It just didn’t make sense. The Minister for Finance announced on Thursday morning last that “the Government has decided, having consulted with the NAMA Board and the European Commission, that where the total exposure of a debtor is below a €20 million threshold in AIB [that’s Allied Irish Banks not to be confused by our foreign friends with Anglo Irish Bank] and Bank of Ireland, that debtor’s loans will not now be transferred to NAMA. The threshold had previously been set at €5 million. This change will ensure that NAMA can operate to the highest level of efficiency and effectiveness in the management of its loan portfolio and allow for the completion of all NAMA transfers by end-year”. The €5m lower limit will remain for Anglo and of course INBS and EBS have no lower limits (page 8 of the draft NAMA Business Plan in October 2009).
Why the announcement didn’t make sense:
(1) The priority is to get certainty on Anglo – not BoI or AIB. Anglo is now required to transfer its remaining €19bn of loans to NAMA by the end of October 2010. Anglo will then have a remaining €38bn of non-NAMA loans that are intended to go to the proposed Asset Recovery Bank. If Anglo is the priority then why not apply the €20m limit to Anglo as well as AIB and BoI? It is not clear how many loans or what value of loans that would re-route away from NAMA but in the context of the €38bn non-NAMA loans, it was likely to be relatively minor.
(2) The deadline for completing the NAMA transfers is February 2011. This is an EU-imposed deadline and if the deadline is not met, then the stars will not fall from the skies – the State will merely ask for an extension. EC Competition Commissioner Joaquin Almunia must now be an expert on the Irish banking crisis given the approvals sought in the last couple of years from his Commission. Surely he would not reject a request to extend the February 2011 deadline by a few months, particularly if the process was substantially completed by then.
(3) Why not apply the €20m limit to INBS and EBS? Wouldn’t that have resulted in a quicker transfer of their NAMA portfolios also?
(4) Given that NAMA’s principle was to cleanse banks of a particularly toxic class of assets, surely the retention of €6.6bn of these loans (the effect, the Minister told us of raising the limit at AIB and BoI was that €4.5bn of NAMA-eligible loans would remain at AIB and €2.1bn would remain at BoI) would undermine that principle?
It seemingly became clear in the middle of last week that AIB didn’t have a future in the short term without majority State control, though the feigned surprise at AIB at the decision by the Financial Regulator that the bank needed another €3bn of capital, was, to say the very least, amusing. So that meant that Anglo, EBS, INBS and AIB are effectively nationalized. The State already owns 36.5% of Bank of Ireland. Was the fear that if Bank of Ireland needed further capital, then that would signal the defeat of a government strategy that sought to avoid nationalization in September 2008? Let’s look.
(1) On 30th March 2010, our new-ish Financial Regulator, Matthew Elderfield announced the results of what he called a Prudential Capital Assessment Review. In respect of BoI he announced “ (1) An additional €2.66bn of equity capital to meet the base case target of 7% equity, and, (2) In meeting this requirement provided at least €0.25 bn of new Core Tier 1 is raised, then Bank of Ireland also meets (a) the base case target of 8% Core Tier 1, and, (b) the stress target of 4% Core Tier 1.” Now this all seems very complex but the Regulator did simplify things a bit when he gave the formula for the new capital requirements which started “Start with Current Capital of bank and forecast Operating Results Deduct impairments on NAMA loans Deduct impairments on non -NAMA loans until 2012”
So Bank of Ireland had to work out its capital requirements by reference to forecast losses on NAMA and non-NAMA loans. Like other financial institutions in Ireland, Bank of Ireland chooses to hide behind the temporary discretion allowed in IFRS 9 to avoid showing realistic estimates of losses on its loans. However the Financial Regulator was going to apply a more prudent measure of losses and reports in June 2010 suggested he was applying a 45% discount to AIB’s portfolio after AIB suffered a 42.3% loss in Tranche 1 – it remains unclear what discount he applied to BoI. The effect of raising the minimum NAMA loan from €5m to €20m reduced BoI’s NAMA-bound portfolio by €2.1bn and was reported by Bank of Ireland as “comprising land and development loans of circa €1.9 billion and associated loans of circa €0.2 billion. At 30 June 2010, the impaired element of this portfolio was €1.6 billion against which Bank of Ireland held IFRS provisions of €0.8 billion”. Was a 40% impairment charge enough (see below)?
