01 November 2009
By Kathleen Barrington
Many investors will be ruing the day they backed AIB’s Belfry commercial property funds in Britain, judging by the appalling performance of several of the funds which recently filed their accounts.
The first Belfry fund was established in 2001,with a new fund set up every year until 2007. At the time that he was trying to drum up interest in AIB’s sixth Belfry fund in 2007, John Rockett, AIB’s then head of private banking, was boasting that the first fund was on course to give investors a return of 227 per cent.
The Belfry property funds were highly geared, which means they borrowed heavily against the equity that the private investors had ponied up. Contemporaneous media reports suggest that the fund typically borrowed 75 to 80 per cent of the value of each property.
Many investors also borrowed the money to invest as equity in the funds. The two layers of borrowing represented a very high risk strategy for investors who were presumably betting that their rewards would be sky-high in a rapidly rising property market.
The first Belfry performed well, giving investors a net return of €50 million, according to Companies Office filings, after the fund sold its British commercial property in the nick of time in 2007.
But investors in the subsequent funds appear to be having a torrid time. For if high gearing gives spectacularly high returns when things are going well, the opposite also applies: high gearing leads to spectacularly awful losses when things go badly.
Take the fifth Belfry fund, for instance. It reported losses of stg£66 million in the year to the end of March, compared with losses of £15 million the previous year, according to accounts just filed in the Companies Office. It was also in breach of its banking covenants, the accounts revealed. The fund has been hard hit by a 30 per cent write-down in the value of its commercial property portfolio - from £235 million to £167 million.
Rockett, the AIB private banker who serves as a director of the company, is sharing some of the pain, as he is also a shareholder in the fund. Others feeling the pinch include director and shareholder Tony Kilduff, whose Cheval Properties manages the property portfolio for the fund; and Stephen McGivern, a partner in BDO Simpson Xavier, which acts as a professional service provider to the group.
However, the advisers’ pain may be dulled somewhat by the fact that they continued to extract very handsome fees from the fund last year, even as investors were losing their shirts.
AIB earned £1.5 million in fees, down from £1.6 million the previous year. Kilduff’s Cheval Properties earned £1.6 million in fees, compared with £1.8 million the previous year, while chartered accountants BDO Simpson Xavier earned £367,000, compared with £411,000 the previous year.
It is quite a wedge of money for investors to be handing over to service providers, at a time when the accounts raise questions about the ability of the group to continue as a going concern due to a number of major uncertainties to which auditor KPMG drew attention.
The Belfry directors have made certain assumptions about a recovery in the property market, the timing of such a recovery, the optimisation of the group’s property portfolio and the support of the group’s lenders.
Given that the group’s main bank is named as AIB, some of those assumptions may prove to be very optimistic. At the very least, the availability of funding from AIB is open to question, given the scale of the bank’s problems.
However, the Belfry directors have stated that, on the basis of heads of terms agreed with the group’s lenders, ‘‘the directors are of the view that funding will continue to be made available to the group to allow it to meet its obligations for the foreseeable future’’.
Even if its bankers stick with the Belfry fund for the time being, it continues to be vulnerable to fluctuations in investment yields, the increasing costs of finance, illiquidity in financial markets, the downturn in the property market and the possible effects of the downturn in other sectors of the economy - which may affect occupancy and rental levels of the commercial properties the fund owns. In short, it is not a pretty picture for investors in the fifth Belfry fund.
Some of the other funds in the Belfry series, meanwhile, haven’t performed much better. For instance, the fourth Belfry fund reported a pre-tax loss of £42 million in the year to March 2009,while investors in the third Belfry fund also suffered a loss of £42 million.
Even the second Belfry fund, launched as far back as April 2002, has reported a loss of €25 million. (The first and second Belfry funds reported in euro, while the subsequent funds reported in sterling.)
The dangers of borrowing to invest have, for years, been well documented in the investment textbooks.
For instance, the Financial Times’ Guide to Investing stated that the risk associated with gearing up became all too apparent when asset prices fell.
Finance professor Glen Arnold cited the example of a trust investing in eastern European shares. Let’s say the trust sells 50 million shares at £1 each to investors, and that it also borrows £50 million. It uses the combined proceeds to buy £100 million of eastern European shares.
On that basis, the net asset value works out at £1 per share (£100 million of assets minus £50 million debt owed). If the underlying asset values fall by 40 per cent because of a fall in, say, the Warsaw Stock Exchange, the net asset value per share falls dramatically - from£1 to 20p: an 80 per cent fall.
That is because the value of the assets fall to £60 million but the debt remains constant at £50million. The value of the fund then becomes £60 million, less the £50 million in borrowings, leaving just £10 million in asset value.
In short, gearing amplifies losses when asset prices are falling. Anyone who borrowed in euro to invest in sterling property assets is also exposed to foreign exchange risk.
Some investors may have been aware of the risks involved in investing in these funds at the time they invested; while other investors may have calculated that they could afford to lose everything. If not, they are now learning their investment lessons the hard way.
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© Thomas Crosbie Media, 2009
Sunday, November 1, 2009
Sunday, October 25, 2009
Danish mortgage model is one to back
25 October 2009
By Kathleen Barrington
When large swathes of Copenhagen were destroyed by a great fire in 1795, the Danes didn’t let a good crisis go to waste. Within two years they had set up the first Danish mortgage credit institute to help finance the reconstruction of their capital city.
More than 200 years later, the mortgage lending model they established remains much admired, from both a consumer and a prudential perspective.
Jack Guttentag, emeritus professor of finance at the Wharton School of the University of Pennsylvania, said the strength of the Danish model was its low cost, the absence of sharp practice at the point of sale of the mortgage and total transparency.
There were no 100 per cent mortgages and no sub-prime loans. Indeed, the maximum loan-to-value ratio was 80 per cent, which meant that borrowers had to put up a deposit of 20 per cent of the value of their homes.
The result was that, while house prices declined in Denmark as a result of the downturn in the economy triggered by the international credit crunch, negative equity did not become a problem as most borrowers had substantial equity in their homes when the crisis struck.
‘‘This was a major reason why the rise in defaults in Denmark was small and manageable,” Guttentag said on his website.
In short, the Danish system appears to have served ordinary consumers pretty well. But the reason the Danish system is attracting so much attention at the moment is due to the resilience of its mortgage banks during the international credit crunch.
While the Danish economy has been contracting and several banks have been bailed out after making risky loans, the Danish mortgage banks did not require a bailout and have been doing business as usual on both the mortgage lending and fund-raising sides.
Billionaire financier George Soros has emerged as a big fan of the Danish mortgage bank model. Writing in the Wall Street Journal earlier this year, Soros noted that a key ingredient in the success of the Danish model was that originators (ie the institutions that sell the original mortgage) are required to retain credit risk on their own balance sheets when they sell mortgage-backed bonds to investors.
In other words, the banks that sell the mortgage are responsible for ensuring payment to the investor in the bonds. This gives the banks an incentive to lend as prudently as possible. That, in turn, makes the bonds they issue attractive to investors chasing safe returns.
The system works like this. There are seven Danish mortgage banks specialising in mortgages. They fund their loans by selling bonds in the capital markets.
For example, if you borrow €300,000 for 30 years at a fixed rate to buy your house, the loan would be placed in a large pool of 30-year fixed rate loans that serve as collateral for an equal number of mortgage bonds held by investors.
The bonds match the mortgages in every respect, so a ten year mortgage would be funded by the issuance of a ten-year bond. This is designed to eliminate the risk of banks lending long, but borrowing short, as happens in many banking systems including the Irish one - leaving them vulnerable in a credit crunch.
The interest rate paid by consumers is the interest rate on the bond, plus a mark-up to cover the mortgage bank’s margin.
Another key feature of the Danish system was that mortgageholders can also buy the mortgage bonds in the market and use them to redeem their mortgages.
‘‘This is useful if a rise in interest rates (or a fall in house prices) causes mortgage-backed bonds to trade at a discount,” the Economist magazine explained earlier this year.
‘‘Redeeming their bonds allows homeowners to reduce the amount they owe.”
The system is not without its drawbacks as it does not serve as large a section of the market as the US system, while partial prepayments of mortgages are too costly to be practical.
