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Archive for September 19th, 2012

For those of you who feel that auditors have questions to answer for the colossal cost of the collapse of the Irish banking system, you’re not alone. Whilst auditors cannot be blamed for failing to identify a credit/property bubble or for not being able to forecast loan losses, they can be blamed for failing to uncover sloppy loan documentation which subsequently rendered loans valueless, and the carouselling of deposits at year end in order to enhance the appearance of financial accounts. In the US, the global accounting and audit firm Arthur Andersen met its end – as it was then embodied, there is still an Arthur Andersen brand name – in the wake of the Enron scandal. Yet in Ireland, not a single auditor has been called to account in the collapse of the banking system as we approach the fourth anniversary of the bank guarantee in September 2008.

It seems that Minister for Finance Michael Noonan has no real interest in pursuing auditors, if only to establish if there is culpability which might give rise to a claim for compensation. Yesterday in the Dail the Sinn Fein finance spokesperson Pearse Doherty asked Minister Noonan to identify those responsible for the audits in Anglo and Irish Life and Permanent – remember these were the two banks where €7.4bn of deposits were transferred at year end so as to enhance the apparent financial strength of Anglo. It was KPMG which audited Irish Life in 2008 and the Minister identified the partner responsible for the audit as Alan Boyne. However in the case of Ernst and Young which audited Anglo, the response was that Anglo was “not in a position to positively identify all the principal persons at that company who were responsible for the conduct of the audit” !

Of course the identity of those responsible for the audits is secondary to the issues that many believe the audits should have uncovered. And when asked what steps had been taken by Minister Noonan to seek redress for apparent failings in the audits, the Minister’s response does not fill you with confidence that there is any serious will, either on the part of the Minister who is the sole shareholder in Anglo (now renamed IBRC after the merger with INBS) and who controls over 99% of Permanent TSB, or on the part of the Department of Finance which supports the Minister. The matter is pawned off on the Chartered Accountants Regulatory Body which is akin to, say, the Irish Farmers Association investigating allegations of milk price-fixing by farmers. It is the State that owns these banks, it is the State that has potentially suffered financial loss and yet it is a trade body (or professional body) which is looked to, to deliver justice to the State. The prosecution of three former Anglo staff is also cited as an excuse for the delay, frankly the opposite could be the case – the prosecution of Messrs Fitzpatrick, McAteer and Whelan could prejudice a financial claim on the auditors.

The full text of the questions is shown here. There is a previous blogpost which details the auditors in Irish banks during the boom and crash here, together with a flavour of Minister Noonan’s position.

Deputy Pearse Doherty: To ask the Minister for Finance the principal person or persons at an audit firm (details supplied) who was or were responsible for the audit of the financial statements for the year ended 30 September 2008, of the bank formerly known as Anglo Irish Bank which is now 100% owned by the State.
Deputy Pearse Doherty: To ask the Minister for Finance the steps taken by the bank formerly known as Anglo Irish Bank to seek redress from an audit firm (details supplied) in respect of any failure to identify irregularities in the financial statements for the year ended 30 September, 2008..
Deputy Pearse Doherty: To ask the Minister for Finance the steps taken by him or agencies acting under his aegis to seek redress from auditors (details supplied) in respect of any failure to identify irregularities in the financial statements for Anglo Irish Bank..
Minister for Finance, Michael Noonan: I propose to take questions 268, 270 and 271 together .

As the Deputy is aware the company referred to in the question, chartered accountants and registered auditors, conducted the audits of the relevant financial statements of Anglo Irish Bank Corporation for the year ended 30 September 2008. I have been informed that the bank is not in a position to positively identify all the principal persons at that company who were responsible for the conduct of the audit.

The Deputy will be aware that the Chartered Accountants Regulatory Board (CARB) appointed Mr John Purcell to conduct an independent enquiry into certain matters relating to their conduct as auditors of Anglo. The Statement issued by CARB following his investigation is attached.

