The Government liars and the Financial Crisis
7 January 2009
When the Government announced its bank bail out guarantee it claimed that “the provisions we are asking this House to approve are in no way a ‘bail-out’ for the Irish financial system.” (Brian Lenihan)
It was all about putting the banks “in a position whereby they can gain access to funds to continue in a stable financial system so the economic and financial life of this country can continue.” (Brian Cowen)
There was no risk to the taxpayer – “I do not see a hazard or an exposure to the decision that I have arrived at . . . “ (Lenihan again) “There is understandable concern that the Exchequer is potentially significantly exposed by this measure. I want to reassure the Irish people that this is not the case.” (Lenihan)
There was no need for recapitalisation of the banks, said the government, and the problem was purely one of liquidity, i.e. the banks had stopped lending to each other for no good reason, which meant they couldn’t lend to anyone else, and the government guarantee would sort all this out.
“Should there in the future be any financial institution that has to wind down its operations, and I’m not contemplating that in any way, but if that were to arise, any deficit will be funded not by the Irish taxpayer but by a further levy on the banking sector over time.” (Cowen)
Lies, lies and more lies. Or rather a lie, a failure, a lie, another lie, and yet another lie.
So let’s take them one by one.
First, we obviously have a bail-out of the banks. The bankers ran to the Government on 29th September asking to be saved as they were about to collapse, and they were saved, with promises of an amount of money that the State could never afford. If this is not a bail out one wonders just exactly what would constitute such an event and what it could possibly look like.
If the guarantee was meant to bring financial and economic stability it has obviously failed completely. Far from economic and financial life continuing, public services are being slashed, tens of thousands of workers are being put on the dole, businesses are going bankrupt and the banks themselves have continued their freefall.
There was no risk to the taxpayer? So if the Government knew that there was no risk and knew exactly what position the banks were in why did they call in PriceWaterhouseCoopers to examine the banks’ loan books to find out exactly what their position really was? Why didn’t they know already? Wasn’t this the Regulators’ job? If there is no risk why has the share price of each bank continued to plummet? Are we really to believe that these banks are not riddled with bad loans to property developers? Are we really to believe the severe recession that has already started will not also impinge on the quality of the loans made by these banks to other businesses? Of course the PWC report is supposed to have said that the banks capital ratios were adequate, but then we haven’t seen the report, have we? Commercially sensitive is the excuse, although if the report really backed the Government’s case there would be every reason to reveal even a couple of figures to convince everyone that it was telling the truth.
Why now has it finally been necessary to recapitalise the banks?
Which brings us to the fact that the Government has been forced to promise recapitalisation - €2 billion each to Bank of Ireland (BOI) and Allied Irish Bank (AIB), which said it would ‘rather die’ than be involved, with €1.5 billion for Anglo-Irish. The Government has also promised to underwrite a further €1 billion each in new share issues by BOI and AIB, which means that should no private investor want to put their money into these banks the government will. It will do so with the pension fund owned by the State, which means the lying, profligate, incompetent, arrogant, speculating and crashing banks will be given the funds meant to provide for the pensions of Ireland’s workers. If the world’s capitalists won’t invest in these institutions, in fact they are selling them as quickly as possible, what possible sense does it make for Irish workers’ pension funds to be gambled on these institutions? And by a Government that has lied and lied, telling us that there was never any problem and then telling us they had it sorted, just before it got a lot worse.
Finally, the lie that should an institution collapse it will not be the taxpayer who pays but the banks. There are at least three reasons to disbelieve this.
First the banks were about to collapse at the end of September and the State brought in the taxpayer to bail them out. The subsequent cost of this to the banks turned out to be trivial in comparison to the benefit.
Secondly the Government promised that the cost of any single bank needing to avail of its guarantee would be borne by the other banks. It then reneged on this while continuing to brazenly tell us that it had not.
Lastly we have just witnessed a bank fail. That bank is Anglo-Irish, which is almost as dead as the parrot in the Monty Python sketch, with the Government playing the role of the shopkeeper claiming the parrot is not deceased. Anglo-Irish has been described as a zombie, the living dead, and, as in all horror films, it can only maintain this ‘living dead’ state by drinking the blood of the working class taxpayer.
The bank has been a mechanism for funding property speculation. Property has collapsed and the bank, without the State, would be history; except that the taxpayer has now had to pay €1.5 billion to maintain its zombie-like existence. Health services have to face cuts of €900 million, which will undoubtedly cost lives, but a lying and reckless bank has been given €1.5 billion, the effect of which will be to protect the fat salaries and bonuses of bank managers, and stave off the collapse of property developers and all those with outstanding loans to the bank, including of course Mr. Sean Fitzpatrick, who also owes the bank €87 million. When bad debts eventually have to be written off it will be the taxpayer who will foot the bill and one more proof will exist of yet one more Government lie.
