March 2010


If, like me, you are curious about what exactly €40 billion buys you these days, then perhaps you were keen to see what revelations would be contained in the Anglo Irish Bank Annual Report released today. If so, I strongly recommend you read the Group Chief Executive’s Review (pp. 4-6), where we get a glimpse of Anglo Irish Bank’s future plans. You just couldn’t make this stuff up! At first, I actually thought that maybe Mario Rosenstock had written it. But alas, it would be funny if it wasn’t such a never-ending fiasco. Here are just a few of the pearls of wisdom provided by the Group Chief Executive, Mike Aynsley:

First things first: “The ‘new bank’ will in time be profitable, well funded and maintain strong capital and liquidity ratios.” Thanks, lads.

“Our aim is to create a medium-sized commercial bank with a well contained risk appetite and stable funding base, operating in Ireland, the UK and the US.” Steady on, lads! Wasn’t it that “risk appetite” that got us into this mess in the first place?

Thankfully, however, help is on the way: “The restructured organisation will have a role to play in the national recovery, acting as a domestic and international fundraising platform for the Irish economy and providing commercial banking services to assist Ireland’s recovery and growth”

“Finally, I would like to thank the Minister for Finance”….. so would a lot of subordinated bondholders, I suspect!

Declan Curran

The details released today regarding the first tranche of loans to be transferred to NAMA from the five participating institutions offer plenty by way of headlines:

  • NAMA is to apply an average discount of 47% on this first batch of  loans. These loans, originally worth €16bn, will be bought for €8.5bn.
  • Of the €8.5bn in loans, €4.9 billion relate to assets located in Ireland; €3.2 billion in Britain; and €0.4 billion in other countries. None of this first batch of loans relate to assets located in Northern Ireland.
  • Investment properties make up the bulk of the underlying assets, which account for €5.5bn. €1.3bn is in land, €0.8bn in hotels, and residential property makes up 0.4%.

However, the NAMA release also leaves much to ponder regarding what is to come in subsequent waves.

The following are just a few of the questions that arise:

  1. How representative is this first wave of €16 billion loans of the entire NAMA portfolio? In particular, development land and hotels are underrepresented in this sample. Will their inclusion increase the “haircut” still further?
  2. This first wave of loans only represents the ten largest builders/developers. Do their investments represent better or worse quality investments than those of smaller  developers associated with ghost estates across the country?
  3. Will it transpire that the ten largest builders/developers were required by Irish banks to invest less of their own equity into development projects than smaller developers?
  4. Security for loans: Where the title of the underlying assets is of bad quality, NAMA legislation provides for an additional haircut which would allow NAMA to purchase  loan for a nominal sum. To what extent will NAMA need to avail of this power?
  5. The first wave of loans gives no indication of the expected level of default that NAMA will experience. Does NAMA maintain that the default level will be 20%, as per the NAMA business plan?
  6. How will the geography of the first waves of loans, and in particular the omission of Northern Ireland from this sample, differ in subsequent waves?
  7. The following information has been provided regarding the Special Purpose Vehicle Investors:

“NAMA has secured a combined investment of €51m from three institutions (€17m each) for a 51% shareholding in National Asset Management Agency Investment Ltd, the NAMA Special Purpose Vehicle. The investors are Irish Life Assurance, New Ireland and major pension and institutional clients of AIB Investment Managers (AIBIM). NAMA will hold the remaining 49% but will have a veto over all decisions that are not in accordance with the objectives of NAMA as specified under the NAMA Act.”

What, if any, influence will these three private investors have in the future operations of NAMA?

If today’s exercise in “drawing a line in the sand” was aimed at removing uncertainty, there’s still a long way to go.

Declan Curran

There was a fair bit of media coverage yesterday (see here and here) about an apartment complex in Mullingar where prices start at €69,950 for one-bedroom apartments, €82,450 for two-bedroom units and €98,000 for three-bed units.   These prices are 55pc and 63pc of their original prices (roughly in line with Morgan Kelly‘s prediction that property prices will drop by a half to two thirds from the peak).  The Mullingar apartments are not unique and there have been a number of such ‘firesales’ around the country where the prices within certain developments, almost certainly built with loans from non-Irish banks and thus ineligible for NAMA, have been slashed once the receivers have been bought in (the Mullingar apartments were funded by National Irish Bank, owned by Danske Bank, who are seeking to recover €2m from the €7.8m owed by the developers).  Prices are generally being cut in these kinds of developments by 50-75% as the banks seek to claw back some of the debt owed.  One development in Rooskey, on the Roscommon side of the Shannon, has seen prices drop from 399K to offers above 100K.

'Firesale' in Rooskey

These kinds of sale are starting to establish a floor in the market.  On the negative side, they start to reveal the level to which the whole market could sink to and thus the extent to which present home owners are in negative equity (and just how far the market will have to rise to climb out of that condition).  On the positive side, once a floor is established, confidence will start to return to potential buyers who are presently too worried to purchase in fear that they will immediately enter negative equity.

