Casey’s Questions for the Banking Inquiry

@Karl Whelan
It is extremely significant that a former head of economics at the Central Bank should end his article by stating bluntly:

“It is also worth remembering that our system of political appointees allows senior politicians pull the strings without the public knowing.”

An additional questions might be for the banks to identify the categories of bondholders for each type of bond along the following lines:
External?
External to EU?
Domestic?
Pension Fund?
Number of members of pension fund >x? <y?
Investment Fund?
Sovereign Wealth Fund?
Coporate Investors?
Financial Institutions?
Retailer (e.g. Dunnes Stores, Tesco)?
Insurance Institution (e.g. Quinn Group, AIG)
Date issued?
Date last transferred?

We should analyse whether these bondholders are also holders of sovereign debt.

Details of all representations made by bondholders and bondholder representatives to financial institutions or the state should be disclosed and investigated.

@Eoin

“But the methodology probably is not all that important as long as the major questions are answered fully and honestly within a reasonable timeframe. ”

This should be the primary focus of all those who actually want to fix our broken financial system, instead of simply looking for people to blame for this sad sorry state of affairs.

For me the most important thing is what happens after the enquiry has concluded……changes have to be made to the whole banking system and this is the main reason in my mind for the enquiry…….part of this of course is getting rid of the people that caused the problem.

Obviously I would prefer if it was in public because as we all know the last sentence in this article is very apt:

“It is also worth remembering that our system of political appointees allows senior politicians pull the strings without the public knowing.”

@Eoin
“or claiming that somehow some proceedings being kept out of the public eye will make the inquiry irrelevant or a cover-up etc.”

All proceedings for the foreseeable future will be out of the public eye and certainly all proceedings until well after we have lost additional billions – on top of the €11 Bn, €7 Bn of it public pensions – already lost on the banks.
Of course €550 million of the public pensions effectively went to help the “small business” of megadeveloper Liam Carroll.

You are starting to remind me of John Gormley (first three pages worth reading):
http://www.politics.ie/political-humour/122582-private-not-secret-john-gormley-dumber-than-george-w-4.html

But here is some good news:
“Fine Gael lodges formal objection to Nama with EU.”
http://www.irishtimes.com/newspaper/finance/2010/0121/1224262775999.html

@Eoin and De Roiste
“This should be the primary focus of all those who actually want to fix our broken financial system, instead of simply looking for people to blame for this sad sorry state of affairs.”
There are, however, two categories of people. Both have valid concerns – one with efficiency (get the system fixed), one with justice (we’re paying for it at the moment, the culpable should also be paying). In the past in Ireland, we’ve only ever seen the former addressed, never the latter, hence the ludicrous position of a former Taoiseach winning handsome sums on the horses…

We have allowed a situation to develop where power doesn’t carry responsibility. The financial crisis is precisely the sort of mess that causes. Nobody cares to do the right thing because there is no consequence for not doing it. Nobody is ever disciplined for ploughing on with the same course.

There used to be a saying in the IT industry “nobody every got fired for buying IBM”… until, that is, companies began to look at their IT spend and then they did… we need to move away from the “no one could have forseen” culture to at least get to the “our best efforts weren’t good enough”…

@yoganmahew
I agree.

@Eoin
As Karl Whelan has already explained public hearings for the Commission of Inquiry are unlikely and the Commission will finish…..Pat Kenny was speculating the Oireachtas would end up looking at this in Autumn 2011 in the run up to a general election. You can’t get more politicised than that. If we don’t want it excessively politicised we should have it in public now in the middle of the government’s term.

“A couple of initial observations. First, as I understand it, it seems unlikely that the second stage will involve any public hearings. The Commissions of Investigations Act of 2004 (link here) states that:

A commission shall conduct its investigation in private unless (a) a witness requests that all or part of his or her evidence be heard in public and the commission grants the request, or (b) the commission is satisfied that it is desirable in the interests of both the investigation and fair procedures to hear all or part of the evidence of a witness in public.

Neither (a) or (b) seem too likely to occur.”
http://www.irisheconomy.ie/index.php/2010/01/19/government-banking-inquiry-proposals/

If our government is innocent of a significant role in the lending bubble and bank collapse why aren’t they anxious to be exonerated? If even THEY don’t think they aren’t innocent or aren’t sure they SHOULDN’T BE THE GOVERNMENT.

Seeing that Michael Casey’s tagline is as a past senior official of the Central Bank, which is more relevant than being one of some 190 or so directors of the International Monetary Fund (the board that matters is somewhat smaller), isn’t it a relevant question to ask, why he didn’t go public on these issues when he could have had an impact?

