Response to NAMAWineLake blog
The blog at the link above was emailed to me and I’ve responded below:
Your opening comments are definitely a little chilly, so I’m putting on my mental “jumper” to take away the chill!
Let’s consider the following:-
It’s becoming clearer in every forum where Deputy Frank Fahey makes remarks about the Banking Crisis and NAMA, that his difficiculties in understanding the concepts and operational characteristics surrounding NAMA increase his frustrations, thus inducing him to making generalised, banal, unfounded, unsupported comments which he repeats and repeats and repeats, as if believing that, by constant repetition, they become true e.g. NAMA is the ONLY solution to the Banking Crisis…So he keeps repeating his unsupported ARTICLES OF FAITH always protesting that the OECD, the IMF, the ECB (yesterday the ESB! sic!), and the EU say so and that makes them so!!
Let’s consider some of Deputy Fahey’s mistaken ideas within his intractable mind-set… Let’s look at some of the afore-mentioned important institutions and what they approve and disapprove. Firstly, they do not give prescriptive mono-rail instructive advice to Governments. They do consider Proposals put forward by Governments and they will make comments on the Proposals submitted to them (e.g. the EU Commission) in order to determine qualification / eligibility for implementation of Proposals within EU Rules and Directives. Accordingly, it would be much more truthful for our Government to say, after Proposals have been submitted to the EU for eligibilty / qualification consideration, that the Proposals qualify if indeed they do), in the sense that they meet eligibilty criteria and have not been disqualified, rather than reporting to us in disingenuous and exaggerated “spin” terms to the effect that the EU approves the Government’s Proposals. Such “spin” creates an entirely false impression that the EU Recommends and even Commends such Proposals. The EU does not prescribe or proscribe preferred solutions for the different member states. Alternative Solutions and Proposals for addressing the Banking Crisis (including nationalising the Banks, as had been carried out by the UK Govt) could also have passed EU eligibilty /qualification criteria in our case. In this overall context, then, it is also relevant to note as a matter of record that the IMF had actually recommended (not prescribed or proscribed) that the Irish Banks be nationalised!
In summary, Deputy Fahey indicated that, along with many people, he may have a shaky understanding or a mis-understanding of the NAMA construct. So the following Post on Irisheconomy.ie Blog will be helpful in clearing up mis-understandings….
No Frank, NAMA is Not Being Funded by the ECB
This post was written by Karl Whelan
On RTE radio this morning (on Today with Pat Kenny with, em, Myles Dungan) Fianna Fail TD Frank Fahey said:
I stand by what I said about NAMA from the very beginning. NAMA is being funded … the bonds are being funded by the European Central Bank.
Now I know that language is a flexible thing and perhaps philosophy graduates could spend all night debating what the meaning of “being funded” is. But, I would suggest that the only reasonable interpretation of this statement is that it implies NAMA are receiving funds from the ECB.
This is not at all true. The ECB has no direct relationship with NAMA at all. NAMA bonds can be used by the banks that have received them as collateral for loans from the ECB but that’s it, that’s the full extent of the ECB’s involvement in relation to NAMA. Furthermore, AIB and BoI executives told the Oireachtas last year that they had no particular plans to use the bonds in this fashion.
The NAMA bonds are fully backed by the Irish government. They are a liability of the Irish state, albeit one entered into at the same time that it acquired some property assets that may or may not yield enough to pay off the bonds.
It is long past time for government politicians to stop misleading the Irish public that NAMA somehow involves the state getting money from the ECB. I would plead with any journalist interviewing Deputy Fahey or any other commentator making this claim in the future to point out to them that it has no grounding in fact.
This entry was posted on Tuesday, July 20th, 2010 at 3:26 pm and is filed under Banking Crisis, EMU. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.