Once the floor is established, how quickly prices will start to rise will be the next big question. It seems likely that prices rises will be relatively modest for quite some time due to: buyer caution because of the present price collapse; the general state of the economy, unemployment and underemployment; the difficulty of securing a mortgage, especially for first time buyers; and the present oversupply in the market enabling buyers to haggle. Morgan Kelly‘s view is that it’s difficult to dismiss the possibility Irish property prices could remain below half their peak value “for the next decade or longer.” It’s difficult not to agree with his analysis.  At least we might be starting to find the floor.

The front page of this mornings MetroHerald ran with a story claiming that the government had issued a “tacit threat” to Passport Services that the division could be outsourced if proposed strike action continued.  The article claimed “Passport Services could be shifted to another department or even outsourced, top Government officials warned yesterday”.  Tucked away on page 5 was a story about Brian Cowen’s backing of the board of Anglo’s decision to give salary increases to 78 staff.  The front page of the Irish Independent advertised two opinion pieces: One by Martina Devlin titled “My passport nightmare” and another by Brendan Keenan titles “Nursing the banks back to health”.  The rhetoric implied by these headlines is another example of the current trend of pitting ‘public’ and ‘private’ sectors against each other.

The image of Irish society that this paints is disturbing.  Are we living in a country where the ‘audacity’ of the public sector mobilising any sort of union power to assert their grievances is met with veiled threats, but where an obscenely inept bank which has guzzled tax-payers’ money to the extent of state ownership is allowed to give its staff pay raises while the same Government steps politely aside?  Responding to appeal by Eamon Gilmore to halt this salary bump, Brian Cowen suggested that “The board have my and the Government’s confidence”.

But what, pray tell, has inspired this ‘confidence’? Is it that the bank operates in the loosely defined ‘private sector’ and, like NAMA, can be trusted to make its own decisions with regard the mechanics of its operations?  Meanwhile, because Passport Services operate in the realm of the ‘public sector’ they must toe the line or face dissolution and privatisation.  Within the current climate of bail-outs and cut-backs just what actually defines the line between ‘public’ and ‘private’ sectors?  As suggested here recently, the Government’s position is disingenuous: on the one hand extolling the benefits of free market neoliberalism and on the other correcting any free market mistakes with tax revenue.  Perhaps if Passport Services was to be outsourced, the unit would then be in a position to dictate its own rates of pay, resist cut-backs, and siphon Government spending.  The inverse logic of this boggles the brain. The horror, the horror.

Cian O’ Callaghan

IBEC have been up to their usual public sector bashing calling for radical reform that cuts costs and boosts efficiency, productivity and flexibility. Perhaps its time for IBEC to look in the mirror at how some of its members have milked the public purse and seek suitable reforms?  There has been, and continues to be, a huge chunk of public purse finance spent hiring the private sector, a huge chunk of which has been squandered – think of the huge overspend on public infrastructure projects, or the massive fees paid to consultants for often quite shoddy pieces of work, or the PPP contracts that funneled huge guaranteed funds to the private companies over long periods of time.  And, just as there is excellent work undertaken in both the public and private sectors, there are slackers, jobsworths and inefficiencies in both.  We’ve all experienced poor service across the service sector; this is not something unique to the public sector.  The private sector would clearly like public sector work to be transferred to them, where it will be supposedly dealt with more efficiently and cost effectively (and certainly more profitably for those companies who would benefit).  There is clearly a wider debate needed here about whether we want vital public services privatised, and under what terms, but in the meantime perhaps IBEC should look at itself, its agenda, and the way its members have been milking the public purse during the Celtic Tiger period whilst it pushes its neoliberal agenda.  Any talk about reform of the public sector should be accompanied by significant reform of private sector contracts driven by an agenda of openness, transparency, good governance, and most importantly value for money.  It’s pretty difficult to believe that we were getting value for money during the boom.  It wasn’t called Rip-Off Ireland for nothing.  The mirror’s this way …

Looks like Nama’s starting to get going. Good stuff. Now we find out how much we’re going to be paying. Then I suppose we can start planning. If it’s €10bn over ten years, that’s €1bn per year, is it? And if it’s more likely to be €30bn over ten years, then that’s €3bn. But, sure, isn’t the €30bn estimate more on the optimistic side of the realistic/pessimistic view? Could it be that we’re in for €40bn? (more…)

An interesting and passionate opinion piece in the Irish Times today by Theo Dorgan arguing that representative democracy is simply not functioning as it should, at present.  An argument that chimes Fintan O’Toole’s assertion in Ship of Fools, that Ireland is still not a mature democracy.

“This democracy of ours is breaking down, on a scale and in a manner that we have not seen before now, principally because there is now a profound contradiction between what we expect of government, and what government thinks it is there for. In my view, the Government now thinks its sole duty is to manage the State as if it were its own property. […]

However imperfect and in constant need of adjustment it may be, representative democracy seems the sanest and fairest practical way to regulate the complex business of the modern State. For representative democracy to work, there must be a complex relationship of trust between the ruled and the rulers.

