Not Yours To Sell

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Logos of Nama and Bank of Ireland

You may recall the Dáil debate on Wednesday in which Nama was discussed in detail.

During it, Social Democrat TD Catherine Murphy spoke about Bank of Ireland in respect of Nama.

She questioned the legality of Nama selling assets it obtained from Bank of Ireland, to entities such as Cerberus, when – according to financial consultants she has spoken with – the assets were owned by the Irish Central Bank-European Central Bank, and not the Bank of Ireland.

Reading part of a document that she obtained, into the Dáil record, Ms Murphy said:

“It appears that Bank of Ireland has delayed the recognition of losses with the financial position of Bank of Ireland being portrayed incorrectly when the bank drew down emergency funding from the Irish Central Bank-ECB.

“In an effort to delay the recognition of losses, Bank of Ireland relied on the International Accountancy Standards Board, IASB, rules. The particular rules in question, IAS 39 and IFRS 9, only apply to published accounts.

“However, IASB is a private entity and company law supersedes IASB. In 2010, the then governor of the Irish Central Bank, Patrick Honohan, raised concerns that Irish banks were delaying the recognition of losses, and the problems it was causing from a regulatory perspective.

“In addition, it appears that the financial position of Bank of Ireland was not portrayed correctly in accordance with the Chartered Accountants Regulatory Board, CARB, when the bank drew down its funds from the Irish Central Bank-ECB.

“NAMA claimed to have acquired approximately €10 billion in assets from Bank of Ireland in 2010. Some of these assets were sold by NAMA to Cerberus, but Bank of Ireland appears to have portrayed ownership of these assets when the assets were, in fact, owned by the Irish Central Bank-ECB by virtue of the aforementioned company law rules.

“In the Bank of Ireland’s interim accounts 2011, page 100, it states that the ownership of the assets would be de-recognised when substantially all the risk and rewards of the ownership have been transferred to NAMA. This would only occur when the ownership of beneficial interests was legally transferred to NAMA.

“As such, the situation is that NAMA stated it had acquired assets from Bank of Ireland when according to research and company law they were not Bank of Ireland’s to sell.”

Readers will note that Ms Murphy raised similar concerns at a meeting of the Public Accounts Committee on January 19 and also raised the matter briefly on TV3’s Tonight with Vincent Browne on Wednesday evening.

In addition, also in the Dáil on Wednesday, Independents 4 Change TD Mick Wallace spoke about a financial consultant Cormac Burke who has been working with the Namaleaks team.

Mr Wallace said:

“Cormac Butler has also been making the point that when Wilbur Ross  – Donald Trump’s secretary of congress nominee – purchased Bank of Ireland shares in 2011 and then flipped them in 2014, for a profit of €477million, he did so with the advantage of having access to the financial position of the bank which was not in the public domain, information which was not available to smaller shareholders.

I’d like the minister to confirm or deny that his, that his officials are now aware that the activities of Wilbur Ross and his sale of Bank of Ireland shares is the subject of an investigation in the US. “

Further to this…

Saoirse McGarrigle writes:

Two financial experts Ed Heaphy and Cormac Butler have been analysing the banking crisis for the past eight years.

They claim that Bank of Ireland deliberately hid the extent of massive losses for five years because, if it failed, their assets would automatically be taken over by the European Central Bank (ECB).

They also claim the ECB itself was aware of how dangerously close Bank of Ireland was to insolvency – where a bank has suffered huge losses and has not enough assets to meet its liabilities – but continued bailing it out.

It means that Bank of Ireland’s bad debts should never have been transferred to Nama in the first place.

Mr Heaphy said: “When a bank is insolvent the ECB automatically assumes control of its assets. The Bank of Ireland was not the true owners of the assets and therefore it should not have transferred them to NAMA.”

Mr Butler said: “A bank automatically becomes insolvent if it hides substantial losses because creditors will refuse to provide funding to banks that fail to keep proper books of accounts.

“This forces the bank to sell assets at distressed prices.

“Bank of Ireland uses mortgages to give to the Central Bank as collateral. Some of the collateral had fallen substantially in value, but Bank of Ireland never disclosed these significant losses.

