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Last Updated:
Apr 24, 2009 - 5:31:05 PM |
The Irish Independent reports that major investors in Anglo Irish Bank will be closely monitoring its annual report this week to make sure the bank stands up its position that €7.3bn from Irish Life & Permanent (IL&P) was correctly accounted for as a deposit.
"It seems to me there would have to be a significant degree of clarity between the board of Anglo and its auditors in order to release their financial statements," said Frank O'Dwyer, chief executive of the Irish Association of Investment Managers.
The circle of transactions, which led last week to the resignations of three top IL&P executives, became the subject of a hot dispute between both banks on Friday evening.
IL&P had €7.3bn on deposit with Anglo on September 30, through its subsidiary Irish Life Assurance, having pumped in €4bn that day -- following the €440bn government guarantee of the Irish banks.
IL&P said it received cash as collateral from Anglo in each of the instances where it placed money, in return, on deposit with Anglo. Such arrangements go back as far as last March.
On September 30 last, following the introduction of the government guarantee scheme, Anglo offered €4bn as security with IL&P.
IL&P, in turn, agreed to place the same amount on deposit with Anglo. This served to bolster the now-nationalised bank's financial standing as it prepared to unveil its full-year figures.
International accounting standards specify that financial assets should be offset by liabilities to give a true picture of a company's financial standing. Sources close to IL&P argue that the €4bn it put on deposit in Anglo should have been offset in Anglo's accounts by the collateral it received in return. This would have left no boost to Anglo's deposit base, they said.
Cash collateral
But Anglo insisted that the inter-bank arrangement it had with IL&P was not cash collateral for deposits and that no set-off arrangement existed.
Any changes from how Anglo treated the transactions in its preliminary full-year figures, unveiled last December, could give rise to legal wranglings.
Meanwhile, Anglo said that IL&P asked for and received inter-bank loans throughout 2008, including a complex €3.45bn "security repurchase arrangement" at the end of June 2008. This served to bring down IL&P's European Central Bank borrowings at the time.
A spokesman for IL&P said: "This is a normal inter-bank relationship that we had with Anglo. There is nothing more to be added." He said it was not a reciprocal arrangement in return for deposits at Anglo.
The Financial Regulator said it made it clear that over the period of the current turmoil it encouraged Irish banks to work together where necessary so as to continue to use normal inter-bank funding arrangements for liquidity purposes.
However, it "utterly rejects any suggestion that this would have constituted encouragement of the type of circular transactions that have been referred to in recent reports".
It is understood major shareholders will hold their fire, however, until after the completion of a watchdog probe of the transactions, which Finance Minister Brian Lenihan wants completed as a matter of priority.
Maeve Dineen writes in the The Irish Independent: 'You've made a commitment to us. We're making a commitment to you.' No it's not the line from a Valentine's card I received over the weekend -- I'd like to think he's more romantic than that -- but it's the headline in a number of full-page adverts by AIB in weekend newspapers.
If I had read such a statement in a Valentine's card, I'd have been fairly shocked and disappointed, not to mention annoyed. But such is the depth of scandal coming from our banking sector that it's impossible to shock or stun us anymore. We're now so conditioned to scandalous revelations that we'd believe anything at this stage.
Last week the two main banks finally got a new lease of life at the cost of €7bn of taxpayers' money. But if the truth be told, it was all a bit of damp squib in the end.
Everyone was focused on more significant matters -- yes, on the day that the country bailed out the banks to the tune of €7bn, we had more serious issues to contend with.
Roll up, roll up, last week was 'shock and awe' week at banks; just take your pick of the event that outraged you the most, because the list of possibilities was endless:
First up, it was revealed that Irish Life and Permanent was in the frame over dubious transactions with Anglo Irish Bank on the day of the government guarantee scheme.
But if you weren't astonished enough by that, Finance Minister Brian Lenihan admitted he did not even read the section of a PricewaterhouseCoopers report which outlined that these transactions had taken place.
Still not shocked? Well, how about the fact that the Financial Regulator was made aware of the transactions but still didn't move on the issue.
