Wednesday, 31 March 2010

Won't somebody think about the jobs??!!!!

OK, so Quinn is looking wobbly and creating rising angst among the chattering classes. Most comments I have seen to date are of the "we have to support Quinn because of all the jobs the company provides".

If I was PR advisor to Sean Quinn himself, I couldn't think of a better approach to trying to secure a nice fresh wad of taxpayers' money in order to prop up my children's' inheritance.

While there is indeed a large number of people employed across the Quinn group of companies, the truth about the prospects for those employees is a little more prosaic than the general hysteria would suggest.

If the Quinn group does pass from administration and into receivership it is not the case that 5,000 jobs would be lost to the Irish economy. I think I have written about this before - in fact I have ( "Jobs"). Jobs are not things that get misplaced or dropped between the cushion of the sofa. They are the labour required to produce goods or services in the economy. The extent to which the Quinn group is providing goods and services to the economy means that the jobs have a place, they are required.

The salient point is that we are confronting the possibility that Quinn might go to the wall, not the demand for Quinn products and services vanishing.

In the worst case scenario that Quinn is placed into receivership, various elements of the business will have value and that includes the people turning the cogs. Sean Quinn and family will no longer own the operations, but what does that matter? Your and my taxes shouldn't be a source of billionaire welfare.

Now, parts of the business do look bit dodgy operationally. Those exposed to the construction sector for example. But those parts of the business will survive or fall regardless of ownership. Also, we might expect some sort of synergy if the group is broken up and sold off, but that will be a modest proportion of the total employment and would help deliver increased productivity and hence increased income for the country in time.

So let's, please, not fall into the trap of pouring taxpayers' money into "national champions". Quinn made some massive mistakes. If his empire flounders, the blame lies at his door. From the remains of the group activity will go on.

The NAMA amateur players

I predict that NAMA is going to be the most entertaining theatre seen in the State since Oscar Wilde was in short pants. Already we have high farce, turning effortlessly to abstract fiction in the blink of an eye.

The first round of invitations to the NAMA drama, the opening night one might say, included the debts of one Ballymore Properties. This is a private company, originally the brainchild of Sean Mulryan - one of Ireland's "Masters of the [property developers] Universe". All I can gleen at the moment, given the paucity of information about how someone else is spending your and my hard earned income, is that Ballymore debt has been transferred to NAMA and the average NAMA discount was 47%.

Now, a logical conclusion to reach about a company that has had its debts sold on at a 47% discount is that the company in question is insolvent. It is a question of balance. Sheets that is. If NAMA, on the back of their own bottom up valuations and financial investigations think that 47% of the total obligations will not be recovered (remember this figure is supposed to include a premium for Long Term Economic Value), then the total value that will be recoverable from the assets of the company is extemely likely to be less than the orginal total value of the debt. If that is the case, there should be nothing of value left at any point for distribtution to equity shareholders of the company.

In other words, a shareholder of any company that has had its debts NAMA'd, should not be expecting any money back - because there won't be any after the debt and interest on the debt has been repayed (and then repayed only partially).

So what price would you put on a share of the equity of such a company? Go on, have try:

Doo-doo, doo-doo, doodoodoodoo, boing

Did you guess zero? Well, you're wrong.

I have some sympathy. I can understand how you would make such an elementary mistake. The correct answer is anything from 30 cents per share to 79 cents per share.

That's right. Ballymore themselves, with the help of their mates at Davy Stockbrokers, reckon shareholders have a healthy 79 cents per share in the bank.

Some asset managers in the Irish market who were clever enough to drop a wad of client cash into this vehicle at inception are a bit more conservative though. Some of them think that shareholders can count on 30 cents per share and book that value in their clients' or pooled fund accounts.

So it's all fine, hunky dory, AOK. You see in NAMA world you can get something out of nothing.

And leaves us with a graceful transition to light opera. Cue Gilbert and Sullivan...

"A paradox, a paradox, a most amusing paradox,

haha haha haha haha a pa-ra-dox...."

Tuesday, 30 March 2010

The implosion of Quinn

An interesting devlopment for the Quinn Group.

It is always worth waiting for details before offering an opinion, but fools jump in so I might as well.

This was something that has been waiting to happened for some time. In fact I am amazed that the general insurance business was managing to stay above water. I flagged that rather racy investment strategy pursued by Quinn around 18 months ago on thepropertypin

The company must have lost a bucket load of assets as property and equity markets fell (and we don't even know how much of the "stocks and securities" recorded on the balance sheet of Quinn were Irish companies, or more specifically one particular bank....)

This will be worth watching. Get your popcorn in now as I suspect there could be all manner of skeletons falling out of this closet.

Tuesday, 23 March 2010

Fair thee well sovereignty

March 23 (Bloomberg) -- Germany and France have agreed to back International
Monetary Fund aid for Greece, a German Finance Ministry official said, signaling
a joint position after weeks of dispute over how to resolve the Greek crisis.

Very curious.I wonder what this means. There is nothing as far as I know contained in any EU law that gives France or Germany any say over Greece's decision whether or not to ask the assistance of the IMF.

Very curious indeed.

Thursday, 4 March 2010

National Pensions Framework - heading for double taxation?