But these must be seen as relatively minor drawbacks given the huge stability of the Danish mortgage system during the credit crunch.
In Ireland, policymakers have shown little appetite for devising creative policies to protect borrowers and banks from the consequences of having our interest rates set by the European Central Bank (ECB) at levels that are not always appropriate for local market conditions.
There is little doubt that having low interest rates here while our economy was booming was a contributory factor in the reckless lending and borrowing sprees of recent years, while 100 per cent mortgages and other ‘buy now, pay later’ mortgage products appear to have contributed to the negative equity phenomenon, a phenomenon that is increasingly seen as heralding a potentially big rise in mortgage defaults here.
The Danes are not members of the eurozone, but the Danish Central Bank maintains a fixed exchange rate policy shadowing the euro.
The Danish Central Bank has pointed out that the prevalence of long-term fixed-rate mortgages reduces the economic sensitivity of the household sector to changes in short-term interest rates whether those changes come from the ECB in Frankfurt or whether the krone-specific interest rates have to be raised.
The Danish Central Bank has said that the availability of long term fixed-rate mortgages with a penalty-free early redemption option allows Danish households to ‘‘have their cake and eat it’’, as Governor Jens Thomsens said.
‘‘The fixed long-term interest rate insulates them from the volatility in short-term interest rates and protects them from the risk of sharp increases in debt-service costs resulting from monetary shocks,” Thomsens said in a speech delivered a few years ago.
‘‘The penalty-free early repayment and delivery options allow them to refinance in the event of lower nominal interest rates and protects them from the increases in real interest rates that resulted from declining wage and price inflation.”
The Danish bond market is also very attractive to pension funds seeking safe long-term returns on their investments.
Meanwhile, in Ireland, we don’t have control over our interest rates, we continue to sell consumers variable rate mortgages leaving them exposed to interest rate fluctuations in the future and there are no long-term fixed rate mortgages on offer worth speaking of, while our pension funds struggle to find safe homes for investors’ money.
So here’s an idea to avoid letting a good crisis go to waste: why don’t our policymakers take the next flight to Copenhagen and find out whether the Danish model could work here?
kathleenbarrington.blogspot.com
--------------------------------------------------------------------------------
© Thomas Crosbie Media, 2009
By Kathleen Barrington
When large swathes of Copenhagen were destroyed by a great fire in 1795, the Danes didn’t let a good crisis go to waste. Within two years they had set up the first Danish mortgage credit institute to help finance the reconstruction of their capital city.
More than 200 years later, the mortgage lending model they established remains much admired, from both a consumer and a prudential perspective.
Jack Guttentag, emeritus professor of finance at the Wharton School of the University of Pennsylvania, said the strength of the Danish model was its low cost, the absence of sharp practice at the point of sale of the mortgage and total transparency.
There were no 100 per cent mortgages and no sub-prime loans. Indeed, the maximum loan-to-value ratio was 80 per cent, which meant that borrowers had to put up a deposit of 20 per cent of the value of their homes.
The result was that, while house prices declined in Denmark as a result of the downturn in the economy triggered by the international credit crunch, negative equity did not become a problem as most borrowers had substantial equity in their homes when the crisis struck.
‘‘This was a major reason why the rise in defaults in Denmark was small and manageable,” Guttentag said on his website.
In short, the Danish system appears to have served ordinary consumers pretty well. But the reason the Danish system is attracting so much attention at the moment is due to the resilience of its mortgage banks during the international credit crunch.
While the Danish economy has been contracting and several banks have been bailed out after making risky loans, the Danish mortgage banks did not require a bailout and have been doing business as usual on both the mortgage lending and fund-raising sides.
Billionaire financier George Soros has emerged as a big fan of the Danish mortgage bank model. Writing in the Wall Street Journal earlier this year, Soros noted that a key ingredient in the success of the Danish model was that originators (ie the institutions that sell the original mortgage) are required to retain credit risk on their own balance sheets when they sell mortgage-backed bonds to investors.
In other words, the banks that sell the mortgage are responsible for ensuring payment to the investor in the bonds. This gives the banks an incentive to lend as prudently as possible. That, in turn, makes the bonds they issue attractive to investors chasing safe returns.
The system works like this. There are seven Danish mortgage banks specialising in mortgages. They fund their loans by selling bonds in the capital markets.
For example, if you borrow €300,000 for 30 years at a fixed rate to buy your house, the loan would be placed in a large pool of 30-year fixed rate loans that serve as collateral for an equal number of mortgage bonds held by investors.
The bonds match the mortgages in every respect, so a ten year mortgage would be funded by the issuance of a ten-year bond. This is designed to eliminate the risk of banks lending long, but borrowing short, as happens in many banking systems including the Irish one - leaving them vulnerable in a credit crunch.
The interest rate paid by consumers is the interest rate on the bond, plus a mark-up to cover the mortgage bank’s margin.
Another key feature of the Danish system was that mortgageholders can also buy the mortgage bonds in the market and use them to redeem their mortgages.
‘‘This is useful if a rise in interest rates (or a fall in house prices) causes mortgage-backed bonds to trade at a discount,” the Economist magazine explained earlier this year.
‘‘Redeeming their bonds allows homeowners to reduce the amount they owe.”
The system is not without its drawbacks as it does not serve as large a section of the market as the US system, while partial prepayments of mortgages are too costly to be practical.
But these must be seen as relatively minor drawbacks given the huge stability of the Danish mortgage system during the credit crunch.
In Ireland, policymakers have shown little appetite for devising creative policies to protect borrowers and banks from the consequences of having our interest rates set by the European Central Bank (ECB) at levels that are not always appropriate for local market conditions.
There is little doubt that having low interest rates here while our economy was booming was a contributory factor in the reckless lending and borrowing sprees of recent years, while 100 per cent mortgages and other ‘buy now, pay later’ mortgage products appear to have contributed to the negative equity phenomenon, a phenomenon that is increasingly seen as heralding a potentially big rise in mortgage defaults here.
The Danes are not members of the eurozone, but the Danish Central Bank maintains a fixed exchange rate policy shadowing the euro.
The Danish Central Bank has pointed out that the prevalence of long-term fixed-rate mortgages reduces the economic sensitivity of the household sector to changes in short-term interest rates whether those changes come from the ECB in Frankfurt or whether the krone-specific interest rates have to be raised.
The Danish Central Bank has said that the availability of long term fixed-rate mortgages with a penalty-free early redemption option allows Danish households to ‘‘have their cake and eat it’’, as Governor Jens Thomsens said.
‘‘The fixed long-term interest rate insulates them from the volatility in short-term interest rates and protects them from the risk of sharp increases in debt-service costs resulting from monetary shocks,” Thomsens said in a speech delivered a few years ago.
‘‘The penalty-free early repayment and delivery options allow them to refinance in the event of lower nominal interest rates and protects them from the increases in real interest rates that resulted from declining wage and price inflation.”
The Danish bond market is also very attractive to pension funds seeking safe long-term returns on their investments.
Meanwhile, in Ireland, we don’t have control over our interest rates, we continue to sell consumers variable rate mortgages leaving them exposed to interest rate fluctuations in the future and there are no long-term fixed rate mortgages on offer worth speaking of, while our pension funds struggle to find safe homes for investors’ money.
So here’s an idea to avoid letting a good crisis go to waste: why don’t our policymakers take the next flight to Copenhagen and find out whether the Danish model could work here?
kathleenbarrington.blogspot.com
--------------------------------------------------------------------------------
© Thomas Crosbie Media, 2009
Sunday, October 18, 2009
Irish Glass Bottle fiasco: taxpayer carries the can
18 October 2009
By Kathleen Barrington
The Dublin Docklands Development Authority risked taxpayers’ money by getting involved in the consortium that bought the old Irish Glass Bottle site in Dublin for €413million at the height of the property boom in 2006.
As revealed in last week’s Sunday Business Post, the value of that site is now being written down to just €60 million - a fall of 85 per cent - following a valuation done by leading auctioneers Lisneys.
Given that the authority owns 26 per cent of the consortium that bought the site, the taxpayer is now sitting on paper losses of about €90 million on its original investment in the site.
It is bad enough that the taxpayer is suffering such massive losses on ill-judged forays into speculative development. But that is not the end of the taxpayers’ liability in the matter.
