Senior Irish public sector pay levels will define Irish competitiveness in 2012

The General Government Debt of Ireland has soared from €144.4 billion (93% of GDP) in 2010 to €166.1 billion by the end 2011 (107% of GDP).  General Government Debt measures the total debt of the State and is used as a comparative measure across the European Union.  But to judge top-level public sector pay in the country one could be forgiven for thinking that the Celtic Tiger is still jiving!

The main story in today’s edition of the Irish Independent (3 Jan 2012) reports a difference of opinion between Finance Minister, Michael Noonan and Public Expenditure Minister, Brendan Howlin about how much the next Secretary-General of the department of Finance is to be paid. Noonan wants to bust the Governments €200,000 per annum pay cap on civil servants because apparently several candidates are ‘put off by curbs on salary and perks’, according to the Independent. Some overseas applicants are skittish about no reimbursement to attend interviews and no relocation expenses. But times have changed in Ireland from the time that the chief executive of an internation charity that raises funds for worthy causes in Ireland could be paid a severance package close to €400,000 and remuneration of over €700,000 while State agencies paid close to €8,000 per table to host a party of ten guests at a charity’s fund-raising dinner.

Public sector employment implies service to the public and senior public sector employees across the world are typically paid less than their counterparts at an equivalent level in the private sector.

It is interesting to compare rates of top-level public service pay in Ireland with those in other jurisdictions. The ten highest paid public sector office holders in the United States are:

10. Hilary Clinton, Secretary of State €144,500

9. Timothy Geithner, Secretary of the Treasury, €147,700

8. Harry Reid, Senate Majority Leader, €149,300

7. Benjamin Bernanke, Chairman of the Federal Reserve, €154,170

6. John Roberts, Chief Justice of the Supreme Court, €167,900

5. Admiral Michael Mullen, Chairman of the Joint Chiefs of Staff, €170,400

4. John Boehner, Speaker of the House, €172,550

3. Joseph Biden, Vice President, €175,500

2. Patrick Donohue, Postmaster General, €189,140

1. Barrack Obama, President of the United States, €309,000

The Permanent Secretary of HM Treasury is paid within the range €209,000 - €215,000, a rate that takes into account that London is ranked 18th highest in terms of global cost of living.

The recently reported 15% pay cut in 2012 that will save the State €138,000 and the waiving of potentially hefty bonuses by the chief executives of National Treasury Management Agency (NTMA) and National Asset Management Agency (NAMA, Ireland’s bad bank) may seem like an extraordinarily benevolent personal gesture There are 14 executives of NTMA and NAMA in receipt of an annual salary of more than €250,000.

The salary of the chief executive of NTMA will apparently be reduced to €416,500 in 2012, compared to the reported €1 million paid to the post-holder in 2008.  This reduction occurs at a time when Ireland is not fit to be in the bond market, but this level of remuneration is still 215% higher than the combined salary and performance pay of the chief executive of the UK Debt Management Agency who oversees exchequer borrowing that is almost nine times greater than the current record-high General Government Debt of Ireland.  It is also noteworthy that 35% of the British national debt is owing to parties outside Britain compared to 85% in the case of Ireland before Troika package became available, a clear indication of the wealth creation capacity of both nations.

Is there not a case for reintegrating these agencies into the Department of Finance from which NTMA was spawned over twenty years ago and dispensing with remuneration policies and practices that bear absolutely no relationship to the cost burden on taxpayers for similar work in other jurisdictions, or the capacity of the State to pay? A strategic move of this nature would clearly signal the Government's unambiguous priority to make Ireland globally competitive and economically robust.

NTMA defy Public Accounts Committee

I have been observing the relationship between the National Treasury Management Agency and the National Assets Management Agency with the Public Accounts Committee with increasing concern.

NTMA and NAMA Remuneration

The activities of the NTMA and NAMA have been examined on several occasions by the Public Accounts Committee in 2010, most recently on 18 November when the Committee sought a breakdown of the remuneration paid to NAMA employees – all seconded to NAMA from NTMA. The Chief Executive of NAMA, Mr Brendan McDonagh in a letter to the PAC dated 7 December 2010 defied the Committee and advised:

That he discussed the Committee request with Mr John Corrigan, Chief Executive of NTMA – but not, curiously, with the Secretary General of the Department of Finance,  an ex officio member of the statutory  NTMA Advisory Committee and principal advisor to the Minister for Finance to whom both agencies are accountable.

• That the pay structures in NTMA are outside of public service pay structures (as authorised by the National Treasury Management Act 1990).
  
• That the NTMA recruit mid-career specialists in banking, property, corporate finance and law for NAMA on what he termed a ‘fixed purpose’ contracts.
  
• The contract and remuneration arrangements of each employee are unique  to a particular individual and are treated as confidential.
  
• The NTMA/NAMA staffing ‘operating model’ is shrouded in so much secrecy and opacity that colleagues do not know how much each other is paid and that NAMA would apparently be seriously compromised in the conduct of its mandate were it to be exposed – (presumably, to the rigours of public and media scrutiny and that of the marketplace  from which NAMA seeks to determine  ’ market competitive’ salaries). 
  
• ‘Operational freedom to negotiate’, authorised by legislation, in NTMA has apparently become seamlessly synonymous with clandestine secrecy by the Chief Executive of a State agency which does not have a conventional board of directors and where the same chief executive, rather than an independent chairman, corresponds with the Minister for Finance on the performance of the entity that he manages on a day-to-day basis.

McDonagh’s letter and Corrigan’s patrician perspective on the Committee’s request is such an appalling indictment of these State agencies that a citizen would wonder about its capacity to fulfil its core objectives in a culture clearly devoid candour, accountability and transparency.  NTMA and NAMA need to be advised in blunt and uncompromising terms  by the PAC  that the principles of transparency and accountability expected of the Irish public sector are not those of the nod, wink and handshake that prevail, for example,  in the dictatorships of North Korea and Burma. The standards espoused by NTMA also directly contravene the policy of the Department of Finance with respect to the governance of commercial State entities.

Furthermore, this is precisely the self-righteous, conniving, corporate attitude which champions generic, non-itemised accounting that prevailed in FÁS, the HSE SKILL Programme, the Health Services National Partnership Forum and other grossly dysfunctional State entities which have shattered public confidence after the wanton squandering of hundreds of millions of euro with abandon.

Transparency has not compromised the ‘operating model ‘or the efficiency and effectiveness of any the debt management agencies in any other OECD country.  The transparency of these agencies would also suggest that the NTMA is an excessively costly agency compared to its counterparts.

