Bertie Ahern: The Man Who Blew the Boom: Power & Money (45 page)

People had borrowed from the banks to buy housing or invest in property development and, when doing so, had factored in the cost of stamp duty and other taxes. This meant that a significant amount of the tax take during the bubble years came from people who had borrowed the money from banks that in turn had borrowed it abroad. When the market collapsed and people found themselves with debts that exceeded the value of their assets, the strain of dealing with the situation was added to by the need of the state to increase taxation. The excesses of the bubble years were literally being paid for in its wake.

By late 2010 the state could no longer borrow abroad and had to seek recourse to the
EU
and the
IMF
. The mismanagement of the economy by the Ahern Governments was such that Ireland’s economic sovereignty had to be in part conceded.

Prof. Laffan was on the board of the
NESC
during the period of the second Ahern Government.

We produced a report on housing, and I sat through the discussions on housing week after week, because it takes months for a report to get through the system. Peter Bacon was there at the time. John FitzGerald. The whole issue was about affordability. No-one actually said, ‘Is there something going wrong here?’

The report was published in December 2004. Laffan remained on the
NESC
board right through the heart of the bubble years. There was a lot of conversation about land speculation and what to do about windfall profits, but no-one mentioned the possibility that the size and rate of growth of the property sector might contain a danger for the banks.

The first person who I heard raise really serious concerns was Morgan Kelly, down the corridor here. In fact at the time Morgan’s office was [near Laffan’s in
UCD
]. Our administrator, Mary Buckley, said, ‘Would you keep him away from me? He’s terrifying me.’ He was the first. He looked at the history of housing bubbles and came to the obvious empirical conclusion that they always end the same.

The view within the
NESC
, according to Laffan, was that if the Irish economy imploded it would be because of a global implosion. In other words, domestic policy was fine. A commonly held view among economists and economic commentators, many of whom worked for financial institutions, was that there would be a soft landing. ‘People convinced themselves that this time it is different,’ said Laffan. ‘It must be deep social psychology. It is not rational.’

Morgan Kelly’s first powerful broadside appeared in the
Irish Times
in December 2006.

Offering no evidence except wishful thinking, estate agents and politicians assure us that we have nothing to worry about: the Irish housing market can look forward to a soft landing. If, however, we look at what has happened to other small economies where sudden prosperity and easy credit drove house prices to absurd levels, we should be very worried indeed. If experiences of economies like ours are anything to go by, we may be looking forward to large and prolonged falls in real house prices of the order of 40 to 50 per cent and a collapse of house building activity.

In July 2007 Kelly followed up his article with a paper published by the
ESRI
in which he said that up to 60 per cent could be wiped off the value of Irish housing over an eight-year period. Kelly had studied almost forty property booms and crashes that had occurred in the
OECD
countries since 1970. ‘Typically real house prices give up 70 per cent of what they gained in a boom during the bust that follows,’ he wrote. However, he pointed out that because of the strong growth in new houses built in recent years and the number of housing units lying empty, the housing bust in Ireland had the potential to be worse than the
OECD
average.

The paper was a serious contribution by a professor of economics published by Ireland’s premier research institute—an institute founded by one of Ahern’s predecessors in an effort to improve policy performance. Ahern gave his response to the article, and to other warnings that were by then emerging, in an aside to an address to the
ICTU
on the day the Kelly paper appeared.

Sitting on the sidelines or on the fence, cribbing and moaning, is a lost opportunity. In fact I don’t know how people who engage in that don’t commit suicide. The only thing that motivates me is to be able to actually change something.

Ahern’s comment on suicide elicited laughter and clapping from his audience, though he later apologised and said it was well known that he was very involved with the Suicide Action Group. He said he had only meant to get at people who are ‘always against things and looking around at things.’

It wasn’t as if he changed his tone as the concerns about the housing sector grew more widespread. In September 2007, at the annual Fianna Fáil think-in, Ahern spoke out about people ‘talking down the economy’ and referred to recent comment that the economy was in danger of collapse. ‘I don’t know which wizard wrote it,’ he said. ‘How can you talk about an economy collapsing and it growing by 6 per cent?’

By this time Kelly had moved on to consider the effect of a sharp property downturn on the banking sector. ‘Banking on very shaky foundations’ was published in the
Irish Times
on 9 September 2007. Kelly pointed out that, while mortgage lending had been slowing since the middle of 2006, lending to builders and property developers was continuing to grow rapidly. In the previous year such lending had increased by €20 billion, to €100 billion, with €20 billion being the equivalent of the share capital of the Bank of Ireland. All the Irish banks’ capital, and a substantial chunk of its depositors’ cash, was now riding on these loans. Since 2000 lending to construction and real estate had risen from 8 per cent of Irish bank lending, a European norm, to 28 per cent. Just before the Japanese bubble burst in 1989, bank lending to the sector stood at 25 per cent. Japan had not yet recovered. International experience showed that when markets turned, developers tended to walk away, leaving the banks, and often the exchequer, to pick up the pieces. Since the beginning of the year, he said, sales of new homes had not slowed: they had collapsed. Yet 80,000 new ‘units’ were due to be completed in 2007, and a further 60,000 were on stream for the following year. The Government’s decision to abolish stamp duty for all first-time buyers, intended as a fillip to the housing market, had meant that young people found buying second-hand houses as attractive as buying new ones. According to Kelly, it had put an unintended final nail in the coffin of the new homes market.