To add insult to injury, it appears the taxpayer may be liable for far more than the €90 million drop in the value of the site, because of the manner in which its involvement with the Becbay consortium was structured when acquiring the Irish Glass Bottle site.
For starters, the authority guaranteed the liabilities of Becbay to the tune of €26 million and interest payments of up to €6 million, according to its 2007 accounts. But that may be only the tip of a very large iceberg moving in the taxpayer’s direction.
It has also emerged that the taxpayer may be liable for substantial clean-up costs associated with preparing the site for redevelopment.
In response to a Dáil question from Fine Gael’s Phil Hogan last September, Minister for the Environment John Gormley said that the site must be fully decommissioned, and that any contamination resulting from industrial activities previously carried out at the site ‘‘must be fully remediated.’’
In addition, it would appear from minutes of the authority’s meetings obtained by Hogan under the Freedom of Information Act, that during 2008 the authority was racking up costs associated with cleaning up the site.
These costs are likely to be made public when the authority publishes its annual report and accounts for 2008, which are already overdue.
The scale of the costs cannot be gleaned from the minutes, as many financial details have been blacked out. But the frequency with which the matter was discussed by the members of the authority during 2008 - coupled with heightened concerns that the authority’s members might have conflicts of interest on the Becbay issue - strongly suggests that the Becbay joint venture was rapidly becoming a matter of deep financial concern for the authority.
For instance, the minutes of the authority’s meeting of March 6 refer to negotiations with the banks in respect of working capital for the Irish Glass Bottle site. The issue of potential conflicts of interest also emerged in March.
One of the authority’s directors, Niamh O’Sullivan, disclosed that engineering firm Arups had been retained by Becbay in respect of remediation and site clearance. She said that, as a director of Arups, she would be directly involved in the project.
Having considered the issues, the minutes record that the board felt there was no actual or perceived conflict.
In May 2008, the board agreed in principle to operational funding to enhance the Irish Glass Bottle site by remediation and site clearance. It is unclear how much funding was sought, due to the blacked-out sections previously referred to.
In June 2008, there were also references to additional funding for Becbay - though, again, the amount was not specified in the released parts of the minutes. In July 2008, the minutes state that the new Anglo Irish Bank facility had been put in place for the Becbay joint venture.
In September 2008, chairman Donal O’Connor reminded members of his previous declaration in respect of his directorship of Anglo Irish Bank, and explained that he intended to excuse himself from the board meeting when there was any discussion dealing directly with the AIB/Anglo loan facility to Becbay.
At that meeting, the director of finance gave a presentation to the board which detailed how the transaction with Becbay was originally conceived and structured and outlined the ongoing work which had been undertaken by Becbay to arrange remediation of the site.
According to the minutes, the presentation also detailed the costs being incurred by the authority in respect of interest and the authority’s contribution to the cost of ongoing work.
This presentation is a key document which is likely to be of enormous interest to the taxpayer, as it should answer the question of why the taxpayer was being called on to fund those interest and remediation payments. So far, Hogan has been unable to obtain sight of that key document.
The matter surfaced again in October 2008, when O’Connor again declared a conflict of interest and left the meeting. O’Sullivan also left the meeting on the grounds that a perceived conflict might be alleged.
In the absence of the potentially conflicted directors, the authority was briefed on concerns in relation to the project. The nature of those concerns is unclear, given the aforementioned blacking out of large sections of the minutes.
Last December, the board set up a sub-committee to deal with issues relating to the Irish Glass Bottle/Becbay site.
It is important to remember that the other members of the consortium are property developers Bernard McNamara, who holds 41 per cent, and Derek Quinlan, who holds 33 per cent.
At the time that the Irish Glass Bottle site was purchased, McNamara and Quinlan were thought to be billionaires, who presumably would have had no problem drawing down funding themselves.
So why did they want to give a slice of the action to the state-owned Dublin Docklands Development Authority? And why did the authority want to put taxpayers’ money into the project?
Some sources have suggested that the billionaires may have seen merit in having the authority as a partner, given that it was also the planning authority for the Irish Glass Bottle site.
But the big question is whether the billionaires saw the taxpayer as a good mark for shouldering some of the remediation costs required for the site and whether the participation of a state-owned company with deep pockets gave comfort to Anglo Irish Bank and AIB, which were lending to the Becbay consortium.
O’Connor resigned as chairman of the DDDA at the end of December. John Gormley has sent in Professor Niamh Brennan, a corporate governance expert, to sort out the mess. Since her arrival, the chief executive, Paul Maloney, has fallen on his sword.
The taxpayer, meanwhile, is awaiting a fuller explanation of how much of their money has been lost, why their money was put at risk in the first place, and whether the perceived conflicts of interest at the DDDA had anything to do with this disaster.
--------------------------------------------------------------------------------
© Thomas Crosbie Media, 2009
By Kathleen Barrington
The Dublin Docklands Development Authority risked taxpayers’ money by getting involved in the consortium that bought the old Irish Glass Bottle site in Dublin for €413million at the height of the property boom in 2006.
As revealed in last week’s Sunday Business Post, the value of that site is now being written down to just €60 million - a fall of 85 per cent - following a valuation done by leading auctioneers Lisneys.
Given that the authority owns 26 per cent of the consortium that bought the site, the taxpayer is now sitting on paper losses of about €90 million on its original investment in the site.
It is bad enough that the taxpayer is suffering such massive losses on ill-judged forays into speculative development. But that is not the end of the taxpayers’ liability in the matter.
To add insult to injury, it appears the taxpayer may be liable for far more than the €90 million drop in the value of the site, because of the manner in which its involvement with the Becbay consortium was structured when acquiring the Irish Glass Bottle site.
For starters, the authority guaranteed the liabilities of Becbay to the tune of €26 million and interest payments of up to €6 million, according to its 2007 accounts. But that may be only the tip of a very large iceberg moving in the taxpayer’s direction.
It has also emerged that the taxpayer may be liable for substantial clean-up costs associated with preparing the site for redevelopment.
In response to a Dáil question from Fine Gael’s Phil Hogan last September, Minister for the Environment John Gormley said that the site must be fully decommissioned, and that any contamination resulting from industrial activities previously carried out at the site ‘‘must be fully remediated.’’
In addition, it would appear from minutes of the authority’s meetings obtained by Hogan under the Freedom of Information Act, that during 2008 the authority was racking up costs associated with cleaning up the site.
These costs are likely to be made public when the authority publishes its annual report and accounts for 2008, which are already overdue.
The scale of the costs cannot be gleaned from the minutes, as many financial details have been blacked out. But the frequency with which the matter was discussed by the members of the authority during 2008 - coupled with heightened concerns that the authority’s members might have conflicts of interest on the Becbay issue - strongly suggests that the Becbay joint venture was rapidly becoming a matter of deep financial concern for the authority.
For instance, the minutes of the authority’s meeting of March 6 refer to negotiations with the banks in respect of working capital for the Irish Glass Bottle site. The issue of potential conflicts of interest also emerged in March.
One of the authority’s directors, Niamh O’Sullivan, disclosed that engineering firm Arups had been retained by Becbay in respect of remediation and site clearance. She said that, as a director of Arups, she would be directly involved in the project.
Having considered the issues, the minutes record that the board felt there was no actual or perceived conflict.
In May 2008, the board agreed in principle to operational funding to enhance the Irish Glass Bottle site by remediation and site clearance. It is unclear how much funding was sought, due to the blacked-out sections previously referred to.
In June 2008, there were also references to additional funding for Becbay - though, again, the amount was not specified in the released parts of the minutes. In July 2008, the minutes state that the new Anglo Irish Bank facility had been put in place for the Becbay joint venture.
In September 2008, chairman Donal O’Connor reminded members of his previous declaration in respect of his directorship of Anglo Irish Bank, and explained that he intended to excuse himself from the board meeting when there was any discussion dealing directly with the AIB/Anglo loan facility to Becbay.
At that meeting, the director of finance gave a presentation to the board which detailed how the transaction with Becbay was originally conceived and structured and outlined the ongoing work which had been undertaken by Becbay to arrange remediation of the site.
According to the minutes, the presentation also detailed the costs being incurred by the authority in respect of interest and the authority’s contribution to the cost of ongoing work.
