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See & Hear No Evil

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The search for the Anglo tapes whistleblower reminds us that the only person convicted in connection with the Beef Tribunal was a whistleblowing journalist.

The Minister of Finance has reportedly complained, in relation to the tapes, that the media should stop "mucking around in garda business".  Surely, politicians are the parties most guilty of "mucking around" for having failed to set up a robust and comprehensive public inquiry into the most damaging event in the State's history.

They also appear to have failed to provide adequate resources to the Fraud Squad, Director of Public Prosecutions and Office of Corporate Enforcement to complete rapid and extensive investigations into events that have left citizens footing a bill for at least €64 billion.

Lead letter in the Sunday Business Post on 14th July 2013.

Inquire and Take Action

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Through greed, incompetence and negligence a few hundred people have set this country back decades in economic and social terms, and have sullied its international reputation. In the few cases where "sanctions" have been applied, they have amounted to big pensions and fat payoffs instead of sanctions and reparation.

Notwithstanding the magnitude and duration of the crisis, we still have no clear plans for a proper public banking inquiry. As in other countries, a comprehensive, lawyer-free and apolitical inquiry could expose systemic failures and serve as a pathfinder for possible prosecutions. To progress this, last years's referendum on Oireachtas inquiries should be rerun in lieu of the planned Seanad referendum.

Because white collar crime can be extremely difficult to prove due to its complexity, wriggle room and "memory lapses", civil actions, as an alternative to criminal prosecutions, could be initiated against the key individuals against whom adverse inquiry findings are made. This route could reduce the burden of proof, speed up collection and presentation of evidence and reduce the duration and complexity of legal actions.

Letter published in the Irish Times on 27th June 2013.

Quick Banking Inquiry

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Will we ever see a report on the Irish banks like the UK's recent parliamentary report on HBOS?  Its  chapter headings read like a thriller - "The best board I ever sat on", "The price of failure", "Conclusion - a manual for bad banking".
 
I don't think the establishment has the stomach for a "full blooded" inquiry which would make the DIRT inquiry look like a picnic. As an alternative, our politicians could get a copy of the HBOS report and simply do a quick search/replace of names, places and dates as I suspect that the findings and conclusions could be left unchanged.

Letter published in the Irish Times on 15th April 2013.

Hypocrisy of Banks

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Reports that AIB is planning to sell a €200 million loan portfolio beg the question as to why taxpayer-owned and foreign-owned banks are selling huge blocks of loans at discounts as high as 70 per cent and crystallising losses amounting to billions while resisting any similar broad-based write-downs of seriously distressed home mortgages. 

These discounts are additional to the €40 billion taxpayer-funded losses realised when developer loans transferred to Nama at a huge discount. Surely, to be consistent and fair, the covered banks should be required to offer write-downs to all very distressed mortgage holders especially given that they have already been fully funded by taxpayers to do so?

Letter published in the Sunday Business Post on 31st March 2013.

Promissory notes: Call a Referendum

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I sent the following email about the promissory notes to all TDs and Senators this afternoon:

Hello

I have reproduced below a letter from me published in today's Sunday Business Post advocating non-payment of the promissory notes.

In it, I emphasised that payment would create a cash loss of €30 billion for the State and that non-payment would create NO cash loss for the ECB/ICB. This is a key point which distinguishes the Irish situation from sovereign defaults which have had serious ramifications for the defaulting states.

If the PNs are not paid, do you really believe that the ECB would apply sanctions to the "best boy in the class"? I think not as these would also provoke a huge euro crisis.

A write off of the €30 billion. as distinct from any other deal, would be transformational for the Irish economy whose the debt/GDP ratio is almost120%, or 150% based on GNP when fickle profits of multinationals are excluded. Let us face facts, this level of debt is completely unsustainable and tinkering at the edges will be fruitless.

Personally, I would like to see politicians work together (for once) in order to provoke a referendum on the question of payment of the PNs so as to settle the matter for once and for all for the electorate, EU, ECB and other international interests. This could be achieved by asking the Dail and Seanad to consider a Bill relating to payment and then, in accordance with Article 27 of the Constitution, getting a majority of the Seanad and one-third of the Dail to petition the President for a referendum on the grounds that the Bill "contains a proposal of such national importance that the will of the people thereon ought to be ascertained".

Such an initiative would have the overwhelming support of the electorate, even without anticipating the result of the referendum. It would also evoke a positive response from the financial markets, and even the ECB might get around to understanding that the circumstances surrounding the PNs were absolutely unique and required a euro-wide response.

Brian

[ To see the SBP letter, just scroll down to next entry or click ]

Don't Pay the Promissory Notes

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Professor Morgan Kelly, writing about the Anglo bailout in 2008, suggested that "the money might as well be piled up in St Stephen's Green and incinerated". Well, unless a write-off deal on the promissory notes is struck, that is exactly what will start happening in March, albeit at a different location, when €3.1 billion of "real cash" is passed to the Central Bank where it will disappear in a puff of electronic smoke.

Any deal that replaces notes with bonds is unacceptable as it simply pushes this senseless burning of Irish taxpayers onto another generation. Instead, a full write off must be sought and secured on the grounds that the cost of the bailout of Anglo should not be foisted on blameless Iriish taxpayers,

A write off is entirely within the gift of EU central bankers and, while it might result in a temporary loss of face, no loss of cash would be incurred. In fact, the full €30 billion will be effectively written off irrespective as to whether notes are paid or not.

The Government should stop spinning and whining about unfairness. Instead, it should start playing hardball and show more backbone even at this late stage.

Burning €30,000,000,000 of taxpayers money for no return whatsoever makes no sense and is extortion given that the State is bankrupt.

What exactly would the ECB do if the notes are not paid? Pull the rug from under the Irish economy or just make the "best boy in the class" sit on the bold step for a while?

Lead letter in the Sunday Business Post on 3rd February 2013.

Why Pay Taxes and Debts?

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Would some kind reader explain why I shouldn't follow the example of the so called 'good and great' and avoid paying my debts and taxes by hiding my wealth, falsifying documentation or emigrating to a tax or bankruptcy haven?

Letter published in the Sunday Business Post on 17th June 2012.

Mahon Tribunal

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At the same time that the Mahon Tribunal was hearing evidence about corruption and wrong doing, about a 100 people - politicians, bankers, senior administrators and developers - were engaged, directly or indirectly, in stoking a crisis that has brought the country to the edge of bankruptcy. But, instead of being subjects of a major public enquiry and sanctions, these people have secured huge pensions, payoffs and bailouts.

At the very same time that the Mahon Report was published, the Central Statistics Office reported that our national economy (i.e. GNP) has declined by 14.8 percent over the past four years. This points to a continuing deep depression, rather than a mere recession - or even a recovery as some vested interests, here and abroad, would like to spin.

Nothing can change until everything has been changed.

Letter published in the Sunday Business Post on 1st April 2012.

Referendum on European treaty

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For me, a decision to vote yes in the forthcoming referendum will hinge on the willingness of the EU and ECB to assume responsibility for the cost of bailing out Anglo. I appreciate that if Ireland votes No, we will be denied access to the restrictive European Stability Mechanism in the highly likely event that a second bailout  is needed.

To address this, the country should turn directly to the more realistic and enlightened IMF and, with its support, impose tough new conditions on the promissory notes and get on with the task of sorting out the self-inflicted domestic deficit.

Letter published in the Irish Times on Friday 3rd March 2012.

Paying Bondholders and Bankruptcy

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Congratulations are due to the National Treasury Management Agency for creating a diversionary bond swap on the very day that it extracts €1.25 billion from our pockets to repay bonds in a defunct bank.

Any chance that Ireland could avail of the new bankruptcy proposals given that it has an unsustainable level of debt and clearly falls into the "can't pay" category?

Letter published in the Irish Times on 27th January 2012.

As readers of this blog will know, I have been concerned about the accounting method used by Nama and have campaigned for more transparent accounts based on the par value of loans acquired (in excess of €71 billion) and full disclosure of written down/off loans and interest.

My campaign included writing to Nama's board, Minister for Finance, EU Commission (twice) and, more recently, the Comptroller and Auditor General (C&AG) and Public Accounts Committee (PAC). See Nama's Accounts and the Comptroller & Auditor General and linked items.

At its meeting on 1st December 2011, the PAC considered my correspondance and invited Nama and the Department of Finance to respond. In reply the CEO of Nama has advised the PAC that, having considered my suggestion that Nama publish "shadow" proforma accounts including a P&L and Balance Sheet based on the par value of loans, Nama, in consultation with the C&AG, "will provide such additional disclosure in respect of the movement in the par value of Nama's acquired loans in our 2011 Annual Report and Accounts". See Nama's letter dated 4th January 2012 to the PAC.

Hopefully, these disclosures will include "shadow" proforma accounts which will highlight the full extent of writedowns on the loans acquired at a huge discount by Nama. Ultimately, the losses could amount to €50 billion inclusive of this discount and related interest write offs.

The reporting of these losses by Nama would be a reminder (if one is needed) of the greed, recklessnes and incompetence of many of our leading developers, bankers, politicans and public officials and of the virtual total absence of "moral hazard", public enquiry and pursuit of possible wrongdoing.

More positively, the reporting will help increase accountability, transparency and openness and facilitate better oversight by the Dail and PAC of Nama's activities. It will also bring into focus the desirability, for the avoidance of doubt and to make matters crystal clear, of changing Nama's legislation to explicity state that maximising the recovery of original debts, over and above the actual cost of acquiring loans and recovering expenses, is an objective under Section 10 Subsection (2) (c) of the Nama Act.

Updates:

There has been some media coverage following publication of this entry:

Some additional comments:

1. What would be the impact on Nama's accounts?

Suppose Nama acquires a €100m loan for €30m and is repaid €30m after 3 years. Arguably, it has discretion, based on its current accounting method, as to how it allocates the sum received between principal and interest. For example, it could say that it has broken even on the loan, ignore the loss of interest and report breakeven before deducting its overheads.

If shadow accounts are created Nama would have to explicitly account for BOTH the capital loss (€70m) and contracted interest written off of, say, €12m (€100m at 4% for 3 years) making a total loss of €84m in contrast to breakeven. Henceforth, we could see headlines indicating that, while Nama might report breakeven using its accounting method, it will have incurred a massive loss in the shadow accounts. This loss would be a huge wakeup call to all concerned.

2. Will additional disclosure make a real difference?

Hard to say because Nama is really captive to future market and economic conditions. However, the reporting of the huge losses based on shadow accounts will highlight the need for Nama to recover the absolute maximum amounts from borrowers, minimise expenses, manage its assets effectively and "play the market" successfully when disposing of assets over the coming years. This will put pressure on Nama and its clients to perform to the maximum (rather than targeting breakeven) and might, just might, result in a lower eventual loss.

Don't Pay Anglo Bondholders

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I wish to protest at the planned redemption at par value of a €1.25 billion bond on 25th January by Irish Bank Resolution Corporation, formerly Anglo, Given that this unsecured, unguaranteed bond traded at less 60 percent of par within the past year, why is the Government redeeming this bond at par notwithstanding that the issuing bank is insolvent and being liquidated?

The proposed payment is equivalent to the salaries of 5,000 extra nurses for five years; or one-third of the cuts and tax increases in the 2012 budget: or the full cost of TWO new national children's hospital. Instead, the money will be used to reimburse anonymous bondholders who provided funds at the peak of the boom to a bank which operated as a virtual casino.

Irish taxpayers are entitled to expect the Government to stand up for their rights and to either refuse to redeem the bond or to pay on the back of an explicit quid pro quo from the ECB if the latter wishes to avoid contagion. To this end, I call for an unwhipped Dail debate where isms, ologies, outdated manifestos and failed policies are, for once, put aside in the national interest and where the bond redemption and related economic and social policies are reviewed in an open, honest way.

It will be patently obvious to any TDs who held clinics during the Dail recess that current policies are failing and that redemption of the bond will simply add costly fuel to a fire which is currently smoldering but could easily get out of control.

Letter published in the Irish Times on 10th January 2012.

See also Another Letter to TDs about Anglo Bonds.

Another Message to TDs about Anglo Bonds

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I sent the following email to all TDs today regarding the next redemption of Anglo bonds:

Dear Deputy

I wish to protest at the planned redemption at par value of a €1.25 billion bond (ISIN ref. XS0283695228) on 25th January by Irish Bank Resolution Corporation, formerly Anglo,

Given that this unsecured and unguaranteed bond traded at less 60 percent of par within the past year, why is the Government redeeming this bond at par given that the issuing bank is insolvent and being liquidated?

