Mathews unveiled as FG candidate

January 23, 2011 1 comment

Paul Cullen, The Irish Times – Saturday, January 22, 2011

BANKING commentator Peter Mathews has been unveiled by Fine Gael as its third candidate in the Dublin South constituency.

Mr Mathews, a prominent critic of Government policy on the economic crisis on television programmes over the last two years, has been added to the party ticket for the five-seat constituency, having joined Fine Gael in the past month.

Mr Mathews was introduced to the media on the Leinster House plinth yesterday by TDs Alan Shatter and Olivia Mitchell.

He said his main priority if elected would be to contribute to the reconstruction of the economy and the “powerhosing” of problem areas of society. A new government’s first task should be to renegotiate the €85 billion Memorandum of Understanding with the IMF, EU and ECB.

Mr Mathews, a chartered accountant by training, claims to have predicted the size of the property bubble and opposed the creation of the National Asset Management Agency.

He said yesterday he told the Department of Finance in January 2009 that the level of writedowns in property values would exceed €50 billion but wasn’t believed at the time.

He will be attempting to win for Fine Gael the seat captured by RTÉ economist and former Dáil deputy George Lee in a byelection.

Mr Lee gave up the seat after eight months over differences with the party leadership.

Mr Mathews denied that he was a “celebrity economist” or “George Lee Mark II” candidate. He said comparisons with Mr Lee were irrelevant and his background as a banking analyst was “actually quite boring”.

Mr Mathews was a member of the Progressive Democrats at the time of their foundation but left shortly after.

His wife Susan was involved in Young Fine Gael. The couple have four grown-up children and live in Mount Merrion.

 

Advertisements
Categories: Opinion

The Battle of Ireland – Lame team failed to point finger back at ECB

November 29, 2010 2 comments

[This article was published in the Irish Times on 30/11/2010]

The ECB is 50 per cent culpable, but we are to pay 100 per cent of price

THE GOVERNMENT has signed us up to a bad deal. The European Union and the European Central Bank (ECB) have stitched us up. The taxpayer is now being forced to repay money to the European banking system as well as the Irish banking system because of policies implemented by the Government, by people who frankly don’t know what they were about and haven’t the wit to learn from those who do, even when it’s clearly and comprehensively explained to them.

We have been used by a European banking system that was flush with cash and needed someone to lend to. It operated recklessly and with dereliction of a duty of care. The EU banking elite, the European Commission and the ECB don’t care what damage they do to our country. They just want their money back at any cost. There is no European solidarity here. That too is an illusion of our deluded politicians and officials. We needed a strong negotiating team with the will and the nerve to say “No! Here’s what the people of Ireland need. This is what we will accept.”

We needed tough negotiators prepared to withstand the pressures that were brought to bear on them, because they understood what they were about and knew it was right. We needed our best politicians to back this team.

This Government had no right to agree to the deal the Taoiseach announced on Sunday night. This Government has failed us. It should be removed immediately, without delay.

Ten days ago, the troika arrived in Dublin: teams from the International Monetary Fund (IMF), the European Central Bank and the commission of the European Union. The ECB was alarmed by a recent and growing problem. A €130 billion problem. A problem sited in the Irish banking sector that the ECB helped to accommodate and then specifically enabled to grow.

First, what Ireland’s negotiators had a duty to clearly demonstrate to the ECB/EU/IMF team was that the ECB had been 50 per cent culpable in its failure in regulation and supervision of Irish banks for four years up to 2007-2008 in which the banks had conducted reckless lending

Second, Ireland’s negotiators should have emphasised the ECB had knowingly advanced loans to the banks which specifically enabled the banks to redeem in full senior bondholders when it was obvious that emerging loan losses at the banks clearly showed they were headed into insolvency.

Increasingly this year, EU financial markets experienced alarming volatility while the EU economies referred to as the Piigs (Portugal, Ireland, Italy, Greece and Spain) presented large and growing fiscal deficits on the back of chronic structural problems.

