Peter’s Analysis

Irelands’ Banking Crisis

A Sounder Alternative to N.A.M.A.

Immediate Re-Capitalisation of Banks by STATE Injection of Equity and Convertible Loans for a Temporary Holding Term (5-7 years)

Incorporating Information on Bad Loans and Bad Loans Write-downs
Announced by the Minister on 16th Sept 2009

Background

Creation of a dangerous Credit Pyramid Bubble got under way in Ireland about 2002 – 2003.

At that time the Ratios of Loans to Customers / Customers Deposits at the Irish Banks and Credit Institutions started to rise sharply. That was proof positive that the foot was firmly on the Credit Creation Accelerator at the Irish Banks. This was not only financially dangerous and reckless. It was far worse. It was professionally financially malfeasant. Why? Because as the Regulator and every Bank Director should know, the Boards of Banks
should always act strictly in accordance with the prudential Principles of Fractional Reserve Banking. In simple terms, the Boards of Banks should ensure that the Ratio of Loans to Customers / Customer Deposits is maintained in the region 80%-90%. To exceed 90% is exposing and imperiling the liquidity and solvency positions of a Bank.

The self-regulating Principles of Fractional Reserve Banking are considered in the textbook example of conservative Westminster Bank, before its merger into National Westminster Bank. At Westminster the Board strictly operated the following Fractional Reserving Policy:-

• For every £100 deposited, the Bank only lent out £86.50, retaining £13.50 as a Reserve.
• The £86.50 money lent out, in turn, eventually made its way back to the Bank in the form of new deposits and the Bank operated the same Fractional Reserve ratio of Loans/ Deposits (i.e. 86.5/100) every time it took a new deposit and made a new loan.
• Therefore, mathematically, the Total Loans (Credit) that could be created from the original £100 Deposited in the Bank was Finite, [it could never be more than £641 at the 86.5% Loans/ Deposits ratio, and also, mathematically, these Total Loans were backed by £100 Reserves (i.e. the sum of all the parts of the Deposits not lent out but held in Reserve, each time a loan was made)].

Major acceleration to Credit Creation takes place when the Fractional Reserve Ratio
(i.e. the Ratio of Cash that is not lent out every time a deposit is made, £13.50 / £100 in the Westminster Bank example) is made smaller and approaches zero. In the Westminster Bank example the initial £100 Deposit will grow to a higher but still Finite Total Loans amount because each time when a Deposit is made a smaller % amount of that Deposit is held back in Reserve and a larger % of that Deposit is advanced as a new Loan. At a Loans/ Deposits ratio of 100%, the Credit Creation theoretically becomes limitless (Infinite) and there are no Cash Reserves to meet repayment calls by Depositors. The same applies with even greater impact when Loans/ Customers Deposits ratios exceed 100%.

In the late 1990’s previously unimaginable expansion in credit creation came about globally with the manufacture and distribution by Banks of new credit derivative products, near cash commercial paper, cash substitute products, new financial assets, new financial instruments and new financial definitions for all these new financial assets classes. Just as Banks were creating and distributing all these new forms of credit and financial assets, many of them were also dismantling the banking principle and discipline of strict fractional reserving by expanding their lending at Loans/Deposits ratios far in excess of 100%. The twin Credit “turbo charge” of New Products Credit Creation plus Traditional Loans Credit Creation without the safeguard of strict self-regulating fractional reserving meant that Overall Credit Creation soon went out of control both in national and global markets. This extremely precarious situation should have been stopped by Governments and financial regulators but it wasn’t. The financial regulators were weak in character, misinformed, effectively powerless and largely irrelevant. There’s no doubt whatsoever that what had been created by the Banks was a massive infinite Credit Pyramid Scheme and that a Crash / Bust was bound to happen, probably sooner than later because of the exponential factor in what was becoming infinite Credit Creation. Mathematic’s Exponential theorem demonstrates how the Crash / Busts were absolutely certain to happen. The only matters that couldn’t be known with certainty were where and when the Crash / Busts would occur.

