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Ireland's Reckoning


On a Sunday morning in October, Simon Kelly sat in the breakfast room of Dublin's Morrison Hotel, looking eager to chat. Simon, 38, and his father, Paddy Kelly, 66, were once among Ireland's most audacious real estate developers. During the boom years, they borrowed around €700 million from the now-infamous Anglo Irish Bank to buy golf resorts and build hotels. Today, the Kellys are €800 million in debt, Anglo Irish has been nationalized, and the Kellys' former assets litter the streets of Dublin. Discussing the Morrison, Simon says casually, "Oh, I own part of the hotel. Well, not anymore. Now, NAMA owns it."

The National Asset Management Agency, or Ireland's "bad bank," was created by the government in 2009 to help stanch a crisis within the Irish banking system that has pushed the country to the edge of insolvency. Ireland's finance minister appointed NAMA's board—a former bank manager, two accountants, and former government officials—which now controls hundreds of the developers' hotels, offices, and resorts. It remains to be seen whether NAMA will take over the rest of the developers' personal assets. According to spokesman Ray Gordon, "Where NAMA is unable to work with debtors [either by virtue of their refusal to cooperate or the hopelessness of their financial position], then NAMA will pursue all avenues to recover what they can for the taxpayer."

NAMA, excluded from Freedom of Information laws, is famous for its opacity. Its actions, meanwhile, have not stopped the momentum of the crisis. The Irish spent this past week bracing for the arrival of European Union and IMF officials to negotiate a possible emergency bailout of the Irish economy. Ireland has not yet asked for assistance, but in an interconnected euro zone, its neighbors may not allow it the luxury of resisting. "Ireland is our closest neighbor, and it's in Britain's national interest that the Irish economy is successful and we have a stable banking system," says George Osborne, the U.K. Chancellor of the Exchequer. "So Britain stands ready to support Ireland in the steps that it needs to take to bring about that stability."

Irish Finance Minister Brian Lenihan has pledged to work with the EU and IMF while asserting his country's stability. "Our budgetary policy has full confidence among European partners," Lenihan told reporters on Nov. 17. "But in relation to banking, steps taken to date require further support. What may be required may not be in fact an actual transfer of money now but a demonstration of how much money can be made available if further difficulties materialize."

The Irish government underestimated the severity of the crisis for the past two years. As of September, it had injected €45 billion into its banks. NAMA says it will absorb an estimated €73 billion in loans from the banks at a discount of about half of their value. It sounds like relatively small stakes compared with the U.S.'s $700 billion bailout, except that Ireland's population hovers at 4.4 million, according to the World Bank; the bailout so far equals 30 percent of the country's €158 billion gross domestic product. EU officials say Ireland's emergency aid package could be worth $136 billion (€100 billion), roughly the same amount given to Greece last May.

While the U.S. economy was driven off a cliff by the reckless securitizing of subprime mortgages and Greece collapsed under the burden of misrepresented government spending, the Irish traveled a simpler road to ruin: by taking out enormous, unregulated loans. Ireland's economy has contracted for three consecutive years, and the Irish Central Bank governor has declared his country's fiscal deterioration "worse than almost any other country." In mid-November the yield on 10-year Irish bonds almost reached 9 percent, compared with 11 percent for Greece.

There were hardly any critics of the Celtic Tiger from 1995 to 2007, when GDP growth averaged 5 percent to 10 percent and pushed Ireland into the ranks of the world's leading economies. Now seemingly everyone in Ireland recalls a symbolic moment when they realized things had gone too far. For David Byrne, a repossessed-car auctioneer, it was the sight of his fellow countrymen swilling expensive wine. For Simon Ensor, a real estate agent, it was the day the owners of a 1,000-square-foot Dublin carriage house insisted on selling it for €2.5 million, as opposed to the agent's suggested €2 million—and then the house went for €3 million at auction. For many, it was the day the Savoy Hotel in London was bought by Irish property developer Derek Quinlan in a celebrated expression of reverse imperialism.

