Wednesday 7 December 2016

Battle lines are drawn but Lenihan not afraid of the fight

The Minister for Finance seems to have a new steel to his make-up as he prepares to take on the banks, bureaucracy and public sector work-to-rule, writes Aengus Fanning

Published 07/03/2010 | 05:00

The iron has ent-ered Brian Lenihan's soul. On the surface, he is the charming, engaging, gracious Lenihan we know, but there is a new steel in his make-up, a distinct impatience to get things done.

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One senses that he has a shorter fuse these days with banks, bureaucracy, public sector work-to-rule, and with rich men, bailed out by Nama, who are continuing to live like lords.

Lenihan in this mode has all the hallmarks of a man with a fight on his hands -- but one who is relishing the fray. I'll let his words speak for themselves.

Aengus Fanning: Allied Irish Banks (AIB) has signalled its intention to put up mortgage rates and I for one thought that these rates were linked to the European Central Bank (ECB) rate, which is being held at 1 per cent and looks like being held at 1 per cent for some time to come. Are banks entitled to unilaterally put up their rates?

Brian Lenihan: It is true that the rate set by the ECB is the rate at which it is lending money and that has had a very beneficial effect on the system in recent times because the ECB's historically low rates have been reflected through in particular institutions and that's very welcome. And it is welcome that the ECB has made it clear that this very low rate is going to continue for the rest of this year.

Now, in relation to the particular institutions in Ireland, it depends on their own capacity to attract funds and on the price of money to them. Clearly if AIB is indicating that it intends to increase its interest rates it is because money is dearer for them to acquire.

AF: Has the Government and the taxpayer any control over this?

BL: Well, we have some degree of influence through the directors that we have appointed to the board of AIB and through the powers that the Financial Regulator has. But in relation to the fundamental questions as to the price of money and the interest rate, governments do not control that because it is dictated by market realities and the market realities for Irish banks since September 2008 have been that money is very expensive and difficult to obtain, not withstanding a government guarantee and not withstanding capitalisation of the two major banks.

I realise that there are many who criticise Nama, but as long as the banks have these very large loans on which nothing is being collected, and they foreshadow future losses, there is clearly a weakness in the banks and that is why the Government found it essential to buy those loans at a reduced price . . . and that leads on to your next questions.

AF: The public perception is that some rich men are still leading very rich lifestyles, flying around the world and living in big houses and all that while the taxpayer is -- through the operation of Nama -- bailing them out.

BL: Well, the first thing is that the taxpayer, through Nama, hasn't purchased any assets off the banks yet. But the first round of purchases will take place later this month and some of the names involved have been suggested in various publications and I think it is worth noting that several of those involved clearly are in financial difficulties in the courts.

Nama has all the powers that any bank and any creditor will have to move in on anyone who owes money and that's what Nama's job will be. People with liquidation experience have been appointed to the board of Nama and clearly the agency will have to collect those debts and squeeze all the money that can be squeezed for the taxpayer that's buying them.

AF: And then the other complaint, which you are very familiar with, is that credit isn't flowing.

BL: No, this is a serious difficulty and I do welcome the fact that the managing director of AIB, Colm Doherty, believes the bank will be in a position to extend more credit as Nama is unfolding.

I have also taken specific powers as Minister for Finance to give directions to the banks in relation to credit, and regulations will be announced, again before any monies are given to the banks, at the time of the transfer, as to the rights of persons who are refused access to loans.

It is especially important that small and medium enterprises can access all the credit they need to support jobs and economic activity in this country.

The guidelines are complete and it is essential that credit is extended by the banks and there will be no hiding place for the banks after the transfers to Nama take place.

AF: A question that I don't think is often asked is that the Government and the taxpayer have invested in the banks and the guarantee scheme and without the Government and the taxpayers the banks could not have survived. But has the taxpayer or the Government any say in how efficiently they manage their own business?

BL: I think this is an important issue. As you know, under the guarantee we obtained the power to appoint two directors to each of the institutions and that has been a valuable power in my experience. In addition to that, the State has a real stake, and a substantial stake, in many of the institutions, which I believe over time will ensure a return to the taxpayer and to the National Pension Reserve Fund and it is important that the State has influence and it is important that the taxpayer obtains a return for the rescue work that the State is carrying out.

