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Posts tagged ‘Boston Consulting Group’

Have we reneged on the IMF/EU bailout deal?

By namawinelake

(Memorandum of Understanding)

The decision by Minister for Finance, Brian Lenihan this week to postpone the next round of bank recapitalisations to after the general election was momentous and I don’t think the shock waves have been accurately captured yet. And the reaction of what are assumed to be the government-in-waiting must surely be a matter of deep concern for our lenders, as it would seem that there has been unilateral repudiation of a key term of our agreement with the EU/IMF (either a one-month-plus delay or a conditional repudiation). Let’s examine the sequence of events

1. 16th December, 2010 – Agreement with IMF/EU of bailout terms following Irish parliamentary debate and vote and IMF board meeting

2. January Exchequer Statement confirms that we have so far received €10.873bn from the EU/IMF facility (€4,979m from the European Financial Stabilisation Fund and €5,803m from the IMF Extended Fund facility) in Jan 2011. The December 2010 Exchequer Statement shows that there was no drawdown from the facilities last year.

3. 1st February, 2011- Dail is dissolved and it is claimed by Minister Lenihan that he discussed the possibility of postponing the recapitalisations with his colleagues.

4. Wednesday afternoon, 2pm, 9th February, 2011 – IMF produces broadly upbeat staff report on Ireland

5. Wednesday afternoon, 9th February, 2011 – Minister Lenihan issues statement cancelling his intention to recapitalise the banks before the general election – “the Minister has informed the European Commission, the IMF and the ECB” The Central Bank of Ireland responds in detached terms (“notes” cf “welcomes”)

6. Thursday afternoon, 10th February, 2011 – Minister Lenihan issues informal invitation to two main Opposition party finance spokespeople to write to him if they wanted the recapitalisation to take place before the general election.

7. FG finance spokesperson, Michael Noonan issues statement in which he says “if Fine Gael is in government will await the results of the solvency and liquidity review before we recapitalise the banks”. These reviews are due to be completed by Barclays Capital, the Boston Consulting Group and Blackshore by 31st March 2011. Work has been ongoing since January so there is the possibility that the results may be published earlier than 31st March.

 8. Labour party leader, Eamon Gilmore said, according to the Irish Times, “his party would not put any further capital into Bank of Ireland, AIB and EBS building society before renegotiating the bailout with the International Monetary Fund (IMF) and the EU”. I cannot find a statement on the Labour website on this subject.

9. General election on 25th February, 2011 with constitutional statement by An Taoiseach that the next Dail will meet on 9th March, 2011. The likelihood is that the next government will be a coalition and the usual post-election horsetrading may delay the formation of a government. For what it is worth, Paddy Power are offering 1/10 odds-on that the next government will be FG/Labour. I recall Paddy Power not being on the money with the outcome of the British general election in May 2010 but the only fly in the ointment I can see in our election is the uncertain role to be played by independents and small parties as my own sense is there is a palpable hostility/apathy towards FF (mostly)/FG/Labour. The reason for mentioning the likely outcome of the election is that above are the positions of the two main opposition parties likely to be in government, on the recapitalisation. So where does this all leave the agreement with the IMF/EU. We’re taking their money but not honouring commitments on the use of that money. The hope on the IMF/EU’s part must be that this is a temporary hiccup and this agreement term will be honoured in April 2011. I can’t find written statements from the ECB or the IMF or EU reacting to Minister Lenihan’s decision but press reporting suggests muted concern. I can’t help but notice that we have €11bn of the bailout funds plus €126bn from the ECB in our banks and yet we seem to be unashamedly delaying (or something more serious in Labour’s case) a key term of the deal.

Comment :

What about to notion that we haven’t seen the real extent of the problem? Perhaps we are only seeing the tip of the iceberg what if the hole in the banks is three times bigger or even four times bigger can we really believe a word any of the players to date .Brian Lenihan, Patrick Honohan Allen Dukes Brian Cowen and even the ECB with their Bank stress tests, none of their figures have been proven right on the on the contrary they all have been wrong.

For my money I bet the hole is so much bigger and we will have no choice but to default. By the time we have the full figures on the Banks derivative positions in CDS, s ,and OTC,s  we will be in for a nasty shock and Lenihan knows it!

The use of derivatives can result in large losses because of the use of leverage , or borrowing. Derivatives allow investors  to earn large returns from small movements in the underlying asset’s price. However, investors could lose large amounts if the price of the underlying moves against them significantly and boy has the underlying assets prices moved and it is down down down so its not going to be good news comming from the banks .

competence of companies that provided information underpinning key policy decisions

Is it time to investigate the competence of companies that provided information underpinning key policy decisions in our financial crisis?

