NAMA Myths

[Sunny]

I am getting sick of politicians and reporters trying to grab headlines by trying to make NAMA scarier than it already is.

Myth No 1: Here is George Lee

http://www.independent.ie/national-news/lenihan-has-got-figures-all-wrong-1890230.html

Does he think the people in NTMA and their financial advisors are muppets? Of course they are taking into account rising interest rates. That is why I assume the bonds they issue will be FRN's to match the Assest's i.e. loans income streams which are usually based on a floating rate of interest. So as interest rates rise on the bonds, interest on the loans should rise to offset it. They can also use derivatives to offset any basis or interest rate risk. There is no €10 billion black hole. Credit risk remains the biggest danger to NAMA.

Myth no 2: This is not a €54 billion gamble as reported in newspapers. For the taxpayer to lose €54 billion, property in Ireland would have to be worth zero in 10 years. If that's the case NAMA will be the least of our concerns. I am not trying to belittle the risks involved but if we are going to discuss NAMA, lets have a rational debate based on realism and not tabloid rubbish

Myth no 3: This is a bailout for developers. It's not. It is no different than a persons bank where they have their mortgage being taken over. It doesn't mean you don't have to pay back the mortgage or that the bank won't go after you for repayment.

I am sure there are more that I can add as I get through the papers today.

 

[z109]

Myth No.4
The ECB is giving us a dig out.

Myth No.5
The average LTV is 77%

Myth No.6
NAMA is transparent

Myth No.7
If the taxpayer makes a loss, there will be a levy on the banks. The legislation makes no reference to a levy.

Myth No.8
We are at the trough of the property cycle.

Myth No.9
House prices bounce back by 88% of trough value following a bust.

Myth No.10
There is no market for property.

Myth No.11
Yields are at historical highs.

But I agree, there is a lot of spin and bluster.

 

[Sunny]

True, I should have been more balanced in my myths! Just George annoyed me as did the headline saying €54 billion gamble. How are we ever to supposed to have a reasonable debate if people are just interested in scare mongering for the sake of it. As you point out, there are enough risks in NAMA to make it scary enough!

 

[z109]

Indeed. Ronan Lyons (the daft.ie economist) has done some good work on trying to work out in terms of yield what the cost risks are (i.e. trying to work out an ideal market value):
Pre-publication on the haircut:
http://www.ronanlyons.com/2009/07/31/notes-on-nama-haircuts-and-house-prices-when-i-retire/

Post-publication on LTEV:
http://www.ronanlyons.com/2009/09/1...istic-assessment-of-long-term-economic-value/

My own view is that the gamble is in the 20-30 bn range in the short term, hopefully heading down in the medium term (as oversupply is worked off). Mainly based on the likely direction of agricultural land values (a third of the loans are for land), commercial and retail rents outside Dublin (only 5% of the loan book is Dublin commercial property) and oversupply.

 

[lightswitch]

How can it bee seen as anything other than a 54 billion gamble?

There are no guarantees, their projections are at best a guesstimate!!

There is no bailout for the countless amount of people that are now in negative equity due to no fault of their own. Why should they in any way have to pay for the reckless behaviour of the banks and speculators. Particularly when the management and practices of the said banks would appear to be able to forge on in what ever way they see fit!

Nobody can accurately predict where we will be in 10 years time. Yet our money, without our consent will be used in whatever way NAMA sees fit.

I agree it is scary, no point in understating the facts.

 

[canicemcavoy]

True, I should have been more balanced in my myths! Just George annoyed me as did the headline saying €54 billion gamble. How are we ever to supposed to have a reasonable debate if people are just interested in scare mongering for the sake of it.

You mean when Fianna Fail keep telling us its the only solution and if we don't implement it, the sky will fall in?

I think Y had shown that if there's any mythmaking here, it's on the "NAMA as we're implementing it is the only solution" side.

 

[z109]

How can it bee seen as anything other than a 54 billion gamble?

It's not that it's not a gamble, it's just that not all the 54 bn is at risk. There are assets, however dubious, underlying the loans. There are loans that are performing (40% of them we are told). There are borrowers that will pay back. There is a market for the loans even in their current distressed state (from about 20c on the euro given other distressed loan sales). NAMA has some tools at its disposal to increase the amount it recovers on repossessed assets (mostly the fact that it doesn't have to pay tax on any sale).

