I welcome Mr. Peter Mathews back to the committee. He will make some opening remarks which will be followed by a question and answer session. I draw attention to the fact that, by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. If they are directed by the committee to cease giving evidence in relation to a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official by name or in such a way as to make him or her identifiable. I now ask Mr. Mathews to continue with his observations.
Banking Crisis: Discussion with Mr. Peter Mathews
Mr. Peter Mathews
I am delighted and thank the Chairman and members of the joint committee for giving me this opportunity. This is my third attempt to present the central and cogent core of my ideas about NAMA and the banking crisis. I circulated to members prior to my first presentation on 5 May four pages of core proposals to deal with the banking crisis.
In a nutshell, we have gone down the wrong road, but we can come back onto the right one — where we recapitalise the three viable banks: Bank of Ireland, AIB and the EBS. They are bruised and battered, undercapitalised and badly directed and managed, but they can be reconstituted and rebuilt. The two other banks — Irish Nationwide Building Society and Anglo Irish Bank — are beyond repair and should be closed.
To recapitalise the three viable banks, what, roughly, what would be the minimum figure involved? The answer is €17.5 billion. I will not go into the detailed portfolio constitution of this figure, but it can be shown, on an overview basis by experts with experience in these matters, that AIB needs €10 billion, Bank of Ireland, €6.5 billion and the EBS, €1 billion. Members can ask me questions later, but these are the figures. The question arises: how could one provide that amount of capital? The answer is that the State could do the majority and the bond holders in the three institutions could provide the balance.
We now switch to Anglo Irish Bank and the Irish Nationwide Building Society which were appallingly run from a banking point of view. Their assets are less than 50% recoverable. It can be shown by expert analysis and demonstration that the correct approach — members will have seen this in the single page submission I presented — is that Anglo Irish Bank should be closed immediately. It would take four or five years to carry this out, but the decision should be made immediately. That would save the taxpayers not less than €17 billion.
I will take matters chronologically. After Mr. Regling and Mr. Watson had produced their report on the banking crisis, they spoke to the joint committee and answered members' questions. It is interesting to note that early in the executive summary of their report they made a point which was not accurate. They said the people had a preponderance to invest in property assets and that Ireland had never suffered a property bubble crisis. That was incorrect. We had one in the 1980s. I know this only too well, as do many of my colleagues who had to carry out the loan recoveries, work-outs and realisations work. Mr. Regling and Mr. Watson made their presentation. I was disappointed when, outside the terms of reference of the report, they were asked what progress, if any, had been made after the announcement of the Government guarantee and they said — I suppose sportingly and generously in a wider context — that some good work seemed to have been done and some progress made. That received magnified coverage in the media and gave a false impression that they were endorsing what had happened since the crisis day. They were not, because it was not within their brief to do that work or make these comments.
The next meeting dealt with Professor Honohan's report, when he presented to the committee and answered questions. His conclusions are put succinctly on two pages. Most tellingly, he said, with regard to the blanket guarantee given, that, even without the benefit of hindsight, the scope and style of the guarantee were inappropriate and that it should not have been brought about in the way it had been. It did not require hindsight to know that. Merrill Lynch, as members know from its testimony at the Committee of Public Accounts, presented a range of scenarios and alternatives, but did not proactively underwrite any recommendation. Rather, it said that there were more dangers in one approach rather than the other. This brings us back to the fact that if Professor Honohan, having done his excellent work, was able to conclude that the guarantee should not have been provided in the way it was, that is a very serious matter.
We have dealt with what can and should be done — the recapitalisation of the banks — and whether that is within the scope of a successful task for the country. We know what should be done with Anglo Irish Bank and Irish Nationwide. We are better able to understand how things happened the way they did and why they should not have happened the way they did — I refer to the guarantee. Where we are now, almost two years after the guarantee, is a very messy place. I know that the banks and NAMA have made no progress in resolving any of the bad loans.
I emphasise again that many people do not understand the nature of the problem that existed, the size of the problem or the task ahead. The problem was that in four years, some €200 billion of excess lending had occurred and assets were created that will never be collected. That is the problem. It is not a question of looking at the liabilities and capital sides of the individual balance sheets of banks, but of looking at the overall asset side — at what is collectable. It is like when a business buys in stock, but buys badly and cannot sell it. There is no point in trying to shift it into a warehouse — NAMA — and pretending that NAMA can deal with it any better than the original purchasers. Not so. It is stupid for the banks to house NAMA divisions that do the actual operational work — although they are not doing it yet because it is all in a state of suspense and paralysis because of the lack of clarity on what should have and could not have been clearer — of transfers and valuation transfers of these loans.