Now subsequent to the Financial Regulator’s review, BoI went about raising €3.4bn of capital with a rights issue of €1.9bn, a €500m institutional placing of shares and the conversion of preference shares to ordinary shares. The €1.9bn rights issue eventually became €1.73bn after a €233m debt-swap. BoI has thus far however remained outside nominal majority State control.
(2) The Minister for Finance has put the NAMA haircut on remaining BoI NAMA tranches at 42% – “Bank of Ireland has already met the Financial Regulator’s 2010 capital requirement. To date the Bank has transferred €3.75bn of loan assets to NAMA at an aggregate discount of 36%. While the final tranche of NAMA loans may have a higher discount of up to 42%, the Central Bank has confirmed that the bank has sufficient capital to meet the PCAR standard to accommodate this increase.” Let’s look at the experience of the banks with Tranches 1 and 2 and the present forecasts from the Minister’s statement.
So of the relatively good performing Participating Institutions in Tranches 1 and 2, EBS’s haircut is to increase by 58% (in relative terms) from 38% to 60%, AIB’s haircut is to increase by 33% from 45% to 60% and BoI is to increase by only 16% from 36% to 42%. The basket cases Anglo and INBS see 16-22% increases but these are from very high levels already (55% and 65%).
Why should BoI’s remaining tranche be so much better than the other relatively good performers? A couple of days ago on here we looked at the Bank of Ireland loans to McDaid Developments (Ireland) Limited – GBP £42m of loans that are reported to be exposed to 85% losses. Although Bank of Ireland has been top of the class in Tranches 1 and 2 with the lowest haircuts (36.2% weighted average) and the statements this morning apparently confirmed that BoI was alright for capital even with a 42% discount, is 42% enough? Also, like the other banks, BoI seems to have been less than realistic in reporting its non-NAMA losses.
Of course by avoiding NAMA’s apparently stringent valuation and due diligence process, Bank of Ireland avoids crystallizing the true level of losses on €2.1bn of loans. And in so doing is perhaps avoiding a capital deficiency that might see the State having to take majority ownership of that bank also. And that is why it makes sense to increase the €5m limit to €20m despite the fact that on the face of it the decision makes no sense.
NAMA Wine Lake 
Could the reasons for some of the changes to NAMA come from the fact that at a certain point it is about an individual, a person, who, with some others could say ‘move the goal post a bit’ and so it was moved? – after all it is an exclusive club and most small businesses have more customers than there are developers in NAMA.
Also,
The American Chamber of Commerce and a Russian Billionaire both flexed their muscles (for want of a better expression) on the same day. Both are telling Ireland what to do, at a time when the international press is accusing the Irish population of Masochism.
‘Austerity and Masochism:- the Irish Context’, now there’s a thesis if I ever saw one.
Well written NWL.
Bank of Ireland have decided to hide in plain sight, and conceal the truth. It is actually an insult to our intelligence. And they rely on our ignorance to do it.
Politicians rely on the fact that most people live in a world of relative ignorance and they like to keep it that way – witness the treatment and denigration of Peter Mathews when he chose to publicly challenge their “truths”. Many are even comfortable with that ignorance, because it is the information received from the politicians’ “experts” – and it is all that they know.
When we first start facing truth, the process may be frightening. But if we continue to seek truth we will want more! Many people thought Peter Mathews was a “loose cannon” or even a danger to society, but he did not care. He was disseminating knowledge and seeking truth and protesting that it was not being spoken. Once the truth is tasted, it is hard to return and listen to ignorance!
There is a story in Plato’s book, The Republic where Socrates is talking to a young follower of his named Glaucon, and is telling him this fable to illustrate what it’s like to be a seeker of wisdom and truth.
[Socrates is speaking with Glaucon]
[Socrates:] And now, I said, let me show in a figure how far our nature is enlightened or unenlightened: –Behold! human beings living in a underground den, which has a mouth open towards the light and reaching all along the den; here they have been from their childhood, and have their legs and necks chained so that they cannot move, and can only see before them, being prevented by the chains from turning round their heads. Above and behind them a fire is blazing at a distance, and between the fire and the prisoners there is a raised way; and you will see, if you look, a low wall built along the way, like the screen which marionette players have in front of them, over which they show the puppets.
