This article was published in the December2013 issue of The Abacus
There was an intriguing item in the Irish Times the other day. It was arresting because of the striking image of a painting by Roscommon-born artist Roderic O’Conor (1860-1940) – Red Rocks, Brittany. The subject matter of the article was interesting. It seems that the value of the painting has plummeted from £250,000 to £120,000. Two paintings by Louis le Brocquy, a Dublin artist who died last year, aged 95, Woman, an oil-on-canvas dated 1958, and Tinker Breaks Whitethorn, a watercolour, both now have a top estimate of just £30,000 compared with £60,000 in 2011.
Another article about the relationship between commerce and art, culture as currency, must wait for another day.
The context of this particular Irish Times story tells something about the financial state of Ireland today. It was NAMA (National Asset Management Agency) that offered the paintings to Christie’s for sale. NAMA, known in Irish as Gníomhaireacht Náisiúnta um Bhainistíocht Sócmhainní, is a body created in late 2009, in response to the financial crisis.
An important component of the Irish meltdown was the property bubble. When I was living in Ireland, from 1998, it puzzled me that so many housing estates were being built when the population was below four million. Sri Lanka is the same size with a population of 20 million. It was in 1998 that the National Crime Forum under the aegis of the Dept of Justice issued a report under the chairmanship of FF and Minister O’Doherty . This report ignored invited professional oral and written contributions made at various appointed official centres around the country relating to Irish Banks and their deceitful practices.
The Irish property market did indeed collapse, leaving all the major Irish banks with bad loans on their books. There are ghost estates all over Ireland. Some property developers had the grace to commit suicide.
The banking crisis did not start only in 2008 and should not have surprised anyone. The major villain of the piece was the Anglo-Irish Bank, but older, more staid institutions, went crazy too. AIB and Bank of Ireland doubled their total loan books in three years. Bank of Ireland took more than a century to build a loan book of €63 billion and then, in three years from 2003 to 2006, it doubled it.
If the banks had admitted on their balance sheets the true value of these loans, they would no longer have been able meet their statutory capital requirements. The banks needed to raise further capital but their stock was too unattractive for a general share issuance to be viable. They avoided this little difficulty by lying through their collective dentures.
The plan for NAMA was that the new agency would bring a better economic solution to the banking crisis than nationalising the banks. The Fianna Fáil government established NAMA on a statutory basis, as a separate body corporate with its own Board appointed by the Minister for Finance. NAMA would arrange and supervise the identification and valuation of property-backed loans on the books of qualifying financial institutions in Ireland. However, it would delegate the purchase and management of these loans to a separately created Special Purpose Vehicle.
The NAMA website today says: “The Agency has acquired loans (land and development and associated loans) with a nominal value of €74 billion from participating financial institutions. Its objective is to obtain the best achievable financial return for the State on this portfolio over an expected lifetime of up to ten years.”
Critics said the government was gambling with taxpayers’ money without asking the banks, bondholders and institutional investors to take their fair share of the pain. Nobel laureate economist Joseph Stiglitz said: “this bank bailout is a simple transfer from taxpayers to bondholders, and it will saddle generations to come. The only thing that might give you solace is that, as chief economist of the World Bank, we see this type of thing happening in banana republics all over the world. Whenever a banking crisis happens, the financial sector uses the turmoil as a mechanism to transfer wealth from the general population to themselves. I’ve been very disappointed to see that it has happened, not only in banana republics, but in advanced industrialised countries.”
The guarantee ought to have been in place only for two years but it was extended because the banks could not keep going without State protection. As the losses mounted, the insurance policy itself bankrupted the insurer. Despite robbing the taxpayer to pay for the foolishness of the banks, Ireland still had to beg EU help, which subjected it to the dictates of the Troika. This did not teach humility. In 2013, bank bosses are still scolding politicians and customers, despite the fact that none of them would be still in jobs were it not for taxpayers’ money. Every single Irish bank was bankrupt in 2008.