Mr Purcell also carried out an investigation into the conduct of Mr Sean Fitzpatrick, Mr William McAteer and Mr David Drumm, all officers of Anglo and members of CAI. The Statement issued following the investigation is attached

In all cases Mr Purcell concluded there was a prima facie case. The next step in the process is for CARB to hold public Disciplinary Tribunals. However, these have been stayed following a request from the DPP who was concerned that the CARB prosecution of any of these cases could prejudice the criminal enquiry against the individuals or the firm named above arising from the various investigations carried out by the Garda and Regulatory Authorities.

The bank has also advised me that it is actively investigating all legacy issues with a view to taking appropriate action to resolve such issues. Due to the sensitive nature of those issues, it would be inappropriate for the bank to comment further on the subject matter of the question at this time.

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The exodus of Irish investors from the London property market continues apace, with news first reported yesterday by UK commercial property portal CoStar.co.uk that Dublin developer Korine Property Partners is putting its shop at 527-533 Oxford Street on the market through property powerhouse CBRE with an asking price of GBP 39m (€49m).

527-533 Oxford Street in London’s West End (Marble Arch end) is reported by CoStar to be a 13,257 sq ft shop leased to two retailers – Evans and ASICS. The asking price reflects a 4% initial yield.

It is unclear who precisely the Korine partners are but Korine Limited is a Dublin-based company whose directors are John Sisk (37), Liam Nagle (50), Briton Stewart Jackson (65), Ciaran McDonnell (45), Bill Nowlan (66) of WK Nowlan fame and George Sisk are directors. It is 100% owned by Capwell Investments Limited which ultimately seems to be owned by members of the Sisk family. Sisk has been involved in the development of GreystonesHarbour and it was recently reported that NAMA had agreed to a €50m debt-writedown on that project.

Property powerhouse CB Richard Ellis claimed that Irish investors were again heavy sellers of London property in the first six months of 2012. Irish investors sold GBP 545m (€700m) in London in the first six months of 2012, compared with GBP 1bn for the same period in 2011. Since June 2012, David Arnold’s D2 has sold 23 Savile Row in London’s West End for €275m and Dublin-based Jaguar Capital sold 10 Queen Street Place in the City of London for €205m. It is unclear if the €500m of Battersea Power Station by administrators acting for NAMA and others is included in the H1 figures.

UPDATE: 16th January, 2012. The property has now been sold for GBP 38m (€46m) according to the Irish Times to “a Hong Kong based group”

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This is an important blogpost which reveals the real cost of the Anglo bailout. You might think that it just confirms information already in the public domain but it goes much further than that.

To date we have shovelled €29.3bn into Anglo Irish Bank and a further €5.4bn into Irish Nationwide Building Society – a total of €34.7bn. Anglo and INBS have now merged and the new entity is called the Irish Bank Resolution Corporation, IBRC. Approximately €31bn of the funds shovelled were promissory notes and the remainder was in cash.

The management of IBRC has up to this point maintained that when IBRC is eventually wound down, there will be a surplus left over for the taxpayer and that has been quantified at €3-4bn previously.

The promissory notes are IOUs that Minister Lenihan used to recapitalise IBRC. The current plan is that €48bn will be paid to IBRC between now and 2031 (see above table, derived from this PQ) – that’s €31bn for the promissory notes and €17bn in interest. When combined with the cash injections into both institutions – which came to a total of €4bn – the overall total cost of the bailout of IBRC comes to €52bn. In addition we have shovelled €20.7bn into AIB/EBS, €4.7bn to Bank of Ireland and €4bn to Irish Life and Permanent and NAMA has given state-aid of €5.6bn to the banks. That’s a gross bank bailout cost of nearly €86bn or nearly 55% of our GDP. Now the State’s stake in AIB and BofI was worth about €8bn at latest estimates, plus we have received under €5bn in bank guarantee fees and interest – we have also received preference shares but these are included in the NTMA’s valuation of the stakes in the banks. But the net cost is still over €70bn or nearly 45% of our GDP.

THIS IS THE NEW INFORMATION.

