Comment: Is Nama an early riser or late sleeper?

Brendan Behan once quipped that if you can secure a reputation for getting up early in the morning you can stay in bed all day. If the legendary rabble-rouser was around today, I think he would be directing his sardonic wit toward the reputation of the National Asset Management Agency.

In response to the collapse of Irish property prices, and the resulting collapse of confidence in the value of the property-related loan assets of the Irish banks, the government intervened in December 2009 by setting upNAMA. The risk of a disorderly fire-sale of those assets in the frenzied environment of the global financial crisis had seemingly been averted. With the effective benefit of ultra-cheap funding from the ECB, a measured and long-term approach to maximising the value of the portfolio seemed to be in prospect.

The reference date for the valuation of all assets transferred to NAMA was November 30 2009. A total of €74 billion was ultimately transferred and €31.8 billion paid as consideration to the participating banks, an overall discount of 57 per cent.

At a well-attended investment gathering in Dublin recently, a respected investment advisor speaking from the floor was effusive in his praise for NAMA. To the apparent agreement of most of those present, he argued that the likely achievement of NAMA in making a modest ‘profit’ proved the accuracy of the original pricing. Moreover, it proved how competent the agency has been in maximising value for the taxpayer.

This sentiment was echoed in the business pages of ‘the paper of record’ on Wednesday. In an article about thecurrent controversies over its dealings in the North and elsewhere, it concluded that ‘NAMA played an important role in helping the State to repair the financial sector.’ Notwithstanding the questions it currently faces, it’s clear that NAMA still enjoys an enviable reputation for getting up early in the morning.

The economist Stephen Cecchetti uses a striking analogy which I think throws particular light on whether this reputation is warranted:

‘Let’s say we are trying to measure tide height at the beach. We know that the sea is filled with fish, and so we exhaustively model fish behaviour, developing complex models of their movements and interactions. The model is great. And the model is useless. The behaviour of the fish is irrelevant for the question we are interested in: how high will the tide go up the beach? We are focusing on the fish when we should be studying the moon.’

The response of the major central banks to the global financial crisis has been clear and decisive. Interest rates have been cut to practically zero and wave after wave of asset buying has succeeded in the goal of propelling asset prices skyward. Since the early months of 2009, stocks, bonds and property have been enjoying one of the greatest asset rallies in history.

For NAMA, this is the moon it should have been studying. But to the great cost of the taxpayer it has spent its time focusing on the behaviour of the fish. Rather than steward its assets wisely to maximise return, it has behaved more like a frenzied auctioneerpackaging and selling assets to whoever happened to show up with the highest bid on a given day. Incredibly, even the sight of the long queue of income-hungry buyers from across the globe seems to have had little impact on its thinking over the past seven years.

Many of the assets sold are now valued at a multiple of what the happy buyers paid. Indeed, every asset sold is now highly likely to be worth more than the price received by NAMA.

In equivalent fashion to asset prices across the globe, Irish property prices have risen strongly in recent years. The SCSI/IPD Ireland Property Index produced by MSCI, measures unlevered total returns of directly held standing property investments. The market coverage is estimated to be 28.9 per cent of the professionally managed real estate investment universe with results dating back to 1995. This index is now at an all-time high, having more than doubled in recent years.

While certainly not an exact comparator for the assets owned by NAMA, it is a reasonable indicator which shows clearly that any investor in Irish property since 2009 is almost certainly sitting on a substantial profit.

Undeterred, NAMA spokespeople continue to regularly make the bizarre claim to have maximised value for the taxpayer. They seem to believe that by accepting the highest bid on a given day for a given asset NAMA has fulfilled its mandate. The commitment to stubbornly model fish and ignore the moon seems unshakeable.

NAMA may argue that the prices it was forced to pay as at November 30 2009 were not market prices, but prices equating to so-called long-term economic value. These prices were certainly higher than that achievable by banks if forced to liquidate in the eye of the financial storm. However, the failure of NAMA to improve significantly on them in the environment of the past seven years is still a striking disappointment.

NAMA may warrant a stellar reputation for administration, public relations and auctioneering. For these activities, it may justifiably claim credit for getting up early in the morning. As a successful steward of assets for the taxpayer however, no such claim seems justified.

Indeed a fairer characterisation is that the fire sale has been spearheaded by the agency set up to avert it. The crystallised loss to the taxpayer of €42.2 billion on setting up NAMA is now likely to be broadly permanent. Given the asset environment, and the luxury of their long-term remit and ultra-cheap funding, I think Behan would feel they’ve spent too much time beneath the bedclothes regardless of what any future inquiries might find.

John Looby is a Senior Portfolio Manager at KBI Global Investors, a global investment manager based in Dublin. The views expressed are his own.

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