In the shadow of Ireland’s last vulture funds

Last week's decision by the Irish government to have a judicial inquiry into NAMA’s sale of the Project Eagle loans is another case of us not being able to see the wood for the trees.

Or you could call it another example of us trying to shut the stable door after the horse has bolted. Or you could say it's throwing good money after bad. And all of these descriptions would be true.
It's easy to get brain freeze when discussing this stuff, with billions being tossed around like snuff at an Irish wake -- the wake in question being the temporary demise of the Irish economy when the property market crashed nearly 10 years ago.

So let me remind you quickly that NAMA stands for the National Asset Management Agency, the "bad bank" set up by the state in 2009 to take the garbage property loans out of the Irish banks to stop them going absolutely bust.

By the end of 2011 NAMA (which had become the biggest property company in the world!) had bought in some €74 billion in property loans from the five banks and loan providers in crisis for €31.8billion, an average discount of 57 percent. The idea was that NAMA would hold these loans for 10 years or more, until the property market had recovered to some degree.

During this time, some of the developments behind the loans could be completed by NAMA, but most of the loans would be sold back into the market as property prices recovered. This was a massive undertaking and NAMA, set up as an independent organization at arm's length from the state to stop politicians meddling in individual sales, became a huge player in the property market here.

One thing soon became clear. Whether you were one of the main speculators and developers who had billions in bad loans, or a builder with just a few million in bad debt, or even an individual with a home mortgage in default, you had little or no chance of benefitting from NAMA.

There was little chance of buying back your loan at the heavily discounted rate that NAMA had paid for it. Or at the even more discounted rate at which NAMA had sold the loan on to some vulture fund.

Some of the biggest developers were hired by NAMA to oversee the completion of their developments. They became employees, with no stake in what they used to own.

But the vast bulk of the property loans were bundled into huge baskets of loans worth billions or hundreds of millions and these were sold on to major international funds, mainly the leading American vulture funds.

From NAMA’s point of view, working through thousands of individual loans was never going to be practicable. A quicker, cleaner solution for NAMA was to sell on huge baskets of the loans to the funds and leave them to deal with the problem of recouping money from individual borrowers, big and small.

To tempt the funds into the market, NAMA offered even more discounts on what it had paid the banks for the loans which, as we have said, were already discounted by more than 50 percent.
Within NAMA, these huge bundles of loans were given names. Which brings us to Project Eagle, the name given to the bundle of around 900 loans made by the Irish banks on property mainly in Northern Ireland.

An American fund called Pimco made known its interest in acquiring the Project Eagle bundle and became the opening bidder, putting in an offer of £1.3 billion. Pimco had appointed two law firms, one in America and one in Northern Ireland, to act on its behalf.

Also involved in trying to push the deal through was a former member of NAMA’s Northern Ireland advisory committee, a businessman called Frank Cushnahan who was associated with the Northern law firm and also was close to senior figures in the Democratic Unionist Party, the loyalist party leading the government in the North.

Pimco had set aside around £15 million for legal and other fees for the deal, but when it became aware that around one-third of this was to go to Cushnahan as some kind of fixer fee it became alarmed that this might be in breach of the Corrupt Practices Act in the U.S. So it pulled out.

NAMA had lined up nine bidders, but the deal was eventually done in 2014 with another big American fund called Cerberus, for £1.24 billion pounds (about €1.6 billion). Unusually, Cerberus was also represented by the same two law firms that had acted for Pimco and seemed to be determined to get a deal over the line.

The sale of the Project Eagle loans subsequently became the most controversial part of all of NAMA’s operations when information leaked out here that millions had been secretly set aside, some of it in an Isle of Man bank account, for fixer fees.

Space does not allow us to go into the full details of this complicated story, which involves politicians, lawyers and business people here and in the U.S. But it can easily be accessed on line by searching under Project Eagle.

It is, as we said, hugely controversial and could have enormous consequences for NAMA -- and some individuals. The financial watchdog on state spending here, the Comptroller and Auditor General (C&AG), has been investigating the Project Eagle sale for over a year and last week issued its finding. The C&AG report said that NAMA could have got an extra €220 million for the loans if the sale had been handled differently.

This became a big news story last week, and it was following this that the government announced that a judicial inquiry would be held. Which brings us back to the wood and the trees.

No one is saying that €220 million is unimportant. But Cerberus paid €1.6 billion. And the original "book" value of the loans was €6 billion. So getting over-excited about €220 million is surely a case of not seeing the wood for the trees.

As far as this column is concerned, the really important point in all this is not the relatively petty graft that may have been going on in the Eagle case. It is what happened to the original "book" value of the loans of around €6 billion euro.

Money does not vanish into thin air. The Irish taxpayer ended up on the hook for this, since all the bank bondholders and bank borrowings were paid back in full with money from the bailout, via the Irish government. And us taxpayers will be paying off this debt for years to come.

The bigger question is how good NAMA has been at recouping as much money as possible for the taxpayer. Now that the Irish property market -- and the economy -- are recovering steadily after the crash, the huge discounts applied to bundles of loans sold by NAMA to the big international funds do not look good. They smack of desperation that may have been unnecessary.

Of course NAMA says that it got the best possible deal at the time each bundle was sold, and that the whole business of estimating future property values is a moving target that keeps changing.

They also point out that the so-called vulture funds were the only ones with the interest and the resources to do deals at the time.

There is some truth in this, but even so we have seen numerous examples of these funds literally doubling their investment in a few years. They identified targets and swooped in (like vultures), buying from NAMA on the cheap, holding for a few years and then selling back into the market at a huge profit.

It's what vulture funds do. The question is whether they were able to buy too cheaply.

Part of the reason may have been NAMA’s hurry to get as much sold as soon as it can. The Minister for Finance Michael Noonan has let it be known that he wants NAMA to wrap up as soon as possible, and that clearly puts pressure on the body to do deals sooner rather than later. They are about halfway through selling the entire amount of loans they took on. They have sold the best half and the other, less attractive half will be far more difficult to shift, so NAMA will be operating for at least a few more years.

In the case of Project Eagle, NAMA had the added pressure of wanting to make a clean and hasty exit from the North, where there was potential for resentment against an organization from the south 'interfering" in the property market in the North.

Added to this is the much slower recovery in property prices in the North and the unknown fallout from Brexit on the way. NAMA insists it got the best deal possible for its bundle of Northern loans.

One aspect of all this that is truly sickening is the way some of the vulture funds that have made huge profits on property loans here have managed to avoid paying any tax. They were able to do this by setting up their operations here as Special Purpose Vehicle companies that qualified for Section 110 treatment, a system that was originally set up to attract securitization business into the Financial Services Center in Dublin. Section 110 operations frequently pay no tax.

So not only have some of the vulture funds made a killing on Irish property, but they also have paid no tax on their profits. Only in Ireland, as they say!

One other thing. NAMA frequently says it is set to make a profit of a few billion on its operations, money it will be returning to the state. But this "profit" is on the discounted price it paid to the banks for the loans, not the original "book" value of the properties. The NAMA outcome will actually be a huge loss, which is being paid for by the ordinary taxpayer here.

There is huge resentment here at all this, not least because of some individual cases which have gained wide coverage.

Some home owners have found that their distressed mortgages were sold on to vulture funds at less than half the original loan value. The same applies to some small builders who got into trouble and now find their loans were bought up by vulture funds for around 40 percent of the "book" value.

These people never got a chance to buy back their loans at these levels. Instead they still owe the full amount of the original loan. And they are being squeezed to pay up as much of that as possible.