The projection of IBRC having a surplus when it is eventually wound down depends on IBRC receiving €17bn in interest. If that interest is not received by IBRC – perhaps because the Government “reengineers” the promissory notes – then IBRC will require the shortfall to be made up in cash so as to meet its projection. So when commentators – and this blog has been as guilty of this as anyone else – refer to the interest rate on the promissory notes as meaningless as it involves one organ of state paying the interest to another organ of state, the fact is that the interest rate on the promissory notes IS SIGNIFICANT because IBRC has factored this interest into its projections – if this interest doesn’t materialise then a bailout will be needed to make up the shortfall.

The fact that IBRC is banking on receiving the promissory note interest was revealed in a parliamentary question (PQ) yesterday when the Sinn Fein finance spokesperson asked the Minister for Finance Michael Noonan for an update on the eventual outturn at IBRC and also how the promissory note interest was accounted for in the planned eventual outturn. Minister Noonan said “in relation to inclusion of interest in the projected ultimate outturn I have been advised that in calculating the projected final net asset position IBRC take into account interest from all assets including customers, securities and Promissory Notes”

Minister Noonan has refused to provide an updated estimate of the outturn citing commercial sensitivities but the tenor of the response is that it will be less beneficial than the €3-4bn previously estimated.

Here is the full text of the two PQs.

Deputy Pearse Doherty: To ask the Minister for Finance in view of the recently published report and accounts for the Irish Bank Resolution Corporation for the six months ending June 2012, which state that IBRC will be wound down by 2020, if he will explain the way in which the operation of the Anglo/Irish Nationwide Building Society promissory notes will be affected, and specifically what will happen to the €12.1billion of payments from him envisaged for the period 2021-2025..

Minister for Finance, Michael Noonan :The issue raised by the Deputy is a matter which requires consideration in the overall context of sourcing and providing the necessary capital for the effective life time of the bank. It is important in this context to be clear the recent interim accounts produced by the bank refer to “winding up of the loan book in an orderly manner by 2020” as opposed to a winding up of the bank. This difference is important for technical reasons and also to provide options as to how the overall cost of the bank can be settled in an appropriate timeframe.

I can confirm that, under current arrangements, the scheduled payments on the Promissory Notes are due to continue until 2031

Deputy Pearse Doherty: To ask the Minister for Finance the most recent projected ultimate outturn at the Irish Bank Resolution Corporation in which he is the sole shareholder; and if the management of IBRC still believes there will be a return of funds to the State.
Deputy Pearse Doherty: To ask the Minister for Finance if the most recent projected ultimate outturn at the Irish Bank Resolution Corporation in which he is the sole shareholder takes account of the circa €13billion total lifetime interest that is presently payable on the €31billion of promissory notes originally provided to IBRC..
Minister for Finance, Michael Noonan : I propose to take Questions 283 and 284 together.

The bank has informed me that the projected final net asset position for IBRC is considered both commercially sensitive and subject to material uncertainty given the current uncertainties in markets, the deterioration in asset values and the complexities, timescales and risks involved in deleveraging. Whilst significant progress has been made the final position will be driven by a number of variable factors against the assumptions in IBRC’s wind down plan. These factors include actual recovery rates achieved for assets, the performance of the domestic and global economies, and the prevailing interest rates in Europe over the duration of the plan.

The bank’s policy is that, due to the commercially sensitive nature of such information as noted above combined with the many external variables involved, it does not issue formal projections.

However, the Bank’s CEO has given an indication previously that the likely outcome for Anglo Irish Bank would be in the €25 – €28 billion region. The bank have informed me that since this time there have been a number of changes in market circumstance, the accelerated pace of asset disposal, and the acquisition of Irish Nationwide Building Society. While not issuing a revised projection as noted above, the bank remains of the view that there will be a small return to the State at full resolution, given the assumptions currently being used.

Further in relation to inclusion of interest in the projected ultimate outturn I have been advised that in calculating the projected final net asset position IBRC take into account interest from all assets including customers, securities and Promissory Notes.