End of Post
Furthermore, specifically, under Freedom of Information, we know (see Report by Simon Carswell in Irish Times 8th Feb 2010…the day George Lee resigned, which resignation caused the FOI article to be lost in the media “blizzard” around Lee) that the IMF Expert (that word again!) Team visiting Dublin had pointedly advised the Minister for Finance and his Dept in March 2009 that the outline NAMA Proposal would NOT increase Liquidity and Credit for Businesses and households in the way envisaged by the Govt’s NAMA sponsors and proposers. The IMF Expert Team also pointedly advised the Minister and his Dept that the Banks’ Bad Property Loan Losses would rise to euro 35bn! In announcing NAMA and setting the parameters for the DAIL and SEANAD Debates and furnishing the NAMA Business Plan, the Govt repeatedly assured the nation that the Banks’ NAMA Loans losses would not be above euro 23bn, implying a purchase price of euro 54bn for the euro 77bn Bad Loans to be acquired by NAMA. The Govt also insisted that at these levels NAMA would yield a profit to the Taxpayer of euro 5.4bn after 10 years! Despite the IMF Expert Team’s timely, pointed reasoned and well judged (at the time, oan losses have transpired to be above euro 40bn) advices, the Minister, the Dept of Finance and the Govt decided to proceed with the NAMA Proposal. They packaged it in the Propaganda PR message that there was NO OTHER ALTERNATIVE which, of course, was not true. Compounding their arrogance and, what recent required loan write-downs and information have shown to be, their professional ignorance and foolishness, the Minister and his Dept suppressed the fact that they had received the foregoing IMF specific pointed advices. NAMA was officially anounced the following month in April 2009, alongside the Budget. NAMA was heavily lead-recommended and heavily supported by preferred crony Economics expert and NAMA sponsor Dr. Peter Bacon and Property expert Mr John Mulcahy (former Chairman and CEO of Jones Lang LaSalle)
It’s also relevant and instructive to remember that in the few days after the publication of his Report into the Banking Crisis, when questioned about NAMA and the re-Capitalisation of the Irish Banks, in early June this year at the INFINITI Conference at TCD, Governor of the Central Bank, Prof Patrick Honohan, stated that “he thought that the NAMA project was viable“. Those carefully measured words could hardly lead one to believe that the Central Bank Governor had any degree of enthusiasm or even a mild confidence in the NAMA Project. In fact it would suggest perhaps the same degree of confidence that an army General might have when being asked to comment on a flimsy pontoon bridge over which he had to move a vast army, while under considerable pressure from the enemy! However, because of his position as Governor of the Central Bank, Governor Honohan is duty bound, under oath of office, to support Official Government Policy in matters relating to Banking and Banking stability. In other words his personal view and his official view may not necessarily co-incide.
Further in relation to experts…..
Deputy Andrews (only present for part of the Presentation) also made a contribution of what could be aptly described as interference static (like what happens the TV picture when you switch on the vacuum cleaner) in Committee room 2. He introduced a diversionary, unhelpful and distracting dollop of politburo-speak, designed to cause confusion and distraction about experts and expertise. We all know what experts and expertise are and it was unhelpful to hear Deputy Andrews distracting thoughts. His contribution was essentially irrelevant and pointless which probably prompted him to leave Committee Room 2 rather abruptly, a few minutes later. Just briefly on this issue of experts…. isn’t it intesting to note that all the highly expensive commissioned Govt expert advisers (fees since Sept 2008 are now well in excess of euro 20m!) have given ambivalent, misleading and indeed down right worthless advice, most of which has been consistently and massively wide of the mark. Contrary to what Deputy Andrews said, any statements made by Mathews have all been entirely based on FACTS, and truthful and correct analysis of those facts. Mathews doesn’t promote opinions. All Mathews’s forecasts have been correct. All his professional forecasts were based on relevant facts and coherent empirical observations and truthful intelligent analysis, on the back of strong qualifications, extensive proven relevant expertise in Property Development, Construction and Investment Financing, as well as Construction and Long Term Contracts Performance Bond Underwriting as well as every type of Bad Loans and Non-Performing Loans recoveries, realisations and work-outs during the Irish and UK “boom” and “bust” Property Cycles of the 1970′s ,1980′s, 1990′s . Deputy Andrews’ diversionary unhelpful comments were an example of unsupported woolly claptrap soundbites. He might reflect on the thought that just because the Govt hired preferred crony professional experts and also International Brand Name presumed experts viz. PWC, KPMG, Jones Lang LaSalle, Goldman Sachs, Merrill Lynch, N.M. Rothschilds etc does not necessarily confer on those firms any presumed merited or justified ability or authority to advise on the composition or quality of the loan assets comprised in the Irish Banking Sector’s Loan books….In fact any intelligent objective professional would seriously question whether the afore-mentioned (conflicted?!) Irish based cosy preferred advisers or indeed the so-called international brand name firms were as well qualified or placed as other Irish based non-conflicted, well qualified, non-crony, non-compromised, non-conflicted, independent, experienced professionals. After all, a non-compromised experienced, well qualified expert ablity to correctly appraise and give good and relaible advice on the composition and collectability of the Loans Portfolios of the Irish Banks is the key and central question concerning the solvency of the Irish Banks!!!
