The Irish Independent reports that the first tranche of toxic loans from two key lenders being transferred into the State's 'bad bank' are set to be worth up to 40pc less than their original value, the newspaper has learned.
And taxpayers could be hit with an even bigger bailout than originally estimated if the rest of the loans into the National Asset management Agency (NAMA) are discounted to the same extent. Sources last night revealed impaired loans from Irish Nationwide and Anglo Irish Bank were coming out worst from the exercise.
Irish Nationwide, in particular, has found it difficult tying down security details for loans to some of the country's most embattled developers. Anglo has brought in extra lawyers in recent days to help it complete legal due diligence on the titles of swathes of properties bankrolled by it.
Final valuations on the first batch of loans bound for NAMA will not be known until this process is completed.
NAMA officials are sticking to the line that average discounts across the sector will not differ significantly from the 30pc average outlined by Finance Minister Brian Lenihan last September.
The banks can initially only value the loans according to their market value -- in line with strict guidelines provided by NAMA.
The agency then has the power to increase the value of certain loans to reflect their so-called "long-term economic value".
However, leading credit ratings agency Standard & Poor's expects more of the loans to ultimately be valued at market price -- or what it calls "fair value" -- than the banks may have hoped.
The five banks and building societies participating in the scheme are preparing to dump an initial €19bn of risky property loans with NAMA over the coming weeks -- representing the country's top builders.
All told, NAMA is expected to take control of €80bn of loans over the course of six months.
The deeper the discounts, the bigger the holes created in the banks' balance sheets, which then have to be filled by fresh capital. In total, the banks will move more than 20,000 individual loans into NAMA.
But the clock is ticking for the European Commission to give the project the green light before the first scheduled transfers this month.
Commission sources poured cold water on reports that Brussels was delaying approval of the scheme.
Speaking in the Dail yesterday, Mr Lenihan insisted the process of valuation and transfer was well under way.
"Work in several major institutions will be finalised in respect of major lenders at the end of this month," he said.
Portfolios
However, sources close to the process have warned discounts applied to the first batch of NAMA-bound loans may not be a reliable yardstick for the rest the banks' portfolios -- or other institutions.
They said it was likely loans doled out to some of the biggest developers in the boom years would be among the most troublesome to value, given their labyrinthine company structures and now worthless personal guarantees.
NAMA officials have found some banks carried out very lax valuations on property projects during the boom. One senior source said the work by some banks amounted to little more than"drive-by valuations".
Meanwhile, NAMA has set up a raft of subsidiary companies in the last week -- including loan management, investment, and property investment firms -- as it prepares to take over the first of the troubled loans.
The Irish Independent also reports that huge losses incurred by Sean Quinn's family on their stake in Anglo Irish Bank has even ended up damaging the performance of the Quinn firm which owns assets in Russia, Turkey, Ukraine and India.
The Irish Independent has seen the annual report for the Quinn investment vehicle, based in Sweden, which owns properties and construction projects throughout Russia, India and other countries.
Due to problems at Anglo Irish Bank, loans provided by this company -- Quinn Investments Sweden -- to a related company have become impaired.
The property investments in these markets were performing well, Quinn said yesterday, but loans had become impaired following problems with the Anglo investment.
"The property portfolio owned by the Quinn family is performing satisfactorily. However, the results for 2008 were impacted by once-off costs relating to the impairment of loans made by Quinn Investments Sweden to a related company which had suffered losses as a result of the family's investment in Anglo Irish Bank,'' said a statement provided by the Quinn Group.
The Swedish-based company took writedowns of €144m on investments in subsidiaries. The annual report shows that an after-tax loss of the same amount was reported.
AGM
An AGM of the Swedish company was held shortly before Christmas and the board approved "proposals'' concerning the losses, although these were not detailed.
The precise level of losses on the Quinn Anglo investments remain unknown, with the Quinn Group describing various newspaper accounts as "speculative''. However, the chief executive of the VHI, Jimmy Tolan, recently said the details of the losses should be put into the public domain.
He said the losses were "relevant" to both customers of and suppliers of services to Quinn Healthcare.
"Whatever the level of losses are, they should be in the public domain. I think they are relevant for people who buy their products. It is relevant for consumer-facing businesses," he commented.
Quinn Group for its part accused Mr Tolan of "scaremongering'' and said the losses arising from Anglo had been "clearly defined''.
