Economics 01/08/2009: Wealth Tax

Someone asked me recently to confirm my assertion - made few months back on TV 3 programme - that a 100% tax on wealth of the Irish members of the Sunday Times Rich List 2009 will last this Government, oh, well, under 5 months.

After actually computing the total ROI-based wealth from the List and taking some adjustments, Table below shows clearly the break down of such a (extremely foolish) tax. Of course, this is a fantasy land, but it does highlight for me the idiocy of our Left wing fanatics.

As you can see, a brutish calculation puts the net take from such an exercise at a maximum of €30bn one-shot gain for the Exchequer - or an equivalent of 4 months and 22 days of Government spending (I was pretty much on target in my original statement).

Factoring in the fact that large chunk of this wealth is held by property investors and construction firms owners, whose wealth has been evaporating since December 2008 when the list was compiled and that the list reflects their wealth as assessed on last filed accounts (2007 or earlier), and taking into account that any half-sane person would diversify her holdings geographically, putting a share of her assets out of reach of the Irish Exchequer, this figure drops to €18bn, or 2 months 25 days worth of Government spending planned for 2010.

Taking into account legal costs and assets seepage during the process of collection, the entire Irish Top Rich List 2009 wealth, if it were seized by the Government, would last our Exchequer no more than 2 months and 17 days.

But, one has to take into the account the facts that:

• public spending economic multiplier is zero, while
  
• private spending multiplier is a positive number dependent on the Marginal Propensity to Consumer out of Wealth, Marginal Propensity to Invest out of Wealth-generated income, the returns to wealth and the velocity of money in this economy; and
• the fact that the Exchequer collects revenue from this wealth

all of which will be foregone if the Exchequer were to seize this wealth in one swoop.

When these factors are accounted for, the Exchequer will be covered for only 1 month and 27 days by the 100% levy on all wealth of the ROI Top Rich List 2009.

What a pack of morons represent economic arguments of the Left of this country!

Economics 31/07/09: NAMA Part III

The NAMA Legislation provides some stunningly simplistic and outright primitive economic analysis. This is contained in Part 5 of the Bill (once again, italics are mine):

PART5: VALUATION METHODOLOGY

Determination of acquisition values—valuation methodology.

58.—(1) In this section—
(a) a reference to the current market value of the property comprised in the security for a credit facility that is a bank asset is a reference to the estimated amount that would be paid between a willing buyer and a willing seller...
(b) a reference to the current market value of a bank asset is a reference to the estimated amount that would be paid between a willing buyer and a willing seller in an arm’s-length transaction...

[In other words, the difference between the two values is that the property value is a valuation of the collateral, while the asset value is the valuation of the loan drawn against this collateral as an asset. This difference should capture: counterparty risk, liquidity risk, expected return risk, lien risk and term structure risks. None are specified or explicitly required for pricing in the NAMA legislation.]

(c) a reference to the long-term economic value of the property [bank asset, per point (d) below] comprised in the security for a credit facility that is a bank asset is a reference to the value that the property can reasonably be expected to attain in a stable financial system when current crisis conditions are ameliorated and in which a future price or
yield of the asset is consistent with reasonable expectations having regard to the
long-term historical average...

[So, implicitly, this statement assumes an imposition of some assumptions on:

• What constitutes a stable financial system and how does this system impact the pricing in operative markets - something that is virtually impossible to ascertain as the only functional markets we have a history of relate to the property bubble period? Was our financial system stable when we were lending x10 times income to home buyers? Or was it stable when the likes of AIB were embroiled in a series of massive scandals?
  
• What constitutes an amelioration of the current crisis - with further issues arising as to what crisis is being meant in this context: the crisis in property markets? in banking? in credit supply? in money supply? in financial assets? in the economy at large? in the Exchequer revenue? in the labour markets? in the markets for land sites? or in demographics? or in all the above?
  