As an interesting and relevant observation, one wonders how or why on 24th Sept 2008 when faced with our impending Banking Sector melt-down crisis the Govt chose to engage Merrill Lynch as its adviser, when it should have been known at that time that Merrill Lynch itself was still struggling for survival on financial “Life-support” having gone bust itself and having been rescued by Bank of America only 10 days earlier on 14th Sept!?
Isn’t it also interesting to note, that, among the most senior members of the NAMA management team, there are a few individual cases who have potential conflicts of interest. However we’ve been assured by CEO Brendan McDonagh a few months ago that the cases where there are potential conflicts of intetest are being managed appropriately! Extraordinary!
To deal with Namawinelake’s Point 1….
It’s not a matter of Mathews’s belief or opinion that Anglo will end up with losses of euro 32bn ….Anybody (not just Mathews) can perfectly see at this point that ANGLO WILL end up with losses of euro 32bn. How? Because it’s already a matter of FACT that Anglo’s un-recoverable embedded loan losses TODAY stand at euro 32bn. I pointed this out and explained it to Anglo’s CEO Mike Aynsley in person in his office on the Monday morning following Anglo’s Presentation to the Oireachtas on 16th June 2010
Namawinelake’s Point 2.
Agreed….of course Donal O’Connor should have been the person to present the up-date Report to the Committee. Several months earlier, Deputy Joan Burton had been repeatedly requesting the Chairman of the Joint Committee that Donal O’Connor should attend the Committee to provide information and answer questions. Donal O’Connor had been appointed a Director of Anglo in June 2008! Following the resignation of Sean Fitzpatrick as Chairman later that year, the Government appointed O’Connor to the post of EXECUTIVE Chairman until he stepped down and Alan Dukes took up the Chairmanship around 10th June 2010, a week before the Presentation to the Committee by Anglo!.
Namawinelake’s Point 3.
I think I know what Namawinelake Means to say, altough he/she doesn’t say it. Anyway, ECB doesn’t publish haircuts. The ECB will advance a loan of over (probably 90% and higher) of the nominal / face value of NAMA bonds lodged as security/collateral for such ECB loan. For such a secured loan the ECB has made a gentleman’s agreement to charge a margin of 1/2% above the current ECB rate of interest which at present is 1%. The ECB rate (not the margin of 1/2%) is variable and subject to change.
A secondary market in NAMA bonds is possible, maybe even probable ….Why….because the NAMA bonds are State bonds incorporating the State’s guarantee. While NAMA hopes to generate and realise funds to enable the State to repay the NAMA bonds from the proceeds of realisation of the bad loans (secured on extremely weak mostly non-income producing property security underlying the NAMA bonds) nevertheless the State (that’s all of us Taxpayers) is obliged to ensure repayment in full of all the outstanding NAMA bonds. The NAMA bonds carry a floating rate of return comprising a Euribor rate plus a margin % (perhaps 3/4% above Euribor). That rate of return, together with the State guarantee might possibly lead to the development of a secondary market in the NAMA bonds.
It may be helpful for clear understanding to read also the explanation written by Professor Karl Whelan in the Irisheconomy.ie blog on 8th Sept 2010 :- ECB, NAMA Bonds and the Irish Banks as Issuers of Sovereign Debt
It’s worth setting out in full. It is clear and precise and easy to understand.
ECB, NAMA Bonds and the Irish Banks as Issuers of Sovereign Debt
The following post was written by Professor Karl Whelan
Listening to Richard Downes question Richard Bruton on Morning Ireland earlier today (“The ECB are funding NAMA at a rate of 1.5%”) I am now convinced that very few of even our smartest journalists understand the basic mechanics of how the funding of NAMA will operate or where the ECB fits in. So here goes.
In exchange for property-related loans, the Irish government will print off €X billion in bonds backed by the taxpayer and give them to the banks. It appears that these bonds will differ in yield and maturity from other Irish government bonds. We are being told that the bonds will pay a floating rate linked to one of the Euribor rates for wholesale interbank lending (there’s a bunch of them corresponding to different maturities. See here.) Some people seem to believe that these assets will somehow be ”backed” by the property assets acquired by the government and that their value may fluctuate based on how these assets perform. I don’t know why these people think this. They will be government bonds backed by taxes levied on you and me.
A figure of 1.5% has been repeatedly mentioned as the initial floating rate on the bonds paid to the banks but, as far as I know, no formula has been provided to justify this figure. The main point to understand here though is this: The 1.5% is an interest rate the Irish government is paying to the banks. It has nothing to do with the ECB.