I have raised this before because we can see in organisations, that it is very rare/ in Ireland non-existent, for people who see what is going wrong to risk position and money by taking a public stand. The Catholic Church and senior Irish public service illustrates the point.

I don’t know Michael Casey but given the calamity that has unfolded, I think that it’s important to make the point, that it is easy to take a stand with a very comfortable pension. But it’s tooo late.

Too many remained silent, accepted sham benchmarking and saw reckless mismanagement or the lack of basic management, close at hand.

To really investigate this dénouement, it should extend further than the search for villains in the banking sector.

How many of us would have behaved the same, including authors in search of fame or money, in an area where there was a backdrop of a broken governance system, of limited accountability at best?

This is what happens with the fish, as it rots from the head down.

@ zhou_enlai

The Central Bank considered itself impotent to force banks to increase provisioning as the Spanish Central Bank did, even before the excuse of having to defer to a regulator who was part of the bank..

Seven members of the CB board were on the board of its regulatory unit and the governor told an Oireachtas committee last year that he had no power to intervene in ths bank lending madness.

Being charged under the OSA, for claiming incompetence/reckless mismanagement would have made an interesting case.

It was certainly a dsyfunctional setup up given that in a small organisation, the head of the FR unit didn’t hear of the discovery of the Fitzpatrick loans for 9 months.

The level of communication, relations with staff, must have been an absolute joke.

What is most disturbing about all this is, is that nothing has changed. Look at the Kraft take over of Cadbury as an example of how it is business as usual. We can have all the inquires in the world but unless these people are going to end up suffering a healty loss it’s all a waste of time. Why did it happen, because of greed. When shareholder value is the over riding motive for doing business you are always going to have a nasty mess for some poor fool to clean up, pay for. Buy, buy, sell, sell!

@Michael Hennigan

There were certainly serious breakdowns in the Central Bank and Financial Regulator. Individual officers may have faced legal impediments to going public on these issues. It shouldn’t need somebody to go public to cure these problems anyway. It remains to be seen how much of a basket case these bodies were, particularly the financial regulator.

@ Eoin
“This should be the primary focus of all those who actually want to fix our broken financial system, instead of simply looking for people to blame for this sad sorry state of affairs.”

It is not a question of looking for people to blame but a question of justice being done. It is self-evident that if justice is not done and punishment not meted out wrong-doers will feel a sense of impunity and will be more likely to re-offend. Looking at the history of Irish corporate governance and politics, it is quite clear that justice is rarely done and the offenders re-offend again and again.

It is really quite simple. Punish those who commit crimes. Sack those who are incompetent. The system will sort itself out.

Well said Eamon accountability is vital and should be the end game of any inquest. We already know a lot of what happened we need to know why it happened and who is responsible . Those responsible need to be removed and if they broke the law should be charged. That is not a witchunt its Justice and anyone with nothing to hide should welcome this approach

@Alan:
Ah sure they had legal advice which said it was within the law to do all that. So any breaches of the law were unintentional and they were all people of great character and utmost probity.

10 What does the Competition Authority make of two big institutions colluding to window-dress year-end accounts? Are there other examples of collusion?

This isn’t a matter for the Competition Authority, its a matter for the securities regulator. But, Ireland does not have a securities regulatory — like the SEC in the U.S. Instead the financial regulator does both bank regulation and securities regulation. That’s a huge mistake. If you have “regulatory capure” of the bank regulator, your securities regulation goes down with it.

The Anglo accounting fraud amply demonstrates the lack of a proper securities regulator in Ireland. Note, AIB or Bank of Ireland did not engage in an accounting fraud. Its interesting to ponder why. it can’t be an unrelated fact that AIB and BOI are “cross-listed” in the US whereas was not.

Since both AIB and BOI have their shares listed on exchanges in the U.S. they come under SEC regulation. If they had engaged in the same accounting fraud as Anglo the consequences for management would have been far different. Instead of dealing with the non-existant securities regulator in Ireland they would be dealing with the Enforcement division of the SEC. The Sarbanes-Oxley Act prescribles 10-20 year sentences for accounting fraud in the U.S. — and its enforced.

@Eamonn, Garo, Andrew, Brian
I agree. We need to stop pretending that Paul Appleby is the Irish Eliot Ness. After yesterday the penny should have dropped with everyone.

Let’s face it, public shaming is the only sanction the vast majority of those who wrecked the country’s economy and it’s banking system will ever get. Only a microscopic proportion of our politicians, public figures, senior civil servants, senior bankers and mega developers will ever be tried. One or two perhaps jailed, none for very long. Inviting them to appear before an Oireachtas committee in a few years – which they will probably refuse to do – is no substitute. Even if they do appear it will be several years after the events they are discussing. Public shaming delayed is public shaming denied. Appearing in a report published in 2011 about events as far back as 2004 – simultaneously with a host of others – is in now way comparable to a personal grilling on TV.

