While ordinary house-buyers are paying high priced loans on average houses, the banks are falling over themselves to lend millions to super-rich developers.

Now that the great credit deluge is coming to an end, it’s time to take stock. Credit liberated the society in a variety of fantastic ways.

The old class system was blown apart by the injection of liquidity which, up until the early 1990s, had been the prerogative of a tight-assed middle class who did very little with the cash at their disposal.

When credit was made available to risk-takers the economy took off. But now that the cycle is turning, something distressing is emerging.

I have written before about how, when lucre gets divided up by the banks, it cascades into an economy like a champagne pyramid. When the banks go out and borrow money it is the equivalent of popping the cork of a jeroboam of champagne.

Credit flows initially into the top, triple-A assets, such as the major development sites.

Then this market overflows, so the excess cash finds its way into other, more risky assets. As these fill up with cash and yields fall, the speculative cash goes further afield looking for return. Eventually, a s long as the taps remain turned on, even the riskiest projects, regions and ventures get cash.

However, the price of that money, like the amount of champagne you get, depends on where your glass is in the pyramid.

If you are close to the top of the pyramid, like the oligarchs, your cup is constantly overflowing. However, if you are at the bottom you realise that there is cash everywhere, but it’s not quite reaching you, so you have to pay more to get your hands on it.

If you want to catch a glimpse of how this system works, to see who is getting all the cash they want and who is struggling, pick up a paper today. Look at the business section. Doubtless you will see details of some mega-deal proposed by some developers or other.

These days this is as much an exercise in PR for the flagging market. Then flick to the small ads, the ones that start by asking if you’ve been rejected by a bank or if you need to roll all your debts into one. You are down with the bottom-fishers now, the people who can’t get credit. The contrast between the two borrowers couldn’t be more stark.

Last year’s hotel deals involving Jury’s, the Berkeley Court and the Burlington saw sites change hands for between €70 million and €80 million an acre, making Dublin more expensive than New York when it comes to land. But how is the whole thing financed? How did the men involved stump up all this cash – €400 million here, €600 million there?

Well the simple answer is that they didn’t. In many cases, the developers buying these properties paid very little of their own hard cash for the pleasure of owning one of the most prized assets in the city.

So let’s examine how a mega-deal at the height of the property mania was financed. The key to all this was/is the banks. In many cases, the developers are just fronts for banks or for a stockbroking firm.

Consider a typical deal at the height of the boom in Dublin where a developer is seen to have bought a property for €100 million. The property, let’s say it’s a premium office block, has a good tenant and a strong stream of income. The rent is €5 million per year. The yield is therefore 5 per cent. But how does he get his hands on the €100 million he needs?

Remember the market was going up, so he was confident that he could sell on in a few years.

The bank, which knows him well, will finance 85 per cent, taking a charge over the property. So he has €85 million already in the bag. He negotiates with the bank to roll up the charges and interest into one lump sum.

Now he has to come up with €15 million of ‘his own’ cash. He calls his mates in the stockbroking company and says he needs €15million.By this stage, the deal is almost secure, and as the market is raging ahead, they can re-rate the asset the minute they have all the cash in.

The broker puts together a syndicate of ten investors to raise €20 million. The extra €5 million is to cover the broker’s ‘costs’, don’t forget. The broker may also negotiate what is called a ‘carry’, which is a bit of the equity for himself, which he can realise when the sale is completed.

However, the ten investors do not put in €2 million each of their own money. They put down €250,000 each in cash and borrow 90 per cent from a bank, usually the same bank that is financing the oligarch. The syndicate investors get shares in a new company which now owns the asset.

The shareholders’ agreement says that the oligarch owns 85 per cent of the building (all borrowed) and the syndicate owns 15 per cent of the building. However, their share is no longer valued at €15 million — which was the original price the oligarch negotiated with the seller and the bank – but €20million,thus revaluing the building at €133 million already.

As a result of this new price all the shares of the new company have to be rerated upwards.

The developer, without putting in any cash of his own, is already looking at a huge capital gain. The interest costs and arrangement and lawyers’ fees are paid for by the rental income. So everyone waits.

These types of deals were happening across the country, so prices were being bid up not by fundamental value but by the effect of the syndicate’s modest outlay which re-values the entire property. The developer is getting money for nothing.

At the bottom of the champagne pyramid, a non-conforming borrower – the Irish world for sub-prime — is paying close to 8 per cent interest for the pleasure of staying in his overvalued townhouse in the commuter belt, whose value is now falling. He is trapped.

This is the paradox of credit, the rich get money for nothing, while the poor pay through the nose for it.

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