McDonagh at the Oireachtas Committee

NAMA CEO Brendan McDonagh appeared today before the Oireachtas Committee on Finance and Public Service. Here‘s a copy of his opening statement. Normally, when there are important Oireachtas committee meetings, I usually have to wait for the transcript to go up on the website. However, thanks to the tireless work of our friend Jagdip Singh, you can get a lot of information on what happened today here and here as well as lots of excellent questions.

One statement from McDonagh that got a lot of attention today was that, of the loans in the first tranche, only one-third are paying interest. I wasn’t too surprised about this because it tallys well with information from the annual reports released by Anglo, AIB and Bank of Ireland.

As I noted earlier in comments, the amounts going in to NAMA from these banks in terms of initial face value are as follows: €36 billion from Anglo, €23 billion from AIB and €12 billion from BoI. That’s a total of €71 billion.

All three banks have released detailed analyses of the loans going into NAMA (here, here and here). From these, we know that €6.6 billion of Anglo’s NAMA-bound loans are neither past due or impaired while the figure for AIB is €10.4 billion and for BoI is €5.4 billion. Add them up and we get that, according to the banks own figures, only $22.4 billion of these loans are performing.

So, according to the figures released by the banks, of the original €71 billion in loans made, only €22.4 billion or 31.5% are currently performing.

One can also point out that if the discounts from face value of 50% for Anglo, 43% for AIB and 35% for BoI are applied across the board to the rest of the tranches, then NAMA will pay €18 billion, €13 billion and €8 billion respectively for a total of €39 billion for the loans from these three banks. So, for these banks, we are paying €39 billion euros for a portfolio of loans of which only €22.4 billion are ostensibly currently generating any revenue.

77 thoughts on “McDonagh at the Oireachtas Committee”

  1. 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.

  2. @All
    “So, for these banks, we are paying €39 billion euros for a portfolio of loans of which only €22.4 billion are ostensibly currently generating any revenue.”

    The reliable Dreaded_Estate makes this comment on another forum:
    “I’ll just add that NAMA is not going to come close to covering its running costs and interest payments. NAMA is probably going to need a couple hundred million annual financing from the Exchequer plus quite a few billion rump loss at the end.”
    All this AND €22 Bn to Anglo/Nationwide? The figures above seem to imply that Anglo really was the superbad of our bad banks. If so then the investors who took the returns as this bubble bank inflated really can’t turn around now, as its chairman does, and say that the other banks were equally bad. Anglo was a runaway deposit taking property speculator.
    Despite being a fraction of the size it has more bad loans and a bigger haircut. Professional investors knew there was a massive property boom in Ireland and that Anglo was inflating at staggering pace predominantly on the back of it. Now that the world has changed we need to put it into administration when the bank guarantee lapses.

  3. @2Pack
    And Nationwide was the building society of the Irish establishment. That says it all.

  4. Tranferring property is meaningless. It can easily be made transfer back if a personal guarantee was in place at the time.

    We will know in September when the developers business plans are finalised for NAMA will we not ?

  5. One problem is that the structure of incentives for NAMA is all wrong.

    NAMA’s goals are to achieve a maximum return on its portfolio, but given its stake in the Irish property market, the best way for it to do this is to protect developers and errant lenders from the pain they rightly deserve.

    NAMA does not want to see Irish property prices fall steeply because this would weaken the value of its portfolio and make the task of restoring the banks’ health more difficult. And yet that is exactly what would be best for the Irish economy right now.

    The fundamental problem is in the design of a bad bank / property magnet working with a handful of crony bankers and drip-feeding the paying public with teaspoons of misinformation….

    References

    IMF (2014) “Chapter 2: The Orderly Winding Up of the Irish Financial Sector” in Crisis Management Plan for a Post-Euro Ireland, New York

    Lucey B (2023) The Teens: Ireland’s Lost Decade MacMillan Publishers, London

  6. 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

  7. @Michael – 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.