The Americans got it right at the outset. They had a troubled asset relief programme which got approval for €700 billion of State funds. The main thrust of that programme when first mooted was that there would be a toxic asset purchase programme — a NAMA. They looked rigorously and professionally at the situation and saw, within weeks, that such a programme could not work and was not fit for purpose. This story is in Hank Paulson's, the former US Treasury Secretary's, book. I refer members to his book, On the Brink by Henry M. Paulson. However, our Government, because a preferred close adviser had mooted the NAMA project, dug its heels in and continued along the path of “there are no alternatives”, which was a lie. I say that advisedly. This became increasingly apparent, as the information provided by the banks became less and less reliable as time went by. Even the day before yesterday, when tranche 2 was announced, we saw again that the valuations were all wrong.
The Government persisted that there was only one solution and that no alternatives had been offered, which was a lie. I offered an alternative solution in print in a 10-page document which I have here. All the Members of both Houses got a copy of my alternative in early October. That document showed an outline of an approach that should have been developed and discussed, but was not. The shutters came down and I was told by the Department that it was too busy to discuss anything else. What a shame. Here we are a year later and there has been no progress and no action plan put in place. All we have is a NAMA business plan that was a discreditable document.
I showed, and was supported by other experts with experience, that the NAMA business plan contained an €18 billion error in its first submission. That has come to pass. The recent NAMA business plan is a reshuffling and revision of figures and assumptions that bear no tenable relationship to reality. That is a shame for our country. It is a shame that the banks which can only stay open for business because of a State guarantee — which essentially involves all our households underwriting all the activities of the banks — remain outside the direct control of the people providing that guarantee. That is conceptually and totally absurd. We were led to believe — and on the Tuesday of the last week before Easter, Deputy Lenihan announced — that the Government would be stern, strict and tough with the banks and that the haircuts would be far greater than had originally been included in the NAMA legislation and that the NAMA business plan would be higher on the first tranche and so on and that the two major banks would be required to have capital of €7.4 billion and €3.65 billion by the end of the year. That fell short and is still not right. It is wrong. It is wrong also that the people are being held out and exposed with that sort of information and that sort of untruth.
I was away last week when the Committee of Public Accounts discussed the information that had been part of the decision making towards the guarantee. Deputy Morgan described it very succinctly and Deputy Noonan asked what was the information and advice on which the decision was taken. That was a very good question. We are poised in a situation where there is paralysis and lack of action, but where NAMA can and should be reversed — because these are only book entries. The people making the decisions can still make their decisions under the correct structure, namely, recapitalised banks temporarily owned by the State requiring accurate and full reporting quarterly about what they are doing in their ordinary business and in the business of loans recoveries, realisations and work-outs.
To recap, the legislation for NAMA was brought forward on a fraudulent basis. I did not mention yet that the International Monetary Fund, IMF, team had been here in March 2009, before the April budget in which NAMA was announced. The IMF team gave pointed advice to the Department and the Minister that a NAMA project, as being formulated at the time, would not increase liquidity and credit to businesses and households and that in its estimation, the loan losses at that point would rise to €35 billion. Only three or four weeks later, the Government brought forward the NAMA draft legislation on the basis that NAMA would clean up the banks' balance sheets and increase liquidity and credit for businesses and households by providing immediate liquidity. The Government further suggested by inference when it brought out its figures that loan losses would be €23 billion, which even within those figures would produce a profit. We know now that was absurd. It was so absurd in size and scale that in retrospect, it was a fraudulent basis for bringing the legislation through the Dáil, the Seanad and for the signature of President McAleese.
That was very wrong. I telephoned Áras an Uachtaráin before the Bill was signed and pleaded with Mr. Lochlann Quinn, an adviser to the President on economic and financial matters. I asked him to please not allow President McAleese sign that legislation because people do not understand the implications of the error of it in its fundamental design. The Americans saw that fundamental error design that it was not fit for purpose. It is wrong of any government, no matter——
Mr. Mathews, we need to go to questions and answers.
Mr. Peter Mathews
Yes, I think two more minutes should wrap it up.
The key points to remember are that NAMA is a fraud, that it cannot work and it can be reversed. The capitalisation of our main banks should be at a far greater level, immediately resulting in control by the State for a temporary period of maybe up to five years. This will allow the economy to recover through asset price and rental price corrections. Experts in many areas will support that view. Even today, as the committee members will know, John FitzGerald of the ESRI said it has now become apparent that the banks need to be stuffed with capital to do their job and they need to be nationalised. It is amazing that firms with international brand names, that were themselves going broke ten days before, were sought for advice. It is like asking somebody on a life-support machine for advice about one's own imminent demise. It is extraordinary. We have paid €7.3 million in fees. There were home-based, uncompromised experts who were not aligned to any parties, independent and truthful, who could do the analysis and who were told by the Department that it was too busy to discuss anything. That is an extraordinary, shameful situation.
As the McGill summer school sits today and for the rest of the week, talking about reform, the new Ireland and all the rest, we should look at our institutions. There must be a clean-out. When I say, clean out, we should ask all the existing board members of banks who were there prior to 2008, to please resign as it is the right thing to do. They did not understand their businesses. The same should apply to other areas of responsibility and regulation.