Here in Ireland, beginning about late 2002 and leading up to the crash in 2008, the
Irish Banks spectacularly mimicked the reckless and malfeasant lending behavior of their counterparts in light touch regulation economies such as the USA and the UK. The Irish Regulators and Supervisory Authorities and the Boards of the Irish Banks deliberately abandoned the Principles of Fractional Reserve Banking. On the back of Customers’ Deposits, they turned to highly volatile inter-bank markets at home and abroad seeking
inter-bank deposits to add fuel to their lending escapades.

They did this with massive (exponential) credit creation effect, creating our own
CREDIT PYRAMID BUBBLE which became the fuel for the Property and other Capital
Assets Bubbles all of which were bound, by mathematical logic, to lead to the certainty
of a Bust. The mechanics of Loans /Deposits ratios in excess of 100% are the
same as those of an exponentially expanding Pyramid Scheme. Earlier this year, in April 2009, Greg Pytel, a mathematician at the London School of Economics, wrote an excellent article entitled “What Financial Crisis?… it’s a Pyramid, Stupid!” demonstrating and expertly explaining this Credit Pyramid construction.

Pytel demonstrates how exponential Credit Creation as a result of Banks operating at
Loans / Customer Deposits Ratios exceeding 100% very soon becomes a Credit Pyramid
or Ponzi Scheme. He further demonstrates how the Credit Pyramid creation in the UK
was the core cause of the UK Financial Institutions’ Insolvency and Bust. Precisely the
same Creation of an unsustainable Credit Pyramid happened in Ireland.

Analysis, Discussion and Recommendations

Recent research and analysis of the most up-to-date published accounts of the 6 Irish
Owned Banks and Building Societies, reveals that their Loans / Customer Deposits Ratios rose recklessly to their current weighted average of 173%, dangerously well above the
100% absolute maximum limit. These extraordinarily high Loans / Customer Deposits ratios, ranging from the lowest 154% (at Irish Nationwide) to the highest 300% (at IL+P) are proof that the Irish Banks and Building Societies were the root cause and perpetrators of the unprecedented massive Credit Bubble and Bust in Ireland.

The collapse of Lehman Brothers and the financial collapses in other economies did not cause our Credit Pyramid and our subsequent credit market and capital assets (including property) market crashes. Absolutely not. It was our Banks, our Regulators and Supervisors of our Credit Institutions and our Government who were at fault and are fully guilty in that order. Warnings were given by the IMF 3 years before the crash and all our Banks, our Regulators and our Government ignored the IMF’s repeated warnings.

With total disregard for custodial and prudential obligations to their customers, the Irish Banks hijacked their Customer Deposits , gearing up on highly volatile inter-bank Bank Deposits and went on a 5 year reckless, stupid, malfeasant lending escapade, ignoring the prudential Principles of Fractional Reserve Banking. At very best, their behaviour was grossly incompetent, professionally irresponsible and negligent. Some people argue that the Directors on the Bank boards should be held professionally liable in damages for financial losses incurred by investors. Some argue that their conduct as Directors of Bank boards creating a Credit Pyramid Scheme with the characteristics of a Ponzi scheme was in fact criminal and, accordingly, that they should be prosecuted.

The scale of their dereliction from their duty of care and their abandonment of the Principles of Fractional Reserve Banking is illustrated by the following Table of Loans to Customers / Customer Deposits Ratios of the UK and Irish Owned Credit Institutions:-.

UK BANKS LOAN / DEPOSIT RATIOS		IRISH OWNED BANKS LOANS / CUSTOMER DEPOSITS RATIOS
HSBC	90%	IRISH NATIONWIDE (Dec’08)	154%
RBS (Note 1)	112.3%	AIB (June ’09)	155%
BARCLAYS	123.45%	BoI (Mar ’09)	161%
LLOYDS TSB	140.84%	EBS (Dec ’08)	167%
Alliance & Leicester	172.41%	ANGLO (Mar’09)	195%
Bradford & Bingley	172.41%	IL+P (June ’09)	300%
HBOS	175.43%
Northern Rock	322.58%
Weighted Average Loan / Deposit Ratio	174.26%	Weighted Average Loan / Customer Deposit Ratio	173%

Note 1:- The RBS position includes
ABN AMRO – without it RBS position was around 135%
Sources: UK http://gregpytel.blogspot.com/2009/04/largest-heist-in-history.html
Ireland – “Summary Overview Schedule Irish Banks – Key ……” 17th Sept 2009 Author: P.B.Mathews

Key Credit Management Indicators at the Irish Owned Banks are summarised in
SUMMARY OVERVIEW CHART Dated 17th Sept 2009 attached.

