400 million for 2010 but declines in property values since the loans were valued in November 2009 meant it had to knock €1.485 billion off the book value of the loans, leaving it with a loss of €1.1 billion for the year.

Commercial property declines will likely have fallen by more than 10 per cent by the end of the year.

Nama has said it will make an operating profit of €600 million for 2011, but the bad debt charge would push the net loss into the red for a second year.

This will be determined by a specific loan-by-loan provision on the top 190 debtors being managed directly by Nama and a general provision on the remaining 610 being managed by the banks.

Given the hit taken in 2010, could Nama have to turn to the Government for a bailout of its own?

Nama is upbeat that it won’t need one as it has buffers to keep its head above water. The agency had €455 million of capital at the end of 2010 but it is not a bank so it does not have to maintain a minimum capital ratio.

Some €1.6 billion of debt raised by Nama is in the form of subordinated bonds, including about €100 million due this year. If the agency makes losses, it does not have to pay out to the banks on this debt, which will shore up some capital.

Nama cannot readjust the value of loans upwards – in the UK for example where the market has improved – but it can make gains from selling assets at a profit. The agency has options but few would have thought two years ago that Nama might not have sufficient capital after crystallising heavy losses at the banks by severely writing down their loans.

Need for radical change from financial advisers

GIVEN ALL the hardship that is being experienced by so many in the debt-riddled western economies, it has to be a given at this stage that the international financial system is operating according to rules and mindsets that are in need of radical change.

This week the Financial Services Authority issued an arguably insufficiently harsh report on its own performance in relation to the regulation of the Royal Bank of Scotland, while also criticising Tony Blair’s government for introducing the “light touch” regulation within which the FSA operated.

The bank has incurred multibillion losses for reasons that included the rapid expansion of its investment banking operations and its reliance on short-term and overnight funding. (Our own Peter Sutherland was on its board.)

The bank led the 2007 €71.2 billion takeover of Dutch bank, ABN AMRO, by a three-strong consortium. The FSA report described the takeover as “extremely risky”, and said it “greatly increased RBS’s vulnerability”, since it increased its exposure to sub-prime losses. Because it was a contested takeover, the buyers could only conduct a limited due diligence exercise.

Two years after the purchase, RBS wrote off goodwill of up to £20 billion (€23.7 billion) arising from the deal.

Henrietta Baldock, a senior member of the banking team within the Merrill Lynch office in London, was among those who advised the consortium on the deal. She was also among the advisers used by former minister for finance, the late Brian Lenihan, during early 2009.

At the time the Department of Finance took comfort from the fact that Merrill Lynch was also providing advice to other European governments seeking to deal with the banking crisis.

It’s a questionable idea given the trouble the financial services sector is causing around the globe, creating strains for democratic government and raising the prospect of the break up of the European Union. But with David Cameron setting out to defend the City of London, and the Irish Government wondering whose side it is on, it is not clear as yet that the mindset in Merrion Street has changed.