Friday, March 6, 2009

Buffet's Lesson from Ireland

Buffett Can't Find Green in Ireland, says Barron's (here)

"IT'S RARE FOR WARREN BUFFETT to suffer a near-total loss on an investment, but he did so with the purchase of shares of two Irish banks last year.

As he admitted in his annual shareholder letter, Buffett, the CEO of Berkshire Hathaway, invested $244 million in shares of two unnamed Irish banks. "At year-end, we wrote these holdings down to market: $27 million, for an 89% loss. Since then the stocks have declined even further. The tennis crowd would call my mistakes "unforced errors."

What were those two Irish bank stocks? We suspect that one of them is Allied Irish Banks (AIB), whose U.S.-listed shares are down to just $1 from a high of $45 last April...

What might have attracted Buffett to Allied Irish? Assuming he bought the stock, we suspect that he was motivated by the same reasoning that attracted Michael Price, a former mutual-fund star who runs MFP Investments.

At the Ira Sohn investment conference last May, Price recommended Allied Irish Banks, then trading around $41. Price said the stock looked cheap because it held a valuable stake in Buffalo-based M&T Bank (MTB). Excluding the M&T stake and another investment, Allied Irish was trading for just five times annual profits, Price asserted.

One reason we think that Buffett bought Allied Irish Banks is that Berkshire is the second-largest holder of M&T Bank at 6.7 million shares, behind Allied Irish Banks at 26.7 million shares. Buffett may have known about the Allied Irish holding in M&T, a bank that Buffett has praised in the past..."

Buffett's losses were small for Berkshire, but they are material for Ireland Inc.

Berkshire's mistake in buying into AIB had nothing to do with M&T share, which fell by only a third, as opposed to a 90%+ loss on AIB and BofI ("The other Irish bank whose shares were purchased by Berkshire could have been Bank of Ireland" says Barron's).

The real mistake was to buy into the banks run by the likes of Eugene Sheehy - a man who just last summer had a nerve to raise AIB's dividend in a clear case of mad macho bravado. And of course, his mistake was to buy into Ireland Inc regulatory circus - ran by a gang of financially inept political appointees of a regime that itself had one economic policy for all problems: throw more money at its cronies.

Now that Mr Buffett has learned his lesson, he will share it with the rest of the investment world. Who would bother putting any institutional money into this economy ever again? And who would bother buying Irish Government bonds backed by a claim on economy that is built on AIB-BofI-Anglo-IL&P-Nationwide & Co sand and issues bonds to keep this sand from liquefying under our feet?


Anonymous said...

Thank you for another of your harmful and pointless insights into the welfare of Ireland Inc and its banks. I question the real purpose of your blog and its true intent. In my strong opinion it is your input into the discussion surrounding Ireland’s difficulties (together with Morgan Kelly and Brian Lucey et al.) which have contributed greatly to the darkening image of Ireland at home and abroad and as a result adding to worsening of the county's finances. The Dublin media and the international press (particularly here in London) have been only too willing to pick up on the 'paddy whacking' hysteria that you and your friends have championed. Perhaps you are too engrossed in academia and domestic politicking BUT if you bothered to pay a even a modicum of attention to the malign behaviour of the foreign equivalents of Irish banking management it may at least help in providing your readers and followers some context! I am not going to plead the case of individuals in Irish banks but I will not be shy about pointing out some of their relative successes of the industry and those of Dublin based regulations. Without going into detail, it is clear from many in the market that these systems in part ensured that the Dublin banks are not today sitting on mountains of worthless paper transactions (e.g. monoline wrapped black holes, ABS CDOs 1,2,3, SIVs ...) unlike their UK, US and European counterparts. These paper ‘assets’ have no security value and cannot even be used in the money markets or central banks to raise funding. And furthermore these toxic assets are in addition to the real estate exposures sitting on the balance sheets of International banks. As one blogger noted recently give me security over a potato field in Kerry any day over this cr"p!

If you insist on critiquing every aspect of economic and banking policy in Ireland I would strongly urge you to at least broaden your net to show that the Irish were not alone in failing to prepare for this global turmoil – and their were a few things they got right.

I have heard the term 'enemy of the state' be used to describe some of the commentators, opposition politicians and practitioners - which I personally think is unfair. I believe we should be able to openly discuss our problems. HOWEVER there are those who are solely motivated by agendas, ideologies, career building… rather than pragmatism; objectivity; and the welfare of the country as a whole. There will be time later to dwell on the past. For now we must move on!