NTMA Costs and Operating Efficiency

The activities of NTMA remained substantially the same in scope between 2000 and 2008 with the exception of the establishment of the National Development Finance Agency in 2003.  Between 2000 and 2007 Ireland’s national debt ranged from €36.5 billion to €37.5 billion.  It increased to €50.3 billion in 2008, an overall increase of 38% since 2000.

But the operating costs of NTMA in that period increased by 314% and remuneration, including superannuation, by 365%.

NTMA held nine bond auctions in 2009 and raised €35.4 billion which brought the National Debt to €75.1 billion.  Salary and pension costs were €22.86 million, or an average of €135,384 per person.  Total expenses in 2009 at €39.4 million were significantly ahead of other OECD government debt management offices.  Debt servicing costs as a percentage of year-end national debt, excluding sinking fund payments, in this period were:

 

2000	5.74%
2001	5.25%
2002	4.66%
2003	4.78%
2004	4.53%
2005	4.61%
2006	5.31%
2007	4.29%
2008	5.24%

Australian Office of Financial Management

The Australian counterpart of NTMA is the Australian Office of Financial Management (AOFM). It raised €38.9 billion by approximately 100 competitive tender in the year to 30 June 2010. Apart from managing the Australian national debt AOFM invested €12 billion in residential mortgage-backed securities to provide funding for small mortgage lenders.  Total expenses for the year amounted to €11.5 million – less than ⅓ of what it costs to run NTMA.  The salary, pension and fringe benefits of Neil Hyden, the recently retired chief executive of AOFM, cost €250,000.  The remuneration, superannuation and fringe benefits of the 36 staff of AOFM amounted to €3.94 million in the year to 30 June 2010, or an average of €109,502 per person.   Approximately 60% of Australia’s government bonds are held by non-Australian residents - compared to 84% foreign ownership in the case of Ireland’s Government bonds.

HM Debt Management Office

The British counterpart of NTMA is the Debt Management Office.  Employing a staff of 112 persons, it raised €267 billion on the bond market in the year ended 31 December 2009 in 58 major and 13 minor auctions – a scale of borrowing 7.6 times greater than that of NTMA.  The activities of the DMO also include the administration of the UK Credit Guarantee Scheme in respect of debt issued by banks and building societies and the Emissions Trading System in the UK.  The salary, pension and fringe benefits of Robert Stheeman, Chief Executive of the DMO was €188,000 – some €12,000 less than the 2009 bonus of Dr Somers.  The net operating cost of DMO operating in the City of London in 2009 was €18.5 million – less than 50% of the overhead to run the NTMA in Grand Canal Street Dublin.

Chief Executive’s Bonus

It was officially disclosed last week that Dr Michael Somers, the founding chief executive of NTMA received a bonus of €200,000 in respect of 2009.  It was reported in the media last September that Dr Somers received a bonus of €400,000 apparently bringing his total remuneration to €1 million.

Ireland enjoyed the considerable advantage of lower level government debt relative to GDP for much of the decade to 2008.  Investor perception of Ireland was positive and reflected in excellent credit ratings; an economy that was perceived to be robust; a positive fiscal outlook and attractive yields on Irish debt.  Irish debt was adopted enthusiastically by investors.  There is no withholding tax on Irish bonds thus removing a barrier to investment for foreign investors unwilling, or unable to invest in assets subject to withholding tax.  Was this bonus merely based on surfing these positive circumstances or what precisely was Dr Somer’s contribution to making a distinctive difference which benefited taxpayers?  The citizen is left scavenging the internet for clues because the agency conveys no information whatsoever  on this issue.  The public are treated with the same bland contempt that occurred days before the recent arrival of the IMF and ECB to take economic control by the scruff of Ireland’s emaciated neck.

It would be helpful  if this key agency of the Department of Finance were to publish the fullest details of all executive remuneration for each of the last 10 years.  This, in the case of bonus payments should identify achievements against particular objectives and confirmation of who approved objectives, achievement and bonus payments. 

Department of Finance Code, 2 October 2001

State bodies, including the subsidiaries of such bodies, are required in the conduct of their operations to adopt this Code of Practice promulgated by the Department of Finance and advocated by the Director of Corporate Enforcement.

The Code of Conduct for the Governance of State Bodies states that the remuneration of a chief executive of a State agency and the remuneration of the chief executive of any subsidiary should be subject to audit and set out in the entities annual report which should state:

• The basic salary
• Payments made under a performance-related pay scheme
• The total value of the chief executives superannuation benefits, with a breakdown between standard entity superannuation benefits and any additional benefits  being provided for the chief executive

NTMA has consistently disregarded this guidance.  S6.(3) of the National treasury Management Act 1990 provides that the terms and conditions relating to the remuneration of the Chief Executive of NTMA are determined by the Minister for Finance after consultation with the Advisory Committee – on which the Secretary General of the Department of Finance is an ex officio member.  State agencies are required to implement Government pay policy, as expressed from time to time, in relation to other staff, including the chief executive and other staff of any subsidiary.

The Department of Finance, in the case of NTMA, is expected to be consulted, according to this guidance,  in good time on any pay proposal, or likely development, that could have significant implications for (i) general Government pay policy (ii) NTMA finances (iii) charges for goods and services provided and / or (iv) other areas of the public sector.  Compliance with Government pay policy, or with any particular Government decision, should not be effected in ways which cut across public service standards of integrity or conduct or involve unacceptable practices which result in a loss of tax revenue to the Exchequer.

The annual report of a State entity should include a schedule of the fees and aggregate expenses paid to each of the directors – or, presumably, in the case of NTMA, to each member of the Advisory Committee

There is, therefore, an obligation on the Secretary General of the Department of Finance to explain the remuneration trends at NTMA and very particularly, the remuneration arrangements between the chief executive and the Minister for Finance to the Public Accounts Committee.  How can he sit on the Advisory Committee and observe long-standing policies of his own department ignored?  That slipshod attitude to supervision allowed FÁS function as a ceded territory dominated and unilaterally controlled and dominated by the chief executive who, in practice was accountable to nobody.

Consultancy & Legal Expenses

NTMA has become a large-scale purchaser of legal and consultancy services.  Details should be provided of the number and value of contracts in each financial year, differentiating between new and existing contracts. 

The annual report should, in the case of consultancy contracts with a value of €10,000, or more, identify the consultant concerned; describe the service provides; confirm the price of that service; details of the selections process and the justification for using the services – to demonstrate transparency and compliance with relevant regulations and directives.  Taxpayers should not have to scavenge internet search sites or surveys of the highest revenue earning professional firms in Europe to distil how much revenue Irish professional firms are obtaining from public sources.

