AN AMERICAN NIGHTMARE Sunday, May 24, 2009 By Richard Curran ‘Empty shopping centres, abandoned office developments, bankrupt apartment complexes in suburbia and land which has been bought and sold a dozen times, but now can’t be given away.”
So began a 1989 article in the Washington Times, at the beginning of a clean-up in the US in the wake of the savings * loans (S&L) debacle of the late 1980s.
The Resolution Trust Corporation (RTC), set up by US President George Bush snr in August 1989, has many similarities with the National Asset Management Agency (Nama) that Brian Cowen and Brian Lenihan are putting their faith in. The RTC began its work in 1989, and closed its doors in 1995. It took on $465 billion of property assets and sold them off, resulting in a total cost to the American taxpayer of $90 billion.
A similar level of loss on the size of the proposed Nama loan book of €80 billion to €90 billion would see the clean-up costing the Irish taxpayer around €20 billion to €22 billion.
Supporters of the American RTC project said the losses were much less than expected at the beginning of the process. Critics said the actual cost of funding the bailout, with interest over a 30-year period, would leave the total cost of the exercise at closer to $400 billion.
As the Irish government works on drafting the legislation which will set up Nama later this summer, its critics are lining up against it. Small developers are concerned that they will be taken to the cleaners. Some taxpayers fear that really big developers won’t be hit hard enough. Economists and opposition parties believe an alternative structure should be sought. Much of the detail of how Nama will work is either not yet disclosed or, more likely, not yet decided.
The experience of the RTC in the US in the early 1990s provides some sense of how tough the road ahead for Nama will be, and the kind of obstacles it will encounter. There are significant differences between the RTC and Nama, which should be kept in mind.
The RTC was set up to take over several hundred busted S&L businesses, which were like small banks. Its role was to recover as much money as possible from borrowers of these businesses, to safeguard depositors and to investigate and prosecute those who had committed wrongdoing in their dealings with the S&L operations.
As part of that process, the RTC sold more off more than $360 billion in assets, including 120,000 properties. It closed or merged 747 savings and loans operations, and protected 23 million depositor accounts across America.
Like Nama, most of what the RTC took under its control was mortgages, although this included residential units, not just commercial property loans. Actual properties made up less than 10 per cent of the holdings, equal to around $35 billion.
But most of the publicity and controversy surrounded the sale of the $35 billion-worth of properties. Because the RTC took over busted S&L operations, many of these minibanks had already seized properties from collapsed developers, so the RTC inherited the actual property, and not just the property loans.
In the case of Nama, it will purchase loans. When these developers fail to pay back their loans and default, it will fall to Nama to take them to the High Court seeking possession orders for properties they will have to sell. This means that Nama will be a major player in the property market for years to come.
Much of the concern about Nama has been around the possibility of legal challenges to its very existence. However, the US experience suggests that it is more likely that Nama will end up taking actions for possession of property every week for years to come, as developers fail to pay up. This will lead to what NTMA chief executive Dr Michael Somers recently described as a ‘‘courts bonanza’’.
In the case of the RTC, it hired a team of 9,000 staff to oversee its operations, investigate wrongdoing and sell properties. Nama will pay the existing banks - which hold the loans - to administer them.
The banks will have to be financially incentivised to perform this process vigorously. It means Nama will not end up with thousands of staff.
The RTC had a shaky start, illustrating the difficulty of setting up a model which can get to work quickly. At least two smaller previous organisations failed to do the job. Under its initial rules, it refused to deal with the developers who caused the loss in the first place or their connected parties when it came to selling off assets.
It eventually had to relent and change the rules. ‘‘Everybody who was anybody would have been unable to do business with the RTC,” was how one US lawyer described the early phase.
Even before the RTC had hired any employees, it was handed 262 failed S&Ls and responsibility for disposing of their $114 billion in assets - loans, real estate and securities. Under pressure to move quickly, the RTC borrowed leadership from other agencies and hired William Seidman, then chairman of the Federal Deposit Insurance Corporation as chief executive. ‘‘The job combined all the best aspects of an undertaker, an Inland Revenue Service agent and a garbage collector,” he later wrote in his 1993 autobiography.
RTC employees struggled to operate in the real world of commercial real estate, and there were allegations of sweetheart deals and buyers looking to pay for properties with suitcases full of cash. RTC staff were supposed to ensure they got the best price for everything, whether they were buying or selling. But the minutely-detailed rules backfired, causing delays and aggravation. The act that set up the RTC called for heavy use of the private sector, but only after a lengthy bidding process that favoured minority firms and was designed to weed out con artists.
The RTC ended up signing 163,272 contracts for everything from data processing to real estate sales, from paperclips to legal representation.
The decision to leave the banks in charge of the administration of property loans for Nama here should take some of that bureaucratic burden away. However, some of the other challenges faced in the US may also surface. The RTC was initially criticised for moving too slowly in setting up its rules and in selling properties. The government is facing similar criticism here from some property interests.
Then the RTC was criticised for moving too quickly in offloading properties and settling for prices that were bargain basement. In some places, the RTC was overwhelmed with foreclosures and an enormous workload, and ended up selling properties for a lot less than it might otherwise have got. Inevitably, there will be controversy.
The sale of properties i n the US by the RTC prompted a lawyer in Texas, where many of the RTC properties were, to describe it as the ‘‘greatest transfer of wealth, outside armed rebellion, in the history of the country’’.
Much of the language around Nama here has been about ‘‘work-outs’’ of developers’ loans, meaning that, in some cases, Nama will work with large developers to bring projects to fruition and thus try to safeguard taxpayer cash.
It will be possible to work through some projects, but the excessive overbuilding that has taken place in Ireland will not suddenly go away when Nama is set up. In reality, as with the RTC, there will be an imperative to move relatively quickly to take control of some properties from defaulting developers, and then sell them off to bring in cash.
In the US, the rapid transfer of properties brought huge opportunities for buyers. In Travis County, Texas, the RTC collected just $489 million for the 2,837 houses, office buildings and development land it controlled. Its original assessment of their value was $1.3 billion.
After initially seeking to realise the assessed values of properties (the value placed on them by the RTC when it took them over), the market and the need to sell quickly dictated that it flogged bundles of properties together, good mixed with bad, at much lower prices.
The rapid sale of properties dragged real estate prices down further in these areas for a number of years. Here, international investment institutions may also circle in search of bargains.
If they can afford to wait for a return, they may do well. Several international institutions are believed to be gearing up for Nama asset purchases. As well as Irish properties, Nama may move to sell off foreign property assets sooner to avoid heavier administration and to bring in early cash. This could see properties being sold in Britain, the US, Bulgaria and elsewhere in continental Europe, reflecting the boom in Irish financed property development worldwide in recent years.
The RTC achieved different prices in different parts of the US. For example, it ended up selling large chunks of real estate for around half the value of the loans that had originally been raised on the properties.
In Texas, Louisiana and Mississippi, the sale of assets with a book value of $76 billion generated cash of $55 billion, or 72 cents on the dollar. When it closed its doors in 1995, the RTC had just $7 billion in unsold property.
Nama is expected to take longer than six years to complete its business, with some estimates saying that it could take a decade or more.
But things could move along quickly, because the government may not be comfortable with the idea of still trying to get back money from developers in 2019.
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