Category: Banking Crisis

AIB “too smart to buy this junk”

The AIB Chairman apologised today at the bank’s AGM for the self-inflicted problems caused by excessive lending to the property and construction sectors. At least, AIB avoided major losses in the US toxic securities sector  – as revealed in the Congressional hearings on Goldman Sachs, the GS view was that AIB was “too smart to buy this junk”.

See this report on the hearings and this extract featruing the committee chair Senator Carl Levin:

Levin chides Sparks for selling “junk”: In his second jousting session with Sparks, Sen. Levin questioned the former executive about the bank’s Hudson Mezzanine deal, reading an email from a Goldman salesperson in which she said that the client, Allied Irish Bank, was “too smart to buy this junk.”

“I didn’t believe it was junk. We didn’t believe it was a junk. A sales person said that,” Sparks said.

“Yes, if a sales person believed it was junk, you were selling junk,” Levin replied.

Bank of Ireland Capital Raising Plans

The Irish Times reports about Bank of Ireland’s capital raising plans here and provides links to all the relevant documentation so I don’t have to.

It is, of course, good news that there’s some sign that private investors are willing to invest in one of the Irish banks. Still (warning — malcontent comment alert) it’s perhaps best to put this in context. These private investors are now willing to do this because the Irish government is buying a portfolio of €12.2 billion in property and development loans from the bank, only €5.4 billion of which are performing, for €7.9 billion (assuming the initial 35% discount is applied to the whole book.)

The idea that private capital sources would renew their interest in investing in the Irish banks after loans had been transferred to an asset mangement agency was also an opinion offered last year by advocates of temporary nationalisation. Whether the route we’ve travelled to get to this juncture has been the right one is still an open question.

It is perhaps because there are still so many questions hanging over his approach to the banking crisis that Brian Lenihan persists with a rhetorical strategy in relation to the banks that largely depends on overstatements, half-truths and falsehoods such as his comments on Morning Ireland today about people who wanted to “nationalise the whole system”, about how temporary nationalisation would have lead to other banks becoming “just like Anglo” and how the bank guarantee scheme has been cost free, indeed how we’ve made a tidy profit out of it.

Are One Third of NAMA’s Loans Producing Cash?

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.

Continue reading “Are One Third of NAMA’s Loans Producing Cash?”

More on the Revised GGB

The Department of Finance explains the data revision here.  In terms of the GGB in 2010 and subsequent years, there is an interesting set of communication issues.  As per the DF note,  one approach is to make a sharp distinction between the ‘headline’ and ‘underlying’ GGB with the difference consisting of the ‘unrequited’ capital transfers into Anglo-Irish etc. (as opposed to the equity-type investments in AIB and Bank of Ireland).  This distinction may be effective if the bank-related capital transfers are a ‘once off’ event or a “twice off” event (ie 2009 and 2010) but may lose its force in relation to a steady sequence of capital transfers over the next decade.  To the extent that the promissory notes spread out the capital transfers over a long period,  this may be a downside to this approach relative to making a larger-but-final capital transfer in 2010.

Update/clarification:  The promissory note approach will not affect the timing of when capital transfers hit the GGB  (once the capital transfer is decided, it hits the GGB in that year in line with accruals accounting) or when the fiscal cost of bank re-capitalisation hits the gross government debt (again, it hits the gross debt at the time of the commitment, since the liability has been accrued).  Moreover, the impact on the gross debt happens immediately even if it takes time (as in the 2009 case) to determine whether the re-capitalisation is an equity-type investment or a capital transfer. The promissory note approach just spreads out the timing of the cash payments.

Eurostat Revises Irish Deficit to 14.3%

Eurostat has today announced that the Irish general government deficit for 2009 was in fact 14.3% rather than the 11.7% figure that the government has been reporting. Reuters report

Irish Finance Minister Brian Lenihan said this was a result of a technical reclassification associated with government support provided to the banking sector.

“It is important to note that the underlying 2009 general government deficit for Ireland is 11.8 percent of GDP, which is broadly similar to that projected in December’s budget,” he said.

“There is no additional borrowing associated with this technical reclassification. This is a once-off impact, and will not affect the government’s stated budgetary aim of reducing the deficit to below 3 percent of GDP by 2014,” Lenihan said.

Though the Eurostat document does not state this, the revision appears to be related to reclassifying the €4 billion used to recapitalise Anglo Irish Bank as part of the deficit (at this point, I can’t resist an I told you so moment.) If this is indeed the case, I’m not sure that the once-off impact comment is correct since there’s more money going in this year.  Hopefully it is indeed the case that we’re not still pouring money into Anglo in 2014.

Oh, they also revised the Greek deficit upwards and said mean things about Greek budget statistics. So nothing new there.