JOINT COMMITTEE ON FINANCE AND THE PUBLIC SERVICE debate -
Tuesday, 13 Apr 2010

I welcome Mr. John Corrigan, chief executive of the NTMA and Mr. Brendan McDonagh, chief executive of NAMA.

The committee will hear short opening remarks from Mr. Corrigan of the NTMA and from Mr. McDonagh of NAMA, which will be followed by a question and answer session with the members.

Before the opening remarks I draw everyone's attention to the fact that members of the committee have absolute privilege, but this does not apply to witnesses appearing before it. Under the salient rulings of the Chair, members should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable.

I welcome the opportunity today to discuss with the committee the setting up and operation of NAMA and how the NTMA and NAMA are giving effect to Government economic policy. By way of background, the NTMA was set up in 1990 to manage Ireland's national debt on a commercial basis. The NTMA has managed this function very successfully and the Government has recognised this by awarding additional financial and risk management functions to the agency, all on the same commercial model.

These include the State Claims Agency, the National Pensions Reserve Fund, NPRF, the National Development Finance Agency and most recently, NAMA and certain banking system functions of the Minister for Finance. The NTMA can bring two attributes to the implementation of Government policy that are of particular benefit in the challenging environment in which the State currently operates. These are a market facing expertise and experience of dealing with capital markets on a day to day basis as well as an ability to recruit professionals from the private sector, in mid-career, where necessary.

In the past this has enabled us to skill up quickly to manage new functions. We are going through this process now with NAMA and we are also doing it with the new banking functions that have been delegated to us. I will briefly set out for the committee the structural relationship that obtains between NAMA and the NTMA. While NAMA is a statutory body in its own right with a board and chief executive, it operates under the aegis of the NTMA – and all NAMA employees are staff of the NTMA. In common with the NTMA's other business functions NAMA will draw on the NTMA's shared services in the areas of human resources, IT, financial control and internal audit. In addition the NTMA treasury unit provides treasury executive functions to NAMA for the purposes of balance sheet management.

While I am an ex officio member of the NAMA board, my colleague, Mr. BrendanMcDonagh, is the chief executive and accounting officer and will take the committee through the progress made to date by NAMA and give it an indication as to how its work will proceed during the rest of the year. Before handing over to Mr. McDonagh, however, the committee might find it useful if I briefly set out the functions the NTMA has recently assumed with regard to the banking system.

On 2 February last, the Minister for Finance announced his intention to delegate several banking function systems to the NTMA and on 11 March the Taoiseach signed the necessary order to give effect to the delegation of these functions. The NTMA is required to carry out these functions in accordance with any directions by the Minister and on 19 March the Minister issued directions to the agency in this regard. Broadly speaking, the main functions delegated to the NTMA and the parameters set out may be summarised as follows: to lead discussions with the covered credit institutions to determine their likely capital requirements and negotiate the terms and conditions on which any capital support provided by the State will be invested; and to manage any ministerial shareholdings in these institutions.

These functions are being carried out in close consultation with the Minister and his Department. As set out in his statement of 2 February, the Minister for Finance will continue to be fully responsible and accountable to the Oireachtas and these arrangements will not result in any changes in that regard. I note that the Minister has directed the NTMA to report to him and seek his approval and direction before entering into any irrevocable commitments.

As members will be aware, the NTMA already had a role in its capacity as the manager of the National Pensions Reserve Fund on behalf of that fund in the banking sector. It managed the carrying out of due diligence on Bank of Ireland and AIB prior to making the preference share investments in these institutions and since then has been monitoring the financial conditions of the two banks on behalf of the National Pensions Reserve Fund Commission and reporting on same to the Minister.

As set out in the Minister's statement of 30 March, any further investments in these institutions will continue to be met from the National Pensions Reserve Fund — in the case of Bank of Ireland, through the conversion of part of the preference share investment into ordinary equity and in the case of AIB through the conversion of part or all of the preference share investment, as required, and if necessary, through further investment in ordinary equity.

The NTMA has established a small banking unit to carry out its NPRF-related banking functions and the newly delegated functions will be undertaken through a limited expansion in this unit. As we are all keenly aware, the country faces very considerable economic and financial challenges. The NTMA, through all its business activities, is at the centre of the resolution of these difficulties and is committed to doing its utmost to delivering the best possible results in each of the functions entrusted to it.

I thank the Chairman, Deputies and Senators for the opportunity to address the committee on the setting up and operation of the National Asset Management Agency, NAMA.

When I was here, nearly a year ago, on 26 May 2009, NAMA existed only on paper. The policy decision to establish the agency was announced by the Minister for Finance in the first week of April 2009 and I was appointed its interim managing director on 5 May 2009. Since that time a small team within the NTMA has worked closely with the Minister and Department of Finance and the Office of the Attorney General to develop the legislation and secure European Commission approval. Today NAMA exists as a reality, having passed all those hurdles and with the transfer of the €16 billion in loans — the first and largest tranche of its planned loan transfers — well under way.

I intend to give the committee a brief overview of the considerable progress made to date and to indicate how our work will proceed during the rest of the year. NAMA is, first and foremost, an asset management agency established with the aim of transferring key property related exposures from the balance sheets of the participating financial institutions, in return for Government guaranteed securities. It will manage these loans with the aim of achieving the best possible return for the taxpayer over a seven to ten year timeframe. Replacing these property related loans with Government guaranteed securities will remove uncertainty about the soundness of the banks' balance sheets, provide the institutions with much-needed liquidity and make it easier to access capital – for some — and liquidity — for all — on the international capital markets.

Finance institutions, cleansed of risky categories of property loans should be free to concentrate on their core business of lending to and supporting businesses and households.

The first tranche of loan transfers to NAMA will see about 1,200 individual loans with a nominal value of €16 billion acquired for a consideration which is expected to be of the order of €8.5 billion, representing an average discount of about 47%. To date, NAMA has completed the transfer of loans from four of the five participating institutions and loans from the remaining one, Anglo Irish Bank, are due to transfer in the coming weeks. Tranche 1 is the biggest single batch of loan transfers that NAMA expects to undertake and represents some 20% of the total. Much hard work was necessary to allow the first loan transfers to begin within a month of securing EU approval and I express my appreciation to every member of the small NAMA team for that effort. We have also established a special purpose vehicle and have secured the necessary private sector investment of €51 million to ensure that the NAMA debt and transactions are off-balance sheet for general Government debt and general Government balance purposes.

Our sole focus at NAMA is to bring proper and disciplined management to these acquired loans and borrowers, with the aim of achieving the best possible return and protecting the interests of the taxpayer. We have already held meetings with many of the borrowers whose loans have been acquired as part of tranche 1. Each borrower will have to submit a comprehensive business plan in accordance with NAMA's template, within 30 days of being acquired. The individual borrower's viability will then be rigorously assessed over the coming two to three months as part of the business plan review process. We are willing to engage with an open mind with our acquired clients, but we require full disclosure of all material information and we will not waste time with borrowers who do not wish to co-operate or who have not yet accommodated themselves to the current realities of the property market.

I want to dispel any notion that NAMA is a bail-out for developers. It is no such thing. The board of NAMA and I were appointed in late December 2009. The board comprises a group of highly skilled and professionally qualified tough-minded people. They have gone about their role assiduously and foremost on their minds is protection of the taxpayer. The board is very clear, as I am, about what NAMA needs to do and what we expect from our acquired debtors. Just as any borrower from a bank must expect to have to repay his or her debts, the same will apply to anyone whose debts are transferred to NAMA. We have a clear commercial mandate to recover debt and therefore NAMA's purpose is certainly not to let developers or any other borrowers walk away from their responsibilities. Borrowers who continue to meet their contractual obligations have nothing to fear from us but those who do not can expect NAMA to take whatever actions it considers necessary to protect the interests of the taxpayer.

Some commentators have expressed surprise that the discounts that have emerged from each of the institutions have been so high. Initial indications of an aggregate discount of 30% were based on information provided last year by the five participating institutions. However, our own detailed due diligence on a loan by loan examination has revealed a troubling picture of poor loan documentation, of assets not properly legally secured and of inadequate stress-testing of borrowers and loans — all born of a mindless scramble to funnel lending into one sector at considerable pace and of a reckless abandonment of basic principles of credit risk and prudent lending. As a consequence of a number of factors — the fall in property values, a detailed scrutiny of each individual loan and security documentation and a sober assessment of the prospects for the underlying property which secures loans — the expected discount of 47% for the first tranche is higher than could originally have been expected. I should point out to those who predicted that NAMA would overpay for assets that the consideration of €8.5 billion is less than the estimated current market value of the property of €9.4 billion and is also less than the long-term economic value of the property of €10.5 billion.

Much has been made of our ability to make a certain amount of funding available to allow projects to be completed. Let me state quite clearly that NAMA will take a strictly commercial view of unfinished projects and will not sanction their completion for completion's stake. NAMA will make funding available only if it makes commercial sense to do so. We must be realistic about the portfolio of assets NAMA is acquiring. As an involuntary purchaser it has to take what it is given. However, when one examines the types of assets or indeed travels through the country one can see land and half-built developments which should never have been contemplated. It is difficult for anyone with an objective view to understand how such developments could have made sense even at the top of an overheated property market, never mind today when the market has collapsed. Inevitably, NAMA may be faced with the very difficult decision of perhaps knocking down certain developments and this will incur costs, but unfortunately there is no avoiding this. However, the taxpayer can be assured the price NAMA will pay the financial institutions for these loans will reflect this reality. There will be other developments where it will make commercial sense to complete the projects already underway but NAMA will not be a soft option and borrower applications for additional funding will be assessed rigorously on a case by case basis. We have already initiated with a number of borrowers a review of costs to completion of individual projects — we are taking nothing for granted and no borrower should expect otherwise.

With tranche one nearing completion work is already underway on the second tranche of loans of €13 billion, which we expect to take place in the second quarter. By the time the third tranche of €8.5 billion is transferred almost 50% of the total loans due for acquisition will have been already taken over by NAMA. I must state that we are entirely dependent on the participating financial institutions to provide us with the requisite due diligence on a timely and, frankly, in a correct manner. Tranche one due diligence was of variable quality and no doubt lessons will be learned by all sides on how to improve the process and with that in mind I fully expect the pace of loan transfers will accelerate during the second half of the year as smaller and less complex loans can undergo due diligence, be valued and transferred more easily. Our objective is to transfer the remaining loans from the five institutions by the end of the year and certainly no later than February 2011, the deadline set by the European Commission. In fact, depending on the institutions themselves and their own individual readiness, we expect that we could have three of the five institutions completed by the third quarter of 2010.

NAMA is not the problem, it is merely cleaning up a problem that was created by others. I can assure the committee that my colleagues and I in NAMA and in the NTMA will remain resolutely focused on the interests of the taxpayer as our work continues in the months and years ahead. To do otherwise would be to repeat the costly mistakes committed by those involved with the banking system in recent years.

NTMA and NAMA are at one with each other. We are all part of the same family, we have a common approach and common purpose. We were glad to be outsiders when we saw the problems created by others. I can assure the committee that NAMA and the NTMA are part of the policy solution to restore the credibility of Ireland's sovereign name as a borrower and part of the rejuvenation of the banking system. We will do everything in our power to ensure Ireland has a better future while at all times protecting the interests of the taxpayer.

