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Archive for August 28th, 2012

The view on here is that IBRC will eventually be merged with NAMA; it may take some time – months or years – but it is complete nuts to maintain two 100% state-owned agencies doing precisely the same job – IBRC might still be classed as a bank, but for the purposes of the following it is regarded as a state agency whose sole shareholder in the Minister for Finance, Michael Noonan.

A merger might be too challenging a task in 2012, but by 2020 when both NAMA and IBRC are scheduled to wind down, it seems implausible that we would still have two agencies with an inefficient duplication of costs, dysfunctionally competing with each other rather than combining their talents to take advantage of best individual practices and to compete with non-state-owned asset management companies.

But which agency should take the senior role in any merger?

You might start out by asking which agency is presently doing the better job in managing its assets, but sadly neither NAMA nor IBRC publishes sufficient information to allow you make a reliable overall assessment. You can glance off some peripheral aspects of both agencies’ published accounts, like non performing loans, and you might conclude IBRC is doing a worse job than NAMA because the rate of deterioration in its loans is worse than NAMA’s. You might also note the €247m profit delivered by NAMA in 2011 and compare that to the €935m loss at IBRC, but the view on here, is that both agencies are hiding a veritable hornets nest of problems in the way they account for loan impairments and NAMA’s €235m tax credit in 2011 doesn’t fool anyone. But overall, you just don’t have enough information to meaningfully conclude which agency is doing better with managing its assets.

And what about costs? NAMA and IBRC are managing loan portfolios of a similar magnitude, though NAMA’s net-of-provisions total of €26bn is greater than IBRC’s €19bn. What does stand out is the fact that NAMA’s operating costs are less than half those of IBRC’s – in 2011 NAMA racked up €128m of operating costs (see above extract from the 2011 annual report) compared to €320m at IBRC (see below extract from the 2011 annual report). For 2012, NAMA has published a forecast of its costs at €194m for this year, and IBRC’s actual H1,2012 costs of €129m indicate that its total costs for 2012 will be down from 2011.

There might be many reasons for the disparity, but there is a sneaking feeling on here that NAMA’s CEO Brendan McDonagh is better at keeping a lid on costs, though he has the advantage of building an asset management company from scratch whereas IBRC’s CEO Mike Aynsley inherited a company in late 2009 which had well-documented poor lending practices and may well have had poor cost control as well, with legacy contracts which couldn’t be avoided. Also, the fact that NAMA’s budgeted costs for 2012 declined from €242m in its projections last September 2011 to €194m this February 2012, may have been due to rigorous cost control, but past experience tells us that NAMA just didn’t scrutinise the costs sufficiently.

In trying to compare operating costs between NAMA and IBRC, what does become obvious is that we have far greater transparency from NAMA. Remember that NAMA produces quarterly reports and accounts, as well as an annual statement and projection of costs, not to mention an annual report. NAMA is summoned to Oireachtas committees every six months (on average) and if you review parliamentary questions, you’ll see that NAMA is subjected to far more frequent and intrusive scrutiny. Despite both IBRC and NAMA being 100% state-owned, doing the same job with similar employee numbers and the same ballpark value of assets, the truth is that we have very little scrutiny of IBRC’s operations, and this would be another reason to merge the two agencies together.

Last week when IBRC reported its results for the first six months of 2012, it claimed that it had undertaken a “cost management exercise” which has led to savings. There is no obvious mechanism at present whereby best practice in NAMA and IBRC is being shared. Our doddering Department of Finance is unlikely to have the nous to examine costs across both agencies, but commonsense tells us that one agency or the other will have better practices or contracts in specific areas. But given the sensible likelihood of an eventual merger, perhaps we can prod the powers that be to start examining costs now – with a combined total of operating costs in 2012 of €400-500m, it would be astonishing if savings couldn’t be achieved.

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This time last year, we had the Morgan Kelly article at the start of August warning about the mortgage crisis, we had what seemed like a knee-jerk reaction with the Government rustling up from nowhere the Keane research which led to the Keane report published in October after President Bill Clinton identified the mortgage crisis as the number one economic problem facing the country. And remember MP Mac Domhnaill, the man from Kerry whose heartbreaking letter to the Irish Times aroused widespread sympathy and alarm?

A year later and the mortgage crisis has intensified; figures released last week show the number of mortgage accounts in arrears has increased by 50% in the past year, that more than 83,000 owner-occupier mortgage accounts are now in arrears of more than 90 days, and when taking into account all arrears including those less than 90 days and the number of restructured mortgages, some of which might be repaying zero at present, then 22% of mortgages are in trouble.

There has been a slight relenting in the pace of increase in the last two quarters, but the numbers are getting worse. And responding that 78% of mortgage accounts are being repaid on time isn’t much more helpful than saying that with only 11 homicides in Q3,2011 in Ireland, the vast majority of the 4.6m in the State wasn’t murdered, that there were 28 Tiger Kidnap offences but again 4.6m people weren’t kidnapped or that 630 people were sexually assaulted but most weren’t. Every single household in arrears should be a matter for concern.