Fingleton’s fantasy at Irish Nationwide is all dust

The Irish Nationwide Building Society presented a gung-ho image of its achievement, ambitions, prospects and the calibre of its chief executive, Michael Fingleton, even if the language used to express this was banal and repetitive.

Massive Expansion in Lending

The increase in mortgage lending between 2003 and 2007 was 189%.  This is why taxpayers are being stalked for €2.7 billion in bailout money.  This is why such a high proportion of the assets of this decrepit building society are being dumped on the doorstep of NAMA.  This is why the Irish Government want the citizens to be subdued, indifferent and ignorant.  Ireland’s GDP grew by 36.6% from €139.4 billion in 2003 to €190.6 billion in 2007

Loan growth Bank of Ireland between 2003 and 2007 was 19%; by AIB was 37% and loan growth at Anglo Irish Bank was 37%.

The loan growth at the three Icelandic basket-case banks between 2003 and 2007 was – Kaupthing 72%, Glitner 54% and Landsbanki 57%.

At the benign end of the scale, the Swiss banks must have appeared to Fingleton to have been in a coma.  Loan growth over this 5-year cycle at UBS was 9% and at Credit Suisse

Chicken’s come home to roost

Results for year ended 31 December 2009 reported a loss of €2.48 billion, a requirement for the Irish taxpayer to provide €2.7 billion in bailout funds, a declarations that assets with a book value of €8.7 billion will be sold to NAMA and that 96% of its loan impairment provisions relate to commercial loans.

The Chairman, Daniel Kitchen stated that the problems reported are a consequence of the nature of the operation of the business which was “clearly a flawed model” and that he was sanguine about Irish Nationwide’s capacity to ‘outperform’ (wow), in the short term.  The new chief executive, Gerard McGinn, attributed the lousy performance to the “impact of the lending policies and practices of previous management”.

It is interesting to see how previous management reported their annual results from the time the credit bubble began to inflate on 1 January 2003.

2009 Results

Interest earned from loans was €529.4 million but €324 million of this has not is ‘unrealised’!  Interest paid on customer savings accounts was down 42.3% to €420.8 million.  If the ‘unrealised’ interest were never to materialise, the net interest income of Irish Nationwide in 2009 would be –€215.4 million.

A total of €4.793 billion in debt is due for repayment before 22 September 2010. How can this be accomplished?

Of the €1.189 billion owing to banks, €1.052.3 billion is repayable on demand and the balance in less than three months.

Impaired loans amount to €2.792 billion but only €105.8 million of this impairment relates to Irish residential lending.

“The final losses on the asset portfolio remain highly uncertain”  until each and ever asset is resolved.

 

Demutualisation

While there were 23 building societies in existence when the State was founded that number shrunk to two after the passage of the Building Societies Act 1989 – EBS and Irish Nationwide. ICS Building Society was acquired by Bank of Ireland where it has operated within the Ireland Retail Division – and is about to be disposed of.

One of Fingleton’s principal goals was to demutualise ‘his’ building society

1994 Annual Report: “In order to enhance all the options open to the Society we

continue to seek a change in Section 102 of the Building Societies Act, 1989. On the

basis of the new structuring within the whole State banking and financial sector through the proposed disposal in whole or in part of the TSB Bank, ACC Bank, and

ICC Bank the restrictions of Section 102 are increasingly superfluous and irrelevant.

It is positively discriminatory against the Society, especially in that the Society must

now compete, without any privileges or advantages, with all other financial institutions to whom such a restriction does not apply. It is in the interests of our shareholders and our staff that this Section be amended to reflect the new realities of the market place.”

1998 Annual Report:  “While mutuality is still a relevant concept even if the number of practitioners are reducing (there really are now only two, Irish Nationwide and the EBS) this as we have repeated often before should not be to the exclusion of other options and the Board of the Society has never presumed on behalf of its members to exclude any such option. Indeed that is why we have consistently sought to have Section 102 of the Building Societies Act, 1989 amended to enable the Society to have the same options that are available to other competing financial institutions. We hold no brief for mutuality as an exclusive option. If we were convinced that changing the corporate status of the Society was the correct option for the members and staff of Irish Nationwide we would have no hesitation in recommending this course of action.”

1999 Annual Report “Your Society gave a commitment to review our present and future status during the year in line with market forces and developments. This review was well advanced when we were forced to pause and to reconsider the position in the light of developments in the financial markets and particularly the serious downturn in the share values of the various financial institutions. Suffice to say that everything is on hold at the moment but we will continue to monitor the situation on an ongoing basis.

We have no brief for mutuality as an exclusive option. If we were convinced that changing

the corporate status of the Society was the correct option for the members and the staff of Irish Nationwide we would have no hesitation in recommending this course of action.”

Personal Remuneration

Michael Fingleton enjoyed personal remuneration from Irish Nationwide of €10 million and a personal pension fund in 2006 just shy of €29 million.

Fingleton’s Personal Remuneration
at Irish Nationwide Building Society

2003	€910,000
2004	€1,034,000
2005	€1,269,000
2006	€1,836,000
2007	€2,313,000
2008	€2,417,000
009	€221,000
TOTAL	€10,000,000

 

 

 

 

 

 

 

 

 

 

 

 

 

Directors’ Report 2003:  “The excellent results we now report are the strongest yet in the Society’s long history of growth and achievement and significantly enhance shareholder value.

The Society has a strong and effective management team headed by a strong and focused chief executive (Fingleton) whose experience and expertise has produced exceptional results year after year

The Society has improved its cost income ration to a new record low of 21.43%

The Society’s plans for demutualisation have made further progress during the year (2003) and the Government agreed, at the Society’s request, to bring in appropriate legislation to enable the Society achieve a solution which would reduce the uncertainty of future ownership and greatly enhance shareholder value and give the Society the options required to do so”

Directors’ Report 2004

“The excellent set of results we now present clearly reflects the effectiveness of the Society’s strategy that has been successfully implemented and developed over many years.

The success of the Society is reflected in its strong chief executive, its excellent staff, its highly qualified and experienced Board of Directors.

The Board of the Society is fully committed to demutualisation.  The Minister for the Environment, Heritage & Local Government (Martin Cullen) issued a full statement on behalf of the Government on 16 December 2003 announcing the Government approval of a package of measures to amend the current Building Societies legislation, including the removal of the five-year barrier under Section 102.  The proposed legislation is extensive and contains several provisions to enhance the future development of building societies as independent institutions as well as removing archaic unnecessary procedures.

