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Chapter 9: Establishment, Operation and Effectiveness of NAMA

Introduction

In early 2009, the financial and construction sectors were at a standstill, with banks and developers alike dealing with the consequences of a liquidity crunch and an inflated property market. The Minister for Finance and his advisors¹ had growing concerns over the capacity of the covered financial institutions to meet their future obligations, especially given their inability to raise adequate capital.² Steps were taken to stabilise the financial system, alleviate doubts over capital adequacy and boost the capacity of the financial institutions both to deal with prospective loan impairments and to lend.

The Rationale for NAMA

The economist, Peter Bacon, was engaged by the NTMA, on the instructions of the then Minister for Finance, Brian Lenihan, to evaluate the options for resolving property loan impairments and the associated capital adequacy of the covered financial institutions. His detailed report³ was completed in March 2009 and outlined three options:

1. Maintain the status quo: This first option was predicated on continuation of the bank recapitalisation programme already in place, with no additional measures being countenanced. This option was not considered beneficial by government, as to ‘do nothing’ would not address the liquidity shortage or promote new lending. Furthermore, it would increase the risk of sovereign default and threaten the stability of the financial system;⁴
2. Insurance scheme: The second option was for the State to establish an insurance scheme for certain types of assets held by the covered institutions, such as their land and development portfolios. This would involve the provision of insurance to the institutions against losses incurred on the loans secured against these assets, above a certain “first loss” position. They would continue to manage the loans which would remain on their books. The benefit of this option was the minimal upfront cost. However, its success would depend on a belief in the markets that the Government would be able to cover any losses. Moreover, this option would not address the liquidity crisis, nor would it incentivise the covered institutions to work through their impaired loans and get the best possible return for the taxpayer, once they had incurred their “first loss”;⁵ and
3. Asset management agency: The final option was to establish an asset management agency. It would purchase a portfolio of loans from each covered institution with payment being made by way of Government Bonds. It would then work out the loans over time, hoping to ensure the maximum possible return for the State. Because this option would crystallise the losses on the covered institutions’ balance sheets, it would reduce the uncertainty over their bad debts and hopefully allow them to increase lending. It would also address the liquidity problem as it would allow the institutions to borrow from the ECB. The downsides were the upfront cost and, similar to the insurance scheme option, its success depended on the Government’s ability to retain market confidence.⁶

From the outset, the ‘status quo’ option was not considered feasible by Government. The consensus among the Department of Finance, the Central Bank, the Financial Regulator, the NTMA and Merrill Lynch was strongly in favour of the establishment of an asset management agency, even though the insurance scheme would have deferred the realisation of impairments and have involved less upfront costs.⁷

However, none of the options were underpinned by robust knowledge on the status of the property-related loans held by the Covered Institutions which, on transfer to NAMA, came to be characterised by a paucity of loan information, high levels of debtor concentrations and poor loan collateral. In his evidence, Peter Bacon commented that:

“… [NAMA] subjected each and every loan to rigorous scrutiny. I would not have been party, at an individual level, to knowing what the security behind those loans was or what they were worth. There would have been all kinds of cross-guarantees at an individual level, which, working from macro data, one would not have had access to or knowledge of.”⁸

When Peter Bacon and the NTMA presented the NAMA proposal to the Minister and Department of Finance officials, it “came as something of a shock”given its ambition and “the size of the proposed contingent liability to be adopted by the State”, according to the evidence of Kevin Cardiff, former Secretary General of the Department of Finance.⁹ Peter Bacon recalled presenting the report, saying:

“I remember the response when I presented the figures in my report. There was a standing committee, chaired by the Minister, comprising the suspects one would expect - Finance, Central Bank and NTMA. I was invited to attend one of those and the Minister asked how my work was going and had I any numbers. I gave the meeting a work in progress account. I suppose that surprise was my memory of that meeting. Surprise from people at the numbers that were coming out.”¹⁰

The standing committee, as referred to above, were also apprehensive over the cost to the State by way of contingent liability.¹¹ Peter Bacon, however, was concerned at how quickly the commercial property books in the covered institutions were declining and believed that these loans needed to be removed from the institutions before lending in the economy could resume.¹²

Support for the NAMA option was based on a number of factors:

• Impaired loans addressed: The option would deal with the impaired property loans by removing them from the books of the covered institutions, forcing them to crystallise their losses.
• Liquidity improved: It would improve liquidity by giving the institutions collateral in the form of Government bonds that could be used to access ECB funding.
• Relationship banking tackled: It would take relationship banking out of the equation, giving greater impartiality for working out problem loans.
• Mandate more focused: NAMA could concentrate on maximising recovery without having to focus on the uncertainty of increasingly high impairments.
• Banks enabled to rebuild: Without the distraction of bad loans the financial institutions could rebuild sentiment and reposition themselves in their core business areas, such as lending for residential home loans and supporting SMEs.¹³