We can recapitalise our banks correctly, with €10 billion to AIB, €6.5 billion to Bank of Ireland and €1 billion to EBS. That would be the right action. We will get that money back. Anglo Irish Bank should be closed along with Irish Nationwide and this will save the State €17.5 billion as a minimum. I have all the figures and I can supply the details if required. Any member of the public can ask me for the figures and the details. These are independent and verifiable figures and they come from the best information available and the best experience that knows these markets.
It is not good enough that people say, "we are where we are" and NAMA continues. I disagree. It can be reversed. They are only book entries. There are only about 80 people working in NAMA. They can all join bank recoveries divisions under the correct structure and the correct capitalisation of the banks. We can save our country from a five or six-year demise of a torpor which has already occurred. There is a paralysis from the big loans to the small loans. I know this because I talk to the people who have borrowed.
We will move on to questions and answers now. I thank Mr. Mathews for his presentation.
I thank Mr. Mathews for this second part of his presentation to the committee. Whatever about the Department of Finance and the Minister, this committee has given Mr. Mathews a fair opportunity to air his fairly controversial views on mainstream thinking.
What is the best-case scenario in terms of wrapping up Anglo Irish Bank and how long would it take to achieve if the decision were made to wrap it up, including negotiation with bond-holders, and so on?
Mr. Peter Mathews
My experienced judgment in this — and I have talked to other people with experience and judgment — is that it would take four to five years. There are some work-out timescales to be considered. In terms of robust decision-making, robust negotiations which are open, honest and transparent, that is the timeframe needed. If there is a will, there is a way.
How much would it cost?
Mr. Peter Mathews
At a cost of €17 billion less than what is being proposed at the moment. To recap on the meeting of 16 June, Mr. Alan Dukes, the chairman, presented his report. It should have been Donal O'Connor. He was chairman and he had been on the board since June 2008 and he retired in June 2010 or handed over to Mr. Alan Dukes. With his experience from the accounting world and from positions he held in many areas, he should have presented that report——
Mr. Mathews should just respond to the questions asked.
Mr. Peter Mathews
Deputy Fahey asked me about Anglo Irish Bank and this is very relevant to Anglo Irish Bank. The chief executive, Mike Aynsley, admitted, albeit reluctantly, and this could have been admitted much earlier, that €22 billion of irrecoverable loan losses were embedded in Anglo. He is not right; the amount is €32 billion and I can prove that. I do not wish to clutter up the minds of members but it is €32 billion. I said it to Mike Aynsley in his office on the Monday following that presentation of the 16 June.
Will Mr. Mathews give a breakdown of the €32 billion?
Mr. Peter Mathews
The breakdown is very easy. There is a €72 billion loan book in Anglo Irish Bank. A total of €36 billion is being transferred into NAMA and it will have loan write-downs of not less than 55%. They have a remainder €36 billion, comprising €12 billion of what they say could be a residual rump of fairly good loans, "goodish" loans, so to speak, to form a bank with capital of €2.5 billion and the remaining €24 billion is not performing satisfactorily and would be wound down.
Any expert who knows the composition of that portfolio and the clients and businesses involved, as I and others do, would know that of that €72 billion loan book, the most that will be recovered is about €36 billion. That has to be used, deployed, to pay off customers' deposits, bank deposits that do not fall within the guarantee and then, if there is anything left over, to pay senior and junior bond-holders.
Another point raised at that meeting on 16 June was that Anglo Irish Bank had made a profit of €1.8 billion on what it called a liabilities management exercise, buying back bonds with a face value of €2.4 billion and using €600 million cash to buy them back. Therefore, the bank made a profit of €1.8 billion. Anybody with experience knows that the people who held those bonds and sold them back for €600 million, would regard themselves as having made a profit of €600 million because those bonds are effectively worthless. Anglo Irish Bank is so deep in deficit that it should be closed. There is no argument for keeping it open, no logical argument — and the same for Nationwide.
I have to agree with Mr. Mathews that there is no logical argument for keeping Anglo Irish Bank open. I do not think we have yet seen the bottom of the pit.
Mr. Peter Mathews
If we close it, then we will get to see it.
Eventually. I have to agree I would like to see a situation where all the board members should have to resign, including in AIB, Bank of Ireland, Irish Nationwide and of course, Anglo Irish Bank. The guarantee has been thrown far too widely to include both Anglo Irish Bank and Irish Nationwide, both of which are zombie institutions.
Can the tide or the situation be reversed? One could say it could be reversed if the will is there. There certainly does not seem to be the political will to reverse at present. I cannot see the Government going out of office in the immediate future. By the time the political changes take place, NAMA would have conducted all its business. Presumably it would have purchased all the portfolios and it would have been so deeply engaged in the work that there would be no going back.
Mr. Peter Mathews
There is an old business term, sale or return. This is a situation of a sale or return. It should be a case of get them back to the banks, capitalise the banks and direct the banks properly. It is not wasted money if we do it professionally. It will actually be a learning experience.