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

I welcome both spokespersons. I was encouraged by the tough minded approach that was taken to the valuation process; nonetheless, it appears that NTMA-NAMA is building into the numbers a long-term economic value uplift of €5 billion on the total portfolio, if we project it across the entire process.

What do the delegates believe it will take to break even on the property portfolio? When a draft development plan was last produced, a 10% property price uplift would have been enough to break even and it was envisaged that 80% of the loans would repay all the money that was granted to them. Has the view of NTMA-NAMA changed on that? What would be its view of property price requirements to break even and what will happen in the event of losses?

On the question of costs, what are the bond yields that NAMA is giving to the banks? I have not seen the figures for them. We were told they were to be based on O.5% over the European rate but they were not revealed to the Dáil at the time they were issued. However, now that NAMA has ownership it has issued terms and perhaps the committee will be told what are those terms.

May I question both delegates on pay and conditions in the NTMA and in NAMA, which traditionally have been a secret? I would like to know if there have been cuts in the pay of the existing staff of the NTMA, given that the public service and the banking sector are taking cuts in pay. I have similar concerns about the approach to professional services where it was envisaged that €2.4 billion would be spent during the ten year period. That gives rise to concern. How does NTMA-NAMA plan to manage its portfolio as, effectively, it will be in a monopoly position in owning development land? What performance framework will be used by NAMA? Will it be to make a profit on every loan? Is it the policy to dispose of the assets in a seven to ten year period? Clearly there would be public concern that NAMA might sit on the entire portfolio in order to manage what might appear to be a profitable flow that might be bad for the market or it might decide to dump on the market. What is the view of the delegates in that regard? Do we try to move rapidly to a floor in the market in order that it recovers or do we hang on to the assets in the hope that something will turn up? I understand the original plan envisaged very few disposals for the first three to four years. We were told that the NTMA has codes on disposal and other aspects of policy and I am surprised they have not been published. They appear to have been made available to the Minister for Finance but not to the members of the committee.

NTMA-NAMA will become a banker which has to deal in development land. I wonder how NAMA will manage the banking dimension which is different from asset recovery. Does it have staff and expertise to do it and how will it be managed?

The NTMA traditionally has not been very open. We do not know how it measures staff performance or what the senior staff are being paid. Will there be more openness, not only on those issues but on individual loan performance and the performance framework of NAMA as a whole? Will the process be open to the public, who can then judge how it is performing? It is clearly a significant new obligation on the taxpayer to fund throughout the period.

What is happening in regard to Anglo Irish Bank that the transfer has not been made to NTMA-NAMA? I thought that bank had the majority of the individuals with these significant exposures. Will Mr. McDonagh explain how the NAMAisation of Anglo Irish Bank will gel with the mini NAMA the bank proposes to set up? Why have a mini-NAMA and go through the process of due diligence that has to be done for loans taken over by NAMA?

I address my final question to the NTMA. I notice that it advised the Government on the policy of placing the preference shares. We were told there would be a dividend of 8%, but the European Union quickly stated it would not allow the payment of a dividend owing to state aid rules. Was the NTMA caught unawares that a dividend could not actually be paid? We were all told in the Dáil that the taxpayer could look forward to such a dividend. In retrospect, it seems the European Union adopted a policy that was similar to the one it had followed in other cases. Who advised that the preference shares could produce a yield?

The business plan was produced by NAMA last October before the board was appointed. Since its appointment, it has committed to the production of an updated business plan, with its own views, which it will submit to the Minister by the end of June. As work on the plan is continuing, I cannot prejudice the outcome of the board's——

I presume NAMA cannot set a price for the loans it is taking in if it does not know what are the prospective returns, property price changes and so on. Mr. McDonagh said it had looked closely at property prices; therefore, some assumptions on prices and loan performance must already have been made.

The valuation methodology used by NAMA is in accordance with the legislation and regulations and has been approved by the European Commission. That is the price we are paying for the loans. The assumptions to be made in the business plan about the level of recovery in the property market here and the United Kingdom must be discussed at board level in NAMA. They are due to be discussed in the next two months and will feed into the formulation of the revised business plan.

The bonds issued by NAMA are priced at a six month EURIBOR rate with no margin. They are not priced at the ECB rate plus 50 basis points, as I have heard people mention many times.

I am sorry. The bonds are priced at a six month EURIBOR rate. Effectively, there is no margin; the rate is currently at 1%. When that rate expires in six months, we will price the second half at a new six month EURIBOR rate, whatever it is at that time. Having examined the forward curves in the market, it is still expected the interest rate will be about 1% in six months.

A point was made about the cost of professional services over ten years. At the time the business plan was produced in October, we were in the middle of a public procurement process because we were subject to public procurement rules. The costs arising from public procurement competitions are much lower than we expected. There was keen competition and while we estimated costs in the first year to be about €160 million, they will probably come in at about €100 million. That reflects the level of international competition in tendering for the business. As these costs will be recovered from the institutions up front, it will not be a cost to NAMA. Between years two and ten there will obviously be ongoing costs for what we will have to pay the institutions to administer the loans. A big part stems from the view that much of the portfolio will be enforced against those concerned. These costs will come to about €160 million per annum, as this large portfolio costs about €80 billion. The costs will depend on the level of enforcement involved. We have only to look at the market for the appointment of receivers. We will be running competitions in the next few weeks to appoint enforcement panels, but receivers are not cheap; they charge a large amount.

NAMA's management of the portfolio will feed into the business plan. Big questions include whether certain assets should be disposed of quickly, whether they can be disposed of and whether certain assets will be held for a longer term. We have made no secret of the fact that within the Irish market we will not see a huge amount of liquidity. However, about 20% of the portfolio is held in the United Kingdom and we see many opportunities to dispose of assets in that market. This will make up part of our assessment of borrowers' business plans. If it turns out that we take the borrower out of the picture, the object of the NAMA board will be to generate cash as quickly as it can in order to reduce liabilities. That will have to be examined on a case by case basis, depending on individual assets.

The NAMA board was required under a section of the Act to submit codes of practice on various items within three months of its establishment. It submitted the codes to the Minister who is now reviewing them and will revert to the board shortly with his views. If he approves them, they will be published on the NAMA website.

I was asked whether NAMA was a bank. While it is an asset management company, part of our organisational structure will inevitably have to have banking expertise. To that end, one head of functions is a head of lending, which individual will start with us next Monday. He is not from the Irish market but is coming here from the United Kingdom.

NAMA will be subject to annual audit by the Comptroller and Auditor General and its accounts will be published. We have adopted IFRS accounting standards which require significant disclosure. Therefore, the accounts will be similar to those produced for a bank which are quite detailed.

I was asked about the delay in the first tranche in respect of Anglo Irish Bank. The bank has loans totalling €10 billion of the first €17 billion — about 600 of the 1,200 loans. It has been a long and difficult process to get the documentation from the bank and engage in due diligence. We are coming towards the end of that process and expect the transfer to happen within the next ten days. It has been a very long process owing to the size of the loan book and the process of due diligence in which we want to engage.

I was also asked about the level of interaction between NAMA and Anglo Irish Bank's own plan in a post-NAMA environment. It will have a good bank and a bad bank. NAMA will have no role in dealing with the post-NAMA loan book that will stay with Anglo Irish Bank which will be setting up its own internal bad bank, subject to European Commission approval. NAMA will not be able to take over the management of that loan book, even if it were asked to do so, without the Minister reverting to the Commission for approval. That is not on the horizon at present. There are other issues in regard to the preference shares and the coupon which I will refer to my colleague, Mr. Corrigan.

Deputy Bruton asked about pay in the NTMA and the question of whether there had been any pay reductions in the current environment. The employees in the NTMA were subject to the pension levy of approximately 7% and, on top of that, we secured an 8% reduction in the payroll. We do not have the grade structure that obtains in the Civil Service so it is necessary to achieve that reduction in a different manner than the approach that was adopted for the Civil Service.

The Deputy raised the question of disclosure with regard to pay. All of the employees in the NTMA are on individual contracts and there is no grade structure. The long-standing convention has been to observe confidentiality with regard to the disclosure of individual pay arrangements.

With respect to the coupon on the preference shares, the position, as the Deputy correctly said, is that the European Commission imposed a coupon stopper with respect to the first coupon payable on the Bank of Ireland preference shares. However, as part of the deal with Bank of Ireland, the terms and conditions of those preference shares provided that, in the event that the coupon was not paid for whatever reason, be it a coupon stopper or for reasons that the bank had not, for example, got sufficient distributed reserves to make the payment, an equivalent amount by way of payment in kind in ordinary shares would be made. That payment in kind arrangement has been triggered by virtue of the coupon stopper and will continue to apply if the coupon stopper continues to prevail, so that, from the point of view of the taxpayers, they have been made good.

In addition to the 8% coupon, there are warrants attached to those shares which give the pensions fund, on behalf of the taxpayer, the right to buy ordinary shares in Bank of Ireland at a future date at a price in a low, single digit sense. If they were to be marketed today, we would be considerably in the money. In the round, therefore, the value has been preserved for the taxpayer.

I welcome Mr. Corrigan and Mr. McDonagh to the committee. I wish the former chief executive, Mr. Michael Somers, well in his retirement and convey our good wishes to him.

I wish to ask Mr. Corrigan some questions about his statement on the changes in relationship between the Department of Finance and the NTMA. That is very interesting and I do not believe there has been an opportunity to discuss it. First, given the delegation of functions order that was signed by the Taoiseach on 11 March and the new kind of liaison with the Department of Finance, it is true to say that, effectively, Mr. Corrigan is now the boss of the Irish banks. From an operational point of view, the NTMA holds the investments through the National Pensions Reserve Fund. It has a very strong relationship to NAMA and its operations and Mr. Corrigan is also on the board.

While this derogation of functions was referred to by the Minister in the Dáil, there has never been an opportunity to discuss it. What, in Mr. Corrigan's view, is the role of the Department of Finance in regard to the oversight and supervision of banking? Does it tell Mr. Corrigan what to do or does he tell it? What exactly is the relationship? This is a very important change. It would seem, from what Mr. Corrigan has said, that he is in charge.

The Anglo Irish Bank Corporation Act 2009 set out what was called a relationship framework between the bank, it having been nationalised, and the Minister for Finance. That relationship framework, which is critical to the relationship between the Minister and the bank, has never been published. Am I correct that Mr. Corrigan has inherited or taken over from the Minister the relationship framework under sections 3 and 34 of the Act? That is a major legal change and Mr. Corrigan is now the legal entity sitting, as it were, on top of the State's investment or ownership of Anglo Irish Bank. What is the relationship between the NTMA and the Department of Finance? Has the Department of Finance in effect abrogated the oversight of the banks and the investment in the banks to the NTMA? That is a matter of interest.

The Minister for Finance, under the old National Treasury Management Agency Act, which is still in operation, has, in effect, a special relationship with the NTMA and is the control Minister or responsible Minister in regard to the NTMA. Is there not a conflict of interest between the steps that have been taken given that while the Minister has given up control, he still retains a degree of control?