The Quinn Group had since moved on from the issue and was planning two IPOs by 2015, according to a communication from founder Sean Quinn.
The annual report outlines the scale and variety of the Quinn assets in eastern Europe, Russia and India, with the Swedish-based company holding assets worth €555m. Russia is the largest contributor to this asset base with €369m of assets, while €61m of assets are held in Ukraine. The Russian assets are unpinned by debt of €311m, while the Ukraine operations have debt of €43.7m.
The Swedish company reports no significant slowdowns from tenants or reductions in rent levels.
The company has launched a series of ambitious plans for the Indian market, including a large 536-bedroom hotel in Hyderabad, the southern Indian city which has a population of four million people. The annual report discloses that this has been postponed.
The Quinn Group yesterday provided an update on its prospects in India. "Our Indian operations recently finished the construction of a 79,000 sq m office block which is being leased out to a variety of international tenants. Demand is still strong in India and economic recovery is well advanced there.
"The second project, a large Hotel in Hyderabad, has temporarily been put on hold due to the world economic decline and its effect on tourism."
The Irish Times reports that the Government intends to use the Finance Bill to close a loophole that allows multinationals to maximise the profits they make from the Republic’s low corporate tax rate.
Minister for Finance Brian Lenihan will publish the Bill today. It will include measures designed to regulate transfer pricing, a practice regularly used by multinationals to exploit the benefits of countries with low corporate taxes.
The Republic does not tax the practice, which means it is out of line with key trade partners in the US and Europe, who fear that multinationals could use operations here to siphon revenue away from those jurisdictions.
Any changes to the regime could spark fears about competitiveness, and tax advisers say some multinationals operating here are “spooked” by reports that the Government is moving to tighten the law.
Transfer pricing is where one branch of a company in a high-tax jurisdiction sells goods at a low or heavily discounted price to a branch in a low-tax location, which then sells them on the open market at a profit.
This means that the company can record the bulk of its profit in the lower-tax jurisdiction, thus reducing its overall tax bill.
Along with finished goods, it can apply to components, patents, services or anything else that forms part of a product that is then sold on.
Companies in key businesses such as pharmaceuticals and IT, which regularly trade ingredients and components between operations in different companies, can benefit from transfer pricing.
The Republic’s low corporate tax rate means it is seen as a net beneficiary of the practice, particularly given the fact that its biggest mobile investor, the US, charges 35 per cent on company profits against 12.5 per cent here.
The Department of Finance recently sought outside professional advice on the provisions, which sources say will be characterised by a “light touch”.
The department has also sought the advice of IDA Ireland, the State agency which sells the Republic as a location to multi-nationals.
The Government is planning to introduce a regime based on what a company would charge on the open market for the goods in question. The approach is known as the “arm’s length” principle and is already used in the US and the UK.
The key to controlling the practice lies with the country that loses out on such transactions, but it can only enforce its laws if the low-tax jurisdiction has similar controls in place. It is understood that this is what the Government intends to do.
Tax advisers say a regime which reflects those of our trading partners should be enough to satisfy them. “It is effectively about our image and ensuring that we are not seen as a tax haven,” one said yesterday.
The Irish Times also reports that the holding company for Aldi Stores (Ireland) Ltd has injected just over €126 million into its Irish operations since November.
Filings lodged at the Companies Registration Office show that Aldi Stores (Ireland) Ltd recently allotted new shares to its British-based holding company, Aldi Stores Ltd, in two separate tranches in return for cash.
On November 11th, 25 million new ordinary shares worth €2 each were issued and allotted to Aldi Stores Ltd, raising €50 million for the Irish firm. Just over a month later, a resolution was passed to increase the firm’s authorised share capital, enabling a second allotment of shares to take place, generating €76. 3 million.
A spokeswoman for Aldi said it had no comment to make on the allotment of the new shares or any restructuring implications.
The German-owned discount supermarket chain, which opened its first supermarket in Ireland in 1999, has more than 70 stores and employs about 1,200 people here.
Last May it announced a €350 million expansion programme in Ireland, saying it planned to open 35 stores over the next three years.
Details of Aldi’s financial performance in Ireland are unavailable as returns for Ireland are conflated with those for the UK. The latest available figures show turnover at its UK and Irish operations was £2 billion (€2.29 billion) in 2008, up 32 per cent on 2007.
