Brian Lenihan Jnr (Dublin West, Fianna Fail)

Senator Callely raised a number of specific questions which are important. Like Senator Burke, he is also reflecting, not so much on what builders and developers are saying as builders and developers but on what they are saying as customers of financial institutions. As Senator Butler correctly stated, NAMA does not yet exist. It has assumed an existence in the public mind which it does not yet have. It does not exist for a legal or any other purpose.

Senator Callely sought clarification in regard to what was being transferred to NAMA. The asset which is transferred is the bank loan, not the collateral. If NAMA has to take enforcement action, action will be taken to secure the collateral and eventually sell it. What is transferred initially under the legislation is a bank loan. The bank loan agreement remains in place. NAMA steps into the shoes of the banks and has the same rights and duties as the bank in regard to the loan. That is the position of the customer as against NAMA.

Senator Callely asked if the management would remain in place. It will not remain in place. I am glad the Senator raised that issue as it is not a topic that has come up in this debate. Clearly, if we buy the asset, we must manage it. NAMA will manage the assets. As regards the larger exposures - of which there are a number, as Members will be aware, some of which have been mentioned in the debate - these will be centrally managed by the agency. They will not be managed by individual banks. The banks will lose all responsibility in the management of large exposures which run to substantial amounts of money. Typically their loans can be located in a number of financial institutions. The particular arrangements surrounding them are - I do not like this verb, although it is used by my officials - bespoke, namely, they are distinctive to the borrower in question. As such, they require careful centralised management.

It is envisaged that NAMA will take direct responsibility for a block of loans owed by the most substantial borrowers whose loans are being transferred. The Government's decision to establish the agency was influenced by the existence of this block of borrowers who cross the financial institutions. I am sure many Senators have heard in the public debate the argument that a separate vehicle should be established in each bank and that each bank should be forced to work out its own loans in isolation from the other banks. However, the litigation referred to in this and the other House illustrates that a large number of financial institutions are involved with the more substantial borrowers. It will be impossible to manage and work out the position if one does not have a single agency managing the problems, taking a collective view on the loan portfolio right across the institutions, taking the necessary enforcement action and managing it in one parcel. That was one of the arguments, although not the only one, for the single agency approach. In response to Senator Callely, that is the position on the larger exposures. The board of NAMA will determine at what level this will happen and clearly will have regard to the degree of cross-collateralisation within the system.

In regard to the majority, in number, if not in value, of loans, NAMA will take a management role in respect of them but the actual loans will be managed by the original banks in which they originated. The bank, in respect of these loans, will be working for NAMA. Under the relevant EU rules, the State will be obliged to pay a management fee to the financial institution in respect of that loan. Senators might legitimately inquire about the reason we took this route. Reference was made by Senator Callely and others to the experience of the United States. While, in respect of the United States Savings and Loan crisis, there was a successful outcome in financial terms, a huge staff and bureaucracy were retained to manage the loans in question. That made the working out of the loans very expensive. We are back to the argument we had about professional fees. No matter how one structures it, there is a cost.

In his evidence to the committee, Dr. Somers rightly warned us all about the dangers of establishing a huge bureaucracy and turning NAMA into a huge bureaucracy. I have been conscious of that from the start. Therefore, the view was taken that the banks should continue to manage the smaller loans, but on behalf of NAMA. That is one of the advantages of the subordinated debt, risk sharing arrangement to which I would like to draw attention. Several Senators suggested I did not follow the advice of the Governor of the Central Bank on risk sharing. In fact when the Governor of the Central Bank was a private citizen he was very free with his advice, both to me and to many others. He had a correspondence with me about NAMA in which he gave much valuable advice. His suggestion was that it was the shareholders who should bear the risk, whereas in fact it is the bank itself that shares the risk under the subordinated bond arrangement. The reason I was anxious for that is that it creates an incentive for the bank to perform in the management of those assets which remain as an agent of NAMA in regard to the management of the loans. They stand to lose if they do not work out the loans correctly. I felt it was important to put the mechanism in place that the bank itself would be at a direct loss so its employees would be incentivised to make that extra €1 billion or €2 billion, which the subordinated debt arrangement gives them the opportunity to earn over time. That is the reason it was structured in that way.

To answer Senator Callely's question on management, NAMA manages but the lesser exposures are managed by the institution on behalf of NAMA. He said there was much confusion due to some accountancy practices. I cannot assist him on that. I belong to a different profession and the mysteries of my profession have always astonished the outside world. One of the things I have learned as Minister for Finance is that the mysteries of the accountancy profession are equally bewildering to the outside world because they seem to make money appear and disappear-----