January 20, 2008

If bank HQs leave the country can the money be far behind?

Posted in Banks · 15 comments ·

The Gulf States are looking round to spend their money and Ireland’s banks are looking good value right now.

A few years ago, one of Ireland’s best known bankers indicated to me just how important it was that the Irish banks remained Irish-run in a downturn. His nightmare scenario was an Irish property market slump, coincident with a change of management in Ireland’s major banks. He feared that, at a time of crisis, the head office of one or more of our major banks might be in London on somewhere outside Dublin, run by non-Irish executives for whom Ireland was only a region in their eurozone banking portfolio.

He believed that, in a downturn, Irish executives who might have children here, who understood the importance of the banking sector to the economy and the importance of the economy to the psyche of the nation would move mountains to maintain liquidity in the country.

In a crisis, he envisaged a response that was almost a type of a financial war-cabinet, where bankers would have a direct line to the governor of the central bank and the Minister of Finance.

Clearly, this was a man who, back in 2005, saw the potential for a serious property recession. Now that recession is upon us. Worse still, there is a very serious possibility that foreign investors will take over one of the major Irish banks. This is now becoming a distinct probability.

In the past few weeks we have seen Arab money bail out the major US banks that are now in post-property bubble problems. The Arabs buoyed up by oil-money are buying up banks all over the world.

For example, in the past three weeks, $30 billion from Arab countries’ sovereign funds (which are national funds set up by the Gulf States to invest their money) have been invested in some of the biggest banks on Wall Street including Citigroup and Merrill Lynch, while a Chinese state fund has pumped $5 billion into Morgan Stanley.

Obviously, the Arab funds are now in the banking business, so what would prevent them from picking up an Irish bank as part of their Euro portfolio? Look at the Irish banks, all of them are now trading at half the price they were 12 months ago. They will probably get cheaper, but not much. So why not take them over, particularly if you have the cash?

The Arabs have the cash because the higher the price of oil, the more cash they have and the more they need to spend. This is what globalisation means. It is a huge circular flow of taking advantage of financial opportunities where nations and national interest are not of any importance.

So, in the same way as Irish investors bought apartments abroad, particularly in eastern Europe, snapping up bargains which might have upset locals who could not afford to buy houses in their own countries, suddenly Ireland is now a target for Arab cash, much of it coming from the petrol we buy in the west.

When you fill up at the pump, do you ever think about where the cash goes? Obviously, much of it ends up in the hands of the oil producer after all the others take their cut, particularly the tax man.

Since the attack on the Twin Towers and particularly since the occupation of Afghanistan and Iraq, the price of oil has increased from $23,peaking above $100 a barrel. It is now somewhere around $90. Arab oil producers benefit from a huge windfall as millions of western drivers hand over cash to the Sheiks.

The best way to gauge just how much of your cash has ended up in the Gulf is to look at the foreign reserves of the region. The IMF calculates that the balance of payments of the Gulf went from a $30billion surplus on the eve of September 11 to $212 billion last year. The crucial oil trade balance has rocketed up from $159 billion to $451 billion. This is your cash – but it is now being used to buy your assets.

Because the Gulf States have pretty modest economies (Saudi Arabia is a smaller economy than Denmark), the bulk of the petro-cash, as happened in the 1970s, has gone back out into the world economy, looking for a profitable home.

All this recycled cash has had the effect of keeping world interest rates lower than they would otherwise be. As well as having old Germans to thank for our lower interest rates, Osama bin Laden has had a big role in the liquidity bonanza of the past few years. His attack on the Twin Towers, triggering the invasion of Iraq, has ensured that a Tsunami of oil money from the Gulf is currently washing over us.

Up to recently, this was a boom for Irish banks that have gone out in the past two years and borrowed Arab money to lend here to finance the last phase of the property boom, which has now peaked. Figures from the Central Bank reveal that our dependence on this foreign money is now verging on the addictive.

Over four euro in every ten lent to you and me is now borrowed directly by the Irish banks from foreigners. But now the worm has turned. The banks are in trouble and the Arabs still have a limitless well of cash based on oil money.

Why wouldn’t they buy Irish assets? Three years ago, Arab money tried to buy the port of Los Angeles and the US authorities said no way. The port was a national asset which should not be sold to foreigners, particularly Muslim foreigners. Today, the US is a fire sale, everything has a price and the bidder takes the prize.

Now consider the conversations going on in Arab sovereign funds headquarters inKuwait, Dubai or Jeddah. They have to diversify their portfolios. They need Euro assets to counterbalance their dollar exposure.

What country is the easiest to invest in? Why not Ireland? It’s a cheap version of America in Europe and its banks are dirt cheap.

In the next year, there is a good possibility that one of our banks will be bought by some foreign sovereign fund. The Irish banker’s worst nightmare might come to pass.

That’s globalisation for you. You’ve got to take the rough with the smooth.