[Glaucon:] I see.
And do you see, I said, men passing along the wall carrying all sorts of vessels, and statues and figures of animals made of wood and stone and various materials, which appear over the wall? Some of them are talking, others silent.
[Glaucon:] You have shown me a strange image, and they are strange prisoners.
Like ourselves, I replied; and they see only their own shadows, or the shadows of one another, which the fire throws on the opposite wall of the cave?
True, he said; how could they see anything but the shadows if they were never allowed to move their heads?
And of the objects which are being carried in like manner they would only see the shadows?
Yes, he said.
And if they were able to converse with one another, would they not suppose that they were naming what was actually before them?
[Glaucon:] Very true.
And suppose further that the prison had an echo which came from the other side, would they not be sure to fancy when one of the passers-by spoke that the voice which they heard came from the passing shadow?
No question, he replied.
To them, I said, the truth would be literally nothing but the shadows of the images.
That is certain.
And now look again, and see what will naturally follow if the prisoners are released and disabused of their error. At first, when any of them is liberated and compelled suddenly to stand up and turn his neck round and walk and look towards the light, he will suffer sharp pains; the glare will distress him, and he will be unable to see the realities of which in his former state he had seen the shadows; and then conceive some one saying to him, that what he saw before was an illusion, but that now, when he is approaching nearer to being and his eye is turned towards more real existence, he has a clearer vision, -what will be his reply? And you may further imagine that his instructor is pointing to the objects as they pass and requiring him to name them, — will he not be perplexed? Will he not fancy that the shadows which he formerly saw are truer than the objects which are now shown to him?
Far truer.
And if he is compelled to look straight at the light, will he not have a pain in his eyes which will make him turn away to take and take in the objects of vision which he can see, and which he will conceive to be in reality clearer than the things which are now being shown to him?
True, he said.
And suppose once more, that he is reluctantly dragged up a steep and rugged ascent, and held fast until he ‘s forced into the presence of the sun himself, is he not likely to be pained and irritated? When he approaches the light his eyes will be dazzled, and he will not be able to see anything at all of what are now called realities.
Not all in a moment, he said.
He will require to grow accustomed to the sight of the upper world. And first he will see the shadows best, next the reflections of men and other objects in the water, and then the objects themselves; then he will gaze upon the light of the moon and the stars and the spangled heaven; and he will see the sky and the stars by night better than the sun or the light of the sun by day?
Certainly.
Last of he will be able to see the sun, and not mere reflections of him in the water, but he will see him in his own proper place, and not in another; and he will contemplate him as he is.
Certainly.
He will then proceed to argue that this is he who gives the season and the years, and is the guardian of all that is in the visible world, and in a certain way the cause of all things which he and his fellows have been accustomed to behold?
[Glaucon:] Clearly, he said, he would first see the sun and then reason about him.
And when he remembered his old habitation, and the wisdom of the den and his fellow-prisoners, do you not suppose that he would felicitate himself on the change, and pity them?
Certainly, he would.
And if they were in the habit of conferring honours among themselves on those who were quickest to observe the passing shadows and to remark which of them went before, and which followed after, and which were together; and who were therefore best able to draw conclusions as to the future, do you think that he would care for such honours and glories, or envy the possessors of them? Would he not say with Homer,
“Better to be the poor servant of a poor master, and to endure anything, rather than think as they do and live after their manner?”
Yes, he said, I think that he would rather suffer anything than entertain these false notions and live in this miserable manner.
Imagine once more, I said, such an one coming suddenly out of the sun to be replaced in his old situation; would he not be certain to have his eyes full of darkness?
To be sure, he said.
And if there were a contest, and he had to compete in measuring the shadows with the prisoners who had never moved out of the den, while his sight was still weak, and before his eyes had become steady (and the time which would be needed to acquire this new habit of sight might be very considerable) would he not be ridiculous? Men would say of him that up he went and down he came without his eyes; and that it was better not even to think of ascending; and if any one tried to loose another and lead him up to the light, let them only catch the offender, and they would put him to death.
No question, he said.
