Are One Third of NAMA’s Loans Producing Cash?
This post was written by Karl Whelan
I received an email recently from someone who objected to my characterisation of NAMA’s goal of being cashflow positive as something of a loaves and fishes act.
The argument put to me was that while Brendan McDonagh says that only one third of NAMA’s loans are income producing and NAMA is projecting to pay a discount of 47% for these loans, the fact that the interest rate on NAMA’s income generating loans are higher than on its bonds means that it will still generate positive cash flow.
Specifically, NAMA’s bonds will pay six-month Euribor while, we are told, that its assets are generally Euribor plus two percent. In this case, NAMA would be cash flow positive as long as 0.33(i+2) is greater than 0.53 i. This requires i < 3.3. In other words, as long as six month Euribor is less than 3.3% (it’s currently about one percent) then NAMA would be cash flow positive.
I don’t disagree with the algebra of the above paragraph. But I do disagree with some of its underlying assumptions. I’m going to write a couple of posts on the various aspects of NAMA’s cash flows.
Here, I want to discuss the extent to which NAMA’s loan portfolio is generating cash.
Appearing before the Oireachtas Finance Committee on April 13, NAMA CEO Brendan McDonagh made the following statement:
When we received information from institutions last summer, the indications were that 40% of the loans were cashflow producing. From tranche 1 and the figures we have seen to date - we are still in the process of finalising the figures for Anglo Irish Bank - we estimate the figure is probably closer to one third, that 33% of the loans are cashflow producing.
Later, McDonagh made it clear that this one-third figure referred to the fraction of original face value that is currently performing:
Out of the €80 billion portfolio, we originally expected that 40% of those assets, or €32 billion, would be cash-flow producing. The reduction to 33%, or €27 billion, means €5 billion less in loans from which we can expect cash-flow. That clearly has an impact on the income of NAMA.
These statements have received a lot of attention from the media. Indeed, they have been considered something of a bombshell. However, there is plenty of publicly available evidence to suggest that cashflow producing loans now account for less than one-third of the original value of NAMA’s loans.
McDonagh’s statements on this matter have generally been considered important partly because people imagine that only NAMA have looked through the detailed loan files of the banks to assess which are producing income and which aren’t. But NAMA appear to have only looked in detail at a limited fraction of the loans. And the banks themselves have already released information about the quality of the loans going into NAMA which, taken together, imply some interesting questions about McDonagh’s figures.
Annual reports for 2009 have now been released by Anglo, AIB, BoI and INBS. Together these banks account for €79.7 billion of the €81 billion in loans that are going into NAMA (the rest are accounted for by EBS). In these reports, the banks have provided information on the performance of the loans going into NAMA. The loans are classified as either “Past Due but not Impaired” (meaning less than 90 days past due) “Impaired” (over 90 days past due) or “Neither Past Due or Impaired”.
Here’s what these reports show.
1. Anglo: €6.6 billion of the face value of €35.6 billion are neither past due or impaired (page 84).
2. AIB: €10.4 billion of the face value of €23.2 billion are neither past due or impaired (page 30).
3. BoI: €5.4 billion of the face value of €12.2 billion are neither past due or impaired (page 71).
4. INBS: €1.4 billion of the face value of €8.7 billion are neither past due or impaired (page 91).
Add them up, that’s €23.8 billion of the €79.7 billion that are neither past due or impaired. That’s 29.9% of the total.
Now you could say that’s about a third, so McDonagh’s statement isn’t too far off. However, for property development loans “neither past due or impaired” is not the same thing as “cashflow producing.”
One person who agrees with me about this is Brendan McDonagh. In his Oireachtas appearance, Mr. McDonagh said:
The first point raised concerns the issue of performing and non-performing loans. This is something of a red herring in the context of the way in which banks produce their figures. They regard a loan on an interest roll-up as performing, whereas NAMA and I are interested in those which are cashflow producing. When I indicated one third are cashflow producing I meant the borrower is paying cash on those loans, which is important for us because we will have to pay out cash on the debt we issue.
Mr. McDonagh admitted in relation to the first tranche that “We estimate the interest roll-up throughout the portfolio to be in the region of 12.5% of the overall book.” When you consider the relatively short term of most development loans and the relatively low interest rates available in recent years, that’s a lot of rolled up interest, suggesting this practice was widespread.
And it’s not just a historical practice either. This is still ongoing with loans that NAMA are taking over and they intend to stop this practice. Again, Mr. McDonagh at the Oireachtas:
A number of the loans, particularly for land and development, have the feature of interest roll-up, whereby the interest is effectively capitalised on an ongoing basis. NAMA is obliged to step into the contractual shoes of the bank when it acquires a loan. It is no secret for me to disclose that when the interest roll-up periods expire, my view - I believe it is also the view of the board of NAMA - is that we will not engage in further interest roll-up with borrowers.