This presentation is a key document which is likely to be of enormous interest to the taxpayer, as it should answer the question of why the taxpayer was being called on to fund those interest and remediation payments. So far, Hogan has been unable to obtain sight of that key document.
The matter surfaced again in October 2008, when O’Connor again declared a conflict of interest and left the meeting. O’Sullivan also left the meeting on the grounds that a perceived conflict might be alleged.
In the absence of the potentially conflicted directors, the authority was briefed on concerns in relation to the project. The nature of those concerns is unclear, given the aforementioned blacking out of large sections of the minutes.
Last December, the board set up a sub-committee to deal with issues relating to the Irish Glass Bottle/Becbay site.
It is important to remember that the other members of the consortium are property developers Bernard McNamara, who holds 41 per cent, and Derek Quinlan, who holds 33 per cent.
At the time that the Irish Glass Bottle site was purchased, McNamara and Quinlan were thought to be billionaires, who presumably would have had no problem drawing down funding themselves.
So why did they want to give a slice of the action to the state-owned Dublin Docklands Development Authority? And why did the authority want to put taxpayers’ money into the project?
Some sources have suggested that the billionaires may have seen merit in having the authority as a partner, given that it was also the planning authority for the Irish Glass Bottle site.
But the big question is whether the billionaires saw the taxpayer as a good mark for shouldering some of the remediation costs required for the site and whether the participation of a state-owned company with deep pockets gave comfort to Anglo Irish Bank and AIB, which were lending to the Becbay consortium.
O’Connor resigned as chairman of the DDDA at the end of December. John Gormley has sent in Professor Niamh Brennan, a corporate governance expert, to sort out the mess. Since her arrival, the chief executive, Paul Maloney, has fallen on his sword.
The taxpayer, meanwhile, is awaiting a fuller explanation of how much of their money has been lost, why their money was put at risk in the first place, and whether the perceived conflicts of interest at the DDDA had anything to do with this disaster.
--------------------------------------------------------------------------------
© Thomas Crosbie Media, 2009
Sunday, October 11, 2009
Living in the shadow of negative equity
Sunday, October 11, 2009
By Kathleen Barrington
Glenn Stevens’ decision to push up interest rates by 0.25 per cent has been interpreted as a sign that the savvy Australian Central Bank Governor believes a global recovery may be just around the corner.
The prospect of a global recovery is good news, but for Ireland’s hard-pressed mortgage holders it is simply a reminder that interest rates will ultimately rise in Europe too.
That will increase the cost of servicing mortgages on homes, many of which are already in negative equity, meaning that the mortgage is greater than the house is worth.
The scale of that negative equity was thrown into sharp focus last week when the Economic and Social Research Institute (ESRI) published a study showing that the decline experienced in Irish house prices to date coupled with the anticipated decline this year would push 116,000 borrowers into negative equity. That represents 18 per cent of households with mortgage debt.
Author David Duffy reckons as many as 196,000 borrowers could be in negative equity by 2010, representing almost 30 per cent of households with mortgage debt. Those figures are substantially higher than for Britain or the US, suggesting that the negative equity problem is greater here than elsewhere.
Duffy’s research pins some of the blame for the negative equity problem on certain newer financial products such as mortgages with longer terms, higher loan to value (LTV) ratios or interest only mortgages.
‘‘Estimating the numbers in negative equity indicates that higher LTVs, interest only mortgages and a longer mortgage term contributes to higher numbers exposed to negative equity.,” he says.
‘‘The housing market boom also saw financial product ‘innovation’ to encourage or facilitate home ownership. Mortgage products with terms longer than the traditional 20 years were introduced.
Loan to value ratios began to increase and borrowers were able to access 100 per cent mortgages compared to the previous maximum of 92 per cent for most borrowers. Lending criteria moved from income multiples to a limit based on the ratio of mortgage service cost to income. Interest only mortgages were introduced. Finally, lenders began to target the sub prime mortgage sector.”
In short, financial innovation appears to have left consumers more exposed to negative equity.
The million dollar question is whether Irish mortgage holders in negative equity will default on their mortgage debt, leaving the banks with yet another raft of bad mortgage loans on top of their toxic development loans.
Duffy points out that negative equity is considered to be a contributing factor to mortgage default, though US research has shown that negative equity in itself does not cause default but is rather a condition of default.
About 10 per cent of US households that fall into negative equity ultimately default. It should be pointed out, however, that borrowers can more easily walk away from their debts in the US than here as the loans are secured exclusively on the homes, whereas in Ireland consumers are liable to repay the debt owed to the bank even when the home has been repossessed.
Even so, negative equity is likely to become a major problem for borrowers if they lose their jobs, become ill or want to divorce leaving them to sell their homes at less than what they paid for them and still owing the bank the difference - a difference which they may be unable or unwilling to pay.
The scale of interest-only mortgages sold to borrowers is a cause for concern, at a time when anecdotal evidence suggests that many buy-to-let investors find that the rents they are getting from their tenants are insufficient to cover even the interest, never mind the capital repayments.
The scale of the mortgage debt in Ireland is absolutely enormous.
Duffy notes that there was a huge increase in the level of residential mortgage debt outstanding from €14 billion in December 1996 to nearly €148 billion in December 2008.
On the assumption that interest rates in the EU will rise as an economic recovery takes hold, the cost to borrowers of repaying that €148 billion in mortgage debt is set to increase from its current historic lows.
The question is whether borrowers will be able to afford those higher repayments given that the outlook for the domestic economy still looks relatively bleak.
Derek Brawn, an economist and former banker, reckons that consumers will be paying almost €500 a month more on a standard €300,000 mortgage in three years’ time. Brawn based his prediction on the assumption that mortgage holders will be paying almost 6 per cent on a standard variable mortgage by 2012.
That’s because the money markets are expecting the European Central Bank (ECB) to begin raising interest rates by July next year, rising 3 per cent by March 2012. Brawn reckons Irish banks will also widen the margins they charge over the ECB rate to the higher levels they enjoyed before the boom, a process that already began when Permanent TSB pushed up rates by 0.50 per cent even though the ECB held rates unchanged at their current historic lows.
What does it mean, however, for the average Joe/Josephine Soap?
‘‘It means 6 per cent home loan rates in 2012 as opposed to the average 3.25 per cent today. A typical mortgagee with a €300,000 25-year loan at 3.25 per cent APR is paying €1,462 per month. That figure will be €470 per month higher in three years’ time’’ Brawn said.
‘‘This will be on top of pay cuts, lower home values, massive emigration, persistently higher unemployment levels and rising home foreclosures,” he predicted. The calculations are based on standard variable mortgages and do not apply to tracker mortgages which consumers may have bought at favourable rates during the boom years.
Brawn, a former economist with Savills Hamilton Osborne King and a former executive with investment banks UBS and Morgan Stanley, predicted that there ‘‘will be less lending and less credit availability going forward, especially compared to before. Plus banks will be lending to fewer people and charging more.”
The question is whether those higher interest rates will represent too great a burden for borrowers to shoulder and what will happen if they default in large numbers? Will the government take measures to keep defaulters in their homes at the taxpayers’ expense? Or will it stand idly by as the banks, which have been bailed out at taxpayers’ expense, repossess those homes and throw the defaulting borrowers out on the streets?
By Kathleen Barrington
Glenn Stevens’ decision to push up interest rates by 0.25 per cent has been interpreted as a sign that the savvy Australian Central Bank Governor believes a global recovery may be just around the corner.
The prospect of a global recovery is good news, but for Ireland’s hard-pressed mortgage holders it is simply a reminder that interest rates will ultimately rise in Europe too.
That will increase the cost of servicing mortgages on homes, many of which are already in negative equity, meaning that the mortgage is greater than the house is worth.
The scale of that negative equity was thrown into sharp focus last week when the Economic and Social Research Institute (ESRI) published a study showing that the decline experienced in Irish house prices to date coupled with the anticipated decline this year would push 116,000 borrowers into negative equity. That represents 18 per cent of households with mortgage debt.
Author David Duffy reckons as many as 196,000 borrowers could be in negative equity by 2010, representing almost 30 per cent of households with mortgage debt. Those figures are substantially higher than for Britain or the US, suggesting that the negative equity problem is greater here than elsewhere.
