by Shane Ross
Oligarchs old and new, but mostly old, were re-establishing themselves in the supposed new order at the banks. Boucher and Molloy were Bank of Ireland archetypes, not innovators. Donal O’Connor and Maurice Keane at Anglo were old oligarchs, now resurrected from the dead. And the quiet succession of the faceless Dan O’Connor and David Pritchard at AIB was merely a case of slotting existing board members into the positions of departing oligarchs. Many of Lenihan’s appointments to the banks’ boards – including Tom Considine at Bank of Ireland, Adrian Kearns at Irish Nationwide, Declan Collier at AIB, Margaret Hayes at Irish Life & Permanent and Frank Daly at Anglo – were veterans of the civil service or the semi-state sector; others – Ray MacSharry at Irish Life, Alan Dukes at Anglo, Joe Walsh at Bank of Ireland, Dick Spring at AIB – were ex-politicians. The minister, no doubt firmly guided by the permanent government, had gone for guys who could play ball with Sir Humphrey and fit in with the traditional mould.
Safe choices were precisely what the banks did not need. Irish banking was crying out for awkward bankers. It needed people who would not conform to the agenda of the Department of Finance. It needed directors who would challenge the mandarins’ role, not accept it. Irish banking and the Irish nation itself needed people who would bring tension, not solidarity, to the relationship between bankers and the regulators, the department, the minister, the Central Bank and the builders. Molloy, the competent old conformist, did not fit the bill. Nor did most of the ageing civil servants who suddenly found themselves on the boards of tottering banks. The new directors oozed the aroma of official Ireland.
Lenihan and the Oireachtas committees should have been looking far more critically at the top advisers in his department. Secretary general David Doyle, his deputy Kevin Cardiff and dozens of higher-grade mandarins in Finance rarely came under the public microscope. Few even realized that the Finance Department’s top mandarins were better paid than other civil servants.
Criticism in early January 2009 from Garret FitzGerald about the shortage of economists in the Department of Finance seems to have prompted Lenihan to recruit the talented Alan Ahearne from University College Galway in early March. Ahearne had been one of the first economists to warn of a property crash. Two weeks before his appointment to Lenihan’s kitchen cabinet he had been advocating temporary nationalization of the banks, a position strongly opposed by the minister and his department.
When he accepted the job with Lenihan, he immediately sacrificed his independence and took a different tack, opposing nationalization, but his reputation beefed up the Lenihan team’s credibility. Still, there was no changing of the guard in Finance; John Hurley, governor of the Central Bank, and Jim Farrell, chairman of the Financial Regulator, were still in situ; departing bankers had departed rich men; their replacements were nearly all insiders. The boom had turned to bust but the main culprits – the top bankers – had hardly suffered.
International ratings agencies were not the sole critics of the prospects for the Irish economy. Anglo, in particular, was also being treated as a cripple by the money market dealers. During the May/June period Anglo was consistently forced to offer higher deposit rates than either AIB or Bank of Ireland, because the possibility of default or liquidation was considered higher. Liquidation of Anglo was a constant fear, leaving the government, as owner, vulnerable to a massive run on deposits. The bank consistently denied that an orderly wind-down was on the way, but the market was sceptical.
An Anglo default would mean a state default. The market feared that the Irish government might be unable to extract itself from the economic quicksands. Anyone who put money on deposit with Anglo was covered by the government guarantee, but the solvency of the guarantor was again being challenged. Not far below the surface lay the rarely spoken truth that the government bank guarantee to all the covered banks carried the most lethal threat of all: if the guarantee was called in, the government could not meet its obligations.
The alternative to establishing a vehicle like NAMA was full nationalization of all the banks. This possibility was fiercely resisted by all the oligarchs, but it attracted support from many commentators far from the Joe Higgins sphere of influence. Leading academic economists, like Professors Brian Lucey of Trinity College and Karl Whelan of UCD, favoured the nationalization road. Many wanted to see the banks taken into public ownership with a view to refloating as soon as they were cleaned up by the state.
