In contrast, the bet of €80 billion on property was a fundamental flaw. Last week saw the collapse of the McNamara empire as the latest instalment in the decline of zombie property magnates.
I am not acquainted with any of the tier-one NAMA glitterati. These are the developers with debts in excess of €1bn which are due to have their entire portfolios transferred in the next few months. They include Liam Carroll, Bernard McNamara, Derek Quinlan, John Flemming and Paddy Kelly.
Speculation abounds that this club has a far from full membership.
Various legal actions have been underway in the High Court as creditors seek to tighten their grip on their over-exposed assets.
Should we have sympathy for these individuals? If they are to be condemned and reviled, is this a reflection on Irish society as envious begrudgers?
In the US, the most successful and revered entrepreneurs often have had a chequered past in relation to previous business failures. Our economy needs a pro-enterprise culture. If we are all to be risk averse, it will limit job creation and growth.
It is estimated that up to eight out of 10 new start-up businesses fail. This is often due to a cashflow crisis rather than an underlying failure of the business plan or incompetence of the entrepreneur.
I have the utmost compassion for any business person who experiences the devastation of insolvency or enterprise failure. However, it is difficult to apply the same sensitivity to these mega speculators because of the collateral damage they have caused. Their collapse has not only impacted on themselves and their shareholders, but has dragged down the whole Irish economy.
Let’s start with the investment sector. Pension funds and the reserves of life assurance companies have been decimated by the bursting of the property bubble and the subsequent demise of financial stocks. Many pensioners and others have lost their life savings due to the destruction of shareholder value. The losses of Davy’s private clients on the Irish Glass bottle site in Ringsend triggered the legal action which brought down the McNamara empire. If the same finance had been put into export industries and services, how much better would Ireland Inc be today?
Property tycoons had a particular penchant for hotels. McNamara acquired the Shelbourne, Parknasilla, Conrad, Burlington and many others. A whole generation of new hotels was constructed on greenfield sites, all with resort and spa facilities.
This resulted in a massive overcapacity of up to 15,000 bedrooms. This was as a result of tax relief for construction profits being rolled over. The glut of extra accommodation destroyed long-term hoteliers who operated for decades servicing overseas visitors and domestic guests.
Construction growth, over the Celtic Tiger era, leaped from 6% to 24% of GNP. This had the most profound impact on the Irish labour market. Male workers transferred to building sites with high wages and incentivised bonuses. Up to 100,000 immigrants were attracted into Ireland to deliver on our building boom. This contributed to our significant loss of competitiveness on wage costs. As boom turned to bust, 200,000 people have lost their jobs. The unsustainability of this employment caused lasting damage.
Within the property market, developers became so intoxicated with their own success that they bought up massive tracts of agricultural land, which distorted the price of farms. The frenzy of enthusiasm for everyone to become property investors knew no bounds.
The tax revenue from the €200 levy on second homes has been an amazing €56m. This indicates the extent of ‘buy to let’ activity. Many of these investors are facing negative equity and substantial losses. The impact of higher rents on all forms of commercial property is proving hugely detrimental to the survival of many retail businesses. The debris from the bust will have lasting consequences on property assets.
The contagion of damage also affected our public finances. Politicians and policy makers became addicted to the extra tax revenue from property and construction. The returns on transactions contributed an extra €5bn to the exchequer annually.
The overriding mantra of “when I have it I spend it” prevailed in the Department of Finance and government.
The termination of this bonanza has resulted in a “structural deficit” in our public finances. The growth in public expenditure and services was based on quicksand. We are left with a residual fiscal crisis. Expenditure exceeds taxes by €2bn a month and our national debt is heading towards €150bn.
These property gurus are probably the most personable, charming, decent and generous of family-focused individuals. This does not negate their contribution towards horrendous losses by investors, distortions within our labour force, depression in the hotel sector and a crippling fiscal deficit.
The long-term relationship between Fianna Fáil and the construction industry is more deep-rooted and real than any political support for bankers. Over the past four decades, FF’s core supporters financially have been the building industry. The Government of the last 12 years is more guilty of tax incentives and support for developers than for bankers. Other than ineffective and incompetent regulation, this is the real nerve-centre of political culpability. Successive finance bills were charters of support for property investment.
THE final assault on taxpayers by developers is now apparent. Donatex Ltd and Bernard McNamara are suing the Dublin Docklands Development Authority (DDDA) to recover their losses. This amounts to a claim for €108m which was lodged in the High Court for alleged failing of the DDDA. Derek Quinlan may follow suit. All three parties are involved as owners of the Glass Bottle site at Ringsend.
This action represents an attempt to get taxpayers to cover their losses. You and I are being asked to pony up. We are the defendants. The public interest is clear. These icons have had no hesitation resorting to legal actions to deflect the cost of their failings and judgments on investors and ordinary taxpayers. Having bet the farm, they want us to cover their losses.
The NAMA project is again predicated on dealing only with developers’ debts. The negative equity of ordinary mortgagees and debt default by other business sectors are not subject to any state rescue within the banking sector.
The banking inquiry, hopefully, will set out a template for regulation of the banking sector. This will aim to protect us from a repeat of excessive credit and appalling risk practices. The long-term relationship between construction/property development and politics needs to be exposed. Politicians always knew there were no votes in banking. Unless any inquiry probes the property bubble it will not detect the real skeleton in the wardrobe. These property barons are guilty of gross miscalculations relating to projected housing demand, construction output, sustainable site values and reasonable gearing ratios.
A generation of taxpayers will have to pay for their mistakes.