We have a problem in the sense that legislation on NAMA and the guarantees has been passed. The difficulty in that respect is that it is the law of the land. If NAMA purchases all of the portfolios, will it not recapitalise the institutions, in effect? We can argue about what it might pay for them. Perhaps it is paying too much already. I do not think anything can be gained from the recapitalisation of Anglo Irish Bank. I do not see it working as a functioning bank again. The recapitalisation of Bank of Ireland, AIB and the EBS will take place by the back door, in effect. The bonds will have been transferred to the banks, which will be able to encash them with the European Central Bank. Therefore, the banks will get cash into their hands and, in effect, be recapitalised. They will be in a position to do what Mr. Mathews is saying they should be able to do. I accept that it will have been an expensive exercise.
Mr. Peter Mathews
No.
It is a slower and more expensive way of going about it, but will the effect of it be the same?
Mr. Peter Mathews
No. The bonds that are issued to the banks by NAMA are not encashed at the ECB. Many people have a technical misunderstanding of the process. The bonds in the hands of the banks are assets that qualify as security or collateral for loans from the ECB. The banks will have to bring those bonds to the ECB, just as one would bring a watch to a pawnbroker. The bonds will be accepted as security for a loan from the ECB. There is nothing to require the banks to bring them to the ECB.
The loan can be transferred into cash. If they do that——
Mr. Peter Mathews
The loan is cash, at a price.
No, they get the bonds. They can then go to the ECB. They can come out with cash from the ECB.
Mr. Peter Mathews
No.
Is that not a fact?
Mr. Peter Mathews
If they wish, they can get a loan of approximately 80% of the face value of the bonds from the ECB. An interest rate of 0.5% above the ECB rate has to be paid on such a loan. That is what the banks will have to pay for the loans they will get after they offer the security of the bonds.
What else can they do with the bonds, other than go to the ECB? Even if what they come out with is a loan, it is cash nonetheless.
Mr. Peter Mathews
They can hold the bonds. I think the bonds pay an income of 1%. I ask not to be held to that figure. I have many figures in my head at present. It is the three-month EURIBOR. The banks get an income off the NAMA bonds.
Who do they get the income from?
Mr. Peter Mathews
The NAMA bonds carry an interest coupon.
Did they explain that?
Mr. Peter Mathews
Yes. It is simple.
They are Government bonds.
Mr. Peter Mathews
Deputy Fahey's response to a question he was asked by Myles Dungan yesterday indicates that he might not understand the funding arrangements.
Perhaps I do not.
Mr. Peter Mathews
He said:
I stand by what I said about NAMA from the very beginning. NAMA is being funded ... the bonds are being funded by the European Central Bank.
If the Deputy cares to read Mr. Karl Whelan's blog later today, it will be explained to him:
This is not at all true. The ECB has no direct relationship with NAMA at all. NAMA bonds can be used——
I never said that.
Mr. Peter Mathews
Deputy Fahey said that "the bonds are being funded by the European Central Bank".
The European Central Bank lends——
Mr. Peter Mathews
I ask the Deputy to allow me to continue with this.
I wish to explain.
Mr. Peter Mathews
This is a very helpful explanation.
Fine.
Mr. Peter Mathews
Mr. Whelan stated:
NAMA bonds can be used by the banks that have received them as collateral for loans from the ECB but that's it, that's the full extent of the ECB's involvement in relation to NAMA. Furthermore, AIB and BoI executives told the Oireachtas last year that they had no particular plans to use the bonds in this fashion.
That is why the IMF said in March 2009 it was highly unlikely there would ever be an improvement in liquidity and credit for businesses and households.
Here we go again.
I would like to be allowed to finish my questions.
I apologise.
I do not know if Mr. Mathews has any knowledge of what has been transferred to NAMA already, and what bonds have emanated as a result. Is he saying the banks could end up with no further recapitalisation, in effect, as a result of the bonds NAMA has given them in exchange for their portfolios?
Mr. Peter Mathews
Yes.
Does he know whether the existing transfers have resulted in any bonds being used as collateral for funding?
Mr. Peter Mathews
I know that the recapitalisation of the banks might only happen very indirectly — not even by the back door. It might happen as a sort of third level effect, rather than a direct effect, of any borrowing from the ECB using NAMA bonds as a collateral. It is important to remember what happens when the loan assets of the banks are priced for the purpose of allowing NAMA to buy loan assets at a discount. Every time a discount is crystallised, the bank has to replace that capital. It is being organised in the wrong way at the moment. They are saying, on the basis of their projections for their balance sheets at the end of the year, that it will be sufficient for AIB to have raised €7.4 billion and for Bank of Ireland to have raised €3.65 billion by the end of the year. The way in which AIB proposes to do this involves a mixture of a few things. It may sell all or part of its investments in a Polish bank, and in M&T Bank in the United States. There may be some share rights issues and there may be a placing. There are many maybes. I reiterate that when the loans are transferred to NAMA, the write-down of €7.4 billion will not be enough — it should be a minimum of €10 billion. That is the figure that needs to be replaced. It has been given a hesitant pencilled tick by Mr. Elderfield and Professor Honohan, who hope it will be all right and will result in an 8% capital cushion for the bank. I stress that this is not right. It falls short of what is required. That is why the eminent economist, Dr. John FitzGerald, who is not a financial accountant, said today that the banks need more capital and that is why they need to be nationalised.