Ireland needs to repair its image - this is clear - but engaging in the type of self-devouring unbalanced behaviour such as your input and warning to those who may have the courage to invest the recovery of Ireland - is outrageous. In the meantime the Irish tax payer / licence fee payers should insist that no platform should be given by the State broadcasters or media for the kind of politically and/or ideologically motivated drivel that you and your comrades are promoting. KJ

TrueEconomics said...

KJ, your anger in part is understandable if by and large mis-directed. Shooting the messengers - be it Morgan Kelly or myself or Brian Lucey, or indeed any member of the group of people who warned about deficiencies in our system - is hardly a good way to resolve the problem. And pointing to the fact that other countries face crises (be these of the same or different nature to ours)is also nothing more than a form of escapism from the reality.

The reality is in plain view for all to see.

Our regulatory authorities are set up and directed by political appointees, who, with rare exceptions, are not fit to run them. Technically, morally and intellectually (on the grounds of lack of experience).

This is not an issue of whether light-touch principles-based regulation approach is better or is the way forward lies with rules-based regulation. In other words, this is about sheer competence, not about ideology.

Our regulatory authorities are staffed with people who do not rock the boat. Again, nothing to do with ideology. A whistleblower on wrong doing who reports to a union is doing a right thing, just as a whistleblower who reports to a regulator.

Our companies are organically integrated into an undemocratic and opaque policy mechanism called the Social Partnership. Our former PM was sitting in the dock in the Tribunal of Inquiry on matters relating to business. Our unions are the largest shareholders in a number of previously state-owned companies. Again, this is a fact, not an ideological statement.

Do you really want me to go on with the list? I suspect not.

What is crucial here is that neither myself, nor Morgan Kelly, nor Brian Lucey, nor ordinary people of Ireland, to the best of my knowledge, approved this system. Yet it exerts reputational and financial cost on all of us.

Ideologies have no bearing here - to me a crook is a crook whether or not he or she read Hayek or Marx.

Career building?.. I have sacrificed significant personal income to take my stands in the past and I am not being paid for what I say on these matters now. In fact, academic world favours cozy consensus. Hence, for example, not a single bold voice out there holds a Professorship in Economics.

Freedom of speech and thought - those cornerstones of liberty and by implication of democracy that you don't give a toss about (judging by your comment about the 'enemies of the state' and allowing people access to the media) - are not favoured in professional or academic endeavours in this country.

Unlike yourself, I see it as a moral duty for people with knowledge to provide information and opinion to anyone who might need it.

If investors are being spooked away from Ireland by my views, so be it. They are not the idiots you hold them to be not to discern what is right and what is wrong/ideological/self-serving.

This is why I have no problem publishing your comment on my site - I believe in people's right to voice drivel and be judged on the basis of it, just as much as I believe in people's right to read it and judge it.

You believe in keeping people in the dark and selling them a bogous investment scheme. The fact that your investment scheme is a sort of an 'Irish recovery'fund does not make your position less dishonest, less manipulative and less morally objectionable.

Did you spot the difference?

The difference between your views and the moral position of the likes of Bernie Madoff is that he was more honest than you are willing to be by not pretending to fool people into investing in some abstract national recovery ideal.

And, per your information, as an Irish taxpayer and TV license fee payer, I would prefer to do away with state ownership of any broadcasters or media. This would, incidentally, assure that politically and/or ideologically motivated drivel gets tested in a more leveled playing field than the one the false 'patriots' like your self have already created in this country.

That said, thanks for reading and do stay engaged in the debates.

My best regards, Constantin

Anonymous said...

I have to say Constantin, whilst I do not doubt your credentials and your experience on these matters, 'anonymous' does make some fair points regarding overkill on Ireland inc.

My partner works in an international bank in the IFSC which has been subjected to some governmental and media scrutiny overseas. The finger pointing is directed, once again, at the Irish regulator. Except in this case I am lucky in that I have access to the more truthful version of the story. The bank in question is regulated locally but also by the German regulator. Critically BaFin is the lead regulator and it was those boys who cxcked up - but it was quite handy for the Germans to join in on the irish-bashing act. Lesson - Sometimes things are not quite as they appear at first.

