Current Account

  • You’ve been “Nama-ed”. Update: the Nama numbers revealed.

    September 16, 2009 @ 5:05 pm | by Laura Slattery

    For Eamon Gilmore, and many more besides, it’s going to ”mortgage the future”. But like a protective, if not quite proud, parent intent on defending his child in the face of overwhelming vitriol (and a few shrugged, slumped shoulders), Brian Lenihan wasn’t having any of that. ”We’re seeking to crystallize the losses that we have,” he said.

    I always thought that crystallizing losses was usually a bad idea when it came to investment, but then the intricacies of the National Asset Management Agency (Nama) defy the rules of normal investment. This is debt. So here’s the breakdown: the ”book value” of the assets to be transferred to Nama is  €77 billion (those same assets had been worth €90 billion, but in the glamorous world of high finance, the writedowns come as thick and fast as the bonuses).

    The current “market value” (the actual value) is €47 billion. But the State is going to pay €54 billion - some €7 billion on top of the current market value and 70 per cent of the book value. This €7 billion top-up is roughly the same value as the amount of income tax collected so far this year. Not to worry, it’s all about the “long-term value”, as Lenihan said several times today. Why pay extra? Because the aim is to strike a balance between not completely ripping off taxpayers and not completely starving the banks so that they have to come back for money. (Which may happen anyway if they can’t raise the additional capital they need from private sources.)

    Some €2.5 billion of this will be “risk-shared” with the banks via subordinated bonds - this means that if the bet goes the wrong way, the banks and not the taxpayer will suffer the losses, but if it goes the right way, they won’t participate in the gains. However, the percentage of risk-sharing - a measure that protects taxpayers from some of the liabilities - was at the low end of expectations.

    Essentially, the State is betting €54 billion - €1 billion shy of the expected number - on the idea that the property market will bounce back. If it does, and Nama actually turns a profit, we could be in the money. On the other hand, as Lenihan stressed twice, the current valuations are entirely provisional: those empty retail parks (the loans on which will imminently be transferred to Nama) could really be worth much less than assumed under the Government’s methodology.

    So has the Government got the balance right? Or has it got all those “values” completely confused? And, as I asked in the previous blog on this subject, if you had the power to vote on Nama, would you vote ”yes” or “no”?

  • It’s Nama day. Will the price be right? And is it going to work?

    @ 1:00 pm | by Laura Slattery

    Have you been “Nama-ed” yet? The Dail debate on the National Asset Management Agency, aka the Government’s “bad bank”, kicks off at 2.30 pm today. (More updates on Irish Times breaking news and the Current Account blog later.) With an amended Nama bill published last week, we already have some idea about how it’s going to work. The big reveal, the thing we as yet don’t know, is the precise scale of the State’s financial exposure to Nama.

    There are still more questions than answers. How much of a ”discount” will be applied? What’s the percentage of subordinated bonds? What the hell are subordinated bonds anyway? (Ask Joan Burton.) Is Morgan Kelly, soothsayer of the property crash, right when he says that if the Government pays two-thirds of the face value of Nama assets, it will wind up inflicting losses of €30 billion on taxpayers? Give or take the odd billion, presumably.

    It has lately become fashionable to say that our grandchildren are going to be paying for this: today in The Irish Times, Dermot Desmond, a man who has been known to buy a bank share or two, concluded his plea to get Nama nixed with the line that “we owe it to our children’s children to find the best solution, even if not politically expedient”. If the Nama drama - rumbling on since the day of the emergency budget on April 7th - represents political expedience, I’d hate to see the kind of crisis plan that doesn’t.

    But, in the meantime, who’s going to break it to our existing grandchildren that taxpayers are planning to take on debt on assets allegedly worth €55-60 billion because 1,500 people got a bit carried away with their property portfolios? What’s the age-appropriate time to have that awkward Nama conversation?

    Can the price ever be right for lumbering future generations with an agency that parcels up the greed, short-sightedness and incompetence of bubble era property developers and policymakers and then taxes the life out of decades worth of payslips? Or is this ”undertaking of Napoleonic proportions”, as Richard Bruton dubbed it, really the only practical solution we’ve got available now.

    If you were a TD and had the power to vote “yes” or “no” to Nama, which way would you sway?

  • Wall Street has learned nothing. But at least Dick Fuld’s mother loves him.

