The Honohan Report Post author By Philip Lane Post date June 9, 2010 You can download the report here. Categories In Banking Crisis Tags Irish banking crisis 100 Comments on The Honohan Report ← Spillovers → The Regling-Watson Report 100 replies on “The Honohan Report” The other report is available at http://www.bankinginquiry.gov.ie/Preliminary%20Report%20into%20Ireland's%20Banking%20Crisis%2031%20May%202010.pdf Much to be analysed but this seems tragic (page 116) “Aside from ELA, although a large amount of resources had been devoted to preparation of the crisis management manual, it was not employed to any significant extent during the actual crisis. This was due to the fact that the procedures outlined were excessively cumbersome, and sought to involve too many officials of the Central Bank and Financial Regulator at a time when rapid decision making was at a premium. ” They put huge resources into a crisis management system that was not fit for purpose. Wasted exercise…. im shocked….so it wasnt Lehman after all. Whodathunkit Oh, and watch the spin on anglo. PH is at great pains to keep ising the words “disorderly bankruptcy” when he says no, best kept alive then. Of course we couldnt have had an orderly bankruptcy as we dont have a goddam resolution system then or now…. @Sarah Carey You expect that when the pen pushers are in charge of the mad house. Taking another area of the Report which lists all of the great and good at the Central Bank and the Financial Regulator from 2003 – 2008 I wonder is there any hope that they might be given their P45s without any Pension/Payoff as they have cost the Taxpayer the proverbial shirts off their backs due to their incompetence. @BL But we do have a law on blasphemy for which we are told that there is a constitutional imperative by our brilliant AG. Special Resolution Regime must have been banned by Pope Pius XII. I’ll keep my contribution short for once. From RTE’s website: But Professor Honohan adds that ‘rocking the boat’ would have meant the regulators’ having to face possibly strong adverse public reaction. He says the Government’s reliance on the building boom helped to create a climate of public opinion which was led to believe that the party would continue forever. I cannot argue with that assessment. I think it is very close to the truth of the situation as it existed ‘on the ground’ in Ireland during the boom years. What I am fearly of, is the history that will be passed on to young people growing up today, who didn’t experience the Celtic Tiger first hand for themselves, is a history that involves a lot of pointing of fingers. But very little acceptance of responsibility on the part of Irish society as a whole. We had better be prepared to accept our own part that we played in our own downfall as a nation, if we intend to conduct any sort of meaningful inquiry at all. The problems were not restricted to any particular generation of Irish folk on the ground either. Each and every age group, and level of society played their own part in Ireland’s downfall. Chief amongst my disappointments, is a body such as IBEC. Discussion recently points to the fact that small and medium scale enterprises were not acquiring a fair share of lending during the Celtic Tiger, not to mind now. We really haven’t managed to build up the eco-system of small and medium entreprises that might see Ireland through a bad recession or depression. BOH. “Irish banks are resilient and have good shock absorption capacity to cope with the current situation” – – Patrick Neary, Chief Executive, Irish Financial Regulator, September 19, 2008: – two days after the collapse of US investment bank Lehman Brothers. There has been a huge human toll from the negligence, recklessness and incompetence of the cast of characters in this drama, while most of them are guaranteed a high income for life. This sentence in particular from RTE’s website: The Governor was particularly critical of the 2007 financial stability report, which predicted a soft landing for the property sector. I personally took the trouble to interview several home owners in the south Dublin area during 2007-08. It was quite clear to me at that stage, that those home owners would not accept any suggestion the values of their properties would suffer any immediate damage as financial circumstances became more perilous – and it was obvious that Ireland’s construction fuelled economy was kicking it’s last few kicks. There was nothing waiting in the wings to replace construction as the engine at the centre of Ireland’s economy. A whole generation of young Irish men and women had left second or third level education to pin all of their hopes and dreams on a career in construction related employment. Simon Kelly’s article in the Sunday Tribune last weekend, pointed out several factors that have helped to avoid a very hard landing. BOH. http://www.tribune.ie/business/news/article/2010/jun/06/back-to-business-simon-kelly-foundations-are-laid-/ Meanwhile Cowen tries to do a Reynolds…. “Speaking at a news conference in Dublin, Taoiseach