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Is it time to investigate the competence of companies that provided information underpinning key policy decisions in our financial crisis?

January 21, 2011 by namawinelake

(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”
6,249,574

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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Posted in Banks, Irish economy, NAMA | 5 Comments

5 Responses

  1. on January 21, 2011 at 12:03 pm Ask Leinster House - News from Irish Poilitics

    […] Follow this link: Is it time to investigate the competence of companies that … […]


  2. on January 21, 2011 at 1:29 pm who_shot_the_tiger

    I wonder how much of this “gorging from the trough” will the public stomach before there is a backlash? Or are we just too supine as a people?

    When will we call an end to this? I give it a lifespan of another 12 months before the payments scandals become so outrageous that we will belatedly rebel.


  3. on January 21, 2011 at 2:55 pm NamaJew

    Was a scope of works letter sent by the IRSRA to the various firms setting out all the issues in clear detail ? Was a fee quote obtained by the IRSFA from the various firms before work commenced ? Did the IRFSA try to reduce the initial quote? Most importantly did the IRFSA ask for their fee’s back as some of the work was just wrong ?

    These would be some of the questions which should be put to the IRFSA/Dept., of Finance (and Nama as they spend spend spend). Let some time pass and watch how this scandel will unfold.


    • on January 21, 2011 at 2:59 pm namawinelake

      Hi NAMAjew,

      “some of the work was just wrong”

      I don’t think you can conclude that without seeing the scope you refer to but on the face of it, it seems that the time is ripe for an investigation.


      • on January 21, 2011 at 3:08 pm NamaJew

        Hi NWL,

        Maybe these documents can be obtained under the terms of freedom of information act?

        What is Freedom of Information?
        The Freedom of Information Act came into effect on 21 April, 1998 and was amended on 11 April 2003. This Act gives you the right to access records held by Government Departments and certain public bodies. You do not have to give a reason as to why you want to see any records. The Government Department or body must give you an explanation if you are not given what you ask for. A decision on your application must normally be made within 4 weeks.

        What can I ask for?
        You can ask for the following records held by Government Departments or certain public bodies:
        •any records relating to you personally, whenever created;
        •all other records created after 21 April, 1998;
        •A “record” can be a paper document, information held on computer, printouts, maps, plans, microfilm, microfiche, audio-visual material, etc.

        It will be interesting to see if the Irish Times or other media outlets follow up on your very important post today. Follow the money trail ! This could be a Watergate moment for some clever journalist.



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