    September 11, 2009 @ 12:45 pm | by Laura Slattery

     

    It’s one year since the biggest bankruptcy in corporate history, the fall of Lehman Brothers, and yet it’s ”as you were” on Wall Street, according to Bank of China vice-president, Zhu Min: “You go to Wall Street, the people feel the crisis never happened,” he told Bloomberg Television. “It’s not only over-confidence, it’s over-myopic. This is too much.”

    He’s not the only one to feel this way. The hundreds of thousands of people who have lost their jobs in this recession, including the 25,000 former employees of Lehman Brothers, will have had that “this is too much” feeling if they spotted the self-pitying comments made this week by Dick Fuld, the erstwhile chief executive of Lehmans - a man who used to be known as “the Gorilla” because of his aggressive, hyper-macho behaviour. 

    Tracked down by Reuters reporter Clare Baldwin outside his riverside country house in Ketchum, Idaho, Fuld said he felt “pummelled” by the negative coverage of him, and yet hopeful because “the good guys do win” in the end: “I’ve been pummelled, I’ve been dumped on, and it’s all going to happen again,” he said. “You know what, my mother loves me.”

    Fuld epitomises Zhu’s complaint: he’s learned nothing. He still thinks he did nothing wrong and that he and his bank were victims of unfair treatment; picked upon by former Treasury Secretary Hank Paulson, who bailed out everyone else except Lehmans. Like the “Phoenix Four”, who scalped MG Rover for more than £40 million as it collapsed and this morning called the report into their activities “a witch hunt”, there is no humility here - just surprise that the world stopped being so kind. The rest of us, meanwhile, already knew that the system sucked.

    Fuld declined to be interviewed for the first episode of the BBC’s engrossing three-part documentary series on the credit crunch, The Love of Money, which aired last night, but even in his absence he emerges by turn arrogant, vain and blinkered even by the standards of his peers, the group of CEOs dubbed the Masters of the Universe (a description made famous in the Tom Wolfe 1980s satire The Bonfire of the Vanities, but one that you feel was embraced all too gladly by Fuld and his ilk). Until this week, Fuld’s only public comments have been at a Congressional hearing, at which he said he didn’t know how he could have done anything any differently.

    Actually, he does have a point, but his ego prevents him from elucidating it properly. People like Fuld were deeply submerged in groupthink at the same time that they perpetuated it; his comment that he didn’t know what else he could have done echoes remarks made by low-ranking soldiers after they were convicted of prisoner abuse in Iraq. For all of his supposed power, he was just another cog on the amoral Wall Street wheel: a wealthy cog, perhaps, but still a cog. But we like a neat, simple story with a villain, and Fuld fits the role nicely.

    The supposedly comic drama The Last Days of Lehmans (which was also broadcast on BBC1 this week) effectively alleged that it was that bit easier for the purse-string pullers at the Treasury and the Federal Reserve to let Lehmans go down because Fuld was such an uncompromising, unlikeable figure. Like pretty much everything in this crass piece of fiction, this does seem incredulous (although I’m prepared to believe that John Thain, former CEO of Merrill Lynch, really was that smug when “white knight” Bank of America gave up on Lehmans and rescued Merrill instead).

    Fuld may have represented Wall Street’s most extreme narcissism, always railing against the business media for fretting about his bank’s property overvaluations and exponential losses, but surely, even in the heat of that historic weekend one year ago, governments and regulators were smart enough and self-aware enough to tell the difference between the causes of the problem and its symptoms.

  • Ireland leads the way in Fibre to the Lab (FTTL)

    @ 11:45 am | by John Collins

    Eircom not so long ago had a big plan for its Irish network which had the rather grand title of Fibre Ireland. The plan was that they would run high speed fibre (rather than the copper wiring which currently runs between you and the telphone exchange) to the telecoms cabinets which are at the end of most streets in urban areas. This fibre to the cabinet (FTTC) plan would allow for relatively high speed broadband for homes luckily enough to be in the coverage area. Only problem was that a small matter of €3 billion in debt meant Eircom’s owners didn’t have the money to deliver Fibre Ireland so they went knocking on the Government’s door.

    Minister for Communications Eamon Ryan knocked that plan back - citing his preference for private sector investment in telecoms but also because the plan would only cover the major urban areas.