So, let’s recap. The banks that account for almost all of NAMA’s loans report only €23.8 billion in performing loans as of December 2009. Even if all of EBS’s NAMA-bound loans were performing (and they’re not) that would imply a maximum of €25.1 billion in performing loans as of December 2009. Since then, it is likely that some of the loans classified as performing have been reclassified as non-performing as other developers fall behind on payments. And many of the loans that are counted as performing are generating no cash because they are simply rolling up interest.
So while Mr. McDonagh says that NAMA is obtaining €27 billion in cashflow producing loans, it seems to me that publicly available evidence suggests that this is not the case.
Tags: NAMA
April 25th, 2010 at 9:34 pm
“So while Mr. McDonagh says that NAMA is obtaining €27 billion in cashflow producing loans, it seems to me that publicly available evidence suggests that this is not the case.”
Perhaps one of the owners of this blog would like to call him tomorrow and ask him to comment on that - on this thread?
I would be very interested to read his answer.
April 25th, 2010 at 10:01 pm
@Joseph
Can I link the following to your request for comment by Nama:
1. Why is there are major 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? My guess is that it is due to write offs of rolled up interest (arising 2010-2020) on non-performing loans amounting to about €10 bn over 10 years.
2. Why the calculated interest rates based on these tables are much higher than one might have expected?
Details at http://www.planware.org/briansblog/2009/10/nama—the-real-default-rate.html#more
April 25th, 2010 at 10:10 pm
They might be tweaking the difference between cash flow producing and impaired. Example — if a borrower is missing principal payments but maintaining interest, would he be impaired but cash flow producing?
April 25th, 2010 at 10:40 pm
@Frank Galton
I agree with you, sort of. I wouldn’t be surprised if, for example, Mr. Carroll’s loans in respect to the Gasworks are ‘cash-flow producing’, because some of the apartments have been rented out and there is a trickle of income coming in. Likewise there are occasional sales being made around the country and no doubt these could be counted on an annual basis (i.e. over the year, 500k was paid on this loan of 200mn… or three apartments were sold…).
What we really need is some idea of what “cash-flow producing means” - does it mean a regular stream of income in line with the original loan agreement (i.e. neither past due nor impaired), or in line with a rearranged agreement (past due, but not impaired?), or an irregular stream of income (not past due, but impaired?). This may explain the difference between the banks accounting and Mr. McDonogh’s - he is seeing a third of the payments that would be expected; from the banks accounting point of view, some of these are too small/too irregular to be considered regular income.
On perhaps a related note, I notice that Anglo’s first tranche has now cost us 500 mn less… two and a half general hospitals saved… Could that be because someone else has missed his deadline for payment at the end of his rollied-up period?
April 25th, 2010 at 11:22 pm
“A number of the loans, particularly for land and development, have the feature of interest roll-up, whereby the interest is effectively capitalised on an ongoing basis. NAMA is obliged to step into the contractual shoes of the bank when it acquires a loan. It is no secret for me to disclose that when the interest roll-up periods expire, my view - I believe it is also the view of the board of NAMA - is that we will not engage in further interest roll-up with borrowers.”
Wasn’t it also clear from the bank accounts that a significant proportion, can’t remember the exact figure but I think it was 60%+, of the loans are due to be repaid in the next 12 months.
If NAMA isn’t going to roll over the loans it will either have to force repayment or foreclose. Neither of these options seem to be built into the expected cashflows.
April 25th, 2010 at 11:24 pm
All,
rather than obsessing over whether 29.9% or 32% or whatever percentage of NAMA loans are impaired, could we move the discussion on to what NAMA is going to do and when is it going to do it?
It now appears to be the owner of a portfolio of loans to developers, many of whom are insolvent. Others may have underlying assets from which value could be extracted. Yet we have no clue yet as to how NAMA proposes to move from here.
April 25th, 2010 at 11:50 pm
@ Karl
You’ve expended an impressive amount of time and energy knocking on the NAMA closet door. I hope one day soon you’ll get to see exactly what’s in there.
P.S
Have you had a chance to say ‘I told you so’ to G.Fitzgerald yet?
April 26th, 2010 at 5:35 am
Tull mcadoo
Agreed!
As I understand it, nothing is liquidated until GFF lose power at an election or by coup. Then some fowl birds come home to roost. Given that the lazy greedy voters may well be bought off by grotesque, UBU promises, that may be over a decade away. By then all the revenue will be devoted to paying off interest on the national debt.
Karl’s point is that NAMA is operating as we all predicted so far and will still be a disaster as we all predicted. Except for Eoin and Chow. They seem to have abandoned all rational attempts to defend NAMA.
May we have a statement from those who still support NAMA?
