The profile of Irish investment preferences discovered by Barclays Bank in preparing their latest issue of Wealth Insights is depressing.  According to press reports, their research shows that Irish high-net-worth individuals (HNWIs) hold an amazing 55 per cent of their wealth in property, despite the collapse in property values in the past 5 years.  This is a higher proportion than any other nationality.  Irish HNWIs also hold 18 per cent in cash, 16 per cent in financial investments and 7 per cent in assets such as collectables.  And just how much private wealth do you think is invested in enterprise or business, the sector which is arguably the most vital to our economic future?  A pitiful 2 per cent.

A long legacy of under-taxation of property assets and transactions, only partly being addressed now, is an important factor in this mis-allocation of investment funds.  We all continue to pay a price for past policy failings in this area.

Historic factors are often also quoted as an explanation for our obsession with property. There is a pithy phrase in the famous Vanity Fair article by Michael Lewis (“When Irish Eyes Are Crying”) about how we crashed our economy:

Irish people will tell you that, because of their sad history of dispossession, owning a home is not just a way to avoid paying rent but a mark of freedom. In their rush to freedom, the Irish built their own prisons.

That sums it up nicely.

I’m reading “Too Big to Fail“, Andrew Ross Sorkin’s colourful mega-narrative on the collapse and bail-out of the US financial system in 2008. Naturally the excessive pay packets of the main actors is luridly fascinating, and leaves one in no surprise that they lost touch with reality, and also lost the ability to countenance failure, before it was too late.

John Lanchester, in his new book “Whoops!: Why Everyone Owes Everyone and No One Can Pay” postulates that people who work with money, and thereby make lots of money, are “proved right in the most inhumanly pure way”, to the extent that they come to see themselves as paragons of rationality, free of the self-doubts that restrain mere mortals. Incidentally, his book has a wonderfully concise and witty description of the ultimate result of the development of the credit derivatives market: “It’s as if people used the invention of seat belts as an opportunity to take up drunk driving.”

But another revelation from Andrew Ross Sorkin’s book (to me at least) was just as interesting.  It seems that, when it came to the crunch, it was the appalling state of Lehman Brothers’ commercial property loan and investment portfolio that torpedoed the prospects of a merger with (i.e. rescue by) another financial institution and, in the absense of a government bailout, precipitated its bankruptcy. My (mis-)understanding had been that Lehman Brothers, in business for 150 years, had been brought down principally by its exposure to sub-prime mortgage securities.

….there was still huge disagreement over what Lehman’s assets were actually worth, especially its notorious commercial real estate assets.  While Lehman had been valuing that portfolio at $41 billion, consisting of $32.6 billion in loans and $8.4 billion in investments, everone knew it was worth far less.   But how much less?   One set of estimates….cut the estimated value of Lehman’s commercial real estate loans by about one quarter, to less than $24 billion. Others thought the situation was much worse.  A handwritten sheet with more estimations making the rounds had the numbers “17-20” – less than half the estimated value.

This has a familiar ring to it, in an Irish context.  How comforting to know that Anglo-Irish, AIB and Bank of Ireland were in good company.   Further demonstration that ridiculously large pay packages did not mean that banks were run by smart and prudent managers, but by weak, greedy and short-sighted fools.