If getting the truth was enough to make Irish institutions reform why did AIB crash again? Since it’s bailout in the mid-eighties it’s been scandal after scandal, each one bigger than the last. Why will AIB reform if it is let off easy again? It didn’t after:

1979 Gave extraordinary benefit to country’s leader
1980s Reckless lending – agricultural land
1985 Reckless trading and reckless oversight – ICI
2000 Tax evasion – DIRT
2002 Reckless oversight – Rusnak
2004 Theft – Bank overcharging
2008 Reckless lending – Green Property
2008 Massive reckless lending leading to total collapse – Bank guarantee
2009 March: Reckless lending – Half a billion of effectively public pensions given to AIB for small businesses but instead loaned to a mega developer against flimsy security

A 21 year old BComm who joined AIB in 1979 would now be 52. He still has 13 years ahead of him. If he is rational he and his colleagues will commit crime and criminal negligence every day until he leaves in 2023 to maximise his salary and bonuses. And after his criminality is exposed again, any attempt to question him publicly let alone convict him will be described by the establishment as witch hunting and vengeance.

The questions will have to be far more circumscribed if there are going to be useful answers.

The questions seem to suppose that banks are solitary thinking beings. No… banks, even small ones, are complex. So much so that some the questions could be answered with a Yay or Nay, presented one way or another, and plenty of examples to boot.

Where that all leads you, I don’t know. I’m all in favour of enquiries. But like banks, enquiries have to be properly managed.

Moreover, the questions are very Irish… as if all the woes originated in Ireland. Yet recognition of the context abroad is critical to understanding.

Quite ironic to read today’s article in this light of another.
http://www.irishtimes.com/newspaper/finance/2007/0302/1172185350811.html
also by the central bank’s former chief economist…
“Making the banks concentrate more on the risks inherent in their lending is all the more important since the Central Bank cannot adjust interest rates and has not engaged in moral persuasion in an attempt to moderate lending.”

And as Michael Hennigan asks, what was economics research up to at the central bank over this time, and what input was given for the CBI’s Financial Stability Review of 2007 (after Michael Casey’s time I believe)? It might be more instructive to explore the factors that led to the writing of such research.

Nor is corruption a new theme – see Michael Casey h here.
http://www.irishtimes.com/newspaper/opinion/2007/0219/1171575969286.html
or here
http://www.publicinquiry.eu/2007/02/19/corruption-an-insiders-account/

Notwithstanding the merits or otherwise of the question posed by Mr. Casey I concur with the points made by Cormac and Michael Hennigan – as I understand it, Mr Casey was in position up until 2005 at which point the slide to oblivion was well underway supported by the numerous tax breaks and incentives in place. The shift from export driven growth to massaged maintenance of the facade of economic development was already apparent as was the state’s increasing over-reliance on property based taxes. Surely these were issues that any self-respecting economist or group thereof (what’s the collective name – a ‘shower’, a ‘contradiction’, a ‘curve’ or maybe a ‘regression’?) should have spotted. So perhaps one of the starting points for Govenor Honohan should be to formally question Mr. Casey, not about his retrospective views but about his then responsibilities (2005) asking him to identify the papers he produced that analysed and alerted the CB and the Regulator to the impending disaster. If he can come up with these and demonstrate that that wisdom existed and was ignored then I’ll be sure to tune into his columns on a more regular basis. Failing that he’s just another hurler on the ditch although a far more cynical one than most of the rest.

Also and accepting that responsibility for the regulation of the banking system rests with the CB and Regulator, it seems to me that the equally and possibly more critical issue of the management of the economy at an administrative level is continually under-played. I accept the crass culpability of the politicians (noting that the soldiers of fortune have today been given a boost with MRBI poll!!!) but it seems to me that the permanent government was extraordinarily derelict in its duties and has gotten off very lightly indeed. Maybe people just don’t understand what they do and the range and reach of their influence but I simply cannot fathom how they got things so wrong – and, of course, there has been no change at the top in that regard. The new Sec Gen was intimately involved not only as a senior manager in the economic mis-management of the country’s finances but was also, as I understand it, the point man in the Department’s interaction with the CB and the Regulator. The dark lords also sat on the Board of the CB. So what did they do? Why did they fail so miserably and to such cost? Were they simply incompetent, indolent, economically illiterate or has there been a genetic transfer between them and their long-term political masters that makes them effectively inseperable? Whatever the answer I’d like to know.

The capacity of the Department to show its teeth when it chooses to is very evident now but was all too absent for far too long in the past….another inquiry anyone?

Two observations.

