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Tuesday, August 25, 2009

NAMA in a nutshell


Many people have asked me, how does NAMA work and how much will it cost? I decided to put pen to paper and offer an example. Joe has lent Mick €200,000 to build a house that Mick wants to sell for €300,000. Mick has built the house but can't sell it, and even if he could, he wouldn't get €300,000 for it because the housing market has collapsed, he'd be lucky if he got €100,000 for it. So he can't pay Joe back. Mary has come to Joe and asked for a lend of €50.

Joe can't lend Mary any money because he's waiting on his loan, with interest, back from Mick. So he gives his buddy NAMA a ring and asks NAMA will he take on Mick's loan and give Joe the €200,000, because at least then he'll have his original money back. The sane thing for NAMA to do here is tell Joe that he and Mick took a mad gamble with that loan given that houses prices were on the verge of collapsing and that Mick should sell the house for what he can get and Joe should take what he can get. Instead, NAMA says no problem, even though he's not sure Mick will ever pay him back.

NAMA makes one condition. He won't give Joe the whole €200,000 because he knows houses will never sell for that much this year. But they might sell for a bit more in the future (yeah right), so he'll give Joe €180,000. NAMA doesn't really care after all, because it's not his money anyway (it's the taxpayers'). NAMA says he's interested in Mary getting the loan too, but both NAMA and Joe know that Joe mightn't lend Mary the loan, because Joe just got stung by Mick and isn't sure he wants to take the risk again. Unless NAMA promises to keep picking up the tab. And it is you, the taxpayer, who will pick up the tab and pay anything up to €90billion. I will let the reader decide if this is a good or bad deal.

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