Monday, August 31, 2009

Why FG's "solution" won't work.

Extract from Richard Bruton’s Irish Times opinion piece in last Friday’s Irish Times. It concerns their approach to the banking system in the NAMA-less solution they are proposing.

“In the event that the banks cannot pass such a stress test by the end of the guarantee period, Fine Gael’s proposal is to split each failed bank into two, leaving the assets with the most uncertain values (the developer loans) in legacy asset management companies owned largely by the shareholders and other classes of risk investors. Deposits, other short-term liabilities, personal loans, mortgages and business overdrafts, the branch networks and the vast majority of the staff would all move safely and seamlessly into a new, going concern “clean bank”, initially owned and guaranteed by the taxpayer.”

This extract illustrates one of the main challenges for FG – a complete absence of understanding as to how the situation is likely to evolve, and a naïve belief that if you write something down it makes it happen.

It was good to hear Richard Bruton finally admit, at yesterday’s committee meeting, that he hadn’t understood the difference between Senior and Subordinated bonds. (Joan Burton also demonstrated a need to read up on Derivatives).

A key plank in the FG solution is the setting up of a “National Recovery Bank”
Let’s assume that this “bank” can raise the necessary €20bn, as outlined in the FG proposal.
How long will it take to get it up and running?
How long to organise
- Fundraising
- Personnel
- Distribution Channels
- Accounting/Bookkeeping/IT/Loan processing Systems/Processes

At best it will take several months to get off the ground, and probably a couple of years before it could be fully operational.

In the interim, for the 2nd leg of FGs banking proposal, the two main banks servicing the Irish economy, AIB & BOI, are told that post-Sept 2010 there will be no extension of guarantees for their fund-raising activities.

What will they do?
- immediately withdraw from any new lending exposures
- commence a major pro-active de-leveraging of their balance sheets, cancelling/ calling in overdrafts
- engage in huge cost-cutting activities e.g. laying off staff, closing any marginal branches
Their sole focus will be in survival, at any cost, beyond Sept 2010 as Zombie banks, in the hope that they can, over time, work out their property loans and return to profitability.

In the process, they will also reduce the economy to a Zombie state – FGs National Recovery Bank won’t be up and running in time to make up the slack, and all the foreign-owned banks are firmly in retrenchment mode.

This aspect of the FG plan, supposedly focused on National Recovery, is mind-boggling in its naïve stupidity.

I have no difficulty with the proposal to leave the bad assets with the banks and letting the shareholders/bondholders take their chances with “long-term economic value” of the underlying security they hold.
But there’s also a need for a functioning banking system over the next 2-3 years while we, hopefully, work our way out of the current recession.
However, that involves allowing the Banks the prospect of trading through the period, so here’s the alternative proposal:

- The current blanket guarantee of all bank liabilities is allowed to expire next year and is not extended. This removes the comfort from the subordinated bondholders.
- The Govt extends the guarantee for ordinary depositors and senior debt providers.
- The Govt provides ongoing guarantees, but only for specific fund-raisings by the main banks on a case by case basis.

This approach gives the Govt considerable leverage in ensuring that the banks support the economy while, at the same time, trying to repair their balance sheets.

If additional capital is required by AIB and/or BOI post-Sept 2010, then the Govt can underwrite rights issues and, in the event that private investment is not forthcoming, will become a major, perhaps majority, shareholder in those banks.

The critical consideration is to maintain a functioning banking system through the cycle, not Zombify it a.s.a.p. as would inevitably happen with the current FG proposal.

The silence of the 46 lambs - not a baaa!

The silence of the 46 lambs is deafening – not a baaa from any of them.

Following Garret Fitzgerald’s critical comments on yesterday’s Morning Ireland regarding the quality of their analysis, in particular their exaggeration of the projected budget deficit, Pat Kenny opened his programme at 10.00am with a reprise of Garret’s comments.

Kenny revealed that the programme had contacted Prof. Brian Lucey about Garret’s criticisms. Lucey claimed that “the numbers weren’t important” (is that a first from an economist?) and declined to come on air to discuss the issue. (Now that definitely is a first for this ubiquitous media whore.)

Kenny then said that the programme had also attempted, without success, to contact several of the other signatories. He then issued an open invitation for any one of the 46 signatories to contact the programme.

Kenny closed the programme at 12.00 without any contact from the gang of 46. Will we hear anything from them today, I wonder?

Following Alan Ahearne’s dissection of their sloppy miscalculation of the value of the underlying security, Garret’s attack may well have terminated the credibility of this bunch of wasters.

Good to see that there’s life in the old dog still.

Friday, August 28, 2009

FG/Bruton anti-NAMA proposal is, sadly, rubbish.

There are legitimate arguments to be made on both sides of the NAMA/ Nationalisation debate, even if I detest the Lucey & Co/populist media commentator loose approach to the potential numbers involved.

But, as a life-long ABFFer I regret to say, the Bruton/FG approach, as espoused in today’s IT, is a clear recipe for disaster, as it displays a complete ignorance of how the real world economic/banking system works.