The terms of this bail out show just how favourably the bankers and the banks have been treated. In the US the proportion of bankers salaries above $500,000 will be double-taxed, in Germany no banker can be paid over €500,000 and receive State funding and even the British have moved to limit bonuses. In Ireland all we have got is vague rhetoric. The kid-glove treatment of the bankers has emboldened them to turn up at meetings with the Government with their solicitors and fight to prevent any banking mergers that would endanger their big fat cat salaries, or in the case of Anglo-Irish, their big fat cat Director’s loans.
In the bank guarantee scheme even subordinated debt-holders of the banks were protected, though they get higher returns precisely because they are supposed to take on a higher risk. Now they get the returns without the risk. With the State guarantee the bankers attempted to put off the inevitable recapitalisation but even the terms of this are remarkably favourable to them, especially given their dire position. BOI and AIB will be charged 8% on the State investment while Anglo-Irish will be charged 10%. The British charged 12% for their recapitalisation. Arguably the Irish banks are at higher risk.
A Merrill Lynch survey of Britain’s biggest commercial property valuation firms named AIB and Anglo-Irish, as well as Halifax Bank of Scotland and Royal Bank – already effectively nationalised, as the most aggressive lenders into the UK commercial property market, which is also collapsing. It has been estimated that 80% of Anglo-Irish Bank’s €68 billion loan book, just under €55 billion, is secured against Irish and British property. Bank of Ireland’s loan book stands at €135 billion with 71% or €95 billion secured against property. For Allied Irish Bank the loan book is €150 billion with 60% secured against property. NCB Stockbrokers have said that if these three banks were to experience the level of debt write-off that British bank Barclays did on its property and construction book in the early 1990s AIB will need €4.4 billion, BOI will need €3.4 billion and Anglo-Irish €5.5 billion in order to reach a core capital ratio of 6% by 2011. Most UK and European banks are now targeting nearer 8% and it was to get closer to this level that the Irish Government justified its recapitalisation programme. Commentators have declared that write-offs for the Irish banks could well be between €20 and €30 billion. In other words the Irish recapitalisation is not near enough. At the best there would be three zombie banks which protected bankers’ jobs but did nothing to support the wider economy.
The question has to be asked why the State is doing this. It is costing a fortune and is risking the solvency of the Irish State. It will prove difficult to raise the money to pay for all this plus the money to fund the already ballooning Government debt caused by over-reliance on property based taxation and non-existent taxation of much corporate profit. If it does succeed in raising the money on the bond market it will have to pay for it. Governments all around the world are trying to do the same thing and many of them have stronger economies than the Irish one, which has spent the last eight or so years riding a tide of property fuelled debt. The Government’s debt is set to double in the next few years and interest payments increase to at least 10% of tax revenues. Why has it chosen such an expensive way to protect its financial system?
A cheaper alternative would have been letting a bank go bust and then stepping in to take it over, although this would involve letting lots of property developers go bust through calling in their loans and would risk other banks doing the same. Not only might one bank go bust but they all might, and the State would be left owning the lot of them while many property developers would be bust as well, leaving the State owning lots of Ireland. Ordinary people might then start getting ideas about what should be done with all this property. Not a good advert for Irish capitalism even if it made the criminals pay for the crime instead of getting everyone else to pay for it.
So the closeness of Fianna Fail and the political classes in general to property developers and the bankers is obviously one explanation. The former are the base of the ruling party, and the Irish establishment is small so that personal links must play a role. In the 1980s the venality and sheer irresponsibility of the Irish capitalist class and its politicians was seen when the State was going bust but this class and their politicians still evaded tax. This was all personified in the person of the Taoiseach Charlie Haughey with his lectures to the ordinary people about living beyond their means while the banks wrote off loans to him and that paragon of righteous virtue, Garret Fitzgerald.
Of course the prominence of the banks and property in Irish economic history is much older, reflecting, in its day, the underdevelopment of native Irish capitalism. The special position of these parasites has continued; for example when the International Financial Services Centre was set up in Dublin to attract international financial institutions with favourable tax treatment it wasn’t long before the local bankers were able to move their international departments there to reduce their tax bills too. Now, as we can all see, they have come running to the State and its taxpayers to bail them out.
But let’s not feel sorry for this State which has so indulged them. Just because it has our money does not make it our State. As we have just witnessed, it is the bankers and property developers’ State. It is no more ‘our’ State than the banks are our banks or the property of the developers is our property. It is private property and the State is the private property of the capitalist class. Only in very extreme circumstances will a capitalist State make the capitalist class pay in order to save the system itself. Such is the depth of the crisis it may come to that, but such is the venal and dissolute character of the Irish political system it may be only at the very edge of the precipice that this may happen.
