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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.


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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.