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News : Irish Last Updated: Sep 17, 2009 - 7:08:44 AM

Lenihan to advise Dáil on NAMA valuation process; Desmond says "bad bank" will cause “untold long-term damage to Ireland Inc”
By Michael Hennigan, Founder and Editor of Finfacts
Sep 16, 2009 - 4:46:26 AM

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Image of the 37 storey tower for the site of the former Jurys Hotel, Ballsbridge, Dublin. Seán Dunne was refused planning permission for the tower but even if it was available, it would likely remain an unrealised dream.

The Minister for Finance Brian Lenihan met Irish bank chiefs Tuesday evening, in advance of today's announcement to the Dáil of the valuation process for the property loans of up to €90 billion that will be transferred to the "bad bank" NAMA (National Assets Management Agency). Meanwhile, financier Dermot Desmond says NAMA will cause “untold long-term damage to Ireland Inc,” while nationalising the banks“is a great sound bite - -but is equally not a solution.”

In the Dáil this afternoon at the opening of the second-stage debate on the NAMA legislation, the minister is expected to set out the book value of the loans transferring from each institution and the split between the current market value of the assets and the projected “long-term” value, which is the most controversial aspect of the proposal.

It has been leaked that the bond issue to banks, which can be used for funding from the European Central Bank is expected to be about €60 billion, suggesting a one-third discount from the original €90 billion value of the loans. However, writedowns already made mean that the value of the loans from which the discount will be taken is less than €90 billion.

It is expected that the Government will end up as a majority shareholder in AIB while significantly increasing its minority stake in Bank of Ireland.

AIB chief executive Eugene Sheehy and chairman Dan O’Connor had a meeting with the Minister for Finance on Tuesday as did Bank of Ireland chief executive Richie Boucher and chief executives of other institutions.

In response to pressure in recent weeks, the Government agreed to ensure more equitable risk sharing between banks and taxpayers. A proposal under consideration was that NAMA would issue two types of bonds to the banks in exchange for ther property and development loans.

The bonds, are in effect Government IOUs which pay interest until the State redeems the debts and the banks would receive a mixture of normal bonds and a second class of bond  - - known as subordinated debt - -  which would only be repaid if NAMA makes a profit as projected.

Issuing subordinated debt to the banks, which would be repayable by NAMA over time, would be a means of charging a levy during the agency’s lifetime.

It is not clear what the true loan-to-value was on loans to developers as it is believed that claims of 75%, suggesting that 25% of project values were paid in cash, does not seem credible.

In The Irish Times today, Colm Keena writes:"Although your average customer seeking a loan is asked to give a complete account of his or her financial affairs, this was not the case with major developers at the height of the property boom.

“In the 2004/2005 to 2007 period, the borrower dictated the terms in which they did business with the banks,” according to the source. “The banks were told: ‘This is the way I do business and if you don’t give me the loan I will go to someone else who will’. And that was usually Anglo [Irish Bank].”

Anglo grew at a rapid rate during the Irish property boom. “Some banks felt they had missed the boat. AIB and the Bank of Ireland decided to get in on the act,” according to the source."

Dermot Desmond


Writing in The Irish Times today, Dermot Desmond says Ireland needs “at least three” actively competing banks, “otherwise good businesses and good projects will be starved of funds with the consequential loss of jobs”.

He says a lack of liquidity, and not property, was the problem in the Irish financial system.

“Setting up a quango to be Ireland’s primary property lender is a sleight of hand to distract from the real need, which is liquidity,”he writes.

“Given that the problem is liquidity, the emphasis should be putting more money into the financial system, not less - - what the economists call quantitative easing.”

He adds that Ireland “must at all costs avoid a comfortable duopoly or, worse still, a group of nationalised banks which quickly become a monopoly”.

The financier was a shareholder in Bank of Ireland until recent months.

Dermot Desmond writes: "Based on the widely rumoured figures, Ireland Inc intends to provide circa €60 billion of bonds to the banks as part of the NAMA exercise. The Government could achieve exactly the same impact by guaranteeing €60 billion of bonds issued by the banks themselves. The Government can then charge a completely transparent fee for the use of this guarantee. This leaves all the risk of the existing loans with the existing capital providers and could be implemented in the morning without new quangos, complicated legislation, or additional risk. It should be noted that Ireland Inc is already showing significant profit on its preference share investment in the two main banks.

Each bank should set up its own delinquent asset management subsidiary (MgmtCo) which would hold all of the assets which would otherwise be transferred into Nama. This gives each existing bank two businesses which would be consolidated – the good bank and the bad. This is purely a book-keeping exercise and could be done overnight.

The Government should guarantee the funds to be raised by the banks to fund their delinquent asset management subsidiaries for, say, 10 years to match the property loan maturities and generate the necessary liquidity to meet their repayment obligations and to fund new lending. The Government should be paid a proper fee for providing this guarantee."

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