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.

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!”

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?

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?

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.

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.

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?

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?

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.”

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

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?

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.

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.

I sense that the findings of any similar Irish report would be much broader as the Icelandic crisis was concentrated on just three banks, a few ministers, central bank and regulator.

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

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.

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

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

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?

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

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?

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.