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 participating banks without any regard to the relative exposure of each to toxic debts that the borrowers could not possibly repay in the light of the property collapse. Never before in the history of the Irish economy had so much been asked of so many to benefit and protect the wealth of so few.
What should we demand even at this late critical stage?
- The Government (that is, taxpayers) must receive an equity stake in every financial institution covered by the State guarantee proportional to the amount of bad debt it shoves on to the public. When and if shares rise, taxpayers are rewarded for accepting the risk. Taking an equity stake could be facilitated by the National Treasury Management Agency through the National Pension Reserve Fund. The Government has to use the crisis as a leverage to impose order on banks and markets with sweeping new laws that match the sweeping new liabilities of the exchequer. After all, it was the absence of regulation and lack of oversight got us into this mess.
- Banks must agree to comply with new regulations related to disclosure of bad debts, capital requirements, conflicts of interest.
- The Minister has to insist that those responsible for reckless policies are removed from all positions without golden handshake payouts.
- The Minister must fundamentally reform the property based tax breaks that have fuelled the construction bubble.
- We have a projected budget deficit for 2009 of truly shocking proportions. This, in part, reflects our recent economic slowdown but it is also structural — a result of this Government’s failure to curtail wasteful spending and vanity political projects such as the shambolic decentralisation programme. Our tax base was for too long skewed in favour of volatile revenue from the property related sector. The Government left the public finances critically exposed to the inevitable bursting of the property bubble.
- The public is entitled to blame this calamity on greedy banking executives and the negligent regulators who enabled them to build a financial house of cards. Our finance houses have been reckless in the extreme but so has a complacent Government over the past 5 years. Ministers endorsed cheap credit to fuel a consumer boom and the feel-good political atmosphere that offered continuing election victories. They resisted tough tax and spending control decisions right to the moment this summer when reality bit hard. These costly excesses now have to be paid for. I fear that the cost will weigh very hard on future generations
Joan Burton is TD for Dublin West, Finance Spokesperson and Deputy Leader of the Labour Party