Brian Cowen insisted the reports vindicated the approach taken by the Government to deal with the crisis” Also Section 8.33 say that the CBFSAI didn’t argue with the arguments in favour of including subordinated debt. But I’m not sure its clear who was making those arguments…DoF? Video interview with the governor here if anyone’s interested. Based on a quick Ctrl+F of the document, I’m disappointed that the change from Income Multiples to Affordability on mortgage lending wasn’t addressed. This happened around 2003. I see this change as a central driver of the resi bubble. Because this was a relaxation of existing guidelines, it’s not just a case of inaction but the regulator(/or CB) proactively encouraging greater gearing. I guess it will remain a mystery. @ Ahura, I see this change as a central driver of the resi bubble. Because this was a relaxation of existing guidelines, it’s not just a case of inaction but the regulator(/or CB) proactively encouraging greater gearing. I guess it will remain a mystery. Interesting observation, thanks. BOH. @ Marcus, Video interview with the governor here if anyone’s interested. I listened to the governor’s interview on RTE news. I worked right smack bang in the middle of the property developers, banks and borrowers. Pat Honohan has the right picture. Many of the players who are culpable, did have an image of themselves as buccaneers. The same rules do not apply and so forth. There might have been an excessive amount of male dominance. The evidence of that was in the excessive work hours, the absence of life balance and general bravado going on. Many of the central figures were held up in enormous admiration, as geniuses. Instead of challenging that culture, the idea was let them get on with it. I was impressed that Pat Honohan could identify that aspect of the Irish ‘boom culture’. BOH. @All Well done to all those who called for an inquiry. The names that spring first to mind are Honohan himself and Colm McCarthy. I remember Irish Independent editorials calling for it and Elaine Byrne and Sarah Carey covered it extensively as well. Special mention to Eamon Keane, who featured the need for an inquiry on his show almost every day weeks. That must have had an impact. Matt Cooper has also given these issues a lot of coverage. There were many links posted on here about inquiries in the US and Iceland and that also helped to raise it. Finally, while Dan Boyle and the Greens were probably the decisive factor all those in the government and the establishment who supported it deserve some rare credit. With the Garda/ODCE investigation losing credibility by the day and with a steady stream of revelations about cover ups it was desperately needed. If only our establishment stopped devoting so much energy to cover ups. If instead they had a swift inquiry, then publicly acknowledged mistakes without reservation, and focused on learning lessons and introduced proper monitoring to prove they’d been learnt, well, there might be hope yet even for them. The situation of Brian Cowen is untenable. If FF want to continue in office with any moral authority he has to go. If you were the Minister for Finance when the great bubble inflated, and you have been severly criticised for your conduct then, you really don’t have any right to hold senior office. With the top bankers, bank board chairs and regulators having gone then, whatever about their replacements, Cowen as the last of those left who were directly responsible must go. @All Typo above. That should have been: “Special mention to Eamon Keane, who featured the need for an inquiry on his show almost every day for weeks.” The graph at this link says more simply than all of these reports put together about what has been happening in Ireland over the last decade or more. http://dublinopinion.com/2010/06/08/irish-housing-and-wages-portrait-of-a-scam/ I am sure that there is ample shelf space for both reports on the many shelves in the Government Departments. Rather than seeking to apply the paint of blame to individuals, surely it is of more importance to see that these reports be properly digested by the permanent government in this country? Its ability to do so will be a clear metric of its fitness for purpose!!! As opposed to being a library for reports that it is unwilling or unable to digest. Running after politicians at this stage seems like an indulgence of a mob. The politicians, at least, face us every few years! @Al I take your point but it’s not a personal thing. Cowen is the last of the (most) guilty men left in office. As the Minister for Finance he was responsible for the finances of the country, for the things he didn’t do as much as the things he did, and for everything that his subordinates did also in overall terms. Excellent indictment of him here: http://www.finegael.org/news/a/3221/article/ @Brian O’Hanlon Chief amongst my disappointments, is a body such as IBEC. Discussion recently points to the fact that small and medium scale enterprises were not acquiring a fair share of lending during the Celtic