Looking back at comments made when Nama was launched this year, there is a sense that Ireland’s ‘bad bank’ was almost destined to fail.
Michael Somers, the former head of the National Treasury Management Agency, which helped set up Nama to buy distressed commercial property loans from lenders, admitted the organisation had no expertise in bank restructuring and faced a “long learning curve”. Six months later, flaws in the scheme have been laid bare.
Ireland’s biggest banks are reeling from another large bail-out, due in no small part to their sluggish progress in cleaning up their balance sheets.
Nama was designed as a way to restore the banks to health quickly by sweeping €80bn ($107bn) of bad property loans off their balance sheets and replenishing funding reserves. But analysts say it has been a slow, bureaucratic process that burdened banks with even deeper losses.
One senior Irish government official last week described Nama as “death by a thousand cuts” for the banks and admitted its structure had been “a big mistake”. Meanwhile, a report for the Irish construction industry by Lombard Street Research said the scheme set up to save the country’s crippled banking system had in fact hastened its demise.
Nama’s greatest failing, say analysts, is the way it crystallised large upfront losses for the banks.
The scheme was set up to buy loans from the banks to relieve them of the risk of future defaults. It will sell or run down loans or, in some cases, provide capital for developers to complete mothballed projects.
Initially, the structure was praised as a definitive solution to banks’ toxic loan portfolios. By comparison, the UK’s asset protection scheme, which formed part of the rescue of Royal Bank of Scotland, offered insurance for future losses on loans, leaving the risky assets on the bank’s books. By stripping the Irish banks of their risky loans altogether, it was hoped Nama would draw a clearer line under their troubles.
The problem was that as the Irish economy deteriorated and the risk of loan defaults grew, the ‘hair-cuts’ – or discounts – imposed by Nama also grew. The scheme bought the first batch of loans at a discount of about 35-40 per cent but many of the €50bn of loans still to be transferred will have their value downgraded by at least 60 per cent.
“Nama forced the crystallisation of losses at the worst possible time for the banks – when the market was at its lowest point,” says Michael Taylor, an analyst at Lombard Street.
Rather than just buying impaired loans, Nama, which hopes to generate a €1bn profit over its 7-10 year lifespan, swallowed the portfolios of some developers, meaning that performing loans were taken from banks as well as impaired ones – which further weakened their balance sheets.
Deeper-than-expected losses left the banks woefully short on capital, and, before long, triggered the need for a fresh bail-out. The Dublin government is investigating whether Nama was misled about the quality of the loans.
As well as criticising the structure of Nama, analysts say it has proved too narrow in scope. The scheme was set up to deal with the banks’ most pressing issue – their biggest and most toxic commercial property loans. It excluded commercial loans worth less than €20m and did not tackle the residential mortgage and corporate loan books, where problems are now brewing.
The Irish government last week expanded the scheme to include €16bn of smaller commercial loans and is to change the legislation so they can be moved into Nama faster.
Under the initial terms of the scheme each individual loan was independently valued. This assessment process made it impossible to clear loans off banks’ balance sheets with any speed, and left unclear the final cost of the clean-up process.
The legislation change should mean the remaining €16bn of smaller loans can be valued in blocks and so transferred quicker. However, bankers say it was not just the scheme’s structure that led to difficulties but the escalation of a crisis many felt was under control.
“Nama could have been effective but the scale of Ireland’s problems rather overwhelmed it,” said one banker.