Not to get too side-tracked...I suppose as a nation we need to consider why we have the IFSC. is it because of our wonderful people? (doubtful sadly) our low tax? (yes) And yes it is also because so called 'light touch' regulation. So we now need to ask whether we want to lose this 'attraction' and do we want to wind down the IFSC (assuming these are the choices). I am told that in the Dublin Docklands there are c25,000 people employed directly (many more indirectly). Ingnoring corporate taxes, just think about the income tax receipts raised on these relatively high salaries. MMM. Although I have a personal bias I still think we would be insane to tinker with this too much. Maybe we need more supervision but we must becareful attempting to raise the regulatory bar (at the behest of the City of London amongst others) Of course if there is a way of maintaining 'lighter' regulation with greater enforcement then great!

That said, as you say, keep up the debate but lets have a little balance. Enjoy :-) SEAN

Anonymous said...

The State bailout of banks involves parting with the family silver - that nest egg that has been accumulating since 2001 which was intended to underpin future pension liabilities. The public are very anxious about this, partly out of ignorance of the mechanisms and the adequacy of the initiative and partly out of real concern that they will be screwed at some stage in the future in the event of fumbling, bumbling or failure. The Government ought to be far more pro-active in informing and educating the public about their plans and intentions and it is only when these make some sense to the wider public will the process of image rehabilitation begin.

The bailout announcement on January 16th has been followed by a sense of the associated risk profile becoming much greater than apparently anticipated. Regards, M

TrueEconomics said...

Sean, I agree that some of the issues in the banking scandals have been over-done. One of these, in my view, is the loan-for-shares Golden Circle investors' names. I wrote about my position on this issue earlier. My analysis of the Anglo share collapse which, in my view, was more due to inept policymaking by the Government and less about the bank's underlying fundamentals is another example.

But the point of my original reply to KJ is that an idea of someone providing criticism is somehow 'unpatriotic' and has to be suppressed is a form of collective idiocy that only those poor in their understanding of what constitutes a strong nation can adhere to.

A strong nation is the one that needs not rely on marketing constructs of myths (e.g myth of our better educated and higher quality labor force) or on a single exogenously-determined policy (our over-reliance on low corporate tax is the case in point). A strong nation is that which confronts openly its own failings and can withstand, not suppress, internal conflict to drive the process of trial and error to arrive at better policies.

America is an example of the latter type of nation - it is not its perfection in some areas that qualifies it as being strong, it is its ability to publicly identify and deal with its imperfections that make the Western World today Pax Americana.

But, returning to the IFSC - it is a great source of good jobs, experience and training for Ireland. In fact, the only two problems I have with IFSC are:
(1) we fail to recognise that while it offers many benefits, it also presents certain threats (denial of the negative is not a good way to acknowledge the positives); and
(2) we have grown embarrassed of its successes because we developed that 'European' disease of treating profit as something intrinsicly dirty.

Case in point - the latest regulatory overhaul that is taking place without engaging the IFSC even at a consultative level. Can you imagine what our politicians can concoct in place of an informed regulatory structure? I recently spent half an hour explaining a simple concept in basic finance to a senior politician who specialises in this area...

I think it is possible (and in my ideological belief - preferable) to have a light-touch regulation, but it has to be vigorously enforced.

The problem we have with CBSFAI is that it cannot do the latter because it lacks capability to properly understand financial and macroeconomic risks and also because it is too closely connected to the DofF. The former implies that CBFSAI simply cannot relate balancesheet weaknesses to systemic threats. The latter means that when the Leinster House is run on the back of property revenue (or any other predominantly important source of income), CBFSAI relationship with the state leads it to transmit the incentives for inflating a property bubble thus distorting (and in some cases known to me distorting directly and knowingly) financial sector lending and investment decisions.

This is the corollary of Ireland Inc - a real Golden Circle of Social Partners interacting with the state to diminish economy's capacity to self-regulation and regulators' capability to manage this process effectively.

Can we do something differently to reduce this risk? Yes. Does it have to be a regulatory over-kill? No. But we should at the very least start by clearing the stables - not later, but now - that manure of incapacity and 'legal' corruption (to use World Bank definition) which clogs our system has to be cleared first, not after the crisis is over.

Best and, gals and guys - great to see contributions! Keep them coming. Thanks!


Anonymous said...

Anon, on my trading desk we would have done a lot of institutional flow for Irish stocks from international investors. We don't anymore. They all got out and have no interest in getting back into the banana republic. Constantin isn't the one doing the damage, the damage has been done already. People are burned and won't be back for a long long long time.

Anonymous said...

So how do we (i.e. you and I) change this perception. How can we get Government to listen? It just seems that the soapbox is not the way to go as too many people do not fully comprehend (or even missunderstand) the complexity of the problem - myself included.

This lack of understanding leads solely to populous remedies - the last thing we need right now.

Have a good week!