By Ivan Yates

Thursday, December 22, 2011

During the Noughties Government buildings entertained interlopers.

The political process was supplanted by partnership. Bertie Ahern
developed a cosy consensus that rendered Parliament redundant, an
irrelevancy to the centre of power. The negotiation of pay and
conditions formed only part of Partnership agreements. These dealt
with social objectives in health, education and the elimination of
poverty. ICTU and IBEC became pivotal to economic and social policy.
There were called pillars. Their mandate was facilitated by Cabinet
ceding authority, believing together they could solve the nation’s
problems.

This transpired to be disastrous. Public service payroll costs more
than trebled. Benchmarking resulted in extra pay for little additional
productivity. Worst excesses are visible in the form of slush funds to
pay for union officials’ training and travel. SIPTU and the HSE
operated a forum with budgets in excess of €5 million to keep the lads
happy. Government lost sight of the fact that union bosses and
employer representatives’ overriding obligation is to look after their
members — not the public interest. There was no appropriate
discipline, dividing roles of gamekeeper and poacher. Calamitous
consequences for the state, not keeping at arms’ length from vested
interests, are part of our bust Bertie legacy.

Alarmingly, harsh lessons haven’t been learned. There is a new cuckoo
in the nest. It is almost faceless, seeks no public profile, is
unelected and has become omnipotent. In a myriad of separate policy
areas they exercise overwhelming influence in outcomes of government
decisions. Who? Nama and Bankers. Voters cast their ballots for Fine
Gael and Labour, but ended up with public administration on behalf of
the newest and biggest elite. They’re facilitated and prioritised
above all else. While election promises are repudiated
across-the-board, a variety of concessions (never previously advocated
by either party) are granted to shore up balance sheets.

The budget provided the biggest ever tax giveaway to property
investors. Section 23 tax relief was to be abolished. FG & Labour
depicted it as a Fianna Fáil wheeze for their developer friends. These
schemes won’t be terminated. Capital gains tax was increased from 25%
to 30%. However, a new zero rate is to apply on all commercial
property bought over the next two years, if retained for seven years.
Stamp duty on similar property was slashed from 6% to 2%. If FF had
introduced these measures, present ministers would have derided them
as a speculators’ charter. Culprits of the property bubble are to be
feted with unprecedented generous incentives. Despite all sectors of
business craving credit and capital, it is buildings that are to be
earmarked for bounteous stimulus.

This benevolence came from nowhere. It wasn’t contained in any
election manifesto. The joint Programme for Government made no
reference to these potentially costly concessions. There was no prior
publicity on behalf of lobby groups vociferously seeking same. No one
in the bailout troika mentioned any external insistence on these
measures. However, behind-the-scenes, one can readily imagine how Nama
and our two pillar banks would desperately seek steps that would stop
assets on their balance sheet declining further in value. €31 billion
was invested in Nama. €62bn was procured to recapitalise indigenous
financial institutions, along with €21bn from the National Pension
Reserve Fund. It’s apparent that their interests are now equated with
the public interest.

The budget is only the visible beginning of their influence. A direct
commercial conflict of interest emerged since 2007 between landlords
and tenants. Business operators, who paid rent, couldn’t rewrite their
lease terms to either exit or negotiate downwards the cost of their
premises. Specific cast iron political pledges were made to abolish
upward only clauses in rent reviews. This was resolutely opposed by
Nama’s chief executive, Brendan McDonagh, who publicly argued that it
would reduce Nama’s asset portfolio by 20% or €2 billion. Their views
reigned supreme. Previous promises were jettisoned due to legal
advice. In other words, Nama rules, okay.

When the ECB cut interest rates by 0.25% in November, there was an
outcry by Kenny and Gilmore as AIB and Bank of Ireland declined to
follow suit. Top bank bosses were summoned to Merrion Street, dressed
down and told to comply. This month, when a further 0.25% ECB cut was
announced, the same lending institutions didn’t respond. BoI’s total
reduction was 0.15%. This time there was no clamour on behalf of
customers and borrowers by the Taoiseach or Tánaiste. The entire
purpose of Draghi’s cheaper money is to pull the Eurozone out of
recession. If banks pocket these benefits, original objectives will
not be achieved. Politicians have been told to button their lips,
because propping up banks is the paramount national objective.

