Saturday, April 30, 2011

Sean Quinn and the Lowry effect

The continuing travails of Séan Quinn are continuing to be portrayed by the media as just that - travails, inconveniences, challenges - and remain of interest to the country while becoming something of a cause for his followers in the border region. Of all of the major figures to be "caught up" in the banking crisis and the "travails" of our nation, he alone retains the sympathy of many people, and seemingly suffers only from the ill-judged accusations of the Financial Regulator, and some revisionist appraisal of his dealings with Anglo Irish Bank. He is not a banker, or a builder, or a politician. In that, therefore, he is unique.

Today (Saturday) it was reported that he was refusing to give Anglo information about what he owns, and what he owes. During the week two very straight looking accountants very matter-of-factly told business journalists that the Quinn Insurance business had lost €700m in the year prior to the administrators being called in. This is despite Mr Quinn himself telling the regulator that the business was hugely profitable, and that it would be through the several hundred million euros in annual profit that he could repay the debts owed to Anglo.

Now - step back a moment and consider the debt he owed. It became clear as Anglo fell apart in early 2009 that there were serious problems, and that Quinn was at the heart of it. Much of the commentary centers on Quinn's catastrophic €2.8bn punt that went wrong, but it was merely the inevitable end of an appalling sequence of decisions where Quinn made poor investments, managed his companies terribly, and piled up losses upon losses. This was not just one bad investment, but the inevitable consequence of failure being rewarded again and again and again by the banks, the state, and the infrastructure in Ireland. Either Quinn was stupid, badly advised, or reckless. Given his position in Irish life and society, his responsibility required that he act far more prudently than he did, and he failed.

Was that bad enough? No, of course not. Emboldened by the myopic sheep of Cavan, the defenders of the man who gave them work when none was going, in a Lowry-esque descent into economic ostrich politics that eschews solidarity and national interest, Quinn fights on. He has been slighted. The Quinn Group showed no losses when he was in charge, but now that the administrators are in, they've destroyed the company (he skirts around the fact that he didn't employ a single actuary in his insurance business - go figure).

There was a point when Seán Quinn was a young man with a farm, from which he quarried stone and made a small business a big business. He hired people. He helped people. And they remember him for that. But he crossed a line when he diversified into other segments. When he went into insurance, the Quinn group was certainly a conglomerate. When he took over the former BUPA business, he was hailed by the establishment as a saviour of competition in the health sector. My sense is he began failing almost immediately after that. The extent to which the State facilitated Quinn's takeover of BUPA was extraordinary, though not unexpected. There were some echoes of the Russian oligarch's enrichment in the 1990's with the distribution of former state assets, though in this case it would have been difficult to line up a buyer for a business that was pulling out for legitimate commercial reasons (the community rating issue and all that jazz), notwithstanding the fact that Mary Harney had been fighting this issue through the courts for a number of years at that stage. The thought has to be that BUPA called Harney's bluff, and she got found out. With few people to turn to, Quinn was probably on a shortlist of one (the alternative being nationalisation or merging with the VHI) to take on the alternative healthcare supplier (with apologies to Vivas). Getting into the healthcare business was enormous for Quinn, and made him politically significant if he was not already that.

Having significant interests then in building materials, and by extension the property market; and in the broad insurance business at home and abroad, Quinn set about leverage his systemic importance in Ireland to bail himself out of every increasing debt. While any normal business faced with compromised positions would scale back, lay people off, take losses and move on, he buried them in a sea of credit, and the Quinn group became a black hole into which massive losses mounted, millions, then tens of millions of euros, suddenly a hundred million euros, then more, and still more, and ultimately almost three billion that we know of, tied up in a twisted, gnarled series of cyclical transactions in, with and of Anglo Irish Bank. Quinn couldn't face the prospect of admitting failure, and he compromised all of those businesses, the Irish health service, the competitiveness of the insurance market, and thousands of jobs, in order to save face. That's what all of this was about - saving his reputation.

And so still today he protests, it wasn't me. I was a victim. The regulator is wrong. By implication, there's a conspiracy. He is insidious in his manipulation of those in Cavan who support him, because they believe he's been unfairly treated, and he does nothing to disabuse them of this. They are following a lie, and he fosters the lie. Sean Quinn crossed a line some time ago when he abandoned all propriety, and compromised the interests of his employees, his companies, his bank, and his country. He should be ashamed of himself, and he should be in jail.

Thursday, April 21, 2011

Property Valuation Con Continues in Ireland

My home insurance renewal letter came in the post today. I called the AA, who have my car policy, and they gave me a quote that was half what Bank of Ireland were charging for the same terms. So I rang the Bank of Ireland - the insurance guys first. They told me that one way to reduce my premium would be to reduce the rebuild cost of the house. So I said OK, but wouldn't the mortgage guys be upset with me for doing that? She said that while I was right, it wasn't their concern, but I should probably talk to them (the mortgage people) first. Property values had come down, so rebuild costs would too.

They suggested I consult the Chartered Surveyors Website, who had a guide to proper insurance, and a table in the guide indicating what the likely cost of rebuilding a house is (on page 3). It varies around the country, but in Dublin it's €164 per square foot, and in the rest of the country around €124, to rebuild a detached house like mine. In 2006-7, when getting quotes to build my house, the prices ranged from €85 to €95 per square foot. This is extraordinary. If the pillar bank is relying on these valuations, they're absolutely nuts. Bonkers. La la la la la. Prices for rebuild have probably fallen in the last few years, and direct labour costs would be significantly lower again (and given my experience building my house - not that the builder was bad, he was great - I'd probably be able to do that if I had to; which would be even cheaper because of the extent to which cash now dominates the building trade). Of course it means that insurance premia are inflated, and that means more money for then banks and insurance companies, who are very innovative in finding ways to screw you. But that was only the start of it.

