COMMITTEE OF PUBLIC ACCOUNTS debate - Thursday, 24 Nov 2016

Chairman

I want to apologise for the late start to the meeting. We had to suspend our meeting primarily because of the late arrival of the opening statements from the two representatives of NAMA. Members of the committee did not have time to review the statements in advance of the meeting so we had to take time out to familiarise ourselves with them before we got into our formal public meeting so that there could be a meaningful discussion here today. I ask the chairman of NAMA to respond to that.

Mr. Frank Daly

I want to apologise to the committee for the late arrival of the statements. It was not intended as any discourtesy towards the committee and its members. The reality is that we have been working long and hard in recent weeks not just on the statements, but also on the great number of questions the committee has quite legitimately sent to us. I know some members of the committee were in the Dáil until very early this morning for the debate on the Finance Bill. I assure the committee that many people in NAMA were working very late on these statements. No discourtesy was meant in the late arrival of the opening statements, which was a factor of the volume of work that is involved in this.

Chairman

That is on the record. We will move on.

Deputy Catherine Connolly

I do not know whether the comments I made earlier are on the record. We may have been in private session. If it was public session, I will leave it at that.

Chairman

The chairman and chief executive of NAMA are well aware of the views of the committee about the late arrival of the opening statements, as expressed to them during the suspension period. We are coming towards the end of our hearings on special report No. 94 of the Comptroller and Auditor General on NAMA and its sale of Project Eagle, which was the code name given to the sale of NAMA's Northern Ireland loan portfolio. Today, we will meet representatives of NAMA again. We have also met members of the NAMA board at the time; the Minister for Finance, Deputy Noonan, and his officials; Mr. Brian Rowntree, who is a former member of NAMA’s Northern Ireland advisory committee, NIAC; the deputy First Minister of Northern Ireland; the chief operating officer of Cerberus Capital Management, which is the investment firm that bought Project Eagle; and Mr. Patrick Long, who is the managing director of Lazard, which is the company that acted as adviser to NAMA in the loan sale. We have received detailed correspondence from other individuals and that has been put on the record as well.

I welcome to today's meeting Mr. Frank Daly, who is the chairman of NAMA; Mr. Brendan McDonagh, who is its chief executive; Mr. John Coleman, who is its chief financial officer; Ms Aideen O’Reilly, who is its head of legal affairs; Mr. Alan Stewart, who is its senior divisional solicitor; and Mr. John Collison, who is its head of asset recovery. We are also joined by Mr. David Linehan, who is the NAMA liaison officer in the shareholding unit of the Department of Finance. As I have mentioned, the Comptroller and Auditor General is also in attendance. I thank Mr. Daly and Mr. McDonagh for their co-operation, despite this morning's suspension. We have written to NAMA on behalf of the committee every week, sometimes with six questions and sometimes with 36 questions. Extensive correspondence has come back to us on a staged basis. I hope we will reach the end of that process in the next week or two. I acknowledge that we have received a great deal of documentation. A little part of it can be seen in the files beside me. A great deal of work has been put into this process by NAMA.

I remind members and those in the public Gallery to turn off their mobile phones. I have to advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, they are protected by absolute privilege in respect of their evidence to the committee. If they are directed by the committee to cease giving evidence in relation to a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of that evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given. They are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members of the committee are reminded of the provisions of Standing Order 186 to the effect that the committee shall 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 a policy. Finally, members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the House or an official by name in such a way as to make him or her identifiable. I invite Mr. Daly and Mr. McDonagh to make their opening statements.

Mr. Brendan McDonagh

I will begin by addressing an issue which, in my view, is at the core of the debate about whether the best price reasonably achievable for Project Eagle in the first quarter of 2014 was in fact achieved. There no longer appears to be any dispute about the appropriate discount rate that should have been used for deriving the market value for a loan portfolio such as Project Eagle in late 2013 and early 2014. There now appears to be general acceptance that the market would have discounted the cash flows in this portfolio at a rate in the range of 10% to 15%. This has been our position all along and it has been supported by a number of market experts. By that criterion, it is reasonable to contend that £1.3 billion was in the ballpark of what a buyer would expect to pay for this portfolio. The position of the Comptroller and Auditor General, as recently articulated to this committee, appears to be that he accepts that a discount rate of 10% to 15% was indeed appropriate for determining the market value of the Project Eagle portfolio in the context of a loan sale. If I understand his position correctly, he is saying that this higher discount rate would have been appropriate for potential buyers of the portfolio but not for NAMA as the seller. A 5.5% discount rate may indeed have been appropriate for estimating the accounting value of the portfolio, but it was not appropriate for estimating its fair value, which is the best proxy for market value, and it certainly was not appropriate for assessing the market value of Project Eagle.

The board made a strategic decision in 2014 to sell the Project Eagle portfolio once that option became available. The Comptroller and Auditor General has said he has no view on this strategic decision. Up to late 2013, in the absence of any alternative strategic option, the default option had been to dispose of the underlying collateral of the Northern Ireland debtors on a piecemeal basis up to 2020. From NAMA's perspective, and indeed from the perspective of any commercial entity, the report's position on the discount rate does not make commercial sense for reasons I will set out. First, there was a major restriction on commercial flexibility. The report's position on the discount rate would rule out the sale of any loan portfolio comprised of granular, multi-debtor and lower value assets. Quite frankly, the market would never buy these portfolios at a 5.5% discount rate. There would always be an unbridgeable gap between the market’s valuation of a granular loan portfolio and NAMA's valuation of it. In effect, this would mean that NAMA could never sell these portfolios and therefore, the strategic option of locking in their market value upfront when the opportunity arose could never be utilised. At the meeting of this committee on 29 September last, we drew attention to the fact that we were advised by UBS that a 10% discount rate was appropriate for Project Tower, a better portfolio than Project Eagle which was launched to the market at the same time in the first quarter of 2014.

In Project Arrow, a portfolio with similar characteristics to Project Eagle, Cushman & Wakefield advised in mid-2015 that a 15% discount rate was appropriate. If one accepts the report's position, the market's view of a portfolio's valuation is irrelevant if it does not match a valuation based on a 5.5% discount rate. That, in effect, would rule out all but a handful of loan sales.

Reason No. 2 is based on our statutory commercial mandate. Given that NAMA has been tasked by the Oireachtas to operate on a commercial and expeditious basis, the report's view that NAMA cannot apply a market discount rate to its loan portfolios is simply not commercially feasible for NAMA if it is to fulfil its statutory mandate under section 10 of the NAMA Act. Had we adopted such an interpretation, it is difficult to see how we could have deleveraged our overall portfolio to the extent that we have done over the past three years. Thus, instead of dealing with a residual senior debt burden of €3.6 billion, or 12% of the original €30.2 billion as of today, we would be dealing with a multiple of that residual amount and facing into the major uncertainties that have emerged, both for property markets and for the global economy over recent months.

NAMA's strategy was set out in 2010. It was to be an orderly and phased disposal but we stated that we would be alert and ready to avail of market opportunities as they arose. If we had not lived up to our promise I am satisfied that, instead of discussing the Project Eagle sale, we would now be appearing before this committee and having to explain why we had failed to take advantage of the favourable and unprecedented market opportunities and the influx of capital that became available over the past three years. Irish taxpayers would rightly be concerned as to why they were still left with a major contingent liability exposure backed by property in Ireland and elsewhere. This report takes no account whatsoever of these major and very real strategic considerations.

Matter No. 3 is the prospect of a long-term piecemeal workout. The Comptroller and Auditor General has stated that he considers it beyond his remit to comment on the strategic and commercial rationale underpinning the decision to sell the loan portfolio. It may not have been his intention to comment on strategic or commercial issues but the position he has adopted is, in effect, a position that favours one commercial strategy, namely, long-term hold to 2020, over another, namely, the portfolio sale in 2014. If one accepts the position that he has adopted in relation to the discount rate, namely, that NAMA is not entitled to use the appropriate market discount rate to estimate the market value of granular portfolios of this type, then he is clearly proposing a position which favours a long-term piecemeal workout in preference to an upfront loan sale. In that sense, without the support of any knowledge or experience of dealing with distressed assets, the report is implying that a long-term workout will always be superior to a loan sale regardless of the risks involved, given that a portfolio discounted at 5.5% will invariably have a higher valuation than a portfolio discounted at a market discount rate of between 10% and 15%.

If NAMA accepted this perspective, which given its statutory commercial remit it cannot do, it would never adopt a loan sale strategy in preference to a piecemeal workout. In fact, we would be around much later than 2020. It is worth bearing in mind, however, that NAMA was not established with a restricted mandate to work out assets on a piecemeal basis over the long term; it was set up with a mandate to act commercially and expeditiously and that meant taking advantage of any opportunities to sell loans and property, either in bulk or individually, subject to the requirement that the best achievable price is obtained. This view of NAMA's mandate was also articulated by the Minister for Finance in his section 227 review of NAMA in 2014.