On 15 September 2004 the Minister, Martin Cullen,  wrote to the Society stating “my Department is at present involved in the drafting process with a view to finalisation of the legislation in the Autumn (of 2004)”.  The Board of the Society,of course, welcomes those announcements and statements but is disappointed that the proposed legislation will not materialise until later in 2005.

The demutualisation process must be managed in a prudent, professional and orderly manner in order to maximise the value for the management, staff and (lastly) members.

The cost income ratio was further reduced during the year from 21.43% to a new record low of 20.24%.”

Directors’ Report 2005

“The record results we now report are the strongest yet in the Society’s long history of outstanding growth and achievement.  The excellent set of results reflects the effectiveness of the strategy that has been successfully developed and implemented over many years.

The long awaited legislation is now being drafted and we understand will be published shortly and finally approved before the Summer recess (of 2006).

In the year under review, the Society further improved its cost income ratio to a new record low of 15.18%.

Under the strong leadership of the Managing Director together with a committed and supportive staff, backed by an informed and unified Board, the underlying value of the Society has increased six-fold in the past ten years”

Directors’ Report 2006

“The record results are by far the strongest since the formation of the Society in 1873.

The results demonstrate once again the exceptional financial strength of Irish Nationwide and clearly reflect its strong management together with the effectiveness of its lending strategy developed and successfully implemented over the years.  The Society has developed a successful business model and continues to be focused on our chosen market.

In a year which may well be the last reporting year as a building society, it is appropriate that the Society should present such an outstanding set of results.

Despite relentless opposition from some of our members’ and other vested interests’, the long awaited legislation formally became law in August 2006.  The Board decided to await the publication of the 2006 audited accounts before formally going to the market.  The value of the Society has been enhanced and the net book worth of the Society is up 27% to over €1.2 billion”.

Directors’ Report 2007

“The Board will continue to seek a purchaser for the Society at an acceptable price and will consider all the options open to it to achieve the objective and to realise the optimum value for its members and staff.

The exemplary results we are privileged to report are by far the strongest yet in the Society’s long history of growth and achievement and significantly increase shareholders value with the Society’s net book worth now in excess of €1.5 billion.

The cost income ratio is now at a record low of 10% having fallen from 14.44% in 2006”

Directors Report 2008

“ … was a disappointing year for the Society due to the disruption in global financial systems, the onset of the recession in Ireland and the UK and the resultant downturn in property values. 

Cost control has always been and continues to be a major objective of the Society’s policy.  The 2008 cost income ratio is 17% due to reduced income in 2008 rather than cost increases.

The Board wishes to thank Mr Fingleton for the enormous and unique contribution he has made to the Society over the past 37 years and wishes both Michael and his wife, Eileen, many happy years of retirement”

Directors’ Report 2009

“It is with great disappointment that I have to present to you the accounts for the year ended 31 December 2009 which reflect unprecedented levels of impairment on our loan book which gave rise to losses on a massive scale in the context of the Society.  The collapse of property markets in Ireland and abroad gave rise to the impairments but this was exacerbated by the nature of the operation of the business which was clearly a flawed model.  Final losses on the asset portfolio remain highly uncertain.  The financial results reflect the impact of the lending policies and practices of the previous management.  The scale of losses reflect the failure of the Society’s commercial lending strategy which was over reliant on asset values.  96% of the loan impairment provisions relate to commercial loans.

The Group’s customer accounts decreased by €1.5 billion in 2009 as a result of deposit outflows from the Group’s Isle of Man subsidiary and reflects concerns held by UK investors about deposit security despite the Irish sovereign guarantee.  2010 remains highly uncertain in the context of an industry seeking to define its future structure.”

Mortgage Lending and Mortgage Funding

 

	Total Mortgages €	Commercial Mortgages % Total	Customer Accounts (€ Savings)
2003	4,248,000		3,465,000
2004	5,553,000	35%	4,755,500
2005	7,572,000	32%	5,733,500
2006	10,306,000	76%	6,602,700
2007	12,281,000	80%	7,250,100
2008	10,473,900	78%	6,785,000

Scope for Anglo Irish Bank to become a ‘business bank’ very slim

An objective cited for bailing out Anglo Irish Bank and committing €22 billion to date is that Anglo would become a business bank in due course.  But, of course, AIB and Bank of Ireland will also need to become business banks, even if operating on a diminished scale.  What scope is there for all three to be ‘business banks’?

Anglo reported a loss of €12.7 billion on a loan book of €72.1 billion – all property related, including hotels and restaurants.  How realistic is the proposition that a bank where the average remuneration by employee is over €88,000 per annum but where the loss per employee exceeds €7.5 million become a business bank?  The patron of Anglo Irish Bank since nationalisation, the Department of Finance, employs 634 civil servants whose average pay in 2010 will be €55,678

The scale of borrowing by Irish residents  in areas outside construction, property development, hotels / restaurant  and residential mortgage lending is:

 

€ Million	June 2009	Sep 2009
Agriculture and Forestry	5,341	5,210
Fishing	381	374
Manufacturing	7,821	7,559
Electricity, gas and water supply	1,015	1,100
Wholesale trade and repairs	13,236	12,965
Transport, storage and communications	3,283	3,225
Financial institutions	86,181	86,206
Education – schools and colleges	823	856
Health and social work	2,638	2,660
Community, charity, social	2,926	2,843
Personal finance for investment	2,659	2,726
Other personal finance	19,210	17,638
	€145,514	€143,362
Mortgages, property development, construction, hotels and restaurants	€240,876	€233,886
Total borrowing by Irish residents	€386,390	€377,248
	(62%)	(62%)
Anglo Irish Bank	15 Months to 31 Dec 2009	Year to 30 Sep 2008
Staff costs	€186 million	€206 million
Average number employees	1,681	1,864
Average cost per employee	€110,648	€110,515
(Loss) / Profit for period	(€12,702 million)	€664 million
(Loss) / Profit per employee	€7,560,381	€356,223

 

 

 

Requirement to boost capital of Irish banks is a huge challenge.

The nation recoils, stunned, by the scale of the NAMA enterprise.   It is interesting to reflect on the scale of additional capital needed by the five banks and building societies that are NAMA clients.  Collectively, NAMA clients’ require additional capital of  €21.8 billion by Christmas, with Anglo Irish Bank accounting for €8.3 billion of this.  This is to be provided by the State as will €3.2 billion needed by the two building societies.  But AIB and Bank of Ireland have to find €10.1 billion by Christmas.

The market capitalisation of all the companies quoted on The Irish Stock Exchange is just shy of €130 billion today.  This figure includes relatively large market capitalisation in CRH €13.2 billion, Diageo €31.2 billion, Tesco €31.1 billion and Tullow Oil €12.4 billion.

