December 15, 2008
Has anyone broken the news to finance minister Brian Lenihan that he owns the banks? So far, this fact appears to be unclear to the minister and his civil servants.
What did they think they were doing when they signed the guarantee? Lenihan not the washed-up boards of the banks is the boss. The buck stops with him, not the squirming chief executives who are in the unedifying and entirely self-absorbed business of holding onto their jobs. There are signs of discussions now under way, though it remains to be seen what emerges.
Given that the management of the banks is in self-preservation mode, any meaningful bid that comes in now will be hostile, not to the institutions, but to the individuals who ran these companies into the ground. Therefore, in the interests of the state, the minister has to act against the interests of the individuals who run the companies. Things couldn’t be clearer. If the minister wants any progress on the banks and, by extension, the economy, he will have simply to go over to the banks, put a friendly arm around the shoulders of the current bosses and usher them out the door. If not quite out the door, at least in the direction of the foyer, explaining firmly but sensitively that they are part of the problem.
If they play ball they might have a chance; if not, they are out. In short, Brian Lenihan is the don and he has to accept this. Any minister for finance who guarantees his banks is the last man. He makes the decisions. If this inconvenient truth hasn’t sunk in at the department, itmost certainly is clear to the financial markets. As far the rest of the world is concerned, ever since the guarantee was issued on October 1, the state more or less owns the banks to the extent that, if the banks collapse, the state picks up the tab.
If you doubt this, look at the simple chart below. This is a chart of what is called the credit default swaps for our country and our banks. A credit default swap measures the risk of default. It is the price you have to pay to insure against the bank or the country defaulting. Obviously, the higher that price is, the more likely the market believes that the institution or the state will default. Check out the chart. Before the guarantee, the market was progressively coming to the view that the Irish banks were moving into default territory. In contrast, during the summer months, despite the banks’ deterioration, no one was attaching any significance to the state defaulting. However, the minute the guarantee was signed, everything changed. The market moved immediately to the view that Lenihan was the boss and that he was responsible.
As you can see, in the past two months, the market’s perception of a sovereign default by Ireland has increased twenty-fold, while the banks individually have seen their default risk collapse. So, rather than the sovereign state bolstering the credibility of the banks, the banks have contaminated the creditworthiness of the sovereign! Had Lenihan moved quickly to recapitalise and had he swiftly fired the culpable, this might not have happened. Because we dithered, the market now sees that the guarantee was nothing more than an underwriting of bad bank behaviour and has reacted by transferring the liability of the banks onto the state.
Make no mistake about it; this trend is going to get worse, not better. If the minister prevaricates, he will simply undermine the ability of the state to borrow for hospitals, because he is trying to protect the banks’ boards and senior management most of whom are millionaires. The reason, I believe, that he is protecting the fat cats and not the small shareholders and pensioners who sadly trusted the banks with their pensions, is that the boards and the management have already destroyed the wealth of the shareholders. By presiding over a 90-95 per cent fall in their share prices, the bosses of the banks not Lenihan have torched the shareholders already.
When I hear the same individuals now pontificating as I did last week about their need to represent shareholders, it makes me feel sick. Worse still, when we see them trying to plunder their own pension funds our money to save their hides, Geldof’s angry ‘‘Banana Republic’’ rings in my ears. Someone needs to clean out this system of ours, because if the banks with new management and boards are not put up for sale at any price, the entire Irish financial system will not might implode.
With every passing day, this Armageddon gets closer. Someone had better tell Lenihan that, if he does not do something quickly, we will some day soon see Ireland’s Bear Stearns and once one goes, more will be threatened. By this, I mean that, one weekend, there will be a knock on the minister’s door and a group of well-dressed but desperate bankers will tell him it is all over.
They’ll do what hundreds of ordinary people will also do, they will hand back the keys and say to Lenihan: ‘‘Sorry Brian, it’s your problem now. We can’t cover our bad loans. We are out of capital. The world won’t lend to us at any price. Because we destroyed our investors’ funds last year and tried to bluff our way out, we have no credibility.” What is the minister going to do then? He’s going to have to write an enormous cheque to keep these places open but he doesn’t have the money. That’s when the financial markets start selling Irish sovereign bonds en masse.
The speculation will be that Ireland will not be able to pay its way and we will see the price we have to pay for credit explode. No one will want to touch us and we’ll move from Celtic to Septic tiger in the space of a year. This is now the most likely course of events. Just as 24 months ago, those who claimed house prices would collapse were smeared as being mavericks, the same applies today. You probably don’t believe the above scenario could happen. What if I were to tell you that it will happen unless the minister moves?
What can he do? He can tell the management of the banks at any price that they have a set time to sell their banks, otherwise they are out. If the buyer is right and by this I mean a large, solvent, Continental solvent bank they might have to think the unthinkable and practically give them away at this stage. If he doesn’t do this, he has potentially, not one, but six Bear Stearns on his hands.