In particular, ballooning losses in Ireland’s banking sector started to receive market attention. By summer, it was apparent these problems were acute. Ireland’s banking losses started to impact on markets as did, but to a lesser extent, the structural weaknesses in Ireland’s fiscal management.

However, the EU appeared to be reasonably satisfied Ireland’s fiscal problems were being addressed. Olli Rehn had expressed approval for the National Recovery Plan that was being announced while ECB and IMF teams were conducting negotiations.

In relation to the austerity programme, there will be enormous pain for the people of Ireland in making the adjustments. No one, least of all outsiders from the IMF, EU and ECB, needs to tell us or prescribe for us what we have to do. We can, without the direction of others, democratically ensure the adjustments are borne and shared fairly. We must not overload the weaker and vulnerable members in our society.

The stronger and more fortunate must step up to the challenge and lead by example. That challenge is addressed to our senior politicians, senior civil servants, leaders in business and senior management in semi-State companies. Also to senior members of the professions including law, banking, accountancy, medicine, insurance, property development and investment, construction, valuation/surveying etc. We must reduce the differentials in earnings between people at the top and people at the bottom of income scales in Ireland.

Similarly, there were undeniable factors surrounding the reckless lending of the Irish banking sector over a four- to five-year period up to 2008. The outcome of what could be seen as something of a credit cocaine surge was an unprecedented financial meltdown in September 2008. Regrettably, the Government, its advisers and others failed to acknowledge the true scale of the reckless lending.

The fact that embedded loan losses in the original €77 billion National Asset Management Agency (Nama) loan listings were not €23 billion, as the Government had insisted when bringing forward the Nama project for enactment, but rather approximately €45 billion, sat uncomfortably with Government. They chose to deny reality. That denial has proved disastrous.

In September 2008, the Government walked us into what has turned out to be the unimaginably costly consequences of the extensive two years’ blanket guarantee for all the liabilities of the banks. We know there was no need to introduce a guarantee other than for deposits, including inter-bank deposits, on that occasion.

As a direct result of the Government’s ill-judged Nama strategy, we have the ECB-IMF bailout.

It was patently obvious last week was the time for us to say “No” – unless there was built into the deal a writedown of €60 billion on the €130 billion lent by the ECB to the banks.

A writedown of this magnitude should have been insisted upon for the following reasons.

From September/October 2008 to June 2009, the ECB had advanced over €35 billion emergency liquidity loans to Irish banks.

The ECB had hoped to have got this back by now but it didn’t because the improvement to the liquidity the Government had told us was going to happen as a result of Nama didn’t happen. So the banks had to retain the emergency €35 billion. In addition, when the transfer of bad loans from the banks to Nama started, loan losses were far higher than expected. The banks, especially Anglo and Irish Nationwide, needed huge recapitalisation and this resulted in further loan advances, probably in the order of €30 billion, from the ECB.

Finally, the markets lost faith in Ireland mainly because the Government’s bank loss estimates have been appallingly bad.

On September 30th, 2010, Minister for Finance Brian Lenihan announced “finality” of bank losses at €50 billion. However, reliable counter-estimates of Nama-type loan losses are now totalling €66 billion, excluding losses for mortgages, personal lending, and the small-to-medium enterprise sector.

Add to this independent estimates of anticipated mortgage and personal loan losses of €25 billion. Taken together, the total estimated loan losses in the banks amount to €91 billion.

Because of rating agency downgradings and market volatility in recent weeks and months, the banks borrowed further from the ECB and also from our own Central Bank. The net result was that the ECB woke up alarmed to find that instead of its initial advances of about €35 billion to Irish banks in the first half of 2009 being reduced following a stabilisation of the banking sector, quite the opposite happened.

That’s why the ECB is now staring at a whopping total of €130 billion loans advanced to the Irish banks, including the €60 billion which it lent enabling them to redeem senior bondholders.

And that’s why the overarching duty for Ireland’s negotiators was to present those indisputable facts assertively to the ECB, demonstrating how the ECB itself contributed directly to the problem for which it was now forcing Ireland to pay.


