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Archive for April 20th, 2010

Anglo and personal guarantees

A High Court Judge today ruled that one of Anglo’s debtors, Michael Daly, who is being pursued to pay €84.4m in respect of loans from Anglo, had produced what the Judge described as an “arguable defence”. That being the case and exceeding the low threshold to prevent a summary judgement, the Judge ordered a full hearing for the case on May 20th, 2010. Mr Daly had said that he was led to believe that personal guarantees given by him to Anglo were “paper” guarantees and would never be called upon. Mr Daly appears to be defending himself but of interest is that the Judge has indicated that he, the Judge, expects Anglo to produce minutes of Anglo’s credit control meetings at the full hearing. The full hearing may cast further light on the general nature of personal guarantees in Irish banking over the last decade and the procedures adopted at Anglo in granting credit. The Irish Times carries a report on today’s judgement.

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NAMA Debt Securities

NAMA has already paid 4 of the 5 participating financial institutions €3.5bn approx of consideration in respect of the first tranche of loans. The payment has comprised 95% NAMA Senior Notes (€3.3bn approx) and the remaining 5% is in Subordinated Bonds (€0.2bn approx).

The summary terms for the Senior Notes are set out by NAMA here. The summary terms for the Subordinated Bonds are set out by NAMA here. In brief, the Senior Notes will be paying out interest at the 6 month EURIBOR rate (currently in April 2010 set at 1%) in September and March. The Senior Notes can be redeemed at the ECB and indeed it was hoped that the financial institutions would do just that and make the resulting cash available for lending to homes and businesses.

The Subordinated Bonds are more complicated. Firstly the interest rate payable by NAMA is set as “10 year Irish Government Bond rate as at the first Issue Date plus 75 basis points”. The 10 year Irish Government Bond rate is in March/April 2010 was/is 4.5-5%. That is a considerable difference to the Senior Notes – using an example of the maximum of €2.7bn of Subordinated Bonds allowed by the NAMA Act, over a 10 year period the difference between a 1% ECB interest rate on Senior Notes and a 5.25% 10-year + 75 basis points rate is nearly €1.25bn. To express it another way NAMA will pay 22% of its interest payable bill on Subordinated Debts which account for 5% of its consideration to the financial institutions. Secondly these bonds are only redeemable in March 2020 in accordance with the financial performance of NAMA as set out in the NAMA Act.

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The Pariahs (3 of 3)

Part 3 – Rehabilitating images and reputations

I had hoped to illustrate the concept of this article with some photographs of Irish men and women who had rehabilitated themselves after a fall from grace. However I just couldn’t find any. Maybe De Valera and his eventual acceptance by the pro-Treaty majority, maybe Charles Haughey who received quite a eulogy from Bertie Ahern – however Dev and Haughey were at their worst, divisive figures, but commanding significant support, and arguably the majority today would disagree with Bertie’s sentiments. But I could not think of a single clear example from any sphere of life where a fall from grace has been succeeded by a public rehabilitation. Where are our Ted Kennedys, our Woody Allens or even our Nelson Mandelas. In particular we don’t appear to have a great tradition of failed businessmen coming good. Maybe we’re not so good at forgiveness, because falls from grace are not particular to Ireland but rehabilitations seem not to exist here.

For now, there are three separate investigations (though there is presumably overlap) into aspects of our banking crisis by:

(a) The Financial Regulator

(b) The Office of the Director of Corporate Enforcement

(c) The Gardai

In addition there is a promised government inquiry into the events which led up to the bank guarantee in September 2008. That inquiry appears not to have started and there have already been calls to alter its terms of reference to include matters post-September 2008. In addition to the specific events surrounding director loans, year end inter-institution deposits and loans in respect of share purchases, there is presumably a need to investigate what led to the crisis and whether there was anything beyond what the ODCE refers to as “ordinary business failure”. It is to be hoped that the various investigations, which in some cases are more than a year old, can be brought to some conclusion in the not-too-distant future. The ODCE have indicated it will have completed its investigations and produced a report in time for the Summer 2010 recess of the Dail. The Gardai have indicated that a report is being prepared for the DPP in “the coming months”. The Financial Regulator seems to have a rolling investigation ongoing. God knows when the government inquiry will start or even finish – previous history with Tribunals doesn’t point to a swift inquiry.

