It seems that there’s hope yet for the future. The Judiciary has stood up for the contractual rights of a foreign-owned company and defied the resistance of the Establishment. “What?!?”, you must be thinking. We can’t be talking about Ireland here. But yes. The rule of law in Ireland has prevailed. All that’s necessary is persistence (and a rather large budget for legal expenses). But is there more to it?

The background was a high-stakes gamble on property that Liam Carroll made with borrowed money, systematically channelled into the black hole known as Zoe Group (the parent company of Vantive Holdings and Morston Investments among others). He had made it big-time during the bubble years but a collapsing property bubble set the stage for a dramatic show-down. An imprudent speculator in many respects, he had the reliable backing of domestic banks, unconcerned for their shareholders but rather more concerned for their political allies and their network of cronies. There was, however, a dissenter in their midst in the form of ACC Bank.

The old “Agricultural Credit Corporation”, privatised in 2002 and bought by Rabobank, had gone astray in the froth of the speculative bubble, along with the rest of the banking sector. They found themselves in the unfortunate situation of having lent a vast sum to a property developer who had gambled away most of their capital through huge losses on speculative property “investments”. Unlike most of their Irish banking peers, ACC Bank have a wary foreign owner to answer to. Rabobank are a triple-A rated bank – a now rare breed of solid global banks – that can boast of a financial stability and a deep capital base they can dip into during leaner times, which is the envy of the global banking sector. It is no wonder that one of their Irish subsidiaries, ACC Bank, with its mounting provisions for loan losses, was proving to be a thorn in their side, and they needed to bring it under control. As a global bank with its headquarters in the Netherlands, Rabobank is reluctant to allow a large part of their Irish loan portfolio to rot away while the Establishment scurries about making deals to protect their own short-term interests.

In contrast, the two biggest lenders to the Zoe Group were far more willing to compromise to avoid liquidating the company. Allied Irish Banks (AIB) is Irish-owned and subject to the pressures of its fellow crony club members. Bank of Scotland (Ireland) is a subsidiary of HBOS and Lloyds TSB which have also proven their lack of aptitude for risk management. Both banks have been rescued from collapse by government bailouts. When Zoe Group finally breached its loan covenants, ACC called time and applied to the courts to liquidate the company. The other banks which had financed Carroll were still in denial about the severity of the problems of Zoe and of the wider property slump in general and focused only on the short-term consequences. Liam Carroll appealed for court protection and, according to an Irish Times article, his justification for this preferential legal treatment of his groups’ €1 billion deficit was a truly remarkable “single page outlining the hope value of his assets and two short sentences explaining the valuations and citing their source“.

Despite the Zoe Group being clearly insolvent and Liam Carroll proving unable to offer any credible plan for long-term survival, the banks were still prepared to support a deal involving examinership (a process akin to Chapter 11 bankruptcy for US readers) and reorganisation to keep Zombie Zoe on life-support – with the exception of ACC Bank. They fought a legal battle to liquidate the remaining value of their loans and were portrayed in the press as agressive.  Finally, on 11 August, the Supreme court dismissed Carroll’s appeal.

Perhaps ACC Bank is playing hard-ball to strengthen their negotiating position and force an offer from the other banks to buy out ACC’s loans on favourable terms in return for relenting on their petition for liquidation. Ironically, their own self interest is also in the interests of the taxpayer. A forced liquidation of Zoe Group companies would ensure that the banks realise the losses on the loans before they become a taxpayer’s liability when they are transferred to NAMA. It must be said, the Establishment, a crony-capitalist club of bankers, developers and politicians (predominantly Fianna Fáil) with vested interests, put up a good fight – as far as the Supreme Court, exhausting all domestic legal remedies. A continuation of legal proceedings and even a hypothetical victory involving the granting of court protection and examinership would have simply delaying the inevitable liquidation the hopelessly insolvent company. Thankfully, the result is a victory for ACC Bank and possibly even a rare victory for the taxpayer.