    Civil servants at NTMA/NAMA will be reluctant always to make decisions on loans, which may be in the best interests of the tax payer, but will instead yield instead to the spectre of potential political back-lash.

    I think we should trust the NTMA to run this thing as a commercial enterprise (now that there is no turning back) without micro management and avoid the likes of Joan Burton and backbench FF cronies un-picking every single decision! Otherwise I entirely agree that NAMA will be a complete disaster and make Anglo look like a picnic.

  8. 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

    date Mon, Apr 12, 2010 at 11:58 AM
    subject Request for Information on Tranche One Key Data Sheet

    Dear Sirs,

    I would be grateful for your asistance in helping me to understand the mechanics of the NAMA loan valuations.

    Firstly, I would be grateful if you could clarify the meaning of the Document setting out Key Data for Tranche 1 (http://www.nama.ie/Publications/2010/NAMATranche1.pdf).

    The Key Data for the First Tranche of loans trasferred to NAMA states that estimated Due Diligence and Enforcement costs for the entire NAMA portfolio has been charged up front.

    Is this upfront charge of estimated Due Diligence and Enforcement costs for the entire NAMA portfolio included in the discount for the first Tranche? i.e., Does the consideration paid for the transfer of the loans in the First Tranche represent the aggregate of the “loan valuations” for the First Tranche or does it also include estimated due diligence and enforcement costs which will affect loans in future transfers?

    Secondly, I would also be grateful if you would indicate what is the typical uplift (or estimated average uplift if available) from LEV of an underlying asset to the value of a loan (excluding all discounts for (i) costs of funds, (ii) due diligence and enforcement, and (iii) any potential legal haircut because of defective or inadequate security)?

    Thirdly, please clarify whether the estimated cash flow genrated by a loan or underlying assets is the main factor which determines whether a loan valuation might be significantly higher than the LEV of the underlying asset.

    I look forward to your response insofar as you are in a position to provide same.

    If you are not in a position to respond to these queries I would be grateful for your confirmation to that effect.

    Kind regards.

  9. @Ribbit

    I’m miffed Ribbit – sorely miffedI What about me recent magnum opus

    The Greatest Bank Heist in Irish History, NAMA Press, Dublin (2010) Eh?

    @Michael Hennigan

    Think Slattery’s ‘cheaper solution’ needs a bit of fleshing out. On ‘transparency’ and potential ‘political influence’ he has a point. But on The Banks – we could do with a little more. Does he blog?

    @Karl Whelan
    “… we know that €6.6 billion of Anglo’s NAMA-bound loans are neither past due or impaired …”

    NO! We ‘KNOW’ nothing for a fact that comes out of Anglo-Irish – to use terms such as ‘know’, ‘knowledge’, ‘known’ etc in connection with this gangrenous growth is to bring epistemology, science, and common sense into the most serious of disrepute. Notwithstanding the fact that it is both nationalised and needlessly propped up by the blood of future Irish serfs, we cannot believe or trust any of its spokespersons, its political backers, its auditors, its customers, its so-called reports, its not-updated website, or anyone in any way associated/connected with it.

  10. 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.

  11. @SeanOC

    ‘now that there is no turning back’ ……… Who says? Hell of a lot going on at the moment that ‘demands turning back’ ……..

    You might re_sit Logic101 ………..

  12. “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.

  13. oops, typo above

    “Mr McDonagh’s statement above suggests it was just the top brass who did a poor job.”

    should be “wasn’t just”

  14. 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.

  15. At this stage we can safely say that all players were culpable.
    Developers, builders, bankers, solicitors, auditors, government, regulators, planners scooping up levies for local authorities, not to mention investors. It is only a matter of time before engineers, architects and quantity surveyors are also revealed to have been cutting corners – how could they escape the corruption.

    That is not to say that we are ALL culpable.
    We weren’t all players.