• What is the relationship that determines the future (expected?) price of an asset or a yield on the asset and what is the assumed relationship between the yield and the price? What determines the relevant expectations mechanism?
  
• What is the long-term historical average? A 10-year historical average taken from today back 10 years is one thing. A 5 year one is another. Yet a third number can be obtained if the historic average is taken back from some date in the past (say 2007 to 1998) and so on. In reality, there is an infinite number of long-term historic averages that can be taken. Which one will be selected and on what basis is never attempted to be answered in the document.]
  

(2) Subject to subsection (4), the acquisition value of a bank asset is its long-term economic value as determined by NAMA.

[Well, see above on long-term economic valuation, but in effect this is the statement that says it all - there is no price, there is no pricing model, there is not even a hint at the pricing model fundamentals. This is a botched economic analysis that would not warrant a permission to buy a typewriter for the DofF, let alone to 'invest' Euro 90bn into any undertaking. And this problem is compunded by the fact that this Bill seals the hatches on risk and credit committees operating NAMA by requiring that their members be NAMA employees or directors and not establishing any independent presence on these committees. This is like having a reactor heading into a meltdown and shutting down your monitoring systems because they are flashing red.]

(3) NAMA shall determine the long-term economic value of a bank asset by reference to the following:
(a) the current market value of the property comprised in the security for the credit facility that is the bank asset at a date specified by NAMA;
(b) the current market value of the bank asset, at a date specified by NAMA, by reference to market rates and accepted market methodology;
(c) the long-term economic value of the property referred to in paragraph (a) at the date referred to in that paragraph...

[This is incomprehensible gibberish, folks. It has neither any meaning nor economic or financial justification whatsoever. There are no accepted market rates, for there is no market for these securities and/or assets other than at extremely deep discounts that Minister Lenihan has already ruled out. The legislation provides nothing for testing the market - as I suggested in one of the required bullet points below.]

(4) NAMA may, if it considers it appropriate after consultation with the Minister, and subject to any regulations made by the Minister under subsection (5)... determine that the acquisition value to be assigned to particular bank assets or class of bank assets shall be—
(i) their current market value, or
(ii) a greater value (not exceeding their long-term economic value) that NAMA
considers appropriate in the circumstances.
[But not a lesser value, note. And once again, since there is no market value or a mechanism to attempt establishing some market value testing, this means NAMA will pay above market value for all assets. Furthermore, this section explicitly commits NAMA to use taxpayer funds to pay the real price or more for the given loan! Sickened yet? Ok, let me explain in a bit more detail. There is an auction with only one bidder. The bidder has stated up front that he will pay any price at or above the market price. But there is no market price. Where do you think the seller will set the opening bid at? If the implicit market value, known to the seller, but not the bidder is X, the seller will set an opening bid at X+y, where y is a positive premium on the 'stupidity' of the buyer or on the fact that the buyer has committed to buying the asset and is willing to pay above the market value for it. What will be the reservation price set by the seller? X+y+z, where z is a positive premium on 'desperation' of the buyer to acquire the asset. What will be the price paid by the buyer? X+y+z+v, where v is the premium on seller's skills in convincing the buyer to purchase the asset. v is also non-negative. Done. Basic auction theory, folks. Incidentally, adopting the approach advocated by me in the bullet points below removes: y through forcing the banks to take realistic writedowns first prior to NAMA; and removes z by requiring a simulative establishment of the market which can test the actual price of at least of the assets. One can't really remove v, for the smarter bankers will always be able to sell to the careless or incompetent, or both, authorities that can author this document in the first place.]

(6) In determining the acquisition value of a bank asset under subsection (2) or (4), NAMA shall have regard to the following:
(a) any value that the participating institution concerned submits as being, in its opinion, the current market value of the property comprised in the security for the credit facility that is the bank asset [that's X above];
(b) the acquisition value already determined in accordance with the valuation methodology of another similar bank asset [thats y derived from previous sales];
(c) the credit worthiness of the debtor or obligor concerned [that's v above];
(d) the performance history of the debtor or obligor in respect of that asset [that's v above];
(e) any reports furnished to NAMA in relation to the matters specified in subsection (7) whether prepared before or after the commencement of this Act [that's z above].