Minister Lenihan’s NAMA Bill and Additional Information on Specific Bad Loans, presented
in the Dail yesterday16th September, is now considered. The attached Summary Overview Schedule of the Irish Banks presents both the weaker (improbable) €23bn (soft-sop) write down on the €77bn loans to be transferred out of Banks and into NAMA as well as the more honest and probable €30bn (i.e. €77bn – €47bn estimated current market recoverable amounts of impaired loans). In the author’s view the larger more honest, probable and correct prudential write-down of €30bn should have been chosen for implementation. In choosing the soft sop write-down level of €23bn the Minister reveals more wishful thinking than realism.

Furthermore, in presenting the Bill the Minister failed to reveal the distribution of the total write-downs charge of €23bn over the separate Banks in which it arises. This was a serious omission. Why? Because without reliably prepared estimate information in this regard, it is impossible to properly appraise the write-downs impact on the capital bases of the individual Banks. The Capital Positions of the Irish Banks determine whether they SURVIVE OR FAIL. It’s as simple as that. Accordingly, it was totally unacceptable that the Minister failed to provide this most basic information. This omission is indeed grave and serious because of the enormity of the NAMA Project and its costs and impacts on the People of Ireland.

In the absence of the actual (known but not disclosed) detailed distribution of the total bad loans write-downs, the author has nevertheless, allocated to each Bank the €23bn (and also, for comparative analysis purposes, the €30bn) total write-downs in the proportions of the respective book values of the loans being transferred from the Banks to NAMA. This basis of allocation is the best reasonable basis, in the absence of relevant detailed information which was withheld.

Accordingly:- AIB : BoI : ANGLO : IRISHNATIONWIDE : EBS = 24 : 16 : 28 : 8 : 1 = 77

The write-downs on the Total €77bn book value of bad loans are allocated as follows:-

	AIB	BoI	Anglo	Irish Nationwide	EBS	Total
Level € 23bn write-down	€7.2bn	€4.8bn	€8.4bn	€2.4bn	€0.3bn	€23bn
Level € 30bn write-down	€9.4bn	€6.2bn	€10.9bn	€3.1bn	€0.4bn	€30bn
Last Reported Shareholders’ Funds Including 2 X €3.5bns and Anglo €3.8bn injections by State	€12.1bn	€6.9bn	€3.9bn	€1.2bn	€0.6bn	€24.7bn

Under either Loans write-downs levels, their impact on Last Reported Shareholders’ Funds shows quite clearly that the Banks urgently need substantial re-capitalisation at levels strongly pointing to Temporary State Privatisation or at least a 75% State Ownership for a 5 year Term.

Based on extensive experience in complex large Property Loans recoveries work and applying actual average outcome ratios of recoveries amounts / written down loans book amounts in the 1980’s, mainly in Ireland and also in the UK, the author strongly advises, in this present instance, application of a write-down level of € 30bn (implying a composite write-down of 39% of the €77bn bad loans on the Banks’ books).

In present circumstances, it cannot be over-emphasised that major Re-Capitalisation of our Banks is a fundamental pre-requisite to restore Trust and Confidence in the Solvency of the Banks and to underpin Customer Deposits levels, which, essentially, are the Core Bedrock-rock, the very Foundation of the Banks.

The Minister and the Taoiseach have told the people that the main Objective of the NAMA Proposal is to clean up the Balance Sheets of our Banks by enabling the Banks to obtain NAMA Bonds with a face Value of €54bn in exchange for the written down €54bn Bad Loans Assets transferred into NAMA. The Banks will then go to the ECB and discount the
€51.75bn Senior NAMA Bonds (out of the total €54bn Bonds ) in exchange for cash. The People have been told that this exercise will create liquidity for the liquidity-starved Irish Banks. They have been told that once the Banks are able to access such a large pool of liquidity (cash) then they will be sufficiently resourced to be able to on-lend that fresh liquidity to Irish households and businesses, especially SME’s.