The market capitalisation of AIB is €1.05 billion and this bank requires an additional €7.4 billion.  Bank of Ireland has a market capitalisation of €1.6 billion and requires additional capital of €2.7 billion.  Irish Life & Permanent Holdings Plc, which is not a NAMA client, has a market capitalisation of €808 million.  This is the bank which coughed up €7.5 billion that distorted the balance sheet of Anglo Irish Bank on 30 September 2008.

The cumulative loan book of the five NAMA clients and Permanent TSB is over €400 billion and this includes loans made in Ireland and elsewhere.  Approximately €100 billion of the €147.2 billion of residential mortgages in Ireland is attributable to these six institutions.  This is a phenomenal scale of indebtedness and must be seen in the context of housing trends in Ireland over the past decade.

A recent UCD study of residential vacancy levels showed that there were over 345,000 vacant housing units in the country.  Allowing for 64,520 holiday homes which are vacant from time to time and a standard 5% vacancy rate which is the norm and that approximately 10,000 houses are obsolete, there are still over 170,000 vacant houses in the country that fall into the ‘exceptional’ character.

Outstanding private sector credit in Ireland, according to the latest data from the Central Bank is €365.5 billion.  It had exceeded €400 billion in October and November 2008.  While the overall level of private sector credit has been somewhat reduced, the amount of mortgage credit outstanding has remained stubbornly high – close to €148 billion since September 2008 when the Irish banking crisis exploded.

Real estate indebtedness if north of €95 billion while the construction sector owes a further €19 billion.  Agriculture and forestry owe €5.3 billion.  The manufacturing sector owes €7.8 billion. The hotel and restaurant sector, which apparently has 15,000 room in excess of accommodation demand owes €11.2 billion.

Where is the additional capital to come from when all of these circumstances are taken into account.  How many decades will it take for the Irish economy to experience a positive charge?  Comments about the collapse of Lehman Brothers and Bear Sterns are comparable to describing a hurricane in the Caribbean.  The damage inflicted on the Irish economy is due to delinquency closer to home and those who inflicted this might have the courage to own up to it.

Mortgage and residential meltdown in Ireland

THE Irish housing market is dead.  The coroner found that a surfeit of 100% and in some instances 100%+ mortgages combined with loans based on ridiculously small income levels to purchase in thistle infested meadows of Ballygobackwards hastened its demise.

The flies are even ignoring its decaying leprosy-stricken corpse.  Stamp duty receipts of €729 million to the end of October are down almost 49.8% compared to a year ago.

The Interim Results from Bank of Ireland for the 6 months ended 30 September 2009 confirm that of the 196,000 residential mortgages it has in the Republic of Ireland, 21,000 of these relate to properties with negative equity involving a quantum of €731 million.  But just 14 properties were repossessed in the six months to September compared to 5 in the previous six months. Impaired residential loans increased by 49% to €342 million during the reporting period.   

The majority of recent mortgagees are therefore, at best, on life support. bewildered by the force of negative equity and unprecedented unemployment levels, wage cutbacks and a collapse in consumer sentiment. The prospect of massive mortgage defaults and repossessions cannot be ruled out.  The mortgage sector is moribund and the blame for this can be laid, in the first instance, at the door of the Central Bank of Ireland whose impact on the economic wellbeing of Irish citizens has been as robust as that of  Mikado, Kimberly or cocoanut cream biscuits  on human nutrition. 

Torrential rain is falling heavily on the parade of maudlin politicians, buccaneering developers and the predatory clown princes and princesses of the Irish banking sector whose malignant vanity and bonus-hunting culture has metastasized the entire Irish economy for at least a decade.  These preening, duplicitous, preening bastards flooded this country with 100% mortgages and are now out to scavenge flesh off the economic corpse.  The income of the average residential mortgage holder is under €58,000.  The size of the average Irish mortgage is €271,000 – a mortgage-to-loan ratio of 4.7:1.

 

The Monthly Statistics of September issued by the Central Bank of Ireland reveals that residential mortgage lending for September declined by €14 million and that September was the sixth consecutive month of decline.  However, when one considers that the total value of residential mortgage debt outstanding is close to €148 billion a drop of €14 million is hardly a drop in the proverbial bucket.  Furthermore, a declining trend over the last six months is a function of how derailed the housing market in Ireland has become rather than a mark of prudence and stability. 

Ireland  has been bewildered with the consequences of toxic debts of the supply side of the construction industry and the passage of legislation to create the National Asset Management Agency to deal with this at enormous cost to the Irish taxpayer. But a significant proportion of Ireland’s 480,000 mortgagees are under enormous personal pressure to maintain repayments of mortgages on houses that are experiencing the consequences of crushing negative equity.  The New Year may herald a tsunami of repossessions and mortgage defaults of an unprecedented scale.  An analysis of mortgage patterns through the EU-27 and the 16 members of the euro currency zone illustrates the appalling extent that Irish citizens were thrown to the predatory wolves by their own Central Bank.

Mortgage ‘Liberalization’

Mortgage liberalization was essentially about letting mercenary yahoos take control while the Central Bank scratched its crotch.  The past 20 years was characterized by a very substantial increase in housing credit that was facilitated by ‘innovation’ in the Irish financial sector.  Mortgage lending was traditionally determined by the basics – disposable income, prevailing interest rates and prudent lending practices based on the deposits of savers.

But the Irish financial sector provided additional funding through access to interbank markets and the increased securitisation of Irish mortgages.  The value of Irish mortgages increased 3-fold between 2000 and 2007 as a consequence.

Formal indicative guidelines on bank lending and the allocation of credit to the private sector were ended by the Irish Central Bank from the 1980’s.