Firstly: we’re now faced with a banking system where foreign-owned banks e.g Ulster, BoS(I)/Halifax, NIB, ACC etc..are effectively in retrenchment mode, they’re actively seeking to reduce their exposure to the Irish market.

When it comes to domestic players, Anglo Irish & Irish Nationwide are dead in the water, while permanent/TSB & EBS are actively trying to deleverage and reduce their loan books – just look at the uncompetitive interest rates they are quoting.

The only real players in the marketplace are AIB & BOI – and god knows they’re fussy enough about extending new credit.

But, between them AIB & BOI are by far the biggest players in all our key banking markets – deposits, lending (both to SMEs and consumers, mortgages,) money transmission (current accounts, payments) etc etc..

So what is essence of the Bruton/FG proposal, insofar as it affects the real economy?

1. Put the two main banks that drive economic activity in this country (even more so now all the foreign-owned banks want to pull out) on a death-watch for September 2010.
2. Create a new “National Recovery Bank” with no branches/outlets of any kind.

What does Bruton/FG think that (1) above will achieve, other than cause AIB/BOI to pull lines of credit from any even slightly dodgy small business across the country, in order to bolster their balance sheets,never mind not extending credit to new business? Even if they wanted to lend they couldn’t – because the FG policy proposal would mean that depositors would immediately start to move their funds elsewhere – to banks which aren’t lending to Irish business/consumers.

How does he think that the National Recovery bank will operate for SMEs when it has no distribution outlets? Online/Phone perhaps? This is a serious question.
The only certainty is that it will pick up every bad business in the country as a grateful client.

There are legitimate questions/challenges for NAMA, mainly around how taxpayers interests can be protected. Nationalisation or majority state ownership of the two main banks may well be an outcome.

But letting the economy/banking system stew for 12 months more than necessary, as espoused by Bruton/FG, is simply a recipe for disaster.

Wednesday, August 26, 2009

Are we wasting 3rd level resources on women?

The introduction of the Health Professional Admissions Test (HPat), to be used in conjunction with the points score from the Leaving Cert in determining admission to University Medicine courses, has resulted in an approx. 50:50 mix of male and female successful candidates. This contrasts with a typical 60:40 skew in favour of females under the old points-only system.

This outcome has been attacked by female commentators, in particular former FG Education Minster Gemma Hussey who argues that the points system is the fairest way of allocating the most sought after 3rd level places.

Even if that is true, is it actually the best way to allocate them?

It is a fact that, in general, girls perform better than boys in the points race, while men, in general, perform better than women in the rat race. This would suggest that the current allocation of valuable and expensive 3rd-level resources may not be delivering the optimum return on investment, i.e. longer-term economic benefit to the country.

From a strategic point of view, the country might well benefit from skewing the allocation of 3rd-level places in favour of boys, reversing the current position. I think 60:40 would be a reasonable and balanced outcome.

Bloody academics - they're at it again!

Those bloody academics are at it again. This time 46, mainly unknowns juniors, have put their names to another Lucey anti-NAMA diatribe in the Irish Times.

On RTE’s Morning Ireland, Alan Ahearne neatly filleted Lucey & Co on the key issue – their willingness to pluck figures from the air without any hard information on the actual assets under consideration e.g.
- the level of equity originally provided by the promoter
- the current income generated by the development
- the ability of the promoter to service the borrowings from other income sources
- the location/value/potential of the individual assets

The number of gobshites willing to put their names to this media circus, run for the benefit of Messrs Lucey, Whelan and Gurdgiev, is frankly irrelevant.
The fact that the 46 are willing to put their names to this poorly researched, illogically argued valuation suggests that their opinions can and should be discarded.

I liked Ahearne’s line about this being a serious business and not just something for (idle) academics to mess about with.

Ahearne’s line from earlier this year that there are two types of economist – those who know they don’t know and those who don’t know they don’t know – is proving to be as true today as the day he said it, and the latter continue to outnumber the former.

Tuesday, August 11, 2009

Inventing the future.

A couple of critical inventions which will greatly improve the quality of life:

The Blackspot

This personal device creates a Wifi & Mobile phone blackspot for a radius of up to 100 metres from the wearer. The power output can be varied by the user to increase or reduce the diameter of this blackspot. In trials it has been effective up to 1,000 metres, but the microwave radiation at that range is sufficient to sterilise the user. Consequently, a maximum range of 100 metres will probably be deemed mandatory.

With the rapid spread of Wifi and mobile phone coverage now extending to aircraft, this device will become essential for anyone seeking a little peace. Indeed, you should not be surprised if, at some point in the near future, hotels and resorts start to promote themselves as “blackspots”, where the harried masses can come for some uninterrupted rest & recuperation.

The Pixeliminator

This clever device will shield the wearer from the unwanted intrusion of digital photography – whether by still or video camera or mobile photo.
The device works on the principle of monochromatism – it emits a low frequency radio wave which renders all the pixels of the wearer, as the intended subject of a photograph or video image, as a homogenous blob of one single colour and shade – with no discernible features. It doesn’t render the subject invisible to the camera, it merely records their presence as a blob.