ISME and other representatives of small businesses have lobbied about
lack of credit. They procured surveys showing crude realities on the
ground of refused term loan and overdraft facilities. The Irish
Bankers Federation insists these claims are false and exaggerated. The
Government knows the overriding priority of indigenous banks is to
downsize their balance sheets. Hence, they are happy to turn a blind
eye to the starvation of cash-flow from lenders. Approval of the
rollover funds is equated with new lending. Finance houses are
deleveraging at a rate of knots — it’s costing jobs. Mortgage finance
has evaporated.

One fundamental flaw that led to our banking collapse was an
incestuous relationship between regulators and financiers. Liquidity
crises evoked a ‘green jersey’ empathetic support, instead of rigorous
independent regulation. Investment banks were deemed to be systemic to
the economy. They weren’t and should’ve been put into administration,
with consequent insolvency terms for bondholders through negotiation.
Nowadays, we conceal the McCann FitzGerald/Ernst & Young reports into
Nationwide. This is not in the public interest, but protects key
individuals wielding enormous power.

Early in 2012, we are promised new bankruptcy legislation. This could
favour debtors, if a copy and paste replica of the UK system is
adopted. This would release more than 100,000 entrapped borrowers from
the Celtic crash. Such a scenario wouldn’t facilitate the maximum
punitive advantages to banks, who can terrorise customers with threats
of judicial sanctions. Don’t be surprised who wins out, as Nama/IBF
leverage their political muscles. The same logic will be articulated:
“banks’ interests equal taxpayers’ interests”. A new tank is parked on
the lawn of government buildings. The partnership commanders have been
replaced by banker/developer/property aristocracy.

This subversion of democracy must be opposed. It’s short sighted.
Fundamentally, there is nothing wrong with cheaper commercial property
— it makes Ireland Inc more competitive. The market, rather than a
lethal cocktail of politicians and property magnates, should determine
asset values. Down the road, the endgame of resuscitated banks and
Nama is that they will be sold off to investors. The state has no
long-term interest in their nationalisation. There is every prospect
in a decade’s time that another set of vulture capitalists will have
raped the country with the collusion of politicians. Cui bono? Usual
suspects.

Read more here

Doomed NAMA does not have expertise to carry out its task

By Ivan Yates

Thursday, April 21, 2011

The hoopla emerging from Friday’s distressed property auction in the Shelbourne Hotel obscures huge headaches for the new Government.
They seem unaware the National Asset Management Agency is a dysfunctional monster. Urgent clarity is required as to how it will achieve the implementation of its second business plan. What precisely is its role? A debt collection agency? A property development corporation? The state’s bad bank? The only certainty at this stage is that it has failed to achieve its original objectives as set out in 2009.

NAMA’s purpose was to take toxic loans for overvalued property off the balance sheets of guaranteed banks so that they would not be nationalised. We now know the only two surviving banks will be in state control. AIB is 92% state owned. BofI has to raise more than €5bn with a current market valuation of €1.5bn. The rest are nationalised and being wound down. Given the state could have dealt with these loans inside nationalised banks, the premise of NAMA can be questioned as an enormously costly bureaucratic vehicle.

The first critique of NAMA relates to the capacity of the organisation’s board membership and executive. There are less than 20 organisations globally with a real estate asset base on the scale of NAMA. NAMA’s board of Frank Daly, Eilish Finan, Michael Connolly, Peter Stewart, Brian McEnery and Willie Soffe have no particular skills in treasury operations, real estate, fund management and capital markets. What qualifies the country’s former top tax collector to oversee NAMA? The chairman sees debts owed like unpaid tax. This will turn Nama into a liquidation agency instead of an asset management agency, with property-related skills.

To comprehend how NAMA is heading for the rocks one must appreciate how unattainable their business objectives are. NAMA acquired €71bn of loans at a cost of €31bn in Government bonds. There is a common misnomer that this was ECB finance, when in fact it is underwritten by the tax payer. NAMA proposes to recover assets valued at €46.9bn between now and 2019. This year and next they plan to dispose of €8.44bn of property. Their portfolio comprises 59% assets in the Republic of Ireland and 36% in Britain. The historical peak year for Irish property investment sales was in 2006, with a total of €3.3bn. In 2009, the comparative figure was €92m. Get the point? NAMA’s level of property disposal is just not achievable.

