BANK OF Ireland had given property investor Paddy McKillen a credit rating of nine on a scale of one to 13, 13 being the worst rating, Attorney General Paul Gallagher has told the High Court.
He was giving evidence at the hearing of Mr McKillen’s action aimed at preventing the transfer of his BoI loans to the National Asset Management Agency (Nama).
Mr Gallagher said that experts for Mr McKillen, including Nobel Prize-winning economist Joseph Stiglitz, had argued he was a “good” borrower with all his loans “performing”, when an analysis by Nama of the state of his borrowings showed several loans had expired while others were in breach of loan covenants.
It was also “amazing” Mr McKillen’s experts failed to recognise the reality of the Irish financial crisis, including that several of the banks which had lent Mr McKillen money would be insolvent without State aid.
Dr Stiglitz had argued Mr McKillen should be allowed maintain “normal” banking relationships but this was to completely ignore the reality, including that Anglo Irish Bank – with whom Mr McKillen had loans of €900 million – was being maintained in an “assets-recovery” capacity.
Dr Stiglitz and other experts for Mr McKillen also failed to recognise Mr McKillen’s €2.1 billion loan exposure to the five participating institutions in Nama represented a “systemic risk” to the Irish financial system requiring their acquisition by Nama, Mr Gallagher said. These experts had adopted a very narrow definition of “systemic risk” which neither addressed the reality nor the definition of systemic risk in the Nama Act 2009.
The Nama Act required a “clean break” from loans such as those of Mr McKillen’s and the acquisition of those loans was entirely consistent with the purpose of the Act.
This was not about individual borrowers but the macro removal of troublesome assets from the banks’ balance sheets. There was no legal requirement for Nama to address Mr McKillen’s individual situation before making its decision.
Mr Gallagher rejected as “absolutely wrong” arguments by Dr Stiglitz that Nama will underpay for bank loans. Dr Stiglitz appeared to be working on a mistaken impression as to the powers of Nama, he said.
Mr Gallagher was concluding his submissions opposing Mr McKillen’s judicial review challenge to the transfer of his Bank of Ireland loans to Nama. Mr McKillen says he has borrowings of some €211 million with the bank, while Nama claims the amount is some €297 million.
The outcome of the case has implications for Mr McKillen’s entire €2.1 billion loans with the five participating institutions in Nama: BoI, Anglo, Allied Irish Banks, Irish Nationwide and EBS.
On the fifth day of the action yesterday, Mr Gallagher read from the affidavits of experts for both sides and argued various factors, including failure of Mr McKillen’s experts to recognise the changed banking situation, meant much of their arguments should be discounted by the court.
In an affidavit for Nama, Prof Dermot McAleese of Trinity College Dublin said the high level of exposure to the Nama banks of Mr McKillen and his companies was “of systemic concern”. Given the “disastrous” lending record of Irish banks in recent years and their failure to take a holistic view of the borrowing situation of property developers, it was not surprising Nama considered it appropriate to include such loans as eligible assets, regardless whether they were performing, he said.
Prof McAleese said Mr McKillen’s arguments appeared to take no account of the fact that the status quo prior to 2007 – where “comfortable relationships” existed with the banks, loans were regularly renewed and debt refinanced rather than repaid – was not sustainable. Property had become a “tainted asset” and borrowing on the basis of property had become subject to more stringent tests, he said.
Irish banks were shown to have been “complacent in the extreme at best and at worst were totally reckless” in the amount of lending they undertook, he said. Without State intervention and Nama, he was certain Anglo and Nationwide “and perhaps most other actors in the Irish financial system, would have become insolvent”.
Mr McKillen could not have been insulated from these trends, he added. He and his companies were not the only ones to have suffered “collateral damage” from the banking crisis and the Irish public “has already borne a heavy share of the costs”.
Brian Murray SC, also for the State, began submissions on various legal issues in the case. Counsel argued the constitutional guarantee of property rights does not extend to protection of “hopes, expectations and practices” between a bank and customer.
The State’s submissions are expected to conclude either today or tomorrow before the three-judge court consisting of the president of the High Court, Mr Justice Nicholas Kearns, Mr Justice Peter Kelly and Mr Justice Frank Clarke. Shane Murphy SC, for Mr McKillen, will then reply.
