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COMMITTEE OF PUBLIC ACCOUNTS debate -
Thursday, 18 Nov 2010

Special Report 76 of the Comptroller and Auditor General: National Asset Management Agency - Acquisition of Bank Assets

Mr. Frank Daly (Chairman, National Asset Management Agency) and Mr. Brendan McDonagh (Chief Executive, National Asset Management Agency) called and examined.

Before commencing, I advise witnesses that they are protected by absolute privilege in respect of the evidence they are to give this committee. If they are directed by the committee to cease giving evidence regarding a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise nor make charges against a Member of either House, a person outside the Houses, or an official by name or in such a way as to make him or her identifiable. Members are reminded of the provisions within Standing Order 158 that the committee shall also refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government, or the merits of the objectives of such policies.

I welcome Mr. Frank Daly, chairman, and Mr. Brendan McDonagh, chief executive, National Asset Management Agency. This is the first occasion in which the Committee of Public Accounts has had an opportunity to examine the NAMA project that is up and running for almost a year. Mr. Frank Daly is a seasoned campaigner before the Committee of Public Accounts from his days as chairman of the Revenue Commissioners. As this is Mr. Brendan McDonagh's first occasion to visit us, I wish both officials well in their tenure. Their public duties are onerous and both are extremely dedicated to performing those public duties in clearing up a banking system that lent recklessly, especially to property developers. Needless to say, many of the individuals responsible are now living abroad or enjoying large pensions but that is for another day. I ask Mr. Frank Daly to introduce his officials.

Mr. Frank Daly

We are accompanied by Ms Aideen O'Reilly, head of legal and tax, and Mr. John Mulcahy, head of portfolio management, in the National Asset Management Agency.

Do we have an official from the Department of Finance?

Mr. Aidan Carrigan

I am from the Department of Finance, financial services division.

You are all welcome. I invite Mr. John Buckley to introduce Special Report 76.

Mr. John Buckley

The National Asset Management Agency was established in December 2009 and its first accounts will cover the period up to 31 December 2010.

The functions that NAMA performs are as follows: to acquire loans made by banks to fund property development; protect and enhance those loan assets and, in practice, the underlying collateral associated with the loans; and engage in workout arrangements designed to dispose of the loans or the underlying assets.

The NAMA scheme required the approval of the European Commission. This approval was given in February this year and the transfer of bank assets from the five financial institutions participating in the scheme commenced about a month later.

Up to 11 November 2010, NAMA has acquired €53 billion in loans or nearly three quarters of eligible loans from the five financial institutions that participated in the scheme. Some €21 billion of this has been recently transferred to it on an accelerated basis in advance of the completion of due diligence work. Ultimately, around €73 billion in loans will transfer to NAMA. Some 95% of the payment is made by way of securities guaranteed by the Minister for Finance and the remaining 5% by way of subordinated debt. Interest payments on, and the ultimate redemption of, the subordinated debt are dependent on NAMA's financial performance.

NAMA is one of a set of measures designed to stabilise banks and the wider banking system. Other measures include deposit and liability guarantee schemes and addressing capital requirements through capital injections by the State.

The information contained in the report is based on my office's preliminary examination carried out as part of interim work designed to feed into the financial audit of the 2010 accounts. Detailed testing of controls, transactions and balances is continuing. The report was produced at this early stage and in advance of the account production because of the materiality and significance of NAMA's operations. It outlines how bank loans eligible for transfer were identified, NAMA gathered and validated information on the loans and borrowers and valued the loans it acquired. The valuation basis was largely determined by ministerial regulation.

Looking briefly at the amount paid for the first tranche of loans, it is the lower of the balance outstanding on the loan or, alternatively, the present value of underlying collateral uplifted for long-term economic value. In practice, the bulk of loans taken over are valued on this adjusted collateral basis. What the analysis of the first tranche of acquisitions shows is that the payments made by NAMA represented around 50% of the amount owed by the borrowers. This percentage has dropped further after subsequent transfers and stands at around 47% after transfer of the first three tranches; the funding shortfall following the transfers must be absorbed by banks or made good by capital injections. In September 2010 the State was committed to capital injections of up to €46.26 billion in order that banks could meet the requirements set by the Financial Regulator; the price paid was adjusted by an amount designed to cover the cost of due diligence and future enforcement. We estimated that the amount retained to cover enforcement would pay for a full enforcement process on around 25% of the collateral.

Compared with the price that would be paid in the case of an immediate sale of the loans, it is estimated that the amount paid represented State aid of approximately 28%. This is partly explained by the 11% uplift to long-term economic value, but it is also due to the fact that higher discounts would pertain if the assets had been sold immediately in an impaired loan situation.

In regard to the actual determination of the price paid for the loans, it involved uplifting the assessed value of the property collateral to a long-term economic value and, thereafter, estimating the present value of the assumed cash inflows to NAMA. These cash flows would include the cash that would arise on the realisation of the loan collateral, as uplifted, and any interim rental streams. The present value was derived using discount rates and timeframes set by ministerial regulation.

The report also sets out the steps taken by NAMA to introduce structures and systems to position it to govern and manage its operations and resource the agency. While these are still evolving, the steps taken to date have been reasonable.

The bulk of procurement of services has been by open tender. The report draws attention to just one instance of payment in excess of the agreed contract level, as well as the explanation which was provided for this departure.

Overall, the report has reviewed the arrangements for the first phase of the NAMA process, that is, the loan acquisition stage. Future audit reports will review the arrangements to engage with debtors, whether directly or under servicing agreements with banks; the transactions associated with acquired property; how NAMA will fund the work-out process; and the overall financial performance of the NAMA group of companies.

I invite Mr. Daly to make his opening statement.

Mr. Frank Daly

I thank members for giving me this opportunity to address them and provide them with a progress report on what NAMA has achieved to date and what now needs to be done. The chief executive, Mr. McDonagh, and I would like to make some comments before we take questions from members.

This is a timely meeting because NAMA is coming to the end of the first critical phase of its work, namely, the acquisition from the five participating banking institutions of about 11,000 problem loans with a collective value of approximately €73 billion. This part of our work will be concluded in the coming weeks and we will then continue to focus on the repayment of these debts by the borrowers.

Members will be very familiar with the background to the establishment of NAMA and I do not intend to rehearse it again but, ultimately, our role is to remove toxic lending from the Irish banking system in order that key institutions can play the critical role we require them to play in the national economy. It is timely to recall that the banks successfully played such a key role for many many years before the collective delusion which seems to have gripped them in the middle of the past decade. I believe they have put that delusion behind them and are now committed to playing the type of responsible and strategic business role that will help to sustain the country in future years.

NAMA had two major priorities in its first year, the first of which was to acquire the eligible assets from the participating institutions. The Minister indicated in his statement on banking on 30 September that NAMA would complete the transfer of all loans by the end of the year. We have made good progress; as of today, NAMA has acquired loans with nominal balances of over €53 billion and issued NAMA bonds to a value of €23 billion to the five participating institutions. We expect that by the time the transfers will have been completed next month, it will have acquired loans with nominal balances of €73 billion and issued over €30 billion to the institutions. The discounts on these loans have been in line with the estimates provided by the Minister in his statement. The full due diligence and valuation process will be completed in the first quarter of next year and, to the extent that NAMA may have overpaid or underpaid for the acquired portfolios, appropriate adjustments will be made at that stage.

NAMA's second major priority was to put in place appropriate structures, strategies and policies to deal with debtors whose loans we acquired. Immediately following the board's establishment in December 2009, we set up a number of key board committees, namely, the credit, audit, risk and finance and operating committees. They were supplemented by two advisory committees, the Northern Ireland advisory committee and the planning advisory committee.

I am pleased to say the board and its committees have been very active and committed in the conduct of their responsibilities; altogether, in the 11 months since it was appointed, we have had in excess of 100 meetings of the board and its key committees - some 83 committee meetings and some 20 meetings of the full board. Taking account of the up-to-date figures as of this morning, there would have been in excess of 107 meetings in all.

A significant part of the work of the board has been to determine policy on debtors and assets. In our business plan published at the end of June we outlined a number of the strategic and policy decisions we had adopted, a number of which deserve to be highlighted in the context of this discussion.

One key principle adopted by the board was that NAMA would pursue all debts and debtors to the greatest extent possible. NAMA's core commercial objective would be to recover for the taxpayer whatever it had paid for the loans, in addition to whatever it had invested to enhance property assets underlying these loans, but it is important to emphasise that NAMA, having recovered its outlay, will not absolve debtors of their further obligations. Debtors will continue to be fully liable for the debts they have incurred. Where appropriate, NAMA may agree to debt rescheduling and loan restructuring in the case of debtors considered to be viable within a three to five-year timeframe, but any debtor who expects the taxpayer to assume his or her debt burden will not be indulged.

In considering the business plans of debtors we have adopted some very clear principles. While we have said we will work with debtors, we will only do so where that is clearly the best commercial approach to take in order to recover money for the taxpayer. The decision will ultimately depend on the realism debtors show in their business plans. For example, we have only accepted plans which set out a target for a significant reduction in debt over a three to five-year time horizon. NAMA is not interested in plans which envisage stabilisation or a modest reduction in debt in the medium term. Debtors must set out a target for a significant reduction in their debt in a three to five-year timeframe and, for most debtors, this means submitting a list of assets which will be sold to raise cash to repay debt. Where a debtor cannot convince NAMA that he or she has the financial and-or managerial capacity to meet a debt reduction target, the only option is foreclosure. Difficult as these decisions are, we have not shirked from them. We understand the real consequences for many; therefore, I need to assure the committee that we take such decisions only after the most rigorous and objective evaluation.

We have also insisted that debtors produce a comprehensive list of all their assets, including assets which have been transferred to spouses or others in recent years. There are means by which we can independently check the veracity of these statements.

We have insisted that debtors reverse asset transfers and grant NAMA legal charges over unencumbered assets. We have been assiduous in acquiring personal guarantees provided by debtors to the institutions, even if such guarantees are currently worthless and we have, therefore, not paid anything for them. We intend to enforce these guarantees to the greatest extent feasible. Each debtor's circumstances are considered on their own merits. However, I assure members that any debtor who considers that he or she is entitled to place certain assets beyond the reach of NAMA while seeking taxpayer support is seriously deluded.

It is important to point out that in circumstances where it is obvious that the purpose of a transfer of assets, whether to a spouse or otherwise, was a pre-emptive attempt to put assets beyond the reach of NAMA, we have considerable leverage in dealing with such creative manoeuvres. There are a number of statutory remedies available to us, including the Conveyancing Act, the Land and Conveyancing Law Reform Act 2009 and some provisions of the National Asset Management Agency Act. Section 211 of the latter Act provides that NAMA may apply to a court to declare a disposition to be void if it can show that the effect of such a disposition was to impair the value of an eligible bank asset or any rights that NAMA would, but for that disposition, have acquired.

Another issue which has attracted some recent comment is the level of salary which may be permitted to debtors in those cases where NAMA has agreed to work with them in order to secure repayment of their debts. We realised early in our engagement with debtors that many of them had been allowed by their banks to develop an unsustainable and unrealistic level of business overheads out of which, in many cases, they were funding extravagant personal spending. As part of the debtor business plan approval process, we have typically directed debtors to reduce their business overheads to between one quarter and one half of what they were. These reduced overheads must cover a broad array of expenses, including salaries for relevant executives.

NAMA does not specify the salary of any individual. However, where a draft plan suggests to us that the salary proposed for a debtor or his management team is in excess of their likely contribution, we will not accept it. The key issue for NAMA is whether leaving a debtor or his team in place makes commercial sense compared with the alternative options, including insolvency. In other words, what is the added value that a debtor can be expected to deliver in terms of achieving the financial and other targets set by NAMA?

I wish now to refer to NAMA's accountability. The board of NAMA must carry out its functions independently but is heavily guided by its obligations under the Act and is subject to a high level of public accountability. I, as chairman, and Mr. McDonagh, as chief executive, will appear before this and other Oireachtas committees when required to do so. NAMA's accounts are comprehensively audited by the Comptroller and Auditor General, who has a permanent team of officials based in the NAMA offices. These officials have unrestricted access to all our records and files. NAMA must report to the Minister on a quarterly basis and provide detailed information with regard to its loans, its financing arrangements and its income and expenditure. No other commercial semi-State body of which I am aware produces such quarterly accounts.

NAMA's annual accounts will include detailed information regarding debt securities issued and redeemed, advances made and its asset portfolios, in addition to the normal profit and loss accounts, balance sheets, administration costs, etc. The board is also required to submit to the Minister an annual statement setting out its proposed objectives for the forthcoming year. This statement includes the scope of activities to be undertaken, NAMA's strategies and policies and its proposed use of resources. The process of loan valuation and acquisition is also being audited on behalf of the European Commission.

There is hardly an entity, public or private, which is subject to as much scrutiny and oversight as NAMA. That is absolutely as it should be. NAMA is managing a huge financial exposure on behalf of the taxpayer and the level of public scrutiny to which it is subject is fully justifiable on that basis. However, NAMA is also a commercial entity and has a remit to produce a return to the taxpayer on its management of a loan portfolio in excess of €70 billion. It is required by law to operate to a commercial mandate and that means being commercially astute. For that reason, NAMA cannot disclose details of individual debtor circumstances, however much some commentators might wish it.

NAMA, over its lifetime, will be engaged in extensive negotiation with a wide array of other commercial interests, including those interested in purchasing loans or properties from it. It would be commercial folly for NAMA to reveal its hand in such negotiations through full disclosure of the detail of its loan and asset portfolios. Such disclosure would fundamentally endanger its prospects of achieving its financial targets and of obtaining the best return for taxpayers.

As stated earlier, NAMA has acquired €53 billion of loans to date and expects to have acquired €73 billion within a few weeks. This represents a very substantial injection of liquidity into the system. The benefits to the banks of the NAMA process are significant. They reduce their risk-weighted assets and remove from their balance sheets loans that generally cannot be used as collateral to access liquidity with central banks or market counterparts. Instead, they receive Government securities which can be used for such purposes.

In the context of its initial key objective of acquiring property-related loans and providing the necessary funding to the banking system, NAMA will, by and large, have completed its work in the coming weeks. It will then be a matter of focusing our full attention on recovering for the taxpayer as much as possible of the €73 billion owed by debtors. We will be managing directly the debts of the largest 170 debtors whose aggregate NAMA debt is approximately €58 billion. The other 650 debtors - with in the region of €15 billion outstanding - will be managed on our behalf by the participating institutions in line with authority delegated to them by NAMA.

In our business plan, which was published in late June of this year, we indicated that our central case scenario was that NAMA would, over its lifetime, produce a net present value, NPV, gain of €1 billion. At this stage, we have no compelling basis for revising that estimate. However, the board is likely to review some of the business plan projections in light of the final figures for acquired loans and associated acquisition values and in the context of the impact of the Minister's decision that NAMA should not acquire the debts of those whose exposure with AIB and Bank of Ireland is less than €20 million. While it is not possible before the completion of the review to be definitive on the matter, I do not believe that said review will have a negative impact on our projected NPV gain.

NAMA has proved its objectivity and independence in its work to date, not least in its rigorous application of the EU-approved methodology for the valuation of acquired assets. I note that we seem to hear much less about NAMA overpaying for loans. If anything, the tune has changed to suggesting that we are underpaying. It is fair to say that participating institutions and debtors which have engaged with us have not found it to be a particularly cosy experience. These institutions and debtors have found us to be robust, professional and intolerant of wishful thinking. The days of "hope value" are over. The days of realism are here. There are those who now say that we have been too harsh in our valuations. This is also untrue. If NAMA had never been established, the banks would still have been obliged to address the fact that the scale of their property lending was well in excess of the value of the associated underlying collateral. All NAMA has done is to force them to recognise this sooner rather than later.

The NAMA process is equivalent to removing a tumour from the system - the initial impact is traumatic but it is a necessary prerequisite for long-term recovery. It is not for me to comment on the efficacy of approaches that have been adopted by other countries. However, I would state that we have been realistic enough to face up to our difficulties at an early stage and to apply the necessary remedial action ahead of many of our peers. This has been well recognised and appreciated abroad. I note, for example, the recent comment in The Economist to the effect that, in the long run, Ireland’s response is the better one in that it forces banks to clean up their balance sheets vigorously rather than put off dealing with their problems or to insure impaired loans and just hope they improve. I thank the Chairman for the opportunity to address the committee.

I thank Mr. Daly. May we publish his statement?

Mr. Frank Daly

Yes.

Will Mr. McDonagh make his opening statement?

Mr. Brendan McDonagh

I thank the Chairman and members for the opportunity to address them on the establishment and operation of NAMA and the special report of the Comptroller and Auditor General.

I very much welcome the first report of the Comptroller and Auditor General which was published on 2 November last. It shows the huge amount of work done by NAMA's board and its staff in order to make the agency operational within a short period. There is a misconception that NAMA has been around for a long time but the reality is that it only really came into full operation at the start of 2010, following the appointment of the board. NAMA, therefore, has only been in existence for 11 months and by the time it is one year old, it will have acquired €73 billion of eligible assets from the five participating institutions. This is a remarkable speed of execution, especially since European Commission approval was only granted at the end of February. The Comptroller and Auditor General's report highlights the huge amount of work that has gone into the operational set-up, due diligence, oversight by the Commission and the strong corporate governance system put in place by the board. I express my personal gratitude to the board and the officers of NAMA and the NTMA for the tremendous effort they have applied to making NAMA operational.

It is important to remember that the eligible loan assets to be managed by NAMA were created by the financial institutions and that NAMA's role is to deal with the aftermath of this injudicious lending. The Irish banks are not alone; the majority of banks in the developed world were also aboard the high octane credit bubble. NAMA is, first and foremost, an asset management agency, established with the aim of transferring certain higher risk property-related exposures from the balance sheets of the participating financial institutions in return for Government guaranteed securities. We will manage these loans with the aim of achieving the best possible return for the taxpayer in a seven to ten-year timeframe. Replacing these property-related loans with Government securities will help to remove uncertainty about the soundness of banks' balance sheets, will provide the institutions with much needed liquidity and should make it easier for the institutions over time to access capital for some and liquidity for all in the international capital markets.

The loan transfers to NAMA will see approximately 11,000 individual loans with a nominal value of €73 billion acquired for a consideration which is expected to be of the order of €31 billion, representing an average discount of about 58%. Our sole focus at NAMA is to bring proper and disciplined management to these acquired loans and borrowers with the aim of achieving the best possible return and to protect the interests of the taxpayer. To date, we have held many face to face meetings with the borrowers whose loans have been acquired in tranches 1 and 2 which is extending to future tranches. Each borrower was directed to submit a comprehensive business plan in accordance with NAMA's template. Each individual borrower's viability has and will be rigorously assessed as part of the business plan review process. We are willing to engage with an open mind with our acquired clients, but I must reiterate that we require full disclosure of all material information and will not waste time with borrowers who do not wish to co-operate or who have not yet accommodated themselves to the current realities of the property market or their own perilous financial situation.