Equally, it is important that the banks are run along commercial lines. If we have a banking system run by politically directed credit decisions then that banking system will lose credibility very quickly and the funding credibility and the capacity of the banks to raise the funds -- that we want them raising to recycle on to our businesses -- will be diminished.

AF: But apart from the banking side of things, are their costs being monitored?

BL: Of course. Costs have to be monitored in all of these transactions and I am advised on this by the Central Bank and I think everyone will accept that the new governor, Patrick Honohan, is doing a very good job. We now have a new Regulator and certainly he is very good and he is putting his stamp on the system. And of course there's the National Treasury Management Agency -- who have always done a tremendous job in funding our own State finances -- are in charge of negotiations with the banks themselves. I think it is important that we have hard-nosed negotiators.

AF: But has the Government any role in how many people the banks employ?

BL: In actual numbers . . . well, all of the banks are reducing the number of people they employ because it is clear that during the final stages of the bubble we were over-banked. We had too much lending and we had too many banks.

Unfortunately, we have moved from that extreme, and you have written very well about this in your newspaper, I have seen several references to it. We have moved from that extreme to where, because they over-banked and over-lent, they are not in a position to lend enough now.

We have gone to the opposite extreme. There is a happy medium here. And that is why the banks have to be back extending credit and that is why we have to implement Nama. I think the test of anyone expounding a theory in this banking area is what will ensure that the wheels of credit move again in the institutions? It is not clear to me that some of the solutions being propounded do anything to assist that.

AF: About a year ago you were forecasting that Anglo Irish Bank would be wound down, but just this week Alan Dukes (a Government-appointed director of Anglo Irish Bank) said he thinks it might be better to keep it in business.

BL: We are in discussions with the European Commission about the future of Anglo Irish Bank. Let's be clear about it, it is going to be substantially reduced, halved in size, as a result of Nama, and that certainly will result in a dramatic reduction of the risk that the institution posed to the whole financial system of the State.

The great difficulty with Anglo -- and I am asked this all the time -- is why doesn't the State let this institution go to the wall? The answer to that is that this institution was too big to fail in terms of Ireland. Our problem with Anglo is that its balance sheet was very large, it was probably nearly half of our annual national wealth and clearly if you let an institution like that fail the ripple effects to the credit of Ireland and the credit of the banking system would be enormous. To de-risk an institution like that cannot be done immediately, it takes time and that is what is under way.

Half the bank will disappear into Nama and the remaining half then is being worked through by new management. Several of the outgoing staff have had to retire for various reasons. Some of them had impaired loans, as you know, and that has all been cleared up, and we have a new management team in place safeguarding the taxpayers' interests.

If there are further difficulties in that residual half of Anglo Irish Bank there will have to be a bad bank established for that but what is good in it is a residual good bank and the strategic future of that good bank will have to be determined. But clearly any decision regarding that will have to be in the interests of the taxpayer.

If there is value there the taxpayer will have to realise that value whenever the taxpayer gets the most out of it. It is essential that the taxpayer get something out of this morass, we clearly will have a return on the investment we have already made in AIB and Bank of Ireland and there is a solid investment there for the taxpayer in the future.

Equally, in the case of Anglo, it is essential -- given the very large investment the taxpayer has already had to make simply to avoid the reputation of Ireland and its banking system and its funding capacity from being destroyed -- that we make this investment. So it is very important that whatever can be salvaged out of it of value to the taxpayer is salvaged. That doesn't always mean a fire sale of assets or an immediate wind-up.

AF: Are you impatient with the length of time that the Appleby Investigation (into Anglo Irish Bank) is taking?

BL: I have expressed my views on that elsewhere, but I am satisfied that investigations are now proceeding at a good pace.

AF: And can you say anything about the possibility of prosecutions?

BL: Well, I believe there will be prosecutions in relation to what happened in Anglo Irish Bank. But, again, it is not a matter for me. It is a belief of mine, but it is not a matter for me to decide that; that will be a matter for the Director of Public Prosecutions when the appropriate files are finalised by the gardai and the Office of the Director of Corporate Enforcement.

However, I am satisfied that the authorities are now engaged in a very wide-ranging and productive inquiry on these matters.

AF: Minister, thank you very much indeed.

Sunday Independent

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