UPDATE: 20th September, 2012.

Professor Karl Whelan of UCD, the economist and former employee of the Central Bank of Ireland and I think fair to say, an expert in central bank operations, has written a recent paper on the finances of IBRC and the operation of the promissory notes. The paper is here.

The one aspect of the promissory notes set out in the paper with which I can agree is the fact that IBRC is borrowing €40bn-odd from the Central Bank of Ireland, to a large extent secured by the promissory notes. The interest rate on these borrowings means that the Central Bank of Ireland generates a profit on the loans – termed Exceptional Liquidity Assistance or ELA. And this profit from the CBI is remitted back to the Exchequer each year, in the past year alone, the Exchequer has received an overall total surplus of €958m from the CBI, this includes all profits including those from ELA. It seems likely that the CBI will continue to generate a profit from the provision of ELA to IBRC, and this profit should be deducted from the gross cost of bailing out IBRC to arrive at a net cost. How much profit will the CBI make? We don’t know, though it should reduce each year as IBRC repays the ELA. But regardless of its quantum, this CBI profit from ELA lending to IBRC will defray the cost of the IBRC bailout. So the €52bn above should come down.

However, this is where I part the ways with Prof Whelan though it’s fair to say that we might be basing conclusions on different information. Prof Whelan believes that based on the current schedule of promissory note payments each year by Minister Noonan to IBRC, that IBRC will be able to repay all of its ELA lending from the CBI by 2022/23, and that consequently in 2022/23, Minister Noonan can cancel the €11bn of remaining promissory note payments scheduled for 2023-2031. Professor Whelan also believes that IBRC will be able to hand over 100% of the €3.1bn it receives from Minister Noonan each year to the CBI.

What I interpret from Minister Noonan’s answer above is that the Exchequer is scheduled to make promissory note payments to IBRC until 2031, the Minister says

“I can confirm that, under current arrangements, the scheduled payments on the Promissory Notes are due to continue until 2031”

and taking account of those promissory note payments which come to an overall total of €48bn, Minister Noonan is expecting some return or “final net asset position” from IBRC, the minister says

“I have been advised that in calculating the projected final net asset position IBRC take into account interest from all assets including customers, securities and Promissory Notes”

What return? It was a return of €3-4bn when estimated by Mike Aynsley last year but Minister Noonan now seems to be less optimistic of getting that much back. If this interpretation is correct, and Minister Noonan appears clear on the point, then IBRC will not be able to clear its ELA liability by 2022/23.

Why might Minister Noonan be saying IBRC won’t have enough to repay ELA by 2022/23? Possibly because Minister Noonan has studied the IBRC H1 2012 accounts which showed a €504m total recognised loss. Perhaps Minister Noonan is pessimistic about the performance of IBRC’s €17bn net loan book which includes the INBS mortgage book and a lot of Irish commercial property lending. Perhaps Minister Noonan doesn’t believe NAMA will make a profit and thatconsequently,  €900m approximately of NAMA subordinated bonds that NAMA used to in part pay IBRC for its loans won’t be honoured.  Perhaps Minister Noonan is pessimistic about the appeal in the UK courts against a decision which forces IBRC to compensate certain subordinated bondholders.

So there are some loose ends here, but I believe the essence of the statement that IBRC will cost €52bn to bail out to be correct. There will be some profit at the Central Bank to defray this. But if there is some other plan, such as repaying 100% of ELA by 2022/23, then that is not alluded to in the Minister’s answer. What is worrying is that Professor Whelan is more expert on this than Minister Noonan and probably those who drafted the response, though it appears to be that Prof Whelan does not factor in any additional losses at IBRC and assumes it break even between now and 2022/23.

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Yesterday, the 166 deputies in the Dail returned from their summer break and you won’t be surprised that the recent shenanigans at NAMA were to the fore of some robust questioning of the minister nominally responsible for the Agency, Minister for Finance Michael Noonan. Some of the Parliamentary Questions (PQs) have become available though all should be published online later today.