Today, according to former Central Bank of Ireland economist David McWilliams, the average Irish family owes €132,000 to the banks. Ireland's Economic and Social Research Institute estimates that housing prices have fallen 36 percent since their peak in 2006. Unemployment has increased from 4 percent during the boom years to 14 percent. Many Irish people won't be able to pay off their debts in their lifetime, and almost all the commercial developers are broke. The nation once described by New York Times columnist Thomas L. Friedman as the second-richest country in Europe has become the country with Europe's largest deficit.

More poignantly, a people who fought against the British Empire for their sovereignty may lose control of their financial future. Brian Lucey, an economist at Trinity College Dublin, says the government miscalculated the crisis' size. "The banks destabilized the sovereign, and the sovereign has destabilized the euro zone," Lucey says. "The banks are totally dependent on the European Central Bank for existence." Of a potential bailout, he adds: "We won't have much of a choice."

Wasteland Tour

Inside an old black Land Rover bursting with pens and wrappers and trash, Simon Kelly conducts a wasteland tour of the Dublin boom years. "We built this thing ourselves," Kelly says as he passes glittering glass buildings. "We were trading with ourselves. And everything was being funded by the Germans through the European Central Bank. So nothing's really changed, if you think about it. We're still being funded by the Germans through the European Central Bank."

According to the Irish Property Council, as many as 29 Irishmen involved in real estate—from property barons to construction workers—have committed suicide since the crash began. The Kellys have steeled themselves against the pain caused by the financial collapse in a uniquely Kelly way: by leaning into it. Paddy was the first of the go-go developers to admit in court, in 2009, that "my liabilities exceed my assets." On Oct. 28, Simon published a book about his misadventures in finance called Breakfast with Anglo.

Simon spends much of his time helping NAMA manage his properties, now estimated to be worth €700 million, down from a high of €2.8 billion, and flying to England every four months for a business course on corporate responsibility and sustainability. He hopes someday to create a company that produces something other than glass and steel. "Half of the developers have gone bonkers, half left the country," Kelly says. "Most of the men are 65 years old, so they don't need a new life. I'm 38 years old and have five kids."

"My wife thought we were all nuts," he adds. "She was from a farming family. 'Why do you want all this money?' she would ask."

Two neighborhoods on Kelly's tour best represent the bubble that overwhelmed Ireland. The Docklands, a stretch along both sides of the River Liffey that was once the dodgiest part of town, now has gleaming office buildings, apartment complexes, theaters, and convention centers. It's also where the empty shell of Anglo Irish's new headquarters sits and inoperative cranes loom like morbid giraffes. At night, the lit-up glass offices, the Samuel Beckett Bridge designed by Santiago Calatrava, and the neon rings of Convention Centre Dublin all look like a futuristic project from an architect's computerized modeling system.

Ballsbridge is the home of Shrewsbury Road, the poshest street in Dublin, where 6,000-square-foot homes once sold for €55 million. The neighborhood also yielded one of the crash's few success stories: the sale of the Jurys hotel in 2005, a bonanza for the property's owner, hotelier John Gallagher. The site consisted of about five acres, and developers were said to be considering bidding €60 million to €70 million an acre, the same price that Chelsea Barracks, the most desirable real estate in London, was going for at the time. Few seemed to notice that while the bidders for Chelsea Barracks included a Qatari real estate investment firm and an American private equity fund, the bidders for Irish properties were almost always Irish.

Driving past Jurys—a five-story brick behemoth rising over lovely, leafy streets—Kelly talks about the bidding war with nostalgia. "It was as if the person who bid the highest was a genius," he says. The Kellys offered €273 million, but Jurys, along with an adjacent site, sold to a developer named Sean Dunne for €380 million. Dunne was celebrated for a time as the "Baron of Ballsbridge" in the press. He's now said to be broke and living in Connecticut. Gallagher, meanwhile, sold much of his hotel chain and escaped the crash with a €1.1 billion profit.

Kelly calls the episode "my awakening moment." "I would look at the Americans, look at Apple (AAPL) and Microsoft, and think they're brilliant, because they produce all this stuff," he says. "And we produce … we buy buildings. We buy products in Germany and turn them into buildings."