    But how many people, who voted in GE 2007 for the Builders Party to keep the party supplied with economic cocaine going, are completely blameless?

  16. @ 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.

  17. @ Eoin,
    “doesn’t the ultimate borrower and buyer (ie the lowly homeowner) also need to share at least some of the blame?”

    No. If they repay their debts, there’s no blame.

  18. 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

  19. Taking a leaf out of zhou’s page, I have also written to Nama seeking clarifications:

    In the light of Brendan McDonagh’s comments at the Oireachtas committee yesterday about non-performing loans, I wish to raise some basic questions relating to Nama’s draft business plan. While I appreciate that this plan will be updated later this year I am also cognisant that it was sufficiently “final” to secure approval from Eurostat on the treatment of Nama’s borrowings and for consideration by the Dail and Seanad.

    My concerns centre on differences between interest projections in the cashflow projections (table 5) and much higher values in the budget projections (table 7) within Nama’s draft business plan. The only way I can explain these differences is that the latter includes rolled up interest arising from 2010 onwards. However, the ten-year cashflow projections do not appear to make any provision from any eventual payment of this interest. If this is correct then the “real” default rate on the Nama loans could be 34% rather than the expected 20% rate. By my reckoning about €10.9 bn appears to be unaccounted for !!! Maybe, it is written off in unpublished budget projections for 2013-20 but this is highly material and should have been disclosed. Please refer to the attached Word document and accompanying spreadsheet*. Given Brendan’s recent comments, the write off could be even higher than this estimate.

    Also, by looking at projected year-end balances (table 5) and interest payable/receivable (table 7), it a simple matter to calculate projected interest rates as per columns M and O. Please comment on these rates which are much higher than one might have expected.

    * Accessible via http://www.planware.org/briansblog/2009/10/nama—the-real-default-rate.html#more

  20. @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 ……

  21. @ SeanOC

    There should be be transparency on public procurement contracts.

    What is likely to happen is that groups who turned a blind eye to what was going on in the banks will also avail of the NAMA fees bonanza of €2.4bn.

    It is not credible that auditors did not discover dodgy multi-year end transactions and did not come across serous discrepancies in security/documentation supporting big value deals.

    Looking at the NAMA issue long-term, to avoid clientism, Tammany Hall, pressure from the IFA etc, it is important that there is a policy on the development/disposal of assets over say two decades as Europe’s biggest landlord will become the focus of politicians seeking to meet local demands for land.

  22. @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.

  23. Investors own at most 20% of the housing stock but they do account for rather a lot of the empties.

  24. @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.

  25. @MOL/Eoin

    I don’t blame homebuyers. They don’t have the data, skill or education to be able to assess property values, especially in a globalised economy.

    Ordinary people may not have suspected house prices instinctively. Many thought they seemed way to high. However, they were advised that the values would hold up and they wouldn’t get it much cheaper. In the meantime wages and prices of other goods went up. House prices kept rising relentlessly and the message from banks and banks’ economists was consistently that prices were reasonable.

    Even if one didn’t fully believe them it seemed stupid to stick with a losing policy while other prudent people bought and sold houses, gradually upgrading their accommodation and accumulating equity. In the long run we are all dead as Keynes said. Many people waited a long time for a change before jumping in.

    We are living in a complex world where we rely on specialists. If specialists err or defraud en masse and the rest of society relies on them to society’s detriment then it is valid for the rest of society to hold them to account.

  26. 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??

  27. @Jagdip

    “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.” ”

    Well that clear’s that up! My worry was the transfer price was less than the loan valuations. If McDonagh says transfer price was aggregate loan LEVs then at least we have another piece of the jigsaw.

    “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.”

    I think that it is clear from the Act, Regs and from the EU Commission Opinion that the Due Diligence and Enforcement costs are deducted from Gross Loan LEVs. It can be taken into account in assessing the Property LEV but that is not where it is primarily applied.