The proposed payment is equivalent to the salaries of 5,000 extra nurses for five years; or one-third of the cuts and tax increases in the 2012 budget: or the full cost of TWO new national children's hospital.

Instead, the money will be used to give windfall profits to so-called sophisticated but anonymous bondholders who provided funds at the peak of the boom to a bank which operated as a casino and which, thankfully, no longer trades.

Irish taxpayers are entitled to expect public representatives and Government to stand up for their rights and to either refuse to pay or negotiate a quid pro quo with the ECB if it wishes to avoid contagion.

What's needed from TDs is an unwhipped parliamentary debate where isms, ologies, outdated manifestos and failed policies are, for once, put aside in the national interest and where fundamental issues underlying the bond redemptions are considered in an open and honest way.

For example, a free vote in the Dail when it resumes next week in favour of a 50% discount on redemption might "frighten the horses" enough to allow the NTMA repurchase the Anglo bonds at, say, 60/100 and save the taxpayer about €500 million without any default arising. Not a bad morning's work in the Dail.

Brian

Here is the text of a previous message sent on 30th October 2011 to TDs about the redemption of Anglo bonds worth approximately €750 million. So, if the January bonds are redeemed at par, the Irish taxpayer will have redeemed unsecured, unguaranteed bonds amounting to about €2 billion since November 2011. To put this in context, the Government announced in December 2011 a savage budget which will raise taxes and make savings for the Exchequer amounting to €3.6 billion during 2012.

See also Don't Pay Anglo Bondholders.

Here is an uptodate and corrected list of TDs as at 22nd January 2012. To help ensure delivery, it has been divided into four parts.

Over the past year, I have expressed deep concern about Nama's accounting methods to Nama's chairman and board, EU Commissioners and the Minister for Finance in a series of letters - see Nama and Creative Accounting for details.

My complaint is that Nama is using an accounting method which effectively "buries" the losses incurred (aka the "discount") on loans acquired from the covered banks.

The furore over the recent "discovery" of €3.6 billion in the national accounts is nothing compared with the "disappearance", I reckon, of about €50 billion (i.e. €50,000,000,000) within Nama's accounts. I understand that the Comptroller and Auditor General is considering the inclusion of this "loss" in Nama's accounts in some shape or fashion.

Against this background, I wrote to the C&AG on 1st November and suggested that, in the interest of openness and transparency, his office should consider producing "shadow" pro-forma annual accounts for Nama showing its acquired loans at par value and indicating the full extent of loan and interest write downs/offs. Here is a copy of my letter to the Comptroller and Auditor General

This proposal would help identify the full extent of the developers' bailout and losses incurred by the covered banks during the bubble years.

Nama's "forgive and forget" approach can be contrasted to the Government's treatment of mortgage holders who through unemployment etc. cannot meet repayments - see Debt Forgiveness Discrimination.

Update:

Having reviewed the full transcript of a meeting of the Dail's Public Accounts Committee with Nama and the C&AG on 26th October 2011, I have written directly to the PAC drawing attention to my letter to the C&AG and related correspondence. This was published at the PAC's meeting on 1st December and forwarded to the Department of Finance and Nama for comment.

Bank Inquiry Snookered?

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May I congratulate the "establishment" on its scare-mongering, self-serving campaign to ensure that the banking crisis which brought the country to its knees is unlikely to ever be the subject of an in depth public inquiry by our elected representatives.

Letter published in the Irish Times on 2nd November 2011.

Message to TDs - Don't Pay Anglo Bondholders

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I sent the following message to all TDs this morning:

Dear Deputy

I wish to protest in the strongest possible terms about the proposed redemption at par value of a US$1 billion bond (ISIN ref. XS0273602622) on Wednesday 2nd November by Irish Bank Resolution Corporation, formerly Anglo,

Given that this unsecured and unguaranteed bond recently traded at just 53 percent of par value, why is the Government paying full value when the bond is rated Caa2 by Moody's and viewed as being of "poor standing ... subject to very high credit risk ... extremely poor credit quality"?

To put this in context, the proposed payment is equivalent to the salaries of about 2,500 extra nurses for five years; or one-fifth of the cuts and tax increases planned for the 2012 budget: or the full cost of the new national children's hospital.

Instead, the money will be used to give windfall profits to so-called sophisticated but anonymous bondholders who provided funds at the peak of the boom to a bank which was operating as a casino and which, thankfully, no longer trades.

I don't buy the argument that refusal to pay will cause contagion. It is very evident that contagion is (like taxes) for the "little people". Irish taxpayers don't like being treated like Darby O'Gills and are entitled to expect their public representatives and Government to stand up for their rights.

I have two questions:

1. According to brokers in New York, the bond is expected to be paid in full. Given that the redemption date was settled years ago, why were no steps taken to secure a substantial discount?

2. If the Government is being forced to pay at par to prevent  EU-wide contagion etc., will the IMF. EU and ECB compensate the State for this specific action?

Sick, Tired and Annoyed

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I am sick, tired and annoyed about:

  • Getting patronising pats on the back from international spokesmen while they stick their hands in my pockets to help international banks.

  • Seeing the State give a bailout worth €50 billion to developers while completely rejecting modest bailouts for deeply-troubled mortgage holders.

  • Watching the EU move towards massive write downs on Greek sovereign debt while preventing Ireland from defaulting on private debt owing by a non-bank, namely, Anglo.

  • Being lectured at by grossly over-paid politicians, experts and administrators on austerity while their retiring colleagues get huge pensions and pay offs

A letter based on this entry was published in the Sunday Business Post on 30th October 2011.

White Collar Crime and Inquiries

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Following on from John McManus's piece (12th September) would someone explain why civil actions cannot  be initiated against the key individuals that grossly mismanaged the economy, the banks and their borrowings over the past decade? This legal route would speed up the collection and presentation of evidence and reduce the duration and complexity of any possible trials.

It is worth noting that the Quinn family has gone to court claiming grounds for suing Anglo for alleged negligence, breach of duty and intentional and/or negligent infliction of economic damage and, separately, that the High Court has ruled that the chief executive and director of a leading bank (NIB) was grossly negligent and that his conduct had fallen below the required standard and constituted a fundamental failure of governance.

Surely, grounds for pursuing politicians, regulators, senior civil servants, bank directors and major property developers might include possible breach of trust, dereliction of duty, failure to manage, incompetence, negligence, fraudulent or reckless trading, dodgy tax activities, misrepresentation, failure to disclose, lying, falsifying documentation, breach of fiduciary duty, abdication of duty of care and so on.

Maybe, passing the referendum on Dail committees will (at last) facilitate the establishment of a proper investigation, with the assistance of whistleblowers, into what went wrong and who were primarily responsible and thus opening up the scope for civil actions.

Letter published in the Irish Times on 16th September 2011.

Debt Forgiveness Descrimination

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The Minister for State for Finance Brian Hayes has said that writing off €6 billion of debt for tens of thousands mortgagees is unrealistic.  If so, how can his Government justify Nama writing off tens of billions of debt incurred by a thousand or so speculators?

Letter published in Irish Times on 23rd August 2011.

Approach to Bailout is a Disaster

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What part of "disastrous" or "catastrophic" do the Irish Government, EU, ECB and IMF not understand in terms of their approach to Ireland's financial problems? 

Ireland is fighting to retain its Sovereignty against the world's largest financial forces. If Ireland involuntarily defaults the resultant contagion will certainly undermine the euro and EU, and could progressively turn the world's economies into a nuclear wasteland.

Any offer of a minor reduction in the interest rate should be rejected out of hand. Instead, the Government should demand a reduction in the bailout interest to a nominal rate (say, 1%), a payment reschedule spread over decades and an immediate write down of outstanding bank bonds by about 50%. In return, it must adhere to the bailout terms and agree for purely political reasons to a temporary levy of, say, 3% on top of the sacred corporate tax rate.

Letter published in the Sunday Business Post on 15th May 2011. See also Letter to TDs: Take Firm Action or We Default.

Pension Levy Hits a Soft Target

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Now that Irish private sector pension funds can be raided, why do bondholders of busted banks and gold plated public sector pensions remain out of reach? Is it simply because we are softer targets than German, French and Irish public sector pensioners?

Letter published in the Irish Times on 13th May 2011.

Nyberg Report

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The Nyberg Report contained sections entitled The Herd, The Silent Observers and The Enablers. I look forward to a sequel dealing with The Developers, The Politicians, The Professionals, The Spinners, The Cronies, The Eurocrats, The Chancers and The Suckers. Should be a best seller.

Letter published in the Sunday Business Post on 1st May 2011.

In a recent entry Banking Crisis: Help Us or We Default, I suggested that Ireland could introduce a temporary levy on top of its current 12.5% rate for Corporation Profits Tax (CPT) as a quid pro quo for EU/IMF/ECB agreement on restructuring some of its bank bonds and slashing the interest rate applicable to the bailout.

It is apparent that there is substantial resentment within the EU, most notably in Germany and France, about Ireland's low CPT rate. My idea is that an increased rate would help Angela Merkel and Nicolas Sarkozy, Chancellor of Germany and President of France respectively, to "sell" such a deal to their sceptical electorates. 

This entry discusses the Irish CPT issue under the following headings:

      1. Importance of Corporation Profts Tax Rate
      2. Consequences of Increasing the Rate
      3. Threat = Opportunity
      4. Stop Kicking the Can

One Letter & One Month

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Based on the new Government's approach to the bank bondholders, the only difference between FF and FG appears to be one letter and one month.

Letter published in the Irish Times on 13th April 2011.

Banking Crisis: Help Us or We Default

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It is almost two months since my last entry. In the interval:

  • We've had a general election in which the Fianna Fail and Green parties were comprehensively rejected by the electorate in favour of a Fine Gael and Labour Coalition.
  • The Moriary Tribunal has reported and concluded that a former Goverment minister had accepted payments from a Irish businessman in return for helping to influence the outcome of a competition to award his company an extremely lucrative mobile phone licence. 
  • After over two years of drip feeding bad news and "kicking the can down the road", we are now approaching the endgame in relation to the banking crisis with the production of further stress test results.

This extended entry reviews the banking crisis and EU/IMF/ECB rescue package under the following headings:

        1. Depth of the Black Hole
        2. Putting the Cost in Context
        3. No Moral Hazard for Golden Circles
        4. Central Bankers were Asleep
        5. Default is Inevitable
        6. Irish Taxpayers Rescuing Foreign Banks
        7. Ourselves Alone or Kind Strangers
        8. Package Deal including CPT.

This entry conclude that in the absence of basic changes to the terms of the rescue package Ireland will be obliged to default. To prevent this outcome, it proposes changes to the package's interest rate, selective restructuring of outstanding bank bonds and temporary concessions on the politically sensitive, Irish corporation profits tax rate.

Prevent a National Default

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The "worst case" scenario confronting Ireland is default on sovereign or bank bonds (effectively the same thing with no thanks to the 2008 guarantee). IMHO, the chance of default within the next few years is 50/50 if:

  • The EU fails to address the Irish situation immediately;
  • Interest rates rise;
  • There is limited international growth;
  • There are further bank shocks or extensive home mortgage defaults;
  • There is any civil unrest;
  • The new Government makes some initial mistakes or delays decisions;
  • The 2012 Budget is as severe as the 2011 one:
  • National growth fails to return (very quickly) to the levels expected last November.

This is a lot of "ifs" and ducks to line up - bear in mind that Ireland's 10-year bonds are still close to 9%, notwithstanding the National Recovery Plan, and that Ireland's growth projections are being revised downwards rather than upwards. Only a few of these "ifs" need to happen for default to become inevitable. 
 
Given the distinct possibility of default, who is considering the implications and preparing the contingency plans? It is most certainly not the Irish political parties in the midst of an election. Surely, the EU/ECB/IMF, having taken control of the economy, have a responsibily to head off any possibility of default rather than cope with it when it happens?

Bear in mind that the Irish people did not cause the bust. Sure, some of us enjoyed it while it lasted but the culprits were regulators (Irish and EU), Irish Government and EU Commission, Irish and International banks, ECB and a small group of Irish-based developers who ignored virtually every business rule about leveraging and demand cycles.

For a detailed and generally accurate assessment of the "Irish bust", you might lke to read this lengthy article in Vanity Fair entitled When Irish Eyes are Crying by MIchael Lewis (author of Liar's Poker and The Big Short). See also Iceland Shows Ireland Did 'Wrong Things' Saving Banks. There are loads of similar articles including some by Nobel Prize winners (Paul Krugman and Joseph Stiglitz) that can be easily found on the 'Net.