Tiger, not to mind now. The Bankers p. 135 points out the extent of the banks’ influence over IBEC. Small wonder it wasn’t shouting too loud about SME lending. Nothing in this report that we do not know already. What I read is failure was and is systemic. Nobody is really to blame. You can all continue to draw your pensions and breathe a big sigh of relief. Waste of paper. What are the implications of assignment of culpability to the DoF and Central Bank for failure to regulate? Is it a case that they will learn their lesson and put capital requirements and safeguards in place to prevent recurrence? Is this even vageuly sufficient? Putting aside the fact that it is increasingly unlikely that we will get an opportunity to have a housing and mortgage market of similar scale to regulate again in our lifetimes, there is a significant moral hazard implication, applicable across all public functions, in failing to apply any retribution to the protagonists in this debacle. Unless there is a significant change in the status quo in Irish society, incompetence appears to be rewarded in our public service. It would appear that depressingly few, if any, individuals have been identified as incompetent in either report, and those that have, namely the erstwhile Governer, have been rewarded handsomely for their failings with very substantial golden handshakes/pensions. And what about those firms of accountants who appear to have missed crucial detail auditing the accounts of banks. Will they face any sanction for failing to protect the shareholders of these institutions? Looking for heads to roll may seem populist, and unlikely to make a difference at this stage, but if a person knows that there are no negative ramifications to making costly errors of judgement, in any walk of life, are they likely to give those decisions due care and diligence? @ anon, The Bankers p. 135 points out the extent of the banks’ influence over IBEC. Small wonder it wasn’t shouting too loud about SME lending. I would like to pick up on that. But I will allow the discussion to develop a little more here in the meantime. I might be back with a further comment later. BOH. @Oliver “If only our establishment stopped devoting so much energy to cover ups.” As Max Weber pointed out, “secrecy is the only power of bureaucracy”. Back to the 1950s… “The success of any public policy depends no less on its intrinsic merits than on the quality of the public service that executes it… The civil servant’s task is at any time a difficult one; it will not be lightened if he fails to bring the public closer into his confidence…In shaping the Civil Service to the satisfactory discharge of its present-day responsibilities, the public may reasonably expect to know how the official mind works and to understand the thought that animates it.” Patrick Lynch. Studies. 42(1953). p. 259-260 IN 2003, the then FF-PD government restricted the Freedom of Information (FoI) Act altough it was not an issue during the 2002 election. However, once that election was over -senior civil servants presented a report calling for changes to FoI. In 2008, OECD reviewed the Public Management of Ireland. The report stated that “the government should reduce barriers to public information by making all requests under the FoI Act 1997 free and extend its reach to a wider range of state agencies…” In the summer of 2008, the Government appointed a Task Force to develop an Action Plan for the Public Service drawing on the analysis and recommendations of the OECD review. The Secretary General of the Government chaired this 9 person group. Other members were the Secretaries General of the Departments of Education and Science, Health and Children, Environment Heritage and Local Government and the Secretary General (PSMD) of the Dept of Finance. Another member was a former Secretary-General of the Department of Entreprise, Trade and Employment. In summary, 6 (two thirds) of the nine members were or had been senior public servants. In November 2008, this group did not make any recommendations on either reducing the FoI fees or extending the scope of FoI. With Fol, we can also see the quality of the official mind, eg, the papers of the Tax Strategy Group; the fees for those managing the Bertie bowl. Without FoI, how can we be sure that low standards do not exist in high places? The current Senior Public Service appears completely unwilling to bring in one key measure that would enable us to be have confidence in their competence. They clearly value secrecy as a means of covering up inept management and as such, bear a major responsibility for the hole. The Senior Public Service has shown that it does not value limiting the scope for excess by favouring one method among a whole series of checks and balances needed in government in a democracy. The Public Sector Task Force has failed to contribute to the design a system of government so that • options being considered are known to the public, in advance of decisions being taken • failures can be spotted more quickly • public officials (elected