Duffy’s research pins some of the blame for the negative equity problem on certain newer financial products such as mortgages with longer terms, higher loan to value (LTV) ratios or interest only mortgages.
‘‘Estimating the numbers in negative equity indicates that higher LTVs, interest only mortgages and a longer mortgage term contributes to higher numbers exposed to negative equity.,” he says.
‘‘The housing market boom also saw financial product ‘innovation’ to encourage or facilitate home ownership. Mortgage products with terms longer than the traditional 20 years were introduced.
Loan to value ratios began to increase and borrowers were able to access 100 per cent mortgages compared to the previous maximum of 92 per cent for most borrowers. Lending criteria moved from income multiples to a limit based on the ratio of mortgage service cost to income. Interest only mortgages were introduced. Finally, lenders began to target the sub prime mortgage sector.”
In short, financial innovation appears to have left consumers more exposed to negative equity.
The million dollar question is whether Irish mortgage holders in negative equity will default on their mortgage debt, leaving the banks with yet another raft of bad mortgage loans on top of their toxic development loans.
Duffy points out that negative equity is considered to be a contributing factor to mortgage default, though US research has shown that negative equity in itself does not cause default but is rather a condition of default.
About 10 per cent of US households that fall into negative equity ultimately default. It should be pointed out, however, that borrowers can more easily walk away from their debts in the US than here as the loans are secured exclusively on the homes, whereas in Ireland consumers are liable to repay the debt owed to the bank even when the home has been repossessed.
Even so, negative equity is likely to become a major problem for borrowers if they lose their jobs, become ill or want to divorce leaving them to sell their homes at less than what they paid for them and still owing the bank the difference - a difference which they may be unable or unwilling to pay.
The scale of interest-only mortgages sold to borrowers is a cause for concern, at a time when anecdotal evidence suggests that many buy-to-let investors find that the rents they are getting from their tenants are insufficient to cover even the interest, never mind the capital repayments.
The scale of the mortgage debt in Ireland is absolutely enormous.
Duffy notes that there was a huge increase in the level of residential mortgage debt outstanding from €14 billion in December 1996 to nearly €148 billion in December 2008.
On the assumption that interest rates in the EU will rise as an economic recovery takes hold, the cost to borrowers of repaying that €148 billion in mortgage debt is set to increase from its current historic lows.
The question is whether borrowers will be able to afford those higher repayments given that the outlook for the domestic economy still looks relatively bleak.
Derek Brawn, an economist and former banker, reckons that consumers will be paying almost €500 a month more on a standard €300,000 mortgage in three years’ time. Brawn based his prediction on the assumption that mortgage holders will be paying almost 6 per cent on a standard variable mortgage by 2012.
That’s because the money markets are expecting the European Central Bank (ECB) to begin raising interest rates by July next year, rising 3 per cent by March 2012. Brawn reckons Irish banks will also widen the margins they charge over the ECB rate to the higher levels they enjoyed before the boom, a process that already began when Permanent TSB pushed up rates by 0.50 per cent even though the ECB held rates unchanged at their current historic lows.
What does it mean, however, for the average Joe/Josephine Soap?
‘‘It means 6 per cent home loan rates in 2012 as opposed to the average 3.25 per cent today. A typical mortgagee with a €300,000 25-year loan at 3.25 per cent APR is paying €1,462 per month. That figure will be €470 per month higher in three years’ time’’ Brawn said.
‘‘This will be on top of pay cuts, lower home values, massive emigration, persistently higher unemployment levels and rising home foreclosures,” he predicted. The calculations are based on standard variable mortgages and do not apply to tracker mortgages which consumers may have bought at favourable rates during the boom years.
Brawn, a former economist with Savills Hamilton Osborne King and a former executive with investment banks UBS and Morgan Stanley, predicted that there ‘‘will be less lending and less credit availability going forward, especially compared to before. Plus banks will be lending to fewer people and charging more.”
The question is whether those higher interest rates will represent too great a burden for borrowers to shoulder and what will happen if they default in large numbers? Will the government take measures to keep defaulters in their homes at the taxpayers’ expense? Or will it stand idly by as the banks, which have been bailed out at taxpayers’ expense, repossess those homes and throw the defaulting borrowers out on the streets?
Sunday, September 27, 2009
Beware the public pensions bill
Sunday, September 27, 2009
By Kathleen Barrington
This time last year, the government told us that the public sector pension bill was €75 billion at the end of 2007.
Now, however, the annual report of the Comptroller and Auditor General (C&AG) has revealed that the bi l l amounted to a staggering €108 billion at the end of 2008. Even when you adjust the figure to take account of the contribution from the National Pensions Reserve Fund, John Buckley, the C&AG, calculated that the net public sector pension liability was €101 billion.
Whichever way you look at it, the public sector pension bill is now at least €26 billion more than was thought a year ago, a discrepancy which has attracted remarkably little attention.
At a time when the public is worried about the burden on future generations if the National Asset Management Agency (Nama) fails to make a return on the €54 billion IOU it proposes to issue for the banks’ toxic loans, it is worth noting that the public sector pension bill was by far the biggest long-term liability on the government’s balance sheet at the end of 2008.
The public sector pension bill is, for instance, twice the size of the second largest long-term liability on the government’s balance sheet, the €50 billion national debt.
The pension schemes in the public sector cover over 300,000 staff and 100,000 dependents. Teachers’ pensions account for €28 billion of the public sector pensions bill, followed by health professionals (€23 billion) and civil servants (€13.5 billion).
Among the other categories, the Defence Forces pension bill now stands at €8.5 billion, the Garda Siochana at €8 billion, VECs and Institutes of Technology at €6 billion, and the universities at €4.8 billion, to highlight a few. The pension bill doesn’t, of course, have to be paid straight away, as it takes account of pensions which will be spread over 60 years into the future.
If the government were a private sector company, it would have to report its net pension liability in its annual report and accounts each year, even though much of it is not payable for many years. But governments are not required to publish accounts in the same way as private sector companies, with the result that public sector pension holes tend to attract far less attention than private sector ones.
There is an important distinction in that, unlike companies, governments can raise the funds they require in the form of taxes when they need to meet their liabilities at some point in the future.
The question is whether some of the pensions bill now being stored up for the future generation of taxpayers is disproportionately large, especially given all the other pressures on the public finances due to the downturn in the economy. Governments rarely worry about the problems that they are leaving behind for future generations, preferring instead to court current voter popularity by doling out the goodies when they are in power.
We don’t know for sure why the pension bill has soared so dramatically in a one-year period. It is possible that the C&AG has used some new methodology for accounting for the public sector pension liabilities.
This should become clear when the government presents Buckley’s Special Reporton Public Service Pensions to the Dail in the next few months. However, it is likely that one part of the answer is that the soaring pension bill reflects the impact of the government’s decision to employ more public sector staff and to pay them extraordinarily generously in recent years.
Last week, the Economic Social and Research Institute (ESRI) published a report which found that state employees were earning up to 25 per cent more than private sector workers in 2006.
The ESRI found that in 2003, public sector workers earned on average 9.7 per cent more than their private sector counterparts. By 2006, they were earning 21.6 per cent more.
When the value of public sector pensions was factored in, the ESRI reckoned public sector workers were earning almost 25 per cent more than their private sector counterparts.
The ESRI noted that its results predated the payment of the two most recent Social Partnership wage deals, along with the pay increases awarded in the second Benchmarking exercise and by the Review Body on Higher Remuneration.
It is likely that some of those additional pay increases will have added to the public sector pension bill as practically all public sector pensions are defined benefit schemes under which the benefits payable are based on the final salary at the date of retirement, while post-retirement increases are awarded in line with pay increases.
It is important to point out that the ESRI findings predate the decision by the government to introduce the public sector pension levy in March this year under the Financial Measures in the Public Interest Act.
The pension levy will, of course, go some way towards the desirable goal of getting public servants to contribute towards the cost of funding retirement benefits, the bulk of which are currently carried by the ordinary taxpayer, including less well-off taxpayers who will themselves have only the relatively paltry state pension to rely on in retirement.