No. 4 is the reliance on the 5.5% rate. I believe that the rationale for the report's position is not sustainable, particularly in its assumption that it would have been appropriate to use a 5.5% discount rate to estimate the long-term workout value of the Project Eagle loans. We have repeatedly drawn attention to the fact that a 5.5% discount rate was not a standard NAMA discount rate and it is inaccurate and unreasonable to characterise it in those terms. It was a rate which the board, in its decision of June 2013, stated was appropriate for use for some, but not all, commercial evaluations. The board decision of June 2013 could hardly have been clearer. A 5.5% rate should not be used as an overarching discount rate to evaluate all potential transactions. It was important that flexibility should be maintained. In particular, care should be taken to ensure that both (a) alternative NPV scenarios are generated using alternative discount rates and (b) that qualitative information would be considered as part of the decision-making process. The key qualitative information in the evaluation of this transaction was the relatively low quality and granular character of many of the assets in the Northern Ireland debtor portfolio, which was not typical of the NAMA portfolio as a whole. A discount rate higher than 5.5% was commercially appropriate, given the risks associated with its asset quality and with underlying weak economic conditions in Northern Ireland and in parts of northern England and Scotland.

This Project Eagle portfolio was very granular. The fact that the top 55 assets accounted for two thirds of its value left the remaining one third of the portfolio with about 870 assets with an average asset value of about £600,000 each. The cash flows attaching to these smaller-valued assets were much less certain, both in terms of projected disposal proceeds and projected income, than was the case with larger assets. It is accepted market practice that the less attractive the assets and the income stream securing a loan portfolio and the less certain that the associated cash flows will actually be received, the higher the risk premium and therefore the discount rate that will be applied by buyers. For that reason, it made perfect sense, through a loan sale, to bundle the large number of poorer quality assets with the better assets.

The discount rate would also have incorporated a risk premium arising from the high concentration of assets located in the small Northern Ireland economy. As we have pointed out, the Northern Ireland property market did not have the capacity to absorb a large volume of asset sales over a short time period, as is evidenced by the fact that, in the four years from 2010 to the end of 2013, sales of NAMA-secured assets in Northern Ireland realised a total of only £113 million. The report's conclusion that there was "a probable loss of £190 million" rests entirely on the view that NAMA applied, or should have applied, a standard discount of 5.5% to all evaluations. This can only be deduced by comparing an estimate of workout value, £1.49 billion, to 2020 with the minimum reserve price of £1.3 billion from a 2014 sale. As the report puts forward no external evidence in support of 5.5% being an appropriate market discount rate or indeed being an appropriate workout rate, everything rests then on the report's interpretation of the board decision of June 2013. The key question then becomes whether one takes the board's June 2013 caveat about other factors, including risk assessment, into account or whether one arbitrarily decides to ignore it. If you accept the objective evidence offered by the actual decision that the board took in June 2013, including the major caveat to which I have drawn your attention, you cannot reasonably contend that the board intended that 5.5% would become a standard, one-size-fits-all discount rate for all strategic commercial evaluations. Therefore, by extension, the whole basis for the conclusion of a probable loss of £190 million does not hold.

Section 3.81 of the report outlines the Comptroller and Auditor General's case for relying on a 5.5% discount rate, based on three statements which are all factually incorrect. One, the report states that "no reference was made in the papers presented to the Board in June 2013 or in December 2013 that a rate higher than NAMA's standard 5.5% rate would be appropriate". For reasons outlined above, NAMA does not accept the contention that 5.5% was a standard discount rate to be used for all evaluations as the June 2013 board paper clearly provided for exceptions if and when appropriate.

Two, the report states that NAMA's cost of funding was 1.2% in 2013, much lower than the funding costs that would arise for the purchasers of loan portfolios. This statement, designed to illustrate that NAMA could have continued to carry the portfolio at a low cost for all future years, is misleading. NAMA's average actual and projected cost of operations from 2014 to 2020, the period of time during which NAMA would have had to work out this difficult portfolio, was 4.95%, not 1.2%. This is significantly higher than funding costs for banks and some other comparable institutions. It also implies a risk premium of 0.55% if you regard a 5.5% discount rate as appropriate. I cannot imagine that any informed analysis would regard such a low risk premium as appropriate for the Project Eagle portfolio.

Three, the report states that NAMA already took account of the poor quality of the underlying Project Eagle assets in its impairment review. This is not the case. As discussed further below, international accounting standards allow impairment reviews only to consider circumstances and known incurred losses at the time of the review, which would have been end-2013. Losses due to future events or conditions from 2014 onwards, no matter how likely, were not permitted. The fact that the accounting impairment review does not capture future losses means that a higher risk premium must be built into the discount rate. Hence, the report's assertion that overlaying a high risk premium on the technical impairment calculation would represent double counting is factually incorrect. In any event, the market ignores accounting carrying values and tends to value portfolios by reference to the price of risk.

We note that the Comptroller and Auditor General, in his evidence to the committee on 29 September 2016, stated that it was not possible to be absolute or definite regarding the alleged probable loss of £190 million. He indicated to Deputy Kelly that there was a margin around it but stated that it was impossible to estimate what that margin might be. Based on the magnitude of possible margins put to him on that date, he did not rule out the possibility that the margin may have been plus or minus £200 million or more. Therefore, depending on the parameters of the margin, the probable loss could have been much higher than £190 million or indeed, at the other extreme, that there may have been no probable loss at all. Such a wide-ranging margin leaves us in the realm of speculation. In our view, compelling and objective market evidence is required to support a finding that there was a probable loss that would not have been incurred if NAMA had held on to the portfolio to 2020 rather than selling it in 2014. While the Comptroller and Auditor General's qualification at this committee of his original report conclusion is to be welcomed, it only goes to highlight the difficulty of positing and estimating a probable loss in the absence of any objective market evidence of a loss. Objective market evidence would be evidence that a credible buyer was willing to offer £1.49 billion, or some other sum greater than the £1.322 billion achieved by NAMA, for this portfolio.

No such evidence has been produced because there can never be any such evidence. It is pure speculation. I cannot imagine that a court of law or any other judicial forum would regard the interpretation of NAMA’s board decision which ignores a crucial element of that decision as a fair or reasonable basis for concluding that there was a "probable loss" of any magnitude.

NAMA had taken a cumulative impairment £478 million on the Project Eagle loans up to the end of 2013. We were well aware that it was highly likely that additional impairment charges would have to be taken in the 2014 and in future years’ financial statements. This emerged in the form of an accounting loss of £162 million on the sale of the Project Eagle portfolio. International Financial Reporting Standards, IFRS, accounting rules, specifically IAS 39, require NAMA to recognise an impairment provision against the book value of its loans where there is a reduction in the amount likely to be received or a change in the timing of future loan cashflows, commonly referred to as "objective evidence of impairment".

IAS 39 operates on an incurred loss basis as opposed to an expected loss basis. Under IAS 39, NAMA could not have provided for expected future losses. At the end of 2013, the board expected future losses but could not provide for them under IAS 39. In setting the £1.3 billion minimum price, the board was, in effect, recognising and bringing up front, losses of at least £175 million. The board was aware that the end of 2013 £1.49 billion carrying value needed to be adjusted to take account of losses that it expected to take in future years but could not yet recognise in its end of 2013 accounts under IFRS. The fact that there was an actual loss of £162 million on the sale which was recognised in 2014 accounts is not in dispute. The IAS board has redrafted IAS 39 and the new standard, IFRS 9, will, when implemented, change the impairment methodology to allow for future expected credit losses to be reported on a timely basis.

In 2014, however, we were operating by reference to the existing accounting IFRS rules. If the timing of the Project Eagle sale had been six or 12 months later, additional impairment would have been recognised and I have little doubt that the cumulative impairment at that point would have been close to the £640 million total impairment that we ultimately took on this portfolio.

I wish to reiterate NAMA’s position. The gross undiscounted cashflows arising from the Project Eagle loan portfolios amounted to £1.68 billion. The Comptroller and Auditor General's report has discounted these cashflows at a discount rate of 5.5% and has produced a NPV of £1.49 billion. The minimum sales price set by the NAMA board was £1.3 billion. This falls within the mid-point range of sale values generated by the 10% to 15% range of discount rates. This is the range that would have been applied to a portfolio such as Project Eagle during the first half of 2014. A 10% discount rate produces a value of £1.36 billion while a 15% discount rate produces a value of £1.25 billion. The £1.322 billion achieved on the sale, which was above the minimum price of £1.3 billion, was, therefore, well within the range of expected values.

It has been suggested that there is no support in NAMA’s contemporaneous records for its use of a 10% discount rate. This is not the case. A 10% rate was used in preparing information required as part of the fair value note in the end of 2012 NAMA financial statements which was certified by the Comptroller and Auditor General. The fair value methodology for the 2012 accounts was based on a discount rate of 10% and, had this fair value discount rate been applied to the Project Eagle portfolio, the NPV would have been £1.36 billion. This was the prevailing fair value discount rate that applied at the time that the sale of the Project Eagle portfolio was being considered by the NAMA board in the fourth quarter of 2013 and, as such, it is a discount rate with which the board would have been familiar during its deliberations about a possible loan sale.

