Showing posts with label INBS. Show all posts
Showing posts with label INBS. Show all posts

Thursday, June 11, 2015

11/6/15: Anglo's Toxic Legacy: It Is Still Around Us, Today...


Here is an edited version of a note from 4Q 2014 that I provided to a non-commercial party interested in the matters of the Anglo Irish Bank that outlines my view of the sharp practices at the bank and the spillover from these practices across Irish banking, economic and political systems.

"As you know, Ireland was forced by the ECB and the EU to bail out its banks. The most egregious case involved Anglo Irish Bank - a mono-line property lender that was nationalised on January 21, 2009 and bailed out using Irish Government funding to the tune of EUR29.3 billion.

Funds for this bailout came from a combination of the Troika loans and taxpayers-owned National Pension Reserve Fund and thus, de facto, amounted to taxpayer financing of the bank.

Nationalisation of the Anglo Irish Bank, as we now know, came on foot of the bank, the auditors and regulators failing to report egregious sharp practices in the bank when it comes to the regulatory rules that date from the early 1990s through 2008 and include systemic and wilful overcharging of customers, breaches of liquidity rules, bank providing funding for its own directors on the basis of preferential treatment of public disclosures in collusion with another bank, INBS, bank engaging in misclassification of loans as deposits, and bank providing funding to its own customers for share price support schemes.

Any one of these sharp practices would have resulted in either a bank closure in a properly regulated regime, such as, for example, the U.S., and/or a complete wipeout of the equity value of the bank in the markets.

Two Examples

Take one example of one such practice. The overcharging problem at the Anglo Irish Bank continued from 1990 through 2004, with clients billed on average 0.3% concealed margin on their loans without notification of the customers charged and without disclosure to the auditors. Bankcheck review of the large number of loans revealed that 80% of these were involving overcharging. More importantly, from the point of view of the current situation, the Irish Government agencies, such as the IBRC and Nama, as well as the purchasers of distressed loans from Anglo borrowers, continue to charge the rates that include the original fraudulent mark ups, despite at least one official judgement on the matter issued by the Irish court. Taken in perspective, the overcharging - officially and on the record exposed in Irish and US courts - represents a quantum of estimated EUR1 billion of overstatement of publicly recorded and audited profits declared by Anglo through the period of 2004, and although we have no means for ascertaining the quantum of overcharging since 2004, the figure of at least around EUR2 billion total over the span of 1990-2014 is most likely a conservative estimate. This overcharging was notified to the Irish authorities repeatedly and on the record, with no action taken in response to notifications by the current Government, the Financial Regulator and/or the Central Bank.

In another sharp practice, the bank lent money to a single customer to cover margin calls on CFDs held against the bank own shares and, subsequent to the accumulated loans in excess of EUR2 billion, the bank arranged and funded a buyout facility for 10 investors (also clients of the bank) who were lent funds by the bank predominantly on unsecured basis to purchase shares underlying the said CFD positions. In simple, most basic terms, the bank used its lending book to prevent a share price collapse that could have resulted from the disclosure to the markets of the cumulated CFD positions.

Impact

In effect, thus, Irish taxpayers were compelled by the European component of the Troika, the EU and the ECB, in contravention of the IMF advice, to underwrite losses in a bank that was neither systemic to the Irish economy (it had basically no retail deposits and conducted virtually no retail business) nor operated within the confines of banking regulations and laws. On foot of the Anglo Irish Bank rescue, we were compelled to rescue an equally egregious Irish Nationwide Building Society - a counterpart to some of the sharp practices carried out in the Anglo Irish Bank.

Between 2007 and 2013, Irish Government debt rose by EUR155.8 billion - the largest jump in debt relative to GDP of any country in the euro area, including Greece. More than 22 percent of this increase is down to Anglo Irish Bank and irish Nationwide Building Society rescues. 

The damage runs deeper than that, however. If the Irish Government was allowed by the ECB to shut down Anglo Irish Bank prior to nationalisation, Irish Government debt today would have been around 93% of GDP as opposed to the current level of 112%. But this does not take into the account the potential contagion that resulted from the Anglo Irish Bank collapse to other banking institutions in the country. At the time of the September 2008 banking Guarantee, the State and its advisers have argued that not rescuing Anglo Irish Bank would have spread market panic to other Irish banks. 

