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    Irish Banking – Beware corporate raiders disguised as good Samaritans

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    Brian Lenihan’s “Farmleigh Formula” of courting an eclectic group of venture capitalists, hedge funds and Irish oligarchs to re-capitalise the banks appears to be the Government’s only big idea for reforming and restructuring this crucial sector that affects all of our lives. Brian Lenihan should be wary of vulture financiers posing as good Samaritans. The news that former Taoiseach, Bertie Ahern, may be acting as a go-between to get these investors to dig-out our banks is quite scary. Most Irish people over the age of 30 will recall the Eircom flotation, botched by his colleagues in a previous Fianna Fáil Government. This was supposed to be Fianna Fáil’s version of “people’s capitalism”, a chance for everyone to get rich from selling off the state’s crown jewels. Not only did many small investors lose their shirt, but the bungled privatisation led to a number of private equity funds asset-stripping Eircom. This is the principal reason why the Celtic Tiger failed to produce the broadband infrastructure essential to any modern economy. Normally, the run-in to Christmas is the most profitable period for many Irish businesses, particularly the retail sector. However, this Christmas, businesses small and large are finding the going really tough, as credit from their local bank dries up. To make matters worse, tens of thousands of consumers are flocking north of the border for huge price reductions fuelled by lower VAT and weak sterling. Many businesses are hanging on by their fingernails until the January sales. If credit doesn’t get flowing again, and quickly, to sustainable businesses, tens of thousands of jobs will be put at risk in the New Year. Meanwhile, the Government appears paralysed, unable to face up to the banking crisis and its devastating impact on the real Irish Economy The Government has had the specially commissioned PricewaterhouseCooper (PWC) report on the Banks for some time now. Astonishingly, the Taoiseach told the Dáil that the report confirmed to the Financial Regulator that the technical liquidity and solvency situation of the banks was fine as at 30th September. This is akin to saying that the State rooms on the Titanic were all in order; but that the ship was sinking. The core of the problem, which the PWC report appears to have sidestepped, is that Irish Banks, just like Fianna Fáil politicians, are refusing to face up to the levels of toxic bad debts arising from construction and land deals that are poisoning their balance sheets. It seems at times that not just the bankers, but also Fianna Fáil Ministers, expect to wake up some morning and find that the calamitous collapse in construction was all a bad dream. Fianna Fáil seems to be shying away from any notion of the state taking a significant equity stake in our banks via the National Treasury Management Agency, or by using leverage from the National Pension Reserve Fund, to recapitalise and reform our banks. It is difficult to know if this comes from a deep aversion by the two Brians, Cowen and Lenihan, to any form of state activism in the financial sector. This is especially ironic given that the National Pension Reserve Fund has been investing in banks, particularly in the US, and is understood to have lost well over €100m on shares in AIG, Citigroup, Freddie Mac and Fannie Mae. Depending on how you look at it, the NPRF is our very own Sovereign Wealth Fund or Hedge Fund which has been losing large amount of taxpayers’ money in the recent financial meltdown. While the two Brians dither, the economic news keeps getting worse, not least because of a collapse of national and international confidence in the capacity of our Government to handle the situation. Its approach to the banking crisis is the most glaring symptom of that incompetence. The decisions they took on September 30th, and still boast about, have done absolutely nothing to lift the credit squeeze operated by the banks. It is this squeeze that it causing the most economic damage as perfectly viable businesses are unable to raise the loans they need to operate and to expand. Without access to regular credit these businesses shed jobs and die. That is the nightmare scenario which will make an already desperate unemployment situation much worse probably very soon. This is most evident already in the stagnant construction sector but is already spilling over into the wider economy. At present it seems many senior bank executives are unwilling to face up to this nightmare scenario and continue to present an unrealistic over-optimistic picture of their financial position. In that case the Minister has to take some very drastic action to put the entire banking sector on a more secure capital footing to maintain its capacity to service the economy. The alternative is a degree of economic stagnation that would be calamitous for the country. There is an illusion at the heart of many Ministerial arguments about the merit of the scheme they announced. That is the pretence that their scheme made no demands on the exchequer. That is just wishful thinking. The funding of the national exchequer requires an active economy that yields adequate tax returns. If businesses fail due to a shortage of capital then exchequer funds dry up. This has already happened in part but could get much worse if a series of firms were to go bankrupt. Many other Governments have seen the writing on the wall and have reacted aggressively to secure a programme of bank recapitalisation, even by taking threatened banks into public ownership. The Irish Government has effectively jettisoned the so called “moral hazard” argument. The misguided State guarantee now protects those who took foolish risks and operated reckless lending policies. Remember, Irish banks are currently owed €110 billion by builders and developers. Of every €100 that Irish residents have deposited in banks, €60 has been lent for property speculation. Now our Government has put billions of euros of the people’s money at risk to preserve every one of the

