Archive for October 11th, 2010

On 6th August, 2010,  NAMA (in its guise as National Asset Loan Management Limited) launched its first legal action against developers Paddy Shovlin and Patrick and Anthony Fitzpatrick in Dublin’s High Court. RTE is reporting that the case was disposed of today. According to the Irish Times the case involved three loans

(1) €280m advanced by Bank of Ireland to Landmark Enterprises Limited to finance the Beacon South Quarter development

(2) a loan of unspecified value advanced by BoI to an unidentified company for the redevelopment of the bank’s former headquarters on Baggott Street, Dublin 2

(3) loans of unspecified value advanced by BoI to Deileon Limited “for refinancing of directors loans and to finance a loan to Landmark Enterprises”

With no defence entered, the redoubtable Mr Justice Peter Kelly awarded a judgement order in favour of NAMA. There seems to be some confusion over the amount that was being claimed. RTE say that the loan was for €280m and that the judge awarded €38.5m against Paddy Shovlin and €22m each against the Fitxpatrick brothers, that is a total of €82.5m. However there is a comment in the RTE report that the judge thought it odd “that in the case of a loan of €280m granted to the men, Bank of Ireland had reduced the amount of money it could reclaim to less than 5% of the total owed”.  The Irish Times is not much more illuminating. They too refer to the €280m having maximum recourse of “less than 5%” (that is, less than €14m) but they say that Paddy Shovlin alone is ordered to pay €25m on that loan. No doubt the confusion will be cleared up in later reporting.

UPDATE: 12th October, 2010. Well, either I have got the wrong end of the stick or there is something seriously rotten in Irish media. I have studied reporting on the case by the Independent (here and here), the Irish Times, RTE and Irish Examiner. All bar the Examiner make reference to the 5% recourse. 5% of €280m is €14m yet all media is reporting that the judgements were substantially in excess of this with either €37.5m (€25m for Paddy and €12.5m total for the Fitzpatricks) or €50m (€25m for Paddy and €12.5m each for the two Fitzpatricks) payable on a €280m loan. To state the obvious, €37.5m is 13.3% of €280m and €50m is 17.9%. Not one media outlet addresses the apparent discrepancy in what is being said. Any explanation or further news on the case will be added here.

UPDATE:  October 15th, 2010. Colm Keena in the Irish Times seems to shed some light on the guarantee calculation – he says that the guarantee for the €277.6m (not €280m though of course the sum owing might have risen with interest and penalties) were €18.2m for Paddy Shovlin and half that €9.1m each for the two Fitzpatricks – equating to 13.5%. Which begs the question – what was Judge Kelly referring to with his 5% comment?

UPDATE: 2nd March 2012. In Dublin’s High Court, a non-NAMA bank, Bank of Scotland PLC has obtained judgments against Paddy Shovlin, Tony Fitzpatrick (Anthony Fitzpatrick) and Patrick Fitzpatrick and others in respect of its lending for the disastrous Bank of Ireland offices on Baggot Street in Dublin. Paddy Shovlin is personally liable for €7,929,447 whilst the Fitzpatrick brothers are liable for a total of €7,929,446. Other investors in the purchase included Ronan O’Caoimh CEO of Trinity Biotech who was ordered to pay €1,523,268 and Peter Lavelle for €517,412. A stay was placed on a judgment against Patrick Mooney for €1,606,794 which is presumably pending an contest over an arguable defence.

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There is a break in the McKillen case today at the High Court but it is set to resume tomorrow and continue until Friday. So, continuing with the examination of the expert witness statements submitted by the applicant (Paddy McKillen and 15 of his companies), this entry looks at the statement of Dr Michael I Cragg. Again, he may not be a household name here but in the introduction to the witness statement he alludes to his experience. Like fellow applicant expert witness Joseph Belanger, Dr Cragg is currently employed by the Brattle Group. His CV is apparently attached to the statement but I have not seen that but the statement says that he has a PhD from Stanford University and was an economics professor at Columbia University and UCLA. He has “conducted research, published, testified, taught and made presentations on the subjects addressed in this affidavit including the current financial crisis, commercial and investment banking failures, financings of property and real estate development, structured financial products, securitizations and other financings”

He deals with what he claims are three fundamental errors in the affidavits filed by the NAMA side (Brendan McDonagh, Anne Nolan, Aideen O’Reilly, John Mulcahy, Philip Lane, Dermot McAleese, Ian Goldsworthy and Matthew Webster):

(1) That any consultation between NAMA and borrowers would be costly and wasteful. On the contrary argues Dr Cragg, it would enhance NAMA’s efficiency and raise its profile in a positive way “internationally”.

In probably one of the most tantalising sections of these expert witness statements, Dr Cragg claims that “numerous references can be found in NAMA e-mails in which the authors admit to scheduling meaningless meetings and setting arbitrary deadlines. These meetings and deadlines are set to give an outward appearance of being accommodating and thereby lessen the chance of EU intervention. This can be seen for example in a March 11, 2010 email from Brendan McDonagh to NAMA board members discussing a deferment in the acquisition of the Maybourne loans:

The Chairman and myself know that the timeline we propose is too short but we are building a defence against [being] accused of being unreasonable and to try to stop an EU complaint before the first tranche occurs” and Frank Daly comments on the thread of emails “The key issue here revolves around the EU. I have no doubt at all that if we go back tomorrow and say no that there will be the strongest of representations on this to the EU and I have a real concern that they at least feel that they have to investigate”

The exchange above is claimed by Dr Cragg to evidence NAMA being more concerned with EU intervention that engaging with borrowers. If NAMA allowed a consultation process it would only be accessed by performing borrowers as impaired borrowers have nothing to lose as they have lost their equity.

