Archive for September 12th, 2010

One of the most startling films of all time must be the 1932 production “Freaks!”, a film that was forgotten for many years but since being re-discovered in the 1960s has grown in stature, much like two of my other favourites “The Shootist” and “What a wonderful life”. The film “Freaks!” was shocking but the storyline itself was straightforward – two normally-bodied unmarried couples live in a travelling circus that includes a freak show of differently-bodied people. The plot is that one of the unmarried couples conspire to marry one of the small people, then poison him and steal an inheritance. That couple famously is revolted by the physical difference of the “freaks” and during a sham wedding between one half of the couple and a small person, the “freaks” famously sing the chant “Gobble! Gobble! One of us! One of us!” and the couple can’t help but show their repugnance at those differently-bodied. The plot to poison her new groom is discovered by the “freaks” and in the film’s climax the freaks castrate the male half and permanently disable the female half of the couple that tried to kill their comrade. The other normally-bodied couple in the film serve to show acceptance and matter-of-factness with the differently-bodied – after all if it weren’t for an accident of birth we might ourselves be differently-bodied. The film is perhaps best known today for its portrayal of real “freaks” – the movie has real-life Siamese twins, a man with neither arms or legs, various small people, a hermaphrodite and others with various differences, some of which rendered them mentally retarded (if that is the correct term) which was particularly controversial.

So there’s the introduction on which to hang our own story of becoming freaks. As our 10-year government bond rate heads inexorably back towards territory last seen back in January 2009 when Anglo was nationalised amidst concern over the spiralling and uncertain cost of bailing out that bank together with slow progress in bringing down the deficit in running the country day-to-day, it seems as if we are attracting the world’s gaze and the tone of the reporting is changing as we ourselves are now regarded as a freak show (wasn’t it grand in the good old days to be simply PIGS).

However politically incorrect though, freaks are intriguing and it is fascinating to gawk at someone’s physical difference thanking the accident of birth that you’re in the audience and not the show. And yet we are the show. The cost of our banking bailout is being put between €29-90bn*. The latest estimate of the cost of rescuing the American financial system is $89bn (or €74bn). So the cost here is certainly in the same ballpark as the American rescue and if you reduce the comparison to a per capita basis then we can wave goodbye to the ballpark as we become 21st century economic freaks.

And in recent weeks we have had the attention of the world’s media the Financial Times, the Wall Street Journal, the Economist, Bloomberg, Reuters, the BBC, NBC, CBS, the Guardian, Der Spiegel. Everyone wants to get a gawp at the freaks.

And to an extent there is the karma of us strutting about the place in the early 2000s pointing at the per capita GDP figures between our legs, the satisfaction of the auld enemy emigrating to Ireland for construction work and who will forget the abuse of the blanket guarantee in September 2008 when some tried to tempt funds from non-guaranteed banks throughout Europe. So we can probably expect a degree of finger pointing now.

But there’s another great movie about the differently-bodied, the Elephant Man, a film based on the life of Victorian Joseph Merrick. And perhaps the most memorable line from the film (and indeed any film) is John Merrick being cornered by the gawkers and straight from his soul he yells out “I am not an animal, I am a human being!”. And I think we are getting to that point here. The article in the Economist this week features a photograph of what looks like the bones of a fine house with overgrown grass around it and a couple of nags (definitely not from the Coolmore Stud!) together with the byline “All that’s missing is a pint of Guinness!” Hasn’t the time come to stand up and tell the world we are human beings?

Of course whilst there remains general uncertainty about the true costs of our crisis, we will attract interest from the serious media as well as the rubber-neckers. And we do need to place a sufficient degree of certainty on the cost of the crisis and stop the Chinese torture drip-drip of a billion here, five billion there approach to the crisis. We also need to meaningfully confront the only and ballooning deficit. We also need to harness some of the skills that saw a global expansion by Irish developers in the last 15 years. Although there is something of the chancer with some brown envelopes to bribe officialdom around the image of developers, there is also in reality an abundance of contacts, skills and experience. NAMA is of course heavily regulated but it seems a waste that the nation will not benefit from the recovering property markets throughout the globe. NAMA is bashing heads together and marrying together the most unlikely of partners. Is there not the potential to build a private satellite of NAMA to take advantage of the skills, and perhaps something to carry us beyond NAMA’s life span. We need initiatives and action. I, for one, am getting fed up with being pointed at.

* The costs of rescuing the Irish banking system.