Figures gratefully received today from the UK’s Council of Mortgage Lenders for the second quarter of 2012 show just how dysfunctional our mortgage crisis has become. In the UK less than 2% of mortgage accounts are in arrears for more than 90 days, in Ireland the latest figures show 10.9%. Despite having a healthier economy, lower unemployment with property prices down just 10% from peak, you are 23 times more likely to have your home repossessed in the UK if you run into difficulty.

Whilst accepting that the UK is a different jurisdiction with a different economy, history and culture, it is our closest neighbour both geographically and arguably, socially; so when there are big differences – be that in unemployment benefit rates or the cost of health or broadband – then questions suggest themselves. Ultimately there may be justifiable reasons for disparity, but when there are such stark differences, it seems sensible to at least ask why.

It may seem heartless to call for more repossessions in Ireland, but by sticking our heads in the sand, we are consenting to perpetual social harm and economic blight. Of course keeping the family home should be a social and economic priority, but we need to debate if it is better to put a merciful end to hopeless cases and provide social housing or rent assistance. And if we had a proper personal insolvency regime, then we might find banks willing to do deals in cases which might otherwise be hopeless. Otherwise we continue to have large numbers of households frozen in fear for the future with all the distress that causes, plus the economic harm of households not spending in anticipation of imminent distress – bad for the economy and even worse for society.

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One of Ireland’s formerly biggest property companies, Treasury Holdings faces its fate this afternoon – from 12 midday, in Dublin’s High Court – as Belgian bank KBC resumes its bid to have Treasury wound up. Yesterday, Treasury told the court that KBC had an ulterior motive in pursuing the winding up petition at this juncture, and that ulterior motive was to assist NAMA. Last month, NAMA defeated Treasury’s legal bid to overturn the decision by NAMA to foreclose on Treasury’s loans to the Agency. At the time, Treasury said it would appeal the decision to the Supreme Court, but if a winding up order is granted now to KBC, then the current owners of Treasury, Johnny Ronan and Richard Barrett will lose control of their company, and the appeal against NAMA may be abandoned. At least, this is what is being alleged by Treasury.

For its part yesterday, KBC said it was pursuing the repayment of its portion of a €270m loan advanced to Treasury and 15 companies within the Treasury group, all for the redevelopment of the Spencer Dock area of central Dublin – a slice of land on the north side of the Liffey which includes the National Convention Centre. KBC was seemingly highly dismissive of Treasury’s latest White Knight, Morgan Stanley which Treasury said offered the potential to invest in the company. Morgan Stanley is but the latest in a loooong line of investors to have an initial dalliance with Treasury, but didn’t progress into anything serious. US investor CIM, and separately US investor Hines and Aussie investor Macquarie all courted Treasury in the past 18 months, but their offers were ultimately rejected by NAMA. KBC said it was rejecting the Morgan Stanley offer as it did “not make commercial sense to the bank and had been refused”

Treasury is seeking an adjournment of the winding up petition. According to the Irish Independent, KBC complained to the court that “request for an adjournment of the petition [by Treasury] was “simply asking the court to allow Treasury trade while wholly insolvent.””

Treasury concedes it is insolvent, but claims that 300 Irish jobs are at stake if the group is wound up. The “300” figure seems to include Treasury’s assessment of externally related jobs in Ireland that would be at risk – Treasury told the High Court in the NAMA judicial review case, which it lost, that the company employed just 45 people in Ireland.

The case resumes at 12 midday today, and it is hard to see it continuing much longer.

UPDATE (1): 28th August, 2012. RTE’s sure-footed Legal Correspondent, Orla O’Donnell will be attending the hearing from 12 midday, and hopefully she might tweet any significant development. You can follow Orla on Twitter here.

UPDATE (2): 28th August, 2012. RTE is reporting the recent transfer of two companies hitherto associated with Treasury China’s operations have been transferred to a Jersey-based company called “Oriental Management Services” which RTE says is beneficially owned by Treasury co-founder, Richard Barrett. It seems that NAMA is not happy with some recent transfers, understood to be these two which RTE is reporting, and has now weighed in behind KBC in supporting the bid to have Treasury Holdings wound up.

UPDATE (3): 28th August, 2012. The hearing has concluded for the time being, and the matter has been adjourned until 9th October, 2012 by the judge, Mr Justice Brian McGovern with several orders including, according to RTE, the production of  “a sworn documents outlining the terms and circumstances of a transfer of the assets of a Treasury subsidiary in Singapore to a company beneficially owned by a director of Treasury, Richard Barrett.” and that there be “no disposition by any companies in the group of their shares before 9 October”. According to RTE, the judge saw no prejudice to KBC’s rights from the 6-week adjournment and also said the matter would not be adjourned further, but would be decided on 9th October.

UPDATE: 31st August, 2012. According to the Irish Independent today, the two companies sold to Richard Barrett were Treasury Holdings Real Estate PTE and Treasury Holdings (Shanghai) Property Co Limited and that Richard Barrett paid €2.236m for the two companies. Richard is reported to have told the Independent that NAMA “knew the deal was on the cards well in advance” and as for the €2.236m purchase price “It was the higher of two independent valuations obtained from accountancy firms, he said. The accountants cannot be identified because of confidentiality agreements, but neither is Treasury’s own auditor, he said.”

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