NAMA was primarily a delaying device. Once the government, somehow, managed to issue bonds to the banks in exchange for the troubled assets, they could undoubtedly buy time. Once the time was bought, their hope was for a rise in property prices over a period.
A recovery in property prices is by no means certain. If property prices continue to fall over the next decade, or even hold steady, the government will have bought a pig in a poke.
Other uncertainties haunt the NAMA project. The government’s intention to pay the banks for their loans in bonds – effectively IOUs – is full of dangers. Hopefully the European Central Bank will look favourably upon the bonds as security and lend money to the Irish banks on the back of them. Hopefully. There is no guarantee that the ECB will forever take such a charitable view of the issuing of something like €60 billion in new Irish government paper.
While the mandarins in the Department of Finance were hurriedly preparing legislation for the establishment of NAMA – the biggest property management company in the world – the real action began to move from Merrion Street to the Four Courts.
The staggering leniency of the bankers towards deeply indebted developers was possibly the most curious feature of the entire Irish banking calamity. Some big builders had gone from billionaires to bust in a matter of months. Yet they were all still living in their big houses, untouched by their creditors.
Paddy Kelly had started the ball rolling down the slippery slope when he told Eamon Dunphy in an RTÉ interview on 29 November 2008 that he owed Anglo ‘hundreds of millions’. He was the first big developer to admit publicly what the nation already knew: builders were being carried by the banks; interest payments were not being made; bankers were hoping that something would turn up.
Kelly was asking for trouble. He put himself in the front line by his public confession. So it was no surprise that a few banks – including AIB, Investec and ACCBank – soon came out of the woodwork seeking repayments from Kelly. In early March 2009 he told the Commercial Court that he was exploring bankruptcy.
Kelly’s court appearances were put down to the mutterings of a maverick, not a U-turn in bankers’ benign policy towards builders; no one saw his troubles as the start of a sudden developer-hunt by bankers, not least because a pursuit of the bankrupt builders might vaporize the banks’ balance sheets. If builders were forced to sell their properties at knockdown prices, the whole market could collapse. The banks themselves would then crash.
The stand-off had worked wonderfully. Irish banks held tight, in solidarity behind the same sham valuations. As long as no one forced any of the big bankrupt builders to the wall, their loans from the banks could not be exposed by the open market as overvalued in the banks’ balance sheets. None of the native banks broke ranks.
Sadly for Ireland’s entrenched oligarchs, foreign banks could not be relied upon to share in this little conspiracy. Suddenly, in early July, ACCBank – the former Irish agriculture bank now owned by Holland’s Rabobank – blew this cosy arrangement apart. The Dutch bank decided to go for the jugular. Liam Carroll, arguably the biggest of Irish developers, was in the frame. Rabobank had lost patience with Carroll, with property in Ireland and, indeed, with the entire Irish economic shambles.
Rabobank had a priceless AAA credit rating, which it did not want to lose through its exposure to the Irish property debacle. ACC, which was owed €136 million by Carroll, went on a solo run, threatening the reclusive builder with insolvency before the end of July. The Dutch meant it.
A few days earlier Carroll had been in a lesser spot of bother with Iri
sh Nationwide, which had won a €78 million judgment against him for unpaid loans, but the skirmish with Nationwide was more a personal spat and did not threaten Carroll’s entire empire. Rabo’s move, by contrast, caused consternation in government circles and put the frighteners on other bankers. If successful, its court action might put Carroll’s entire group of companies into receivership or liquidation. A receiver or a liquidator could flood the market with unwanted properties. The delicate balancing act, so precariously maintained between the builders and the bankers, was in peril.
As a foreign-owned bank, ACCBank was not covered by NAMA. The Dutch owners wanted their money back before NAMA started buying up loans in the autumn.