The ESRI noted that its findings raise serious questions with respect to the justification for any further boosts to the pay levels of public sector workers. It also highlighted the importance of correcting for differences in pension coverage between public and private sector workers when making any assessment of the public-private sector pay differential.
Taken together, the ESRI report, the C&AG’s annual report and the C&AG’s yet-to-be-published special report will help the public focus on the size of the public sector pay bill and the related pension bill which we are storing up for the country in the future.
At a time when many private sector workers are losing their jobs and some are even being forced to emigrate due to the lack of opportunities here, it is important that we keep the public sector pay and pensions bill in check.
Otherwise, the burden of taxation that will fall on the shoulders of private sector workers will be so great as to stymie future economic recovery.
By Kathleen Barrington
This time last year, the government told us that the public sector pension bill was €75 billion at the end of 2007.
Now, however, the annual report of the Comptroller and Auditor General (C&AG) has revealed that the bi l l amounted to a staggering €108 billion at the end of 2008. Even when you adjust the figure to take account of the contribution from the National Pensions Reserve Fund, John Buckley, the C&AG, calculated that the net public sector pension liability was €101 billion.
Whichever way you look at it, the public sector pension bill is now at least €26 billion more than was thought a year ago, a discrepancy which has attracted remarkably little attention.
At a time when the public is worried about the burden on future generations if the National Asset Management Agency (Nama) fails to make a return on the €54 billion IOU it proposes to issue for the banks’ toxic loans, it is worth noting that the public sector pension bill was by far the biggest long-term liability on the government’s balance sheet at the end of 2008.
The public sector pension bill is, for instance, twice the size of the second largest long-term liability on the government’s balance sheet, the €50 billion national debt.
The pension schemes in the public sector cover over 300,000 staff and 100,000 dependents. Teachers’ pensions account for €28 billion of the public sector pensions bill, followed by health professionals (€23 billion) and civil servants (€13.5 billion).
Among the other categories, the Defence Forces pension bill now stands at €8.5 billion, the Garda Siochana at €8 billion, VECs and Institutes of Technology at €6 billion, and the universities at €4.8 billion, to highlight a few. The pension bill doesn’t, of course, have to be paid straight away, as it takes account of pensions which will be spread over 60 years into the future.
If the government were a private sector company, it would have to report its net pension liability in its annual report and accounts each year, even though much of it is not payable for many years. But governments are not required to publish accounts in the same way as private sector companies, with the result that public sector pension holes tend to attract far less attention than private sector ones.
There is an important distinction in that, unlike companies, governments can raise the funds they require in the form of taxes when they need to meet their liabilities at some point in the future.
The question is whether some of the pensions bill now being stored up for the future generation of taxpayers is disproportionately large, especially given all the other pressures on the public finances due to the downturn in the economy. Governments rarely worry about the problems that they are leaving behind for future generations, preferring instead to court current voter popularity by doling out the goodies when they are in power.
We don’t know for sure why the pension bill has soared so dramatically in a one-year period. It is possible that the C&AG has used some new methodology for accounting for the public sector pension liabilities.
This should become clear when the government presents Buckley’s Special Reporton Public Service Pensions to the Dail in the next few months. However, it is likely that one part of the answer is that the soaring pension bill reflects the impact of the government’s decision to employ more public sector staff and to pay them extraordinarily generously in recent years.
Last week, the Economic Social and Research Institute (ESRI) published a report which found that state employees were earning up to 25 per cent more than private sector workers in 2006.
The ESRI found that in 2003, public sector workers earned on average 9.7 per cent more than their private sector counterparts. By 2006, they were earning 21.6 per cent more.
When the value of public sector pensions was factored in, the ESRI reckoned public sector workers were earning almost 25 per cent more than their private sector counterparts.
The ESRI noted that its results predated the payment of the two most recent Social Partnership wage deals, along with the pay increases awarded in the second Benchmarking exercise and by the Review Body on Higher Remuneration.
It is likely that some of those additional pay increases will have added to the public sector pension bill as practically all public sector pensions are defined benefit schemes under which the benefits payable are based on the final salary at the date of retirement, while post-retirement increases are awarded in line with pay increases.
It is important to point out that the ESRI findings predate the decision by the government to introduce the public sector pension levy in March this year under the Financial Measures in the Public Interest Act.
The pension levy will, of course, go some way towards the desirable goal of getting public servants to contribute towards the cost of funding retirement benefits, the bulk of which are currently carried by the ordinary taxpayer, including less well-off taxpayers who will themselves have only the relatively paltry state pension to rely on in retirement.
The ESRI noted that its findings raise serious questions with respect to the justification for any further boosts to the pay levels of public sector workers. It also highlighted the importance of correcting for differences in pension coverage between public and private sector workers when making any assessment of the public-private sector pay differential.
Taken together, the ESRI report, the C&AG’s annual report and the C&AG’s yet-to-be-published special report will help the public focus on the size of the public sector pay bill and the related pension bill which we are storing up for the country in the future.
At a time when many private sector workers are losing their jobs and some are even being forced to emigrate due to the lack of opportunities here, it is important that we keep the public sector pay and pensions bill in check.
Otherwise, the burden of taxation that will fall on the shoulders of private sector workers will be so great as to stymie future economic recovery.
Sunday, September 20, 2009
How media helped inflate the bubble
20 September 2009
By Kathleen Barrington
The other day, I went to hear journalists David Murphy and Martina Devlin read from their best-selling book, Banksters, at Dun Laoghaire Book Festival.
It is a testament to the interest of the public in the economic crisis that there was a relatively good turnout for the reading, considering it was a rare sunny Sunday at the end of a disappointing summer.
There were many questions from the floor from an audience clearly engaging with the subject matter. One question raised was the role of the media in inflating the property and banking bubbles. Murphy, RTE’s well-regarded Business Editor, later told me that he had spoken at three such meetings.
At every single one of them, members of the public had raised the question of the media’s role.
The public tends to focus critically on the supplements stuffed with property advertising published by many newspapers during the boom years. They also point to TV programmes sponsored by financial institutions featuring lavish home renovations in Ireland or property-buying opportunities in sunny locations abroad.
The property supplements were probably best described by commentator David McWilliams as ‘‘property porn’’. It is certainly likely that the sheer volume of such property porn did influence the public psyche.
But the property porn did at least have the advantage of being naked in its intentions, whereas there are other ways in which coverage may be influenced that are not so clear to the public.
For instance , Murphy also highlighted the fact that business journalists may have erred in relying too heavily on bank and stockbroker economists in their reporting, though he noted, too, that the Central Bank of Ireland, which was an independent authority, also subscribed to the soft landing theory for the housing market.
This is not a uniquely Irish problem. Murphy told the Insider that when he attended a meeting of the European Broadcasting Union, business editors from a number of European countries had voiced concerns about the reliance of broadcasters on bank economists in their programming.
You might think the main role of the bank economist would be to produce accurate economic information for the bank and the public. But a job description for the position of economist at an Irish bank, seen by the Insider, suggests the economist has specific responsibility for gaining profile and branding for the bank through the media.
It says key responsibilities include developing strong working relationships with relevant journalists and producers in the various media. That responsibility is listed ahead of the job of assessing the impact of changes in economic conditions on households and businesses.
The key performance indicators for the economist are listed as the level and breadth of media coverage and the effectiveness of media coverage in presenting the bank’s image.
I do not know if the job descriptions of economists working at other private sector institutions are similarly worded. But, as a working journalist, I can testify to the ready availability of industry spokesmen who are totally tuned in to the deadlines of an often harried media community.
Their sheer accessibility effectively guarantees them easy access to the media compared with economists working in academia who may not be so readily available due to competing duties such as teaching and research projects.
It has been a striking feature of the property and banking crash that many of those academic economists have quit their ivory towers to participate in the debate about finding solutions to our current crisis - greatly recalibrating the balance of the public debate.
The problems faced by journalists who voiced concerns about the property bubble may also have acted as a deterrent.
Some were ridiculed or parodied by the establishment (George Lee, David McWilliams), one (Richard Delevan) lost his job following complaints from an estate agent, while another (our own Richard Curran) was the subject of complaints from angry estate agents to the broadcasting commission about his Future Shock property programme, complaints which happily weren’t upheld.
