'The information given by banks did not turn out to be the reality," Brendan McDonagh, the chief executive of the National Asset Management Agency (Nama), said last week as he explained the workings of his agency to an Oireachtas committee.
cDonagh chose his words carefully. He did not call the banks liars or cheats -- he said that "a lack of awareness and denial . . . was prevalent" -- but the implication was clear: Ireland's bankers, who remain in business because the State saved them from collapse, have lied to the government and its agencies from the very beginning of this financial crisis and they have kept lying all the way through.
It is possible to argue that leading executives of Allied Irish Banks, Bank of Ireland, Anglo Irish Bank and Irish Nationwide have simply been incompetent; that they never understood what their own banks had been doing for the previous few years, never understood the difficulty they were in and have been continually surprised by the unfolding disaster. If that is the case they deserve to be hung, drawn and quartered by their own shareholders.
It is possible, too, that they were so shell-shocked by disaster that they chose collective delusion over reality, but it is far simpler to believe that Ireland's banks lied repeatedly to the government while extracting as much cash and guarantees as they needed to stay alive, and continued to lie to Nama about the quality of the loans they were handing over and even the number of loans that were actually being serviced by interest payments.
McDonagh described "a troubling picture of poor loan documentation, of assets not properly legally secured and of inadequate stress-testing of borrowers and loans" as well as a "reckless abandonment of basic credit risk and prudent lending".
Remarkably, no one noticed. In recent years auditors have, presumably, trawled through the various banks, taking at face value every statement made by a bank executive. Was there rigorous spot-checking of loans? If there was, the spot checkers failed to notice the serial errors in documentation and security that McDonagh's team have uncovered. These were not mind-numbingly complex errors that would have required specific banking expertise to unravel: names were wrong, or omitted; types of mortgages were wrongly stated; banks thought they had a first charge on a property but did not bother to check, and subsequently discovered they had a second charge. The errors, McDonagh said, "are surprising. One would have thought these are just basic things that any bank should get right when issuing large sums of money to individuals."
Basic things, but in the mad rush to lend money the basic things went out the window. "It appears to me, from the outside looking in, that banks were writing loans so quickly that in many instances they were relying on the undertakings of the borrowers' solicitors and did not register their charges in time," McDonagh said.
And remember the protestations many months ago about all the equity that was wrapped up in those loans to developers? The banks dismissed the idea that they had been handing out 100 per cent loans, claiming that 75 per cent was the real figure. McDonagh could not have been clearer: "We have come across a number of instances where there was no equity in the deal, where there appears to have been a loan of 100 per cent to the borrower for what may have been speculative agricultural land. Again, I do not think anybody would call that good banking practice."
And what about rolling up the interest on a loan and booking that interest as profit even though not a cent had passed from borrower to bank? As many as 15 per cent of the loans transferred to Nama by the banks have rolled up interest, and just over a third of the loans are actually generating cash repayments.
The scale of the collapse is staggering. Nama will pay at least €43bn to buy loans that were originally worth €81bn. At least another €30bn has to be pumped into the banking system in recapitalisation, much of it dead money flowing into Anglo Irish Bank. Not all of it goes in immediately, with many billions to be drip-fed into Anglo over the next decade. There will also be some money coming back from Nama, and possibly some coming back from AIB and Bank of Ireland in the future, but the losses for the state will most likely exceed €30bn. That is just the straight financial cost: no one can say what impact Nama will have on the economy over the next decade. It will dominate the property market, controlling prices, availability and the solvency of developers. Its transparency will need to be crystal clear and the scrutiny from Comptroller & Auditor General, as well as from the Oireachtas, will need to be forensic.
McDonagh's testimony last week helped to show that our banking system was not brought down by global forces, or by recession, or even by a few bad loans. They contributed to the crisis, but the fundamental flaw in an unregulated system was the recklessness of the executives who authorised billions of euro in loans without bothering to assess the risks or check the security. When it all started to crash down around their heads, they could have come clean, told the government the truth and allowed it to form a bank resolution policy founded in reality rather than delusion, but that would have required a level of honesty and humility that is all too clearly absent in the modern-day banking executive.
Just seven months ago when Finance Minister Brian Lenihan gave the Dail an estimate of what Nama would pay for the loans, he opted for a discount of about 30 per cent. Lenihan stressed that the final figures would be calculated on a loan-by-loan basis, but based on what the banks had told him, 30 per cent was a reasonable estimate. With the exception of Bank of Ireland, which is coming in close enough with a discount of 35 per cent, the other banks are so wide of the mark that it is impossible to believe that the original estimates were anything other than a figment of their own deluded imaginations. Or crude deception as they bought time to try and find some way to wriggle free.
The result of their mendacity is a bank resolution policy that was created on the false premise that Ireland's banks were struggling with a liquidity crisis -- the credit freeze dried up their access to funds -- when in reality they were struck down by a solvency crisis.
If Lenihan had known the truth, his response to the crisis could have been very different. Nationalisation would have been a far more likely policy response so the banks had a huge incentive to be economical with the truth. And it has worked, up to a point. Bank of Ireland and AIB remain in majority private ownership, though their ability to stay that way depends on the capital they manage to raise this year. Despite the evidence of serial incompetence at executive level, personnel changes have been few and the banks' cultures remain intact. We still see the occasional flicker of arrogance (a €1.5m bung to the pension pot of Bank of Ireland's chief executive, as if it were a mere contractual bauble rather than two-fingered insult), but enough to realise that recovery will see it return in all its old hubristic glory. For the moment, nothing has changed: AIB fought its corner right up to the last minute before the Super Tuesday announcement, believing that it could still bludgeon the government to bend to its will.
All the banks have played fast and loose with Nama, trying to push through valuations and loan assessments that are simply false. As McDonagh said "we rejected approximately 25 per cent of the valuations submitted by the institutions because they were too high". He said that was no surprise, because he expected the banks to "put their best foot forward" but added that "on the days of fully trusting people to do things the right way, we have all learned the hard way that it just does not happen".
That is the grim truth: our banks cannot be trusted to do the right thing and must be treated with hostility and suspicion by Nama and by Matthew Elderfield, the new financial regulator, and by Lenihan and his Department of Finance officials. They have bluffed and blustered and lied their way to a resolution that protects them at the expense of the taxpayers. That cannot be allowed to be the final outcome. Bankers who were reckless must be excised from the system and never allowed work in it again; lawyers who left their clients or others exposed must be pursued and auditors who failed to protect shareholders from the wilful excesses of their executives must be brought to account. There may, of course, be criminal proceeding at some distant point in the future, but the prospect of those proceedings cannot get in the way of a rigorous assessment and punishment of those who failed their shareholders, their employers and their clients. Failure carries a price and it must not all be borne by the taxpayer.
