Misdirection

Two women approached me recently at a friend’s funeral. Both are retired and widowed for many years. They wanted to know if their bank shares and dividends could ever recover. They told me that they took their advice mostly from media writers. None of these, they pointed out had warned about the clear danger to bank shares from a property market slump. It seemed that those who’d railed against Irish property tipped putting everything on the ISEQ instead – their business sections were crammed with it. One leading luminary had even showed up at bank AGMs to publicly berate boards for the destruction of his own loot. You can understand how these small shareholders did not see the peril but the misdirection from professionals is much harder to swallow.

Over-concentration dangers

Bursting bubbles are as old as the hills, tulip mania in Enlightened Amsterdam, South Sea bubbles in Victorian London and the stock market fever on Wall Street in the roaring twenties. Time and again the lessons of history are forgotten but this time there’s no excuses about not having diversified given the huge choices available. If there’s one common theme that permeates everything that has gone wrong with this bubble it’s the story of over-concentration. In short, greed and gambling trumped commonsense and prudence at the end of the great game once again: 

• Internationally banks gambled vast fortunes in unregulated financial bets that few people understood, much of it related to property.
• Nationally the Government made a whopping strategic error in concentrating its investment in construction, exposing the economy to tax revenue destruction when the bubble burst.
• Banks, following the stimulus created by misguided Government policy, brown-nosed developers who had, quite literally bet the stack on the pipe dream of ever rising prices.
• Everybody was winning and doubling up their profits on the same asset. There was precious little diversification.
• It was Las Vegas. 

Bank-financed property investments

But ordinary investors made copycat errors. Billions have been lost by just about anyone who wasn’t 100% in cash. Hardest hit are bank-financed property investments as plummeting values lead to wipe outs when lenders foreclose. In surviving investments the destruction of equity continues as prices fall and bank finance approaches judgement day.

But everybody has taken a lick from the bust - I’ve been following my own advice about the need to diversify out of Ireland and across assets for the best part of twenty years but I’ll still freely admit to a car crash in one of my own positions.

Crash victims

Many others are less fortunate having concentrated practically all of their money in Irish property and its interwoven stock market which fell 80% last year. Huge numbers of ordinary Irish investors whose balance sheets were leveraged 50% plus by borrowing face a complete wipe out. It’s very harsh medicine for getting it so badly wrong. This is the untold story of the crisis, the silent victims who haven’t lost their jobs or are likely to default on their debts. Instead they’ve lost a lifetime’s investment and are faced with starting all over again in their late forties and fifties. So just in case you thought otherwise - this crash has spared no one.