 

Irish mortgage history

Year	Outstanding Residential Mortgages € Billion	% GDP	Mortgages issued € Million
1985	6.74	25.8%	880
1990	6.56	17.9%	1,492
1995	11.93	22.3%	2,666
2000	32.54	31.3%	9,004
2005	98.95	61.5%	27,753
2008	147.9	77.1%	15,140

 

 

 

 

 

 

 

 

Ireland compared to EU-27

	EU-27 2007	Ireland 2007	Ireland 2009
GDP growth	2.9%	5.3%	-8.7%
Unemployment rate	7.1%	4.5%	12.2%
Inflation	2.4%	2.9%	-6.5%
% houses owner occupied	70.4%	74.5%
Residential mortgage average loan per capita	€11,250	€32,200	€34,400
Value of residential loans € Billion	6,146.6	139.8	147.9
Typical mortgage rate	5.1%	5.1%	4.5%

 

Ireland and other € countries

 

2007	Total Residential Mortgages € Billion	Residential   Mortgages  % GDP	Mortgage Debt per Capita
Austria	65	23.9%	€7,820
Belgium	121.8	36.8%	€11.530
Cyprus	6.9	44.8%	€8,870
Finland	61.7	34.3%	€11,670
France	651.1	34.9%	€10,170
Germany	1,155.7	47.7%	€14,050
Greece	69.3	30.2%	€6,210
Ireland	139.8	75.3%	€32,200
Italy	304.2	19.8%	€5,130
Luxembourg	13.8	38.5%	€29,030
Malta	2.0	37.6%	€4,940
Netherlands	558.9	100%	€34,140
Portugal	101.0	62.1%	€9,520
Slovakia	6.5	11.9%	€1,120
Slovenia	2.6	8.0%	€1,320
Spain	646.6	61.6%	€14,510

 

The 16 central banks of the €-zone countries face similar constraints insofar as none of them determine local interest rates.  But Ireland has managed to increase it mortgage debt, per capita, from €5,650 in 1998 to €32,200 in 2007.  Expressed a percentage of GDP, residential mortgage debt in Ireland increased from 26.5% in 1998 to 75.3% in 2007 and will be even higher in 2009 given that GDP will contract and residential mortgage debt has increased by €9 billion since 2007.  The stock of housing units in Ireland has increased from 1,173,000 in 1998 to 1,883,303 in 2007 but many of these are located in remote and inconvenient places in incomplete housing estates.  Does this not suggest utter dereliction of responsibility on the part of the Central Bank of Ireland?

The residential mortgage debt of The Netherlands is equivalent to 100% of GDP.  But the owner occupation rate there is only 54% but this has increased from 43% in 1983.  Like Ireland, Holland experienced a sustained period of house price increases.  This occurred between 1996 and 2001.  Since then prices have risen at a more moderate pace – 4%-5% per annum.

The Dutch authorities introduced a Code of Conduct for Mortgage Lenders in 2007 that has led to a considerable tightening up of the lending criteria by limiting lending at high loan-to-value ratios and putting a ceiling on mortgage-to-income ratios.  Should the Irish Central Bank follow suit, or do they care?  The new Governor will have to transform the Central Bank quickly and successfully if there is to be any chance change for the better.

NAMA – Crucial considerations from a consumer perspective

THE European Central Bank has exhorted the Irish authorities not to overpay for assets that the proposed National Asset Management Agency (NAMA) is set to acquire. Mr John Mulcahy, a chartered surveyor who has been seconded to NAMA, opined at the meeting of the Joint Committee on Finance and the Public Service on 31 August, that “there has always been a recovery in the property market, although sometimes it has been more vigorous than in others. In general, the commercial market has recovered over a seven year period to an average of about 88% of where is was in the trough. For residential property, the market has recovered in seven years to a figure of about 96% of where it was in the trough”.

Two fundamental questions must be addressed before these opinions can be relied on to become viable propositions.

“Is recovery to be based on individual continuing to take on mortgages based on a wholly unsustainable income-to-loan and loan-to-value ratios, as has been the case over the past several years? If so, the proposal is doomed to catastrophic failure”

Residential mortgages are the largest single component of private sector credit in Ireland. The economic crisis that this country is now inflicted with is a direct consequence of sclerotic levels of credit being made available by delinquent banks and building societies since 2002 – loans that are too many multiples of gross income, or loans that are equivalent to almost 100% of the value of the underlying asset, obliterating any potential equity element.

Traditional prudent lending practice dictated the following maximum limits for house loans:

• Not more than 2½ times annual gross income. If a spouse or partner has an income, a sum equivalent to that person’s annual income can be factored into the calculation of the maximum sum that can be borrowed.

• The loan should not exceed 90% of the value of the mortgaged property

The evidence of recent Irish banking practice and the lack of adequate oversight can be traced through the following table:

Actual Income to Loan Ratio 2002 - 2006

€ Million	2002	2003	2004	2005	2006
Collective gross income of mortgagees1	18,671.29	20,537.96	22,757.63	24,859.01	28,143.10
Prudent borrowing capacity (2½ times gross income)	46,678.22	51,344.90	56,894.07	62,147.52	67,857.75
Actual residential mortgage lending2	47,212.00	59,242.00	77,029.00	98,956.00	123,288.00
Excess lending : ‘bubble’	534	7,897.10	20,134.93	36,808.48	55,430.25
Loan : Lending ratio	2.52	2.88	3.38	3.98	4.38

1 Based on data contained in Revenue Commissioner Statistical Reports Tables IDS 1 and 15
2 Source Table A2.2 ‘Residential Mortgage Lending to Irish resident’s, Central Bank Quarterly Bulletin

² Actual residential mortgage lending includes outstanding securitised mortgages (the initial amount of the securitisation less all repayments of capital made by borrowers’).

The consumer housing credit bubble started in earnest in 2003, the year Ireland ceded control over interest rates to the European Central Bank and the year that The Financial Regulator came into being.

The pace at which this bubble gathered momentum is staggering. It grew within eighteen months to over €20 billion, equivalent to 88% of the gross income of all claimants of mortgage interest tax relief in 2004.

When it reached €55.43 billion at the end of 2006, the bubble was over 197% of the estimated gross income of all those claiming mortgage interest tax relief that year. The consequences of this credit bubble after 2006 has to be considered in the context of even greater debt and prevailing adverse economic circumstances.

This pace of the housing bubble was almost reminiscent of Moore’s Law which was defined by a founder of Intel, Gordon Moore. It describes a long-term trend in the history of microprocessors that the number of transistors that could be placed on an integrated circuit doubled approximately every two years. While that pace of incremental change is sustainable in the computer world, it is certainly not sustainable in the residential mortgage market.

The bubble took shape following a 43.8% increase in the total gross income of all Irish taxpayers from €36,899 million in 2001 to 53,090.7 million in 2002. The number of taxpayers increased from 1,763,859 in 2001 to 1,824,878 in 2002, an increase of 3.4%.

Programme for Prosperity and Fairness 2000

The social partnership agreement, Programme for Prosperity and Fairness 2000, covered the 33 month period between 2000 and 2002. The agreement provided for the following increases in basic pay as it applies in each particular industry:

• 5½% of basic pay for the first 12 months

• 5½% of basic pay for the second 12 months

• 4% of basic pay for the next 9 months

Statutory minimum pay was adjusted to £4.70 (€5.97), on 1 July 2001; £% (€6.35) from 1 October 2002. PPF also provided for the benchmarking of public sector pay vis-à-vis  the private sector. These rates of increase do not account for the entire actual increase in gross income of €16.19 billion across all taxpayers’.