April 26th, 2010 at 7:18 am
@Karl,
I take issue with the assertion that 6 mth Euribor of less than 3.3% would mean NAMA breaks even cashflow-wise. 95% of the NAMA consideration is in NAMA bonds on which NAMA pays 6 mth Euribor. The remaining 5% is in subordinated bonds which have a nasty interest rate (10-year govt bond plus 0.75 which for March/April will be an average of 5.5% in total - the terms for both securities are now on the NAMA website and are worth a read and I think the fact that the riskdebt carries such a high interest rate has been ignored).
In the inequality (0.53*i*0.95)+(0.53*5.5%*0.05)<0.33(i+2), i needs to be less than 2.1%. As you say i, 6-mth Euribor is currently 1%. It is forecast by the CB to rise to 1.75% next year so for 2012 the sums might get iffy. 3.3% might seem some years away into a European recovery but 2.1% is not all that different to the 1.75% forecast for next year?
April 26th, 2010 at 7:34 am
Oops, early morning mistype - instead of 2.1% above, meant 2.9%.
April 26th, 2010 at 7:55 am
@Tull
“rather than obsessing over whether 29.9% or 32% or whatever percentage of NAMA loans are impaired, could we move the discussion on to what NAMA is going to do and when is it going to do it?”
indeed…not like you Tull to obsess about figures when the bigger picture is whether the entity under discussion is alive or dead.
April 26th, 2010 at 9:36 am
@Karl, @Jagdip
the interest rate “i” should in fact be a swap rate (fixed vs 6m euribor) with maturity corresponding to the length time that NAMA holds the portfolio.
since NAMA will be around for much long than 6m, it is IRS rates, not the 6m euribor which is relevant.
if NAMA hedges out its interest rate risk for 10y it would pay 3.25%. for 5y the rate is about 2.4%.
April 26th, 2010 at 9:37 am
@ yoga,
I agree with you, sort of. I wouldn’t be surprised if, for example, Mr. Carroll’s loans in respect to the Gasworks are ‘cash-flow producing’, because some of the apartments have been rented out and there is a trickle of income coming in. Likewise there are occasional sales being made around the country and no doubt these could be counted on an annual basis (i.e. over the year, 500k was paid on this loan of 200mn… or three apartments were sold…).
I have often referred to Simon Kelly’s article in the Sunday Tribune, Thank you, Anglo, for being there for business. What Simon’s article demonstrated is the extent to which risk had to be eliminated in the initial phase of the Celtic Tiger boom, to enable development to accelerate in scale and output appropriate to the rapidly expanding growth of the Irish economy. In other words, there were dangers of bottlenecks in basic organisation of projects to accomodate multi-national employers in Ireland. Of course, there had to be a coordinated effort between the political establishment, lending institutions and the construction industry, to ensure the Irish economy wasn’t hampered too severely. But we can see now, how those relationships and institutions which were so useful in the earlier days, became the problem in the second phase of the Celtic Tiger boom, where things became fuelled more by debt and speculation. Many players in the game had made mistakes in the first phase of the Celtic Tiger, where if they had jostled their way into the right position, they could have charged into a lead position. That was what was going through their minds in the second debt-fuelled phased of the Celtic Tiger. They were using debt to jostle with one another, to get into key positions for a ‘third phase’ of the Celtic tiger. Of course, they thought the third phase of the Celtic Tiger (which never happened, the opposite did) would be based on real positive economic growth in Ireland. I.e. The much anticipated third phase who be more like the first phase and less like the second phase. But of course, we all now understand in hindsight the third phase was an mass delusion and its brief few years, is responsible for the worst of the problems we find ourselves in today. I once saw a documentary on Channel 4 television about The Real Casion Royale. I noted one interesting aspect of the documentary, that Lord Lucan was allowed to win a large sum of money at his first night in the casino and never won another cent afterwards. But he kept on trying until he had worked through most of his fortune. What NAMA is tasked with doing, is trying to manage somehow the fall out from that sort of situation. The third phase of the Celtic Tiger which never came. BOH.
http://www.tribune.ie/business/news/article/2010/apr/04/back-to-business-simon-kelly-thank-you-anglo-for-b/
April 26th, 2010 at 9:44 am
@ yoga,
I remember during the final days of trading at Liam Carroll’s companies, the penny had actually dropped. All of the directors were actually re-focussed on the issue of cash-producing assets, rather than on acquiring non-cashing producing assets financed through debt (the jostling for position in the race I referred to above). But of course, by the time the penny had dropped it was too late. My question is this, what information or what hymn sheet were those same directors working from prior to the penny dropping? Who composed and printed the hymn sheet, and who distributed it? And why was it taken as gospel? My instinct and recollection would indicate very strongly, it was the banks who came up with the song that everyone learned to sign. It wasn’t until the writing was on the wall, the guys in Liam Carroll’s operation, realised they were wearing emperor’s clothing, and started to think about self-preservation, rather than being so trusting of their lenders. I know a lot of them felt seriously betrayed and still do, to this day. BOH.