Land Boom

The Irish were long dispossessed of land by an Anglo Protestant ruling class. Simon Kelly's great-great grandfather went to prison in 1882 for promoting land reform during a period known as the Land War. Simon's grandfather was a builder and refurbished elite Georgian houses. For the Kellys, the ultimate goal in life was to become landlords—"You'll never go hungry if you have a piece of land" was common wisdom for a generation. Paddy and his seven brothers did well building houses in the 1960s and '70s. Then he went bust for the first time during the '70s oil crisis, and like many Irish builders, Paddy moved to England during Ireland's miserable recession in the 1980s, where he enjoyed an affluent life in Mayfair. By this time, Simon, the oldest of four children, had demonstrated a knack with spreadsheets and gotten involved in the business. When the economy collapsed in the late 1980s, Paddy went broke again and came home.

This time, a new opportunity awaited him. In the late '80s and early '90s, American corporations such as Intel (INTC), Microsoft (MSFT), and Dell (DELL) arrived in Ireland to take advantage of the country's educated, English-speaking workforce and 12.5 percent corporate tax rate. (Multinationals account for about a fifth of Ireland's GDP.) The foreign companies required buildings and helped start the boom that got the Kellys back on their feet. Simon calls the early '90s their "honest endeavor phase." More and more "builders"—men who didn't go to school, calculated sums on the backs of envelopes, and adopted the American term "developers" only a decade ago—became rich. Soon they would also become national heroes.

The other beast born in the late 1980s was Sean FitzPatrick's Anglo Irish Bank, which, being a smaller bank amid old standbys like Allied Irish Bank and the Bank of Ireland, needed to distinguish itself. FitzPatrick was ambitious, and Anglo began to aggressively offer loans for property development. "We'd have a lovely breakfast at 7 in the morning at the Shelbourne, and I'd say to my lender, 'I need some money,' " Simon recalls, "and he'd give me 10 million quid. Just like that. I could have gamed the whole system if I wanted. There was no amount of money I wouldn't have been lent."

Simon's memoir details endless deals and speculations—acres bought, developed, or flipped. The Kellys couldn't keep track of them all: a ski resort in Italy, a hotel in Malta, the waterfront in Sarasota, Fla. "In the end, I found it vulgar," he says. "It became like Wall Street."

The actual boom ended in 2001, when productivity growth fell to 5 percent. After that the Fianna Fáil government, which has led Ireland throughout boom and bust, failed to spur growth but kept credit flowing easily. "After 2001, we went into this credit-fueled boom," says Brian Lucey. "Although people conflate the booms, one was based on exports and competitiveness, and the other was a decision to keep that going by pouring credit into the markets and not regulating the financial-services industry."

Soon, everyone joined the party. Newspapers published real estate sections 50 pages thick. Developers began to travel by helicopter, the black birds frequently crossing the Dublin sky. Men went to Antwerp for bachelor parties. Ireland's GDP, which had been $25 billion in the 1980s, soared to $267 billion in 2008. The Irish could suddenly boast to the British that "our GDP is bigger than yours." Even more meaningfully, a country that had seen large numbers of its citizens leave for America, Australia, and England now had close to zero unemployment. Even today, the Irish speak of those years with self-deprecating affection. "Getting a mortgage was really like queuing up for cupcakes," says Byrne, the car auctioneer. "Ordinary people were telling their neighbor they're buying a three-bedroom with a private pool in Spain! Ordinary people!"

The Irish banks that made all those second houses possible were not investment banks or hedge funds but traditional banks, which found themselves suddenly flooded with cheap credit. "There was a lot of money sloshing around," says Lucey. "Plus, there were historically low interest rates in the euro zone."

FitzPatrick was an early adopter, aggressively loosening loan restrictions at Anglo Irish. Other banks implemented the same strategy to keep up. Financier Niall McFadden told the Sunday Business Post that one bank had accepted a personal guarantee for a €6.3 million loan without ever bothering to meet with him.

"They did it because they could, because the regulator was nonexistent and the government was perfectly happy to engage in bubble financing of the public sector," says Lucey. "When the bubbles went away, the whole thing fell apart."