The business plans of tranche 1 and 2 borrowers with exposures of €27 billion are complex in nature, but we will have completed our analysis of all 30 debtors by mid-December. These, in consideration terms, represent more than 40% of all those debtors who will transfer to NAMA. The issues emerging from the debtor business plan reviews are, by and large, common: debtors who have over-borrowed against assets, overheads still at unsustainable levels, proposed build-out of greenfield sites and debtors still wanting to hoard assets and not sell anything to pay down their debt until some unknown time in the future when asset prices recover. The board is very clear, as I am, about what NAMA needs to do and what we expect from our acquired debtors: just as any borrower from a bank must expect to have to repay his or her debts, the same will apply to anyone whose debts are transferred to the agency. We have a clear commercial mandate to recover debt and, therefore, the purpose is certainly not to let developers or any other borrowers walk away from their responsibilities. Borrowers who continue to meet their contractual obligations have nothing to fear from us, but those who do not can expect the agency to take whatever actions it considers necessary to protect the interests of the taxpayer.

Some commentators have expressed surprise that the discounts that have emerged for each of the institutions and in overall terms are much higher than anticipated. However, it must be remembered that the initial indications of an aggregate discount of 30% were necessarily based on aggregate information provided last year by the five participating financial institutions. Specifically, the 30% estimate was based on information provided by the financial institutions that their average loan-to-value ratio was 77% and, by implication, that there was, on average, a residual 23% equity in the portfolio. Property prices declined substantially in Ireland during 2009 up to the valuation date of 30 November and that certainly would have contributed to the erosion in value, but that is not the whole story. Equity releases as asset values, apparently, rose certainly contributed to the equity erosion. I can only conclude that, notwithstanding the decline in property prices during 2009, the LTVs were much closer to 100% than the figure of 77% represented. If the LTV disclosed was more accurate, this would have resulted in an estimated average NAMA discount of 53%, that is, 30% plus add-back on 23% equity. That is in line with the indices.

Furthermore, NAMA's own detailed due diligence on a loan by loan examination has revealed a picture of poor loan documentation, assets not being properly legally secured and inadequate stress-testing of borrowers and loans by the financial institutions. The legal documentation is capable of remedy and the majority of the €1 billion of loans we did not acquire in tranche 1 have now been acquired by the agency after we forced the institutions to remedy the legal issues with the borrower by advising we would apply a 100% discount if they did not. However, I acknowledge that the participating institutions have worked hard in tranches 2 and 3 to deal with these legal issues as they compiled their NAMA due diligence. This is the right course of action, but it is frustratingly slow. It is much harder to fix a problem than to do it correctly in the first instance. We estimate that the final overall NAMA discount will be about 58% for the total acquired portfolio of €73 billion.

Another issue on which there has been comment relates to the percentage of performing loans. This was estimated at 40% in mid-2009. There are valid reasons the 40% figure would not hold in 2010, given the scale and pace of the economic downturn; business failures, with a fall in rents on new leases, would have impaired a borrower's ability to pay back his or her loans. That is a fact of life and we will have to deal with that aspect as we manage the portfolio. There are other factors such as debtor management, the charging of rents, etc., which can improve the performing nature of loans. The NAMA board has set a realistic target of 25% in its business plan and we believe this will be achievable once we have acquired all of the loans and set about and applied a disciplined debtor management process.

NAMA's accounts for the second quarter of 2010 were also released on 2 November, the same day as the Comptroller and Auditor General's report, and show that we are making good progress on financial performance, with a profit of €6 million being achieved. In terms of cash performance, NAMA generated €130 million net from operating activities in that quarter. Cash was primarily generated from receipts from borrowers - interest paid on loans - of €117 million and NAMA derivative net cash inflows of €73 million. The significant cash outflow for the second quarter comprised €47 million advanced to borrowers to complete projects and fund working capital. We were also cash-generative in the third quarter from operating activities and this permitted us to repay at the end of October the €250 million advanced by the Minister for Finance to NAMA in May for its working capital.

There has been much comment about service providers to NAMA. I emphasise that we will only use external service providers where absolutely necessary. There are certain services which would not make sense for NAMA to undertake such as primary servicing which is undertaken by the original banks or master servicing, which means effectively acting as a consolidation agent. Furthermore, where we do have to engage service providers, we have a strong focus on getting the best value for money that we can. We estimate that we will have achieved substantial savings of about €40 million in due diligence costs when all the eligible assets are acquired.

NAMA, by its nature, will require the services of insolvency practitioners, but I am very concerned at the levels of fees the insolvency industry charges. I welcome the recent moves by the Commercial Court to highlight this issue and it has resulted in substantial fee reductions. The market in Ireland is very under-developed and the widespread use of corporate receivers for property assets is unnecessary and inappropriate. I am determined that NAMA will change the market by using statutory receivers and property receivers, as is the practice in the United Kingdom, rather than traditional receivers who in most property-related cases may not add very much value. The concept of property receivers is well established in the UK market in which they are commonly known as law of property agents, LPAs, or fixed charge receivers. Property receivers have been active in the UK market for more than 20 years and a specialist sector has developed there to provide property receivership services. The property receiver is appointed to take control of and, ultimately, sell assets over which the lender has a fixed charge. The appointment does not include the borrower entity - typically the company which granted the lender a fixed and floating charge. As such, the property receiver has no role or involvement in running the borrower company. He or she is only interested in the asset.

The main perceived advantages with property receivership are the focus on the property, the direct reporting relationship between the property manager and the lender and the avoidance of liabilities associated with the borrower company. This means that the property receiver can concentrate on optimising the value of the property and deliver results at lower cost to the lender than the comparative corporate receivership. The property receivership is focused on taking control of the property, insuring and managing it and, ultimately, preparing it for sale. The property focus, direct reporting and low cost are attractive to NAMA as the required skills for the receivership and property management are provided by one firm and there is less chance of duplication of roles or unnecessary charges in the process. However, I accept that where the borrower is a trading entity or the corporate structure is complex, there will be a need to retain corporate receivers to take control of all aspects of the borrower company secured by fixed or floating charges.

Irish banks have traditionally appointed insolvency practitioners as corporate receivers, even though property receivers would have been more appropriate. Where an insolvency practitioner is appointed to a property company, he or she will immediately have to appoint a property manager as the insolvency firm is unlikely to have the required property skills. The property manager will be from the borrower's own team or from a firm of property managers who report to the receiver. This immediately creates a double layer of fees and often the borrower ends up working for the receiver. NAMA does not intend to follow this practice and intends to promote the concept of property receiverships in the Irish market.

Earlier this year, NAMA conducted a tender competition to appoint panels of firms to act as receivers and to carry out other enforcement work in Ireland and the UK, which are the two markets in which the vast bulk of NAMA's secured properties are located. The competition attracted significant interest and the evaluation of fees disclosed a significant variation in proposed fees between insolvency practitioners and property managers, the latter would be acting in the capacity of property receivers. Typically, NAMA will put together an enforcement strategy before it enforces, which will only be put into operation if a consensual agreement cannot be reached with a borrower. However, NAMA must be realistic and understands that not every borrower will be prepared to agree a workout-asset disposal plan or implement such a plan in good faith. In these circumstances, NAMA will have carried out full contingency planning and will be in a position to enforce against the borrower at any time if there is a lack of co-operation or bad faith.

I repeat that NAMA is not the problem; it is merely cleaning up a difficult situation created by others. As pointed out by the Chairman, one of the ironies of recent months has been the shift in some of the public commentary from the claim that NAMA would overpay for assets to the newer claim that NAMA, by overpaying for assets, will decimate the banks' capital. Neither proposition is accurate and is ill-informed. We have no wish to pay any more or less for assets than what they are worth. We endeavour to pay fair value at all times. We work to the valuation guidelines laid down in legislation and approved by the EU Commission and apply the methodology consistently. It would be totally inappropriate for NAMA to adopt any other approach. NAMA is subject to intensive scrutiny from the EU Commission and the Financial Regulator, which audits the acquisition and valuation process. The Commission has already completed its oversight of tranche 1 transfers of some €15 billion and has given us a clean bill of health in this regard. We expect our tranche 2 opinion shortly. There is also provision under the NAMA Act for the participating institutions to appeal the valuations to an independent valuation panel which will make the final determination in due course as to what constitutes fair value for appealed cases.

NAMA must look to the future and deal with the realities of where we stand today. We must be smart and innovative. We must preserve and enhance value and cannot allow the market to take advantage of us. I can assure the committee that my colleagues and I in NAMA and the NTMA will remain resolutely focussed on the interests of the taxpayer as our work continues in the months and years ahead.

I thank the committee for the opportunity to make these comments. We are happy to take any questions members may have.

May we publish Mr. McDonagh's statement?

Mr. Brendan McDonagh

Yes.

I welcome Mr. Daly, Mr. McDonagh and their colleagues to the meeting. I wish them well in their new roles, which carry very significant responsibility.

My first question is directed to Mr. Daly. NAMA has or will have paid some €30 billion for the loans it has taken in. Perhaps Mr. Daly will explain to us how this is being paid for on a day-to-day basis and how it impacts on the State's finances.

Mr. Frank Daly

It is being paid for through the issue of bonds on subordinated debt to the institutions. This provides the institutions with the means to go to central banks or market counterparts to access liquidity, ultimately leading to greater capacity for those institutions to return to the normal business of lending and so on. We will be dealing with funding for the bonds in two ways, namely, a euro commercial programme and a longer-term programme. It is in that sense that it impacts on the State's finances because ultimately those bonds are guaranteed by the Government.

When are the bonds due to mature?

Mr. Frank Daly

I will ask Mr. McDonagh to answer that question. In regard to subordinated bonds, the situation is more complex. They are only paid if NAMA makes a profit at the end of its day.

Mr. Brendan McDonagh

On the bonds issued by NAMA, we will have interest costs on those bonds on an ongoing basis. NAMA will be self-financing of its own resources on the interest it will charge on the loans to borrowers so that it can pay its own way. This has been demonstrated in Q2.

The bonds are issued as one-year instruments. Effectively, if NAMA has cash to repay those bonds, it will redeem them from institutions and give cash to them or will issue new bonds when those bonds mature. That is the position in terms of normal bonds. The bonds are linked to interest rates of six months EURIBOR, which is currently in the region of just over 1%. In terms of subordinated debt, this has a maturity date of March 2020, which effectively is the date from first date of issue. That coupon is discretionary and dependant on the performance of NAMA and is set at 5.5%. Whether that interest is paid or not is dependent on the performance of NAMA on an annual basis.

Perhaps Mr. McDonagh will explain how the ongoing interest costs will be dealt with.

Mr. Brendan McDonagh

In terms of NAMA activities, we will have €30 billion worth of liabilities that we would have issued to the banks. As Mr. Daly said, 95% of this, €29 billion, will be in the form of bonds which will be linked to six months EURIBOR. Taking an average of, say, 1% that will be €290 million per annum in interest. We would then have €1 billion worth of bonds, which is subordinated debt, which would accrue at 5.5% per annum. That interest would be approximately €55 million. NAMA must generate approximately €350 million in cash to pay its interests on those bonds. However, taking account of the loans we have from the institutions, we estimate that approximately €20 billion of the portfolio will be around cashflow paying which the borrowers will be paying. The pricing we charge in this regard is six months EURIBOR plus 2.5%. That is the margin we charge. Taking that scenario, NAMA will earn more cash on the loans it has given out to debtors than it will pay in interest on the bonds, thus the Government finances will not be affected.

Another important consideration is that NAMA is off balance sheet for EUROSTAT purposes and as such the general Government balance or debt will not be affected.

What is the total annual interest on the €30 billion estimated to be?

Mr. Brendan McDonagh

If for argument's sake interest rates are at around 1%, we will have interest costs of in the region of €500 million and income of approximately €700 million, as such we will be €200 million positive. They are the figures.

Mr. Brendan McDonagh

Yes. We have protected ourselves by hedging against the possibility of rising interest rates. We have hedged a certain element of the portfolio at sub 2% so that if interest rates rise, we will be protected. As such our costs would be relatively fixed for an average duration of four years.

Perhaps Mr. McDonagh will explain the 1% interest rate.

Mr. Brendan McDonagh

The current rate in the market for six months EURIBOR is approximately 1%. That rate increases and decreases.

Did the agency acquire the bonds at 1%?

Mr. Brendan McDonagh

That is the interest rate we gave on the bonds to the banks.

What is the agency paying for the bonds?

Mr. Brendan McDonagh

That is the interest rate we are paying to the banks.

Why can the Government not buy them? What is the problem if the agency can borrow at 1%? Why is the IMF here if the agency can access money at an interest rate of 1%?

Mr. Brendan McDonagh

We are not able to borrow money on the markets at 1%. Effectively, the bonds we have issued to the banks carry a coupon linked to the six-month EURIBOR rate. That could go up and down.

People do not understand what Mr. McDonagh is saying. He is kind of saying he can borrow at 1%. I know that is not possibly what he means. We should hand over the running of the country to him if he can get money at 1%. Give it to us in simple English. He has referred to the EURIBOR rate and this, that and the other. The IMF would not be here if Ireland could get money at 1%. I do not understand what is being said. I am sorry.

The Deputy can raise these issues during his slot.

Mr. Brendan McDonagh

With regard to interest rates in the market at the moment in the eurozone, if one wants to borrow six-month money and one has no constraints, one can borrow in the market at 1%. The interest term on the bonds that we have issued to the banks say we will pay the six-month EURIBOR rate, whatever it is. It could be 2% next year, it could be 3% the year after but, at the moment, the rate in the market is 1%. I do not say we could borrow at 1% if we went to the market this morning but that was the interest term when we issued the bonds. When the bonds were set up, we could have borrowed in the market at 1%. Ireland is in a particular situation at the moment where it is out of the markets and there is a question about whether we could borrow in the markets at the moment but that is a question for another forum.

Yet the agency's calculations are based on the ability to borrow at 1% on an ongoing basis.

Mr. Brendan McDonagh

No. That is our contractual interest rate of payment. What we have done is protect ourselves against a rise in interest rates. Effectively, we have hedged in the market whereby if interest rates, say, went to 3%, we would only pay 2% because we have hedged our position in the market.

Mr. Daly stated "full due diligence and valuation process would be completed in the first quarter of next year and to the extent that NAMA may have overpaid or underpaid for the acquired portfolios, appropriate adjustments will be made at that stage". Were the properties on which loans were transferred valued as of 30 November 2009?

Mr. Frank Daly

Yes.

Given what has happened in the property market over the past 12 months, how does the agency intend to go about making the appropriate adjustments?

Mr. Frank Daly

The adjustment I am referring to is caused by the fact that in the early transfers, the full legal due diligence and the full valuation was done and then we were asked to accelerate the transfers in later months. Approximately €21 billion will be transferred on an accelerated basis. We could not meet the objective of the Minister in doing that transfer before the end of the year and, at the same time, doing the full valuation and full legal due diligence process. When I say it will be completed in the first quarter of 2011, I am referring to that and to the fact that if in that process, it transpires that our estimated haircuts were wrong, we will make an adjustment accordingly either way.

Is that relevant to the November 2009 market conditions? Can the agency adjust up to the current day?

Mr. Frank Daly

It is relevant to the final valuations.

When were the final valuations agreed?

Mr. Brendan McDonagh

Effectively, the way it works is that as a result of the Minister's statement on 30 September, it was decided to accelerate the transfers of the loans into NAMA. In the regulations published, NAMA has to have a sound and reasonable basis for estimating a valuation with full due diligence and valuation afterwards. In tranches 1 and 2, we had the full legal due diligence and we also had individual property valuations by reference to the 30 November 2009 valuation date.

In terms of the accelerated transfers, we have to make reference to the portfolio on which there had not been full due diligence yet, estimating what the discount would be but after we have done that, the banks will be obliged to submit the full due diligence and the proper valuation by reference to 30 November 2009. If we have estimated the valuation on a particular loan to be at a 50% discount and the full due diligence and the full valuation estimates it should have been a 51% discount, then we will have to claw the additional 1% back from the bank.

With regard to market value, must the agency stick with 30 November 2009 as the valuation date?

Mr. Brendan McDonagh

Yes.

Mr. Frank Daly

That is what is in the legislation.

Mr. Brendan McDonagh

Effectively under the legislation the board had to choose a valuation date-----

The agency is, therefore, unable to adjust for the further decline in the property market over the past year.

Mr. Brendan McDonagh

No, because in reality what it means is that we bought the loans by reference to one valuation date - 30 November 2009 - as if we acquired all the loans on that date. All that has happened is that, administratively, it was not possible to have the full diligence and get through all 11,000 loans on that date. One has to follow up on the administrative side afterwards.

Those valuations are, therefore, unreal to a large extent in the current climate, given values have declined so much since then.

Mr. Brendan McDonagh

If the Deputy looks at the indices, between the end of 2009 and September the Irish market has declined by 8% and they also say the UK market, which has a substantial element of our portfolio, is up 6% in that period. Therefore, on the basis that two thirds of our portfolio is in Ireland and one third is overseas, with the majority in the UK, if one applied those metrics, there would be an approximate 3% decline on a weighted average basis compared to the 30 November 2009 valuation date. However, NAMA has a life of ten years and we would hope to earn that back over ten years. There will be swings and roundabouts.

I would like to go into detail on the first tranche of loans relating to the top ten borrowers. Is the agency in a position to provide their details?

Mr. Frank Daly

No, we are back to the matter I referred to in my statement about the commercial remit that NAMA has and the way in which revealing the details of individual borrowers, their assets and loans and the valuations we have applied to them would compromise us in getting the best return for the taxpayer. While we are determined to reveal as much aggregate information as we can in our accounts and to this committee, we will not go down the road of giving details of individual borrowers or individual cases. I am leaving aside in that discussion the other issue, which might be the client confidentiality that those people would feel they are entitled to, whether we like it or not, and which, if it was breached, might well have us down in the High Court on a fairly regular basis.

Is the agency precluded from providing such detail under the legislation?

Mr. Frank Daly

There is nothing in the legislation that permits us to provide the details but there is very firmly in the legislation a commercial remit for NAMA, that we are to get the possible return for the taxpayer. I do not consider if one is dealing in that commercial milieu that one can tell people about what one has spent acquiring an asset, what one thinks is the value of an asset and a week later try to sell that asset because one will not get the best return on that basis.

I do not suggest that the agency provides sensitive commercial information but, given the taxpayer is bailing out these people, there is a demand for a level of transparency in its operation and that public demand needs to be satisfied in some way. There needs to be an absolute assurance that these people are being dealt with properly and that-----

Mr. Frank Daly

I appreciate that and I understand the demand and the way in which people would like to know all these details but I have to refer back-----

With all due respect, the Deputy has not looked for all the details; all she looked for is a list of the names of the top ten borrowers.

Mr. Frank Daly

The Deputy hit on a fairly sensitive issue. Everybody would love to know all the names but-----

Not even the top ten names?

Mr. Frank Daly

I do not believe one can pull out the top ten and say there is any particular validity or argument for releasing their names and not releasing the names of the other 840 going into NAMA. I do not believe NAMA can-----

They are the subject of the report of the Comptroller and Auditor General before the committee today and that is the reason for my question.

Mr. Frank Daly

Future reports of the Comptroller and Auditor General will presumably deal with the other 840 debtors that were commensurate.

Yes, and it should be dealt with there.

Mr. Frank Daly

We can have different views on this. There is nothing in the legislation that requires us nor anything that allows us to name the debtors or the cases coming in.

What provision in the legislation prevents NAMA from doing so?

Mr. Brendan McDonagh

Section 202 re confidential information.

What about names?