This claim is, in my opinion, dubious. It could have been as likely, if not more so, that shutting down a rogue institution (or, with INBS - two rogue institutions) in a public and transparent manner could have resulted in more confidence in the systems and procedures present within Irish regulatory and supervisory regime. By opting to preserve and secure Anglo Irish Bank and INBS, Irish Government at the time sent a signal to the markets that any institution, including that with questionable business model, strategy and practices will be preserved and protected. In turn, such a signal was consistent with telling the markets that Ireland has no will to or cannot (due to the limited regulatory abilities) distinguish rogue operators from legitimate and functional ones. The effect of this could have been undermining confidence in all Irish banks, in order to protect a rogue one.

Ireland opted for a solution of shoring up and covering up the structural vulnerabilities exposed by the Anglo Irish Bank practices in the system of our regulation and supervision, as well as governance. This is neither a sustainable strategy, nor is a markets-securing strategy.

Legacy

The legacy of the Anglo Irish Bank-related debt remains with us. Currently, Irish Central Bank holds some EUR25 billion worth of long-term Government bonds issued to offset Emergency Liquidity Assistance credit line extended to the bank liquidators. Ireland is mandated by the EU and ECB to gradually sell these bonds into private markets. As we do so, the burden of this debt is befalling Irish people who will have to fund interest and principal on these bonds into perpetuity. 

There is an easy solution to this problem that ECB can enact within a minute: the bonds should be left in the Central Bank and cancelled at maturity. This implies no cost for European taxpayers and no new issuance of money by the ECB.

In ethical terms (moral hazard etc), such a move is warranted due to the sheer scale of deception and concealment of the facts of the Anglo Irish Bank operations that have been exposed to-date and are still being exposed and that were not disclosed at the time of the September 2008 Guarantee or, indeed, at the time of the 2010 Troika 'Bailout'. In other words, the argument can and should be made that both the Guarantee and the Bailout involved Irish commitments to lenders and lenders agreements that were not reflective of the full informational disclosures by the Anglo Irish Bank and the INBS.

In moral terms and economic terms, Irish people have paid a huge price for the crisis - far more than their fair share, given the fact that in rescuing Irish banks, we have underwritten a rescue of private bondholders and banks across the EU, the US. Irish people are paying for the crisis with dramatically higher rates of suicide, destroyed families, lost or endangered family homes, decimated health care system, devastated pensions, underfunded education and childcare, and an economy that in per capita GDP terms has sustained the third biggest drop across all Euro area countries. A large share of these costs is attributable to EU and ECB decision to force Irish Government to accept full losses in the Anglo Irish Bank and INBS - two rogue banking institutions that were not systemic to Ireland - which itself was predicated on incomplete information and misleading information being supplied to the Irish authorities at the time of decision making.

Furthermore, it is my opinion that the legacy of the Anglo and INBS - embodied in the continued process of disposal of the residual bonds on the insistence of the EU and ECB - is toxic to the democratic institutions of Ireland, from the point of view of the future. As long as Irish political elites are forced to deal with the legacy of the bonds disposals, there will remain an incentive for the Irish establishment to stay mute on the issues of systemic breaches in regulatory, supervisory and legal frameworks around the operations of the two rogue institutions. In return, official refusal to deal with the legacy fuels public mistrust of the core democratic institutions of the State, increasing the appeal of the extreme ideologies and political positions. 


The legacy of Anglo and INBS is so toxic that it prevents a rational, informed discovery of facts and debate of these facts as relating to the regulatory and supervisory breaches within Irish financial system. The only way we can functionally deal with this malfunctioning of the state systems is if the European authorities allow Ireland to move beyond the cost of carrying the repayments accruing from these liabilities on the State balance sheet. Only after shedding the immediate burden of having to finance their legacy can we, as a nation, move to the stage of addressing deeper, more structural problems exposed by the crisis.


Note: Details of overcharging sharp practices at Anglo Irish Bank that allegedly continued into IBRC and Nama are discussed here: http://trueeconomics.blogspot.ie/2015/06/1062015-bombshell-goes-off-on-anglo.html. Details of Mr. Morrissey letter quoted in the Dail (Irish parliament) are available here: http://trueeconomics.blogspot.ie/2015/06/11615-full-letter-concerning-ibrc.html. Details of the affidavit filed by Mr. Declan Ganley with Irish authorities concerning overcharging allegations are available here: http://trueeconomics.blogspot.ie/2015/06/12615-anglo-overcharging-saga-ganley.html. Details on evidence of Nama value destruction and other systemic problems are covered here: http://trueeconomics.blogspot.ie/2015/06/14615-why-read-wallaces-speech-on-nama.html.