Categories: Opinion Tags: , , , , , , , ,

Vox Pop outside Dáil Éireann

October 31, 2010 2 comments
Categories: Opinion

Irish Bank reconstruction on ‘Irish Debate’

Categories: Opinion

“Stark Reality” of Bank Losses

September 12, 2010 1 comment

“Stark Reality” of Bank Losses

Madam,

I refer to Dan Loughrey’s, Head of Group Communications, Bank of Ireland (BoI), letter published 10th Sept 2010 Irish Times.

On 16th September 2009, Minister for Finance, Brian Lenihan, advised by PricewaterhouseCoopers, reporting consultants to NTMA and the Department of Finance(PWC are also auditors to BoI – potential conflict of interest?), presented to Dail Eireann the summary details of the Loans Listings from 5 Irish owned banks which would be participating in the NAMA Project.

The facts were as follows:- The Minister told the Dail that NAMA would purchase loans totalling €77bn from the Banks for €54bn.  Included in the €77bn were €16bn loans to be purchased from BoI.

Mr Lenihan stated that the loan write-downs applicable to the €77bn would total €23bn, representing an average write-down of just under 30%.  We were told that BoI had the least “bad” loans and therefore its loan write-downs would be below the average of 30%.  A 30% write-down on €16bn indicated that write-downs on BoI’s €16bn NAMA destined loans would amount to €4.8bn.  This level of write-down would put pressure on BoI to re-capitalise in order to be able to buffer further losses on its Mortgage loan book, its corporate loans, its personal lending book etc.  Re-capitalisation at a €4.8bn level would result in severe dilution to the existing Shareholders.

Dan Loughrey states that BoI’s NAMA listed loans at audited (by PWC) Balance Sheet date 31st December 2009, only 3 months after 16th September 2008, amounted to €12bn.  Curiously, a large €4bn amount of re-classification of NAMA “eligible” loans had materialised in the 3 months since September.  No plausable, transparent explanation has been offered.  The effects of that re-classification were as follows:- At a 30% write-down level, reducing the NAMA destined loans from €16bn to €12bn, achieves a smaller total write-down of €3.6bn instead of €4.8bn and, correspondingly, a reduction in losses of €1.2bn.  In turn, this reduces by €1.2bn the pressure on the Bank to re-capitalise thereby reducing / avoiding existing shareholder dilution.  This type of “massage” accounting actually undermines  proper measurement and true assessment of the capital requirements of the bank, and, arguably, undermines the safety of customer deposits.

As Christmas 2009 approached, all emerging evidence across the banks and markets indicated that the scale of the asset bubble and bust was far greater than the Government and the banks and their beholden professional advsers had feared. Unfortunately, from the very outset of the NAMA Proposal in April 2009, despite the warnings of a substantial body of independent analysts, the Government and its cheerleader advisers had insisted that their approach was unassailably correct. However, shortly after Christmas it had become obvious that far higher levels of loan write-downs were required.  Levels of at least 40% were clearly indicated even on the relatively better and less impaired well documented loan cases.

40% write-down on BoI’s €16bn loans amounts to €6.4bn. This should be rounded to €6.5bn as a minimum capital replacement requirement to adequately address the non-recoverable element in its original NAMA listed loans all of which still have to be managed and worked out irrespective of any and all re-classification carried out prior to 31st Dec 2009.

In relation to reviews and re-classifications on the original NAMA loans lists since September 2009: not surprisingly Anglo’s NAMA listed loans rose from €28bn to €36bn; AIB’s NAMA loans essentially remained at €24bn; Nationwide’s (INBS) rose from €8bn to €9bn; EBS remained at €1bn; Lastly and completely “against the tide”, and surprisingly, BoI’s fell from €16bn to €12bn!  There’s no apparent objective logic for such a major reduction re-classification by BoI.

Some observations are relevant.  A re-classification by BoI would have been helpful to any share placing or rights issue under contemplation for early 2010.  Lower loans listed for NAMA in the audited 31st December 2009 accounts would present a stronger capital position to would-be investors.  To use Dan Loughrey’s term, a stronger audited Balance Sheet at Dec 2009 would become a “major plank” for such would-be investors.  And as pointed out above, even a €1.2bn improvement in the capital position, as a result of €4bn lower NAMA loans at a 30% write-down level, is quite significant.