But then as the IL&P saga wore on, it was gobsmacking when Mr Lenihan expected to be given heads on a plate by IL&P chairman Gillian Bowler but, instead, was given the two fingers.
That the minister had to have two separate meetings with the formidable Ms Bowler before she finally accepted IL&P's chief executive Denis Casey's resignation beggars belief.
Less shocking and more ironic were interviews with the two main banking chiefs -- Bank of Ireland chief Brian Goggin earnestly admitting that he would be taking home less than €2m salary this year while AIB's Eugene Sheehy said he would forgo all bonuses for the rest of his career.
Sociopaths
Yet by the time the director of corporate enforcement, Paul Appleby said the cover-up by Anglo Irish Bank of Sean FitzPatrick's loans may have been illegal, this didn't shock anyone.
It's incredible that even in the face of these debacles of historic proportion, many bankers are continuing to act in a manner more resembling an economic sociopath than a responsible steward of the public interest. And they seem to forget that their salvation has been made possible and underwritten by the Irish taxpayer.
But for all the heat being generated by the present controversies, behind the (justified) furore about payouts for failure lies a more profound question. What sort of banks do we want to emerge from the wreckage of the financial system? Our financial system needs some real engineering and proper regulation if we are to get back on our feet.
But unfortunately, by the time I write next week's column, the Anglo accounts will have been published and there will be a new raft of issues to be outraged about. The most significant being the identity and the financing arrangements of the so-called 'golden circle' of 10 investors in the bank.
The Irish Times reports that childrenwear chain Adams will remain on the high street after a rescue deal with its former owner that will preserve 1,900 jobs, administrators have said.
PricewaterhouseCoopers (PwC) said the business was sold to Northern Ireland businessman John Shannon – who originally bought Adams out of administration two years ago. PwC said the sale would preserve the Adams brand and save the jobs of the chain’s remaining 1,900 workers and 120 Irish and British stores.
The deal between PwC and Mr Shannon’s newly formed company, JS Childrenswear, comes just six weeks after administrators were called in. PwC has closed 147 stores and shed more than 1,100 jobs at the chain as a downturn in consumer spending battered the already struggling retailer.
Rob Hunt, joint administrator and partner at PwC, said:“We are delighted to be able to secure this business sale and provide some much-needed stability for customers, suppliers and employees.”
He said the sale was the “best deal” for all concerned, adding that administrators had received “a number of expressions of interest” for the chain.
Adams had previously been bought out of collapse by Mr Shannon in February 2007.
The group had appeared to be showing signs of improvement recently, posting a 25 per cent increase in like-for-like sales in boys’ and girls’ fashion ranges in spring last year.
But a sharp deterioration in trading, combined with competition from supermarkets, reportedly hit its ability to service its debts.
The Irish Times also reports that senior officials from the Taoiseach’s office, trade union Unite and the Irish Congress of Trade Unions (Ictu) are discussing the possibility of a national pension protection plan.
Such a scheme was one of the issues raised by the trade union movement during the social partnership talks which collapsed when the Ictu refused to accept that public servants should pay a pension levy.
It is understood that a senior official from Taoiseach Brian Cowen’s office, has held talks with figures from Unite and the Ictu, including its general secretary, David Begg.
The current talks are being held against the background of the bids by two US firms to buy Waterford Wedgwood out of receivership.
The luxury crystal and china group’s pension fund had a deficit of €111 million in October last year, about the same time that it began seeking new investors.
There are fears that staff who have contributed to the scheme will lose out should the pension plan become insolvent.
In this case, those that are already getting a pension from the scheme would continue to receive payment. However, current and former staff who have contributed, but who have yet to qualify for a pension, risk getting little or nothing.
This does not apply to workers in the group’s Wedgwood and Royal Doulton businesses in Britain, as the UK introduced a pension protection plan following a European court ruling.
Trade unions have argued that the Irish Government should do the same. Unite played a key role in getting the scheme on the table in the partnership talks as it became an issue when Waterford Wedgwood was placed in receivership early in January.
Two private equity firms, KPS Capital and Clarion Capital, are bidding to buy the group, which is reported to have a deficit in the region of €330 million.