The collapse of Lehman Brothers in 2008 accelerated Ireland's slide, as property prices continued a downward trend that had started in 2007. "As a small, open economy, Ireland was always going to be vulnerable to global swings," says Ray Kinsella, an economist at University College Dublin. "But this is predominantly a self-inflicted crisis."

On Sept. 29, 2008, with the shares of financial institutions plummeting, the government declared it would guarantee the debts of the banks. The financial regulators—who hadn't regulated much of anything for the past decade—didn't realize the extent of those debts, and bankers didn't help illuminate the scale of the crisis. A few days after the guarantee, Fitz­Patrick appeared on a popular radio program and declared that everything was fine: "The cause of our problems was global," he said, "so I can't say sorry with any degree of sincerity and decency, but I do say thank you."

Outcast Auditor

On Oct. 6, something unusual happened to Eugene McErlean: The Central Bank of Ireland's new financial regulator, Matthew Elderfield, apologized to him.

McErlean, 52, had worked for five years as an auditor for Allied Irish Bank. In 2002 he prepared a report for the nation's then financial regulator making a case that his employer had overcharged on hourly rates for the amount of time that bank managers spent with customers. (The range of overcharges tallied some €88 million.) The Central Bank decided against launching an investigation, and a year later McErlean was removed from his job.

"The banks believed their own publicity, that Irish banks were the best in the world. I had worked other places," he says over coffee in the lounge at Buswells Hotel. "And my job as auditor was to give an independent opinion."

In a rare admission, Elderfield apologized for how his office handled McErlean's case. "Some of the matters could have been handled better by the public authorities involved, and as a result of that I am sorry for any unintentional distress caused to Mr. McErlean," he said before Parliament.

Irish banks operated in a culture of deference and uniformity, and, due to the sharp increase in business and the arrival of a Wall Street culture of performance-based pay, bankers went from making €150,000 a year to millions. As Simon Kelly describes it, bankers also stopped paying attention to their loans. Ireland had 10 to 15 major property developers who could drive the market, and everyone wanted to loan money to them. McErlean says the regulator at the Central Bank, who got reports on this activity at least once a quarter, didn't pay close attention. "If normal checks and balances had been in place," he says, "none of this would have happened."

The Irish still don't really know what went on inside their banks. While at least one banker, FitzPatrick, has been arrested (and released) for fraud, Shane Ross, a senator and author of two best-selling financial books, says criminal activity wasn't the cause of the crash. "It was a simple circle of being interdependent on each other," he says, referring to the politicians, developers, regulators, and bankers. "The country would have gone bankrupt without spectaculars like Sean FitzPatrick."

Few whistleblowers or truth-tellers have emerged as heroes in Ireland. David McWilliams and an economist named Morgan Kelly, Ireland's Dr. Doom, were mocked during the bubble years when they predicted a downturn in the country's fortunes. Bertie Ahern, Ireland's Prime Minister from 1997 to 2008, famously dismissed the naysayers at a trade union conference in 2007: "Sitting on the sidelines cribbing and moaning is a lost opportunity. I don't know how people who engage in that don't commit suicide."

Now the very idea of Ireland seems at stake. "This is now about sovereignty," says Diarmaid Ferriter, a historian and author of The Transformation of Ireland. "Can we actually survive? Have we lost control? We're very proud of our independence. … This was a country that fought a Land War and got rid of an English class of landlords, and that was replaced by an Irish class of landowners, speculators, and bankers even more invidious. That's a terrible tragedy."

Home Repossession Court

The grand front entrance of the Four Courts, an 18th century building that houses the High Court of Dublin, was recently reopened to the public. Inside, the mood is grim. On a busy morning in the bankruptcy and home repossessions courts, the judge, Brian McGovern—sad-faced under an obligatory gray, curled wig—sat on a bench in a small wood-paneled courtroom. Six globe lights hung from the ceiling; carafes of water had been placed on the tables and benches. The room soon filled with lawyers in black capes; debtors in jeans hid in the back row.

The bankruptcy session ran long. "I'm sorry," the judge said to the lawyers waiting for the foreclosures portion of the morning. "The bankruptcy list unfortunately has grown in size." There were some 50 cases that day.