More recently, the bank’s half year results to 30th June 2010 revealed evidence of some further “massage” accounting.  In this instance NAMA listed loans on the audited balance sheet were transferred to NAMA shortly after 30th June, crystallizing losses of €300m after 30th June that had not been provided for at 30thJune.  This meant that losses for the 6 months to 30th June 2010 were understated by €300m.

In relation to PCAR capital ratios, there’s an inbuilt assumption that the assets and liabilities of the institution will realise their stated amounts.  That’s where the problem is for Irish institutions.  The recoverability of the loan assets of the Irish Banks is still only in course of truthful measurement.  To date loan losses have been hopelessly undermeasured.

Two years have passed since the Blanket Guarantee date 30th September 2008. Discovery of the true extent of appalling lending by the banks and the frightening scale of loan losses have terrified the government, the institutions, the banks and their professional advisers into drawn out denial.  This has been unhelpful and the real economy has been hurting badly for 2 years.  Businesses are bankrupt, hundreds of thousands of jobs have been lost, unemployment stands at 14%, intelligent educated young people emigrate etc.  People are depressed from lack of truth and honesty amongst our politicians and professionals.  These are the real stress tests that the people of Ireland have experienced.

In regard to Moody’s upgrade, I invite BoI to furnish Moody’s with a copy of my article in the Irish Times, together with a copy of Dan Loughrey’s letter on behalf of BoI and also this reply.  I should be delighted to take any questions from Moody’s

I would remind Dan Loughrey and the Board and Management of BoI that all the citizens of this State, jointly and severally, guarantee all the liabilities of BoI and all the other Irish owned banks. That’s why we should have a say in what levels of capital each and every bank should maintain. The regulators are merely our assistants.  We shouldn’t be in awe of our public servant assistants.

Finally, I should be pleased to cordially invite the Board and Management of BoI or any of their representatives to a public debate on radio or on TV on the issues discussed in my article, in BoI’s letter to the Irish Times and in my reply.

Yours truly

Peter Mathews

B.Comm, MBA, AITI, FCA.

Support of Anglo Irish Bank Strains Ireland

September 1, 2010 1 comment

August 31, 2010 International Herald Tribune by By LANDON THOMAS Jr.

DUBLIN — Can one bank bring down a country?

Anglo Irish Bank, the midsize Irish lender whose profligacy has come to symbolize the excesses of the real estate bubble here, is doing its best to find out.

No other country aside from Iceland suffered a banking bust as severe as Ireland’s during the financial crisis. Ireland was also the country that took the most direct route in tackling the problem, by recognizing upfront the bad loans of its devastated banks and transferring them to government ledgers.

Both the United States and Britain avoided such a move by taking stakes in their troubled banks and, in the case of Britain, insuring their worst-performing loans.

Now the Irish government’s strategy is being called into question as its credit rating suffers and its borrowing costs resume their upward trajectory. Ireland’s struggle to cope with its mounting bank losses could well be a harbinger for other parts of Europe and for the United States as stuttering economic growth and stagnant housing markets put further strain on bank balance sheets.

Anglo Irish, which on Tuesday reported a first-half loss of 8.2 billion euros ($10.4 billion) also said the government had injected an additional 8 billion euros ($10.16 billion) into the bank, bringing total aid so far to 22 billion euros.

Mike Aynsley, the bank’s chief executive, said Tuesday that he expected the government’s total investment in the bank to be about 25 billion euros ($31.75 billion). He added that commercial property, the bank’s core lending market, which is already down 60 percent, had not yet reached bottom.

“Anytime you see a correction like that, you will see carnage,” he said. “But we think that the 25 billion euros will be largely sufficient.”

Analysts here expect the bank’s defunct loans to hit 35 billion euros, or about 22 percent of Ireland’s gross domestic product — a hard-to-believe figure, given that Anglo Irish at its peak was just the third-largest bank in Ireland. In 2008, total Irish bank lending to households and nonfinancial companies was more than 200 percent of G.D.P. — by far the highest such ratio in the euro zone.