  1. AndrewGMooney

    David, you’re positing two entirely different financial and political cultures. In the first, traditional model, the trade of banking is anchored within a core context of national political and cultural values.
    It has integrity and some influence and independence with which it can plead, cajole or warn National Politicians to act in the interests of the Electorate.
    It sees itself as integral to the strategic plan of The Nation State. And it understands local and national business culture and the ‘psyche’ of the nation in a way that alien cultural or political owners would struggle to do.

    It may sometimes be corrupt in its’ dealings with Government, but the links are there and the networking produces results for good or bad.

    The second ‘globalised’ banking system is much more volatile towards The Nation State. As you state:

    “This is what globalisation means. It is a huge circular flow of taking advantage of financial opportunities where nations and national interest are not of any importance.”

    Globalisation under the aegis of footloose capital is amoral, short-term and doesn’t give a toss what damage it leaves behind when it moves on to another host country to wreak its’ parasitism. The corporations, private equity funds, vulture funds, hedge funds, are driven to exploit every weakness they spot. On their terms, it would be ‘immoral’ not to do so.

    Here in Britain , we had a very fine example of this on September 15th 1992, now infamous as ‘Black Wednesday’. Having made a bad judgement call on ERM the British Government was humiliated by Mr George Soros. The legacy? Implacable British opposition to joining the Euro, whereby we lose control over our domestic interest rate policy and are hostage to a Franco-German trading bloc. Never.

    I have always been amazed at the credulity of sophisticated wealthy Irish people I meet who are, almost always, gushing at the benefits of having joined the Euro. Of course, in the shabbier postcodes you still hear the resentment of hidden, continuous inflation and seditious mourning for the Punt.

    At some stage the German and French economies will get their act together in a serious way. Poland will boom, making The Ossis viable and Sarkozy (or someone else) will adapt/reform the French economy. They’re rich even now when they’re lazy: What will happen if/when they get the Protestant Work Ethic?

    And what will happen to Eire when it is facing serious structural recession, deflation of property values, rising interest rates (to control German/French inflation) and escalating unemployment? Oh, and because of it’s qualifying record from the ‘Celtic Tiger miracle years’ is also required to become a Net E.U Contributor to accommodate Turkey’s membership of Eurabia?

    What use will ‘a type of a financial war-cabinet, where bankers would have a direct line to the governor of the central bank and the Minister of Finance’ be in such circumstances?’ Not much.

    What percentage of the enlarged E.U economy does Ireland represent? Will the E.C.B listen to the direct line from Irish bankers via the Irish Central Bank Governor and The Minister of Finance? Will Germany and France risk 1% point of GDP growth to help Ireland. Or Portugal? I doubt it.

    Either Ireland has undergone a miraculous transformation guaranteeing wealth even unto the 10th generation, or it’s been the victim of a cynical, mendacious scam by amoral globalised capital and corrupt local politicians and their cronies.

    We’ll all know within the next 3 years.

    If my kids were growing up in Eire I’d want to ask some serious questions of the Political Class about exactly where and why the Structural Funds were spent, and how much R&D for ‘next wave’ industries were funded alongside the ‘miracle’ construction industry.

    Paddy, is that glass half-empty or half-full? Who cares. Optimism and Pessimism are unbalanced emotional indulgences which there’s no time for now.
    How about sober Realism?

    Kind regards
    AndrewGMooney b.11.09.1960 Birmingham Eng-Eire-Land

  2. VincentH

    Hmmm, you present an very real scenario. But banks owned and run by outsiders would be a bad thing ?, given that as it stands at the moment the irish banks are at best dealers and as such applying another layer to costs.

  3. barry

    My question, what is the % of the shares of the Irish banks already ‘owned’ outside Ireland? I say ‘owned’ as they are mostly in the hands of ‘the institutions’ a euphemism for dealers, who don’t have any interest except keeping their assets up…. any old way.

    My scenario, oil $ become oil €, a threat the oil money and China holds over the US. In that move European banks become part of the € assets. Irish banks are folded in to that.

    Just listening to someone from Dolmen saying ‘buy, buy’ – are the oil people listening? Not if the slide continues, they’ll wait for better value.

  4. Dan Hayes

    AndrewGMooney got it exactly correct.

    David, you ended your screed with the bromide: “You’ve got to take the rough with the smooth.” What “smooth”? In America, globalization has only meant flooding the country with cheap Chinese junk and the concomitant destruction of American manufacturing. Productivity gains have been relegated to the service industries (flipping burgers, cleaning bedpans, etc.).

  5. kevin buckley

    Sell the bloody bank and take the billions , better in our pocket than theirs. Remember the Japanese spending spree of the late 80′S We are going to get a nice little recession, the price of oil will tank and we will buy our little bank back. Really, a bank in Mayo cannot be run from Mecca

  6. Paul

    How come no economic commentators in the Irish media or even academia can spot the next global economic depression? Or can they, and don’t dare call it?

