c/o Chelsea Footaball Club
London SW6 1HS
Greetings from Ireland. We are delighted your club is topping the table in the Premiership, following on from last year’s league and cup double. Unfortunately, matters off the pitch are less benign. Reports have reached us that you and your investment vehicle, Millhouse LLC, are strenuously resisting attempts by our Government to discount on subordinated bonds at Irish Nationwide Building Society (INBS). This conflict, not of our making, is unavoidable.
Bond markets have responded to several downgrades by the rating agencies of Irish banking stocks, particularly Anglo Irish Bank and INBS. They currently trade at triple C status. They are junk bonds, worth a little more than 20 cent in the euro. Whether by legislation or bond buyback, we are obliged to apply a severe haircut on your investment. This has been a disaster for the Irish taxpayer, who is entirely innocent. Allow me to set out our predicament.
INBS is insolvent. Its loan book comprised €2.5bn of mortgages and €8bn of commercial property loans. The latter in its entirety is moving to another state-sponsored asset recovery agency, NAMA. Total recapitalisation required from public funds is €5.4bn.
We are baffled. Large financial institutions are of systemic importance to the economy. Allied Irish Bank and Bank of Ireland fit into this category. This is analogous to Bank of America and Citigroup in the US. Nationwide’ is small. By comparison, it is the equivalent of Lehman. There was no strategic argument in favour of rescue or nationalisation. Like Lehman’s, it should have been put into administration.
As Russia’s fourth most wealthy individual, you know problems evolve when oligarchs become too close to government. Over six years your country has borrowed $500bn from global banks and investors in the belief that the energy sector could support a permanent increase in consumption in the economy. Your political elite embraced these investment plans with lucrative contracts, tax incentives and subsidies. These business empires are built on a mountain of debt. Our Government mistakenly embraced Nationwide’s buccaneer Michael Fingleton. ‘Fingers’, as he is known to his friends, was an extremely dominant CEO. He was the type of guy who would facilitate temporary housing of bankers’ loans to disguise them off balance sheets at the year end of annual accounts. He targeted personal loans to the good and great in society. There was poor corporate governance and whistleblowers now tell incredible stories about the absence of risk committees and proper analysis at INBS. Poor legal procedures and inadequate security on collateral have added to the horrors. Fingers had the full support of the prime minister, special legislation being enacted.
Ireland had its own KGB (Keep Giving to Bertie). They sustained him in office for 12 years. Special tax incentives were put in place to maintain a property and credit boom. A whole generation became engaged in a ‘buy to let’ orgy that drove property prices to unsustainable levels. A light touch regulatory regime became invisible – ending up as cheerleaders for false information.
When the manure hit the fan in September 2008, what did they do? Government provided extra help. They then relied on the banks to provide transparency on their own balance sheet. It is only now we have visibility on their wreckage.
Our difficulties are without precedent. A current budget deficit this year of 32% of GDP compares to Greece’s 8% and Portugal’s 9.3%. The latest estimate of taxpayer subvention to banks, excluding NAMA, exceeds €50bn. This comes on top of a serious imbalance in our public finances whereby spending exceeds revenue by €18.5bn.
Unlike the dotcom bust and the daily closure of four businesses a day, market forces of insolvency have not featured at Nationwide. We trusted Fingers. Our trust has been abused beyond belief. We believed his plans in 2006 to sell Nationwide for €1.5bn – a bounty was to be paid to each member of €14,000. Fingers was rewarded with pay and bonuses in 2007 of €2.3m. This was surpassed in 2008 with a package of €2.4m.
Unlike Drogba, Essien and Terry, he wasn’t worth it – specialising in own goals that bankrupted the building society. His pension pot was worth €26.7m when he retired in April 2009. Our political elite nationalised his organisation without our consent. It should have been let go.
Throughout this sad saga, our people have been lied to by bankers and failed by regulators. Our legislators have been led by the nose in the mistaken belief that saving institutions like Nationwide was unavoidable and in the national interest. Our academics are the only group to tell us the truth. They have accurately predicted the losses, despite being ridiculed by the establishment. They now propose we should partially burn the bondholders. We anticipate four years of national austerity. We face a household water charge of €175, a median residential property tax payment of €1,000 and an average annual increase in income tax of €400.
Our main man, Finance Minister Brian Lenihan, is developing plans to turn our recession into a depression. Record unemployment is matched by unprecedented emigration. These are force majeure circumstances for Ireland Inc. Rumours abound the Government is allocating extra resources to train our police for riots.
Perhaps horses, dogs and water cannon may be required to keep us at bay. We are upset, dejected and broke.
SO what’s the story? We had harboured forlorn hopes that some creditors might develop amnesia, forgetting their Irish investments. Ideally, they may develop a sense of humour. We will cut a deal – 22 cent in the euro seems fair. We were innocent, but your advisers should have done smarter due diligence on Fingers and Nationwide. Their risk was your moral hazard. Private bets at a property casino aren’t public liabilities.
We appreciate your passion for soccer and now seek to sugar the pill. We could throw in a League of Ireland club for €100 or a special offer of three for a euro. We have another financial guru – he’s John Delaney who runs the FAI.
Our national soccer body is a little overstretched on its finances revealing €38m of loans to the end of last year. They believe in old-style transparency, not revealing any additional liabilities on a new stadium and poor ticket sales. Would you be interested in securitising their loans with bonds? We are assured this is a profitable venture. The fundamentals are sound and a soft landing is guaranteed. Let us know what you think. Sorry about the raw deal. Our plight is desperate, but we’ll be back with our sovereign bond auctions early in the new year. Kind regards,
Poor Paddy O’Lunacy
(aka the Irish Taxpayer)
PS. Don’t suppose there’d be any chance of four tickets to the United match at the Bridge on December 18. As dedicated ABUs we’ll cheer on the Blues.