KPS emerged as the front runner last week. Over the last few days, the New York-based fund has done deals to buy High Falls Brewery in Rochester, New York, and high-end US china manufacturer, Lennox.
The company specialises in buying and investing in manufacturing businesses, particularly those that are insolvent or which have heavy debt burdens. In the past it has invested in sectors such as heavy engineering, motor components and paper milling.
Clarion advised Waterford on the sale of its US kitchen-ware business, All Clad, in 2004. That company has invested in a diverse range of businesses, and is the current owner of Tennessee-based luxury luggage manufacturer, Hartmann.
Receiver David Carson of Deloitte has been in talks with both parties for several weeks. It is understood that a deal will save about 300 of the 700-plus jobs in Waterford Crystal. Workers there have been sitting in in its showroom since manufacturing was shut down at the Kilbarry plant over two weeks ago.
The Irish Examiner reports that Bord Gais is due to detail, later this week, the full scale of its ambitions for inclusion in Ireland’s electricity market.
It is understood the company has been gradually building up a strong electricity supply base, including via acquisitions, over the past year. Details are expected to be announced early this week.
The company’s ambitions to become a leading dual fuel business are already well-documented, but the exact details of how it has been building up the new aspect of its business — and how it plans to over the next few years — has not been communicated in full, as yet.
Last summer, Bord Gáis announced its desire to form a significant part of the Irish electricity market on both sides of the border in the coming years. Its stated target is for more than one million customers to be buying both gas and electricity from the company by 2014 and for the company to have doubled in size by then. It is also hoped that half of group turnover will come solely from electricity sales by that date.
The company was one of the parties linked with a bid for the two electricity power stations sold by the ESB last year — Tarbert in Co Kerry and Great Island in Co Wexford — which eventually went to Spanish company Endesa for around €450m. Bord Gáis was also linked with a potential move for Northern Irish energy group Viridian, which owns the Huntstown power station in north Co Dublin.
Meanwhile, Chambers Ireland has called for the Commission for Energy Regulation (CER) to move faster in helping to restore competitiveness in the economy, adding support, sooner rather than later, for a double digit percentage cut in energy prices would help support jobs and the economy.
"Given the decline in the price of energy internationally, there is now a compelling case for a cut of more than 10% in energy prices for business and consumers. Reduced charges would have a significant impact on both residential and business costs and would be very beneficial in the context of supporting spending power and restoring confidence on the main streets of Ireland," said Chambers Ireland’s director of policy Sean Murphy. "The CER should prioritise the core issues affecting Irish business now — such as reducing energy costs immediately — rather than focusing on medium-term themes, such as further investment incentivisation.
"Reduced energy charges now would strengthen cash flows for hard-pressed businesses. This would also sustain jobs while improving Ireland’s competitiveness. Given that the CER approves electricity charges in Ireland, it must act without delay."
The Financial Times reports that the public finances are set to be their worst since the end of the second world war, according to a forecast by the CBI, the employers’ organisation.
The study suggests a far more dismal outlook for public borrowing than predicted by the Treasury. It underlines that the burden on taxpayers will be larger as the economy begins to recover from the recession, and that even more stringent or longer-term cutbacks in public spending and investment may be necessary.
The CBI research predicts public sector net borrowing will rise to 10.6 per cent of national income in 2009 – easily exceeding the previous postwar high of 7.8 per cent in 1993, and far above the 6.9 per cent reached in the mid-1970s before Britain’s economy was bailed out by the International Monetary Fund.
The estimate is also much higher than the 8 per cent peak forecast by the Treasury in November in its Pre-Budget Report.
After “the immediate crisis has past, and when [fiscal policy] is no longer focused on staving off a deeper recession, we will need a very clearly delineated plan for how to bring the deficit back to more sustainable levels”, said Ian McCafferty, chief economist at the CBI.
Government borrowing to finance public spending will jump from £88.7bn, or 6.2 per cent of gross domestic product last year, to £148.7bn this year and £168.1bn, or 11.8 per cent, in 2010, the CBI expects. This gloomy outlook comes as the economy has deteriorated much more quickly than the Treasury and most economists were expecting, and suggests that the downturn will be deeper and longer than previously thought.