[So to recap: NAMA paid price for an Asset = X+y+z+v, where X is 'true' value of the asset; and (y+z+v) is a strictly positive premium accruing to the bank from the economic illiteracy written into this legislation!]

I have covered section 59 of the Act already in the previous post.


I will repeat the list of provisions that must be required before NAMA can be allowed to proceed in every post on NAMA from ehre on:

• Provisions for taxpayer protection and provision for a taxpayers' oversight board filled with only independent observers, who are not in the employment of NAMA, NTMA, the State or any other party to NAMA undertaking;
• Complete and comprehensive balance sheet and cost/benefit analysis of the undertaking;
  
• Exact upper and lower limits for banks equity the taxpayers will receive in return for NAMA funds and post-NAMA recapitalization funding;
• The exact procedures for divesting out of the banks shares in 3-5-7 years time with exact legal commitment by the state to disburse any and all surplus funds (over and above the costs) directly to the taxpayers in a form of either banks shares or cash;
  
• The formula for imposing a serious haircut (60%+) on banks bond holders, possibly with some sort of a debt for equity swap and a restriction that NAMA cannot purchase any rolled up interest acrued since the latest 'restructuring' of a loan;
• A recourse to all developers' own assets - applied retroactively to July 2008 when the first noises of a rescue plan started;
• The list of qualifications for any bank to participate in NAMA, including, but not limited to, the caps on executive compensation at the banks and the requirement to set up a truly independent, veto-wielding risk assessment committee at each bank with a mandatory requirement for a position of a taxpayers' representative on the board that cannot be occupied by a civil servant or anyone who has worked in the industry in the last 10 years;
• A requirement that risk and credit committees of NAMA include at least 51% majority of independent experts who cannot be employees of the state, NAMA or any toher parties to this undertaking;
  
• A condition that the banks must undergo loan book evaluation prior to transfer of any loans to NAMA, the results of which will be made public - on the web - instantaneously - and will impose a requirement on the banks to write down their assets, again before NAMA purchases any of them, by the requisite amounts to balance their own books in line with valuations;
• A condition that any loan purchased by NAMA be placed on the open market for the period of 2 weeks and that NAMA will not pay any amount in excess of the bids received (if any), with a prohibition for the participating banks to bid on these loans;
• A condition that every NAMA loan should be publicly disclosed, including its valuations and bids it receives in the auction stage of the process;
  
• A stipulation that all and any regulatory authorities (and their senior level employees) that were involved in regulating the banking and housing sector in this country take a mandatory pension cut of 50% and return any and all lump sum funds they collected upon their retirement;
• A provision for dealing with the speculatively zoned land to be acquired by NAMA, i.e orderly de-zoning of this land and transfer of this land to either public (if no bidders arise) or private use consistent with sustainable agricultural development, environmental improvements, public use or forestry;
  
• The measures to prevent banks from beefing up their profit margins through squeezing their preforming customers;
• The measures to force the banks to reduce their cost bases by laying off surplus workers;
• The measures for accounting (in a transparent and fully publicly accessible fashion) on a quarterly basis for NAMA operations and the performance of the state-supported banks.

If I forget something, please, let me know...

Economics 31/07/2009: NAMA Part II

And now slightly more on theat NAMAster:

Remember the levy that the Government dangled in front of the taxpayers as a sign of loss protection or minimization to be built into NAMA. Well, word 'lvey' does not appear in the entire legislation. Not even in a tocken fashion. Not even as a lip service.

And yet, bad and all as this idea might have been, the levy on the banks was announced by Minister Lenihan, repeatedly, as the only means for recouping losses on NAMA. As a friend and colleague remarked, "even that figleaf of taxpayer saving is gone'.


