The debacle over the Quinn Group and the extent of huge personal debts owed to the nationalised Anglo Irish Bank, has brought focus on efforts to create a democratic Irish State of justice and rules but what remains as a known unknown, to borrow from the lexicon of the former US Defense Secretary Donald Rumsfeld, is the potential for the business to generate cash to pay down the huge personal debt, from post-tax personal income.
There are few large Irish successful business groups and the economy is overwhelmingly dependent on foreign firms for its prosperity. The case of the Quinn Group is a classic business school case where the entrepreneur who has great success in building companies, maybe as an iconoclast challenging conventional wisdom and convention, is not generally the best person to adminster a large group expected to operate by defined rules. Henry Ford is often cited and after the conversion back to car building in the aftermath of the Second World War, his grandson Henry Ford II hired managers from rival General Motors where Alfred P. Sloan had introduced a multidivisional structure with sophisticated management accounting systems to support superior marketing.
The risk for the self-made man is the syphocancy of subordinates who would be averse to telling inconvenient truths as people inevitably tailor their interactions with a perceived powerful person to moods and familiarity on what to say or not to say. This can also be a problem in a non-entrepreneurial company where an individual is identified with its growth. Who for example at Anglo Irish Bank would have said boo to Seán FitzPatrick? Would Ryanair's Michael O'Leary tolerate another individual like himself in the company? Even where individuals have guaranteed high income meal tickets for life in the senior civil service, going with the flow usually pays dividends.
The Quinn Group encompasses cement and glass making; hotels, golf courses, insurance and the family separately has a portfolio of property interests.
Seán Quinn told Shannonside Northern Sound radio this week, that the Financial Regulator was “technically right” in raising the issue of solvency levels at Quinn Insurance and guarantees for group debts.
Asked whether his actions in running Quinn Insurance and buying shares were based on someone else’s advice, he said:“No, I wouldn’t be blaming anybody only myself. It was my idea to push forward and buy shares.”
He said his family had even asked why he was buying shares in other companies when he had no control over those companies.
“I accept that we are technically wrong, but there is nobody . . . saying we haven’t got a very good model and a proven track record making money, so if we have, why put us into administration?”
In October 2008, under the ancien regime of 'light touch' or more often than not 'no touch' regulation, at the Central Bank, the Financial Regulator fined Quinn Insurance Limiteed (QIL) and Seán Quinn €3.4m for breaches of regulatory requirements.
The breaches related to contraventions by QIL of obligations under the Insurance Acts and Regulations, including failure to notify the Financial Regulator prior to providing loans to related companies.
The Financial Regulator required QIL to pay a monetary penalty of €3,250,000 and Seán Quinn was fined €200,000.
The Department of Finance urged the Financial Regulator and the Central Bank in March 2008 on the priority of finding investors who would take up shares in Anglo Irish Bank, arising from unwinding of holdings by Seán Quinn, because of fears for the stability of the bank.
Quinn had built up an interest in 25% of the shares of Anglo Irish Bank, via instruments termed contracts for difference (CFD). He would have paid a small percentage of the share price to a broker and was gambling that the rise in the share price would give him a huge profit without having to buy the actual shares. However, the share price went the wrong way and he had to take a big loss.
This week, he said his total loss from equity investments was €3bn and Quinn family personal debt to Anglo Irish Bank is €2.8bn..
Minister for Finance Brian Lenihan told the Dáil last year that he had been briefed about Quinn’s ownership of CFDs linked to 25% of the bank’s shares when he took up office in May 2008.
Officials said the unwinding of Quinn’s CFD stake was a “serious threat to the stability of the bank”.
Quinn announced in July 2008 that he was acquiring 15% of Anglo Irish shares arising from the unwinding of the CFDs. The bank gave him a loan to purchase the shares and separately issued loans to 10 of its best customers to buy the remaining 10% from the CFD unwinding.
In most advanced countries, this action by the bank would be viewed as share price manipulation or creating a false market.
Last year, Taoiseach Brian Cowen rejected a suggestion from the Labour Party leader, Eamon Gilmore, that there was anything untoward about the action he took to advise the Revenue Commissioners against imposing a tax on contracts for difference (CFDs) when he was Minister for Finance in 2006. Stamp duty was payable on shares but not on CFDs.
In fairness to Cowen, there was a big lobbying campaign by the Stock Exchange and stockbrokers against the proposed tax and foreign investors including hedge funds were the biggest buyers of Irish shares.
The 2008 accounts for the Quinn holding company, Quinn Group (ROI) Limited, showed a pre-tax profit of €83m in 2008, compared with a loss of €425m the previous year, when it wrote off loans to the family totalling €762m relating to losses on the CFDs.
Before exceptional items, the group made a pre-tax profit of €466m in 2008, and €530m in 2007.
The insurance business performed strongly in 2007 with gross written premium increasing by 40% to just under €1.1bn. The new health insurance business contributed 22% of the growth. The company generated profit before tax of €245m compared to €323m in 2006.
QIL has had investment losses in excess of €220m over the last two years,
The Quinn Group said this week that it has borrowings of €1.2bn with annual cash profits of between €300m and €500m over the past five years.
While it is not clear what the impact of the recession has been on the various business units - - it certainly hasn't been positive -- it is clear that in the post-crash business environment, that the insurance business is the cash cow.
It is reported that the State-owned Anglo is proposing a €550m bailout to payoff bondholders to nullify guarantees given by QIL, while advancing €150m to QIL to improve solvency ratios.
This would bring taxpayer exposure to Quinn to about €3.5bn.
|Matthew Elderfield, Head of Financial Regulation, Irish Central Bank
Last week, the new Head of Regulation at the Central Bank, Matthew Elderfield, applied to the High Court to have joint administrators appointed to Quinn Insurance because of a breach of solvency rules arising from guarantees totalling €1.2bn, dating from 2005 to 2008, which were provided by eight subsidiaries of QIL to cover the debts owing by the wider Quinn Group to bondholders.
On Monday, a High Court hearing is scheduled on the issue.
There are thousands of jobs at stake but the regulator has to make a judgment on the issue of Anglo extending its exposure to its biggest debtor, in advance of a ruling by the European Commission on State aid.
At a time of very low interest rates, the annual servicing costs of the existing personal debt to Anglo is at least €60m.
To pay this post-tax amount, would require a distribution from the group of over €100m annually - - never mind income to pay down the capital.
There needs to be some clarity on how the debt will be paid, including unavoidable asset disposals.
On the new regulatory regime, to use a French expression, it is important that we don't kill the chicken in the egg.
Organised public campaigns can be as invidious as the system which brought ruin to the economy.