McDonagh at the Oireachtas Committee

McDonough carefully obfuscated the issue of personal guarantees and how NAMA would account for these personal guarantees in collateralising itself.

EG Bernard Mc loans transfer to NAMA and haircut is applied , lets say the net is €1bn and the funny paper then issues for €1bn to the banks.

NPV LTEV Original loans all nominally greater than €1bn of course but funny money nevertheless.

Is this €1bn INCLUDING a valuation of some sort of Bernards personal guarantees against the original borrowing or €1bn on the value of the projects against which the original amount was loaned ??

Brendan McDonagh carefully did not say which and the thickos like Tweety from Cork never pulled him up on this.

Nationwide was the Superbad, relatively speaking.

@2Pack
And Nationwide was the building society of the Irish establishment. That says it all.

“The Pheonix suggested Johnny Ronan was planning to transfer Glenda Gilson into NAMA.”

As an asset or a Liability?

Any of the economists here tried to rework the NAMA business plan based on the new data?

Willie Slattery, head of State Street bank in the IFSC and a contemporary of mine from Bandon, is a dissenter from the pro-NAMA former bubblists’ consensus.

“It is not credible to put all of the private sector infrastructure assets of the country, equivalent to 60pc of an economy, into one body with no transparency, subject potentially to political influence, in any way,”

Slattery told KCLR radio according to the Irish Independent and added that it was “ridiculous” that the country was not taking a cheaper solution to our problems.

Report

Cross collateralisation, bottom up valuations, legal haircuts and high LTVs seem to be behind the increased haircuts.

One assumes that different banks were valuing PGs from the same developer as if he had no PGs outstanding to others. It also appears that some banks valued assets as if they had first charges whereas other lenders had prior charges for indeterminate amounts. It is hard to believe they would be so stupid.

The effect of cross collateralisation is not clear. One assumes that individual loans to the same borrower were valued separately notwithstanding that the they were likely all sums due facilities. It is possible that the overall indebtedness of the borrower has adversely affected cash flow predictions.

It is also possible that some loans could have a negative value (because they didn’t have the first charge) but need to be managed to get the land (because it is necessary to the realisation of the value of adjoining land). In such case the negative value could be deducted from the values of associated loans. However, this is not at all clear.

I think my initial theory that the due diligence and enforcement costs for the entire portfolio were included in the first tranche transfer is looking more unlikely. However, it would help clear it up for me if NAMA would reply to the email I sent them on Monday, viz:

from XXXXXXXXXXXXXX
to info@nama.ie

Kind regards.

There is a risk that the legal services sector could be devastated by the suggestion that there are as yet unquantified liabilities for solicitors practices. If this is not crystallised then practices will have huge difficulties renewing insurance. This follows on from the near collapse of the professional indemnity insurance market last year. If solicitors don’t get insurance then they can’t practice. If many solicitors can’t practice then legal fees will rocket in all areas and businesses will be affected. There will also be huge loss of employment.

This is of course apart from the fact that solicitors who have been negligent in the past may end up with no insurance. As bad as it is for them to lose their livelihood for making mistakes (a fate which bankers have avoided by the State saving their indemnifiers), it will be a dark day for those hoping to claim against such insurance. NAMA seems to be warning these international insurers to get out of Dodge now to avoid claims by NAMA or the banks.

“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.” harrumphed Mr McDonagh.

So Mr Dukes thinks Anglo has a good shot at turning Anglo into a SME lender. Mr McDonagh’s statement above suggests it was just the top brass who did a poor job.

This also reflects badly on the Financial Regulator, not just Patrick Neary. How many of his staff have been fired?

Finally, what value are auditors and annual reports? Documentation is something auditors are good at requesting. The first set of loans NAMA takes are the big ones. Auditors should look at the big ones 😉

Another recent gripe on annual reports relates to Mr Lenihan telling the Dail that Anglo could need an extra 10bn. Anglo’s annual report was released at moreorless the same time, yet it didn’t seem to show where an additional 10bn might be needed.

From the previous topic…

I think it should be noted that four items are valued (para 53 of the EU Commission Opinion):
1. Property CMV
2. Property LEV
3. Bank Asset CMV
4. Bank Asset LEV

Isn’t it bizarre that we have only been furnished with the Property CMV and LEV when we are told it is the Bank Asset values that count? There appears to be a deliberate policy of witholding basic information from the public announcements. It is hard to figure out why.