The Irish Examiner reports that Dublin needs to elect a credible non-celebrity mayor to drive critical local authority reforms and to eliminate €170 million of waste in expenditure and work practices.
Dublin Chamber of Commerce president Peter Brennan will express this view to Taoiseach Brian Cowen, special guest at the Chamber’s AGM in Dublin later this evening.
Mr Brennan is looking for the Government to stop talking about its proposed new legislation for the Mayor’s office and to bring it in immediately, allowing for Dublin to elect a new Mayor by June of this year.
He also believes that effective local authority reform will require a manager with political experience, not some "random celebrity" mayor as proposed recently by Environment Minister John Gormley.
Dublin Chamber’s business members are seeking a reduction in their annual €650m rates bill. They want to merge certain services and to reduce hidden costs in the €2.5bn annual budget of Dublin’s four local authorities, which employ 10,000 people.
As Peter Brennan explains: "We want the Taoiseach to show his support for a Dublin mayor with wide-ranging powers and authority. This will redress the damage done to the planned office by proposals for celebrity candidates.
"Businesses pay some €650m, a full third of the day-to-day costs of the four Dublin local authorities by way of commercial rates – much more if waste, water and other charges are added. This is an unfair burden on businesses to subsidise local authority inefficiencies. This is no longer sustainable.
"The recommendations of the Local Authority Efficiency Review Group must identify and eliminate €170m of waste in expenditure and work practices in the delivery of programmes. Equally, we need fewer, but full-time, elected councillors to serve the needs of citizens and rate payers.
"There is scope to provide better services. For example, if you have 20 debt collection operations across the four local authorities, then you outsource it to one service. That is how you can achieve efficiencies.
"This is not about cutting jobs. The expanded mayor’s office may even require additional roles if run properly. In most other European countries, the mayor’s office has stronger powers, and the extra capital would probably mean extra jobs. This would require some restructuring, which is exactly what is happening everywhere else in the economy."
Dublin Chamber estimates that a newly empowered mayor could merge functions and achieve a 10% saving across the four Dublin City, Dun Laoghaire/Rathdown, Fingal and South Dublin local authorities. Such umbrella powers are expected to be covered by the mayoral legislation.
The Financial Times reports that the UK should wait until its economy has stabilised before moving to cut spending, says the independent National Institute of Economic and Social Research.
“What we should do is to have a fiscal expansion now and a fiscal contraction in the future,” said Ray Barrell, economist at the institute, who on Tuesday presented the body’s quarterly economic forecast.
“There is no reason for tightening fiscal policy now. People are worrying about long-term debt problems when they should be worried about short-term output problems.”
The institute’s forecast says its caution is not because Britain’s fiscal woes are not severe; indeed, it is forecasting that public sector net borrowing will rise from 2.3 per cent of gross domestic product in 2007-08 to 12 per cent of GDP in 2010-11. But even if public finances were tightened in line with institute assumptions, which include a 1.5 per cent fall in inflation-adjusted wages for the public sector, borrowing would still be almost £114bn in 2013-14, 6.8 per cent of GDP.
Public finances are un-likely to be rescued by strong growth. The institute is forecasting the economy will grow by a very modest 1.2 per cent in 2011 and by 2 per cent over the next two years. It is also forecasting that the surge in inflation, which it believes will rise comfortably above 3 per cent in the first quarter, is likely to be temporary, falling to an average of 1.7 per cent, below the Bank of England’s medium-term target, through 2011.
It expects savings rates to continue to rise from the 8.6 per cent of disposable income seen in the third quarter of 2009, with growth coming from rising exports spurred by a weaker pound and by domestic companies rebuilding badly depleted inventories.
The institute believes the unemployment rate has not yet peaked, contrary to the view of many private sector forecasts, which have pointed to recent stability in the labour market. The institute says it is likely to rise further with the number of people out of work peaking at 2.9m, or 9.2 per cent, by 2011. It says that when real wages and hours worked are taken into consideration, the labour market has been much weaker than the headline figures show; wages, adjusted for inflation, have fallen while full-time jobs are being lost and part-time employment rises.
Given the sharp fall in output and the adjustments to wages and hours worked, the jobs market has actually performed slightly worse than expected and slightly worse than other G7 countries, according to the institute.
