The question of how much the Government will pay for toxic loans remains unanswered
MINISTER FOR Finance Brian Lenihan kept his counsel on the key detail that will determine Nama’s success or failure when he appeared at a lengthy Oireachtas committee hearing yesterday.
He would not divulge how much the Government will pay for toxic development and connected loans with a book value of close to €90 billion on the books of five lenders.
This detail would be provided as planned on September 16th, he said, when the Oireachtas returns to debate the Nama legislation.
However, he did provide some signals of what might be expected.
He ruled out “blanket nationalisation” but indicated that there may be part-nationalisation as the Government may take majority stakes “in some cases”, he said.
This will be decided “contemporaneously” with the valuations of the loans, the Minister said, and the market will be able to “read through” what the September 16th figures will mean for the capital needs of the lenders and how big a stake the State may take in each.
Recent discounted valuations of €27 billion to €35 billion on the loans from some commentators, including an estimate from 46 academic economists last week, suggest that the country was “insolvent” and the banking system would be under threat if they were accurate, he said.
This was not the case based on the information he had seen, he said, referring to the expected write-down of Nama-bound loans.
Ruling out a full nationalisation of Bank of Ireland and Allied Irish Banks (AIB), he said the market value and the views of credit rating agencies suggest the existing shareholders in the two banks would not be wiped out. They are “survivable entities”, he said.
He dismissed full nationalisation, the alternative to Nama suggested by the Labour Party, saying that the State would still have to deal with the problem assets and that “concentration risk” would lead to investors withdrawing funds from some banks if all banks were “owned by the same owner”.
Fine Gael’s plan to negotiate aggressively with investors in the banks’ bonds and debt to share losses as part of its plan to create a “good” or “national recovery bank” would have “catastrophic effects”, the Minister said.
He said this would have “a severe detrimental effect” on the banking system and on the State’s ability to fund itself. Nama was “a far more discriminate and effective policy”, said the Minister.
The Minister also gave details on what will move to Nama – 1,500 borrowers and 18,000 loans will transfer to the agency. He also said that “hopelessly insolvent developers would be liquidated”.
The method of valuation was once again the issue that attracted most concern. Opposition parties were critical that “the long-term economic value”, which is higher than the current market value and will be assigned to certain loans valuing them over time, would mean the State over-pays.
Valuer John Mulcahy, the chairman of Jones Lang LaSalle who has been seconded to Nama to work on the plan, said commercial properties backing the loans have fallen by 50 per cent. Long-term economic valuations would be based on seven-year cycles, the average recovery time in the cycles since 1971, said Mulcahy.
During seven-year recoveries in those cycles, commercial properties increased on average by 88 per cent from the bottom of the cycle, he said, while residential properties climbed 96 per cent.
Lenihan said the valuation formula would allow for an increase to “a long-term economic value” on certain loans but this will be “very limited” and “nothing near” 88 per cent above their current market value.