In any commercial transaction, there can only be one definitive market value, namely, the price on which a buyer and a seller agree after a competitive sales process. In advance of a sale, a buyer and a seller will, in most instances, have different views on what a portfolio may be worth, but these views are notional unless, and until, a transaction price can be agreed. NAMA does not accept the inference in the Comptroller and Auditor General's report that the sales process restricted the field of credible potential bidders and thereby compromised the objective of obtaining best market price. The nine potential bidders approached by Lazard were all credible entities which had the capacity to fund and execute a purchase on this scale. Collectively, they purchased 88% of all large loan sales across Europe between 2013 and 2015. There is no evidence that there were other potential bidders who could have participated in the process and who would have been likely to submit a competitive bid for the portfolio.

It is not plausible to suggest, as is done in the report, that NAMA set a reserve price for the Project Eagle portfolio which was too low. By definition, any suggestion of a NAMA giveaway of £190 million must have involved a gain of £190 million for the successful bidder, and this is not plausible. Are we being asked to believe that of the nine major international investors approached and the five major international investors which took a detailed look at the portfolio, only one identified the £190 million that NAMA was allegedly giving away when it set the minimum price of £1.3 billion? Major astute international investors do not operate in that way. We are being asked to believe that, uniquely on this occasion, they decided to leave easy money on the table.

Up to that point, NAMA had redeemed €7.5 billion of its senior debt. An opportunity emerged in autumn 2013 - in the form of an offer from PIMCO to buy the Northern Ireland debtor portfolio - which would have enabled NAMA not only to lock down the value of one of the less attractive elements of its overall loan portfolio but also to generate cash proceeds equivalent to one fifth of the total senior debt that had been redeemed over the previous four years. It would have been extraordinary, in the circumstances, if NAMA had not given the offer the most serious consideration as it was obliged to do under sections 10 and 18 of the NAMA Act.

Three years later, that €22.6 billion contingent liability has been reduced to €3.6 billion and we hope to reduce this further before the end of the year. It is important that the committee – and indeed the wider taxpaying community - should appreciate that the €19 billion reduction in the State’s contingent liability could not have been achieved if NAMA had been unwilling or incapable of operating on a commercial basis. Operating on a commercial basis means that one takes advantage of a good opportunity now to sell assets unless one has reason to expect that a better opportunity will come along in two, three or five years’ time.

NAMA proceeds cautiously but a commercial mandate means that one can never allow caution to lapse into decision paralysis. To achieve that scale of deleveraging has required thousands of commercial decisions, none of which could have been made with any degree of certainty as to how prices would evolve in the future. Decisions can only be based on information available at a particular point in time.

Would NAMA have realised more if it had delayed all its sales by one year? Perhaps. Would it have realised more if it had delayed all its sales by two years? Perhaps. Would it have realised more if it had delayed all its sales by five years? Perhaps. One will never know and neither will anyone else.

What NAMA knows is that a combination of developments, including a recovering Irish property market and an influx of international investors into Ireland, provided it with an opportunity to deleverage its risk by selling loans and property collateral and to thereby accelerate the redemption of its senior debt. As of now, 88% of the senior debt has been repaid and NAMA expects that all of the €30.2 billion of guaranteed debt will be repaid by 2018.

If NAMA were operating to its original 2020 horizon to repay all the senior debt rather than to a 2018 horizon, would it have realised more cash from its loans? One will never know and I am not sure that there is much point in speculating. What NAMA sought to do, given the huge debt that it had to deal with, was to reduce that debt on an accelerated but phased basis as market opportunities allowed.

NAMA is now in the fortunate position of dealing with outstanding senior debt of just €3.6 billion, rather than €22.6 billion at the end of 2013. Bearing in mind the significant uncertainties ahead, that is a good position for the State to be in.

There is market speculation that the likely impact of the policies signalled by Mr. Trump is that interest rates will rise faster than expected up to now. That is likely to reduce the attractiveness of property assets to international investors. The flow of international investor funds into property in recent years has been partly due to the relatively high yields available compared to cash and bond yields. A narrowing of the yield differential is likely to reduce investor interest in property. In that context, the big question a commercially informed market analysis would ask is: “Did NAMA get its timing broadly right in reducing the huge contingent exposure of Irish taxpayers to property and has Ireland’s cost of funding benefited correspondingly in the bond markets?”. I believe we did and that this has been reflected in the sovereign’s funding costs.

I will now talk a little about Britain. Contrary to suggestions made at earlier hearings, we did not claim that we had foreseen the outcome of the Brexit referendum. What we did was take advantage of favourable market conditions in Britain to reduce our risk exposure to that market on a prudent and commercially sensible basis. According to official statements, the UK economy, after the Brexit vote, appears to be heading for a period of lower growth and reduced investment. News reports last week indicated that land values in central London had fallen by over 10% in the last year and that house prices were 11% below their 2014 peak. Our own analysis suggests the fall in UK prices may be much higher than official estimates. Analysts are forecasting that prices will fall further in the coming years, partly in response to a weakening economy and the likelihood that companies will move staff overseas in response to Brexit. Nobody is suggesting we saw all of this coming; what we are entitled to claim is that our strategy since 2010 has been consistent in acting prudently and commercially and taking advantage of good market conditions when they have prevailed. For that reason, we do not now have to deal with the consequences of a weakening market. Our debtors have only about £800 million in assets located in Britain. At one stage in 2011 we had an exposure in excess of £12 billion to the British and Northern Ireland markets.

I will turn to the issue of PIMCO’s withdrawal from the sale process. Before doing so I wish to address its recent letter to the committee which was read at one of the meetings. It is dated 8 November 2016 and sets out a number of important facts, none of which was disclosed by PIMCO to NAMA in March 2014. The first fact which was not disclosed is that PIMCO was approached by Brown Rudnick and introduced to Mr. Cushnahan in April 2013. The second fact which was not disclosed is that Mr. Cushnahan was one of the organisers of a meeting in May 2013 at which PIMCO met the Northern Ireland First Minister and the Northern Ireland Minister for Finance and Personnel. The third fact which was not disclosed is that PIMCO was approached by Brown Rudnick in June 2013 about a success fee, one third of which was to be paid to Mr. Cushnahan. The fourth fact which was not disclosed is that PIMCO sought confirmations from Brown Rudnick in 2013 as to whether NAMA had been informed of, and had approved, the involvement of Mr. Cushnahan in PIMCO’s proposed transaction. PIMCO’s letter to the committee is materially inaccurate because it states it provided details of these matters for NAMA in a series of calls in March 2014. It did not provide these details for NAMA in March 2014 or at the time of its indicative offers in September or December 2013. At no stage during NAMA’s extensive engagement with it from September 2013 until 10 March 2014 did PIMCO inform it that Mr. Cushnahan was a potential beneficiary of the success fee arrangement proposed to PIMCO by Brown Rudnick. Only PIMCO can explain why it did not tell us about these details and we have written to it to ask why none of these details was disclosed to NAMA at the time.

I wish to outline again NAMA's state of knowledge at the time of the various calls to PIMCO in March 2014. PIMCO first informed NAMA during the conference call on 10 March 2014 of a proposed fee arrangement involving Brown Rudnick, Tughans and Mr. Cushnahan. It asked if NAMA was aware that Mr. Cushnahan was potentially a beneficiary of this arrangement. NAMA confirmed that it was not so aware. For the avoidance of doubt, NAMA only became aware on 14 October 2015, through evidence given by the Northern Ireland First Minister, that Mr. Cushnahan had been involved with PIMCO in the potential purchase of Northern Ireland debtor loans as early as May 2013. The NAMA board, at a meeting on 11 March 2014, considered that the proposed fee arrangement, in so far as it included Mr. Cushnahan, represented a significant issue for it. It requested that this message be conveyed to PIMCO and this was done in a conference call at 11 a.m. on that day. PIMCO was asked to reflect on the matter in view of the board’s view of the significance of the issue. Later on 11 March 2014, during a conference call at 5 p.m., PIMCO indicated that, having reflected on the matter, it was willing to withdraw and, in a call on 12 March 2014, confirmed its withdrawal, stating it believed it did not have any choice other than to withdraw gracefully. In my view, the board, once it was informed of the Cushnahan matter, knew that it was inevitable that PIMCO would have to leave the process and the board provided it with the space to reflect and withdraw. I am in no doubt that had it had made an effort to remain in the process, we would have had to formally remove it, but that did not arise, as by the time of the board meeting on 13 March 2014, it had signalled its withdrawal from the process. In the circumstances, we were pleased that it had.

