Court: Ireland's 'bad bank' seized loans illegally

DUBLIN (AP) — The Supreme Court dealt a surprise blow to Ireland's "bad bank," a fund set up to take on and ringfence toxic loans, ruling Thursday it had illegally seized control of a property tycoon's €2.1 billion ($2.9 billion) in debts.

Ireland's highest court ruled 7-0 in favor of Paddy McKillen, the first developer to sue the National Asset Management Agency. The NAMA chairman, Frank Daly, called the judgment "obviously a disappointment."

The government created NAMA in 2009 to prevent the nationalization or collapse of five Dublin banks, all of whom had loaned billions recklessly to an elite of Irish property barons. NAMA over the past year has purchased more than €71 billion ($98 billion) in bad loans from those banks at massive discounts — with a mission to force the debtors to liquidate assets and repay at least some of the bill.

McKillen, who has 15 companies and stakes in properties worldwide including three of London's top hotels, was among the 10 biggest debtors targeted by NAMA.

But the Supreme Court ruled in his favor, saying NAMA's actions against him were initiated before legally permitted. The ruling triggered spirited debate in Dublin financial circles over whether the judgment would encourage other construction kingpins facing financial ruin to also sue NAMA and complicate Ireland's already tortuous efforts to stabilize their cash-strapped banks.

Most analysts said the Supreme Court's verdict represented only a narrow technical victory for McKillen, who still could face renewed NAMA pressure to dump assets at currently depressed prices. McKillen insists his assets are all generating cash and he won't be forced to sell anything.

The court, hearing an appeal against NAMA's initial High Court victory, ruled that the agency had not exercised its powers legally — because it took action against McKillen one week too early.

It found that NAMA officers started action against McKillen in mid-December 2009, but Ireland's parliament did not pass the required law granting them this power until Dec. 21 that year.

The government created NAMA in hopes that the rapid transfer of toxic debts would prevent most of the five banks from being nationalized. That strategy failed. Three are fully state-owned today, while state ownership of the two biggest banks — Allied Irish Banks and Bank of Ireland — has risen to 92.8 percent and 38 percent, respectively.

Critics say the NAMA strategy actually made Ireland's banking crisis worse, because it forced the five banks to face the true scale of their property-based losses in one blow in 2010 rather than seek to string out reporting of the losses over several years.

NAMA paid the banks just €30.2 billion ($41.7 billion) for the €71.2 billion book value of the loans. That staggering 58 percent discount reflected the property assets' current worth, and the five Dublin banks were obliged to report the difference as 2010 losses.

Those losses, in turn, were covered by Irish taxpayers and drove Ireland's 2010 deficit to an unprecedented 32 percent of gross domestic product. Ireland in November negotiated an international rescue loan worth a potential €67.5 billion ($93 billion) to help recapitalize and restructure those five banks.

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Online:

National Asset Management Agency, http://www.nama.ie/