April 26th, 2010 at 9:49 am
I think YM & FG have hit the nail on the head. A loan does not have to be “performing” or “neither past due or impaired” to be “cash-flow producing”.
The confusion is the result of there being no consistent taxonomy. We had the same problem before with “land and development” and also with asset values, loan values and property values. We are left to make best guesses on items which should be crystal clear.
In the current case, we are looking at 33% of loans. Is it 33% by volume or number. One would assume it is by volume.
If a loan for €100m is producing cash to cover interest on €70m then is €70m of the loan considered to be cashflow producing by volume while the other €30m is considered non-cahflow producing notwithstanding they are part of the same loan? One would have to assume so. Otherwise, a loan for €10bn could be said to be “cashflow producing” if if was producing cash to service interest on €1m.
Of course, there is the possibility that defferent elements of facilities are viewed as separate loans. This would mean that a loan of €50m for an investment property such as an office bloack would be cashflow producing if it was half let and servicing 70% of the interest. However, if that is the case then the statistic is meaningless.
Accordingly, my best guess is that what McDonagh’s statistic means is that the combined loans are producing enough cash-flow to service the interest on 33% of the debt.
Otherwise it is a meaningless statistic. I think it unlikely that McDonagh is feeding us meaningless statistics. As pointed out by YM and FG, this is not inconsistent with the banks’ statistics quoted by KW above. Much of the cashflow could be coming from past-due or impaired loans.
April 26th, 2010 at 9:54 am
@bg
What is your basis for asserting NAMA will pay swap rate interest on NAMA bonds. I have read the term sheet which is available on the nama.ie website and heard what Brendan McDonagh told the Oireachtas Joint Committee - the transcript is now available at the Oireachtas website. There is nothing whatsoever mentioned about hedges and the impression given both by the term sheet and what BM said was that NAMA would pay whatever the 6 month Euribor rate was for the relevant period.
You assert differently. On what basis? (Not meaning to be confrontational but you can see where I get my view from - nama term sheet and CEO, where does yours come from?)
April 26th, 2010 at 10:03 am
@ zhou_enlai,
yoga may have hit the nail on the head, but that isn’t a fair judgement of how well these various loans will perform. What I described was the situation as the bubble inflated to such a degree in 2006/07 that build-er(s) were focussed more and more on the asset price inflation side of the equation - that they were persauded by short sighted advice on the lender side, to take their eye off the important side of the equation, the cash flow from assets. Of course, as the dust settled on the Celtic Tiger, the focus of the build-er(s) once again returned to what they do best, which is to make up their own hymn sheet, and develop assets which are cash flow positive. There was a brief period there around 2006/07 where the lenders sold the same story all over town - that it wasn’t about the dividend, it was all about the asset price inflation, and that ‘traders’ who received credit from lenders, needed to trade on asset prices, rather than on immediate dividend potential. It was a tailor made replica of the dot.com madness. The problem was the lenders persauded the build-er(s) to throw out their original rule books. Perhaps telling their borrowers it, we the lenders know better than you. Listen to us. BOH.
April 26th, 2010 at 10:10 am
@bg
read my post again. i am saying that the effective interest “i” which appears in Karl’s formula can be implied from the swap market. very simple, and consistent with underlying notes paying 6m euribor.
NAMA can choose to lock in the current implied 6m euribor curve over a chosen term using swaps at current rates. these are potentially massive swaps. they are unlikely to go blabbing in advance about that.
April 26th, 2010 at 10:25 am
@ Jagdip and BG
I think you’re both right. Letter from NAMA to the IT
http://www.irishtimes.com/newspaper/letters/2010/0403/1224267630951.html
“The NTMA, acting on behalf of Nama, will execute Nama’s interest rate hedging strategies in the capital markets to deal with interest rate risks as appropriate.”
NAMA are certainly paying Euribor on their principal bonds, as Jagdip says. But if the risk is fully hedged, then perhaps JG’s calculations are more appropriate. Getting ahead of myself here as I had intended to discuss all this in Loaves and Fishes, Part Deux some time in the next few days. Anyway, keep it coming and I’ll try to sum up about the cash flows (and the various interpretations of what that means) in a day or two.
April 26th, 2010 at 10:39 am
@Karl
Thanks and to bg, accepted there appears to be hedging.
However, from my very limited treasury management experience, does not NAMA paying 1% 6 month Euribor plus hedging premium, which if I understand bg correctly, could be in the 2-3% range (are the rates quoted by bg the total rates or just the premia above the 6 month rate?). Does not the locking in of rates at say 3.25% total expose NAMA to loss if the euribor rate stays at 1% for the next decade? As Michael O’Leary was fond of saying Ryanair didn’t used hedge (I think that changed when oil prices came off 60% of their highs) and it oftentimes battered the competition by not doing so.