I ask this specifically in regard to my next question for Mr. Corrigan, which concerns Quinn Insurance and the difficulty the company is now experiencing. One of the proposals we understand has been made is that Anglo Irish Bank, of which Mr. Corrigan now has the command oversight, has put a proposal into the public domain that it would in effect take control of that insurer, or take control of the companies, and inject either a debt swap or €700 million — to be honest, I do not know more than is in the newspapers and it is not very clear what the chairman of that bank is proposing. Has Mr. Corrigan been consulted or has he taken a position on this? What is his role in this regard? Is it to him we should talk about Quinn Insurance or to the Department of Finance? It would be helpful if he could clarify this for the committee. Perhaps later, we might come back to this because it is a very special issue.

With regard to NAMA, to follow up on some of the questions asked by the previous speaker, I find it hard to believe, given all the work I know Mr. McDonagh and all the people in NAMA have put into it, that he does not at this point have a revised business plan. NAMA has been in operation for several months. I presume he has heard the bulk of the horror stories that have emerged in regard to title, the quality of the loans and so on. He suggested he will possibly not be in a position to finalise a revised business plan for two months, or is it simply that he is submitting it to the Minister for Finance in two months? I find that strange. When will the business plan be published? In all of this, the more information that is published, the better the decisions that can be made and the better understanding taxpayers, who are paying for all of this, can have.

At our last meeting, I raised with Mr. McDonagh the issue of conflicts of interest between NAMA employees and either the banks which are having their loans taken or some of the individual loans. Mr. McDonagh went to great lengths to assure me that he and other people involved in NAMA had made extensive declarations in regard to their own interests and so on, and that these were published. There was a report in a Sunday newspaper that Mr. Mulcahy, who attended the last meeting as the valuation expert for NAMA, retained shares to the value of €2.3 million in Jones Lang LaSalle, his former employer. That company is providing key professional advice to NAMA. Can Mr. McDonagh comment on this? On the face of it, there seems to be a conflict of interest.

Mr. McDonagh referred to not taking on people involved in the debacle of issuing these loans. This referred to taking staff from banks, the covered institutions involved in the NAMA process, and Mr. McDonagh's anxiety to avoid conflicts of interest. There are reports that former Anglo Irish Bank staff are directly employed on a contract by NAMA or in some way working with people offering advisory services to NAMA. Is that the case, how many people are involved and what are they doing?

I refer to Mr. McDonagh's statement on bonds. The adviser to the Minister for Finance, Dr. Alan Ahearne, referred to NAMA bonds washing their face by being valued at 0.5% above the euro rate. This is where the 1.5% arose. Now, Mr. McDonagh suggests this figure will be the EURIBOR rate. In effect, this means current rates and the return will be lower than that suggested by the adviser to the Minister for Finance. When NAMA bonds are issued, that is the payment to the taxpayer. This committee was told that on previous occasions.

Yes, and that is the cost to the taxpayer. I refer to the business plan. Is there an outcome? As euro interest rates increase, are those rates for six months and are they entirely variable on a six-month basis? That has been clear as a principle from the beginning but there is a suggestion the rates will always be highly advantageous. If they are entirely flexible it seems there is a greater level of variability if interest rates in the euro system continue to change.

I have been asking the Department of Finance about another issue but perhaps I should have asked the NTMA and NAMA. What is the total figure for the eligible liabilities guarantee and the amount of debt issued under the revised guarantees since it came about? The bank guarantee is due to expire at the end of September. The Government introduced a mechanism to have an extended guarantee for a further five years to roll over or issue new debt. Is it possible to provide the committee with details of the commitments under the eligible liabilities guarantee? What commitments are being racked up?

Regarding the delegation of functions order in respect of banking functions, the position of the agency is identical to its position on debt management. As CEO of the agency, I report directly to the Minister for Finance on those headings and the Minister has not surrendered his control as suggested. He is still ultimately responsible——

As part of the direction the Minister has given us under the delegation order, he asked us to work in close consultation with his Department. Ultimately the agency reports directly to the Minister in respect of debt management and the banking function. With regard to other businesses, there are intermediary boards, for example, with the pension fund and the National Development Finance Agency. The difference is that we report directly to the Minister on debt and banking.

We report directly to the Minister.

Deputy Burton asked about Anglo Irish Bank. Although the order has been made, pragmatically we must recruit a small number of staff and we are in the process of transferring the responsibility across. It will shortly include responsibility for Anglo Irish Bank, as suggested, but at the moment the Department is dealing with that. We have only two people in our banking unit, we have hired another two and we will probably bring the total number to five. I anticipate that later in the month the relationship framework will have to be recast so that the relationship is between the NTMA and Anglo Irish Bank. For the moment, pragmatically, we are not directly involved. Our efforts involved discussions with AIB and Bank of Ireland in respect of their positions because we have a limited number of staff.

We must go through a governance process where the board approves the plan submitted to the Minister. Mr. Corrigan and I are two members of a nine person board. The board must buy into the plan that will be published. I do not want to pre-empt what the board may ultimately decide to include in the plan which will be published. That is the important point.

Deputy Burton raised issues about NAMA's employees and conflicts of interest. Under section 42 of the NAMA Act, every person who works in NAMA must complete a statement of his or her interests, assets and liabilities. This is also true of everybody — myself included — employed by the NTMA who will be assigned as NAMA officers. I will not comment on newspaper speculation about a particular individual because it would be unfair to do so in the public domain. All I can state is that there was full disclosure by all employees who joined NAMA. We ensured full disclosure.

A statement was made — whether true or not — in a major Sunday newspaper about what by most people's standards was a significant investment of a couple of million euro by NAMA's chief valuer. I am not sure what is his official title, but that is what he seemed to be when he appeared before the committee on a previous occasion; he was the person advising on valuations. He has a major shareholding in one of the key providers of professional services for NAMA. It is very reasonable for the Oireachtas committee to ask Mr. McDonagh whether this is correct and, if so, what measures have been taken to ensure there will be no conflict of interest where there is a crossover in the provision of services and where someone is a significant stakeholder in one of the service providers. That is what conflict of interest is all about.

I can answer that question for the Deputy. The individual in question worked as managing director and chairman of that organisation in Ireland and would have built up shares in it prior to joining NAMA. He would not be permitted to take part in any allocation of work to his former company — this applies to anyone who joins the NTMA or NAMA. This is a house rule and how we manage conflicts of interest. Effectively, there would not be any inference of favouritism towards a former employer. We had to recruit people with experience from the market. Many people would have potential conflicts of interest and the question is how we manage them. We have an internal procedure to manage them.

It is obviously true that he has a significant shareholding in a business providing significant services for NAMA for, presumably, reasonable amounts of money. Mr. McDonagh has stated the individual in question is not allowed to allocate work to the company in which he has shares and that is fine, but what about his shareholding? Is he allowed to be an active shareholder in that company with regard to the management of his holding and interest in it?

No, he is not allowed to be an active shareholder in that company. To be realistic, it is a publicly quoted company and once a senior employee declares he or she has a shareholding, that is what is required under the NAMA Act. All employees are required to make a full disclosure of their assets, liabilities and interests. It does not mean to say the conflict is not managed. It is. That is all I can say to the Deputy.

I saw the story in the newspaper and there is no basis to it. No one on the staff of NAMA was in a senior position in Anglo Irish Bank. I am not aware whether former Anglo Irish Bank executives are advising borrowers who could potentially come to NAMA. Even if they are doing so, there is little we can do about it because they are advising borrowers, not NAMA.

With regard to bonds, the interest coupon on them is priced at a six month EURIBOR rate with no margin. Effectively, the rate is 1%. For argument's sake, if we issue €50 billion worth of bonds, they will carry a 1% interest rate. That is a cost NAMA would have to pay the bondholders — the banks from which we had bought the property loans. On the other side, we would have asset loans which were producing income. Those loans would typically be priced at a six month EURIBOR rate plus a margin, typically 2% approximately. Effectively, on the loans, one is getting in 3% and paying out 1%.

Details of the loans guaranteed under the ELG scheme are on the NTMA website, which is a requirement. There is full disclosure and transparency around the instruments that have been the subject of the guarantee. I must apologise as I did not come prepared to recite chapter and verse but they are available.

I shall explain and perhaps Mr. Corrigan can send the committee a note. The Government extended the guarantee by means of a five-year roll-over guarantee. I would like to know, as I think other members of the committee would, the totality of the facility being used or to be used in the future. I have the list to which Mr. Corrigan referred but there is very little by way of a breakdown in it. There are many figures of €8 billion, €5 billion, €3 billion and €2.5 billion; I will not bore people by reading the list. Is there a total figure for the amounts issued and their duration? I presume they are all for five years or close to it.

When we received information from institutions last summer, the indications were that 40% of the loans were cash-flow producing. From tranche 1 and the figures we have seen to date — we are still in the process of finalising the figures for Anglo Irish Bank — we estimate the figure is probably closer to one third, that 33% of the loans are cash-flow producing.

Yes. A number of the loans, particularly for land and development, have the feature of interest roll-up, whereby the interest is effectively capitalised on an ongoing basis. NAMA is obliged to step into the contractual shoes of the bank when it acquires a loan. It is no secret for me to disclose that when the interest roll-up periods expire, my view — I believe it is also the view of the board of NAMA — is that we will not engage in further interest roll-up with borrowers. Effectively, there is an issue to be addressed in regard to interest roll-ups whereby banks took income on their profit and loss accounts. This income was never paid and banks repeatedly increased the loan balance while delaying dealing with the problem. Our view in NAMA is that we are taking over the loans as a new bank manager and will deal with the problem. Engaging in an interest roll-up only puts off the day when one has to deal with the question of whether a loan will be repaid. We will have to live with this practice where it was contractually agreed in the loans we are taking over but once the contractual period expires, our view is that we will not engage in continual interest roll-ups.

Yes. Out of the €80 billion portfolio, we originally expected that 40% of those assets, or €32 billion, would be cash-flow producing. The reduction to 33%, or €27 billion, means €5 billion less in loans from which we can expect cash-flow. That clearly has an impact on the income of NAMA.

The experience of examining the individual loans in tranche 1 has taught us to be very cautious about what we can expect in future tranches. The information given by banks on tranche 1 did not turn out to be the reality when we examined the loans on a case-by-case basis. In terms of remaining tranches, we will examine that as we carry out due diligence. This demonstrates the importance of carrying out due diligence on the loans to identify the value of underlying properties, whether they have appropriate legal security and whether they are cash-flow producing. That a lack of awareness and denial on the part of institutions was prevalent became clear when we compared the information we identified with what they were maintaining.

The €16 billion in tranche 1 comprises approximately 1,200 loans across the top ten borrowers, with an average exposure of €1.6 billion. If these loans are non-performing and the borrowers have significant other assets, to what extent does the legislation allow NAMA to force developers to sell their assets to make repayments? It will shock many people to learn that two thirds of the €16 billion in loans are not at present being repaid.Mr. McDonagh took pains to point out that NAMA is not a bail-out for developers but the perception is that some of them are still swanning around in helicopters or travelling to exotic destinations overseas even while they are failing to repay their loans. What power has NAMA to extend its reach into personal wealth where personal guarantees have been given, or other aspects of borrowers' businesses?

When we bought the loans, we bought all the securities that attached to them. We also acquired the personal guarantees and have paid zero consideration to institutions on these guarantees. The institutions did not like this. If what we bought is based on the value of an underlying security, we can recover money where we end up enforcing against a borrower. However, the amount owed by the borrower will remain outstanding. If, for example, somebody took out a €100 million loan which we bought for €50 million, he or she still owes €100 million and we will pursue him or her for it. If he or she has a personal guarantee and other assets, we will try to recover the full amount. This will be part of the exercise which NAMA will pursue to try to force borrowers to repay as much as possible. In certain instances, borrowers may not have as many assets as people might think because they purchased loans from several institutions.