The only way Ireland can prevent a national default is to separate sovereign from bank debt and default on the latter. If this is not done then there is a high chance that Ireland will default on all its debt (for reasons given above) with much more serious consequences for both Ireland and the EU.

Some of my other views are at Saving Ireland and Vote Against IMF/ECB/EU Bailout.

Saving Ireland

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David McWilliams in the Irish Independent on 8th January 2011 had an excellent piece on how he would save Ireland if he ever became Taoiseach. Here is a summary of his ten-step plan:

    1. Hold a referendum to confirm that the people wish to renounce the debts of Irish banks.
    2. Convert Ireland's bank debt problem into a euroland problem.
    3. Rescind the bank guarantee.
    4. Close Nama.
    5. Impose debt-for-equity swaps onto bank bondholders.
    6. Get the ECB to accept that it is unlikely to be ever repaid the €97 billion injected into the Irish banking system.
    7. In due course, convert the funds owing to the ECB into bank equity.
    8. Make domestic mortgages "non-recourse" and simplify the bankruptcy laws.
    9. Extend the vote to all Irish citizens no matter where they live.
    10. Draw on some of the $800 billion deposited in the IFSC to help rebuild a New Ireland. 

These proposals co-incide with views expressed here, for example, close Nama, reject the bailout, terminate the bank guarantee and use debt-equity swaps to recapitalise the banks.

Vote Against IMF/EU/ECB Bailout

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Here is the text of a message sent to all TDs ahead of the Dail debate on the IMF/EU/ECB rescue package on 15th December. This debate lasted two hours and the package was approved by 81 votes to 75.

I would ask you to reject the IMF/EU bale out in the vote on Wednesday on the following grounds:

- Our debt crisis cannot be solved by increasing our national debt.

- Our deep recession cannot be reversed by reducing economic activity.

Please note that the €85 billion rescue package includes €17.5 billion of our own money and up to €35 billion could end up being used to "rescue" major continental banks and the ECB.

It appears to me (and many experts) that Ireland will default sooner or later as the bale out terms are too onerous and growth projections are unrealistic. So, lets nip the problem in the bud as delay will only make matters much worse.

If the bale out is rejected by the Dail, the worst that can happen is that the terms will have to be renegotiated to slash the composite interest rate and restructure senior bank debt. To facilitate the latter, a clear distinction must be made between sovereign and bank debt.

Finally, this is one of the most important votes ever taken in the Dail and I would urge you to vote in the national interest rather than on party lines.

Click the Continue Reading link below to see replies received (as at 21st December):

IMF/ECB/EU Bailout

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If any new EU treaties are planned for the next decade, it is increasingly likely they will be blocked by Irish referenda and there will be no reruns to reverse decisions.

Our debt crisis cannot be solved by increasing debt, and a deep recession cannot be reversed by reducing economic activity.

And can we stop talking about a €85 billion rescue package as €17.5 billion is our own money and up to €35 billion could end up being used to "rescue" major continental banks and the ECB.

Letter published in the Sunday Business Post on 12th December 2010.

Reject IMF Baleout of Banks

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The EU is foisting a massive loan (€50+ bn) on Ireland in order to rescue the ECB and major banks which irresponsibly lent to Irish bubble banks. This will only worsen Ireland's position as the principal could amount to about one-third of our GDP and the interest burden could equate to about one-quarter of all income tax receipts. This, on top of everything else, is unsustainable.

The bale out should be rejected. Instead, Ireland must introduce a bank resolution scheme by copying the UK version and secure ECB support to negotiate a deal with bondholders. Meantime, Ireland will pursue a four-year plan to reduce the deficit.  In this way, pain would be shared by all participants and because the Irish banking crisis is exceptional, contagion should be contained.

Letter published in the Sunday Business Post on 21st November 2010.

How to Resolve the Crisis

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The Government should invoke force majeure and immediately introduce legislation to halve the salaries and pensions of all highly-paid people in the public sector and dispense with all special entitlements.

It should signal that it will aggressively contest any attempts to frustrate these actions. They must be fully implemented before the budget to ensure that, unlike previous budget announcements on pay and pension cuts for ministers and senior civil servants, they will not be watered down or reneged on. Such a move, backed by the Opposition, would demonstrate leadership to citizens and financial markets.

From this high moral ground, the government should then negotiate pain-sharing with bondholders alongside the introduction of a bank resolution scheme; nationalise both main banks; pull back on Croke Park Agreement; finalise the four-year plan; secure support for the 2011 budget; and hold a general election. All these things could be done by next spring when Ireland could re-enter the bond market with a much stronger investment case and brighter future.

Lead letter published in the Sunday Business Post on 14th November 2010.

Nama and Creative Accounting

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This entry might appear technical but it involves tens of billions and gets to the heart of Nama's role and activities.

As explained in its second business plan (June 2010), Nama has adapted an accounting method (Amortised Cost - Effective Interest Rate) which is based on expected cash flows rather than contracted cash flows. This has facilitated the "disappearance" of some rolled up interest and enables it to massively write down the value of loans acquired from the covered institutions from the very outset.

Use of this method is misleading and diverges very significantly from that signalled in Nama's original business plan (October 2009) in the following respects:

  1. It excludes rolled-up interest accruing after it acquires loans from the covered institutions. This could amount to €10.9 billion over the eleven years commencing 2010.

    As evidence of this, Nama's original business plan provided for interest income of €9.46 billion in the budget projections (Table 7 on page 12) for the three years commencing 2010 as compared with cash interest income of only €4.5 billion for the same period (Table 6 on page 10). The difference of €4.96 billion is rolled up interest which disappears, thanks to the accounting methodology.

  2. The original business plan indicated in a bullet point accompanying the 11-year cash flow projections that "of the €77 billion nominal value of loans acquired, €62 billion will be repaid by borrowers and that loan defaults or debt restructuring will occur on €15 billion (a rate of 20%)". This implied that Nama would be accounting for these transactions via Profit and Loss accounts. Clearly, this is not happening.

Nama's use of creative accounting effectively buries about €50 billion of losses comprising €40 billion of loan write offs and €10 billion of uncollected rolled up interest. This has two significant implications as follows:

  1. It becomes much easier for Nama to report an illusionary "profit" when wound up. It also made it possible for the Irish authorities to claim that Nama was the best solution to Ireland's banking crisis.

  2. With the stroke of the pen, Nama is effectively forgiving about €50 billion of debts. Where is the "moral hazard" and justice in this when, based on Nama's creative accounting, every billion euro of discount on the loans being acquired is immediately written off to the benefit of borrowers?

    Repeated suggestions by the Minister for Finance and Nama that it will pursue debts to the "greatest possible extent" must be taken with a pinch of salt as they don't even appear in Nama's balance sheet or form part of Nama's core objective.

Against this background, I wrote to Joaquín Almunia, EU Competition Commissioner, on 17th September last. Here is a copy of my letter which explains my issues and concerns in more detail. It also contains proposals to make Nama more transparent and accountable. I will post the Commission's reply if it comprises more than an acknowledgement.

This was my second letter to the Commission - the first one (17th December 2009) which deals mainly with rolled-up interest can be seen here. The Commission's reply was just a lengthy acknowledgement. 

I also wrote an  open letter to Nama's board on this matter. This was done prior to the change in Nama's accounting method which confirms (to me) that Nama is consciously forgiving tens of billions of borrowers' debt by failing to comprehensively account for it in its accounts. The Minister for Finance replied to a copy of the letter and assumed that Nama would also do so - it didn't. I suppose Nama's replied indirectly by changing its accounting method to bury its bale outs!!!

Moral Hazard with Justice

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Many international commentators including the Wall Street Journal, New York Times, Financial Times and Economist have queried the pain being inflicted on Irish taxpayers arising from the banking crisis. They had anticipated that taxpayers would be at the end of the pain queue after shareholders, management, borrowers and lenders.

Instead, they have been pushed to the front of the queue immediately after bank shareholders. At the same time, managements continue to enjoy huge salaries and pensions, borrowers get massive bale-outs thanks to taxpayer-supported Nama, and lenders are secured by guarantees underwritten by taxpayers.

Where is the "moral hazard" and justice in this?

Where are the public enquiries into the destruction of over €50 billion of wealth?

Where are the apologies and offers of restitution from the still wealthy borrowers hiding behind limited liability and sloppy documentation?

Where is the political leadership that puts citizens ahead of cronies and sound strategies ahead of self-serving spin?

Where are the prosecutions for blatantly fraudulent, reckless business activities?

Letter published in the Sunday Business Post on 10th October 2010. 

Nama could become toxic dump

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The Government set up Nama to help rescue the banks and get credit flowing. We were assured that it would make a profit for the taxpayer without disrupting or distorting markets or bailing out developers. Nama's short history suggests that it is unlikely to achieve these objectives because it is paying well above market rates for loans; the proportion of performing loans is much lower than projected; banks are transferring fewer good loans; and discounts are far higher than expected due to poor security and documentation.

For these reasons, Nama could become an expensive toxic dump rather than a well-balanced asset recovery vehicle as originally envisaged and it would become part of the problem rather than the hyped solution.

To head off this possibility, the Government should immediately introduce a bank resolution scheme. Once in place, Nama should hand back all its loans to the originating banks and bondholders and let them jointly deal directly with borrowers without involving long-suffering taxpayers.

In contrast to the Government's tip-toe approach, the hand back should be accompanied by focused guarantees, selective defaulting and debt-equity swaps leading to the creation of "good" banks and work-out institutions.

Letter published in the Sunday Business Post on 19th September 2010.

Economic Recklessness

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Through greed, incompetence and negligence a few hundred people have set this country back a decade, or more, in economic and social terms. In the few cases where "sanctions" have been applied, they have amounted to big pensions and fat payoffs instead of sanctions and punishments.

Notwithstanding the magnitude of the crisis, we still see no plans for a comprehensive public enquiry and we know that proving white collar crime can be extremely difficult due to complexity, wriggle room and "lapses of memory".

Given the scale of the economic and social devastation, it is inconceivable that any further painful remedial measures will be accepted by the nation unless firm lessons on "moral hazard" are seen to have been applied.

This could be done by designating economic recklessness (alongside the existing crime of reckless trading) as a crime and setting up a judicial or Dail-based investigation to identify the most culpable organisations within the public and private sectors based on public testimony of experts. The Honohan and Regling scoping enquiries would be relevant inputs regarding developments prior to September 2008.

Having decided which boards and groups of administrators should be examined in detail, the investigation should proceed with public questioning of relevant individuals leading, where appropriate, to files being passed to the ODCE or DPP. The level of proof for economic recklessness convictions should be the civil rather than criminal level to take account of the difficulties associated with prosecuting "white collar" crime.

Penalties for economic recklessness should include lengthy prison sentences, massive fines (linked to the wealth of the convicted) with significant scaling back for those who admit complicity or become whistleblowers.

Nama Accounting Methods

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I wish to draw attention to Nama's accounting policies which have attracted little comment but have huge significance for taxpayers as the cost of the banking bale-out rises.

Specifically, Nama has decided to use a methodology which allows it to immediately write off about €40 billion of the €81 billion of loans being purchased from the banks and to ignore related interest, amounting to about €10 billion. This means that, with a stroke of the pen, Nama is forgiving about €50 billion of developer debts and, of course, making it much easier to report an illusionary "profit" when wound up.

Where is the "moral hazard" and justice in this when, based on Nama's creative accounting, every billion euro of discount on the loans being acquired is effectively a billion less to be paid by developers but a billion more to be pumped into the banks (mainly by taxpayers)? Suggestions by Nama that it will pursue debts to the "greatest possible extent" should be taken with a pinch of salt. As they don't even appear in Nama's balance sheet, where is the pressure to collect them?

Nama should be obliged to show the original value of the loans being acquired in its balance sheet and to properly account to taxpayers for bale outs and write offs when all methods of recovery have been exhausted.

Letter published in the Sunday Business Post on 22nd August 2010. For more on this topic, see this Open Letter to Nama's Board and the related blog entry.

Nama Business Plan - 1

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I wish to make the following points about Nama's new business plan:

  1. At best, it is a "concept plan" describing operational arrangements, short-term work plan and structures. It may be a plan but it is not a business one.

  2. Considering that it relates to a loan portfolio of €81 billion, it includes no pro-forma projections and its financial forecasts are confined to a simple 4x4 table containing only nine values summarising Nama's activities for three scenarios over the next ten years! 

  3. The plan indicates that Nama will use the amortised cost method of accounting. This ensures that the true extent of the bale out and foregone interest, exceeding €40 billion, will not appear in its accounts.

