NAMA for Dummies

Monday, 19 October 2009 00:00

As we knuckle down and hit the books before exams in May, the world outside of CIT will soon become a reality for many CIT Students. 

Everyone is aware that there is a recession, but what is really going on. Well lets start with something simple like NAMA (National Asset Management Agency), yes simple.

In the midst of the economic collapse of 2008, many Irish banks and building societies found themselves in the position of having lent money and provided mortgages to individuals and corporations that now looked as if they may not be able to keep up their repayments. Many of these debtors were involved in property development, and with the bursting of the property bubble found their portfolios to be worth much less than the value of the loans which they had taken out to finance their development. As a consequence, the chance that the banks would get back the money they had lent became more difficult to assess.

This left many of the banks in a difficult position. As part of the normal functioning of a commercial bank, it itself can receive loans from larger international financial institutions. However, with huge amounts of the Irish banks’ money tied up in “bad” loans that it was not clear would ever be repaid,  lending to them became a riskier proposition for these institutions, due to the possibility that the banks may find themselves lacking in funds to repay such loans (or indeed may collapse altogether).   The banks therefore found it more difficult to raise money to help them continue in their day-to-day business, and so could no longer afford to provide favourable loans and mortgages to individuals and businesses throughout the country. This was deeply damaging to the economy, and so the Government developed the NAMA plan.

The objective of the plan is to relieve the banks of the pressures of these bad loans, and so to free up money which the banks can then lend to individuals and businesses. This is achieved by purchasing the bad loans of  participating banks using taxpayers’ money. These bad loans are transferred to the ownership of NAMA, a government  body, which continues to pursue the holders of these loans and mortgages in the hope of having them repaid; the money collected by NAMA in this way is then returned to the state.

This approach was considered by the government to have a number of advantages in addition to freeing banks to lend. In order to maintain the health of their balance sheets, the banks would have required the bad loans to be repaid promptly in line with the original agreements between the banks and the debtors. As NAMA is backed by the resources of the state, however, it can afford to delay or space-out repayments of the loans if necessary, making it more likely that NAMA will recover a good percentage of the value of the loans. This, combined with the fact that NAMA purchases the loans from the banks for a substantial discount, makes it likely in the government’s opinion that NAMA will actually have turned a profit for the taxpayer by the projected date for the wind-up of the scheme in 2020.

What they said:

Brian Lenihen

• NAMA will ensure that credit flows again to viable businesses and households by cleansing the balance sheets of Irish banks. This is essential for economic recovery and the generation of employment. It will ensure that we avoid the Japanese outcome of zombie banks that are just ticking over and not making a vibrant contribution to economic growth. NAMA will ensure that credit flows again to viable businesses and households by cleansing the balance sheets of Irish banks. This is essential for economic recovery and the generation of employment. It will ensure that we avoid the Japanese outcome of zombie banks that are just ticking over and not making a vibrant contribution to economic growth.

What the opposition said:

• Fine Gael Leader Enda Kenny said “the Government's plans amounted to 8.5 on the Richter Scale and that the aftershock will be felt by future generations.”
• Labour's Joan Burton described the re-capitalisation and transfer of assets to NAMA as socialism for bankers and developers. She said the Irish taxpayer was seeing the costs and consequences of crony Irish capitalism.
• Sinn Féin Finance Spokesman Deputy Morgan said the Government was throwing money into the banks that could be better spent elsewhere.

CIT Students’ Union President, Gearóid Buckley acknowledged that it is action to get the country back on it’s feet but fears that NAMA has mortgaged the future of the country’s youth. 

“Whether NAMA will be good or bad for Ireland, it will inevitably play a role in the future of the state thus it has the potential to be a hangover for future budgets, which I pray will not hand excuses to any Minister for Finance to inject further cutbacks on the third level sector.”

NAMA to politicians is like what RAG Week is to students. This year’s national and local news has been dominated with the four letter word, a word which will grow further legs and arms over the coming years, but for now you have it simplified.  

Kevin McCarthy & Gearoid Buckley

This article was first published in the print edition of expliCIT - April 2010.