The strong view of the board of NAMA is that if somebody owes us money and is displaying obvious wealth almost in defiance of us, we will fight tooth and nail to recover the full amount. The taxpayer has shelled out money and we will pursue the debts to the very end to get back as much as possible.

How quickly does Mr. McDonagh expect NAMA to become a property owner? Some of the loans it has bought are probably hopeless cases if two thirds of them are not being repaid at present. Once the business plans are submitted by developers, how quickly will NAMA move in to take the underlying securities where they are assessed as hopeless?

The board of NAMA decided to give the borrowers an opportunity to put their best foot forward. If they produce viable plans, we will do our best to work with them but where they are unrealistic or not co-operative we expect to move quickly because we do not have time to wait for people in the hope that tomorrow will be sunny again. Tranche 1 loans are very complex and have intricate legal structures but based on having business plans submitted by borrowers at the start of May, we will spend two or three months assessing them and hope to be ready to move on plans that are not viable by September. In respect of borrowers who refuse to co-operate or are completely unrealistic, we have not ruled out moving sooner but we are at present giving people the opportunity to produce their business plans before assessing them. We want to be fair but that does not mean we intend to hang around waiting.

Mr. McDonagh stated that due diligence on the loans revealed a troubling picture of poor loan documentation, assets not properly secured legally and inadequate stress testing of borrowers and loans, all born from a mindless scramble to funnel lending into one sector and a reckless abandonment of basic principles of credit risk and prudent lending. That is a damning indictment of our banking system and the senior executives who were involved in making these reckless decisions. I ask for some examples of the problems he cited. Is NAMA investigating situations where the same security was offered and accepted in respect of multiple loans or loan documents that were never properly signed off? Will he also outline some examples of the issues his staff encountered in regard to stress testing when they carried out due diligence on the loans?

I expected this question would arise and I prepared some examples of the issues we encountered. I cannot find that note at this moment but will explain it off the top of my head. The types of issues that arose include the registration of charges. It appears to me, from the outside looking in, that banks were writing loans so quickly that in many instances they were relying on the undertakings of the borrowers' solicitors and did not register their charges in time. A number of items have been uncovered in which the bank in question believed it had a first charge on assets but when it applied due diligence, and when we cross-checked the registration of charges in the property registration office and elsewhere, we found that the bank did not have a first but a second charge.

Other issues arose in terms of legal documentation, such as whether this covered a certain amount, for argument's sake, €20 million in a loan of €100 million, or whether all sums due were covered. Again, there was a lack of clarity around that in certain instances. There were also instances where the type of mortgage used was not a standard one. Members will know, because it is in the public domain, that a major developer was a client of one of the major financial institutions and that institution had to go to court because of the type of mortgage in question. Effectively, it was an equitable mortgage as opposed to a real mortgage. That issue had to go to court in an effort to resolve it.

There were issues concerning title. These could relate to a particular piece of land where the title was described incorrectly and therefore it would be difficult to enforce against it. There were other issues. For argument's sake, a loan might appear to everybody to have been lent to Brendan McDonagh and John Corrigan. According to its own files the bank had lent €100 million to those persons but when one looked at the legal documentation, only Brendan McDonagh's name appeared on the actual mortgage. In effect, therefore, no action could be enforced against John Corrigan. Those are all types of issues that arose. They are surprising. One would have thought these are just basic things that any bank should get right when issuing large sums of money to individuals.

Exactly. There were issues also in terms of stress testing the loan to value, whether it was 60% loan to value, 70% or 100%. We have come across a number of instances where there was no equity in the deal, where there appears to have been a loan of 100% to the borrower for what may have been speculative agricultural land. Again, I do not think anybody would call that good banking practice.

I asked a senior, long since retired banker in the UK what was the standard for lending for speculative agricultural land that might get planning permission for development. He said the rule of thumb in his time would be to lend no more than 50% or, at maximum, 60% if one was almost certain that the planning permission would come through. That practice did not seem to be followed. The best way I can put it is that when the banks were looking at their books and stress testing, it appears they were taking a very benign view of their loan book with regard to its quality and that of the borrower.

Yes. I suppose that is so but accountants or external auditors would rely on letters of representation from the senior executives in the banks in terms of controls and procedures. That is another issue but it is not germane to us because what we are dealing with is the aftermath of this problem. Who saw what or when and who should have seen what are not matters we can change at this stage. The problem has been created.

I shall follow through on the question Mr. McDonagh asked himself concerning the lower than anticipated number or level of performing loans. I presume this is something that has influenced the higher than expected haircut and discount in the loans and is some kind of compensatory measure.

I am also interested to hear whether the analysis of this first tranche has revealed the level of cross-securitisation that exists in this grouping of loans and, on foot of that, the extent to which the people who took out these loans have been seen to be multiple borrowers with all the institutions involved. That type of analysis is important in getting to the bottom of this and trying to bring about some level of public confidence in the situation.

Deputy Burton made a point, not so much in regard to individuals but about counteracting some of the criticism that exists about NAMA as a concept and how it is operating initially. Fear has been expressed about the hiring of expertise and services such as valuers, solicitors and accountants. Although there has been a tendering process for much of this, there are accusations and implications regarding what are known as the usual suspects, those people who were involved in this process professionally over the past two decades who, in the opinion of many, contributed to the process. Mr. McDonagh might comment on how that perception is being dealt with. I suspect the diversity of work is one way of doing it. The firms themselves talk about the existence of Chinese walls, which does not inspire much confidence in many people. There are others in each of those professional areas who lack that experience because they were not involved in the circle which made the decisions in the past. The extent to which NAMA can and will avail of their competency and experience and expertise will help to inspire the necessary public confidence in this process.

I agree with Deputy Bruton that an encouraging start has been made in how NAMA has approached its role. Many of the concerns expressed are slowly being undermined by the efficiency with which NAMA has taken on its opening areas of work. This should be encouraged. As the point was made, transparency and openness are essential in dealing with those concerns and seeing that they never see the light of day. It is important, as Mr. McDonagh stressed in his opening statement, there is and must be a distance between NAMA and the people it is assessing. In the way it has performed its role to date, I am confident this is happening.

I do not know whether Mr. McDonagh is aware that the Conservative Party in Britain launched its election manifesto today in a building that may become part of the NAMA loan portfolio. I do not know if this in itself is a statement of confidence but it seemed a neat irony, given the times we live in.

I have sympathy with any political party that would take over government in the current international circumstances. I wish that for any other parties of government who aspire to that position at present.

My other question for Mr. Corrigan relates to the role the National Pensions Reserve Fund will play in bank recapitalisation. This is a somewhat contrived position because of the circumstances in which we find ourselves but the National Pensions Reserve Fund as part of its remit needs to make decisions on a commercial basis and on the extent to which this recapitalisation of the banks is seen to be a valid investment and can expect a return. I am interested in the NTMA chief executive's view.

I welcome Mr. McDonagh and Mr. Corrigan. Mr. Corrigan referred in his speech to the takeover of responsibilities in the banking area. It was mentioned that there was no direct involvement with Anglo Irish Bank but by implication, the NTMA had an indirect involvement. It seems there will be a large-scale involvement in future. What is Mr. Corrigan's view of the position set out that another €10 billion may go into Anglo Irish Bank? Does the bank have a possible viable future or would it be better to wind it down over a period in an orderly fashion? Would that provide better value for the taxpayer and a better return in that context?

Mr. Corrigan might also comment on how he views Anglo Irish Bank investing €700 million in the Quinn group of businesses, which might also happen under his watch. Taking account of the jobs in the Quinn group of businesses, how would Mr. Corrigan see the issue?

I have read the draft plan and Mr. McDonagh has indicated there is yet to be a final plan with regard to NAMA. At this stage, we received the draft plan almost five months ago. With regard to the loans being taken over by NAMA, a business plan is required with quite severe and rigorous testing, and I compliment the organisation for that. It seems incredible that NAMA will have transferred very shortly up to €16 billion or 20% of the proposed loan book but we cannot be advised of the parameters. This is taxpayers' money.

The first tranche of loans have been transferred and Mr. McDonagh has said the market value of the underlying property assets was €47 billion. What is the expected value overall? The interest roll-up was €9 billion overall and how much of the €16 billion taken over — or rather the €8.5 billion being paid — was interest roll-up? The loan-to-value ratio was an average of 77% but what will this be in the first tranche?

Mr. McDonagh has already answered the question regarding the cash flow production, which means two thirds of the loans do not produce cash flows. The default rate is 20%. The draft plan only had 40% of the assets producing cash, with 60% not producing a cash flow; nevertheless, it was indicated there would only be a 20% default rate and 80% of the loans would perform. Will Mr. Corrigan elaborate on those features?

I will specifically deal with Anglo Irish Bank in terms of security. At this stage we are looking at 60% of the loan book being taken over being from Anglo Irish Bank. There was an estimated figure of a haircut of 50% but what will the final figure be? How many of the loans in Anglo Irish Bank are non-recourse loans and will Mr. Corrigan elaborate on the security? Is no value being placed on personal guarantees? Will NAMA take possession of assets or will receivers or liquidators be appointed? What form will it take?

From a human context, there are half-finished housing estates around the country. Some people are living in estates that should have 200 or 300 houses but only ten were constructed. What is proposed in respect of those estates? Will half-built houses be knocked or will people in the houses receive an offer to have their houses bought back? Many people are coming to us at the moment who are fearful of their estates going into NAMA and what will happen as a result. This is a human issue.

Is it expected that NAMA will make a return? The net present value in the draft plan was €4.8 billion, which was based on various assumptions. We are entitled to know what changes and assumptions have been made. Mr. McDonagh stated in his presentation that the consideration being paid is €8.5 billion of €16 billion, with the market value being €9.4 billion and the long-term economic value at €10.5 billion. That differs from the draft plan, where the consideration was €7 billion, 15% higher than the current market value. Is that a sign of things to come? Will the amount to be paid be significantly less than €54 billion? Extrapolating the figures based on a 45% haircut, one would be talking of the order of €43 billion. Will Mr. Corrigan elaborate on whether we are getting some front-loading, so that in coming to the second, third and fourth tranche, the haircuts will be significantly lower?

Mr. Corrigan referred to the special purpose vehicle, SPV, and indicated a 51% shareholding. Will he elaborate on what exactly is involved, who the investors are, the type of return that NAMA will get, who will control the SPV and how the income will come from the SPV? Are there different SPVs within each bank, what form do they take and how will they be controlled?

NAMA will be the largest single property owner in the world and the European Commission stated it was worried that NAMA could distort the market. How will it deal with that issue? Is NAMA taking over all the development loans in the banks? NAMA is taking over nearly 30% extra in loans with Anglo Irish Bank and in every other bank bar Irish Nationwide, it is taking less. It has gone from taking over €77 billion in a loan book to €81 billion. Ironically, the figure for AIB is down by €1 billion and Bank of Ireland is down by €4 billion, with the figure for Anglo Irish Bank up by €8 billion. Irish Nationwide's figure is up by €1 billion.