  4. Nama says that it will take a neutral view on future property prices, will not engage in speculating hoarding and will wind up in just seven-ten years. This points to a short-term, uncommercial approach and to fire sales, negating a key reason for setting up Nama.

  5. Nama's intention to pursue debtors to the "greatest possible extent" really only refers to recovering the cost of acquiring loans from the banks rather than to the much higher nominal value of the loans owed by developers.

In contrast to its own plan, Nama is seeking extremely detailed business plans from its debtors and its recently published quarterly financial report contain dozens of pages of tables. Clearly, Nama's approach is to disclose as little as possible about future prospects and intentions but endless detail after the horse has bolted. This resembles the "everything is fine" strategies of the banks that it is meant to be rescuing.

Letter published in the Sunday Business Post on 11th July 2010.  For a more detailed assessment of Nama's plan, see Nama's New Business Plan

Nama's New Business Plan

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Nama's latest so-called business plan (dated 30th June 2010) is by no stretch of the imagination a business plan in the accepted sense of the word. At best, it is a "concept plan" describing proposed operational arrangements, short term work plan, organisational and corporate structure along with a review of progress and series of statements relating to accounting matters, proposed operating principles and similar. It may be a plan but it is certainly not a business one.

The plan is remarkably short on numbers for a business plan linked to a loan portfolio of €81 billion. There are no operational or financial projections of any note and no pro-forma projections of any kind. Clearly Nama has learnt from the poor reception given to its first business plan (October 2009) that the fewer the numbers it supplies the better (for it).

Our comments on Nama's first business plan include the following:

In the latest plan, financial projections are confined to a simple 4x4 table containing just nine (yes, nine) values presenting the net present values of Nama's activities over the next ten years for three scenarios i.e. it offers a mere three values per scenario.

Given that Nama will be taking over loans amounting to almost half of Ireland's GDP, its business plan should, at a minimum, have included "scenario-based" P&L statements and balance sheet projections as well as cashflow forecasts for the ten years along with explicit and clear assumptions. These would have given a fuller picture and facilitated analyses which might have helped anticipate problems identical to those being experienced by the banks that Nama is seeking to rescue. For more on this, see my Open Letter to Nama's Board.

Some specific items in the new plan that caught my attention:

  1. It is even less transparent and useful than the initial draft. After the draft was published, I had thought of sending Nama a copy of Free-Plan, a business plan template available for free download from the PlanWare website. It has over 0.25 million registered users covering a huge range of industries etc. If anyone from Nama is reading this, they can download Free-Plan using this link http://www.planware.org/freeplan.zip It would not take much effort to adjust it to suit Nama and would result in vastly improved plan both as regards scope, structure and content.

  2. The new plan indicates that Nama will operate as an "independent commercial entity". However, it also states that its life will be seven-ten years (as determined by the Minister for Finance!). This is much too short a time frame for Nama to realise an optimal return for taxpayers - the chances are that Ireland will still be in the "recovery ward" after the 2008-10 recession and Nama will be selling off properties or doing deals close to the bottom of the cycle.

    Strangely, the plan indicates that "NAMA will not engage in any speculative hoarding of assets. Strategy will be shaped by a neutral view as to future market movements on a portfolio basis". This strategy is completely un-commercial and will ensure that third-parties, rather than taxpayers, will get the greatest benefit from any upswing in the property market as we approach the 2020s.

  3. The plan states that "Nama will pursue all debts owed by debtors to the greatest possible extent" on page 2, 7, 8 and 10. It also says that "debtors will continue to be liable to Nama for full loan balance recovery of €81 billion" but that the recoveries assumed in its NPV projections are based on the amounts that would be recovered if NAMA foreclosed on debtors and underlying assets had to be realised by reference to the long-term economic value of the assets".

    This all means is that Nama's "official" debts only relate to the actual payments made to acquire loans from the covered institutions rather than to the nominal value of these loans. In other words, Nama does not appear to be officially expecting (or demanding) any payment of the haircut on these loans with the result that its debtors could be securing a bale out of up to €40 billion (based on the 50% discount being paid by Nama for the loans). This view is confirmed by looking at the accounting treatment of the loans (€814 million nominal) from EBS and INBS which were taken into Nama's balance sheet (at €371 million) during the first quarter of 2010 (see page 17 and accompanying note in Nama's quarterly financial statements for period ended 31 March 2010).

    This huge "forgiveness" of debtors i.e. bale out for developers, merely merits a note in the accounts. At the very least, Nama should show the nominal value of the loans up front in its balance sheets and clearly indicates write off as they arise.

  4. Nama is adopting an accounting policy (page 18) which "considers expected cash flows, not contractual cash flows, on loans. This means that the Profit & Loss account will reflect what is happening in reality in cashflow terms, rather than taking income to the Profit & Loss account that is not cashflow-based e.g. NAMA will not accrue interest rollup to its Profit & Loss account. It reflects an accounting approach which values the loans by taking the 'actual' initial value plus future expected cashflows less potential impairments."

    However, it also means that Nama will be effectively writing off almost all rolled up (or unpayable) interest arising over the next ten years! Based on the draft business plan (October 2009), we estimated that write offs of rolled-up interest could amount to €11 billion over the ten years to 2020 - see Nama - The "real" Default Rate for more on this.

    The latest business plan indicates that only about 25% of acquired loans will be income producing (as compared with 40% estimated in the October 2009 plan) and suggests that our original estimate for rolled up interest write offs is very conservative.

  5. The discount rate used in the scenario projections in the business plan was 5.5%. This is much too low to cover the risks facing Nama. For example, the October 2009 plan indicated that the NPV (using a 5% discount rate) for its activities over the ten years to 2020 would be €4.8 billion. The base case in the latest plan suggests a lower NPV of €1 billion.

    When account is taken of the plan's expectation that Nama's operating costs will be €1.04 billion lower than originally envisaged, there has been deterioration in Nama's projected profitability of about €5 billion in the space of just nine months. Proof positive that Nama is not risk-free and that a much higher discount rate should be used.

  6. The projected NPV in the new plan for Nama's activities over the ten years is €1 billion (scenario A) as compared with €4.6 billion in the initial plan.

    If, for simplicity, we ignore the the effect of discounting and simply add back the €2.64 billion expenses to the projected NPV in the initial plan we get a value of €7.44 billion representing the total projected contribution to Nama's expenses and "profit" over the ten years. If, for the new plan, we add back the updated forecast of expenses (reduced to €1.6 billion) to scenario A's NPV, we get €2.4 billion. The difference (€5.04 billion) is a indicator of the deterioration in the outlook for Nama's activities in just nine months. If this trend were to continue then Nama is in real trouble.

  7. Given the inadequacy of Nama's published business plan, I wonder does it have a different one for internal use and, if so, is it clearer or different? In either case, surely it should have been published? How acceptable is it for Nama to have two separate plans but keep one hidden? Surely, there should be only one plan. 

Where is the openness and transparency?

Its not there and, worse still, there are clear signs that Nama is striving to bury losses of up to €50 billion (haircut plus interest write offs). In contrast, it is seeking extremely detailed business plans from its debtors and the statuary financial reports covering its first three months operations contain dozens of pages of tables.

Clearly, Nama's strategy is to disclose as little as possible about future prospects and intentions but endless detail after the horse has bolted. This is no way to run an organisation that could end up costing taxpayers tens of billions and resembles the "in denial" strategies of the very same banks that it is meant to be rescuing. 
 

Moral Hazard

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The Honohan Report said there was a ''moral hazard'' involved in the blanket bank guarantee, ''though this argument does not appear to have been made''.

The chairman of Nama and the Financial Regulator have recently suggested that it would not be possible to assist people with distressed mortgages, due to ''moral hazard''.

So where is the moral hazard for the politicians, administrators, bankers, developers and related professionals who created the financial crisis, but continue to hold positions of power, draw huge pensions, operate insolvent businesses and get massive bailouts, courtesy of taxpayers?

Letter published in the Sunday Business Post on 27th June 2010.

Nama's Mission Creep ?

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Recent comments by Nama's Chairman suggest that it is moving the goal posts and is no longer going to do what it was set up to do, namely, to recover as much as possible of the loans transferred to it from the banks.

Instead, it appears that Nama is going to only recover what it is paying for these loans plus its expenses and that it intends to wrap up this process in seven to ten years instead of the original ten to fifteen years.

On this basis, Nama could be writing off, or forgiving, about €30 billion of debts as well as substantial unpaid interest.

Letter published in the Sunday Business Post on 20th June 2010. See also, the Open Letter to Nama's Board which discusses this matter in greater detail.

Open Letter to Nama's Board

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I've sent this Open Letter to Nama's Board expressing concern that Nama appears to be scaling back its original mission at a potentially enormous cost to the taxpayer. Basically, it appears that Nama may be moving the goal posts and engaging in mission creep.

While I fully accept that no plan "survives first contact with the enemy", the Nama concept and its original business plan were prepared following extensive studies commissioned by the Minister for Finance into the loan portfolios of the banks. It appears that these expensive studies all missed the fact that loan documentation was poor, security was not properly charged, debt/equity ratios of many borrowers were ridiculously high, assets were being pledged as security on multiple loans, loans were being restructured or interest only. Also, where were the banks' internal/external auditors, non-executive directors and legal staff/advisers during this carry on? It is very hard to accept that no one had any insights into the real condition of the banks' property-related loan portfolios.

If Nama's mission is to be changed, I think that, in the light of changed circumstances, it must  toughen its approach to securing repayment of the €80 billion of loans being taken onto its books instead of watering down its targets and reducing its life span at great cost to the taxpayer, economy and society.

UPDATE - 1

The Chairman of Nama has, when speaking at the CPA's Annual Conference on 4th June 2010, sought to clarify Nama's core objectives in the following terms:

NAMA's core commercial objective will be to recover for the taxpayer whatever it has paid for the loans in addition to whatever it has invested to enhance property assets underlying those loans. This objective has not been determined by NAMA; it has, in fact, been set for us by the legislature under Section 10 of the NAMA Act. There has been some comment that the consequence of this objective is that NAMA, having recovered its outlay, will then absolve borrowers of their further obligations. This is absolutely not the case. Borrowers, as both I and NAMA's CEO Brendan McDonagh have already said on a number of occasions, will continue to be liable for the debts that they have incurred.

He also says that "NAMA is expected to have a lifespan of seven to ten years and when, in the view of the Minister for Finance, it has made sufficient progress towards achieving its overall objectives, it will be wound up." His full speech is here.

The Chairman spoke of reserving the right to recover arrears if a borrower regains the capacity to repay debts. It may be appropriate for Revenue to follow this route in respect of a tiny proportion of its clients but in Nama's case arrears could amount to half of all borrowings! This highly qualified, weak-kneed approach simply confirms the perception that Nama does not really intend to pursue borrowers for all their debts. It would be interesting to know whether the business plans being prepared by borrowers are intended to explain how all borrowings are going to be repaid or merely enough to enable Nama recover its costs. If the latter, then it is clear that Nama expects to write off huge debts (€30 billion or more) at the expense of the taxpayer. Finally, all the signs are that any economy recovery is going to be extremely slow and consequently Nama, by foreshortening its life by up to eight years, could miss an upswing in the property market at great loss to the taxpayer and gain for its delinquent borrowers.

Notwithstanding the Chairman's clarifications, I still take issue with Nama's core objective as being too limited and too short term as stated in my open letter to the board. 

Section 10 of the Nama Act dealing with the purpose of Nama was mentioned by the Chairman. It refers back to Section 2 which states that the Act's purposes include protection of the taxpayer and contributing to social and economic development.

Maybe, to make things crystal clear, Nama should state that maximising payments of all debts, over and above the cost of acquiring loans and recovering its expenses, is an explicit objective under Section 10 Subsection (2) (c). This would help minimise any misunderstandings amongst taxpayers or Nama's borrowers and ensure that Nama is not wound up by the Minister for Finance as soon as it breaks even or that borrowers' business plans merely target Nama's breakeven point.

Moral Hazard is only for Little People

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The Irish Times reported (26th May) that the Financial Regulator has said that there were no "silver bullets" to assist people with distressed mortgages due to "moral hazard".

Where is this moral hazard for all the politicians, administrators, bankers, developers and related professionals who created the financial crisis but continue to hold positions of power, draw huge pensions, operate insolvent businesses and get massive bale-outs courtesy of taxpayers?

To my mind, the Financial Regulator has crossed a line by destinguishing between "moral hazard" for developers/bankers (not needed) and for "the little people" (needed to teach people lessons) and thereby seems to have aligned himself with the former happy campers in the Galway tent.