Role and Impact of The Financial Regulator

The Financial Regulator does not have the power of utility regulators to price financial products.

The Chairman of The Financial Regulator, Jim Farrell, commenting in the 2008 annual report, stated that their strategic approach to regulation was framed in a much “more benign environment” but the Regulator “had taken steps to slow bank lending, in particular in 2006 and again in 2007”. The steps taken did not achieve the intended goal.

The evidence presented above does not indicate that the environment was as benign as Mr Farrell intimates. Residential mortgage lending to Irish residents increased from €98.56 billion in 2005 to €123.28 billion in 2006 and to €139.84 billion in 2007. The latest figures indicates that residential mortgage debt sat the end of May 2009 was €148.2 billion.

The former chief executive of the Regulator, Liam O’Reilly, stated in the 2005 annual report that

“Along with the Central Bank, we are concerned about the rapid rise in the levels of indebtedness in the economy and are well aware that if conditions change adversely, many people could be severely affected. We monitor and require institutions to anticipate and prevent risk issues now rather than to have to address problems down the line. There has been much debate about high loan-to-value ratios in recent days for mortgage borrowers. In this debate, the critical issue is the ability of borrowers to repay the loan in full. It is the responsibility of each financial institution to ensure that their credit standards, provisioning policy and levels of capital are appropriate to provide not only for today, but, in the event of any future downturn in the market. So long as the quality of credit is maintained and the ability to repay is not compromised this is not a problem. We have a responsibility to inform consumers which we are doing through our publications, which set out the risks and benefits of various financial products, including mortgages and personal loans.”

How Responsible Are Banks in Ireland?

 

Private sector credit to Irish residents expanded from €142.6 billion (109.5% of GDP) in 2002 to €317.7 billion (179.8% of GDP) in 2006. It reached €389.1 billion by May 2009 (216% of GDP). Iceland was the only country in 2005 to have exceeded the PSC-GDP ratio of 200%.

Residential mortgages are the largest element of private sector credit.

The construction sector component of this increased from €4.4 billion in 2002 to €20.7 billion in 2006 – from 3.2% to 6.5% of GDP and is significantly smaller than the residential element.

The catastrophe that has now unfolded indicates that the chances of avoiding lethal consequences as a result of relying the standards of responsibility of Irish banks is comparable to the chance of avoiding death, having been bitten by a rabid dog.

Consequences of Housing Credit Bubble

 

The house building cost index increased from 171.8 in 2002 to 194.2 (13%)

Average new house prices outside Dublin increased by 51% from €206,879 to €313,087. The average price of a second-hand house, outside Dublin, increased by 56% from €241,054 to €375,577. Prices bore no relationship to costs and were escalating because credit restrictions were effectively non existent.

Conclusions

The apparent economic climate at the end of 2006 was one of calm before the tsunami. The construction sector completed 350,035 new houses during the preceding five years sufficient for an additional population of 840,000 persons. But the population of Ireland only expanded by less than 323,000 in this period.

There are approximately 1,469,000 households in the country. The following table summarises the number and value of mortgages paid between 2002 and 2006:

	New	Used	Total
Number of mortgages paid	221,316	260,767	482,038
Value of mortgages paid € Million	€50,454.0	49,669.8	€100,123.8

Source: Department of the Environment, Heritage and Local Government

Over 32% of the nation’s housing stock has been caught up in this bubble. Mortgagees’, with indebtedness of over €100 billion, are now subject to the consequences of negative equity as well as the other implications of the most severe economic downturn in living memory.

A crisis of a similar nature occurred in Ireland as a consequence of the agricultural depression of the 1870’s. It followed a 20-year period of economic expansion following The Famine. But rents became unaffordable and land values collapsed. Credit became unavailable as the insurance companies who provided it vanished from the marketplace. That downturn lasted until 1914.

If the malignancy of the credit bubble that now paralyses our economy is not eliminated Ireland will never successfully escape this downturn. The only course that will protect society is to legislate the maximum gross income-to-loan and loan-to-value ratios that are prudent and sustainable.

It is abundantly clear that the passive advocacy of The Financial Regulator has been wholly ineffective. The history of the relationship between the leadership of Ireland’s banks and Irish society is not based on shared values or the common good. If it were the Exchequer would not have lost hundreds of millions of € when the Irish banks facilitated the setting up of illicit off-shore accounts. Rampant customer overcharging would not have occurred and the ranks of the leadership of the banks’ would not have been cited for personal income tax evasion, when they were on 28 March 2006.

Bankers’ now claim they made ‘regrettable mistakes’. The did, in fact, engage in delinquency of a treasonable scale and nothing short of stringent legislation will restore a balance and sentiment from which stability and sustainability has some hope of being nurtured.

Eighty per cent of all those claiming mortgage interest tax relief earn less than €75,000 per year and many earn significantly less. Over 43,000 mortgagees earned less than €20,000 per year in 2006 when the economy appeared to be significantly more buoyant. Their interests deserve the protection of the State from predatory banking practices.

The peril of NAMA and the blind faith of the taxpayer

Scope and role of NAMA

IRELAND’s National Assets Management Agency (NAMA) is being set up to buy the most dodgy loans to property developers’ on the balance sheets of Irish banks. The existence of these loans is said to be preventing the banks from lending to the authentic, productive segment of the economy and enabling that segment to stimulate economic recovery.  They lent too much to too few property developers and speculators but it acted as steroids would for bankers’ bonus enhancement.  Many a good Sunday afternoon in the corporate boxes at Croke Park, Punchestown and the Curragh was enjoyed on the strength of it!

These loans are to be valued on the basis of a prescribed methodology, as defined in the Bill. Their valuation will be lower than that recorded in the balance sheet of the lending bank. Valuation is not to be determined by the inflated assumptions and price structure on which they loans were first approved. The assets which were provided as security for the loans will be valued on the basis of a price is realistically achievable in the medium to longer term in term. NAMA will be the largest property owner in the country and will have the bargaining power that goes with this status. This means that it should be able to choose when to put property on the market without depressing market prices unduly.

It is intended that the elimination of uncertainty and the cleaning up of bank balance sheets to more truly reflect the genuine underlying values of their assets and liabilities will revive our financial system and provide credit to businesses that need it and the interests of depositors will also be more secure. 

The recent court case involving ACC Bank could put a spanner in works of NAMA if emulated.  Not all banks will entertain the NAMA agenda as evidenced by the approach of its parent since 2002, the Dutch AAA rated Rabobank,

 

Can Irish banks be trusted?

