The liquidators of the failed US investment bank have turned their sights on Nama, writes Simon Carswell, Finance Correspondent
‘YOU THINK €81 billion in loans is a huge process? Try $1 trillion,” says US restructuring expert Tony Alvarez, in reply to a query about the task facing the National Asset Management Agency (Nama).
Alvarez is one half of the founding duo behind Alvarez and Marsal (AM), the restructuring firm better known as the liquidators of failed US investment bank Lehman Brothers. The company is one of five firms hired by Nama to value the €81 billion in loans being acquired by the agency. AM is working on the loans of two of the five financial institutions participating in the State’s bad bank.
Alvarez and the managing director of his European unit, Ann Cairns, who is leading the Nama work, declined to say which institutions’ loans they were valuing.
Cairns is leading a team of 16 and, while valuing Nama loans is the main focus, the firm is keen to secure lucrative contract work for the financial institutions, advising them on their restructuring plans into good and bad bank operations and helping them to manage out their troubled loan portfolios, particularly in property or retail.
On the ground, AM is represented in Dublin by senior adviser Tom McAleese, the former head of Barclays in Ireland who also worked as a senior executive at investment firm Claret Capital.
The dilemma of whether to hold property assets long or sell them quickly – such as the one facing Nama now – is something that AM knows plenty about from its work on the mammoth task that is the clean-up after Lehmans. The firm is dealing with the liquidation of a bank with a $630 billion (€490 million) balance sheet but facing claims of $1 trillion.
Lehmans’ off-balance sheet activities, which felled the bank in September 2008, multiply this figure. Cairns says that Lehmans had 1.7 million “legs of swap transactions” worth about $6 trillion.
“It is just staggering,” says Alvarez, “that is why you had the heart attack in September 2008. At every side of those transactions is a decision.”
As liquidators of Lehmans, the firm has sold just 20 per cent of the bank’s property assets and is holding the remaining 80 per cent and waiting to secure better value as property markets recover.
“If we were to sell today, we would get bunkus – you have to decide asset by asset,” he said.
Alvarez says there is no value given the current state of property markets, and so AM has set up a new firm called Legacy Asset Management or Lamco which will remain in existence, with large holdings of property, after Lehmans exits Chapter 11 bankruptcy.
“With real estate assets, everyone who holds them should only be driven by value. I don’t care who you are, if you’re a government or a company,” he said.
“You have to ask yourself whether time will be an ally or do you think this is an asset that doesn’t have much value? Our folks have been navigating that issue with Lehmans.”
Yesterday Nama responded to comments from the International Monetary Fund (IMF), saying that it would not engage in speculative hoarding of assets. The IMF had advised Nama that “moving ahead with early sales is important”, adding that delays had proved costly when a similar bad bank scheme was introduced in the US.
Alvarez says that devising clever strategies to restore financial institutions to full health is one thing but execution is more important. He divides the assets in Nama into three categories – raw land, work-in-progress projects and fully developed property.
“Land is easy. You either hold or sell because you are not going to start construction,” he said.
“Work in progress must be looked at case by case. If it is 80 per cent complete and you have got five banks involved, it becomes a game of chicken on who will provide the 20 per cent. There is a process that you need to play out.
“Then you have the fully developed property where it is just an economic decision as to whether you are getting full value now – this has to be played out asset by asset.” Clearly pitching for work from a banking sector on the verge of major change, Alvarez and Cairns believe banks should be planning how they intend to execute the restructuring of their businesses.
The European Commission has just signed off on Bank of Ireland’s restructuring plan, but the other five domestic institutions await official sign-off from Brussels.
“Splitting a bank in two actually inflates expenses for a while if you try to do it in a very clean way because there is a lot of shared functions there,” said Cairns.
Alvarez points to the service-level agreements that AM agreed with Barclays, which purchased the systems and staff of Lehmans North America unit.
Cairns says Irish banks must put in place service agreements between their good and bad banks – their internal asset run-down companies - and with Nama.
“Often when creating a bad bank, you can have management gaps and bringing in outside firms can help,” she said. “We didn’t write the loans so we can be very dispassionate about the assets.”
Alvarez says the two main challenges in creating a bad bank are motivating staff – by agreeing pay that incentivises employees to stay with a “bad bank” project to the bitter end – and agreeing services deals to ensure that good and bad banks don’t duplicate services.
Again, Alvarez believes that strategies and plans are all well and good but execution is everything. “What I like about Ireland is that you are taking action. You are still not getting credit for it – credit will be given over time,” he said.
“Compared with other countries you are doing it faster, more decisively. You are still filling in the blanks about what to do. But whichever structure you use, the proof will not be in the structuring but what you do afterwards.”
