Category: finance

Not my advice but another suggested initiative for the government. You can read the irish times article hereThe sustained war on the middle classes continues unabated with huge taxes on buying houses, cars and luxury items like soap. Given the modest level of the student grant in comparison with living costs for students I think that we’re an expensive enough country to live in besides yet another balance-the-books tax that reduces the benefits available to the hardworking middle classes. The impact isn’t discussed in the article so I’m hopeful if cautious that any such initiative would be implemented sensitively.
The Irish economy is at a pivotal moment as it tries to move from a building bubble to a sustainable knowledge economy. Government policy should reflect this with greater investment in every aspect of education, including the financial supplements available to all parents to help educate their kids.

I don’t know what the take-up at the video-stores has been but if you’re looking for a provocative and articulate documentary on corporate america then “Enron – The Smartest Guys in the Room” should find it’s way into the DVD player or even red furry stocking. So why is this movie so noteworthy? It succinctly exposes a chilling cynicism and general misanthropy at the heart of Enron itself and tangibly explains the complicity of many of the world’s largest financial institutions in perpetuating lies about the organisation’s success. Many could claim they were duped but these are people who consider themselves very shrewd. Also it’s fair to say that the CFO’s proposals regarding using a network of companies to reposition debt stank. There should reasonably have been some suspicions. Yet the documentary tells us that a dissenter at Merril Lynch was fired for failing to appreciate what Enron were doing. What were they doing? Falsifying revenues and profits as quickly as they could to push and bolster the share price.
The end result of all this was staggering losses for ordinary workers whose pension funds were obliterated when Enron collapsed & the explicit manipulation of energy prices on the west coast of the United States for fun and profit. There are a few scenes in this movie which take your breath away. Rather than the often-snide commentary style of Michael Moore the filmmakers opt to show you real footage and let you judge for yourself. There’s plenty of footage to choose from with Skilling et al. turning in some pithy lines like:
“What’s the difference between California and the Titanic? (cue sniggers ) At least when the Titanic went down, the lights were on” (cue uproarious laughter)
So that’s pretty much every member of senior and middle management having a laugh about the rolling-blackouts in the state of California. Blackouts that Enron helped precipitate through resource and price manipulation. Director Alex Gibney also incorporates the behavioral studies of famous US psychologist Stanley Milgram by referring to his infamous Milgram Experiment which concludes that the majority of people will do what their told, to the point of killing someone, if the order comes from an authority figure. It’s all too easy to believe. Over 40 years later people are still trying to discredit Milgram’s findings as the suggested truth is too uncomfortable for societies that believe themselves to be both moral and just. Just to summarise the Enron story:

• The company falsified revenues and profits over a prolonged period of time
• The business model was apparently so difficult to explain that the CEO couldn’t explain it and the company was a “black box” which had to be “taken on faith”
• Many financial analysts who SHOULD have known better took it entirely on faith! A young and inexperienced journalist pointed out that the emperor wasn’t wearing any clothes by asking the simple question “how does Enron make it’s money?”
• Executives cashed in millions of dollars worth of share options when they knew they could no longer sustain the lie & while urging ordinary workers to use their pension allowances to buy Enron shares.
• The various checks and balances that should have stopped this happening failed because auditors, bankers etc. were willing to overlook obvious inconsistencies in financial reports in return for massive payments and the promise of more in the future

Makes you wanna hide your money under the mattress! Occam’s razor would suggest that they weren’t the exception and there are other Enron’s out there. So the next time you’re offered a financial product or investment opportunity that seems too good to be true, it probably is.

