The media seem to be going through the developers one by one. First we had my father Paddy Kelly, then Liam Carroll, and now we have Bernard McNamara.
At this rate, it is going to take a long time to reach the obvious conclusion. Let me take you directly to the end of this story and save you a lot of reading over the coming months.
The property development business is insolvent, or bust, if you prefer.
The developers' assets are worth less than their debts. There may be some exceptions to this statement, but I do not know of them, and I know most of the people involved. That is why we have Nama and this is why the banking system failed.
My personal rule of thumb is that a lot of property developers are wiped out. The personal guarantees make this a certainty. All of us developers signed them. If you wanted to do business with banks in Ireland, you had to sign a personal guarantee. This meant that all your personal assets were acting as security for your debts. When the debts reached into the millions, and the market collapses, insolvency is the only natural conclusion.
The credit system in Ireland was built on property and personal guarantees as security. On the back of this fictitious collateral, billions were lent.
Banks would lend 100% and more to projects, assuming they could get access to other personal assets to support the loan.
Lawyers, accountants and valuers signed off these worthless statements of net worth, and they still feed off the property crash through the courts and Nama. As ever, this old professional establishment wins both ways.
The result of this reliance on personal guarantees is clear to see. Bankers were generally lazy in assessing the true risk of a project. The support of the personal guarantee allowed the bankers to paper over the cracks on a loan.
They always felt that the vast net worth of the developer would be there to support the loan. They presumed that the net worth was a real thing whereas in reality, it was a dream.
As can been seen in the Bernard McNamara case, even apparently clever people like Davy and their investors believed in the dream of the personal guarantee.
I was personally told many times that my personal guarantees would not be used and that their function was to keep my focus on the project. I know this to be true of other developers. We too were foolish to trust the bankers.
Personal guarantees are exactly that: personal. They do not spread debt over the borrowers, spouses or children. Most guarantees in recent years excluded the family home as security so do not expect to see every developer put out on the street soon.
The fallout from this crisis will ensure that people never sign personal guarantees again. Under the current banking system, this will stop banks lending and will reduce investment in the economy. We need to outlaw the reliance of personal guarantees for all loans and we need to look towards banning with retrospective effect the enforcement of existing guarantees where the borrower has handed over their assets to Nama. The bankers need to bear the responsibility for the billions they lent and stop hiding behind the personal guarantee of the now-bust developers.
People need to be able to restructure their business and personal affairs in a mature manner as is normal in most developed countries. Modern sophisticated democracies have bankruptcy and insolvency laws that allow people and businesses to fail. Many business people in America have been through the bankruptcy process prior to their ultimate success. America is the home of the second and third chance for people and it is a stronger economy because of this. In Ireland, one failure rules you out for 12 years at least.
When a person becomes insolvent in Ireland and significant judgments are registered against them, 'them' become a kind of non-person.
They are neither bankrupt nor solvent and productive. Bankruptcy strikes terror into hearts of the banks as the control of the assets is passed to the courts, and in previous cases in the 1980s, very little was recovered.
What then becomes of people like Bernard McNamara? In the current system in Ireland, Bernard can do very little. His creditors will ask him not to go bankrupt and to help them he will reside in a type of financial purgatory.
He will probably be paid by the banks to manage various assets, but this will offer him little over the long term.
He has little or no commercial incentive to work and try to rebuild a business in Ireland as any value he creates will be for the sole benefit of his creditors. I suspect, he will be forced to build business and value abroad which is to the great loss of Ireland.
Simon Kelly is a former developer who writes a weekly opinion column for the Sunday Tribune. The opinions expressed here are his own and not necessarily those of the Sunday Tribune
Great to see Simon dispensing his wisdom to the great unwashed. No humility.apologies or regrets. I think the taxpayers deserve better than this from the Tribune.