Fairly sound analysis. I’ll have to keep working on my grand theory of everything then! BOH.

Development is not designed to fall like a deck of cards. It is modular with the ability to replace contractors, subcontractors, professionals, insurers and even developers and funders as needs be. The problem is that funders in difficulty cannot be replaced in the Irish market at this time because the whole sector is banjaxed. This has nothing to do with contractual relationships and has everything to do with economic reality.

Fair enough. I think the more general conclusion I came in my blog entry sub note, is that to have some activity like construction at the heart of your economy, carries a specific kind of risk, because of the way construction is designed to fall like a deck of cards. Very fast and everything is supporting something else. Obviously Anglo was at the centre of it all for such a long period. The suddeness of the collapse in 2008 was felt all across the world. But I think because of the way the industry in Ireland was structured, it made things even worse. This is why I guess, construction activity should be moderated to an upper limit of size, in terms of GDP (and employment) at any one time. But what we saw in the Celtic Tiger years, and we all experienced, is in the middle of a boom, how politically difficult it may be to intervene. BOH.

Funders are generally well protected from claims by contractors et al unless there is novation, and even then the funder is generally not liable for payments made to the developer but not passed on. Any funder will assess the situation carefully before novating. In any event, these matters undoubtedly form part of the due diligence carried out by NAMA and so are likely to already be factored into the consideration paid.

I wrote something just now, but as usual it got quite long, so I added it as a sub note, Contractual relationships, at the blog entry linked below. It is not directly concerned with shareholders of Anglo sue-ing the state owned bank. But I tried to make some general points about the construction industry, and why parties in that industry sue other parties. Namely, the party (corporate or otherwise) who is sued the most is the one who has ability to pay. In the context we are talking about, Anglo Irish bank given its deep connectivity with the construction industry, backed by the Irish state, has painted a fairly large target on itself. That is my opinion anyway, for what it is worth. BOH.

http://designcomment.blogspot.com/2010/04/third-phase.html

I was hopig you would check it for me! I can’t see the signatures of Dukes or Daly on the accounts. I can see O’Connor on the 2008 accounts and O’Connor and Aynsley on the 2009 accounts. That is not to say that Dukes and Daly don’t have a checking role in relation to the accounts. The idea of investors suing the State is still outlandish in my book.

@PD

Do you posit that there is a cause of action? If so, by whom and against whom for what action causing what loss and how was it unlawful/giving rise to a liability?

Do you maintain that you have a legal qualification?

The main barrier to action against companies and auditors is the IMMENSE cost. Throwing good money after bad. In a depression, while many solicitors and barristers will act on contingency and class action, the problem is that adequate defence will slow justice until the liable defendant is without assets, paying off their own legal team as they go!

Insurance companies may end up insolvent in a depression and they pay for most of the honey available when suing auditors, who may have limited liability (I know they used to be unable to do this, but in a kleptocracy, it is virtually a given) and cannot pay the damages, although the plaintiffs lawyers may get a lunch out of it.

The loan transfers have been delayed in part because of the non-real estate collateral, including wine collections, art collections and equity portfolios, which had been pledged as part of the collateral for the loans. On a wider scale, Nama has discovered that many of the developer’s status symbols, like top of the range cars, were leased rather than owned by them.

http://www.tribune.ie/business/article/2010/apr/25/anglo-faces-further-haircut-of-500m/

The gospel according to Padraig was that never in the long history of Ireland has there ever been a time when property values declined.

In other words, there were two decades of economic activity in Ireland, during which the cashflow from an investment was not certain, but the appreciation in value of the underlying asset was. If Karl Whelan will permit me, I would like to write a few lines in order to join together a couple of dots. The comment by Michey Hickey, makes me think of the tradition in Irish lending, of allowing interest to roll up and become bundled with the full loan amount. A tradition which NAMA is almost certain to break away from. Given the context Mickey Hickey describes, Irish lenders must not have been in a rush to confiscate the assets of defaulting borrowers. If the worse came to the worst, the lending institution could sell the assets and claim back the margin in value appreciation to pay them for their efforts as lenders. Which is not a good thing for borrowers over an extended period, as it encouraged them to become too complacent. In the end, both lender and borrower became so complacent as to offer and accept these infamous ‘personal guarantees’ as a substitute for real hard collateral.

I see stories in the newspapers at the moment, whereby limited companies have directors who offer ‘personal guarantees’ on loans to the same companies. Justice Peter Kelly raised the question recently, why go to the trouble of creating limited liability entities and then offer a personal guarantee? The newspapers contain stories of wifes of borrowers who offered personal guarantees, while still arguing to the commerical court, they would never do anything to jeopardise the family’s home. None of this adds up in logical terms, needless to say. It points to what Michey Hickey calls, delusions of superiority, on the part of Irish people. Given that context, there was no huge incentive for lending institutions to acquire skills in the accurate assessment of risk associated with any venture. We saw the case of Irish Nationwide, €10 billion of assets were managed by less than 10 people. That was sold to members of the society as being some kind of responsible asset value to administration costs ratio! I have to comment, the situation inside Irish Nationwide building society described by many journalists in the newspapers, of small numbers of people being in charge of vast amounts of capital investment, does sound eerily familiar to my own experiences of working for Liam Carroll. BOH.