“The value of the mortgages used as collateral by the Bank of Ireland fell for two reasons. Customers pledged their property as security for the mortgage and that fell in value. Also customers lost the ability to repay because people had lost their jobs.

“This is in breach of the Companies Act 1990 – the failure of banks to recognise losses from the mortgages falling in value is a breach of company law because it is difficult to see if the bank is solvent. They were insolvent but they weren’t disclosing it.”

Mr Heaphy added: “They [BOI] admitted in the Banking Inquiry that they exploited a supposed loophole in the accounting standards which apparently allowed them to hide their losses.

“In fact, the law requires them to write down the value of the mortgages, but they thought that they didn’t have to. It’s their ignorance of the law. The bank was no longer the true owners of the assets, the ECB should not have transferred assets to NAMA.

“But if the ECB had confirmed they owned the assets, it would be admitting Bank of Ireland was insolvent.”

Mr Butler added: “If they (ECB) admit the insolvency then they wouldn’t get their money back. The ECB, like any other creditor, is not allowed to take back loans it advanced to an insolvent bank.”

“In such cases, the bank must be liquidated with broadly all creditors treated equally. By keeping quiet about the commercial bank’s insolvency the ECB was able to transfer its losses to the Irish government, which is potentially illegal.”

Auditors Price Waterhouse Cooper never disclosed that the bank was either insolvent or very close to it.

On October 15, 2010, the then ECB president Jean-Claude Trichet threatened to withdraw extra funding because of fears that the Irish banks were not ‘financially sound’.

His solution was for the Irish government to inject fresh funds into the bank so that he could withdraw illegally the loans he advanced.

Hedge funds bought Bank of Ireland bonds at distressed prices and said that they wanted the 100% price back.

Mr Butler added: “The Government said ‘no they must take responsibility for some of the losses’, but the hedge funds said because Bank of Ireland has not admitted to the losses, we don’t have to take any losses.

“The hedge fund should have taken the losses, but the Government faced legal challenges and therefore decided not to burn the bondholders.

“Bank of Ireland had a lot of losses built up which were hidden therefore the hedge fund claimed that Bank of Ireland was solvent.”

Mr Heaphy added: “The Irish Government paid dearly for its failure to admit that some losses were hidden.

“It left the hedge funds with an opportunity to profit at the expense of the Irish taxpayer.”

Saoirse McGarrigle is a journalist with the Irish Daily Mirror

30 thoughts on “Not Yours To Sell

    1. Andy

      According to two Financial Advisers (one of whom was a builder from 14 years until his company was liquidated in 2010). This is Reggie Middleton level conspiracy theory.

      What they seem to be suggesting is that because BOI was insolvent (in their opinion) the ECB/Irish Central Bank should’ve enforced on their collateral under the ELA terms.

      However, what they’re saying is rubbish. Insolvent is formally an accounting definition. IAS 39 is also an accounting definition/rule. IAS 39 (effectively the inability to book general provisions for expected future defaults) was problematic and was heavily discussed in the Banking Inquiry – it’s appropriateness for use was questioned by all actors (Bankers, accountants, regulators & it is being changed as a result).

      None of the Banks were actually technically insolvent – because the govt pumped in equity to support them and stop them going insolvent – and therefor the ECB/NCB couldn’t take the collateral if they wanted to.

      Another thing these guys have neglected to note is that, just cause a lender has collateral doesn’t mean they’ll enforce on that collateral in the event of a default (in this case a hypothetical insolvency event). How many people in Ireland with mortgage arrears or people with business loan arrears ended up with restructured loans rather than their banks enforcing on the collateral? The ECB would do same, they’d go to the Irish govt & say, “Poor little Leprechauns, Bank A is insolvent, put in XX billion to correct this or we’ll be forced to take control of the assets” & the govt would dutifully obliged.

      Furthermore, ELA is secured on some assets not all assets.

      Anyway, I’m sure these guys are actually great and they’ll magic back the money the govt put into the banks.

