Dan O'Brien: Why didn't Brian Cowen demand the resignations of top bankers?
It's becoming apparent that this was more about bailing out the bankers than preventing a banking collapse, writes Dan O'Brien
Politicians grandstand as normal human beings breathe. Usually it comes instinctively and effortlessly to them.
But there has been surprisingly little grandstanding at the Oireachtas banking inquiry. That the members of the inquiry have been so restrained is remarkable given the perception, held by many people, that decisions taken during the crisis were as much or more about bailing out bankers than preventing the collapse of the banking system.
Among the main reasons for believing that bankers were being bailed out was the treatment of Anglo Irish Bank. It was the weakest link in the Irish financial system. It began crumbling from the moment the commercial property market turned in 2007. And when Ireland's already collapsing economy was hit by the tsunami sweeping across the Atlantic from the failure of Lehman Brothers in mid-September 2008, Anglo was washed away.
When a business fails, those who have been at the helm must bear the consequences. When the managers of a business who preside over total failure and when massive taxpayer resources are needed to prevent havoc being unleashed, there is all the more reason for senior management to be sent packing.
Yet when Anglo was going under and threatening to bring down the entire domestic financial system with it, the people responsible kept their jobs. This was always an outrage, but it is all the more now that Kevin Cardiff, a senior official in the department of finance, told the banking inquiry last Thursday that a plan was in place to have new management in the bank within four days.
He said he was in favour of nationalising the bank in late September 2008, along with his then boss, finance minister Brian Lenihan, but that the then Taoiseach Brian Cowen was opposed, along with those tasked with regulating the banks (who bear most responsibility for the fiasco, after the bankers themselves).
The argument against nationalisation of Anglo at the height of the crisis - voiced both last week and by previous witnesses - was that it might be a sign of weakness and/or it would cause financial markets to become even more fearful of Ireland Inc. As it happens, there is something to this.
The day after the guarantee was given, Irish government bond yields didn't move, despite the state explicitly taking on huge additional exposure. But when Anglo was eventually nationalised a few months later, Irish bond yields rose sharply, suggesting that market participants saw nationalisation as worse for the state's creditworthiness than a wide-ranging guarantee.
But if there were legitimate concerns about nationalisation at that time, why did the government not demand the resignations of managers in return for the guarantee as a demonstration that failure is not rewarded?
It is already well established that the regulator had an excessively close and even deferential relationship towards the institutions it regulated. The relationship between Cowen and senior bankers, and Anglo management in particular, should be the subject of extensive scrutiny when he appears before the inquiry next month.
That is all the more so because there has been no discussion at the inquiry as to why the authorities at the time of the guarantee did not demand extensive changes in management and boards in return for granting such open-ended support for private entities which had failed and required public support.
As always, this is particularly the case for Anglo. As Cardiff correctly pointed out, regardless of what had happened subsequently, that bank's business model was not going to work in the future.
Given that it had no future, there was absolutely no reason to allow the management to return to run the bank. There were many reasons to turf top players out.
Quite apart from the optics of allowing failed managers to continue to take huge salaries, the longer term signal was sent to the banking community about the absence of a downside for failed risk taking.
I have no wish to jump on any banker-bashing bandwagon, but the failure of the Cowen administration to act proportionately towards financiers who had presided over the failure of their institutions has been insufficiently scrutinised by the inquiry. And make no mistake, that failure had consequences far beyond this island's shores.
Among the things that perplexed outsiders, and led them to conclude that cronyism was rife Ireland, was the timidity with which the authorities dealt with bankers even after the collapse. The influential Lex column in the Financial Times newspaper, reflecting on the eventual nationalisation of Anglo in January 2009, wrote: "Time, then, for Ireland's cosy coterie of bankers and politicians to resume discussion of their golf handicaps in the club bars."
It is perfectly possible that this perception of politicians protecting bankers had real cost in terms of driving up bond yields.
Brian Cowen needs to be asked next month why he did not demand resignations when he was guaranteeing the banks, whether his personal relationships (if any) and/or deference towards bankers influenced his decision not to demand resignations and not to nationalise Anglo, whether he was naive in allowing bankers to return en masse to their previous positions and, over the following months, why did he not do more to remove more bankers as the scale of their failings became increasingly apparent?
If the former Taoiseach has many questions to answer, so too does the number two at the European Central Bank.
The questioning of Vitor Constancio, if it goes ahead, is likely to be more anticipated than ever given the discrepancies between the evidence of both Cardiff and his successor, John Moran, on the one hand, and the evidence previously given by ex-ECB chief, Jean-Claude Trichet.
Of the three main charges commonly made against the ECB, Cardiff dismissed the first: that Frankfurt obliged Ireland to grant a liability guarantee.
The Irish authorities did what they did in the weeks following the Lehman Brothers' collapse because they believed - rightly or wrongly - that it was in Ireland's best interests. Because there was a Europe-consensus against any further bank collapses does not mean a guarantee was forced on Ireland. For the committee to bark up that tree if and when Constancio makes an appearance would be to waste precious time.
A much more productive line of inquiry would be the manner in which the ECB suddenly and aggressively pulled the plug on Ireland in November 2010.
With the benefit of hindsight, it is clear that Ireland would have been required to seek a bailout in early 2011, so the judgment of the ECB is not the issue.
What is an issue is the high-handed and unflagged manner in which an institution peopled by technocrats treated a sovereign-elected government.
A matter of more significance in material terms is the "burning of bondholders". As was stated emphatically by John Moran at the inquiry, this was never a game-changing issue.
The savings that the previous administration and the current administration sought by burning the remaining senior debtors in defunct banks would have amounted to €3bn at most.
In the context of a gross government debt of more than €200bn, that is clearly not significant.
But it is still a significant sum in absolute terms. Even if the ECB had good reason from its own financial stability perspective for not wanting to set a precedent on burning senior bank bonds (these instruments are a foundation of the European banking system, and changing their risk profile during a crisis would have been very risky), there is a very clear discrepancy between the stated positions of the ECB and the former Department of Finance officials who appeared before the inquiry last week.
That discrepancy needs clarification.