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

    It would appear to make sense that where the cost of funds exceeds the cashflow that the asset value would be negatively affected such that it is possible that (estimated cashflow(no. of years) – cost of funds discount(rate, no. of years)) <= 0.

    I expect that a valuer or banker or finance specialist should be able to explain the discounted cash flow model considering it is supposed to be a standard model rather than an innovative method for NAMA.

  28. @Jagdip (/2Pack)

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

  29. @Zhou

    I’d like to point you to some comments by me and others on a thread on this site from September regarding the legal profession and indemnities.

    http://www.irisheconomy.ie/index.php/2009/09/04/articles-on-nama/

    The London insurance market already view this as a systemic problem. We are now seeing (yesterday – BOI vs. Donal Downes who acted for BOI) the start of the fall out.

    I’m surprised by the lack of attention to this and am pleased to see you highlight it. The potential impact on the wider economy is enormous, let alone the question of who CAN be trusted.

  30. @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.

  31. @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.

  32. @Henry

    I remember you saying that. We seem to be sleep walking into a serious problem. Considering the investment losses sustained by the solicitors’ mutual defence fund, the clipping of Quinn’s wing and concerns of foreign insureres highlighted by you, we could be heading for a very serious situation.

  33. 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?

  34. EDIT of Loan Valuation

    I can’t find a way to indent text so this will not be very clear

    I am guessing that
    Loan LEV is approximately =
    (

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

  35. 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.

  36. Michael H
    You make a very good point. As an ex-IOT, I could comment upon the honesty of these firms, but what good would it do?

    Those in power use these firms for many services. I hope none are laundering funds for the pollies? Remember the “pick me ups”? The problem with corruption is that unless there is a guard against it, it will drive out the honest altogether.

  37. 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.

  38. @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.

  39. @ Dreaded_Estate

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

    A. If we only make 1 adjustment to the draft business plan: 1/3 of loans paying-cash interest, not 40% as previously assumed. Then the interest income would be a cumulative €9.9bn, not €12.0bn. Cumulative cash-flow to NAMA would be €3.38bn not €5.48bn. If we also do the Net Present Value calculation, NPV would be €1.9bn not €4.8bn, as previously forecast. (NB: I am time-shifting to April which boosts this).

    So, more than 50% of the NPV, before we start adjusting for “quality” of loans.

  40. @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?

  41. @ Dreaded_Estate

    CORRECTION: to NPV calculation. Would fall to €3.2bn from old forecast of €4.8bn.

  42. 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?

  43. @ London Reader

    I have two non performing loans
    One is for x
    The others are for 2 x
    Which asset should I try to sell first ?

  44. @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/

  45. @OV

    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.

  46. 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.

  47. @All (thanks Zhou)

    Re NPRF

    Mr. John Corrigan: Senator Boyle asked about the National Pensions Reserve Fund investment in the banks and the role of the fund with regard to the bank recapitalisation. He also asked to what extent I think the investments to date have been good. The investments of the National Pensions Reserve Fund in the two banks, Bank of Ireland and Allied Irish Banks plc, were made on foot of special legislation introduced by the Minister for Finance which gave the Minister power to direct the board of the National Pensions Reserve Fund to make investments in the two institutions. The role of the National Pensions Reserve Fund is limited to quoted institutions. There are three quoted institutions and, in effect, two of these require substantial recapitalisation. The role of the fund is, in effect, limited to Bank of Ireland and AIB.

    The other question was to what extent we believe these are good investments. We believe these investments will generate a good return for the fund. Earlier, I mentioned in reply to Deputy Bruton’s question that the coupon is 8%. To the extent that the coupon is not paid we will be paid in kind. In addition, we have warrants which entitle us to buy ordinary shares at a substantial discount from where the market is currently trading. For example, if in four years’ time the share prices of the two institutions were to be approximately €5, taking the various elements of the investment together we would be looking at a substantial double digit return to the fund. We have a reasonable expectation of a good return on the back of those investments.