Separately, Mr Barrell noted the “credit easing” undertaken by the US Federal Reserve and the Bank of Canada, in which the central banks bought private sector assets, appeared to have done more to boost demand in those nations than the Bank of England’s quantitative easing programme, under which it purchased almost entirely gilts. Direct intervention in UK credit markets could have boosted output by 0.66 per cent.
“The Bank’s decision not to undertake credit easing was a mistake,” Mr Barrell said. “There are many excuses for not intervening directly [in credit markets]. But they are excuses.”
The FT also reports that US lawmakers are seeking to expand the reach of anti-money laundering regulations after a Senate investigation found that hundreds of millions of dollars in suspect foreign funds have been able to land in the US.
The funds, from allegedly corrupt foreign officials, have entered the US with the help of American lawyers, lobbyists, bankers and real estate agents, according to the inquiry.
Carl Levin, the Democratic senator from Michigan who previously spearheaded investigations into Riggs Bank and UBS, said that while US banks had become more vigilant, legal loopholes were allowing other sectors to facilitate the flow of “dirty money” into the country.
A Senate report to be released on Thursday details how foreign officials from Equatorial Guinea, Gabon, Nigeria and Angola – some of whom are under investigation in the US – allegedly took advantage of legal gaps, poor due diligence and inadequate controls to move funds from shell companies and bank accounts in London and elsewhere into the US.
Mr Levin plans a renewed effort to close loopholes with legislation implementing recommendations in a recent World Bank study that would force banks to strengthen controls on accounts held by current or former political officials.
In a move likely to come under criticism, Mr Levin is also pushing the US Treasury to issue an anti-money laundering rule that would require banks to obtain certification from attorneys that open accounts with them on behalf of their clients.
The certification would state that the bank would not be used by the law office to circumvent money laundering controls and also require enhanced monitoring of such accounts.
Another fix Mr Levin is pushing would require the US Treasury Department to revoke exemptions it granted real estate and escrow agents in the Patriot Act. Reversing the exemptions would force individuals handling real estate closings and escrow agents selling cars and aircraft from having money laundering programmes and safeguards in place and would force them to report suspicious activity.
One case investigated by the Senate involves the late Omar Bongo, who was president of Gabon until his death last year. The report details how Mr Bongo, the subject of an earlier congressional investigation who has been mentioned in connection to corruption complaints in France, used a US lobbyist, Jeffrey Birrell, to purchase 6 amoured vehicles from Saudi Arabia for his own purposes. As part of the transaction, funds were wired from Gabon to bank accounts held in the name of the Grace Group, Mr Birrell’s corporation. An attorney for Mr Birrell said “every transaction was transparent and Mr Birrell had received government approvals for the deals.” He said Mr Birrell would appear at the Congressional hearing on Thursday but declined to comment when asked of his client would refuse to testify in order not to incriminate himself.
In one case, the report alleges Citibank was so concerned about corruption involving the then head of the Angolan Central Bank that after two attempts to transfer $50m in government funds to US private accounts were blocked, the bank in 2003 closed all accounts it held for Angolan officials and shut its office there.
In contrast, congressional investigators say HSBC “may be providing the [Angolan] Central Bank with offshore accounts in the Bahamas” and continued to provide banking services to the bank in Angola and London. HSBC declined to comment on the allegations but said it “takes compliance matters very seriously” and its record demonstrated “commitment to vigorous enforcement”.
The New York Times reports that the Prius, a centerpiece of Japan’s cutting-edge technology, fell victim to Toyota’s widening quality crisis on Wednesday after Japanese authorities told the automaker to investigate reports of faulty brakes on the gas-electric hybrid.
Slow-moving brakes on the car may have led to a collision last July, just months after the third-generation Prius went on sale in Japan, the country’s Transport Ministry warned Wednesday. At least 77 more cases of possible brake malfunctions have been reported in Japan since the newest model went on sale in May.
The company had not yet decided about a recall, but a spokeswoman, Ririko Takeuchi, said a defect with the brakes could not be ruled out.
Concerns over the Prius’s safety threatens to undermine Toyota’s reputation even in its home market, where confidence in the carmaker has appeared watertight despite a worldwide recall of other models because of sticky gas pedals and unintended acceleration.