Mr. Brendan McDonagh

We have confidential information-----

I think the witness is being very rigid in his interpretation of that clause.

Mr. Frank Daly

I refer to the other point made by the Deputy. I can understand that ultimately everyone wants us to ensure these are dealt with objectively and properly. All I can say in that regard is that the Comptroller and Auditor General's staff have full access to every piece of information we have. I know this committee places a great reliance on the audits the Comptroller and Auditor General will conduct and the reports he will produce with regard to NAMA over the years. As to putting all the names into the public domain, that is beyond us.

We may have to take our own legal advice on our rights to obtain information and we will do so.

With regard to that first tranche and the loans valued at €16.4 billion, the payment made being €8.5 billion, what percentage of those loans were underpinned by personal guarantees?

Mr. Brendan McDonagh

The personal guarantees were offered at borrower level and every single one of the borrowers in tranche one had offered some form of personal guarantee.

Mr. McDonagh says they had offered some form of personal guarantee.

Mr. Brendan McDonagh

They had given personal guarantees.

I am asking how many of the loans were underpinned by personal guarantees.

Mr. Brendan McDonagh

They are underpinned by personal guarantees because they would have given personal guarantees to the banks and we would have acquired the loans with the personal guarantees.

Do those personal guarantees stand up?

Mr. Brendan McDonagh

We have not tested any of these but as far as our legal due diligence has examined them, we believe we stand up.

I ask Mr. McDonagh to describe the logistics of the transfers and the implications for a borrower. For example, if a borrower had loans of €100 million and the associated assets were valued at €50 million, the loan or the debt would remain with the individual. What action can NAMA take in respect of pursuing that debt?

Mr. Brendan McDonagh

As the chairman of NAMA outlined in his statement, the borrower remains liable for the €100 million debt, no matter what price NAMA paid for it. Referring to the Deputy's example, even if NAMA only paid €50 million for it, we will continue to pursue the borrower for the total debt, for the €100 million. Clearly if the borrower has no other assets remaining and the asset is sold - for instance, if it can only be sold for €50 million - then that €50 million will pay off NAMA and the borrower would still owe €50 million outstanding. It is a policy of NAMA to pursue the debt to the maximum extent feasible. If the borrower has given personal guarantees and has transferred assets to third parties or offshore, we will go searching for those assets and we will pursue them.

I ask Mr. McDonagh to describe what action NAMA has taken in that regard to date.

Mr. Brendan McDonagh

When NAMA acquires a debtor, its first request is for the debtor to produce a business plan. When this is submitted to NAMA, we examine it to ascertain if it is in accordance with NAMA's broad parameters. For instance, we decide whether it is sensible and realistic and whether it makes reasonable assumptions. If not, we return the business plan to the borrower and ask that he or she re-examines it as we will not waste time on it otherwise. Assuming it passes that barrier, the business plan is reviewed. It is then assessed and reviewed by the executive, by the NAMA credit committee, and by the NAMA board as necessary and decisions are made. We are dealing with the debtors on that basis. We encourage them to be realistic about the worth of their assets. Some people believe the market will come back to the former levels and that if they are left alone for five years they will be all right but that is not how NAMA works. It is our job to get the money so that we can reduce the NAMA debt and unwind the debt scenario as quickly as possible.

How many business plans has NAMA received to date?

Mr. Brendan McDonagh

We have received 30 business plans to date. We will have reviewed all 30 of those plans by the middle of December. The NAMA board is meeting this afternoon and 12 of those plans will have been reviewed by the board this evening and 16 plans have already been dealt with by the credit committee en route to the board. We are making good progress. The board is sitting for extra board meetings to deal with these business plans. We are determined to deal with all of them by mid-December.

Has NAMA received business plans from all of the first ten borrowers?

Mr. Brendan McDonagh

We have received business plans from all the tranche 1 and tranche 2 borrowers. We have received plans from 30 of the 32 tranche 1 and tranche 2 borrowers. Two borrowers have not provided business plans but the two are related in that they relate to a borrower who was already in receivership and multiple receivers had been appointed by different banks. NAMA is in the process of streamlining those receivers down to one single receiver. Four of those receivers are dealing with the same borrower.

Are the first ten at the final stage?

Mr. Brendan McDonagh

Yes, the majority are coming towards the final stage. Once the board makes a decision, the borrower is informed whether NAMA has accepted or rejected his or her business plan and the reason for any rejection is given. Any rejection is based on the reality of the current market and where NAMA forecasts it will be.

How many of those first ten business plans were rejected?

Mr. Brendan McDonagh

To be honest with the Deputy, of the business plans we have received to date, we would not have accepted any of the proposals put forward to us. We would have accepted some of the propositions but not the broad thrust. As I said in my opening remarks, the issues are common; people want to build on greenfield sites on the basis of build it and the buyers will be there. The overheads are too high and they have not adjusted to the reality that they will need to sell assets to repay their debts. These issues are quite common and we are dealing with them.

I ask Mr. McDonagh to explain that process. For instance, a developer comes to NAMA with a business plan which NAMA examines but NAMA has not accepted any of the first ten plans. What happens next?

Mr. Brendan McDonagh

Once we have made our analysis and having taken advice and reviewed it by means of the executive credit committee, we tell the borrower what we want from the business plan. This is line with the board's target. We want 25% of the portfolio repaid by 2013 and 40% by 2015. We set milestones for the borrower. We also inform him or her that we have no real interest in funding greenfield developments unless they can be proven to make commercial sense to NAMA. We are required under the Act to take a commercial view. We cannot support speculative development. If there is an over-supply of houses or apartments then building more will not help the problem but rather make it worse. It will not make sense.

We know that 75% of the loans were non-performing. Mr. Daly has said he would expect debtors to make a significant reduction in their debt over a three to five-year timeframe. How realistic is that given that a number of those people would be fairly close to bankruptcy and given the forecasts for the property market over that timeframe?

Mr. Brendan McDonagh

That is a very good question. The important thing is that the price we pay for the asset reflects reasonably enough what the underlying asset is worth. Those assets will have to be sold to repay what NAMA has paid for the debt. The fact that a person has borrowed €100 million and the asset is only worth €50 million is neither here nor there because both NAMA and the borrower would be silly to wait around and hope that the asset would revert to being closer to €100 million. If one has an asset that is worth €50 million we suggest that it be sold now, or whenever we agree with the borrower, and pay off the debt. That is the objective.

An issue arises with the fact that, as the Deputy said, 75% of the loans are non-performing. Effectively, that is very much in terms of NAMA's definition of performing. Our definition of performing is paying interest in cash. A bank's definition of performing is completely different because a bank would allow a borrower who was on interest roll-up to count as a performing loan. That is something NAMA does not do. We have got a basis that is much closer to reality for what we mean by performing. Effectively, it is whether a person can pay for a loan or not.

One of the big issues we found was that some borrowers were collecting rents on their investment properties but were not paying interest on the loans. That is extraordinary. We are putting a stop to that. We are taking direct charge of the rent that is coming from tenants and paying it to our bank account. We will use the money to pay the interest. Much bad practice has built up. Our job is to manage debtors in a disciplined way so that the maximum amount of income comes to NAMA on those debts.

But I still make the point about how realistic it is to expect those involved with NAMA to put shape on their situation as we are in a three to five-year period.

Mr. Brendan McDonagh

To be frank, some of the borrowers are not realistic but it is our job to impose realism upon them. If the asset can be sold at the best possible time then it is our job to encourage the borrower to do that. If the borrower does not wish to co-operate with us or is completely unrealistic then NAMA will have a different conversation with the borrower.

I am asking how realistic is the expectation of NAMA that we can begin to sort this out within the next three to five years, given that the property market is unlikely to lift for some time.

Mr. Brendan McDonagh

The property market all over the world, not just in Ireland, is linked to the economic fundamentals. Two factors are important in that regard, namely, how competitive the economy is and what is the level of unemployment. A third factor is that one needs to have a functioning banking system because, effectively, we can put assets on the market but if there are no banks to lend money to people who want to buy assets - unless the buyer has cash reserves - that will impact upon the situation. One has to start out on the basis that if there are assets and we pay a realistic value for them, we can realise that value when we are trying to sell the assets for €50 million as opposed to €70 million.

Mr. Frank Daly

It is important to say in that context that what we have seen with some of the debtors that came to us is an almost sentimental attachment to some of their properties. We really have to force the pace, not just to get into what the Deputy was talking about of working out our own figures over time, but there is also a secondary obligation on us to help start the market again. In some cases that will mean testing it out and putting properties on the market to see what happens.

Okay. The public is extremely sceptical about the workings of NAMA and the final outcome of this whole process. Two things really bug people; the first is that they are concerned that the golden circle will continue to exist and that people who are living lavish lifestyles and have done for many years will be allowed to continue to do so, albeit that they have come a cropper to a certain extent. A statement was made at the outset that NAMA intends to go after personal wealth and assets and that it is entitled to do so under section 211 of the NAMA Act. Has NAMA taken any action to date and does it anticipate taking action in the near future?

The second concern of the public is that we will have phoenix situations where many of the developers who have taken a big hit will lie low for a while and then they will re-emerge from the ashes and in some cases perhaps buy back properties at knock-down prices. What steps is NAMA taking to ensure that we do not have that kind of obscenity?

We have a long list of Deputies wishing to ask questions so we need to move on.

Mr. Frank Daly

On the issue of the golden circle and wealthy lifestyles, there is no tolerance within NAMA for any golden circle or any other circle. We do our work totally objectively and professionally. We will chase every asset that anybody has. To add to the process explained by Mr. McDonagh on the business plans, we are doing two other things in that area, namely, we look for unencumbered assets that might be around the place and we look for a first charge on those. We also look for any assets that might have been put out of our reach or where an attempt has been made to put them out of our reach in recent years. We seek to reverse those moves, sometimes on a consensual basis, because we inform people that we are aware of it and that they had better bring it back into the mix. If that does not work we will use every legal manoeuvre we can.

I accept that is the aspiration. What has been the experience or what action has been taken to date?

Mr. Frank Daly

In some cases, after it was put to them, people have voluntarily decided to bring assets back into the frame. That has happened in a few of the engagements with people on the business plans. As to the legal chasing up of assets, that has not happened yet because we are not at the stage where it could have happened. I assure the Deputy that if we have the opportunity to do that, we will.

On the second part of the question on the phoenix situation, there is a provision in the Act that we are not allowed to sell back properties to the people who are debtors in the first place. We are very conscious, both at the board and in the executive, of the sensitivity of that and making sure it does not happen. I cannot come to the committee and say that somewhere down the road someone will not come back and set up a company or work through a relation, for example, to buy back some properties. It is almost impossible for NAMA to give a 100% guarantee that that will not happen. We are alive to it and we will do our utmost to make sure it does not happen.

If an outstanding debt is attached to an individual, is there anything stopping that individual from starting up a new development or construction operation?

Mr. Frank Daly

If there is an outstanding debt against an individual that debt is going to be chased up by NAMA and there will be a charge against it. We will use every means to recover it.

But is there anything stopping one of those individuals from setting up a limited company, for example?

Mr. Frank Daly

I do not think there is anything. I bow to legal advice but I do not think there is a provision in company law to prevent someone from setting up a company simply while he or she has a debt outstanding somewhere else.

Would Mr. Daly see that as a weakness in company law?

Mr. Frank Daly

The Deputy is getting into an area where in the nature of things people have debts and they cannot repay all their debts at once. To have something like that in company law could appear to be draconian. I am not talking about the developers we have in NAMA. I am talking about ordinary business people who might get into trouble. If one prevents such people from ever setting up another company or going into business, one is in danger of becoming too draconian and of stifling entrepreneurship. I emphasise that I am not talking about the NAMA people.

But Mr. Daly has said that those individuals would not be able to buy back properties.

Mr. Frank Daly

Yes.

But could companies with which they are associated buy back those properties?

Mr. Frank Daly

That is the point I was making, namely, we are precluded from selling the properties back to the individuals who are debtors with NAMA.

But NAMA could sell them back to companies where the principal is a developer?

Mr. Frank Daly

That is the point I am making. We are very sensitive to that. We will do our damnedest to ensure we do not do that. It is unfair to ask-----

NAMA doing its damnedest is one thing, but-----

Mr. Frank Daly

That is all we can do within the law.

Well, I am asking about the law then. Is the law sufficiently robust in this area?

Mr. Frank Daly

That is a different discussion. It goes back to the point-----

It is an quite important question. What happens in the coming years and the extent to which the people in question honour their debts comprise a critical aspect of Mr. Daly's work.

Mr. Frank Daly

It is a quite valid question. One would have to come up with a law that targets particular individuals. One would have to relate it to the NAMA debtors or borrowers. If one tried to come up with a law that applied the principle that if there is debt outstanding, one cannot set up a company or engage in business, that would probably be a much wider issue. This is not a decision for NAMA but a wider question.

I expect Mr. Daly to have a view on it.

Mr. Frank Daly

I am sure I would.

Is it correct that 30 business plans were submitted?

Mr. Brendan McDonagh

Thirty were submitted.

How many have been implemented?

Mr. Brendan McDonagh

The board, by the end of today, will have reviewed 12 of those business plans and have reverted to the debtors. Approximately five debtors have accepted our view.

Have five been implemented?

Mr. Brendan McDonagh

Five plans are in the course of being implemented. Effectively, we will contractually sign up the borrower to the business plan. We will have to document that. Five have signed up to the principles associated with what we want.

Mr. Frank Daly

That does not mean there is inactivity as this process takes place. Even as we review the business plans and go through the process of approving and implementing them, decisions are being made daily on an individual property or credit line, for example. There is activity all the time.

It is eight months down the line.

Mr. Frank Daly

It is eight months down the line but this is a massive operation. Even if one were to concentrate on the top ten cases, the level of complexity would be very high. I have a great deal of experience of the public service and have never seen structures and plans as complex as these. There is a huge amount of work to be done in this regard.

Questions are raised from time to time as to whether NAMA has sufficient resources. We absolutely have and have the right people with the right skills. Intensity is required in focusing on the cases. That is what is important. While this work is taking place, day-to-day decisions are being made.

I welcome the delegation. How does NAMA arrive at a valuation?

Mr. Brendan McDonagh

First, the bank must provide us with a current market valuation of the property by reference to 30 November 2009. It submits that property valuation and submits its legal due diligence. We have the property valuation reviewed by our property reviewer to determine whether he agrees with it. If he disagrees with the property valuation submitted by the bank, we get a third valuer to carry out another valuation. That is the one we pursue.

The valuation process and the result of any legal due diligence to ensure correct security and title would feed into the loan valuation model. By and large, the loan valuation model, which is quite complex in nature, is usually such that the value paid for the loan is very closely linked to the value of the property in the first place. That is just the way the valuation model works.

How can one justify the haircut of the amount stipulated when there is no market? The banks have closed down, the property market is dead and we are in recession. How, therefore, can we justify the haircut?

What is the timescale under the Act? Is there a fire-brigade policy involving one year of writing off everything or is there a five-year business model? There is a long history of valuation in this country. Griffith's Valuation of land was carried out in the 19th century when we had landlords. NAMA is a bit like a landlord. There are Revenue valuations when a farm or house is sold. Capital acquisitions tax must be paid in such cases. Five or six values are taken in an area before the Revenue Commissioners arrive at a valuation of a holding of a deceased person or family.

Will Mr. McDonagh clarify the matter of valuation? The person seems to have gone over the top and the country is on its knees. We are the laughing stock of the whole world today. Luxembourg's Minister for Finance and Professor Honohan are telling us what is occurring, yet today we are going to close down the country. I take exception to the statement made by Mr. Daly to the effect that the only option is foreclosure. Let us be realistic; we live in the real world. The people walking the street and sleeping on the steps of houses are now asking questions. I would like an explanation.

Mr. Brendan McDonagh

In terms of the valuation process, the loans are bought off the banks and are bought off them in accordance with the valuation methodology which is approved by the European Commission. That methodology must be accepted by NAMA and its board because it has been approved by the European Commission. When the bank sells a loan, it must take the write-off in year one because it is effectively like selling to a third party.

How can the bank put a value on the loan when there is no market?

Mr. Brendan McDonagh

The first step in the process is that the banks get the property valuation and submit it to us. We are aware that banks canvass two or three valuers in getting a property valuation and then submit to us what they believe is the best value. We get that value reviewed independently by our valuer to ascertain whether it stands up. We rely on people who are supposed to have professional expertise in terms of reviewing the valuations submitted by the bank.

I refer the Deputy to Mr. John Mulcahy, who has 40 years experience in the property valuation business. He will talk to the Deputy about establishing values in the market.

Mr. John Mulcahy

The valuation is in accordance with the international standards. There is a definition of market value. Usually when people talk about there being no market, they usually mean there is no market at levels they would find acceptable. There are transactions taking place all the time. The definition we have used, because it had to be a definition agreeable to the European Union, was the international valuation standard definition of "market value of property". As the Deputy mentioned, this definition is not very far removed from a definition that one finds in much legislation. For instance, if there is a compulsory purchase order, the date is fixed for the value of the land and the land must be valued on that date. One must go to court or arbitration with it and evidence would be given on both sides. Similarly, in relation to capital taxation, there is a requirement to value property at a particular date.

That there is a paucity of evidence does not mean the valuers cannot value. They can. It usually means people do not like the figures and believe they are either on the high side are low side. What we have done is try to put in place a system of checks and balances. The bank makes the valuation initially. It proffers the valuation to us in accordance with the methodology agreed. We then review that. In 80% of cases that valuation has not been challenged and in 20% of cases it has been challenged by a reviewer, in which case the properties have been revalued. That is a constant in the system.

It is a difficult system because there is a paucity of evidence on the market. However, it is a system that works.

There is such a thing as the red book, the Bible of the valuation system. Is the guidance of the Royal Institution of Chartered Surveyors being used?

Mr. John Mulcahy

There are three standards, namely, the international, European and red book standards. They all have the same definition.

Which one is Mr. Mulcahy using?

Mr. John Mulcahy

The definition is common to all three.

Recently there was a change whereby the valuation threshold increased from €5 million to €20 million. Was that to help the UK market? This is because assets to the value of €800 million on our books are in the United Kingdom, including Northern Ireland.

Mr. John Mulcahy

That was not a valuation issue but an eligibility issue.

The threshold was changed from €5 million to €20 million. Was that to accommodate the loans in the United Kingdom, including Northern Ireland, which amount to €800 million?

Mr. Brendan McDonagh

No. The increase in the threshold from €5 million to €20 million for Allied Irish Banks and Bank of Ireland meant 650 smaller customers were excluded. That represented loan values in the region of €6.6 billion, the majority of the loans being within the Republic of Ireland.

What is the extent of the exposure in Britain and Northern Ireland?

Mr. Brendan McDonagh

Is that for NAMA as a whole?

Mr. Brendan McDonagh

One third of NAMA's portfolio is outside the Republic of Ireland, about 4% is-----

What are the exact figures?

Mr. Brendan McDonagh

Approximately €3.5 billion of our portfolio would be in Northern Ireland and not far off €20 billion is in Britain.

What proportion of those loans have been written down, and what has the haircut been in that regard?

Mr. Brendan McDonagh

In terms of the Northern Ireland loans the haircuts are, by and large, similar to those in the Republic of Ireland because effectively they have the same features with an enormous amount of lending into land and development. In terms of Britain, the property market there made a recovery during 2009 which has continued into 2010 to date. However, if one assumes the peak of the market was at the end of 2006, then the Irish market is down in the region of about 57% and the British market is down in the region of 34%, so that effectively it is ahead by about 22%.