From Announcement to Implementation

NAMA’s establishment was announced in the “mini-budget” of spring 2009.¹⁴ From that date, it took over a year for the enabling legislation to be enacted and the loans to be transferred from the relevant institutions. The Office of the Attorney General commenced work on the legislation in April 2009¹⁵ and the first tranche of loans was transferred in March 2010.¹⁶

The NAMA legislation needed to address many potential risks, while at the same time ensuring that its legal structures would enable NAMA to acquire all relevant property-related loans, obtain the underlying collateral, operate efficiently and protect taxpayer interests.¹⁷

It was also essential that NAMA would comply with the European Commission’s State Aid rules.¹⁸ This was quite a complex process, requiring the NAMA Steering Group to have ongoing consultations with the European Commission throughout the drafting process.

The draft legislation was completed in July 2009, at which time the Government decided that there should be a public consultation process. The consultation period ended in September 2009, and the legislation was enacted in November 2009.¹⁹

The scheme provided for under the NAMA Act secured the required State Aid approval from the European Commission on 26 February 2010.²⁰

Principal Features of the NAMA Act

The legislation supported a number of key processes for loans to be transferred to NAMA, including:

• Participatory discretion: The legislation provided that the Minister for Finance could only reject or accept an application by a credit institution to become part of NAMA, not determine which credit institutions would take part, but could only designate a credit institution as a ‘Participating Institution’ if he was satisfied that it was systemically important to the financial system of the State.²¹
• Eligible assets: The types of assets that could be acquired by NAMA would be prescribed by the Minister and could include all loans for the purchase, exploitation or development of development land.²²
• Valuation discretion: The acquisition value of a bank asset would be its long-term economic value as determined by NAMA.²³
• Developer liability: NAMA would take over the position of a Participating Institution in relation to a loan or its security, and acquire all of the rights that the Participating Institution had formerly enjoyed as a result. This would have the practical effect that developers would continue to be liable for 100% of the money they had owed to Participating Institutions before their loans were acquired by NAMA.²⁴
• Maximise return: NAMA would be obliged to obtain the best achievable financial return for the State.²⁵

Effects on Developers

The Joint Committee received evidence from nine of the largest developers and property investors who participated in the NAMA scheme, four of whom gave evidence in public hearing and five by written statement.

From the announcement of NAMA in April 2009 to its eventual establishment in December 2009 and the subsequent transfer of the first tranche of loans in March 2010, uncertainty in the economy was prolonged.²⁶ There was a complete lack of liquidity in the market and financial institutions were no longer able to operate effectively. Work-in-progress on developments stopped, agreed sales fell through and the bottom fell out of the property market.

For Sean Mulryan, the prolonged uncertainty meant “that the business [Ballymore Group] didn’t operate for probably 12 months; it was just absolutely stopped.”²⁷ The difficulties were accentuated by the fact that the majority of his business interests had been in London and the market there had little understanding of either the banking crisis in Ireland or the role that NAMA was designed to play – they had to get their “heads around”the requirement of “handing over such an enormous amount to a new entity.”²⁸

Michael O’Flynn said that developers were caught in limbo between their existing financial institutions and NAMA.²⁹

Joe O’Reilly commented that he “…continued to asset manage and drive the business from that point of view.”³⁰

In his statement to the Joint Committee, Gerard Gannon said:

“Like many other parties, I was apprehensive when NAMA was established and I feared the unknown. In some respects it offered relief as the banks had ceased to function and we were finding it difficult to carry on our normal day to day activities.”³¹

Participating Institutions

Over the period from announcement to implementation, Participating Institutions were tasked by NAMA with completing questionnaires and organising exposures to allow for the eventual transfer of relationships. These questionnaires and related follow-up steps uncovered a number of problems such as a significant amount of interest rolled up by the Participating Institutions, widespread use of paper collateral and major reliance on solicitor’s undertakings, amongst other issues.

Kevin Cardiff said in evidence:

“…there was a real problem that the assets that NAMA was purchasing in the banking market were not turning out to have the characteristics that NAMA had been led to expect – on various measures, the loans were not as good as they should have been.”³²

The property market generally also continued to deteriorate over the period.

Such issues came to be reflected in the discounts applied by NAMA to acquired loans. NAMA ultimately acquired €74.4 billion of assets for a final consideration of €31.7 billion, an average discount of 57%³³ of the total amount owed by the borrowers.³⁴

To participate in the NAMA scheme, the credit institutions had to apply to the Minister for Finance within 60 days of the establishment of NAMA.³⁵ The Minister - in consultation with the Governor of the Central Bank and the Financial Regulator – could then decide to permit a institution to participate if the Minister was satisfied that the credit institution was systemically important to the financial system in the State and that the other requirements of the NAMA Act had been fulfilled.³⁶ NAMA was then set the task of acquiring loans from the Participating Institutions i.e. AIB, BOI, Anglo, INBS and EBS.

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