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!
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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 .
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… Read more »
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… Read more »
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
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.
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… Read more »
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… Read more »
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.
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,… Read more »
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.
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… Read more »
David Revisited
http://www.davidmcwilliams.ie/2009/03/25/we-need-a-complete-break-from-the-ideas-of-the-past/comment-page-2
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… Read more »
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.
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… Read more »