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 06/05/2009: NAMA & Bananas for Brian

January-April tax receipts are down 24% y-o-y or €3.2 bn. Same as in February, but erasing a slight gain (-23% y-o-y deterioration) in March. Some say this is good. I am not sure what they have in mind:

1. the fact the we are back on a steeper February downward curve rather than on an imperceptibly flatter March one; or
2. the fact that we are not down 50%?
   

Worst performing tax heads are in bold in the table above. But seasonality matters, so we compare monthly changes in the shortfalls this year so far against the average monthly shortfall for 2008 for the same period of January-April.
Red marks subheads that deteriorate in performance from month to month, relative to previous year. In other words, red numbers represent the cases where y-o-y shortfalls increase from one month to the next. Several conclusions worth making:

• Compared to average shortfall in 2008, April 2009 is much worse across all, but two categories: CGT and Stamps. This, of course, is just due to the fact that once you have fallen through the basement ceiling, there isn’t much room left to fall further;
• Overall, shortfall in April 2009 is worse than the monthly average for 2008 period;
• In April, shortfall has improved relative to March in Customs, Excise, Stamps, Corporation Tax, VAT and Total Taxes; it has worsened in Income Tax (despite the levies), CAT and CGT;
• VAT leads as a main cause of the overall shortfalls – down €1.043bn – ca 33% of the total shortfall – this, in part, is because of the reckless VAT hikes, not despite them;
• Another 26% of the shortfall came from Stamps and CGT both property related taxes, were down €838 million, making up a further 26% of the shortfall.
  

Now to the deficit matters: in April Budget, tax shortfall for 2009 is estimated at €34.4bn – 15.6% decline on 2008. We are now at a 24% decline in annualized terms, suggesting DofF is waiting for some miracle to significantly raise revenue. What this might be?

Speculation 1: another mini-Budget post local elections with a massive tax hike - doubling income levies and doing some nuclear work on PRSI; or
Speculation 2: Pfizer, Dell, Glaxo, Apple, Microsoft, Google and the rest of the world producing a rescue package for Ireland that is massive and has no lags to build; or
Speculation 3: in response to President Obama threat to tax US MNCs based here, we impose a tax on Irish-Americans.

Looks to me like Speculation 1 is the winner.

Now to the expenditure side:

• Current spending was up 4.5% in the first four months, down from the 8.2% rate of increase in March. Factoring deflation, this is still a hefty increase;
• Capital spend was down 14.5% on April 2008, so no stimulus, Brian, despite all the promises;
• Service of national debt is up from €1.262bn in Jan-April 2008 to €1.501bn this year so far. Total debt management costs along with sinking fund: up from €1.736bn to €2.108bn a rise of 21.4% y-o-y;
• Agriculture & Food – up cool €145mln y-o-y - pork dioxins scare, I presume;
• Community, Rural and Gaeltacht Areas – up minor €5.6mln y-o-y;
• Education & Science down €173mln, so Government priorities on who gets dosh first are pretty clear – building the knowledge economy out on the farms;
• Environment, Heritage & Local Government is being beefed (or biffoed?) for local elections with a juicy €30.1mln increase on 2008;
• Other increases are linked to social welfare and other spending that is most likely unemployment-related;
• Overall, voted Government spending is up €275mln or 1.8% in nominal terms, roughly 5% in real terms – some fiscal crisis they are having…
  

If the last bullet point isn’t enough, public sector salaries, pensions and allowances are up from €16.477bn in the first months of 2008 to €16.69bn in 2009. Now that is an interesting number. Up 1.3% y-o-y in nominal terms, 4.5% in real terms. And one has to recall that 2008 includes the six months of Government’s denial that we are facing a crisis and six months of promises to cut public spending!

But wait, there is more fun in the numbers. We dumped €19.04mln into Carbon Act 2007 Fund in the last 4 months – a 100% increase on 2008. We also managed to stuff more cash - €396mln to be precise – into the NPRF, aka public sector pension piggy bank.

Yes folks, we are still broke, but don’t tell it to the public sector employees. For them, the party is just keeps rolling on. So taxes for us, baNAMAs for Brian and some champagne for public sector workers. Sharing the pain...


NAMA has an 'interim' head... and he, as expected,

• is independent,
  
• is experienced in the private sector and management of stressed assets on a large scale,
  
• is an outsider with no links to the civil service or to the good old boys networks in the public sector
  
• has no past policy fiasco on his report card.
  

Brendan McDonagh is currently director of finance, technology and risk at the NTMA (not many degrees of separation from the public sector here).

He works for NTMA which never did stressed assets management although it does a good job at raising debt - so NTMA is a borrower, and Brendan will be running a Lender. Wolves guarding sheep... or is it the other way around?..

There is no real separation from the DofF / the Government, since NTMA is the financing branch of the DofF / the Government.

This 'outsider' to the old boys network is originally from ESB - that pillar of private sector excellence in Ireland.

I am sure he is an excellent accountant and a good treasurer and a great technology officer (though judging by the NTMA website, there is work left to be done on that front)... But here are some crucial questions to be asked:

• is he any good at investment and risk strategy? (I presume he has a worldwide following amongst asset managers for his strategy insights into asset markets, risks pricing etc. He handled treasury, audit and accountancy for ESB and largely the same for NTMA, but there was some risk management part to his role);
  
• is he any good at portfolio management? (I presume he has managed some real asset portfolios long and short, yield and CG, fixed income and equities, private equity and partnerships, for it will take a lot more than a chartered management accountancy qualification to understand and manage €80-90bn worth of portfolio assets. Does he have vast experience in dealing with diversified (internationally and instrumentally) financial products under macro and micro-economic stress?);
  
• is he any good at saying No to political classes pushing for political payoffs from NAMA - a certain to take place in months to come? (I presume he earned such fierce independent reputation at NTMA which is happy to borrow short (3mo-9mo) to finance our deficit even as the OECD and IMF warn the world not to test their luck and borrow long);
• is he any good at preparing assets for sale and liquidation via private markets (for this is what NAMA will have to do in years time)?

... ah... well, we wouldn't know, because we don't get CVs of the career public servants released to us, but on the last point we actually have some past performance record: http://www.finance-magazine.com/display_article.php?i=3879&pi=162 (here). Mr McDonagh it turns out was instrumental in one 'successful' long-term financial engineering project - privatization of Eircom. That was a resounding success that all of us wish onto NAMA too, don't we?

In reality, Mr McDonagh may or may not be a right candidate for a job. We do not know. And past performance with Eircom privatization is not necessarily an indicator of future performance either. This would be unfair to him had he be given a chance of defending his application for the position in front of us...But Brendan never did defend his candidacy in front of anyone so lowly as us, people whose money he will be taking. Incidentally - was his position advertised in line with the EU law for public appointments?

As I said, it is my money and yours that Brendan will be spending and managing. And we need to know, for when we do not know, we are asked to trust the appointing authority. Do we trust Brian Lenihan? With some €80-90bn worth of our last pennies? It is that simple.