I do not believe we have mischaracterised PIMCO’s exit from the process, but even if we have, in our view, nothing turns on it. At its meetings on 11 and 13 March 2014 the board discussed PIMCO's disclosure of 10 March 2014 and whether it did, in fact, wish to remain in the process. On 10 March 2014 PIMCO asked if NAMA was aware of the Mr. Cushnahan fee and indicated that, if it was an issue for NAMA, it would have concerns about continuing to deal with Brown Rudnick, Tughans and Mr. Cushnahan. The only plausible reason for bringing this matter to NAMA’s attention was that PIMCO wanted to receive confirmation from NAMA either that it knew about it or that it was not an issue for it. Presumably, if NAMA had indicated that it had no difficulty with the proposed arrangement, it is likely that PIMCO would, at the very least, have pursued the matter further with the three potential beneficiaries. The board’s reaction to the proposed arrangement - the committee has heard it from various individual board members in recent weeks - was unequivocal. It decided on 11 March 2014 that PIMCO would have to go. I reiterate what I stated to the committee on 9 July 2015 that the board was of the view that if PIMCO did not withdraw, NAMA could not permit it to remain in the process. In other words, if PIMCO had not withdrawn, the board was minded to remove it and would have made a formal decision to that effect.

When it was made clear to PIMCO that the proposed arrangement involving Mr. Cushnahan was a significant issue for NAMA, the only residual question for it was the choreography of its withdrawal from the process. From the board’s perspective, it was preferable that PIMCO leave the process voluntarily rather than we having to make a decision to remove it. The manner of its exit suited both sides. Subsequently, we informed Lazard of PIMCO’s withdrawal, but we did not inform it of the reasons for it. Our key concern at that point was whether PIMCO’s withdrawal was likely to have a serious impact on the level of competitive tension in the process. Lazard advised us that there was sufficient competitive tension in the process with the remaining two bidders. In retrospect, I accept that it would have been better if Lazard had been aware of the real reason for PIMCO’s exit, but we did not regard it as a major commercial issue at the time, given that Lazard considered the post-PIMCO level of competitive tension sufficient. I do not believe the information would have materially changed its advice on the residual level of competitive tension in the process.

As we have repeatedly stated, our primary concern was to ensure that Mr. Cushnahan was not involved in a bid and PIMCO's withdrawal had the effect of achieving that outcome.

I now wish to refer to other options. One issue which has received some attention is the reference in the note of the second call of 11 March at 5 p.m. to a query from the head of asset recovery about other options and his query in respect of whether the deal could be "shaped differently for the arrangement fee to come out". Taking these references in isolation, there has been an attempt to suggest that the head of asset recovery was seeking to persuade PIMCO to remain in the process. That was not at all the case. In raising these queries, the head of asset recovery was following up on the question that PIMCO had raised during the call on 10 March 2014. During that call, Tom Rice said that if it was an issue for NAMA, then PIMCO would have concerns with continuing to deal with the three counterparties and would have to consider whether the business could proceed without the counterparties involved. In order to establish the outcome of PIMCO's consideration of whether the business could proceed without the involvement of the counterparties, the head of asset recovery asked about it in the second call on 11 March 2014. In their letter to the committee of 8 November 2016, PIMCO representatives make reference to NAMA's question on 11 March 2014 but, for some reason, fail to mention that the other options were originally canvassed by them on 10 March 2014. The question from the head of asset recovery was only to clarify, as a matter of fact, what PIMCO's decision was in respect of its consideration of whether the business could proceed as outlined by PIMCO on 10 March 2014.

I will now outline the position on NAMA's response to the report conclusions. There have been comments by a number of committee members to the effect that NAMA has been overly robust in its response to the Comptroller and Auditor General report. I admit that we have been robust and I think we have been subject to very robust questioning at this committee. The reason for our robustness is that we believe there is unfair commentary in the Comptroller and Auditor General report, that the report has questioned our competence and has implied that we failed in our obligations to taxpayers under section 10 of the NAMA Act. Its key finding implies that members of the board and the executive who have extensive commercial experience and expertise set a minimum price for this portfolio which had the effect of locking in a probable loss of £190 million on its sale. According to the Comptroller and Auditor General report, this loss could have been avoided if NAMA had held on to the loans and worked them out over the period to 2020. The NAMA chief executive has pointed out the numerous flaws in the hypothesis grounding the report's conclusion of probable loss. He draws attention again to the fact that the report's reliance on a 5.5% discount rate appears to be based on an incorrect interpretation of a NAMA board decision of June 2013.

The report also concluded that we authorised a sales process which may have failed to identify a market investor with the willingness and capacity to pay more than £1.322 billion for this portfolio. In reaching this conclusion, the report disregards the compelling evidence that the nine firms which were admitted to the sales process accounted for 88% by par value of all European commercial real estate loan sales of large portfolios in excess of €1 billion transacted over the period from 2013 to 2015. The report took no account of Lazard's opinion that there was no evidence that any other investors existed at that time, in quarter 1, 2014, who were as credible and as well qualified such that it appeared that they were in a position to pay a higher price to NAMA than that secured from Cerberus. The report took no account of Lazard's opinion that the process was open to the most qualified and credible potential counterparties. Lazard's view was that there were fewer participants in this process than in some other transactions because there were fewer investors that were sufficiently qualified and credible. I would suggest that the views of NAMA, Lazard and the Department of Finance, all of which have loan sales experience and expertise, should be treated as having strong evidential value in any review of a major loan transaction, especially if no market-based counter-evidence is offered.

We had serious concerns with the key contentions of the report and indeed our response has been robust, but appropriately so in my view. In the circumstances, how else could we have been expected to respond? We are entitled to defend our position. I hope it is not being suggested that NAMA is obliged to accept the conclusions of the report regardless of the agency's views, not to mention the evidence submitted by us and Lazard, which, we believe, casts serious doubt over those conclusions.

We have always tried to run our business to the highest professional and commercial standards over the past seven years and I do not accept the implication of this report that, on this one occasion, the board and executive suffered a major collective lapse in managing our responsibilities which resulted in a probable loss of £190 million of taxpayers' money. My view then and now is that the Project Eagle deal was the best available at the time and no one has come forward with any credible evidence to suggest that a better deal might have been available then or since. I note that Mr. Patrick Long of Lazard stated unequivocally to this committee on Tuesday that Cerberus paid the best price that was available in the market. Our view in 2014 was that the sale of Project Eagle was a good deal for Irish taxpayers and events since then have only reinforced that view.

Chairman

Mr. Daly, I am sorry to interrupt. There is a vótáil in the Dáil Chamber. Several of us arranged during the last vote to put in place a pairing arrangement. The meeting is continuing. Several of us are paired so the meeting will continue uninterrupted. There might be a vote in an hour or so, but between now and then we have pairing arrangements in place.

Mr. Frank Daly

I am keen now to discuss documentation. We have listened carefully to all the evidence presented to this committee over the past two months. If there is one message above all others that has come home to me based on that evidence, it is the fact that we did not document in greater detail and with greater clarity the rationale for key board decisions, especially those taken in December 2013 and January 2014. Those decisions were taken after prolonged debate and discussion by the board.

Given that board members were experienced in financial, property, banking and accounting matters, much of the discussion revolved around the very topics that are now the focus of the committee's attention. These included the issue of the appropriate discount rate that the market would apply to a portfolio such as this, our acceptance of the fact that our carrying value was in excess of the market's valuation of the portfolio and the probability that we would have to take substantial additional impairment on the portfolio in 2014, and possibly later, regardless of whichever strategy was adopted.

As with all board minutes, the minutes of those particular board meetings record the decisions ultimately taken by the board and do not provide a detailed account of the various considerations that were reviewed and discussed as part of the decision-making process. If, at that stage in December 2013 and January 2014, we had any reason to expect that the board papers and the board minutes relating to Project Eagle were going to be subjected to the intensive review that is taking place, I have no doubt that the board would have been more than willing to set out a comprehensive and detailed rationale for its decisions. If we had done so, I have little doubt that many of the issues which have attracted scrutiny from committee members since September would have been much clearer to them and that, as a result, we would all have spent less time now discussing them. That is a lesson that we have learned from this experience. Nowadays, board decisions and the rationale for them are recorded in much greater detail than was the case three years ago.

I will now discuss the position on management of conflicts of interest. The report concludes that Mr. Cushnahan's potential conflicts of interest could not be managed by withholding of debtor-specific information and that NAMA should formally have considered whether his engagement in discussion of its Northern Ireland strategy was consistent with his involvement as a financial adviser to various Northern Ireland debtors. Mr. Cushnahan was a political appointee intended to represent the views of Northern Ireland. I believe that we managed the potential conflicts of interest appropriately within the statutory framework.

The key question to ask in a conflict of interest situation relates to the function of the designated director. It is only if the interest is material to the performance of a function that an actual conflict will arise. In the case of Mr. Cushnahan, his function was to sit on a committee which offered advice to NAMA about Northern Ireland. He had no function in the formulation of NAMA strategy on the sale of Project Eagle or any other loan portfolio and he had no function relating to the management of any debtors or loans or assets.