    Of  course while, mostly private, discussions about fibre to the cabinet were going on here other European nations were getting on with delivering fibre to the home - a far superior service. Over 2 million Europeans have it, accordingto new research released this week. Not surprisingly Sweden tops the league table with almost 11 per cent of broadband users having a superfast connection. More worryingly for Ireland Inc. those bastions of the tech world Andorra, Lithuania and Slovakia, also feature. Wonder do their government ministers prattle on about the smart economy at the drop of a hat?

    Just to add insult to injury is this morning’s press release on behalf of Conor Lenihan, our “technology” junior minister, entitled “World’s most advanced fibre-to-the-home network concept demonstrated in Irish research laboratory”. To read the release one would think there was an issue with the technology for next generation networks. Without doing down the excellent work of the Tyndall Institute, there isn’t. The issue has been successive governments allowing Eircom to be loaded with debt to fill the pockets of private equity players and an employee share ownership trust. Here’s hoping Singapore Telecom can deliver the telecoms infrastructure we need for a smart economy.

  • Lights, camera, tax relief

    September 9, 2009 @ 3:23 pm | by Laura Slattery

     

    The Irish film industry can exhale. The Commission on Taxation has not shouted cut on film tax relief. Not that it’s given Section 481 of the tax code (the bit that basically keeps the film production coffers from emptying) a five-star endorsement either. But cash-hunting film financiers will probably settle for this latest stay of execution, given that the last Government-commissioned review of how stuff should work, the Bord Snip report, bluntly suggested that the Irish Film Board should be shut down and subsumed within an Enterprise Ireland super-body. How’s that going to look on the opening credits?

    You have to wonder how the arts sector copes sometimes; always dangling at the end of a fraying thread. I’ve lost count of the number of times that the Government has threatened to remove or change the terms of film tax relief, while if the Irish Film Board is axed, it won’t be for the first time.

    For the moment, the Commission’s report has put a big tick next to film relief (it literally put ticks next to tax reliefs that should continue and crosses next to those that should cease). It added that it should be subject to regular review - common sense, of course, but the kind of qualifier that will be keeping the film industry as tense as an actress on Oscar night. Without tax incentives, production simply migrates, so not only would Ireland lose its position as a tax-effective double for other parts of the world, but films purportedly set in Ireland would wind up being shot in the Welsh valleys or greenest Hampshire.

    Who gets the honour of hosting (and staffing) the film crews is an international competition often determined by whichever tax legislators are the most generous. It is telling that one of the recent success stories of Section 481 is not a film at all, but a television series, The Tudors - with Jonathan Rhys Meyers and (until she lost her head) Natalie Dormer, pictured above - which is filmed at Ardmore Studios and on location in Ireland thanks to its eligibility for tax incentives that are not available in the UK.

    This legislative arms race isn’t just done for the cachet of having lots of extras wandering around Wicklow wearing corsets and bejewelled hair. Keeping the film industry here through tax reliefs generates more wealth for the Exchequer than it costs it (the benefits in 2004-2006 were €96.3 million and the costs were €90.9 million, according to the 2007 Indecon review), while Minister for Arts Martin Cullen expects that €150 million worth of film business will be anchored here this year partly as a result of improvements made to Section 481 in the 2008 Finance Act.

    But from the film industry’s perspective, Section 481 is far from the tour de force it wants it to be. In its submission to Indecon, the film board called for the maximum investment that can be made by an individual to be increased to €150,000, in line with that for the Business Expansion Scheme. Instead, it got a much smaller increase from €31,750 to €50,000. This means more individual investors are required for each production, ramping up the admin headaches for smaller budget films - the very ones that are more likely to be indigenous productions deserving of a little State encouragement.

    The most high-profile example of this is Once (2006), John Carney’s story of love, music and migration that, thanks to its surprise international box office success in 2007, showed off nippy, workaday, busking Dublin to the world - the film was charming precisely because its snapshot of Irish culture is one that could never be made through a Hollywood lens. But Once’s producers did not avail of Section 481, as its micro-budget was too low to justify the costs associated with rounding up funds from hundreds of film-loving investors.

    It would be wrong for the film industry to become the latest tax haven for the wealthy. But in practice, Section 481 to date has hardly been a get-rich-quick scheme - it’s more like a risky investment option shrouded in something akin to a philanthropic edge. Without the tax relief, there would be no return. So it would be a shame if fewer small Irish films like Once, which epitomise the kind of productions the State should incentivise, were to get made because of something as prosaic as admin costs. Even if it was a pretty morose flick, and The Tudors is much more fun, now that I think about it.

  • Apt report or APT nightmare? Has the tax commission got it right?

