Mr. Frank Daly:

Thank you, Chairman and members of the committee for the opportunity to address you today. I need to say at the start that we're here, of course representing an agency that was a key part of the response to the banking crisis, rather than as a contributor to that crisis. You've asked me to deal with five lines of inquiry, and I will take them each in turn. The first one was the commercial real estate development model that existed before the crisis and that model was ultimately, of course, very costly for this State in terms of fixing the financial institutions that funded it and, as a consequence, an inordinate and painful burden has been placed on citizens as the necessary steps are taken to restore normality to our economy. Volumes have been, and I'm sure will be, written about the confluence of factors that made that model inherently high risk, vulnerable and unsustainable. Contributing factors, such as zoning and planning policy, tax incentives, irresponsible developer funding, consumer mortgage lending, absence of market analysis and others, have been well documented and no doubt will be explained to you by experts in these areas. The most effective way that I can contribute is to give you comment, informed largely by NAMA's experience over the past five years in dealing with the consequences of the banking crisis and our role in fixing it. As NAMA was established to acquire the loans of the largest real estate developers, I will focus on the structure of lending to these developers.

NAMA, having bought these loans, is now for such developers the successor to the banks.

Let me talk first about debt funding dependence. From that vantage point what jumps out most of all is a commercial real estate model with an almost complete dependence on debt funding. This had the effect of placing all of the risk with the banks, and as it transpired, ultimately with the State and its citizens. By way of background, traditionally in lending equity is provided by the borrower to mitigate a bank's risk. Equity, in effect, puts the borrower, not the bank, in the riskiest capital position. In the event of default the borrower is the first to lose. New rules in mortgage lending, for example, require that a person buying a home now has to come up with a 20% deposit as equity. However, based on NAMA's experience that fundamental precondition of bank funding was rarely observed in the pre-crash commercial real estate model.

While internal bank lending documentation may indicate that loan-to-value ratios were typically less than 100% when the loan was drawn, the reality in many cases was that a developer's equity contribution was in the form of a rolling up of unrealised paper profit from other developments. This was presented as an equity position. Rarely, if ever, was it in the form of cash. On the face of it then, developers had some skin in the game, but in reality that amounted to nothing more than unrealised equity positions, levered by the developer to secure funding for new transactions. This meant that the banks were taking high equity grade risk for low debt grade returns, and in fact even those low debt returns were often not realised, but rather accrued as rolled-up interest booked as income in bank financial statements. These were, and continue to be, the accounting rules under IFRS, not just in Ireland but wherever IFRS is adopted.

In effect, therefore, the banks were providing all of the real cash funding for both acquisitions and development. It's safe to say that quite often the borrower's paper equity position never paid for an acre of land or concrete or scaffolding or a worker's wage at the end of the week. The safety zone of borrower equity usually existed only on paper. The result is that the borrower was typically not the first to lose. In the event of a crash the banks stood to take 100% of the losses, and that's what happened. Those losses, as we now know to our cost, have had to be funded by Irish citizens to the tune of €64 billion. It would be no thanks to many of those who were the cause of this if, ultimately, that cost turns out to be less than the €64 billion.

There was a relaxed approach to project feasibility. The recycling of unrealised equity positions from project to project meant that the model could only keep working as long as prices kept rising and the banks kept lending, and few questioned those assumptions. Many decisions seemed to be based on a view, shared by bankers and developers, that property prices could continue to defy the fundamental law of any market that when prices rise unsustainably, there is always going to be a day of reckoning, and the steeper the price, the more painful the reckoning.

This was compounded by the fact that the model did not appear to require a stringent approach by borrowers to analysing project feasibility. It's much easier to take an optimistic view of a project when you are not being asked to put your own hard-earned capital at risk. Based on the loans that NAMA took over, feasibility analyses in respect of projects either didn’t exist or were incomplete or were based on flawed, overly optimistic, assumptions about the future. In the residential development sector, for instance, feasibility workings seem to have been based on aspirational exit sales values in an already frenzied peak market. Very little, if any, consideration was given to the inherent cyclical nature of the property markets. The attitude appears to have been that the only way was up, that somehow the forces of gravity were suspended as far as the Irish market was concerned and that the long-established pattern of property market cycles was no longer relevant to Ireland. In this model the banks were taking the type of risk normally the preserve of private equity or hedge fund providers without demanding the same level of rigorous analysis that those providers would have made a condition of funding in the first place.