The growing losses at Anglo Irish and other Irish banks are expected to cost the government 80 billion to 90 billion euros, according to Standard & Poor’s, which says 35 billion euros will be needed for Anglo Irish — a figure the government and Mr. Aynsley say is significantly overstated.

The ratings agency said that the country’s banking liabilities would push its debt-to-G.D.P. ratio to 113 percent in 2012, higher than Spain’s and Belgium’s and approaching the levels of countries like Italy and Greece.

Last week, S.& P. downgraded Ireland’s credit rating to AA-minus from AA, a change that has driven the already steep yield, or risk premium, on 10-year Irish government bonds to new highs of 5.5 percentage points — second in the euro zone only to Greece’s 11 percentage points.

“This is out of control and the markets see it now,” said Peter Mathews, an independent banking and real estate consultant here, who for the last year has been waging a furious one-man crusade, warning of Anglo Irish’s escalating losses and calling for the bank to be liquidated — with bond holders, not the Irish taxpayer, taking the hit.

“How bad can it get?” Mr. Mathews said. “Irish debt paper could stop being tradable, and the outside agencies like the European Union and the International Monetary Fundmight have to come in.”

Mr. Mathews’s view in this regard represents an extreme. Economists at the Economic and Social Research Institute, an independent organization here, cite the government’s cash cushion of about 40 billion euros — much of it set aside at the outset of the crisis — as a crucial safety net that separates Ireland from Greece.

The government, for its part, argues that Ireland’s approach to bad loans — taking them off the balance sheets of the banks and then assuming responsibility for them — was correct.

“Our banks would have probably assumed zombie-like status if we had delayed in recognizing these impairments,” said John Corrigan, the chief executive of the country’s debt management agency. Part of his organization is the National Asset Management Agency, the government group that has spent the year buying bad loans from banks.

“The downgrade was deeply disappointing to us, but we still have a better credit rating than Italy and Portugal,” he said. And international bond investors, who own about 85 percent of the government’s debt, continued to buy its paper, he said.

Will the Anglo Irish loans lead to a buyers’ strike by investors?

“No,” said Mr. Corrigan with a vigorous shake of his head. “We have enough liquidity to take us well into the second quarter next year.”

While Mr. Mathews and the government may be opposed on how to handle the problem, they agree on how absurd the lending practices at Anglo Irish were.

Even by the standards of the global banking collapse, Anglo Irish stood out. From a loan book of about 75 billion euros when the government took over in 2009, Anglo Irish says that it has only about 12 billion euros in loans that it classifies as performing. The bank is expected to transfer 36 billion euros in troubled loans to the asset management agency — about half its existing loans.

“It was mad — a credit cocaine run,” said Mr. Mathews, his voice rising in frustration.

He was standing outside a gravel-strewn 25-acre plot, flanked by a housing project and the rough Dublin docklands. In 2006, as Ireland’s real estate frenzy reached its peak, a group of developers paid 412 million euros ($523.2 million) for this industrial site, backed by a 300 million euro loan from Anglo Irish.

Mr. Mathews, a former banker who now advises real estate developers, estimates that the land may now be worth only 20 million euros — if it can be sold at all.

It is not just in Ireland that the bank’s aggressive lending stood out. Through its private client division in Boston, Anglo Irish was one of the most wildly eager property lenders in the United States. It financed the construction of skyscrapers in Chicago and shopping centers in Boston, not to mention lending more than $500 million to a series of troubled and in some cases failed real estate projects in New York.

Most notorious of those was a top-of-the-market, $393 million mortgage in 2007 to the Apthorp, a luxury apartment building in New York that has been home to celebrities like the writer Nora Ephron and the actor Al Pacino.

After a series of legal disputes, the building’s developers are struggling to convert the complex into an upscale condominium. Anglo Irish recently said that rents on the units would be paid directly to the bank — an indication, analysts say, that the project’s developers may be facing further financing strains.

