Wednesday, 31 March 2010

Nama, Lenihan, and Fianna Fail play "fast and loose" with the economy.

“The detailed information that has emerged from the banks in the course of the NAMA process is truly shocking. At every hand’s turn our worst fears have been surpassed.

Some institutions were worse than others. But the fact is that our banking system, to a greater or lesser extent, engaged in reckless property development lending. In too many cases there were also shoddy banking practices. The banks played fast and loose with the economic interests of this country.

Yes, our previous regulatory system failed abysmally and it is right that the role of the regulator, the Central Bank and the Government is now the subject of independent inquiry. But the fact remains that senior figures in Irish banking made appalling lending decisions that will cost the taxpayer dearly for years to come…”

Brian Lenihan, 30th March 2010. Statement to Dail on the first transfer of banks’ bad loans the National Asset Mangement Agency

Here is our finance minister, Brian Lenihan, sounding as though his party, Fianna Fail, had nothing to do with the country’s economic collapse. But then again, you’re always more likely to get a “cupla focal” from our political masters than a “mea culpa”. 

See below excerpts from a feature on Government property-based tax breaks that appeared in the Sunday Business Post of May 8th, 2005, one year before the peak of the “boom”.  They demonstrate how Fianna Fail played "fast and loose with the economic interests of the country".  It would be interesting to have accurate and complete figures showing the number of ministers and their friends who availed of the schemes.  Exclamation marks in brackets are mine, and need no clarification.

The most popular scheme - and generally the most successful - is Section 23.   With Section 23, you get tax relief on the capital used to construct, refurbish or convert rented residential accommodation in a tax-designated area. The price paid for the site does not qualify for tax relief. However, as the site usually represents between 5 and 20 per cent of the cost of the property, investors can write off between 80 and 95 per cent of the property purchase price against rental income earned from property within the state.

For example, if an apartment costs €200,000 and the site cost €20,000, the Section 23 allowance would apply to capital of €180,000.   One of the advantages of the allowances is that they are not restricted to property bought under the Section 23 scheme. It can be written off against an investor's rental income from all properties located within the state. (!!!!!!!!)

Section 23 relief is only available if the property is first let by an individual under a qualifying lease (!!!!!!!!). It must continue to be let for ten years from the date of the first letting…. Section 23 relief is currently available for rural renewal, town renewal, living over the shop, integrated urban renewal, student accommodation and park and ride schemes.

Section 50 operates in the same way as Section 23 but relates to qualifying student accommodation. “There's very strong demand for Section 23 schemes,” said Marie Hunt, director of research with CB Richard Ellis Gunne (!!!!!!!!). “Section 50 is not seeing the same demand because there's a bit of caution there as to whether it's a good or bad scheme.”

Typical investors in tax-designated properties will borrow 90 per cent of the property price and pay a 10 per cent deposit. In some cases, a smaller deposit may only be required. Interest-only mortgages are generally considered as the most efficient way of financing an investment under Section 23 or Section 50.

Investors use rent from the property to fund the interest on the loan and can then use their tax break to pay off the loan or make another investment elsewhere. (!!!!!!!!)

“Typically, investors in these schemes have a number of other properties and they're looking to grow their property portfolio,” said Aiden Murphy, a partner with Horwath Bastow Charleton. (!!!!!!!!)  “To allow the rents to materialise for the properties, they go interest only for the first few years and once the rents are flowing through, they pay off the balance of the interest on the loan.” (!!!!!!!!)

Interest-only mortgages are useful for covering the shortfall from the rent on investment properties, according to Michael Dowling, president of the Independent Mortgage Advisers Federation (IMAF). (!!!!!!!!)

According to Dowling, a two-bed apartment in Smithfield will normally yield maximum rent of €1,200 a month. “There's no way this would cover repayments on a €450,000 mortgage,” he said. (!!!!!!!!)  “However, typically, anyone buying under Section 23 has rental income from other investment properties - many of which have little or no outstanding mortgages. Investors can use rent from these properties to offset any shortfall on the new property.” (!!!!!!!!)

 Murphy [says that], a lot of today's investors are more sophisticated and use interest-only mortgages to manage their rental cashflow more efficiently. (!!!!!!!!)
The interest on variable rate interest-only mortgages can range from between 3 to 4.3 per cent APR for investors, depending on the lender and broker, your relationship with the bank (!!!!!!!!), and the amount being borrowed.

Capital appreciation
Although rental income might not cover the mortgage repayments on a Section 23 property, capital appreciation and tax allowances usually make such investments worthwhile. (!!!!!!!!)
“Investors really have to discipline themselves and put aside the tax break for a moment,” said Ned Gladney, director of OSK Tax. “All of the common sense rules apply regarding location which is one of the things that people often ignore because they get blinded by the tax relief.” (!!!!!!!!)

Holiday homes
If choosing a tax-designated holiday home for investment purposes, it's important to choose a property with good rental potential. “Before investing in a holiday home, you must look at its location and its value as a destination,” said Aiden Murphy from Horwath Bastow Charleton. “For example, examine the amenities and activities on the site and the actual size of the resort. You would normally need a certain minimum number of units in the resort to cover your loans.” (!!!!!!!!)

Footnote:  A lot of these schemes are now ghost estates, or holiday developments blighting the landscape.  GM.
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Anna said...