The Increase in Bank Deposits of €46.6bn on the Summary Overview Schedule of the Irish Banks, shows that what is most likely to happen is that the Irish Banks will be tempted to use the €51.75bn cash received from the ECB (the cash they get in exchange for the NAMA bonds) to repay / replace the huge increase over the last 9-10 months or so of €46.6bn of more expensive Deposits received from other Banks in the Inter-Bank Market and from the Central Bank included in Bank Deposits standing at €127.3bn at Mar/June ’09.

Thus, the “instant” liquidity “fix” by getting liquidity cash injections in exchange for NAMA bonds could turn out to be illusory and have as disappointing / disappearing effect as pouring water into sand.

Of much more importance is the danger that heated debate on the NAMA architecture and its finer points is distracting our Leaders from the urgency of addressing the huge need for strengthening the Capital of our Banks in order to eliminate the Fundamental Financial Vulnerability of the Irish Banks, evidenced by the flight of Deposits. It cannot be over-emphasised that CAPITAL, INTEGRITY, COMPETENCE and TRUST in our Banks have to be re-built, in that order. Robust, honest, substantial, immediate Re-Capitalisation of our Banks is a must! This is by far the most pressing problem to address and mend.

What Ireland most needs now is a proper TRANSPARENT COMPREHENSIVE BANK CAPITAL RE-STRUCTURING PLAN, put together by a National Coalition. Ireland is in a Financial Dunkirk situation. The People of Ireland are demanding National Leadership and would support such a PLAN. Rightly, they deeply suspect everything else. Such a Bank Re-Capitalisation Plan would win the respect and support of the People. In addition, such a Plan would be respected by people abroad, most importantly and crucially, by depositors and investors in the international Financial Markets.

Without any doubt, the Overview Summary Chart clearly shows that the Irish Banks urgently need Fresh Capital, SUBSTANTIAL IMMEDIATE RE-CAPITALISATION from the State by way of 75% State Ownership, State Privatisation (Nationalisation) for a holding term to absorb the estimated total €30bn (i.e.39% composite) write-downs of the €77bn very bad loans to their estimated realistic recoverable aggregate amounts of €47bn in addition to sustaining and maintaining the appropriate level of stabilised Shareholder and Loan Capital necessary to support the Banks’ ongoing Banking businesses.

Already the State has injected a total of €10.8bn [€7.0bn into AIB and BoI and €3.8bn into Nationalised Anglo] all of which is included in the €26.85bn Total Shareholders’ Funds (see Summary Chart,). A further immediate State (no other investors are forthcoming) Re-Capitalisation injection of €30bn is needed to absorb total write-downs of €30bn and to maintain Shareholders Funds at €26.85bn,

Regrettably, Minister Lenihan has been persuaded to present the NAMA Bill in such a way that he reduced, ill-advisedly, the required prudential write-down of €30bn by €7bn to only €23bn (i.e. a 23% reduction in the write-down) in order to give substance to a speculative potential long term recoverable economic cycle value embedded in the distressed assets being transferred to NAMA. This €7bn long term economic value is so speculative that any recognition of such a speculation is not warranted in the largest ever proposed transaction in the History of the State.

Having already invested €10.8bn into three of the Banks, the Minister must now insist and ensure that there is indeed sufficient Shareholders’ Capital to absorb the prudential level of write-downs on Bad Loans and also to support the Banks’ Total “Normal” Loans to Customers of €319.8bn (€396.8bn less the Total “NAMA identified” Bad Loans List of €77bn).