The document reads:
"In making regulations under subsection (1), the Minister may [my emphasis] have regard—
(a) to the rules in relation to State aid and any relevant guidance issued by the Commission of the European Communities [as if he can avoid this under the EU rules], and

(b) in relation to the determination of the long-term economic value of the property comprised in the credit facility that is a bank asset, to—

(i) the extent to which the price or yield of the asset has deviated from the long-term historical average [the half-wits who wrote this don't even understand that our historical averages are so severely skewed by a lengthy bubble in the property markets, that a return to these averages will take well over a decade],

(ii) supply and demand projections by reference to the type of asset and its location,
(iii) macroeconomic projections for growth in the gross domestic product and for inflation,
(iv) demographic projections,
[Who is going to supply these projections? Our forecasters - the DofF, the CB, let alone completely inadequate Forfas and Fas - are so grossly inaccurate in their usual predictions that you might as well use a crystal ball. One good example is the CB - this institution has been frantically issuing new forecasts on a monthly basis in order to catch up with the published forecasts by the private sector.]

(v) land and planning considerations (including national, regional or local authority development or spatial plans) that may exert an influence on the future value of the asset concerned,
(vi) analyses presented by the Minister of the Environment, Heritage and Local Government on the extent to which existing land zoning and planning permissions granted and in force meet or exceed projected growth requirements, and
(vii) analyses presented by the Dublin Transport Office and the National Transport Authority of existing and future transport planning and the associated supply and demand projections for land use.
[As I told the meeting of the Green Party recently, all of this means only one thing - the fig leaf of decorum awarded to the Green Ministers for their singing on the dotted line will see NAMA as a continuation of the development patterns that were based on utterly mad and unsustainable vision of spatial development in Ireland. In effect, the Green Party has lost all and any moral ground to stand on when it signed up to the development model (under NAMA) that cuts across the entire philosophy of the Greens.]

(c) in relation to the determination of the long term economic value of bank assets, to—
(i) the long-term economic value of the property comprised in the security for a credit facility that is a bank asset,
(ii) the net present value of the anticipated income stream associated with the loan asset,
(iii) in the case of rental property, current and projected vacancy rates,
(iv) loan margins,
(v) an appropriate discount rate to reflect NAMA’s cost of funds plus a margin that represents an adequate remuneration to the State that takes account of the risk in relation to the bank assets acquired by NAMA,
(vi) the mark-to-market value of any derivative contracts associated with the bank asset,
(vii) any ancillary security such as personal guarantees and corporate assets,and
(viii) fees reflecting the costs of loan operation, maintenance and enforcement, and

[This lengthy passage tells me right away that NAMA will operate as a banking sector's out of town office. The primacy of taxpayer protection absent in the legislation and the length afforded to the protection of the banks' bottom line is the destruction of the private sector economy on the vast scale. Incidentally, it is also a sealing of banks into servitude to the Exchequer, implying that from the day of NAMA instituion, Bank of Ireland, AIB, IL&P and other participating banks will be Japanese-styled zombies. A short-term pain relief turns a long term cancer!]


I will repeat the list of provisions that must be required before NAMA can be allowed to proceed in every post on NAMA from ehre on:

• Provisions for taxpayer protection and provision for a taxpayers' oversight board filled with only independent observers, who are not in the employment of NAMA, NTMA, the State or any other party to NAMA undertaking;
• Complete and comprehensive balance sheet and cost/benefit analysis of the undertaking;
  
• Exact upper and lower limits for banks equity the taxpayers will receive in return for NAMA funds and post-NAMA recapitalization funding;
• The exact procedures for divesting out of the banks shares in 3-5-7 years time with exact legal commitment by the state to disburse any and all surplus funds (over and above the costs) directly to the taxpayers in a form of either banks shares or cash;
  