Enda Farrell is a former NAMA portfolio manager and NAMA has seemingly accused him of removing data and information from the Agency without authorisation. NAMA has said that it has reported the alleged breach to the Data Protection Commissioner, the Gardai and of course NAMA has taken legal action against Enda Farrell and his wife Alice Kramer which has been transferred to the Commercial Court division of the High Court. NAMA is not commenting on these matters saying that the matter generally is sub judice. Neither Enda Farrell nor Alice Kramer has apparently released any statement on the matter, though in relation to an unrelated matter Enda Farrell has claimed that NAMA was aware of his intention to buy a property owned by a NAMA debtor.

What did we find out yesterday?

(1) Since the start of this year, 15 employees have resigned from NAMA, of which Enda Farrell will be one. This statistic was revealed in a question that appeared unrelated to the recent events at NAMA, but it gives a sense of the number of former employees with sensitive NAMA information which are no longer working for the Agency. Of course any departing employee since December 2009 may possess sensitive NAMA information. As an aside, NAMA has recruited 28 new employees this year.

(2) To the best of NAMA’s knowledge, no assets have been sold to companies, which have employed departing NAMA employees but NAMA does stress that it doesn’t always know the identity of a departing employees’ new employer.

(3) NAMA “is aware” of only one sale of property belonging to NAMA or its debtors to an “employee, their family or associates” and that is the sale of the Lucan property to Enda Farrell.

(4) NAMA claims “that it has procedures in place restricting access to sensitive information between different business areas and within specific business areas. Access to such documents is restricted to essential personnel.”

(5) It seems the main safeguard that NAMA has to prevent unauthorised use of information is legislation – the National Treasury Management Agency Act 1990, the NAMA Act, the Ethics in Public Office Act 1995 as amended by the Standards in Public Office Act 2001 and the Official Secrets Act 1963 to which NAMA staff are subject. So if you are convicted of contravening these statutory obligations, you face “a fine not exceeding €5,000,000 or imprisonment to a term not exceeding 5 years or both”

(6) NAMA is considering changes to its safeguards and procedures arising from the Deloitte investigation.

The questions available at this time have come from the Sinn Fein finance spokesperson Pearse Doherty. No doubt other PQs have been posed by other politicians and parties and if new information crops up when these PQs become available, it will be posted as an update here. Here are the PQs in full.

Deputy Pearse Doherty: To ask the Minister for Finance the number of employees that have resigned from the National Asset Management Agency since 1 January 2012; and the number of new employees engaged by NAMA from that date..

Minister for Finance, Michael Noonan :I am informed by NAMA that 28 new members of staff have joined NAMA since 1 January 2012 and that 15 members of staff have resigned.

Deputy Pearse Doherty: To ask the Minister for Finance if he will lay before the Houses of the Oireachtas a copy of the National Asset Management Agency’s procedures and employment contract extracts which set out to deal with potential conflicts of interest, or the assurance that the use of confidential or privileged information garnered by employees in the course of their work at NAMA is not used for their personal benefit, or for the benefit of family or associates.

Minister for Finance, Michael Noonan : I am informed by NAMA that all of its officers are provided with a copy of the Code of Practice – Conduct of Officers of NAMA when they are assigned to NAMA and they are required to sign an undertaking that they have read, understood and will comply with it. This document, which is published on http://www.nama.ie, sets out in detail the obligations of officers of NAMA with respect to confidentiality and conflicts of interest including statutory obligations regarding confidentiality and use of information including their obligation under the Official Secrets Act 1963.  The document is reviewed annually by the Board of NAMA and circulated annually to officers of NAMA, who are required to sign an undertaking on each occasion that they have read, understood and will comply with it. The Code was first approved by the Minister for Finance on 5 July 2010 and any changes made as a result of the Board’s annual review are also subject to the Minister’s approval.

In addition, those officers of NAMA who are holders of designated positions of employment under the Ethics in Public Office Act 1995 as amended by the Standards in Public Office Act 2001 (“the Ethics Acts”) are notified in January each year of their obligations under the Ethics Acts.