Deputy David Cullinane

I will come back to it. I just want to finish on Mr. Daly's opening statement in terms of what he said and what he has put on to the record of the committee. He said that "PIMCO’s letter to the committee is materially inaccurate". That is a very strong statement to make because Mr. Daly is aware that this sale is the subject of two criminal investigations. PIMCO made him aware of the Foreign Corrupt Practices Act and that it had to be in compliance with that Act. There is also the Bribery Act 2010 in the UK. There are two criminal investigations in two jurisdictions. PIMCO is trying to helpfully present this committee with information. It would seem from what Mr. Daly is saying that PIMCO is misleading the committee, which is a very serious charge for Mr. Daly and his organisation to make against PIMCO. We will need to hear from PIMCO because it would be very interested in what Mr. Daly has to say. Mr. Daly says the letter is materially inaccurate. Given that there are criminal investigations and PIMCO is subject to the Foreign Corrupt Practices Act, to say that the information it gave was materially inaccurate is a very strong statement.

Deputy Catherine Connolly

We are working from record 3.

I am drawing the witnesses' attention to a reference to April 2013 in the board minutes of 13 March. We spoke about the PIMCO letter. What Mr. Daly is really saying, then, is that the question was asked but PIMCO did not give NAMA the information, which is very serious, given that a criminal investigation is ongoing. I think PIMCO would be very interested in Mr. Daly's comments. I think they are very explosive in the context of the criminal investigation.

I will move onto another topic. With respect, Mr. Daly is counting on the clock now and what I will leave there is the letter we got from PIMCO and the evidence from Cerberus. Obviously, we will have to make up our own minds on all of that.

Our discussion around that was that we had, as the Deputy knows, two other bidders left in the race at that stage. We wanted to make sure that they would be told that PIMCO had pulled out and that it was gone. In fact, as I think some of my colleagues have told the committee, whenever the former board members were in - or maybe it was the executives - we felt that we would never want to lose a bidder in a race.

While we obviously never wanted to lose a bidder from the race, the fact that PIMCO was gone might well have enthused the others to keep going and bid at a more competitive price. That phraseology was all around-----

Deputy David Cullinane

With respect, I am going to cut to the chase. There was talk of Lazard being in the position to give advice on how NAMA could relay information to other bidders. The fact is that Lazard was not given that information. The final point I will make is that Lazard went on to say that it had complete information and accepted that the process had become compromised. That comes from Lazard.

Mr. Frank Daly

Deputy Josepha Madigan

I thank Mr. Daly for his forbearance and I thank his team for being here today. I know it is quite taxing for him. It struck me that the truth is stranger than fiction sometimes. When the witness was talking about an "Eagle deal", I thought it would be a good title for a novel, with all the various characters-----

Mr. Frank Daly

When I retire, I might write it.

Chairman

If you ever get to retire.

Deputy Josepha Madigan

Some of the characters are more desirable than others and some are quite nefarious, with a plot line changing as it goes along. I am not sitting here in judgement of Mr. Daly or NAMA, for that matter. We have a report to produce and we are trying to establish the truth more than anything else. The witness can understand, from our perspective, when we are hearing different narratives and polar opposite statements about different things, that it is quite difficult to find the commonalities and to ascertain the truth. That is what we are paid to do and why we are here. I hope he can appreciate why people get a bit excited at times about it.

I will start with a positive. Mr. Daly's opening statement discusses documentation on page 9. When he was previously before the committee, he did say that the process could have been tweaked better, if my memory serves me correctly. Mr. John Collison of NAMA also said that there could have been improvements. At the time, Mr. Daly said that the minutes should record decisions, not discussions. However, in his opening statement on the issue of documentation, Mr. Daly said, "If there is one message above all others that has come home to me based on that evidence, it is the fact that we did not document in greater detail and with greater clarity the rationale for key board decisions". That is something I asked him about on the last occasion and I think it is very important. I am glad that he accepts that because it is a departure from what he originally said to us. I believe that it will be helpful going forward in order that we alleviate something like this happening again. That is what we are all about at the end of the day. I welcome that in Mr. Daly's opening statement.

The other thing I will put to Mr. Daly is something I asked Ms Ann Nolan in the Department of Finance. It is only fair of me to ask Mr. Daly today. It is about the NAMA Act itself. My view is that it was quite restrictive in terms of expediting the sales above everything else. I said that to Mr. Daly on the previous occasion he was before the committee with regard to haste. I know I outlined a lack of certain things and I will go through that in a minute. What is Mr. Daly's view of the NAMA Act itself? Does he think it was restrictive on NAMA? Did it put haste above everything else?

Mr. Frank Daly

That is probably getting into an area of policy, which is difficult for me to comment on. There are many restrictions in the NAMA Act, including not selling back to defaulting debtors and all of that. I would say that, in the aggregate, those measures were probably quite positive from the point of view of NAMA's business. The expeditious point is in the Act a few times. That is our mandate and we cannot really depart from it. The point Ms Nolan made, or perhaps it was Deputy Madigan, was that there is a tension between that and getting the best value. There might be some validity in that but, at the end of the day, an asset management agency has a number of objectives. It must manage the assets, not necessarily retain them. It also has the objective of getting the market going. Part of that is in actually putting assets on the market.

Deputy Josepha Madigan

I do not think that is the case because my colleague has the same here.

-----we will have to look at it.

Deputy Josepha Madigan

It could be an administrative error, but I want to check it because it is important.

Chairman

We have requested them. I understand they are being printed and are on the way. I hope we will have them shortly. I call Deputy MacSharry.

In respect of the NIAC - the committee has the minutes - I remember that it was not a very long discussion. I have actually wracked my brains and consulted some of my colleagues about who said what in terms of the external members. Certainly my recollection is that Mr. Cushnahan said little enough and that most of the contribution was made by Mr. Brian Rowntree, but I cannot recall who said what. I do recollect that Mr. Cushnahan would have said the question of value would be key for NAMA or something like that, but most of the contribution was made by Mr. Rowntree. Deputy Marc MacSharry used the word "discount". I want to make it clear that it was just a general remark that a discount would be sought. There was no discussion of what it might be, the range or anything like it.

Deputy Marc MacSharry's other question was related to what I think I termed a "debtor's charter". This was a document that had been mentioned during the telephone conversation with the Minister for Finance, Deputy Michael Noonan, who suggested it be sent to NAMA. It was sent to NAMA by somebody in the First Minister's office, but we ignored it. From our point of view, we thought it was laughable really because it amounted to a debtor's charter. I was never quite sure what the intention was and whether it was intended that NAMA would consider making it a condition prior to the sale of Project Eagle. I do not know. If there was anybody with that spurious hope, they would have been given short shrift. We effectively ignored it.

Deputy Catherine Connolly

Are we breaking for lunch?

Chairman

At what time do we want to break for lunch? We will take a break after Deputy Catherine Murphy concludes.

It actually influenced the process by virtue of the fact that they came with an offer on the table. It became a single process as opposed to the customary best-practice two-phased approach where one opens it up to a wide group and then one narrows it down. More information is probably offered to those in the second round. The process appears to have been influenced by the fact that the bid was on the table. That then has the prospect of being an influencer in the minimum that NAMA would have set.

Mr. Frank Daly

Fair enough.

Chairman

Mr. Frank Daly

We wish it was documented and we have acknowledged that today. At the end of the day, I presume the committee is considering all the evidence. There have been two, three, eight, nine or ten people from the board or executive of NAMA before the committee who have given evidence in regard to that.

I have one brief comment. I go back to the Chairman's reference to the ordinary person on the street. He or she will say the Comptroller and Auditor General found NAMA should have held onto the assets and have gotten €190 million more. That is what is being said to me. I accept that the Comptroller and Auditor General did not make a recommendation to that effect. I point in particular to paragraphs 3.86 and 4.83. When one looks at those together, the clear inference is that if we had held on we would have gotten the €190 million. I know the Comptroller and Auditor General has not directly said that. If he said what he said two or three minutes ago, going back to our previous conversation, namely, that NAMA had the option to sell or hold and that was a commercial decision for NAMA because it is our responsibility and it had been left at that, I doubt we would be here arguing about all this.

The headline that came out of this was that NAMA generated a probable loss of €190 million for the taxpayer. That is what is being said to me on the street. From our point of view as a board, as individuals on the board and executives, the committee will understand that is what we find difficult. The Comptroller and Auditor General said some time ago that it was NAMA's decision to hold or sell, and it was.

Chairman

That has been clarified.

Deputy Catherine Connolly

I have difficulty with this type of interaction. I am 100% happy with the Chairman. The report of the Comptroller and Auditor General has been excellent in its clarity. From day one I have asked every single witness who appeared before the committee whether they read the report. Every time we were told they did, but it is as if he is saying what he said for the first time. He has repeatedly made points in his report and kept a dignified silence, in contrast to a number of witnesses who went straight to the newspapers with a particular narrative. I address my comments to the Chairman; I will come back with my questions.

