Property developers and property development companies go into liquidation all the time globally. In the US in April, General Growth Properties filed the largest real-estate bankruptcy in US history. While deeply painful for creditors, the company's demise barely caused a ripple in the US banking market or on the stock market.
In Australia, the Centro Properties Group, which owns giant shopping malls in Australia, New Zealand and the US, got into trouble earlier this year, but again damage to Australia's largest banks was relatively limited.
In the UK, the company which leases out most of the buildings in Canary Wharf, Songbird Estates, was in serious trouble earlier this year because of a mountain of debt, but again the follow-on implications for lenders in the UK were minimal.
One of the few occasions when politicians have been asked for their views on a property developer getting into trouble globally was in the 1990s, when Olympia & York (O&Y), a giant Canadian real-estate firm, went into Chapter 11. But in that case, O&Y was believed to be the largest developer in the world, with a string of trophy assets scattered throughout North America and Europe.
Here, the travails of Liam Carroll and his spider's web of companies have become the subject of daily commentary from stockbrokers and international financial news wires. The chief executives of Ireland's largest banks and senior cabinet ministers are asked to give a view on whether Carroll's empire can survive and what its collapse might do to the solvency of Irish banks and Nama.
As the largest developer on the island by assets, this is, on one level, understandable. Carroll's entire range of companies is reported to owe the banks about €2.8bn. His Zoe group is insolvent with an excess of liabilities over assets of €265m. This sum and the larger sum are very significant debts, even by the standards of larger markets than ours.
But the sheer scale of financial damage Carroll's companies are capable of doing to the balance sheets of the Irish banks illustrates the wider problem of loan concentration. Irish banks lent too much money to a dangerously small number of developers, weakening their risk profiles and turning manageable individual customer exposures into huge systemic threats.
Risk concentration is one of the most obvious systemic threats that risk officers and, in an ideal world, lending officers, are supposed to guard against. Put simply, no bank should ever have a customer on its books that could imperil the whole institution. Alternatively, the banks together should never allow any customer grow to such a size that he or she has the potential to pull down the entire system.
Carroll alone does not have that potential, but when his troubles are placed alongside already high levels of loan losses and concerns over Nama, the scale of the Louth man's property empire becomes a relevant concern.
Leaving Carroll aside, the problem of loan concentration – or concentrating risk in a small number of large scale customers – is endemic to Irish banking. AIB, for example, has disclosed that its top 50 exposures amount to €19bn. In other words, its top 50 customers owe, on average, about €380m each.
At Irish Nationwide, the problem is almost as bad, with its top 30 customers owing an average of €343m each.
The level of concentrated risk at Bank of Ireland was not disclosed in its last annual report, but it is likely to be significant. The number of loans Nama will move highlights the concentration of risk even more. According to early indications, some 50 developers will have loans worth €30bn transfered to Nama before the year end.
That works out as an average exposure per developer of €600m, a larger concentration of risk than can be found in an individual institution, with the possible exception of Anglo Irish Bank.
Every bank is supposed to have policies for limiting maximum exposure limits, but they have clearly proved ineffective, both at the individual level and more generally. For example, AIB allowed its top 50 customers to grab almost 15% of its entire global loan book.
When the financial crisis broke late last year, those working outside Irish banking were surprised at the layers of risk that were embedded in the balance sheets of Irish banks. Not only was risk tied up in the fortunes of a small number of developers, it was also concentrated in one asset class – property – and concentrated in one geographical area – Ireland.
This grouping of risk was not a surprise. All the banks are headquartered in Ireland; the property market was capable of delivering the large-scale loans that banks can earn big margins from; and the small number of developers had proven to be solid and resilient... up to now.
Against that backdrop, the accumulation of huge concentrated risk was regarded as acceptable, at least by those running the main property lending institutions. What appears to have happened was that once one institution was prepared to weaken its risk controls, the others then decided they had no choice but to follow if they wanted to keep up.
They gave money to developers to speculate and gamble, that was and is the problem. It was a one way bet. As far as the banks were concerned property could only go one way and that was up! Three words describe this careless, reckless and madness! The banks so-called experts turned out to be anything but experts and simply did not do their job. What the hell am I saying? For gods sake, they even joined in the party by selling their own bank headquarters to the very speculator developers to whom they were lending out huge sums of money.
These developers ended up becoming meglomaniacal and instead of attending GA gamblers anonymous they continued to be enabled by their banker 'friends".
I maintain that every bank should have an ordinary Joe Soap who is not an economist or financial analyst, someone who will state the blatantly obvious! Things like, there are way too many apartments being built or who is going to live in all these developments or why are you lending so much to the same guys or why are you are putting all your eggs in the same basket. In other words it was common sense that was required not degrees and PhDs. This is now the danger with NAMA it defies common sense and is designed by more of the so-called "experts." We know where that will lead us.
Well do not take your anger out on the Lisbon Treaty!
That would be a disaster for corporate Ireland and our politicians too!
Obey your betters prole!
It was mentioned last year that the Irish loanbook/landbank represents the equivalent to the sites for 450,000 new homes. In a country with a small population and an established housing stock, this 'reserve' was madness.
As for Lisbon, has anyone demanded a policy statement from the ECB on interest rates for the next ten years? If Europe is to work for Ireland, a strategy must be in place to allow the unwinding of property debt to take place.
Also, if rents are to remain flat-lined, an interest rate policy to support this new low-cost economy must be in place, along with the appropriate government spending reforms.
It is important that Lisbon should not be about saving Brian Cowen and Fianna Fail. It should be a step forward for Ireland.
If it is not, then we should step back until the terms are agreeable.
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All this endless talking about the D4 banks. These commercial operations just like "Joe's grocery store". If Joe fails, he doesn't get a bailout. But these bankers, all from very priveleged backgrounds, and all very well connected get bailouts. We are sick of it. We are sick of the corporate takeover off our society, and their ability to peddle all sorts of 'truths' and 'facts' and realities - that don't stand up on even the most elementary principles.
Let Anglo Irish bank fail, and be over and done with it. Iceland let their banks fail. And now they industrial output is increasing. But we are just continuing to delude ourselves collectively as to where our stupid misconceptions about finance are leading us. The only reality I can see is that we are being flushed down the drain.
And let's admit it - our leaders have no plan for our society, or our economy. Their only plan is to preserve their own salaries and pensions, and keep peddling lies to the people.