August 21, 2014

When the vulture funds move on, our broken banks will be right back where they started

Posted in Irish Independent · 36 comments ·
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The Irish crisis happened because our banks were massively leveraged to over-expensive Irish property. That’s it. We all know the story. Everything that happened afterwards was the consequence of this banking idiocy, not the cause of the country’s economic plight. How unforgiveable would it be if this crisis ended with the Irish banks once again leveraged to expensive Irish property?

We are in the process of heading this way and this lamentable upshot could be the unintended consequences of NAMA’s “success” in selling off its property portfolio to foreigners. The dynamic of foreign funds buying up Irish property at deep, deep discounts, only to sell the same assets on in a few years at a significant profit, is the Hibernian piece in a global jigsaw which is seeing the very rich get even richer.

To misquote Doctor Spock, “it’s capitalism Jim, but not as we know it”. This development is not vibrant capitalism, based on fair competition. It is plutocracy, based on almost monopoly access to capital and it threatens all of us.

Here is what is happening. The US, UK and Japanese central banks are operating a policy of printing money. However, due to the fact that the banks are being given the job of distributing this cheap money to the economy, the efficacy of this policy is based on the decisions of the boards of the large banks – the very people who caused the problems in the first place!

The money isn’t finding its way into the hands of the people, but is staying in the big banks and being lent to smaller outfits which are placing bets on everything from stocks, to coffee and real estate.

In many cases these institutions are from the same banking gene pool, with lots of successful bankers having jumped ship to set up the funds.

Now here is a twist. Because interest rates are at an all-time low, rich savers who were happy to live off the odd bit of interest on their savings now want to get better yields.

Therefore, they are knocking on the door of these private funds, looking to get more from their money than they can on deposit.

The funds now having promised the wealthy better returns have got to deliver. So they need to find cheap assets. This the nub of investing and they are perfectly entitled to do so. In fact, they are mandated to do so by their shareholders.

They are following the maxim of their favourite value investor Warren Buffet who cautioned buyers: “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results”

The implication for the rest of us are not so sanguine because foreign funds are not the natural owners of Irish property assets. The natural owners of Irish property assets are Irish people.

Therefore, the question is not “Who is buying Ireland”, as an RTE documentary gushed last year, but who will buy Ireland back from those guys? And at what price?

The strategy of a fund, is termed in the business “three and thirty”. This means they buy and hold for three years and when they have achieved a 30pc profit, they sell and they are gone to the next “distressed” country. The accumulation of wealth in this case in the hands a very few people is obscene.

However the question is who pays for their extravagant returns.

This is where it gets tricky for Ireland because when the opportunity passes for significant double-digit returns, why would a property fund sniff around here?

Against this background, is it any wonder the foreign private equity funds have been impressed with NAMA and at every opportunity are praising NAMA? NAMA is making them very rich and by selling quickly to highest bidder now, it will ensure that the Irish credit crunch only chokes the Irish and precludes the Irish from partaking in the Irish recovery!

The figures are extraordinary. One foreign fund, which received much attention at the end of 2013, is Kennedy Wilson – a US owned international fund managing $13.7bn in assets. It was estimated that some 15pc of its global investment is in Ireland. I’m sure they’ll be happy to divest.

However, they are not alone. US investment group Starwood Capital bought €200m of loans, which had a face value of €810m, indicating that the new owners bought the portfolio for 25 cent in the euro.

On April 4 of this year, NAMA announced the completion of the sale of its Project Eagle portfolio of loans, a Northern Irish debt portfolio. The sale of the portfolio, which has a par value of £4.5bn and represents the largest single transaction by NAMA to date, to US private equity fund Cerberus Capital Management relates to loans secured on assets in Northern Ireland and in other locations where the underlying properties are owned by Northern Ireland-based debtors.

The fifth-largest private equity firm in the world, Blackstone has bought about €2bn of Irish loans and property. It is better known in the headlines as the preferential owners of €1.8bn par value of loans linked to developer Michael O’Flynn, which Blackstone bought from NAMA at a discount for around €1.1bn.

