Nama doth protest too much...
The Comptroller and Auditor General has looked at one dimension of one National Asset Management Agency portfolio: Project Eagle. It has checked to see whether the State agency got value for money based on its own rules.
Before looking at this comprehensive piece of work, it is important to put things in perspective and remember that the reports and allegations regarding Project Eagle are far more wide ranging.
As I’ve said, it is just one portfolio. So much information of a worrying nature relating to several other portfolios has been brought to our attention over the last 18 months. But let us just take a closer look at this report for now.
Nama chairman Frank Daly has questioned the competence of the C&AG to value the loans that Cerberus acquired in 2014.
The C&AG claims correctly that the discount rate used for valuation should be 5.5 per cent, not Nama’s preferred figure of 15 per cent. The discount rate reflects the value to Nama of selling the properties in one go in 2014 rather than disposing individually over a number of years – the bird in the hand is worth two in the bush. It is used to arrive at the net present value of the portfolio: what it is worth today.
It is usually based on the seller’s cost of borrowing. Work out what it would cost to borrow today the amount of money you would receive in rent and sales over the time it takes to wind up the portfolio. The starting point in establishing a correct discount factor for Nama is its cost of borrowing currently, about 1.5 per cent. Add a premium on to the borrowing rate to reflect the risk you might not sell all the properties in time or get what you expected for them. It is called a risk premium.
These risks are usually quite small, hence the low premium. In the case of Nama, the C&AG has correctly recognised that the agency is not only exaggerating, but also double counting these risks.
Grossly misleading
Nama also implies that Belfast, unlike London or Dublin, is too "regional" and therefore additional discounts are justified. This is grossly misleading. Belfast may not be as trendy as London but rental yields are much higher, thus making Belfast a safer bet for property developers. For London investors, prestige is often more important than value for money.
Finally, Nama claims that it must increase the discount rate to compensate Cerberus for the risk that there is not perfect security or legal title to the Belfast properties. It claims that borrowers may not co-operate with the transfer of collateral.
This too is false. The agency has told us repeatedly that when it acquired the loans it already reduced the cash flows to reflect this potential loss.
The CA&G was not only correct in accusing Nama of double counting, it offered a generous discount rate of 5.5 per cent – well above the cost of finance of 1.5 per cent – more than adequately compensating Cerberus for its small risk.
Why was the agency so willing to risk its reputation by pleasing the titans of Wall Street with an overgenerous discount? In 2014 there was already a whiff of improper conduct, conflicts of interest along with preferential treatment and improper payments.
Parochial dispute
It may seem surprising that Daly has been so critical of the C&AG, given the position he holds at Nama. But a full-scale row over what discount rates should be applied or not might suit the agency right now. They have been fighting fires on all fronts, and this parochial dispute has the potential to take the focus away from the bigger picture: that Nama has a lot of questions to answer, its level of credibility is heading in the wrong direction, and it is running out of places to hide. It is long past the time that our Government should have stopped pretending that everything is grand.
An immediate suspension of all activities by Nama is required. We are in possession of a long list of individuals who worked for, or who are still working for, the agency, who may have engaged in malpractice. The Nama hierarchy has failed to hold them to account.
Their strong reluctance to deal with them is disconcerting, to say the least, and likely linked to the fear that allowing a few cracks to develop could lead to the collapse of the Nama edifice.
Only a truly independent commission of inquiry into Nama can establish the truth. The positions of Daly and chief executive Brendan McDonagh are not sustainable.
Any government or party that protects them may well pay a heavy price.
Mick Wallace is an Independents 4 Change TD and property developer