Nama is Bailout for Builders

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The headline on page one of last week's Markets stated "€5.5 billion-worth of mortgages now in arrears". This doesn't include the many thousands of mortgage holders with restructured loans or the hundreds of thousands being locked into negative equity amounting to €10-15 billion. Page two of Markets indicates that the Minister for Justice has ruled out a so-called 'Nama for the people' on the grounds that lenders or taxpayers must take the pain if borrowers do not replay their debts.

Contrast this with the treatment of developers and banks. Taxpayers, including those in negative equity, are being forced to assume at least €40 billion of additional debt to pay for their bad loans and decisions. And in a classic case of pass the parcel, Nama will shortly start writing off, effectively forgiving, about €20 billion of developers' debts due their inability to pay. And this takes no account of the massive write-offs directly incurred by the banks.

Where the justice in this when developers can also avail of tax breaks and losses, legal loopholes, ring-fencing, limited liability and expensive advice to duck their debts?

Letter published in the Sunday Business Post on 30th May 2010.

Fighting White-Collar Crime

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In addition to whistleblower legislation, would it be feasible to alter the guilty requirements for certain types of white-collar crime to a civil rather than the virtually unprovable criminal standard of proof? This should speed up the collection and presentation of evidence and reduce the duration and complexity of trials.

Letter published in the Irish Times on 27th May 2010.

Nama and Freedom of Information

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The call by Alan Dukes, director of Anglo Irish Bank, for Nama to be covered by the Freedom of Information Act should also embrace Anglo given that it could account for about half of all loans going into Nama. This should enable taxpayers to find out about Anglo's bondholders, the cost of winding up and its extraordinary lending decisions.

By my reckoning Nama will, unless it is very lucky or tough-minded, have to write off about €11 billion of unpaid interest on top of loan defaults of least €20 billion over the next ten years. Given the scale of these losses, it is essential that Nama's and Anglo's plans and operations be open to maximum public scrutiny.

Letter published in the Sunday Business Post on 16th May 2010.

National Solidarity Bond

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Solidarity with who? Arguably, every cent raised by the National Solidarity Bond will be needed to bale out reckless banks and greedy developers rather than improve the infrastructure.

Letter published in the Irish Times on 1st May 2010.

Nama and the Banking Crisis

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These three letters from me about Nama and the banking crisis were published in the Sunday Business Post over the three Sundays commencing 18th April 2010:

Updated Cost of Crisis

On 22nd March you published a letter from me indicating that the banking crisis could cost taxpayers up to €35 billion. In the light of recent revelations, my "worst" case estimate has been upped to €47 billion. This is additional to related interest payments, social and economic costs and forfeiture of future investment opportunities.

How is this going to be paid for? Surely, it would be unrealistic to expect the cost to be shouldered by the lower paid who, by definition, are having trouble making ends meet. On this basis, the only realistic answer is a new levy on high earners on the grounds that they can still enjoy boom-time lifestyles and probably don't pay full taxes thanks to untaxed pension contributions and tax allowances arising from the ill-fated building binge. I can think of several memorable names for such a levy!

Lead letter published on 18th April 2010.

Haircuts and Scalping

Much attention has focused on the larger than expected haircut on the €81 billion of bank loans going into Nama. However, this haircut amounts to a scalping for taxpayers as it means that developers will walk away from residual debts of €36 billion if Nama merely breaks even over the next decade.

Accordingly, Nama's mission must be to collect as much of the haircut as possible - every unpaid billion euro is in effect a donation by taxpayers to developers' gambling debts and their incompetent banking pals. This means no sweetheart deals or fire sales, and maximum enforcement no matter how long it takes or difficult it proves.

Lead letter published on 25th April 2010.

Phantom Funds

Your front page headline "Phantom funds make up to 66% of INBS income" (25th April) could just as easily refer to Nama. Buried in the financial projections of Nama's draft business plan is evidence that it expects to roll up about €5 billion of interest in its initial three years and there is no indication that any of these phantom funds or "unrealised interest" will ever be paid. Indeed, I estimate that they could amount to €11 billion over ten years to 2020 and would almost equal the projected interest actually paid by borrowers. The Nama plan is silent on this possible write off.

It is interesting to see how the plan, issued with great flourish and used to justify Nama to the electorate and secure Eurostat approval for off-balance sheet borrowing, has been suddenly downgraded to "illustrative"  before a Joint Oireachtas Committee. Of course, the best approach would be to include Nama in the Freedom of Information Act to facilitate access to details of Nama's plans and operations.

Letter published on 2nd May 2010.

The Way Ahead ...

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Here are my proposals to help address some key issues confronting the Nation. They were originally published on 3rd April as a comment in the Irish Times at the conclusion of its wonderful Renewing the Republic series.


1. Introduce a new income levy for high earners on the grounds that they have been the main beneficiaries of the boom. I can think of several memorable names for such a tax.


2. Beef up the prosecution arms of the State to ensure that all possible resources are thrown at the the few hundered or so people who through greed and incompetence created the mess.


3. Have a general election and ensure that those elected agree to root and branch reform of the Dail. Here are some suggestions dating back to 2003 to get the debate started. Only one (related to expenses) has been partly implemented to date (after seven years !!!).


4. Establish a Citizens' Assemby or similar to commence drafting a new constitution with a view to launching a Second Republic to mark the centenary of the 1916 Rising.**

** This suggestion has been submitted as a proposal to Your Country Your Call.

Banking Crisis Comments

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If the Government is powerless to prevent pay increases at the State-owned Anglo Irish Bank, what hope has it of ensuring that the credit policies of the other banks concentrate on helping SMEs rather than bolstering capital bases to benefit owners and bondholders?

Letter published in the Irish Times on 26th March 2010.

Your correspondent Henry Roberts (7th April) makes a good point but has mixed up apples and oranges. The €15.3 billion quoted for California refers to its expected budget deficit for 2010-11 i.e. excess of expenditure over income. The good news is that the €79.3 billion quoted for Ireland relates to our total national debt rather than the budgeted deficit. However, the bad news is that this national debt is about to double thanks to Nama, bank bale outs and ongoing budget deficits.

Letter published in the Irish Times on 8th April 2010.

Cost of Banking Crisis - Update 1

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The following is an update of our previous estimate of the direct cost of the Irish banking crisis following the announcements on Bail-Out Tuesday (30th March 2010) by the Minister for Finance, Central Bank and Financial Regulator.

Our previous estimate was that the ultimate direct cost could be between €12.2 billion (best case) and €34.2 billion (worst case) with the most likely cost being €23.2 billion.

Our updated estimate is €22.8 billion (best case), €46.5 billion (worst case) and €34.7 billion (most likely). The central finding is that the most likely cost has increased by about 50% and our previous worst case estimate has effectively become the most likely.

The updated most likely cost amounts to three years' income tax receipts - equivalent to about €17,000 per taxpayer, or six months' average earnings.

This table presents the basis of our estimates. They exclude the cost of borrowings, dividend/coupons payments and any profits from share stakes, and they ignore the massive social and economic costs of the crisis.

Ignoring timing differences, crisis-related borrowings could theoretically hit €83 billion comprising cash provided to covered institutions (€38 billion) plus the Nama bonds (€45 billion). This takes account of the fact that any share investments made by the National Pension Reserve Fund are effectively funded by borrowings via the NTMA. Again ignoring timing issues, the annual interest cost could peak at about €3.8 billion before allowing for possible interest, dividend and coupon receipts.This is equivalent to about one-third of annual income tax receipts. At a guess, the net annual interest cost to the taxpayer could exceed €1 billion per annum. 

Cost of Banking Crisis

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Rough calculations suggest that, in the "worst" case, the banking crisis could ultimately cost taxpayers about €35 billion based on €10.8 billion expended to date, €14 billion for further bail outs and partial nationalisations, and a provision of €10 billion to cover Nama losses.

This is equivalent to about three years' income tax receipts, or €17,000 - or six months' average earnings - per taxpayer. Related borrowings would peak at about €79 billion with annual interest of about €3.5 billion either borrowed or paid by taxpayers. It takes no account of broader economic and social consequences.

Given the magnitude of the likely losses, it is truly extraordinary that a full public enquiry is not already well underway. Maybe, this because most of those who created, or failed to prevent, the crisis are still in charge.

Lead letter published in the Sunday Business Post on 22nd March 2010.

Some additional comments:

      1. In a "best" case scenario, triggered by a miraculous resumption of growth, the foregoing cost (€35 billion) might be reduced by two-thirds thanks to Nama achieving better than break even, repayments by some banks and proceeds of bank share sales.

      2. Based on the average of "best" and "worst" cases, the "most likely" direct cost of the banking crisis could be about €24 billion.

For the record, the key assumptions were as follows:

  • €10.8 billion already expended: €3.5 billion to Bank of Ireland and AIB; €3.8 billion to Anglo Irish Bank.
  • €13.4 billion for further bale outs etc.: €6 billion for Anglo; €2 billion for Irish Nationwide and €0.4 billion for EBS; €5 billion in new equity to be shared between Bank of Ireland and AIB.
  • Provision for Nama losses: €10 billion based on 20% of the €54 billion to be paid for loans from the covered institutions.
  • "Best" case provision assumed that all funds (€12.2 billion) to Anglo, Irish Nationwide and EBS are written off; that Nama breaks-even; and that preference and ordinary share investments in AIB and Bank of Ireland are recovered at cost,
  • Peak borrowings comprise cash provided to the covered institutions (€24.2 billion) plus the Nama bonds (€54 billion). This takes account of the fact that any share investments made by the National Pension Reserve Fund are effectively funded by borrowings via the NTMA.
  • Assumed interest rate on these borrowings is 4.5% (current yield on 10-year Government bonds).

The foregoing estimates exclude any possible losses linked to €10 billion provided by the Central Bank to Anglo Irish Bank under Master Loan Repurchase Agreements last March. This is secured against collateral of €14.5 billion provided by Anglo. For more information, see Outsiders Pay for Insiders Greed by David McWilliams in the Sunday Business Post and Anglo's latest fun in the sun by Dr. Constantin Gurdgiev.

 

Nama - Too Many Locals and Insiders?

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Over the past few months, the Minister for Finance and NTMA have announced the membership of Nama's board and its senior management team.

Given that Nama is going to become one of the largest property managers in the world, it is very surprising that so many of these appointments have been drawn from the NTMA which has no prior experience or expertise in managing and running down a vast property portfolio. By way of confirmation, the former CE of NTMA told the Oireachtas Public Accounts Committee in May 2009 that "we have no experience of bank restructuring or the whole new area which is coming our way, and we will be on a very steep learning curve."

For the record, two of the eight members are from the NTMA and two of the four senior management appointments are from the NTMA. This means that one-third of the team leading Nama are NTMA insiders. Of the remainder, only one has extensive property experience, one works for a major multinational, two are former bankers, two are former public servants and two are accountants. Although an additional person with international financial and banking expertise will join the board in May 2010, this will not radically alter the team's range of expertise or experience.

Having previously commented on the need for Nama to have world-class management,  I would have expected to see more property, legal, banking and international expertise on a team managing a €80 billion loan/property portfolio. I would also have expected a somewhat larger board and executive team. This gives rise to a concern that Nama, by accident or design, may be under-resources at top levels and overly dependent on very expensive and footloose external advisers. 

Irish Banking Enquiry - 2

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The Government's convoluted, evasive plans for a banking inquiry are a bucket of whitewash and waste of time. They insult the electorate who will bear the cost of the crisis without ever seeing and hearing exactly why and how it happened.

We need is a new type of inquiry which is a mix of tribunal and commission and provides for membership by politicians and others. It should have subpoena/discovery powers, take evidence under oath, make findings, exclude lawyers, be open to public and televised, have an independent chairperson, engage expert support staff, hold private hearings by exception, have power to refer to ODCE/DPP/Gardai and so on.

Letter published in Sunday Business Post on 31st January 2010. For a more detailed discussion on these proposals, see Irish Banking Enquiry.

Irish Banking Inquiry

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The Irish Government's convoluted, evasive plans for a banking inquiry are a bucket of whitewash and waste of time. They insult the electorate who will bear the cost (€40+ billion) of the crisis without ever seeing and hearing exactly why and how it happened.

We need is a new type of inquiry which is a mix of tribunal and commission and provides for membership by politicians and others. It should have subpoena and discovery powers, take evidence under oath, make findings, exclude lawyers, be open to public and televised, have an independent chairperson, engage expert support staff, hold private hearings by exception, have power to refer to ODCE/DPP/Gardai and so on. There are plenty of examples of this type of inquiry including the US's Financial Crisis Inquiry Commission which is examining a much more complex crisis than Ireland's and required to report by the year end.