What happens when a bust in Sydney or Calgary attracts these funds?

They will sell to Irish investors.

Where will the Irish get the cash?

Why they’ll borrow it from Irish banks and we will be back to where we started with Irish banks overleveraged to expensive Irish property.

You couldn’t make it up!

 


  1. Financial Caliphate

    This article just proves how fruitless the inhumane suffering the Government imposed on the Irish Bank Borrowers .It should be time that after the capture of the securities by the Vulture Funds that a Financial Caliphate should be formed to castrate their values and allow the public acquire them from the Vultures at a social discount thus removing these marauders from our lands forever.

    Land League should now be replace by a National Financial Caliphate .

  2. michaelcoughlan

    Outstanding analysis.

    No solution preferred though.

    The article should be printed as a manifest and nailed to the door of Fail Eireann martin Luther style .

    What’s clear from the article is that the Irish people are in the same position of oppression as we have experience previously. This time we are being fucked over by a native government. So what do we do? Ans; We do what we always do and BACK OURSELVES to thrive IRRESPECTIVE of what the politicians inflict on us.

    So how do we do it? Very simple; The currency we use is corrupted and cant get rid of it but WE CAN STOP USING IT. So lets just say David McWilliams was to print the local currency you use in Kilkenny on a medium similar to that used by the isle of Mann, Australia or Canada; a high quality plastic currency.

    Then when people exchange their Euros for the new currency you printed use the Euros to create a fund invested in an etf which buys a diversified portfolio of natural resources including say gold, water, etc which pays a dividend from the sale of options. This dividend can cover administration and printing costs. I suggest that guidance be taken from EC Riegel on this matter.

    You now have real asset backed currency which will increase in value against the Euro as more Euros are printed and which gets around the problem of the gold standard that classically trained economists identify which is; the economy may be prevented from expanding because the supply of gold cant be increased fast enough. You can always print more currency David if more people want to sell their Euros for it. I will send you 100 Euro this week to get you going if you like? the beauty of this is that no one person controls the whole currency as each citzen will control enough to meet their needs.

    You could use crowd funding to get the people to do this and you would free your your fellow countrymen in a heartbeat if you so choose. If you don’t do it I would love to under your tutelage. I know an etf fund that invests in such assets by the way. It has increased 10% in value this year and pays a div of over 8%.

    respectfully,

    Michael.

    • Eireannach

      The solution will not be found merely in changing currency. It’s like the old remark about the Free State soldiers, simply changing the buttons on the uniforms.

      No, the solution is in developing our skills in new and previously unimagined ways. Tech skills, skills in prop making, costumes or the forging of steel (HBO’s Game of Thrones spends £23m in Northern Ireland EVERY YEAR, much of it goes into the hands of artisans south of the border), organic food production and processing skills (West Cork chorizo comes to mind).

      What you are talking about is just, how can I put this – lazy. Lazy is the right word. Put in 10,000 hours in the development of a niche skill. Continue on to 20,000. Love what you do so that you become a master at that skill or craft. These are the foundations for the future independence of the Irish people.

      • michaelcoughlan

        Eireannach,

        You are plain wrong. If the currency you use to trade is corrupted you will be robbed and turned into a serf because the value you add with your skill will be transferred to the people controlling the currency. Like a landlord upping the rent as the tenant makes the land more productive. The tenant never gets out of bondage unless he shoots his way out as we did.

        Its not just changing the currency like for like its changing a fiat currency for an asset backed one which makes all the difference.

    • michaelcoughlan

      Hi,

      You could call it a savers currency since a bad currency (Euro) drives out the good one (This new one). You could pay a small percentage on savings if people wanted to deposit money with you from the dividend. As the fed, Japs and every one else prints more the fund would rise in value and PROTECT THE PURCHASING POWER AND SAVING POWER of the customer.

      If you set up a credit union and used this currency as the basis for it you could issue loans on a fully reserved 100% basis and it would go a long way to countering the boom and bust cycles prevalent in a fiat money system.

      • Better off just using Bitcoin – it already exists.

