An auction process for quickly valuing bank property loans to be bought by NAMA

[patslatt]

What happens when inevitably there is huge disagreement between NAMA and the banks on the €90 billion of property loan valuations? The lack of liquidity and infrequency of commercial property transactions makes it impossible to do statistically meaningful property valuations in most cases,even within a broad limit of say + or - 20%. So even if experienced valuation experts come up with plausible judgements,there will be massive scope to challenge their valuations. Will this give rise to litigation under Irish constitutional property rights? Meticulously valuing properties on a case by case basis to avoid litigation may take so long that it would be impractical,like tribunals that want to go down every boreen in Ireland.

However,there may be a relatively quick way to achieve agreement through an auction process. Say there is a bunch of 100 different houses on a partially finished estate. NAMA, the bank and the auctioneer could each ask independent valuers to come up with a quick valuation. The bank is given valuation figures of €12 million,NAMA is given a figure of €15 million and the auctioneer a figure of €17 million. The auction rule is that each side simultaneously submits one figure,with the closest figure to the auctioneer's figure deciding the price. Hypothetical examples of prices for different cases A,B and C are shown below.

Valuations (€Million)
Bank NAMA Auctioneer Winner
A €12 €15 €17 €15
B 40 22 30 22
C 60 42 50 42

In A, NAMA paid too much by setting its bid too high when a bid of 13 would have won. In B and C, the bank lost by setting its bid too high when bids of 37 and 57 would have won (eg 57-50 =7,50-42=8,so 57 wins out over 42). The auction rule incentivises the bank to bid low and NAMA to bid high.

Before the bidding process starts,banks would have to agree to a binding agreement on this auction process for all assets where valuations could prove difficult,if not for all assets.

[mollox]

Developer Mick Wallace, seen by many as one of the less avaricious of that breed, was on Pat Kenny earlier in the week.

I didn’t hear all the interview, but one interesting piece was where he said he’d had a development site he owns in Dublin valued by 3 different auctioneers. The highest value was double the lowest, with the other falling somewhere in between.

That, I think, neatly highlights the problem for the AIB & BOI, and for NAMA.

[Cael]

Such a mess, and nationalisation would have cost a fraction of the price.

[politicaldonations]

Just auction off land/property from defaulters with no reserve over a period of several years. Taxpayer is gonna pay for this anyways so we might as well ensure no Friends of Fianna Fail or developers or bankers or shareholders make more than they should in a free market.

[mollox]

Is it important for NAMA to drive the hardest bargains and pay the MINIMUM value possible?

The Govt has said that it will claw back any final shortfall through a Bank Levy – so even if it overpays to some extent initially, it can recoup the overpayment PROVIDED the banks survive to pay it off. No Govt ever lost votes by imposing a bank levy, so there’s no reason to suspect that this will not be followed through.

If NAMA uses the weak bargaining position of the banks to effectively screw them and steal the assets, the banks will be so weakened by the necessary write-offs that the Govt will have to inject new capital and probably become the majority shareholder of the banks which are not already nationalised. So it’ll end up imposing a levy for any ultimate shortfall on itself.

How will NAMA achieve the best sale prices for the properties it will wish to sell?

There’ll be enormous political pressure to avoid “scandal”, so selling to existing developers will probably be avoided at all costs – even if they are the highest bidder – out of fear that accusations of “Galway Tent, political cronyism” will have public credence.
The Minister has also said that the banks, once relieved of these loan books, will be barred from lending for speculative development in future. So who will provide the financial backing to purchasers of the assets NAMA are trying to sell?
If the main Irish banks are precluded from providing finance, this will significantly reduce the number of potential bidders and, consequently, the sale prices achieved for these assets.

What will NAMA cost to set up & run?
The banks are to be stuck with any shortfall – which means that unless NAMA gets back everything it paid the banks for the assets transferred PLUS enough profit to cover it’s own running costs, then the banks will end up footing the bill for the shortfall.
The banks already have the staff, processes, book-keeping systems, in-house legal teams etc for managing these loans – and much of this overhead will now be replicated in NAMA.

Alternative Solution
Instead of re-inventing the wheel with NAMA, let the banks manage these loans using their own bad debt processes – under supervision from Govt in-house inspectors.
The banks bundle the impaired loans and sell them as securitised packages to the Govt, at an agreed price and on a full recourse basis – so the banks are responsible for any ultimate shortfall, as is currently the case with NAMA proposed modus operandi.

The benefit is that it takes the loans off the banks balance sheets, albeit with the overhang of any ultimate shortfall, which is what’s proposed anyway with NAMA, but saves the time and costs associated with setting up NAMA. Those costs will ultimately have to be borne by the banks anyway and they duplicate existing costs they already have to carry themselves.

[patslatt]

Is it important for NAMA to drive the hardest bargains and pay the MINIMUM value possible?

The Govt has said that it will claw back any final shortfall through a Bank Levy – so even if it overpays to some extent initially, it can recoup the overpayment PROVIDED the banks survive to pay it off. No Govt ever lost votes by imposing a bank levy, so there’s no reason to suspect that this will not be followed through.

If NAMA uses the weak bargaining position of the banks to effectively screw them and steal the assets, the banks will be so weakened by the necessary write-offs that the Govt will have to inject new capital and probably become the majority shareholder of the banks which are not already nationalised. So it’ll end up imposing a levy for any ultimate shortfall on itself.

How will NAMA achieve the best sale prices for the properties it will wish to sell?