    September 7, 2009 @ 2:30 pm | by Laura Slattery

    Annual property tax. A third rate of income tax. The abolition of dozens of tax reliefs. A carbon tax on fuel. A “user/polluter pays” principle on water charges. The taxation of child benefit… Are you feeling queasy yet? Or will you be delighted to see the back of iniquitous “special case” reliefs? Are you glad that the burden of taxation is set to shift from the nation’s wage packets to its property wealth, or sick to the stomach at the thought of the worthless shack you bought at the peak of the property market costing you even more money?

    The Commission on Taxation, charged with the task of assessing the “structure, efficiency and appropriateness” of the Irish taxation system, has come back with a 550-page document, for the Government to adopt wholeheartedly or distance itself from as it sees fit. But while Brian Cowen may not be ”wedded” to the idea of property tax, it seems increasingly likely that in years to come, homeowners will enjoy nothing more than a grumble about their APTs - not their apartments, but their annual property tax.

    Forget hyping up the value of our properties, estate agent-style: soon we’ll all love nothing more than downplaying what our home is worth in order to save on tax. Never mind the attic conversion, we’ll be telling the professional valuer, look at this rising damp. Not that tenants will find much to enjoy in the Commission’s report either - rent relief is just one of the many tax reliefs up for the chop.

    According to Frank Daly, the Commission’s chairman, the compensation for this extra pain will be lower income taxes. Overall, the recommended measures - ones that we have spent decades trying to avoid, he said - will spur economic activity, he believes. But right now, the economy is still flapping around unsure of itself, lumbered with a horrible Government deficit. It seems likely that an annual property tax will come knocking on our doors before the income levies are banished from our payslips.

    If I stop being selfish and paranoid for a moment, however, I can see that there is much in this report that is both logical and fair. What do you think?

  • Brick up your windows, shave your beards, hide your urine stash: the taxman is coming

    @ 7:30 am | by Laura Slattery

     

    For Michael O’Leary, it is the €10 travel tax. For British rioters in 1990, it was the indiscriminate “community charge” aka the poll tax. And for Marks & Spencer, it was the wrongful classification of its teacakes as VAT-attracting biscuits rather than VAT-free cakes that was the real injustice. Yes, tax codes throughout history have had their quirks, and today at 11 am, the Commission on Taxation will publish its take on the Irish system. But will it find anything lurking on the Revenue’s rule books that is quite as strange as any of these taxing matters?

    1. Urine tax. In the first century AD, the Roman emperors Nero and Vespasian levied a tax on urine. But it wasn’t quite spend a penny, pay a penny. Back then, urine was a valuable commodity - it was actually someone’s job to collect people’s piss and sell it on to tanners and laundry-washers, who craved its high ammonia content. But the urine collection trade had its drawbacks. Arguably, the least of these was tax.

    2. Window tax. An architecturally influential forerunner of the kind of property tax that the Commission on Taxation will recommend / shy away from today. Wikipedia tells me that this tax on glass was enacted in England in 1696 under the splendidly titled Act of Making Good the Deficiency of the Clipped Money and lasted until 1851. The more windows your house had, the more you paid, so living in bricked-up darkness was soon all the rage.

    3. Beard tax. You can see how this one happened (circa 1705). Peter the Great, Tsar of Russia, took a little trip to western Europe, where everyone was impressively clean-shaven. Peter liked the look. But what with being an autocrat and everything, it wasn’t long before he was imposing a tax of 100 rubles on any Russian who dared to cross the line from stubble to tufty bits. I think it just applied to the men.

    4. ”Botax”. Not, as yet, in existence, but a whimsical proposal by members of the Obama administration to pay for US healthcare reforms via an extra 10 per cent tax on cosmetic procedures such as Botox injections, rhinoplasties and breast augmentations (not to be confused with the Marks & Spencer “tit tax“). Effectively, a tax on neuroses. All that silicone isn’t exactly biodegradeable either - how about a cosmetic tax / carbon tax double whammy?

    5. No tax at all. Ha, ha, ha. Fancy not charging your citizens any tax? With the Cayman Islands on the brink of going bust and tax havens everywhere on the diplomatic naughty step in the wake of the global financial crisis, perhaps in the future there will be no such thing as tax exiles: just taxpayers, tax evaders and the tax exempt. And we’ll all look back and laugh at that crazy Netherlands phase. Won’t we, Bono?

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