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    This month’s philosopher of the Left: John Rawls

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    John Rawls (1921-2002) is often said to be the greatest political philosopher of the twentieth century. He was a professor at Harvard University in the right-on seventies. His most famous work is A Theory of Justice (1971). He refined it endlessly which made an already over-elaborate theory even trickier. His theory is intricate, full of jargon and somewhat contrived. Still it reflects something that many, perhaps most, reflective liberals, would find fair. In A Theory of Justice, Rawls attempts to balance liberty and equality, the basic components of justice and fairness, in his theory of “justice as fairness”. Utilitarianism advocates the greatest good for the greatest number. It is an appealing practice, possibly the dominant theoretical driver of liberal democracies (The Fine Gael website says that it is Enda Kenny’s long-standing political priority), but it does not have any theoretical justification – unlike Christianity for example which claims to be rooted in the Bible and natural law. Rawls feels the need to find a justification for the theory he is going to offer. He roots it in the idea that if we could work out what people would decide was just if they had no knowledge of the situation they are in, that decision would stand even when they do know the situation they are in. He infers a sort of social contract among people from what he says they would do in this “original position” operating under such a “veil of ignorance”. We would, Rawls argues abstractly, affirm a first principle of equal basic liberties, thus protecting the familiar liberal freedoms of conscience, association, expression, to vote and the like. However, he damagingly says that equal basic liberties must be preceded by meeting very “basic needs” for economic goods – in effect opening his theory to the usual tin-pot dictator excuses for violating rights to free speech etc. Rawls conservatively considers that demanding that everyone have exactly the same effective opportunities in life is a nonstarter since it would undermine the very liberties that are supposedly being equalised. Being American he assumes that free people would not want to be equal, that there are no “lasting benevolent impulses”. The most he would demand is fair equal opportunities not the same opportunities. So, he said, we would agree a two-part second principle requiring fair equality of opportunity – and the famous (and controversial) difference principle. This second principle demands that those with comparable talents and motivation face roughly similar life chances, and that inequalities in society work to the benefit of the least advantaged. Rawls further argued that these principles were to be “lexically ordered”, i.e. he gave priority to basic liberties over the more equalityoriented demands of the second principle. His theory can justify a sort of Tony Blair/Gordon Brown half-baked egalitarianism. The sort that balks at saying it wants an equal (or even “socialist”) society but happily lends its support to fairness. To equality of opportunity. Where he differs from them is that leftish governments now speak the language of community, not of individual rights; and of desert rather than the difference principle. Confusingly, this puts him both to the right and left of them. Rawls justifies inequalities provided they are necessary to increase the amount of stuff we all have. And provided they are not to the detriment of the very worst off. But the likes of Blair and Brown have a lax view of what is “necessary”. And so Rawls’ thinking can be used to justify shoulder- shrugging at inequalities in society. For example, if (as may well be the case) allowing corporate executives to earn annual incomes of ten of millions of dollars helps to generate the economic dynamism that raises living standards, including those of the poor, such inequalities are allowable. If it does not, however, they are not. Interestingly this seems to cut across orthodox contemporary leftish views that all things being equal the rich should be allowed to get richer, and not be taxed for the sake of it. So again Rawls is both to the right and left on the issue of inequalities in society. Of course his “liberal” orientation and even a half-baked egalitarianism has ruled Rawls out of the American debate. And he isn’t exactly a staple of the Irish discourse either

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    Ambivalent Berlusconi: Ambivalent Italy