If I am to be ruled, if I am to consent to be ruled, then I must grant government considerable latitude in its decision-making processes provided only and always that government acts honourably, scrupulously, fairly and attentively in the discharge of its business.

It has become terrifyingly clear that this Government is really, truly not listening to us. All criticism is dismissed, jibed at, spun out of meaning – as if we are not really there.

A licence to govern is not carte blanche to do as you please between regrettably necessary elections, to behave wilfully, even stupidly, between polling days, with a mental resolve to gloss over mistakes (and worse) in your pre-election literature in the hope of being returned to the merry-go-round. Government is a process, an ongoing process whose driving force, so to speak, is the constant renewal of mutual trust. […]

If we are to survive the present crisis we will need a government prepared to feel shame when it lets us down, prepared to put the national good before party or sectional interest, prepared to listen to, learn from and act upon the collective, unbiased intelligence, including the moral intelligence, of its own people.”

It’s an interesting piece.  It’ll probably won’t be “dismissed, jibed at, spun out of meaning” as he fears, but rather the more usual strategy adopted – it’ll be ignored.  Perhaps the most interesting thing in the Irish case, is that despite many people being unhappy with how the country is being governed, there is very little explicit, well organised protest or calls for political reform.  We are a long way from pots and pans being used to bring down a government, as in Iceland.  It seems we have little appetite for a ‘mature democracy’.

Brian Cowen had an editorial in the Irish Times on Saturday arguing that Ireland will recover as a global innovation hub – ‘the best place in Europe to turn research and knowledge into products and services’ – guided by a policy of creating a smart economy. Presumably this would necessitate a highly trained workforce and a well developed research culture and facilities?

Apparently not.  At the same time that billions of euro are being pumped into propping up the banking and property sectors, there is presently underway a massive disinvestment from the education system – core budgets are being drastically trimmed, staff are being cut, supports slashed, capital programmes terminated, research funds hacked, etc.  And this is despite the fact that the the OECD reports that Ireland, pre-the crash, was one of the lowest spenders per capita on research and development, and on education in general, with very large teacher-student ratios and weak support infrastructure (see paras 18 and 23; Tables 4 and 7; also see here).

At a time when we should be investing heavily in education, we are undertaking savage cuts and doing serious damage to the limited capacities that have been built up over the past few years.  How this helps to foster innovation and entrepreneurship, attract inward investment, and create a smart economy is anyone’s guess.  Without a clear roadmap, accompanied by proper financial investment and political will – as opposed to a list of hopes – it is difficult to see how Ireland as an ‘innovation island’ will materialise.  Perhaps if we repeat our desire to be an innovation island enough, it’ll simply happen?  Or perhaps we could invest in education and research capacity building, or at the least seek to maintain pre-cut levels?

Here’s an interesting research question for the government – who do they think will want to move their research and development operations to a country where they are actively disinvesting in the creation of talent?

It is becoming increasingly difficult to read a newspaper these days without further stoking one’s cynicism with regards to how the present crisis is being handled.  There were a couple of stories in Saturday’s Irish Times concerning NAMA that once more highlighted reasons to be concerned and cynical about its implementation.  The first story concerned the enormous pay rises being given to NAMA board members just weeks after they have taken up their posts.  The second story concerned the banks and developers, looking for a relaxation in the paperwork and due diligence required to transfer loans to NAMA.

So, let’s get this straight.  First, the banks provide huge sums of money to developers with little due diligence and little oversight or regulation by government bodies.  Second, when the whole edifice comes crashing down, the government and tax payers step in to bail them out, providing billions of euros of guarantees, injections of funds, and the concocting NAMA.  Third, the government then staffs NAMA in part by re-employing failed gamekeepers and converted poachers to manage the state’s takeover and management of assets (these might be honest and honourable people with the required skills, but the optics are terrible – but then the same ‘masters’ who got us into this mess think they are compenent to get us out of it).  Fourth, the state then awards the board an immediate, and very large, pay rise at the time that it is cutting the pay of the rest of the public sector and seemingly doing very little to create employment for those who have lost their job.  Fifth, there seems to be a waivering around the need for proper due diligence on assets that are costing the tax payer billions of euros, which is one of the reasons we’re in this mess in the first place.  Cynical?  Why shouldn’t we be cynical?

It seems that the financial eyes of Europe and beyond are firmly locked on NAMA, tentatively watching its evolution and keenly hoping for success.  As reported in the Irish Times, Guy Monson, the chief investment officer of London-based wealth management firm Sarasin Partners, speaking to a group of private investors in Dublin, suggested that NAMA is seen as ‘road testing’ a flagship model of addressing long term problem property loans.  “People are looking to see if an economy as flexible as Ireland can manage to make these challenges… I think the model is brave and bold, and there are a lot of people in the international community who would like to see it succeed”.

Given the recent discussions on whether the fundamental assumptions underpinning NAMA are at all realistic, it is debatable if this sort of close scrutiny is at all positive.

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