April 26th, 2010 at 10:59 am
@BO’H
“yoga may have hit the nail on the head, but that isn’t a fair judgement of how well these various loans will perform.”
Oh, of course not. This is just how they are currently performing. In part it is sematics, or zhou’s kinder word of taxonomy. The NTMA/NAMA being a public service organisation (despite its denials!) there will be very careful language used. Descriptive names will both reveal and conceal. It is not so much spin as a particular form of cryptic crossword language. Certain words or phrases have certain meanings. You can take those meanings to the, er, bank.
So it is not just semantics, it is about getting the meaning behind the words - when an EU report ‘questions’ something in the public accounts, you can be sure it will cause late nights in the department of finance. If we can figure out what is meant by “cash-flow producing”, we will be able to infer some measure of future performance.
April 26th, 2010 at 11:03 am
@Frank/Yogan
“What we really need is some idea of what “cash-flow producing means”
Human nature I’m afraid. When you are trying to put the best foot forward then if the loan has produced any sort of cash flow at all - even €10, then it will be included in the cash flow producing loans.
What we’re getting and will continue to get is a drip drip feed of things are a little worse than we thought (hence the €500m less to Anglo). Security will continuously weaken, cash flow will “cease”, values will drop. Anglo/INBS will cost more and more …… If they want the general public to be less gloomy they need to get the bad news out there in one dollop and stop the drip feed.
April 26th, 2010 at 11:15 am
@ yoga,
I have a question for you. When lenders in the United States persauded their borrowers to back things like ‘Pets dot com’, to whose benefit was that? Anyone with a clue would know that ‘Pets dot com’ was a questionable risk. Worth a punt or two maybe, but to the extent that so many investors waded in, to whose benefit was that? Pets dot com didn’t perform very well. It was never set up to perform very well as an entreprise, and that is the point. Who benefitted from that departure from sound business trading analysis and principles? Why do their asset bubbles, these departures from principles keep occuring and who is benefitting, short term or otherwise? I have my own ideas, which I will not bore you with, but I wanted to put the question to you.
Another question. Where a build-er, during the Celtic Tiger in Ireland was forced into a strategy where they completed commercial development which lied empty for years, who benefitted from that arrangement? Was it the case that valuations of the original loan amount improved? The original loan being to buy land, and pay for construction costs. The question I am asking is, in terms of the banking business model, and its balance sheet, how is it affected by so much expansion of assets, and development of assets, in the absense of a plan otherwise, to seek cash flow from the same? How does that work? I mean, as a genuine economics question. Is it the fact, the bank institution is valued higher in terms of shareholder capital, because its asset base has expanded out of all proportion? I was reading in the SBP yesterday, the fact that Fingleton tried to present a picture of his insitution, INBS, for having high profit to capital requirement ratios. He did this by only employing himself and seven other people to manage €10 billion worth of assets. What was that about? Is it related to my questions above? Were all the bankers hoping to make windfalls from share appreciation? Was that the whole game? BOH.
April 26th, 2010 at 11:25 am
How does that work? I mean, as a genuine economics question. Is it the fact, the bank institution is valued higher in terms of shareholder capital, because its asset base has expanded out of all proportion?
Does that mean, with inflated shareholder capital, the Irish banks in the boom years, could lend even more? BOH.
April 26th, 2010 at 11:25 am
@BO’H
Para 1 question:
1. Greed and stupidity
2. Technical factors (mathematic modelling of greed and stupidity that makes it look like there could be a profit mainly)
Para 2 questions:
You are mistaking me for an economist!
You also seem to think that builders were forced to do this and that developers are just builders on a larger scale? I believe neither of these to be true.
April 26th, 2010 at 11:40 am
Overall, the zero spread on 95% of NAMA’s bonds should be welcome by the taxpayer. However, it leaves the banks in a weaker position as their funding costs are higher.
BmcD - “that 33% of the loans are cashflow producing.” – I read this as 33% are paying some money, which is different to 33% paying fully.
On future cashflows /modelling: when your starting point has only one third performing, it’s hard to survive many stress tests. There just isn’t much wriggle room for interest rate increases or further delinquencies. I’ve been doing a little work on US subprime mbs, one noble truth is that good loans tend to refinance (/paydown) and bad loans don’t have such luxuries and linger. If there are good paying loans in NAMA (which aren’t linked to a portfolio of bad), these may disappear at a higher rate. This is probably a bigger issue for loans outside Ireland.
On a completely different topic (one more good reason to close Anglo): Richard Curran in the Sunday Business Post had an interesting point. If it’s proven that Anglo misled shareholders and the same legal entity continues to exist, shareholders might be able to sue for losses http://www.thepost.ie/story/?jp=eyidqlqlkf Maybe that’s what the extra 10bn is for
April 26th, 2010 at 11:53 am
@ yoga,
I’ll get back to you, but I want other posters a chance to have their say in the meantime.