By Namawinelake

Looking back at the financial crisis over the past three years, it is striking that at practically all milestones the information upon which key decisions were made has turned out to substantially wrong, in particular the assessment of the problems in the banks and more specifically still, the losses on property loans.
If, back in September 2008, it was known that the banks’ assets were not worth €500bn as claimed but were worth substantially less, would the Government have campaigned to introduce a guarantee of bank liabilities then worth €440bn? If, at the start of 2009, the Minister for Finance knew of the likely losses in what would later become the five NAMA Participating Institutions, would he have started a recapitalisation programme that may see €80-90bn ultimately taken from State coffers (through borrowing) and shovelled into these black holes? If, at the start of 2009, when Dr Peter Bacon was reporting on the desirability of an asset management agency, he knew that the haircut to be applied to loans would be 60% rather than 30%, would NAMA ever have seen the light of day? It seems to me that these three key moments in our State’s economic history are characterised by the Government acting on poor information. Of course it is to be recognised that information can modify over time and there was a deterioration in the economic environment, both here and internationally, from 2008 which will have affected more up-to-date values. But even taking account of the passage of time, was the information produced by the institutions and external advisers, at such colossal cost to the State, so significantly inaccurate that it is time to investigate the competence of those companies that produced the information?
What prompts this entry is a letter dated 23rd December, 2010 from the current Financial Regulator, Matthew Elderfield, to the Committee of Public Accounts, which has just now been published, in which he encloses copies of the invoices paid in respect of advice received by the Financial Regulator in respect of the Bank Guarantee Scheme and “the discharge of other related supervisory duties”. The invoices are partly redacted by the Financial Regulator to remove the names of consultants and the companies’ banks details for payment of the invoices. The second redaction is understandable but isn’t the identity of the consultants that were seemingly paid substantial sums (€1,000-plus and expenses per day typically) of public interest?
I have extracted the invoices from Matthew Elderfield’s letter for ease of review and they are as follows (sorted by invoice date – click on the description for a copy of the invoice):
DateCompanyAmt (ex VAT)Description
27/11/2008PwC1,670,000Work on six State-gteed banks
31/01/2009PwC1,139,150Work on 5 NAMA banks and JLL fees
19/02/2009Deloitte95,720Review of directors loans
06/03/2009PwC23,415Secondment 11 days Feb 2009
03/04/2009E&Y16,667Secondment Feb 2009
03/04/2009E&Y16,667Secondment Mar 2009
03/04/2009E&Y16,667Secondment Dec 2008
03/04/2009E&Y16,667Secondment Jan 2009
28/04/2009KPMG1,034,080Investigations Mar/Apr 2009
23/06/2009PwC214,480Ref to “Engagement letter April 2009”
30/07/2009KPMG218,219Investigations and “potential ASPs” Apr-Jul 2009
21/09/2009PwC239,310Impairment provisioning INBS
30/10/2009PwC225,750Impairment provisioning EBS
20/11/2009Deloitte196,789″Assistance”
06/01/2010Deloitte56,9992 secondments for 21 days
19/02/2010E&Y87,394″Professional services”
03/03/2010PwC464,500Due diligence
03/03/2010PwC483,100Due diligence
20/08/2010E&Y34,000″Professional services”
6,249,574

There are three invoices of particular interest and they are:
The PwC invoice from 31st January 2009 which includes a charge of €691,250 in respect of “Jones Lang Lasalle Valuations”. And this has continuing relevance for NAMA because JLL’s managing director at the time, John Mulcahy, is now NAMA’s Head of Portfolio Management and arguably NAMA’s most senior property man. It should be emphasised that it is not disclosed on the invoice the remit that JLL operated to when providing their services, so for example they may not have examined loan documentation which, following NAMA’s legal due diligence exercise, proved to be execrable. It should also be stressed that property values continued to drop in late 2008 and 2009.
The two PwC invoices dated 21st September, 2009 and 30th October, 2009 which relate to the impairment provisioning in INBS and EBS. Knowing that the last estimates (in October 2010 – yes, the NAMA CEO did indicate lower estimates last week at the CPA but those are on incomplete loan transfers) of final haircuts for INBS and EBS were 70% and 60% respectively, how competent was PwC’s work in 2009? NAMA’s valuation date is 30th November, 2009 so there may well have been some deterioration in values with the passage of time but November 2009 was only a matter of a few months after the reviews.
A notable omission from the invoices is work on impairment provisioning for AIB, BoI and particularly Anglo. Didn’t the acting Financial Regulator, Mary O’Dea,  think to commission such work? Though on the other hand, given how inaccurate the work appears to be for EBS and INBS in the context of present estimates, perhaps she saved us unnecessary fees.
With NAMA’s acquisition work coming to an end and with yet another review of loans by the troika of Barclays Capital, the Boston Consulting Group and Blackrock Solutions, is it not now time to review the competence of the work undertaken in 2008 and 2009?

source http://wp.me/pNlCf-Xp

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