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Archive for September 26th, 2010

There seems to be a whirlwind of activity on the internet concerning the spreadsheet under the developers tab which was introduced as a feature on here in May 2010 and is regularly updated. The wild, inaccurate and unfounded claim is that it is a leaked list of NAMA’s borrowers and property. It is no such thing. As stated under the developers tab, NAMA don’t normally disclose the identities of NAMA borrowers or property underpinning loans. And I don’t have any leaked information, though I do receive private messages with speculation and claims but these are not reflected in the spreadsheet.

What the spreadsheet is, is  a list of developers and property owners, some of whom have been flagged by the media  as being NAMA bound. Others shown under the “NOT FLAGGED FOR NAMA” heading have not at all been associated with NAMA in the media – they simply own property or have been associated with property as shown.

The source for all information shown is in the comments field and the main comment giving rise to the entry is in the right hand column. In the main the information is based on media reporting or company websites. Associations with people and companies may be commercial or not, past or present (I see Brian Cowen’s relationship with Offaly developer Ger Killally is attracting attention – read the source to see that Mr Killally was involved in FF politics in the county and in that sense was involved with Brian Cowen – read the news story in the comments to see what is meant). The association with the property also maybe past or present.

So to summarise:

1. The spreadsheet is not based on leaked information.

2. It includes NAMA and non-NAMA developers and property owners

3. The links to all sources for all the information shown is in the comments field

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Patrick Honohan’s stress test

Patrick Honohan became governor of Ireland’s Central Bank in September 2009 at age 59 with a lifetime of bluechip academic experience and a professional career that included terms at the World Bank, IMF and Ireland’s ESRI (economic/social think tank) and as economic adviser to Irish Taoiseach (Prime Minister) Garret Fitzgerald in the 1980s. Widely admired as capable and plain-speaking he became governor at a time of national banking catastrophe. His appointment was welcomed across the entire political spectrum. Amazingly (and I have looked) there does not appear to be any major criticism of the man or of his past career – a rare thing indeed. In the next fortnight his reputation will indeed to put to the test as he is tasked with producing a credible estimate of the final costs of Anglo Irish Bank (not to be confused with AIB – Allied Irish Banks plc). This entry looks at the task facing the man.

It can be extremely difficult to judge a person’s performance in the aftermath of a catastrophe and there is always the temptation towards sympathy when their tenure is separated from the catastrophic events themselves. And in Ireland we have a whole raft of post catastrophe personalities – the boards of most of the banks, a new central bank governor, a new financial regulator – though more or less the same personnel at the Department of Finance and the professional advisers are most definitely the same faces. And we seem to have shied away from being harsh or critical of the performance of the new blood – “ah, sure they’re dealing with someone else’s mess” is the usual refrain if any criticism raises its head. In normal times we expect a mixture of good and bad performance, why do such judgements go out the window in a catastrophe? Expediency and all hands to the pump might be adequate responses in the immediate aftermath but we are now a year (plus) on from the catastrophe and also a year on since much of the new blood was recruited.

How so is Patrick Honohan getting on?

(1) His proposal to get NAMA to pay banks for loans in a phased manner was substantially rejected (though the 5% subordinated debt payment and a bank levy might be nods to his proposals)

(2) Control over monetary policy – interest rates and money supply. The ECB of course has appropriated much of our national decision-making but interest rates on government debt have now reached record rates (in terms of the period since our euro membership) and the supply of credit to the economy has reduced significantly – partly due to the economic decline but there are complaints from small and medium businesses that they cannot access credit.

(3) Finance sector stability – the past year has seen the announcement of departures from the Irish market of Fortis (partner with An Post), Halifax and Bank of Scotland. No new banks have opened operations here. No banks have gone bust though plainly there has been an enormous cost to the State with supporting AIB, Anglo, BoI, EBS and INBS and indeed ILP is still benefiting from the blanket guarantee.

(4) Financial Market operations – God alone knows how safe the bank’s reserves are as they are in part loaned to basket case banks like Anglo.

Whilst dealing with a very difficult environment, and accepting that we still have a basically functioning banking system, it is difficult to see where there have been major successes created by the Governor in the past year.

And looking forward to the task of estimating Anglo’s final costs, how good are Patrick’s forecasting skills anyway? Take the forecasting of economic performance in 2010. This is what the Central Bank quarterly forecasts have projected:

The last forecast from the Central Bank showed quite a turnaround in GDP from 0.5% to +0.8% though it should be said that the Central Statistics Office (CSO) reported that GDP rose by 2.7% (now revised down to 2.2%) from quarter 4, 2009 to quarter 1, 2010 so perhaps the Central Bank had cause for optimism. However as the figures below demonstrate given the shock performance of the economy in Q2, 2010 as reported by the CSO this week, we need quite an improvement in quarters 3 and 4 to meet the last Central Bank forecast, in fact we need a 2.9% in GDP and 2.5% in GNP (both comparing with Q3,4 of 2009) to meet the latest Central Bank forecast. It should be said that Irish GDP and GNP can be erratic due to the multi national export sector but it would have to be said that the last Central Bank forecast looks very doubtful.