I note the uplift from Loan CMV to Loan LEV is 15%. This is despite the 5.25% standard discount. Whither the protection of the cap of 20% uplift on aggregate property LEVs?

@Jagdip

I have looked at the Commission’s opinion properly. It is clear that the cost of funds discount is not 1.7% per year. See para 118 and footnote 44:

(118) Concerning the discount rate applied to the cash flows, the Irish authorities will discount the asset cash flows over 3 maturities (3, 5 and 8 years) depending on the recovery prospects (paragraph (64)) at a rate equal to the Irish government bond yield as of 21 December 2009 for the relevant maturity plus 170 basis points [44].

Fn 44. The Irish government bond yields as of 21 December 2009 with a 3, 5 or 8 year maturity are 2.844%, 3.900% and 4.462% respectively, resulting in a total discount rate of 4.544%, 5.600% and 6.162% for each maturity respectively.

Also, the discount rate appears to be applied to anticipated cashflows rather than to the overall LEV of the loan/property (paras. 51, 62, 63, 64 [fn 22], 65, 71, 102, 118 [fn 44], 119, 121 [fn 47]). It would be great to hear from somebody with valuation experience how this works, i.e. what the discount will be charged on.

Accordingly discounting the LEV Property by 5*1.7% to arrive at LEV Loan is not valid.

@ Maurice

doesn’t the ultimate borrower and buyer (ie the lowly homeowner) also need to share at least some of the blame? Banks were stupid for offering mortgages equal to 10 times salary, but so were people for accepting these offers. There was a “mad scramble” to lend money, but there was also one to borrow.

Not true Eoin. Irish people are brainwashed into thinking that they NEED TO BUY a house to raise a family. So they took out mortgages to buy reasonable houses. Now if the banks were giving them, you cannot really blame them if all they want is to buy a 3-bed semi-D. Now a couple with both having higher degrees and decent jobs should be able to afford that. Is it their fault that prices were such that they had to borrow 10 times salary for a shitty semi-D in D9?

You can however blame buy to let and other types of investors

@Ahura Mazda

This ‘banking culture’ of managerial compliance with the ‘dodgy’ was identified in the Blaney/Grace National Irish Bank Report. Action then: SFA more or less in real substance … and a budding FF junior ministerial potential but no real lessons learned then.

@Zhou

Yes – there must be implications for legal profession around all this … many others in ‘professional’ classes also ……… follow the paper, or perhaps the lack of paper ……

@Eoin

To be fair, I did include property investors among the culpable.
But most ordinary people buy a house/apartment when they have to just to live in. Ordinary people were reassured by mainstream bankers (people who they might mistakenly considered to be their betters) – if the bank is giving me the money, it must be OK.
Ordinary house buyers weren’t buying 3 or 4 flats off the plans in the hope of selling them on before completion.
So ordinary people didn’t inflate the demand for houses, albeit they did take the money and add to the buying power. But ordinary people bought houses for shelter not for gain.

@zhou,

from yesterday, consideration paid = LEV of the bank loan, that’s verbatim but is also consistent with the EU “The maximum transfer price (or purchase price by NAMA) will be the bank asset’s
long-term economic value.”

With respect to adjustments made to the LEV property to arrive at the LEV of the loan (the consideration paid), I assumed the LEV property had taken account of the various discounts and that all that remained was to deduct the State’s remuneration for creating the asset rescue scheme and bailing out the banks and the EU indicated this was 1.7% for an average of 5 years. It made sense to me that a substantial legal haircut would be applied to the LEV property of Anglo and INBS because the press had rumoured there were particular issues with their documentation.

However I have made a lot of assumptions and as I said until NAMA produce a worked example or indeed show all the components at aggregate level with headings for the first tranche, I’m not sure anyone outside of NAMA is certain.

What you’ve previously written ties in with Brendan McDonagh’s evidence that the consideration was arrived at after deducting the debt chasing and due diligence (5.25%) and the NAMA premium dependent on year but it was not totally clear whether he was talking about a “gross” LEV property of “net” LEV property. So good luck with getting a response from NAMA. Rest assured I will let you know if they reply to my follow-up email from last week.

We still have no idea how much of NAMAs ‘asset’ base is made up of an imputed write on of personal guarantees and cross collateralisations, do we??

@Jagdip (/2Pack)

Did you say McDonagh said personal Guarantees were valued at nil in your commentary yesterday?