It is ironic that the two institutions that will never make a return to the taxpayer are the two institutions whose loan amounts taken over have increased and they have the highest haircut. I refer that to Mr. Corrigan as well. Are Anglo Irish Bank and Irish Nationwide viable or are we dropping taxpayers' money into a bottomless pit that will never make a return, money that could be used in a better fashion?

Are the staff in the banks who were involved in giving out these loans now managing the loans for NAMA? Does the €5 million limit still apply? Will toxic loans remain in banks after NAMA's actions? What was the process in deciding what to take out of the banks?

Senator Boyle asked about the National Pensions Reserve Fund investment in the banks and the role of the fund with regard to the bank recapitalisation. He also asked to what extent I think the investments to date have been good. The investments of the National Pensions Reserve Fund in the two banks, Bank of Ireland and Allied Irish Banks plc, were made on foot of special legislation introduced by the Minister for Finance which gave the Minister power to direct the board of the National Pensions Reserve Fund to make investments in the two institutions. The role of the National Pensions Reserve Fund is limited to quoted institutions. There are three quoted institutions and, in effect, two of these require substantial recapitalisation. The role of the fund is, in effect, limited to Bank of Ireland and AIB.

The other question was to what extent we believe these are good investments. We believe these investments will generate a good return for the fund. Earlier, I mentioned in reply to Deputy Bruton's question that the coupon is 8%. To the extent that the coupon is not paid we will be paid in kind. In addition, we have warrants which entitle us to buy ordinary shares at a substantial discount from where the market is currently trading. For example, if in four years' time the share prices of the two institutions were to be approximately €5, taking the various elements of the investment together we would be looking at a substantial double digit return to the fund. We have a reasonable expectation of a good return on the back of those investments.

I refer to Deputy O'Donnell's question. I have not been involved directly in the Anglo Irish Bank consideration and the Minister has indicated the policy in respect of Anglo Irish Bank. Anglo Irish Bank and the Irish Nationwide Building Society, to which the Deputy referred, must prepare, submit and have approved by the European Commission reconstruction plans. Several iterations remain with respect to these institutions. I refer to the additional money required for Anglo Irish Bank. Brendan McDonagh will correct me if I am wrong but my understanding is that the bank made provision for the loans which have been taken over by NAMA on the basis of an expected haircut of 28%. The committee has heard the haircut is expected to be 50% or north of that percentage and this is what gives rise, in the main, to the additional capital requirement. With my borrowing hat on, which is the other function of obvious relevance to Anglo Irish Bank, the recapitalisation is to be done by way of a promissory note drawn down over a period of ten years. In our discussions with the three main ratings agencies, they have taken the view, to use the language used by the ESRI, that it is perfectly manageable within the context of the State's borrowing programme. The announcement of the additional requirement had no impact on the State's credit rating.

I refer to the €8.3 billion for Anglo Irish Bank and €2.6 billion for the Irish Nationwide Building Society. Does this mean the IOU or annual payment over ten years will be €830 million per year for Anglo Irish Bank and €260 million per year for Irish Nationwide Building Society, which would come out of current spending? Will it be the first item in the budget for forthcoming Ministers for Finance and will in excess of €1 billion be paid for ten years for both of these IOU's or promissory notes?

I refer to Mr. Corrigan's role. Would he have been consulted by the Minister for Finance on the issue of the recapitalisation of Anglo Irish Bank? Mr. McDonagh will elaborate on the reason for the extra €10 billion to be provided. Was Mr. Corrigan consulted on the prudence or wisdom of providing this level of taxpayer funding to an institution which, according to its account statement, has lent nothing; there has been no new lending of any description. I refer to guarding or raising this level of funding. Does Mr. Corrigan have a view on whether this is especially wise on behalf of the taxpayer? Has the Minister consulted Mr. Corrigan in this regard?

I refer to the questions put by Senator Boyle. The first point raised concerns the issue of performing and non-performing loans. This is something of a red herring in the context of the way in which banks produce their figures. They regard a loan on an interest roll-up as performing, whereas NAMA and I are interested in those which are cash-flow producing. When I indicated one third are cash-flow producing I meant the borrower is paying cash on those loans, which is important for us because we will have to pay out cash on the debt we issue.

I refer to the point made about cross-collateralisation of loans and whether borrowers have borrowed from multiple lenders or multiple institutions. This is clearly a factor. In our analysis of the eligible asset lists submitted by the institutions, we encountered the same borrowers. The top 100 borrowers pop up throughout the institutions. Some pop up across all institutions and some among perhaps two or three institutions. That was simply the nature of the borrowing activity that went on. Banks were chasing the dragon. They were chasing borrowers to lend money to them and because they were with one bank, the banks would try to get them and lend them money such that the banks could get hold of that borrower. That is the reality and that is what happened.

I refer to NAMA's hiring of expertise and services. We are subject to proper procurement rules and for procurement competitions we use the services of an external process auditor. The external process auditor who sat in on all our assessments of all the tenders was Maurice O'Connell, the former Governor of the Central Bank. He signed off on the competitions for the board of NAMA to indicate they were run in a fair and transparent manner, which is very important. The issue of the usual suspects was raised. We run a tender competition and many firms tender for the business. As long as they meet the criteria we set out in the RFPs, request for proposals, which must be in accordance with public procurement rules, we try to spread the net as far as possible to get as many firms on to our various panels. The issue is that, realistically, there is not a legal, auctioneering or valuation firm in the country which has not been involved in the property business in the past six or seven years. This is the reality of the business they were in. There was so much business available and they were involved in it.

Deputy O'Donnell raised the issue of the NAMA business plan. I wish to make a very important point to the Deputy on this matter. The board of NAMA was appointed on 22 December and its first subject of discussion was to ensure we received European Commission approval. We are working towards getting such approval and then getting the first transfers across. We have a good deal of information now in respect of tranche one and certainly we have information that we did not have before we carried out due diligence. Let us contrast this with the position of the borrowers. The Deputy may say we are taking a very tough line by asking them to produce a business plan within one month. Those borrowers are in full possession of knowledge of their portfolios in terms of the amount of money they have borrowed and the sites they have. As I pointed out in my statement, we received information from the institutions but the information we cross-checked when we carried out due diligence painted a somewhat different picture.

When the board of NAMA is considering its business plan it seeks to have already subjected a substantial part of the portfolio to due diligence and to have it analysed such that the board is aware of what it is dealing with. There is no point in our producing a business plan if we find out that the next tranche is either worse or better than tranche one. We seek to get a certain amount of the portfolio across such that when we are doing the analysis and building in assumptions of how that portfolio will perform——

Exactly. It is based on the valuation date. We instructed the valuers to provide a value at a certain point in time and we asked for a value from the current rates book. Also, we did not allow the valuers to make any wild assumptions that rents would go up by 20%. Clearly, they will not go up by 20%. We are in an environment in which——

Is this to do with the rents or is the consideration lower than the formula? The consideration NAMA was paying was higher than the current market value under the business plan. Mr. McDonagh now advises it is lower than the current market value. Why is NAMA paying so much? Is it because the security is so poor?

Let us assume a property is secured on a loan worth €9.4 billion and one ends up paying €8.5 billion for the loan. As part of the European Commission approval, two factors reduced that consideration straight away. One related to the enforcement costs. The European Commission stated that we had to apply a 5% enforcement cost, which means we were obliged to knock 5% off the value straight away. We also had to take off a quarter of 1% for the recovery of the due diligence costs. These costs reduced the considerations.

Let us consider the assets. Although a property may have a certain value, if it is supporting a loan which is not income producing or real-cost producing then one is effectively discounting such a loan, depending on the uplift. If the uplift is between 0% and 10% one discounts it over three years, if it is 15% one discounts it over five years and if it is greater than 15% one discounts it over eight years. The discount can cause the value of the loan down the line to be less than the property. This is a mechanical effect.

Long-term economic value is applied because part of the formula involves taking the current market value of the property, we uplift it by whatever it is and then discount it back. The Commission holds a view on the long-term economic value. Long-term economic value is applied in terms of the uplift of the property. For argument's sake, one could end up paying €7.5 billion rather than €8.5 billion because one would not have had the benefit of the uplift otherwise. The Commission considers the long-term economic value, which is the difference between the current market value of the loan and the long-term economic value of the loan. We are paying for the long-term economic value of a given loan.

On 15 July last year, the EUROSTAT rules were quite strict about off-balance sheet vehicles for governments and so on. On that date, EUROSTAT published revised guidance for the purposes of helping France and Germany which had set up such vehicles. The revised guidance was to the effect that if one set up a majority private-owned vehicle one could place debt off balance sheet.

We sought investors to put €51 million into the SPV through the Irish Association of Investment Managers. Three investors have put in €17 million each, namely, Irish Life Investment Managers, New Ireland Assurance and Allied Irish Banks Investment Managers. The control of the SPV rests in NAMA because NAMA has a veto over all decisions. The return to the investors is outlined and is in the public domain. Effectively, it is linked to the ten-year Government bond rate.

I thank the witnesses for their presentation. Mr. Corrigan told us the NTMA has no direct involvement with Anglo Irish Bank, which I am sure is a source of huge relief. The institution with which it is involved has a substantial record of shrewd investments over a long period. Can Mr. Corrigan tell us if his organisation would invest in a provisionally administered insurance company, perhaps to the tune of €700 million?

Some of the questions have been answered. We have the information on the haircut. Can the jet-set continue to fly around all summer until September before they need to concern themselves with NAMA moving against them? Is it likely that in some cases it may move before September? I can imagine the people concerned will enjoy their summer better than most people in the State.

Mr. McDonagh told us NAMA is entirely dependent on the participating institutions providing it with the requisite due diligence in a timely and correct manner. We know how the covered institutions dealt with the Government and the Department of Finance. They refused, on many occasions, to give accurate information. I understand why tranche 1 was difficult because NAMA and the NTMA were teasing things out. That is life and there can be some difficulties with such a process. If the characters concerned persist with their waywardness, at what stage in the tranche 2 process will NAMA and the NTMA tell them to piss off? When will they tell them they will have none of this nonsense from them and to get lost? Could such a time arrive?

Many of the questions have been answered and I do not want to delay the meeting. On some of the unfinished properties, in particular the housing and apartment developments, have NAMA and the NTMA considered negotiating with the Department of the Environment, Heritage and Local Government in order that some of them can be handed over to local authorities for social housing? What are their considerations in that regard? I understand why they might want to knock some of them down, but there are others in that category.

Mr. McDonagh may know the origin of the saying "chasing the dragon". I do not know if it is the best or worst metaphor to use to describe bank lending practices in recent years.

I wish to focus on the issue of valuations. My wife bought a house in Rosslare Strand to expand her business in August 2005, two years before the peak of the market, and its value is now 50% of the price which was paid for it. It is worth less than the some of the valuations NAMA is putting on the loans it is purchasing. When one takes into account that a lot of what it is buying is, as Mr. McDonagh said, of questionable legal status, that some of the developments might have to be bulldozed and much of it is development land which has lost up to 90% of its value, one has to ask if many of the valuations are wrong. Perhaps they are a lot lower. Mr. McDonagh might give us a clear indication of how the valuations were reached. When I examine issues which affect me and others in this room — we are not privy to everything the witnesses know — we get a sixth sense that these valuations do not sound correct, considering what NAMA and the NTMA is taking over and what we see happening in the other markets regarding the houses and businesses of ordinary people which are still very viable.