Mr. McDonagh has talked in some detail about another facet of the model: the dearth of professionally-run developer platforms. The banks were quite clearly lending to individuals and companies that, notwithstanding the massive sums involved, had little or no supporting corporate infrastructure, had poor governance and had inadequate financial controls and this applied to companies of all sizes. The banks failed to ensure that Irish property companies, to whom they advanced billions of euros in lending, operated to the same corporate governance standards as their peers in other jurisdictions or, indeed, similar-sized entities in other sectors of the Irish economy.

There was over-production of residential accommodation in the economy and this, and a range of other factors at play, cumulatively resulted in the situation where development and construction output totally overshot what would have been considered the normal level of production in an economy of our size. This is best illustrated by the construction of 90,000 new houses and apartments in Ireland in 2006 - 90,000 new houses in one year for a population that was then 4.2 million. The output was more than five times the European average at the time. In the same year in Britain, to meet demand from a population which was 14 times the size of Ireland's, just 190,000 new residential properties were built. The Irish development model, fuelled by a combination of the poor lending practices that I have just described, a scattergun approach to tax incentives, poor zoning and planning decisions and a complete absence of rigorous, independent analysis of population and market trends, appears to have been relying blindly on the belief that if you build it, they will come, and no matter what price, they will buy. I should say, lest I give the wrong impression, that this problem was not peculiar to the residential sector. All segments of the market were affected by varying degrees of over-supply. You could be forgiven, indeed, for describing the sentiment that informed this over-supply as hubris, and perhaps in some of the more spectacular lendings as trophy-chasing. Part of the Irish landscape still bears the scars of that approach in the form of unfinished and half-finished housing estates, some of which have been inherited by NAMA and which NAMA is now funding to completion.

And the final point I would like to mention relates to the quality of construction, and, in some cases, the absence of much quality at all. NAMA has incurred multi-million euro costs in remediating building defects such as non-compliance with regulatory standards, including fire safety standards, as we prepare assets for sale or for occupation. Many of these defects stem from a lack of oversight and attention to detail from both the builder, developer and the building control divisions of the local authorities. This was compounded by the sheer volume of development which reduced the due diligence carried out. Hopefully, these issues have been fully addressed with the recently enacted Building Control (Amendment) Regulations Act of 2014. Chairman, that gives you a picture of what the model was like before the crash based, again I emphasise, on NAMA's experience of the aftermath.

So, what would a sustainable model look like? To finish off this segment could I suggest learning from NAMA's experience that a sustainable model for the future would, at a minimum, include all of the following features: In the funding area there would be a sustainable financing model that includes both debt and equity finance. There would be proper banking supervision, robust but not stifling. There would be macro prudential measures to flatten peaks and troughs. There would be adequate bonding for customers and there would be pertinent audit standards such indeed as IFRS 9 which is coming down the tracks and they would be implemented rigorously. In the development sector there would be properly resourced and governed development and construction companies, including publicly quoted companies. There would be active and skilled boards of directors with proper oversight. There would be prudent management of balance sheet exposures, especially debt arrangements, and there would be adequate building regulations and appropriate oversight in relation to building standards.

And then in the planning and market area in general there would be a holistic, centralised approach to zoning, planning and infrastructure provision. There would be long-term social housing planning and there would be publicly-available information of population projections, demand projections and the likely supply outlook. In regard to the latter, NAMA has, with the Irish bank and payments federation, taken an initiative to fund research by the ESRI into the residential housing market, specifically into the likely pattern of emerging demand and the potential supply constraints that may influence future market activity. That research, and similar research from other sources, will be important in terms of guiding future development investment plans in Ireland. What the initial findings, by the way, of that ESRI research tell us is that the vast majority of future housing demand will be in Dublin, the surrounding commuter belt and other major urban centres. Sadly, it is also clear from the research that some of the housing supply built at the height of the boom will never be occupied because it is located in areas where there is no demand.

The second and third lines of inquiry which you asked me to deal with, Chairman, are the duty to ... NAMA's duty to obtain the best financial return and its contribution to property market activity, and if you agree, I will take both of those together.

NAMA's mandate derives from the NAMA Act and section 10 of that Act defines the purposes of NAMA. It requires NAMA to obtain the best achievable financial return for the State, to deal expeditiously with the assets acquired by it and to protect or otherwise enhance the value of those assets. That is the core of NAMA's mandate and it is clearly a commercial one. Our raison d'être, therefore, is to get the best financial return from the assets in our portfolio and, crucially, to do so expeditiously. It is not an option for us to adopt what might be termed a "long-term holding strategy" to await some optimum price level at some indeterminate point in the future before disposing of the assets. We have to do our business expeditiously, which means responding pragmatically to market conditions by taking advantages of opportunities to sell assets where demand and price are favourable. It's also the case, though, that the phrase, "achieving the best financial return for the State", has implications beyond simply getting the highest price for an asset, which, of course, we always seek to do.

