The funding of Nama

 

Madam, – Brian O’Neill, NTMA/ Nama (April 3rd), takes issue with a number of points I raised in my Opinion piece (April 1st) regarding the funding of Nama. In particular, he takes issue with my characterisation of the proposed funding structure as exposing the taxpayer to refinancing and interest rate risk.

He states that the taxpayer will not be exposed to interest rate risk as the NTMA will “engage interest rate hedging strategies”. This however, admits that there is such risk, else why would the NTMA hedge? What sort of hedge will be used – swaps, options, futures, forward purchases?

He also takes issue with my characterisation of the maturity structure of Nama, in particular the fact that Nama is, in my view, funding the purchase of illiquid longterm assets (distressed property loans that may take decades to repay, if ever) with shortterm funds. However, this fact is unargued. Mr O’Neill states that the taxpayer is not exposed to refinancing risk, as the funds are, while of one year’s duration (thus admitting that they are funding at the short end), extendible at Nama’s option.

Nama bonds are technically “extendible bonds” which are priced as a combination of a bond and an option. The misspecification of option pricing is seen by many as one of the chief causes of the crisis. It would be good to see the option pricing methodologies used by the NTMA in its calculations. In addition, the existence of a potential from the issuer to not extend the bonds’ lifespan makes these inherently possess a maturity less than the ultimately considered lifespan. These 10-year bonds are therefore not – they are of considerably shorter maturity, again demonstrating a problem that of asset-liability mismatch.

Nama, it seems, is the Government scheme that keeps on giving – problems that is. The present funding proposals contain within them a complex stew of financial derivatives, instruments called “financial weapons of mass destruction” by Warren Buffett. While I do not subscribe to this characterisation, it seems more and more that Nama and its ugly sister Anglo are such a weapon aimed at the taxpayer of Ireland now and into the future. – Yours, etc,

BRIAN M LUCEY, BA (Dubl), MA (NUI), PhD (Stirling), FTCD,

Associate Professor of Finance,

School of Business Studies,

Trinity College, Dublin 2.