Official position: Anglo CEO Mike Aynsley said yesterday that the net cost of the new Anglo configuration was €25-28.5bn. Central Bank governor, Patrick Honohan said in August in Beijing that the cost of “what is mainly a small building society” was €4bn. NAMA’s central projection is that generates a “net present value” of €1bn.

Standard and Poor’s place the cost at upto €90bn made up of €45-50bn as the cost of bailing out the banks and €40bn for NAMA.

My own view (for the little that it’s worth) is that Anglo will cost €35bn net, INBS will cost €5bn, EBS will cost a rounded €1bn and AIB will effectively cost €2bn. It’s too early to say on NAMA. So my total would be near the €43bn mark excluding NAMA.


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As a footnote to the entry on here earlier in the week generally criticizing what increasingly looks like more multi-billion-euro policy-making on the fly with the split of Anglo into two new units, there remains a legacy question regarding the NAMA levy.

The NAMA levy, to remind ourselves, was going to be the mechanism by which NAMA’s profitability was guaranteed because if NAMA made a loss through its normal operations then when the time came for NAMA to be wound up, that loss could be levied (or recovered) from the banks that transferred loans to NAMA.

This issue was examined on here earlier on this year but in summary Anglo is transferring just under half of NAMA’s loans and would appear to be on the hook for a corresponding proportion of any NAMA loss. NAMA’s June 2010 Business Plan projected a base scenario of a €1bn net present value though there were two other scenarios which showed a €0.8bn negative net present value and one which showed a €3.8bn positive net present value. Independent commentators have projected losses up to €20bn (not sure how they relates to a net present value because it depends on the timing of losses and the discount rate used). My own view is that NAMA could make a profit though recent  policy decisions to abandon performing loans at AIB, BoI and Anglo give cause for concern.

But let’s for the sake of argument say NAMA makes a loss of €5bn. The NAMA Act suggests that about €2.3bn will be charged as a levy to Anglo. But which Anglo? Since both the Funding Bank and the Asset Recovery Banks might be wound down before NAMA, where can this levy be applied?

And let’s remember that Eurostat gave a “preliminary” view that NAMA’s debt could stay off the national debt based to a large extent on NAMA being profitable and the levy was specifically referred to as a safety net to ensure NAMA was profitable. So does Eurostat now change its assessment?

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Whilst many papers yesterday led on NAMA’s pursuit of €300m from 12 individuals (averaging €25m per person), I regard that as shaking a stick at the smaller developers whose loans will be transferred in later tranches – at least tranche 4 onwards if you’re talking about €25m loans. NAMA has taken action against one developer to date – Paddy Shovlin. National Asset Loan Management Limited has three applications all dated 6th August 2010 against Paddy Shovlin “and others” at the High Court.

The greater news story coming from the Cantillon School of Economics in Tralee where the NAMA CEO, Brendan McDonagh, gave a speech and took part in a panel discussion and apparently spoke to the media was that NAMA was close to disposing of €500m of property.

It says something about the suspicions about NAMA’s secretive operations which aren’t covered by the Freedom of Information Act that commentators were immediately talking about shenanigans. How had NAMA calculated the selling price? Who were the buyers? Were the buyers the same developers whose loans are being taken over by NAMA? Was the taxpayer, in whose name NAMA is given life, being bilked out of the true value of the assets being sold?

Unfortunately little else was reported on Friday. Yesterday the Independent seemed to clarify some details of the sale when it said “The agency is also preparing to sell off land worth around €500m as it tries to meet a target to dispose of a quarter of its portfolio by the end of 2013. The land will be sold by local auctioneers and those buying the land will not know that it is being sold by NAMA. The only signs that NAMA is active will be “realistic asking prices”, Mr McDonagh added.” And then yesterday, a journalist at the Tribune asserted that NAMA was only selling loans at this stage and that one of the main “assets” being sold was a €250m bank loan held by NAMA Top 10 developer, the Cosgrave brothers, relating to a 1.1 acre holding of land and property on London’s Oxford Street. The Cosgrave brothers filled the Top 10 slot left vacant when Paddy McKillen launched his judicial review action.

The public however need get used to the concept of NAMA selling assets, be they bank assets (ie loans) or real property (either repossessed or disposed of by NAMA developers under NAMA’s auspices). And the rules are confused. Loans can be sold on by NAMA using whatever means NAMA deems appropriate. NAMA has published a Code of Practice which states (and this is just reconfirming what is stated in the NAMA Act):

“1.4 This Code does not cover the disposal of property and assets other than  bank assets. NAMA confirms that the disposal of property and other assets will be subject to the provisions of the Code of Conduct for the Governance of State Bodies (2009).”