NAMA paid for the loans it acquired from the banks with senior debt of €30.2 billion guaranteed by the State. Central to the best financial return for the State is repaying that senior debt and repaying it quickly. It is a contingent burden that should be removed from citizens as soon as practicable, not just because of the amount, not just because of the interest payable, not just because of the impact on the banks' balance sheets but because of the wider implications for the sovereign.

It became very clear very quickly from early engagement with the troika that they would have had serious concerns if NAMA had signalled or adopted any type of extended senior debt redemption schedule. They regarded repayment of the NAMA debt as one of the key recovery factors for this country and one of the key deliverables in exiting the bailout. I would contend that if NAMA had not reduced its debt as expeditiously as it has, Ireland could have been in a second bailout, as market concerns about the contingent liability would have been very real. The troika closely monitored the progress that we were making in meeting our first major senior debt redemption target - that was €7.5 billion by the end of 2013. To the troika, but also to the capital markets and the rating agencies, the signal effect of reducing the State's contingent liability was very important. It was recognised that in so far as NAMA could make significant progress on redeeming its senior debt, there would be collateral benefits in terms of the creditworthiness of the sovereign and, by extension, in terms of Ireland's borrowing costs. This has been recognised in Ireland's ratings upgrades and it is an obvious contributory factor to the very favourable position of Ireland right now in the bond and money markets and, indeed, it has been recognised as such.

I might also mention that, for the second year in succession, we have been in a position to pay a coupon on our subordinated debt. This has had a positive impact on the balance sheets of AIB and Bank of Ireland, manifested in the significant upward revision in the valuation of their holdings of our subordinated debt on their balance sheets. It is a simple fact that debt redemption needs cash generation and cash generation needs asset sales.

We have been able to repay our senior debt well ahead of schedule because of our strong cash performance - nearly €20 billion to date through asset and loan sales and €5 billion in non-disposal, mainly rental, income, €25 billion in total. Thoughtful, well aligned asset sales in the Irish and UK markets in particular have been key to this very strong cash generation.

NAMA actively instigated a programme of asset sales by its debtors in Britain in the period 2010 to 2012 when conditions were strong in that market and, likewise, we responded actively when conditions in the Irish market improved significantly in 2013 and 2014. That approach accords fully with two key principles underpinning NAMA's strategy: no fire sales and no hoarding. In each of our main markets our approach has been to release assets for sale in a phased and orderly manner that's consistent with the level of demand, the availability of credit, and the absorption capacity of the market.As a result, London and the UK accounted for almost 80% of all disposals between 2010 and 2012.

Ireland in contrast accounted for just 12% of disposals during that period and that approach enabled NAMA not only to achieve the best possible return during its early deleveraging phase, but it also allowed the Irish market time to reach its trough and to begin its recovery. A fire sale in the Irish market at that time would have been ... would have had the effect of intensifying and prolonging the market's downturn, and would have been contrary to both NAMA's overriding commercial objective of achieving the best possible return for the State and its ancillary objective of contributing to a sustainable level of activity in the Irish property market. It could also have crystalised a loss on the NAMA portfolio, which because of the State guarantee would have created additional losses for taxpayers on top of the losses that they have already had to fund in recapitalising the various financial institutions.

We were not, however Chairman, during that time sitting on our hands...on our hands in Ireland in that 2010 to 2012 period. During that time NAMA placed a major emphasis on asset management to enhance the future value...disposal value of the collateral securing its loans, most notably by working with debtors and receivers to complete unfinished projects, to fund new viable commercial and residential development and to enhance planning permissions and remove other obstacles to development. During that period when there was little other activity in the Irish market we invested over €600 million in the sector and during that crucial period we also placed a major emphasis on stimulating the market's recovery and fostering the sense that the market was open for business despite perceptions to the contrary. One initiative was a vendor finance fund of two billion, and there is detail in the statement of how that was deployed, Chairman, but in the interest of brevity I won't read out the details. But that vendor finance fund played an important part in generating activity in the early days of recovery when the banks had stopped lending for commercial property and investors were still wary of committing funds to Ireland. These early transactions signalled to international and domestic investors that the Irish market was open for business and played a vital role in attracting finance and activity, particularly from overseas investors where previously there was little or none.