Carroll’s response was predictable. On Friday 17 July he pre-empted ACCBank’s action when he sought the protection of the High Court. Carroll was initially granted temporary protection for a few days to enable his Zoe companies to come up with a survival plan to satisfy his creditors. All the Irish banks were supportive of Carroll’s initial protection plan. It involved the freezing of interest and a gradual sale of his properties. Judge Peter Kelly believed it was pie in the sky.
Carroll may have momentarily cheated the liquidator’s weapons of annihilation, but the genie had escaped from the bankers’ bottle. Carroll was forced to reveal the depth of his trouble. It made for grim reading.
The six Carroll companies that were at issue in the ACC action – a fraction of the overall Carroll empire – had borrowings from eight banks. ACCBank’s €136 million was far from his worst headache. The six companies owed the banks a total of €1.2 billion. AIB was on the list for €489 million and Bank of Scotland (Ireland) for €321 million, Bank of Ireland for €113 million, Ulster Bank for €82 million, Anglo for €38 million, KBC Bank for €23 million and EBS for €8.5 million. Irish Nationwide had been lending to other Carroll companies elsewhere – as, undoubtedly, had the other banks.
It was revealing that none of the other banks supported ACCBank in its action. They nurtured a hope that something – like NAMA – would turn up. It took an outsider, a Dutch bank, to explode the Irish charade. The Irish banks had been indulging Carroll for months, if not years.
The loans were bad enough, but Carroll’s summary of his six companies’ net position was even worse. His lawyers told the court that his companies would be €900 million underwater if they were forced into liquidation.
According to John McManus, writing with characteristic perception in the Irish Times, Carroll’s summary meant that he was taking a 75 per cent write-down on all his properties. If that 75 per cent write-down were accepted across the board, Ireland’s banks would all be worthless.
Down at the Department of Finance the mandarins must have been paralysed. The NAMA project could be torpedoed if the Zoe chief was not granted the benefit of an examiner. NAMA’s valuations, with projected write-downs of maybe 25 per cent on the properties, would have looked ridiculous. The forbidden word ‘nationalization’ was being whispered again in Merrion Street.
The mandarins were cheering for Carroll on his day in court. But Justice Peter Kelly rubbished his rescue plan – not once, but twice. He refused to give the developer’s business plan court protection, describing Carroll’s proposal as ‘lacking in reality’. He dismissed the application, deriding the developer as seeking further borrowings into a ‘grossly oversubscribed’ commercial market and into a residential sector that is ‘hardly moving at all’. According to the judge the optimistic prediction of a highly dramatic three-year turnaround in Carroll’s fortunes ‘borders, if not actually trespasses, on the fanciful’.
Carroll was not the only developer in the wars with the Dutch. ACCBank had already taken an action against a lesser-known Cork developer, John Fleming, to recover €21.5 million. Once again the figure owed to ACCBank was peanuts in terms of Fleming’s overall indebtedness, but even such a small amount threatened a domino effect on a whole series of Fleming companies. What stunned observers was the overall figure of Fleming’s debts. Here was a company of whom few had hitherto heard, which owed over a billion euros.
On 21 July Justice Peter Kelly had replaced a receiver to the Fleming group with an examiner, giving John Fleming 100 days’ protection from his creditors and a chance to find a way out of difficulty. Carroll was not so lucky.
On 28 July, even as Justice Kelly was delivering his initial thoughts on Carroll’s failed bid to go down the Fleming route, the Cabinet was putting the finishing touches to the draft NAMA legislation. The Dáil was set for recall in mid-September to ensure that the bill was passed into law with respectable speed. It was important to the Cabinet that NAMA was up and running before foreign banks made further moves against developers. Forced sales of developers’ assets could set a very low benchmark for valuations of all the properties held as security for the developers’ loans. The appalling vista of a two-tier market in property beckoned.
On 30 July the NAMA legislation was published.
