A major gamble without knowing the odds

One of the most common clichés that has been bandied about over the past few weeks to describe the new National Asset Management Agency (Nama) and its workings is that it represents 'the biggest gamble in the history of the State'. More than one contributor to the media debate in recent days has taken issue with such a description, saying that at least when you place a bet, you know what the odds are. With Nama, no-one has any idea about the odds of it working. That certainly makes it a massive gamble, but because it's the only game in town, the only way to save the banking system from the mess it has got itself into, the die has now been cast and we, the taxpayers of this country, must learn to live with it. Nama is based, of course, on the successful Swedish model set up to rescue its banking sector following a similar situation in the Scandinavian country in the 1990s. It removed bad property loans from the balance sheets of Nordbanken and Gota Bank, two nationalised institutions, managed and restructured them over a number of years and sold them on, even realising a modest profit in the process. Pricing the assets was also easier because taxpayers were on both sides of the deal, owning both the nationalised good banks and the bad banks. In truth, the bad bank idea is probably the best of a bad lot of choices for Ireland but there are still many questions which have not yet been adequately answered. By buying commercial property sites and virgin development land in Ireland, the UK and elsewhere at the bottom of the market, Nama could possibly even turn a profit in time if it manages to sell the assets off when the economic tide turns. The flip side of the coin is that if the assets do not appreciate in value over time, the Irish taxpayer is likely to be saddled with a huge debt burden that will last for generations to come. That is not an outcome anyone wants to see happen. The biggest question that everyone wants to know the answer to is at what discount will the new entity buy the soured loans from the likes of AIB and Bank of Ireland? There are €90 billion of distressed loans out there to property developers and conventional wisdom has it at the present time that Nama will pay the banks about €30bn less - than their face value: the so-called 30 per cent haircut. This is a bigger discount than previously thought and may be designed to at least in part rebut the public perception that the Government is being somehow 'soft' on the banks, something that would certainly incur the wrath of taxpayers. However, all the carefully crafted number-crunching could be thrown into disarray this week with the possible collapse of one of the country's biggest developers' €2.3bn property empire. The Commercial Court last Friday removed removed protection from creditors to Liam Carroll's Zoe Group, a move which could precipitate the collapse of his entire property domain. The decision is being appealed to the Supreme Court but if the higher court upholds Mr Justice Peter Kelly's ruling from the lower court, it could force a 'fire sale' of Carroll's assets at writedowns of up to 80 per cent, placing in jeopardy the economic valuation model to be used by Nama and throwing the whole process into disarray. The Dept of Finance insists that Nama can cope with a big receivership and not be derailed. Nama's whole reason by being is to try and lead this country from the catastrophic mess the banks and developers have created, and which has jeopardised the entire economic health of this nation. A liquidation of the Carroll empire and the resulting 'fire sale' of his assets would effectively set the market price for distressed property. Thus, it would be very difficult for Nama to be seen by the taxpayer to be paying overly inflated prices for other properties if this developer's property sites were to be sold for significantly less. The outcome of this case will have very important repercussions for Ireland's new bad bank.