Who stands where on Nama?


The official debate will have to wait until next month, but public arguments over the wisdom of the Nama plan continue to dominate

IT IS 20 weeks since the Government announced plans to set up the National Asset Management Agency (Nama), the so-called “bad bank”, in an attempt to cleanse contaminated property development loans, kick-start lending and save the economy. However, a key factor in determining whether the plan will work still remains a mystery. The Government has yet to say how much it will pay the three participating banks and two building societies for loans valued at €90 billion on their books.

Taoiseach Brian Cowen said last month that the Government “has to write what cheques are necessary in the interest of maintaining financial stability”. Minister for Finance Brian Lenihan has said that the loans will be purchased at a “significant discount” and that on September 16th he will outline the cost of the plan, how much each lender is likely to be paid for the loans and whether they will require more State investment.

Resistance to Nama has grown over the past week or so, after Fine Gael stated that it would vote against the plan, even before it had been debated. Senator Dan Boyle, of the Greens, the junior Government partner, subsequently said that the party’s support for the Nama legislation could not be taken for granted.

Then, 46 academic economists and lecturers voiced their opposition in an article published in The Irish Times on Wednesday. This brought a strong reaction from the Government, which mobilised economist Dr Alan Ahearne, an adviser to Lenihan, who described their criticism as “misleading”.

The Government’s difficulty is that the vacuum of information about the price to be paid for the Nama-bound loans is being filled by vocal opponents of the plan ahead of the official debate on the legislation next month. Critics argue that the State will pay too much for the loans – well in excess of the current market value of the properties backing them – and that the taxpayer will be left with unknown losses for an unquantifiable period of time, placing a massive financial burden on future generations.

These fears have been heightened by figures disclosed in court about the potential collapse of the Zoe Group, a business controlled by one of the largest developers, Liam Carroll. The group owes €1.35 billion, including €1.27 billion to eight banks. If it is liquidated, the banks will be forced to write off €1.15 billion, or 90 per cent, of its debts. Valuers to the group argue that its properties would be worth €644 million if sold within six months through “forced or distressed sales”, but €1.21 billion if sold on an orderly basis over three years (based on an assumption that the property market starts to recover in 2011).

With a potential €90 billion worth of risk facing the State, the debate is only beginning. So what are the positions of the interested parties on the Nama plan?


Minister for Finance Brian Lenihan has said that the State will buy the toxic property loans, comprising development loans with a current face value of €60 billion and investment property loans with a book value of €30 billion, in exchange for Government bonds.

If the Government pays a 30 per cent discount, a figure emanating from some in official circles, for the loans on their face value, it will give the banks access to about €60 billion in bonds which they can then exchange for cash with the European Central Bank (ECB). Most development loans were provided at about 75 per cent of the value of the land securing them, so a halving of property values doesn’t mean that the loans have halved in value.

Lenihan has said that some loans will be bought at their current market value, taking account of the very heavy falls – in some cases 90 per cent – on development land, while others will be purchased at a “long-term economic value”, taking account of the value of land, half-finished developments and completed properties over Nama’s expected 10-year lifespan.


The Green Party is concerned that the discount on the loans will not be deep enough to shield the taxpayer from losses over the expected 10-year life of Nama.

The party, which will hold a convention in October to consider Nama, wants the plan tweaked to include safeguards ensuring that the risk to taxpayers is shared with bank shareholders, as has been suggested by Prof Patrick Honohan of Trinity College Dublin. The Government is considering such risk-sharing options, including holding back part of the payment for the loans, which would only be paid if the State was making a return on the loans purchased. This would remove the risk of over-payment.

One difficulty with this plan is how the banks would account for this over time on their books. Their loans would be purchased, but they could face a contingent liability in the future.

Lenihan says that, should Nama make a loss over its lifespan, the Government would recoup this by charging the banks a levy at the end of the process. However, the levy has not been included in the legislation, partly due to fears that it would cast a shadow over the banks and leave them having to deal with a similar contingent liability. The stated aim of Nama is to remove all uncertainty about the banks, so legislating for a levy would run counter to the plan. Regardless, Lenihan believes that Nama will end up making a profit.


The 46 academic economists said in this week’s article, drafted by Prof Brian Lucey of Trinity College Dublin, that the key difficulty facing the Government is that if the loans were bought at prices based on the current depressed values in the property market it would leave substantial losses in the banks and wipe out their capital. This would force the State to pump more money into the banks and take large stakes, effectively nationalising them.

The economists argue that this is why the Government is determined to pay well over the odds for land and speculative developments. If it pays market prices, the Government would face a much larger upfront bill and major headache due to widespread bank nationalisation.

Bank shareholders should forfeit their investment because of the scale of the losses incurred by the banks, the economists suggest, and investors in the banks’ bonds should accept losses on their investments and swap debt owing to them for equity in the banks. The economists say the loans are worth €30 billion, which amounts to a 66 per cent write-down, a figure rubbished by the Government as property values have not fallen so steeply.


