ANALYSIS:THE MODEST scale of the National Asset Management Agency's (Nama) main "risk-sharing" measure is such that taxpayers will still bear the overwhelming burden of the vast risk in the project, writes ARTHUR BEESLEY
Nama will buy loan assets estimated to have a current market valuation of €47 billion for €54 billion. The €7 billion uplift takes account of an estimate of the long-term economic value of the loans.
While payment of this allowance was always one of the most controversial aspects of the Nama plan, risk-sharing was designed to ease taxpayer risk while incentivising banks and building societies to recover as much of the Nama loans as they can in the long term.
However, we now know that the downside risk will remain very much on the shoulders of taxpayers. Only about €2.7 billion of the entire bond issue of some €54 billion will be in the form of subordinated or second-class bonds. This represents about 5 per cent of the total issue and less than 40 per cent of the €7 billion estimation for long-term value, the part of Nama’s consideration for loans that will be subject to the banks’ own efforts in the future to maximise the value of the assets in question.
If the assets underperform – due to bank laxity, market conditions or both – the banks’ exposure is limited to €2.7 billion. By contrast, the exposure of Nama and its taxpayer owners would be about €4.3 billion.
All of that assumes, of course, that the €47 billion estimate for current values is correct and that values don’t continue to drop as the economy contracts.
Given the extent of the current malaise, these are big assumptions indeed.
This gives rise to the obvious risk that the true level of market values lies somewhere below €47 billion, raising prospects that Nama starts out with an overpayment of sorts even before the long-term estimation of value kicks in.
While current values in a collapsed market may well be impossible to determine, the attraction of risk-sharing was that it was designed to put banks at risk if Nama lost money without giving them an upside on gains it makes.
Quite how Minister for Finance Brian Lenihan and his army of advisers arrived at the 5 per cent figure for subordinated bonds remains unclear. However, the figure is at the very low end of the scale mooted in reports after the Government decided last week to adopt the risk-sharing measure.
Indeed, senior banking sources believed a subordinated bond issue between 10 and 20 per cent of the total was on the table before the Minister discussed Nama with AIB chief Eugene Sheehy and his Bank of Ireland counterpart Richie Boucher at separate meetings late on Tuesday.
Lenihan has emphasised all along that he is open to persuasion as regards possible improvements to the scheme. It is possible, therefore, that he might increase the amount of subordinated bonds.
Another possibility is that the figure set out yesterday is an opening gambit in advance of concessions he may make in order to secure the enactment of the Nama legislation.
Whatever the final outcome, the risk-sharing mechanism is far from the proposals mooted by Prof Patrick Honohan. Now governor of the Central Bank, he suggested that Nama would make only part of the payment for assets in the form of bonds with the remainder being made in the form of a claim on its future recoveries.
Lenihan stressed that Nama will be “derisked” to an extent by the State’s ownership of Anglo Irish Bank and its interest in AIB and Bank of Ireland, but the bank levy he threatens should Nama incur a loss is not included in the legislation. At the end of the day, no amount of risk-sharing can take away from the fact that Nama is inherently risky for taxpayers. There would be no need for a scheme of this kind if the banks themselves could bear the losses on their wildly optimistic lending.