Therefore it is a shifting market.

Mr. Brendan McDonagh

Yes, that is correct.

Mr. Frank Daly

Chairman, I want to come back to Deputy Ned O'Keeffe's comment about foreclosure. I said in my statement that this was not a decision we take lightly, and it is a very sensitive area. I cannot talk about cases, but foreclosure or receivership is usually sensitive and has consequences for a great many people, not just those with whom we are dealing directly. Many people are caught up innocently in the consequences of receivership.

I reiterate that our first preference is always to work with the business and to get an agreed work out if we can at all, because this is what best preserves value and from our perspective gets the best results. Receivership is absolutely the last resort, and it is a decision that is never taken lightly. It is only taken after the process that Mr. McDonagh has explained, in response to Deputy Shortall, namely, an independent business review, going through portfolio management, lending, credit, risk, treasury review in NAMA, going through a credit committee and going through the board. It arises only where at the end of this process we reach the conclusion that the business is not in a position to continue trading and we come to the conclusion that we cannot put good taxpayers' money after bad when there is no prospect of getting it back, and it would be irresponsible of us to act in any other way.

However, I want to assure the committee that we are very sensitive to the consequences and it is an absolute last resort, and in the event, is based on the fact that we have to protect taxpayers' money.

Where does NAMA find valuers, because most of them, as I see it, are involved? What are the procedures for appointing valuers and how are they assessed?

Mr. John Mulcahy

We had a public procurement process to which we invited valuers. There were different panels, all-Ireland, UK and the various provinces. We appointed 32 firms to sit on our panel for reviewing valuers. There is, of course, the whole conflict of interest and disclosure element in relation to valuers. This includes those who are acting for a particular bank, because although a bank may offer us the initial valuation, the valuer acting for it has to agree to offer us a legal duty of care in relation to the valuation he or she performs. The reviewing valuers we use come from our panel. When we allocate work to them we do a rigorous conflict of interest check. Any possible conflict of interest rules them out. In simple terms, that is the process we use.

By conflict of interest Mr. Mulcahy means, simply, that NAMA cannot have a poacher turned gamekeeper. I understand that some members of the panel are involved as valuers in the existing property market.

Mr. John Mulcahy

They are valuers, because they must have requisite experience and have been valuing over a long period of time.

How many of those valuers were involved in the property market before NAMA was set up?

Mr. John Mulcahy

I should say, the majority.

How can they act fairly and honestly in a situation where the sky was the limit two years ago, while today it is under the ground?

Mr. John Mulcahy

The Deputy must remember that valuers usually act on both sides of the fence. In other words, they act for tenants, for instance, on the one hand and landlords on the other, in the same way as a barrister will act for a defendant and so on. The fact they have operated through property markets that have gone up and down is just a normal feature. As valuers, they do not make the market, but simply comment on it.

Deputy Ned O'Keeffe is asking about the personal and professional relationships that exist among the people who are making key decisions, and their previous history.

Mr. John Mulcahy

They cannot act where there is a conflict of interest, Chairman.

I am referring to ongoing professional and personal relationships among people who are now making key decisions at the very top.

Mr. John Mulcahy

That would represent a conflict.

Mr. Brendan McDonagh

If they have dealt with a particular property before, Chairman, or have a close personal or professional relationship with the principles, then they cannot act. That is a conflict of interest and as such, has to be declared. This is dealt with under section 45 of the Act, which provides, in the event, that they would be in breach of contract.

How many of those NAMA is assessing at present are involved in the construction industry as well as property development?

Mr. Brendan McDonagh

The reality is that nearly all of the 850 borrowers in the NAMA universe are involved in property development in some form or other, because effectively they all became involved in buying land, building on it and trying to sell the product. If the Deputy is asking about property construction companies-----

How many got involved in the construction industry outside their own developments?

Mr. Brendan McDonagh

In terms of what we describe as normal contractors, I should say 30 to 40.

How many of those are at risk? I believe I read in the newspapers within the last few weeks that NAMA had five lined up for court proceedings, with a view to closure.

Mr. Brendan McDonagh

What is reported in the media is not reality. All I can say is that each individual borrower-----

We live in the age of whistleblowers.

Mr. Frank Daly

We do not line anybody up for foreclosure, or anything else. We have a process we go through with them, and a business plan. As I explained, foreclosure may ultimately emerge as the option, but in the majority of cases I should hope that the other option of actually working with them on a work out could be the solution we can achieve as being best for both sides. There is no hit list, and nobody is being lined up. It is something that arises at the end of a very objective and rigorous process.

Clearly, NAMA is making the point that its work will be completed within a year.

Mr. Frank Daly

We are going to have the transfer of the loans from the banks completed by the end of the year, within the next few weeks.

This means that the whole thing is written off in one year, then.

Mr. Brendan McDonagh

Yes, the banks take the write-offs, when the work is completed.

Is NAMA confined within the legislation as regards a one-year write-off rather than a five-year write-off?

Mr. Brendan McDonagh

Effectively, the banks must publish their financial accounts. They are all subject to international financial reporting standards. Once the asset is sold the difference must be recognised between its value on the balance sheet and what it realised. Effectively, the loss has to be recognised as regards the price for which it was sold.

World economic trends move in different ways, however, and in five years time we could have a different economy. Take, for example, what happened in Britain in the 1990s under the Thatcher Government, when development took place and the property market ultimately collapsed, just as has happened here. The most buoyant part of the British economy today, however, is where all that development took place.

Here the figure is €73 billion. On a business basis, as a rule of thumb one should write off approximately one fifth of that as being toxic or as a failure, which would leave NAMA with a substantial amount of it. In this case, through no fault of the witnesses, the NAMA concept does not appear to me to be a practical workable solution in the western world. This is the present issue. NAMA is doing a job that will wreck the economy and that already has wrecked the banking system. I make this point because this is a suitable forum to so do.

Mr. Frank Daly

I think the Deputy is getting into an area of Government policy because we represent NAMA. We implement Government policy and implement the legislation.

What about all the other Government policies?

Mr. Frank Daly

The Government chose NAMA as the option after-----

I was about to state that this discussion is straying into policy.

Mr. Frank Daly

----- consideration.

No, Mr. Daly may comment. He has free comment.

Mr. Frank Daly

What we do is what we are required to do under the legislation and we have done it absolutely in the context of the legislation and of the European Union approval of NAMA.

Mr. Frank Daly

As Mr. Brendan McDonagh explained, the reality of the banks being obliged to write it all off as they take the hit really is a matter of accounting treatment and is not a matter for NAMA.

Very well, I will move on. The Comptroller and Auditor General is NAMA's main auditor and Deloitte & Touche acts as the agency's internal auditors. Why did NAMA not set up an internal audit committee drawn from its board, which is usual under corporate governance? Why did the agency employ an outside auditor to look at the auditing of the Comptroller and Auditor General?

Mr. Brendan McDonagh

The board does have an audit committee. While Deloitte & Touche audits NAMA, it also audits all the agency's service providers. It will go out to the financial institutions that will carry out work for NAMA to ensure there are appropriate controls pertaining to the management of loans and it will report back to the audit committee. The entire objective in this regard is that there must be a robust control framework within NAMA to ensure that matters are dealt with properly using appropriate procedures. This will provide assurance to the audit committee, which will be reporting up to the NAMA board.

What fees has NAMA paid thus far to Deloitte & Touche?

Mr. Brendan McDonagh

There was a public tender competition and its fee was referenced to other firms that tendered for it. It is not in the public domain but the fee that was appropriate was accepted by the board.

What is so secret about it? NAMA is a public body.

Mr. Brendan McDonagh

The issue I have is that when people tender, they do so on a confidential basis. However, the fee will be published in the NAMA annual report next year. My point is that I cannot release something without the agreement of the board of NAMA.

With respect, NAMA will release this information in its annual report-----

Mr. Brendan McDonagh

Yes.

----- but will not answer a valid question from a member of the Committee of Public Accounts. Moreover, the question pertains to a contract about which members have concerns as to whether proper procurement was followed and whether taxpayers are getting value for money. Surely if this committee seeks this information, it is entitled to it.

Mr. Brendan McDonagh

In terms of taxpayers' money and value for money, I assure the Chairman that this has been followed. We went through a public procurement competition and followed all the procedures. There are minutes of meetings and everything and I am sure that this has been followed. I understand the issue. All I am saying is that if it is all right with the Chairman, I would like to revert to him after this meeting to tell him what the fee is. I am obliged to clear that with my board.

Mr. McDonagh should outline the reasons he cannot give it to members.

Mr. Brendan McDonagh

At present, in respect of the fee, there is a contract with Deloitte & Touche and before I release that fee, I would like to get the agreement of the board. While I am the chief executive of NAMA, effectively there is a board here.

I am concerned about transparency in all this. The purpose of this committee is to ensure there is public accountability and transparency and Deputy O'Keeffe has asked a simple question to which the committee is not getting an answer.

My concern is that members have gone through all this in respect of FÁS and all the other agencies who engaged in this kind of hide and seek business. However, this committee is not in the hide and seek business and is entitled to this information.

Mr. Frank Daly

We have a board meeting this afternoon and I would like to clear this with my board colleagues. I do not have the fee figure at the top of my head but-----

A telephone call would get that figure for members.

Mr. Frank Daly

----- I would like to clear it with the board this afternoon. In fairness to the board, it needs to be done and I am sure there will not be a difficulty and then we will provide the figure to the committee.

It will be hard for NAMA to operate because although its representatives speak of transparency, honesty and all sorts of things before the committee, at the end of the day, in respect of one small issue, they do not have the information for members. If they wish to be honest, above board and up-front, members are entitled to know everything that happens.

Mr. Frank Daly

No, we came here-----

This figure should not be secret.

Mr. Frank Daly

We came here on the basis that this figure would be published in our annual report anyway. There never was any doubt about that as we always intended to do it. All I am saying is that because Deputy O'Keeffe has asked us to provide that figure in advance, I would like to do the board the courtesy of talking to its members this afternoon, after which I will revert to members.

Mr. Daly also has a duty of courtesy to members.

Mr. Frank Daly

I appreciate that-----

The committee is trying to do a job and when members ask a question, they expect to get an answer.

Mr. Frank Daly

I am trying to balance the two but I promise the committee will get an answer this afternoon.

The committee will get an answer this afternoon. Is that acceptable to Deputy O'Keeffe?

Will it be in the public domain?

Mr. Frank Daly

If I send it to the committee I am sure it will be.

Yes, we will publish it.

A number of consultants are involved with NAMA. It has engaged Arthur Cox as solicitors, as well as PricewaterhouseCoopers. What has been paid out to those two firms?

Mr. Brendan McDonagh

The Comptroller and Auditor General's report lists all of the service providers we have used, as well as their fees. Arthur Cox was appointed to assist a steering group that involved the Department of Finance, the Office of the Attorney General and the NTMA at the time - because this was pre-NAMA - in respect of the development of legislation. The report sets out that a fee of approximately €911,000, including VAT, was paid to Arthur Cox. As for PwC and tax advice provided, fees were paid of approximately €230,000 to €240,000.

Was a base figure agreed with those firms from the outset?

Mr. Brendan McDonagh

Yes, in respect of the Arthur Cox contract, we tendered on the basis that all the work on the Bill would be done by 30 July. The NAMA draft consultation Bill was published on 30 July 2009. However, substantial work went on between 30 July and the ultimate passage of the Bill on 22 November. I understand there were more than 420 amendments and that work had to be paid for.

What has been the approximate roll-up of Arthur Cox's bill to date?

Mr. Brendan McDonagh

For that piece of work it was paid €911,000.

Was the original agreement for €200,000?

Mr. Brendan McDonagh

At the outset when that firm tendered, we agreed a fee on the basis that at that time, it was envisaged that a substantial amount would be carried out by the end of July. A substantial amount of work had been done by the end of July when the Bill was published. However, between 30 July and the Bill's introduction to the Dáil on 16 September and following vigorous debate between 30 July and the Bill's ultimate passage on 22 November, more than 420 amendments were tabled. This additional work had to be paid for, which resulted in a final bill that was in the region of €911,000, including VAT.

How much of that work was based on consultancy work?

Mr. Brendan McDonagh

That work is consultancy work because effectively what the firm was doing was providing technical legal advice to the steering group, which comprised the Department of Finance, the NTMA and the Attorney General's office.

Mr. McDonagh stated that PwC was paid €230,000 by NAMA. Has that firm received additional moneys on top of that €230,000?

Mr. Brendan McDonagh

Yes, it has received additional moneys.

For what kind of work?

Mr. Brendan McDonagh

Effectively, PwC has advised us on the tax structuring of NAMA and the NAMA group entities or special purpose vehicles. That covered tax advice both in Ireland and in overseas jurisdictions because one important point is that we do not wish to suffer tax leakage in overseas jurisdictions, given that one third of our portfolio is overseas.

Has NAMA discovered many ghost estates in its work to date?

To break away from that if the Deputy does not mind, I refer to one or two loose ends. In respect of the European Union guidelines on procurement, was the contract to which Mr. McDonagh referred above the threshold?

Mr. Brendan McDonagh

Yes.

Did NAMA advertise in the EU journal?

Mr. Brendan McDonagh

Yes, absolutely.

Paragraph 5.13.

Mr. Brendan McDonagh

Is the Chairman referring to the Arthur Cox contract? It was subject to public procurement rules. The PricewaterhouseCoopers tax contract was also advertised in line with public procurement rules.

I have another question about the Department of Finance. Why did the National Asset Management Agency pick up the tab for the drafting of the legislation even though it was being set up at that point?

Mr. Brendan McDonagh

The National Treasury Management Agency received a direction to drive forward with the implementation of NAMA from the Minister for Finance, who formed a steering group that was chaired by the Department of Finance and involved the NTMA and the Attorney General's office. As part of that work, we were asked to procure services to assist in the development of the legislation.

I asked a question.

Just returning to NAMA's response, I am reading paragraph 5.12 of the Comptroller and Auditor General's report. Four of the open tender competitions were not advertised in the journal, only on the national public procurement website.

Mr. Brendan McDonagh

Yes.

They were for financial services, tax advisory services, legal advisory services and legal due diligence services.

Mr. Brendan McDonagh

They were advertised-----

The financial advisory services were above the threshold.

Mr. Brendan McDonagh

They were advertised on eTenders.

That website is different to the journal. I asked about the latter.

Mr. Brendan McDonagh

We had no idea what the services would cost at the time because it was a greenfield operation. We advertised on eTenders and received international interest in the competition, as well evidenced by the number of firms that tendered internationally for the business. There was international reach in the competition.

That is not what the Comptroller and Auditor General's report says.

Mr. John Buckley

To clarify, legal services are not subject to the full scope of EU procurement rules. They would have been outside the process. The explanation for the financial advisory services, for example, is that they were anticipated to be below the threshold at the point of procurement.

Mr. Brendan McDonagh

Yes.

Mr. John Buckley

That caused a technical non-compliance. The tax advisory services were below the threshold, although I am speaking from memory. There are explanations.

That is okay.

What is the up-to-date position on the non-performing housing and industrial estates that will not be required and are under NAMA's remit? What is NAMA's proposal in this regard?

Mr. Brendan McDonagh

A recent Department of the Environment, Heritage and Local Government study estimated that there are approximately 2,800 unfinished estates. Not all of these will be funded by NAMA or by institutions that originally lent the money that is in NAMA. Some of them are funded by institutions that also operate in Ireland. The board accepts this situation is a difficult problem, but we will need to deal with issues on a case-by-case basis. As the Deputy is aware, the Minister of State with responsibility for housing has established a working group to consider this matter and is due to report by the end of January 2011.

Has NAMA plans? What the Minister of State is doing is on the housing side of it, but what about industrial estates and out-of-town shopping centres that will not perform and are in excess of the cap? What is NAMA's assessment of their future?

Mr. Brendan McDonagh

It is a difficult problem. Many people built a great deal of stock, be it housing, industrial or shopping centre stock, in the wrong location. This is a fact of life. We must find the best use for that stock. If something was built in the wrong place or supply was too great in one place, it would have led to a lower price being paid on those loans. Discounts on loans are higher because they reflect the reality.

How does NAMA propose to decide their future? That is only the monetary side.

Mr. Brendan McDonagh

Yes. NAMA is not the only party that must solve this problem. For example, Government policy and local authorities are also involved. NAMA is not the panacea for all ills. Unfortunately, where the loans associated with the buildings in question are concerned, the borrower is not likely to be in place or to have the resources necessary to finish the developments. Even if the borrower did finish the developments, the next question is whether they can be sold or used. This is a difficult problem. NAMA will try to find the best uses we can. We will look to find a buyer in the first instance, as we are obliged in terms of our commercial remit. If certain buildings are of societal use, NAMA's board is open to considering possible solutions.

I have a few more questions. Is my time running out?

It is well over.

My apologies. I was told that four PricewaterhouseCoopers staff cost €60,000 per week, excluding VAT. Is it true that NAMA is paying out this kind of money?

Mr. Brendan McDonagh

Yes, at the start of NAMA. When it commenced in January 2010, NAMA only had four or five staff, each of whom had transferred in from the NTMA. We were charged with setting up an organisation and its procedures and controls and developing the process involved in the credit policy. We had no other choice but to second people to help. Those are the prices professional firms charge. As we recruited, we got rid of the people in question, but we had no choice at the start. We needed to bring in people.

I do not disagree with much of what NAMA has done, but I will leave this meeting disillusioned. NAMA paid these people €400 per hour. We are living in a new age, so how can I defend anything when €400 per hour is being paid to people? NAMA went after top-of-the-market people for its business. The sky is the limit for the people it has employed. Let us be realistic. How many more outside agency staff of this nature is NAMA employing?

Mr. Brendan McDonagh

The people in question were employed at the start when we were trying to find staff with the requisite skills and who would not be conflicted. Recruiting the right people with the right skills takes time. We have gone from no staff at the start of 2010 to 87. Even when we find people, most must serve their three months notice before they can start work. One must continue with the work in the meantime. Four people are helping us to do certain tasks because of their technical expertise.

At €400 per hour.

Mr. Brendan McDonagh

No. That money is recovered by the price we pay institutions as part of the due diligence process of acquiring their loans.

It is part of the report.

Mr. Brendan McDonagh

Yes.

How can Mr. McDonagh justify paying that kind of money at such an early stage?

Mr. Frank Daly

The Deputy needs to recall the period to which Mr. McDonagh is referring. There was a national urgency to set up NAMA from scratch and to take on a large operation in a short time. We did not target the big firms or anyone like that. To get the organisation off the ground, we needed people with project skills and expertise very quickly. We would never condone high fees. We have a competitive tendering process. Over the past year, that tendering process has seen fees such as these drop enormously, to the extent that members may have seen media reports that some firms will not tender for NAMA business because we will not pay them enough. I regard this as a success rather than a failure. It is not a question of targeting any big firms; in fact one of the issues NAMA has is that we would love to spread any such work around many firms if we have it in the future but we will have very little of it. The reality is that it is a competitive tendering process under EU or national rules and we have to abide by what emerges.

I accept the spirit of Mr. Daly's reply. Did NAMA advertise for those people on day one or were they hand-picked?