Shareholders’ Funds in the Individual banks are now considered: (Summary Spread-sheet)

	AIB	BoI	IL+P	ANGLO	IN	EBS	Total
	€bn	€bn	€bn	€bn	€bn	€bn	€bn
Sh.holders’ Funds Pre- W/D	12.1	6.9	2.15	3.9	1.2	0.6	26.85
Less:- €30bn W/D Bad Loans	9.4	6.2	nil	10.9	3.1	0.4	30.00
Sh.holders’ Funds Post W/D	2.7	0.7	2.15	(7.0)	(1.9)	0.2	(3.15)

Again, the Table clearly shows, just as the reader can infer from the Overview Summary Chart, that all the Banks and Building Societies need immediate Substantial Re-Capitalisation. A State Privatisation Re-Capitalisation of the Banks is strongly indicated and the injection of STATE funds could be by a mixture of Equity and Convertible Term Loans, thus providing some return to the State during the holding term of the Investment.

It is essential that the Re-Capitalisation does not fall short of well-judged exacting prudential requirements. It must completely absorb the full scale of the total realistically assessed Prudential Write-Downs on Bad Loans in order to underpin and stabilise the capital, solvency and liquidity structures of the Banks.

The most fundamental positive effect and signal of an immediate robust State re-capitalisation of the Banks is the rebuilding and underpinning of Trust and Confidence in
the minds of Deposits Customers (and also Inter-Bank Bank Depositors) thus fortifying and strengthening solvency, and liquidity and maturities structuring of the Banks short-term funds.

Banks’ Total Loans to Customers of €396.86bn (see Summary Overview Chart) are now considered. It’s imperative that the €77bn “NAMA Listed” Bad Property Loans be robustly and immediately written down to realistic current market recoverable amounts.

Experience in Loans recoveries and realizations management in the 1980’s at ICCBANK suggests that a composite write-down factor of not less than 40% should be applied across the total of the €77bn Bad Loans. The Minister actually acknowledged that full write-down to current market realistic recoverable amounts requires a write-down of €30bn (39%). Amazingly, he decided not to apply that write-down, arguing that certain advices he received suggest it would be reasonable to add a future economic cycle valuation uplift in the sum of €7bn to the current market recoverable / realizable value of the assets. The result is that Loan assets with a book value of €77bn will be transferred out of the Banks at a total written down recoverable value of €54bn instead of the more prudential value of €47bn.

The Sounder Alternative to NAMA, would restate Bad Loans at Total Recoverable Amounts of €47bn and the Bad Loans would NOT BE TRANSFERRED INTO ANY NAMA. Instead, they would be retained by the banks and managed, recovered and realized within “fire-walled” Recoveries Divisions in the Banks. Their “fire-walled” divisions would be headed up by vetted, “uncontaminated”, non-compromised, expert bank management and staff. Following State Privatisation, the Banks would be directed by New Boards which would be obliged to Report quarterly, on a proscribed basis (comprising Traditional Lines Banking Reports and “Fire-walled” Recoveries Divisions Progress Reports) to a State Oversight / Governance Board, Chaired possibly by the New Governor of the Central Bank.

In overview terms, this recommended correct course of RE-CAPITALISING THE BANKS WILL REQUIRE SUBSTANTIAL (STATE) INJECTION OF CAPITAL AND LOANS thereby resulting in Nationalisation, or Majority State ownership, or State Privatisation if preferred, on a bespoke, purpose-designed holding term basis. The State Privatisation will be short term / temporary, specifically for the main purpose of STABILISING the BANKS’ CAPITAL POSITIONS, and also to allow the BANKS RECOVER and to be firmly FINANCIALLY AND BEHAVIOURALLY REHABILITATED within a Period of SAY 5 YEARS (possibly 7 years but, the author is confident that recovery momentum will be speedier than many estimate).

At that point in say 5 years time, the Temporary State Investment in the Banks can be re-floated on the Markets or sold by direct sales. Reflecting on this, ….if the combined Traditional Lines Maintainable Business Profits of the Banks at that future date, in 5 years time, amounted to an undemanding €6.0bn p.a. in total, then applying a Price/Earnings multiple of only 7 times would result in a reasonably conservative Sale Flotation Market Capitalisation of €42bn for the Equity and Convertible Debt held by the State. So, with this Approach, the State gets back in full its Total Capital injections of €40.8bn (i.e. initial €7bn + €3.8bn + €30bn Re-Capitalisation). Furthermore, during the 5 year holding term, the State will earn interest on the Convertible Loans element of the €40.8bn invested in the Banks.