      1. cb

        This comment on IAS 39 is flawed.
        The ECB defines ‘Event of default is defined as something which may threaten the performance by the Counterparty of its obligations…” The concept of ‘technically insolvent’ is wrong. Even if the comments above on IAS 39 are correct, Bank of Ireland’s performance to repay loans was ‘threatened’, principally because it overvalued assets and therefore misled creditors, shareholders and regulators.
        Furthermore the ECB doesn’t have to ‘enforce collateral’ to control the collateral.

        1. Andy

          Rubbish.

          That’s waffley wording for a MAC clause which are never relied upon or upheld. There needs to be a breach of a set covenant for remedial action to be taken.

          And of course the ECB (actually the NCB who operates ELA facilities on behalf of the ECB system) needs to enforce on collateral to control it.

      2. Bill Coggins

        The bank inquiry failed to mention that the ECB automatically takes control over a bank’s collateral if there is evidence that the bank cannot repay the money to the ECB. This is why the famous Trichet letters put pressure on Brian Lenihan to pump money into the banks so that he could recover his.
        Once the ECB takes control of the collateral it is only the ECB and not the commercial banks that can enforce the assets. Nama cannot enforce assets it doesn’t own. Therefore the ECB has the locus standi.

        1. Andy

          Bill,
          You’re talking out of your hat. When did the ECB ever take control of Irish bank collateral?
          Andy

      3. Fact Checker

        The whole post displays an ignorance of how central banks provide emergency liquidity. The ECB never ‘owned’ the BoI assets, they were pledged to the ECB as collateral in the event that BoI did not return the liquidity advanced to it. BoI always DID return the liquidity due in part to the large chunk of state funds it received which ensured its solvency.

        This line (““In such cases, the bank must be liquidated with broadly all creditors treated equally.”)
        is also utter tripe. In the event of any bank insolvency there is a clear and UNEQUAL hierarchy of creditors, running roughly like this: equity holders, CoCo holders, junior bondholders, senior bondholders, unguarantted depositors, guaranteed depositors.

        1. cb

          This comment misses the point. BOI became insolvent BEFORE the government injected the money in. It follows that the ECB suffered a loss (the difference between the collateral value and the amount advanced) on 30 September. According to a PWC report, http://www.finance.gov.ie/sites/default/files/Anglopwc.pdf however all Irish banks were solvent on 30 September 2008 so investors (including the Irish government) were misled when they bailed out the banks and the ECB. The ECB managed to pass on their losses to the Irish government by forcing the government to inject money into the Irish banks (Trichet letters). The term ‘broadly treating creditors equally’ simply means that all creditors suffer losses (though subject to the usual hierarchy). In summary, if you lend money to an insolvent bank and accept collateral, the collateral remains yours until the bank can fund the repayment, through legitimate means.

          1. Anne

            +1

            Nama – the world’s biggest property agency..thanks to you and me. The state agency has a mandate. And it’s profit.. to recoupe the losses to pay back debt that was never ours. Aka.Asset stripping.

            It’s socialism for the rich, when it suits. All going on in the middle of a housing crisis..just an unfortunate little inconvenience for the state in it’s asset stripping mandate. Noonan is a sociopath and an idiot.

        2. cb

          Both Frank Daly (as a former chairman of Anglo’s audit committee) should have known that Irish banks were insolvent in 2008 and Brendan McDonagh stated at the bank inquiry in 2015
          “I think the evidence has been that, from what’s in the public domain … is that, there was a view they had a, the banks had a liquidity problem when in fact they had a solvency problem. So I think the market made its own assessment subsequently that the banks weren’t solvent.”

          See also http://www.lapfforum.org/Publications/latest-research/files/LAPFF_Post_Mortem_report.pdf/view
          and http://www.pensions-insight.co.uk/rbs-deliberately-doubled-losses-to-2bn-in-alice-in-wonderland-accounting/1467197.article

          1. Anne

            + 1

            There’s taped conversations between individuals at one of the banks about it Fact Checker. Where have you been?

            Nama has no authority to sell on assets that should not have been transferred to it.

            This wholesale taxpayer funded interference in creating the world’s biggest property portfolio, sell onto investors at up to 90% discounts and charging zero tax, needs to stop.

            Noonan is a sociopath.

    2. Donal

      That’s my reading, and the result is a debt to us, rather than a loss for a hedge fund.
      All with the complicity of the government and the ECB, I think?

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