    I refer to Deputy O’Donnell’s question. I have not been involved directly in the Anglo Irish Bank consideration and the Minister has indicated the policy in respect of Anglo Irish Bank. Anglo Irish Bank and the Irish Nationwide Building Society, to which the Deputy referred, must prepare, submit and have approved by the European Commission reconstruction plans. Several iterations remain with respect to these institutions. I refer to the additional money required for Anglo Irish Bank. Brendan McDonagh will correct me if I am wrong but my understanding is that the bank made provision for the loans which have been taken over by NAMA on the basis of an expected haircut of 28%. The committee has heard the haircut is expected to be 50% or north of that percentage and this is what gives rise, in the main, to the additional capital requirement. With my borrowing hat on, which is the other function of obvious relevance to Anglo Irish Bank, the recapitalisation is to be done by way of a promissory note drawn down over a period of ten years. In our discussions with the three main ratings agencies, they have taken the view, to use the language used by the ESRI, that it is perfectly manageable within the context of the State’s borrowing programme. The announcement of the additional requirement had no impact on the State’s credit rating.

    Deputy Joan Burton: I refer to the €8.3 billion for Anglo Irish Bank and €2.6 billion for the Irish Nationwide Building Society. Does this mean the IOU or annual payment over ten years will be €830 million per year for Anglo Irish Bank and €260 million per year for Irish Nationwide Building Society, which would come out of current spending? Will it be the first item in the budget for forthcoming Ministers for Finance and will in excess of €1 billion be paid for ten years for both of these IOU’s or promissory notes?

    Mr. John Corrigan: Obviously, that is the answer to the maths question if one takes it on the basis of a straightforward average. As regards whether it comes out of current spending, to be frank I am not up to speed on where exactly in the budgetary accounts—–

    Deputy Joan Burton: By European law it cannot come out of the National Pension Reserve Fund, or can it?

    Mr. John Corrigan: No, it must come from the Exchequer, but the question of whether it comes from current or capital expenditure was rattling through my mind as the Deputy put the question and I do not know the answer. The Deputy is correct to state it must come from the Exchequer.

    Deputy Joan Burton: Either way, it would be a part of the annual spend.

    Mr. John Corrigan: Yes. Either way it would be part of the annual borrowing requirement.

  48. 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?

  49. @Ahura

    Well present crazy policy appears to be for the sovereign stallion to cover ‘EveryThing’ ……………. [think you are right on here ………. ]

    Posted by Tracy Alloway on Apr 15 10:55.
    Like the plot-line of a tragic libretto, Opera Finance CMH ’s good fortune has taken a sudden turn for the worse.

    Cue the ballad.

    Opera CMH is one of the few commercial mortgage-backed securities (CMBS) deals with significant exposure to Irish real estate — including shopping centres in Dublin. Given the extent of Ireland’s property crash, it’s been fairly amazing how Opera has been able to keep the valuations of its real-estate pretty steady. In June for instance, Opera’s properties were being valued at €534,989,641, giving it a loan-to-value ratio of 70 per cent. Fitch Ratings had been pretty skeptical of some of Opera’s valuation, saying back in January that an LTV of 101-127 per cent might have been more realistic.

    Finally on Thursday, we got the following statement from Opera:

    The Borrower expects that the Junior Loan will be transferred to NAMA later this month. As instructed by the Junior Lender, the properties were revalued by DTZ Sherry at €342,190,000 as at 30 November 2009.

    That’s a rather big drop over the course of four months. And as Michael Cox over at Chalkhill Partners notes, it pushes up the deal’s loan-to-value ratio to 110 per cent. It’s not a problem for the senior loan, but the junior loan — the one going into the Irish government’s Nama – has an LTV covenant which might just have been broken. Lucky then, the Irish taxpayer is about to take the whole operatic bond off the junior investors’ hands. Deus ex machina, and all that.”

    http://ftalphaville.ft.com/blog/2010/04/15/203426/operatic-structured-finance/

    IRISH STOCK EXCHANGE ANNOUNCEMENT

    http://www.ise.ie/app/announcementDetails.asp?ID=10450719

    @All

    Quinn accepts Administration

  50. 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.”

