The Numbers
2,000
The number of bank customers whose loans will be transferred to Nama. They hold a total of about 21,500 loans between them.
47%
The average fall in property prices assumed by the Government’s Nama calculations.
€54bn
The sum that Nama will pay for €77 billion worth of loans advanced by five banks (including €9 billion of rolled-up interest).
€7bn
The extra amount that the State is paying for the loans on top of their estimated current market value, a sum roughly equivalent to the value of all the income tax levied on workers so far this year.
The Words
Haircut– another word used for the "discount" that will apply to the original value of the "assets" (in other words, the bank's loan books) when the State comes to transfer them to Nama. The "haircut" in this case is 30 per cent off. The bigger the haircut, the better it would be for taxpayers.
"Nama-ed"– verb used in court by barrister Lyndon Mac Cann to describe the process by which bank loans are transferred to the Government's "bad bank" plan. See also: Namafication, Namafied.
Subordinate bonds– subordinate bonds are this season's credit default swaps, no one cared about them a few minutes ago, now everyone's an expert. The more subordinated bonds there are, the less the risk is for the taxpayer and the more there is for the banks. So how much of the total debt is subordinated? Um, 5 per cent.
"Toxic triangle"– phrase currently favoured by Labour Party leader Eamon Gilmore to describe the relationship between banks, developers and Fianna Fáil that he says destroyed the economy.
Zombie bank– a zombie bank is one that is nominally still alive, but is not doing very much of one very essential banking activity: lending to customers. Figures released by the Government yesterday show that Irish Nationwide approved mortgages to zero first-time buyers in both September 2008 and June 2009.
The Lowdown
What is Nama?
The National Asset Management Agency (Nama) is the Government’s “bad bank” scheme to “cleanse” five financial institutions – AIB, Anglo Irish Bank, Bank of Ireland, EBS Building Society and Irish Nationwide – of “toxic” loans amassed during the property bubble. The Government says this is the only chance to get the banks lending again and stimulate economic growth – the Taoiseach told the Dáil yesterday that there was “no other motivation” behind Nama.
How does it work?
If the legislation is passed, the Government will pay the banks €54 billion in the form of bonds, or IOUs, in exchange for the loans. This is 30 per cent less than the original value of these loans, plus the interest that has rolled up so far. Nama will then manage these loans on behalf of the State and try to “achieve the best possible return” for taxpayers, according to Minister for Finance Brian Lenihan. So the repayments made (or defaulted upon) by some 2,000 bank customers will no longer be to the bank, but to Nama and, by extension, taxpayers.
What are the chances of this working?
It all depends on the future direction of the property market. Under Nama, the Government is assuming that the average value of the bank borrowers’ property portfolios has fallen by 47 per cent. The current market value of the assets is estimated to be €47 billion, although it could be more or it could be less. But the State is paying €7 billion extra for the loans. This is described as an “allowance for the long-term economic value” of the assets – in other words, it’s assuming that prices will go up again.
Why isn’t the State paying the current market value of the assets?
The property market is in a state of distress. The current market value of properties reflects the fact that there are no buyers around, which in turn is related to the original problem: cash-strapped banks are no longer lending.
According to Mr Lenihan, it’s all about striking a balance between getting a fair price for taxpayers and avoiding a situation where the banks are so starved of cash that they have to come back to the State looking for another bailout. However, banks may require additional capital from the State at a later date anyway.
How much will it cost to run Nama?
Some commentators have described Nama as a costly quango that is letting the banks “off the hook” at taxpayers’ expense. Yesterday, the Minister said 40 per cent of the properties were “cash-flow producing”, meaning the rental income could be used to cover interest payments on the Nama bonds and its operating costs. But it declined to say how much it would cost to run Nama.
Will Nama “mortgage the future” of our children and grandchildren?
Nama means the economy’s prospects remain inextricably linked to the fortunes of the property market. It may take decades for the economy to be fully “cleansed” of these bad debts. The legacy of the property bubble means that taxation is likely to increase and Government spending continue to be constrained for years to come.