A quick referendum would also facilitate other major inquiries in the future. It would make sense to delay the banking inquiry until the necessary changes could be introduced.

The Government needn't spend three months scoping its flawed approach to a banking inquiry. Instead, it should look at the terms of reference for the Financial Crisis Inquiry Commission. Most of them are relevant including role of regulator; monetary policy and availability of credit; accounting practices; tax incentives; capital requirements; credit rating; lending practices; concept of "too-big-to-fail"; corporate governance; compensation structures and levels; legal and regulatory structures; quality of due diligence; and fraud and abuse. To these, I'd add role of media and commentators; role of ministers and government departments; and relationships between politicians, developers and bankers.

Needed to say, a proper inquiry would not stop at September 2008 and should investigate the basis for the bank guarantees (relating to liabilities exceeding €400 billion), Nama (cost to taxpayer unknown but could exceed €10 billion), nationalisation of Anglo Irish Bank (€4 billion injected and another €6+ billion to follow) and provision of €7 billion in preference shares to Bank of Ireland and AIB (at a time when their combined market capitalisation was a fraction of this) with billions more to follow.

It is quite clear that the Government is doing its very best to frustrate the electorate's demand for an inquiry by doing as little as possible and working as slowly as possible. At the very least, the Opposition should withdraw all support for the proposed inquiry and undertake to set up a public inquiry when they win the next election.  

Celtic Tiger pussycats

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When a quarter of Iceland's electorate opposed the payment of €3.8 billion to the UK and Dutch governments arising from its banking crisis, its President refused to sign the relevant bill into law and the matter goes to the people in a referendum.

Meantime, our Government rams Nama down the electorate's throat and bails out banks and developers at a cost of at least €20 billion notwithstanding widespread opposition.

Whereas the Icelandic government resigns, our government clings to power in spite of having presided over the entire crisis.

While Iceland hires a high-powered, international investigator to help investigate possible criminal actions by bankers, our government dithers about even holding an enquiry.

Clearly, the Celtic Tiger has turned the Irish electorate into pussycats.

Letter published in the Irish Times on 15th January 2010.

Management of Nama

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The Board of Nama has been announced but I'm uneasy about its breadth of expertise and experience for several reasons.

Firstly, too many locals (8 out of 9) are members and too many of these previously worked for the establishment (4 out of 8) raising the possibiliy of "board capture". Presumably, they were selected because they "understand" the Irish business culture and political agenda, as well as for their undoubted experience and expertise. I would like to have seen the board include "real outsiders" with direct experience of very large-scale asset management, well-known views on protecting taxpayers and track records of aggressively pursuing large-scale, delinquent loans. These would include some really tough, nasty lawyer-types who cut their teeth on Wall Street and would be more than a match for any of the "locals". Of course, appointments of this type could put the "cat amongst the pigeons" and this isn't what the Minister for Finance is seeking at board level given his role in shaping and running Nama.

Secondly, bearing in mind that Nama will be one of the largest property companies in the world, I would have thought that its board and management should also be world-class. Anything less is equivalent to sending a boy on a man's errant. Bear mind that the three most important factors determining the success of a venture are management, management and management. The equivalents for property are location, location and location - these factors were often ignored during the boom and contributed to the crisis which Nama seeks to address.

Thirdly, the proposed staffing of Nama is only a fraction of that used by the Swedish "bad" bank operation which dealt exclusively with nationalised banks (this may still happen in Ireland) and had a loan portfolio far smaller than Nama's. It appears that Nama's in-house staff of about 100 people will be managing a highly fragmented, complex portfolio worth €77 billion covering 20,000 loans linked to almost 2,000 developers' business plans. As a consequence, Nama will be over dependant on expensive external advisers and will be obliged to over-delegate back to the covered institutions. Such an approach is penny wise and pounds foolish and a clear recipe for cock ups.

Overall, I'd have liked to have seen more people with substantial, relevant, international experience at board level and clearer indications that the management team will be appropriate to the task. Bear in mind that Nama exists because of massive managerial failures at government, regulation, administration, banking and developer levels. We don't want Nama to repeat these errors due to insufficient experience or expertise.

What is Nama ?

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Ireland's Nama (National Asset Management Agency) is not unique. It is also:

  • An African ethnic group of South Africa, Namibia and Botswana.
  • Means "baby names" in the Java language.
  • Old English and Sanskrit for "name".
  • A military camp in Baghdad, Iraq, standing for "Nasty Ass Military Area".
  • Nama demissum is a genus of plants in the family Hydrophyllaceae.
  • An adjective meaning raw (food) or draught (beer) in Japanese.
  • A national language in Namibia.
  • A hero in Altaic folklore who built an ark to save his family from a flood.
  • A verb meaning "to be flexible" in Swahili.
  • A wine used in Greek Orthodox Churches in Holy Communion.
  • A common greeting or salutation in the Indian subcontinent.
  • A collective name for the four mental groups in Buddhism.
  • A pronoun in Croatian.
  • Nama shoyu is a raw, organic, and unpasteurized soy sauce.
  • The meditation, vocal singing of hymns from the sacred scriptures of the Sikhs.
  • Shah nama is an epic poem written by Firdawsi which recounts the early history of Persia.

And the world is full of Namas! Here is a (partial) list of other organisations that use Nama as an acronym:

      1. Nashville American Marketing Association
      2. National Academy of Modern Accountants
      3. National Agri-Marketing Association
      4. National Air-Monitoring Audit
      5. National Alliance for Medication Assisted Recovery
      6. National Alliance of Methadone Advocates
      7. National Anger Management Association
      8. National Association of Mapua Alumni
      9. National Association of Master Appraisers
      10. National Association of Mathematics Advisers
      11. National Automatic Merchandising Association
      12. National Automatic Merchants Association
      13. National Ayurvedic Medical Association
      14. National Mall, Washington
      15. National Merit Awards - Zimbabwe
      16. Nationally Appropriate Mitigation Action - Bali Action Plan
      17. Native American Music Awards
      18. New Amsterdam Musical Association
      19. Newsletter and Magazine for Alumni - Aga Khan University
      20. Nigerian Airspace Management Agency
      21. Nigerian Automotive Media Awards
      22. Node Activation Multiple Access
      23. Non-Agricultural Market Access - WTO
      24. North American Mailing Associates
      25. North American Manipur Association
      26. North American Manx Association
      27. North American Metabolic Academy
      28. North American MICR Association
      29. North American Millers' Association
      30. North American Mobile Association
      31. North American Modeling Association
      32. North American Mushroom Association
      33. North American Mycological Association
      34. Northalsted Area Merchants Association
      35. Northwest Airlines Meteorologist Association
      36. Northwest Arkansas Music Awards
      37. Northwest Atlantic Marine Alliance

Nama and Rolled Up Interest

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According to Nama's plan, budgeted interest income for 2010-12 will total €9.5 billion but its cashflow projections only show interest income of €4.5 billion for this period. Presumably, the difference of €5 billion is rolled up. I reckon that rolled up interest could total €10.9 billion over the ten years to 2020. If this is included in the €62 billion of principal repaid by borrowers then the "real" default rate on loans would be 34% rather than 20% indicated in the plan. This would transform Nama's projected surplus into a trading deficit of at least €5 billion and signify that the bank/building crisis is far more serious than implied by Nama's plan.

Given that Nama will be taking over loans amounting to almost half of Ireland's GDP, its business plan should, at a minimum, have included "scenario-based" P&L statements and balance sheet projections as well as cashflow forecasts for the ten years. These would have given a fuller picture and facilitated analyses which might have helped anticipate problems identical to those being experienced by the banks that Nama is seeking to rescue.

Letter to the Editor published in the Sunday Business Post on 22nd November 2009.

Anglo Irish Bank & Taxpayers

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The seemingly innocuous decision of Anglo Irish Bank to change its year-end from September to December, presumably with the approval of the Minister for Finance and "public interest" board members, is a striking example of the Government's opaqueness and Machiavellian approach to the banking crisis and Nama. This date change means that the State-owned bank can hide the full extent of its problems until 2011.

Meantime, the Government has gifted almost €4 billion of taxpayers' money to the bank for absolutely no return and will probably need to flush a further €4-6 billion down its plug hole. This is additional to the estimated €28.4 billion of loans to be transferred to Nama. The State is knowingly paying over the odds for the privilege of handling these loans to the extent of, maybe, €3-6 billion.

On this basis, Anglo is going to cost the Irish taxpayer anything between €8 and €16 billion. This means that up to 15 months of all income tax collected in the State could be used to pay for the reckless behaviour of Anglo's management and some of its clients.

Nama - Horses, Carts and Stable Doors

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Nama's draft business plan projects a profit of €5.5 billion by 2020 even after overpaying €7 billion for loans and incurring expenses of €2.6 billion. Surely, this forecast undermines the need for Nama. In truth, the plan's projections are undoubtedly "very best case" and other scenarios should have been published using lower repayments and interest income, higher defaults etc. These scenarios would explain why the banks are so enthusiastic about passing all their property loans to Nama.

Letter published in the Sunday Business Post on 1st November 2009.

What is the point of the Dail debating the Nama Bill before Nama has undertaken basic research on its prospective loan portfolio and finalised its business plan and strategies? If Nama's draft plan was used to seek €54,000 from investors, it would be rejected out of hand as an extremely poor document. Given that Nama needs to effectively raise an amount which is a million times larger i.e €54,000,000,000, surely no taxpayers' money should be provided until its plan has been fully researched and approved by the Dail. Only at that point would it be appropriate to resume consideration of the Nama Bill. Thoughts of horses, carts and stable doors come to mind.

Letter published in the Sunday Business Post on 8th November 2009.

Nama - The "real" Default Rate

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Our general criticisms of Nama's draft business plan are presented in Nama - A Flawed Business Plan.

This posting raises basic questions and concerns about the plan's underlying default rate and treatment of rolled up interest. These could have huge implications for the plan's credibility; the likely depth and duration of the banking/building crisis; and the cost of Nama to taxpayers.

In summary, detailed analysis of Nama's cashflow projections suggests that the "real" default rate is either an unrealistically low 6% or a catastrophically high 34% depending on the treatment of rolled up interest arising over the ten years to 2020. This compares with a 20% rate quoted in Nama's plan.

Instead of debating the Nama Bill, the Dail and Seanad should undertake a more indepth review of Nama's business plan. Bottom line: no taxpayers' money or support should be forthcoming until its plan has been fully researched and presented in final form for approval.

Our detailed assessment is presented in the five sections below. They review Nama's projections, highlight concerns, pose questions, explain implications and present general conclusions. 

Nama - A Flawed Business Plan

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Nama's draft business plan is merely a work in progress and no taxpayers' money should be invested until the plan has been fully researched, presented in final form and approved by the Dail.

If the plan was used to seek €54,000 from investors, it would be rejected as an extremely poor document. Given that it is being used to raise a million times more, no taxpayers' money should be invested until the plan has been fully researched, presented in final form and approved by the Dail.

As developer of financial projection software with a user base in over a hundred countries, I'd like to comment on Nama's 10-year projections as follows:

  1. The discount rate used to convert future cashflows to present-day values is 5 percent. This corresponds to the current rate, presumably risk-free, for Government bonds. If a more realistic rate of, say, 15 percent is used to partly counter the plan's rosy assumptions, the projected net cash value drops from €4.8 billion to €3.7 billion for the ten years.

  2. Every business plan, especially one involving an investment of €54 billion of taxpayers' money, should include projected P&L statements and balance sheets as well as cashflow forecasts for each year. This would present the full picture and facilitate ratio analyses which might help anticipate problems similar to those experienced by very same banks that Nama is trying to rescue.

  3. Given the huge uncertainties, projections for less favourable scenarios, based on the plan's own risk assessments, should have been published. These would facilitate the development of defensible strategies and mini-max assessments (to minimise the maximum regret that might be anticipated once the final outcome is known) as well as Monte Carlo simulations to take account of the compounding effect of risk. 

  4. The projections assume modest principal repayments during the initial three years and a surge in repayments during the final seven years. If over half of all borrowers cannot pay any interest during the initial years, what are the chances that property markets will recover sufficiently to facilitate repayment of loans as well as rolled up interest in later years?

