Value of loans bought by Government still the big unknown

ANALYSIS:Transferring to Nama bank loans with a book value of €90 billion will be a huge challenge

DETAILS ARE finally emerging about how the National Asset Management Agency (Nama) will be operated day-to-day and managed strategically on a long-term basis.

Transferring a fifth of all the loans in the domestic banks – worth between €80 billion and €90 billion on their books, including soured property development loans – into a State-run agency will be a huge challenge.

It looks likely that the day-to- day administration of the loans will remain with the banks themselves, while the really troublesome loans may be more intensively managed by outside specialists working for Nama on contract.

It seems unlikely that the National Treasury Management Agency (NTMA), under whose authority the agency is being set up, will seek to recruit a significant workforce to crew the Nama ship.

The new agency will operate as a kind of super-credit committee, taking control of problem loans from the bankers who approved and managed them, and deciding which developers to repossess.

This, the Government hopes, will make the cut clean, ensuring the banks no longer postpone interest on toxic loans and that the institutions book the actual value of the loans, crystallising losses.

It is hoped that this will determine their capital needs once and for all, as well as the level of State ownership of the institutions.

Removing this uncertainty requires all infected classes of loans to be purchased.

This is why the State is buying asset portfolios, which include good and bad loans.

Repayments on good loans are expected to pay for some bad ones.

Green Party Minister Eamon Ryan has said that Nama’s interim board and chief executive will be appointed within two weeks.

Economist Peter Bacon, Nama’s architect, is expected to play a role given his involvement so far, as are some NTMA directors who have been working on the plan.

The market value that the Government will pay the banks for the loans remains the big unknown.

The National Treasury Management Agency listed an example on its website of how a loan might be transferred to the new agency.

Describing the example as being for “illustrative purposes only”, the NTMA says a €65 million loan provided in February 2006 on a property then valued at €100 million would be bought for €40 million.

The “haircut” for the bank involves a 38 per cent reduction in the loan’s value with the bank making a loss of €25 million.

Haircuts of more than 25 per cent are expected to wipe out the banks’ existing capital reserves.

The NTMA says the property would have to fall in value by more than 60 per cent from when the loan was made for the agency to be in a loss-making position.

Development land has fallen by at least 50 per cent, and by as much as 70 to 80 per cent in severely affected areas, Aidan O’Hogan, chairman of Savills, told RTÉ recently.

This means Nama could still incur losses on some loans, based on the example.

Writing in The Irish Times today, economist Alan Ahearne, an adviser to the Minister for Finance, says the difficulties with valuing the loans remains, irrespective of whether the banks are temporarily nationalised in full.

He opposes full nationalisation, saying that it creates “a significant risk of undermining the capacity of the banks to raise funds internationally for domestic lending”.

He said it was “difficult to see a credible exit strategy from wholesale bank nationalisation” and that the returns for the taxpayer reprivatising later “would probably be disappointing”.

“The simple inescapable truth is that nationalisation creates a significant risk of a political rather than a commercial allocation of credit,” Dr Ahearne said.

“This would be bad for the banks but even worse for the country.”

The level of State ownership of the banks will only be determined when the transfer price is known.

That may be some time away.