Another simple transparent advantage of this DIRECT RE-CAPITALISATION OF THE BANKS BY A TEMPORARY / HOLDING TERM STATE OWNERSHIP is that there’s no need to set up an Intermediary /Agency NAMA. The NAMA model involves another layer of unnecessary very expensive costs and also the possibilities for break-downs in communications and confusions in the highly challenging work of loans recoveries and realisations (by far the majority of which will have to be done anyway by vetted and “uncontaminated” non-compromised bank management and staff in the Banks).

Under the author’s Recommendation, IMMEDIATE SUBSTANTIAL RE-CAPITALISATION OF THE BANKS BY THE STATE, it is more likely that there will be speedier recovery for the overall economy, creation of jobs etc. This is because the NAMA Model would delay the necessary process of downward realistic sharp price corrections to property, which is urgently and critically needed for the economy to have realistic prospects for sustained recovery. Specifically, huge property market price corrections from the market highs are ESSENTIAL to correct rents and yields (which became far too high and far too low respectively) to levels that are compatible with starting and maintaining sustained real economic recovery.

Without Property Asset Price corrections (rents need to fall by at least 25% and property investment yields to rise by 50% -100%) there will remain intolerable burden and drag on economic recovery in the competitive production and distribution of goods and services sectors. For example, one needs only to look to rents and yields on Grafton Street Retail Investment Properties to see that rents were far too high, causing tenants to go out of business and that yields on those retail investment properties had also fallen to absurd levels of around 2.5% -2.75%. Yield correction to say 5.5% – 6.75% levels implies that the capital values of retail investment properties on Grafton Street will fall by at least 50% from their high values. This level of price correction is huge but very necessary, right across the market. Without such major price correction the Irish economy is likely to malinger for several years and the cost will be jobs lost and very high levels of unemployment.

One of the significant disadvantages of the NAMA Model is that it will probably encourage a culture of procrastination in decision making leading to postponement in executing robust courses of action to achieve effective recoveries and realizations. In this regard, over recent weeks, it became evident that the Proponents of NAMA were reluctant to recognize the need for substantial downward and enduring asset price corrections in the market. In fact it became apparent that the Values of Property Assets forming part of the security for the Bad Loans were being “talked up” by the Minister’s Valuation Advisor.

The concept of Long Term Economic Cycle Valuation was advanced by the Minister with great emphasis and ill-advised recommendation. The Long Term Economic Cycle Valuation concept is not appropriate because, as an artificial prop, it only adds a speculative unwarranted premium to the current market realisable / recoverable values of the Bad Loans. The real shortcoming in this concept is that it introduces a very real hazard of encouraging, perhaps unwittingly, procrastination of robust executive action needed to prosecute efficiently the challenging work of loans work-outs, recoveries and realizations.

In the NAMA Model there is also the additional Agency / Principal Moral Hazard problem, whereby while the profits or losses on the recoveries will accrue to NAMA i.e. to us, the Taxpayer, ironically, the Banks will be paid anyway, probably handsomely, by NAMA to do the work for us, the Taxpayer. As one commentator remarked …“It all seems very strange!!!”

It’s also hard to make much logical sense of shifting what have turned out to be extremely bad unrecoverable loans (many of which are very poorly secured ….some of the security may be pragmatically inoperable because it was, legally speaking, poorly executed…, in addition to being massively over-valued and bearing no relation to current or sustainable market prices into the reasonable foreseeable future) into a totally new untested NAMA entity charged with the function of MANAGING / RECOVERING / REALISING those loans, especially when the main immediate financial task facing the country is to RE-CAPITALISE THE BANKS ONTO A SOUND AND SUSTAINABLE CAPITAL FOUNDATION in order to RESTORE FINANCIAL TRUST AND CONFIDENCE IN THE BANKS, thereby directly UNDERPINNING CUSTOMER DEPOSITS (AND ALSO INTER-BANK BANK DEPOSITS) etc.