What happens next to the bonds? Many people start talking about the ECB at this point. However, that’s getting a bit ahead of things. Alan Ahearne’s column on Saturday stated
Nama will pay the banks for the loans using bonds issued by the Government. These bonds can be exchanged for cash on international markets and at the European Central Bank.
I’ll get to the ECB in a second. However, what’s more important is that Ahearne is telling us that the NAMA bonds can be sold on the open market and don’t have to be held to maturity by the banks.
This has very substantial implications for how the Irish state is going to funds itself over the coming years. NAMA bonds being tradable will in effect make the Irish banks competitors for the issuance of Irish sovereign debt with the NTMA. Indeed, it may be necessary for the banks and the NTMA to co-ordinate sales of NAMA bonds on the secondary market with issuance of new bonds by the NTMA.
Of course, this raises the question of why cash-strapped banks wouldn’t just go straight to the open market with the €X billion of Irish bonds and sell them straight away. After all, according to those who propose the NAMA approach, the government will have also bought assets that will turn out to also be worth €X billion, so its net solvency shouldn’t be affected and markets should be no less willing to buy Irish government bonds.
That’s the theory anyway. In practice, I suspect the markets will have grave doubts about whether NAMA will break even. More importantly X is going to be a big number and there is simply not likely to be a market for that large a quantity of Irish government bonds all to be sold off at once.
Now, and only now, does the ECB come in to the picture. Knowing that there will only be a limited market for the NAMA bonds on the open market, it appears that the government and the banks have made something of a gentleman’s agreement not to sell many (any?) of the bonds at first. Instead, the banks can go to the ECB and look for loans. The ECB requires that a bank have eligible collateral to secure its loans. Dodgy developer loans are not on the ECB’s list of eligible collateral; government bonds are.
So, the NAMA allows the banks access to a new source of liquid funds (it appears they are either at or close to their limit in terms of eligible collateral). The interest rate on the loans from the ECB will be at the main refinancing rate. This is currently 1% but it will rise at some point. Note that contrary to what is commonly stated, the ECB will not be buying these bonds—they are forbidden from buying government bonds of member states—they are only requiring that the bonds be available as eligible collateral.
But for how long will this process of large-scale ECB collateralised borrowing go on? Even before the banks receive the NAMA bonds, they have become highly dependent on the ECB, taking about 15 percent of the total liquidity handed out in recent ECB operations. The ECB is currently running unlimited liquidity operations so that any bank with the eligible collateral can get a loan. However, it will at some point return to its usual practice of issuing a fixed amount of liquidity, rationing it off via an auction. One would wonder at that point whether the Irish banks would start selling off the NAMA bonds gradually over time.
For all the information that has been released along with the detailed legislation, I find it strange that none of the issues mentioned here (maturity of bonds, formula to determine interest rates, marketability of NAMA bonds, implications for NTMA issuance, plans for weaning off reliance on ECB operations) have been discussed publicly in any detailed way by the Department of Finance.
End of Post
Namawinelake’s Point 4.
Agreed. Of course it was unnecessary, highly wasteful of Taxpayers’ resources, in fact disgraceful for Anglo management to buy back the bonds for euro 600m! The bonds are intrinsically worth nothing!
Namawinelake’s Point 5.
Of course NAMA can be reversed ….It’s not just Mathews’s opinion or his view…. It’s a matter of demonstrable logical facts and information, analysis of facts, and drawing up an intelligent Action Plan to effect the reversal.
Namawinelake’s Point 6.
Namawinelake may not have heard what was said or may be confused. It’s very simple….I said that closing Anglo would SAVE the Taxpayer at least euro 17bn (i.e. 2bn would be for the account of remaining subordinated Bondholders and euro 15.2bn would be for the account of the remaining senior Bondholders.)
All Oireachtas Committee members were circulated with comprehensive relevant Papers and Documents, details, analyses etc prior to Mathews’s earlier Presentation to the Committee on 5th May 2010. That Presentation on 5th May was interrupted because Herr Klaus Regling had arrived from Berlin at short notice and had sought to give the Committee an interim update on his investigation work into the Banking Crisis prior to publishing his Joint Report with Max Watson 3 weeks later at the end of May. Mathews’s Presentation to the Joint Committee on yesterday 21st July, was effectively the completion of his earlier (interrupted) Presentation of 5th May.
In the light of the above, Namawinelike might care to watch and listen again to the complete recording of the Presentation and also the questions and discussion which followed, mindful that the members of the Committee had received comprehensive briefing papers, financial facts and summarised combined balance sheets, information, analyses and documents beforehand, containing quite a lot of substance with which they would have become familiar before the Presentation.
Every good wishes,