Carroll case exposes NAMA scandal
17 August 2009
Whatever decision the courts ultimately take on the future of Liam Carroll’s property empire (he is currently awaiting the outcome of yet another bid to be protected from his creditors) the ongoing legal process has served the useful purpose laying bare the true state of the Irish property market and the scandalous nature of the Government’s efforts to bail out the banks and the developers. The public examination of Carroll’s affairs has served to quantify the liabilities that the public are being asked to take and on the losses that could be incurred.
The legal action came about as a result of Carroll’s Zoe group being unable to repay loan to the Dutch owned AAC bank. When demand letters were issued Carroll made an application to the Hugh Court for protection. The court refused to extend protection and instead appointed an examiner to six companies in the Zoe group. This process culminated in the Supreme Court last week with Carroll’s failed attempt to have the High Court judgement overturned. ACC was granted a series of orders it was seeking to recover the €136m owed to it by the Zoe group.
While the ACC bank is relatively small player its decision to pursue Carroll has put a spotlight on the whole rotten structure of the Irish property market. It has also made public some facts about the property sector that the Government, banks and developers would have preferred remain a secret. This comes at a particularly sensitive time with the Government bringing forward its plans for a “bad bank” (NAMA) that would take the high risk loans from banks and transferred the liability to the state. The claim made for this plan is that the value of the assets (largely property and land) on which these loans are secured while currently low will recover over time and thereby minimise any losses. However, the examination of Carroll’s affairs by the courts has revealed such positive projections to be totally baseless.
Liam Carroll is one of the biggest developers in the state and owes over €2.5 billion to the banks, Irish owned banks accounting for the baulk of this. His Zoe group, which was the subject of the action, owed €1.2 billion to eight banks including ACC. Given the overall size of Carroll’s property empire, and the size of the part of it that was under scrutiny, it can be assumed that what was revealed about the state of his companies is a fairly accurate picture of the wider property sector. Indeed, as most of their property is located in and around Dublin, Carroll’s companies are probably in a better state than those of most developers.
The argument that Carroll made to forestall
his creditors, which is essentially the same as that made by the Government
for NAMA, was that the value of his assets would rise in the near future
and allow him to pay back his loans. However, his business plan lacked
any credibility. How the fortunes of the Zoe companies could be transformed
from insolvency and a deficit of more than €1 billion into a €290
million surplus in three years – and in a depressed property market – was
never clearly established to the court’s satisfaction. The judge
dismissed the plan describing it as "fanciful", "lacking in reality" and
containing "something artificial".
While Vantive and Morston have their own problems with respective deficits of €396 million and €361 million on liquidation, they also have colossal exposures on inter-company debts and guarantees across Carroll’s groups. Companies throughout Carroll’s group owe €569.9 million to Vantive which has in turn guaranteed debts of €224.4 million between his companies. There is heavy intermingling of debts across Carroll’s Zoe group and his other two groups, Dunloe and Orthanc. The three owe an estimated €2.8 billion. This cross ownership and intermingling of debt creates the potential for a domino effect of defaults, liquidation and sell offs across his entire business. Such a scenario would also have a major impact on the wider Irish property and banking sector as companies are liquidated and the fire sale of their assets pushes property values down even further.
The Carroll case and its outworking also have implications for National Asset Management Agency (NAMA). It has given us a clear picture of the likely financial state of the Irish property developers whose loans NAMA is supposed to purchase. During the High Court case Carroll’s accounts admitted that, as of today, his Zoe group could only pay back about one-quarter (25 per cent) of the money it owes to the Irish banks. If as predicted NAMA purchases loans for an average discount of one quarter (75 per cent of the original value of the loan), the public will be paying three times the amount that they could currently be sold to anyone else for. The potential loss to the public would be greater than even the direst predictions so far – up to €45 billion if property values fail to recover!
The Carroll case has also exposed the corrupt relationship between the banks, developers and politicians. Despite the reality that Carroll’s business simply could not be saved, all the Irish banks involved 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. The banks were determined to maintain the illusion that Carroll could pay back the money he owed. The prospect of the creation of a bad bank provided a big incentive for this. With the finance minister signalling his determination to take a positive view of all loan purchases (emphasising their “long-term economic value”) participating banks were encouraged to maintain that loans such as Carroll’s were good just long enough for them to be sold to NAMA for far more than they will ever repay. This manoeuvring by the banks only came into the public realm because the Dutch-owned ACC was left out of NAMA and so didn’t have any incentive to go along with the pretence over the value of Carroll’s loans.
It is not yet clear how the Carroll case will finally work itself out. It is possible that the Irish owned banks involved in lending money to Carroll will pay off ACC and order the liquidators to go along with the ”fanciful” business plan. They will hope to nurse the Carroll group long enough for it to be dumped on NAMA. It is quite possible that NAMA will end up buying Caroll’s loans at a huge premium. Given the secrecy surrounding the proposed purchasing process the Irish public will never know.
However, with what has been revealed in
the courts, there is wider recognition of how little the NAMA loans are
actually worth. The Carroll case has served the useful purpose of exposing
the corruption of the bankers and developers and their accommodation by
the Government. It has strengthened public opinion in opposition to NAMA
as the potential scale of the scandal begins to emerge. The discontent
over this and the wider austerity drive is finding expression among the
grassroots of the Government parties, for example two Fianna Fail TDs resigning
the whip and Green Party members calling for a special convention to discuss
NAMA. However, the Irish working class cannot rely on public opinion
or parliamentary manoeuvres. The Government parties are set on a
course, one with which the opposition parties are largely in agreement,
and are determined to keep to it. With such unanimity among the political
class public opinion isn’t really a factor. Indeed, it has already
been discounted. As Frank O’Dywer, chair of the Irish Association
of Investment Managers and key government adviser, has stated “the key
audience is international financial markets”. As the price to be
paid by the Irish working class to please this audience escalates by the
day the need to establish its political and orgainsational independence
becomes ever more urgent. This is essential condition for building of an
effective opposition movement