First, in relation to Cormac’s point “The main focus of his questions above are directed to the actions of the Financial Regulator. But he is strangely quiet when it comes to hard questioning of his former employer, the Irish Central Bank.” I know that during my time there (2002-2007) I didn’t think of it as “I work for the Central Bank and the Regulator is some other organisation”. My employer was the Central Bank and Financial Services Authority of Ireland. There may have been separate units looking after monetary policy and regulation but nobody was in any doubt that this was a joint organisation. I can’t speak for Mike but I would suspect he does believe he is criticising his former employer.

Second, I agree that questions about the economic analysis relating to house prices inside the Central Bank are valid ones. I would point out that institutions like the Central Bank are not monoliths in which everyone holds the same opinion. One example I’d give is this paper by Gerard O’Reilly and Kieran McQuinn
http://www.centralbank.ie/data/TechPaperFiles/15RT06.pdf

Look at Figure 4 at the back. They were estimating that house prices were over-valued by 15% at the end of 2005. According to ESRI\PTSB house prices then went up another 12% before they peaked in February 2007, so their model’s estimated overvaluation was probably above 20% by then. Of course, house prices have fallen by more than 20% but their model calculates an appropriate value for house prices taking GDP as given and since 2007:Q1, nominal GDP has declined by about twenty percent.

Ultimately, though, decisions about what to say about house prices in official documents — as opposed to working papers by staff economists — were taken at the highest level.

@ Zhou

Many incorrect predictions appear moronic in retrospect! This wasn’t really a prediction that prices would fall by 20%. It was that they were 20% out of line with fundamentals — one way that things could have become realigned was by fundamentals continuing to improve and prices staying flat for a while, i.e. the soft landing scenario. This is mentioned as a possibility in the paper.

But, yes, once the misalingment started to get as big as it did, the soft landing became increasingly unlikely. And once prices started to drop, the unsustainable share of employment in construction was going to drop fast. As the over-valuation started to get big, the risk of a nasty landing got bigger. Layer the biggest global recession since the 1930s on top of it and we are where we are.

Note, I’m not trying to defend the CBFSAI’s performance during this period. But it’s worth making a distinction between, on the one hand, research done by people trying to understand what’s going on and, on the other hand, official pronouncements in which “the soft landing” is always going to be the baseline scenario.

@KW

Hindsight is indeed 20:20 vision!

I get the impression that many lessons have been learned internationally on the performance of the housing market when equity has been released for personal consumption.

I would like to know if our analysis of the side effects of the hoped for soft landing on the wider economy sufficiently well informed and rigorous.

I take the point about the soft landing being the base line in public utterances. I would be interested to know how the likelihood/risk of a soft landing as opposed to a sudden stop were weighted in presentations to governments. I would also be interested to know what reliance was put on representations, analysis and figures provided by the private banks.

The risk management strategy of the Central Bank/Financial Regulator which gave rise to the quality, degree and scope of risk analysis must now be under the spotlight. This is not a criticism of all the individuals involved.

@MH

If the system relies on individual civil servants to fall on their swords losing their jobs and pension entitlements then the system is broken.

Also, if somebody provides advice and it is rejected then they have to live with that because it is not their right or responsibility to attack the institution they work for.

If the advice was provided then the records will show it. If people did not put their views in writing becasue of fear of FOI then that is a problem. However, the fact that views may well have been expressed to senior officials and possibly to politicians will be relevant.

@ yoganmahew

I agree with you regarding the culture of not taking responsibility in Ireland. I also think changing the system after the lessons of the enquiry have been learned goes in tandem with those that were responsible taking a fall. Changing the banking system cannot happen without these people taking a fall as the cosy cabals would still be in existence if they didn’t.

I definitely feel that those responsible should not be getting golden handshakes when they are disposed of and if there is any illegality they should face the full rigours of the law……..do we even have laws to deal with this type of thing!!!!!

@zhou
“If the system relies on individual civil servants to fall on their swords losing their jobs and pension entitlements then the system is broken.”

I agree. The system catastrophically failed and remains completely broken. Honohan is an effective piece of emergency surgery but the underlying body politic remains completely sick. There were many warnings, from abroad and from within Ireland. If Honohan had been appointed well before the bubble burst things would have been different. But he would never have been appointed to any powerful position by an Irish government before this crisis, let alone by FF/PD/Inds to the governorship of the Central Bank during a lending bubble.

The government chose people who would go along, and they went along. Now the government are getting away with blaming their own appointees for doing what the government appointed them to do. Only in Ireland.

@Jonathan:
Any relation to Jonathan Larbey, who writes press releases for Irish Liquidations, which provides the Director Insolvency Advice to which you refer?

bjg