I thanked her for her advice, and rang Bank of Ireland Mortgages. They advised me to look at the SCSI website as well, and then said I needed to get a new valuation done on the property in order that my house rebuild estimate - and therefore insurance costs - be reduced. I asked who should do the valuation, and she said it didn't need to be anyone on "the list". the conversation that followed was extraordinary:
Me: "I'm not sure I follow - can anyone do it?"
BOI Lady: "Well, someone qualified, obviously."
Me: "What qualification do you mean?"
BOI Lady: "Well, an estate agent, or auctioneer, or valuer, you know."
Me: "But you don't need any qualification to be an estate agent or auctioneer."
BOI Lady: "Well, it must be someone working for an estate agent"
Me: "What about my sister in law, she's temping as a secretary for an estate agent in Offaly, would she do?"
BOI Lady: "No, well, I mean, I know some people who work for estate agents aren't qualified, but it needs to be, you know, someone qualified"
Me: "But - you don't need to be qualified in anything to be an estate agent"
BOI Lady: "well..."
Me: "Look, I've a friend who used to be an estate agent, could he do it? I could just throw him twenty quid, you know, that'd do."
BOI Lady: "Well it must be sort of official, you know? On letter paper and all that"
Me: "Oh, sure he has letter paper."
BOI Lady: "But if he's not in business..."
Me: "He has a registered company"
BOI Lady: "Oh that's fine then, if he has a registered company"
Me: "Thanks, I'll do that so."

And there we have it folks. the valuation of my mortgage - that you all are on the hook for - can be based on whatever my mate Charlie thinks if I buy him a couple of pints down the pub. I reckon the value of my house will have fallen even more significantly than the national average, don't you?

Of course, the interesting thing is that as people re-value their homes for insurance purposes, will these new valuations register with NAMA, or the NTMA? Not a hope. Complete disconnect. It's all a con, the whole lot of it.

Friday, April 08, 2011

Improving Youghal: A Two-Sided Business Model Approach

The Irish Times story on Youghal - and the subsequent stories - made for difficult reading. Having grown up in the town, and moved back to the area in recent years, I know it intimately. It has never in recent times been a wealthy town, and ever since the carpet factory shut down in the early 1980s, followed shortly thereafter by Murray Kitchens, it has been in decline.

Today's Irish Times editorialises on the resilience of the Irish Town. I disagree. In America, Detroit was once a huge bustling metropolis, the fifth largest city in America. Today, it has slipped to eighteenth; at the recently completed census, the city asked for a recount because the Federal Funding level is likely to drop dramatically. A once proud city, center of the world in car manufacture, the top eight employers are "public sector" - education, healthcare, government. General Motors is number nine. Its exquisite art deco architecture is now in decay. Cities, towns, villages have been abandoned throughout history. If our towns are not managed properly, they may also slip quietly into history.

Some others have offered some suggestions as to how Youghal might be improved - the rail line to Cork (a feasability study for which is tentatively roadmapped for "sometime before 2020 in the County Development Plan); the monk's road and other tourist attractions; a mayor, and devolved local government. Previously there have been discussions with interested parties on the construction of a marina, and attendant facilities.

Youghal is not the only town, of course, that finds itself in trouble. It has its own plusses and minuses, but there are things in common, including the building boom legacy. The National Asset Management Agency is in control of countless properties and assets that they are trying to generate a return on. For example, let's consider an apartment that cost €200,000, with loans attaching of maybe €150,000, and a market value of - maybe - €50,000. Even with that market value, it is not an immediate value, but a future likely value. There are of course other assets available - building land, houses, hotels, and so forth. In the mean time, these assets are decaying, or costing more money to maintain or complete. Half built developments may be destroyed.

There could be a way to take some of those assets, and make them generate a value return other than simply cash. For example, could the town of Youghal lease a dozen apartments from NAMA for ten years for €1 per apartment, and then use its own resources (the resources of the town clerk, essentially) to maintain them? They could be rented out to holiday makers for €50 per week, the intention being to cover costs of maintenance only, in the hope of generating tourist revenue for the region?

If there are hotels owned by NAMA, the same could apply. If we are making an assumption that the value of an asset is only realisable in the medium to long term for accounting purposes, then it appears logical that we should be trying to maximise the value of that asset in the near term - NAMA could let the property....or it could seek to find other uses for it that would generate value in other ways. There are issues to consider - local hotels would be upset at the competition, for example (although in Youghal, I'm not sure there are many who would have that problem) and others struggling in the buy to let market may similarly complain. However, the argument may be that prices need aggressive downward pressure like this in order to re-set them properly. If the apartments are not being let anyway, that would certainly be true. And only certain types of landlords open apartments for short term let like that.

Other assets could be used for other things. Sites, fields could be alternately developed for short term use - markets, festivals, fairs could be organised on downtown sites where planning was secured for an unbuilt apartment block.

The impact would be to unlock some of the value trapped in a pincer movement of a depressed market for property, and the NAMA / loan structures. Allowing regional or local access to the economic value even for a short time could be modelled to have an impact on the economy as a whole, and accelerate its move out of recession. In turn the properties become more valuable - and NAMA gets its return, while its assets are protected and utilised. Just a thought...