Economics 02/08/2009: Liam Carroll's case

For those of you who missed, here is my article from Saturday edition of Irish Daily Mail

An Irish person recently remarked to me in the context of NAMA that “If any other electorate in Europe, nay, the world, faced this scandal, their citizens would be on the streets.” They would. We have been led to believe that NAMA is a necessary solution for the banks having to write down the odious development debt acquisition of which over the years past was cheered on by the Government through tax breaks and the stamp duty widnfalls. In reality, NAMA is Ireland’s own financial Chernobyl – a self-inflicted devastation of taxpayers’ finances perpetuated for the sake of doing something about the crisis.

By denying the examinership to Liam Carroll’s six companies, the Irish High Court has put itself out as the sole branch of State that stands between the innocent taxpayers and this redlining reactor.

First, let me clearly state that I have no objection to proper developers who build what is truly demanded by the market. They too will be the victims of the NAMA debacle.

Pursued by a creditor, the ACC Bank, Liam Carroll has been languishing in the High Court for a better part of this week, awaiting a decision on whether he will be granted an examinership for six of his companies. An alternative for Mr Carroll was to face an appointment of a receiver – a sure bet that his companies will be shut down. This alternative has now come to its logical fruition – denying Mr Carroll the examinership, the court has forced him to face the music. Receivership is now all but inevitable.

The motivation behind this battle was NAMA. Mr Carroll would like his companies debt to be assumed by the state, allowing for them to continue as an ongoing concern. Mr Carroll even hoped to convince the folks running the bad bank to give him few quid to finish some of his
failed projects. A pipe dream for a businesses that, by his Senior Counsel’s admission generates just €22-23 million in annual revenue against the debts of roughly €1.4 billion. Now, do the maths – a company that was supposed to be bought by us, the taxpayers into NAMA will not be able to cover even 15% of its annual interest bill.

Mr Carroll’s case has serious implications for us all – the Irish taxpayers – as the underwriters of NAMA.

Mr Carroll’s Senior Counsel Michael Cush told the court that the six companies in question, had historically been very successful businesses. But he said more recently they had suffered credit problems, the downturn in the property market, and some “problems with investments”. Per Mr Cush, the companies are clearly insolvent and if liquidated, their unpaid debts will reach €1 billion. This indicates that there is no hope for a recovery of the business and that examinership was rightly denied to them.

But it also shows that there is not a snowballs chance in hell that NAMA will be able to recover any positive value from Mr Carroll’s companies, unless it forces his banks to write down at least €1 billion of some €1.4 billion in loans amassed. That NAMA will do nothing of the sorts, preferring to continue the circus of pretending that these businesses worth something in excess of their debts is clearly something that the courts disagree with.

The NAMA legislation published this Thursday states that the taxpayers will be paying for the current values of the banks loans, while the developers will be pursued for the original loans amounts. Mr Carroll’s case illustrates that currently insolvent businesses continue to accumulate liabilities (rolled up interest and fresh demands for continuity funding) that simply cannot be repaid, ever. These roll up debts are odious, for they are extended to the clearly insolvent companies in the hope that NAMA will simply cover them at a higher rate than the markets would were the banks to go out into the open trying to liquidate these development loans.
Which means that NAMA will be using our money to pay for the rolled up interest on top of already grossly overvalued loans of insolvent enterprises.

Do a simple math, with a 50% fall in the value of underlying assets, 11% interest charge on the non-performing loans and a 25% NAMA discount, the taxpayers will be overpaying for the assets they by to the tune of 70% plus. Put simply, imagine walking into a shop and seeing a TV set on sale. The sign reads: ‘Sale! Original price €100. Sale price €170”. That does look like Minister Lenihan’s bargain for the taxpayers.

Liam Carroll’s case also shows that over the last year, soft budget constraints for insolvent businesses, like Liam Carroll’s empire, were accepted by the banks solely on the anticipation of a state bailout. If not, these banks actively engaged in destroying their shareholders’ wealth by undertaking knowingly reckless decisions. Take your pick.

I have absolutely nothing against Mr Carroll's enterprises, other than the simple argument that if they are insolvent today, the should be shut down today and they should not be allowed to accumulate additional liabilities at our, taxpayers' expense.

The examinership case for Mr Carroll’s companies was not warranted from day one of his application to the court. Minimizing losses to the economy and the taxpayers resulting from his companies farcical ‘operations’ required an appointment of a receiver and no restructuring period under the examinership would have done any good to their solvency. If only the same wisdom of the courts can be applied to NAMA itself.