The Government has been saying that all the time.
Mr. Peter Mathews
It cannot be said often enough.
Mr. Mathews is suggesting there could be an ongoing situation in which credit does not flow to small and medium sized enterprises. The main retail banks — Bank of Ireland and AIB — would not be sufficiently recapitalised to be able to allow credit to flow. That could be part of what we are experiencing at present.
Mr. Peter Mathews
Absolutely. The Deputy has put it perfectly.
They have already committed themselves to €12 billion over the next couple of years.
Before I ask my questions, I want to comment on the misunderstanding to which Mr. Mathews referred. NAMA is paying the banks for the toxic loans that are being transferred to it. Those payments are being made in the form of bonds which are being financed by the ECB at an interest rate of 1.5%, or being underwritten by the ECB.
Mr. Peter Mathews
No. The Deputy is incorrect.
I ask Mr. Mathews to let me finish. The interest rate is 1.5%. If the ECB was not underwriting these loans to the Government at a rate of 1.5%, we would not be able to transfer these loans to NAMA. That is my understanding.
Mr. Peter Mathews
It is wrong.
What is Mr. Mathews telling us?
Mr. Peter Mathews
It is very simple. The banks have toxic loans. These are loans that they will never recover. They have to be written down to a level that corresponds with what the banks think they might get back for them. That is the figure for which NAMA is buying them. NAMA is paying for them by means of the issue of Government-guaranteed bonds that pay a coupon above the three-month EURIBOR, which means the banks get income for them. With those bonds that produce income for the banks——
Where is the Government getting the money?
Mr. Peter Mathews
What does the Deputy mean? The Government just prints promissory notes. It will eventually get the money to pay them back from the recovery of the loans.
Is Mr. Mathews saying the ECB has nothing to do with this?
Mr. Peter Mathews
The ECB might have something to do with this. It has said the rate for getting loans will be just 0.5% above the ECB rate, if the banks use the bonds they get. According to what the Minister, Deputy Brian Lenihan, said to me on 6 November, the attraction is the availability of cheap ECB loans.
Is Mr. Mathews saying the ECB might have something to do with this?
Mr. Peter Mathews
The ECB will only have something to do with it if the banks go to it and say they would like a loan against the security of the bonds. If they do not go near the ECB, the ECB is saying to them that its window is open to give them loans on the agreed basis that the bonds are used as security for the loans. The ECB has made a commitment to give the loans but it is necessary for the banks to draw them down. If I am a banker and I tell Deputy Fahey that I will give him a stand-by credit on certain terms if he gives me security, if he comes to my bank and offers me security I will give him the loans.
Why would the banks not take money at 1.5%, which is a very low rate of interest? Why would they not use that money to start lending again, as the Government has required them to do to the tune of €12 billion over the next two years? Why would they not do that?
Mr. Peter Mathews
Because they might decide that if they borrow from the ECB at 1.5% currently, which could rise to 5.5%——
We all know that.
Mr. Peter Mathews
——but if they do use the money they might use it to pay back expensive deposits, which is not giving it to businesses.
They could use it to improve their overall capital position. Surely the main responsibility from now on for Bank of Ireland and AIB in terms of making a profit for themselves is to start lending money? Does it not make sense if they are able to borrow it from the ECB at 1.5% for them to give it out to customers at 3.5% or 4%?
Mr. Peter Mathews
I will give Deputy Fahey an example. If a bank is paying 3% on some expensive deposits and it can borrow from the ECB at 1.5%, would it not use the borrowing to pay back the deposits?
That is its business, as long as it can improve its capitalised situation. That is the whole point in NAMA, namely, to take the toxic loans that they cannot do anything with at the moment and reduce their value but at least to give them back some value.
Mr. Peter Mathews
People with experience and experts will tell one that——
Who, other than Mr. Mathews, claims to be an expert?
Mr. Peter Mathews
If Deputy Fahey would excuse me for a moment, in England RBS is 84% owned by the State. Lloyd's TSB is 43% or 44% owned by the State, depending on what stocks are bought back. Those two banks have got on with the job of recoveries, realisations and work-outs to a far greater degree on their loan portfolios than our banks because our country is in a state of suspense because of the uncertainty, doubt and mistrust surrounding NAMA. I said earlier that it was not fit for purpose. The Americans saw that in five weeks.
I will return to my questions. Mr. Mathews has clarified that what I said was correct.
Is there or will there be a secondary market in the bonds?
Mr. Peter Mathews
The honest answer is I do not know.
That would normally be the case with bonds.
