BUSINESS OPINION:If the pursuit of Paddy Kelly forces others to jump into the unknown, we may thank the Dutch
ONE WOULD have to suspect that ACC Bank is something other than flavour of the month with its larger peers at the moment. The Dutch-owned bank’s relentless pursuit of debts of €23 million owed by property developer Paddy Kelly and his family stands in stark contrast to the more “supportive” stance that has been adopted by the bigger Irish-owned banks as regards their developer clients.
Their forbearance of course is due entirely to self-interest. The last thing AIB or Bank of Ireland want to see is the entire portfolio of some bankrupt property developer dumped on the market by a liquidator. Not only would the banks have to write off their losses on that particular developer, they would have to write down all the other loans extended to all the other developers to reflect the value of the prices being achieved by the liquidator.
It’s the quick and dirty version of what the National Asset Management Agency has been set up to let the banks do: recognise and absorb their property losses. But doing it outside the warm embrace of the taxpayer means almost certain bankruptcy for the banks themselves. Hence the need for the State to step in with taxpayers’ money to help the banks find a way out of the stalemate that they have engineered for themselves.
ACC appears to have no such worries, and that presumably reflects the small size of its Irish exposure in the context of its triple-A-rated parent Rabobank. ACC also must feel that its job is to try to get its money back from delinquent customers, and not worry about the wider systemic consequences of its actions. And if you were viewing the Irish market and the sort of behaviour attributed to Paddy Kelly in the courts from Rabobank head office in Utrecht, you would probably think the same. Nobody likes to be taken for a fool.
AIB and Bank of Ireland do not have this luxury. Their fear is that once one of the big developers enters formal insolvency, they will all go, so intertwined are their business interests. Equally, so complicated and incestuous are their banking relationships that one of the big banks has little to gain by forcing a large developer into bankruptcy.
As a result, Kelly and most of his peers are effectively on life support, with the banks taking the view that their best chance of seeing any of their money is to help their clients work through the problems.
It remains to be seen whether ACC will now pursue Kelly for the judgments it has obtained and what the consequences of that would be. But it does hold out the prospect of at least one developer going bust before Nama can be established.
The current timeline sees the legislation to create it being put through the Dáil by the end of the summer. This would not be the end of the world. There are well-established procedures for dealing with the collapse of large multi-banked enterprises. Richie Boucher, Bank of Ireland’s chief executive, made reference to the collapse of the Goodman group and the subsequent work-out in which he was involved.
Indeed, the process undertaken by Nama will not be a million miles away from what the banks would be doing themselves if they were not so overwhelmed by the scale of the problem. One Goodman they could deal with in the early 1990s, but 30 Goodmans coming at the same time would have destroyed them back then.
Equally, the banks could probably cope with Paddy Kelly going bust and the arrangements put in place could be absorbed by Nama once it is up and running. The bigger question is what will happen if ACC forces Kelly into a formal insolvency process which in turn forces a couple of others over the brink – all before Nama is ready?
The answer is a truly awful mess. But it also serves to hasten the inevitable, and that is not necessarily a bad thing. The banking system is close to paralysis because of fear as to what will happen once the process of confronting the reality of the bad debt problem begins in earnest. The comments two weeks ago from Michael Somers of the National Treasury Management Agency – which will be responsible for Nama – to the effect that he did not know how it was going to work, are open to the interpretation that the State is equally terrified of the consequences.
The property developers themselves are adding fuel to the fire with talk of legal challenges and the like. It’s very easy to see the whole process of setting up Nama drift out until the new year.
The temptation to step back from the edge is intense. If it takes the precipitous collapse of Paddy Kelly to force everybody to jump into the unknown and get on with cleaning up the mess, then it is to be welcomed.
We may yet have reason to thank the Dutch.
jmcmanus@irishtimes.com