There are many things to be said about this "framework". This is not a novel model, following roughly the "Chilean" or more recently "Australian" approach. What caught my eye (as a cynical and inveterate critic of politicians) was this bit:
  • There will be matching State and employer contributions. The State contribution will equal 33% tax relief - the delivery mechanism for this to be decided;
  • The same matching State contribution (and delivery mechanism once decided) will apply to existing occupational and personal pension schemes and will replace the current system of tax relief at the standard and higher rates;
There is a cut in the tax relief for higher earners (and and increase for low earners), but that was known already. What is more interesting is the monetisation of the tax credit.

They appear to be moving from a system where you current pay less tax on your income (i.e. you employer diverts you gross income into your pension, rather than send some in tax to the Revenue), to one where you will make you contributions after paying tax on your income and then a direct payment will come from general government revenue as a supplement.

This has no immediate ramifications for what you save. It should be revenue neutral. However, it would appear to me to be a system that is more conducive to change. It will be a much easier task, for example to, reduce the amount of the "credit" or put a cap on it at some monetary ceiling., or even scrap it altogether as an "expenditure cut" rather than as a tax increase.

I reckon this is the sign that tax credits for pensions saving is on the way out. And this is a bad thing.

Why is it a bad thing? Well, from an equity point of view, it means that taxpayers in the future would be subject to double tax. You would be taxed on your income when it is earned. You would then lock it away in an account for 10, 15, 20 years or whatever, and then when you access it in retirement it will be taxed again.

Make no mistake. This is no different from the government subjecting you to income tax on any bank withdrawal you make. It is the same.

How many people would tolerate that? Well, it looks like we're on that slippery slope.

Wednesday, 3 March 2010

Miracle Energy

More than one "alternative energy" subsidy scam, I mean electricity generation project has emerged from the cracks in the floorboards in Ireland in the last year. The most prominent of these has surely been Spirit of Ireland (sounds inspiring doesn't it), but there is at least one other I have seen.

What are they about? I'm glad you asked. You see they make FREE ELECTRICITY, by "harnessing the natural wind resources of Ireland" or somesuch nonsense. In the world of sensiblespeak they use wind turbines to pump water into reservoirs which then generate hydroelectricity. OK, it is a batch of windmills connected to a big battery.

Sounds great. If you don't dig too deeply. Let's do that.

Our starting point is that wind generation of electricity is a complete waste of time. No matter how many windmills you have, you can never have the type of certainty of generation that a modern society requires. Today, we will never accept "sorry you need to be cut off for a while because there is no wind". Nor should we.

Simply put, windmills provide electricity when the wind blows, not when people need it. It is only by random chance that those two conditions occur at the same time. And even a 90% concurrence is 10% too low.

So we need an alternative for when the wind isn't blowing, noting that sometimes there is next to no wind across the entire island of Ireland. In which case we need alternative methods of generation available at all times for immediate supply of electricity. Of course, that begs the question; why have the windmills at all then?


So windmill buffs come up with a weeze. Why not store the electricity generated when the wind blows so it can then be provided only when people need it. A big battery, like a hydroelectric reservoir where we pump the water uphill to be released downhill when electricity is needed.

Sounds lovely, until you try to mount this baby and ride it full tilt down the wrong side of the motorway of the real world.

It turns out that the reliability of wind in Ireland (the windiest place in Europe supposedly) is such that even with massive storage capacity such a combined generation and storage system is still likely to run short of electricity. Don't believe me? I got into a discussion about this hair brained scheme some time ago. I like to check things out for myself so I modelled such a system using data for actual electricity generation yields from the Irish wind network combined with different theoretical stored capacity. This is what I found using data at the time (note, this is from last year, but I didn't cherrypick the time period, I simply took the current month).

The chart below shows how much potential electricity would be stored in such a system with different level of storage capacity; from a pretty hefty 100 Gigawatthours up to a massive 500 Gigawatthours. Just note that 500 Gigawatthours is about enough electricity to keep all of Ireland running for about 10 days. It is alot.

Next I assumed that the reservoirs were full to the brim at the start.

Next I simply calculate how much electricity would remain available to meet demand from households and industry if it was attached to a flock of windfarms with a theoretical 5 Gigawatt output (i.e. if running at optimal generating speed they would generate 5*24=120 Gigawatthours of electricity in one day, at 50% they would generate 60 Gigawatt hours)

We then compare how much such electricity was being generated and how much electricity was being demand across Ireland over the period and can track how much storage would remain over time (it being used to meet demand when the wind wasn't blowing sufficiently strongly).

This was the result:

Even ,with a massive 500 Gigawatthours of storage at the start of June last year, Ireland would have been blacked out by the middle of the month. We would have needed an alternative backup generation system available to meet 100% of the country's needs on top of this very expensive hair brained scheme. So, why bother with the hair brained scheme?

Some people might try and quibble by pointing out that I have simulated how this system would operate meeting the electricity needs of the entire country, when the proposal is only ever to meet a proportion of it.

Well, leave aside the fact that some of these proposals claim we could use this for all our electricity needs, all you need to realise is that this analysis shows that the system could not be relied upon to meet any arbitrary amount of electricity demand on its own. It would need 100% backup.

So again. Why bother with this, when the backup works on its own?