If I asked how much your house was worth, you probably couldn’t tell me for sure.
You might guess it is worth half what it was worth at the peak of the boom.
Or you might fear it is worth even less, as there is a house on the road quoting half the peak price and it still hasn’t found a buyer.
There is no reliable indicator of what the market price of houses currently is.
The Permanent/ TSB ESRI index is based on too small a sample, while data protection laws prevent estate agents from disclosing transaction prices even if they were minded to do so, although Friday’s distressed sale auction by Allsops has partially helped fill the information gap.
Things aren’t much different in the world of high finance. Many bankers don’t really have a clue what once-valuable assets are now worth, as the assets rarely trade (and when they do, the prices they fetch aren’t necessarily disclosed on a stock exchange).
Bankers may also fear trading those assets as the price they would achieve might be so low as to do damage to their balance sheets and force them to raise new capital.
This is the case with asset backed securities, particularly those securities backed by mortgages of doubtful quality. It is also true of sovereign bonds issued by countries with big deficits as well as corporate bonds issued by institutions that are under stress.
Many European financial institutions still carry these troubled assets on their books.
That is why, three and a half years into the credit crunch, many banks are still struggling with the legacy of the collapse in market confidence which began in August 2007.
Take, for example, the accounts of UniCredit Bank Ireland plc, a subsidiary of Italy’s largest bank, UniCredit.
UniCredit’s Irish operations are pretty substantial with total assets of €23.7 billion at the end of 2010.
Many of those assets include the complex financial instruments that have proven difficult to value ever since the credit crunch hit.
UniCredit Bank Ireland has, by its own admission, endured a difficult period for liquidity, and was among the banks that availed of emergency amendments to accounting rules introduced in October 2008 at the height of the financial crisis.
The Irish subsidiary, which is based at the International Financial Services Centre (IFSC) in Dublin, reclassified about €3 billion of assets in 2008.This meant that those assets did not have to be valued at market prices which were then in turmoil.
UniCredit Ireland continued to avail of this accounting treatment in subsequent reporting periods.
The bank did it again in 2009 and then also in the 2010 accounts, which were filed in the Companies Office in recent weeks.
Writing in the annual report, chairman Ronan Molony said the significant turmoil experienced in 2008 and 2009 continued in 2010, culminating in Ireland accepting the bailout in November.
This had a negative affect on UniCredit Bank Ireland’s funding costs.
However, Molony reckoned the bank had produced a ‘‘satisfactory’’ result for the year, taking into account the ‘‘considerable market headwinds, recording a net profit after tax of €89 million compared with a net profit after tax of €131 million the previous year.”
But the notes to the accounts reveal that the continued use of the emergency accounting treatment flattered the company’s reported profit figure by €63 million in 2010.
The reclassification is permissible under the emergency accounting rules which were introduced at the height of the crisis. In the case of UniCredit Bank Ireland, the reclassified assets are now described as ‘‘loans and receivables’’, whereas previously they were described as ‘‘held for trading’’.
If they were still described as ‘‘held for trading’’ they would have to be written down to their current market value, which would dent the reported profitability of the Irish subsidiary.
Elsewhere, the accounts show that there was a €344 million reduction in the value of certain assets which were available for sale during2 010.However, this reduction has been written off against shareholders’ equity rather than to the profit and loss account, a move which accountants say is entirely legitimate, but which also flatters headline performance.
It is true that UniCredit’s performance at group level continues to appear stellar when compared with the performance of our own Irish banks.
In March, UniCredit reported fourth quarter net income of €321 million, down from €371 million a year earlier after provisions more than doubled to €472 million.
The bank generated full year profit of €1.3 billion, down 22 per cent from a year earlier.
But there are concerns that the bank’s expansion into eastern Europe, and elsewhere, may lead to greater loan losses in future, which would require the bank to raise new capital. This has been reflected in a fall in UniCredit’s share price over the last few years.
The shares closed at €1.71 last week, compared with €5.06 in August 2007 when the credit crunch began.
UniCredit has been under particular pressure ever since the banking foundation Cari Verona, one of its largest shareholders, declined to take part in a rights issue at the height of the credit crunch in 2008.
UniCredit then controversially accepted funding from the Libyan dictator Muammar Gaddafi’s Libyan Investment Authority.
The decision to accept those funds contributed to the loss of shareholder confidence in UniCredit chief executive Alessandro Profumo, who was ousted last year. It has proven even more embarrassing now that Gaddafi’s own people are in open revolt against his rule.
There have been repeated suggestions that UniCredit may be forced to raise new capital either through asset disposals or fundraising.
Among the assets that might be disposed of is Pioneer Investments, its IFSC-based fund management division.
It just goes to show that in this global financial crisis, a road that leads to Rome may well also lead back home.
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www.kathleenbarrington.blogspot.com
E-mail: Whistleblower.IRL@gmail.com
