NAMA - how much write-down?

One for the greatest unknowns about the NAMA escapade is the proportion of loans that will be recovered by this newly conceived Naughty Bank (increasingly naughty by the day). Under the Plan, the loans to be acquired will have a nominal value of €77bn and will be purchased by John Q Taxpayer for €54bn. The Draft Business Plan for NAMA assumes that €62bn of the €77bn will be reapid - an 80% recovery rate. 62 is greater than 54, brilliant, we're laughin'. Let's just ignore for the moment the matter of interest on this €77bn pile of debt, which is a tidy sum itself, which may or may not be paid.

Now, you may have read in the press that NAMA is going to make us taxpayers a tidy €5.5bn in profits. That of course depends on the ability to recover from the various borrowers 80% of what they borrowed. If we get only 70% paid back, that is €7.7bn lost and there goes the profits and up go the taxes. Not much wriggle room in those assumptions, I think you will agree. I wonder what type of robust analysis has been done to arrive at the 80% recovery assumption. How certain can we be that it will be achieved. Well, here it is:

"Over a five year period in the early 1990s, one UK bank experienced a default rate of less than 10% on its whole book. Given the concentrated nature of the prospective NAMA portfolio and the risk of a prolonged recession, a 20% default rate assumption has been made."

Looks impressive, doesn't it? We have found out via Karl Whelan at irisheconomy.ie that this "one UK Bank" was in fact Barclays. So let's have a little gander at Barclay's accounts.

In the five years between 1990 and 1994 inclusive Barclays recorded realised losses on write-offs of £7.0 bn. At the start of 1990 Barclays had a total loan book of £77.7bn. Now what I am about to do is a massive fudge, as it assumes that all the write downs occurred on loans on the balance sheet at the start of 1990. But I am writing this on the hoof and in the spirit of NAMA I don't think it appropriate to get to pernickety about precision.

Barclays realised default rate was 7/77.7 = 10% near enough for any Naughty Bank.

Excellent. This seem quite robust then. But, just for fun, let's dig a fraction deeper. Let's look at the type of loans NAMA is taking on. This is taken from the Draft Business Plan again and is a broad breakdown by borrower:



















Doesn't look great to me. Lent to people to develop property assets, to buy land to develop property assets and to buy things associated with buying land and developing property assets.

I think we can safely say that there is a comprehensive diversification of exposure right across the property development/construction sector of the Irish economy. It is the contention of the government that this Naughty Bank will recover all but 20% of lending from this portfolio of loans.


Now let's look what Barclays did in 1990:


















Yes. Do you see that pale blue slice around 6 o'clock. That is the amount that Barclay's accounts for 1990 identify as being to customers in "property and construction". The rest is spread all over the place (what were these guys thinking?????).

Do you want to see where the UK economy generated its income around 1990? Here is a breakdown of Gross Value Added by sector. Not directly comparable, but the best I could do on my budget (45 minute lunch break):
















Note that I have taken out the public sector as best I could. Also note, that I have built in a novel "Individual" sector; this doesn't exist of course, but I need some device to compare with Barclays lending. I could have allocated that lending across the Barclays book - and maybe should have, but the affect on what this data is telling us should be the same.

Now look at those two compared. The proportion of Barclays loan book exposed to any sector minus the size of that sector in the economy by income).

It looks like this:

















You can see the affect of my fudge. It assumes that Barclays exposure to individuals was neutral on a sectoral basis (i.e. it wasn't all to people in finance for example). You can also see the overweight and underweight position of Barclays' loan book. A maximum exposure of around 10% to broad sector. Underweight manufacturing and finance and overweight services and property and construction.

That isn't too bad I would suggest, when you compare with NAMA, which is 100% overweight property and construction.

Now, this data isn't particularly robust. But it is certainly more detailed than that revealed in the NAMA draft Business Plan, which is a type of finger in the air exercise. But I think it tends to suggest that if Barclays managed to confine their losses to 10% of their loan book with a good amount of diversification, then NAMA will have one hell of a time trying to confine its losses to 20%. Even 30% seems a bit racy to me.

You can make up you own mind. Then cross your fingers. That is what the architects of this seem to be doing.