Banking Expert Peter Mathews on fixing Ireland's Banking Crisis

I’m writing this post from somewhere on the Irish Sea between Dublin and Holyhead.

For fear of doing a Declan Ganley on it, I won’t say it’s my last. But as I said to the taxi driver this morning as he dropped me to the ferry terminal, I’m looking forward to not thinking about NAMA for a while. Unfortunately, I’m not expecting a limo to be waiting for me when I arrive.

I met Peter Mathews for the first time just this day four weeks ago, as the country went to the polls to vote on Lisbon. We had been invited to participate in a panel of experts on our objections to NAMA. It’s funny how such chance encounters can change your plans. Peter has been very generous with his time and helped me get up the learning curve on the technicalities of our banking crisis. My head now understood what my gut was telling me. And in what might best be described as a Quixotic exercise, I did what I could to help Peter get his message out there.

Read more…

The anger at last night’s political cabaret in Temple Bar, Leviathan, was palpable. And with my partiality clearly stated, the defenders of NAMA did not hold themselves to account well. The evening got off to an entertaining start, with the best of political satire as only the Irish know how, all resonating with the opinion that NAMA is closer to criminal theft than the contrary.

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In his public lecture in the RDS last week, Banking Expert, Peter Mathews, holds up a copy of the NAMA Bill and its Supplementary Information and highlights the lack of an overview as listed in the Table of Contents as occurring in ‘Section 5 Covered Institutions – An Overview’ on page 33.

Peter has prepared the kind of overview that our legislators should be looking at before they consider supporting the NAMA Bill. It makes for frightening reading.

What's going into NAMA

To see all the graphs: download

from leviathan.ie:

Leviathan Special: “NAMA: The Only Show in Town or Criminal Theft?”

The Government has proposed a National Assets Management Agency as a solution to the banking crisis. Its supporters describe it as “the only show in town” but increasing numbers of critics are calling it the biggest theft ever perpetrated on the Irish taxpayer.

On Wednesday October 28th, David McWilliams hosts a panel including Green Party finance spokesperson Senator Dan Boyle; Frank Fahey TD, member of the Oireachtas Select Committee on Finance and the Public Service; banking expert Peter Matthews; and Margaret E. Ward of The Irish Times to explain the plan and help the audience separate the fact from the fiction.

Also featuring satire from Paddy Cullivan, The Emergency: Live and a new film from Doris/Magee.

Tickets available now at €17.50 (including booking fee) at Tickets.ie

Karl Whelan kindly gave our event last night a plug on the Irish Economy blog and there are plenty of comments there from people who attended the event.

Thanks again to those who ventured out last night.

NAMA Losses will exceed €12 billion – There is still time to avert the NAMA Crisis.

Over 200 members of the public attended a talk in the RDS Concert Hall, Dublin, by banking expert Peter Mathews on Ireland’s banking crisis and NAMA. Mathews’ talk was followed by a lively Question & Answer session with members of the audience. Economist Constantin Gurdgiev joined Peter on the panel for the Question and Answer session. The session was chaired by energy expert Richard O’Rourke.

Peter presented data demonstrating that all six of the Irish banks being considered for transfer of loans to NAMA are bust. All the banks have a ‘Loan to Customer Deposit’ ratio greater than 100%, as shown in the figure below. Best banking practice maintains this ratio at a maximum of 86.5%, implying that Irish banks neglected their own ‘Golden Rule’ of Fractional Reserving and pumped credit into the Irish economy creating the bubble that has now burst.

Breaking the Golden Rule: Loans/Customer Deposit ratios = 86.5%

Buying a proportion of the bank’s bad loans at a 30% discount to create NAMA does not solve this problem, also shown above. Our banking crisis will not be solved until good banking practices return and this ‘Golden Rule’ is restored. This will take years to achieve and likely incur further write-downs in the value of the loans, i.e. reductions to the amount considered recoverable.

What's going into NAMA

Secondly, Mathews pointed out that even at the very optimistic write-down of only 30%, all of the Irish banks will be seriously under-capitalised i.e. the amount of shareholders funds will not be sufficient to satisfy the international banking market that our banks are on a solid and sustainable foundation, as shown in the table below.

“In other words,” says Mathews, “NAMA cannot do the job for which it is being created. It is a fundamentally flawed approach and will leave the State with zombie banks for at least a decade.”