  5. The plan forecasts a profit of €5.5 billion by 2020. Surely, this forecast undermines the need for Nama and begs the question as to why the banks' shareholders are not lining up to get a share of the action. In truth, the plan's projections are "very best case" and other scenarios should be published based on lower repayments and interest income, higher defaults, higher debt interest and expenses and a higher discount rate. These would be more realistic and explain why the banks are enthusiastic about Nama.

  6. After market risk, the greatest challenge facing Nama relates to management. To succeed, its resources and expertise must be appropriate to one of the largest property portfolios in the world. This means experience of world-scale asset recovery and portfolio management with minimal reliance on inexperienced local secondments, expensive advisers and delegation of nothing but basic administrative activities back to covered institutions. According to its plan, Nama's inhouse staff of under a hundred people people will be managing a highly fragmented, complex portfolio worth €77 billion covering 20,500 loans linked to almost 2,000 developers' business plans.

  7. The business plan explores six alternative scenarios. Only one of these is linked to Nama's operational performance and the trading environment and indicates that Nama would only break even if a default rate of 31% is used. The other five relate to interest rate trends and indicate that the impacts will be either negligible or highly unlikely. Extraordinarily, no attempt was made to assess the impact of any of the eight risk factors detailed in the business plan.

  8. The plan contains no assessments of likely economic conditions over the next ten years to provide a basis for its projections regarding loan defaults and repayments. Notwithstanding this, the Government has already decided that the long-term outlook justifies paying €7 billion more than the market value of the properties linked to the loans to be repaid over the next decade.

  9. The plan makes no reference whatsoever to the creation and role of Special Purpose Vehicles (SPV) which will be majority private-owned and play a pivital role in the execution of Nama's plans. Does Nama's right hand know what the left one is doing?

Instead of discussing the Nama Bill, the Dail should undertake an indepth review of Nama's business plan. 

Nama's Business Plan

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Nama's business plan was published last night. It is of particular interest as my business specialises in business planning and financial projections. Having seen hundreds of plans and projections, I have learnt to take most projections looking beyond 2-3 years with a pinch of salt.

Nama's plan projects a profit of €5.5 billion by 2020 even after overpaying €7 billion for loans and incurring expenses of €2.6 billion. This is absolutely incredible and laughable if it was not so serious.

Surely, these glowing projections undermine the need for Nama and beg the question as to why the banks' shareholders are not lining up to get a share of the action. In truth, the plan's projections are "best case" and, as a specialist in business planning, I'd advocate a much more conservative set of numbers with lower repayments and interest income, higher defaults, higher debt interest and expenses and a higher discount rate. This scenario would be much more realistic and would explain why the banks are so enthusiastic about Nama.

Having originated the Double/Double/Half Rule (double time, double costs and half revenues), I'll like to see it applied to the Nama projections.

More seriously, an independent review of the plan's projections is essential before any further steps are taken. I'd love to see Justice Clarke of the High Court review the plan in the light of his devastating assessment of the financial projections accompanying the Zoe Group companies' application for examinership.

Politicians' Expense Scandal is Small Fry

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The current outrage about politicians' expenses is well justified and must lead to a complete reform incorporating a vouched system and lower expense rates (e.g. for attending the Dail). The message to politicians is that they should stop arguing, fix it and then move on as there are much bigger fish to fry.

Preoccupation with politicians' expenses and the million euro payment to a former FAS executive should be contrasted with the proposed payment by Nama to the banks. This is 54,000 times greater.

To put this in context, a million euro of €10 notes laid end-to-end would stretch from O'Connell Street to Howth whereas the Nama payment could be wrapped 17 times around the earth at its widest point. Given the magnitude of Nama and the limited information available (we know much more about the Ceann Comhairle's expenses), surely the Dail should spend more time discussing the principles of Nama rather than the minutiae of the bill. An expert-supported, forensic examination of Nama and its proposed pricing methods might help close the stable door before, rather than after, Nama bolts.

Also, compare the FAS furore with the deafening silence and absence of sanctions surrounding current and former ministers, bank directors and senior banking, public sector and regulatory executives for leading the entire economy to the edge of a precipice and then demanding that everyone else pays for their incompetence.

Nama - Three Suggestions

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The following message about Nama was sent on 4th October to all TDs and Senators as a follow up to that sent on 28th August. Several recipients pledged to raise the suggestions in the Dail or at the Committee stage of the Nama Bill. Whether any of them make it into law remains to be seen.

On 28th August, I wrote to you signifying my deep concerns about Nama. In the event that Nama proceeds in its present form, I wish to offer the following suggestions to help enhance public trust and improve its effectiveness:

1. Whistleblowers' Charter

The Nama Bill covers corruption, acting in bad faith, conflicts of interest, lobbying as well as failures to comply with obligations. It also provides for extensive reports, audits and accountability. Provision should also be made for a whistleblowers' charter to cover staff within Nama, covered institutions, debtors, advisers and service providers so as to help ensure that these parties all operate to the highest professional and ethical standards.

2. Reporting on Policy Matters

As the incumbent Minister for Finance will effectively control a €90 billion property empire and as several individuals of different political hues could fill this role over the life of Nama, robust checks and balances are essential to ensure that these ministers cannot use Nama in any manner at variance with its original purpose. To see how easily this can happen, consider Nama's sister body, the National Pension Reserve Fund which was set up to develop an international investment portfolio over a twenty-year horizon. Eureka, at the Minister's direction it now holds €7 billion of Irish bank shares amounting to a third of its total assets. Sections in the Nama Bill preclude its Chairman and CE from discussing policy matters with Oireachtas Committees. As things stand, these committees could be prevented from raising major issues, such as pricing of asset sales, on the grounds that these are policy matters. These sections should be removed and senior management should have unrestricted access to Oireachtas Committees.

3. Management Resources

After market risk, the key variable determining the success of a venture is usually managerial risk. In Nama's case, the former will be addressed largely by the size of the so-called haircut. To address the latter, Nama's senior management team must have extensive direct experience of world-scale asset recovery and portfolio management. Reliance on local secondments, expensive advisers and delegation of anything but basic administrative activities back to covered institutions should be minimised. The proposed staffing of Nama is only a fraction of that used by the Swedish "bad" bank operation which dealt exclusively with nationalised banks and had a loan portfolio far smaller than Nama's. It appears that Nama's inhouse staff of under a hundred people people will be managing a highly fragmented, complex portfolio worth €77 billion and covering 20,500 loans linked to almost 2,000 developers' business plans. Such an approach is penny wise and pounds foolish and is equivalent to sending a boy on a man's errant. Accordingly, the management resources and expertise within Nama must be appropriate to managing one of the largest property portfolios in the world even if this entails much higher operating costs than envisaged to date.

Thank you for reading this. I would welcome feedback or comments but please don't simply reply with a canned response or by enclosing any more general policy documents about Nama.

Who are Government & Nama Trying to Fool?

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Supplementary documentation published by the Department of Finance alongside the Nama Bill about property yields contains some extraordinary statements (starting on page 10):

  • It indicates that property yields (rents as percentage of prices) are higher in Dublin (7.25 percent) than in other major European cities and that Dublin's yield is well above its 20-year average of 5.6 percent.

  • It then states that as "yields move towards their long term average this would indicate an increase in property prices". To re-enforce this view, it expects the exceptionally large difference between property yields in Ireland and key euro interest rates to narrow as a result of rising interest rates or rising property prices!!!

Whilst acknowledging that property prices have fallen by almost 50% in the past few years, the document completely ignores the possibility that the exceptional yields may be anticipating a sharp decline in rents. It not so long ago that the Irish banks offered unprecedented double-figure dividend yields before they were obliged to suspend dividends and their shares collapsed.

Furthermore, the Government could be accused of conspiring with Nama by not implementing legislation to permit downward rent reviews for commercial leases, as has happened already in the residential sector. This has the effect of artificially underpinning high property yields and thereby supporting property prices for the benefit of Nama, the banks and their developer friends. 

Hopefully, the European Commission is taking note of the Government's and Nama's approach to property valuation and their use of taxpayers' hands to catch falling knives.

Questions about Nama

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Four questions about Nama:

  1. Why is the onus on Irish taxpayers to recapitalise the main banks via Nama? These banks could raise substantial capital by selling off non-core investment and insurance activities and holdings in banks in the UK, Poland and the US. 

  2. Why is the Minister preoccupied with the capital requirements of the banks when determining the haircut on loans being transferred to Nama? Surely, this amounts to match-fixing with taxpayers on the losing team.

  3. Will the Minister accept that property values could continue falling for the next few years and might not rise for several years thereafter? This would be a consequence of the overhang created by Nama's portfolio, rising interest rates and ultra-conservative bank lending.

  4. Why doesn't the Government direct the banks to grant share options to mortgage holders experiencing negative equity? This would help compensate them for the failures by the Government, Regulator and banks to exercise judgement and prudential control during the boom which they provoked.

Lead letter published in the Irish Times on 17th September 2009.

Nama's Role in Price Rigging

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The property market is in the doghouse simply because, as dogs on the street know, prices have to fall considerably further to make long-term economic sense based on yields and prospective interest rate increases.

Clearly the Government is not listening as it strives to ensure that Nama will be able to exploit its dominant market position to keep prices artificially high for the benefit of bank shareholders, bondholders and developers. Surely this amounts to price rigging and State subsidisation and is contrary the public interest.

Nama - TDs and Senators

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The following message was sent to all TDs and Senators on 28th August 2009. It was acknowledged by about forty recipents who mainly supplied canned responses with attachments about party policies.

I'm very concerned about the Government's approach to resolving the banking crisis and wish to make the following points to you as a public representative in the hope that you can influence or lobby the Government:

  1. As the economy moves through an unprecedented recession, all possible measure should taken to ensure that credit is readily available for viable projects and credit-worthy borrowers. It is impossible to see how this can be done by a lame-duck banking system which is being pulled in several directions - to lend more, protect shareholder value, ration credit to improve ratios, hoard resources to cover bad debts, and make guarantee and recapitalisation payments to the state. 

  2. While the Minister for Finance views bank nationalisation as the "last resort", he must also appreciate that the main banks continue to operate thanks to the State's guarantees for €400 billion, its €7 billion preference share investment, its plan to purchase €90 billion of their loans and, if needs be, to take equity stakes.

  3. Nama is a huge gamble which exposes taxpayers to a multi-billion euro hit if prices paid for the loans prove to be too high. In these circumstances, the banks would emerge unscathed and their shareholders would make massive gains as the economy recovers. If you think that this couldn't happen, recall that an insurance levy paid for many years to bail out AIB after its ill-fated takeover of ICI. Note: This was incorrect - the levy related to the failure of PMPA.

  4. As the Government has a responsibility to protect the banking system and taxpayers ahead of banking institutions or bankers, it is very hard to understand why it doesn't simply "bite the bullet" and temporarily nationalise the main banks as a central element of Nama's rescue mission. Given that it holds the whip hand, the Government could cut deals with bank stakeholders to ensure that gains and pains are shared more fairly.

Thank you for reading this.

Who will Control Nama

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Based on the draft Nama legislation, the Minister for Finance will effectively control a €90 billion property empire and, given Nama's expected life span, several individuals of different political hues could fill this position over the next decade.

This raises concerns about the robustness of checks and balances to ensure that these ministers don't use Nama for pet projects at variance with its original purpose. Couldn't happen?

Just look at Nama's sister body, the National Pension Reserve Fund which was set up to develop a high-grade, international investment portfolio over a twenty-year horizon. Suddenly, at the direction of the Minister for Finance, it has been stuffed with €7 billion of Irish bank shares amounting to a third of its total assets.

Any requirement that finance ministers account for Nama to the Oireachtas offers absolutely no solace based on that body's track record. Instead, the legislation must include overarching controls to ensure that Nama cannot become a ministerial sweet shop offering goodies like bail-outs, tax-breaks, benchmarking and decentalisation.

Role of Nama

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Why is the Government proposing to use Nama to prevent a decline in property prices at a time when Ireland has the second highest cost of living in the EU?

Surely, it should be encouraging lower prices as these would result in cheaper houses, lower shop prices and more competitive commercial and industrial rents. Instead, taxpayers are expected to underwrite a multi-billion punt on Nama to ensure that property prices don't fall and that the country remains uncompetitive.

Lead letter published in the Irish Times on 26th August 2009.

Nama

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In discussing the need for strong oversight of Nama, Noel Whelan (1st August) mentioned that the draft legislation provides for a special Oireachtas committee to oversee Nama in addition to the Public Accounts Committee.