Mr. Peter Mathews
Yes, it would, depending on whether there is an attractiveness in them. Markets price the attractiveness or otherwise of bonds. The important thing is that our country's crisis arises because we have created credit that can never be collected and we must reset the clock for the economy. That is asset price correction. Anything that gets in the transparent way of that recovery is unhelpful and patently wrong. That is what has happened.
I thank Mr. Mathews for his presentation. Bank interest rates are beginning to increase. That has begun with variable mortgage interest rates. Is there any justification for the banks doing that? Is it the case that because the banks are under-capitalised they must get the money from somewhere and they are trying to tap poor home owners?
Mr. Peter Mathews
Of course. What has happened is that because the State has given a blanket guarantee, which will have to remain until the banks are fully capitalised, they cannot open for business without the guarantee. If they are allowed to stand outside majority State ownership they will do everything to try to preserve that status quo. They will try to preserve their boards and management in order to stay outside State control. We should take control of the situation. Because we have given the guarantee we have de facto control. We should formalise it and make sure the banks do the job properly in terms of the collection of loans. The banks are doing the operational work anyway under the instruction of NAMA, which is a sort of dishonest cop-out. If we did the right thing by taking the banks over they would have the opportunity to earn their way back to liberty by good performance on loan recovery, realisation and work-outs.
If we had done the proper thing at the beginning and written down the loans towards the current level the banks would by recovering the loans create cash flow and liquidity faster as well as engaging the wheels of recovery for the economy. They have done the wrong thing on so many levels. The right approach of capitalising them, closing Anglo Irish Bank and the Irish Nationwide and putting proper direction and fully cleansed boards in place would allow the recovery to start, which would be self-motivating. People would be motivated by achievement against the re-setting of the clock.
In the opinion of Mr. Mathews if the banks were nationalised would the Minister for Finance have more control in terms of interest rates? Could he interfere in the market if there were full State control?
Mr. Peter Mathews
Yes.
Mortgage interest rates are being increased yet the ECB has not increased interest rates. The banks are not passing on any benefit. They are saying the cost of funds has increased.
Mr. Peter Mathews
This is an operational survival strategy by the banks.
Has the cost of funds on the markets increased for banks?
Mr. Peter Mathews
The cost of funds is not just one item; it is a layer of items including senior debt, junior debt and deposits. That is the cost of funds. The banks still rely heavily on the inter-bank market. The only reason the banks are in place is because of the State guarantee.
Is there any justification for the banks increasing interest rates currently?
Mr. Peter Mathews
There is not a justification, there is a logical explanation for why they are doing it, namely, that they need to try to buffer up operational reserves or prevent increases in losses by raising the margins. The important thing is to get the damaged loan assets collected, realised and recovered. That can happen with people who are experienced and expert under proper management and governance. What is missing is capital, good governance, good management and transparency. They are the missing ingredients. Depositors need to have transparency and trust in their institutions, which is not the case at present.
In Mr. Mathew's opinion, is the Minister not doing his job in allowing the banks to increase mortgage interest rates?
Mr. Peter Mathews
He is caught in an impossible situation created by him and the Government. I worked for 20 years in a semi-State bank, the Industrial Credit Corporation, then ICC Bank. That was a superb banking organisation that understood its business on both sides of its balance sheet and its customers requirements. The funding was done well, as was the lending. The maturities on both sides of the balance sheet were directed well. That was a semi-State organisation. There is nothing wrong with semi-State. That is what is needed in this country for the next five years. What is going on at the moment is a dishonest charade.
Will Mr. Mathews do a revised paper to bring everything up to date? Perhaps he would circulate it. We could meet him at a later date.
Mr. Peter Mathews
If the committee would like one in headline form I will be delighted to provide it. I can provide the bullet points of what I have just presented.
This is not really a question, it is more an observation. Mr. Mathews has referred to experts. The one thing the global financial debacle has shown is that there are no experts; there are only economists and academics with opinions.
Mr. Peter Mathews
But that is not the same——
I am sorry. It is clear that some people are convinced of their opinions. Messrs. Regling and Watson came before the committee with their report. They said there was very little good advice available. Even Professor Patrick Honohan indicated that the advice contrarians were late with their opinions.
Mr. Peter Mathews
That is not so.
I am sorry. I am just quoting what Professor Honohan said. When Mr. Mathews refers to experts, his remarks should be qualified. They are people with opinions who have training in this area. If we were listen to all the experts, I do not know where we would be. They have made a bags of it. Economists and financial experts such as the delegates have made a bags of it. Ultimately, they have not put their hands up.
Mr. Peter Mathews
The ones who——
That is not so much a question as an observation.
Mr. Peter Mathews
This is very important.
It was a statement. We will proceed to——
Mr. Peter Mathews
The experts who were listened to——
The experts made a bags of it.
We cannot have an argument.
They are people with opinions, not experts.
Mr. Peter Mathews
The ones who were listened to were wrong.
We must have factual statements.
Mr. Peter Mathews
I will give the Chairman factual statements.
Deputy Costello has a question.