The media has focused on the need for better corporate governance at the banks in the wake of the property and banking crashes. But there may also be a need for improved governance in the media industry to ensure that the media is sufficiently independent of vested interests, particularly in cases where media organisations are funded by the taxpayer.
The Insider is aware that some student journalists are preparing dissertations on the role of the media in inflating the property and banking bubbles. There is certainly no shortage of angles they might investigate.
Banksters: How a Powerful Elite Squandered Ireland’s Wealth by David Murphy and Martina Devlin, published by Hachette Books Ireland
By Kathleen Barrington
The other day, I went to hear journalists David Murphy and Martina Devlin read from their best-selling book, Banksters, at Dun Laoghaire Book Festival.
It is a testament to the interest of the public in the economic crisis that there was a relatively good turnout for the reading, considering it was a rare sunny Sunday at the end of a disappointing summer.
There were many questions from the floor from an audience clearly engaging with the subject matter. One question raised was the role of the media in inflating the property and banking bubbles. Murphy, RTE’s well-regarded Business Editor, later told me that he had spoken at three such meetings.
At every single one of them, members of the public had raised the question of the media’s role.
The public tends to focus critically on the supplements stuffed with property advertising published by many newspapers during the boom years. They also point to TV programmes sponsored by financial institutions featuring lavish home renovations in Ireland or property-buying opportunities in sunny locations abroad.
The property supplements were probably best described by commentator David McWilliams as ‘‘property porn’’. It is certainly likely that the sheer volume of such property porn did influence the public psyche.
But the property porn did at least have the advantage of being naked in its intentions, whereas there are other ways in which coverage may be influenced that are not so clear to the public.
For instance , Murphy also highlighted the fact that business journalists may have erred in relying too heavily on bank and stockbroker economists in their reporting, though he noted, too, that the Central Bank of Ireland, which was an independent authority, also subscribed to the soft landing theory for the housing market.
This is not a uniquely Irish problem. Murphy told the Insider that when he attended a meeting of the European Broadcasting Union, business editors from a number of European countries had voiced concerns about the reliance of broadcasters on bank economists in their programming.
You might think the main role of the bank economist would be to produce accurate economic information for the bank and the public. But a job description for the position of economist at an Irish bank, seen by the Insider, suggests the economist has specific responsibility for gaining profile and branding for the bank through the media.
It says key responsibilities include developing strong working relationships with relevant journalists and producers in the various media. That responsibility is listed ahead of the job of assessing the impact of changes in economic conditions on households and businesses.
The key performance indicators for the economist are listed as the level and breadth of media coverage and the effectiveness of media coverage in presenting the bank’s image.
I do not know if the job descriptions of economists working at other private sector institutions are similarly worded. But, as a working journalist, I can testify to the ready availability of industry spokesmen who are totally tuned in to the deadlines of an often harried media community.
Their sheer accessibility effectively guarantees them easy access to the media compared with economists working in academia who may not be so readily available due to competing duties such as teaching and research projects.
It has been a striking feature of the property and banking crash that many of those academic economists have quit their ivory towers to participate in the debate about finding solutions to our current crisis - greatly recalibrating the balance of the public debate.
The problems faced by journalists who voiced concerns about the property bubble may also have acted as a deterrent.
Some were ridiculed or parodied by the establishment (George Lee, David McWilliams), one (Richard Delevan) lost his job following complaints from an estate agent, while another (our own Richard Curran) was the subject of complaints from angry estate agents to the broadcasting commission about his Future Shock property programme, complaints which happily weren’t upheld.
The media has focused on the need for better corporate governance at the banks in the wake of the property and banking crashes. But there may also be a need for improved governance in the media industry to ensure that the media is sufficiently independent of vested interests, particularly in cases where media organisations are funded by the taxpayer.
The Insider is aware that some student journalists are preparing dissertations on the role of the media in inflating the property and banking bubbles. There is certainly no shortage of angles they might investigate.
Banksters: How a Powerful Elite Squandered Ireland’s Wealth by David Murphy and Martina Devlin, published by Hachette Books Ireland
Sunday, September 13, 2009
Nama plan has echoes of 1985
13 September 2009
By Kathleen Barrington
As the Dáil debate on the government’s proposed National Asset Management Agency (Nama) looms this week, it is interesting to review the response to the then Fine Gael/Labour coalition’s plan to rescue AIB’s Insurance Corporation of Ireland (ICI) subsidiary amid fears that, if it was allowed to go bust, there could have been a run on AIB.
It was 1985 whenthe exchequer borrowing requirement was running at over 12.5 per cent of GNP, and individuals were being taxed to the hilt. The scale of the ICI collapse was seen as enormous relative to the size of AIB at the time, and the taxpayer could ill afford to bail it out.
The best government estimate of ICI’s losses was between IR£50 million (€63.5 million) and IR£120 million, though figures as high as IR£500 million were also being bandied about. The potential liabilities were very large compared with AIB’s shareholders’ funds - which then stood at IR£277 million.
Garret FitzGerald’s government and the monetary authorities feared that AIB’s foreign depositors and bondholders might run the bank, as had happened not long before in the case of Continental Illinois Bank in the US.
FitzGerald, then finance minister Alan Dukes and trade minister John Bruton were forced to face down criticism not only from the Fianna Fáil opposition - particularly from one Charles J Haughey and his Mayo deputy, Padraig Flynn - but also from within their own party and the Labour Party, which nevertheless supported the bailout bill in the end.
There was outrage at the proposal to bail out AIB with taxpayers’ money, particularly in circumstances where taxpayers’ liability in the matter was unusually difficult to quantify because ICI had written insurance covering asbestos, pollution and health risks, where claims might be made long into the future.
Media commentators, such as the Irish Times’s political correspondent Dick Walsh, were not slow to highlight the hypocrisy of hard-headed businessmen who ‘‘complain about helping lame ducks in the public sector’’, but ‘‘have no compunction about demanding assistance for the lame ducks in their own’’.
Walsh also fretted that taxpayers and consumers would be forced to pick up the tab for the bailout in the form of taxes and higher charges.
In fact, things weren’t much different from what we are facing today, insofar as each of the players recited the lines you would expect, according to the parts they were then playing. The government proposed, the opposition gave the government hell, the backbenchers moaned, the business people looked after their business interests and journalists didn’t refuse ink.
In the ensuing months and years, many observers would seize on certain events to justify their positions - be it that the bailout was a very bad thing or that it was the best option available.
The strategy employed by the Central Bank at the time of the 1985 bailout was an initial advance of IR£100 million at a low interest rate which was subsidised by the banking sector. (AIB subsequently repaid this money in 2000 as originally envisaged.
There was also an interest-free advance of about IR£34 million in 1993 which was repaid in December 2002.)
The fact that the then AIB chief executive, Gerry Scanlan, bought 50,000 shares in AIB the night before the Central Bank announced its rescue package - only to see those shares rise by 25 per cent just two days later - left an indelible mark on the bailout’s critics. It certainly did nothing to reassure the public that the bankers who had made mistakes in buying ICI and failing adequately to supervise it were paying a suitable price for their mistakes.
But, on the other hand, the Fine Gael/Labour coalition could argue that the country’s worst banking crisis had been averted with relatively little market disruption or, indeed, disruption to ICI’s policyholders.
Still, there remained a feeling that AIB and ICI had got off extremely lightly. Eventually, Progressive Democrats leader Desmond O’Malley managed to extricate a wedge more money from AIB which had not been part of the original agreement.
He was not strictly legally entitled to do this, but he basically refused to give AIB a licence to re-enter the insurance market in the 1990s until the bank caved in to his demands to pony up a further IR£176 million, spread out over a number of years.
By 1997, economist and professor Patrick Honohan (who, just last week, was appointed by the government to succeed John Hurley as governor of the Central Bank) was writing in the journal, Administration, that the ICI bailout outcome had ‘‘proved reasonably satisfactory’’.
From 1985 to 1997, ICI’s fortunes were turned around. Unprofitable business was curtailed, profitable subsidiaries in banking and life insurance were sold for good prices and, eventually, the core non-life business of the company was sold to a foreign insurance company and continued to trade profitably under its old name.
Donal O’Connor, the PricewaterhouseCoopers accountant who administered the bailout of ICI through a vehicle known as Icarom, also succeeded in recovering about €300 million from overseas re-insurers although, as he was happy to remind the Insider last week, a number of international commentators said at the time that this would be impossible.