• The formula for imposing a serious haircut (60%+) on banks bond holders, possibly with some sort of a debt for equity swap and a restriction that NAMA cannot purchase any rolled up interest acrued since the latest 'restructuring' of a loan;
• A recourse to all developers' own assets - applied retroactively to July 2008 when the first noises of a rescue plan started;
• The list of qualifications for any bank to participate in NAMA, including, but not limited to, the caps on executive compensation at the banks and the requirement to set up a truly independent, veto-wielding risk assessment committee at each bank with a mandatory requirement for a position of a taxpayers' representative on the board that cannot be occupied by a civil servant or anyone who has worked in the industry in the last 10 years;
• A requirement that risk and credit committees of NAMA include at least 51% majority of independent experts who cannot be employees of the state, NAMA or any toher parties to this undertaking;
  
• A condition that the banks must undergo loan book evaluation prior to transfer of any loans to NAMA, the results of which will be made public - on the web - instantaneously - and will impose a requirement on the banks to write down their assets, again before NAMA purchases any of them, by the requisite amounts to balance their own books in line with valuations;
• A condition that any loan purchased by NAMA be placed on the open market for the period of 2 weeks and that NAMA will not pay any amount in excess of the bids received (if any), with a prohibition for the participating banks to bid on these loans;
• A condition that every NAMA loan should be publicly disclosed, including its valuations and bids it receives in the auction stage of the process;
  
• A stipulation that all and any regulatory authorities (and their senior level employees) that were involved in regulating the banking and housing sector in this country take a mandatory pension cut of 50% and return any and all lump sum funds they collected upon their retirement;
• A provision for dealing with the speculatively zoned land to be acquired by NAMA, i.e orderly de-zoning of this land and transfer of this land to either public (if no bidders arise) or private use consistent with sustainable agricultural development, environmental improvements, public use or forestry;
  
• The measures to prevent banks from beefing up their profit margins through squeezing their preforming customers;
• The measures to force the banks to reduce their cost bases by laying off surplus workers;
• The measures for accounting (in a transparent and fully publicly accessible fashion) on a quarterly basis for NAMA operations and the performance of the state-supported banks.

If I forget something, please, let me know...

Economics 31/07/2009: NAMA legislation Part 1

Over the next few days I will be posting my thoughts on NAMA legislation. But here is a quick first installment:

A search of PDF document reveals that:

1. The word 'taxpayer' appears in the entire legislation only once. Despite the taxpayers being the sole payee for the scheme;
2. Words 'Taxpayers representation' do not appear in the document at all;
3. Words 'Taxpayers interest' do not appear in the document at all;
4. Words 'stop-loss' do not appear in the document at all;
5. Words 'transparency', 'public interest' (outside the scope of court decisions) and 'public information' do not appear at all;
   
6. 'Public disclosure' only applies to restricting such in the cases of expert opinions;
   
7. Word 'loss' appears in the legislation only in the areas of:
   

• Giving NAMA power to issue complex derivative instruments to hedge against "the risk of loss arising from changes in interest rates, currency exchange rates or other factors of a similar nature, to eliminate or reduce the costs of raising funds or borrowing or the cost
  of other transactions carried out in the ordinary course of business, or increasing return on investment. No stop-loss rules on these derivatives are envisioned, as if they are risk free;
• In making sure that "participating institutions to indemnify NAMA. 111.—(1) If NAMA or a NAMA group entity so directs, a participating institution shall indemnify NAMA or the NAMA group entity and its officers against any liability or loss..." In other words, the Government employees and NAMA will be protected from any loss claims, but not the taxpayers. Minister Leniham did his job of shielding his cronies well.

6. "30.—(1) As soon as practicable after the establishment day, the Board shall establish 3 committees, and appoint members to them, as follows: (a) an audit committee; (b) a credit committee; (c) a risk committee." There is no independent committee membership requirements, with all, save two members of each committee appointable by the Board of NAMA, and the remaining two - by the Minister.

Actually, worse that that: "(5) The members of the credit committee and the risk committee shall be members of the Board or officers of NAMA. At least 2 members of each of those committees shall be members of the Board." Thus, there will be no independent oversight over risk and credit decisions by NAMA. Not even in theory.

