Did Ireland’s ‘bad bank’ NAMA work?
At the height of the financial crisis in 2009 Ireland set up the National Asset Management Agency, better known as NAMA.
Its purpose was to deal with the loans given by banks to developers and builders – many of which would never be repaid.
By any measure, it was one of the biggest decisions in the State’s history, taken by a Fianna Fáil and Green Party coalition.
With unemployment rising, taxes increasing and general loathing of boomtime bankers, there was little surprise it was an unpopular decision.
At the time, the government had guaranteed the Irish banks, which meant that the Irish taxpayer was on the hook for their losses.
The financial institutions were highly exposed to the plunging property market.
Confidence in the banks steadily ebbed and it became impossible to calculate the losses they faced.
As banking was grinding to a halt, loss of confidence fed into the wider economy, which was rapidly contracting.
The bond market, which had provided funding to banks, walked away from the Irish financial system.
Irish banks had to borrow from the European Central Bank through a mechanism called emergency liquidity assistance.
The amounts borrowed from the ECB began to rocket and alarm spread across the euro zone about the unfolding banking crisis in Ireland.
The challenge was how to stop the rot in the Irish financial system.
One of those involved in designing a mechanism to deal with the banks’ bad loans was Professor Alan Ahearne who was advisor to the late Brian Lenihan, Minister for Finance during the crash.
Professor Ahearne advocated using an Asset Management Company (AMC) to deal with the problem: “I had seen AMCs used previously when I was at the Federal Reserve in the US. This was a prominent tool used before.”
It was deployed in South Korea and Malaysia during the Asian crash and in the US to deal with the Savings & Loans crisis in the 1980s and 1990s.
The idea was that a State-backed company would buy failing property loans from the banks at market prices.
When those borrowings were transferred, confidence in the banks would return and they would be able to access funding again.
Professor Ahearne says: “There were two key objectives: stability for the banks and the public finances.”
NAMA, the so-called bad bank, was designed by officials in the Department of Finance, the National Treasury Management Agency and the Attorney General’s office.
The figures involved were nothing short of enormous.
During the financial crisis, politicians of all hues worried that banks were hopelessly unrealistic about the losses they faced.
Many bankers were slow to admit that lending approved by them had become horrible miscalculations which would be paid for by the taxpayer.
A day of reckoning came when NAMA bought loans from AIB, Bank of Ireland, EBS, Irish Nationwide and Anglo Irish Bank.
The borrowings were valued by the banks at €74 billion.
NAMA paid a total of €31.8 billion for them – that left a black hole in excess of €40 billion in the banks’ balance sheets.
The gap was plugged by the Irish taxpayer.
When the loans were transferred to NAMA, some of the writedowns were as large as 70%.
That transaction was critical and effectively crystallised the losses of the banks.
Professor Ahearne says: “The crash created those losses. You have to recognise those losses one way or another.”
The fact that the government had guaranteed the banks meant the losses would have to be paid by taxpayers, regardless of what mechanism was used to clean up the mess.
After the loans were transferred, NAMA faced a huge task. Brendan McDonagh became its chief executive, seconded from the NTMA to start NAMA from scratch.
His job was to sell off the 60,000 individual assets bought from the banks and repay NAMA’s €31.8 billion in borrowings.
Hot on the heels of the agency’s creation, Ireland entered a bailout in late 2010.
The Troika or bailout team, made up of the European Commission, the International Monetary Fund and European Central Bank, provided €67.5 billion to the State.
Representatives of that triumvirate took control of Ireland’s financial decisions.
NAMA was under enormous pressure to sell loans quickly and repay its debts. But it was doing so at a time of depressed property prices.
NAMA’s decisions were frequently controversial. It had a series of high-profile legal spats with developers who fought the agency in the courts.
Some questioned whether better value could be obtained if NAMA waited for property prices to recover.
One prominent example was the Battersea Power Station site in central London.
It was part-owned by Treasury Holdings and its loans came under NAMA’s control, which sold its interest in the asset to a Malaysian consortium in 2011 for €600m.
The sale was criticised by Treasury Holdings’ former owner Johnny Ronan who said “a very short-sighted view was taken, especially by NAMA.”
But Professor Ahearne argues: “The main aim of NAMA was to restore stability to the banking system and financial conditions. Judged by that, it did achieve its aims.”
The agency will be dissolved at the end of 2025. It has paid back its borrowings and generated a larger than expected surplus to the Exchequer.
This week, Mr McDonagh said: “In the early days people said NAMA was going to lose €8 billion, €10 billion or €12 billion. And today we stand here making €5.5 billion.”
But some questions remain to be answered and some lessons remain to be learned.
Would it have achieved more value if allowed further time as property prices recovered? Was it put under too much pressure to sell quickly? To what extent did its establishment help the Irish banks get back on their feet? And did that allow Ireland to recover faster than expected too?
Professor Ahearne believes there is merit in a “look back study” given the scale of the policy intervention.
Mr McDonagh said the agency put the taxpayer at the heart of each of its decisions.
NAMA’s chairman Aidan Williams said: “We have never lost sight of the fact that NAMA, unlike other commercial entities, was designed to disappear.”
But it won’t entirely vanish. Ten legacy legal cases tied to assets worth less than €20m will be taken over by the NTMA next year.
Mr McDonagh will return to the NTMA after withdrawing his name for consideration to lead the Government’s housing activation office, amid political fallout over his proposed salary.
This week he said it had yet to be decided what he would do in the NTMA or if he would retain his €430,000 salary.
Did NAMA work? It certainly did what it was charged with doing, and its critics have become notably less vocal.
Article Source – RTE.ie – Did Ireland’s ‘bad bank’ NAMA work?
