I knew it was going to be bad but I didn’t think it was going to be as bad as this. And personally, I’m disgusted at bailing out the banks. The same banks that threw suitcases of cash at the housing developers that made first time buyers life hell during the boom years.
The first problem – it’s a bailout but people are pretending it’s not real money
Ah-hah, you say – it’s not really a bailout. The state is guaranteeing the deposits in banks (some Euro 400 Bn worth, or 300,000 Euro for every taxpayer in the country) – but no money has changed hands. What a stroke by the Paddys - not.
No money has changed hands - ‘yet’. Experience in the US (who have been through this a couple of times in recent decades) suggests that 20% of the loan book will go bad. Because of gearing banks can lend out far more money than it takes in deposits, so 20% of bad loans = a lot more than 20% of our deposits needing rescued.
If the banks were hunky-dory, then why are other banks refusing to lend to them? Why couldn’t they go to their shareholders for more funds (like Royal Bank of Scotland did in recent months, raising 12 Billon Sterling)? And if these two groups (who know far more about banking than I or the average taxpayer does) are refusing to lend, then why should we? Fear is one factor, but fear is normally there for a good reason.
The second problem: Meet the new boss of the six largest banks in the country.
I’m sure Mr Lenihan is a fine man, competent and full of integrity. He’s got a good CV – politician, lawyer, family man. Strange that – no mention of banking on his CV.
The new boss of Irish banks – minister for finance Brian Lenihan - image from Agent Provocateur
If the state is underwriting the banks, then they’ll be kept on such a short leash that they can’t go to the toilet without asking permission. And if they’re not being kept on a short leash, then why not – that’s 300 grand of my money that they’re playing with. So Mr Lenihan, as the person making the guarantee, is now the ultimate boss of not one, but six Irish banks.
Bit of a dilemma there: Who will run the Banks the best? The current management who made the loans to developers that got us into this mess? Or a politician without any banking experience (although I’m sure he’s learning fast)? Answers in the comments section at the bottom please.
The third problem: Moral Hazard
When we get through this and growth starts again (and despite my pessimism, we will get through this pain, with Ireland coming out in a competitive position) we now have a problem; The very same bankers that we are now supporting / bailing out will start making loans again. And making risky loans, knowing that the state will (probably) bail them out if they fail. So the state intervention now means that Mr Lenihan and his successor politicians will be regulating the heart of the banking system for years to come.
And who do you think will win? Well intentioned regulators on a fixed salary, or highly paid highly motivated bankers who get paid bonuses for finding new ways of bending the rules?
The finale
Can we roll out all the estate agents / politicians / brokers / other talking heads that popped up on TV predicting a ‘soft landing’? Yep, the same ones that critisied those who dared sound a warning as unpatriotic and ‘talking down the economy’?
(Tumbleweed)
Do I have any better answers? No. But it would be good to stop pretending that this bank rescue carries no cost to the Irish Taxpayer.
Update: Actually , this thing might be cost free - but in a beggar-my-neighbour kind of way. Loads of capital is flowing into Irish Banks and out of UK and European Financial institutions. Great for Irish banks (loads of lovely money to fund existing loans), but I can’t see the other countries being too happy about it if the withdrawals cause a collapse there. Still, it will stop them complaining about our low 12.5% corporate tax rate.