So the question is not whether it is a gamble, but how much of the 54 bn is at risk?

 

[Guest116]

I am sick of all the rubbish coming from Fine Gael about NAMA, I often feel I know more about it that they do. If they stopped trying to treat people as if they are thick and will fall for the scaremongering they just might get my vote.

 

[goosebump]

Myth No.7
If the taxpayer makes a loss, there will be a levy on the banks. The legislation makes no reference to a levy.

Prior to January this year, there was nothing in Statute re. a pension levy, but we now have a pension levy.

Legislation isn't created for the purposes of keeping the media happy. If it were necessary to put something into the NAMA bill re. a bank levy, there would be something in the NAMA bill re. a bank levy.

The fact that there isn't doesn't mean there won't be a levy; its means that it isn't necessary to legislate for a levy at this point.

 

[z109]

Prior to January this year, there was nothing in Statute re. a pension levy, but we now have a pension levy.

Legislation isn't created for the purposes of keeping the media happy. If it were necessary to put something into the NAMA bill re. a bank levy, there would be something in the NAMA bill re. a bank levy.

The fact that there isn't doesn't mean there won't be a levy; its means that it isn't necessary to legislate for a levy at this point.

The banks will be able to argue that because the legislation did not contain a levy, an after the event levy is unconstitutional.

Governments change, ministers change, situations change. It the banks are taken over or reconstituted as new companies, how can a levy apply if it is not already in existence?

 

[Sunny]

The banks will be able to argue that because the legislation did not contain a levy, an after the event levy is unconstitutional.

Governments change, ministers change, situations change. It the banks are taken over or reconstituted as new companies, how can a levy apply if it is not already in existence?

To be fair they did it a couple of years ago (2002 to 2005) when the banks were announcing record profits. The Government just decided to pick on the banks and stuck a levy on them. They can do so again pretty easily.

I think the reason they didn't include the levy was that it might create a contingent liability for the banks. Its easier to just pretend it is not there even if we all know it is!

 

[goosebump]

The banks will be able to argue that because the legislation did not contain a levy, an after the event levy is unconstitutional.

Governments change, ministers change, situations change. It the banks are taken over or reconstituted as new companies, how can a levy apply if it is not already in existence?

The State can apply a levy to anything that moves, if it so chooses.

 

[ipxl]

I am getting sick of politicians and reporters trying to grab headlines by trying to make NAMA scarier than it already is.

Myth No 1: Here is George Lee

http://www.independent.ie/national-news/lenihan-has-got-figures-all-wrong-1890230.html

Does he think the people in NTMA and their financial advisors are muppets? Of course they are taking into account rising interest rates. That is why I assume the bonds they issue will be FRN's to match the Assest's i.e. loans income streams which are usually based on a floating rate of interest. So as interest rates rise on the bonds, interest on the loans should rise to offset it. They can also use derivatives to offset any basis or interest rate risk. There is no €10 billion black hole. Credit risk remains the biggest danger to NAMA.

Sunny - I hope I don't feel like the monkey on your back but - with regards to the interest rate risk -:

Isn't there still some insiduous risk in there if , for example, the better of the "well performing loans" included derivatives, ie. interest rate swaps which insulate developers in the longer term from interest rate fluctuations ?

Were we to surmise that the more prudent borrowing developers transacted such derivatives as part of their bank loans. It could be that the more risk averse and credit-risky developers didn't.
So , if interest rates rise you could have a double jeopardy of the credit worthy developers still paying off their loans but insulating themselves against the interest risks and those also in the "good pile" of loans finding it impossible to meet their interest payment obligations on account of the rising rates ? I am guessing you will say that the FRNs will be carefully balanced or calibrated (sorry layman terms) to mitigate these risks but it seems to me that there is a perfect (and not unlikely) storm of risk buried in the whole package ?

I could be talking garbage here but to me I see plausability.
I'm just wondering if the whole "ingenious on the face of it" NAMA bonds in exchange for ECB credit trick could fall foul of its own ingenuity (if that makes sense!)

 

[Sunny]

Sunny - I hope I don't feel like the monkey on your back but - with regards to the interest rate risk -:

Isn't there still some insiduous risk in there if , for example, the better of the "well performing loans" included derivatives, ie. interest rate swaps which insulate developers in the longer term from interest rate fluctuations ?

