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“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.

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Anglo’s paper profit

July 23, 2010 4 comments

An elaboration on NAMAWineLake’s point 4 in the previous article:

Anglo had on its Balance Sheet euro 2.4bn “face value” (i.e. euro 2.4bn was the nominal value of bonds originally issued meaning that when the bonds were originally issued Anglo raised euro 2.4bn cash and at the same time entered into the obligation to those bondholders to pay back those bonds in full at the bonds’ redemption date, that is, at the end of the term of the Bonds.

So, after original issue of these bonds, Anglo was carrying the liability on these bonds (i.e. euro 2.4bn) on its balance sheet.   Now, because Anglo is now a totally collapsed bank seen to be a basket case Bank, which made loans that will never be collected in full, all investors, from shareholders to bondholders are very well aware that they will never get their money back because ther just arren’t enough assets on Anglo’s balance sheet which can be sold or realised to raise the cash to pay them back.

Thus, the Bondholders know that essentially the Anglo Bonds they hold are worthless!  But because of the confusion and also because the State Guarantee (which expires at end Spt this year) gives the “false” impression that bondholders should be fully covered by the guarantee, the Management of Anglo offered to the bondholders to buy back from them (the bondholders) their nominal/face value bonds totalling euro 2.4bn for euro 600m which is euro 1.8bn less than the face value euro 2.4bn.

And now Anglo Management are trying to play up the absurd notion that they have thus been successful in achieving a Profit of euro 1.8bn on what they called a Liabilities Management Exercise Event!!

What I’m saying is that the truth of the matter is that the Bondholders should congratulate themselves that before the expiry of the guarantee, they were able to sell back to Anglo their worthless bonds with a face value of euro 2.4bn for euro 600m cash!  If, in the true and best interests of the taxpayer, the correct decision which is to close Anglo, was announced, then the euro 2.4bn bondholders after Sept this year would get nothing clearly demonstrating how Ango’s board and managment has stupidly missed out on saving the taxpayer a further euro 600m, which instead  was stupidly paid out to the euro 2.4bn bondholders.

Categories: NAMA Tags:

Response to NAMAWineLake blog

July 22, 2010 3 comments

see post Banker Mathews at the Oireachtas again

The blog at the link above was emailed to me and I’ve responded below:

Dear Namawinelake,

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!!

Read more…

Categories: NAMA, Opinion

President can still pull off a ‘financial Dunkirk’

November 14, 2009 3 comments

THE NAMA Bill is essentially perhaps the most financially toxic piece of proposed legislation that has ever been presented to the Oireachtas.

Judging by the Dáil debate it is apparent that the nature, depth and extent of the banking sector’s perilous financial situation is just not properly understood by our politicians and even by some of their advisers.

My previous letter (November 7) clearly shows how the NAMA experiment will result in losses on loans recoveries of not less than €11.65bn. No one has been able to fault that analysis.

Huge denial in government, departmental and banking quarters still persists. Such stubborness and obduracy will cost the country enormously.

Irrefutable facts and correct analysis clearly show that the negative financial consequences of NAMA for the Irish people will be on an appalling scale. There was a much sounder alternative to the NAMA bill – a transparent, well structured, correct solution to the banking sector’s crisis. It would involve immediate, robust and adequate recapitalisation and pre-privatisation of the banks. It would require a writedown of their bad loans by about €40bn to realistic recoverable amounts and recapitalisation by writing down existing bondholders in the banks by about €20bn (in appropriate proportions) and injecting new state capital of about €20bn.

Both these elements could have been drawn up, negotiated and put in place expeditiously. This alternative is transparent and would have had the inbuilt advantage of motivating the banks to clean up their acts and earn their way back to market/shareholder independence over five or six years while a state investment trust company held a majority shareholding control following the recapitalisation.

If Finance Minister Brian Lenihan had shown courageous leadership and steered this correct course, it would have enabled him, without political embarrassment, to bypass the NAMA concept and move urgently to the robust recapitalisation and pre-privatisation of the banks, thus preventing stagnation and creation of a property market swamp and consequent long drawn-out economic decline, in addition to the enormous losses on loans recoveries exceeding €12bn (more probably approaching €20bn) that the NAMA model entails.

The country is facing a “financial Dunkirk” and it demands courage, leadership, decisiveness and all-party support as well as national co-operation from all our citizens to follow the right path.

President McAleese has the opportunity now to invite the minister to bypass the costly, inadequate NAMA concept and move swiftly to recapitalise the banks. Proper recapitalisation means proper liquidity.

Peter Mathews B Com, MBA, FCA, AITI
Mount Merrion
Co Dublin

This story appeared in the printed version of the Irish Examiner Saturday, November 14, 2009

Abandon every hope, ye who enter here

November 13, 2009 1 comment

Reported today in the Irish Times:

The Minister for Finance this morning said he was not contemplating failure in the operation of the National Asset Management Agency (Nama) following the passing of legislation to create it…

The Bill passed its final stage in the Dáil yesterday by 81 votes to 62.

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The NAMA Bonanza – boNAMzA?

November 8, 2009 4 comments

Writing my last post and thinking about Deputy McGrath’s political speak raised a couple of questions in my mind about the NAMA business plan and so I’ve gone back, yet again, to look at the numbers. I wanted to study closer the argument about the value of the underlying assets and their ability to cover the NAMA loans.

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Categories: NAMA, Opinion Tags:

None so blind as they that won’t see

November 4, 2009 5 comments

Lady S. Not at all; but, you know, there’s none so blind as they that won’t see.
Jonathan Swift (1667-1745, Dublin) A Tale of a Tub and Other Satires (1704)

For those of you who watched RTE’s Prime Time last night you will have seen what happens when a politician meets a banker. If you’d like to hear what happens when a banker meets a banker listen here. I’m reminded of Fiona Looney’s reply to Vincent Browne on his TV3 show last month when asked what she thought of NAMA: “Oh it’s all very honours, isn’t it?”

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Categories: NAMA, Opinion