The difficulties with brakes on the hybrid Prius could deal a second blow to the automaker’s reputation for quality. Toyota executives must now confront complaints that seem tailor-made for late-night comedians — some cars that keep accelerating against the driver’s will and others that fail to stop promptly when the driver hits the brakes.
“There couldn’t have been a worse timing for Toyota,”said Koji Endo, analyst at the research agency, Advanced Research Japan.
The Prius is one of the world’s best-known cars and the centerpiece of Toyota’s campaign to portray itself as more environmentally aware and progressive than its rivals. Toyota had promoted the cutting-edge design of the Prius brakes as a feature that gives the car a technological edge and better mileage.
Faced with the shutdown of more than half its sales in the United States because of a recall of cars with faulty gas pedals in several Toyota models, Toyota embraced the Prius even more tightly this week, making it the focus of the company’s advertising.
But on Wednesday, Japan’s Transport Ministry said it had told Toyota to investigate 14 reports of momentary brake failure since the car went on sale in May.
Drivers complained that the brakes on the newest Prius momentarily stopped working at low speeds, especially on slippery surfaces, said Kenji Sato, a Transport Ministry official. In one incident in July 2009, a Prius crashed head-on into another vehicle at an intersection, hurting two people in that car.
In the United States, the National Highway Traffic Safety Administration has logged at least 136 complaints about the brakes on the 2010 Prius. Many are from drivers who say the vehicle surged forward or temporarily lost braking after driving over a pothole or other uneven surface, and many say it is a recurring problem.
Four cases involved a crash, and two of those resulted in injuries, according to the safety agency’s complaint database.
Ms. Takeuchi stressed that the newest Prius model was fitted with an overhauled regenerative brake system different from the ones used in previous models, which had not caused any complaints.
“We are examining any complaints that we hear through our dealers, one by one,” said Shinichi Sasaki, an executive at Toyota in charge of quality. “Only after that can we get back to our customers on possible improvement.”
Experts say a possible problem with the regenerative brakes in the Prius raises a conundrum not just for Toyota but for the entire industry. It is also bad news for environmental advocates who considered the technology one way to help improve fuel economy and reduce the contribution of automobiles to global warming.
Regenerative braking is simple in theory but complicated in practice. The energy of most cars’ momentum is wasted during braking, as brake pads exert friction against rotors on the wheels and heat up. The theory of regenerative braking is that the car’s momentum is partly used to recharge a car battery.
This helps to slow the car while storing power that can be used to help the car regain speed later. John German, a semi-retired auto engineer and an expert on environmental engine technologies, said that adding regenerative braking improves a car’s gas mileage while driving in a congested city by at least 10 percent.
Practically all hybrid cars have regenerative braking.
“The greater benefits occur if there are frequent braking events, as you find in congested city driving,” said Danilo J. Santini, an urban systems engineer at Argonne National Laboratory in Argonne, Ill.
Some early hybrids, like the Honda Insight, added regenerative braking to conventional brake pads for extra force in slowing a car. But the Prius and other hybrids increasingly rely on complex electronics to combine the regenerative braking with brake pads, so that battery recharging absorbs as much energy as possible.
Mr. German, who is now the program director at the International Council on Clean Transportation, an environmental group, said that possible problems with the brakes on the Prius might have nothing to do with the electronics system and, might, in fact, be related to the conventional brakes.
If any problem does surface on the Prius, it could prove troublesome as Toyota tries to rebut claims that electronics difficulties, and not flaws in gas pedals, are behind incidents of sudden acceleration in Toyota and Lexus cars.
Meanwhile, Japanese regulators have been stepping up their vigilance after long being known for a passive role in identifying possible auto defects. Auto safety is overseen by the Transport Ministry, and its recall division solicits reports of possible defects from the public and posts them on a Web site.
A catalyst for the government’s expanded role was a scandal in 2000 involving the cover-up of a string of defects by Mitsubishi Motors, which almost drove the automaker out of business. The number of cars affected by recalls in Japan have surged since then, jumping to 5.07 million in 2008 from 680,216 in 1998.
The ministry’s recall unit stressed, however, that its request to investigate the Prius brakes was routine. The unit handles about 5,000 complaints a year.
“The government intends to get involved to examine whether a recall will become necessary or not,” Japan’s transport minister, Seiji Maehara, said .
