Sunday, 30 May 2010

Nama: The Truth...

Nama: the truth it's a bailout for developers...

The National Asset Management Agency (Nama), which was set up to cleanse the banking system of toxic debts, has been revealed to be solely a bailout for builders and developers.

The stark truth of the agency's core objective emerged this weekend as the Government's banking strategy lurched towards outright nationalisation.

The deepening crisis in European stock and currency markets forced the Educational Building Society (EBS) into state control as it failed to find private investors, and now market analysts say that AIB, the country's largest bank, will be effectively nationalised by the end of the year.

The unravelling of the Government's banking strategy -- which was designed to avoid nationalisation -- came as Frank Daly, the chairman of Nama, announced that its "core objective will be to recover for the taxpayers whatever it has paid for the loans in addition to whatever it has invested to enhance property assets underlying those loans. It is expected that Nama will have a lifespan of seven to ten years and when it has achieved its core objective, it will be wound up".

Nama will buy loans worth €81bn from Ireland's main banks, but will pay just over €43bn for those loans. Mr Daly's comments suggest that the borrowers -- including the 10 largest property developers who owe a staggering €16bn -- will be expected to repay half of what they owe.

Mr Daly said that due diligence by his staff had discovered remarkable flaws in the legal agreements that developers had signed to secure their loans. He said that "much of this lending was carried out in haste and inadequately secured and documented", making it difficult to pursue developers for the personal guarantees that many had offered to secure their loans.

In effect, Nama has become the bailout for developers that the Government always claimed that it would not be.

The creeping nationalisation of Ireland's banking also represents a major reversal of government policy. The latest bailout of the struggling EBS will cost taxpayers €875m -- €100m for a controlling stake in the company and a further €775m to cover its losses and repair its balance sheet.

The move follows the nationalisation of Anglo Irish Bank last year and the effective nationalisation of the Irish Nationwide Building Society this year. The State also holds large minority stakes in AIB and BoI, plus warrants that could convert into a further 25 per cent holding in both banks, and is expected to increase its holdings further if they also fail to secure outside financing to meet rules on the reserves that they must hold against future losses.

While market analysts expect BoI to keep the State at arm's length, AIB is likely to be majority State-owned by the end of the year. Of the six independent banks guaranteed by the State in September 2008, only Irish Life & Permanent is now free of State investment or control.

BoI managed to raise €1.5bn by issuing new shares at a deep discount to its existing shareholders this month and got the deal away just before the markets crashed. AIB faces the prospect of raising €7bn, but the total value of the bank on Friday was just over €900m.

"It just can't be done in these conditions," said one investment manager yesterday. "AIB will be nationalised unless there is a dramatic and unlikely recovery in the stock markets this summer."

EBS's failure to secure outside investment was not unexpected as its hopes of staying independent were effectively dashed by the chaos in the financial markets caused by the collapse of confidence in the euro and the failure of a Spanish regional bank.

But the EBS's inability to raise cash represents another blow for the Government's policy, which was meant to avoid nationalisation of the banking sector.

The Government has pumped tens of billions into the banks to keep them solvent and is raising another €40bn to buy their property loans through Nama.

Even though his building society has just received a €100m bailout from the taxpayer, EBS chief executive Fergus Murphy believes there can be no Nama-style rescue for distressed mortgage holders.

"I don't think it's workable. I don't think it's there. I think moral hazard would make it very, very difficult. I don't currently see that structurally as something that could happen. Banks need to fund their balance sheets," Mr Murphy told the Sunday Independent when asked about the issue on the margins of his society's AGM last Friday.

The EBS chief's response is sure to anger the thousands of homeowners struggling to meet their monthly repayments in the face of falling wages, rising interest rates and the ever-present threat of redundancy.

According to the latest statistics, 33,321 mortgage accounts -- 4.1 per cent of all private residential mortgages in the State -- were in arrears for more than 90 days at the end of March. Total arrears for these distressed mortgages amount to €464.5m.

Report by Alan Ruddock and Ronald Quinlan - Sunday Independent.

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