@zhou,

valued at nil by who? NAMA valued them at nil (and paid nil for them) when acquiring them from the banks much to the banks’ chagrin apparently.

test
test
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@Jagdip

The opinion issued by the Commission suggested PG’s could have some value but that there wouldbe nil uplift to LEV. See para 60 and fn 20:

(60) …. This matrix will however be subject to specific ceiling values, as stated in the Act, for the determination of the long-term economic values as follows :
• for any property other than land[20], Property LEV is equal to Property CMV;….
fn 20 – This includes for example, all other types of security that could be attached to a loan such as personal
guarantees, art, share portfolios, wine collections; helicopters and life insurance policies.

Valuing PGs at zero seems to be the prudent approach. Good on NAMA if that is what they are doing.

Ribbit
Correct! At least that is what the Dail hopes. But the EU may not agree. In the meantime, GFF need contributions and this NAMA is being sold as a cushion for the developers and banks. The reality will be different, but the extra cost of their desire for backhanders may cost the taxpayer ten times whatever they might raise?

Many solicitors will be prevented from practicing because they are going to be caught out. The remainder, more honest and scrupulous, will share the smaller pot. They will be unable to increase fees because of the general state of the economy and continued property doldrums.

Home buyers should have known there was something fishy about it all. The internet has many sources that were warning about the bubble. Those decided to buy bigger than they needed got the liabilities they wanted. They will say they were deceived. They are correct. Those who deceived them are still here!

But go not worry anyone, they can’t touch anyone who is anonymous.

@Pat

I think the problem is deeper than this. Those who wish to continue to practice must have insurance cover. If SMDF fails (or can’t get reinsurance) then solicitors must go to the open market. There may not be an open market willing to give cover. If there is, then cover will be incredibly expensive. If there isn’t then the government (=taxpayer) will have to step in. Good solicitors will exist but I think their operating costs will be high so that their only choice is pass it on or close (or be subsidised). Any which way individuals and businesses will be hit by this timebomb.

@SeanOC
” the problem in my opinion is that if there is too much transparency (not to be confused with accountability) this will lead to poor commercial judgement.”
You are being ironic about leading to “poor commercial judgement”, are you not?

What kind of judgement got us to NAMA, fiscal incontinence etc?

Much as one might like to trust NTMA, all the surveys report that Irish people trust Government less than most other
“The findings show that Irish people have the lowest level of trust in politics and business in the 22 countries surveyed. Conversely, countries such as the US, Sweden and France experienced an increase in levels of trust, further underlining a deep institutional scepticism in Ireland. Ireland was the only country surveyed that experienced declines in trust across all four institutions, business, government, media and NGOs.”
http://www.edelman.ie/index.php/insights/trust-barometer/

Who appoints the NTMA Board?
Who gives the riding instructions?
Will NTMA – a creation of the 1980s government debt crisis here – now go the way of many other state-bodies set up to bring in expertise/skills/know-how which the civil service cannot attract?

How to Positively Interpret Recent NAMA data?

1. Loan value of €81bn up from €77bn
2. Cost to taxpayer the same, at €54bn
3. Lower, cash-interest, not a long-term concern, if reported interest remains the same/higher. As shall accrue and be repaid, as principal.
4. NAMA not issuing all €54bn at start of 2010, but over 2010, reducing interest costs in year 1.
5. Upfront charge of 5.25% to banks to cover costs, not included in previous business plan.

So the €2bn in lower interest, is more than offset by the €3bn in upfront fees charged. AND taxpayer gets larger loan book for same costs.

Who wouldn’t be happy with that?

@All
The establishment’s policy is to divide and rule the serfs (us) so that they can keep their aristocratic wealth. But they can’t be as cynical as this analysis suggests, can they?
“Am I alone in feeling puzzled as to why revelations about the scale of our banking crisis seem to be followed so swiftly by outpourings of rancour towards the public service? (The chart shows how interest in the public sector, measured by number of web searches from Ireland, surged after the first anouncement of the bank guarantee scheme in September 2008, and again after the publication of the NAMA legislation in September 2009. The current surge, following the fallout from Minister Lenihan’s speech and the conclusion of talks on the proposed public sector agreement on March 30th is too recent to appear clearly on the chart).”

http://irelandafternama.wordpress.com/2010/04/14/nama-and-the-public-sector-whats-the-connection/

The transcript of the Committee debate on 13 April is up on the Oireachtas website.

http://debates.oireachtas.ie/DDebate.aspx?F=FIJ20100413.xml&Node=H2#H2

Dome more info on the mechanics of Loan Valuations:

Brendan McDonagh:

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.

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.”