"31.—(1) The Board may establish such advisory committees as it considers necessary or desirable to advise it in the performance of its functions. ...(4) The Board shall determine the terms of reference and procedures of an advisory committee." There will be no statutory requirement for independent oversight of NAMA - cronies run cronies' loans.

7. "Indemnification of members of Board and officers of NAMA, etc. 32.—(1) This section applies to the following: (a) each member of the Board; (b) each officer of NAMA; (c) a director of a NAMA wholly owned subsidiary; (d) a director of a NAMA group entity; (e) a member of the staff of the NTMA. (2) A person to whom this section applies is indemnified in relation to anything done or omitted in the performance or purported performance or exercise of any of NAMA’s functions or powers under this Act, unless it is proved that the act or omission was in bad faith." So the incompetence can never be penalised - a standard practice for Mr Leniham's pets in the public sector.

And a succinct summary of the legislation (hat tip to Richard W):


More to come, so stay tuned, but this already bad enough...

Economics 29/07/2009: NAMA time horizon

Peter Bacon on today's Morning Ireland has stated that the time horizon for the real estate cycle built into NAMA assumptions is between 5 and 10 years. I have written about this assumption in the previous post (here). Assuming that what is meant by the 'cycle' here is peak-to-peak U-cycle, the most conservative Government estimate, then, is for the growth of 14.86% annually in house prices, if we are now at the bottom of the cycle. Oh, that is realistic, of course, but only if the Government spends the next few months blowing up - physically - so much housing stock in this country that it will create a massive overhang in demand over supply. Good luck!

But there is an added complication that was revealed by Liam Carroll's examinership case. As we all knew, loans to developers, by and large - all developers - to date have not been serviced with interest roll overs becoming a routine at the very latest mid 2008. This means that by the time NAMA purchases a given loan with face value €X, given the reasonably expected average rate of interest on refinanced loans of 8-11%, this loan will be refelective of:

• 12.24-16.95% cumulative rate of rolled interest, plus
• the orignal principal of €0.8305-0.8776 to the Euro of the face value of the loan

Now, suppose NAMA applies a haircut of 25% on the loan, so we buy €1 of the loan at a price of €0.75. What do we get for that €0.75? A loan that had at the time of its origination an underlying asset value of €0.83-0.88. So the real face value discount we are getting is 0.75/0.83 - 0.75/0.88 or 9.64% to 14.77%.

But wait, the actual principal (face value) amount has depreciated by, say, roughly 50% since the time the loan was written, so in reality, the discount NAMA will take will be negative 70-78%! What does it mean? Take a simple analogy. You walk into a shop and see a TV advertised 'For Sale'. The signs reads:
Original Price €100.00
Sale Price €178.00
How fast will you walk away from this 'deal'?

NAMA will overpay for the assets it buys on a vast scale!

Economics 28/07/09: NAMA & Liam Carroll's Case

Of course, the news is in - NAMA got Cabinet approval around 7 pm tonight. This does not change much - we still have a battle to wage to ensure that proper taxpayer protection and risk management, as well as investment strategies and stop-loss rules are put in place, but we are now one step further away from seeing it done.


Per RTE report (here), the High Court has delayed its decision to Friday afternoon on an application by six companies controlled by property developer Liam Carroll to have an examiner appointed to them. There are several significant implications of this for NAMA.

First: it is now clear that any decision will hang over the weekend, providing for increased uncertainty in the banks shares valuations in the days before Monday. Irish banks shares are currently valued as a call option on success of NAMA. If Carroll is not granted an examinership, this will open up a floodgate for the banks to race to force the receivership on other developers in a hope of salvaging whatever value they can under the prospect that NAMA will distort the seniority structure of debts. This, in turn will act to reduce the scope of assets left for NAMA to pick off the banks balancesheets and will force the banks to write down the loans under receivership. The resulting decrease in the future valuation of the big 3 Irish banks will translate in the fall of the value of a call option, thereby reducing the price of the banks shares. Forcing the Carroll decision to Friday afternoon leaves the markets in a serious uncertainty for the next 3 trading days – an uncertainty where anyone staying long in Irish banks shares has a 50:50 chance of not coming out alive, comes the opening bell on Monday.