So, are we to congratulate our Supreme Court for upholding the rule of law for a foreign-owned company just as it would for a domestic one? Well, perhaps. That is the best answer I can give because my suspicions remain that the Supreme Court had their hands tied. Ever since Ireland joined the European Union in 1973, it has been subject to the supremacy of European Community Law which is within the jurisdiction of the European Court of Justice. The Supreme Court judges know that if they had ruled in favour of Liam O’Carroll and against ACC Bank, any appeal to the European Court of Justice would have been overruled. They would have lost much credibility.

It is perfectly understandable that the public should be furious at the continued payment of bonuses to high-earning investment bankers and financial traders while the taxpayer is being called upon to rescue their banks. Well, finally, action is being taken. Several European countries have imposed caps on bank executive pay. In the United States, on Thursday, the House of Representatives approved a bill that would impose 90 per cent tax on bonuses to employees whose gross income exceeded $250,000 at bailed-out firms.

Astonishingly, investment bankers now seem to be braving the waters of public fury by striking back at limits imposed on their earnings according to an article in the Financial Times. (more…)

As Obamamania took hold during the early days of his presidency (and even before), the US electorate seemed to be relatively satisfied with the all-guns-blazing approach to tackling the crisis. As he is not George W Bush, we are not, thankfully, talking about Iraq

The media in the US seems rather unaware of how mixed the responses to the crisis are in the rest of the world. China announced strong measures which were subsequently understood to be a re-packaging exercise of already budgeted spending. Germany, the economic core of the European Union, has taken a rather conservative approach. France, keen to protect its national champions, offered capital injections to avoid some significant likely bankruptcies. Spain is currently debating whether to significantly increase its budget deficit to stimulate its economy and draw the wrath of the European Commission in the process.
(more…)

Although Fianna Fáil government and their voters (along with the government-appointed Financial Regulator) deserve the blame for the financial crisis in Ireland, I must reluctantly admit that Fianna Fáil are probably the best choice to tackle the critical problems now faced by the state. Their determination to push through the pensions levy was needed in the face of fierce opposition. It is unlikely that another party would be prepared to take the necessary action without a strong mandate from the electorate. (more…)

To catch up on recent events concerning the banking collapse in Ireland, I decided to watch Questions and Answers, a current affairs program of RTE. Fintan O’Toole, a columnist and assistant editor of the Irish Times, stood out for his pragmatic criticism of government policy. Also participating, among others, was Martin Cullen, Minister for Arts, Sport and Tourism, representing the government.

In a sharp exchange, O’Toole accused the government of (more…)

Critical conduits

We’ve come to learn, over the past few months, that banks are not typical businesses. They are basically huge conduits for distributing capital from savers and investors to other business that need to borrow in order to grow, for example, by financing the purchase of new equipment or facilities. As they are the trusted ones who manage the lifeblood of modern economies, they are critical to our economic welfare. (more…)

Irish banks such as Allied Irish Banks, Bank of Ireland and Irish Life & Permanent are receiving capital injections of public money from Ireland’s National Pension Reserve. All are suffering from the first major increases in bad debt provisions, now that they are admitting the extent of their speculative lending to Irish property developers and construction companies, of which, many are now breaking the covenants of their loans. (more…)

Anglo Irish Bank is primarily a lender to property developers and construction companies. They were nationalised following a staggering fall in their share price and lack of confidence in them by the financial markets. Now that their accounts are being scrutinised by auditors, (more…)

Financial regulators

Financial regulators appear to have been to be impotent onlookers in the monetary boom and bust of many developed countries, and not the strong authoritative pillars they were meant to be. Any financial regulator or central bank chairman who are proven to not have acted upon information received about excessive risk taking by the sector under their oversight,  or even if they did not adequately investigate and monitor the sector, should, in my opinion, be held legally responsible. (more…)

Bubbles bubbles everywhere…

Following the collapse of the Dot-com bubble in 2001, Alan Greenspan, chairman of the Federal Reserve at the time, dropped interest rates substantially to cushion the impact rather than let the market imbalances correct themselves. This monetary expansion resulted in excess liquidity in the markets that eventually found its way into oil and commodity speculation and, of course, property. (more…)