He raised the prospect of the state having to bail out the banks, as had happened in Japan and Finland in recent years. His estimate, €15 billion to €20 billion, was far short of what would eventually turn out to be the case. He then said:

You probably think that the fact that Irish banks have given speculators €100 billion to gamble with, safe in the knowledge that taxpayers will cover most losses, is a cause for concern to the Irish Central Bank, but you would be quite wrong.

But Ahern wasn’t listening to university professors or other disinterested observers. Just as he had an apparent dislike for blue-blood Fianna Fáil politicians, he had an aversion to academics and intellectuals. He and his party’s fund-raising operations always had a close connection with the building sector, and during the property bubble years some of these people became enormously wealthy (or certainly appeared to be). They flew around in helicopters, had palatial homes, got married on yachts formerly owned by Greek shipping magnates. Many, if not most, were men who had finished their education after secondary school: self-made men. They crowded around Ahern at his annual dinner in the Kilmainham Castle and in the party’s Galway tent fund-raiser.

The annual shindig at the Galway Races became a symbol during the Ahern years of the connection between the builders and his party. It was an in-your-face phenomenon, with the people who gathered to drink champagne with the country’s political leaders the beneficiaries of the multiple tax schemes that continued to exist right through one of the most sustained property booms in the Western world since the end of the Second World War.

Ahern’s character as revealed in the witness box of the Mahon Tribunal was that of a man who foresaw difficulties long before they bubbled to the surface and who devised strategies for dealing with them long before most others knew of their existence. He was an intelligence man, a man who sought information, studied it, absorbed it and linked it together. Yet he genuinely appears to have been unaware of the grave financial dangers that were created during his second Government. According to Rabbitte, Ahern’s focus on the political aspect of everything is part of the explanation for this. He also believed that Ahern’s habitual wariness and worry was more focused on his own personal situation, and on the financial skeletons in his personal cupboards, than it was on dangers to the well-being of the state.

He had access to anyone in the country, but he didn’t seek out the advice of people he didn’t want to hear from. I was always immensely impressed by Bertie’s grasp of detail, despite what people might think, and it came not just from doing his homework. No Irish politician ever, in the history of Ireland, including Daniel O’Connell, had such frequent interaction with so many people. You could see at ordinary, boring question time, as distinct from leader’s question time, that Bertie had hoarded the detail that had been whispered in his ear when he was at a party event in Clonakilty and the local builder or businessman told him something, or when he was at an
IBEC
dinner and they told him something, or a trade union leader told him something.

Ahern had a tremendous facility to absorb and regurgitate data.

For every economist or
ESRI
paper that warned him of the dangers that existed, there were scores of bankers and property developers and local politicians telling him the opposite, said Pat Rabbitte.

The builders were whispering in his ear, ‘Don’t listen to that bearded academic [economist John FitzGerald], sure he’s fucking Garret’s son, what do you expect? Let me tell you about the project I have, Bertie. I have this project in Chicago; I’m gone to Canary Wharf now. I’m going to do a marvellous job on the quays.’ I mean they had direct access to him . . . The show he ran out of Luke’s is a temple to modern-day lobbying. I mean the people who mattered got in there to tell him what they thought. Bertie was there for a long time, and all the evidence was around the place that those guys were right in the past, so why shouldn’t they continue to be right?

For Rabbitte, the Galway tent, in the main treated lightly by the media and the general public during the boom years, was a terrific representation of how Ireland was governed during Ahern’s tenure. Haughey, he said, would never have got away with anything so vulgar. ‘There is no Calvinist tradition in Ireland,’ according to Rabbitte. ‘If people had a job and things were going well, they were willing to turn a blind eye.’

Miriam Lord used to attend the Galway races each year and report on who was in the tent. At first, she says, there were people such as the millionaire tax exiles Michael Smurfit and J. P. McManus there, but they drifted away, and it became the haunt mostly of builders, developers and auctioneers. She doesn’t think many deals were done there. ‘It was more like a dating agency for developers and politicians, an introduction service, where they can touch base and exchange numbers.’ Later again some people decided it wasn’t good for them to be seen there, and they began to stay away, though most didn’t care. ‘Near the end it got such a bad name, it was always oversubscribed, but it was a lot of
PR
companies bringing clients who wanted to be able to say they had been in the Galway tent, even though there was no-one of any great note there, apart from Bertie and the occasional minister.’

However, the lavish parties thrown by the developer Bernard McNamara for his guest of honour, the Taoiseach, continued to the end.

There would be a big party in Bernard McNamara’s penthouse suite in the Radisson Hotel, I think on the Thursday night. Ahern was paraded around as the guest of honour. There was always a lot of vulgarity. One of the prime movers was always asking if I wanted a lift in the helicopter anywhere. There was a lot of them staying in Ashford Castle and places like that, and they would come up on the chopper.

At the McNamara parties you could have anything you wanted. There would be about sixty guests. Bollinger champagne was freely available. The penthouse had a panoramic view over Galway Bay.

Near the end the atmosphere was very strange. The final year he had that reception there was a strained atmosphere; people knew the good times were maybe coming to a close, and Bertie’s troubles were beginning to emerge, so there was a feeling that things were maybe on an edge.

Chapter
17