As the latest banking fraud ripples across the beleaguered public consciousness it is salutary to recall that the concept of banking has always been counter-intuitive. Artificial entities with legal personality that charge and pay out interest, but whose purpose is to protect the assets of its shareholders. Banking has never prioritised the protection of those who use it, the customers and deposit holders who fuel capitalism, whose interests banking is imagined to wholeheartedly serve.
Of course the enthusiasm of a bank for you the customer varies in proportion to the size of your account and whether you are one of the 20% of customers who yield the banks 80% of their profits – indeed apparently the 20% actually lose the bank money. This underpins their contempt for ordinary users, consigned to queues and machines while the 20% find themselves served by the contrived joys of ‘personal banking’.
Lorenzo De Medici pioneered banks in Florence in the thirteenth century. The bank (Italian banca – a bench) was where the activity took place on the market square and if it went wrong and the bank went bankrupt– the bench would be symbolically broken (banca rupta). It was perfected by mercantilist capitalism.
Tellingly banks have not always been pariahs and if you throw your mind back to Jimmy Stewart and ‘It’s a Wonderful life’, Frank Capra’s classic film of depression-era America, the bank saves the community and invests in people’s hopes, dreams and of course homes. The local bank in particular had a sense of civic responsibility and pride absent today.
The point is that the nature of banking shifted with the ascendancy of neo-liberalism. The US ‘Glass Seagall’ Banking Act of 1933 had severed most of the ties between commercial and investment banking. However, it was repealed in 1999 under President Bill Clinton on the dubious basis that this would “enhance the stability of our financial services system” by permitting financial firms to “diversify their product offerings and thus their sources of revenue” so making financial firms “better equipped to compete in global financial markets”. Greater stringency, including higher equity requirements and demands for clearer data, was introduced under Basel 3 following the financial and economic collapses in 2008. In the US President Donald Trump aims to reduce this regulatory burden. Europe seems more inclined to hold its nerve.
Commercial or retail ‘high-street’ banks cater to the general public and provide services such as deposits, loans and the provision of basic investment products. Investment banks are financial institutions that assist individuals, corporations, and governments in raising financial capital by underwriting or acting as the client’s agent in the issuance of securities (or both).
Thus the historic function was to facilitate depositors and to lend money to enable people to build their dreams slowly, wisely, incrementally – popularly represented by the self-congratulatory bankers’ song celebrating frugal fiduciary investment, in ‘Mary Poppins’.
Once the bank is transformed into an investment vehicle and speculators become intrinsic then all changes. The high-street banks aim to glean money from people to use for investment purposes. They will as soon invest your money in pension funds, insurance companies or sub-prime mortgages as re-invest it in your community. The banks, operating in an insufficiently regulated market encouraged customers to buy sub-standard or over-valued stock and mortgages which they could not repay. ‘Triple A’ ratings were conferred in the United States on sub-prime facilities and money was handed out like confetti. This lending madness was promoted and controlled by the investment banks such as the vampire squid Goldman Sachs which fed people sub-standard information, and reinforced by delinquent ratings agencies. All of this is documented thoroughly in such filmic works as ‘The Big Short’.
It’s useful to look at the history of one bank, Ireland’s biggest – AIB – over the post- Glass-Seagall-repeal period. It is representative and appalling.
Around 2002, John Rusnak, a ‘lone wolf’ currency trader at Allfirst, racked up losses of almost US$700 million. It was Ireland’s biggest banking scandal and the fourth-biggest banking scandal in the world, when it came to light.
The €90m settlement that AIB reached with the Revenue Commissioners in respect of Deposit Interest Retention Tax (‘Dirt’) evasion in 2000 was the highest tax settlement in the history of Ireland. The bank’s internal auditor, Tony Spollen had highlighted a Dirt liability of £100m for the period 1986 – 1991 but the group CEO at that time rubbished this estimate, describing it as “infantile”. The 1999 Oireachtas Sub-Committee Inquiry into DIRT concluded that it was “extraordinary” when the CEO told the Inquiry that he was unaware of the scale of the DIRT issue.
In 2006, the Moriarty Tribunal found that AIB had settled a million-pound overdraft with former Taoiseach Charles Haughey on favourable terms for the politician just after he became Taoiseach in 1979. It found that the leniency shown by the bank in this case amounted to a benefit from the bank to Haughey. It noted that the bank showed an extraordinary degree of deference to Mr. Haughey despite his financial excesses.
In 2004 it was revealed that the bank had been overcharging on foreign exchange transactions for up to ten years. AIB set aside €50m to cover the cost of refunds. On 12 February 2009 the Irish government arranged a €7bn rescue plan for AIB and Bank of Ireland. The bank’s capital value had fallen to €486m. The following year the National Pensions Reserve injected €3.7 billion of capital into Allied Irish Banks, becoming the majority shareholder and effectively nationalising the bank. This smokescreen of misrepresentations led to over-borrowing and the present virus of evictions, dispossessions and receiverships. Now it is noticeable that the bailing out of the banks in many countries served to protect the shareholders and to impose the burden on the customers or more scandalously the public who bore no responsibility for this nonsense. Socialism for the rich and capitalism for the poor.