The CBI now expects a 3.3 per cent decline in economic growth over the course of 2009 – which would spell the worst year for growth since comparable records began in 1949. It foresees another four quarters of decline, following the two quarters of falling GDP at the end of last year, before the economy begins to expand again early in 2010.
“We believe the UK economy will be mired in a deep recession for the whole of 2009,”Mr McCafferty said.
The forecast is slightly worse than both the Bank of England’s central forecast for about a 3 per cent drop in growth this year, and the IMF’s expectation of a 2.8 per cent fall. The Treasury in November predicted rapid recovery in the second half of 2009 and was expecting only small falls in GDP.
Mr McCafferty said the forecast relies on the expectation that government measures to boost lending will improve access to credit, that the financial system stabilises, and the weaker pound, lower interest rates and fiscal stimulus help to restart the economy next year.
It foresees a total 4.5 per cent drop in UK output during the recession, which would make it much worse than the 1990s downturn but not as extreme as the 6 per cent GDP decline during the recession of the early 1980s.
The FT also reports that the European Central Bank will stick to a policy of “gradualism” as it combats the global economic crisis and will avoid aggressive actions that add to economic uncertainty, a senior policymaker at the bank has said.
Jürgen Stark, an ECB executive board member, made clear in an interview with the Financial Times that eurozone interest rates could fall further and hinted growth and inflation forecasts would be revised down again next month.
However, he issued a strong warning about the risks of cutting borrowing costs too far and too fast, especially when “deflation is not on the cards” in the 16-country eurozone.
“Gradualism has remained a critical aspect of our monetary policy. Overly aggressive reductions in our policy rate when we cannot see any risk of deflation would exacerbate and not resolve uncertainty,”he said. “A price stability orientated central banker, acting only on the basis of fears, would risk losing his or her credibility.”
Jean-Claude Trichet, ECB president, has said the bank could use “non-standard” measures to boost the economy, for instance by buying corporate debt, but Mr Stark signalled that the ECB remained cautious about taking such steps.
In spite of dramatic falls in eurozone inflation recently, there was “no risk of undershooting”. Expectations about inflation“in the medium term . . . are fully in line with our definition of price stability”.
Official data on Friday showed the eurozone heading for its worst recession since the second world war. Gross domestic product contracted by a larger-than-expected 1.5 per cent in the fourth quarter. Mr Stark expected only a “very gradual” recovery late this year, “or more likely in the first half of 2010”.
Since early October, the ECB has lowered its main policy rate by 225 basis points to 2 per cent, the lowest in its 10-year history. Financial markets expect another half a percentage point cut in its main policy rate in March. The Bank of England and the US Federal Reserve have already set rates lower and the ECB has faced criticism that it has not responded aggressively enough.
Such arguments were “simplistic” and based on the “academic discussion” that followed the collapse of the dotcom bubble early in the decade, Mr Stark said. Not only was there no deflation risk, “what was recommended after the bursting of the dotcom bubble contributed . . . to new excesses”, he said.
Mr Stark favoured a“more prudent approach. Yes, use the room for manoeuvre that is still available but not in a way that would put our reputation at risk.”
Asked about “non-standard” measures the ECB could deploy, Mr Stark said that in the US, some of the steps taken by the Federal Reserve had been backed by government guarantees. In the eurozone, “an important principle is not to blur the borderline between government and central bank responsibilities.”
His comments are significant because Mr Stark, a former vice-president of Germany’s Bundesbank, is closely involved in the ECB’s economic analysis and in making recommendations on interest rate changes.
Mr Stark, known for his stability-oriented approach to economic policy and as one of the more “hawkish” members of the ECB’s governing council, also warned that soaring public sector deficits in the eurozone were“alarming”.
He said politicians were in danger of creating a “crisis in public finance” that risked “prolonging and aggravating the situation”.
ECB concern has mounted as national capitals unveiled economic rescue packages funded by higher borrowing – risking “crowding out” the private sector from capital markets.