The thorny topic of how much NAMA would pay, on behalf of the taxpayer, for the banks’ development loans was ducked. The minister maintained that as there was no liquidity in the market it was impossible to pay ‘market value’. The Department of Finance would work with the European Commission on a formula combining market value and ‘long-term value’. He would give full details of the price mechanism in the Dáil in September. ‘Long-term value’, the invention of the mandarins, assumed a rise in property prices.
The banks were gleeful. On the morning of Friday 31 July, when the stock markets opened, bank shares spiked; Bank of Ireland finished the day up 9.2 per cent at €2 while AIB (now known to have far more dangerous exposure to developers – including Liam Carroll – than Bank of Ireland) rallied less spectacularly for a gain of 2 per cent. The market’s initial judgment was emphatic. In the battle between the bankers and the taxpayer, the bankers had triumphed.
Politicians are fond of whispering in the safety of the bar in Leinster House – or in the corridors – that Europe will not allow Ireland to default on its sovereign debt. Perhaps they are right, but if Ireland has to be rescued by the European Union, we will pay a European price. Probably the first demand would be for an end to our 12.5 per cent corporate tax rate, latterly so irritating to the UK and a permanent source of anger to Franco-German leaders. We would be in no position to resist their diktats. They would insist that we take nasty and more immediate measures to keep within the Stability and Growth Pact. In addition, if Europe insisted on tax harmonization, we might not only have to retreat on corporate tax but might also be forced to introduce a property tax at European levels, as well as more uniform income tax rates. We might finally be compelled, in our hour of weakness, to sacrifice the last vestiges of our economic independence, jealously guarded for so long, with our right to a veto on tax matters.
Alternatively we could throw ourselves at the mercy of the International Monetary Fund. In return for the cash to keep us afloat we would take painful medicine: punitive measures such as massive cuts in public service pay, social welfare reductions across the board, further income tax hikes, the sale of state assets, a bonfire of the quangos and other penal levies. The consequences could be far-reaching. The measures might create social discontent.
Luckily for Ireland, we already have our own home-grown IMF-equivalent, known as An Bord Snip Nua.
Back in November 2008 Brian Lenihan appointed Dr Colm McCarthy, an economist with University College Dublin, to recommend spending cuts in the public sector. McCarthy, who undertook a similar exercise for Charlie Haughey and Ray MacSharry in 1987, attacked the task with relish. His small group, of six mostly anonymous experts, reported to the government on 17 July. It suggested €5.3 billion of cuts covering every department of state, including staffing reductions of 17,358 people.
The biggest targets were the three biggest-spending departments: Social Welfare, Health and Education.
A down-to-earth Dubliner, McCarthy did dozens of media interviews explaining how everyone, inc
luding social welfare recipients, teachers, doctors and members of the Oireachtas, would have to share the pain. The nation shuddered.
McCarthy’s team had not been asked to tackle the political minefield of public sector pay, but they could not resist taking a swipe at the state’s payroll and making it crystal clear that cuts in this area were imperative.
A political debate began immediately. Farmers and trade union leaders were first out of the traps to launch an onslaught against McCarthy and his team. Opposition politicians carefully selected which cuts to oppose while studiously refusing to produce their own programme.
The debate was useful insofar as it established that every citizen’s standard of living was set to plunge.
No sooner was McCarthy’s report off the presses than the knockers emerged. Some ministers sent smoke signals to pressure groups that McCarthy’s recommendations were not gospel. Tánaiste Mary Coughlan asked Forfás – a government agency in her own department – to examine McCarthy’s report. Forfás was unlikely to approve it as McCarthy had recommended a cut in Forfás’s own budget. Additionally he had proposed chunky savings in other sections of Coughlan’s department including FAS, Science Technology and Innovation, Enterprise Ireland and even the IDA. The chief executives of Enterprise Ireland and the IDA, as well as the director of Science Foundation Ireland – all targets of McCarthy – are on the board of Forfás, and the Tánaiste would have been aware of it. Cabinet members were first out of the traps to play the ‘not in my back yard’ card.
Everyone hoped that their own pet project, their job, their hospital or their local school would escape the minister’s knife.