The various investigations may reveal previously buried information which contributed to, or exacerbated our crisis. In my opinion, the investigations should clarify whether our banking and property sectors suffered anything other than “ordinary business failure” however great the scale. Practices and the end-results in our banks have in recent times been described as “reckless”, “outrageous”, “having lax lending standards” “truly shocking”, “a reckless abandonment of the fundamental principles of credit risk and prudent lending”. There appears to be evidence though that these practices were ongoing for some time, and that at least for a time, delivered impressive financial results. It is the nature of business to have risk and arguably the greater the risk, the greater the potential for reward and loss. One question I would like to see answered by the various investigations was whether the risks were calculated and transparent to those with an interest in the business and to those whose responsibility it was to oversee the business.

What concerns me though is that a large tranche of banking and property development expertise built up in this country and widely exported in the last decade is being lost. The impression created is that many of the pariahs are becoming reclusive and have certainly retired from the business world. During most of the last decade, Ireland developed an enviable reputation internationally with successful property development spanning the globe. Although our participation in development hasn’t dried up completely, we have been relegated to the second division. Whilst criminality needs to be pursued without fear nor favour, I worry that we are throwing the baby out with the dirty bathwater. I worry that we are not separating the talents that allowed us to grow and prosper from the traits that prompted our crisis, that we are not separating the decisions that were within our banks’ and developers’ control with events that were outside their control, that we are not separating events that should have been anticipated with events that were not widely anticipated at all.

I wonder what the future holds for our pariahs. Even with a baseball cap and oversized sunglasses, they will be recognised whether it’s in Quincy Market in Boston or the backstreets of Puerto Banus. Their children and families are carrying quite a burden in their parents’ responsibility for what has been described as the Irish Chernobyl. We Irish have long memories and a wide reach across the globe. Even in the red-blooded thrust and parry of business where the characteristics of “ordinary business failure” are known , this cannot be what the pariahs wanted as their legacy. If you go back to Mazlow’s hierarchy of needs, business failure on such a large scale must destroy any sense of self-actualisation. Right now the pariahs are toxic, and no politician would touch them with a bargepole. Such is the scale of the car crash that is our banking and property industries, I suspect they will have difficulty with developing any sort of real business in their own rights again.

So I’m concluding this with a plea. Let the investigations run their courses, BUT IF THE PARIAHS ARE NOT CONVICTED beyond guilt for “ordinary business failure”, it might be a wise act of maturity for us as a young State to open a dialogue whereby the pariahs can work with the State and society to bring their contacts and expertise to the service of a society that has been deeply hurt by the consequences of their actions.

Part 1 – “The Ends of the Earth”

Part 2 – “It wasn’t me that burned your shed down”

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Ronan Lyons the respected DAFT.ie economist has today produced a very helpful calculator to help residential property buyers in their rent-v-buy decisions. You can find the calculator here. There may be some bugs to iron out though Ronan has also produced a google docs spreadsheet which set out the full workings and you can find a link on his post also.

Having run a number of computations based on actual asking prices and rental prices from DAFT.ie, the picture that emerges to me is that either property needs to drop substantially or rents need rise substantially to get to the point where the rent-v-buy economics get into equilibrium. With a potential review of the Rent Assistance program by the government and  falling wages (mainly referring here to the Governor of the Central Bank seeking a 20% reduction in wages from a speech earlier this year to restore competitiveness) it is hard to see how rents will rise unless there is a societal acceptance that rents are presently pitched at too low a level.  In simple terms therefore it would seem that a further a property correction is more likely if the economics of buying-v-renting are paramount and if there is to be an economic balance. David McWilliams writing in today’s Independent echoes this point by proposing that the average home has to see a 45% drop  before the rent-v-buy decision comes into equilibrium. The graphs referred to in David’s article should become available here.

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