The language is unclear. However, it suggests that Jagdip’s assesment that the standard discount of 5.25% for due diligence is applied to the Property LTEV before the discount for cost of funds is applied to the loans cashflows.

I would therefore amend my previous guess as follows:

Loan LEV is approximately =
(Property LEV *(1 – Due Diligence and Enforcement))
+
( estimated cashflow(no. of years) – cost of funds discount(rate, no. of years) )
–
Legal Haircut.

Following this (Operatic structured finance) on http://ftalphaville.ft.com/ , my warning light is flashing. I don’t have enough detail, so with a bit of luck my initial reaction might be wrong.

From Alphaville: “Lucky then, the Irish taxpayer is about to take the whole operatic bond off the junior investors’ hands.”

Although I haven’t access to the deal documents, Opera Finance (CMH) seems to be a synthetic CMBS. This means the securitized assets remain on bank’s balance sheets, with the noteholders of the linked spv taking the risk. These noteholders do not have the status of covered bondholders or bank bondholders. There is no reason why the taxpayer should bail these people out (or, for that matter, the originating banks to take a loss unless they’ve retained a portion of the risk). Noteholders in US subprime MBS are being burnt, (unless there’s some unusual transaction features), I see no reason to protect Opera Finance noteholders.

Does anyone have more information on this?

Kieran O’Donnell asked the question I wanted to ask.

Deputy Kieran O’Donnell: “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?”

He did not get an answer the fisrt time. He later asked the question in a truncated form:

Deputy Kieran O’Donnell: “Does Mr. McDonagh anticipate that NAMA will pay approximately €43 billion rather than €54 billion?”

The answer suggests there was no front-loading to cause the T1 discountt to be skewed (even if the answer is qualified by “If that discount carries through”).

Mr. Brendan McDonagh: “Yes, absolutely. If that discount carries through we expect to pay approximately €43 billion on our consideration.”

Much has been made of the need to have a special resolution scheme in order to wind up the banks and impose losses on, in particular, subordinated debt holders.

However, in the case of Anglo, I can’t see why the governemnt did not simply seize the subordinated debt in the same way it seized the shares in the company?

The state could, perhaps, have continued to make interest payments until such a time as an assessor arbritrated on the value of the debt.

The provisions of the companies acts and the companies constitutional documents were simply dissaplied by the Act in any event.

Is there something Im missing here?

@zhou
“Typically when one start running out of money one starts looking at all areas of expenditure. This is particularly so as windfall/ construction/ property sector taxes no longer provie a lot of the funding. People realise everything has to be largely covered by income tax just when their incomes are being battered.”
I don’t remember repeated media campaigns against the following where a billion euro could have also been saved/raised:
1. Tax reliefs (€8Bn per TASC).
2. Quangos and non-priority spending (another 3Bn at least of McCarthy not cut).
3. Repealing blanket bank guarantee pre-Sept 2008 (tens of billions).
4. Property taxes introduced.
5. Income taxes raised.
6. Wealth tax.
7. Property speculation profits windfall levy?

The timing is a giveaway. Don’t look at the tens of billions we are pouring into the banks to…er…get credit flowing to business, look at the EVIL PUBLIC SECTOR WORKERS who are draining a billion or two from us.

@All
Good letter on the taxpayer robbery (aka the bank bailout) referenced here:
http://www.publicinquiry.eu/2010/04/14/the-brutal-truth-in-numbers/

Sean O’Rourke gave Brian Lenihan a very soft interview after Christmas. That was understandable given it was the first interview since his illness but he seems to have done it again last Tuesday.
http://www.publicinquiry.eu/2010/04/13/rte-saves-minister-from-nasty-union-man/
In contrast his treatment of the representative of the nurses who have had their pay slashed was apparently a full-on assault. It is ironic too that O’Rourke got a lot of credit (and perhaps blame from FF) for his interview with Willie O’Dea. The truth was he and RTE came to the story only in the very last stages. Then there was this:
http://www.irisheconomy.ie/index.php/2009/10/19/free-speech-and-the-green-jersey/
Was he wearing a green jersey when he interviewed Lenihan?

@Oliver
I estimate that the direct cost could be anything between €23 bn and €47 bn with the most likely cost (in the absence of any certainties) being about €35 bn. This is additional to related interest payments, social and economic costs and forfeiture of future investment opportunities. Breakdown at
http://www.planware.org/briansblog/2010/03/cost-of-banking-crisis—update-1.html#more

http://www.irishexaminer.com/ireland/aib-whistle-blower-takes-unfair-dismissal-case-117444.html

Why would any bank with competent management, sack such a person? At any time? In the middle of a bank funding crisis? What was discovered? Has the CB looked into these matters?

