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Archive for October 7th, 2010

It is hoped that the statements can be made available here shortly. Meantime we will be continuing with summarising the statements. Here is the summary of the statement of Jim Power, economist at Friends First with a lengthy career in banking & economics.

What makes these statements so fascinating is that they address obvious questions. For example, there is much controversy about whether Anglo, INBS and EBS were systemic banks whose failure would pose systemic risk to the banking system. For the first time that I am aware of, arguments and definitions are being put on the table in respect of the term “systemic” and it is particularly constructive now in the sense that two years into the crisis, we have a greater understanding of the issues and the cost of getting the solution wrong. Jim deals with three broad issues in his statement.

 

(1) Paddy’s loans and systemic risk. Jim claims that in order to conclude systemic risk, there must be an analysis of the solvency of Paddy and his companies, the likelihood of impairment or non-payment of individual loans or the portfolio, the quality and diversification of the portfolio, historical performance of the debtor and the extent to which cashflow exceeds financing costs. Jim concludes that Paddy’s loans do not pose a “systemic risk” which Jim defines as a risk to an entire financial system or market as opposed to a single participant in the system/market. What followed made me laugh (not in ridicule it must be said): Jim implies that the Irish banking system is so knackered that Paddy’s loans couldn’t be a systemic risk!

 

(2) Leaving Paddy’s loans at the institutions would benefit society more than if they are transferred to NAMA. Jim firstly argues in strong terms that Paddy’s loans are good quality and reveals for the first time that just 27% of Paddy’s loans are secured by assets in Ireland (that’s still over €500m by the way). Jim says that the loans are contributing to the capital base of the banks and that will continue should they remain there and that near-term forced sales at NAMA of long-term assets will destroy value, and hurt the taxpayer.

 

(3) NAMA and reputational risk. Jim produces pieces from the media where NAMA is described as a bad or toxic bank, and accordingly it is inevitable that NAMA debtors will suffer by association. Although it’s more an economic argument Jim says that forcing Paddy to dispose of 25% of assets in 3 years (a reference to NAMA’s intentions from its business plan and speeches, particularly, in a small distressed market like Ireland will hurt Paddy’s prospects.

 

There are strong overtones in Jim’s statement, which at 8 pages in length is relatively short, of themes dealt with in some detail by Joseph Stiglitz’s flagship statement.

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