“a) Sale by NAMA directly – NAMA may sell certain bank assets to other financial institutions or other third parties.

b) Sale by an appointed agent(s) – NAMA may appoint agents to sell bank assets on its behalf.

c) Sale by tender – AMA may decide to sell bank assets using a tender mechanism.

d) Any other disposal mechanism that NAMA considers appropriate – these are varied but NAMA may decide to securitise its bank assets or utilise any other financial mechanism that may be appropriate”

On the other hand, with respect to property that NAMA owns (ie through foreclosure and repossession action), NAMA says it will comply with the Code of Practice for the Governance of State Agencies (2009) which states

“18.1 The disposal of assets of State bodies or the granting of access to property or infrastructure for commercial arrangements e.g. joint ventures with third parties, with an anticipated value at or above a threshold level of €150,000 should be by auction or competitive tendering process, other than in exceptional circumstances (such as a sale to a charitable body). The method used should be both transparent and likely to achieve a fair market-related price. The anticipated value may be determined either by a reserve price recorded in advance in the State body’s records or by a formal sign-off by the Board on the advice of the Chief Financial Officer (CFO) or, if delegated by the Board, sign-off by the CFO or the Board Audit Committee, that, in its view, the anticipated value is likely to be less or greater than €150,000. In determining market value, regard should be had to accounting standards best practice in Ireland. Compliance with use of Auction or Tendering Requirements

18.2 If an auction or competitive tendering process takes place and the highest  bid is not the bid accepted, then specific Board approval is required before the disposal of the asset or granting of access to property or infrastructure for commercial arrangements with third parties can be completed. For reasons of transparency, such approval together with the reason why a lower bid was permitted to be accepted should be noted in the minutes of the Board.

18.3 Where an auction or competitive tendering process is not used and the agreed price is €150,000 or more, then specific Board approval is required before negotiations start and also before the disposal of the asset or granting of access to property or infrastructure for commercial joint-venture arrangements with third parties can be completed.

18.4 No disposal of an asset or grant of access to property or infrastructure for commercial arrangements with third parties should be completed until the officer authorising the disposal or grant of access has certified formally that (i) Board approval is not necessary, with the reasons therefore, or (ii) Board approval, where necessary, has been obtained.

Directors and their Families

18.5 Disposal of assets to Directors, employees or their families or connected persons, should, as with all disposals, be at a fair market-related price. Where the Board is considering a proposal for any such disposal, the Director connected to the potential purchase should absent him or herself from the Board deliberations on the issue. A record of all such disposals to such persons (to include details of the asset disposed of, price paid and name of the buyer) should be noted in a register kept for this purpose (minor disposals below €5,000, or a threshold approved by the Board may be omitted from the register). This register should be available for inspection, if requested, by the Board or by any Director. The Board may specify that any disposal above an approved threshold should be formally endorsed by the Board who may impose specific restrictions with regard to any such disposal.

Reporting of Disposals

18.6 Details of all disposals of assets or grants of access to property or infrastructure for commercial arrangements with third parties (save for connected third parties which is dealt with in paragraph 18.5) below the threshold value of €150,000 without auction or competitive tendering process should be formally reported to the Board, including the paid price and the name of the buyer, on an annual basis.

18.7 Details of and explanations for the disposals of assets or grants of access to property or infrastructure for commercial arrangements with third parties above the threshold of €150,000 which have not been subject to auction or competitive tendering process should be included in the Chairperson’s annual report to the relevant Minister (see paragraph 13.1).

18.8 The Chairperson, in the annual report to the relevant Minister (see Paragraph 13.1), should affirm that the disposal procedures, as outlined above, have been complied with.”

It is not clear what protocols exist for developers selling property themselves secured by loans now owned by NAMA. And indeed NAMA have a say in loans which are scheduled for transfer in the remaining batches.

It would help NAMA’s reputation if some clear statements were forthcoming. It would be a very clever person that would predict events that would bring protests onto the street against NAMA but suspicions of underhand transactions involving property bought in the taxpayer’s name might just be enough. NAMA has been scrupulous in many of its operations for example tendering for contracts (though that didn’t stop untendered substantial secondment fees being paid to Pricewaterhouse Coopers in the period up to 31st March 2010). Some reassurance at this point by NAMA might be in everyone’s interest.

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