Remember that middle management work closely enough with upper management. They will eventually, notice the real ethical climate and act accordingly. The potential for further losses is real if the banks no longer use their internal processes for any constructive purpose?

@All
“The administration estimated that its net loss on the TARP program would be $42 billion, down sharply from its estimate of $341 billion in summer 2009.”
http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/bailout_plan/index.html?scp=1&sq=TARP%20final%20cost&st=cse
If it was all down to Lehmans (per Brian Cowen), then Lehmans hit Ireland 70 times harder proportionately than it did the US. This is a remarkable phenomenon that deserves further study.

@Pat – I posted a comment on the AIB whistleblowing saga at http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&gid=2693430&discussionID=17787066&goback=%2Eanh_2693430. You need a LinkedIn account and ‘membership’ of the compliance officer group. If anyone wants to ‘join the group’ just let me know in your email that you are from irisheconomy and I’ll put you straight in group. We adopt a invitation approach to the group to prevent folk seeking to simply advertise services.

In any event here are the comments posted at the above:

“The story relates to a claim of unfair dismissal lodged by a former AIB employee and whistleblower Brian Purcell commenced before the Employment Appeals Tribunal. Michael Forde SC (counsel for Mr Purcell) said AIB took the first opportunity to dismiss Mr Purcell after his identity as a whistleblower was revealed in the bank. It is claimed that in February 2008 Mr Purcell had used the bank’s whistleblower procedure to alert management about non-fraudulent irregularities in internal accounting. The following month he did not get paid a bonus.

AIB claim that Mr Purcell accessed the private bank accounts of nine colleagues to see if they were paid bonuses – presumably to check how many others like him did not get a bonus(?) – and that this was a flagrant breach of trust and of the bank’s internal rules. Counsel for the bank also states that Mr Purcell’s dismissal was a reasonable response.

RTE reports on AIB’s claim that Mr Purcell was one of only six employees who had open access to every bank account. AIB claims that the reason why no bonus was paid to Mr Purcell was not because of him blowing the whistle but because he was not performing well and that bonuses were allocated in advance of Mr Purcell’s whistleblower complaint.

The allegations and cross-claims will get underway when the matter resumes for a 3 day hearing commencing 31 August.

AIB does not have much luck with whistleblowers. Readers will remember that just a little while ago that AIB belatedly apologised to Eugene McErlean through its outgoing CEO Eugene Sheehy. See http://www.tribune.ie/business/article/2009/may/24/whistleblower-mcerlean-is-vindicated/ ) and read the comment from a person claiming to be a former employee of AIB in the comments section at the end of the article.

Another AIB whilstleblower, Tony Spollen, blew the whistle on AIB’s exposure to bogus non-resident accounts. Here is a link to a story on Tony Spollen – http://www.independent.ie/national-news/conor-lenihan-lobbied-his-brother-on-bank-board-role-1927535.html .

There have been at least two other whistleblowers – one in the public domain and another informed to me privately – of staff who claim that their careers headed south when they blew the whistle on their employer or a client. The matter which I refer to as being private related to a MLRO who reported a key client of his employer. The pressure placed on this person after he filed a section 57 report (CJA 1994) was so unbearable he said he had to leave the organisation.

Whether Brian Purcell’s allegations have merit is yet to be seen. But surely this is further evidence that Ireland needs to implement protection for whistleblowers at regulated firms. Such a law will be of great benefit to the Financial Regulator as people will feel safer to come forward when they spot – in good faith – something wrong and the regulator can respond swiftly and decisively. The FSA has a whilstleblowing hotline ( http://www.fsa.gov.uk/Pages/Doing/Contact/Whistle/index.shtml ) and it recently stated that reports had surged from 835 in 2007 to 1,890 in 2009 (see http://www.ft.com/cms/s/0/620ec7fe-3e8b-11df-a706-00144feabdc0.html)

Here is hoping that the Financial Regulator will have a member of staff present at Mr Purcell’s hearing when it gets underway on 31 August. I say this not pre-judge AIB’s action but rather so that the regulator can listen first-hand to the claims and rebuffs in order to decide if there is anything worth investigating. Employment hearings relating to bank staff are rich pickings for regulators -ask the UK FSA!”

SMDF unstuck. Beware timebomb warning of April 14th above.