OPINION:The Carroll judgment is very good news for the taxpayer: the cat is out of the bag as to why the banks are cosying up to Nama, writes KARL WHELAN
IT IS too early to assess the impact on the Irish property market of the Supreme Court’s decision to deny examinership to Liam Carroll’s Zoe group. However, despite a lot of coverage focusing on potential complications stemming from the decision, I believe that the Carroll case has been very positive for the public interest.
The first positive aspect is that the case has finally given us a clear picture of the likely financial state of the Irish property developers whose loans the National Asset Management Agency (Nama) is supposed to purchase.
Carroll’s accountants have admitted that, as of today, his Zoe group could only pay back about one-quarter of the money it owes to the Irish banks. Keep in mind that many analysts have predicted Nama will purchase loans for an average discount of one-quarter. If Nama were to purchase the Zoe loans for such a price, it would imply the Irish taxpayer paying three times the amount that they could currently be sold to anyone else for.
Of course, it could be argued Carroll’s property empire might be in worse shape than those of other developers. It seems perfectly possible, however, the opposite is the case. His properties mainly consist of Dublin projects likely to get developed in years ahead. Consider, in contrast, the position of those developers who have pinned hopes on developing the proverbial field outside Mullingar.
The second positive aspect of the Carroll case and the judgments passed are the insights they have given us into the current unholy alliance between the Irish banks and property developers.
The first instalment in this story will be familiar to those who have followed banking crises elsewhere. As the property market began to fail and the prospect of substantial losses loomed, the banks decided to take it easy on developers because the revelation of large losses could have scared off international money markets from providing them with funds.
By the time these international markets were scared off, in September 2008, the banks continued to deny they were facing enormous losses. This denial of reality paid off for them. By fooling our Government into believing they suffered from a short-run liquidity problem rather than a long-term solvency problem, the banks managed to receive an almost-blanket guarantee on their debts from the Irish taxpayer.
The Carroll case revealed the latest, and most disturbing, aspects of the unholy banker-developer alliance. Justice Peter Kelly concluded that the survival plan put forward by the Carroll group was “fanciful” and “lacking in reality” and he was supported in this assessment by the Supreme Court.
However, despite the reality that Carroll’s business simply could not be saved, all the Irish banks involved, apart from ACC, actively supported this survival plan, allowing Carroll to continue rolling up interest and also taking the highly unusual step of providing the funds to pay off unsecured trade creditors.
Why would the banks do this? Why would they extend further money to a clearly failing developer with a fanciful survival plan? The only possible answer is these banks were determined to maintain the illusion Carroll would one day pay back the money he owed. And the reason for this illusionist act? Nama.
With Nama apparently determined to put an optimistic spin on all loan purchases, viewing them through the rose-tinted spectacles of “long-term economic value”, the incentive for the participating banks has been to maintain that loans such as Carroll’s are good and to then sell them to Nama for far more than they will ever repay.
The only reason we were ever allowed see the inside workings of Zoe’s alliance with the bankers was because Dutch-owned ACC was left out of Nama and so didn’t have any incentive to pretend the Zoe loans were any better than they are.
We don’t know what’s going to happen next in the Carroll saga. Quite possibly, the other banks involved in lending money to Carroll will now pay off ACC and revert to business as usual, ordering liquidators to let the fanciful survival plan be put into action. And quite possibly, Nama will end up purchasing Carroll’s loans at a large premium without the Irish public ever knowing, because the information will never be revealed, thanks to “commercial sensitivities”. Still, to some extent the cat is out of the bag because the public has now been able to see how little the Nama loans are really worth.
Much of the commentary on the Carroll judgment has focused on two potentially negative implications. The first has been the concern that a liquidation of Carroll’s assets will result in a “fire sale” that will somehow make the underlying situation in the Irish property market worse than it is already. I think this concern is misplaced.
What we now know is that the banks have been actively working to keep development properties off the market, so that their true values are kept out of the public domain. However, to work through our current problems, these property assets are going to have to be dealt with – either sold at a reasonable price or else demolished or returned to agricultural usage.
Carroll’s properties represent a small fraction of the overall €90 billion in assets that need to be dealt with. If the Supreme Court decision gets us finally started on the road to working through this overhang of property assets, then it will have done the Irish public a big favour.
The other widely expressed concern is that the potential sale of Carroll’s assets will be a “problem” for Nama’s valuation method. I suspect the problem these commentators are worried about is that when such sales reveal the true low value of Irish property assets, this will make it more difficult for Nama to pay high prices under the guise of long-term economic value. Well, this may be a problem for bank shareholders but I can assure readers that it’s good news for the Irish taxpayer.
Karl Whelan is professor of economics at University College Dublin