Tuesday, December 23, 2014

23/12/2014: RTE Finance: Money Grows on NTMA Trees


Oh dear, dear... Irish State Broadcaster is clearly in the need of some cash for training... or else, they are geniuses of the unimaginable proportions. Either way, RTE has discovered nothing more, nor less than a genuine money creation principle of the Irish Government Promo Notes.

Don't believe it? Read here: http://www.rte.ie/news/business/2014/1223/668729-central-bank/

Let me summarise the logic:

  • Anglo & INBS went bust (we know).
  • Government created IBRC to 'close off' Anglo & INBS, funded by the Promissory Notes (government debt issued to government-owned agency)
  • Government created a swap to 'close off' IBRC: NTMA issued a bunch of 'IBRC' bonds (government debt) that were swapped for IBRC Promissory Notes (government debt).
  • The 'IBRC bonds' were given by NTMA to the Central Bank of Ireland which is obliged to sell them.
  • NTMA, at the same time, on the sideline as a part of its normal business borrowed cash from the private markets. It stuffed this cash into Irish banks as deposits, getting paid nada on the euro and paid interest on this cash to the private markets, which amounted to a lot more than nada.
  • NTMA then 'bought' back some of the IBRC bonds from the CBI, paying with cash it borrowed from the markets on which it paid interest and will continue paying interest.
  • RTE described the above as a 'costless' transaction, cancelling the debt.
  • In reality, debt is still there right were it was, except if before interest on IBRC bonds was payable to the Central Bank it is now payable to... drum roll... the private lenders who lent money to NTMA.
That last bit is something RTE just couldn't spot with the Hubble Telescope of Financial Wisdom they deployed in the above link.

Which brings us to the Nobel Prize-worthy breakthrough at the RTE: money grows on trees or locates itself at the end of a rainbow or something of the sorts... but in the end, money is free for the State Broadcaster that truly does get 'free' money (aka taxes)...


Oh dear...

Two twitter reactions:



Wednesday, May 12, 2010

Economics 12/05/2010: Irish Nationwide - an expensive delay

I have gone through the Irish Nationwide balance sheet, as summarized in the table below (all values are in millions of euro):
All scenarios are explained above and all assumptions are in there as well.

So the conclusions are:
  • If we continue injecting cash into INBS, the total cost of winding down the bank will be the loss of all cash already put into it, plus the expected post-Nama injection of ca €1,148 million. The grand total bill for shutting INBS via Minister Lenihan's preferred option will be €7,234 million;
  • Shutting down INBS back in 2009 would have cost between €2,030 million and €3,078 million, were the Government to listen to people like Peter Mathews, Brian Lucey, Karl Whelan and myself. The bond holders (senior ones) would have been paid 50 cents on the euro.
  • Shutting it down now, without going Nama route will cost €1,575-2,659 million, plus the money we already dumped into it to date, i.e €2,700 million. Which is still cheaper than what Minister Lenihan's plan would deliver.
Either way, the DofF and Minister Lenihan really must come clean on the issue of bondholders at this stage. How much more can this economy carry on throwing good money after bad?

Monday, April 19, 2010

Economics 19/04/2010: INBS - Titanic hits the ocean floor...

INBS has reported a €2.49bn loss for FY 2009 on the loan book just under €11bn, with roughly €8.5bn of this attributable to development and investment in property markets. Provisions amounted to €2.8bn, so in other words, the Kingdom of Irish Local Finance has managed to pile up an impressive 25.5% impairment charge on the book that has already taken a hit in 2008. Between 2008 and 2009, INBS has managed to post impairments of 30%.

Actually, here is a better view: 96% of all losses are on commercial development books, which means INBS has been lending money to folks whose default rates are currently running at more than 33% yoy! These are recognized default rates, which conceal the fact that many of the INBS' loans (just as in the case of other banks) would really be deep in red, were they not re-negotiated and switched into 'interest holiday' loans back in 2008-2009. Now, remember the numbers released by Nama? 2/3rds of the loans not paying interest. Apply that to the INBS books - the expected impairment charge for 2010-2012 will be around €5.7bn. And that's only for the non-householders' loans...

The numbers are truly outstanding by all possible measures.