and appointed) are clearly accountable for both success and failure. We have a lot of work to do. @Oliver Vandt At this point the government should ask for Paul Appleby’s resignation and approach … say, how about seeing if William K. Black would be willing to serve as our Director of Corporate Enforcement for a period? This would allow him to take over the criminal investigation. Of course the government would sooner eat its shoes than do this. But if the opinion-formers who got behind Honohan’s call for a banking investigation were to come together in calling for a new DCE, then something good (if not necessarily Black) would quite possibly come of it. I’m pretty serious. Bill Black for DCE, how about it? @ Robert Browne I thought the same thing. Everyone is to blame – politicians, bankers, regulators – but who is going to be held to account? Brian Cowen says he takes full responsibility for the decisions he made as Minister for Finance. If he takes full responsibility he should resign!!! @Donal O’Brolchain +1 The most interesting comment on the decision to include Anglo in the guarantee is to be found in the following footnote at p.132. With respect, it is disappointing the Patrick Honahan regards this of “academic interest” only. The inclusion of Anglo in the guarantee has resulted in the State being exposed to a liability running to some 14 billion to date. Whatever difficulties a decision to exclude Anglo might have created, surely these would have been lesser of two evils? “With the benefit of hindsight, a plausible case can be made for a more complicated policy as perhaps offering a lower net cost in the end. Thus, the whole system except Anglo could have been guaranteed, allowing the latter to close, without that implying destruction of the rest of the system. Given what we now know about the extent to which most of the final fiscal costs of the guarantee come from Anglo, on the face of it such a course would have offered savings. It would not, however, have been trouble-free. It would have earned harsh criticism from other EU countries as being a ―second Lehmans‖ imposing a destabilising spill-over effect on them, would have caused a jump in government borrowing costs and would have entailed large and arbitrary costs to Anglo creditors, including other banks, resulting in economic disruption and job losses. Since the decision makers had no inkling of the scale of the looming net deficiency in Anglo, this option – with its sizeable risks in an already volatile environment – did not seem worth considering. As such, it is of academic interest only.” @ All, Okay, I am going to let this fly. But what I really need is to hear from some others with experience in other industry sectors than mine. I can be accused too easily of having blinkered vision, by the fact that I work in providing professional services to the construction industry. I would be delighted to hear someone contradict me on this, or provide a better story from some other industry sector. There has been much heat, and little light shone by politicians about delivery of credit to small business. I have worked a lot in small business and gained a professional training myself. I am in my mid thirties and I am finally old enough to know the SME sector in Ireland is never going to support a vibrant, young working population. I am basing my argument on some recent investigation I have done on a few Irish enterprises who are hoping to win contracts abroad. I only looked at the construction industry professional services sector where I work (providing design and engineering services to a wider foreign market). I tried to article some one my ideas in the blog entry linked below. The picture I discovered, when I compared enterprise efficiency and sophistication in Ireland to elsewhere, is that we are struggling at the small and medium enterprise level (in the industry sector I mention). We stole resources from SME’s during the boom years, to divert into property assets. In theory, if that plan had worked, lots of SME’s would now benefit from good credit supply lines. Investors could dispose of their valuable property assets, to fund SME’s. But I find, at the SME level, with information systems, management, training and staff we are not able to compete for work abroad (in the particular industry sector I mention). The situation I find is that management in Irish SME’s are at a loss. Much of it down to lack of credit, much of it to lack of broadband infrastructure etc. But not all of it. SME management are chasing their tails, not matching their human resources up with the right tasks. They are not able to give the right tools and training to the right people. My guess is, we have a legacy of neglect and under-investment at the SME level, which existed throughout the boom period. Now we are suffering for it, because we need our SME’s to be able to compete. BOH. http://designcomment.blogspot.com/2010/06/pushing-envelope.html @all Just watched Vincent Browne interview Patrick Honohan – I haven’t read his report but it seems to me his