This entire allegory, I said, you may now append, dear Glaucon, to the previous argument; the prison-house is the world of sight, the light of the fire is the sun, and you will not misapprehend me if you interpret the journey upwards to be the ascent of the soul into the intellectual world according to my poor belief, which, at your desire, I have expressed whether rightly or wrongly God knows. But, whether true or false, my opinion is that in the world of knowledge the idea of good appears last of all, and is seen only with an effort; and, when seen, is also inferred to be the universal author of all things beautiful and right, parent of light and of the lord of light in this visible world, and the immediate source of reason and truth in the intellectual; and that this is the power upon which he who would act rationally, either in public or private life must have his eye fixed. [End]
It’s time that our politicians and the banks shared the world of knowledge with us – something that they still refuse to do. The problem that they have in hiding in plain sight is that some of us still see them for what they are.
Well done for being one of those that try to shed some of that reason and truth.
“It’s time that our politicians and the banks shared the world of knowledge with us – something that they still refuse to do. The problem that they have in hiding in plain sight is that some of us still see them for what they are.”
Lets have FOI for Nama to improve sharing and visibility.
“Well done for being one of those that try to shed some of that reason and truth.”
Agreed 100%.
I appreciate your NAMA Wine Lake Blog and commend your excellent labours.
Can anybody that REALLY KNOWS WHAT THEY ARE TALKING ABOUT try and basically explain or give me simple short logical answers to the following concerning the unprecedented fiscal fiasco that such a small country as Ireland has gotten itself into? To me these are very important questions that need answering. I do believe the public at large would be interested too.
The staggering amounts of billions of Euro we hear being bandied about seem unfathomable. I often wonder are we really talking about anything that could have occurred in Ireland!
Questions:
1 Did any person or business/organisation ever receive any real actual monetary element of those billions of Euro that were willingly handed out by our financial institutions as loans?
a. Can we list all such people, businesses and/or organisations who received such loans?
b. What did they spend the money on?
c. Who ultimately received the money as payments on that spend?
d. Who has that money now?
e. Can any of that actual money that was used in such payments be recovered?
f. Are there some very fat cats out there who sold something and received actual payment on the basis for which these loans were issued?
g. If there are, should such people, businesses and organisations not be identified?
h. Should efforts be made to recover money from them?
i. Should all of the national and international Bank Accounts of such people and senior politicians in Ireland be forcefully examined and if necessary sequestrated?
j. Is there any possibility that the Bank bail-outs by Government are governed by any fear on the part of politicians and or associates that the Banks may be in a position to “squeal” on them? In other words were there any special high monetary favours given to politicians for favours and not in accordance with law, especially those in government?
2 Of all those billions of euro that seems to have gone awry is any element of it recoverable elsewhere?
a. Instead of the Irish people bailing out the Banks can any of the monies that were actually issued as loans be recovered from any source it may have ended up with?
b. What I am really concerned about is – are there people, businesses, organisations out there who have actually managed to stow away extraordinary large sums (billions of euro) in secret accounts or actual hard cash?
c. Could this all actually be the “Fraud of the Century” against the ordinary people committed by the few at the helm in Ireland and indeed many other so-called democratic nations? I firmly believe politicians are corrupt enough to do so!
Please answer each question separately under the tabularisation given.
Hi Art, I appreciate the frustration behind your question. For myself I can’t give you an answer. I bought David McWilliams’ book around this time last year, the one entitled “Follow the Money” because I thought it might have given the answers but that’s not what that book is about. From what I can gather some of the wealth was destroyed, money made on one property sale was lost when the bust came. Or developers invested in bank shares and they were wiped out (€50bn+ in shares wealth has been wiped out). Ultimately though some people did do well and some still have their wealth – Paul Coulson for example who sold the Irish Glass Bottle site for €412m to a consortium that included you and I, well he has recently put €1.7bn into expanding his industrial group. A lot of wealth went to Banladeshi and Vietnamese textile workers, Chinese and Taiwanese mobile phone and computer manufacturers, South Korean TV manufacturers, Japanese car makers, Italian shoe and handbag companies, French vineyards and champagne producers, Spanish and Greek holidays, Indonesian and Swedish furniture, American software and movies. Others have no doubt secretly kept wealth but it’s really only that category that we can go after and it is unknown how much is out there.
Maybe David McWilliams will write a new book called “Follow the Money” and this time get the contents to match the title on the front.
Haven’t time to answer fully as I have to go to the day job – but the taxman got 40% of it!