There is now an active Irish market and NAMA is now taking advantage of that. The major improvements in the market over the past 18 months have enabled us to shift our disposal focus more to the Irish market. Reflecting this, in 2014 disposals in Ireland accounted for 46% of all disposals, while London and the rest of the UK accounted for 33%. In addition to the opportunity to accelerate disposals through existing channels, we have also been taking advantage of new opportunities as they emerge, such as packaging assets for sale to satisfy demand, providing regular flows to the market or providing greater clarity to potential investors, allowing those with limited capacity to bid on a greater number of transactions, thus widening the number of potential bidders and increasing the potential return to the State.

In the light of the positive shift in the Irish property market and its outlook, the board of NAMA undertook a review of strategy in early 2014, and following that review we moved to take further advantage of strong investor appetite and to accelerate disposals with a view to redeeming 80% of senior debt by the end of 2016, a full two years ahead of the original schedule, and completing the deleveraging process in 2017-18.

In the context of the clear supply shortages evident in the Dublin residential and office markets, NAMA is also facilitating and funding the delivery of 4,500 new homes in Dublin and the greater Dublin area, and is also facilitating the provision of 3.84 million square feet of prime office space in the Dublin docklands SDZ, to ensure adequate office supply to meet growing demand.

In summary Chairman, as the committee has specifically asked the question, I would say that NAMA has played an important part in stimulating activity in the market. Our interventions were at all times strategic, helping to lift the market off the floor and to stimulate activity levels that are more sustainable in the long run. For quite a while, indeed, we were almost alone in doing this.

The fourth line of inquiry, Chairman, you asked me to deal with is the contribution to the social and economic development of the State. In the context of the overriding commercial mandate that we have just discussed, we seek to manage our portfolio in Ireland in a manner that complements the objectives of other public bodies, including Government Departments, State agencies and local authorities. One way that NAMA gives practical effect to this is by giving public bodies first option on the purchase at current assessed market valuations of property securing NAMA loans. In line with that commitment we have facilitated the sale of land and property for a range of public uses including schools and health care facilities. An aspect of that work that is very important to NAMA is the delivery of houses and apartments for social purposes...social housing. Where we can make properties available for social housing in a way that is consistent with section 10, it is a win-win for everybody involved. And we have identified more than 6,000 properties as being available and potentially suitable for local housing. Local authorities have confirmed demand for about 2,000 of theses, and while I am a little disappointed that take-up hasn't been higher, I do understand that local authorities and the Housing Agency are obliged to comply with their own policies on the location of social housing. But we are working hard to deliver on the properties for which demand has been confirmed, and at the end of 2014 more than 1,000 had been delivered and today that figure is very near 1,200, and by the end of the year we would hope to achieve the delivery of all of the remaining properties up to the 2,000 for which the local authorities have indicated demand. It is important to say, by the way, that it is not just a question of handing over the keys to the local authorities. In most cases significant investment is required to complete the property and to carry out estate-wide works. In this way, indeed, the beneficiaries of NAMA's social housing extend beyond the residents of the new properties. For existing residents, empty houses become inhabited and outstanding works are completed and capital expenditure in excess of €20 million, has been incurred to date in carrying out such work.

We also, Chairman, facilitate commercial transactions and that is another important part of work...of NAMA's work in the Irish property market that might not otherwise take place. A good example of this is NAMA's ongoing work in identifying suitable properties for companies looking to establish or expand existing business operations in Ireland and facilitating engagement between those companies and NAMA debtors and receivers. NAMA's work in this area is very closely aligned with that of IDA Ireland and other State agencies, whose core responsibility is to attract and expand foreign direct investment activity and employment in Ireland and there are similar examples of that, Chairman, in the written statement but I won't read them out.

NAMA makes a wider contribution also in its rent abatement initiative to help retailers that are struggling to meet their contracted rent obligations. The aggregate annual value of abatements agreed to date is in excess of €23 million. In addition to this, NAMA has agreed long-term rent reductions worth over €40 million. This does mean that NAMA has agreed to forego rent due to it, but the corollary is that we are safeguarding jobs and activity and businesses in the wider economy.

We also work hard, including through our interaction with public representatives such as yourselves, to facilitate the letting and saleing of land to local community and sporting organizations and to accommodate other local requests where we can. And often these may not be particularly high-profile initiatives but they are important locally. And a very recent illustration is our capacity to accommodate a request from the Blarney Community Association for the provision of temporary car parking facilities for the community's St. Patrick's Day festival. I just give it as an example of things we do like that. It is totally coincidental, Chairman, that it is in Cork.