Author: Karl Whelan

Mortgage Modifications

As posted earlier, Brian Lucey has a timely article in today’s Irish Times on the government’s plan to perhaps have a plan to help people who can’t pay their mortgage.

Brian makes a number of important points on this issue (moral hazard, fairness of helping those who took out excessive mortgage, limited capacity of these banks to take further losses leaving it back on the hard-pressed Irish taxpayer, bankruptcy reform).  I was going to post a comment on it but the thread’s already really long and I wrote too many words, so I’ll put this on the front page instead.

I’d like to add to Brian’s points by discussing a stylized example in which a mortgage modification plan could work in the sense of easing the difficulties of current owners without costing the bank or taxpayer anything. Then I’ll note how the conditions of the stylized example won’t necessarily hold in many cases.

Continue reading “Mortgage Modifications”

New Responsibilities for NTMA

A busy day, with lots going on. But I think it’s worth flagging this story about new responsibilities for the NTMA.

The move is understood to be aimed at creating a sharper focus on the State’s financial interest in the banks, while leaving Mr Lenihan and the Government to address broader economic and social concerns.

It may also serve to alleviate European Commission concerns about political interference in day-to-day financial decisions being made by institutions receiving support from the State.

The main functions being delegated include discussions with the so-called covered institutions about their capital needs, as well as discussions in relation to “realignment or restructuring” within the banking sector.

The NTMA will also be delegated with the Minister’s powers in relation to the management of the State’s shareholdings in credit institutions, and some remaining functions under the State guarantee scheme.

It will also be delegated functions in relation to the giving of advice on banking matters generally, including issues relating to crisis prevention, management and resolution.

The distancing of the managing of the state’s control in banks that may soon be partly or fully nationalised is a good idea. The rest of the announcement I’m more puzzled by. I would have thought that the capital needs of the banks was an issue for the Central Bank to discuss with the covered institutions rather than the NTMA.

More generally, I can’t imagine there are too many countries that use their government bond issuance office for “advice on banking matters generally, including issues relating to crisis prevention, management and resolution” so I’m not sure why we are.

Constantin Gurdgiev discusses the annoucement here. He argues that there is a conflict of interest between obtaining the best return for NAMA and obtaining the best return on the government’s bank shares, presumably in relation to the pricing of the assets to be transferred.  Of course, if the government owns both the banks and NAMA, this conflict of interest would more of an ecumenical intra-NTMA matter.

Explaining Banking to Bank Directors

The Federal Reserve has announced a new initiative: A website to explain banking to new bank directors. No, really, they have. From the press release:

“Many people who are asked to serve on bank boards have little training or experience to prepare them for their new roles,” said Patrick M. Parkinson, director of the Federal Reserve Board’s Division of Banking Supervision and Regulation. “This website has been developed with new directors in mind, but there is plenty of useful information for those who have already spent time on bank boards.”

In relation to the Irish banks, one can certainly argue that bank directors with little experience of banking, finance or economics played a role in their downfall. It will be interesting to see if this is an issue touched upon by Mr. Regling in his report to the banking enquiry.

This raises a more general question: Why are bank boards so commonly made up of people with little relevant experience? Is this an issue that needs to be addressed by regulators in the future? Or is it too much to expect bank directors to have technical expertise and these issues are best left to management, with boards simply overseeing corporate governance issues?

Price Reductions on Off-Patent Drugs

The news that the government has negotiated a 40% reduction in prices with the Irish Pharmaceutical Healthcare Association for 300 off-patent drugs (announcements here and here) got the warm fuzzy feel-good treatment on last night’s RTE News at 9 (the word patent did not make its way into the two-minute report). 

This is, of course, undoubtedly good news, particularly for those with regular prescriptions for these drugs. Being a dismal scientist, however, I’m always looking for the catch: Is asking nicely for price reductions the way to tackle our budget deficit or are these cuts just an indication that we’ve been paying too much for drugs all along?

The Irish Times newspaper piece by Eithne Donnellan reports about the negotiations between the Minister and the IPHA and then poses a pointed question:

Very quickly the IPHA – which represents all the major drug firms such as Pfizer, Roche, GlaxoSmithKline and Merck Sharp & Dohme – agreed to cut prices of its off patent drugs by 40 per cent if the State didn’t touch the cost of their proprietary or branded drugs for another 18 months. The new deal takes the IPHA up to March 2012, replacing the one due to expire this September.

But if prices could be reduced this much, were the manufacturers of 90 per cent of the drugs on the Irish market just ripping us off all along?

Indeed, this deal comes after another deal struck in 2006 to reduce the prices of these drugs by 35%.  So another version of this story is that these deals expose how much money the state has been losing over the years by paying high prices for branded off-patent drugs instead of purchasing generics.

I don’t claim to be an expert in this area, so I’d like to hear from those who know it better. Is this the best we can do or could the state find further savings in this area?

Further Delays on NAMA

When the NAMA bill was being debated in the Dail last Autumn, the public was regularly told that the plan was to have the first tranche of loans transferred by the end of last year. Today’s Sunday Business Post reports that further delays are now expected due to delays in preparations at the banks and due to the absence of clearance from the European Commission. The story reports that a verdict from the Commission may not come until the end of February at the earliest.

Stories such as this and this from the today’s Sunday Tribune also make it clear that it is going to be very difficult to attract private funds to the banks. At this point, it is perhaps a legitimate question to ask whether events have not overtaken the whole NAMA-Long-Term-Economic-Value strategy to keep the banks out of some form of temporary nationalisation.