independent

Sunday 20 April 2014

Colm McCarthy: Four years now and still no explanation

The bank bailout, in dollar bills, would carpet Louth, yet the genesis of the bust remains unrevealed, writes Colm McCarthy

The sheer scale of the Irish banking collapse is lost on most people. The numbers are just beyond everyday comprehension. The American politician Everett Dirksen, criticising a US government capital programme back in the 1960s, remarked: "A billion here, a billion there, and pretty soon you are talking about real money."

The financial crisis makes people nonchalant about incredibly large numbers. Newsreaders no longer say 'million' when they mean billion, but it is only slowly beginning to dawn on everyone that a billion is rather a lot of money. Phrases like 'a billion dollars' or 'a billion euro' trip rather lightly off the tongue, but to what everyday reality do these numbers correspond? Most people are comfortable with figures corresponding to their annual salary, the price of a car or the price of a house. Larger numbers with lots of zeroes attached are easy to toss around in conversation but much harder to grasp.

If you stack $1bn in one-dollar bills flat, one on top of the other, how high a pile do you think you would get? Would it be as high as a tall skyscraper perhaps? The answer is a pile roughly 12 times the height of Mount Everest. A billion is a lot of money.

A dollar bill is just over six inches long. A daisy chain of dollar bills long enough to reach the moon would take only two-and-a-half billion in dollar bills, barely enough to bail out a prudent Irish bank. To bring things a little closer to home, the rescue of the Irish banking system has cost the taxpayers to date about $83bn (€63bn) in greenbacks. The unbroken chain of one-dollar bills would need 17 round-trips to the moon to account for the taxpayer cost of the Irish bank rescue.

Measured in dollar daisy chains to the moon, Anglo Irish has cost six return lunar expeditions, AIB about four, Irish Nationwide one-and-a-half or thereabouts. Bank of Ireland is somewhere around one dollar daisy chain to the moon (and back).

Think of it another way. To carpet a soccer pitch in $1 bills, leaving not a blade of grass exposed, would cost surprisingly little by the standards of bank bailouts, a mere $1m or so. Dublin's Phoenix Park, supposedly the largest walled city park in the world, would pose a stiffer challenge. But it is just not big enough to require a billion – to carpet the entire park, all 7 sq km, would cost only about $700m, about half the losses at Quinn Insurance, never mind the banks. In order to use up the entire $83bn Exchequer cost of the Irish bank bailout, you would have to carpet the entire county of Louth. Nearly all would have to be printed for the occasion, since the entire stock of $1 bills in existence, enough to keep the tills of the US ticking over, only comes to about $4bn.

The Irish banking bust has cost the State over 41 per cent of GDP (the annual output of the entire national economy). There are contingent liabilities which could see that figure rise further, and there have been enormous costs to others. The shareholders of Bank of Ireland, AIB, Irish Permanent and Anglo Irish have been wiped out. These shareholders include tens of thousands of individuals as well as the pension funds of numerous Irish companies. The foreign-owned banks, including Ulster, National Irish (Danske) and Bank of Scotland (Ireland) also wiped out their share capital and needed bailouts provided by their foreign owners. In some cases, the foreign banks which rescued their Irish subsidiaries required support from their own taxpayers. Thus the enormous losses at the UK-owned banks in Ireland have imposed costs on UK taxpayers. There is as yet no firm figure for the total losses in the Irish banking system, domestic and foreign. It is likely to reach at least double the cost to the Irish Exchequer, allowing for the losses to Irish and foreign shareholders and the haircuts imposed on some subordinated bondholders.

Banking busts are quite common around the world but busts on the scale of what happened in Ireland are rare. The International Monetary Fund in Washington keeps a scorecard. There have been just seven banking busts ever recorded worldwide which resulted in taxpayer costs comparable to ours. Five of these have had fiscal costs in the range 40 per cent to 45 per cent of GDP, the level reached thus far in Ireland. The other members of this club are Chile (1981), Iceland (current), Jamaica (1996) and Thailand (1997). Only two banking system failures, in Argentina in 1980 costing 55 per cent of GDP and in Indonesia in 1997 at 57 per cent, are likely to deny Ireland world honours. The costs in Iceland, as a percentage of GDP, are running a little ahead of ours at this stage but the game is not over and the European title remains within reach.

There have been banking busts in several countries during the current crisis. In the United States the financial institutions which went under include the giant mortgage banks Countrywide and Ameriquest, Wall Street's Lehman Brothers, and the more recent casualty the broker/dealer MF Global. In every case you can google a comprehensive report by US investigators into what went wrong at each individual bank. Numerous civil actions have been instigated and several former bankers are facing prosecution. In Ireland, after what looks likely to be one of the worst banking collapses the world has ever seen, no proper inquiry has yet been initiated, never mind completed, into what went wrong. It is over four years since the collapse began in September 2008.

The chronology of the MF Global case in the United States is instructive. This firm lost about $1.6bn of customer funds speculating in securities markets. The offences occurred in 2010 and 2011. The firm went bust at the end of October 2011 and the report of the Congressional Committee was released just over 12 months later, in November 2012. Named executives were blamed for the collapse, numerous civil lawsuits have been filed and criminal charges are under consideration. This bust happened long after the balloon went up in Ireland but the report has already been published.

How is it acceptable that the genesis of one of the biggest banking busts ever to have occurred anywhere on the planet should remain unrevealed? It is clear that the government got it badly wrong at the end of September 2008 when a blanket guarantee was offered to the Irish banking system, in the mistaken belief that the banks were solvent. The politicians, regulators, bankers, officials and advisers who misunderstood the nature of the crisis have not been held properly to account. But it is a far greater omission not to have explored, patiently and in public, what happened inside each bank.

There could have been no mistake in dealing with the banking crisis if the banks had managed to stay solvent in the first place. How did Anglo Irish executives believe, as late as September 2008, that their bank was solvent when it had lost more than eight times its capital, much of it lost many years earlier? How did AIB executives believe, as late as the spring of 2009, that their bank would survive when it was bust several times over? Most fundamentally, who initiated the disastrous lending policies throughout the banking system which began as early as 2002?

The Irish public are entitled to know, bank by bank, the answers to these and many other questions, for the simple reason that they are now having to pick up the bill. The unfortunate shareholders in the banks, which in aggregate accounted for half of the value of the Irish Stock Exchange, have not just been wiped out. They have been wiped out without explanation. If you own shares and the company goes bust, you lose your money, that's capitalism. But you normally get an explanation, at the insistence of the state through its laws or of the securities exchange through its rules. The absence of explanation by the listed banks marks an unwelcome addition to the variety of economic systems in operation around the world. Let's call it Irish no-fault capitalism.

Sunday Independent

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