I was reading Peter Zotto’s interview in the Business section of Irish Times on Friday and pondering his description of Iona Technologies as a “national treasure”. As a former employee of this company and onetime signifigant shareholder (the family piled into IONA at around 6 dollars a share, they reached a peak of over 100 dollars) I can’t help but feel this is entirely correct but unfortunately so. It was there that a I got my first taste of real software development while still at college and I’ve never forgotten the wealth of intellectual talent the company had at its disposal. With a sense of nationalistic fervour many of the best and brightest of Irish technology graduates made the trip to Stephens Green, then Ballsbridge to help Ireland’s most successful indigenous technology company take on the world. For a while at least, it actually worked. The cliched stockquote web service in the corner of my screen told me just how well it was working and I considered life on a never-ending series of tropical beaches. Alas, it was the company’s ill-fated and perhaps premature move into corporate web services that signalled the end of the good times.
Or was it? IONA had always suffered from being the first to market with a product that wasn’t quite ready, mainly due to ever evolving standards rather than to any lack of talent in their quite extraordinary engineering department. In the early days, they hit the market with an application interoperability product coded against a loose standard which left key interoperability questions unanswered. The product was all that mattered to the commercial customers and the company became an overnight success. When the underlying standards solidified and then plasmified repeatedly into something vastly complex the company struggled to adapt to the difficulties of fulfilling a standards specification and appeasing a customer base. Now, with many years more experience under my belt I understand clearly that this is simply how software development works (and often doesn’t). Engineers build bridges based on mathematical calculations. These mathematics don’t change based on commercial imperatives although the construction of the bridge might. Software bridges are constantly shaped by political and often malevolent commercial imperatives designed to create a state of chaos in the industry from which only behemoths like Microsoft can consistently survive. People will cite Google as a contradiction to this theory but they have a lot to prove as they have only a fraction of Microsoft’s longevity and despite their proliferation of new beta technologies, a domination of search algorithms may be more fragile than many market analysts predict. Code that works perfectly well in theory, often doesn’t survive the transfer to commercial product as software logic is discarded in favour of commercial forces. The point of all this is that it’s difficult to create a very successful software company. Now that market valuations have a more realistic basis than an almost entirely mystical “market potential” it’s more difficult than ever for an investor to make a software play work.
IONA will recover. The management team understand the mistakes of the past and they have a substantial cash pile with which to help carve out a successful niche in the future. Technologies change and they’re well placed to take advantage of that. Their support for the open source movement is a clever strategic move and yet another indication of an evolved management. The real problem is that they’re regarded as a national treasure because we’ve have largely failed to produce high profile technology companies despite the massive, if misleading, percentage of our GNP contribution from software and IT services.
I think the fundamental problem is investment. Ireland’s need for capital investment in infrastructure projects has been met in a number of ways. The continued boom and the resulting low interest rates have made debt cheap. The positive attitude of all lending agencies to real estate has encouraged investors to devote the majority of their portfolios to land and buildings. Last but certainly not least the massive tax incentives available for constructing hotels, car parks, student accommodation, inner city apartments etc. has made investment near foolproof. In another article in the Times on Friday I read that there were potentially 30 billionaires in Ireland and the majority were property developers who’d made the bulk of their money over the past 5 years.
So why would anyone invest in software when property has been so steady, well-understood and lucrative for so many? You wouldn’t and that’s the problem. If we really want an indigenous technology industry we don’t just need to support R&D through funds such as Science Foundation Ireland, we need to incentivise through reduced taxation for all technology investments, NOT JUST FOR MULTINATIONALS.
From past experience it’s easier for a foreign university to waste over 35 million of Irish taxpayers money on pipedreams than for an Irish company to get a fraction of that investment. We need to coldly ask ourselves why this is the case? Unfortunately, Brian Cowen seems to have signalled the end of many of the tax breaks that drove the construction industry to such heights.
Here’s a simple proposal that would encourage investment in Irish Technology companies.

1. Enable investors to write off 50% of the value of all investments in privately held Irish technology companies against all other personal taxation over 5 years.
2. Reduce the CGT on investments in all Irish privately-held technology companies to 5%, for all investments made within the next 10 years

I know these are very rough and ready rules and require refinement to be put into practice. Any such refinement should ignore the possibility of selection processes to determine the potential of a technology company. Let market forces do that as if the existing selection bodies knew what they were doing, we wouldn’t have this problem in the first place. Technology will always be an uncertain bet, a “punt” as they say. The punter needs to be unambiguously rewarded or they’ll continue to put every last penny into real estate.

I posted a few weeks ago about asset financing in Ireland. I recently discovered the following caveat on the abundantly useful oasis.gov.ie. Hire purchase agreements are increasingly popular in Ireland but many consumers are unaware of the protections afforded them under the 2nd Amendment to the Hire Purchase Act of 1960. Here’s a direct quote from Oasis.gov on the “one third rule”

The finance house can only repossess the goods under certain circumstances. If the consumer has not yet paid off one-third of the total hire purchase cost, the owner can repossess the goods at any time without taking legal action against the consumer.
However, if the consumer has paid one-third or more off the total hire purchase cost, the owner cannot repossess the goods without taking legal proceedings. Any deposit that is paid at the start of the agreement or the value of any trade-in for example, is taken into account in calculating one third of the cost.
If this “one-third” rule is breached by the owner, the consumer is entitled to end the agreement and can seek a refund of all payments made.

Very useful to know. Once the one-third threshold is exceeded the finance company cannot repossess the rented item without first issuing legal proceeding which means that well-intentioned consumers who miss a payment after this period will not be subject to an ill-considered repossession.