The banks have been recapitalised without any sanction. The Government's Christmas spirit knows no bounds as the Establishment moves to protect its own, writes Michael Casey
THE TRUTH has at last come out. For some months now the chairmen and chief executives of the banks, the Central Bank, the Financial Regulator and the 20 PwC consultants all agreed that there was no problem of under-capitalisation in the Irish banks. There was also complete agreement that the banks had adequate shock-absorption capacity for a number of years ahead.
The speculators on the other hand did not believe a word of this line and went on selling the shares of the banks, forcing them down to very low levels indeed.
Now the truth is out. The speculators were right all along. Three banks have been recapitalised by the Government to the tune of €5.5 billion. It is not as if the Government forced this funding on the banks; they would hardly have accepted it if they didn't need it. Therefore, the bankers, by their deeds, have finally admitted that their institutions were under-capitalised.
This implies an admission that they badly mismanaged their institutions. It also means that the various stress-testing exercises that seemed to keep the regulator happy were not worth the paper they were written on. The banks, of course, were free to tick whichever boxes they thought the regulator would like to see ticked. This exemplifies how "principles-based" regulation works - or rather doesn't work.
The terms of the recapitalisation are not very onerous from the banks' perspective. Indeed, they would not be able to raise the money themselves from the capital markets on such favourable terms. If and when their fortunes improve they can buy out the Government and get back to normal. The taxpayer will not benefit from any increase in share values.
Although the banks are supposed to allocate a proportion of credit to small- and medium-size enterprises, it is difficult to see how this will work out in practice. To do this properly would involve micro-management, which the Government cannot do, and it is most unlikely that their representatives on the bank boards will be able to get into that level of detail. The Central Bank tried to administer similar schemes in the 1980s, and failed. In a recession where demand is deficient, most companies are not going to be able to access bank loans anyway. One wonders if the Government has been misled on this point.
The banks have been bailed out without any sanctions. The fact that Anglo-Irish Bank is deemed to pose a systemic threat is surprising - clearly the Government's Christmas spirit knows no bounds. The banks didn't have to engage in any form of consolidation - not these three at any rate.
Full nationalisation was avoided and there doesn't seem to be any question of takeovers by foreign institutions. Hence, when things recover, the same boards and executives can go back to their normal management practices, knowing that they can do as they like because the State will bail them out again if needs be. The "moral hazard" problem is now fundamentally embedded in the system. There is no incentive for banks to do better in the future.
The truth about inadequate capital is out at last. But there is a much more fundamental question - and that is why do banks get away with so much in this country?
Banks are part of the establishment in Ireland, and have been for many years. In the 1960s and 1970s virtually every family in the country hoped to get one or more of their children "into the bank".
In most towns and cities, bank managers were respected and looked up to. Many of them were Peace Commissioners. In those impressive bank buildings - almost like churches - business was conducted in reverential tones. It never occurred to anyone to check their bank statement. It was inconceivable that a bank would make a mistake, let alone pull a fast one.
These attitudes persist to this day, despite many banking scandals. It comes as no surprise that the recently revealed behaviour of Seán FitzPatrick of Anglo Irish Bank is not, according to him at any rate, against the law. Even the law bends over backwards to protect companies, especially banks.
This brings us full circle to the question of legislators, ie politicians who are also part of the establishment - the second estate. The laws are not designed to punish one's own kind. They are designed primarily to protect the establishment. It is virtually impossible to prove fraud in this country. That is not an accident. In the US there is a crime called "civil racketeering", which is used to punish many white-collar fraudsters. There is no such crime on our statute books.
No individual in Ireland could afford to take a bank to court, and class actions, which are common in the US, are not permitted here. The consumer doesn't count for very much in this country. No political party has ever sponsored any form of consumerism.
During the tribunals of inquiry there were occasional revelations about politicians who had personal debts written off by banks. It is not an infrequent occurrence. There was even a case where RTÉ refused to pursue a politician for full recovery of legal costs.
Politicians and senior public officials (including former central bankers and regulators) are regularly invited on to the boards of banks. It is also the case that the children and other relatives of politicians and senior officials are employed by the banks via an inside track. If foreign banks took over, would these perks continue?
Corporate hospitality and political donations are perhaps not as flagrant as heretofore, but it would be naive to assume they do not still have a significant impact. As a former politician once observed: "It's hard to be mad with an opponent when he stands you a large brandy in the Dáil bar."
Over the years the banks were treated well by policymakers. The bank levy was removed. Various ratios were removed or reduced. Administrative controls to safeguard the consumer went by the board.
The banks were given carte blanche before there was enough competition in the system to ensure a fair deal for the consumer. As soon as the IFSC was set up, the big Irish banks were allowed to move their international departments there at the earliest possible date and so benefit from tax concessions.
The banks received the lightest tap on the wrist over the bogus non-resident account scandal, which, of course, the entire establishment had always known about. Tax settlements were not particularly onerous.
It is also worth remembering that the major mistakes made by the banks were centred on lending to property speculators, who are also part of the establishment. The bailout of the banks will also take pressure off property speculators and avoid forced sales of land and buildings.
By giving massive guarantees and capital injections to the banks, the Government has severely constrained its own ability to borrow. Hence, taxpayers and consumers and workers will have to pay the price over the next few years - for mistakes which they had absolutely nothing to do with.
But, once again, the establishment which caused the mistakes has come out of the meltdown virtually unscathed. If the banks, including Anglo Irish Bank, need additional capital, it will be forthcoming - at a time when health services are being slashed, taxes and levies raised, and workers will have to accept substantial pay cuts and job losses.
It is interesting to note that the only Minister who has proposed any sanctions against the banks is a member of the Green Party, which has probably not yet been fully absorbed into the establishment.
Although the recent Government plan is all about change and renewal, some things never change. The banks are still very much part of the establishment and will remain so.
• Michael Casey is a former chief economist with the Central Bank and a board member of the International Monetary Fund