A significant amount of asset transfers to family members by some of the major players with whom the NTMA and NAMA are dealing seem to have taken place. Are the witnesses aware of assets being transferred to other family members? I have read some reports in the media about this issue. Why are these developers transferring such significant amounts of assets to other family members? Does it impact in any way on the business of the NTMA and NAMA? Are there legal time limits which might determine whether they can move against the assets if they have been transferred within a certain period? I would like to hear the comments of the witnesses on why we hear so many reports of people transferring significant assets to other family members.

In the course of the valuations carried out by the NTMA and NAMA, clearing up legal title and doing the due diligence which the witnesses discussed, have they come across many cases of deliberate fraud? Can they put any value on such issues?

I thank Mr. McDonagh and Mr. Corrigan for appearing before the committee. I wish to ask a series of questions. How many loan tranches will there be? On the handover of the loans to the banks, have the NTMA and NAMA received the complete file the bank had prior to the loan transfer? What kind of relationship will there be between the person in NAMA and the borrower's bank? Will the loan be handed over to NAMA with no further interaction between the people who lent the money or who are managing the loan if there are any issues to be overcome?

What lessons have been learned from tranche 1 transfers and what actions will the NTMA and NAMA not repeat? On the procedure for the write-off of loans, have certain thresholds been set in terms of who will have the capacity and ability to write off loans? I know we are not yet at that stage, but will Mr. McDonagh write them off or will the Minister ultimately write off the highest loans, if there is a write-off? What social dividend will NAMA provide to the people, in particular the 100,000 people who find themselves on housing lists?

A question was asked about unfinished housing estates. Can the witnesses advise what will happen in cases where a development comprises six occupied houses and others which have not been completed?

Regarding professional fees, are those with whom NAMA has decided to proceed listed on its website? Are the majority based in Ireland? Its presentation stated it has initiated with a number of borrowers a review of costs for completion of individual projects. Would it not be best practice to ensure it gets information on the costs of completion for all the unfinished projects and estates?

Deputy Morgan asked when enforcements were likely to happen. I outlined that if we go through the normal process whereby we assess the borrower with a review of his or her business plan — he or she may be engaging with us but he or she may not be viable — we expect such a process to start some time in September. However, certain other borrowers may not survive until September and if they do not want to engage with us on a proper basis or if we figure out that there is no point in waiting for them, we will then engage in enforcements against such people. Obviously, NAMA is no different from a bank. When it wants to engage in any type of enforcement, it will have to go through the courts and the information on such cases would be in the public domain.

On due diligence, the Deputy understood why there were issues regarding tranche 1 and asked when we would tell the institutions to give us the information rather than ask them nicely for it. It is no longer the time to do that. Under Part 6 of the National Asset Management Agency Act we have the power to issue directions. Last weekend we issued directions to the institutions in which we set out that they have to give the information relating to tranche 2 onwards in a certain format which will allow us to get through the process much more easily. Tranche 1 was very difficult. We expected it to be very difficult and that it would be a learning curve for everyone involved but some of it was not acceptable. However, we had no choice but to live with it and decided, once we got through tranche 1, that we would not put up with it anymore from institutions. We have already done this.

Regarding unfinished properties, we had discussions with the Department of the Environment, Heritage and Local Government and the County and City Managers Association whose members came to meet us. NAMA has a planning advisory committee which is chaired by Mr. Willie Soffe who is a member of the board of NAMA and a former county manager in Fingal County Council. Part of the process will involve pursuing our engagement to ensure that if we end up with certain assets, we will know where we can convert a loan into real assets and, where we have properties, what we can do with them. Our first priority is not to knock something down but to try to find a use for it. However, it is clear that in certain instances, even for health and safety reasons, a development in place for three years might be completely damaged by the weather and so on. In relation to a development which should not have been built in the first place, we might have no option but to knock it down but we would try to find alternative uses for it.

Deputy Michael Ahern took the Chair.

Absolutely. We are working to a deadline in that asset transfers must happen by the end of February 2011. We have to bring across 1,500 borrowers into NAMA. At this stage we have got through 20% of the portfolio, but we must speed up the process. We cannot wait around on institutions which state they still do not have a certain piece of information. They will have to obtain that information and produce it, but, as I said, as we move down through the portfolio, the assets will not be complex. The borrowers will be less complex and it should be much easier for institutions to give us the data required. Does that answer the Deputy's question?

Yes.

Deputy Michael McGrath took the Chair.

Senator Twomey referred to a personal investment. The property valuations are based on a property valuation date set under the Act — 30 November 2009. We have always been realistic within NAMA about the fall in values. It is correct that the fall has been in the region of 50%, more in certain instances. Regarding certain properties which form part of the loan book in tranche 1, because it is purely speculative development land, the value would have fallen by around 90%. However, the valuations we have received are subject to scrutiny. They can be cross-referenced by the Financial Regulator on behalf of the European Commission and will be checked also by the Commission as part of its audit and control process. There is full transparency to make sure the valuations are correct.

On the way the process worked, institutions submitted valuations as part of the process and we then got a review valuer to check them. In tranche 1 we rejected approximately 25% of the valuations submitted by the institutions because they were too high. We obtained third party valuations at much lower values than those submitted by the institutions. This was no surprise from our point of view. We expect institutions would want to put the best foot forward, but we took a very realistic view of the valuations.

The Senator spoke about asset transfers by borrowers to third parties, as mentioned in the newspapers, and the impact on NAMA. If it turns out that a borrower has done this and he or she is trying to walk away from his or her responsibilities, we will use whatever tools are available to NAMA, as an institution, to recover these assets. We will pursue the borrowers to try to recover them. We are in the hands of the courts when we do this, but it is a policy objective that if people who owe money try to transfer assets to third parties which they should not transfer, whether it is in contravention of company law or otherwise, we will pursue them to try to recover the money.

We have only acquired ten borrowers from the system. As part of the process we will assess them and see a statement of their assets and liabilities and if we find they have transferred assets to third parties and that they do not want to meet their existing liabilities, we will engage in enforcement proceedings against them. We will also pursue any assets they try to transfer, but in that regard, we are in the hands of the courts. It will depend on them whether we will be successful, but it is our intention to protect our interests at all times to make sure we cover what should be in place.

The Senator asked about instances of fraud. We have not come across any such instances. Under the Act, where we come across anything illegal, we are duty bound to report the matter to the relevant authorities. We did not come across any such instances in tranche 1. However, we may do so in future tranches.

Deputy Flanagan asked about the total number of tranches. We will try to condense it to about 15 overall. The Deputy also asked whether we had access to files. Under the Act, we have the right to request access to all of the information we require. Again, we can give a direction to an institution to produce books and records.

The Deputy asked about the borrower's relationship. In the way we are setting up the process, the institutions will administer loans. While the top 100 borrowers will continue to deal with their institutions, any decisions about them and the loans will be made by NAMA. In regard to other borrowers below that figure — the other 50% of the loan book; approximately 1,400 borrowers — we will allow limited delegated authority to institutions to make certain decisions but major decisions such as on the release of security or a change in contract documentation will be reserved for NAMA. It is a matter of being practical in what we want to do. We do not want to be involved in every minor decision to be made on a day-to-day basis.

The Deputy asked whether there were lessons to be learned in tranche 1. I outlined to Deputy Morgan that there were lessons to be learned on all sides in tranche 1. There were many complaints in institutions that the process of due diligence was very detailed and onerous, but the reality from our point of view is, to return to the point I made earlier, judging from what had been represented to us, what had been presented on paper and our investigations, it was necessary to do this.

The property valuation is submitted by the institution to NAMA. We then allocate that valuation to a review valuer who makes a recommendation to NAMA. Therefore, three people sign off to see whether they agree with the valuation. On legal due diligence, we allocate the matter to a legal panel and a legal in-house team for review. There are multiple sets of eyes looking at each individual loan and each piece of documentation. There is a huge amount of documentation available on each individual loan. It would probably be of the size of a book as large as the one in front of me; in the case of more complex loans, it would be even larger. A large number of people are looking at them to make sure we cover all the angles.

The Deputy asked a question about the writing off of loans. NAMA and its board have a delegated authority mechanism which does not involve the Minister. Depending on the size of the loan, decisions escalate up from the head of credit and risk to me, the NAMA credit committee and board. The NAMA board has kept a very tight leash on delegated authority because it is very anxious to see what is going on all the time. Therefore, it is fully involved. If there was a decision on any of the top ten borrowers, it would have to go to the NAMA board for approval given the scale of what is involved.

A question was asked about unfinished estates and the social dividend aspect in that respect and this is a matter about which Deputy O'Donnell asked earlier. This is a huge problem. Friends of mine moved into housing estates and were promised that the respective developments would be lovely and would have a nice play area for children. The crisis came in 2007 and work on those developments stopped. This is a huge issue. Clearly, if NAMA takes over loans from the borrowers involved, we will ask them about those estates. It will be viable to finish off some of the estates but not to finish off others. Health and safety in this respect is a major issue. If the borrower concerned is still involved in the development, part of our remit is to engage with the borrower to make sure those sites are safe and fenced off as appropriate. There probably will be instances where it does not make sense to finish off the rest of the estate. In those instances, a practical approach will have to be taken and some arrangement will have to be made with the people concerned to be fair to them.

The board will be reasonable about that. There will be a few instances in this respect but it will not be widespread. We must be sensible about this issue.

In terms of service providers, all our tenders and all the names of the tenderers are published on the NAMA website and there is a mix of Irish and international firms. It is no harm that some international firms came in and bid for the business aggressively because it introduces competition for some of the Irish service providers.

Deputy Terence Flanagan asked about the review of the costs of the completion of individual projects. Part of the report on property valuations regarding unfinished developments covered the estimated cost of completing properties. If there was a huge cost involved, that would have fed into a reduced property valuation for that individual asset. We are conscious to ensure that we do not take at face value a borrower who would say he or she has a site and that it would cost €5 million to complete the project. We would ask the borrower to examine the costs of completing the development and we are recruiting people with the necessary expertise who are able to question the borrowers in detail about whether estimated cost of, say, €5 million to complete a development is reasonable. If we do not believe it is reasonable, we have a right to ask our quantity surveyor to calculate the completion costs in certain instances. We have a scarce resource in terms of the amount of money NAMA will have and it must be used wisely and effectively. The days are gone when a borrower could go into the bank and say he or she needed €5 million to finish a development. That might have been the way things were done previously, but it will not be the way things are done under NAMA. I hope that answers the Deputy's question.

Once we took over the loans from the institutions, a number decisions on advancing working capital to finish off projects nearing completion were passed to the NAMA credit committee. That is the business in which we are engaged. A few of those issues have happened, although there have not been a great number of them. In terms of certain costs that were building up on projects, we have had to advance working capital, but we only advance it on the basis that it makes economic sense for us to do so, namely, that there will be a return on it.

I wish to put on record Mr. McDonagh's damning comments on what he found regarding the inadequate stress-testing of borrowers and loans. Those of us who are members of this committee can vividly recall the governor of the Central Bank and the chief executives of several of these banks who sat where Mr. McDonagh is seated and assured us that all these banks had been properly stress-tested and now we find that this committee was totally misled. I am sure it may have had some bearing on some unfortunate small investors who may have taken different decisions at the time had we been told the truth. It was not proper conduct to make such statements that were totally untrue.

