Sunday 17 December 2017

Earth calling elite bankers

Eugene McErlean

'Sometimes when I am driving on the road at night I see two headlights coming towards me. Fast. I have this sudden impulse to turn the wheel quickly, head on into the oncoming car."

This is a line from one of my favourite movies, Annie Hall, said by Annie's younger brother, Duane (played by Christopher Walken in that weird ambivalent way he has perfected) after he bumps into Woody Allen's character, Alvy.

Alvy looks bewildered and replies: "Right. Well, I have to go now Duane, because I, I'm due back on planet Earth."

The banking recapitalisations announced last week were caused by banking irrationality on a level similar to Walken's death wish desire to crash into oncoming cars. It appeared a coincidence worthy of a Woody Allen script that on the day when the Large Hadron Collider (LHC) was finally switched on under the French Swiss border, the Minister of Finance announced the latest capital requirements of the banks. Some people had objected to the LHC fearing that it could imperil the Earth by creating micro black holes -- and mysteriously, a black hole appeared in Dublin in the form of the implosion of the Irish banks' balance sheets.

It now appears clear that the banks were incredibly profitable not because they were doing anything better, not because they employed any greater skill, efficiency, judgement or intelligence, but merely because they were placing bigger and bigger bets under the noses of the watchdogs.

Even the Bank of England noted in a recent report that all of the increase in bank profits in recent years could be accounted for exactly by the increase in the amounts they borrowed from international markets. So, all those profits they claimed credit for, all those record salaries and bonuses the executives paid each other over the past five years have been earned not on the basis of great insights, efficiency or skills, but rather by the absence of these qualities.

Ironically the Irish banks did not have any of the toxic derivative products such as mortgage-backed securities on their balance sheets. Consequently if the Financial Regulator had made sure that some form of banking basics had been applied, Ireland should have emerged from the international crisis largely unscathed.

But where exactly are we in this crisis? In the week of 'Super Tuesday' it is time to stand back and have a look at what will happen next.

We have clearly moved through three of the four stages of a business crisis as analysed by international business gurus.

The first stage involves denying that the problem exists in the first place -- it's about minimising the amount and significance of the issue. We have had no shortage of the drip-drip approach that has attempted to present the outrageous as normal. Here's some of the spin doctors' handiwork: "The investment in Irish banks by Nama isn't going to cost the state a cent"; "It's a liquidity crisis not a credit crisis"; "Irish banks are some of the best-capitalised banks in the ... "

Secondly, the media was blamed for supposedly portraying the banking business in the worst possible light. Bankers and some politicians accused commentators of damaging the country by talking about the precarious funding structure of the banks. Even short sellers got the blame and eventually they were proven to be right.

This brings us to the third tell-tale sign: the organisation feels that it has no alternative but to offer up some sacrificial scapegoats, and a few executives are let go with handsome pensions in order to soften the blow. "They have taken one for the team" as a banker was heard to remark about a colleague who had fallen on his sword.

Lastly and most significantly, management gurus observe that within a couple of years the business rebounds stronger, more dominant and just as dysfunctional as ever. Having survived the worst, the banking elite's sense of self-importance is confirmed and the status quo is restored.

In the United States they have progressed further and faster through this process. They have managed to hold several public sessions of their banking inquiry.

In one hearing, Congressman Emanuel Cleaver of the House Financial Services Committee said in his deceptively slow southern drawl that banks had reached the point where "they now have what it takes to take what we have". In short, it appears that they took the massive bail-out money and kept going as if nothing had happened.

Goldman Sachs, to name but one bank that availed of Troubled Asset Relief Programme (Tarp) funds, is now back paying billions in executive bonuses. It may be a waste of energy and intellectual capital to rise up in indignation at the enormous amounts of bail-out money required by our bankers. It would be better to spend time focusing on measures designed to ensure that we will never again be dependent on the self-interest of elite bankers in the future.

Bankers have always maintained with the flourish of a winning argument that there has never been a successful economy without successful banks.

They point to examples of countries with poor economic performance and note that bad banks accompany poor economic performance as sure as night follows day. Therefore if government ensures -- no matter what the cost -- that banks are successful, a strong economy will follow.

A version of this theory is being offered to Irish people now. However, banks also have the capacity to impair an otherwise healthy economy if left to their own devices. Bankers have a privileged position by virtue of their banking licence.

With this privilege must come responsibility and accountability to those whose money they hold in trust. We should now require fundamental change. This banking crisis is, after all, one we have created at home; it is not just another economic downturn.

There will be new international regulatory standards applied in the near future. However in advance of international agreement and the findings of our banking inquiry, some things could be done immediately.

The first challenge is to restore some public confidence by applying the principles of openness and transparency to the banking inquiry. A commitment to holding the majority of the investigation in public and changing the structure of the inquiry to ensure that the Central Bank and Financial Regulator are not investigating themselves would demonstrate a change of approach.

A further challenge is to restore credibility to the accounting figures produced by the banks. Measures to increase the transparency and clarity of disclosure in these figures should be considered.

Thirdly, the regulator should stop hiding behind banking confidentiality and agree to subject itself to the Freedom of Information Act. Lastly, we should extend the whistleblower protections included in the Nama legislation to all financial services companies operating in Ireland.

Last week the governor of the Central Bank described the combined announcements of banking losses and recapitalisations as horrendous. These are banks that have been built up over generations to look after Irish people and their money. They and the regulator have failed us. It is time to tell the elite bankers that they are "due back on planet Earth"!

Shane Ross is on holidays

Sunday Independent

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