INBS's administration expenses rose to €46mln from €45mln in 2008, and the bank has managed to accumulate €7 million in professional fees as one-off expenses, presumably relating to the management efforts to shore up the hull of a sinking boat.

Per Irish Times report, CEO Gerry McGinn said the greatest management challenges were in relation to the commercial loan portfolio. "The society has manifestly been seriously under-resourced in many areas of its business activities and support functions, but most especially in commercial lending," he siad.

Under-resourced? As if throwing more cash at staff and consultants would have prevented them from issuing so absurdly poorly priced and analyzed loans?

At this stage, especially given Mr McGinn's denial of the reality (that the INBS is a burnt-out force with not a modicum of decorum to pretend that it can act as a functional lender) any more taxpayers cash directed to the INBS would be a pure and gratuitous waste!

Wednesday, March 31, 2010

Economics 31/03/2010: An expensive joke called Nama

I must confess, the last thing I expected in yesterday's quadruple whammy of one Ministerial speech, one Nama document release, a Central Bank statement and the Financial Regulator's decision was a joke. But there it was. For all to see, for few to notice.

Armed with a law degree-backed mastery of logic, Minister Lenihan has issued a statement that he will be requiring Irish Bankers Federation to run courses for the benefit of our bankers on how to lend money to projects other than property. That statement, coming from the Minister after he announced that the Anglo will be provided with up to €18.3 billion in taxpayers cash, and the rest of our banks will swallow billions more was worthy of a comedian. In an instant - we had a Minister for Finance throwing money at the banks which, by his own admission, have no idea of how to lend.

Anything else had to take a back seat to this farce. And it almost did. If not for another pearl of bizarre twist in the Nama saga. Recall that this Government has promised the world an arms-length entity to control and legally own Nama - the Special Purpose Vehicle arrangement which, in order to keep Nama debts out of the national debt accounts was supposed to be majority (51%) owned by external investors.

At the time of the original announcement of this arrangement I publicly stated that there was absolutely nothing in the Nama legislation precluding parties with direct interest in Nama from investing in this SPV. And boy, clearly unaware of such pithy things like conflict of interest, Nama announced that its majority owners will be:
  • Irish Life Assurance (a part of the IL&P that has been at the centre of the Anglo deposits controversy and one of the most leveraged banks in the nation),
  • New Ireland (an insurance branch of BofI), and
  • AIB Investment Managers.
In other words, the very institutions that will be benefiting from Nama's taxpayers riches will also own Nama and will comprise SPV board. They couldn't have given a share to Seannie Fitz and Mick Fingleton, could they?

Having a good laugh - even at the cost of tens of billions to us, the ordinary folks - is a great end for a day in the Namacrats land. So much for responsible and vigilant policies of the Government.


Now to the beef: Nama release figures.

In its note on the first tranche of loans transferred, Nama provides a handy (although predictably vague) description of the loans the taxpayers are buying as of March 30, 2010. Table below summarizes what information we do have:

Let us take a further look at the data provided in the official release and the accompanying slide deck.
Applying more realistic valuations on the loans transferred against the average Nama discount, while allowing for 11% assumed LTEV uplift (Nama own figure), net of 2% risk margin - the last column in the above table shows the amounts that should have been paid for these assets were their valuations carried out on the base of March 30, 2010 instead of November 30, 2009 and were the discounts applied reflective of realistic current markets conditions.

Thus, in the entire first tranche of loans, Nama has managed to overpay (or shall we say squander away) between €1.2 and €3.1 billion - a range of overpayment consistent with 14-37% loss under the plausibly optimistic assumptions. Returning this loss across the entire Nama book of business and adding associated expected costs of the undertaking implies a taxpayer loss of €9.6-25.3 billion from Nama operations.


In Nama statement, Brendan McDonagh, Chief Executive of NAMA said: “Our sole focus at NAMA is to bring proper and disciplined management to these loans and borrowers with the aim of achieving the best possible return and to protect the interests of the taxpayer. ...NAMA is willing to engage with an open mind to our acquired clients ...”

Pretty amazing, folks - Nama CEO clearly sees the borrowers as his 'clients', while claiming that his organization objective is to benefit the taxpayers. Would Mr McDonagh be so kind as to explain the difference? Is Nama going to serve the 'clients' or is it going to protect the taxpayers? The two objectives can easily find themselves at odds - the fact Mr McDonagh is seemingly unaware of.