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    With the collapse of hands-off capitalism in the Western World, it’s nice to live in a country where the leader has his hands on everything. That, at least, seems to be the mood in Italy, where Berlusconi’s approval rating has soared to seventy per cent as the markets have plunged. The key to understanding the phenomenon that is Silvio Berlusconi, three-time Prime Minister of Italy, is to appreciate that he is driven by a sense of self-interest offset by a powerfully paternalistic impulse. He sees himself as a magnanimous baron, or, to use his own phrase, “the Anointed One”. If anyone – magistrates, students, journalists, other political parties, unions, local governments – challenges his good intentions, he feels as might a father towards an ingrate child. Against the sound of crashing world markets, Berlusconi has skillfully synthesised his paternalistic and selfish impulses to achieve a harmonic style all his own. The falling markets may well constitute exceptional circumstances for the rest of the world, but the way Berlusconi has handled them here epitomises his style of leadership. The old saw that in Italy things are always in crisis but never serious seems to hold true even when the crisis is global. How has Berlusconi arrived at an approval rating of seventy percent? Rather than return to the well-worn theme of his domination of the media, let us consider another sector in which he has considerable interests: banking. Berlusconi is the majority shareholder of Mediolanum SpA, a banking and financial services company (the current England manager, Fabio Capello, used to work in its insurance division). Capello, used to work in its insurance division). On 22 October, it was reported that Berlusconi and Ennio Doris – the bank’s two main shareholders – had decided personally to reimburse Mediolanum SpA’s customers in full for losses incurred by the collapse of Lehman Brothers – to the tune of €120 million. That’s called putting your money where your mouth is. But whatever Berlusconi does, he usually manages to manoeuvre himself into a position where he cannot lose. If he uses his own funds, he seems generous. If he declares a state of emergency and uses public funds, he saves himself some money but, far more important, he extends his political power deeper into the world of finance. The two largest retail banks in Italy are Unicredit and Intesa Sanpaolo. Both of them have seen their stocks take a real hammering during the banking crisis. Neither appears to have serious liquidity or solvency problems, but they are vulnerable. Even so, neither is asking for public funds. Unicredit announced a capital increase on October 5, effectively passing on the risk to its own shareholders rather than running to the taxpayer. Although Intesa Sanpaolo continues to look wobbly, it is valiantly resisting state intervention. Alessandro Profumo, the CEO of Unicredit, and Corrado Passera, of Intesa-San Paolo, are aligned with the centre-left – which goes some way to explaining their heroism. The last thing they want is a government bail-out and the arrival of Berlusconi appointees on their board. They know that no real difference exists between the institution of government and the person of Berlusconi. Italians easily accept the idea that a bank is also a centre of political power. It may well be true of banks everywhere, but in Italy a bank’s political function is overt. Mediobanca is a case in point. It was founded in 1946 as a central pillar of the “Italian miracle” of post-War reconstruction. It enforced its own industrial and financial policy, which remained fixed as various governments formed and fell. In Italian, the word for policy – politica – is the same as the word for politics. Mediobanca’s role has been not just to allocate funds to major industries, but to build networks of cross-holdings among Italian industries. In the old days (until 1993), when the Christian Democrats reigned supreme, Berlusconi was kept out of this salotto buono (posh club) of Mediobanca shareholders. Nowadays, he is at the very heart of it. His Mediolanum bank and insurance group holds a stake of around 3.3% in Mediobanca, while Fininvest, his personal holding company, holds around 2%. With two spokes stuck into this hub of power, he is more influential than Gianni Agnelli ever was. But he is still outgunned by the major shareholder Unicredit (9%); the bank that is resisting the idea of state assistance. The foreign press universally disapproves not just of Berlusconi, but of the Italian people for having elected him. More interesting than the censure itself is the difficulty that many foreign commentators seem to have in explaining why the Italians should have elected Berlusconi to office so many times. Underlying these declarations of disappointment at how Italy has been behaving itself lately is the notion – spearheaded by publications such as The Economist – that Berlusconi’s blatant self-interest is his primary vice. Wilfully blind, Italians have got the government they deserve. All this may very well be true, but what if we consider Berlusconi’s primary vice as also his greatest, perhaps his only, saving grace? To the question of what Berlusconi represents, the answer is simple: Berlusconi. There is no such political creed as Berlusconism. Quite the contrary: he has always presented himself as all things to all people, and was elected thanks mainly to his essential disinterest in ideology. True, he is opportunistically anti-Communist, but that only means he is opposed to any ideology that would take away his companies. He does not have one of his own to put in its place. When his political mentor Bettino Craxi (in theory a Socialist) was hounded from the country, Berlusconi simply assumed direct control of his political as well as business interests. It is this directness that so annoys the Pearson Group and Murdoch press. Berlusconi makes the plutocracy that they defend too explicit. Clowning about on the international stage, while openly catering to his own interests through legislation, Berlusconi has cast off the cloak of invisibility beneath