All of the foregoing is predicated on the Government having no role in the commercial conduct of Irish banks.

The Government has rejected, at least for now, the option of nationalisation, arguing that it is better that the banks’ maintain a presence on the stock market and conduct themselves within the constraints and disciplines of that marketplace. But is this great act of faith not a bridge too far for the Irish banks? It sends a shiver through my spine that almost frightens the living daylights out of me to see these morons’ self-policing.  Some of them are not fit to be the janitors removing cigarette butts from the latrines in the staff toilets, even with the protection of plastic gloves and goggles!

Were these banks not supposedly operating within the constraints and disciplines of the investment market for decades only to end up as the basket cases that they now are? The same disciplines that allowed them foster a nationwide culture of tax evasion (including personal tax evasion by themselves), offshore accounts for indigenous residents, scam charges on customer accounts and the cute-whore approach did not seem to conflict with their notion of discipline.

When one peruses the annual and interim reports of these awful banks it is abundantly clear that their all-consuming love affair with the property sector was intense, passionate, titivating and, of premier importance,  bonus yielding. But have these dysfunctional gobshites any understanding of the needs and dynamics of authentic economy?

I frankly fear they do not and are incapable of learning and the more I see of their Windsor Tie Knots, their grimaces of injured innocence and the ugly oversized cuff-links perched on their starched white shirts, the less convinced I become.

As the nation awaits the debate of the NAMA Bill in the Oireachtas next month many of us are utterly mesmerised by the complexity and scale of the proposed NAMA project and the level of risk that it involves is beyond the comprehension of the average person. The value of the assets concerned, around €90 billion, is equivalent to the total personal expenditure of all the citizens of the State in an entire year in good times. It is three times the amount of tax the Revenue Commissioners will collect in 2009 and it is over 50% of the likely GDP in 2009. 

 

Impact of lower credit ratings’

Many are being hurt by mortgage interest rate and cost increases.  But the Government see these as reflecting commercial marker realities.  They are careful not to spell out what these realities are.  But could they have anything to do with degraded ratings and subversive transactions for which no one has been held accountable in a court of law?

The investigation by the Chartered Accountants Regulatory Board was being overseen until recently by the board Chairman who is also a director a bank being investigated.  Can you imagine the bean-counters even allowing such a juxtaposition to materialise for the sake of their own credibility in society?

Apart from being clueless about the authentic economy our friends with the golden cuff links had no difficulty ramping up credit until it surpassed 200% of gross domestic product as though it were competing with Iceland in the financial services Olympics.  The could do this because the vey same Government “had no role in the day-today commercial operation of the Irish Banks” – so they could do what they liked and to hell with the consequences, as long as it did not impair their personal remuneration.

NAMA does not have a mandate now to deal with dodgy residential loans.  The individual mortgage bearer is not as  ‘systemically important’ enough to matter as Anglo Irish Bank, a bank where no fewer than five chartered accountant ran they show.

 

The Alan Greenspan influence on Irish banking

Capitalism in the United States and elsewhere was energised by an approach proselytised by Alan Greenspan the Former Chairman of the US Federal Reserve Board (the Fed) to the effect that the enlightened self-interest of owners and managers of financial institutions would lead them to maintain a sufficient buffer against insolvency by actively monitoring and managing their firms’ capital and risk positions. It was against this background that a plethora of so-called financial instruments, derivatives, sub-prime mortgages and securitised assets.

Greenspan was a passionate advocate of the free market. He was appointed to the chairmanship of the Fed by Ronald Reagan in August 1987 and held this position throughout the presidencies of George H Bush, Bill Clinton and George H W Bush until he was replaced by Ben Bernanke in 2006. The 1987 stock market crash coincidentally occurred the following October. Greenspan used the tools of monetary policy to guide the US economy.

This means controlling the availability and cost of money – so varying the interest rate was a central feature of the Fed’s tool kit throughout his tenure to particularly control the threat of inflation and maintain the value of the US $ at a satisfactory level on foreign exchange markets. The Republican Party, starting with Reagan, was a very strong advocate of reducing government influence and this meant that the Fed avoided the toolkit of fiscal stimulus – government borrowing, spending and taxation, to guide the economy. Their approach was to allow the market determine virtually everything.

The crucial difference between these newer financial products and traditional financial assets, such as stocks and shares, is that cash is directly exchanged for an asset concurrently in the case of a share purchase. Credit problems do not fester like rats in a sewer.  The incidence of risk is minimised so the calculus of a bookmaker are not as necessary. Auditors can audit share transactions.

Derivatives and similar financial products are based on underlying contracts that can remain unsettled for very long periods. Some of the more complex derivatives can involve thousands of contracts and hundreds of contracting parties. Values are determined by an independent index – such as FX rates, interest rates, share prices etc.  If there is an adverse movement in a relevant index of indices there may, or may not be a guarantee in place to trigger a payment.If there is no guarantee, or collateral underpinning a derivative their value is a function of the credit worthiness of the various connected parties but the apparent profits are recorded as earnings before money changes hands. 

What happens in practice is that banks involved with derivatives and similar assets accumulate large quantities of ‘paper assets’, liabilities and counterclaims – an opaque cobweb of mutual dependence and dependence on third parties that are often unidentifiable. This minefield has yet to raise its head in the context of the assets and liabilities of Irish banks and building societies.

This meant that investors are not in a position to understand and analyse banks and financial institutions because these instruments can be underpinned by thousands of contracts and hundreds of counterparties. Their value and the value of their underlying financial assets can therefore be over or understated by a crippling variation, as was demonstrated by the collapse of Bear Sterns.

 

Limitations of transparency

Transparency is a much bandied word especially when it comes to averting future problems. Bu there is no reporting mechanism that can either define the risk of measure the value of a complex set of derivatives. They are not audited and they are not regulated.

I will be interested to observe the level of transparency that applied to NAMA.  The nationalised Anglo Irish Bank has billions of € in impaired loans, including loans to directors and managers,  but it is not possible to ascertain if these include the loans approved for the purchase of the Irish Glass Bottle site at Ringsend, Dublin to which the State’s Dublin Dockland Authority is a joint venture partner, notwithstanding that the current Government appointed Executive Chairman of Anglo Irish Bank was also the Government appointed Chairman of Dublin Docklands Development Authority in succession to Lar Bradshaw, formerly a director of Anglo Irish Bank. The current Chairman of Dublin Docklands Development Authority, Niamh Brennan, is an accomplished UCD professor and the leading academic advocate in Ireland of transparent, credible corporate governance!  Will our patience ever be rewarded?