        • The goverment, the banks, the credit unions etc. are going to do shit for you Michael, no matter how many good plans you come up with – you’ll be waiting 1000 years for that and it still won’t happen. Take matters into your own hands.

        • michaelcoughlan

          no. Bitcoin isn’t asset backed which means it has no intrinsic value. further more its quantity is finite giving the same constraining effect on growth as the gold standard.

          You misread my post. I suggested that I do this under David’s tutelage in other words do it for myself.

      • This other suggestion ‘under David’s tutelage’ ain’t going to happen.

        I know it, you know it, the dogs in the street know it, so we may as well get back on Planet Earth and discuss real possibilities.

        • michaelcoughlan

          I am going to try and do it anyway. Ill let you know how I get on. I am really serious about this.

          • Ok fair enough, good luck and keep me posted.

          • Adelaide

            EC Riegel “To establish a money unit with a constant purchasing power and a money system that will prevent booms and depressions, inflations and deflations, and assure constant prosperity and universal circulation”

            Riegel’s brilliance was realising that
            a perfect money system only needed to be based on ‘sound mathematics’, zero-sum mathematics, where total debt always equals total credit, thereby assuring a constant purchasing power for each money unit, because inflation and deflation of the money supply is systemically and mathematically impossible.

            Zero-sum money is blindingly simple to initiate. All participants start with a zero balance. Participants issue their own money, example, the very first trade, a buyer makes a purchase, here the buyer issues a quantity of money to the seller, the buyer’s balance is recorded negative while the seller’s balance now has a corresponding positive balance. All negative balances = All positive balances. I don’t have time to explain all the safeguards in place to eliminate abuse of the system by unscrupulous participants, but they work.

            Riegel’s dream was that one day all citizens would be participants in one global zero-sum decentralised system, controlled by no state or bank, a people’s money, everyone would have access to credit by means of them being allocated a Zero Balance upon their birth.

  3. Eireannach

    The theme of this article seems to be ‘the disempowerment (of fall) of the native Irish’. Irish people bought over-priced property in Ireland, and are now chained to heavy debts. Irish banks lent the money, and sunk as a result, needing tax-payer bailouts, further adding to the debt burden of the people.

    What is debt? The late Richard Douthwaite described it best. ‘Debt is a claim against your future wealth’. So FUTURE wealth, generated in Ireland by Irish people, will be handed over, because banks have a claim on it. Alternatively, people can give up their houses to pay off the debt – another kind of claim on their wealth.

    However, to borrow heavily is so unbelievably stupid that the world simply doesn’t owe it to you to ensure that you continue to have a nice life, if you borrow recklessly. Borrowing money – debt – is like whiskey. A little greases the wheels of life and is a pick-me-up, a lot leaves you with a terrible hang-over, too much too fast will actually kill you.

    Look how we treat alcohol consumption in Ireland. Is it any wonder we behaved/behave the same way with debt?

    How can we remain prosperous, when so many of us behave so recklessly, even today? It’s impossible.

    Many Irish people still think the way to wealth, security and prosperity is through owning property. In other words, they will be suckers yet again, and buy over-priced property yet again, because they simply don’t have any other ideas about how to better their lives.

    They know that ‘labour’, meaning people living off weekly or monthly wages, is being squeezed, with social charges, water charges, etc, etc. The only other idea they have is the ‘investor’ or ‘speculator’ model of property, essentially gambling on prices going forward. It’s a very lazy way to make money.

    There is another way. Develop unique, sought-after skills, and learn how to set up a business – Memo and Arts, Form A1 to the CRO, VAT number, Annual Return Date, register for PRSI and PAYE, open a company account, etc. – to trade these unique, niche skills in the global marketplace. Websites like http://www.freelancer.com for skills, or Ebay for sellers of products, allow people to trade all over this planet of 7 billion people.

    Opportunity and future prosperity are to be found in that direction. But to avail of these opportunities, the culture of conversations about property prices, whilst drinking alcohol, has to sober up and ‘diversify’. There should be more TV shows about strange and fascinating new business models, sprouting up in Ireland, and less TV show about property developers gone bust and ‘through the keyhole’ oogling of nice house interiors.