The party wants to establish a national recovery bank, or “good bank”, using investment from the State bolstered by further funding from the ECB and the international money markets.

Under its plan, the banks would be given until the end of the guarantee in September 2010 to pass a stress test showing that they had repaired their balance sheets by selling assets (such as foreign businesses), raising more deposits and negotiating with investors to write off losses.

If they fail the test, each bank would be split into two, with bad assets, including development loans, remaining in “legacy asset management companies” owned by shareholders and other investors who have advanced money to the banks on bonds and other forms of debt.

Deposits, short-term loans, bank branches and most of each bank’s workforce would move to a new bank created out of the good remnants of the old. This entity would be owned and guaranteed by the taxpayer and would, Fine Gael hopes, be free to lend again.

A key part of the party’s plan is that it would negotiate with investors in the banks’ bonds and other forms of debt to pay off their liabilities at greatly discounted prices or by swapping them for equity in the banks. In other words, the party would ask them to take a loss. Finance spokesman Richard Bruton says it is internationally accepted that risk investors in banks, such as the owners of subordinated debt (“sub debt”) – the lowest form of protected investment in a bank, but which pays high returns – should absorb loan-related losses before taxpayers. The party says that the Government could be exposing the taxpayer to a cost of up to €10 billion by “allowing some investors and speculators to walk away scot-free”.

Of €10.9 billion in “sub debt” owing to investors by the two biggest banks, Bank of Ireland and Allied Irish Banks (AIB), some €8.9 billion is guaranteed by the State, according to the banks’ own figures, and part of this has to be repaid during the guarantee.

A problem with Fine Gael’s plan is that international markets operate on the basis that banks must honour their debts to investors and, if they cannot, then the State must step in.

International investors would view a default on debt with some alarm, say market analysts, and the State may have difficulty borrowing money again internationally when trying to raise a further €20 billion next year to pay for the running of the country.


Many of Nama’s opponents believe that taking the banks into temporary State ownership is a better option as it removes the risk associated with get the loan pricing wrong. The State would be represented by both buyer (Nama) and seller (the banks).

Labour Party leader Eamon Gilmore has said that full temporary nationalisation of the banks is the cheapest and most effective option. Under his plan, toxic loans would be written down by setting up units within the banks and by an industry-wide clearing-house mechanism to minimise legal costs. Once the banks are cleansed, the State would sell the banks by re-floating them on the market, thereby making a profit to cover the cost of the rescue.

The Government is opposed to full nationalisation as it would load all the debts of the banks on to the State and dry up funding from investors such as pension and investment funds and large companies who spread risk by investing in many institutions.

Lenihan has said that the State may part-nationalise some of the institutions. He has stated that the Government would take large ordinary share stakes in the banks if the losses on the loan discount were so great that they required more capital and State funding. The loan transfers are expected to lead to the State taking a large shareholding in AIB, because the bank has more development loans and less collateral backing them than Bank of Ireland.


The International Monetary Fund (IMF) says the pricing of Irish toxic loans would be easier if the banks were nationalised. If the toxic loans are so great that they render a bank under-capitalised or insolvent, the only option may be temporary nationalisation, the IMF believes. The US-based fund has advised the State to share the risks in Nama with the banks, with the State under-paying for the loans and shareholders getting a share of the upside.

Similarly, it argues that the Government could be given an opportunity to profit from any potential future increase in the share price of a healthy bank cleansed by Nama.



The UK government has chosen to ensure against losses on toxic assets over time under an “asset protection scheme”. The plan starts with the banks taking a first loss on toxic assets. The government then insures 90 per cent of the remaining risk, with the banks taking a 10 per cent hit on future losses. In return, the banks must pay the government a fee. So far, part-nationalised lenders Lloyds and Royal Bank of Scotland have signed up.


The German government is using a bad bank model similar to Nama to deal with toxic assets. The banks will move bad assets at 90 per cent of their book value into cold storage in holding companies that sit off their balance sheets. In return, the banks will pay the government a fee. The toxic assets are not gone forever, but will return to banks in 20 years. Difficulties arise, as in Ireland, when determining the value of assets that have a life of 20 to 99 years. Also, the assets will eventually have to be taken out of storage at an unknown cost and the plan, initially, is dealing with only a fraction of the €800 billion-plus in toxic assets.


The US government has set up a public-private investment plan in which between $75 billion (€52bn) and $100bn (€69.5bn) of state funds would be used to kick off bidding for up to $1,000bn (€695bn) worth of toxic assets by banks. The difficulty is that few bankers want to participate in an auction that sets prices on assets that are lower than the values sitting on their books. The plan would lead to further write-downs on the value of assets, and losses which the banks can ill afford. Like all plans to deal with toxic assets, setting a price on assets in a depressed market means further massive losses and more state investment.