December 24, 2008
Brian Lenihan is the Marie Antoinette of Irish politics. He has just done a deal with the management of the Irish banks which even the bewigged last queen of France (bred into the regime, like Lenihan) would not have tried to get away with.
Not only should he lose his political head for it, the entire regime is likely to fall as a consequence. This recapitalisation is Fianna Fail’s “let them eat cake” moment and the electorate will not allow them to survive it.
This botched recapitalisation is based on the economics of Noddyland. It is cronyism of the highest order and will plunge Ireland into a much longer recession than is necessary. Furthermore, the fact that the financial delinquents who run the banks have been rewarded for the economic vandalism that they instigated sends a signal to every foreign investor that Ireland is a banana republic.
The management of the Irish banks has played our Marie Antoinette like a fiddle. In poker terms, at the beginning of this process when the guarantee was announced, Marie Antoinette Lenihan held a full house against the banks, who were dealt a pair of threes. He was in an unassailable position and could have directed policy as he wished. Instead he prevaricated, with the upshot that the management beat him hands down. Not only have they kept their jobs but they’ve just snaffled an enormous subsidy from the taxpayer as well.
The banks’ top brass have engineered a deal whereby their multi-million euro salaries will be paid for by people on the minimum wage!
To make matters worse, Marie Antoinette is out there telling us that we, not they, have got a good deal. This is an appalling stitch-up and amounts to “stroke politics” of Congolese proportions.
The extent of the stroke is obvious if we compare the terms of the deal that we have been forced to do with the banks with the terms of any deal the international financial markets are prepared to do with them.
Just think about the value of the banks: The taxpayer has lent â‚¬4bn to the two main Irish banks at an interest rate of 8pc, in return for 25pc voting rights. According to the market, both main banks were only worth â‚¬3bn on Sunday, 25pc less than the government’s loan to them. And the banks’ management and boards are still in place.
So why is Marie Antoinette, acting in our name, trying to right the wrongs of a small, incompetent cabal? Rather than make these incompetents accountable, he has rewarded the very financial delinquents who got us into this mess in the first place. We can only assume that he is being advised very badly. Merrill Lynch is his adviser. This is a bankrupt bank, remember. So our State is being advised by people from a bank that could not even look after its own money, let alone anyone else’s! Could it possibly be that Merrill Lynch is more interested in future fees from the management of big banks when it comes to further borrowing than it is in the immediate fortunes of the country?
Something else stinks in this deal. For example, why give the banks money at 8pc when you know that 8pc comes nowhere near the rate which the market is charging these banks? Last weekend, you could have bought Bank of Ireland preference shares with a 14pc yield.
Marie Antoinette Lenihan, on the other hand, thinks that we should lend to them at 8pc! Why? Does he know something we don’t? Does he think that the bad loans in Bank of Ireland will be considerably less than the market does? No, he knows nothing more than the average Joe Soap. In fact, despite all his advice, this dreadful deal reveals a man out of his depth. He has just been conned by the banks’ management, who have told him the situation is so dire that they can’t survive if they have to repay at a rate higher than 8pc.
Remember, these are lads who said up to last week that their capital position was so robust that they did not need any money from the State. So, turning economics on its head, Marie Antoinette has risked taxpayers’ money at an interest rate that even the most idiotic investor wouldn’t entertain. This is a sick joke, but the joke is on us.
Now, having established that you have been robbed blind, let’s look at the pathetic economics of the deal. For a recapitalisation to be successful, bad debts have to be written down to zero immediately. This is costly and this is why the State needs to raise a lot of money rapidly to cover the mess. Equally, a “bad bank” needs to be set up like a financial skip, into which all those bad loans and rubbish on the “good” banks’ balance sheets can be thrown. The cost of the skip should be paid for by the “good” banks, because they have been the ones given a reprieve.
Such an approach, adopted by Sweden in 1992/3, clears the air and allows the good banks to start lending again. In this way, the recession is cut short by taking the pain up front and allowing the system to right itself. We have chosen the worst of all worlds. Marie Antoinette has condemned us to a long recession and he seems pitifully oblivious to this fact.
We are following the Japanese approach, which saw Japan plunge itself into a decade-long downturn.
First, no one is held accountable and the managers are given a subsidy rather than a penalty for bad behaviour. Second, the bad loans will not be written down — banks will use the State’s money to roll over debt service on bad loans, hoping that the recovery will miraculously arrive on its own. Third, the money advanced today will simply be swallowed up by the huge bad loans on the banks’ books — all of which were lent by the present management — who, lest we forget, have held onto their jobs.
The numbers are frightening. The Irish banks have a loan book of â‚¬450bn, of which probably at least 6-8pc will go bad in the recession. This means a total problem of over â‚¬30bn, and quite obviously the â‚¬7bn recapitalisation for AIB, Bank of Ireland and Anglo is only a drop in the ocean.
Make no mistake about it: our money will disappear in the next 12 months. Irish bank shares will continue to fall steadily as the extent of the dire loan book is revealed and we, the taxpayers, will be asked to stump up again and again.
The long recession will make a mockery of Fianna Fail; and when they are hammered in the polls, they will trace the tipping point back to this Christmas week and Lenihan’s “let them eat cake” idiocy.