Second: about that 50:50 chance. Reading into RTE report, one gets a serious sense that examinership might be denied to Carroll. “Senior Counsel Michael Cush said the companies, and the wider Zoe group of which they are a part, had historically been very successful property development businesses. But he said more recently they had experienced difficulty due to credit problems, the downturn in the property market, and problems with investments. In particular, he said difficulties arising from the development of a new headquarters for Anglo Irish Bank at North Wall Quay in Dublin had created significant difficulties. He said Vantive Holdings is now clearly insolvent, as are three other companies related to it. If liquidated, he said, the estimated deficiency of the group as a whole would be over €1 billion.”

This indicates that indeed, aside from historical record, there is no chance for a recovery of the business and that receivership, not examinership should be applied.

Mr Cush also said that “following the drawing up of a business plan in 2008, seven of the companies' eight banks had supported the continuation of the businesses. He said this had required huge forbearance from the banks. Part of the plan, he said, had seen AIB and Bank of Scotland Ireland make available additional finance to pay back third party unsecured creditors, which had since been done. Another feature of the plan saw seven of the banks agree to a moratorium on repayment of the loans and the rolling up of interest. But he said ACCBank, which is owed €136m, or 10% of the six companies' bank debts, had taken a different view, and its intention to have the companies wound up had prompted the application for examinership.”

This is also significant not only because it is showing the scale of banks’ willingness to roll over for large developers – itself hardly a laudable practice – but because it shows clearly that currently insolvent businesses continue to accumulate liabilities (rolled up interest and fresh demands for continuity funding) that are simply cannot be repaid, ever. Again, examinership is not warranted here, since loss minimizations should require an immediate appointment of a receiver to wind down the companies. In fact, this claim invalidates the ‘hardship’ argument about receivership resulting in €1bn loss on current obligations, as it shows that this loss is only going to increase under the case of examinership that will not be able to introduce any chance of reducing the probability of such a loss.

Mr Cush “said that given time, forbearance of the banks (none of which is opposing the examinership application) and the orderly disposal of assets, there has to be a prospect of survival for the companies. He also pointed out that the companies are not envisaging having to write off any of the money they owe the banks, and intend repaying in full.” This is simply impossible under the conditions outlined by Mr Cush in previous paragraphs.


“The court also heard that since the new business plan was put in place [in 2008], the companies had sold 39 residential units, worth €11.7 million.” Which, of course puts these companies cash flow at maximum €23mln pa, with expected loss of €1bn and the combined debt of companies of ca €1.4bn. Now, at 11% yield, the cost of servicing this debt will be around €154mln pa – hardly a sign of ‘survivability’ of the companies.

“Summing up, Mr Cush said it was a most unusual application for examinership as it was not being opposed by any creditors, no debts were being written down, and 90% of creditors were co-operating, all of which must satisfy the requirement for there to be a reasonable prospect of survival.” What Mr Cush neglected to mention is that the lack of opposition by the debtors is simply a jostling for seniority between Irish banks, not a reflection on survivability of the firm.


Carroll’s case shows conclusively that NAMA will transfer liability of the banks and developers onto the taxpayers that is well in excess of the original borrowings. Rolled up interest, operating capital injections and other soft budget constraints for insolvent businesses, like Carroll’s empire were accepted by the banks solely on the anticipation of a state bailout (otherwise these banks actively engaged in destroying their shareholders’ wealth by undertaking knowingly reckless decisions). Once again, the markets have neglected this risk. They might have to reprice that call on Irish banks shares now, or risk being repriced by the more proactive traders comes Monday.