    But would the people watch the TV shows about fascinating new business models, or switch over to the ‘through the keyhole’ looking at properties? If it’s the latter, then we haven’t learned our lesson yet, we’ll have to go property bankrupt twice (in 10 years) before we snap out of it.

  4. douglaskastle

    It’s Mr Spock, Dr Spock put out that famous baby book in the 40s, Baby and Child Care.

    http://en.wikipedia.org/wiki/Benjamin_Spock

    This would be a mildly trekkie pedant moment if it wasn’t for the quote that actually is associated with Doctor Spock:

    “you know more than you think you do.”

    I like to think we do

  5. VincentH

    Just an FYI. Dr Spock is the fellow that wrote the baby books beloved of women for the last 60 years. Mr Spock is the spiky eared one from Star Trek.

  6. McGoo

    David, you say that the funds are buying “Irish Property”, but all the examples that you give are of funds buying portfolios of loans that are secured on Irish property. Not the same thing at all, as the funds don’t actually own the property. Do you think that they are planning mass repossessions to get their hands on the property? It’s possible, but it seems more likely that they will simply sit back and collect the cash that comes in from the loan repayments for the next 30 years, and deal with defaults on a case-by-case basis. Because they bought at a deep discount, that would be very profitable for them, and would not really have any impact on the Irish property market.

  7. dochasach

    If only we had sold up Ireland at peak prices of more than 20,000 per agricultural acre, we could have bought Spain or California with enough leftover to buy Massachusetts. If only… But that delusion has passed and now we must force our imagination to believe that the multinational slumlords who’ve distorted the property markets in London, Vancouver and much of the US won’t affect us in Ireland because “it’s different here.” Yes it was different when we were the slumlords pricing the locals of Spain, Eastern Europe and Florida out of their homes. That wouldn’t happen here to be sure. So there.

    It’s no coincidence that with each boom/bubble/bust cycle, the capital cities; Washington DC, Beijing, London and Dublin have each distanced themselves from their country’s financial hinterlands. Even while holding millions of public debt, the landed class pry themselves away from the homeless, the poor, the young and the unborn. Plutocrats look after their own as they always have.

  8. pauloriain

    Good article David, but one error, it wasn’t just the over leveraged banks, which caused the crisis, it was also the overpaid public servants. Ireland has been unable to invest it’s way out of this crisis, because the majority of the borrowed money is being used to plug a hole in the current deficit and it became a crisis, because the money markets could see that the budget was unsustainable.

  9. tim1234

    As everyone knows our banking bailout was around €64 billion. Perhaps in around 4 years time we will know what the net cost of the bailout will be. We will only know the figure when NAMA is gone and all of the stakes in AIB and BOI are sold(any profit, if any, from NAMA could be counted towards reducing the bailout cost).
    We have got around €10 billion back so far and assuming we get the par value of the IBRC loan back (€21 billion) and assuming we get €10 billion and €1.5 billion from AIB and BOI sales respectively, and assuming another €2 billion in bailout fees from banks, €1 billion from PTSB and €500 million profit from NAMA windup (even though it costs quarter of a billion to run annually!) then the net cost of the banks bailout will be around €18 billion (yes a lot assumptions there)which obviously doesn’t even include the interest being paid on the loans.
    So roughly €20 billion could be our cost while these vulture funds take some of that money.
    An example would be a company or individual with a loan of a million and having to sell the property for €400,000. The cost to the bank and/or the person/company would be €600,000, some or all of which could be counted towards the net bailout figure. In the meantime the vulture fund that bought the property for 400k, sells it for €520,000 3 years later. The profit of €120,000 is money that will never go towards reducing the loss of €600,000 to the state/bank/person.
    We as a nation are so desperate to sell these properties and put the banking fiasco behind us that we are knowingly selling these assets at a bargain in the hope that we will be better off in the future to be able to buy the assets back at the higher price.
    Next spring we are supposed to find out how successful or not, most of the liquidation of IBRC has been which will give us a much better picture of how much we have been screwed over (even though most of IBRC is not residential). Hopefully by then, NAMA will have reached the 60% completion mark and a stake in AIB has been sold for us to know how close we are to getting our net bailout near my €18 billion rough estimation.

