The last days of Namaland: Nama is a moral hazard generator

The National Asset Management Agency exists to destroy itself. That’s a funny job to have.

Nama was set up in the teeth of the crisis to save the banking system and the Irish economy. The idea was to move loans, both good and bad, off the books of the banks, swapping them for cash which would make the banks look healthier.

These loans were mostly secured on property in Ireland and abroad. Then Nama would pay off those it borrowed from to get set up in the first place and return something to the taxpayer, either by working out the loans themselves directly with the developers, or selling the loans (or the assets connected to those loans) off to someone else.

In the end, with all the loans sold off and the maximum amount realizable from these sales and disbursements remitted to the state’s coffers, Nama’s staff can head into the eternal sunshine of the spotless magnificent pension, closing the doors on a very odd institution now at the heart of the Irish economy.

The economic idea behind Nama is to avoid a catastrophic deflation in asset prices during a crash. This deflation is to be avoided, pretty much at all costs. Asset price changes affect economic activity through their effects on the balance sheets of firms, households, and financial intermediaries such as banks and pension funds, and as all of these are linked, a deterioration in one area – say commercial loans – hammers the balance sheets of both banks and financial intermediaries, and then the households get hurt.

By buying the most vulnerable loans and assets and effectively warehousing them for controlled release into the system later, Nama helped avoid the collapse of asset prices across the board, at least to some extent.

Wags joked as Nama was being set up in 2009 that the government should set up the tribunal of inquiry into Nama at the same time, to save time and money later on. This may well prove to be an opportunity missed.

As Nobel Laureate Joseph Stiglitz discussed in his testimony on behalf of developer Paddy McKillen in 2010, Nama’s structure actually mitigates against moral hazard. He wrote that Nama “has an incentive to seize bank assets that are performing well because this strategy allows it to create short-term gains for shareholders and demonstrate profitability to the public”.

Because Nama sells its loans in tranches, it must be mispricing some of these loans. Those who work in Nama are very skilled people, but they are not infallible. The sheer scale of the asset transfers means much value for the taxpayer is likely being destroyed. The cost of running Nama is also non-negligible. And that is the rose-tinted view of the whole enterprise.

Nama is a moral hazard generator. Moral hazard happens when the consequences of your actions are borne by others, incentivizing you to make further poor decisions. Moral hazard exists when I behave differently when I know I’ll get bailed out if I fail. At the individual household level, the argument goes that bailing out those stupid people who took out too much money for their homes constitutes moral hazard, because it encourages them to borrow more again later.

The exact opposite argument was applied to the Nama debtor, whose expertise was apparently needed to maintain the assets the newly-bought loans were secured against. Their time in Nama was not easy, but it was not hard the way being in hock to AIB when you’re a plumber from Tullamore in 2010 was hard.

The truth is that Nama debtors like D2 Investment’s Deirdre Foley and colleagues were emboldened by their Nama experience. One example is the recent liquidation of Cleary’s with the removal of 400 people from the workplace and the cost to the state several million euro in paying out statutory redundancy. That’s what moral hazard means: when the consequences of your actions are borne by someone else, you just keep on truckin’, and truckin’ harder. Expect more of the same from Nama’s other alumni as balance sheets improve.

Remember that Nama acquired these tranches of loans from our bunched banks at the very bottom of the market, and has been releasing them ever since. At one level it is no more complicated than buying low and selling high.

Nama made a profit last year of €458 million, from selling off loans it bought at the bottom of the market to international investors starving for yield in a low inflation, low interest rate environment.

Nama will produce about 13,000 residential and commercial units by the end of 2016. Nama’s control over the supply of housing is immense – more than 40 per cent of all of Dublin’s new housing supply in 2014. Nama has the funds, the market power, the secrecy and the control over the stock of available inventory to do anything.

And I mean anything. Nama could have been responsible for a revolution in social housing, planning, legislative reform, and social cohesion. Imagine Nama parks the length and breadth of the country, not the ‘palaces of the poor’ that John Quincy Adams and others spoke of, but something actually transformative. Instead we have no idea, no idea at all beyond what they choose to tell us, what they are doing.

We have no idea whether Nama’s 2014 profit was a good number, or a bad number. It sounds massive – who wouldn’t want €458 million into the state’s coffers? But in the end the scale of the enterprise and the secrecy with which it operates means we just don’t know.

You may choose to believe the worst, or not. It is up to you.