Lets say I'm a developer. A few years ago I borrowed €10m from AIB to buy a site, and I intended to build an office block. Construction costs, fees, etc. were €5m, and I was going to make €20m over seventeen years in rental. All fine so far, and I've made a €5m profit. But now, things have gone pear shaped. I'm left with a €10m site, and no way of borrowing the €5m I need to complete the scheme. Without a revenue stream, I can't even begin to pay back the original loan.
Thankyou for that explanation. I am familiar with the 'shipping dock' problem myself from my understanding of computer networks. Basically, where the dock side becomes full to capacity of containers in one harbour, but the entire contents of a shipping order have not been off loaded yet to the said dock. It results in a log jamb of the entire network system. Basically nothing can move off or on the dock, because there is no room to shift things about.
Your description of a typical Irish toxic debt, is quite similar to that from a system dynamics analysis point of view.
(Sorry for trying to sound so sophisticated, I am not really you know)
I manage to cling on for a year. I restructure my debts,
Lets look at consumer debt, something we are all familiar with nowadays. It can consist of many different problems: car loans, home mortgage repayments, credit cards, overdraft facilities, students loans etc, etc. Of course, the ads on the TV tell you, you can 're-organise' all of that into one easy payment per week, that is easy to manage. Effectively what the loan organisation is doing, is handling your administration for you, taking it off your hands. I call it 'managing your mess for less'. (That was always Sun Microsystem's quip about IBM)
In reality, NAMA is trying to re-organise all of those private borrowing, which were very inefficient and expensive in terms of interest etc and exposure. NAMA is trying to do on a gigantic scale what lenders do for consumer debt on a smaller scale. I imagine, that NAMA will focus on and tackle the kind of 'shipping dock log jamb' problem that you described so well above. NAMA is probably necessary to do that, to shake up the system again and clear the docks so to speak.
In fact, I’m making more than I thought I would because construction costs have fallen in the meantime and I only need to borrow €3m.
Some Irish developers were extremely lucky this way during the Celtic Tiger. Their inefficiency at securing planning permissions for sites, effectively meant that they held off long enough to make the windfall profits when the housing demand really spun out of control. So sometimes being a messer can be very profitable!
So... my question is this - What happens after the bit everyone is talking about - after the price is fixed? Is NAMA is basically just a big holding tank just to get debt out of the banks?
If that’s the case, there will be no role for anybody within NAMA except land assessors. There are no assets, and they will not be managed. A price will be set, and then NAMA will sit on the land until the developer is forced to move on it, because he's still liable for the original loan.
I recommend a reading of Bull, Balchin and Kieve's book on urban land economics. Available in good book stores. It is an old classic, but it does mention the problems that Great Britain had in terms of 'fixing' the price of land in the mid to later stages of the twentieth century. Successive Labour governments in Britain tried to do it, and most of them failed. There were a lot of interesting things that went wrong. I think in the end, the local authorities who had the authority to buy land at that fixed price, continually decided not to exercise their powers. Afraid that it might give negative signals to the private portion of the economy, not to get involved in that part of Britain as a developer etc.
An architect the other day mentioned to me a possible problem with NAMA. It might well prevent any private development in Ireland for a long time. Because NAMA is such a huge player in it all, there would be no knowing when NAMA would release a 'flood' of property onto the market, which would affect prices and plans of private developers etc. I could see the man's point to be honest. Who knows what could be waiting behind the hulking great dam walls that would be NAMA. That is why transparency and fore warning should be at the heart of NAMA and how it goes about things.
If things don’t turn around quickly enough we're twice as screwed. Because this time, there will be no NAMA to transfer assets into. It'll already be full. The banks will just do the same lending they did before because the hit they took first time around from NAMA wasn't big enough, and in the end, their only function is to make a tidy return for their shareholders.
That scares the living crap out of me too.
My conclusion I left the interviewer with on radio was basically, that no matter how you played the game in Ireland in property, no matter how well you played it, you were still bound to lose. It seems to me like playing against the house. Only in movies like Ocean's Thirteen does the punter get away with the money bags.
I think with Liam Carroll, when he had waded in for a cool billion, he was simply coerced by the banks to wade in even further. He was already compromised by that stage and losing a bit more wasn't going to improve or disimprove his reputation. So in total he ends up owing €2.3 billion. The radio interviewer pressed me on the point yesterday on radio and to be honest I wasn't prepared for that large a question. I don't know, if I ever will be.
If the above is the case of the Liam Carroll debacle, then the whole idea of NAMA stinks to high heavens. Worse than that, it provides no future lesson for which the Irish banks should live by. NAMA is by no means a done deal. The Irish people still have time to raise their point of view. I would fully support them in whatever direction they choose. But choose something now and stick to it.
You will see an August 5th entry at my blog entitled 'Renault Five'. Basically, there is no transparency whatsoever, in the €2.3 billion worth of dealings between Carroll and Irish banking institutions. If the Irish taxpayer looks set to take possession of that debt sum, then I believe the least it has earned the right to, is a full and proper account of exactly what happened. Otherwise, all of this time wasting by the Supreme Court about this rescue plan, or that rescue plan is simply a smoke screen in order to distract time and attention away from asking the real questions, the Irish tax payers has a right to ask now. What exactly did go on?
Brian O' Hanlon