The property market is paralysed. Banks are contracting loan books and are unable to lend. Large surpluses of property are due to come to the market from distressed sellers outside NAMA. High unemployment and emigration, along with pay cuts, future tax increases and higher interest rates all serve to depress underlying demand. It will take the equivalent of Friday’s auction (82 properties yielding €14.5m) for every working day over eight years to clear NAMA’s stockpile. The sheer scale of the overhang of NAMA’s estate is mind-boggling. NAMA’s actions will have a mega effect on the market.

The programme for Government sets out no strategy for NAMA. Other than kick-starting property sales, insistence on the highest standards of transparency and platitudes about ghost estates — FG and Labour have yet to clarify their policy direction for NAMA. This vacuum and the necessity to restore a functioning property market are key immediate challenges for Kenny and Gilmore. All we know for certain is that previous terms of the EU/IMF bailout for NAMA have been aborted. The plan was: tier one tranche (top 30 developers’ loans); tier two tranche (next 145 developers), followed by tier three comprising €16bn of loans for smaller developers with valuations less than €20m. This latter group are now to be left with banks or a Special Purposes Vehicle, but not proceeding to NAMA.

NAMA has been extremely slow and indecisive. They have missed their own deadlines by several months. They are still only dealing with the business plans of the top 10 developers, with an average loan of €770m. The next tranche of 20 developers with an average loan of €645m have been told to wait until next February for further correspondence. No one knows when the remaining 130 clients, with an average loan of €110m, will get concrete decisions. Additional problems in assessing possible defects in security and title with loan collateral have yet to be established. An overall policy in relation to NAMA’s 83 hotels remains unclear.

Initial debates in 2009 about NAMA revolved around the level of impairment or haircut to be applied to toxic loans. The underlying contentious issue of “cash for thrash” still remains unresolved. The original premise of NAMA was based on LTEV. Remember that? Long Term Economic Value based on the mythical notion of “uplift”, from God knows where. This was resolved by Section 73 of the NAMA Act which established November 30, 2009, as the legal baseline date for property valuation. Recent international stress tests suggest that property price declines may continue until December 2012.

There is still an absence of accurate residential transaction data. We don’t know what the Current Market Value of NAMA’s estate is and whether their “worst case scenario” of an overall €800m loss is excessively optimistic. NAMA is set to spend €270m on professional fees. Their disposal of the Montevetro office block in Dublin to Google for €99m has been hyped as success — one swallow does not make a summer. Machinations of NAMA still lack transparency. They are making it up as they go along, last week floating the idea of being a mortgage provider. No details, only vague references, have been made to a 30% joint scheme with AIB and Bank of Ireland. Meanwhile, they must shift more than 10,000 apartments.

This Government inherited NAMA. So far they have merely put a halt to grandiose plans. There is no coherent state scheme for lease law reform and market rents of commercial property. By the end of 2012 NAMA’s business plan will have crashed in terms of asset disposals. Radical and fundamental appraisal is now required, involving game-changing solutions. The principal capital market options must include NAMA establishing new joint venture property funds with foreign investors who operate on a global scale.

The scale of NAMA’s asset recovery programme has not been fully absorbed in the corridors of power. The NAMA board and executives do not have the expertise, experience or capacity to carry out the task. The overwhelming objective of attracting such heavy investment in Irish property must now be acknowledged. Oversupply of housing and office accommodation, poor growth prospects, collapsing domestic demand, limited public capital investment and slow recovery in consumer spending means there is a risk premium in holding Irish assets. Floods of forced fire-sales seem inevitable. It’s time to negotiate with credible real estate organisations from China, EU, US and Middle East, which have global scale.

A multinational approach, based on a handful of separate funds to be established must replace the present doomed agency.

This appeared in the printed version of the Irish Examiner Thursday, April 21, 2011

Story in summary

20/21 Grosvenor Square in London bought for £250 million (€290 million)

NAMA took the loan off Irish Nationwide last year for about 50% discount.

However, NAMA paid fees etc top buy this discounted loan from Irish Nationwide which is now nationslised. So any “profit” for NAMA is only clearing out a debt which fell to the taxpayer. The hidden costs are unstated and liable to be considerable. So from a citizen’s viewpoint, it is clear that no real profit has been made and that the bank has been got off the pitch in relation to that particular loan.

Last week, NAMA disclosed that 70% of its loans are non-performing. It is planned to restructure some of these loans and with a lowered interest rate and a prolonged borrowing term.