Economics 1/8/10: Merrill Lynch & Minister Lenihan's Banks Guarantee

Those who follow my tweeter contributions (@GTCost) would have probably seen the following quotes from the 3 documents relating to Merrill Lynch advice given to the Irish Government regarding the banks guarantee of September 2008. Nonetheless, I've been asked by a couple of readers to provide their summary in a single place so here it is.

In relation to Minister Lenihan letter to the Irish Times (here) which stated amongst other things that: "In the papers on the bank guarantee recently released by my Department and published by the Public Accounts Committee, the Government’s financial advisers Merrill Lynch strongly endorsed the principle that no Irish bank should be allowed to fail against the backdrop of what the Governor describes in his report as “the hysterical state of global financial markets”. Merrill Lynch also recommended a blanket guarantee of Anglo Irish Bank, including, incidentally, subordinated debt."

The Minister was referring to 4 documents available on the Oireachtas site (here) and numbers 3, 4, 5 and 6. Document 6 contains no information on the actual position of the Merrill Lynch.

Transcript of the meeting Merrill Lynch & DoF 26/09/2008: page 1 "On a blanket guarantee for all banks: Merrill Lynch felt could be a mistake and hit national ratings and allow poorer banks to continue" Link: http://www.oireachtas.ie/viewdoc.asp?fn=/documents/Committees30thDail/PAC/Reports/DocumentsReGruarantee/document5.pdf

Same source, page 2: "More generally, institutions should be encouraged to sell assets & get equity." So Merrill referred to equity capital injections (either in the style of Swedish recapitalizations by the state or private equity sales, with the latter being an unlikely outcome. At no time does the document references the need for a blanket bailout! Minister Lenihan was present at the meeting (see last paragraph of the document to prove this, although the official list of attendees at the top of the document does not include his name).

Merrill's presentation on 26/09 does state (p2) that a guarantee, covering subordinated debt holders as well is: "Best/Most decisive/Most impactfull from market perspective" option of considered. It does not state this to be the case from the taxpayers perspective. Minister Lenihan does not represent the markets interests. He represents taxpayers interests. Thus, if he indeed take the advice from the above statement, he thus knowingly or unknowingly altered the terms of his core responsibilities.

The same presentation voices a number of concerns, some of which are blacked out by DofF... What are these? Link: http://www.oireachtas.ie/viewdoc.asp?fn=/documents/Committees30thDail/PAC/Reports/DocumentsReGruarantee/document4.pdf)

Email from Merrill to K. Cardiff from 29.09/08 18:43(just a few hours before the guarantee was issued and containing final advice by the investment bank to the Government) does not contain any endorsements of the Guarantee (or of any other singular option), despite being based on 26/09 presentation cited in the earlier quote.

But the email does say (p2): "There is no right or wrong answer [to strategic options available to the Gov]... preserving flexibility is key & solution may be different for each institution"

Does this advice sound like a call for a blanket guarantee on all debt holders?
Link: http://www.oireachtas.ie/viewdoc.asp?fn=/documents/Committees30thDail/PAC/Reports/DocumentsReGruarantee/document3.pdf

There are even deeper issues involved in Minister Lenihan's statement. One of the most troubling ones is why has the Minister summoned the advice of an investment bank that two weeks before the advice was sought (on September 14th) was taken over by Bank of America in questionable condition?

Congressional testimony by Bank of American CEO Kenneth Lewis, as well as internal emails released by the House Oversight Committee, indicate that Bank of America was pushed into the purchase of Merrill Lynch by the US regulators. BofA executives and board were, allegedly, threatened with the firings and were warned of "damaging the relationship between the bank and federal regulators". Full three weeks before Minister Lenihan engaged Merrill Lynch, the company was severely downgraded by its peers in the market (September 5 downgrade by Goldman Sachs is indicative of this and was public at the time).

However, the main issue that arises from Minister Lenihan's letter is that of the purpose of its existence in the first place. Is Minister saying that the Guarantee decision was the correct one? If so, why does he need the defense of being given such an advice? If no, what does his statement about Merrill Lynch advice really tells us? To say that Guarantee was issued because Government advisers said that it was the best option is equivalent to saying that poor weather forecasts has caused Titanic to sink.

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.

Economics 21/11/2009: State Directors Fees

Per RTE report (here), Anglo's 'Public Interest' directors are being paid handsomely for their gargantuan efforts to... do exactly what? Steer the bank out of trouble? Not really, Anglo is not any better today than a year ago. Carry out its ordinary business? Not really, Anglo is not doing any new business at all and is in effect sitting pretty until Nama cleans up the mess. Safeguard public 'investment'? Not really, for no one sane really expects any return from this 'investment'. So what exactly do these 'Public Interest' director do? No one dares to ask. 

In the mean time, Alan Dukes and Frank Daly - two, in my view fine individuals - collect public retirement pay and are receiving €99,360 each in fees from a publicly-owned Anglo. A figure more than six times the compensation for directors of other State bodies.

But things are not much better in BofI (where Tom Considine and Joe Walsh received total fees to €102,375 and Joe Walsh's to €78,750). AIB in contrast paid Dick Spring and Declan Collier €27,375 and also topped these with €3,000 for each committee meeting attended. IL&P's public guardians, Ray MacSharry (fees of €56,250) and Margaret Hayes (€63,500) were handsomely well off as well. At EBS, Tony Spollen and Ann Riordan both receive a basic fee of €29,000 each. State appointed noble folks of Nationwide, Rory O'Ferrall and Adrian Kearns, in line with a long-running tradition at the building society to behave like a secretive private bank, simply didn't disclose their earnings to the public.

Further irony: fully state-owned Anglo pays second highest rate to its non-execs, while the Irish Government is flustered with privately held banks (AIB & BofI and the rest of privately held 5) executives' remuneration. It looks like someone (Minister Lenihan?) can't control his own organization (Anglo), while trying to play tough with organizations he has little stake in. Oh, incidentally, the fees for Dukes & co were set on the 'recommendation' by the State own 'commission' - another state body that Minister Lenihan apparently cannot reign in.

Expected annual cost (inclusive of expected, but not disclosed fees) €760,000 plus.

After having a quick chat with few friends in academia, here is a bold proposal for the Minister for Finance - you can find at least 12 senior and experienced academics and industry practitioners, including my self, who would do these jobs for €10,000 per annum plus expenses. As a real exercise in our patriotic (Minister Lenihan's words from last Budget) duty.

How about it, Minister? You promise left right and center that you will save taxpayers money. Here is a chance to do so. Some €640,000 of taxpayers money!

Oh and while we are on the topic of silly/dodgy political news - there is a recent report in the US (here) that argues that President Obama evokes Jesus and God more frequently than his predecessor. Not that I have a problem with this myself, but I wonder what all the European 'Liberals' would make of this...