  7. Fergal73

    So – who’s actually going to listen to the argument and buy AIB /BoI shares? If you believe that David is correct, then this logically would be a good move…

    On the other side, the C level banking executives of the major banks are focused on the bottom line of their organisation. They expect a 4 – 8 year term in office and are rewarded based on share performance during their period in office. Their concern is not for Ireland Inc. Their children will be educated in private schools and 3rd level will be taken care of – in Ireland or somewhere else.

    ‘It’s the economy stupid.’ We are all products of this economy, the C level executives are in the main the ultimate product of the capitalist economy. Their concern is for themselves and their reward. National pride has no place in the operation of a large bank, or any other organization. Apple may design in San Francisco, but it produces in China. Dell is American, but it produces where it makes financial sense to do so. Banks are an important part of the same economic machine, the focus is only on profit and share price.

    On that basis, I don’t care who owns the banks – the focus will remain on profit, be the owner Christain, Muslim, Hindu, Agnostic, Atheist, Black, White, Hispanic or Oriental.

  8. Glen Quinn

    The Irish business model of Irish banks are crap. All the Irish banks are heavily exposed to Irish property and Ireland is there only market. The banking stocks are still going to tank thats why I’ve been shorting Irish bank stocks for the last 6 months.

    All the bankers were in church last Sunday all praying for the crisis to be over by March 2008. Guess what, It’s not going to happen. The stock market is going to be in decline for the next 3 years and the DOW will reach a low of 7000. LOL :-)

    Anybody who buys Irish stock now would need there head examined even though they have halved in value. It’s simple stocks are priced off earning that a company makes. Since know one is taking out much mortgages then the bans are going to earn a lot less. Remeber banks look back over the year but the stoc market looks ahead into the next year.

  9. o

    Is it possible to view The Generation Game online if you live OUTSIDE of the oul sod?

  10. Owen Callan

    Couple of things.

    First, while Sovereign Wealth Funds (SWF’s) have indeed poured capital into many financial institutions over the past year, they haven’t attempted to actually buy any of them. There’s a few reasons for this, the most obvious being the political fallout that would emerge from such a move. While any Irish government critisisms wouldn’t register too loudly on the radar for them, its quite likely that French and German governments would be worried by such an occurence and would essentially use us as a buffer to prevent the start of any further moves to acquire European financial institutions.

    The other major reason (especially for the Mid East SWFs) is that they have practically zero experience in owning and managing a large financial services company! Financial services in the Middle East are still very much at the immature stage in terms of scale, scope and experience. Most of them (including Chinese banks) are in fact preferring in fact to go for joint ventures with Western banks instead of trying to buy them, as this gives them access to technology and experience, while bringing the captial themselves. In fact, under Sharia law, many of our Western banking practices are actually illegal, so it would be a brave SWF that decided to row in with our decadent ways and actually manage such an immoral institution. Far easier for them to buy up minority, but significant, stakes after the recent large sell offs!

    Lastly, the regulatory requirements that come with owning a financial services company are far more onerous and transperent than in most industries, and would prove problematic for the notoriously secretive SWFs – this also being the reason why few, if any, private equity groups, despite their equally limitless spending abilities, have attempted to buy up any retail banks (save for the debacle formerly known as Northern Rock).

    While the threat of an SWF buying up a large Irish financial institution needs to be considered, in reality its probably something more like 10 years down the line in terms of actually happening.

  11. Dermot

    The sovereign funds from Asia and the Middle East are not investing in Europe because the Euro is too strong, so an Irish bank doesn’t look cheap in dollar terms, and the medium term prospect for Ireland is poor. By buying decent stakes in cheap US banks they are hoping for a double whammy when the dollar recovers and the shares move back up. And no management hassle.

  12. Malcolm McClure

    David: I seem to remember your positing in “The Pope’s Children” that much of the money borrowed in the Irish housing boom was coming from the savings of old people in Germany. It would seem natural for them to want to bring their money closer to home in view of troubles in the economy of the fatherland. Since Ireland is tied to the Euro we have no independent mechanism to raise interest rates to persuade them to leave their money slumbering here, when it might be better invested in Germany (or say India).

  13. William Winters

    There are many possible suitors for the Irish Banks and from a patriotic point of view, I would like to see them remain in Irish ownership. If liquidity is a problem in a few years time I would much rather beg for money off an Irish man who would understand my plight than go cap in hand to London or Frankfurt to an unsympathetic bureaucrat who cares little for Irish risk.
    To protect themselves from the inevitable I think the time is right for a merger between Bank of Ireland and AIB. Charlie McCreevy was labelled a mad man for suggesting this several years ago but I believe there is a lot of merit in his idea. Create a strong Irish Banking Corporation with Global ambitions. The synergies of such a merger in Ireland would be huge. They could close a branch office in every provincial town in Ireland. As part of such a merger, they would no doubt be forced to sell these braches to competitors such a Bank of Scotland and Danske bank who have ambitions of expanding NIB.
    Let the foreign banks take us on,…… not take us over !
    I for one will lodge my money with an Irish Bank.

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