January 18, 2009
Anglo Irish Bank is Ireland’s Enron, and those responsible for destroying shareholders’ assets should be pursued accordingly. It’s not just the shareholders: the system has also failed the people miserably. We are now in a position where nobody trusts us. The minute Anglo was nationalised, the risk on Irish government debt jumped significantly because this disaster will be paid for by all of us. Our national debt has just – effectively – doubled and dodgy banks are now contaminating everything associated with Ireland.
We will soon be downgraded. This means that, not only will we pay more for our debt, but we can forget about any infrastructural development paid for by public private partnerships. No one will touch us. And if we can’t structure our financing of railways and roads using private investment, how are we going to build stuff?
On a more personal level, to see pensioners’ funds wiped out is heartbreaking. What are these people going to do? Worse still, it is enraging to hear those responsible squirm and spoof while they cowardly stage-manage an egm – paid for by shareholders – to hide the truth from those very shareholders. Is this what we have come to?
Certainly, questions need to be answered, such as: why did you not see executives moving money around the balance sheets and why did you not act in the shareholders’ interests and sound the alarm bell? That is, after all, what an audit is supposed to reveal, is it not?
But it is not just the auditors. Make no mistake about it: it is a story of monumental failure in the banking system. Not one person in a position of responsibility did his or her job and now the taxpayers have to pick up the tab, the size of which no one seems to have any idea.
Let’s look at the players in turn. The Central Bank failed to oversee the system.
Every month, the Central Bank issued statements showing monetary growth in Ireland — which was exploding. This column pointed out time and again that this explosion of credit could only have its balance sheet counterpart in enormous foreign lending. Yet nothing was done. Think about it, banks are given licences to trade.
These should be treated like driving licences. If you drive dangerously, your licence is taken away. Likewise, if you trade dangerously in a manner that endangers the integrity of the entire system, you should have your licence taken away.
But what did the Central Bank – the guardian of the system – do? Nothing, despite all the information to hand. Did anyone resign? No, in fact the governor has just been given an extension!
The Financial Regulator clearly was ineffective, and its chief executive has now retired. The auditors? Well, we know what they did. The last thing they did was carry out a proper audit. Why might this be? Within the bank, things were worse. A sizeable number of the senior management of Anglo surely knew what the chairman was up to, moving personal loans around to avoid detection.
Did they raise this? No. What about those on the boards, these well-paid characters who are supposed to be representing shareholders, such as the pensioners, at the egm? What did they do? They did nothing.
The stockbrokers – who in many cases channelled their clients’ funds into the bank, arranging and dressing up Anglo’s unsecured loans and stuffing them into the hands of unsuspecting credit unions – did nothing. Did they raise any question about the darling of the financial sector? They did in their Swiss! They were making too much easy money.
Finally, there are all the regulators and – presumably — the Department of Finance and their role in the saga in which Sean Quinn invested heavily – and lost heavily – in Anglo through contracts for difference.
Should this CFD position have been let develop without being declared to the market? And was Quinn’s massive contract for difference position unwound and translated into an ordinary shareholding of 15 per cent?
The upshot of this tawdry tale is clear. Our financial system is populated by cronyism and incompetence. This assessment makes the likelihood of contagion all the more probable.
So who is next? Is it possible that one or two of the smaller banks – some with a ludicrous gap between their deposits and their loans – will suffer a withdrawal of funds? No one believes anyone any more, and the flight to allegedly better banks will be overwhelming. Just witness the massive market hit on Barclays Bank in London last Friday.
Faced with this scenario, there is only one thing the Irish government can do to retrieve the situation. It can quarantine large diseased chunks of the Irish loan book in Anglo. In effect, it can turn Anglo into a financial skip, throwing into the bank all the bad debts of the other banks.
Bank of Ireland and AIB, although they like to hold their noses and look down on Anglo, might actually have a worse bad debt position than the nationalised orphan. This is because, in an effort to catch up with Anglo, the big banks accelerated lending at the top of the market from 2005 to 2008. So they need the financial skip as much as anyone else.
It would be unwise to allow them to get off the hook by throwing all the bad debts into Anglo. Brian Lenihan should raise a huge bond on the international markets to finance the bad loans.
The profits of all the banks which have been bailed out should be directed to service the interest on this, and the money will be used to pay the bad debts. Over time, the debt will trade at a deep discount, but as the economy recovers, so too will these debt prices.
The idea is based on the Brady Bond solution to Latin American fiscal delinquency in the 1980s.Hard as it is to get our heads around now, Ireland in 2009 is more Brazil than either Boston or Berlin.