  10. dwalsh

    Excellent article and analysis David.

    I also suggest that what is unfolding is part of a deleveraging and laundering process fed by the virtual profits of the deriviatives bubbles.

  11. dwalsh

    By right the central bank of a nation should belong to the nation; its primary asset is after all the productive and creative capacity and good faith of the nation. The central bank should therefore be publicly controlled and operated for the benefit of all the citizens of the nation.

    Today the central banking system of most countries is either privately owned (e.g. Federal Reserve) or privately controlled (independent) and operated for the benefit of the banking and financial industry.

    This arrangement is nothing less that daylight robbery.

    The central banks and the banking & financial industry are looting the public treasury and the public commons.

    • Mike Lucey

      Maybe things are moving against the CBs! Have a look at whats going on in Berlin.

      Video – Explosion of Rallies in Germany Protesting the US Federal Banking System
      http://mediachecker.wordpress.com/2014/06/20/establishment-is-afraid-of-end-the-fed-movement-in-germany/

      It looks to be spreading rapidly and from what I understand its a social media movement.

      • dwalsh

        Thanks for that link Mike.
        Hopeful signs. I hear there are protests against the financial system and austerity going on in various parts of Europe…but the mainstream corporate media cartel tends to ignore or minimise them. Not exactly a revolution; but green shoots perhaps.
        Bad and all as things seem to be to many of us, I think they will have to get worse before they can get better. Most people I know dont yet get it or understand what is happening.

        • Mike Lucey

          The ‘sheeple’ will understand quickly enough when the so called ‘bail-ins’ start and I think, start they will as this system for legalized theft …. eeeerrr, bail-ins, by banks has been put in place.

  12. Deco

    The whole thing is brought to your courtesy of the biggest state quangos in the business…the Banks and NAMA.

    NAMA – A “bad Bank” – because apparently even though the taxpayer already got lumped with six dodgy banks/quasi-banks – it was decided that there was a need for another “official” bad bank.

    The un-magnificent seven.

    The vulture capitalists seem mostly interested in the capital. Obviously they have sussed out the centralized nature of Irish politics.

    Full credit to Flynn in Cork for taking them on.

    I think David wrote an article about this a few years back, predicting that it would happen.

    What did the various arms of the Irish institutional state do in response ? They played golf, and carried out like as if the plan (flawed) was going to work. Even more alarming was the position taken by the Irish left – they took no position at all on the issue. The Irish left are useless.

    Thank you David.

    Time for the idiots in charge to WAKE UP !!!

  13. nh1999

    residential property is shown in the long run to have a real return of zero. despite this we choose to allow the investor 10 to 1 leverage to purchase a property. we are then somewhat surprised at the damage that is done when the market falls over, which it always does. can someone show me a property market that has not corrected significantly at some point? we will make the same mistake again. but i suspect it is a few years away.

    • michaelcoughlan

      “residential property is shown in the long run to have a real return of zero”

      Show us your data.

      • Mike Lucey

        Technically the statement is correct as when one buys a ‘property’ its the actual land on which the property is constructed that is purchased as outlined in red on an ordinance survey map registered in Land Registry.

        Eventually all buildings fall into ruin or are demolished. So I imagine it could be argued that the end result is zero return on property (buildings).

  14. E. Kavanagh

    I don’t really think 30% over 3-years is an unconscionable profit; especially after some kind of market crash. We’ve seen well over 100% increase in the market since it’s recent crash.

    I have no problem with the vulture funds acting the way they do; and I’ve seen nothing here that should amount to a criticism. Their job is to make as much money as possible. Why wouldn’t they buy at sale prices and sell later higher; isn’t that what we all are trying to do with our assets?

    The issue is with the government and whether it there is an alternative to selling to the vulture funds that would be better for the country. The article doesn’t point to what would be a better realistic solution.

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