Archive for January 21st, 2011

It’s finally here, the Finance Bill to give legislative effect to most of the measures in Budget 2011 announced at the start of December 2010 and which aims to set us on our way to reducing the budget deficit to 3% in 2014/5. The Bill has political significance as our shaky coalition is holding together just long enough to get the Bill passed – feels like an incompatible couple waiting for the children to grow up before getting divorced.

A brief review of the Bill indicates that there is little that is out of line with what was announced on 7th December 2010. I don’t recall measures to outlaw Zappers but they seem like a good idea.

What is surprising is the consultation period that will precede the abolition of section 23 reliefs. It looks like those Leitrim ghost estates might have a bit more tax life in them yet!

There will be an expanded entry on here once the review of the Finance Bill is complete.

Meantime here are the relevant links to Department of Finance documents:

Finance Bill
Finance Bill – an overview of the changes
Finance Bill – announcement

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(click to enlarge)

Looking back at the financial crisis over the past three years, it is striking that at practically all milestones the information upon which key decisions were made has turned out to substantially wrong, in particular the assessment of the problems in the banks and more specifically still, the losses on property loans.

If, back in September 2008, it was known that the banks’ assets were not worth €500bn as claimed but were worth substantially less, would the Government have campaigned to introduce a guarantee of bank liabilities then worth €440bn? If, at the start of 2009, the Minister for Finance knew of the likely losses in what would later become the five NAMA Participating Institutions, would he have started a recapitalisation programme that may see €80-90bn ultimately taken from State coffers (through borrowing) and shovelled into these black holes? If, at the start of 2009, when Dr Peter Bacon was reporting on the desirability of an asset management agency, he knew that the haircut to be applied to loans would be 60% rather than 30%, would NAMA ever have seen the light of day? It seems to me that these three key moments in our State’s economic history are characterised by the Government acting on poor information. Of course it is to be recognised that information can modify over time and there was a deterioration in the economic environment, both here and internationally, from 2008 which will have affected more up-to-date values. But even taking account of the passage of time, was the information produced by the institutions and external advisers, at such colossal cost to the State, so significantly inaccurate that it is time to investigate the competence of those companies that produced the information?

What prompts this entry is a letter dated 23rd December, 2010 from the current Financial Regulator, Matthew Elderfield, to the Committee of Public Accounts, which has just now been published, in which he encloses copies of the invoices paid in respect of advice received by the Financial Regulator in respect of the Bank Guarantee Scheme and “the discharge of other related supervisory duties”. The invoices are partly redacted by the Financial Regulator to remove the names of consultants and the companies’ banks details for payment of the invoices. The second redaction is understandable but isn’t the identity of the consultants that were seemingly paid substantial sums (€1,000-plus and expenses per day typically) of public interest?

I have extracted the invoices from Matthew Elderfield’s letter for ease of review and they are as follows (sorted by invoice date – click on the description for a copy of the invoice):

Date Company Amt (ex VAT) Description
27/11/2008 PwC 1,670,000 Work on six State-gteed banks
31/01/2009 PwC 1,139,150 Work on 5 NAMA banks and JLL fees
19/02/2009 Deloitte 95,720 Review of directors loans
06/03/2009 PwC 23,415 Secondment 11 days Feb 2009
03/04/2009 E&Y 16,667 Secondment Feb 2009
03/04/2009 E&Y 16,667 Secondment Mar 2009
03/04/2009 E&Y 16,667 Secondment Dec 2008
03/04/2009 E&Y 16,667 Secondment Jan 2009
28/04/2009 KPMG 1,034,080 Investigations Mar/Apr 2009
23/06/2009 PwC 214,480 Ref to “Engagement letter April 2009”
30/07/2009 KPMG 218,219 Investigations and “potential ASPs” Apr-Jul 2009
21/09/2009 PwC 239,310 Impairment provisioning INBS
30/10/2009 PwC 225,750 Impairment provisioning EBS
20/11/2009 Deloitte 196,789 “Assistance”
06/01/2010 Deloitte 56,999 2 secondments for 21 days
19/02/2010 E&Y 87,394 “Professional services”
03/03/2010 PwC 464,500 Due diligence
03/03/2010 PwC 483,100 Due diligence
20/08/2010 E&Y 34,000 “Professional services”

There are three invoices of particular interest and they are:

The PwC invoice from 31st January 2009 which includes a charge of €691,250 in respect of “Jones Lang Lasalle Valuations”. And this has continuing relevance for NAMA because JLL’s managing director at the time, John Mulcahy, is now NAMA’s Head of Portfolio Management and arguably NAMA’s most senior property man. It should be emphasised that it is not disclosed on the invoice the remit that JLL operated to when providing their services, so for example they may not have examined loan documentation which, following NAMA’s legal due diligence exercise, proved to be execrable. It should also be stressed that property values continued to drop in late 2008 and 2009.

The two PwC invoices dated 21st September, 2009 and 30th October, 2009 which relate to the impairment provisioning in INBS and EBS. Knowing that the last estimates (in October 2010 – yes, the NAMA CEO did indicate lower estimates last week at the CPA but those are on incomplete loan transfers) of final haircuts for INBS and EBS were 70% and 60% respectively, how competent was PwC’s work in 2009? NAMA’s valuation date is 30th November, 2009 so there may well have been some deterioration in values with the passage of time but November 2009 was only a matter of a few months after the reviews.

A notable omission from the invoices is work on impairment provisioning for AIB, BoI and particularly Anglo. Didn’t the acting Financial Regulator, Mary O’Dea,  think to commission such work? Though on the other hand, given how inaccurate the work appears to be for EBS and INBS in the context of present estimates, perhaps she saved us unnecessary fees.

With NAMA’s acquisition work coming to an end and with yet another review of loans by the troika of Barclays Capital, the Boston Consulting Group and Blackrock Solutions, is it not now time to review the competence of the work undertaken in 2008 and 2009?

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