Do we even know which directors sign the accounts? I don’t think such an email exists! If it did, I would expect the defence of “If Jimmy told you to jump off a bridge would you do that?”.

Off the topic of ‘cash from loans’. I wrote a response to the posters above, which as usual got far too long. I have added it as a subnote to my blog entry linked below. While the risk of litigation to the Irish state for Anglo, is a matter of concern, I believe there is a real sense now in which, a further prolonged police investigation into the Irish banking collapse, is getting in the way of progress in sorting out the mess. Yet the need to minimize future liability of the Irish state to claims from bank shareholders, is exactly what is providing incentive to the police investigation to take as long as possible. I have to ask the big question in my blog entry, Old foundations, what purpose is the police investigation really going to achieve, other than perhaps to minimise future exposure of the Irish state? BOH.

http://designcomment.blogspot.com/2010/04/old-foundations.html

I think it would be pretty much impossible to find the state liable for the actions of public interest directors in non-nationalised banks unless there were some sort of intentional misfeasance perpetrated on the express instructions of the Minister.

Just for reference purposes, on the issue of due diligence in Irish banks. On April 9th 2010, Colm Keena reported in the Irish Times, Do question marks hang over the heads of auditors? Eamon Quinn’s article in yesterdays Sunday Tribune, which I linked above, is a very nice complement to Keena’s story. I think it Keena who probably got the ball rolling first. BOH.

http://www.irishtimes.com/newspaper/finance/2010/0409/1224267970377.html

General points on legal entitlements of shareholders, bond holders etc. It appears as though shareholders in Irish banks did very badly indeed. It was the same in all countries, including Lehmans. It seems to have been a much better option to buy Irish bank debt than equities in the same. Related maybe to the point about Anglo’s shareholders being misled and possible litigation arising out of that, I noticed a story in SBP April 4th 2010, Merrion bond fund offers good returns, which again encourages larger investors to steer clear of equities. BOH.

http://archives.tcm.ie/businesspost/2010/04/04/story48341.asp

Anglo is more complex, in that accounts were only released after nationalisation so equity holders should have no complaint against public interest directors. However, I am not aware that you could just will away previous liabilities. That is why insurance companies have to hold reserves even against non-current policies, no?

NAMA will not take over any liabilities of the banks. Any counterclaim under a loan agreement will have to be made against the bank, not NAMA.

There should be legislation to the same effect for Anglo. There should be no liability under any of the old indemnities to directors. Similarly, there should be no liability for acts of the pre-nationalised entity beyond those covered by the Guarantee. With that said, I think people should be entitled to set-off against share debts if anglo got them to borrow the funds to buy shares based on misrepresentations, innocent or otherwise. Beyond that, people should only be entitled to the cover the bank could have provided if not nationalised, i.e. nil.

The reality is Anglo did mislead shareholders and if there were a few US investors we would have a law suit by now. Maybe they are waiting for the DPP case.

http://www.tribune.ie/business/article/2010/apr/25/how-banks-gave-cheques-without-checks/

“By that do you mean the good paying loan in NAMA will be paid down quicker?”

Yes.

I’ll get back to you, but I want other posters a chance to have their say in the meantime.

@ Ahura,

If there are good paying loans in NAMA (which aren’t linked to a portfolio of bad), these may disappear at a higher rate. This is probably a bigger issue for loans outside Ireland.

By that do you mean the good paying loan in NAMA will be paid down quicker?

I read the Richard Curran piece in yesterday’s SBP. That is really the question I am trying to ask about. The large asset bubble of Irish banking shares, was driven in no small part by the banks accelerated asset base expansion, which depended on a lot of negligence on the part of the banks, internal auditors etc, etc. Sunday Tribune’s Jon Ihle’s article Future shocks can’t be stressed enough, is worth a read. BOH.

http://www.tribune.ie/business/article/2010/apr/25/future-shocks-cant-be-stressed-enough/

BmcD - “that 33% of the loans are cashflow producing.” – I read this as 33% are paying some money, which is different to 33% paying fully.

On future cashflows /modelling: when your starting point has only one third performing, it’s hard to survive many stress tests. There just isn’t much wriggle room for interest rate increases or further delinquencies. I’ve been doing a little work on US subprime mbs, one noble truth is that good loans tend to refinance (/paydown) and bad loans don’t have such luxuries and linger. If there are good paying loans in NAMA (which aren’t linked to a portfolio of bad), these may disappear at a higher rate. This is probably a bigger issue for loans outside Ireland.

On a completely different topic (one more good reason to close Anglo): Richard Curran in the Sunday Business Post had an interesting point. If it’s proven that Anglo misled shareholders and the same legal entity continues to exist, shareholders might be able to sue for losses http://www.thepost.ie/story/?jp=eyidqlqlkf Maybe that’s what the extra 10bn is for

Para 2 questions:
You are mistaking me for an economist!
You also seem to think that builders were forced to do this and that developers are just builders on a larger scale? I believe neither of these to be true.

Does that mean, with inflated shareholder capital, the Irish banks in the boom years, could lend even more? BOH.