I’ve been thinking about the possibilities that may arise with this new National Asset Management Agency. Given the lack of detail there is a possibility that the following scenario may arise. It is however impossible to totally rule it in or out given current details released. Please realise also that this is just my thinking at the moment – I’m not an expert on any of this.
You could surmise that this scenario would be political suicide for Fianna Fail if it did turn out to be true, and did actually happen, but given everything that’s happened in this country so far, it may not be beyond the realms of possibility.
This scenario became all the more “live” for me over the weekend when I saw in the Sunday Times that the person who actually came up with the National Asset Management Agency used to actually work for a property developer themselves – i.e. an insider in the whole Irish property game. (See here for the Sunday Times report on how Peter Bacon worked for Ballymore Properties).
Here’s my thinking on a how this who NAMA scheme might work:
A property developer sets up off the shelf company in 2006 to borrow €100m to buy a particular property.
This €100m borrowed from a bank, with the property itself as collateral, valued at €100m. No personal assurances are requested, because they were never given and there was always a bank down the road that would give the loan without it anyway.
Let’s assume that as of today then, there is €100m still outstanding – capital owed plus unpaid interest plus charges (therefore debt deemed toxic).
Now, the new National Asset Management Agency (NAMA) comes riding in on it’s white horse.
The property is deemed to be a distressed asset, with no interest being paid on the loan.
Magically, through whatever is the valuation formula that isn’t being revealed to us, the property is valued at €20m.
The net position now for the property developers company is that it’s still in the hole for €80m.
NAMA now assumes the responsibility of the debt from the Bank, and the property is handed over as well.
So, NAMA now owns property that was valued at €100m but is now worth €20m, and now has a creditor, the property developers company, who owes it €80m.
The property developers company is now supposed to make payments to the NAMA on a loan on property that it now doesn’t actually own.
As for the bank, it is now in the hole for the difference between the value of asset when it was passed to the Agency (€20m) and the amount of the loan (€100m). However the bank will most likely get a capital injection of €80m from the government where required to make this up – this is how people assume that the use and development of NAMA will lead to nationalisation of the main banks.
However most people don’t care about this and just say that the toxic assets are successfully removed from Banks balance sheet and they can get lending again. But watch below where they can start lending again.
The property developer will now look at the situation and see that they are running a company that is €80m in debt, but owns no assets. Obviously this isn’t worth continuing, so they wind up the company.
The NAMA now has a debt for net €80m which immediately becomes a bad debt, and property worth €20m.
As the property developer has wound up the company, there is no way for the €80m to be recouped since no personal assurances were likely to have been given to the Bank originally, and it was only the property itself that was used as collateral.
As of now, the original debt of €100m with the bank has now seen €80m handed over by the government to the Bank, and the NAMA sitting on a bad debt of €80m. If you remove the €20m value of the property, the original €100m debt at the bank has now turned into a €140m cost to the government via bank recapitalisation and the liabilities of its NAMA.
What happens next then? The NAMA is left sitting with huge debts, and an amount of property that it doesn’t have the mandate to develop or make money from – apart from maybe getting rental due.
How about if the original property developer sets up new company – or someone close to him does? This new company is set up to purchase and develop property.
The new company now identifies a distressed property, owned by NAMA, that it would like to get its hands on – mainly because of the fact that it used to own it previously.
The property developer company now gets loan for €40m from the same bank or another bank (that’s free and clear of bad debt and willing to lend thanks to NAMA and the government recapitalisation).
Property developer company goes to NAMA and offers €40m for the property that it has on its books, valued at €20m.
NAMA accepts the offer as it is making a book profit of 100% on the property – which it will crow to the rooftops showing us that the whole scheme is a fantastic success.
But, NAMA still has a remaining and now unrecoverable net debt of €60m. But this will be declared as “expected” by the government and will, they will tell us, be recovered by a “levy” on the banks to make up the difference.
Remember though, that even if this €60m was recovered from the banks, through the recapitalisation earlier in the process, the banks have already received €80m from the government, so the levy really is just the government getting their own money back.
And leaving the banks with a €20m profit on what was essentially a bad debt.
And in the meantime, our property developer friend gets his property back priced at a song compared to what he originally paid for it, and a repayable debt of only 40% of what he originally had.
As I say, I’m more into this for the conspiracy theory angle given that I’m not an expert on this whole thing, but I’ve run this scenario past a few people who know more than me about such things, and they haven’t dismissed it out of hand.
What do you reckon?