Spark for chaotic fire sale goes all the way to ECB

Frankfurt’s refusal to act as lender of last resort spurred Nama’s decision to sell into a weak market, says Colm McCarthy

NAMA was established in late 2009 to buy property-related loans from Ireland’s bust banks at a discount. The intention was that the assets be warehoused and fed gently into the market, avoiding a chaotic fire sale.

Nama was given a 10-year time horizon to dispose of its monster portfolio and hired hundreds of staff and professional advisers for the task.

It paid the banks with government-guaranteed paper which they could use to borrow real money from the Irish Central Bank, with permission from the European Central Bank in Frankfurt.

All of this was a necessary step in cleaning up the balance sheets of the banks, which also received guarantees and direct injections of capital borrowed by the government, adding to Ireland’s exploding debt pile.

The overall strategy failed in November 2010 when the State was forced into a bailout by the troika of the IMF, the ECB and the European Union.

Nama’s Northern Ireland disposal realised about one-quarter of the amounts initially advanced by four Irish banks to borrowers there, and Nama took a loss on the heavily discounted price it paid the banks for these loans.

Nama’s adventures in Northern Ireland are now the subject of investigations which could lead to prosecutions in Ireland, the UK and the US. Revelations by the BBC Spotlight programme have triggered investigations by the PSNI and by the UK’s National Crime Agency, and Nama has made a complaint to An Garda Siochana.

Improper behaviour extending to bribery and corruption may have occurred on both sides of the Irish border. Last September, the US Justice Department issued a subpoena seeking information on the deal from Cerberus Capital Management, the distressed asset fund which bought the loans from Nama. Both the Securities and Exchange Commission and the FBI are involved actively in the US investigation.

The price paid by Cerberus was too low according the Comptroller & Auditor General in Dublin, a claim disputed by Nama, which insists it got the best price for the taxpayers.

The US investigators have no duty to worry about Irish taxpayers: they care more about a 1977 piece of legislation called the Foreign Corrupt Practises Act, enacted during the Carter administration.

The FCPA makes it illegal for US companies, or foreign companies operating in the US, to bribe officials of foreign governments, and there have been numerous jail sentences and fines running to hundreds of millions of dollars on US, European and Japanese companies.

The Department of Justice in Washington first took an interest in the matter after a bidder called Pimco withdrew from the Nama process due to concerns about ‘success fees’ that its officers had promised to various people in Northern Ireland.

The compliance department at Pimco drew the matter to the attention of Nama and the firm dropped out of the bidding. Success fees for professional advisers are not illegal and often feature in legitimate transactions. But they can also be used as a conduit for illegal payoffs, contrary to the provisions of the FCPA.

The successful bidder, Cerberus, retained the same advisers as had been promised the success fees by Pimco. It appears that fees were paid when Cerberus won and the intended recipients may have included public officials in Northern Ireland.

Hence the subpoena issued by the US Department of Justice and the possibility that US law may have been broken.

None of these matters can usefully be pursued by the political process. If laws have been broken in Northern Ireland, the Republic, or in the US, the investigative processes already in train will lead to prosecutions if the evidence can be found.

There is, however, an important issue for any inquiry that does not cut across the work of the various investigations. This is the question of the extent to which the Nama timetable was accelerated needlessly in a manner which damaged the return to the taxpayer and the solvency of the Irish State.

The Minister for Finance will be quizzed at the Public Accounts Committee on this matter and both Nama and the Government have been making a virtue of the pace at which the various loan and property portfolios have been sold. The full 10 years originally envisaged is unlikely to be utilised. The timelines are important. In the immediate aftermath of the troika bailout, and through 2011 and 2012, there were doubts that the combination of emergency official loans and budget cutbacks would repair the damage, permitting Ireland to exit the three-year programme and regain the ability to finance itself on the markets.

In the event things worked out, Ireland exited the bailout at the end of 2013 and the State’s finances began to stabilise, as did the health of the rescued banks.

The acute phase of the Irish financial crisis was over by 2013. So why was there pressure on Nama to sell assets quickly, in competition with banks outside Nama which were also selling property-related assets in Ireland and with competition elsewhere for the attention of distressed-asset funds? At least, in part, the answer can be located, not in Dublin or in Belfast, but in Frankfurt.

The IMF releases detailed minutes of its executive board meetings with a five-year lag. At the meeting on December 4, 2010, the first after the bailout was inked, the staff report contained the following critical passage:

“Ireland is expected to have a large balance of payments need over 2011–13, in particular, to finance the build-up of reserves to improve banks’ ability to meet their large external debt rollover needs and prevent substantial capital outflows. The programme aims at gradually restoring market access, ensuring that any financial account shortfall is temporary.

At the same time, the ECB would need to continue providing liquidity support to the domestic banking sector, as needed, over the course of the programme.”

As has been widely reported, the ECB did not deliver. There was constant pressure to reduce liquidity support, threatening the success of a programme to which the ECB was supposedly committed and in whose supervision it participated on the same side of the table as the IMF.

The ECB declined to act as lender of last resort into a programme which, in late 2013, was clearly succeeding despite the lack of liquidity support.

The matter is referred to on page 43 of the Comptroller & Auditor General’s report. This is an extract from a Nama board document dated June 2013: “The more pressing concern for Nama is that there is no certainty that it can continue to fund itself by reference to ECB floating rates.

“The ECB will continue to demand repayment of Nama senior debt so that the banks can reduce their reliance on ECB funding.”

Nama needed to sell assets quickly in order to retire this debt, replacing ECB loans to the banks with the cash realised.

The ECB’s behaviour in this matter was contrary to the advice of the IMF at the inception of the programme and spurred Nama’s decisions to sell into a weak market.

Mario Draghi had succeeded Jean-Claude Trichet as ECB president when these events took place. He should be asked to explain the ECB’s damaging behaviour to the inquiry.

‘The acute phase of the crisis was over by 2013. So why was there pressure on Nama to sell?’