Patrick Honohan also involved himself in forecasting the bailout needs of INBS and that forecast has increased from €2.5-2.7bn in May 2010 to €3.2-4bn in August 2010.

As regards the competence of the Central Bank, it is widely assumed that the bank has benefited from recent recruitment and a general strengthening of the bolts on the stable door. However the fact that they got their reporting twisted of NAMA loans in their last quarterly update was embarrassing.

Next week however might see the greatest test of Governor Honohan since he took up his appointment. He has been tasked with estimating the final costs to the State of bailing out Anglo under the new proposed split of that basket case bank. The continuing uncertainty over the bank bailouts generally and in particular of Anglo is being blamed for the recent spiking in the prices demanded by investors for Irish government debt.

What will Patrick’s assessment of Anglo’s costs look like? It’s difficult to say but it is quite feasible that his assessment might resemble the controversial EU bank stress tests in July 2010 in which the Committee of European Banking Supervisors (CEBS) modeled the viability of banks based on a base and an adverse scenario. So Patrick might look at risks and prospects for growth in the various property markets in which Anglo has non-NAMA loans. He may look to overall economic indicators like GNP/GDP. He may have projections for unemployment, inflation, interest rates. The bottom line though is that he is going to have to come up with a tangible number or a fairly narrow range (€25-45bn won’t cut it!). To add credibility to the estimate he is going to need to reveal his assumptions. And frankly that’s where Patrick Honohan’s own credibility is likely to be exposed to attack. In addition if he reveals projections of unemployment, economic growth or residential property prices then will Patrick contradict the Department of Finance? On Friday last Minister for Finance confirmed what most responsible people already knew – that “anger [in respect of the economic crisis] has been well articulated by commentators who genuinely and rightly believe they have a role in giving voice to the frustrations of the citizens. But those of us in positions of leadership have a duty to give people hope”. Will Patrick’s supporting detail and projections dash that hope?

So will Patrick Honohan’s reputation be shredded by either the reaction to the detail supporting the Anglo estimate or subsequent events invalidating the estimate (including events that should have been assessed)? And even if the Anglo estimate is well received, won’t the focus move from Anglo to the other bailouts (INBS and EBS and possibly AIB) and more generally to the continuing deficit between State income and expenditure? Regardless, the events of the next two weeks are likely to test the mettle of Patrick Honohan.

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Well done to David Clerkin at the Sunday Business Post who reveals today that AIB has confirmed in a “recent” filing (in fact it’s from May 2010 and is available here – section 18.6 on page 150 is what you’re looking for) that of the €17m that AIB has invested in the NAMA SPV, €12m is from the staff pension fund and €5m is on behalf of other clients. The NAMA SPV has initial capital of €100m so it seems current (including retired) members of the AIB staff pension fund own 12% of NAMA. Perhaps someone should ask them are they happy with the financial terms of their investment. UPDATE: 7th October, 2010. NAMA has in fact stated in the June 2010 Business Plan (Page 15) “In order to achieve its objectives, NAMA established a special purpose vehicle (SPV), National Asset Management Limited, which is responsible for the purchase, management and disposal of loan assets from participating institutions and financing such purchases through the issuance of debt securities. The SPV is owned
jointly by private investors (51%) and NAMA (49%) through an investment holding company, National Asset Management Agency Investment Limited. NAMA maintains a veto over all activities of the SPVs. The annual return to the private investors is capped as it is linked to the Irish Government 10 year bond yield at the time it is declared with the potential upside of 10% of capital invested to be paid at maturity if NAMA meets its objectives. All other profits and losses accrue to NAMA.”

Section 18.6 of the AIB filing above says “18.6 National Asset Management Agency Investment Ltd. (“NAMAIL”) In March 2010, a subsidiary of AIB made an equity investment in 17 million “B” shares of the NAMAIL, a special purpose entity established by NAMA. The total investment amounted to A17 million, of which A12 million was invested on behalf of the AIB Group Irish pension scheme with the remainder invested on behalf of clients.”

There are two noteworthy points in David’s piece in the SBP  – firstly he claims that in respect of the reward available from the investment “this dividend can be no more than the prevailing rate applied to 10-year bonds issued by the Irish government.” I wonder is this speculation on David’s part because the EU Decision in February 2010 which approved the NAMA scheme redacted the details of the rewards available to the SPV investors though it had previously been reported in October 2009 by RTE that SPV dividends would be capped at the 10-year rate (6.47% at close of business on Friday last by the way).

Secondly he claims that there were “extensive efforts” to find overseas investors in the SPV but eventually it was four Irish financial institutions that ponyed up. Given that ratings agencies and others (eg the Economist magazine) are already regarding NAMA bonds as part of general government debt, I wonder if all the jiggery pokery with giving the impression of having private investors in NAMA was worth it – the idea being that if NAMA was a private enterprise its bonds would stay off the national balance sheet. At the time it required a willing suspension of disbelief, now it just looks tawdry and embarrassing (and futile).

There is a major entry on the NAMA SPV investors and their rewards here.

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