The NYT also reports that voice-mail boxes inside Goldman Sachs lit up on Jan. 21 with an unusual message from the bank’s chief executive — a bit of Wall Street speak that sounded like the makings of a book on Zen and the Art of Money-Making.
“In a year that proved to have no shortage of story lines, I believe very strongly that performance is the ultimate narrative,” the chief, Lloyd C. Blankfein, said in the companywide message. He then celebrated the bank’s record profits in 2009 and discussed its plans to pay bonuses to its employees.
Left unanswered now, as then, is the question that all of Wall Street has been chewing on for months: How much will Mr. Blankfein be paid for his remarkable — and controversial — success in running Goldman?
Anxious executives at rival banks are awaiting the news with a mixture of envy and alarm. Guesses range from nothing to $100 million. Whatever the final figure is — high, low, or somewhere in between — it will set a new benchmark for pay throughout the industry. Goldman Sachs insisted on Wednesday that no decision had been made.
Goldman employees offered various interpretations of Mr. Blankfein’s voice-mail message, one of dozens that he has left since becoming chief in 2006. Many agreed on one point, however: The message was somehow linked to the uproar in Washington and elsewhere across the country over resurgent profits and pay at big banks like Goldman.
Some heard in the message a call to keep quiet about the many billions of dollars in bonuses that Goldman is paying. Others said Mr. Blankfein seemed to be suggesting that Goldman employees, rather than policy makers or the news media, would write their success story by doing what Goldman does best: make money.
Lucas van Praag, a spokesman for Goldman, said everybody got the message, which was that“performance speaks for itself.”
Many other big banks disclosed the compensation of their top executives in recent weeks, and Goldman was widely expected to do the same by now. The delay has spawned a number of reports about what Goldman will do. The Times of London, for instance, reported this week that Mr. Blankfein might receive a mind-boggling $100 million, a figure that would eclipse his previous record of $68 million in 2007. He took no bonus in 2008.
“There is speculation, and then there is stupidity,” Mr. van Praag said. “This speculation transcends the simply stupid and takes it to an entirely new level.”
Even so, Goldman is undoubtedly making some careful political and business calculations. The bank also may be biding its time and waiting for an opportune public relations moment to break the news.
Nearly everyone on Wall Street focuses on the Number, the annual bonus that makes up the vast majority of compensation for bankers and traders. But this year, Mr. Blankfein must also consider what one public relations specialist called the Gag Number — how much he can be paid without unleashing another round of bonus-bashing in Washington.
That limit is uncertain. What is sure is that the politics of pay are as heated as ever. Two Democratic senators, Barbara Boxer of California, and Jim Webb of Virginia, plan to propose legislation on Thursday that would tax bonuses for top executives at companies that received billions of bailout dollars during the financial crisis. Like most big banks, Goldman paid back the money, with interest.
Who decides Mr. Blankfein’s pay? The answer may come as a bit of a surprise. Goldman’s compensation committee comprises 10 outsiders. Among them are Ruth J. Simmons, the president of Brown University; the billionaire steel magnate Lakshmi N. Mittal; and James A. Johnson, the Washington insider and former chief executive of Fannie Mae, who was forced to resign as head of the vice presidential vetting committee for Barack Obama in response to a variety of accusations about corporate missteps. None of those three could be reached for comment on Wednesday.
Whatever the size of Mr. Blankfein’s bonus, it will come in the form of long-term stock, rather than cash. Goldman, in a nod to public opinion, has already announced that he and 29 senior executives would forgo cash payments.
Once the compensation committee decides how much stock Mr. Blankfein and those executives should receive and at what price, and the stock is awarded, Goldman has 48 hours to file a Form 4 with the Securities and Exchange Commission. Over the last week or so, people up and down Wall Street have been keenly watching the S.E.C. Web site for Mr. Blankfein’s filing.
Goldman, meanwhile, has quietly told its thousands of other employees what they might expect for their bonuses. Other Wall Street chiefs have revealed their paydays. Morgan Stanley, for instance, recently announced that its new chief executive, James P. Gorman, was getting about $11 million or $12 million. But others, like Jamie Dimon of JPMorgan Chase, who is expected to be paid $15 million to $20 million, appear to be waiting for Mr. Blankfein’s announcement — and the reaction to it — before announcing their own bonuses.