There’ll be enormous political pressure to avoid “scandal”, so selling to existing developers will probably be avoided at all costs – even if they are the highest bidder – out of fear that accusations of “Galway Tent, political cronyism” will have public credence.
The Minister has also said that the banks, once relieved of these loan books, will be barred from lending for speculative development in future. So who will provide the financial backing to purchasers of the assets NAMA are trying to sell?
If the main Irish banks are precluded from providing finance, this will significantly reduce the number of potential bidders and, consequently, the sale prices achieved for these assets.

What will NAMA cost to set up & run?
The banks are to be stuck with any shortfall – which means that unless NAMA gets back everything it paid the banks for the assets transferred PLUS enough profit to cover it’s own running costs, then the banks will end up footing the bill for the shortfall.
The banks already have the staff, processes, book-keeping systems, in-house legal teams etc for managing these loans – and much of this overhead will now be replicated in NAMA.

Alternative Solution
Instead of re-inventing the wheel with NAMA, let the banks manage these loans using their own bad debt processes – under supervision from Govt in-house inspectors.
The banks bundle the impaired loans and sell them as securitised packages to the Govt, at an agreed price and on a full recourse basis – so the banks are responsible for any ultimate shortfall, as is currently the case with NAMA proposed modus operandi.

The benefit is that it takes the loans off the banks balance sheets, albeit with the overhang of any ultimate shortfall, which is what’s proposed anyway with NAMA, but saves the time and costs associated with setting up NAMA. Those costs will ultimately have to be borne by the banks anyway and they duplicate existing costs they already have to carry themselves.

If the banks are precluded from providing speculative finance to property developments,the solution could be to set up bank subsidiaries whose capital would not count towards Basel capital ratios. Then if they lose the subsidiary company capital,it won't undermine the parent company bank's Basel capital ratios.

Transferring the property loans to the banks with NAMA compensated for any losses on those loans on a full recourse basis would not resolve the suspected deficiencies in bank capital ratios under realistic property valuations. Until these deficiencies are addressed to a realistic extent and new capital injected,it will be difficult for the banks to expand lending.

[mollox]

If the banks are precluded from providing speculative finance to property developments,the solution could be to set up bank subsidiaries whose capital would not count towards Basel capital ratios. Then if they lose the subsidiary company capital,it won't undermine the parent company bank's Basel capital ratios.

I think the Minister's intention was to reassure the public that the banks wouldn't be allowed get themselves into such a mess again - and/or get the public finances into such a mess again (which any fool knows was actually the responsibility of Govt, rather than the banks). In that context, I doubt if the type of financial engineering you suggest would be politically acceptable.

Transferring the property loans to the banks with NAMA compensated for any losses on those loans on a full recourse basis would not resolve the suspected deficiencies in bank capital ratios under realistic property valuations. Until these deficiencies are addressed to a realistic extent and new capital injected,it will be difficult for the banks to expand lending.

Securitising the loans and selling them to the govt on a discounted basis, but with full recourse, will remove them from the banks balance sheets, albeit with exactly the same potential overhang as that currently proposed by NAMA, which is to buy the assets at a discount now and impose a future levy to recoup any shortfall.
Indeed, the NAMA solution puts no pressure on that agency to maximise sale prices and minimise its own operating costs! After all, it has a blank cheque from the banks to pick up the tab for any shortfall.

[patslatt]

I think the Minister's intention was to reassure the public that the banks wouldn't be allowed get themselves into such a mess again - and/or get the public finances into such a mess again (which any fool knows was actually the responsibility of Govt, rather than the banks). In that context, I doubt if the type of financial engineering you suggest would be politically acceptable.


Securitising the loans and selling them to the govt on a discounted basis, but with full recourse, will remove them from the banks balance sheets, albeit with exactly the same potential overhang as that currently proposed by NAMA, which is to buy the assets at a discount now and impose a future levy to recoup any shortfall.
Indeed, the NAMA solution puts no pressure on that agency to maximise sale prices and minimise its own operating costs! After all, it has a blank cheque from the banks to pick up the tab for any shortfall.

The future levy on the entire banking system would not endanger the capital bases of banks as it would tend to be passed through in higher charges on customers and would be a low charge collected over a long period of time,maybe 15 years,to minimise the adverse impact.It might cause corporate customers to bank abroad to avoid the charges,though.

[feargach]

Rrrrrright, we will be able to levy the banks, to claw back several dozen billion €, will we?

Please think it through for a second:

NAMA happens.

We pay let's say €35bn too much.

The global crisis calms down in 2010 and some semblance of normal stable trading comes to Ireland.

Foreign banks start setting up in Ireland, and we can't stop them because of free trade. They will offer higher deposit interest rates and cheaper loans than the Irish banks.

Irish banks will be unable to compete by the same means. Why? Because they have a massive €35 billion levy to repay. So they'll have to go out of business.

Can somebody explain what bit I'm missing?

[BodyofEvidence]

Rrrrrright, we will be able to levy the banks, to claw back several dozen billion €, will we?

Please think it through for a second:

NAMA happens.

We pay let's say €35bn too much.

The global crisis calms down in 2010 and some semblance of normal stable trading comes to Ireland.

Foreign banks start setting up in Ireland, and we can't stop them because of free trade. They will offer higher deposit interest rates and cheaper loans than the Irish banks.

Irish banks will be unable to compete by the same means. Why? Because they have a massive €35 billion levy to repay. So they'll have to go out of business.

Can somebody explain what bit I'm missing?

Lenihan clearly has the missing piece so why not ask him. Oh, and this was flagged
Brian Lucey - Expect a return of NAMA-rama and '80s greatest hits