The comments have to be balanced. The narrative was written by certain witnesses from NAMA in regard to the percentage. It persisted with that narrative until today, and now we see some type of apology. There is no confusion in the minds of the people on the ground, except-----

Chairman

Let the-----

Deputy Catherine Connolly

Deputy Catherine Connolly

Then Lazard came back-----

Mr. Frank Daly

Standard stuff, by the way.

Deputy Catherine Connolly

Please, I am not drawing any conclusions. I am establishing facts. I have a completely open mind. I have a report from the Comptroller and Auditor General. I am listening and I am asking questions.

Deputy Shane Cassells

Mr. Brendan McDonagh

No. There is a technical accounting issue around this. Accounting rules and international financial reporting standards mean we could not have impaired at a higher discount rate. Did we believe that, by discounting cash flows by 5.5% into the future, we would get £1.49 billion eventually? The board did not believe that. Under the accounting rules, we could not have written down the portfolio at the end of 2013 more than we did.

In judging the appropriate discount rate to the value of the portfolio, one size does not fit all because there are assets of differing qualities in NAMA's portfolio of debtors. When the board set a policy of using the 5.5% discount rate in June 2013, it did not close the door and lock itself into it. It left open the possibility of using different discount rates depending on the circumstances.

Deputy Alan Farrell

Can Mr. Stewart give more detail on the technical breaches to which he referred? Perhaps he could circulate a copy of the letter.

Chairman

The secretariat will take copies and circulate it. None of us was aware of it until now.

Mr. Alan Stewart

Perhaps I can read it out first.

Chairman

Is it a long letter?

Mr. Alan Stewart

It is two pages long.

Chairman

If M. Stewart is comfortable doing so he may read it into the record.

Mr. Alan Stewart

It is addressed to National Asset Loan Management D.A.C. It regards Project Eagle NDA and is for the attention of Mr. Alan Stewart. It reads as follows:

Dear Mr. Stewart:

I am writing to follow up on my telephone conversation with Mr. McDonagh and Mr. Whelan on November 18, 2016 concerning the agreement entered into with NAMA on February 11, 2014 (the "NDA") in response to your letter of the same date.

Please allow me to repeat my apology for not bringing this matter to NAMA's attention sooner. While I do not offer it as an excuse, I was focused on preparation for the meeting with the Public Accounts Committee (the "Committee"). I intended no discourtesy to you and your colleagues.

As you are aware, I attended a meeting of the Committee on November 17, 2016 as a representative of Cerberus Capital Management L.P. and certain of its affiliates ("Cerberus"). Cerberus was invited to assist the Committee in its examination of the Special Report of the Comptroller and Auditor General with respect to a number of matters. Some of those matters related to events in relation to which I had direct contemporaneous knowledge, whereas for others, I did not.

In advance of attending a meeting of the Committee I reviewed some contemporaneous documents dating from 2014, including emails that were not copied to me in 2014. As part of that process I became aware that some information had been disclosed by Cerberus to Brown Rudnick LLP ("Brown Rudnick") in March 2014.

Cerberus engaged Brown Rudnick to provide legal and strategic services in connection with Cerberus' proposed acquisition of the Project Eagle portfolio. Cerberus was first approached by Brown Rudnick on March 14, 2014 and professional interactions began from that date. The engagement was formally documented on March 24, 2014. As solicitors permitted to practice in England and Wales Brown Rudnick are obliged by the Solicitors Regulation Authority's code of conduct to treat information received from clients or prospective clients as confidential. This professional and legal obligation was acknowledged and other related representations and warranties were made both in our discussions with Brown Rudnick and in Cerberus' formal engagement letter with Brown Rudnick.

Chairman

Can Mr. Stewart slow down so that members can absorb the letter?

Mr. Alan Stewart

I will do so. I will continue:

Specifically, I became aware, during my recent preparation of the following information having been disclosed to Brown Rudnick [these are the technical breaches]:

- On March 21, 2014 Cerberus told Brown Rudnick the adjusted reserve price that had been communicated to Cerberus by Lazard.

- On March 25 2014 Cerberus shared with Brown Rudnick a letter received from Lazard earlier that day (which I note was substantially similar to an earlier letter received on February 14, the equivalent version of which I assume Brown Rudnick would have seen during their time working for PIMCO). I believe this correspondence, and that of March 21, was shared by Brown Rudnick with Tughans. Tughans owed confidentiality obligations to Brown Rudnick.

- On March 27 2014 Cerberus told Brown Rudnick that Cerberus' request for an extension of the bid deadline (to 1 pm on April 1, 2014) had been granted.

My responses to your queries are based upon the information of which I am aware concerning the NDA as of the date of this letter. The preparation of our bid involved over 100 Cerberus personnel and advisory personnel. Consequently, I have not conducted a full review of Cerberus' records nor have I interviewed all of our personnel, or those of our advisors. I have included information concerning Cerberus' affiliates and advisers in the Appendix to this letter.

Although regrettable, the disclosure of this procedural information was not material in the context in which it occurred. I accept that the three instances listed above may contain some information that may not have been previously known to Brown Rudnick and which may therefore be deemed to be "Informational Materials" as defined in the NDA. I do not believe that the information sharing had any impact on the integrity of the Project Eagle sale process. Brown Rudnick (and Tughans) had no role in determining the purchase price Cerberus offered for the Project Eagle portfolio. I can confirm that Cerberus' sharing of these three pieces of information did not impact on the amount of Cerberus' bid. I also want to acknowledge that the inadvertent disclosure summarized in this letter was Cerberus' responsibility and was not the result of any failures by NAMA or inefficiencies in the Project Eagle process.

Finally, I confirm that Cerberus does not object to NAMA providing a copy of this letter or the NDA to the Committee.

Very truly yours

Cerberus Capital Management, L.P.

Mark A. Neporent

Chief Operating Officer

General Counsel

Chairman

We will take copies of that. Thank you.

Deputy Alan Farrell

Mr. Stewart repeatedly used the term "technical" but I do not think it is technical. It is a direct breach of the NDA.

Mr. Alan Stewart

Cerberus used the phrase.

Deputy Alan Farrell

It is clear that further direct breaches may come to light if Mr. Neporent is to continue on the course of action he outlined in the letter. It would be prudent either for the committee to correspond with Mr. Neporent to establish when those particular findings were made or for NAMA to provide the committee with his further responses. It would be helpful, although we have a limited timeframe.

Mr. Alan Stewart

There is a short appendix to the letter which I can also read out:

A number of different entities in Cerberus' corporate structure were involved in the Project Eagle transaction, each of which had access to Informational Materials [which is the defined term in the NDA].

- Cerberus Capital Management L.P.

- Cerberus European Investments LLC

- Cerberus European Capital Advisors LLP

- Promontoria Holding 82 B.V. and Promontoria Holding 83 B.V.

- Cerberus European Servicing Ltd.

In addition to Brown Rudnick, Cerberus retained the following advisers in the period prior to submission of its bid on 1 April 2014 in connection with its consideration of the proposed acquisition of the Project Eagle portfolio, each of which may have had access to "Informational Materials".

- Linklaters LLP

- Deloitte LLP

- A&L Goodbody

- Hatfield Phillips

- Lambert Smith Hampton

- Ronald J. Bolger

- Allsop

- Lunson Mitchenall

- Brodies LLP

- New River

- Nomura.

I want to run through a few topics before we move to Deputy David Cullinane.

Dealing with the overall loss on the Northern Ireland portfolio, there is a document from NAMA, PAC R167B, which deals with the NAMA audit committee meeting on 1 May 2014. The document, from around the time of completion of the sale, states: “Based on preliminary calculations, it is anticipated that the loss generated on the loan sale may be up to £160 million”. That is a figure NAMA recorded at its audit committee and would have been relevant because it was when there was a big discussion of how much one should provide in the 2013 accounts versus the 2014 accounts.

In his opening statement on Thursday, 9 July 2015 Mr. McDonagh stated:

In overall cash terms, taking into account disposal proceeds, non-disposal income, advances and the proceeds of the loan sale, the net cash loss to NAMA, in layman's terms, on the Northern Ireland [debtor] portfolio was about €280 million.

Around the time of the sale the figure was £160 million. With the passage of time and after looking at the figures, a year after the event, Mr. McDonagh presented a figure of €280 million to the committee. In September 2016 the Comptroller and Auditor General's report, in paragraph 3.86, referred to the famous issue of £190 million being a “significant probable loss of value to the State”. On 29 September 2016, in his opening statement to the committee, the Comptroller and Auditor General stated:

NAMA recorded a loss of £162 million in 2014 as a result of sales relating to its Northern Ireland debtors. Most of this related to Project Eagle. Losses of £478 million on the Northern Ireland loans had already been recognised in earlier years, reflecting deterioration in market conditions since November 2009. That was the market value reference point used by NAMA when it bought all its loans.

The Chairman is completely right. I cannot produce a written record for the committee-----

Chairman

We understand, and I think we have dealt with the issue. Part of our coming to the end of the process of these public hearings is perhaps to draw some of those issues together.