“It was just the height of hubris,” Mr. Mathews said as he drove away from the deserted development site in Dublin. “And why should Citizen Joe and Mary pick up the tab for this when it was the bondholders that had all the aces in their hand?”

Categories: Opinion Tags: , ,

Misleading Reporting and Mounting Loan Losses at the Irish Banks

August 23, 2010 2 comments

This article originally appeared in Friday August 20th Irish Examiner on page 13 (Analysis) under the headline “Time to rethink bank rescue plan“.

In the last fortnight AIB and Bank of Ireland (BoI) respectively reported their half year results.  Both sets of accounts were untruthful.  In the case of AIB, their reported loan losses were under-stated by €500m (€.5bn).   In the case of BoI their reported loan losses were under-stated by €300m (€.3bn).  This is not acceptable.

Also in recent days we were informed that Anglo’s loan losses had risen from the €22bn admitted to an Oireachtas Committee on 16th June 2010, to a revised figure of €24.35bn.  Again, this is misleading and unacceptable.

It would be far more honest and truthful of the Minister to acknowledge that embedded irrecoverable loan losses in Anglo are at least €32bn (not the admitted €24.35bn) and will rise to not less than €36bn. Embedded irrecoverable loan losses in Irish Nationwide Building Society (INBS) are at least €4bn (not the admitted €3.2bn) and will rise to not less than €6bn.  Fundamentally, that’s why both Anglo and INBS should be closed down. Further details in relation to close-down consequences (they have been considered and presented to an Oireachtas Committee) are not discussed here.

In relation to the 3 viable banks, AIB, BoI and EBS,…. AIB needs €10bn (not the stated €7.4bn before year-end) re-capitalisation now, to cover its Property Development and Investment loan losses. BoI needs €6.5bn (not the stated €3.65bn) re-capitalisation now, to cover its Property Development and Investment loan losses.  EBS needs €1bn in re-cap. That’s a total immediate re-cap requirement of €17.5bn for the 3 viable banks.

These 3 banks should be re-capped at this level without delay and temporarily nationalised…. for the sake of the country. The absurd situation at present is that these 3 banks couldn’t even open for business without the State’s Blanket Liabilities guarantee. And yet the State has had negligible influence on these 3 institutions since September 2008! Astonishing!

What should, of course, now happen (it should have happened soon after the Blanket guarantee was put in place) is that Bondholders in the 3 institutions should be directed by the State to contribute to this re-cap at a level of say €6.5bn in appropriate proportions. [As part of this restructuring, the State might offer bondholders a small (token) debt for equity swap]. The State would invest the balance of €11bn by way of a State Banks Re-Cap Bond issue (zero coupon).

The State’s earlier investments (€3.5bn each to AIB and BoI) plus the “fresh” €11bn, making a total of €18bn, would be more than recovered with a profit / gain in 5 years time by sale of the investments in the 3 institutions. An undemanding €3.5bn – €4bn level of normal maintainable annual profits for the combined 3 institutions multiplied by a 6.5 times Price / Earnings (P/E) multiple gives a valuation range of €22.75bn – €26bn. All three viable banks would thus be transparently and successfully nationalised temporarily (5 years) for the purposes of their full rehabilitation / re-booting.

NAMA loans transfers should be reversed (fundamentally this is merely accounting book entries). Recoveries Divisions in the Banks would be tasked with loans recoveries / restructurings / work-outs etc, at the re-cap fully written-down amounts. This Banking Sector Re-Capitalisation Action Plan would, of course, entail full clean-outs of the bank boards and major senior management changes plus some infusions of new management with excellent leadership temperaments. Perhaps senior NAMA personnel can be re-deployed into the Banks Recoveries Divisions to provide fresh operational leadership.

All of this could be put in place very speedily (weeks). This type of robust, transparent re-capitalisation of the Banking Sector is what is needed for the hugely necessary asset price and rental levels corrections to continue in order to repair our economy. Unless this happens there will be no recovery in the overall real economy, the economy that produces, distributes and exports goods and services and supports jobs and employment.

Peter Mathews

19th August 2010

Categories: Opinion