'Rasher' returns
From the property price bubble to the 'bad bank', this troubleshooter has stormed back
The Government's plans for a 'bad bank' to warehouse the banks' bad loans are largely the handiwork of economist Peter Bacon.
It is truly ironic that he has been called back by the Government to clean up the mess left by the property bubble he foresaw and tried to prevent.
If this Government had a motto it would surely be: When in trouble, send for Peter Bacon. The 56-year-old economist, known as "the rasher" to friend and foe alike, seems to have become this Government's economic and financial troubleshooter.
Way back in 1998, the newly-elected Government of Bertie Ahern was feeling the political heat from rapidly rising house prices.
As soaring property values threatened to price more and more buyers out of the market, the pressure on the Government to 'do something' about rising house prices was intense.
That something was the Bacon reports, three reports on the property market which were published between 1998 and 2000. The centrepiece of Bacon's strategy was to force investors out of the housing market by scrapping the tax relief on interest payments for investment properties.
Measure
The measure was implemented by the Government in April 1998. Initially it had little impact with the annual rate of house price inflation accelerating from 17.6pc in 1997 to 29.8pc in 1998.
However, the rate at which house prices were increasing slowed after that, falling to just 4.3pc in 2001.
Unfortunately, while the abolition of the tax relief on interest pushed investors out of the market and eventually reduced the annual rate of house price inflation to manageable levels, it created its own problems. A very large problem actually.
By the turn of the century as the numbers in employment expanded rapidly and tens of thousands of workers immigrated to Ireland to fill these new jobs, the demand for rented accommodation soared to unprecedented levels.
However, the abolition of interest relief meant that the supply of rented accommodation had virtually dried up.
The result was rocketing rents. By late 2001 the clamour to reverse the abolition of the tax relief on interest had become irresistible. Charlie McCreevy duly obliged in his December 2001 Budget.
Although the restoration of interest relief, by increasing the supply of available accommodation, took the pressure off rents it did so at the cost of re-inflating the property price bubble. House prices increased by 13.3pc in 2002 and eventually rose by 72pc from their December 2001 levels by the time the market peaked at the beginning of 2007.
Although Bacon was bitterly disappointed by the Government's rejection of his proposals he was careful not to show it at the time. Close to former Taoiseach Bertie Ahern, his economic consultancy, Peter Bacon & Associates, picked up a steady stream of public contracts even after the Government's change of tack on housing policy.
Consultancy
These other consultancy contracts included a review of forestry policy for the Department of Agriculture, an examination of the value of road safety measures by the Department of Transport and a review of future skills requirements for the HEA.
Despite the recommendations of these three reports being fiercely opposed by many builders and property developers, Bacon joined Sean Mulryan's Ballymore Properties as the director in charge of its European operations in January 2003. He stayed with Ballymore until last year when he left the company as it downsized following the collapse in the Irish and international property markets.
His departure from Ballymore coincided with the eruption of the Irish banking crisis, caused in large part by excessive property lending.
For over six months none of the remedies advanced by the Government, including the September 2008 deposit guarantee or the €7bn bank recapitalisation in January 2009, seemed to work.
With the Irish-owned banks refusing to come clean on the tens of billions of euro of bad property loans on their books it was vital to establish a "bad bank", which by buying these bad loans from the banks, would get them off their balance sheets and get them lending again.
Who better to advise the Government on such a bad bank than the gamekeeper-turned-poacher-turned-gamekeeper again?
Having first advised the Government on how to rein in the property boom more than a decade ago he was now advising it on how to clean up the mess caused by its not sticking to his advice all of those years ago.
And what a mess it is. At this week's press conference announcing details of the National Asset Management Agency (NAMA) it was revealed that the new agency could end up purchasing as much as €90bn of bad loans from the banks.
While not all of this money will have to be written off -- the Government will be hoping that at least some of the loans will be recouped when the properties pledged as collateral against these loans are sold off when the market recovers -- it is clear that the banks' losses will run comfortably into the tens of billions of euro. Even a 50pc write-off of these loans would force the Irish-owned banks to take a €45bn bad debt charge.
Bad debts on such a scale would wipe out the capital of the Irish-owned banks. After the announcement of the Government's plans for NAMA and the revelation of the extent of the problem loans on the banks' balance sheets, ratings agency Moody's cut the credit rating of the 12 banks operating in Ireland.
With the bad loans being purchased by NAMA -- potentially doubling the size of the national debt over the next few years -- another ratings agency, Fitch, stripped Ireland of its Triple A rating this week. This follows the example of Standard & Poor's, which downgraded Ireland's sovereign credit rating last week.
The establishment of NAMA will force the banks to finally come clean on the full extent of their bad debts. This will almost certainly force the Government to inject further fresh capital into the banks on top of the €7bn which has already been pumped into AIB and Bank of Ireland.
This will probably mean that all of the other five Irish-owned banks will follow Anglo Irish into state ownership.
In his budget speech, Finance Minister Brian Lenihan was adamant that the State would insist on receiving voting shares in return for any fresh bank bailout.
However, at the press conference on Wednesday at which details of NAMA were announced, both Lenihan and Bacon stressed that outright nationalisation was not their preferred outcome but that majority state ownership of the Irish-owned banks was a possibility.
If this happens then, given his closeness to the Government, it is a fair bet that it will be Bacon who will once again be advising Lenihan on what to do with the latest batch of semi-states.
This would represent a remarkable turn of events for Bacon, whose spell as managing director of the AIB-owned Goodbody Stockbrokers in the 1990s was dogged by in-fighting between its corporate parent and some of the old guard.
This rancour meant that his reign at the helm of Goodbody was not an entirely happy experience.
That's all water under the bridge now. In a comeback worthy of Lazarus himself, "the rasher" has come storming back and is now arguably the most influential person in the entire Irish financial services sector.
