Questions and answers about Nama
What is the National Asset Management Agency?
There are many different definitions of Nama. It's "a key part of the solution to the current banking difficulties in Ireland," according to the Department of Finance. It's "socialism for bankers and developers", according to Labour Party deputy leader Joan Burton.
One thing that most people will agree on is that Nama is an experiment designed to cleanse the Irish banking system of its most toxic loans and eventually get things back to "normal" again (but preferably without the reckless lending this time).
What are toxic loans and why do Irish banks have so many of them?
Toxic loans are loans that were advanced by the five Nama institutions - AIB, Anglo Irish Bank, Bank of Ireland, EBS Building Society and Irish Nationwide Building Society - to property developers at the peak of the market that now cannot be repaid by the insolvent developers.
The banks got caught up in a property bubble where they chased short-term profit at the expense of long-term prudence: none of the banks paid adequate attention to the risk that the property market might collapse.
But how does Nama work exactly?
Nama is buying the toxic loans from the participating banks. The loans come from the riskiest part of the banks' portfolios: loans secured on development land and property under development.
The idea is that taking these riskier loans off the balance sheets of the banks will "make the banks safer and more secure for depositors and investors and free them to lend again".
Is this a bailout for developers?
The Government says no, as all of the borrowers whose loans are transferring to Nama will have to continue repaying their debts in full. In fact, as many of the banks have been imposing moratoriums on developers' repayments, Nama may treat borrowers more rigorously and impartially than the banks have done to date. Nama has "a clear commercial mandate to recover debt" and will try to sell assets on which borrowers default, with the income accruing to the taxpayer.
How much will all of this cost taxpayers?
We still do not know exactly how much the State will pay for the toxic loans. We do know that the loans expected to transfer to Nama had an original value of €81 million. However, the value of the assets on which the loans were secured has plummeted as a result of the property crash.
Originally, the Government said it would apply a discount or "haircut" of 30 per cent to the loans.
We now know that this haircut is likely to be much greater, but we won't know the final sum that the State is paying for the loans until the transfer process is completed.
So what happened yesterday?
Yesterday, the Government announced that it has completed the transfer of the first loans to Nama. The loans come from Irish Nationwide Building Society and EBS Building Society. The first tranche of loans from Bank of Ireland will be transferred on Friday, while the first transfers from AIB and Anglo Irish Bank will take place by early April. The Government announced that the average haircut to be applied to those loans is 47 per cent - meaning the current market value of the underlying assets is much lower than initially estimated.
Why is the Government pouring more money into the banks?
The massive fall in value in the transferred loans means the banks now have to recognise their losses upfront. This means that the banks need more capital in order to keep functioning and keep the wheels of the economy turning. As a result of the capital injections flagged yesterday, the State is likely to end up with a majority stake in AIB and a minority stake in Bank of Ireland.
It will also control the two building societies. Anglo Irish Bank was nationalised in January 2009. Irish Life & Permanent, which is not transferring any loans to Nama, does not require any capital support from taxpayers.
Will the impact of Nama be "felt for generations", as Sinn Féin's finance spokesman Arthur Morgan said yesterday?
It's possible. Nama is designed to hold the loans for a timeframe of seven to 10 years, at which point it is hoped that the property market will have recovered enough for Nama to break even or make a surplus. However, this is far from certain. In the meantime, the billions being pumped into the banks to keep them going will weigh heavily on the public finances in the years to come.