Then it was time to deal with home repossessions. In 2007 there were fewer than 10 cases heard in a week; now there are 90. According to the Independent Mortgage Advisers Federation, there are 700,000 active mortgages in Ireland; experts like Morgan Kelly warn that 100,000 of those mortgages are under water, and one in 20 mortgages is at least three months in arrears. In court, most lawyers requested that their clients' cases be deferred for six months, and the judge showed a bias toward granting debtors some breathing room. "There'd be a civil war in Ireland if legislators let financial institutions repossess people's homes," says Byrne, the repossessed-car auctioneer. Because of its history with landownership, when it comes to houses, Ireland maintains a relatively generous forbearance policy, although in 2009, repossession orders were up 27 percent from the year before.

The tradition of leniency made the two couples who stood before Judge McGovern volunteering to relinquish their homes that much more surprising. The judge inquired about their finances, their employment, and their children—and then nearly pleaded with the couple to hold off, to try and get their funds together.

"We're ready to move on," one woman said, her voice breaking. "It's dragging us down."

On Nov. 8, Morgan Kelly published a column in the Irish Times on the mortgage crisis. "If one family defaults on its mortgage, they are pariahs: if 200,000 default they are a powerful political constituency," he wrote. "The gathering mortgage crisis puts Ireland on the cusp of a social conflict on the scale of the Land War."

Developers Look Back

One of Paddy and Simon Kelly's major projects had been transforming Carton House—a stunning castle-like estate that once belonged to lords of Ireland—into a hotel and residential development. Carton House is now €72 million in debt and partially owned by NAMA, but Paddy enjoys playing its golf course.

It's still unclear whether NAMA will initiate bankruptcy proceedings against developers. For that reason—and because Ireland's bankruptcy laws are devastatingly harsh—many developers have skipped town. Paddy and Simon haven't, though Simon admits to being more nervous these days about the prospect of bankruptcy. In the meantime, they expect to receive civil servant salaries to help NAMA manage their businesses.

Paddy, white-haired and pink-faced, sits in the golf clubhouse dressed in a yellow sweater over a pink button-down shirt. Talking about the Celtic Tiger years, his eyes light up like an aging rock star remembering the '60s. He says they "were magic." Asked if at any point he had become depressed by the crash, he screws up his face and says, "Are you joking?"

"When I was younger, I was the best marble player, and then I hurled them all away," he says. "Someone asked me why. They had no value. The fun was in the game."

Paddy quotes sages from Albert Einstein to Elizabeth Gilbert. "The illusion in our lives is attachment," he says, during one of his many philosophical asides. "Yesterday's history, tomorrow's a mystery, but today is a gift, and that's why we call it the present."

Paddy, who last went bust in 1987, knows that tomorrow isn't a total mystery. "Learn to protect yourself, and have safety nets," he says. "Three years ago I came back from the United States, and I said, 'Everything in America has shut down. When America gets a cold, we get the flu; let's tidy up, see if we're O.K.' " He says he knew what was going to happen 18 months before he went under. "We're comfortable," he says.

Then he tells another story: "When we were building houses with my father and there'd be 20 tons of cement delivered, Daddy'd always take a bag and hide it. When we'd go to finish the job, we'd say, 'Daddy, we run out.' And he'd come with the bag. He taught us all: You have to have savings. You have to have hidden strength and hidden assets. And overall, your first duty is as a family."

Should the developers feel responsible for what happened to their country?

"No question," says Paddy. "But I think the blame game essentially doesn't work. If you take the last few years, we haven't borrowed any money. Why didn't we borrow money? Because it was not available. It starts with the Minister of Finance, but he didn't know what was going on. And the regulator didn't know what was going on. And the European bankers didn't know what was going on. They kept pushing money into Ireland."

Paddy Kelly is already talking about new projects. Simon is less enthusiastic. "I'm an example of corporate excess," he says. When Simon's small son climbs into the car at the end of the Celtic Tiger Graveyard tour, Simon looks at him and says he can't help hoping he finds a future far away from the developers' trade: "I hope he goes to Harvard."


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