I am not worried about experts one way or the other; I am only interested in whether one has something valuable to say. Mr. Mathews has much to say to us today that is of value.
The debate on the NAMA legislation, in which I was involved, went on all night. One of the main purposes, if not the main purpose, of the legislation, as stated therein and by the Minister, was that NAMA would get credit flowing in the economy.
That was said already.
We must not repeat statements time and again.
I want clarification on this because I was always of the view that one of the major functions, if not the major function, of NAMA was to create a flow of credit.
Mr. Peter Mathews
Deputy Costello is quite right; it was repeated to us ad nauseum.
It was said it would have the effect of recapitalisation.
Mr. Peter Mathews
That was the propaganda, the mantra.
No, it was not just the mantra but what the Minister wrote into the legislation. We asked about this but the Minister assured us the purpose was as stated. What Mr. Mathews is telling us today is that it may not be the purpose.
Mr. Peter Mathews
It is not a case of "may not be" in that it was not the case.
We are going over this time and again. The question has been answered.
This is extremely important.
Mr. Peter Mathews
These are facts.
The Deputy has already said that. He should ask another question.
I was always of the understanding that once NAMA would be in full flow——
The Deputy has said that.
——which is not yet the case, there would be a flow of credit to Irish businesses and recapitalisation of the banks. Is Mr. Mathews saying we could go right through the NAMA process without securing a flow of credit for Irish businesses because the banks will not be properly recapitalised?
Mr. Peter Mathews
That is an outcome that is very possible and quite probable. The IMF is not just a careless adviser to the Department of Finance. It said in March 2009 that it could not see how the position on credit and liquidity would improve. The proof is that the combined balance sheet that all the Deputies and Senators got on 21 September in hard and electronic form, and which was discussed with the Minister in person on 6 November, shows the outflow of deposits in the period January 2009 to June 2009 was at a level of over €32 billion. This showed that there was not a hope, even with the State guarantee, that there would be an increase in liquidity and credit in the Irish economy. Those deposits left the system and they were shored up by ECB emergency funding and by other means. These are facts. There is no opinion involved.
It is very unfair of Deputy Chris Andrews to say what he said about experts. Experts who were listened to have let us down. There were many people with vast experience and qualifications who wanted to give advice. I went to the Department of Finance on 26 January 2009 and said I had experience in the area and that there would be loan write-downs of €50 billion across the sector. I offered the Department my services humbly and I presumed no seniority in the massive task of reconstruction and recovery. I did not hear a dicky-bird.
That is an appalling vista.
I do not wish to have an argument with Mr. Mathews.
Mr. Peter Mathews
This is a discussion.
I respect the amount of work he has put into this. In line with what Deputy Costello asked, it is quite clear, based on Mr. Mathews's analysis this morning, that the latter disagrees with the best expertise available internationally and nationally. He clearly disagrees with the Governor of the Central Bank, who is an internationally——
Mr. Peter Mathews
How do I disagree with him?
I should be allowed to make my point.
Mr. Peter Mathews
The Deputy should explain how I disagree with him.
I ask that I be allowed to make my point. From what we have heard today and on the last occasion, we note that Mr. Mathews disagrees with the Governor of the Central Bank, an international expert on bank rescues. The Governor has said the banks, through the NAMA system and the Government's recapitalisation scheme, will be capitalised adequately by the end of the year. Mr. John Fitzgerald of the ESRI confirmed that this morning.
Mr. Peter Mathews
He did not. He said this morning that the banks need more capital than estimated.
May I please make my contribution? The OECD, the IMF, the European Commission and the ECB have stated that NAMA is necessary to address the difficulties faced by Irish banks. That difficulty pertains to the toxic loans on their books, which cannot be dealt with at present other than by way of the NAMA system.
Mr. Peter Mathews
That is incorrect. To say something incorrect on the record is wrong.
I am interested in Mr. Mathews's statement that the Government should adopt the US approach. The US approach would give the banks additional capital to deal with their problems. If Mr. Mathews is saying we should give extra capital to the banks and get them to value their lands and assets properly, he should note we have learned enough from the banks to date to know we should not give them any such responsibility.
Mr. Peter Mathews
The Deputy is quite right. We should give them nothing, invest and, if we proceed properly, get our money back with a profit. Everybody who understands fully the financing of banks and such institutions and the elements of their balance sheets knows this.
Mr. Mathews may answer my points when I am finished.
The IMF stated NAMA is an essential component of restoring the Irish financial system. The IMF advice in this respect is critical. Mr. Mathews is disagreeing with all the best expertise, such as that from the OECD, the IMF, the European Commission, the ECB and the Governor of our Central Bank. I put it to him that he is wrong. While he is very sincere in making his case, that case is causing some confusion.
