Banking Expert Peter Mathews on fixing Ireland's Banking Crisis

Reported today in the Irish Times:

The Minister for Finance this morning said he was not contemplating failure in the operation of the National Asset Management Agency (Nama) following the passing of legislation to create it…

The Bill passed its final stage in the Dáil yesterday by 81 votes to 62.

My own reaction was somewhat more melodramatic as this came to mind:

“Through me the way into the suffering city,
Through me the way to the eternal pain,
Through me the way that runs among the lost.

Justice urged on my high artificer;
My maker was divine authority,
The highest wisdom, and the primal love.

Before me nothing but eternal things were made,
And I endure eternally.
Abandon every hope, ye who enter here.”

The Divine Comedy/Inferno/Canto III

In the Seanad debate on Wednesday, Senator Fitzgerald asked the Finance Minister to respond to Peter Mathew’s analysis of NAMA:

Senator Frances Fitzgerald: What the Minister is trying to do through NAMA is restore confidence in the banking system and, through that, in the economy. With that in mind, I want to ask about his response to material linked to this amendment concerning confidence in the Minister’s projections that has been put in the public arena by Mr. Peter Mathews – I know the Minister has looked at this material. I would like to hear the Minister’s response to what Mr. Mathews says in regard to the assumptions underlying NAMA. He suggests that the assumption there would be 100% recovery on the €30.8 billion of performing loans is completely wishful thinking, bordering on fanciful, and the assumption that there will be 50% recovery on the €46.2 billion of non-performing loans is equally fanciful. He goes on to quote what the Minister’s adviser, Dr. Alan Ahearne, said last year in regard to the banks, namely, that they should sell these loans at fair market value.

I raise this point simply because it is very much in the public domain and has been circulated to all Senators and Deputies. I am genuinely interested in this. We were talking about whether NAMA would make a profit, and there was also some discussion on this point earlier. On Mr. Mathews’s figures, he suggests NAMA will make a loss of between €12 billion and €18 billion, and that the assumptions the Minister is putting forward in the business plan and elsewhere are quite fanciful. I would like to hear the Minister’s response to that today. Quite a number of papers have been presented to all of us by this gentleman. The question is linked to this issue of confidence and the desire to achieve confidence in this plan. Will the Minister address the House in regard to the points that have been made about the potential losses of between €12 billion and €18 billion?

Deputy Brian Lenihan: Senator Fitzgerald inquired about Peter Matthews. I had an opportunity of meeting him recently and he submitted to me the papers I am sure he submitted to Senators. I wish to make a number of points on them. I could be here a very long time if I were to do a detailed analysis. An assumption he makes in his papers is that he is not restricting himself to the assets to which NAMA is restricted. He is looking right across all the banks’ assets. He is looking at mortgages, consumer debt and other miscellaneous borrowings. He is giving a picture of an entire bank rather than part of a bank. I do not mean to criticise him but he is doing it without the benefit of having looked at the loan quality in the banks. Since the guarantee was introduced we have had that benefit in the past year of going into the banks and looking at the quality of the loan books and doing the due diligence on the different institutions.

I salute the fact that he has done all of that work off his own bat and put it into the public domain. It is still under examination in my Department. We do not always agree with him but it is valuable that a public spirited citizen would take that interest. He also makes certain assumptions about the loan books, which again are not in accordance with the assumptions we are making on the evidence we have available to us.

The other point, which I mentioned to him when I met him, is an interesting one. Essentially, he is arguing that what we need to do for the banks is give them massive capital injections. In other words he wants us to build up their capital base and not concentrate so much on liquidity and exchanging assets for bonds that will give the banks cash. There is a balance to be struck. There is no doubt that when the NAMA exercise is complete it will accelerate capital requirements in the banking system and there will have to be an increase in capital. However, one of the difficulties about putting in capital without doing the kind of detailed examination of the loan books we are doing is that I do not think one would create the same international confidence in the institutions if one did not come up front and look at the weakest loan books, carry out an individual evaluation of them and then see what is the exact capital requirement.

Peter’s analysis takes less than sixty seconds to outline so I don’t understand why the Minister ‘could be a very long time’ if he were to explain his ‘detailed analysis’.

The Minister has chosen to ignore Peter’s core arguments about NAMA losses. His primary argument is focused solely on the NAMA loan book, the €77bn, and how it will neither recover 100% of its performing loans nor 50% of its non-performing loans. The €12bn loss figure stems from assuming it collects all the performing loans, ‘fanciful’, and 25% of the non-performing. The €18bn loss arises in the case of only collecting 65% of the performing and 25% of the non-performing loans. And that doesn’t mean, as Deputy McGrath has suggested elsewhere, that if there are 100 loans we only collect on 65 of them and forget about the rest. It means we only collect 65% of the total value of the loans, on average, across all the performing loans.

On Peter’s second argument, anyone following his analysis will spot the Minister’s misunderstanding re ‘restrictions’ straight off. As Peter has outlined repeatedly, the reference 10% default rate used in the NAMA Business Plan occurred in Barclay’s Bank in the UK in the early nineties. They found that across their entire loan portfolio they had a 10% default rate, but when they analysed the types of loans that were defaulting, they found that they were almost exclusively in property. The Minister appears determined to miss the point. It’s such an enormous mistake that it can’t be admitted in public.

However, I take heart from the statement to the effect that a detailed analysis of the loan books will reveal the capital required. I am hoping that it amounts to a coded message to the effect that we’re keeping the option open to by-pass NAMA and go straight to pre-privatisation if the loan books turn out to be as truly awful as Mathews predicts.

In a NAMA debate this evening with friends over dinner I was quoted this, useful to keep in mind for people like me who get a little worked up about these things.

The Serenity Prayer

God grant me the serenity
To accept the things I cannot change;
Courage to change the things I can;
And wisdom to know the difference.

Living one day at a time;
Enjoying one moment at a time;
Accepting hardships as the pathway to peace;
Taking, as He did, this sinful world
As it is, not as I would have it;
Trusting that He will make all things right
If I surrender to His Will;
So that I may be reasonably happy in this life
And supremely happy with Him
Forever and ever in the next.