(The Capuchin, No. 43)
In 1985, the Insurance Corporation of Ireland (ICI), a subsidiary of Allied Irish Banks (AIB), was rescued from bankruptcy by interest-free loans, repayable over twenty years, from the Central Bank and AIB. In 2002, John Rusniak, an employee of a US bank owned by AIB, lost the company almost $700 million through misjudged investments before anyone noticed something was wrong. Lack of supervision was identified as a factor in the size of the loss.
In 2001, the American energy corporation, Enron, one of the largest in the world, with annual revenues in excess of $100 billion, collapsed with huge debts as a result of what an enquiry called institutionalized, systematic, and creatively planned accounting fraud. Investigations showed that Enron had been helped to hide its true financial situation by the Royal Bank of Scotland, Citibank and Deutsche Bank. These were later obliged to reimburse Enron’s creditors some $20 billion. The accounting firm of Arthur Andersen, the second largest in the world, by giving its seal of approval to Enron’s fraudulent accounts, had shown itself to be either incompetent or complicit. The loss of credibility drove it out of business.
In 2008, the US bank, Bear-Stearns, went bankrupt. This was followed by the collapse of Lehmann Brothers. An investigation showed that Lehmann executives regularly used cosmetic accounting gimmicks at the end of each quarter to make its finances appear less shaky than they really were, and that this created a materially misleading picture of the firm’s financial condition. Then came Bernard Madoff’s pyramid scheme, which he admitted was ‘one big lie.’ It had cost those who trusted him $65 billion. Two of the US’s largest building societies, popularly known as Fanny Mae and Freddie Mac, also went bust. These collapses triggered a near financial meltdown on Wall St. and world-wide. The US Federal government organized a huge bailout with public money to save the situation. It introduced a tough regulatory system; it appointed board members to the banks it had saved; and it is now the owner of many of the largest US banks. Bernard Madoff pleaded guilty and was jailed. A levy is now exacted from the banks by government and paid into a ring-fenced fund, so that, in the event of a future bank collapse, it will be the banks collectively, not the public, which will fund a bailout. This motivates the banks to monitor each other’s behaviour.
In April 2005, the New York Times described Ireland as ‘the Wild West of European finance.’ In the same year, the Financial Regulator published a report described as reading like a promotional brochure for money-lenders. It included a section devoted to arguing why they should be allowed charge as much as188% interest, plus “collection fees” of up to 11%.
In 2008, Ireland’s financial institutions – Bank of Ireland, AIB, Anglo-Irish Bank, National Irish Bank, the Educational Building Society, the Irish Nationwide Building Society and others – came close to collapse. Subsequent investigation attributed the blame to negligence by boards of directors, recklessness by management, the abandonment of established lending criteria, and simple hubris. Our “light touch” regulatory system, advertised as such when the International Financial Services Centre was set up in Dublin in the 1980’s and promoted as one of its assets, appeared to see, hear, and say nothing. Accountants and auditors reported nothing wrong with Anglo-Irish Bank, in the years prior to its running up losses of €12.7 billion in 2010, the largest in Irish banking history.
The Irish State has invested €22 billion in Anglo-Irish to save it (though this may not be the final figure.) That’s over €5000 from every man, woman and child in the Republic. AIB and Bank of Ireland between them have received some €7-8 billion in support. This is taxpayers’ money, paid for through cut-backs in public spending and through borrowing which will take two to three generations to repay. In the “good old days” of the Celtic Tiger, AIB and B of I each made about €1 billion profit every six months. While profits were privatized, losses are socialized. And this happens against the background of the highest number of unemployed people in the country’s history, and 120,000 people expected to emigrate in 2010-11, equivalent to the population of Cork city.
Part of the government’s response was to institute NAMA (National Assets Management Agency.) Its task was to take so-called toxic loans from the banks’ books, leaving them with sound loans which should make a profit, thereby enabling them to start lending money again and turn the credit-starved economy round from recession. (The use of the term “assets” to describe bad loans and “treasury” to describe the national debt in the National Treasury Management Agency has a perversely Orwellian twist.)