In regard to the banks that are not part of NAMA, does Mr. McDonagh have any conflict with them regarding borrowers who have loans with non-participating banks and those in respect of whom a greater emphasis on security is being place in terms of their business with the non-participating banks with the future in mind? Mr. McDonagh might fill us in if there is anything in that respect that is worth knowing.

On the transfer of responsibility for banking functions to the NTMA with one of its key functions being to manage any ministerial shareholdings in institutions, can Mr. Corrigan say to where this extends? Does the NTMA have a responsibility to seek out possible purchasers of shares currently held by the State or, say, in the case of Anglo Irish Bank does it have responsibility in terms of what risks Anglo Irish Bank takes on board? The NTMA seems to be the body that makes the decision in this respect. This point relates to an earlier question about the Quinn Group. Surely the NTMA would be the first port of call, if it is responsible for the management of the Minister's shareholding in these institutions. Surely it must have a major say in what types of activities, if any, banks would involve themselves in, particularly in the case of a bank in which the State has a 100% shareholding.

Mr. Corrigan referred to the fact that these functions are being carried out in close consultation with the Minister and his Department. Has the Department of Finance set up a special unit comprising people with expertise and that these would be the people he would contact? Who in the Department of Finance would he contact? That is a very important point. What people with expertise, if any, are in the Department for Mr. Corrigan to consult? It is a requirement that he consults the Minister and the Department. Surely we should be satisfied that the unit with which he would consult comprises people with professional qualifications who would be capable of taking a proper decision on any consultation that might take place.

How many people are involved in the participating institutions on an agency basis on behalf of NAMA? What is the relationship between them and their own institution? Will they be engaged on a full-time basis on behalf of NAMA, or what is the arrangement? Mr. McDonagh might tell us a little about that. There is anecdotal evidence that perhaps many of the people who are assigned to these duties may have sanctioned or signed off on the impaired loans that comprise some of the portfolio being transferred to NAMA and they would have had an easy, if not a cosy, relationship with the people involved. What code of conduct, control or instructions have issued? Mr. McDonagh's management of these people will be vital and I wonder how that is happening. There can be conflicts. The people concerned are engaged in business and various companies are involved and many of the loans are being transferred. I heard of a case recently of a person whose loans were allegedly being transferred who was applying to another section of the institution concerned. Obviously, these institutions have now centralised lending policies because of the risk assessment factors. Some of the people that NAMA now has on an agency basis are senior and may be able to lean on more junior officers or other officers in other sections. I am worried about the influence and the conflict that could arise. One such case has been brought to my attention.

With regard to assets, will the 1,500 have to transfer first? Mr. McDonagh has already answered Deputy Flanagan that he is making decisions on property with regard to further investments. I assume that the foreign assets, and particularly the UK assets within the M25, will be sold first. Presumably, NAMA is already talking to a number of property companies and interests. Can Mr. McDonagh tell us a little bit about the prospects and if any sales are currently in process?

I will deal with Deputy Barrett's question first. Seeing what is emerging, it seems to me that there would be inadequate stress as regards borrowers. Other people might have their own opinions, but all I can say is that the directors, chief executives and board members of those institutions — especially if they are listed institutions, but it would apply anyway even if they are not — would have a duty to act in the best interests of their shareholders. Whether they did or not, unfortunately, the evidence has shown that these banks have got themselves into a huge amount of trouble. It happened under their stewardship and that is certainly an issue.

On banks that are not part of NAMA, I have had discussions with all the institutions operating in Ireland and did not apply to become part of NAMA. One of the codes of conduct under section 35 of the Act is how NAMA will deal with non-participant institutions. It was certainly part of the thinking of the European Commission when it gave approval to NAMA that we would have this code. It asked that we would include certain things — and I think its decision has been published now — regarding the non-participant institutions and how we execute our powers. NAMA cannot have greater powers than others operating in the market because the Commission did not want to distort competition. We have no problem with that. I have had very productive meetings with these institutions.

The issue will boil down to whether both sides can have an aligned commercial view of dealing with certain borrowers and certain loans. We must be realistic, however, and say that sometimes we will and sometimes we will not. That is just a commercial view that each side would take. I found that they welcomed the engagement with NAMA. They have all said to me that over the past year the institutions there have not been dealing with them. They were just waiting to come into NAMA so that they could transfer loans to the agency. Now they are actively seeking engagement with us so we can start dealing with common borrowers and, in certain instances where one has syndicate loans, to see if the issue can be resolved. I have found most of these people to be quite straightforward and sensible, to date.

On Senator Coghlan's question on criticism of the institutions, the staff in the institutions work for the institutions. Effectively, the institution itself is providing agency services for NAMA. We did not permit a situation where we would engage with institutions on a contractual basis. In fact, within the Act, section 131 allows NAMA to issue directions to institutions as to how they will manage their assets. We have issued a section 131 direction to the institutions on how they will manage the assets and the type of staff and skills that we want involved.

Effectively, we have set out guidelines to them on what type of things should come back to NAMA and what things they can do themselves. We have given them very little discretion concerning the top 100 borrowers. We have this relationship with the institutions whereby they are doing a service on our behalf. We have insisted that there would be an executive director of the institution who would liaise directly. He will have ongoing meetings with me and my senior management team. He would represent the board of the institution because I want the board of the institution to take responsibility for the NAMA units that are within them. If there are problems emerging in those NAMA units, I will not go to the head of the NAMA unit about the problem. I will go to the chief executive or chairman of the institution and I will want that issue escalated at the board. This is taxpayers' money we are paying for these assets and I want the assets managed correctly. I do not want any games played; I want things to be done correctly. It is important that it is done correctly.

On the disposal of assets, the UK market has had a resurgence in terms of assets. Many of the assets in the UK are within the M25. There is a market for those assets. One can see from the Financial Times this morning that the NatWest Tower has been put up for sale by the Hermes pension fund. At present, there is a market for selling a number of those assets, which belong to borrowers. Part of our engagement with the borrowers is to see which assets they can sell quickly and what price one can get for them. The question is whether one sells them now or would one get a better price later. There is a view that there is now a shortage of office space emerging in London. The peak of the market in London was £70 per square foot. It went down below £50 per square foot, but that is beginning to rise again because no new capacity is coming into the London market. Some of the properties that will come into NAMA would fit that bill, so there might be an opportunity to dispose of them. I have had a great deal of contact from third parties expressing interest in acquiring assets from NAMA and having joint ventures with NAMA, but they are very much at a preliminary stage. NAMA’s engagement in that will end up when we own the assets — when the borrower is out of the picture and we have the assets in our own hands.

We have had a great deal of interest from third parties who are interested in buying certain assets. In the meantime, because we have attracted a great deal of interest, many of the borrowers are currently over-extended. They cannot get any additional loan facilities and they might need a bit of money to finish certain assets. NAMA can facilitate in bringing new capital to them through third parties who might want to invest with them. Many of these parties, to date, would have resisted this and would not have been forced to do this by the institutions. The game has changed now, however, and we are interested in getting greater realisation. So if there is a third party who wants to invest money with a borrower in a certain asset, even if the borrower might not be overly enthusiastic about it, part of our engagement with the borrower would be to make them enthusiastic about taking third party investment.

I think so, Senator. This is the game. This is the state we are in now. We have to make this portfolio work. Where a borrower wants to engage, where it makes commercial sense to engage, we will ask that borrower to engage. If the borrower does not want to engage, then clearly it would be a sign for us to take the borrower out of the picture and deal with it ourselves.

Absolutely. We will hold institutions to that. Part of the process, especially when we have a number of borrowers below the top 100, is that we will put two of our own staff into the institutions, and those units, to be there on the ground and know what is going on. They will be senior staff, so they will not be intimidated by the institutions. On the days of fully trusting people to do things the right way, we have all learned the hard way that it just does not happen. One must have some form of control and sanction over people.

Deputy Barrett cited the management of any ministerial shareholdings in these institutions as one of the new functions of the NTMA, and asked what this involved. The pragmatic position, to which I referred earlier, is that, to date, our efforts in that regard have been primarily concentrated on AIB and Bank of Ireland because of the limited resources that we currently have available. However, we expect to double those resources within the next couple of weeks. We will then extend them to the other credit institutions.

I will give an example of what exactly this function means. It would mean that we would be intimately involved with these institutions in regard to any change, for example, in their capital structure or any major acquisitions or disposals. An example of that is the case of AIB. In his most recent statement to the Dáil, the Minister mentioned that as a first step in meeting its capital needs, AIB will immediately commence the process of sale of assets in the US, Poland and Great Britain. The process which brought about that statement was managed by the NTMA. We would have led the State side in those negotiations concluding in that decision by AIB to sell assets. That is the type of involvement represented by the term "managing any ministerial shareholding".

In that respect, and as I said earlier, as chief executive of the NTMA, I would report directly to the Minister for Finance. They are the terms of the delegation order. As correctly noted, we are also required to consult the Department of Finance. The Department has a financial markets division and we are happy to keep it informed and to consult it, for whatever public policy reasons it requires, on what we are about in regard to our banking function.

The Quinn Group and Anglo Irish Bank were mentioned. In all frankness, while I am aware of and privy to certain information, I have not really been involved in the process because we have had enough on our plate getting AIB to where it is. There have also been substantive ongoing negotiations with Bank of Ireland. However, as I mentioned earlier, I expect that towards the end of the month or very early in May, we will be looking at moving the framework agreement in regard to Anglo Irish Bank from the Department of Finance. We would then have the lead role in that respect.

With my National Pensions Reserve Fund hat on, I will answer the Deputy's question a little indirectly. When looking at investment decisions in the National Pensions Reserve Fund, which holds quite a diversified portfolio of investments, we would model, so to speak, for the expected risk adjusted return. One would have to look at the price, what the risk was and at the expected return one would get from the investment. There is not a black or white answer. Clearly, it depends on what would emerge from the due diligence and whether one could put a price on it. At the end of the day, most things have a price.

If this responsibility is being passed on to the NTMA — I have no problem with it managing the State's shareholding — it is important we follow through on that and that people do not go off half-cocked in one area only to find we have not consulted the people to whom the powers have been transferred. That is what I am concerned about. If there are not proper resources currently, there should be. These are very valuable assets.

Anglo Irish Bank is costing the taxpayer an enormous amount of money. It seems, of necessity, to be managed far more than some of the other institutions at this point. That is why I am very anxious we are absolutely certain that Mr. Corrigan and his friends in the NTMA are given the proper status and position to carry out the function of managing this State shareholding in this very important institution.

I assure the Deputy and the committee that we have set about putting the proper team in place. As I mentioned earlier, we have two fairly seasoned banking analysts who have been on our team for a while and we have signed employment contracts with another two. I can say definitively that they will be coming on board at the end of April or early May. We may need a further person. There is absolutely no question but that we will have experienced staff who have the necessary skills and professional qualifications to do what must be done. I am satisfied we have a good, close working relationship, as is appropriate, with the Department of Finance. In regard to this matter, it is important to stress that it is like the debt service function in that we report directly to the Minister.

Deputy Michael Ahern resumed the Chair.

All afternoon we have pussyfooted around the issue of the developers and the fact that this is not a bailout of them in a very interesting way. As I understand it, the first ten principal developers are indebted to the tune of approximately €1.5 billion each. Will Mr. McDonagh name the individuals, the loan groupings or the companies involved? We have seen a huge amount of leaking to the media about who the likely people are. Could Mr. McDonagh, as a courtesy to Dáil Éireann, put on the record the names of these individuals because it is important in terms of democratic accountability that taxpayers, who are paying for this, are aware of who these people are?