Mr. Brendan McDonagh

In terms of those-----

How did NAMA decide? It is very difficult to decide. Was it NAMA's own initiative to decide how to pick them? There were several other large and small firms in town. Small firms are usually more efficient than large ones, by the way.

Mr. Brendan McDonagh

In terms of the type of people we brought in, they were brought in from PricewaterhouseCoopers UK because we did not want to use people from Irish firms. These are people who are property restructuring specialists who we recruited for a period of time to help us set up procedures and processes to deal with this very complex piece of work, who had already worked for the UK Treasury on the data protection scheme and for RBS or Lloyds HBOS in the UK. They had a particular skill and expertise which was scarce in the market and we wanted to bring in these people for their particular skills.

To round off the question of expenses and salaries, are positions in NAMA linked to public sector grades?

Mr. Brendan McDonagh

Everybody who works in NAMA is an NTMA employee. The committee will be aware from John Corrigan, the chief executive of the NTMA, that everybody in the NTMA is on individual contracts. To get the right people to run quite technical businesses one must pay market rates.

I wish to clear up the question of staffing. How many staff does NAMA have?

Mr. Brendan McDonagh

At the moment we have 87 staff.

It is clear that the pay rates are not linked to public service rates.

Mr. Brendan McDonagh

No, because-----

Are all of the 87 on individual contracts?

Mr. Brendan McDonagh

Yes, everybody is on an individual contract. We do not have a grading system such as that of the Civil Service within the NTMA, and this applies to people seconded from the NTMA to NAMA. Effectively, people are recruited for a skill set and two people with similar skills could be on very different contracts.

Does this include the receptionist, the person answering the telephone or the person making the tea?

Mr. Brendan McDonagh

No. The type of people we are trying to recruit are those with banking, property, credit and risk skills. They are very particular skills.

Does NAMA have administrative and support staff?

Mr. Brendan McDonagh

Absolutely, but administrative pay rates are the same by and large as they are in public service contracts. It is for the more specialist skills that we have to pay market rates.

What will be the total salary payment for the year?

Mr. Brendan McDonagh

Under EU Commission approval, NAMA has to pay all of the costs it incurs back to the NTMA and the budget for those costs, including rent for the floor and all other overheads, is in the region of €25 million.

Is that €25 million mainly salaries?

Mr. Brendan McDonagh

The majority is salaries.

Do salaries account for 80% or 90%?

Mr. Brendan McDonagh

Probably 70%.

Does that include payments to the board? How many people are on the board?

Mr. Frank Daly

There are nine people on the board.

Are board payments also a State secret?

Mr. Brendan McDonagh

No.

Mr. Frank Daly

No, they are not. They are outlined in the report of the Comptroller and Auditor General. I am not sure on what page, perhaps page 78. They are not a secret.

Is it only the salary payments which are a State secret?

Mr. Frank Daly

As Mr. McDonagh stated, all of the staff working in NAMA are NTMA employees on individual contracts, and traditionally those contracts have not been divulged by the NTMA.

If NAMA wishes to employ somebody, it goes through the employment procurement process.

Mr. Frank Daly

Yes.

Then NAMA gets the NTMA to employ the person.

Mr. Frank Daly

The NTMA conducts the process. It provides that service for us.

I see. From the point of view of transparency, does Mr. Daly not think it would be better if these things were public knowledge?

Mr. Frank Daly

The Deputy is asking me as chairman of NAMA. The reality is, as I stated, they are NTMA employees so it is probably a question better addressed to the NTMA. Perhaps I will leave it at that.

We have been through this laborious process before with the NTMA when Mr. Somers and his colleagues were before the committee. Deputy O'Keeffe is asking a very reasonable question. He asked a question initially about administrative staff such as receptionists, and the witnesses clearly defined a distinction between administrative staff and specialist staff. Will Mr. Daly give us a figure for the payments directly to specialist staff? If it is a State secret that is something we would question. Will Mr. Daly give us an average payment figure per specialist?

Mr. Frank Daly

I really think that is probably a question that the Chairman would have to address to the NTMA rather than to me. It is the employer in this case.

Here again there is a lack of transparency; there is also a lack of transparency in two other issues. It is unsatisfactory.

Mr. Frank Daly

We will publish-----

It is a public body.

Mr. Frank Daly

We have already published the figure Mr. McDonagh outlined here today for the payment we make to the NTMA for all of the services. We will certainly explore in our annual report whether we can break this down further and categorise it into salaries and other payments.

We would like a note from Mr. Daly's organisation, having consulted with the NTMA on the valid questions asked regarding salaries.

Mr. Frank Daly

I do not have a difficulty in talking to the NTMA chief executive about this and I will come back to the Chairman on it.

To clear this up and get a ballpark figure, an annual bill to the NTMA of approximately €25 million was mentioned, 70% of which Mr. Daly thinks is salaries, and 70% of €25 million is €17.5 million. There are 87 staff so it averages out at more than €200,000 per person. Is that a ballpark figure?

Mr. Frank Daly

I am not doubting Deputy O'Keeffe's calculations but averages can be misleading.

I must say I have the aid of the mathematical genius of the Fine Gael Party, Deputy D'Arcy, who has been working out the figures.

Mr. Frank Daly

All I would say is that speculation on averages can be-----

Of course, because Mr. Daly mentioned some of the staff are receptionists and telephonists.

Mr. Frank Daly

Yes.

I presume they are paid at a lower grade. If they are removed from the figures, the overall average of the professional staff is much higher again, would it not?

Mr. Frank Daly

I do not know. Is Deputy O'Keeffe averaging the €25 million over the-----

No, 70% of the €25 million.

Mr. Frank Daly

Yes.

Mr. Brendan McDonagh

Effectively, that was on the basis of approximately 104 staff. Different people at different levels are on different pay scales. If we are competing in the market to manage effectively a €30 billion exposure for the taxpayer, we need to find the right people to be able to do that and to protect the interests of the taxpayer. We are competing in the market at present trying to recruit people not only from Ireland, but also from abroad. A number of them who are specialists have moved from the UK. The major thing they bring is that they have no history; they are impartial and have no relationship with these borrowers. This is very important. We are trying to recruit the type of people who are typically recruited by investment banks or private equity funds. This the type of market with which we are competing to get the best people. We have to get people who are very clever, very good at their job and have a good track record. Many of the people we recruit are in their 40s or 50s. They might not want to leave their current positions and we have to pay them to get them to join us because they are already very well paid.

Mr. McDonagh gave a good defence of high pay but allow me to make my view clear. I want him to have the best people and if he has to pay over the odds, so be it. However, the process requires transparency and it is the job of this committee to hold the mirror up to the full facts. That is my concern in regard to non-disclosure and regarding the matter as a State secret. I am not encouraging Mr. McDonagh to pay too much but I want him to hire the best people. I suggest the issue should be revisited by both NAMA and the NTMA with a view to full disclosure. There may be nothing to hide if NAMA has to pay people to move here from the UK but we should know about it.

Mr. Frank Daly

I suspect that discussion has been rehearsed previously with the NTMA because the principle is the same. We are trying to hire the best people but publishing their salaries can inhibit them from coming to work for us. That is the reality we face but I acknowledge the Deputy's point.

How would Mr. Daly characterise NAMA's relationship with the Minister for Finance and his Department? Does the agency operate independently or under directions of a general or specific nature?

Mr. Frank Daly

We operate independently. The legislation makes clear that the board is independent, although it provides that the Minister has opportunities to give us directions under specified circumstances. If he gives us a direction, however, he must publish it and lay it before the Houses of the Oireachtas. He has done so on two occasions since the agency was established but I assure the Deputy that our board is independent. We maintain a good working relationship with the Department where necessary but we are independent. The National Asset Management Agency Act 2009 includes certain provisions on lobbying which I have not seen in other legislation. It is a serious offence to lobby the board or officers of NAMA or for a member of the board or staff to neglect to report being lobbied.

Is NAMA immune to or divorced from the financial turmoil affecting the country at present?

Mr. Frank Daly

Absolutely not. The board and executive are clued into what is happening around us and we have regard for it where we can. At the end of the day we have to operate according to the remit and objectives set out for us in legislation but we do not live in isolation.

I note from Mr. Daly's statement that 20 board meetings were held. How often does the board meet and does it set regular dates for its meetings?

Mr. Frank Daly

We have held 21 meetings and will have held 22 by this afternoon, assuming we leave here in time.

Is Thursday the normal day?

Mr. Frank Daly

Thursday is the normal day. We originally set out to hold a meeting every month but that quickly disappeared from our agenda as our workload became apparent. We have scheduled three more meetings before the end of the year.

Was the 21st meeting held on Tuesday of this week?

Mr. Frank Daly

We held a meeting earlier this week.

Was there a special reason for it?

Mr. Frank Daly

We sometimes hold meetings when it is necessary to decide something fairly quickly but there was nothing in particular.

Is it required to hold board meetings before releasing guaranteed securities to the banks or confirming the purchase of such securities?

Mr. Frank Daly

Yes, because the board has to exercise its discretion in respect of the purchase of loans.

Will it be part of Mr. Daly's job to meet the delegations from the IMF and elsewhere? Have they requested a meeting or has Mr. Daly requested to meet them?

Mr. Frank Daly

They have not requested a meeting thus far and we have not requested to meet them. Obviously, if they want to speak with us, we would be more than happy to facilitate them.

Mr. Brendan McDonagh

In the course of the normal visits by delegations from the IMF or ECB to Ireland over the past couple of years, we have met them when they asked us to do so.

Do the witnesses anticipate entering discussions with them?

Mr. Frank Daly

It would not surprise me.

Does NAMA's funding come from the ECB, either directly or indirectly?

Mr. Brendan McDonagh

We issue Government guaranteed securities to the banks which can be brought to the ECB to be cashed.

Mr. Brendan McDonagh

We give them Government guaranteed paper, or the equivalent of a Government bond, which they can use with the ECB to get cash.

What is the amount of that at present?

Mr. Brendan McDonagh

We have issued approximately €23 billion in securities and by the time we conclude our purchase of the full portfolio in a few weeks, the figure will have increased to just over €30 billion. This is €30 billion in securities which they did not have at the start of 2010.

How would the witnesses characterise their relationship with the banks?

Mr. Frank Daly

It has been a moveable feast.

Is it a stand-off arrangement?

Mr. Frank Daly

At present, our engagement is very professional and intensive, and it has been for quite some time. In the initial stages the banks probably found it difficult to come to grips with the concept of NAMA, particularly in regard to the degree of examination we conducted into their loans and loan assets. They might have regarded our questioning as excessively intrusive. The facts that emerged as a result of that process justified the level of intrusion.

Mr. Daly paints a picture of appalling mismanagement which is not very pretty.

Mr. Frank Daly

Whether one wants to describe it as mismanagement or something else, we had to deal with what we found and that was pretty appalling. As we moved through the different tranches, our relationship with the banks improved and there is now a healthy respect for NAMA and the work we are doing.

Mr. Daly referred to poor loan documentation, assets which were not legally secured and inadequate stress testing of borrowers. Were these features evident right across the institutions?

Mr. Frank Daly

I would have to say they all had these types of fault lines. A kind of madness obtained for quite some time in terms of a considerable concentration of lending to a particular sector and a small number of individuals, poor credit appraisal and evaluation and, in some cases, sloppy documentation and security. It is probably related to the question that Deputy Ned O'Keeffe was asking earlier about the costs incurred by NAMA. We are incurring many legal costs, for example. For the first three tranches, the cost of due diligence on the legal side - that is, the costs we incurred in checking out the legal and security issues - was €5.4 million. However, the legal adjustments we made as a consequence of the defects that came to light in those loans amounted to €259 million. In some ways, the situation that came to light was unfortunate, but this indicates the value of such diligence.

Mr. Daly has highlighted dreadful mismanagement and reckless lending, which seem to be characteristic of what was uncovered.

Mr. Frank Daly

Well, it was.

Was it - I will not say "just that". Was it confined to that, or was there worse?

Mr. Frank Daly

I will not comment on whether there was worse. I think it was confined to that. It was a type of madness that gripped many people in this country. I said in my opening statement today that I think - some people might wonder about this - the banks have now moved beyond that and put the delusions they had in the past behind them. In fairness to the banking sector - I do not want to be too fair to it - we need to say that there are banks that served this country very well for many years, had high standards and operated well, and there is a banking sector growing now that will probably do the same in the future. In between, though, for whatever number of years it was - ten years, maybe a bit more - something went wrong. They lost the run of themselves and they lost sight of the standards they should have applied.

There is another aspect-----

I ask the Deputy to conclude as he has gone well over time and five other people wish to speak.

All right. I have a question about disclosure by the banks. Does Mr. Daly feel that the statements from the banks could have been classified as full disclosure of their situation? If not, was it because of a lack of knowledge on their part, wilful carelessness or deliberate concealment?

Mr. Frank Daly

I can only speak about what NAMA has discovered from this process. Mr. McDonagh may want to speak on this as he was much closer to the reality of day-to-day disclosures. Certainly the disclosures were inadequate; Deputies will see this in some of the figures from earlier, when we explained why the initial discounts were projected to be 30% and why the number of performing loans was projected to be X and turned out to be Y. As to whether it was deliberate or down to carelessness, lack of process, lack of systems or lack of awareness, I think it was a mixture of all of those, along with a sort of denial and reluctance to face up to the extent of the problem. That is my view; Mr. McDonagh may want to add something to that.

Mr. Brendan McDonagh

The chairman is completely right. So much business was being written so quickly that the banks did not have adequate systems or controls to manage the process. One of the big deficits has been the quality and perhaps the lack of information filtering up through the organisations from the people who were actually writing the loans to senior management and board level. I have said before that if one sits on the board of any institution - whether it is a school board or the board of a bank or company - one has an obligation as a director to fulfil one's responsibilities and to inform one's self of what is happening. If one is not informed, one must figure out a way to become informed. What happened in the heat of the market was that everybody got caught up in the delusion that prices would constantly increase, including the banks, borrowers, and the general public - "The house down the road sold for €20,000 more than the other house down the road so therefore my house, which is a much better house than those two, is worth much more than that." When the reality started to emerge that things were not as good as they had seemed, people found it hard to accept, and they probably did not have the systems to give them the information they needed.

Does NAMA have a policy on bonds for completion of construction projects? My namesake referred to ghost estates. I imagine there would be construction bonds for some of these. Is there such a policy and has any action been triggered in this regard?

Mr. Brendan McDonagh

Yes. We do not acquire performance bonds. The banks got into the business of providing performance bonds to developers, but we do not acquire those bonds as part of the process. Effectively, it was a new line of business set up by the banks to generate income for themselves. They should never have got into that business because it was previously provided by the insurance companies, and the banks effectively muscled their way into it to increase their product line. It would not be appropriate for NAMA to get involved in that business. There are specific bonding companies which provide such business and it is more appropriate for them to do it because they are more technically able and have much more expertise in that area than we have and than the banks had when they were writing this business.

So it is the banks that are exposed in the area of bonds.

Mr. Brendan McDonagh

Absolutely. If a bank has given a guarantee of performance bond to a local authority, it is the bank that is exposed.

Before I ask Deputy Fleming to contribute, I have a question for Mr. Carrigan, so he does not feel left out. The IMF was mentioned earlier. Has the IMF been in contact with the Department of Finance about NAMA at any stage and for what reasons?

Mr. Aidan Carrigan

There is a schedule of meetings to be worked out this morning with regard to who will be met and who will not be met. As of yet it has not been decided.

I do not mean at present; I am talking about the past. Were there any recommendations from the IMF or European bodies regarding oversight mechanisms for NAMA because of its dominant position in property and banking?

Mr. Aidan Carrigan

There is close oversight of the operation of NAMA at European level. As each of the tranches is transferred it is reported to the European Commission. The first tranche of loans, which we are considering today, has been reported in great detail to the Commission and it has reviewed it and given its imprimatur, recognising that everything was done properly and appropriately.

Was there any recommendation for an oversight body or mechanism?

Mr. Aidan Carrigan

There were some recommendations, but I will ask Mr. McDonagh to talk about this in more detail.

Mr. Brendan McDonagh

As part of the European approval of the NAMA decision, NAMA must report annually to the local Competition Authority and to the European Commission's Directorate General for Competition on its activities. This deals with the issue of whether we are a dominant player in the market. This is important in the Irish market as we have bought loans from five institutions, but in overseas markets we are quite a small player.

With regard to the recommendations on competition and so on, have those mechanisms been established?

Mr. Brendan McDonagh

Absolutely. We were obliged as part of the European Commission decision to report after the end of each financial year to the local Competition Authority and the European Commission on our activities. That is in the public domain as part of the EU approval process.

I thank the delegation for being here.

I am sorry to interrupt the Deputy, but for the information of members, the order of questioning is as follows: Deputy Fleming, Deputy Michael McGrath, Deputy Rabbitte and Deputy D'Arcy. I am sorry about that.

Deputy Michael D'Arcy took the Chair.

To return to an issue that was mentioned in passing earlier, the Comptroller and Auditor General stated that NAMA had issued approximately €25 billion in NAMA bonds and that by the end of the year, when the process is completed, it will have issued bonds to a value of €30 billion. Will Mr. McDonagh repeat that interest rate? How much do those bonds cost NAMA? Mr. McDonagh gave the figure earlier which I believe was 1%. I ask him to explain it in layman's English and to spell out what he means by words such as EURIBOR.

Mr. Brendan McDonagh

Absolutely. I apologise if I confused anybody. I shall try to make this very simple. In layman's terms, NAMA effectively has a €30 billion mortgage. If interest rates are at 1%, our interest costs will be €500 million per annum.

So NAMA has a rate of 1%.

Mr. Brendan McDonagh

If the interest rates stay at 1% we have-----

Is that the current rate or facility?

Mr. Brendan McDonagh

That is the rate we are paying at present.

When did NAMA negotiate that rate?

Mr. Brendan McDonagh

When we first issued the bonds we said the rate was linked to a rate set by the market. The current market rate for six-month money, if one wishes to borrow for six months, is 1%.

When was that negotiated?

Mr. Brendan McDonagh

It was in March when we issued the first bonds.

If NAMA were in the market today, what would it pay?

Mr. Brendan McDonagh

It depends on what one is doing. If one could borrow on the market today without any constraints, one would be able to borrow at 1%.

Will Mr. McDonagh explain the broader picture? Why are we talking about 5%, 6%, 7%, 8% or 9% when NAMA can borrow at 1%? It is an arm of the State and can get money at 1%.

Mr. Brendan McDonagh

Okay. If Ireland went to the bond markets today and tried to borrow ten-year money, or money for ten years, the markets would say that Ireland would have to pay the latest rate available on that ten-year money, namely, 8.5% interest. When NAMA was established in March and we first started to pay bonds, Ireland could have borrowed ten-year money at 4.75%. The cost of borrowing for Ireland has gone from 4.75% to 8.5% for ten-year money. Obviously, that increased interest rate reflects the fact that the market wants a higher return and regards Ireland as a bigger risk to its money.

Deputy Bernard Allen resumed the Chair.

How was NAMA able to borrow at 1% last March when the Government was borrowing at 4.75%?