I wonder how effective these committees will be given that the draft legislation contains clauses (50 and 51) which preclude the Chief Executive Officer and the Chairperson of the board of Nama from (a) questioning or expressing an opinion on the merits of any policy of the Government or a Minister or on the merits of the objectives of such a policy or (b) producing a specified document in which the Chief Executive Officer or the Chairperson questions or expresses an opinion on the merits of any such policy or such objectives.

Surely, these "gagging clauses" will preclude key officials from speaking openly on fundamental issues and effectively nobble comprehensive scrutiny of Nama.

Letter published in Irish Times on 4th August 2009.

Why Nationalise?

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Mr X (April 16th) is shocked that so many innumerates are advocating nationalisation of the banks. The real innumerates are the bankers and policy makers who ignored long-term trends. The Government's approach to the banking system is the financial equivalent of half-pregnancy as it involve nationalisation of bad loans and continuing privatisation of good loans. Even at this late stage, it should go the whole hog and nationalise the main banks. Reasons for not doing so, such as the need for transparency, coming from a totally opaque Government are pure hogwash.

Nationalisation would remove uncertainty, simplify matters, restore confidence and ensure that state funding is used to boost the economy rather than bale out bank shareholders. It would be much less risky as it would eliminate the need to price impossible-to-value impaired loans. These could cost taxpayers tens of billions if transferred at the wrong price to Nama in addition to billions of interest payable on bonds used to purchase the dodgy loans at the outset. The idea of applying a levy on the banks to offset any shortfalls is more hogwash as it will be simply passed on to customers.

Published in the Irish Times on 18th April 2009.

Time to Nationalise Banks?

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It is self evident that as the economy lurches into an ever deepening recession, every possible measure should taken to ensure that credit is readily available for viable projects and credit-worthy borrowers. It is just as evident that this cannot be done by a lame-duck banking system which is being pulled in several directions - to lend more, protect shareholder value, ration credit to improve ratios, hoard resources to cover future bad debts, and make guarantee and recapitalisation payments to the state. More ...

Banks & Ictu Advertisements

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Last Monday, the Irish Times contained full-page advertisements from AIB and ICTU. The contrast between the two could not be greater.

The former comprised patronising guff about commitment (mentioned five times) which was undoubtedly generated by an advertising agency. The ICTU contribution was a measured document which addressed many of the problems confronting the state. Although far from perfect, it was close to being the type of comprehensive plan that the Government should have produced months ago.

The bank's advert stated that it is regulated by the Financial Regulator. Thankfully, the ICTU advert contained no such statement.

Letter published in the Irish Times on 20th February 2009.

The Banking Crisis

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There are clear signs that the proposed recapitalisation of the main banks will prove inadequate and that further support will be required from the Government in line with its minimalist "drip drip" strategy.

To protect the economy and banking system as distinct from banks and bankers, the Government should change tack before being forced to do so and withdraw their proposal in favour of the following variation on the "bad" bank approach. This would buy time and ensure that state funding is used exclusively for productive purposes. In addition, it would be less risky and costly for the taxpayer, eliminate the need for bad debt insurance, and remove pressures on the banks to withhold credit or hoard resources to cover future bad debts.

Here are some suggestions:

  1. AIB and Bank of Ireland (combined market value of €0.86 billion) should be nationalised and their existing shareholders compensated mainly by options to acquire substantial new equity stakes when the two banks are eventually re-privatised.

  2. Each nationalised bank should be divided into good and bad banks with new boards and senior management teams working exclusively in the public interest and insulated from political interference. The good banks should receive capital injections from the state to improve liquidity and operate using existing staff, premises etc. These banks could be very profitable as all their problematic loans would have been shunted into their bad banks.

  3. The two bad banks should undertake no new business and, having secured minimal working capital from the state, would effectively operate as high-powered debt collectors. They would pursue borrowers for repayments and where necessary call in securities and, rather than engage in fire sales, accumulate such assets for sale once economic growth resumes. Repayments should be passed back to good banks to further enhance liquidity.

  4. Once the crisis has passed, the final deficits attributable to the bad banks will be clear. These should be absorbed by the good banks which could then be refloated on the stock market to repay the state, grant equity to option holders and raise new capital.

Banking Package

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The Minister for Finance has stated that the €5.5 billion package for the banks is a good deal for the taxpayer. In reality, the return to the Exchequer is derisory given the risks involved, the cost of borrowing the funds for the package, and the fact that the proposed preference shares are neither convertible nor cumulative and have no priority over ordinary shares in the event of a liquidation.

In addition, the government has agreed to act as funder of last resort for the two main banks if their private fund-raising is unsuccessful and, most extraordinarily, it has offered Anglo Irish a blank cheque by agreeing "to make further capital available if required so that it remains a sound and viable institution". If this bank is sound and viable why does it need €1.5 billion of State funding and why is its share price sinking like a stone and valuing the entire bank at a mere fraction of this support?

All this largess comes on top of several hundred billion of guarantees which have increased interest costs for the state's own funding needs.

Surely, it is completely unacceptable for the very same people - ministers and bankers - who created the crisis to also negotiate the solution using "our" money. Where are the sanctions to ensure that their reckless behaviour is not repeated and why should the taxpayer shoulder all the risk and none of the rewards?

 Letter published in the Irish Times on 29th December 2008.

Bank Recapitalisation

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Given that the state is committing €5.5 billion to the banks using borrowed money sourced via the National Pension Reserve Fund, the net return to the Exchequer is really only two-thirds the proposed divided payments. The Minister for Finance has stated that the deal is a good one for the taxpayer. In reality, the return is derisory given the risks involved and the fact that the shares are neither convertible nor cumulative and have no priority over ordinary shares in the event of a liquidation.

In addition, the government has agreed to act as the funder of last resort for the two main banks in the event that their private fund raising is unsuccessful and, most extraordinarily, it has offered Anglo a blank cheque "to make further capital available if required so that it remains a sound and viable institution". This begs the question as to why it needs €1.5 billion from the taxpayer if it is already sound and viable. All this largess comes on top of several hundred billion of guarantees which have already increased interest costs for the state's own funding needs.

Notwithstanding the offer of billions which the Exchequer can ill afford, the combined market value of the three banks has sunk by a half billion over the past week. This speaks volumes and suggests that another, even larger, funding round will be required next year as the economic decline accelerates, unemployment rises and property prices tank.

As further preference shares will no longer be an option, the government will be forced to do then what it should have done at the outset, namely, nationalise the banks, reform them into three distinctive banking entities with new balance sheets and management and then refloat them on the stock market to raise further capital and ensure that taxpayers benefit from the upturn.

The blame for the domestic banking crisis can be laid squarely at the foot of the Government, Financial Regulator, Central Bank, bank directors and some property developers.

Where is the "moral hazard" to ensure that their reckless behaviour is not repeated and why should the taxpayer shoulder all the risk and none of the rewards when the perpetrators of this debacle continue to enjoy enormous salaries and other perks?

Rescuing the Banks

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Given that the economy will contract by a massive 4% next year and that State's guarantees to the six banks will expire just a year later, delays in restructuring the banks are simply making matters much worse for shareholders, borrowers and the economy.

Instead of inviting management of the banks to reluctantly submit proposals for rationalisation and recapitalisation, the government should take off its gloves and exercise real leadership by appealing directly to shareholders and announcing cash offers, based on current share prices, to temporarily nationalise the quoted banks.

To ensure acceptance by all six guaranteed banks, it should make it patently clear that the State's existing guarantees cannot be extended and that a special levy, or other sanctions, will be applied to any profits of banks which don't accept the offer. The acquisitions would cost about €4 Bn and warrants should be issued to existing bank shareholders so that they benefit from the restructuring.

On acceptance of the offers, the government should form three distinctive banking entities with realistic balance sheets and new boards and senior management teams. They should be seeded with mezzanine finance from institutional and private equity sources and immediately refloated on the stock market to raise a final round of new capital. The government could, if desired and appropriate, gradually reduce its holdings during the next decade.

Future of the Banks

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Has the Government learnt nothing from Eircom's experience in the hands of private equity investors and venture capitalists? It now seems to be wrapping up some of the Irish banks to facilitate a new game of pass the parcel using another key national resource.

Why doesn't the Government simply create a special investment vehicle to borrow the funds needs to recapitalise the banks via high-coupon preference shares and then do a public floatation of this vehicle to repay these borrowings?

This would allow the banks stay in, largely, Irish hands, give the Government a say over credit policies and ensure that banking strategies are aligned with the national interest rather than dictated by the short termism of unregulated Wall Street funds which played a lead role in creating the current international crisis.

This letter was published in the Irish Times on 22nd November 2008.

Banking Crisis

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Having provided guarantees to the banks on very favourable terms, the Government must follow these up with equity injections, as is being done in many other countries, in order to underpin our fragile banking system, re-enforce its guarantees and participate in the upswing which will ultimately occur.

While this will impact on Exchequer borrowing, massively dilute existing shareholders and shred the reputations of many high-flyers, it is surely more prudent to inject new equity before problems arise rather than as the "the last option" favoured by the Minister for Finance.

If, God forbid, an Irish bank was to default on any significant scale, it is hard to see how the other banks could respond without jeopardising their own stability with disastrous national consequences.

To mangle a phrase often attributed to banks, the Government should lend them umbrellas before it rains and take them back once the sun starts shining.

This letter was published in the Sunday Business Post on 2nd November 2008.

Guarantees for Banks

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The value of the proposed bale out in the US is equivalent to US$2,000 per US citizen. The Irish bale out could be worth up to €125,000 per man, woman and child. If US citizens won't accept their bale out, why should we accept something a hundred times larger?

The Government's action is nothing more or less than a huge reward, underwritten by taxpayers, to banks for foolish lending, to the Regulator for failing to regulate, and to its beloved construction industry.

It does absolutely nothing to address the underling problems which the banks, government and construction industry jointly created over the last five years by building, selling and financing grossly over-priced houses and commercial property.

This is the AIB and ICI rescue repeating itself. Where are the restrictions on bankers remuneration? Where are the equity stakes? Why should Irish taxpayers guarantee to bale out a bank that stupidly financed an overpriced property development in Dublin, London or Germany or made billions by conspiring with house builders to lock hundreds of thousands of young purchasers in huge mortgages for the rest of their working lives?

Irish households are amongst the most heavily borrowed in the world and, instead of helping them, the Government gives guarantees worth a multiple of the Irish economy's annual output to the Irish banks.  This, on top of the hammering that households can expect in the forthcoming budget.

Lead letter published in the Irish Times on 1st October 2008.

Property Prices

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Do the estate agents selling their businesses and the banks selling their properties know something their customers don't?

House Prices: The Real Financial Scandal

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It is a pity that outrage over AIB's overcharging and NIB's transgressions is not being directed also at the fact that house buyers were obliged to borrow €17 billion last year to acquire overpriced houses. Arguably, if house prices had been, say, 10% lower, these new borrowings might have been reduced by as much as €2 billion and interest payments would have been lower for new and recent borrowers throughout the life of their mortgages.

Having ceded control over interest rates to the European Central Bank, the Government tried, and failed, to contain house prices by tinkering at the edges - mainly by encouraging the building of even greater numbers of overpriced houses. It has ducked real issues such as land prices and hoarding, excessive lending, inflationary tax incentives, profiteering, overcharging and tax gouging. As a consequence, hundreds of thousands of house buyers will be making excessive loan repayments amounting to billions of euro for decades to come.

Given that house prices have escalated to such a degree, containment of price inflation is no longer adequate. It is small consolation to see a slow down in price increase when current prices should never have been reached in the first instance. Instead, what is needed is a substantial reduction in house prices to bring them back to levels that make them sustainable when interest rates rise and economic growth moderates.

To start this process, the Government should immediately establish a Task Force to implement key suggestions in the All Party Committee on the Constitution's progress report on private property. If the Government fails to unwind the house price problem in an orderly way, then its much-beloved "market forces" will do the job with consequences that will be many orders of magnitude greater than the current financial scandals.

Lead letter in the Sunday Tribune and published in Sunday Business Post on 8th August 2004.

On 19th May the Minister of Finance moved an amendment to the Central Bank and FSA Bill to allow a financial institution pay penalties for a transgression without admitting guilt or where it admits guilt. I assume that these payments and the underlying circumstances will not be publicised. This could allow financial institutions or management to engage in doubtful practices and then plea bargain in private if caught. Contrast this approach with the naming and shaming of tax defaulters.

Could this amendment mean that  the emerging scandals at AIB would have never become public? If so then the Minister must urgently review his proposals to provide full transparency and disclosure. Consumers should not be treated like mushrooms (kept in the dark and covered in fertilizer) or be dependant on whistle blowers for such information.

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