I now want to refer to page 111 of the Comptroller and Auditor General's report. I will lay out the scenario as I see it and will ask Mr. McDonagh to convince me otherwise. I have not made up my mind yet, but this jumps out at me. We are dealing with page 111, which contains the NAMA board minutes of 8 January 2014. Towards the end of the third paragraph, they state: "As agreed at [the] 12th December 2013 meeting the Board noted it would not consider the sale of Project Eagle portfolio of loans for a consideration [of] less than STG£1.3 billion." Mr. McDonagh accepts that. Those are the minutes. We will not argue. That is a definite recording.

However, I have to ask myself where this figure of £1.3 billion came from. Mr. McDonagh has said that he has not been able to demonstrate it based on his figures. The only thing that has been demonstrated to me is that PIMCO came to NAMA with a bid of up to £1.3 billion in December or thereabouts. It was towards the end of the year. The only people to put a figure of £1.3 billion on the table were PIMCO. It offered up the £1.3 billion and that became NAMA's price. It is hard to believe there is a coincidence there.

I want to move on to the PIMCO offer. The PIMCO offer had a number of what I would call restrictions. I am pulling them from the notes prepared for the board. The board stipulated that it would be cash only. That is significant. According to page 82 of the report, Lazard also referred to these restrictions when it was making its recommendations to NAMA. At paragraph 4.61 of the report, it is stated that Lazard, in a letter dated 2 April, after the conclusion of the bids, noted that "[t]he process involved a limited number of highly qualified bidders". That is a restriction. There was a limited number of bidders. It went on to note that there was "limited due diligence information". That is a second restriction. There was "a single round of bidding". That was a further restriction. "[T]he requirement for bidders to acquire the portfolio 'entirely [for] cash'" was another significant restriction. There was a tight timeline as well, although it is not mentioned in that particular paragraph. I also think that in one of the recommendations - in the information of the board meeting - NAMA said that there should be restrictions on the number of advisers appointed by the purchaser. That was probably for confidentiality reasons.

When NAMA came to put out its proposal to tender, lo and behold, everything it had laid out - confidentiality, cash upfront, limited due diligence, time restrictions and the price of £1.3 billion - appears to have been mirrored exactly in what went out. I have to say that it looks to me - Mr. McDonagh might convince me otherwise - that NAMA's tender document was, possibly, based on what PIMCO gave it. This whole thing about 10%, 5% and 11.7% is all well and good, but the figure of £1.3 billion came from the PIMCO document. That is the only place I have seen that figure. Will Mr. McDonagh address that point?

My next question leads on and I will deal with all of this particular issue on PIMCO. In respect of the last sentence on page 132 of the report, one has to ask how PIMCO came up with the figure of £1.3 billion. I would be surprised if the board did not ask it when out of the blue it gets an inquiry and an indicative offer from PIMCO and it comes in with the figure of £1.3 billion. It is a mystery. I do not think it is based on NAMA's internal discount rates of 10%. PIMCO has come up with the figure of £1.3 billion, which NAMA ran with from there on in and which was the ultimate final figure. I will require explanation of the last sentence on page 132, because whoever was preparing the information for the board obviously had to understand where PIMCO was coming from. The sentence reads: "PIMCO's analysis was conducted by way of reverse engineering NAMA's Balance Sheet and cross-referencing the publicly available information on NAMA's portfolio." Therefore, there are two bases by which it came by the figure of £1.3 billion. Is "the publicly available information" newspaper articles about who the big debtors were, etc., or how was that established? If it was publicly available information, did anyone ask at that stage if anyone on the Northern Ireland committee might have been aware and dealing with it and have already declared he or she was working with debtors to help put some of this information together? I would have asked how it, out of the blue, came up with the figure. I am asking Mr. McDonagh to explain it.

I have asked a couple of people how it was able to work out the bid based on reverse engineering NAMA's balance sheet. It is a lovely, beautiful technical term to confuse us all, but I do not think NAMA issued a separate balance sheet for Northern Ireland. The figures that are available or that NAMA normally gives us include Northern Ireland and the UK. I do not know how someone could have used "reverse engineering" of NAMA's balance sheet to work out what was left in NAMA.

I will stop at this point now. I want to take this further. Can Mr. McDonagh understand our concerns as to where the whole bid structure came from? It is very similar to what PIMCO approached NAMA with. Did NAMA not ask how it come up with the figure, which NAMA ultimately went with?

Mr. Brendan McDonagh

I will deal with the two points the Chairman raised. The Chairman may want to come in and participate.

Page 158 of the Comptroller and Auditor General's report refers to the famous phone calls. I will not get into these phone calls. I want to pick out one aspect. In the last sentence of the second paragraph referring to a call on 11 March it states, "At this point, it was also noted that one third of the fee was in fact payable to a named individual at Tughans". Page 118 contains an extract from NAMA's board minutes of 13 March, two days later. We have looked at this before, but I am picking out a particular aspect. It refers to "a potential payment of £16 million split equally three ways between Brown Rudnick Solicitors (London), Managing Partner, Tughans Solicitors (Belfast) and Frank Cushnahan". Here are two references to NAMA knowing the money was not due for Tughans, it was due, according to the phone call, to a named individual and the NAMA minutes recorded that it was specifically to the managing partner. Is that correct? Therefore, NAMA was aware that two thirds of the payments were to actual individuals.

Mr. Frank Daly

At that stage, yes.

Chairman

Therefore, NAMA was aware that it was an individual.

While it might not be easy to bring this up on the screen, among the documents NAMA sent to us was a letter dated 23 July 2015 from Mr. Daly to Martin McGuinness in his constituency office in Cookstown, County Tyrone. It is part of a bundle of documents NAMA submitted to us. I will read the paragraph which I find a bit unusual. Obviously, Mr. McGuinness wrote to Mr. Daly concerned about all the things that emerged in 2015 and the revelations. Mr. Daly wrote back to Mr. McGuinness as follows:

It subsequently emerged only very recently, [this was July 2015] that a former partner of a Belfast law firm, Tughans, had, according to that firm, "diverted to an account of which he was the sole beneficiary, professional fees due to the firm without the knowledge of the partners". According to Tughans, the diverted fees relate to its professional work on the buyer side, not the seller side, of the NAMA loan sale. NAMA could not have been aware of this matter and the disclosure has no relevance to the competitive sales process run on behalf of NAMA. As you point out in your correspondence, the Tughans matter is subject to investigation by the police in Northern Ireland. It would be entirely wrong, as some parties have sought to do, to conflate NAMA's process with the unrelated Tughans issue.

So NAMA was very much on notice that the first fixer's fee, as it is being called, was to the managing partner, the named person. Then when NAMA got the letter from Cerberus it was informed that there was a payment again, to two parties on this occasion, Brown Rudnick and Tughans.

Mr. Frank Daly

Is that from PIMCO?

Chairman

From Cerberus.

Mr. Frank Daly

From Cerberus.

Chairman

That is a great idea.

Deputy David Cullinane

Mr. Brendan McDonagh

I will give my personal view.

Deputy David Cullinane

No. I am asking for the board's view and not the personal view of Mr. McDonagh.

Mr. Brendan McDonagh

Deputy David Cullinane

My very last point is-----

Deputy Mary Lou McDonald

It was not mentioned and it is unfair to selectively quote from a letter on a serious matter like this without giving the full context. As such, I am now reading to the committee the letter dated 18 November 2016 from Mr. Ronnie Hanna to Mr. Lenihan, the clerk of the Committee of Public Accounts, Leinster House, Dublin 2:

Re C&AG's Special Report No. 94 - National Asset Management Agency Sale of Project Eagle

I acknowledge receipt of your letter dated 14th November which arrived at my home on 17th inst.

I regret that I have to decline the invitation to attend for two reasons:

1. I remain under a statutory duty of confidentiality arising from my former employment with NAMA. I have not received any communication from that organisation that I am at liberty to divulge details of any activities in which I was engaged while in their employ.

2. A more fundamental reason for declining the invitation is that I was arrested on allegations of bribery, misconduct in public office and conspiracy to defraud. I vehemently denied all of those allegations. I was subjected to an interview under caution under the Police and Criminal Evidence Order.

While I was initially released on police bail, that has now been removed although I have not yet received any indication from the NCA/PSNI or the Public Prosecution Service that I am no longer a suspect.

Until such time as I have been informed that I am no longer a suspect and therefore, remain under caution, I cannot make any statement about the activities under consideration without the protections afforded by the above legislation.

I regret that I am obliged to refuse and wish to assert that I mean no discourtesy to your Committee and the Oireachtas.

Then, I asked Mr. Collison what happened after that.

Mr. John Collison

The only thing I would say is that Lazard was appointed and completed a contract order for services. That contract order for services set out the scope of those services, which included identification of prospective bidders, which is what it did. I mean, that was one of the main objectives and tasks we set them. The actual letter to us at the end of the process is this letter of 25 June 2014. I think the committee has it albeit there may be a restriction on its publication. Lazard confirms that the process was structured in order to seek to achieve NAMA's objective and, specifically, Lazard, in consultation with NAMA, identified a select group of investors who were qualified in terms of financial resources, expertise, track record and so on to undertake a transaction of this nature. Lazard did that.