Mr. Brendan McDonagh

The bonds we issued had contractual interest terms whereby we linked interest rate to money market rates rather than ten-year Government bond rates. Effectively, we linked it to six-month interest rates. It is like a variable rate mortgage and a fixed rate mortgage. In the former, the borrower is exposed to the rise in interest rates but, with a fixed rate mortgage, the interest rate is fixed throughout the term for which it is borrowed. Our interest rate is linked to the movement of interest rates for six months or whatever the market would demand for six-month money.

NAMA obtained the facility to borrow at approximately 1%, covering all considerations.

Mr. Brendan McDonagh

The rate is currently 1% in the market. If interest rates were to rise to 2%, our interest costs would increase from €500 million to €650 million. We have hedged our portfolio to protect ourselves against a rise in interest rates. If interest rates went up to 3% and we were not hedged we would have to pay €810 million per annum in interest. We have hedged our portfolio at a level of around 2% and, therefore, our interest costs would be fixed at €650 million for an average period of four years because we hedged our interest rate for the first four years.

For how many years does Mr. McDonagh expect NAMA will have to pay interest on the bonds?

Mr. Brendan McDonagh

Effectively, as the assets are sold and borrowers repay their debt, we will redeem those bonds. We would envisage a certain number of those bonds would be redeemed every year but, realistically, in its first couple of years NAMA will not redeem too many bonds. If we can sell 25% of the portfolio by 2013, we would hope to redeem close to 25% of the bonds. As NAMA generates more cash through repayments, we will pay down the debt. The average life of NAMA's debt could last anywhere between three and seven years. It is totally dependent on how quickly the portfolio can be-----

When did NAMA negotiate the rate of the bonds that will be issued between now and Christmas? Is it still 1%?

Mr. Brendan McDonagh

It is.

That was the rate negotiated last March.

Mr. Brendan McDonagh

Yes.

Essentially, the position is that by the end of this year NAMA will take on €73 billion in loans out of which it will pay €31 billion and there will be a shortfall for the banks of €42 billion. I will come to that presently. NAMA is issuing either €30 billion or €31 billion. We will not argue about the figure. Last March NAMA thought there would be a markdown of only about 30% and a number of loans were coming in. I remember a figure used of approximately €80 billion which NAMA was possibly going to take over. There was the €6.5 billion. I speak from recollection now. There was a figure of €50 or €54 billion that NAMA expected to have to pay last March. Is that correct?

Mr. Brendan McDonagh

Yes.

At that stage did NAMA negotiate the bonds to cover potential payments of €54 billion?

Mr. Brendan McDonagh

Yes.

Mr. McDonagh can see my question now. NAMA now has a facility, negotiated last March, for €54 billion but will use only €30 billion of it. Therefore, it has €24 billion of unused facility in place at 1%.

Mr. Brendan McDonagh

No.

Where is the flaw? Please explain this to me.

Mr. Brendan McDonagh

In effect, we said we linked the interest rate to the consideration paid, whatever level was to be paid. If we had paid €50 billion for the loans it would be linked and the interest rate would be priced off that amount. In fact we issued only €30 billion which was all we were allowed to issue under the Act and, therefore, we do not have this buffer. The only securities NAMA can issue are equal to the amount we pay for the loans.

That is the amount issued. I understand NAMA has not issued any more than the €30 billion. When all this was being set up last March, however, NAMA put in place a facility for €50 billion or €54 billion.

Mr. Brendan McDonagh

No. In terms of our planning-----

It was merely a facility and NAMA did not issue it. How much did NAMA expect to have to pay for the entire loan book it was to take over last March? That includes the figure of €6.5 billion it will not now take over under the €20 billion limit. Was the amount not approximately €50 billion?

Mr. Brendan McDonagh

Last March the emerging discounts were in the region of 50% so, in effect, we would have paid about €40 billion for the €80 billion portfolio.

I understand. Where is the other €10 billion or so for which NAMA had in place a facility at 1%? Is it not available? Where has that facility gone? The Irish taxpayer pays for NAMA, which is a public body. Can the Government not get access to that €10 billion at 1%, given that an arm of the Government negotiated it? Is NAMA allowing it go back to the European Central Bank?

Mr. Brendan McDonagh

No. The amount was not a facility for what was issued. It meant that whatever price we paid for the bonds, that was the maximum of the bonds we could issue. We cannot issue any more bonds. Under the Act there is a restriction in the number of bonds NAMA can issue to €54 billion because the anticipation was that it would end up paying a maximum of €54 billion for a €80 billion portfolio. In reality, it has turned out that for a €73 billion portfolio we will pay €30 billion and that is the maximum number of bonds NAMA can issue. It is not a facility but was purely linked to the price we paid.

I understand NAMA did not issue that amount but it seemed it would have the ability, if necessary, to issue €54 billion worth of bonds.

Mr. Brendan McDonagh

Absolutely.

NAMA is now issuing only €30 billion. That is a saving to NAMA, and a credit from Mr. McDonagh's point of view. It is a pity there was a belief there was a facility at 1% for an extra €20 billion to which we no longer have access. There would have been access had NAMA required it. Someone allowed that access to disappear.

Mr. Brendan McDonagh

I understand the Deputy's point but we can only go with what is in the legislation. That limits us to issue bonds at the price we paid.

That is grand. I wish to move to the German statement. There are two references on page 3. One states that NAMA is not interested in plans which envisage stabilisation or a modest reduction in debt over the medium term, the other that if people cannot do a debt reduction, the only option is foreclosure. How many people does NAMA expect to put out of work as a result of its actions? If the IMF were to approach Ireland on the basis that it would not tolerate a modest reduction in or stabilisation of debt in the medium term, all the lights in the country would go off at teatime. However, Mr. Daly appears to have the attitude that he will not tolerate a modest reduction in debt over the medium term and if people cannot achieve a debt reduction now, the only other option is foreclosure. Has Mr. Daly worked out, is he interested or does he care about how many people such a draconian interpretation would put out of work? There is no reason NAMA must go straight for the foreclosure option. Mr. Daly maintains it is a last resort but he puts it as the only option if people are not making large reductions.

Mr. Frank Daly

No. I am certainly not putting it up as the only option. As I have already explained, it is the last resort and it is where we go when we have no other option. The targets we are setting for a three to five-year timetable are reasonable. NAMA has a mission or objective to work this out in a period of seven to ten years and we are supposed to go out of business at that stage. There must be mid-term objectives along the way. Having gone through all of the detail, we believe these are reasonable objectives. We put a great deal of effort into engaging with the debtors and developers, whoever they may be, in this regard. Again, our preferred option is to work it out with them on a consensual basis. If that does not happen, there is no other option. We cannot continue to throw good taxpayers' money after bad. We are very conscious of the consequences of any receivership.

There appears to be some confusion. Mr. Daly referred to "work out" and business plans earlier. Is Mr. Graham Emmett among NAMA's staff?

Mr. Frank Daly

Yes, he is there.

He attended a conference in September and spoke to the British press afterwards, stating that NAMA was a property company and business plans should never have been asked for because what borrowers need to produce for NAMA is a liquidation plan. Is there a conflict between what you have stated and what Mr. Emmett stated in September?

Mr. Frank Daly

I am unsure whether that is a press report.

It was a quotation.

Mr. Frank Daly

The NAMA board's policy is to work out things on the basis that I have stated and that liquidation or receivership is the last resort. Certainly, it is not our preferred option.

Do you disagree with what Mr. Emmett is reported to have said?

Mr. Frank Daly

I am not sure whether that is the case.

Will you clarify that for us at some stage?

Mr. Frank Daly

Certainly, I would like to clarify it. I refer back to the remarks of Deputy Fleming regarding our sensitivity towards people who may be out of work as a consequence. Of course we are conscious of that. Regarding Deputy Jim O'Keeffe's question earlier, we do not live in isolation. We are people in touch with the real world. But what should one do? If one reaches the stage where one decides by all objective criteria that a business is not viable, are we supposed to continue to pour more money into it?

Mr. Frank Daly

Every penny we pour in now is taxpayers' money. It is not the banks' money anymore.

I am pleased that Mr. Daly has moved on to the phrase "taxpayers' money". I refer to the next part of Mr. Daly's opening statement when he referred to overheads and salaries. He made soothing noises about extravagant personal spending. Mr. Daly mentioned it in a nice way but I wish to tease out the detail. How does NAMA put a value on a person's contribution? What is the highest amount NAMA has allowed for a person's personal spending? Mr. Daly referred to personal spending and he is now saying it involves taxpayers' money. If NAMA has not done so it would be a disgrace but it should have a table worked out for someone who comes to the agency. Let us suppose NAMA allows a facility for whoever is on the books, including the debtors. Is there a table that NAMA uses which allows them to live on a certain amount for personal spending? What is the figure for such a person's mortgage, house expenses, car expenses, SUV costs, foreign holidays and other income? How does NAMA value the income from such a person's spouse? Mr. Daly has stated this is taxpayers' money. Does NAMA have a chart which it can give the committee which shows how much it allows per individual for personal spending out of taxpayers' money?

Mr. Frank Daly

No, we do not have such a chart. As I said in my statement we do not set salary or personal spending levels.

Is Mr. Daly telling me there is no limit on what a person can obtain through dealing with NAMA for personal spending? I suggest at this stage that NAMA should employ a social welfare or community welfare officer to advise it because thousands of people depend on the same taxpayers' money to which Mr. Daly referred and have an exact table of what they are allowed for each of the items I mentioned. If taxpayers' money is being used, there should not be two systems of allowing for personal spending by the Irish taxpayer, one for those on social welfare and another for those on NAMA social welfare. We must see this.

Mr. Frank Daly

Let me explain. We do not set salary levels. We do not set personal spending levels.

NAMA should do so.

Mr. Frank Daly

We have not done so in any business plan to date. We set overheads for a business. When someone comes to us we consider the overheads. Personal spending and salary come from the overheads figure. Some of the businesses which have come to us with business plans, including those we spoke about rejecting earlier, have had totally unrealistic salary figures. The highest case involved someone seeking €1.5 million. I assure the committee that request did not get beyond first base. We focus on the overheads. We put it to people that we believe the overheads in a given business are too high. Typically, we have instructed people to reduce them to one quarter of what they were or, in some cases, one half. Then we ensure they are applied to best effect to preserve the value of the asset and they are kept under review throughout the process. This is not something we set at the beginning of the process. If someone comes to us and suggests a level of overheads for the business and we believe there is the capacity for him or her to be living a high lifestyle or to be overpaying themselves, we will simply not approve those overheads.

I am not satisfied with that answer. I interpret Mr. Daly as suggesting that the personal living expenses for an individual may in some cases be cut to one quarter, a benchmark to which Mr. Daly has referred several times here. I imagine a developer could give up his private plane or jet and cut his expenses but continue to drive in a Bentley or Rolls Royce from taxpayers' money and it might be one quarter of what it cost to run the jet. I do not believe it is appropriate to pick a percentage cut. Money is at issue. NAMA will not be paying a percentage when it is over. While it is good to achieve a 75% cut, a person can do so by getting rid of his jet but he should not be allowed to drive around in a Bentley at the taxpayer's expense.

Mr. Frank Daly

The jets, yachts, Bentleys or whatever are not supported by NAMA and in many cases we will insist they are sold by NAMA to reduce the level of indebtedness.

Mr. Frank Daly

It is already happening because we put it to them in the business plans that they must excise a certain amount of indebtedness over a certain period and they must bring every asset into that and must begin to get rid of certain assets.

Why would NAMA allow such personal spending? That is NAMA's phrase and it is in the NAMA document. The agency allows personal spending. What if a person's spouse has a good income or a good share in a pension fund or some other asset? If this involved those on social welfare, they would not qualify for any payment for personal spending if their spouse had a reasonable level of income. Why are we even discussing allowing personal expenditure?

Mr. Frank Daly

If a spouse has assets that should be brought into the business of the debtor we will pursue that to the utmost. We are taking what I believe to be a pragmatic approach, namely, reducing overheads considerably, down to a quarter of what they were for a business. Within that, the individual must decide how much he will spend on his lifestyle and how much he will spend working with us to work out the business.

I understand that.

Mr. Frank Daly

The consequence of not working with us and of coming in with an extravagant lifestyle and not repaying his debt is that we will move to receivership.

I question the whole premise of the percentage reduction. To use Mr. Daly's words, everyone lost the run of themselves for a ten-year period. NAMA is basing what they can keep now on a figure which, Mr. Daly has already accepted, was related to when these people had lost the run of themselves. There should be no connection between what they are allowed spend now on personal spending and what they were earning when they had lost the run of themselves. An absolute figure should be set out for what a person requires to be able to live in a house, run a car, have meals and get the children to school. There should be a figure, not a percentage of a figure dating from when they lost the run of themselves.

Mr. Frank Daly

I do not believe there will be any comparison between what some of these people were spending prior to NAMA and what they are spending within NAMA.

There should not be.

Mr. Frank Daly

It is only realistic for us to set an overall target. We could be tied up in knots if we decided what people can spend on their children or schools.

The chairman should have a schedule worked out.

I will be brief. I welcome the delegation from NAMA. I would like to pick up on the point made by Deputy O'Keeffe on the quality of the information it got from the banks in 2009 and which fed into the draft business plan in October 2009. Some of the information must have come from fantasyland because if one considers the reality NAMA found when it went in and did a loan-by-loan analysis and a detailed probe, some serious questions need to be answered about the intentions behind some of the information it was given.

For example, in the draft business plan it was anticipated at that time that €77 billion worth of loans would be acquired and that €62 billion of that would be repaid by borrowers over the lifetime of NAMA, 40% of the loans were performing and the loan-to-value ratio was 77%. We know the reality is entirely different. The level of performing loans is 25% and the loan-to-value ratio, as Mr. McDonagh mentioned, is closer to 100%, something which is a matter of fact and which did not change because of the deterioration in the economic environment. How could they have gotten it so wrong?

In his response to Deputy O'Keeffe, Mr. McDonagh referred to a lack of systems but I would take a far more cynical view, namely, that the banks were concerned with trying to extract the maximum possible price from the taxpayer for the loans which we were acquiring.

Mr. Brendan McDonagh

In terms of that, I do not disagree with the Deputy. The reality of our detailed loan-by-loan analysis showed up what it was. People sitting on the boards and senior management in those companies had responsibilities. I recall that when the Minister went into the Dáil on 16 September 2009 and introduced the NAMA Bill there were Stock Exchange statements by the two major banks into the market telling it that they expected their discount to be even less than 30%. The reality has turned out to be different. The Deputy is completely right. There are questions to be asked and answered.

We went in, found what the situation was and reported on it. The discounts are much higher than what could have been anticipated. Based on the information provided at the time, and given what we have been dealing with in terms of the banks over the past ten months and the due diligence which is coming through, they are finding out things about borrowers and loans that they should have had at their fingertips before. They did not have this and there are huge systems failures on the back of that.

I think it is much more than that. If NAMA had not taken such a rigorous approach in going in and analysing every single loan individually and had taken the information it was given at face value, it would have dramatically overpaid for the loans it was acquiring.

Mr. Brendan McDonagh

Absolutely.

That would have been at the net expense of the taxpayer. It seems to me that there was a clear pattern of false and misleading information being fed into NAMA by the main banks in Ireland during 2009. That has to be investigated. I do not know who has the function to refer that information to the Garda, the National Bureau of Fraud Investigation or the Office of the Director of Corporate Enforcement, but it needs to be done. Some of the data would have changed with the deteriorating economic environment. I can understand the percentage of performing loans changing, for example, and Mr. McDonagh referred to that in his opening remarks. However, getting the loan-to-value ratio so wrong across the board should have rung alarm bells that there was something more going on. It needs to be investigated by the Garda and the Director of Corporate Enforcement. I do not know whether NAMA can make information available to them but there is a clear, systematic pattern of false and misleading information being fed into NAMA and that cannot go unaccounted for.

Mr. Brendan McDonagh

I do not disagree with anything the Deputy said. The first port of call in terms of looking at that must be the Financial Regulator, who has responsibility for supervising and knowing what goes on within the banks. We will provide whatever assistance we can to anybody. I can assure the Deputy that we have established the facts and will make that information available to any regulatory authority, if appropriate. This is where we are now. Other people have questions to answer on what was done in the past.

Is that process under way? Has the regulator looked for information on all of the details that were provided to NAMA?

Mr. Brendan McDonagh

Absolutely. The European Commission is working hand in hand with the Financial Regulator on the auditing of every single loan evaluation that is happening. The regulator has access to all that information and what it does with that is a matter for it.

In view of Mr. McDonagh's comments, the committee should write to the regulator now, make it aware of the comments and ask it to inform the committee of the appropriate action it proposes to take.

Absolutely. I recognise that it is a very serious charge to make but the evidence is overwhelming that the information being provided to NAMA was fundamentally false and misleading.

We will do that.

The regulatory authority needs to investigate and involve, as appropriate, the Garda and the Director of Corporate Enforcement. I welcome the Chairman's suggestion.

NAMA has acquired loans of €53 billion to date and has issued bonds worth €23 billion. What is the current market value of the loans which have been acquired? We paid €23 billion. How much of that has a long-term economic value?

Mr. Brendan McDonagh

The way the valuation process works is that the loan value which NAMA pays is very closely approximate to the current market value of the property. There is one valuation date of the property, 30 November 2009. Some two thirds of the portfolio relates to Ireland and one third is overseas, the majority of which is in the UK. The Irish market, according to current indices, is down another 8% since that time and the UK market is up 6%. Overall, there is an average of about 3% deterioration in the value compared with 30 November 2009.

At the time of purchasing those loans we paid €23 billion. What was their market value at that time? How much was added to that as the long-term economic value to reach the figure of €23 billion?

Mr. Brendan McDonagh

I will give the figures in aggregate to the Deputy as it might be easier to explain. If one looks at tranche 1, the current market value of the property at that time was €7.5 billion, the long-term economic value was €8.3 billion and we paid €7.7 billion. There is a huge link between the consideration of €7.7 billion and the market value of the property of €7.5 billion.

On tranche 2, the current market value of the property was €5.4 billion, the long-term economic value was €5.9 billion and we paid €5.3 billion. Effectively, the consideration is very much linked to the current market value of the property. While one goes through uplifting for the long-term economic value, because the cashflows are discounted back to today's figures one erodes the long-term economic value and banks end up effectively being paid the current market value of the property.

We have been paying far closer to the current market value.

Mr. Brendan McDonagh

By reference to 30 November 2009.

There has been slippage since.

Mr. Brendan McDonagh

Yes.

Of the €73 billion we expect to acquire, how much of that do we now anticipate will be repaid in cash?

Mr. Brendan McDonagh

On the €73 billion paid, if we end up paying €30 billion in consideration and we could sell every single asset, if the market could take it, we would get €30 billion for the assets.

My question related to the €73 billion in loans which NAMA is acquiring. How much of that will be repaid by the borrowers?

Mr. Brendan McDonagh

We will pursue the borrowers for the full amount. Many of the borrowers have given personal guarantees. If they try to place money such that it cannot be accessed by NAMA, we will pursue the personal guarantee to get the money back. If, for argument's sake, a loan were worth €100 million and the asset €50 million, it could be sold for €50 million. If the borrower has put €5 million into his wife's name or the name of a family member and has a personal guarantee, we will actively pursue the €5 million to get it back, thereby getting €55 million back for the taxpayer even though we would only have paid €50 million for the asset. Effectively the borrower is on the hook for the €100 million.

