Thursday 14 December 2017

Emmet Oliver: US handling of Drumm issue puts Irish system to shame

Emmet Oliver

The longer ex-Anglo Irish Bank CEO David Drumm resides in the state of Massachusetts, the more obvious become the deficiencies in Ireland's system of corporate law, personal insolvency and investor protection.

So far, not a single state agency in Ireland has placed on the public record the allegations of how David Drumm (and Sean FitzPatrick) ran Anglo Irish Bank in the final years of the boom.

Yet each day that passes, a humble US bankruptcy official, one Kathleen Dwyer, has been able, in surprising detail, to outline how the final years of Anglo unfolded.

The law here prevents people like Paul Appleby outlining his case until formal charges are filed. To even discuss such matters could taint his case, we are told.

Equally, while large sections of FitzPatrick's bankruptcy process took place behind closed doors, the Drumm bankruptcy has been exposed to the public light, with even Drumm himself being cross-examined in public about whether he really should be entitled to the protection of the US bankruptcy regime.

No such cross-examination took place in Ireland in relation to FitzPatrick.

Drumm's financial records in that context have been disclosed not only to his creditors, but also to the general public, a key cornerstone of the insolvency system in the US.

Equally, records relating to Drumm's use of the immigration system in the US are also freely available. Dwyers' trawl of Drumm's various house purchases (with wife Lorraine) has also been publicly disclosed.

Nobody has shouted about subjudice or prejudicing future cases, although Irish legal officers will argue that the US may not ultimately prosecute anyone from Anglo, so consequently they have nothing to worry about in that regard.

It is also worth repeating that despite everything that happened with Anglo, not a single investor lawsuit has been successfully prosecuted under Irish company law to date.

Legal disputes

While the courts are full of mis-selling actions and legal disputes about commercial property loans, not a single investor in Anglo Irish Bank has found a way to pursue actions over the purchase of Anglo shares and the financial information the company disclosed during 2008 about the bank's health.

One suspects that such a dramatic collapse as Anglo's would have triggered a tsunami of suits in a US context.

In fact, the Irish Government here has rubbed even more salt into the wounds of Anglo's now long-forgotten shareholders.

Two years ago, the Department of Finance promised to appoint an assessor to examine whether there was any residual value in Anglo shares.

Most people chuckled at the idea, and said the former shareholders of Anglo probably owed the Government here money after it was bailed out.

But still the Government said it would take such a step, a la Northern Rock, but to this day Anglo shareholders have been left behind by history, with not only no token compensation for their shares, but apparently no recourse to the courts in relation to how the company was managed in its final year.

Meanwhile, the US bankruptcy process rumbles on and the net tightens on Drumm in that jurisdiction. Dwyer has accused Drumm of effectively perjuring himself by not giving full information about his assets last year.

That allegation will be answered by Drumm shortly in his own US filing -- all of them freely available in the public domain, unlike here in Ireland.

Germany -- look to Switzerland to see what euro break-up would be like

A cup of coffee costs the equivalent of $8.30 (€6.10) these days in Zurich. Just about everything else is prohibitively expensive, too. If you buy a Big Mac in a Zurich branch of McDonald's to go with your coffee, you end up paying 128pc more than someone in the US.

These are the day-to-day costs of an overvalued currency. Swiss exports to its European trading partners during the summer dropped by 3.3pc, with further declines likely.

The Swiss franc is the culprit -- it has risen by 30pc against a basket of global currencies since the onset of the financial crisis.

The only help for the Swiss has been that the process has happened gradually, allowing the economy to at least partially adjust. But the pain is real and the attempts at intervention so far have only met with limited success.

As another week passes with German leaders refusing to tell their own public about the benefits of euro membership, Switzerland is fast becoming something of an exchange rate laboratory, where ordinary Germans can study the impacts of an overvalued currency. In a euro break-up scenario where Germany returns to the beloved deutschmark, the currency is likely to appreciate against either a leftover euro or a basket of national currencies by between 40pc and 50pc.

Investors would rush into the recreated deutschmark, driving up its value and creating huge inflationary pressures. House prices and stock prices would also get a lift. Things would get very bubbly on one level.

But Germany's export industries would be destroyed or "wiped out'' as a report from UBS predicted last week. Growing trade links with China would not be enough to offset the crippling loss of competitiveness when trying to do business with key markets such as those in France, Italy, Spain and the UK.

The other problem, of course, is the bank balance sheets of Germany would effectively get stretched beyond their limits. Liabilities in the newly minted deutschmark would surge, but assets in other currencies would plunge in value. The gap between the two would have to be filled with taxpayer cash.

All in all, a euro break-up for Germany is going to do more damage than simply making the coffee more expensive in Berlin.

Effects of Chile move on Irish funding could be limited

It looks like Ireland's funds industry, about €1.9-trillion strong at the end of last year, will be able to shrug off the battering Ireland's credit rating has taken over the past six months.

Unlike Irish banks and the NTMA (which admitted last week raising fresh money is going to be horrifically difficult with a junk rating), the funds industry is confident it can put clear blue water between the Irish Government's particular set of problems and the funds industry here, which is international in nature.

Authorities in Chile of all places have brought this issue to a head. Unlike other regulators, the Chilean regulator does not allow Chilean pensions to be invested in certain jurisdictions where the host country itself is below investment grade.

But the funds industry believes that while the Chileans have unfortunately reclassified the status of Irish funds as a result, capital flows out of Ireland are still highly unlikely.

Irish funds are now seen from the vantage point of Chile as restricted funds, rather than general investment funds. This is unfortunate, but not all hope is lost and the reclassification does crucially leave some wriggle room for those who place money here.

Those who watch Ireland's funds industry believe the reclassification will turn out to be a Chilean solution to an Irish problem and should prevent any large-scale withdrawals.

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