All of the above points are so basic that they shouldn’t even need demonstration or explanation. Clearly, the abandonment of operating the Principle of Fractional Reserve Banking while creating a massive Credit Pyramid Bubble which was certain to lead to the Credit Bust, demonstrates that the Directors of the Banks, the Regulatory Authorities, the Minister for Finance and his Advisors didn’t properly understand the core importance of Fractional Reserve Banking throughout the period 2002-03 to date. That lack of understanding on something so basic and fundamental only highlights their total unsuitability, lack of qualification, knowledge and competence for Bank Board or Regulatory roles.

In addition, it was plainly evident that they knowingly, negligently, complacently and arrogantly conspired in a reckless greedy race for lending growth while embarking on unacceptable and unquantifiable risks, thereby imperiling the safety of their customers’ deposits. On all accounts their lack of understanding of core banking principles, their incompetence and reckless conduct renders them unfit to be Directors of Banks.

On this point, it is imperative to insist that the Boards of the Banks be totally cleared of every director who sat on the board prior to September 2008. Why? Simply because they were the Directors responsible for their Banks’ abandonment of strict self-regulating fractional reserve banking which would have ensured that loans/ Customer Deposits Ratios never exceeded 100%. Our Banks failed because Loans/ Deposits ratios exceeded 150%!

They didn’t even have to buy sub-prime collateralised mortgage backed securities to go bust. They committed their own home-grown bust by ignoring the fundamental Principles of Fractional Reserve Banking, Principles that are fundamental for every Institution licensed to take Deposits. What the Banks did and what the Regulators did by way of dereliction of responsibility and dereliction of duty was truly appalling.

That’s why all Directors on banks’ boards pre-September 2008 should be called on to resign forthwith. If they do not resign, they should be dismissed straightaway. The suggested 2 year period of grace to allow time to find replacement Directors for Board continuity is absurd! Governments and Cabinets change overnight! Continuity of incompetent boards that have caused untold financial damage is certainly not what’s needed.

In relation to installing new Boards at the Banks, the author recommends that each non-executive director commits to not less than 18 hours work attendance per week in their capacity as director (suitably evidenced), that non-executive directors receive annual fees in a range of not more than €100k – €150k pa and that each director sign a personal guarantee in an amount equivalent to twice his / her individual annual director’s fees guaranteeing Deposits placed by Customers at the Bank of which he / she is a director.

Following the Massive Credit Bubble Bust and Property Market Bust there’s now a huge job of Loans recoveries and realisations to be done….. it’s going to need courageous, uncompromised, experienced, superbly led people of integrity to do this. We’re facing a financial Dunkirk .. However, as with all great challenges… there are achievements to be earned and medals to be won! Honest, clear-sighted leadership based on sound understanding of what must be done and why it must be done are essential. Choosing the Correct Road to Recovery is Imperative.

No one doubts the enormous work and outstanding commitment demonstrated by Minister Brian Lenihan and those involved to save and salvage a nightmarish situation. However, the N.A.M.A. Model is not correct ….it is sub-optimal and has inefficient characteristics. As an initially reflex-preferred model to address the Banking Crisis NAMA has received what has been exclusive consideration and advancement almost by accident, perhaps because the Minister and his advisors may have simply a mistaken understanding of the situation in which the Banks find themselves and the root cause of that situation.

The N.A.M.A. approach is circuitous in design and is likely to become too drawn-out. It will entail unnecessary delays, confusions and obfuscation in the challenging course of the robust work of loans assets recoveries and realisations. It will be prone to operational break-downs in communications and sub-optimal decision-making and political interferences.

Finally, the author expressly acknowledges that all the enormous preparatory work already undertaken for advancing a NAMA model is not lost or wasted. Essentially that work has been an extensive, focused due diligence for the purpose of properly identifying and listing and making preliminary evaluation of the bad loans. All that due diligence work has been absolutely necessary in any event because the Banks need to address those questions openly and properly to honestly assess and estimate the true recoverability of those bad loans.

Whatever decision is taken … …there’s a big job of work ahead. And we all need to get on with it!

Author:- Peter Mathews Date:- 17th September 2009

Peter Mathews
B.Comm., M.B.A., A.I.T.I., F.C.A.