Newspaper headlines today have Huge banners like 'BaNama republic' and '26,000 bank debt on everyone in the state' and 'A lost decade ahead of us'.I have to read all the above again carefully, but am always V happy to see the above...this will come up time and again when anyone is searching to see who plundered the country...FF, the party inspired by Bart Ahern ..'I didn't do it/ you can't prove a thing/ no-body saw me.'

The Gombeen Man said...

Yes, I thought it was worth digging out the details on their inflationary tax shelters... listening to Lenihan lecturing from the high moral ground you think none of this stuff had ever existed.

Ella said...

Hi GM, this does not make happy reading. These criminals have cost us (at latest esimate) 30 billion euro, who knows what the final tally will be. They are white collar criminals so they will get away with it. There will be no material changes in their lives. We bail them out and to do that we pay increased taxes and get a reductionn in pay. Life is just a bowl of cherries.

Anonymous said...

GM, yes section 23 and 50 didnt help, but wow how the worm turns, eh? The bandwagon was very full a the time. All part of the "celtic tiger" eh? As far as I'm aware there was only one politician who spoke up about the madness that went on but surprise surprise I cant even remember his name. The whole thing was sick. Nobody gived a toss then and to be honest thats still the way. And just to say if they impose draconian taxation they will make it worse.


Ella said...

Anglo Irish Bank lost nearly 13 billion euro in the past 12 months. HOW can that be possible? We keep on being told it's cheaper to pump money into Anglo Irish Bank rather than let it go bust. I don't either understand or believe that. Can anybody please explain?

The great unwashed (that's you and me folks) will be paying for the mistakes of the "elite" of this country for years to come.

Anonymous said...

hi there mr GM iam so shocked and crushed i forgot to have lunch today this news is horrific, but as you know i predicted all this when seanie and wee willie were invited for bed and breakfast by the rozzers with lots of press cameras around, as i only predict the future, next time the banks need money from lenny it will be deja voodoo all over again for seanie and willie this will go on for years like some tribunals,what a grand little country too bad cj is not around to see how nicely things are coming along.tis a grand soft kind of a day here in BEVERLY HILLS cheerio ps. noticed the tanaiste is displaying lots of roots these days iam changig my mind i think

Anonymous said...

Ella the scale of it is beyond belief! If not the worst, then one of the worst economic disasters on record, anywhere. I wonder how many of the "elite" will pay the price?

Owe a thousand and its your problem, owe a million and its someone elses problem. Bottom line still remains, they and the like, have the money now and left us with the problems. These problems include (apart from the obvious destruction of the finances) the transformation of state and individuals expectations (some of which are deserved and some not).

Have the lessons been learned? No I really dont think so. This recession - could be argued - is just a change of the economic landscape, the underlying stimulus is still there. Rampant capitalism is now the norm. I'm not saying capitalism per se is a bad thing but the type which was dominant in the last 15 years (especially in Ireland?!) was very distasteful.

In addition to the financial madness up until the end of 2005, the afterglow manifested by all of the nasty cultural traits which accompanied this insanity (eg. latent jingoism, superficialality, manipulation, disrespect, yobism and an unhealthy deference to capitalism -and all that compliance brings!) is another long term problem.

The question has to be asked, if economic conditions didnt change in 2005 would Seanie and that ilk be still the doyen of society?


Anna said...

People say despairingly‘,” But the Regulator relaxed the rules, so there were none to break, so they did not break the law,”
OH yes they did- reckless trading & creative accounting for 2- but see also Irish Times Sat 3rd April, IV with a non Irish young banker
‘James.’ This story seems almost contemporaneous- not even 2 yrs ago. James went to work for an IFSC bank and being non Irish very carefully studied the Financial regulators rules. A bank was not to lend out more than 90% of its reserves- OK I have not got the technical details exactly right, but you get the picture. James had to inform the regulator , by law at close of each day when the ratio went down by even 1% below what it should be - and if he Didn’t and this went on a while a banker could be jailed for FIVE years. Yet the ratio was down Every day to about 70 or 80%. Perplexed he asked for reasons- every day a different story. He got in outside auditors- they told him his own figures were still out- the Real ratio was 50%. He informed his bosses And the Regulator- neither took any notice.
He resigned and is unemployed- he was being tacitly asked to break the law Every day, Moral- it is significant that James is not Irish. Moral 2- Yes Even Ireland Does have banking laws- so why aren’t they applied- because we are not out on the streets banging pots and pans like the Icelandic people did.
‘For evil bankers to flourish, it is necessary only for good men to do nothing ( but quietly emigrate/ watch the X factor/ drink themselves to despair )..etc….’ Edmund Bourke, great Irish parliamentarian
See also Edmund Bourke’s more pithy contemporary, Dean Swift ( on a banking crisis of 200 yrs ago) :” It would be to the good of Ireland if a dozen bankers were hanged every year.’
Mmm…we can’t do that anymore..But totally with him on the sentiment behind it.

The Gombeen Man said...

It looks like James was too honest for a career in the Irish financial sector.

Anna said...

It's the THIRD biggest bank bust and bailout in History( not Irish history- but World history) seems in the last 20 yrs there were 2 other Big ones possibly Japan & Korea ?
( I read this on an Irish press clipping service this week WC 5th April 2010 , the source may have been Examiner paper). Serfdom for the Irish Nation and all Guaranteed Irish-NO colonisers at all to blame.
Hopefully a really big change will come, a change as far reaching as catholic emancipation @ 1830's...
It's not enough to have an Independent nation..we all have to see it's a decent one..apathy, buck passing, cowardice have been far too common here..must go, I'm off to the Dail to bang on a few cooking pans.