The culprits with a few exceptions got off scot free and of course used Nama, Ireland’s (very) bad bank, a toxic money-laundering entity for reviving failed property speculators and enriching vulture funds, lawyers and accountants.
There was an alternative to bailing out the banks – to nationalise them. In Iceland the banks have been stabilised and toxic bankers are in prison. Iceland took the economically orthodox route, letting risk-takers take the downside. Ireland did not.
Worse, the implicit post-bailout civic contract with the banks was sundered when they reneged on deals with the consumer to either preserve or reinstate tracker-mortgage agreements or adjust interest-rate repayments to something close to a plummeting ECB level. Homeowners wrongly taken off trackers were then forced to pay tens of thousands of euro more than was necessary. The banks dishonestly fleeced the consumer, often lying about promises on variable interest repayments. At least 33,700 customers failed to obtain their rights to a tracker mortgage and the banks’ liabilities will stretch to at least €900m.
The bankers’ misrepresentations were scandalously upheld and fortified by the Financial Ombudsman’s office and indeed by much of our judiciary as of course was Nama.
It need not be stressed that many of those appointed to the bench, knee deep in speculation-fuelled debt, now sit in imperious judgment over those they are dispossessing, oblivious to the principles of natural justice and for that matter the rule of law.
The banks of course work in tandem with a society that has never properly regulated anything. So our property market is hyper-inflated and sub-standard. The lack of social and affordable housing and the lack of control of the property market has ineluctably led to all ownership of property being a factual long-term impossibility for all but the lucky or the demographically blessed.
Of course much of the banking debacle was caused by poor ‘principles’ based’ regulation by the Central Bank.
The former financial regulator, Patrick Neary, told the useless 2015 Oireachtas Banking Inquiry that he regretted that the regulatory system within which he was working “didn’t work”. He admitted that he relied on the banks for analysis of risk management, believing them to be best placed to provide such analysis.
Nearly all Ireland’s banks breached liquidity requirements, leading to the lack of liquidity that the government provided a guarantee against, and which ultimately emerged as the insolvency that effectively bankrupted the country and immiserated the next generation. Village has described how Jonathan Sugarman, a risk-manager whistleblower in the Irish unit of UniCredit, Italy’s biggest bank, told how the Financial Regulator failed to intervene when he blew the whistle on massive repeated breaches, but no action followed. The Central Bank said it would conduct a review of the case and invited parties with information to share it but in the end it just claimed the case was closed. And the witless Banking Inquiries never spoke to risk managers.
More positively, in an extraordinarily significant move a major German community-oriented bank Sparkasse, the biggest bank in Germany, which issues half of all German mortgages at rates well below standard Irish rates, recently signaled that Ireland is ideal for its municipality-owned, non-profit model: an alternative to the major commercial banks, particularly in regional towns.
The European Investment Bank has indicated support for the €200m project conditional on the proposal receiving political backing in Ireland. So far this has been slow to materialise, it is understood, since the State has a stake in the loathed, incumbent, competition.
As we feel the pressure from anonymous failed institutions to bank on-line and to forsake the once-gracious banking halls for windowless rooms behind security doors with snaking queues, we may reflect that the future is community or municipal banking, perhaps provided by nationalised lenders, with a public-interest mandate. Of bankers and banking as we know them, we have had enough.
Meanwhile we can nostalgically recall happier banking times and the… Fidelity Fiduciary Bank.
Fidelity Fiduciary Bank
If you invest your tuppence
Wisely in the bank
Safe and sound
Soon that tuppence safely invested in the bank
And you’ll achieve that sense of conquest
As your affluence expands
In the hands
Of the directors
Who invest as propriety demands
Railways through Africa
Dams across the Nile
Fleets of ocean greyhounds
Majestic self-amortizing canals
Plantations of ripening tea
Tuppence prudently, thriftily, frugally
Invested in the…
To be specific
In the Dawes, Tomes, Mousley, Grubbs
Fidelity Fiduciary Bank
When you deposit tuppence in a bank account
Soon you’ll see
That it blooms into credit of a generous amount
And you’ll achieve that sense of stature
As your influence expands
To the high financial strata
That established credit now commands
You can purchase first and second trust deeds
Think of the foreclosures!
Bonds, chattels, dividends, shares
All manner of private enterprise
Lyrics from “Mary Poppins”. Composed by Robert B. Sherman and Richard M. Sherman.
David Langwallner is a barrister at Great James Street Chambers London