Northern Ireland judge dubs Anglo “Golden Circle” scheme “improper and unlawful”

There was something surreal about lawyers in the High Court last October, 2010 acting for Paddy McKillen, casually referring to the €45m loan provided by Anglo to the developer as a participant in what has become known as the “Anglo Golden Circle” or “Anglo Maple 10” transaction whereby a group, reported to have been 10 of Anglo’s customers, were advanced some €450m in allegedly non-recourse loans to purchase shares being disposed of by tycoon, Sean Quinn. The reference to the loan in open court last October, 2010 had nothing to do with the probity/legality of the transaction, the purpose was to examine if the loans were performing or not in the context of NAMA’s rights to acquire the loans. At the time, it seemed decidedly surreal.

Surreal, because there have been several investigations into the so-called “Anglo Golden Circle” transaction over the past 28 months. Two of the investigations have been by the Gardai (Irish police service) and the Office of the Director of Corporate Enforcement. Just before Christmas 2010, there was an indication that files were being sent to the Director of Public Prosecutions, but four months later, there doesn’t appear to be any progress.

Of interest therefore is that a judge in Northern Irelandhas referred to the scheme in a judgment (not yet available online seemingly) reported yesterday by the BBC. The case inBelfast involves a company controlled by prominent Northern Irish developer, Peter Curistan on one side and Anglo Irish Bank on the other. There is a contention that another Northern Irish property company, PBN Property (now in NAMA incidentally) was favoured in a transaction involving Anglo and Peter Curistan. PBN Property is partly controlled by Paddy Kearney who is alleged to be one of the “Anglo Golden Circle”. The judge is reported to have called theGolden Circle transaction “a prima facie improper and unlawful proceeding”. One wonders what the process is inNorthern Ireland whereby a judge’s assessment of something as unlawful leads to a police inquiry. And on this side of the border, we continue to wonder when or even if, we will ever get legal clarity on what seems to have been a share support scheme.

UPDATE: 18th April, 2011. The quite short but fascinating judgment by Judge Deeny is now available here. With respect to the Anglo Golden Circle the judge says “it is a matter of dispute between the parties as to whether this [the decision by Anglo to abandon support for a bid by PBN for a Peter Curistan property] was because PBN was asking for too much or, as evidenced by an internal bank email of 23rd December, 2009, that the bank did not want to make a non resource [sic, probably means recourse] loan to PBN and Mr Kearney because in the interval it had been disclosed that he was one of the ten clients of the bank who had been given non recourse loans totalling €451m to allow them to buy shares in Anglo Irish Bank – a prima facie improper and unlawful proceeding.”

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NAMA 2 abandoned because the assets would be geographically scattered. Hmmm…

Frankly I am surprised that yesterday’s assessment ofIreland’s compliance with the IMF/EU Memorandum of Understanding (MoU) was as upbeat as it was. Despite Minister Noonan claiming “we’re fully in line with the MoU” the truth is that we’d stuck two fingers up to our benefactors who have to date advanced us €18bn from a €56bn bailout (to get to €85n, add €17.5bn to that representing our domestic contribution to our own bailout and the €11bn “saving” on the banking element of the bailout, set at €35bn but the stress tests indicated €24bn would be enough). We’d committed in the MoU to putting €10bn into the banks at the end of February, 2011 and then we played coy after the stress test results at the end of March 2011 and indicated that bank recapitalisation might be contingent on a reduction in bailout interest rates. Secondly we told our benefactors that we were abandoning NAMA 2, the transfer to NAMA of €16bn of sub-€20m exposures at AIB and Bank of Ireland, for which Minister Lenihan impishly tabled legislation on the eve of the election, knowing it would be kicked into the longer grass. We also said we were restoring the minimum wage at €8.65 per hour despite the commitment in the MoU to cut it to €7.65. These deviations from the plan were papered over in yesterday’s announcements – the recapitalisations should take place by 31st July, 2011 with an exception in respect of Irish Life and Permanent, the minimum wage would be restored but the cost to the Exchequer from the corresponding loss of PRSI was not disclosed. This entry examines the abandonment of NAMA 2.

This is the transcript of what Minister Noonan said yesterday in relation to the abandonment of NAMA 2

“They [creditors from the IMF and EU] have also agreed with our proposal that NAMA 2 will not now take place. So the transfer of funds [sic] below €20m representing impaired assets from the banking system to NAMA will not now take place. And the banks will deleverage these at the same pace as the deleverage we outlined for other impaired assets when I was announcing our banking programme.”

And then in the Q&A session that followed the statements

“Scrapping NAMA 2 was in the Programme for Government so it is the position of the government to do that. There are difficulties within the banks with NAMA 2. A lot of the small, if we can use that in the banking sense, sub-€20m loans, the portfolio would be…, you might have a small housing estate in Letterkenny, the developer might have a block of flats in Tuam and a small commercial outlet in Skibbereen, so you are dealing with different bank managers. So in terms of servicing the debt and deleveraging it they didn’t have, the Europeans didn’t have, the concept that it was so scattered and not so centralized as they would have experience of.  So when that situation was explained to them they understood where we were coming from

The second issue on that is if you deleverage within the banking system over a number of years, if BoI was trying to attract private funds in. There’s always a promise when deleveraging is internal that things will work out better than straight-line numbers would suggest so again it helps the banks in their negotiations if there is some deleveraging of assets in there so it’s just a better formula and when we explained that position,  they agreed that it was a better way of doing things.”

I have my doubts about what the Minister says for the following reasons

(1) Both EBS and INBS are transferring all land and development exposures regardless of value. Anglo has a threshold of €5m. So the assumption must be that NAMA is already dealing with relatively small value & scattered loans.

(2) NAMA is valuing assets by reference to 30th November 2009 and paying a Long Term Economic Value (LTEV) premium on top. InIreland, commercial and residential property is down 10-15% since 30th November, 2009 and NAMA’s average LTEV premium has been 10% of the current market value. So you might expect banks to substantially profit from the disposal of these loans to NAMA.

(3) In relation to Bank of Ireland in particular, I believe that the losses on smaller loans will be substantially more than the 40% expected. That belief is based on (a) the small number of foreclosures in the public domain which indicate 70%+ losses (b) the contrast with other Irish financial institutions which are expecting losses to be ~60% and (c) confidential but unverified claims that Bank of Ireland’s lending practices were, in some instances, every bit as reckless as those in Anglo, AIB and INBS.

(4) NAMA seems to be struggling with its existing workload and portfolio. And Minister Noonan’s director of elections inLimerickwas none other than NAMA board member, Brian McEnery.

So the belief on here is that the abandonment of NAMA 2 has nothing to do with property assets being strewn from Donegal toCork. But is more to do with protecting Bank of Ireland’s balance sheet by not crystallising losses and to a lesser extent reducing NAMA’s burden of work with which it is presently struggling. A downside of the abandonment of NAMA 2 is that our banks, Bank of Ireland in particular will be nursing loans of doubtful value for some time to come, which might serve to deter potential investors/lenders to that bank.

With yesterday’s announcement and confirmation that our creditors were allowing the deviation from the MoU, it seems that NAMA’s final total of loans will be €76bn once Paddy McKillen and other objectors whose loans total an estimated €4bn are transferred. NAMA will pay an estimated €33bn for these loans.

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