Mr. Brendan McDonagh

With regard to how much more than €30 billion can be got back, it certainly depends on how much we need to pursue assets transferred to third parties. We will only address this as we go through the business plan process with each borrower. We have agreed plans with a couple of borrowers to date. One borrower has brought €50 million worth of assets back into the pot as part of our engagement with him.

Is the percentage of performing loans still approximately 25%?

Mr. Brendan McDonagh

Yes.

Are the performing loans fully performing?

Mr. Brendan McDonagh

Yes. What NAMA means by performing is cashflow paying, or the payment of real cash. Banks regard performing loans as those held by people who are meeting their commitments contractually. Even if their interest is rolled up, the loans can be counted as performing.

Mr. Brendan McDonagh

At the end of June the percentage would be 29%. By the time we acquire all the portfolio, we will be hopeful and quite confident that we will be able to exceed the board's realistic target of 25%. One of the big issues has been the lack of debtor engagement between the banks and the borrowers until we acquire the portfolios. Effectively we are pursuing the borrowers and saying that if they have free cash, they must give it to us with the interest.

Are the 25% paying interest and capital?

Mr. Brendan McDonagh

Yes.

Mr. Daly stated in his opening remarks that where it is obvious that a transfer of assets is a pre-emptive attempt to put the assets beyond the reach of NAMA, NAMA will use the provisions in the Act to pursue the borrower. Has Mr. Daly encountered evidence of such attempts to date? Is he pursuing any such matters?

Mr. Frank Daly

Yes. To answer the first part of the Deputy's question, in our examination of the business plans and examinations beyond what is actually put before us on the table, we would have found evidence of assets that were transferred. Some of those assets have been brought back in voluntarily during the business plan process, during which we pointed out that the debtors could reverse the transactions voluntarily, the alternative being that we would chase them up. We have not taken legal action at this stage to reverse any transactions. However, we do so as and when the need arises. We are very committed to doing so and we have the means. There is provision in the NAMA legislation and the land and conveyancing legislation. We will avail of this.

Will Mr. Daly give us a flavour of the evidence for transfers designed to evade the reach of NAMA? Were the assets transferred to family members or related companies?

Mr. Frank Daly

The ones we have seen to date have predominantly been to family members. Either a property or some other asset was transferred in the past four years.

Are we talking about many cases or is there an isolated number?

Mr. Frank Daly

There is a fair number of them. I do not think it happened in relation to every one of the debtors we have examined so far.

Would NAMA have come across examples in the top ten cases?

Mr. Frank Daly

Yes.

Mr. Brendan McDonagh

The majority of what I would call the more sophisticated debtors – the tranche 1, 2 and 3 borrowers – would have transferred assets to third-party names.

Mr. Brendan McDonagh

Yes, in our experience of the cases we have encountered to date.

Mr. Frank Daly

We do not take at face value in this process what is put before us on the table. We conduct our asset searches at different levels, depending on the level of concern we have over whether we believe every asset has been disclosed to us.

Is it NAMA's view that in regard to many of those transfers, be they to spouses, sons, daughters or corporate entities, the purpose was to put the debtors beyond the reach of NAMA?

Mr. Frank Daly

No. Nobody would say that is why he transferred the assets.

Mr. Brendan McDonagh

They would give reasons such as tax planning, making provision for their families or having been encouraged by their advisers to do so for all sorts of reasons. I am sceptical about that. It is usually the case that they knew NAMA would pursue them, especially where they had personal guarantees. While they might have been protected by their corporate veil if they were borrowing by the special purpose vehicle, if they had given a personal guarantee on top of that I suspect they would have tried to transfer the assets.

Can Mr. McDonagh reassure us that in every such case, NAMA will use the powers available to it to pursue them?

Mr. Brendan McDonagh

Absolutely.

Mr. Frank Daly

There is no doubt about that.

It was stated that some of the debtors have voluntarily reversed the transfers while others have not. At what point does NAMA initiate proceedings under the legislation to seek to undo the transfers?

Mr. Frank Daly

In the business plan process, one still tries to persuade them to undo the transfers. At the stage where they refuse to do so and were it is clear they will not take any action, we will initiate the appropriate proceedings. In the published policy statements of the board, published in our business plan, it is quite clear that we will go after all those debtors.

How much of the €5 billion loan facility has been extended to date? What proceeds have been received from the sale of property? What is the overall value of deals done in respect of the disposal of NAMA assets thus far?

Mr. Brendan McDonagh

In terms of the €5 billion facility, we have not entered the markets because the markets are obviously very difficult. We have set up a Euro commercial paper programme for short-term borrowing worth €2.5 billion. We have not actually gone into the markets in that regard and are in the middle of setting up a €2.5 billion longer-term programme called the Euro medium-term note programme. It will be finalised before the end of the year. Since we have been cash generative since we started, and since, by the end of September, we had built our cash balances to more than €600 million, we were in a position to repay the Minister for Finance the €250 million in working capital he gave us on our establishment. This allowed us to advance working capital to borrowers, which was obviously very welcome. We were able to repay the money to the Minister.

We have approved advances to borrowers for working capital and to finish off projects where it made commercial sense for us to do so. These advances have amounted to approximately €350 million to date. This involves a quite involved process in which the borrower makes an application for money. The cases are assessed by the NAMA teams, including those associated with credit risk, banking and portfolio management, and evidence submitted to the credit committee. If the advance is sufficiently large, it must be put to the board for approval. There are checks and balances all along the way.

What about the disposal of property by NAMA?

Mr. Brendan McDonagh

In terms of NAMA's property disposal, we have not foreclosed and taken hold of any assets directly. We are working with borrowers in terms of the disposal of assets. Since 1 March this year, when NAMA really came into operation, we have approved as part of the process the disposal of up to €1 billion. Some of these loans were syndicated loans that involved banks in the Irish banking system that are not part of NAMA. If an affected borrower wanted to sell a loan with Ulster Bank or Bank of Scotland, for example, we would be involved in that.

To date, NAMA would have realised probably in the region of €250 million. Where a sale went through, we were collecting the cash. In terms of prospective realisation, there is at least another €350 million in the pipeline in respect of which we hope the relevant cases will be concluded by the end of the year. As can happen with property transactions, the borrower can offer to pull out at the last moment. That has happened on a few occasions but that is the business we are in. We are achieving disposal in the market. It is important to say to the Deputy that the main source of liquidity at present is in the overseas market. That is where it is easier to make disposals.

Before inviting Deputy Rabbitte to ask a question, in the context of loans, I read somewhere that NAMA applied 100% discount on some loans. How could that happen?

Mr. Brendan McDonagh

Yes, that would have happened because of inadequate legal documentation, where, in effect, the bank had no correct security or title over the loan. The bank had advanced the loan to the borrower but the documentation was defective. If one tried to enforce on the loan the borrower could have got out from under it. That was due to the problem of the documentation in the banks being inadequate.

Did that happen often?

Mr. Brendan McDonagh

That was quite a feature, as the chairman said. We discounted in the region of €260 million on the price we paid to the banks on the back of that. Sometimes it was a 15% legal haircut and at other times it was a 100% legal haircut. We did not acquire €1 billion of loans in tranche one because we were threatening to apply up to a 100% haircut. The banks discussed the issue with the borrower and fixed the majority of those loans which have now been acquired by NAMA. Effectively, if NAMA had paid for those loans and if we tried to enforce them we would be answering to the Deputy on why we paid money for those loans when there was no security. We put the onus on the bank to resolve the matter.

I have a couple of quick questions. I do not wish to hold up the progress of the nation if a board meeting is pending. I have a small point to put to Mr. Daly. Why did he say in his statement that the loans acquired were €53 billion but the written statement indicates €62 billion?

Mr. Frank Daly

I am sorry. The figure in the written statement was a draft figure. It was incorrect. It is as simple as that.

What will be left outstanding by 30 December?

Mr. Frank Daly

Nothing will be left outstanding by the end of the year because in the next few weeks we will have acquired the full portfolio that is coming across to NAMA of €73 billion. We will have paid something in the order of €30 billion for those loans.

Will there literally be nothing above the new threshold left to be transferred?

Mr. Frank Daly

There might be one or two cases where legal issues arise. I do not wish to comment on what is happening in the Supreme Court at the moment but there might be one or two cases outstanding. The bulk of the operation will be completed by the end of the year.

Could what might be left outstanding be very big?

Mr. Frank Daly

Not in the scheme of things. Not in the context of €73 billion.

Last week the ECB was no longer happy to accept funding requests from Irish banks on the basis of the quality of the collateral being offered. Were NAMA bonds rejected at any stage?

Mr. Frank Daly

No.

The outside assistance that NAMA had to acquire included experts in financial derivatives. Did NAMA have to resort frequently to experts in that area?

Mr. Frank Daly

We have a very small team of expert people in that area who advise us throughout the process.

Mr. Brendan McDonagh

We use Société Générale, which is a major French bank, to value derivatives. They are the people who value the derivatives that are acquired as part of the loans from the institutions. We advertised and they won the contract.

I am not so interested in that aspect of the matter. I am sure the best advice available has been selected. NAMA should do that given what it is paying for the advice. To what extent did our banks resort to the use of derivatives?

Mr. Brendan McDonagh

The derivatives we are acquiring are straightforward derivatives. They are primarily interest rate swaps where, effectively, when the borrower borrowed money he wanted to protect himself against interest rates rising so the bank would have given him an interest rate swap as well to fix his mortgage, as such. Banks all over the world engage in derivatives in terms of their own book but that is not something that would involve NAMA. We are only interested in derivatives which were attached to the loans.

In terms of the way we have recently seen the price of money on the bond markets increase, were positions on derivatives taken up by any of the banks that could provide difficulties for the State later?

Mr. Brendan McDonagh

I am not aware of that. The question is probably more appropriate to the Financial Regulator because I do not have access to that type of information other than what is in the annual reports of the banks. Irish banks were not exposed to toxic financial products. They were exposed to an over-dependence on property lending. That was the majority of their balance sheets. When I was involved in a previous life in the NTMA I worked with Mr. John Corrigan to look at the banks after the guarantee was introduced. The balance sheets of the banks were very straightforward when aggregated. They had approximately €60 billion loaned out on land and development, €100 billion on commercial real estate, €140 billion loaned out on residential mortgages and approximately €100 billion to all other sectors of the economy. They did not have any exposure to financial products in the manner of banks in other countries which caused them huge difficulties. The asset side of their balance sheet was based on lending primarily to the property sector.

From Mr. McDonagh's work in the area, is he satisfied that there are no landmines lurking in the banks because of the use or abuse of the derivative instrument?

Mr. Brendan McDonagh

From my information based on the work I did at that time, the problem was property-based lending. I presume that is the same now the banks have been forced to deleverage. I am not aware of whether they have any exposure currently. Mr. Elderfield is the appropriate person to answer the question. As far as I am aware that is not a significant issue.

Does Mr. McDonagh include Anglo Irish Bank, for example, in his answer?

Mr. Brendan McDonagh

All I can go on is information to which I had access a couple of years ago. I do not have that information now. I cannot say what the current position is.

When Mr. Daly was talking to my colleagues he referred to the madness that overcame the banks, and the extraordinary revelation that in some cases there was a 100% write-off because of defective paperwork. If NAMA had not been established could we ever have relied on the banks to clean up their own mess?

Mr. Frank Daly

That is a tough question. My view, based on what I have seen in the past year or so, is that they would have eventually had to clean up the mess. This would have emerged in terms of what is happening in the wider economy. It would have been done on a very piecemeal basis. There would have been a continuous drip-feed of more and more bad data and bad information coming from the banks.

Apart from the core objective of NAMA of taking the €73 billion in deadweight off the banks books and enabling them to get access to liquidity, the other achievement of NAMA has been to force the banks to face up to the reality of what was in their books. That would not have happened at the same speed or to the same degree of accuracy without NAMA's involvement.

Wearing his former hat, does Mr. Daly think the paperwork he has discovered in the Irish banks meant that in the past they got away without paying their due tithe to the Exchequer?

Mr. Frank Daly

Wearing my former hat, I have not seen any particular instances of that. I have seen evidence of some very creative structuring, if I can put it that way. The one thing I am clear about is that my former colleagues are very well clued in to what has been happening and that if there are issues to be dealt with, they will deal with them.

In any economy, even a post-boom economy, there is a minimum of construction. Some critics would say that NAMA is a dead hand on construction activity, which has been slow for the past two years. I accept NAMA is not up and running two years. However, there is no market for construction and there are projects that could get under way if only we could determine what the market is. Until NAMA gets on with disposal of properties and so on, nothing will happen.

Mr. Frank Daly

I will make a couple of comments on that point. We are getting on with disposal of properties, which while slow at the moment will accelerate fairly quickly. The people who say that nothing has been happening because of NAMA are probably forgetting that to have construction and activity in the property market one needs finance. In this regard one must ask from where this finance would have come during the past year or so. The banks were not lending. Where would the banks be without the €20 billion or €30 billion of liquidity to which NAMA has indirectly given them access? I do not see NAMA as a dead hand. I am sure there are people who decided to sit back and wait to see what NAMA would do. We are not a dead hand, rather we are a commercial organisation in terms of the approach we take. We have made credit and other decisions during the past several months. I explained earlier that approval of the business plans is not the only activity in which we are engaged. We have approved credit in several instances and, as stated by Mr. McDonagh, we have to date advanced approximately €350 million of the €5 billion, all of which should be a spur to activity. I think we will see a great deal more in this regard.

It is not possible to respond to the statement of NAMA being a dead hand without posing the question that if NAMA had not done what it did in the past year, from where would money have come in the first instance.

Does Mr. Daly anticipate a day when, for example, NAMA might call in the county managers to discuss its doing business with the local authorities in respect of the number of properties it has on its hands in particular zones which are lying idle while there are people in need of housing?

Mr. Frank Daly

We have engaged in a process with the local authorities. NAMA has a planning and advisory committee, chaired by former county manager, Willie Soffe. The committee has engaged with many bodies, including the HSE, the Department of Education and Skills, county and city managers and local authorities. It also engages on a rural basis with the Department of the Environment, Heritage and Local Government. We have made a clear statement in our business plan that where a need is demonstrated by a local or other authority for a property in NAMA's portfolio, we will engage with it and give it first refusal in respect of that property. We are happy to do that. There is no significant evidence of such demand so far. We are engaged in that process and welcome it.

If the HSE believed it possible to convert a particular closed hotel into a geriatric home, thus taking people out of hospital beds, could that be done?

Mr. Frank Daly

Yes. We have already had that discussion with the HSE. The difficulty is that the standards in terms of hospitals and care facilities are so high, and correctly so, that the view is that the cost of conversion of hotels might be prohibitive.

I might also mention that the view is that NAMA will own hundreds of hotels after this process. The reality is that we will have approximately 100 hotels. There are many other players in the Irish market who are not in NAMA, in particular Bank of Scotland which is involved in the hotel business. On the Deputy's core point, we are engaging with local authorities and welcome that engagement. We would have no difficulty with that.

Arising from Deputy Rabbitte's questions, the figure of 71% in terms of transferred properties, relates to completed estates and commercial properties. What percentage of the 71% has been to date put on the market?

Mr. Brendan McDonagh

Up until NAMA acquired the loans, the developers and banks did not want to put this property on the market. In my assessment, the banks wanted to pretend a particular apartment was still worth €400,000 when in reality the market value was €200,000. In fairness, a borrower told us he wanted to put the property on the market but the banks would not let him because they were waiting for NAMA to buy the asset. They believed we would pay close to €400,000 for it, which we did not.

In terms of our engagement with borrowers as part of the business plan process, we are setting targets for disposal and are working with them to identify particular priorities for disposal. The housing market is non-functioning. This over-hang must be dealt with and we realise that some teaser offers may have to be made in order to find a floor in terms of where the market is. This might result in allowing the borrower to sell the asset for less than NAMA paid for it. This often happens in order to get transaction activity in the market and for the market to find a clearing level. There are recent examples of receivers putting particular properties, not in NAMA, on the market at a certain price resulting in a particular level of activity. Once people saw these properties selling the remainder sold and at much better prices than that at which they started off. This is what needs to happen.

How much of the remaining 29% relates to unfinished or ghost estates? Bearing in mind that figure, has NAMA engaged in discussions with developers in regard to finishing such estates?

Mr. Brendan McDonagh

Developments less than 30% complete form a small element of our portfolio in terms of tranches 1 and 2. As far as I can recall the percentage in that regard is 4% or 5%.

The big issue for developers, in terms of finishing ghost estates, has been that the banks will not give them the money to finish them off. When these developers' loans transfer to NAMA we will have to sit down and examine whether it is worthwhile putting money into finishing these estates or whether we should do something innovative such as fence them off for, say, health and safety or other reasons. We will have to work with borrowers on a case-by-case basis. It is a difficult situation, which we recognise.

The NTMA quarterly review, which we received in July, records the amount of loans at €81 billion. What is the reason for the reduction of 10% to €73 billion in a matter of a few months?

Mr. Brendan McDonagh

That came about as a result of the statement made by the Minister for Finance on 30 September in regard to the banking system and trying to get finality in terms of what would be the cost of recapitalising the banks and of the NAMA transfers. The Minister in that statement said he would increase the threshold of loans transferring to NAMA from AIB and Bank of Ireland from the €5 million limit to the €20 million limit, resulting in close to approximately €7 billion worth of loans not going into NAMA.

NAMA came into being in September 2009.

Mr. Brendan McDonagh

No. It only came into formal existence on 22 December 2009 when the board was appointed. That is its establishment date, as set by the Minister. Up to that point, the NTMA was trying to do the preparatory work to allow the board to move quickly after its appointment.

Mr. McDonagh has given an explanation for the €81 billion worth of loans decreasing to €73 billion. The initial figure was approximately €150 billion, which was the extent of the toxic loans within the banks. How was that figure reduced to €81 billion?

Mr. Brendan McDonagh

There is not that level of problem loans within the institutions. As I explained, the riskiest parts of the banks' loan books were the land and development loans, which amounted to approximately €60 billion at the end of 2008. Another €100 billion was lent to commercial real estate, which ranges from office blocks to shopping centres to industrial buildings. It was decided that NAMA would take the land development loans from the banks. Those who borrowed for lands and developments would also have their associated loans removed from the banks as well. Their total exposure, including outside investment loans, would be removed. It was not just the loans that constituted the risk, but the borrowers, as they could not sustain that level of borrowing and, as such, were a threat to the banking system.

Dr. Peter Bacon, one of those in discussions with officials - I am using "officials" as the wider term for those involved in the NTMA, the Department of Finance and others - calculated that the toxic hole in the banks amounted to €150 billion.

Mr. Brendan McDonagh

No. I worked with Dr. Bacon on that report. He stated that the direct exposure to what he called riskier property lending amounted to €60 billion in land and development loans and €100 billion in investment loans. It was from these he derived the €160 billion figure. Not all of it is bad, as it also comprises good loans and assets. What was decided and what Dr. Bacon recommended was that one should remove the land and development loans and the relevant borrowers' associated loans, which resulted in a portfolio comprising €80 billion, some 50% of the initial amount.

It looks as if the €150 billion figure for loan values has been reduced to €73 billion. The markets do not believe enough of the remaining €80 billion is good. This is what is crippling us.

Mr. Brendan McDonagh

Markets-----

NAMA has done its work in terms of the €73 billion.

Mr. Brendan McDonagh

Yes.