The second issue is the important one of transfer of choice assets to spouses, family members and perhaps other individuals or companies. Mr. McDonagh referred to family home issues in a previous answer. Will he clarify if a family home is a portfolio of family homes or is it an individual family home? Is there an upper limit on the value of the family home? For instance, if a developer has a family home on Ailesbury Road, a holiday home in the south of France and a holiday home outside Dublin, are we talking about a portfolio of family homes? Is there an upper limit on the portfolio of family homes? That is very important as is whether there is a limit.

Does the law need to be changed in this respect in order that a limit is introduced? Most people's understanding of a family home is a three or four bedroomed home worth perhaps €0.5 million to €1 million, depending on its location. I do not believe most people would think of Ailesbury Road, Marbella and some mansion somewhere along our west or south-west coastline. Mr. McDonagh should clarify that.

When Mr. McDonagh spoke about the problems he had uncovered with the loans, he really outlined a kind of chamber of horrors. He spoke about wrong descriptions of the types of charges. People thought they had a first charge when it was a second or subsequent charge, which means the charge may be worth little. He spoke about equitable or real mortgages and that a proper distinction was not made. He also spoke about improper titles and description. He gave the example of Mr. Corrigan and himself as partners in a venture and where the bank understood it was both of them but subsequently the papers only referred to one of them. In my experience as an accountant, this is very close to fraud, if not actual fraud. It would also imply that bank officials dealing with this are accessories to fraud or have colluded with fraud.

I notice Mr. McDonagh seemed to suggest almost definitively that this was not fraud. This committee and other committees stand over the fact people on social welfare who defraud the Department or people who defraud the tax system are brought before the courts. In terms of this litany of horrors, does NAMA propose to seek criminal actions against these people so that, for instance, the Criminal Assets Bureau can go in to recover some of these assets or is it merely a softly, softly approach where we are pussyfooting around and where we all are nice people and the developers are the nicest people in the world? I want to hear a stronger answer on what NAMA proposes to do in that regard.

On the references to knocking down unfinished estates or bulldozing other partially finished buildings, there is one monument on the Dublin quays, that is, the empty floors of the Anglo Irish Bank building. Does Mr. McDonagh have a take on the future of that particular piece of architecture? Is somebody offering to buy it completed?

The Minister mentioned in the NAMA legislation that the agency would have a budget of up to €5 billion for completions. How much of that, if anything, has NAMA allocated? How much of that are the top ten likely to get?

I accept in good faith Mr. Corrigan's replies on the default functions. There may be much merit in him giving advice to the Minister in that, by and large, the NTMA was not involved in the banking debacle. However, the relationship of the NTMA to the Dáil is rather limited in that Mr. Corrigan comes before Dáil committees but our power to ask questions directly of the NTMA is quite limited. I would be concerned if we are moving towards a HSE-style model, if that is what is on the Minister's mind. In the case of the Department of Health and Children, the Minister, Deputy Harney, can pick and choose what she wishes to answer. The rest passes over into a kind of Jarndyce & Jarndyce process in the HSE where there are no answers available and we all are fluttering around between the head of the HSE and the Minister for Health and Children. What assurance can Mr. Corrigan — he is not the principal actor in this matter as it is the Minister and the Taoiseach who decide how they structure the new framework — give the committee that we are not entering into a HSE-style structure, not in administrative efficiency because his operation is obviously much tighter and smaller, but in giving answers to taxpayers about the enormous responsibilities that they are shouldering?

I compliment Mr. Corrigan on the 8% reduction in costs he negotiated, presumably through agreement with the staff. This was similar to what the trade unions originally proposed that they would do and it is interesting that at the level of the NTMA it has been possible to get internal agreement with the staff to adopt those reductions. Maybe that is an indicator that——

The position with respect to the banking functions will be identical to the position with respect to the debt. That is the best analogy that I can give. Certainly, the Minister for Finance has continued to be accountable and answerable to the Dáil on the debt management questions and he will continue to be answerable to Dáil Éireann on the banking functions. Beyond that——

In the Anglo Irish Bank legislation to which Mr. Corrigan referred earlier, in section 3, there are references to a framework agreement which was never published. Will the framework agreement be published. I ask this because the HSE model is that nothing is published but there may be leaks and we never get to know about it formally.

I would have to look at why the framework agreement was not published. Clearly, in all of these issues there are questions of commercial sensitivity which must be respected, otherwise the position of the State may be undermined. If the committee could give me an opportunity to consult with my colleagues in the Department of Finance who are currently in possession of the framework as to why it was not published, I will revert to the committee.

On the points Deputy Burton raised, when NAMA has acquired the loans of the top ten borrowers, we will contractually step into the shoes of the banks. The banks have not published the names of the top ten borrowers. There has been speculation in the press about who are the top ten borrowers but until such time as we would engage in enforcement proceedings — which would be a public matter — against the borrow, we would not publish the name of any of these borrowers because we must deal with them on the basis that if they are making arrangements to pay back their debts, it is a banking type of relationship.

The issue of transfers to spouses and third parties was raised previously. Any transfers to third parties would have to be unencumbered in the first place, not subject to loans. If they were subject to loans, for the transfers to happen they would be subject to transfers in the legal documentation. As I stated previously, we will take a very strong view on that. We will pursue it. If there is any fraud within transfers, we will go through the courts to try to reverse these transfers. We want to ensure that our interests are protected. Clearly, if people want to try to transfer to third parties assets which prima facie look to be unencumbered but at the same time they have offered up personal guarantees, then I would regard that as tantamount to a fraudulent transfer.

What I stated is that we are paying no value to the institution of the guarantee; we are taking the guarantee. NAMA will use the personal guarantee; it is just that we will not pay the institution any value for it. Clearly, if a borrower has transferred assets to a third party but he still has a personal guarantee on a loan that he does not intend to pay back, then we would pursue that borrower for any transfers he made because the personal guarantee can be enforced against it.

There are protections on the family home, as the Deputy outlined, under the Family Home Protection Act 1976. Our view would be that a person needs only one principal private residence. If, as the Deputy stated, somebody declares his or her principal private residence to be a trophy house in a particular district, then we will pursue him or her, subject to the constraints of the Family Home Protection Act 1976. The Deputy asked whether the law would need to be changed. I saw something in a newspaper over the weekend on whether the authorities set a certain limit on that in certain states in the US. That would be a policy decision of the Government. Clearly, if the law existed, it could well be helpful.

On incorrect security on title, what I outlined to the committee is the facts of what is emerging as we do the due diligence. The Deputy asked whether it was fraud. I am not so sure whether it was fraud or whether it was incompetence on behalf of the institutions. In the first instance, the institutions themselves have suffered losses because if they had correct security on title, we would have paid them a higher consideration for the loan. The fact that they are getting lower consideration for the loan, or in certain instances getting zero consideration for the loan because there has been incorrect security on title, means the bank itself has suffered the loss. That is an issue for the institution, in dealing with how it will resolve its internal controls to ensure this does not happen again.

Mr. McDonagh suggested that was incompetence. Does that mean he is stating that the board of the banks were incompetent and lacking proper competence over their functions? Many shareholders have lost their pensions. Do they have a case for suing the boards of the bank for incompetence amounting to fraud?

All I can say to Deputy Burton, as I stated to Deputy Barrett, is that the management and the boards of these institutions had a fiduciary duty to protect the interests of their shareholders, whoever those shareholders might be — whether they are members in the case of building societies or public shareholders in the case of a listed organisation. It is the responsibility of these institutions to examine the consequences of the valuations NAMA has applied to their loans. If they receive a lower valuation because of an additional haircut as a result of incorrect securities, that is a matter for the institutions involved to consider. In the context of their governance frameworks, it should also probably be examined by the Financial Regulator. That is part of the process. It would also be necessary to consider what control processes had caused a lower value to be applied to their loans than should have been the case. The fact that they might not have had the correct securities attached to such loans would be crucial.

I discussed the subject of unfinished estates in the context of questions posed by other members. With regard to the particular asset or item of architecture on the quays to which reference was made, to date not many people have beaten a path to my door to inquire about acquiring it, but we all live in hope in respect of that matter.

NAMA has a borrowing facility of €5 billion. I do not know how much of this will be utilised. We have a loan portfolio of €80 billion and more than €20 billion of the assets therein will relate to development — everything from fields in which holes have been dug to half built developments of one type or another. The €5 billion borrowing facility will not stretch very far and we will be obliged to use it wisely in order to ensure we will only invest money in developments from which some profit might be realised. The board has given a general indication of how the €5 billion should be used. However, the position will be outlined in more detail when the business plan is published.

I thank our two guests for attending. Mr. Corrigan was involved with Bank of Ireland and AIB in respect of the recapitalisation. What level of funding will the Government, in the form of taxpayers' money, be obliged to provide for in order to recapitalise these two institutions? Is it the case that the revised business plan being prepared by Anglo Irish Bank will have to be presented to the NTMA and the European Commission in May? Will the NTMA be responsible for reviewing the position on the further recapitalisation of Anglo Irish Bank?

I would expect that to be the position in respect of Anglo Irish Bank. That would be consistent with the takeover timetable I outlined. On Bank of Ireland, I am obliged to be careful in commenting on it and other institutions because they are publicly quoted and I do not want to say anything that might have severe price implications. It is our expectation that, as part of the recapitalisation, a portion of the existing shareholding — by way of preference shares — will probably be converted into ordinary shares.

I would not like to speculate on the consequential fallout in the context of the percentage of the bank the State might or might not own. The Financial Regulator has asked AIB to submit a recapitalisation plan by the end of April. As acknowledged by the Minister, that clearly involves the sale of certain assets. Obviously, the bank will be obliged to supplement it by raising some capital. To the extent that it might not be able to bridge the gap by raising private equity, the State will be prepared to convert all or part of its preference shares into ordinary equity. Ultimately, it is all State money. It will not give rise, however, to further Exchequer borrowing because it will be ring-fenced within the National Pensions Reserve Fund.

Yes. This point was raised and I apologise I did not address it at that stage, but the discussion moved on.

Under the National Asset Management Agency Act, the institutions are obliged to produce eligible asset lists. Effectively, these are lists of all loans that are in accordance with the eligible assets regulations which specify the loans that can be transferred. They must be jointly certified by the chief executive and the chief financial officer of the relevant institution. If an institution provides us with a list of eligible assets, effectively it is certifying that said list is correct. One of the issues on which we are going to sweep up subsequently will relate to our returning to the institutions and inquiring as to whether they have transferred all the relevant assets. If they have not transferred such assets, we will want to know why that it is the case. If an asset is not eligible, clearly it should not be transferred to NAMA. However, we will want to know why eligible assets have not been transferred to us. Part of the exercise to which I refer will involve a follow-up with the European Commission and the Financial Regulator. This will ensure the banks have complied with the asset-relief mechanism of NAMA. Assets must be transferred in accordance with the eligible assets regulations.

I thank Mr. Corrigan and Mr. McDonagh for coming before the committee. Unfortunately, I was not able to be present for most of the meeting. However, I have read their opening statements and I am sure notice will be taken of the incisive comments contained therein. I thank them for providing answers to the various questions posed by members. I wish them well in their onerous duties and I am sure they will do a good job.