  51. 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?

  52. Re Opera Finance CMH:

    It looks as though this transaction isn’t a securitization of an Irish bank’s commercial mortgages. It seems to be Treasury holdings via REO. It’s quite creative (and a cheap source of credit). The issuer (spv) makes the loans. The funding mechanism has a senior and junior split.

    The senior is made up of €375m worth of notes. The junior is an Anglo loan for €50m (leverage in a leveraged position 🙁 I wonder what capital charge the regulator required).

    The asset reference pool is quite strong. See page 61 (64th page of pdf) of http://www.ise.ie/debt_documents/opera_5328.pdf . Nice to see who the tenants are, the annual rent and the buildings involved (oh, the commercial sensitivity!).

    The document linked (above) gives the terms of the notes. With reference to the LTV covenant / Junior Event of Default, I’m not clear on what the consequences are for Anglo. In certain circumstances the Senior notes can call for their money back, with the junior having the option to purchase the senior notes. I don’t know if Anglo is otherwise required to increase their loan amount (i.e. the level of subordination for the seniors).

    We know the reference properties were revalued by DTZ Sherry at €342,190,000 as at 30 November 2009. Given that the senior debt is €375m, Zhou & Jagdip – care to speculate on the NAMA transfer price?

  53. @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.

  54. @zhou
    I’ll run a few statements by you and you tell me if you’ve heard government arguments/talking points to that effect:

    EVIL TAX AVOIDERS! No. EVIL QUANGOS! No. EVIL PORK SPENDING! No. EVIL BONDHOLDERS! No. EVIL MANSION OWNERS! No. EVIL BOOM GOMBEENS! No. EVIL LAND SPECULATORS! No.

    EVIL PUBLIC SECTOR WORKERS! Yes. I bet you’ve heard many statements to that effect. The only people the government declared a media war on were public sector workers.

  55. @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?

  56. @All
    Error in letter:
    The US only has about 290 million people not 350 million. Also our bailout may cost only €25Bn per the ESRI. Seems a bit low.

  57. @Brian Flanagan
    Thanks. That’s a very useful summary of the costs to date and the possible future costs. Morgan Kelly originally forecast €35Bn plus €25Bn interest (and NAMA was originally due to spend €5Bn finishing projects). He gave €42 Bn plus interest as the worst case. Stupid optimist.

  58. 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?

  59. @Pat Donnelly
    Whatever about this particular case, it is clear that in the overwhelming number of cases of reckless or improper behaviour our banks have been covering up what happened or endorsed the misbehaviour, as did the regulator. We have suffered a colossal, self-inflicted financial defeat.

  60. @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.

  61. @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!”

  62. On a theme closer to Brendan McD’s appearance, what did folk think of Elderfield’s performance the next day? I could see interest in a separate posting re Elderfield should one of the main folk want to create a separate discussion on Elderfield’s comments to the Committee?

    Also there seems to be a bit of discussion about whether banks under financial pressure will examine if they can move borrowers off ECB trackers. The latest articles I have see are in the Sunday Business Post (at http://www.thepost.ie/story/?jp=eyidgbcwsn), Sunday Times (at http://www.timesonline.co.uk/tol/news/world/ireland/article7100692.ece) and Independent (at http://www.independent.ie/business/personal-finance/property-mortgages/bank-offers-borrowers-83641000-if-they-switch-mortgages-to-rivals-2141972.html and http://www.independent.ie/business/personal-finance/lenders-deny-claim-theyre-seeking-to-alter-tracker-mortgages-2140419.html). Probably worth a separate posting but perhaps the topic is a too consumerish for this blog? Quite a bit of stuff on askaboutmoney and boards blogs.

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