NAMA requires its entire staff to complete a disclosure under Section 42 of the NAMA Act outlining all assets, liabilities and interests which they hold. Each employee is also required to inform the CEO of NAMA of any changes to their disclosure and to immediately inform the CEO of any matter that could raise a question about their suitability to act (or continue to act) as an officer of NAMA or that could result in an actual or potential conflict of interest with respect to their duties or obligations as an officer of NAMA

Deputy Pearse Doherty: To ask the Minister for Finance the number of properties that have been sold by the National Asset Management Agency, its receivers or debtors to NAMA employees, former NAMA employees, their families and associates, and the total value of such sales..

Deputy Pearse Doherty: To ask the Minister for Finance the consideration that has been given by the National Asset Management Agency to adopting practices from other State asset management agencies, such as the US Federal Deposit Insurance Corporation, which ban outright any dealings in agency property by employees.

Minister for Finance, Michael Noonan :I propose to take Questions 306 and 307 together.

I am informed by NAMA that it is aware of only one transaction involving the sale of property by a NAMA debtor to a former employee. After NAMA became aware of the particular transaction involved, it instructed its internal auditors, Deloitte, to carry out a comprehensive review of the transaction. The Deloitte review has established that the sale of the property was transacted at market value as the sale price was in accordance with an independent valuation at the time of the transaction. It found that the former employee did not disclose the transaction to NAMA at any time either prior to or following the transaction.

NAMA requires its entire staff to complete a disclosure under Section 42 of the NAMA Act outlining all assets, liabilities and interests which they hold. Each employee is also required to inform the CEO of NAMA of any changes to their disclosure and to immediately inform the CEO of any matter that could raise a question about their suitability to act (or continue to act) as an officer of NAMA or that could result in an actual or potential conflict of interest with respect to their duties or obligations as an officer of NAMA.

I am advised that the Board of NAMA is currently reviewing the Deloitte findings and, as part of that review, will consider whether there are any changes required to NAMA’s current compliance procedures

Deputy Pearse Doherty: To ask the Minister for Finance if any employees seconded by the National Treasury Management Agency to the National Asset Management Agency that have resigned from either organisation, and who have subsequently been engaged by organisations which have purchased property from NAMA, its receivers and developers or which have met with NAMA to express interest in the purchase of property..

Minister for Finance, Michael Noonan:  I am informed by NAMA that it does not, in all cases, have information on the identity of employers who recruited staff following their resignation from the Agency as some former staff have taken up employment overseas. However, in cases where NAMA has such information, NAMA is satisfied that no sales transactions have taken place between the entities involved and NAMA, its debtors or receivers appointed by it.

The number of meetings between NAMA staff and entities involved in property financing, investment or development runs into hundreds per year. Many meetings between NAMA staff and external parties, of necessity, involve such parties expressing an interest in NAMA and its activities.

I am advised by NAMA that it has procedures in place restricting access to sensitive information between different business areas and within specific business areas. Access to such documents is restricted to essential personnel.

Deputy Pearse Doherty: To ask the Minister for Finance if any employees seconded by the National Treasury Management Agency to the National Asset Management Agency that have resigned from either organisation, and who have subsequently been engaged by organisations which have purchased property from NAMA, its receivers and developers or which have met with NAMA to express interest in the purchase of property..

Minister for Finance, Michael Noonan: I am informed by NAMA that it does not, in all cases, have information on the identity of employers who recruited staff following their resignation from the Agency as some former staff have taken up employment overseas. However, in cases where NAMA has such information, NAMA is satisfied that no sales transactions have taken place between the entities involved and NAMA, its debtors or receivers appointed by it.

The number of meetings between NAMA staff and entities involved in property financing, investment or development runs into hundreds per year. Many meetings between NAMA staff and external parties, of necessity, involve such parties expressing an interest in NAMA and its activities.

I am advised by NAMA that it has procedures in place restricting access to sensitive information between different business areas and within specific business areas. Access to such documents is restricted to essential personnel.

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