United Left TD (Irish MP) Joan Collins took a case to court in October 2013. In her action, Ms Collins claims the promissory note payments, proposed as part of the €31 billion recapitalisation announced by the Minister for Finance in 2010 of the former Anglo Irish Bank, Irish Nationwide and the Educational Building Society, are unlawful and unconstitutional. She claims the promissory note payments are a profound attack on the democratic nature of the State because they amount to an appropriation of public monies not authorised, as required by the Constitution, by a vote of Dáil Eireann.
In May 2013, the World Economic Forum published its global competitiveness index for 2013-2014. Switzerland is top of the league. Overall, Ireland is at 28 (Sri Lanka at 65). Under the indicator of “the soundness of the bank”, Ireland ranks 141st out of 144.
By far the biggest problem Irish businesses face as the economy struggles to recover is access to financing. The banks are scared or reluctant to lend to businesses because they have squandered their capital.
Back to those paintings: they once belonged to Derek M Quinlan, an Irish businessman, who was prominent in real estate investment and development. In 2004, Quinlan headed an investment syndicate that bought The Savoy Group for £750 million, giving it control of landmark London hotels including Claridges, The Connaught Hotel and The Savoy Hotel. Quinlan outbid competing buyers, including Saudi Prince Alwaleed Bin Talal. Some months later, Quinlan sold The Savoy Hotel to the Saudi prince for £250 million, while retaining the other hotels in the group.
Mr Quinlan once said: “When I started in this business, I quickly understood how the mathematics work, that you get as much leverage as possible, [and buy property] with a good covenant and a good location.” Quinlan’s business model was indeed predicated on acquisition using maximum leverage. With the crisis, his Irish property assets in particular suffered precipitous declines in value.
In 2009, Quinlan resigned and moved to Switzerland to concentrate on negotiations with lenders to restructure his personal debts of €600 million. He personally owed Anglo-Irish Bank alone €300 million. In May 2010, Royal Bank of Scotland moved to repossess his yacht. In April 2011, a receiver was appointed on behalf of NAMA to take charge of a number of properties owned by Quinlan, after he had failed to repay loans to the agency totalling hundreds of millions of Euros.
Veteran Irish broadcaster Gay Byrne has said that he has “no hard feelings” over losses he made from boom-time property investments with Quinlan. The pair recently had lunch together at the Lord Edward in Dublin (many is the trouser- busting meal I have had there). Mr Byrne revealed that Mr Quinlan invited him to lunch to say goodbye as Quinlan is making another move, this time to the United Arab Emirates.
Critics bemoan the inadequacy of Rialtóir Airgeadais, the Irish Financial Regulator. One reader of the Journal.ie commented: “He was fully aware of what was going on in the banks but was an integral part of the cute hoorism that existed…the guy should be slopping out above in Mountjoy”. Rather than being in prison Patrick Neary retired witha handsome pension. Another commenter said: “He was only following orders from his boss in Fianna Fáil, who, in turn, was following orders from his property developer/builder fund raisers. Neary was not the problem. Fianna Fáil corruption was the problem. Who is in jail for that? Political corruption is indeed a crime but nobody is in jail for it.”
In 2005, the Regulator was criticised for publishing a report, which, read like a promotional brochure for the money-lending industry. It included a section devoted to arguing why moneylenders should be allowed to charge as much as they do. (188%-plus collection fees of up to 11%. The New York Times referred to Ireland as the “Wild West of European finance” in April 2005. Transcripts of phone calls by the Financial Regulator’s senior staff suggest they gave tacit approval to the illicit movement of deposits involving Irish Life and Permanent plc. The Financial Regulator hired Ernst & Young to advise on the €440 billion bank guarantee scheme in January 2009, despite the fact that the company’s audits of Anglo Irish Bank were under investigation.
Before he became a property mogul, Quinlan was a tax inspector with the government Revenue Commissioners – gamekeeper turned poacher?