NAMA challenged on all sides

When the idea of NAMA was first proposed it was commonly referred to by its proponents as “the only game in town” in the context of providing a solution to the banking crisis. Now that it has actually become the only game in town it finds itself under exceptional scrutiny and having to deal with a new government who, to put it mildly, have in the past been dubious about the NAMA solution.

Indeed, before his election Taoiseach Enda Kenny was scathing over the setting up of NAMA. Now that he finds himself having to accept the reality of its existence, the language may have become more moderate but the attitude to NAMA remains somewhat sceptical.

In his time in opposition Kenny habitually referred to NAMA as a “secret society” and a bailout mechanism for bankers and developers. And his residual scepticism remains as expressed by the Programme for Government.

“At the core of the loss of domestic and international confidence in Ireland’s economy has been the outgoing Government’s commitment – between NAMA asset purchases and the subsequent recapitalisation – of over €100 billion of State resources to bank rescues. This is three times the national debt before the crisis…

“Much of this taxpayer commitment reflected the policy to crystallise – through asset transfers to NAMA – massive losses in banks under taxpayer guarantee at a time of extraordinary financial distress…

“We will end further asset transfers to NAMA, which are unlikely to improve market confidence in either the banks or the State…

“We will insist on the highest standards of transparency in the operation of NAMA, on reduction in the costs associated with the operation of NAMA, and that decision-making in NAMA does not delay the restoration of the Irish property market.

“We will seek to capture some public good from NAMA by identifying buildings that have no commercial potential, and which might be suitable as local facilities for art and culture.”

One of the themes of the new administration has been to consistently remind everyone of the sins of its predecessor. As a fundamental policy decision of the last coalition, NAMA automatically suffers from something like guilt by association.

The government has now successfully lobbied the EU-IMF to stop planned further asset transfers to NAMA in the revised Memorandum of Understanding – something that indicates that the new administration is keen to contain the size and influence of the organisation.

But, in fairness to the government, there are some reasons to be concerned about the makeup and the competence of NAMA and whether it can deliver on its objective of maximising the returns to the Irish taxpayer for the taxpayers’ “investment” in the banks’ loan books.

First there is the Board. A real estate asset management company of the size of NAMA with assets of some €30 billion would be expected to have highly skilled and experienced individuals in international real estate capital markets, real estate operating platforms, law, corporate finance, economics and property markets and corporate governance.

These skills are not apparent in the NAMA board and there does not appear to have been any effort to recruit abroad. As far as the domestic hiring goes it is believed (for somewhat understandable reasons) that the board selection process used by the previous government required that candidates had no potential “baggage” that could be used by the media.

NAMA has an advantage from the point of view of administration and systems in that it was set up under the supervision of the National Treasury Management Agency – an organisation with a proven track record of competence.

But the organisation is in a difficult position with regard to decision-making. Certainly most, if not all NAMA (developer) clients believe that all NAMA decisions are made with the overriding objective of avoiding any scandal or perception that borrowers are getting off the hook (as per Enda Kenny’s comments in opposition).

This might be understandable but may not optimise returns to the taxpayer. NAMA needs to tread a fine line between being tough – but not too tough – on developers who owe it money. It recognises that the best chance it has of getting value for the assets it effectively owns is to keep existing development teams together.

Until now, prospective purchasers have felt that NAMA has been unrealistic over the prices it expects to fetch for disposal of its assets. This has been a function of the fact that NAMA ultimately expects to make a profit from its operations over a 10 year period and since its formation the Agency has appeared to adopt a long-term type of approach to its loan book. It has up to now been slow to foreclose and dispose and this has led to a kind of stasis in the market. There is also anecdotal evidence that prospective buyers have been frustrated by the Agency’s remote and unaccommodating approach. The net effect is that a price “floor” for Irish property has yet to be established.

This state of affairs, however, should change with the new commitment as part of the EU-IMF deal for NAMA to dispose of 25 percent of its assets by end of 2013. Ironically, this target has already been cited as unattainable by commentators.

And the scale of the task confronting NAMA is enormous if one considers that the absolute peak of the property investment in Ireland in 2006 some €3.2 billion of asset transfers were transacted – and this was at a time when there was a rising market from a valuation and occupier perspective and when the banking system was recklessly over-lending. Using that as a barometer, the prospect of NAMA disposing of some €30 billion of assets in 10 years seems at this point unrealistic to say the least.