The New York Times reports that as President Obamaprepares to sign the $787 billion stimulus bill, administration officials sought to temper expectations, warning that the economy has not yet reached bottom and that increased economic activity as a result of the legislation would “take time to show up in the statistics.”
Mr. Obama is spending the holiday weekend in Chicago and is expected to sign the bill on Tuesday in Denver, kicking off another campaign-style trip to drum up support for the stimulus package.
“There will be signs of activity very quickly,”David Axelrod, the White House senior adviser, said on “Fox News Sunday.” “But it’s going to take time for that to show up in the statistics. The president has said it’s likely to get worse before it gets better.” He added that the economy would most likely not begin gathering steam until the second half of the year.
Robert Gibbs, the White House press secretary, echoed that sentiment on CNN’s “State of the Union,” saying that while the stimulus package will put the country on the right track, “it is safe to say” the economy has not reached bottom.
Lindsay Graham, one of the Republican senators who voted against the stimulus bill, said the nationalization of the banking industry should not be taken off the table as Congress looks for ways to shore up the teetering financial system. “This idea of nationalizing banks is not comfortable,” Mr. Graham, who is from South Carolina, said on ABC’s “This Week With George Stephanopoulos.” “But I think we have gotten so many toxic assets spread throughout the banking and financial community throughout the world that we’re going to have to do something that no one ever envisioned a year ago.”
Republicans, bolstered by their coordinated opposition to the package, remained on the offensive over the weekend. On CNN, Senator John McCain continued to brand the stimulus bill a “generational theft,” and accused Mr. Obama of not reaching across the aisle despite promises of bipartisanship. The measure gained the votes of only three moderate Republican senators in the Senate. No Republicans voted for it in the House.
“Let’s start over now and sit down together,”Mr. McCain said.
The administration seemed to be laying the groundwork for a double-edged strategy in advance of the president’s trip, talking up the stimulative effects of the new bill while hedging on any promises of immediately noticeable relief. Mr. Obama will sign the stimulus bill into law in Denver and plans to unveil his mortgage rescue proposal Wednesday in Phoenix. In taking his arguments on the road, this time out West, the president is repeating a tactic he employed during the debate over the stimulus package. Before the bill was passed, Mr. Obama traveled to hard-pressed cities in Indiana and Florida, where he was greeted with campaign-like rallies.
After the bruising battle on Capitol Hill over the stimulus, the administration now turns its attention to the nation’s struggling automakers, who must submit plans by Tuesday describing how they would return to viability.
“We need an auto industry in this country,”Mr. Axelrod said on NBC’s “Meet the Press.” “But it’s going to be something that’s going to require sacrifice.”
In exchange for $13 billion in bailout funds approved by President George W. Bush, General Motors and Chrysler agreed to a Feb. 17 deadline to deliver their plans to the Treasury Department. Both companies are requesting additional government support as part of their plans.
General Motors received $9.4 billion and would get an addition $4 billion if the Treasury Department approves its plan. Chrysler is seeking $3 billion on top of the $4 billion it has already received.
Mr. Axelrod did not say whether more bailout money would be approved or whether the administration would let the automakers go into bankruptcy.
The NYT says: “Everybody does it,” is what high school students say when caught committing an offense. And now that the economy has plummeted, it’s the defense offered by lenders, borrowers, brokers, investors, credit agencies, government regulators and elected officials alike.
Everybody was doing it, and nobody wanted to stop it. As Michael Francis, a former Wall Street investment banker puts it in “House of Cards,” a documentary on CNBC on Monday, “No, there was never a time where somebody said: ‘Hey, hold on. Let’s not do this.’ ”
Collateralized debt obligations are so complicated that even the former Federal Reserve chairman Alan Greenspan says he finds them bewildering. But now, in hindsight, it’s just as difficult to fathom the individual gambles and collective folly that brought down Wall Street and cost millions of Americans their homes, jobs and retirement savings. And that’s why “House of Cards” and “Inside the Meltdown,” a “Frontline” documentary on most PBS stations on Tuesday, are so gripping.
