Joan Burton (Dublin West, Labour)
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Question 28: To ask the Minister for Finance the position with respect to the National Asset Management Agency legislation; if a valuation methodology for assets being transferred to NAMA has been agreed; if it has been approved by the EU; if the valuation methodology will imply a mark up on market price or a mark down on their book value; and if he will make a statement on the matter. [28105/09]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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As the Deputy will be aware, the initial preparations for the establishment and operation of NAMA are being managed by a steering group. The group is tasked with overseeing the preparation of the legislation in parallel with the practical preparations for the establishment of NAMA and is made up of representatives of the Department of Finance, the Attorney General's Office and the National Treasury Management Agency, NTMA.

The valuation of loans is, of course, crucial for NAMA. Loans will be transferred to NAMA at an appropriate write down which will ensure value for money for the taxpayer and take into account the risk being transferred to the State on the basis of the European Commission guidelines. The valuation methodology will be based on a number of factors, primarily current market value and the underlying longer-term economic value of the assets.

The NTMA has engaged HSBC to assist in the development of an appropriate valuation methodology which will ensure the independence of the valuation process. The valuation methodology require to be agreed with the European Commission.

Joan Burton (Dublin West, Labour)
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Will the Minister confirm that at this point in time NAMA is, as I understand it, talking about taking over the bad loans of some 20 to 50 big developers whose loans amount to between €20 billion and €45 billion? Will he confirm that the way this will work is that each loan will be valued separately and independently? The Minister did not address the question I asked. I asked whether he will use a mark to market method for the valuation? In other words, will he take the current market value and use that as the basis of valuation or will he take book values and take a markdown on the book values?

There is a significant variation between those two methods. The director general of the Swedish National Debt Office, Mr. Bo Lundgren, recommended yesterday that there should be a high relationship with market value or otherwise Irish taxpayers would end up bearing an enormous burden. Will the Minister confirm what method of valuation will be used? Will it be based primarily on market values or on the kind of manufactured valuation to which the Minister alluded, based on some long-term potential economic value?

Is it true that loans under €5 million held by developers will not be referred to NAMA but will be worked out separately by the banks?

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I do not confirm and it is not the case that NAMA will simply select bad loans from 20 to 50 developers to deal with in the first instance. That is not envisaged. It has always been envisaged that both performing and non-performing loans will be taken over. On the Deputy's question about loans under €5 million, there is a question of degree in terms of the management of the loans. We are anxious to ensure we have as tight a staff and personnel as possible. Therefore, it is the case that some of the larger loans will be directly managed by NAMA, but some of the smaller loans will not.

On the question of the valuation methodology to be used, as I pointed out, the valuation methodology has not been finalised. However, the development of thinking on the valuation methodology to date is along the lines mentioned by the Deputy and by Mr. Bo Lundgren yesterday. I met him yesterday after his presentation to the Joint Committee on Finance and the Public Service and would like to thank him for the constructive contribution he made to our banking debate there.

With regard to the valuation methodology, as I indicated in my reply, we must value the assets on both a market and individual basis, but under the European directive there is the option of taking into account a longer-term economic value. There is no question of starting off with the book value and devising an appropriate discount. That is not the way to do the valuations. The valuations must be done on a mark to market basis, but scope is given in the EU rules for some element of additionality based on medium-term economic value. The precise scope of that must be determined by the Commissioner and it is a rule that will apply in all member states.

Joan Burton (Dublin West, Labour)
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How would the Minister propose to assign a medium-term economic value to development land in a context where throughout the country we have large volumes of unsold property, both commercial and residential? It is obvious to anybody that a medium-term economic value for development land, which constitutes the largest element, is likely to have to face a very steep discount. Does the Minister understand that people working with and running businesses in this country are terrified of the charges the Government proposes to put on the backs of taxpayers for the NAMA process? Mr. Lundgren, the gentleman from Sweden, specifically told us that in Sweden the banks had to take the hit in terms of discounting the values.

The Minister said NAMA is not going for the big developers and he denied that there were 20 or 50 big developers. Did I get the number wrong? Are we talking about 100 big developers? Why would the Minister go after developers whose positions were positive? Surely the only people going into the NAMA structure are those who are impaired. They may have, as the Minister suggests, some good assets like rent rolls from, say, commercial property centres and so on. Can the Minister elaborate on that remark? I find it extremely difficult to understand why NAMA would acquire good assets from a developer in good standing. Surely NAMA is only for people who are so impaired they have to be bailed out. There is no other meaning to it.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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Deputy Burton raised a number of matters and I will deal with each in turn. First, the agricultural or zoned land which has no construction on it is not in fact the majority of the book value, which is an important point where the Deputy is wrong.

Joan Burton (Dublin West, Labour)
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I did not say it was the majority; I said it was some of it.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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The Deputy seemed to suggest it was the great bulk of it. The key point in regard to the valuation of those assets is exactly as Deputy Burton stated, namely, that there has to be a very steep discount for such assets. In addition, in the case of land, the potential for any medium-term economic value has to be very carefully evaluated because in some cases there may be no medium-term economic value. I do not fundamentally disagree with the point of principle on which the Deputy asks, which is a matter the NTMA is factoring into its thinking in the evolution of a valuation methodology.

With regard to the number being 50 or 100 developers, the point I made was that the number of loans being directly managed at NAMA will not cover all of the loans as, otherwise, a huge administrative burden would be imposed on NAMA. Although that number has yet to be finalised, whether it is 50, 100 or 150, there will be a cut-off point in terms of the size of the loans being worked out directly by the new agency.

The Deputy raised another point.

Joan Burton (Dublin West, Labour)
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Will the Minister expand on his suggestion concerning quality assets being included with impaired loans?

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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It has been made absolutely clear since the supplementary budget statement and it remains the case that performing loans - good assets - are being taken as well as bad assets in the land and development category. In other words, in terms of the construction cycle from the acquisition of land right through to the completed house which is not sold, and the various intervening stages at which developments may be, it is the intention that all of that segment of the banks' books will be taken over by NAMA.

Joan Burton (Dublin West, Labour)
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But only impaired developers.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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No, that is not correct. There is no requirement of impairment, as I have told the Deputy several times.

Joan Burton (Dublin West, Labour)
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Why would NAMA acquire quality assets?

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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That is why NAMA is not as dangerous as the Deputy keeps representing it.