(2) Whether Paddy’s loans constitute a systemic risk to the Irish banking system. It is claimed that the NAMA side has not defined “systemic risk” but to the extent it means risk to the entire financial system, Dr Cragg says that the system is already knackered (and the risks now are to do with recapitalisation, the guarantee and the deficit) and Paddy’s loans are but a small part of the overall total. He then lists out six areas that he would expect to be considered as part of any overall consideration of the risk posed by Paddy’s loans (the six areas are identical to those in Jim Power’s expert witness statement):

(i) The solvency of Paddy and his related companies

(ii) Whether there has been or is likely to be any impairment or non-payment in respect of any given loan

(iii) Whether there has been or is likely to be any impairment or non-payment across the portfolio

(iv) The quality and diversification of the portfolio

(v) The historical performance of the debtors

(vi) The extent to which cash flow exceeds financing costs

If NAMA has not considered these headings in relation to Paddy’s loans, then how can NAMA have judged Paddy’s loans to be systemic, argues Dr Cragg. What expertise have Brendan McDonagh, John Mulcahy, Aideen O’Reilly and Sean O’Faolain to judge systemic risk, what analysis did they carry out and they appear not to have engaged an expert to advise on the matter.

There is a very lengthy and interesting retelling of the rise and fall of the Irish economy through the 90s and 2000s, the Celtic Tiger years (divided into pre- and post-2000), the expansion of debt, the construction and housing bubble, the bust, the collapse in share prices, the scale of bad debt. This part of the statement draws heavily from the Patrick Honohan’s Summer 2010 banking report. There mightn’t be much that you haven’t see before but the point is that the losses already exist, and the risks now are to do with the magnitude of our bailout costs and the guarantee. Dr Cragg sees NAMA as destroying value through its professional fees and considers a €80-90bn recapitalisation of the banks might have achieved similar results. Paddy’s loans relate to borrowing before the post-2000 mania, his property is diversified in location and funding source and represents less than 0.2% of AIB and BoI’s lending and less than 1.5% of Anglo’s. And in terms of risks associated with bank recapitalisation, Paddy’s loans are performing so shouldn’t affect that State exposure.

(3) The “flawed, inadequate and economically unsupportable process” that NAMA used in judging the treatment of Paddy’s loans

Dr Cragg cites the Official Journal of the European Union in March 2009 “Information from European Union Institutions and Bodies Commission on the treatment of Impaired Assets in the Community banking sector” which says “However, assets that cannot presently be considered impaired should not be covered by a relief programme” If NAMA was supposed to deal with performing assets then it would have credit capability over a long period. He goes to claim that NAMA are interested in Paddy’s loans because they may represent an opportunity to make a profit. He describes an email from NAMA board member Eilish Finan which makes reference to “the very real possibility that in a few months if the loan were to be refinanced and/or the asset were to be flipped at a profit, NAMA has forfeited the profit”

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St Patrick’s Day 2010 saw the usual exodus from our shores of government Ministers jetting around the world to fly the flag for Ireland. It’s hard not to be a bit cynical and agree with the observation recently that they don’t attend parades in Sunderland or Gdansk. But one minister who stayed at home in March was our Minister for Finance Brian Lenihan. You would be forgiven for forgetting that the man is dealing with a cancer in or near his pancreas which is by any standard serious – forgiven because he has appeared to tirelessly (and in a very articulate if not always persuasive way) promote the policy and actions in regards to the banking crisis.


Over the weekend it was reported that he was attending what was stressed to be a “routine” meeting at the IMF in Washington. “I really do not want to see a headline in Ireland saying ‘Minister meets IMF’ at present” he said according to the Irish Times. And goes on “No more can be read into it than that [routine meeting],” he said. “I think that’s very important, and I’d like that stated on the record and part of the story.” And yet this appears to be the first time since he became Minister for Finance in May 2008 (following his predecessor’s elevation to Taoiseach) that he has gone to the IMF annual meeting. And the meeting comes at a time when Ireland’s economy has become a global freak show, when the State has withdrawn from the funding markets, when a coalition partner is flying a national unity government kite, when we are confronting an enormous deficit (11%) with the betting now that €4-5bn will be cut from the budget in two months, when the position of our banks (even Bank of Ireland) look shaky. So it would make sense for the Minister to be at least contingency planning for extraordinary aid measures either from the EU or IMF. Of course even talk of such planning can hurt confidence and is unpalatable. Though on the other hand, waking up one morning to find the government has abandoned the economy to the IMF without consultation and where the citizenry is unprepared and uninformed of the consequences is equally unpalatable.


So I hope to see in the coming weeks an examination of what IMF intervention would mean for Ireland. The world knows that we have a mess to tackle here so having an honest discussion amongst the citizenry is hardly going to materially shake confidence further. Radical and previously dismissed as extreme steps need to be responsibly examined.

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