Deputy Catherine Connolly

Please, Mr. Daly. Honestly, I will not interrupt you.

All of that is in Mr. Daly's statement. In Mr. McDonagh's statement, he argues about the 5.5% and the 10% all over again. This is about the third time. Really, the issues are as set out here. They are basic issues, namely, interest and how NAMA handled it, the sales process, whether the process gave reassurance to the Comptroller and Auditor General's office and so on. That is what is set out. I asked Mr. Daly if NAMA risk assessed a major change of strategy and he said it was not formally done, that there was an opportunity and that NAMA took the opportunity. Is that right?

Mr. Frank Daly

We examined the opportunity and the risk assessment ultimately was - and this is what is important - that we assessed what outcome we could get from a loan sale and measured it against all of the risks associated with holding onto those assets until 2020. I will not go into the detail of all the risks but they related to the granularity, the debtors, the Northern Ireland market, etc. That is the key risk assessment: Were we getting a better result? Should we take the £1.3 billion in the hand in 2014 as opposed to the possibility of more or, more likely, less if we held onto it?

Deputy Catherine Connolly

In PIMCO's opinion, it would not have been less because it assessed the market much more positively than NAMA. That is a fact. That is set out. That is a fact that has been set out by PIMCO.

Let me ask a few more specific questions. I have a question about Cerberus for the legal team. When it was communicated to NAMA that there was €15 million - all of this has been set out and dealt with already - what did the legal team advise in respect of follow-up? Perhaps Ms Aideen O'Reilly can answer.

Mr. Frank Daly

I can answer it myself, but-----

Deputy Catherine Connolly

At this point, this is for the legal team. I want to deal with both of them in the context of this matter and Cerberus as well.

Ms Aideen O'Reilly

We are talking about PIMCO-----

Deputy Catherine Connolly

Yes, and the period 10 to 12 March.

Ms Aideen O'Reilly

There is no suggestion that NAMA was doing this. The suggestion is that PIMCO was doing it.

Mr. Brendan McDonagh

It is not uncommon for bidders on portfolios buying from NAMA or anyone else to negotiate, get a hold of the assets and tell debtors that they will do a deal on personal recourse if the debtors give them control of the assets. That is not unusual here, abroad or in any bank.

Chairman

The restrictions - a limited number of bidders and the one phase of bidding, that there had to be cash up front, confidentiality attached, people were not allowed to get local valuations, limited information was available to perform due diligence, the restriction on advisers and the time restrictions on the process - could only have reduced the possible price that NAMA could achieve. Had NAMA sold the loan book without these restrictions, it could have achieved more. They must have had an impact on the price. NAMA must demonstrate to us that it got value for money for the Irish taxpayer. The restrictions impacted on the possible value that NAMA would have got. Can NAMA demonstrate to us that it got value for the Irish taxpayer in this transaction? How can it do that?

Mr. Brendan McDonagh

I will address the Chairman's points under paragraph 4.61, page 82, which refers to "highly qualified bidders". When Lazard appeared before the committee, it stated that it had identified a universe of bidders from its market knowledge, which is why we employed Lazard in the first place, that it believed would be qualified and be interested in the portfolio. All of the bidders who could meet those criteria were invited into the process. Lazard discounted others who tried to enter the process because it did not believe they were up to it. Lazard dealt with this matter previously.

We had a single round of bidding but, as Lazard had said, it did not affect the outcome. People who signed up to the process knew that they were signing up to a single round of bidding. A condensed process appealed to some of them.

A further point was made on acquiring the portfolio for cash. That is what we told people. Those who were approached had the money to do it. If they got in pole position and NAMA told them that they were the preferred bidder, they could close the transaction. That is not a real restriction. We are referring to funds that have in the range of $10 billion to $200 billion under management. They are not funds that have $500 million under management trying to buy a £1.3 billion portfolio. They have multiples of the portfolio's value.

Chairman

What the witnesses seem to be confirming is that PIMCO is saying it was approached twice about a fee and never consented to it. If it did not agree to do anything wrong, why did it withdraw? The witnesses can understand that question.

Mr. Frank Daly

The issue with PIMCO was that we made it very clear to it that the involvement of Frank Cushnahan, with or without a fee, was an issue for NAMA. The success fee was a major issue but it is quite obvious that he was involved with PIMCO. We did not know how far back. Even if it was a day or two, it was an issue for us. I think that at the end of the day, PIMCO withdrew because we made it very clear to it that we would not allow it to continue. That has been my view from the start.

Chairman

Chairman

Not thus far. Will NAMA pass on the correspondence when it receives a response?

There is a chart, on page 77, that I want to ask the witnesses about. For the benefit of people, most of us took it on face value until Mr. Neporent highlighted the matter the day he was here. The chart refers to European sales from 2013 to 2015. Project Eagle was completed at the beginning of 2014. That is using sales that happened substantially after the conclusion of Project Eagle to explain who are the main players, or for NAMA to state it dealt with the main players. It would have been more helpful if we had the European sales from 2012 to 2014. Do the witnesses get the point? Those figures represent activity in the market after the conclusion of Project Eagle. NAMA has used the chart to justify the fact that it brought it in the big players. For all we know, some of those may not have been players prior to the Project Eagle event. Can that chart be reworked? NAMA said it got somebody to produce it for it, Cushman & Wakefield. Does it have a similar chart for the three years 2012 to 2014 that would give us an indication of who the big players in the field were at the time of going to market?

Mr. Brendan McDonagh

No problem. We will go off and seek that for the committee.

Mr. Frank Daly

I would like to point out the loan sale process was only developing around that time so I am not sure what would be there before 2013.

Chairman

In other words, if we test that chart on the basis of who NAMA was actually going to, we find NAMA is beginning to suggest it was not as substantial as it is looking.

Mr. Frank Daly

No.

Chairman

We want figures as well. To what does the rate of 30% apply? I have no idea. We need possible quantities.

Mr. Frank Daly

This was a time when there was activity in the market. It is quite valid as well to look beyond it to 2015.

Chairman

We are nearly there.

On 13 February, there was a media leak. Confidentiality was a fundamental issue as far as NAMA was concerned. Shortly afterwards, in mid-March, we had the PIMCO issue coming to light. Then, on 2 April and 3 April, we had the issue with Brown Rudnick and Tughans coming to light. I refer to the success fee. At any of those three stages, did NAMA consider halting the process? Mr. Daly should consider them one by one. There were three occasions on which significant problems arose. I believe Mr. Daly said before this committee on an another occasion that, as a result of the leak, he considered whether he would pull the process. Owing to the difficulties in the process, it was not a clean, neat process. Those are the three issues that arose.

It is quite clear to us that there has been a lot of engagement and many parliamentary questions on these issues and perhaps it was said somewhere but it has not been highlighted.

Mr. David Linehan

I am pretty sure it has been, but I would have to check parliamentary questions, PQs.

Chairman

Deputy Catherine Connolly

Deputy Catherine Connolly

Okay. The witness has said that and there is a conflict there. Let us look at page 112, paragraph 4 of the Comptroller and Auditor General's report. PIMCO were in the process from a very early stage, not with NAMA, according to the witnesses, but with Brown Rudnick and Tughans from April 2013. They went forward to September and through the various board meetings. On 8 January 2014, a decision was made by NAMA. Paragraph 4, page 112 reads as follows:

In parallel, PIMCO were permitted to complete their due diligence on the "tail" of the Eagle Portfolio and formalise their bid. AR would, at this juncture, meet with PIMCO to advise them of the intended approach regarding the other short-listed investors noting that this would be as much to protect PIMCO's interests with regard to the integrity and the credibility of the disposal process;

Mr. Seamus McCarthy

I wish to make a further point. I will not revisit any of the issues in the report at this stage.

I thank the committee for the attention it has given to the report and the way it has studied it. I know it is a complex report. I am sorry there are so many matters in dispute. I was bringing a report without these having been resolved. I came to the conclusion that if I continued indefinitely with this process, I really could not take it any further. Having listened to and examined the evidence presented to the committee, I am satisfied with my report and I stand over it.

Chairman

On behalf of the Committee of Public Accounts, I thank the witnesses from NAMA, the Office of the Comptroller and Auditor General and the Department of Finance for participating in today's meeting.

COMMITTEE OF PUBLIC ACCOUNTS debate - Thursday, 24 Nov 2016

Special Report No. 94 of the Comptroller and Auditor General: National Asset Management Agency Sale of Project Eagle (Resumed)

Mr. Frank Daly

Mr. Brendan McDonagh

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Ms Aideen O'Reilly

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Mr. Frank Daly

Mr. Frank Daly

COMMITTEE OF PUBLIC ACCOUNTS debate -
Thursday, 24 Nov 2016