Tuesday, 6 October 2009

The National Asset Management Agency Bill 2009: the value of loans

Jim Stewart: One of the contentious issues in the NAMA proposal is the value of the loans being purchased. Loans with an estimated market value of €47 billion will be taken over by NAMA at an estimated value of €54 billion. Many have argued that market values should be used. One problem with this argument is that it assumes that there is a market for property assets underlying these loans in the accepted sense of a market.

In fact, there has always been massive state intervention in the property market and there probably always will be. For example planning procedures, tax incentives (hotels, section 23 houses, multistory car parks) and absence of tax in other cases. The State can also influence values via provision of infrastructure, for example provision of a school, bus service, a Luas extension, or reopening a railway line. Planning regulations can have a considerable effect on property values. If the Minister for the Environment were to restrict apartment building so as to effectively prevent new building, existing apartment blocks are more likely to gain in value. The current crisis has revealed serious flaws in our planning process. Reform is bound to affect property values

The problem with valuing the assets that NAMA may own is that the State is both negotiating with the banks, and eventually the property owner, as to value, and at the same time can influence value. Any valuation is subjective, including the estimates that have been widely discussed of the loans to be acquired by NAMA. The draft bill recognises this.

One of the advantages of earlier intervention was the certainty of the state commitment, plus the existence of options which under certain circumstances increased returns to the State and reduced risk. For example, the preference shares issued to banks earlier this year had associated warrants for a 25% shareholding in both banks, which have become much more valuable because of the rise in bank shares. If either bank raises further capital and repays the preference shares issued, the potential State shareholding is reduced to 15%.

The current NAMA proposal envisages a small element of risk sharing – 5% of the total amount paid to the banks will be linked to the performance of NAMA, although precise details have not been published. There are other ways that the Bill could be changed to further reduce, but not eliminate, risk and uncertainty to the State.
That will be the subject of my next post.


SlĂ­ Eile said...

@Jim to the clear 'the small element of risk' at 5% applies to subordinate bondholders meaning a huge element of risk for taxpayers. If we 'play by the rules of capitalism' to use a phrase of Stiglitz, today and yesterday on RTE, then (a) Government should pay much less and much more gradually for dodgy loans (having gone through the books) and (b) any risk should be levied on banks through penalties later on. There is still the issue of ownership. Prefernce shares could give the taxpayer a handsome yield in the medium term. But why delay nationalising AIB and BOI in the current climate before share prices might rise further. No matter what risk-sharing formula is used with a revised NAMA it is goihng to represent a daylight theft. i look forward to further posts following up on this issue.

Anonymous said...

The certainty with which some assert the value of assets (bad or otherwise) suggests that they are blind adherents of the totally discredited and utterly flawed efficient markets hypothesis.