This clever device will restore some semblance of privacy to the citizen and is destined to enliven the conversation over wedding photos & videos in years to come. “And who’s the blob dancing with Auntie Pam?”

Funding these projects:
To provide the necessary capital to finance development of the above devices, which will undoubtedly be highly profitable in due course (think Dyson), we’re about to launch the ultimate “cash cow”: Wii Adult!
No details, just use your imagination.

Saturday, August 08, 2009

Hats off to Rupert Murdoch!

My hat is off to Rupert Murdoch, who has recently declared his intention to charge for online access to his many media publications. It’s about time that someone, somewhere, sometime, declared that giving stuff away for free that actually costs real money to produce makes no economic sense and, ultimately, has no economic future.

The current business model on the internet not only makes no financial sense, it also creates a culture of entitlement to getting everything for nothing. Otherwise respectable middle-class people are induced into law-breaking use of unlicensed electronic equipment to steal cable tv, internet access, phone connections etc etc.. Such people should, of course, be reported and prosecuted – so watch out Bat!

The next step is to promote the creation of Wifi/Mobile phone “black-spots”, as opposed to hot-spots. What a relief it would be to find places where you can’t contact, or be contacted by, anyone else. Finally, you might regain control of your own time and your life without uninvited interruption or distraction. What a blessing that would be! I can see such places becoming a mecca for the overly-stressed – the next “big thing”

A firther important challenge is to kill 24/7 news and talk-radio!
Bruce Springsteen famously recorded a song which proclaimed that there were “57 channels and there’s nothing on”. Sadly, it now feels like there’s about 1057 competing channels and there’s still nothing on. Competition certainly hasn’t brought quality!

Our media is filled with the same talking/writing heads, endlessly repeating the same old tired guff ad nauseam. They speculate endlessly on what might happen if X, Y or Z was to occur, even when the result e.g. a general election, will be known within days. If you change radio stations, you’ll hear the same contributors turning up on RTE, Today FM & Newstalk over the course of any day. If only we could have a law that confined current affairs of any kind to 5% of station output we’d all be better off – believe me! That would be a boon to public service broadcasting. Perhaps coupled with a legal constraint on politicians – how much time per week/number of opinions they can give to media?

Give my head peace. Please.

Thursday, August 06, 2009

Republican band split

It’s part of republican mythology that a split in “the movement” is inevitable. So the IRA spawned “The Officials”, “The Provisionals”, “The Real IRA”, “Republican Sinn Fein”, the INLA etc etc.. (Brendan Behan famously joked that the first item on the agenda for a meeting of any Irish political party is “the split”.)

It now seems that the splitting virus also infects republican bands. Today’s Liveline featured the acrimonious 8-year split in The Wolfe Tones. Derek Warfield revealed that he hasn’t spoken to or seen his three fellow band-members since the split – and that includes his own brother Brian! Then the two non-fraternal band members phoned in to abuse Warfield.

Great stuff. I always thought the Wolfe Tones were a bunch of rabid dog, rabble-rousing wankers who weren’t worth listening to. So, in my opinion, this acrimony couldn’t have been visited on a more deserving bunch.

Strategic need to preserve independence of AIB & BOI

One aspect of the current banking crisis, which appears, to date, to have gone un-remarked, is the strategic imperative of maintaining the “independence” of our two main banks, at least insofar as it relates to ownership by foreign banks.

It now seems clear that the subsidiaries of foreign banks currently operating in Ireland e.g. Ulster, NIB, BoSI/Halifax and ACC, have effectively withdrawn from the new lending market, particularly in the mortgage market and the vitally important SME sector.

If AIB and Bank of Ireland were subsidiaries of foreign banks, there is little doubt that a similar retrenchment policy would be in operation and the ability of the Irish government to influence such a policy would be severely circumscribed.

If AIB was owned by a major UK bank, one can imagine that the discussion in the London boardroom would not be about whether they should dispose of AIB’s US or Polish interests in order to bolster the balance sheet of the Irish subsidiary, it would be about how to downsize or dispose of the Irish unit!

There is understandable public anger at banks and bankers, a “to hell with the lot of them” attitude is commonplace.

This anger is routinely stoked by populist politicians, academics and media commentators who make no distinction between the banks, despite the evidence that some have been considerably less irresponsible than others e.g. IL&P and BoI.
Those commentators might usefully, in future, reflect on the long-term national importance to the Irish economy of maintaining a strong indigenous banking sector.

The current economic crisis will, hopefully, pass within a couple of years, but the national strategic need to maintain local control over key elements of our banking system will persist. At some point in the future, hopefully distant, we will inevitably have another international economic/banking crisis which will test the ability of the Irish economy to survive/revive.

Given the open nature of the Irish economy, we will always feel the pain when our major markets suffer an economic setback. In such circumstances, the Government’s ability to influence events is very limited e.g. our exchange rate is fixed by the ECB, reflecting the perceived need of the larger community rather than Ireland, and our interest rates are largely dictated by our membership of the Eurozone.

The banking system remains one of the key levers of economic power that the Government can influence and we must maintain control of it. Perhaps there is a case for the Government to maintain a long-term minority stake in the two major banks.

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