I disagree with Deputy Costello. There is nothing of any value in the prognosis we are getting. It may be close to the Labour Party prognosis. It is clear the best way forward is NAMA. As I stated, the banks can use the NAMA bonds as collateral from the ECB. That is not to suggest they must give out the money. If they have NAMA bonds used as collateral from the ECB on their books, they can go to private investors. It improves their capital base. This is why it is critical that we can borrow this money from the ECB, if we want to, at a rate of 1.5%. It is critical to the banks' ability to use the money as collateral from the ECB or seek investment from private investors. Nothing Mr. Mathews said on the last occasion or today counteracts that. His analysis is wrong and I have not heard any "experts", to use his own term, who have suggested he is correct.
Mr. Peter Mathews
May I deal with some of the observations?
We must vacate this room at 1.15 p.m. It is now 1.10 p.m. so we have five minutes.
Mr. Peter Mathews
The Deputy did not understand Myles Dungan's question yesterday on the ECB and its role in how NAMA bonds might be used as collateral, and it has happened again today. The Deputy does not understand the points I am making. The key points are that recapitalisation of our viable banks would require €17.5 billion of capital, not all of which the State will put up, as bondholders in the two big banks would also be directed to subscribe. The second point is that Anglo Irish Bank and Irish Nationwide Building Society should be closed, because by keeping them open, the State and its citizens are paying an unnecessary minimum €17 billion. These things can all be proved. The Deputy might not understand them, but they are all proven. The experts who have experience of balance sheets of banks, loan portfolios and their chances of recovery, all agree.
Who are they?
Mr. Peter Matthews
I can name them all. They are Karl Whelan, Constantine Gurdgiev, Brian Lucey, Colm McCarthy, accountants who are members of my institute and many others such as business people and bankers who I know. The international experts mentioned by the Deputy are unfamiliar with Ireland. What does Merrill Lynch know about the lending practices of our banks here and the markets into which they lent? Nothing. What could Merrill Lynch be expected to find out in four days? Nothing. I could name 12 individuals off the top of my head who could have assessed the balance sheets of the Irish banks. I did it on one page and the Deputy received it. He also got this document which is the alternative to NAMA. Why did the Deputy's Government say that there was no alternative when there was one? The alternative to NAMA was submitted and it is the best platform for getting out of this crisis.
The Deputy's Government has been hell bent on repeating a mantra that there is no other show in town and that it will increase liquidity. As Deputy Costello has shown, every examination and the answer to every question on the issue shows that it will not do so. While it might have been technically possible, it was highly improbable and it has not happened 24 months later. The Americans have done the right thing because they have been able to get a return on their investment for the money they put into the banks. The British have contained their losses because they have been able to sell back to the markets that are now more confident that the correct picture has emerged and that the banks are recovering through a mixture of direct capital investment and insurance programmes that work and that have been thought through.
This is not a matter of political economy. It is less political and more economy. We need more honesty and integrity and less cronyism. If people do not understand what is going on, then I ask them to please step aside and give the 450,000 people who are unemployed a chance to get back into employment because the economy can take traction again. I ask them to please get on with the work of resetting, repricing and correcting the asset prices and rents of this country. Carluccio's restaurant across the road was stupidly priced up to a year ago at €20 million. It is now correctly priced at €3 million. That is the level of price correction needed. Let us please be honest.
It does not give me any pleasure talking like this and having to do all the work. There is an opportunity cost to me in income terms, but I have sons in their mid-20s who will soon be actively seeking work and they will probably have to go abroad, and I have a daughter who has just done her leaving certificate. I represent a very common cross-section of this country and we have let it down big time by being complacent and cosy and by not being honest, by not facing up to the truth of the situation, recognising the problem and being humble in getting the right advice. Much of it is here under our noses. We did not have to go abroad for brand names like Merrill Lynch, PWC, KPMG and so on. This time last year——
We have to finish our meeting.
Mr. Peter Matthews
——Jones Lang Lasalle talked up the long-term economic value of property.
I thank Mr. Matthews for attending. It has been a worthwhile meeting. He has made many comments and raised questions that are being asked by many people in the country, and which are worth examining. We will be submitting a report of the meeting to the Minister for Finance and I am sure that he will have an interest in the comments that have been made. I look forward to the response to the Minister in due course.
Again, I would like to thank Mr. Matthews for coming——
Have you invited the NAMA executives to come before us?
Not yet, but we will do that.
I suggest that we do that for our first meeting in September, because we need an update from NAMA.
We cannot do that at our first meeting in September, because we have committed to a schedule given to us by the Dáil——
We should then have a special meeting and bring in NAMA executives to give us an update on the progress they are making. I suggest you write to them about the continuing delay in completing the transfer of loans and mortgages from the banks and ask when exactly it will be fully completed.
I understand that they are transferring the second tranche at the moment.
Mr. Peter Matthews
I thank you, Chairman, and I genuinely thank the committee members. They have not got an easy job in the Dáil and the Seanad. It is very time-consuming and they are pulled from every quarter. I appreciate that they do their best. I represent a sizeable professional view that is beholden to nobody, independent and truthful and I would like them to take it in that spirit. We are passionate about our country and the need to address the problem and get moving again, but we have to measure it right and prepare ourselves correctly.
Thank you.