So much is still at stake that it’s hard to remember what happened even a few months ago when the Bush administration and Congress gave Wall Street its first bailout.
“Inside the Meltdown”is a post-traumatic-stress flashback: a searing look at how the treasury secretary at the time, Henry M. Paulson Jr., and others acted — and failed to act — in those fraught days in September when the world’s entire economic system seemed on the brink of evaporating. “Frontline” concludes that by refusing to rescue Lehman Brothers, Mr. Paulson kicked off the worldwide credit freeze and deepened the recession.
CNBC’s inquiry weaves together Wall Street bankers, first-time homeowners, mortgage brokers and even the mayor of a fishing town in Norway. Blame is spread far and wide, with no one culprit singled out — though Mr. Greenspan, unburdened by remorse and blithely philosophical about the inevitability of it all, indicts himself. Of the two programs this one is broader, more comprehensive and ultimately more compelling.
Oddly enough the PBS offering is showier and more melodramatic, embellished with the kind of foreboding sound effects and stark black-and-white photographs that are a specialty of Sept. 11 films or accounts on History of the Cuban Missile Crisis. “Frontline” builds a persuasive case against Mr. Paulson but relies for the most part on secondary sources to do so: academics and reporters.
A shot of black limousines gliding up to Capitol Hill sets the stage for one of the most dramatic moments in the narrative, the Sept. 18 meeting in which Mr. Paulson warned Congressional leaders that without a huge bailout, the financial system would melt down. Senator Christopher J. Dodd, Democrat of Connecticut, recalls the meeting: “There was literally a pause in that room where the oxygen left.”
Mr. Dodd and Representative Barney Frank, Democrat of Massachusetts, are the only members of Congress interviewed in the piece, which is a weakness. Many voters hold Republicans and Democrats equally responsible for oversight failures. “Frontline” holds these politicians up as reliable, unbiased witnesses, but some viewers may feel they don’t deserve that trust.
“Inside the Meltdown”is illustrated with sweeping aerial shots of Lower Manhattan and the skyscrapers of Wall Street. CNBC’s David Faber, the reporter behind “House of Cards,” takes his camera onto a helicopter with a Southern California public health inspector to look down at a patchwork of slimy green backyard swimming pools left to fester after the houses were foreclosed.
“This is the pulse of the subprime industry, the nerve center,”says Lou Pacific, a former officer at one of the country’s busiest loan companies, Quick Loan Funding.“This is where it all started and this is where it all ended.” (Daniel Sadek, the founder of Quick Loan Funding, which is now defunct, was pocketing $5 million a month and spending it on mansions, antique sports cars, Las Vegas junkets and a car race movie, “Redline.”)
Almost like the Spirit of Christmas Past, Mr. Faber visits homeowners, lenders, bankers and Wall Street dealmakers to collect a Dickensian cast of characters who explain how they were sucked into an “affluenza” bubble that seemed unbreakable. The gullible range from Ira Wagner, formerly a senior managing director at Bear Stearns, to pizza delivery men who became loan officers, that is, salesmen, with no training, regulation or even dim understanding of what Wall Street was doing with the mortgages they handed out like supermarket coupons.
Like Diogenes, Mr. Faber hunts for a person who saw the crash coming and tried to do something about it. He does, but the whistle-blower is not a Wall Street banker, an S.E.C. investigator or member of Congress: it’s Kyle Bass, a Texas hedge fund manager who looked closely inside the subprime market and decided to bet against it. (His fund went up 600 percent in 18 months.)
The CNBC documentary closely follows Mr. Bass’s line of thought, but for perhaps obvious reasons it does not cite a letter of warning he wrote to investors in July 2007. “Consequently, when I hear people like Kudlow on CNBC tell their viewers that the subprime problem is ‘contained,’ I can hardly bear to watch,” Mr. Bass wrote, referring to Larry Kudlow, host of CNBC’s “Kudlow & Company.”
So many people didn’t see it coming that it’s hard to know where to assign blame. “Inside the Meltdown” and “House of Cards” reveal why even the most culpable don’t blame themselves: everybody did it.
CNBC House of Cards
PBS Inside the Meltdown