@ Ahura,
If there are good paying loans in NAMA (which aren’t linked to a portfolio of bad), these may disappear at a higher rate. This is probably a bigger issue for loans outside Ireland.
By that do you mean the good paying loan in NAMA will be paid down quicker?
I read the Richard Curran piece in yesterday’s SBP. That is really the question I am trying to ask about. The large asset bubble of Irish banking shares, was driven in no small part by the banks accelerated asset base expansion, which depended on a lot of negligence on the part of the banks, internal auditors etc, etc. Sunday Tribune’s Jon Ihle’s article Future shocks can’t be stressed enough, is worth a read. BOH.
http://www.tribune.ie/business/article/2010/apr/25/future-shocks-cant-be-stressed-enough/
April 26th, 2010 at 11:56 am
@Brian O’ Hanlon,
“By that do you mean the good paying loan in NAMA will be paid down quicker?”
Yes.
April 26th, 2010 at 11:58 am
Apoligises, it wasn’t Jon Ihle’s article I meant to link. It was Eamon Quinn’s article, How banks gave cheques without checks, I meant to link to, with regard to internal auditing and other checks necessary as part of due diligence proceedures. BOH.
http://www.tribune.ie/business/article/2010/apr/25/how-banks-gave-cheques-without-checks/
April 26th, 2010 at 1:28 pm
@Ahura
“On a completely different topic (one more good reason to close Anglo): Richard Curran in the Sunday Business Post had an interesting point. If it’s proven that Anglo misled shareholders and the same legal entity continues to exist, shareholders might be able to sue for losses http://www.thepost.ie/story/?jp=eyidqlqlkf Maybe that’s what the extra 10bn is for ”
The reality is Anglo did mislead shareholders and if there were a few US investors we would have a law suit by now. Maybe they are waiting for the DPP case.
April 26th, 2010 at 1:34 pm
@Stuart
“The reality is Anglo did mislead shareholders ”
What’s possibly worse is that it continued to mislead shareholders while there were public interest directors on the board. Whether or not this constituted ’state’ approval for any share purchases after the date of the director’s appointment is not one I really like to think about.
April 26th, 2010 at 2:12 pm
@SB/YM
NAMA will not take over any liabilities of the banks. Any counterclaim under a loan agreement will have to be made against the bank, not NAMA.
There should be legislation to the same effect for Anglo. There should be no liability under any of the old indemnities to directors. Similarly, there should be no liability for acts of the pre-nationalised entity beyond those covered by the Guarantee. With that said, I think people should be entitled to set-off against share debts if anglo got them to borrow the funds to buy shares based on misrepresentations, innocent or otherwise. Beyond that, people should only be entitled to the cover the bank could have provided if not nationalised, i.e. nil.
April 26th, 2010 at 2:18 pm
@Zhou
What I was worried about is that the minister’s nominees were appointed to a private bank. In the case of AIB and BoI, they have signed off on accounts. Should any malfeasance emerge with regard to information that was material to the share price and should have been placed in the public domain, but was suppressed by the directors of the bank, who will be sued? Traditionally it has been the board in toto. Director’s indemnity insurance has its limitations. Will Mr. Lenihan abandon his placemen? I doubt it (and he would be right not to!).
Anglo is more complex, in that accounts were only released after nationalisation so equity holders should have no complaint against public interest directors. However, I am not aware that you could just will away previous liabilities. That is why insurance companies have to hold reserves even against non-current policies, no?
April 26th, 2010 at 2:34 pm
@ All,
General points on legal entitlements of shareholders, bond holders etc. It appears as though shareholders in Irish banks did very badly indeed. It was the same in all countries, including Lehmans. It seems to have been a much better option to buy Irish bank debt than equities in the same. Related maybe to the point about Anglo’s shareholders being misled and possible litigation arising out of that, I noticed a story in SBP April 4th 2010, Merrion bond fund offers good returns, which again encourages larger investors to steer clear of equities. BOH.
http://archives.tcm.ie/businesspost/2010/04/04/story48341.asp
April 26th, 2010 at 2:36 pm
@ All,
Just for reference purposes, on the issue of due diligence in Irish banks. On April 9th 2010, Colm Keena reported in the Irish Times, Do question marks hang over the heads of auditors? Eamon Quinn’s article in yesterdays Sunday Tribune, which I linked above, is a very nice complement to Keena’s story. I think it Keena who probably got the ball rolling first. BOH.
http://www.irishtimes.com/newspaper/finance/2010/0409/1224267970377.html
April 26th, 2010 at 2:51 pm
@YM
I think it would be pretty much impossible to find the state liable for the actions of public interest directors in non-nationalised banks unless there were some sort of intentional misfeasance perpetrated on the express instructions of the Minister.
April 26th, 2010 at 3:02 pm
The Sunday Trib quotes the technical director of the CAI as saying that internal auditors check the documentation and external auditors focus on the recoverably of loans. Clearly, neither were doing their jobs in some banks.