Mathews also reviewed the recently published NAMA business plan and highlighted several of its flaws. The most glaring of which is the comparison drawn with the 10% default rate ‘over a five year period in the early 1990s’ at one UK bank. The NAMA business plan inappropriately applies this to only the €77bn in loans being transferred to NAMA and not the entire loan book of almost €400bn. This mistake converts a €12bn loss into a €5bn profit, and that’s using the 10% level. If the 20% level proposed in the business plan is used the losses are substantially larger.

Mathews said, “NAMA will cost the Irish tax-payer at least €12bn but it’s likely to be closer to €17bn.” He quickly added however that there is an alternative and explained to the audience that an immediate 40% write-down in the loans and injection of €31bn to recapitalise the banks will put them immediately on the road to recovery, at a much lower cost, and a much greater chance of having the investment recouped in six or seven years.

Download Peter’s full presentation.

Download Peter’s summary table of the state of the Irish banks, it’s a one pager. However, if you’re a banking expert like Peter we recommend you read the 76 page summary provided on the NAMA website. SECTION 5 – COVERED INSTITUTIONS – AN OVERVIEW on Page 33. Somehow, no-one at the NTMA could manage to compile this information onto a single page.

I had the opportunity to participate in the audience at last night’s RTE Frontline show with Pat Kenny.

At about 11:58 I point out to Pat how our bankers broke the golden rule of banking by lending out more than they had on deposit.

At about 23:02 I told Pat that until the banks are recapitalised none of the solutions being thrown around can start to work.

I will be getting into the detail of both these statements at tomorrow night’s talk in the RDS, 8pm.

I hope to see you there.

NAMA Losses on Loans Recoveries will be euro 12.78bn!

There is, inter alia, a fundamental error in the NAMA Business Plan.

The error amounts to euro 18.26bn as follows….

See Page 10 of the NAMA Business Plan (BP) , 3rd Bullet point assumption….

Barclays Bank in the early 1990′s did experience a default rate of 10% across its entire Loan Book (not 10% across only its Property Loan Book).

The entire Loans to Customers (Loan Book) of the 6 Irish Banks is euro 396.86bn (see Summary Overview Schedule dated 17th Sept 2009 PBM which I’ve already supplied to you as well, of course, to the Minister for Finance and Alan Ahearne etc., when I made my Alternative to NAMA Submission on 21st September – I’m attaching a copy of this Summary Overview Schedule to this email for your convenience).

Apply a 10% (leave aside for the moment the BP suggestion that it might be prudent to increase this 10% to 20%) default rate correctly to the entire Loan Book, i.e. euro 396.86bn = 39.86bn

NAMA BP Default Rate was increased from 10% to 20% for stated reasons in the NAMA
Business Plan assumptions and applied (incorrectly) to only the euro “impaired” NAMA Loans
euro 77bn = euro 15bn (i.e. 20% X euro 77bn)

NAMA BP Recovery rate Applied = euro 4bn recovered / euro 15bn default loans = 26.6%

Apply the NAMA Business Plan Recovery rate of 26.6% to the correct 10% Default Loans i.e.
euro 39.86bn = euro 10.6bn

NAMA Business Plan needs to be Corrected as follows:

The NAMA Business Plan, as presented, overstates NAMA Total Profit by euro 18.26bn at a 10% Default rate!!

The corrected NAMA Result based on NAMA’s own Assumptions is
euro 5.48bn less euro 18.26bn
making an OVERALL NAMA LOSS = euro 12.78bn!

Furthermore, based on my extensive professional experience in the whole area of Work-outs, Realisations and
Recoveries on defaulting Property Loans in the 1980′s, I would have no confidence whatsoever in the amounts and profile of Principal Repayments and Interest Income from Borrowers columns in Table 5 of NAMA BP on Page 10.

There are many more areas where I see the NAMA BP as materially inadequate. In short, I would dismiss the NAMA BP as a wishful thinking exercise, based on fragile and unacceptable/unsupportable assumptions and foundations, having little connection with reality or comparable historic situations.

Once again, please refer to the attached 1 Page Word doc. NAMA Loans Losses – Summary Projected
Alternative Realisations Outcomes -12th October Author:PBM. The PBM document was carefully prepared, and may be considered a well judged projection of what will be certain minimum NAMA Losses of euro 10.88bn and much more probable NAMA Losses of euro 17.81bn on NAMA Loans Recoveries.

To put the scale in perspective:-

A million seconds is……. . 11.6 days
A billion seconds is ……. 31.7 years
17.8 billion seconds is ….564.4 years

for the record, from the draft NAMA Bill:

Purposes of this Act.