I am not criticising that work. The €80 billion left behind is tripping us up.

Mr. Brendan McDonagh

The Financial Regulator, who has done a prudential capital assessment and stress testing of the banks, has imposed capital level targets on them to deal with losses in the remainder of the non-NAMA book and part of that book. I do not have better information than the committee, but if Mr. Elderfield says he has done a capital assessment, I have no reason not to believe that he is forcing the banks to deal with potential losses of that level.

Mr. McDonagh is telling the committee almost exactly what the Secretary General of the Department of Finance told us a few weeks ago, namely, that he is satisfied the numbers have been analysed and scrutinised closely. The markets do not seem to believe anyone.

Bonds amounting to €23 billion are to be made available by the ECB to the banks. The figure could increase to €30 billion. Are these figures included in the more than €100 billion received by the banks in liquidity from the ECB? Alternatively, is this year's final figure going to be the more than €100 billion plus the €23 billion plus the additional €7 billion?

Mr. Brendan McDonagh

My understanding is that the ECB will only advance money against what it regards as good quality collateral. I do not have direct access to the information, but I assume the banks will use the NAMA bonds, which amount to €23 billion to date, to access liquidity. That figure is probably included in the €100 billion. I do not have direct knowledge of it. Rather, I am making an educated assessment.

I will touch upon the question of developers and banks being negligent. When I say negligent, I am referring to certain premises and sites being left in neglected states. NAMA's role differs from ours, yet we are receiving reports from the general public concerning dangerous sites. Mr. Daly mentioned how it is an offence to lobby. To whom should a public representative go if he or she is receiving complaints about neglected estates that are in the possession of banks, developers or NAMA?

Mr. Frank Daly

When I referred to lobbying, I did not mean the normal type of information that a public representative might want to pass on to NAMA. There would be no difficulty in that respect.

If the information is of that nature.

Mr. Frank Daly

Yes.

Mr. Brendan McDonagh

We would welcome it. If people can give us information, we can take matters up with the borrower directly to determine the situation. We have noticed that everyone assumes every estate in a neglected condition is NAMA's, but many of them are not or they are funded by other banks.

Many of them are NAMA's.

Mr. Brendan McDonagh

I accept that.

Clarification is good. People seem to be terrified to ask NAMA a question for fear of prosecution.

Mr. Frank Daly

No. That is not lobbying. Lobbying is when someone tries to influence a decision of NAMA for personal benefit. Passing on information is not remotely like that.

As to the figure of €73 billion, issuing bonds for €30 billion constitutes a 58% write-down. Will it reduce further?

Mr. Brendan McDonagh

No. The discount will be in or around that level. We will need to do the full due diligence, but we must first acquire the loans after the administrative statement. There is no material difference, as we now possess a great deal of knowledge in terms of geography and asset type. We have performed full due diligence on approximately 5,500 loans. We can apply many metrics that can give us a reasonably good assessment of what the discount should be for any type of asset.

As the largest property corporation in the State by a long way, is NAMA satisfied there will not be further reductions? I appreciate it is only an opinion.

Mr. Frank Daly

Is the Deputy referring to further reductions in the discount?

In the market. Having analysed properties across the country using its staff, the banks and developers, is NAMA satisfied this figure will be the base?

Mr. Frank Daly

I will hand over to our property expert.

Mr. John Mulcahy

I would be reluctant to make a forecast, but the consensus among commentators seems to be that, if we are not at the bottom, we are close. The UK market has gone in the other direction, in that it has taken off. So have the markets in the US and Europe.

I will offer a caution. The market is not an amorphous mass. For example, some commentators believe shortages of certain types of residential accommodation will appear in south County Dublin within 18 months whereas there will be a long-term oversupply of some out-of-Dublin locations, which might not recover. However, the generality of commentators seem to be of the view that, if we are not at the bottom, we are close to it or too close to call.

My next question follows on from that. While Mr. Daly has referred to the belief that NAMA has been slow, in my view it is not a belief as the agency has been slow to move assets to the market. The witnesses have stated that NAMA is now concluding its initial process, which is to move all the properties and loans across to the agency. This suggests that NAMA needs to move more quickly to the next stage, which is to test the market because for as long as NAMA is not selling, no one else will do so. NAMA and no one else will put the base on the market because everyone else is waiting to see what it will do.

Mr. Frank Daly

We are already moving and as I mentioned earlier, we will be moving even faster in future. However, to state that NAMA was slow does not really recognise the full extent of the work we were obliged to do over the past year. Everyone in NAMA is working absolutely flat out. One could not have asked them to work any longer hours or to any greater degree of effort than they are without being completely unreasonable. As for the complexity of what we are dealing with, the Deputy should think of the figures. He should think of the €73 billion, the 850 debtors and the 11,000 individual loans. When one considers such figures, one sees the extent of the issue. Moreover, the Deputy should consider the complexity of some of the structures used by many of those companies.

I can see that. Equally however, I can see that for as long as we do not start to rebuild, tens of thousands of construction workers will remain on the dole. Consequently, as soon as NAMA gets going, there will be some prospect that those who are on the dole might get some work. I appreciate the chairman's point and appreciate the quantity of work that has arisen.

Mr. John Mulcahy

On a point of clarification, we do not stop properties from going on the market. For instance, if we have office buildings, as we do, they are available to let and during the past year, their operators have been successful in attracting tenants for them.

However, for as long as there is an oversupply-----

Mr. John Mulcahy

Yes.

----- there will be no construction, be it residential or commercial.

Mr. John Mulcahy

That is fair comment.

I note NAMA has 100 hotels or thereabouts. How many rooms does that come to?

Mr. Frank Daly

That is probably about-----

Mr. John Mulcahy

Actually, we have 139 hotels in total. As the chairman and chief executive have observed, 87 are in Ireland, 37 in the United Kingdom, five each in Germany and France, two in the Czech Republic and one each in Belgium, Malta and Spain. In respect of the Irish hotels, if one took an average of 120 to 150 bedrooms per hotel, that would give one an idea of the number of bedrooms.

Regardless of whether it is correct, there certainly is a belief that NAMA is allowing developers to develop some hotels of this type, thereby skewing the business for non-NAMA hoteliers. I seek the witnesses' views in this regard.

Mr. Brendan McDonagh

These hotels already have been built and already are in operation. As part of the business plan process with the borrowers, we look to the hotel owners to introduce efficiencies into the operation of their hotels so they are viable. In any business plan that we have done to date in which hotels were involved, these people have not been reliant on NAMA in the course of any financial year. Like any business, they would have short-term cash outfalls because the business drops off in the winter season and so on. To date, however, we have been very rigorous in respect of hotel assessment while trying to get efficiencies in order that they remain self-financing. Just because we have inherited these hotels, we are not in the business of supporting what people call zombie hotels. Although NAMA has been accused of this, it is a very unfair assessment. Other hotels are being supported by non-NAMA banks, which is a real problem because they are allowing them to offer rooms at unrealistic prices. We are not in that business. We are trying to tell operators that it is a competitive market, that we realise it is very difficult but that effectively, the operator must achieve efficiencies in the business in order to be self-financing.

Unfortunately, Mr. McDonagh used the word "viable", which is the crucial word in this regard. Some of these hotels cannot be viable, given what it cost to build them and with the current outputs. At what stage does Mr. McDonagh envisage that NAMA will conclude its losses in respect of hotels that are part of the NAMA process?

Mr. Brendan McDonagh

Towards the middle of 2011, we will be developing a comprehensive strategy to deal with the hotels that are within our portfolio. The big issue for us in this regard is if one bought a functioning hotel that is working quite well at present and in which the operator has done everything to trim back all the costs and so on, but when the hotel 200 m down the road is being supported by another institution that is undercutting the first operator. This is causing as much difficulty for our borrower as it is for a normal family hotel operator.

However, those institutions do not appear before this committee and members can only deal with what is in front of them.

Mr. Brendan McDonagh

Absolutely. My point is that we are dealing with the realities of the market and with whatever people are doing to distort that market. We must develop mechanisms to deal with this. There certainly are hotels that have been built with the wrong grading and in the wrong location. Ultimately, the long-term future of those hotels will not be as hotels and alternative uses must be found for them. I will be completely honest with the Deputy by stating that some hotels certainly must be closed down. The question is what one can do with them and whether one can find alternative uses for them because, as we stated earlier, people in the local economy are dependent on such hotels for jobs or may be supplying services and so we must consider things in the round.

What is NAMA's view regarding the liability that may be owed by those hotels in respect of local authority rates and so on?

Mr. Brendan McDonagh

This issue must be dealt with as part of the business plan process when we meet the borrower. At such meetings, we ask the borrowers for a list of all their creditors. We ask to whom they owe the money and whether they are capable of paying it or otherwise. In the first instance, what NAMA bought was the loan for the hotel, which probably is secured on the premises. As for the business activity, that effectively is being operated by the borrower. However, the borrower may have built up many creditors, which realistically has nothing to do with NAMA.

I am nearly finished.

The Deputy should try to wrap up in a few minutes.

Is there impatience, anger or annoyance with overseas investors in respect of the pace at which NAMA is recapitalising projects or borrowers or both?

Mr. Frank Daly

With overseas investors in particular?

Mr. Frank Daly

I am not sure exactly what the Deputy is getting at. Does he refer to people who wish to do business with NAMA?

Mr. Frank Daly

People certainly are making approaches to us and obviously we welcome each approach while assessing the degree of realism contained therein. However, we also must be careful to avoid being exploited at this stage in our business. In the nature of these things, one will have a lot of bottom feeders who wish to come in and make a quick killing. Again, this reverts to the idea that NAMA is a commercial organisation. We need to get the best value we can for the taxpayer. There probably will be occasions when we will be obliged to sell at less than the acquisition price but we will not be bounced into doing a very bad deal for the Irish taxpayers. However, we welcome approaches and we certainly engage with anyone who approaches us.

I will conclude with one final question, which is directed to Mr. Daly and Mr. McDonagh. Do they believe there was an attempted fraud by the banks in respect of the figures they placed in front of NAMA and which they expected the agency to accept at face value?

We already have dealt with this.

Mr. Frank Daly

We did and I will repeat basically what I stated previously. The figures certainly were misleading. One can speculate as to what exactly was behind that, whether it was carelessness, lack of information, bad systems, denial or anything like that. However, it is not for us to pronounce on whether there was fraud or the intention of fraud behind it.

Mr. Brendan McDonagh

The important thing from the taxpayers' perspective is that we have established the facts and have only paid the value that we believed to be the correct value for the assets. Consequently, it is not as though we are appearing before the committee, having completely overpaid for assets, and are trying to defend how we did so. We have paid what we believe to be the valuation, based on our own assessment, which is independent of the banks.

As I said earlier, we will follow up on that matter with the Financial Regulator. I will allow a brief supplementary question from Deputy O'Keeffe. Mr. Daly and Mr. McDonagh must attend a NAMA board meeting at 2.30 p.m.

How many cases of enforcement does NAMA have on its list?

Mr. Brendan McDonagh

We have approved initiation of enforcement proceedings against 18 people. The banks have recommended the taking of additional enforcement proceedings against a further 15 people. We have opted not to accept that recommendation and to discuss the situation with the borrowers. Although we approved initiation of enforcement proceedings, few of these will reach court. Often a borrower who will not return calls or respond to letters from NAMA will contact us when he or she receives a final letter on the initiation of enforcement proceedings. We want people to come and talk to us. Enforcement is a last resort. People will often only engage with us when we inform them that because they have not returned our calls or responded to our letters, we are going to initiate enforcement proceedings.

One enforcement has been decided by the courts. How does NAMA propose to deal with subcontractors and the issue of unfinished hospitals, which are very much a mercy job?

Mr. Frank Daly

I do not wish to speak about particular cases. I have stated that this is a sensitive area for us. We consider all the consequences. Obviously, some of the consequences will be on subcontractors. The reality is we did not contract with the subcontractors, rather it was the principals of the company that contracted with them and who had knowledge of the company position when doing so.

NAMA had to take the decision on receivership. The reality is that responsibility for that decision having to be taken lies way up the chain. We are dealing with the consequences of situations. On the completion of developments and so on, the reality is that in most cases clients are now engaging with the receiver in examining the best way of completing them.

Does the chairman envisage that being the position in many other cases? It is important that work on hospitals and so on is completed. Are there many such cases in the pipeline? With how many contractors and developers is NAMA dealing?

Mr. Brendan McDonagh

NAMA has approximately 40 contractors or developers in its portfolio. These are the bigger type of contractors who might be well known.

What is the total employment of those contractors?

Mr. Brendan McDonagh

The contractors concerned subcontract and as such do not directly employ a huge number of people.

Does Mr. McDonagh have a rule of thumb figure in this regard? Could it be 10,000, 20,000 or 30,000 people?

Mr. Brendan McDonagh

If there are 40 contractors, each of which has an average of 100 subcontractors, that makes 4,000 people. We are conscious of this.

Mr. Frank Daly

That is only an estimate from our point of view. We do not have visibility down the line in terms of how many people are employed by subcontractors.

NAMA was not established to create misery in the economy.

Mr. Frank Daly

We have no wish whatsoever to create misery in the economy. The reality is that at some stage we have to face up to the problems we have in the economy. I repeat that we engage in a lengthy process prior to appointing a receiver, which is our last resort. We make the decision at the end of the line but responsibility for this lies further up the chain with those who got themselves into these circumstances. We cannot sweep this under the carpet.

While I thank Mr. Daly for answering my questions, my question earlier about newspaper reports was dismissed. Newspapers are fairly accurate in terms of the truth. From where is NAMA sourcing its 1% in the context of AIB?

Mr. Brendan McDonagh

We are giving IOUs to the banks which then bring these financial instruments, which are Government bonds, to the ECB from which they get cash.

It is European Central Bank money.

Mr. Brendan McDonagh

Yes.

What is the margin on that?

Mr. Brendan McDonagh

We do not pay a margin. The interest rate we are paying on the IOU issued to the bank is linked to current interest rate for the money market, which is approximately 1%.

That is concessionary finance. No one on this island, except for NAMA, is borrowing money at that rate.

Mr. Brendan McDonagh

We are paying the banks the market interest rate for six-month money.

What is that rate?

Mr. Brendan McDonagh

It is 1%.

I know that there is no one on this island borrowing money at that rate. It is usually 1.5% plus a margin.

Mr. Brendan McDonagh

Yes, but that must balanced against the income NAMA can collect on the loans to the developers and what they can generate to pay us. We must collect enough money to pay interest on the bonds. This is how the structure is set up.

Deputy Rabbitte made a good point about the clean-up of the mess in our banks and the scale of cuts and so on. It was originally thought that the cut would be of the order of 28%, as stated by the Department of Finance. The haircut has created the problem. How long would it take to clean up the mess if it were left to the banks to do it? In a business situation one must write off debts and so on over a period. Perhaps Mr. Daly will say how long it will take to do this. I do not believe the banks are in a mess. I made the point the other day that 20% would be, for example, the write-off in relation to the €80 million. How long will it take to reach that write-off? We would have a more stable banking system had we done this.

We have been over this ground.

Mr. Frank Daly

I will be brief. I do not believe the banks would have faced up to their problems. I believe the figures presented to NAMA earlier in the process in the context of loan to value and performing loans would have continued for some time. The reality is that during the past year to year and a half, the markets have not believed the banks. They believe the NAMA figures. Who knows then how long the process would have taken? The wider issue is the credibility of the banks.

Bank of Ireland owes approximately €16 billion. Could that bank not have been left to sort out its problems in this regard over a five-year period? Had it been allowed to do so, we would now have a more stable banking system. When one takes that amount of money from a bank, a liquidity problem arises. That is the mess we are in now.

Mr. Frank Daly

Deputy O'Keeffe appears to forget that the banks got themselves into this mess in the first instance.

Yes, but they probably could have got out of it.

Mr. Frank Daly

Could they be trusted to work it out? I am not sure they could.

Lloyds Bank and Bank of Scotland come to mind.

Mr. Frank Daly

There are other schemes in the UK.

They are all principled people, as Mr. Osborne said.

Mr. Frank Daly

One of the strong points of the NAMA approach is that the working out was not left to the people who caused the problem in the first instance. To my mind, that is important.

NAMA is dealing with €70 billion worth of loans and the banks are dealing with €80 billion worth of loans. NAMA had to drag the banks kicking and screaming to the realisation that their numbers were completely wrong. Is NAMA satisfied - the markets are not - that the banks, in terms of resolution of their €80 billion worth of loans, are operating in the real world?

Mr. Frank Daly

This relates back to the point dealt with earlier by Mr. McDonagh, namely, that the Financial Regulator has examined-----

I am asking about the experience of dragging them kicking and screaming.

Mr. Frank Daly

I have confidence in the work that the regulator has done and in the capitalisation requirements he has set for the banks. It is because of the NAMA process that the management of the banks are facing up to their problems. They have a greater capacity and willingness to work these problems out than would be the case if this had not happened.

Can someone give me a definition of "derivative"?

Mr. Brendan McDonagh

A derivative is, in simple terms, the same as converting a variable rate loan into a fixed rate loan. That is the most basic form of derivative. The conversion of a variable rate mortgage into a fixed rate one is achieved by financial institutions creating a derivative.

I will leave the delegation alone.

A recent High Court judgment was critical of NAMA. The judgment stated:

NAMA is open to legitimate criticism for not having properly or adequately responded to [a named individual's] correspondence...it is the Court's view that institutions vested with significant power can reasonably be expected to respond to legitimate enquiries from those who may be directly or indirectly subject to the exercise of that power, in a more open and forthright fashion than was engaged in by NAMA in this case.

How is NAMA responding to that criticism? People who did not commit any offence are also tied up in this crisis. They, too, want to put their affairs in order. The High Court has found that NAMA failed to deal with an individual in a proper manner.

Mr. Frank Daly

It is not that I do not want to respond but I have a difficulty in responding because the judgment is being appealed to the Supreme Court and, as such, is currently sub judice. I will make two general comments. First, it was a wide ranging judgment and in so far as it made criticisms of NAMA, it would have to be seen in the context of the remainder of the judgment, which was generally supportive of the agency and the process behind it. I do not want to comment on the specific case.

I appreciate that.

Mr. Frank Daly

NAMA is responsive to people. At the heart of the case was the issue of the degree of consultation we should enter into with individual debtors but I do not want to comment because the case is still sub judice. There is a general principle that we will respond if somebody writes to NAMA.

My question was prompted by Mr. Daly's earlier comment that he invites people to communicate with NAMA in an open way.

Mr. Frank Daly

At issue in the aforementioned case was the principle of individual consultation with each debtor. I would prefer not to comment.

All right. I invite Mr. Buckley to make a closing statement.

Mr. John Buckley

I have very little to say except that our next reporting milestone will be in April, when we will present a report on the financial statements and our second report, which will principally deal with the work-out arrangements and the arrangements for servicing the loans.

Is it agreed to note report No. 76? Agreed. I thank the witnesses for attending and apologise for keeping them so long. Our opening dialogue was very fruitful and I thank them for the quality of their responses, generally speaking. We would like to hear from them at the earliest opportunity in respect of a number of outstanding issues.

Next week's business is the 2009 FÁS accounts.

The witnesses withdrew.

The committee adjourned at 2.15 p.m. until 10 a.m. on Thursday, 25 November 2010.
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