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Archive for September 19th, 2010

The Independent today reports that controversial former Irish Minister for Finance, Charlie McCreevy, is involved in a bid to acquire AIB’s (that’s Allied Irish Banks PLC for foreign readers, NOT Anglo) operations in the UK. McCreevy is a non-executive director of investment group NBNK which is said to be interested in acquiring AIB’s UK operations which includes €3.2bn of what were NAMA-bound loans. The Independent reports that McCreevy’s fees will double “if NBNK completes a major acquisition”.

The disposal of AIB’s UK operation was signaled earlier this year as part of the drive for AIB to achieve capital targets at the end of this year set by Ireland’s new-ish Financial Regulator, Matthew Elderfield. With the publication of its half year results in August, AIB said that it expected the sale of its UK operation to take place in September 2010. It now seems as if a sale is some months away.

As discussed on here previously, the loss of €3.2bn of NAMA-bound loans which had a low provision for losses (6% in 2009) in a market where there has been a strong recovery in commercial prices in the past year (15% to end July 2010), will be a blow to NAMA. In fact it is unclear why NAMA is allowing these loans to be disposed of. The involvement of a former Minister for Finance in a bid for the loans will hopefully prompt questions and that NAMA’s objectives are not compromised.

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This week sees the first of five weekly interviews in which aspects of Ireland’s financial crisis will be discussed with some unusual personalities with some unconventional thinking. This week we are joined by Tony Soprano, New Jersey businessman.

NAMAwinelake: So Tony, I understand that you have some experience of the debt business and we’re here today to talk about the enormous debt burden being faced by Ireland as it tries to restore a functioning banking system to the economy.

Tony Soprano: Right, but somehow I don’t think you’re gonna like what I have to say.

NWL: Well, let’s see. So you know the score. We’ve had a property boom. Banks loaned enormous sums to fund property projects. Property prices have crashed. Which means banks are in danger of going bust which would ruin the economy and the country. The government has borrowed huge sums to shore up the banks and the day to day running of the country and has guaranteed even bigger sums. And now we’re facing a decade or more of crippling austerity. Have you any ideas?

TS: Ever heard of a “bust out” scam? No, let me tell you about it.  Now to work this, you have to have a good credit history but you’re facing ruin and need to be desperate. Say you have a credit card with a €20,000 limit. During the month, you runs up debts right to that limit, you buy things that you can easily sell on – booze, cigarettes, iphones whatever. And then you get your credit card statement. What you do you is you go to the bank and pay in a €20,000 cheque. And here’s the clever bit. The credit card company credit your statement immediately when you pay in the cheque and you get your full €20,000 credit limit restored. However, it takes 3-4 days for your cheque to clear and of course it doesn’t, it bounces. But in those 3 days you spend another €20,000, again on merchandise you can sell on quickly. And you stash the cash. The credit card company comes after you and you declare bankruptcy.

NWL: Jeez! And credit card companies haven’t wised up to that?

TS: Maybe some have. But now let me explain how the bust out scam works in business. I used to have a friend from school, let’s call him John Konna. Now John was a hard working family man and he built up a chain of sporting goods shops, you know, sports kits, sneakers, bicycles, canoes, that sort of thing. The one thing about John was that he had a gambling problem. And he owed a gambling debt of €10,000 to a friend of ours. Now you know how it works, you have a debt, you pay it back with the vig.

NWL: What’s the vig?

TS: The vig? That’s short for vigorish. John owed our friend €10,000 and said he’d pay it back over 4 weeks. Each day €200 in vig was added to the debt. In addition if John missed a debt payment, that was added to the total. It’s tough but that’s how it works. Now John was having difficulty paying back the debt and it had gotten to €20,000. He came to me and begged me to join the “Executive Game”, poker for high rollers. I said to him “John, don’t do this, this game is not for you”. But he begged me, and then he begged me for a €50,000 loan. And what happened? He lost it all. And I wanted my money back. But John had all sorts of debts. So we worked the bust out scam on his stores. We ordered to the limit from his existing suppliers and sold the goods on, we opened up accounts with more suppliers, everything from flat screen TVs to computers and we maxed the credit and when the goods came in the front door we shipped them out the back door. All in, we took €500,000 of goods and sold them for €200,000. That’s when the credit stopped. John was ruined and never recovered. But we got our money.

NWL: But as you say, John was ruined, he was labelled a dead beat, he’d lost all trust and he’d never have a business again.

TS: Yeah but that was John, you’re talking about a country and you know sovereign debt it’s like diplomatic immunity. You remember that guy out of Lethal Weapon, you know the one who tells Mel Gibson that he can’t be shot because he has dip-lo-mat-ic imm-un-ity. Now of course in the movies, he gets shot anyway but this isn’t Hollywood, it’s real life and sure, for a period of time no-one will lend to you and if they do they’ll want extortionate interest. But hey, they can’t take your country, can they? And sooner or later they will start lending again. Maybe you get kicked out of the euro or even the EU. Maybe you move closer to Boston or Beijing or Bahrain.

NWL: But as to how this would work in Ireland. Take NAMA, they’re buying loans with €40bn or so of government-backed bonds. The banks can cash these bonds at the ECB. Now the loans that NAMA is acquiring have a value and if the government defaulted on its debt and NAMA refused to pay back the ECB, I could see the ECB trying to recover its debts from NAMA in the courts – after all NAMA is a company independent of government.

TS: True, but in the bust out scam you move the goods quickly so that the creditor can’t find them. So NAMA sells the loans or assets for whatever it can get for them. Say they buy the loans for €40bn and they sell them at a 25% discount for €30bn. And for good measure the banks cash the NAMA bonds immediately and lend them out to businesses. The bottom line is that your country gets an extra €30bn of cash that is not paid back. And that’s just NAMA. Consider your government bonds, consider the funding from the ECB to your zombie banks. Very quickly you could be talking about over €100bn of debt and that’s before running the bust out scam.

NWL: Well this is very entertaining stuff but it is never going to happen. You’re talking about default which happens very rarely but you’re also talking about a country defrauding its creditors. It just doesn’t happen.

TS: Ever heard of the “trolley problem”?

NWL: Don’t think so, no.

TS: My therapist told me about it. Comes from philosophy. A trolley on a railway line is running out of control. On the line ahead, there’s this one guy tied to the rails and he’s going to get run over and killed. You can flick a switch and the trolley will be diverted onto another rail but on this other rail, there’s two guys tied to the line and both of them will get killed. What do you do? Look, sure, in absolute terms it’s not right that anyone gets killed. But you have to weigh up the alternatives. There is pain ahead one way or the other and you have choices to make. And you might choose to runs up debts of 125% of your GDP and pay them back on the nail. But you might decide that the pain and sacrifice needed is too great and you default. Or maybe there’s something in between. You have choices.

NWL: Interesting but I can’t see the country defaulting and certainly can’t see the country deliberately running up maximum debts and defaulting.

TS: Maybe. Anyway, look it’s been nice talking to you. But I have to get on. I read in the press that these NAMA guys are saying that some developers will not survive. I need to give them a call and maybe offer my services.

Next week: A leading left-wing broadcaster warns of the dangers of Ireland being burdened with Weimar-era levels of debt which he says will breed a new generation of satirical writers who’ll cast a shadow over Europe for decades to come with their Swiftean prose. Scary.

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