Finance minister Brian Lenihan's snap decision to delegate the handling of the banking crisis to Michael Somers' NTMA is shrouded in mystery

The reasons behind Brian Lenihan's snap decision last week to delegate the highly sensitive handling of the banks to the National Treasury Management Agency is still shrouded in mystery. The announcement came out of the blue on a day when the economic news agenda was dominated by bad news from the exchequer as well as worsening live register numbers.


According to a Department of Finance spokesman, the delegation of banking responsibilities to the NTMA is just "formalising what was already happening". He said Finance and the NTMA have been working closely together since September 2008 and this change merely makes the arrangement official.


Finance minister Brian Lenihan made the same point in the Dáil last week: "As the banking crisis has evolved, officials of my department and the NTMA have worked together very closely. The demands of the crisis have required significant adjustments in the deployment of resources in both organisations... The department will remain necessarily very closely involved with banking and financial services issues. However, the NTMA will be involved in discussions with the covered institutions on their capital needs and it will lead those discussions."


According to the department, this business-as-usual arrangement will require no new staff at the NTMA, nor will it require any secondments from the department since "everybody is already doing these jobs", a spokesman said.


This close level of cooperation may have been implicit throughout the government's handling of the crisis, but it was never made entirely known either. Indeed, Labour finance spokesperson Joan Burton went so far last week as to raise a possible legal objection to the new delegation of authority.


"Legal advice available to the Labour Party suggests that there are serious doubts about the capacity of the minister for finance to delegate key functions in regard to banking to the NTMA," she said in a statement. "The Labour Party cannot find anywhere else a power of the minister for finance to delegate any other of his powers [apart from treasury management] to the NTMA, particularly in relation to the covered institutions."


Yet the tacit understanding – at least of long-serving NTMA chief executive Michael Somers, who preceded current chief John Corrigan – is that its authority is much wider, as Somers told an Oireachtas committee last May: "When the NTMA was set up, the government could delegate the minister for finance's powers to the NTMA, which operated through the chief executive, who was answerable to the Committee of Public Accounts and the minister."


One theory being floated in finance circles is that Lenihan is giving the tough job of sorting out the banks to a tight group of executors he can trust. While the Central Bank may be in a position to advise on the required level of capital for the banks, it would be over-extended if it had to deal with the banks' management of their capital needs.


"Finance would rather see control go to NTMA than to see it go to Central Bank. Governor Honohan is still only getting himself into the role. Perhaps Lenihan felt that Finance doesn't have the energy to micromanage the handling of both the economy and the banking crisis." a banking source said. "NTMA are more secretive than the Kremlin so you will never find out anything."


Another theory is that Lenihan is preparing for the inevitable nationalisation of AIB and Bank of Ireland and is getting the administrative capacity in place before a state takeover is executed.


According to Brian Lucey, associate professor of finance at Trinity College Dublin, the move indicates that the government envisages an increasing role in the banks' future and is giving the NTMA functions similar to that of UK Financial Investments, the body that controls the British government's holding in RBS and Lloyds Banking Group.


"It would make sense if they are lining up the ducks in the knowledge that they are going to have to take the banks into state ownership," Lucey said.


Lenihan has made no secret of the fact that he expects the state to have to provide more capital to the banks, most likely through the National Pension Reserve Fund, which is ultimately managed by the NTMA. Department officials reiterated this expectation to the Sunday Tribune last week, saying it was "logical" that further state capital would be required and that the NPRF would probably provide it. The fund was the source of the €7bn that went into AIB and Bank of Ireland last spring, but the €4bn recapitalisation of Anglo Irish Bank came straight from the exchequer.


But the question is what the level of capital will be and, consequently, what level of control the NTMA will ultimately assume for the price.


The official government position is that once the banks' post-Nama capital needs become clearer, they should raise fresh funds through a combination of asset disposals, liability management and equity issues. AIB could raise as much as €2bn by selling its ownership stakes in M&T Bank in the US and Bank Zachodni in Poland, but Bank of Ireland has limited options. Both banks also have nearly exhausted their debt-buybacks, too.


That leaves rights issues. But the appetite for investing in Irish banks that was present into autumn 2009 has disappeared as share prices have fallen and uncertainty over the scale of Nama writedowns continues to dog the Irish banking system. Lately, institutional investors have been signalling that they would prefer to see the state commit fresh capital to the banks first to give the market 'direction' on the ultimate level of state-ownership private investors can expect. Without some sense of just how nationalised the banks will be, they fear that a new equity issue may not be fully subscribed without government involvement or that they could be diluted by a subsequent conversion of preference shares.


Analysts outside Ireland are very bearish on the prospects of AIB and Bank of Ireland raising money on the capital markets. RBS, for instance, is telling its clients to wait for a "second round" of equity issues before committing, while JP Morgan is advising investors to "avoid" AIB especially, since it will have to retain earnings for more than eight years to reach its required capital level.


With the clock ticking, the state may have to jump first.


NTMA Functions


Since the NTMA was set up in 1991 it has assumed more functions than traditional debt management offices. The NTMA manages personal injuries claims against the state, sources cheap finance for public projects and also oversees the prize bond company.


However, former chief executive Dr Michael Somers said the agency wasn't equipped to take on responsibility for the banking sector when it was tasked with overseeing the National Asset Management Agency.


"The banking crisis is not something which fell within our remit and we were not, nor are we now, staffed to deal with it," he told a Dáil committee last year. "A number of my colleagues, as well as doing their ordinary jobs, have had to get closely involved... in dealing with the various crises that have occurred since August or September 2008 and have spent a significant amount of their personal time, including weekends and nights, in trying to deal with this."


Somers argued at the time that the NTMA's structure was inappropriate for the various roles it carries out.


"One would not start from here if one was starting again. We are not short of boards."