2.—The purposes of this Act are—

(a) to address the serious threat to the economy and the stability of credit institutions in the State generally and the need for the maintenance and stabilisation of the financial system in the State, and

(b) to address the compelling need—
(i) to facilitate the availability of credit in the economy of the State,
(ii) to resolve the problems created by the financial crisis in an expeditious and efficient manner and achieve a recovery in the economy,
(iii) to protect the State’s interest in respect of the guarantees issued by the State pursuant to the Credit Institutions (Financial Support) Act 2008 and to underpin the steps taken by the Government in that regard,
(iv) to protect the interests of taxpayers,
(v) to facilitate restructuring of credit institutions of systemic importance to the economy,
(vi) to remove uncertainty about the valuation and location of certain assets of credit institutions of systemic importance to the economy, and
(vii) to restore confidence in the banking sector and to underpin the effect of Government support measures in relation to that sector.

If you can find anyone in the world who can reasonably explain how NAMA will achieve these objectives please ask them to contact Peter Mathews.

Consider the Government’s Stated Main Objectives for NAMA:-

1. Cleaning up the Banks’ Balance Sheets so that they can return without distraction and burden to normal business and lending
• Question… what normal business and lending? We’re in recession
• Consider… possible real (but un-stated) reason = slightly “panicky” desire by Banks, who realise very well that they are totally undercapitalised, to get problem loans and all that goes with them off the Banks’ hands at a negotiated lowest possible cost (i.e. NAMA’s highest tolerable purchase price).
2. Obtaining liquidity for the Banks (discounted €51.75bn Bonds for cash) at ECB so that the Banks can then inject more liquidity into the economy – into firms and households by way of loans for capital investment and for working capital purposes. This is highly unlikely to have the stated desired effect, because the Banks will be inclined to use the €51.75bn cash to pay down the huge increase of €46.6bn in Bank Deposits on their Balance Sheets over the last 9-10 months (See Summary Overview Schedule Irish Banks – Key Credit Management Indicators)

Consider some Counter-Indications and Observations as follows:-

• Still a lack of understanding the Fundamental Cause of the Credit Crash and Banks’ busts in Ireland – Abandonment of Fractional Reserve Banking – Make no mistake the Irish Banks are still insolvent and undercapitalised. NAMA doesn’t address this as the single largest weakness and threat to our Banking System




• On Ireland’s Balance Sheet, cleaning up, work-outs and recovering the Bad Loans has to be carried out anyway




• Immediate and Robust re-Capitalisation of Banks at correct Indicative level (not less than €30bn after robust write-downs of not les than €30bn on Bad Loans – see 17th Sep 2009 Excel Spread-sheet Summary Overview of Banks) in addition to proper Re-Habilitated Bank Direction (by new Boards reporting to a State Governance Board) to swiftly prosecute Bad Loans recoveries would promote efficiencies to achieve:-
• Faster rehabilitation of Banks
• Early correction to Property Market Prices and re-activation of property market
• Well based boost to competitive real economy on the back of corrected asset prices and corrected rents etc.
• Resulting Economic traction and competitive re-positioning for overall economy
• With no NAMA no need for new for new Legal Architecture for NAMA entity and operation ….. existing Company Law, Receivership, Examinership and Liquidation Laws already established
• With no NAMA – no Principal / Agency Moral Hazard
• Relatively early (5 years) repayment of State Re-Capitalisation Injections of Equity and Loan Capital by Re-Floats / Sale on Market in 5 years time at 7 times P/E multiple yielding €42bn assuming undemanding Total Bank Sector Profits of €6bn p.a. at year 5.
• Effective New Bank Boards responsible specifically for implementing Bank Policy of prudent Fractional Reserving etc. i.e. controlling Loans/ Deposits Ratios within range 85% – 90%
• Well led Bank Management motivated to earn the Banks’ way back to IPO Re-Floats and Market listings by reference to actual performance on Recoveries of W/D Loans as well as establishing stabilised Banking Profit levels from their traditional lines of normal banking business.
• Rebuilding and restoring Trust and Confidence in Banks as Safe repositories for Savings and Customer Deposits. Banks’ Capital bases are the fundamental support and underpinning of Customer Deposits. The flight of around €31.3bn of Customer Deposits in the last 9 -10 months (see Excel Summary Overview Irish Banks) was evidence of how Confidence in the Banks disappeared when the scale of the Bad Loans could no longer be hidden and it became apparent how severely undercapitalised the Banks were.
• The re-building of Deposits Customers’ Confidence so that Government will get closer to being able to roll back the “blanket” Government guarantee on Customers Deposits.