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    There are systemic risks of errors

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    You may not be sick of the election yet, but give it time. One of the more depressing aspects of elections is how little coverage is given to discussions of the merits of different policy options or the plausibility of the teams on offer, and how much is given to treating the election as a horse race. The 2011 election was somewhat different, but that’s because Ireland was in peculiar straits and people suddenly cared about Ireland’s bond yields and such stuff. Now that people aren’t so concerned the media is also reverting to type. The big feature of election-as-horse race is the opinion poll. They are useful for voters who can use them to consider which potential coalitions are likely. They are useful for parties which can better understand the concerns of voters and failings in their campaigns. They are especially useful for newspapers which can make an opinion poll fill a few pages, even when nothing at all has happened. Though there are concerns as to the accuracy of polls in recent elections across Europe, they remain the best barometer of public opinion we are likely to have. But because papers are in the business of making the ephemeral seem note- worthy there is a temptation to read too much into polls. To avoid falling into this trap, here are some pointers to keep in mind: 1.  Polls draw samples, and the size of the sample matters. Samples only work because of the probability that they are representative of the population (which is what we really care about) though comprising a relatively small number of respondents. A poll with 1,500 respondents will typically be a more accurate representation than one with 900. With a sample of about 1,000 we are pretty certain that the parties’ real support is in a range around what is reported. This is often about +/-3%. Movements within this Margin of Error (MoE) really might be random, not based on any movement in support for the parties in the population. So: look at the sample size. Many constituency polls have small samples, which increases the margin of error to rates that make the poll wholly questionable. 2.  Sometimes we see interesting results and the media gets very excited. One poll in the 2014 Scottish referendum showed the Yes side in the lead, though all other polls showed a narrow but consistent lead for the No side. There was a frenzy. The likelihood was that this was a ‘rogue poll’, which isn’t to say it was a dishonest poll. When we are pretty certain that a party’s support is in a range (say +/-3%), we mean we’re confident that it is in this range 95% of the time. About one in 20 polls will be wrong. Unfortunately we don’t know which ones they are. But if a poll is very interesting, then it’s likely to be wrong. To avoid getting excited about potentially rogue polls, look at the trends. If a number of polls show a party going up in support, and it’s sustained over time, then we can conclude they’re capturing real movement. 3.  Just because many opinion polls agree about a level of support doesn’t mean that they are right. Polls in the UK election had the Tories and Labour neck and neck for much of the campaign. The MoE assumes perfect random sampling. In practice opinion polls rarely use pure random sampling. Different companies identify and approach respondents in different ways, but all have some selection bias. That is certain groups are more likely to respond than others. This would be fine if these groups all had similar opinions. But they don’t. Older, middle-class men are harder to get to respond than younger, politi- cally active people. This is what caused the failure of polls in the UK to detect the Tory lead. Tory voters weren’t ‘shy’ – embarrassed to admit they voted Tory; they were just less likely to say Yes when asked to respond to a survey. Unfortunately there’s not a lot the lay person can do about this, except retain scepticism. Even when we get accurate poll numbers Ireland offers other challenges. The nature of the electoral system means that converting percentage support into seats is difficult. It is even harder now because the fragmentation of the party system means looking at past trends isn’t all that useful. Also, partly because of the gender quota legislation, many parties have more can- didates than they would like. This splitting of the vote means that while we can be reasonably confident of the first two or three seats in most constituencies, after that the large number of competitive candidates makes predicting the final seats little more than a coin toss. Predictions: Dr Eoin O’Malley is senior lecturer in the School of Law and Government, Dublin City University. If we assume polls in Ireland have the same problem as those in the UK and under sample people who are “content”, and if we assume that larger parties get a seat bonus, and Sinn Féin struggles to attract transfers, then on the basis of recent polling numbers, here are my predicted seat ranges for the parties. Fine Gael  59 ±5 seats Fianna Fáil  34 ±4 seats Sinn Féin   25 ±4 seats Labour   14 ±3 seats We can be even less certain for smaller par- ties, especially for the Greens and Renua, who may return no TDs. Green 1 seat, Renua 2 seats,  Social Democrats 3 seats, AAA/PBP 5 seats, Independents 15 seats

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