Will NAMA work? There are grounds for serious questions. Its auditors are the same company that gave the all-clear to Anglo-Irish’s accounts. Its chief property valuer is the person who valued the Irish Glass Bottle site in Dublin at €450 million, now estimated to be worth only €70 million. The directors appointed to banks by the State, because it now partly or wholly owns them, have been criticized by some economists as passively allowing the banks to carry on as before. Critics say the banks see the present crisis as a storm that will pass, allowing them, in time, to go back to the way things were. (There are people in the church who see the sex abuse crisis in the same way.) These are among those on whose competence and integrity the NAMA bail-out rests. The same critics say that the banks’ senior management have learned nothing from the experience, because it has not hit them personally or corporately. The public has saved their bacon and been handed the tab, allowing them to live in a world of non-responsibility. How many bankers or property developers have so far said, ‘Sorry, it was my fault’?
Why are the Irish public seemingly so permissive and tolerant towards bad banking practices? Is it that we have swallowed the line peddled by the banks: ‘A country has to have a banking system. For better or worse, we are that system. You can’t allow us to go under. If you do, you go under along with us. So pay up, and shut up.’ People, disillusioned by the collapse in credibility of almost all the country’s institutions, seem to have lost the will to fight. They do not appear to see that while a country does indeed need a banking system, it does not need this one. Why? Because the banks have failed, and do not seem to have learned from failure. Did AIB learn from the collapse of ICI in 1985, or from their experience with John Rusniak in 2002? Ireland “needs” the present banking system like the church “needs” another round of abuse and cover up.
There is an alternative: leave the banks to cope with the consequences of their policies and decisions. That would mean large losses for holders of bank shares. But they have already lost: AIB and B of I shares went from a height of about €90 each to below €1, even to 18 cents at one time. That money is gone. Depositors could also lose some of their money. But they are losing anyway, and so will their children and grand-children, because the State is spending their money, currently €30 billion – a provisional figure – on propping up failed banks, and currently borrows €55 million a day to run the country, money that has to be re-paid, and with increasing levels of interest.
What is the alternative? It is for the State to set up a 100% publicly-owned bank, funded by the taxpayer, and serving the taxpayers’ interests. That could be done for a lot less than €30 billion. It could be managed at board- and CEO- level by non-Irish staff; this may be the only way to avoid the cosy cronyism, the incestuous alliance of bankers and property dealers that characterizes the small Irish business community. This approach appears to be working, with the appointment of non-Irish investigators of the banking crash and at the head of the Irish Financial Services Regulatory Authority. In addition, some of the measures adopted by the US administration, such as the levy on banking to build up a safety net, would put some much needed steel into the regulatory process.
The market told us it was self-regulating and created a bogeyman of government interference, red tape, and bureaucracy. With the benefit of hindsight, market self-regulation, or “principles-based” government regulation, are as credible as a commission headed by the devil regulating sin. The trickle-down effect of the market works best when left to itself, we were told. Like water, it would find its own level, and the rising tide would lift all boats. What we got was a flow up rather than a trickle down. Adam Smith, the ideological father of capitalism, believed an ‘invisible guiding hand’ would automatically bring benefit to all if each pursued self-interest. One has only to state this to see how absurd it is: the self-interest of each will add up to the mutual benefit of all. Really? Truly, capitalism is an economic superstition.
Although there is outrage at the injustice, the casual cynicism, the amorality of it all, are we going to learn the lessons of history, or merely repeat its mistakes? At the heart of this debate is a large question. Are all the efforts and sacrifices to save the economy going to result, at best, in getting us back into the old economic model, which may crash again? Is the real lesson that we need a new economic model, one that is environmentally responsible, sustainable, and socially just?