As we have noted, the State investment, even if it rises to €7.5 billion is not going to be enough. The Government has signalled it would welcome private investment and it has not ruled out such investment from private equity firms. One of those being mentioned is the Carlyle Group, which has close ties to the Bush family, and has been dubbed “the evil empire”, while another is the successor to a firm whose partners were known as the “barbarians at the gates.” The typical modus operandi of such firms is to make as quick a killing as possible and then move on. Funding the long term development of a small offshore island is not one of their concerns. Yet is it sheer stupidity that led Lenihan to say that “we cannot characterise foreign investment all the time as predatory or a threat. Of course, if there is private investment in the banks, I will have to ensure that the public interest is served”? Public interest served by private investment? Is this one of the greatest oxymora of our times, just moronic or just another Government lie?
If these investors want to buy one or all of the Irish banks why don’t they just buy the shares on the stock market? After all they’re cheap enough! In fact why didn’t the Government do this? The value of the four public banks has fallen from €52.8 billion in 2007 to less than €4 billion now, less than the cost of recapitalisation. The private investors don’t want to do this because they want sweeteners for their investment. The ‘risk-takers’ want to minimise their risk with public money, which means we take the risk and they look forward to the rewards. The Government doesn’t want to do this because the whole existence of an Irish capitalist economy is predicated on foreign investment which in turn is dependent on having an unrivalled business friendly environment. Being ‘business friendly’ means being nice to capitalists. Nationalisation smacks of socialism to the capitalist classes, especially the Americans, and it is to these that the future of Irish capitalism has tied its horses. If it means bending over backwards to show how much the Irish State will do for private investors then this is what it will do. This is what Brian Cowen meant when he said that he had “provided the reputation of the State to the banks” and this reputation is all about being as friendly as possible to US multinationals.
This therefore explains the third response of the Government to the financial crisis – its economic “plan”, which is cut from the same cloth as its bank bail out. Pander to the rich and depend on foreign investment to save the Irish State and Irish capitalism. We shall deal with this “plan” in our next article. But first, one last bit of Government fiction, which constitutes the second response to the financial crisis: its list of promises from the banks which are supposed to be the quid pro quo for the recapitalisation.
The purported purpose of all the help to the banks has been to boost lending to the rest of the economy in order to halt or at least mitigate the recession. Brian Lenihan has described this as the most immediate and pressing issue for business and the Government although even this isn’t true. Recapitalisation is supposed to allow the banks to solve this problem.
Unfortunately the problem with this idea is twofold. First, it isn’t big enough, and secondly, even if it was big enough to soak up the losses, the banks need to deleverage, a fancy word for reducing debt levels, and everyone knows this. As one banker explained “It doesn’t matter if we were to raise up to €20 billion in capital, we still have to reduce our loans-to-deposits ratio and our reliance on wholesale banking.” It should be recalled, as we mentioned in a previous article, that Irish banks’ loans-to-deposit ratios are extremely high in international terms.. The time it will take to achieve the reduction will therefore be longer and the effect greater. Even Cowen has had to admit that recapitalisation is not a “panacea for the solving of all ills.”
The list of promises from the banks about increased lending are not meant to be taken very seriously. Everywhere around the world the same pantomime is being played out. The banks’ commitments are supposed to build on similar ones given after the guarantee scheme was introduced and the latest vague promises will have similar minimal effect.
They involve an additional 10% capacity for lending to small and medium sized companies, but subject to demand from viable businesses, which means the capacity will remain unexercised. An increase of 30% in capacity is supposed to be created for mortgage lending for first time buyers but again this is subject to demand and who is going to buy a house when prices are tumbling? Banks are supposed to wait six months before action to repossess houses from those falling into arrears, but since the banks will anyway want to try as hard as possible to get existing mortgage holders to pay, and have no interest in holding houses they can’t sell, this is no big move on their behalf. No doubt the Greens were responsible for a €100 million fund to help environmentally friendly investment but the usual (or rather now restrictive) commercial criteria will apply, so nothing much new will come out of this.
The final two bank ‘commitments’ are really rather comical. In cooperation with the Financial Regulator the banks will support and develop financial education for consumers and potential customers. Just what people who have dragged their organisations to the verge of bankruptcy have to teach anyone about proper financial conduct is anyone’s guess. And finally the bankers will continue to improve transparency . . . The liars who hid their bad debt, their loans to themselves, their offshore accounts etc. etc. are to teach us all about transparency. You really couldn’t make this up.
But the Government and the bankers together have, and the last laugh is on all of us if we let them away with it. It is worthwhile recalling this quickly forgotten cunning plan of the Government’s. One more lie, or perhaps just one more exposure of the first lie we began with – that this is not a bank bail out. It now so clearly is. The banks are not going to help get the Irish economy going and these pathetic ‘commitments’ are proof of this. The only ones to gain by the Government’s action are the banks themselves. This is what makes it a bail out. How ironic that it may very well not be enough to save them.
to be continued