The Great Numbers Game

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Sometimes the diffusion of figures required to explain what is going on with NAMA, the bank bailout and the economic crisis, produce nothing more than a thick cloud of confusion. For most readers, even for those who are not normally numerically illiterate, they seem to fall about incomprehensibly as we read any of the many articles spewed out by the Great Financial Crisis Machine. There are times, however, when one number can stand out, helping to make sense of all the rest.

In this case, keep the number 63 fixed in your mind.

The amount paid by NAMA for the loans in 2009 when first established (excluding the amount paid by ‘private investors’ and interest charged on the bonds raised when the loans were taken over) is €30.2bn, says this article by Tom Lyons in the Irish Times today.

In the article NAMA’s Chief executive Brendan McDonagh said that “Nama’s clients now number 700, of which 500 were relatively small with total combined borrowings of €2.5 billion.” The original number of borrowers transferred in 2009 was 800.

Based on this, it suggests that in 2009 300 people were responsible for the vast majority of the €74bn of loans taken from the banks. While we have to wait until later in the year to get a proper figure, it’s reported that €22bn of the original €30.2bn loan book remains.

The article now informs us that just 200 people originated the remaining combined borrowings of €19.5bn.

However, if we look at the figures for 2009 when NAMA was set up we can see that now only did the vast majority of the stock of the loans emanate from a very small number of people and its actually far less than 200 people.

In 2009 just 63 people were associated with €45.47bn of the €74bn of loans transferred from the banks, while 709 people were associated with the remaining €28.54bn.

Given that McDonagh has said that 500 people are now associated with total combined borrowings of just €2.5 billion, it’s worth looking at the bottom 500 debtor connections on NAMA’s books in 2009. These bottom 500 held a nominal debt of between €49m and less than €20m with combined total borrowings of €9bn. This means that 300 borrowers were associated with €65bn (€9bn less €74bn).

If 63 people were associated with €45.47bn it follows that 237 people were associated with €19.53bn (45.47 plus 19.53 equals 65).

Now NAMA has 100 fewer borrowers on its books. How many of the 63 largest borrowers in 2009 are responsible for the remaining €19.5bn on NAMAs books (€22bn remaining on NAMA books in 2014 less €2.5bn of the 500 smaller borrowers)?  I don’t know exactly, but the point remains, the vast bulk of NAMA loans were taken out by a very small number of people.

The article with McDonagh states that the cost of NAMA is €30.2bn. It also mentions that NAMA expects to repay ‘at least’ 80% of the bonds it raised to fund the transfer of loans by 2016, “two years ahead of schedule”.

Potentially, therefore, the cost of the actions of a small number of key players will be repaid to the state. But that is far from the full story.

This is because the difference between the €74bn of loans held by the banks and the €30.2bn figure (excluding interest) that NAMA paid for the loans was filled in by the state recapitalising the banks.

This has so far cost €64 billion.

It’s worth remembering that apart from a relatively small number of mortgages that were part of Irish Nationwide’s loan book no recapitalisation has been used to deal with ordinary mortgage debt. The ‘disappointment’ at the slow pace of resolution around the burgeoning mortgage arrears crisis at the moment highlights the fact that the cost of the banking crisis so far has very little to do with residential property. However, whenever anyone talks about Ireland’s economic crisis they speak about the escalation in the cost of residential property up to 2006-7 and the subsequent collapse in prices.

Certainly, many problems in the economy are associated with the collapse in residential property prices – negative equity, people paying down debt before other expenses, the collapse of SME borrowing because the SME sector too built up an accumulation of non-core debt related to property which it has been struggling to pay back. However, the cost of the banking crisis, the €64bn and related cost of interest on borrowing, including any losses realised by NAMA, are almost entirely attributable to the profit motive of a very small number of people.

But they haven’t got away scott free, we are told. When the loans are sold on by NAMA, for example, the developer who took out the loan often has to pay back more than NAMA originally paid for them – a win for the state, surely.

But as has happened a number of times already, once a developer leaves NAMA they are simply changing loans provider. Once the transaction is completed what they have to repay is considerably less than the value of the original loan. A significant gain for the borrower, as can be seen here and here.

The McDonagh interview in today’s Irish Times also reveals that about 75 per cent of the approximately €8bn Nama has sold to date (€22bn minus €30.5bn of the original book) ‘has been snapped up by fewer than 10 very large American investment funds’.

The numbers of vested interests keep on getting smaller.

But these large American investment funds are now working directly with the original large borrowers in NAMA. In the case of Johnny Ronan and Paddy McKillen with US private equity giant Colony Capital, with Cork Developer Michael O’Flynn with Blackstone and in the case of Sean O’Reilly with Lone Star.

These investment funds specialise in distressed property, and of course, it is the paper asset, and not the bricks and mortar that they are interested in.

These small number of large borrowers and foreign investors are now re-entering a market that is being pumped up by NAMA itself. NAMA’s development of the Dublin Docklands is being co-ordinated with vulture capital fund Oak Tree Capital and is providing €3bn in investment directly. The crisis in social housing accelerated by the complete halt on government spending since 2008 is being used as cover. The previous Dublin Docklands development plan of course, which reneged on commitments to those in the local community, was the centre of a scandal which has been documented by Frank Connolly, founder of the Centre for Public Inquiry. the Centre reported that there was a massive conflict of interest.

As Connolly put it when asked by Media Bite about the report compiled by a new chairperson of the DDDA, and Connolly himself was personally attacked by the then Minister for Justice, Michael McDowell in the Dail:

“It is clear that there has been a fundamental conflict of interest at the heart of the DDDA for several years. It centres on the dual role of former DDDA board member Sean Fitzpatrick and former DDA chairman, Lar Bradshaw, who were also on the board of Anglo Irish Bank the main lender to many of the dockside developments.

Minutes of DDDA board meetings show clearly that Fitzpatrick and later Bradshaw were involved in crucial decisions which affected the profitability of projects Anglo was funding in the docklands over several years. The issue was raised in the Dáil as far back as 1995 by the late Tony Gregory but the then Minister for the Environment, Dick Roche, defended the two executives. The beneficiaries of Anglo loans and fast track planning decisions from the DDDA include the developers who were significant donors to Fianna Fáil over the past decade and more. Whether the two reports prepared by Niamh Brennan get to the root of the issue and expose the culture of cronyism and the deep conflicts of interest remains to be seen.”

The essence of this scandal was the collusion of those profiting from property speculation and state actors (politicians and civil servants working in the DDDA) working in the interests of those small number of speculators and those seeking to gain by providing the liquidity.

Now that the small group of people behind the first artificially inflated commercial property boom (or technically, the fifth Office Development Boom) are back are we in line for another collusion with those same state actors.