Were we to surmise that the more prudent borrowing developers transacted such derivatives as part of their bank loans. It could be that the more risk averse and credit-risky developers didn't.
So , if interest rates rise you could have a double jeopardy of the credit worthy developers still paying off their loans but insulating themselves against the interest risks and those also in the "good pile" of loans finding it impossible to meet their interest payment obligations on account of the rising rates ? I am guessing you will say that the FRNs will be carefully balanced or calibrated (sorry layman terms) to mitigate these risks but it seems to me that there is a perfect (and not unlikely) storm of risk buried in the whole package ?

I could be talking garbage here but to me I see plausability.
I'm just wondering if the whole "ingenious on the face of it" NAMA bonds in exchange for ECB credit trick could fall foul of its own ingenuity (if that makes sense!)

I am not sure that I totally understand what you are asking. There is a risk that devlopers will struggle to make repayments if interest rates rise. But that's credit risk, not interest rate risk. Interest rate risk with regard to NAMA is talked about in relation to the income flows of it's assets i.e. loans and the income flows of it's liabilities i.e. NAMA bonds. To the best of my knowledge, NAMA is issuing bonds paying 6mth ECB/Euribor + 0.5% and most of its's loans are floating rate based.

What George Lee is saying that the Government ignored the fact that interest rates will rise and that this increases the interest bill for NAMA hence his €10 billion black hole. What he didn't mention was that the assets that NAMA owns will pay more income as interest rates rise to offset the increased interest expense as most of the loans will be based on a floating interest rate. Or even that NAMA can hedge it's interest rate risk if needs be.

Of course the big unknown in this is how stable NAMA's income flows will be in a rising interest rate environment i.e. will commercial property be able to generate the same rent.

I would like to know more about the derivative contracts that NAMA are taking over. I have no idea what volume they are talking about but considering they tendered for a valuer for derivatives would suggest it is significant. I have no idea what sort of agreements the banks had with developers. Swaps like these usually have credit support mechanisms to protect the bank but like I say, I have no idea. I would suggest that the banks are in the money on alot of the swaps i.e. owed money by the developers so I am not sure if this exposure is being looked at closey enough by people. (It only becomes a problem if the developer defaults).

 

[ipxl]

Yes - I probably confused things by painting the scenario of credit risk mixed in with interest rate risk.

However, the nuance I wasn't aware of was that these interest rate swaps don't enter into the equation (typically) unless the developer/borrower defaults.

I was somehow assuming that they were a mechanism for cushioning a borrower who continues to pay their interest amounts even in the face of
increasing interest rates.

I guess I was conceiving of them as (please excuse simplistic analogy) an
insurance premium which borrowers could call upon even when there was no question of them being solvent enough to meet their interest payments.

If they only enter the equation when the borrower defaults then I would agree that they arise out of credit risk rather than interest rate increases in themselves.

 

[z109]

You'd have to wonder who is on the other side of these swaps. My suspicion is Anglo. And that NAMA will end up with both sides of the trade. I don't know if this is a good thing or a bad thing, but presumably if it results in defaulted, but still performing loans no longer performing, it is a bad thing...

Still, it's only a suspicion. Who knows, the 200 bn Anglo Interest Rate Swaps are probably written by the smartest men in the room

 

[Sunny]

If they only enter the equation when the borrower defaults then I would agree that they arise out of credit risk rather than interest rate increases in themselves.

The reason they only become a problem for the banks if the developer defaults is that the bank will offset any interest rate risk in the swap but keep the credit risk.

E.g. A developer enters into a swap with a bank where he pays 5% on €100,000,000 and receives 6mth Euribor +50bps on €100,000,000. The bank will then go to another bank where it pays 5% and receives 6mth Euribor +52bps. The fixed side cancels out and the bank is left with 2bp profit on the floating side with no interest rate risk. Everything is fine as long as everyone makes their payment.

However, the bank does face credit risk in that it is relying on the developer to continue paying that 5% because it has to pay the other bank the 5%. (very simple example). Depending on where interest rates are, the bank could lose significant amounts of money on top of the loans that the developer defaults on.

Like I say, I have no idea the volume of these swaps, credit support mechanisms in place etc but I would imagine that a developer with €1 billion of borrowings has entered into significant derivative contracts. The fact that NAMA are taking these over suggests to me that the banks have significant exposures. I could be wrong through.