April 26th, 2010 at 3:39 pm
@ All,
Off the topic of ‘cash from loans’. I wrote a response to the posters above, which as usual got far too long. I have added it as a subnote to my blog entry linked below. While the risk of litigation to the Irish state for Anglo, is a matter of concern, I believe there is a real sense now in which, a further prolonged police investigation into the Irish banking collapse, is getting in the way of progress in sorting out the mess. Yet the need to minimize future liability of the Irish state to claims from bank shareholders, is exactly what is providing incentive to the police investigation to take as long as possible. I have to ask the big question in my blog entry, Old foundations, what purpose is the police investigation really going to achieve, other than perhaps to minimise future exposure of the Irish state? BOH.
http://designcomment.blogspot.com/2010/04/old-foundations.html
April 26th, 2010 at 5:06 pm
@zhou
So an email saying “just sign the accounts” wouldn’t count? (Not that I have any such thing!).
April 26th, 2010 at 5:22 pm
@YM
Do we even know which directors sign the accounts? I don’t think such an email exists! If it did, I would expect the defence of “If Jimmy told you to jump off a bridge would you do that?”.
April 26th, 2010 at 5:34 pm
On the subject of the page in the hymn book and the gospel. The gospel according to Padraig was that never in the long history of Ireland has there ever been a time when property values declined. As the boom caught fire this was an article of faith as dearly held by Paudeen sitting on the side of a ditch in Duagh Co. Kerry as it was by the Princes of high finance living in cloistered luxury in Dublin 4. An unbroken run from 1987 to 2007 (2006 if you want to nitpick) burned the idea that we who have lived in relative poverty for so long and now at long last we are being rewarded for our suffering, justice is being done at last. In Irish terms the princes of finance were doubling their bets on the favourite at the Curragh and it was working for 5 then 10 then 15 years. The we cannot lose mentality was so deeply entrenched at all levels of society by then that disaster was inevitable. Where were the Central Bank of Ireland, Financial Services Authority, Banks, Building Societies all riding on the gravy train. There were a few brave souls in the Economist professsion who raised doubts about the medium prospects of a bust, they were met with a chorus of boos and charges sabotaging the economy because they begrudged the gains made by farmers who now had a new cash crop called building lots, developers who could count on being bailed out by 10% + appreciation and Bankers/Bldg.Soc. who went along for the ride. We must not forget FF and their aiders and abetters who drank deeply from an ever more bountiful botomless vessel. Then alas reality intruded and now we are now looking for the econometric models, professionsals , bureaucrats and politicians who might have saved us from ourselves. What saved us was economic collapse and had it been trigerred sooner the pain would have been less. Now we have learned a painful lesson which will last two generations. What the Weimar Republic and hyperinflation did for German thinking on Banks, inflation, thrift and responsible government FF has now done for Ireland. We will come out of this stronger, wiser and less prone to delusions of superiority. That is a good thing.
April 26th, 2010 at 6:47 pm
@ MH,
The gospel according to Padraig was that never in the long history of Ireland has there ever been a time when property values declined.
In other words, there were two decades of economic activity in Ireland, during which the cashflow from an investment was not certain, but the appreciation in value of the underlying asset was. If Karl Whelan will permit me, I would like to write a few lines in order to join together a couple of dots. The comment by Michey Hickey, makes me think of the tradition in Irish lending, of allowing interest to roll up and become bundled with the full loan amount. A tradition which NAMA is almost certain to break away from. Given the context Mickey Hickey describes, Irish lenders must not have been in a rush to confiscate the assets of defaulting borrowers. If the worse came to the worst, the lending institution could sell the assets and claim back the margin in value appreciation to pay them for their efforts as lenders. Which is not a good thing for borrowers over an extended period, as it encouraged them to become too complacent. In the end, both lender and borrower became so complacent as to offer and accept these infamous ‘personal guarantees’ as a substitute for real hard collateral.
I see stories in the newspapers at the moment, whereby limited companies have directors who offer ‘personal guarantees’ on loans to the same companies. Justice Peter Kelly raised the question recently, why go to the trouble of creating limited liability entities and then offer a personal guarantee? The newspapers contain stories of wifes of borrowers who offered personal guarantees, while still arguing to the commerical court, they would never do anything to jeopardise the family’s home. None of this adds up in logical terms, needless to say. It points to what Michey Hickey calls, delusions of superiority, on the part of Irish people. Given that context, there was no huge incentive for lending institutions to acquire skills in the accurate assessment of risk associated with any venture. We saw the case of Irish Nationwide, €10 billion of assets were managed by less than 10 people. That was sold to members of the society as being some kind of responsible asset value to administration costs ratio! I have to comment, the situation inside Irish Nationwide building society described by many journalists in the newspapers, of small numbers of people being in charge of vast amounts of capital investment, does sound eerily familiar to my own experiences of working for Liam Carroll. BOH.