Honohan calculated in 1997 that the cash cost of bailing out ICI amounted to about IR£403 million. Of that, IR£277 million (or 70 per cent) was borne by AIB; IR£34 million by the government; IR£78 million by accountants Ernst & Whinney,
against whom AIB took legal action on foot of the accountants’ due diligence of ICI prior to its acquisition by AIB; and IR£14 million contributed by other banks forced to participate in funding the rescue. Honohan calculated that the figure worked out at IR£185 million in 1985 terms.
Of course, the final cost of bailing out ICI cannot yet be fully calculated, as O’Connor is still winding it down, a process that could yet take years. However, O’Connor said this weekend that the only cost to the exchequer to date had been the interest forgone on the government’s interest-free advance.
He added that the ‘‘current projections indicate that there will be a net profit to the exchequer as a result of the administration of ICI’’.
This calculation takes account, of course, of the fact that O’Malley got tough with AIB and, retrospectively, forced the bank to increase its contribution by a very large amount.
As we head down the Nama road, we can take some comfort from the fact that the ICI saga does, at least, show that what may appear as an almost insurmountable crisis can eventually be resolved. It also reminds us of the enormous power of government to extract more from businesses bailed out by the public purse at a later stage, if it is felt that taxpayers were hard done by.
Admittedly, the collapse of ICI was nowhere near as serious as the banking crisis we are now facing.
The scale of what is now being considered is truly awesome, given that practically every major bank in the country is teetering on the brink of bankruptcy.
Even so, it is interesting to note that it is the Fine Gaelers who were involved in helping solve the ICI crisis - namely FitzGerald and Dukes - who are now siding with the government in backing Nama, to the fury of the current Fine Gael leadership.
It seems that the ones who have soldiered in the trenches of a serious financial crisis, and struggled to win support for an unpopular solution, are telling us that they see no other realistic way out.
--------------------------------------------------------------------------------
© Thomas Crosbie Media, 2009
By Kathleen Barrington
As the Dáil debate on the government’s proposed National Asset Management Agency (Nama) looms this week, it is interesting to review the response to the then Fine Gael/Labour coalition’s plan to rescue AIB’s Insurance Corporation of Ireland (ICI) subsidiary amid fears that, if it was allowed to go bust, there could have been a run on AIB.
It was 1985 whenthe exchequer borrowing requirement was running at over 12.5 per cent of GNP, and individuals were being taxed to the hilt. The scale of the ICI collapse was seen as enormous relative to the size of AIB at the time, and the taxpayer could ill afford to bail it out.
The best government estimate of ICI’s losses was between IR£50 million (€63.5 million) and IR£120 million, though figures as high as IR£500 million were also being bandied about. The potential liabilities were very large compared with AIB’s shareholders’ funds - which then stood at IR£277 million.
Garret FitzGerald’s government and the monetary authorities feared that AIB’s foreign depositors and bondholders might run the bank, as had happened not long before in the case of Continental Illinois Bank in the US.
FitzGerald, then finance minister Alan Dukes and trade minister John Bruton were forced to face down criticism not only from the Fianna Fáil opposition - particularly from one Charles J Haughey and his Mayo deputy, Padraig Flynn - but also from within their own party and the Labour Party, which nevertheless supported the bailout bill in the end.
There was outrage at the proposal to bail out AIB with taxpayers’ money, particularly in circumstances where taxpayers’ liability in the matter was unusually difficult to quantify because ICI had written insurance covering asbestos, pollution and health risks, where claims might be made long into the future.
Media commentators, such as the Irish Times’s political correspondent Dick Walsh, were not slow to highlight the hypocrisy of hard-headed businessmen who ‘‘complain about helping lame ducks in the public sector’’, but ‘‘have no compunction about demanding assistance for the lame ducks in their own’’.
Walsh also fretted that taxpayers and consumers would be forced to pick up the tab for the bailout in the form of taxes and higher charges.
In fact, things weren’t much different from what we are facing today, insofar as each of the players recited the lines you would expect, according to the parts they were then playing. The government proposed, the opposition gave the government hell, the backbenchers moaned, the business people looked after their business interests and journalists didn’t refuse ink.
In the ensuing months and years, many observers would seize on certain events to justify their positions - be it that the bailout was a very bad thing or that it was the best option available.
The strategy employed by the Central Bank at the time of the 1985 bailout was an initial advance of IR£100 million at a low interest rate which was subsidised by the banking sector. (AIB subsequently repaid this money in 2000 as originally envisaged.
There was also an interest-free advance of about IR£34 million in 1993 which was repaid in December 2002.)
The fact that the then AIB chief executive, Gerry Scanlan, bought 50,000 shares in AIB the night before the Central Bank announced its rescue package - only to see those shares rise by 25 per cent just two days later - left an indelible mark on the bailout’s critics. It certainly did nothing to reassure the public that the bankers who had made mistakes in buying ICI and failing adequately to supervise it were paying a suitable price for their mistakes.
But, on the other hand, the Fine Gael/Labour coalition could argue that the country’s worst banking crisis had been averted with relatively little market disruption or, indeed, disruption to ICI’s policyholders.
Still, there remained a feeling that AIB and ICI had got off extremely lightly. Eventually, Progressive Democrats leader Desmond O’Malley managed to extricate a wedge more money from AIB which had not been part of the original agreement.
He was not strictly legally entitled to do this, but he basically refused to give AIB a licence to re-enter the insurance market in the 1990s until the bank caved in to his demands to pony up a further IR£176 million, spread out over a number of years.
By 1997, economist and professor Patrick Honohan (who, just last week, was appointed by the government to succeed John Hurley as governor of the Central Bank) was writing in the journal, Administration, that the ICI bailout outcome had ‘‘proved reasonably satisfactory’’.
From 1985 to 1997, ICI’s fortunes were turned around. Unprofitable business was curtailed, profitable subsidiaries in banking and life insurance were sold for good prices and, eventually, the core non-life business of the company was sold to a foreign insurance company and continued to trade profitably under its old name.
Donal O’Connor, the PricewaterhouseCoopers accountant who administered the bailout of ICI through a vehicle known as Icarom, also succeeded in recovering about €300 million from overseas re-insurers although, as he was happy to remind the Insider last week, a number of international commentators said at the time that this would be impossible.
Honohan calculated in 1997 that the cash cost of bailing out ICI amounted to about IR£403 million. Of that, IR£277 million (or 70 per cent) was borne by AIB; IR£34 million by the government; IR£78 million by accountants Ernst & Whinney,
against whom AIB took legal action on foot of the accountants’ due diligence of ICI prior to its acquisition by AIB; and IR£14 million contributed by other banks forced to participate in funding the rescue. Honohan calculated that the figure worked out at IR£185 million in 1985 terms.
Of course, the final cost of bailing out ICI cannot yet be fully calculated, as O’Connor is still winding it down, a process that could yet take years. However, O’Connor said this weekend that the only cost to the exchequer to date had been the interest forgone on the government’s interest-free advance.
He added that the ‘‘current projections indicate that there will be a net profit to the exchequer as a result of the administration of ICI’’.
This calculation takes account, of course, of the fact that O’Malley got tough with AIB and, retrospectively, forced the bank to increase its contribution by a very large amount.
As we head down the Nama road, we can take some comfort from the fact that the ICI saga does, at least, show that what may appear as an almost insurmountable crisis can eventually be resolved. It also reminds us of the enormous power of government to extract more from businesses bailed out by the public purse at a later stage, if it is felt that taxpayers were hard done by.
Admittedly, the collapse of ICI was nowhere near as serious as the banking crisis we are now facing.
The scale of what is now being considered is truly awesome, given that practically every major bank in the country is teetering on the brink of bankruptcy.
Even so, it is interesting to note that it is the Fine Gaelers who were involved in helping solve the ICI crisis - namely FitzGerald and Dukes - who are now siding with the government in backing Nama, to the fury of the current Fine Gael leadership.
It seems that the ones who have soldiered in the trenches of a serious financial crisis, and struggled to win support for an unpopular solution, are telling us that they see no other realistic way out.
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© Thomas Crosbie Media, 2009
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