Wednesday, December 1st, 2010

CIF and NAMA were never going to be happy bedfellows.  The former represent the interests of developers and builders, the latter is charged with relieving the banks of property loans to try and address the banking crisis, and to manage and offload those loans on behalf of the state and taxpayers.  Whilst most citizens view NAMA as a bailout to developers, keeping them afloat when most of them would have gone to the wall a couple of years ago, CIF views NAMA as a predator that is trying to radically overhaul and restructure the building industry, is trying to gain at the developers’ expense and country’s best interests, and is a punative instrument that is inflicting more harm than good on the property sector.

As reported in some of the papers today (here and here), Lombard Street Research have just published a report commissioned by CIF, attacking the rationale and practices of NAMA (which makes interesting reading).  NAMA has responded by arguing that the developers are living in denial and they need to wake up to the new realities of property development and the market. Whilst there is undoubtedly a number of issues concerning the formation and operation of NAMA, CIF’s principle problem is that there is little public sentiment for their views given that they’re clearly a vested interest who seem to care for little else other than the interests of its members (which they try to spin as, what is good for us, is good for the country – the same as they did all through the boom).  From NAMA’s perspective it is finding its work tough because the banks and developers seem very reluctant to work with it, they are economical with the truth, are slow in coming forward with documentation and workable business plans, and are clearly more interested in their own self-interests than acting as good citizens in dealing with the present crisis.  No doubt the spat will continue to run and run.  There are unlikely to be any winners and ultimately citizens will pick up part of the tab.  Sounds about par given the history of the crisis so far.

Rob Kitchin

Simon Kelly started in property development as a teenager, crunching the numbers for his father, Paddy Kelly, one of Ireland’s best known developers.  He quickly progressed to become his father’s right hand man and eventual partner, specializing in the financial and legal side of the business.  In Breakfast with Anglo he tells the story of the Irish property boom from the developers’ perspective, providing a reasonably frank account of how the property development game worked, focusing especially on the finance side of things and the relationship between developers and the banks, especially Anglo Irish Bank.

Breakfast in Anglo is a curious read.  Kelly has produced a candid, seemingly open, and engaging narrative.  Whilst many elements of the story will rile many readers, Kelly has clearly been on a journey of self-reflexivity and he’s able to step back a pace and set out the ins and outs of the business, his role in it, and to acknowledge his culpability and express remorse for the ensuing disaster of the collapse of the Celtic Tiger.  That’s not to say that Kelly is full of regrets, though he has a few, or that is he rounds on his former colleagues and partners, or is apologetic for his lifestyle or the fact that he knows how to work the system and does, including walking away or sheltering from massive liabilities.  Indeed, it’s clear that even now he has a soft spot for Anglo Irish Bank and many of the staff who worked there, and he’s generous in his praise of those he worked with.  However, by wearing his heart on his sleeve and being straight, the result is a book which as much as one would like to hate it, and as much as the story annoys and riles, and for all its faults and silences, one has to admit was a pretty good read.  That’s not to say that there aren’t issues with the story being told, but that the writing craft and narrative was solid.

As for the story.  Breakfast with Anglo principally tells the financial and deal making side of the building of the Kelly’s property empire.  In particular it focuses on the relationship between the Kellys and Anglo Irish Bank, how they built a complex web of partnerships with other developers and financiers to make different deals work, and how the nature of development changed throughout the boom years.  Told from Kelly’s personal perspective it also reveals how he changed as the business grew and became increasingly disillusioned by the life he was living, but ultimately was unable to extract himself from it.

Where the book is strongest is in its insight into the way in Anglo, the other banks, and the deal making side of development worked.  Anglo built relationships that extended beyond simply servicing business.  It cultivated its clients, gave them royal treatment, bent over backwards to help them out and make financing as easy as possible, but in return demanded loyalty.  They became the bank of choice for developers because they actively facilitated them by building a relationship, cutting through red-tape, and were reactive to their needs.  They also didn’t impose ‘silly rules and restrictions’ as Kelly puts it, by which he means sensible and prudent rules and restrictions.  Some quotes gives the flavour of Anglo’s business strategy.

‘Anglo was the easiest place to source a draft for your bid, and you knew that they would be able to follow up and finance the deal if you were successful.  That was part of their unique service.  The other banks were never as free with that kind of money.’

‘We never had to worry about the money for a deal.  Once the numbers on the deal stacked up, Anglo was there – and sometimes Anglo was there even if the numbers didn’t stack up.’

‘We heard rumours from other developers of the existence of a head of risk, but we didn’t worry about him because he had no power in the bank.  The ADs [associate directors] all wanted to get their own loans through, so they would not stop each other’s.  … If a deal looked tricky, the bank would put up the price of the money but lend it anyway.’

‘In the bank’s heyday, borrowing money from Anglo was easy – provided you were already an Anglo client.’

‘They thought more like developers than bankers.’

Where the book is almost completely silent is with respect to politics, vested interests and planning.  Not one single politician makes an appearance in the story.  The much talked about cabal in the media is developer, banker, politician.  Either the Kelly’s had nothing to do with the politicians or political donations or political lobbying, or this is conveniently dropped from the narrative.  And whilst Simon Kelly might not have been actively and directly involved in this, one would find it hard to believe that he wouldn’t have known what other elements of the firm were up to given the level of interaction and family and partner plotting.  Neither is the role of vested interest groups such as the CIF much discussed and the role of developers in shaping the policy landscape around planning and tax breaks.  And the book is pretty mute on the business of securing planning permissions and working the planning system and bullying local communities through threats of compulsory purchase orders and the like, other than a couple of short notes.  There are hints at how developers played the tax incentive schemes and avoided capital gains tax and stamp duty, but these are in passing and there is no in-depth discussion as to how these were played and exploited.  The story then is selective, rather than the full warts and all promised.  For the book to have been the full expose of what went on, then all these issues needed to be explored in depth.

At the end of the book, Kelly provides ten lessons for the boom.  Interestingly, they all focus on what a developer should remember in order to be successful and avoid crashing.  None of the ten lessons focuses on what Ireland should do to avoid future boom and bust – no mention of the Kenny Report, nothing about financial regulation, nothing about a more robust planning system, nothing about political reform, and so on.  Ultimately, Kelly cannot see beyond the developer horizon.  If after being at the centre of the property development boom and bust, the ten lessons are simply about protecting developer interests, one ultimately feels that despite his self-reflexive soul searching, Kelly hasn’t learnt a lot beyond self-interest.  And he is one of the developers who isn’t still in denial, as NAMA accuses in this morning’s papers.  Unless the cabal of developers, bankers and politicians can start to see the bigger picture beyond their own interests, then one anticipates reading a similar book by a Kelly-wannabe or the next generation of his family in 30 years time.

Overall, a book as interesting for its silences as for what it has to say about property development in Ireland, but an engaging read nonetheless.

Rob Kitchin