April 26th, 2010 at 10:38 pm
In the absence of further comments from the Irish Economy brainstorm, I will offer this quote up for comment. It forms another crucial piece of the jigsaw puzzle from the point of view, of loan security and due diligence procedures. From an article by Neil Callanan, Ian Guider and Jon Ihle in the Sunday Tribune, Anglo faces further ‘haircut’ of €500m.
The loan transfers have been delayed in part because of the non-real estate collateral, including wine collections, art collections and equity portfolios, which had been pledged as part of the collateral for the loans. On a wider scale, Nama has discovered that many of the developer’s status symbols, like top of the range cars, were leased rather than owned by them.
http://www.tribune.ie/business/article/2010/apr/25/anglo-faces-further-haircut-of-500m/
April 27th, 2010 at 4:26 am
Oh God!
BOH has discovered how to use BOLD!
April 27th, 2010 at 4:46 am
zhou_enlai
Corporate law and directors’ responsibility is a well ploughed field, although nowhere as hotly pursued as libel.
Do you maintain that you have a legal qualification?
The main barrier to action against companies and auditors is the IMMENSE cost. Throwing good money after bad. In a depression, while many solicitors and barristers will act on contingency and class action, the problem is that adequate defence will slow justice until the liable defendant is without assets, paying off their own legal team as they go!
Insurance companies may end up insolvent in a depression and they pay for most of the honey available when suing auditors, who may have limited liability (I know they used to be unable to do this, but in a kleptocracy, it is virtually a given) and cannot pay the damages, although the plaintiffs lawyers may get a lunch out of it.
April 27th, 2010 at 9:10 am
@zhou
“Do we even know which directors sign the accounts?”
Yep. It’s in the accounts…
April 27th, 2010 at 10:27 am
@YM
I was hopig you would check it for me! I can’t see the signatures of Dukes or Daly on the accounts. I can see O’Connor on the 2008 accounts and O’Connor and Aynsley on the 2009 accounts. That is not to say that Dukes and Daly don’t have a checking role in relation to the accounts. The idea of investors suing the State is still outlandish in my book.
@PD
Do you posit that there is a cause of action? If so, by whom and against whom for what action causing what loss and how was it unlawful/giving rise to a liability?
April 27th, 2010 at 11:29 pm
@ Zhou_enlai,
I wrote something just now, but as usual it got quite long, so I added it as a sub note, Contractual relationships, at the blog entry linked below. It is not directly concerned with shareholders of Anglo sue-ing the state owned bank. But I tried to make some general points about the construction industry, and why parties in that industry sue other parties. Namely, the party (corporate or otherwise) who is sued the most is the one who has ability to pay. In the context we are talking about, Anglo Irish bank given its deep connectivity with the construction industry, backed by the Irish state, has painted a fairly large target on itself. That is my opinion anyway, for what it is worth. BOH.
http://designcomment.blogspot.com/2010/04/third-phase.html
April 28th, 2010 at 10:10 am
@BOH
Funders are generally well protected from claims by contractors et al unless there is novation, and even then the funder is generally not liable for payments made to the developer but not passed on. Any funder will assess the situation carefully before novating. In any event, these matters undoubtedly form part of the due diligence carried out by NAMA and so are likely to already be factored into the consideration paid.
April 28th, 2010 at 10:25 am
@ Zhou,
Fair enough. I think the more general conclusion I came in my blog entry sub note, is that to have some activity like construction at the heart of your economy, carries a specific kind of risk, because of the way construction is designed to fall like a deck of cards. Very fast and everything is supporting something else. Obviously Anglo was at the centre of it all for such a long period. The suddeness of the collapse in 2008 was felt all across the world. But I think because of the way the industry in Ireland was structured, it made things even worse. This is why I guess, construction activity should be moderated to an upper limit of size, in terms of GDP (and employment) at any one time. But what we saw in the Celtic Tiger years, and we all experienced, is in the middle of a boom, how politically difficult it may be to intervene. BOH.
April 28th, 2010 at 10:58 am
@BOH
Development is not designed to fall like a deck of cards. It is modular with the ability to replace contractors, subcontractors, professionals, insurers and even developers and funders as needs be. The problem is that funders in difficulty cannot be replaced in the Irish market at this time because the whole sector is banjaxed. This has nothing to do with contractual relationships and has everything to do with economic reality.
April 28th, 2010 at 11:05 am
@ Zhou,
Fairly sound analysis. I’ll have to keep working on my grand theory of everything then! BOH.
July 5th, 2010 at 12:21 pm
[...] ago, NAMA CEO Brendan McDonagh appeared before the Oireachtas Finance Committee and told them that one third of NAMA’s assets are cashflow producing. I noted at the time (based on the information in bank [...]