argument for the inclusion of Anglo Irish as “systemic” is extremely weak, and streches the meaning of “systemic” to “it may have triggered panic among lenders and depositors to the other banks if Anglo was allowed to fall”. Not a convincing argument in my view. @ George Orwell Mr Honohan interviewed by Vincent Browne shown now but ( pre recorded) said that he was “least interested in who was to blame” but was more interested in the why and in looking at the various “seats” eg regulator, Govenor etc. I and three quarters of the country are very interested in the Who! Sometimes knowing the Who tells you the Why! @ AMcGrath The opposition have got a quit a few sticks out of todays reports. They are stuck between a rock and a hard place on the Bank Guarantee though, if they challenge Honohans comments they’d have to give up those sticks. So we’ll be stuck with the Brians telling us how brilliant the guarantee is for the forseeable future. Which in turn will muddy the debate on renewing the guarantee in September. Which of course is a disaster. So we’ve gone from Iceland!, Iceland! Iceland! to Greece!, Greece!, Greece! to Honohan!, Honohan! Honohan!, all the while Rome burns. @ Brian O’Hanlon The relevance of your points to Ireland Inc are that more sustainable economic growth will come (if at all) from microbusinesses and SME’s. FDI and public sector employment will be marginal. There are two fundamental problems that Irish SME’s tend to have: lack of absorbtive capacity for knowledge and methodology that would make them more capable and insularity. The latter issue reflects the fact that little we do in Ireland in the services domain (2% of the EU’s population) is competitive with what is available in other EU or ME markets. There is a long and honourable tradition of Irish SME’s scaling to a level necessitating export focus – followed by stasis and ensuing entropy. There is no particular mystery about how to make an Irish SME globally relevant. But it is hard to do that when the key people often have no significant work or life experience beyond the inflated Guernsey that is our little nation. Their ‘great’ is only ‘good’ when benchmarked globally. The absorptive capacity issue is common to all small businesses – they are so busy trying to survive that they haven’t time to listen reflect and learn. What would help a great deal would be opening up public procurement to Irish microbusinesses. Typically they are excluded from tendering to the 30% of the Irish market for goods and services that is procured by the state. Consequently most microbusinesses trade with one another. Indemnifying procurement staff in state agencies of the career-limiting effects of an occasional procurement failure would be necessary to bring this about. Beyond that, you are talking about pragmatic innovation capability-building. This is what has been sorely needed since always in Eire. Unfortunately this agenda has been hijacked by university basic and thematic research forcefeeding in recent years which is incapable of generating a commercial return in Ireland. EI is not really mandated to focus on this and in any case neither it nor any other state agency or professional body has the capacity to transform SME’s attitudes and capability in this regard. You are correct in pointing out that some SME proprietors autopiloted their businesses during the boom years and made more from subletting commercial space to other business than they did from their own operations. This was one of the stranger findings of some research my firm did on Irish SME attitudes towards innovation in 2006 @Ahura Mazda I’m disappointed that the change from Income Multiples to Affordability on mortgage lending wasn’t addressed. This happened around 2003. Maybe drop the investigation a line on the off-chance they might take heed of your suggestion for the final version of the report? Has anything good come out of this mess? Well, yes, perhaps there is one thing. A significant portion of the elite of Irish society has been tested and we can separate the wheat from the chaff. Now let’s have a bit of sense and dump the latter. Let’s get some nonsense out of the way. Everyone is not equally guilty. Everyone was not deluded. Anyone with reasonable intelligence, a bit of education and an interest in the world around them could see where we were heading. It didn’t require a degree in anything – least of all economics – to see first the empty factories, then the unsold houses and the furniture stores at every roundabout. Putting it bluntly, anyone who failed to see the problem is a fool and anyone who saw the problem and failed to speak out is a knave. Here are a couple of short pieces from my own blog in 2009 which make the point: http://colummccaffery.wordpress.com/2009/12/31/appointments-in-irish-banking-and-finance/ http://colummccaffery.wordpress.com/2009/05/13/never-mind-the-landing-who-was-in-favour-of-the-flight/ Here’s one that tackles the habit of hiding behind the term, “culture” be it applied to child abuse or reckless banking: http://colummccaffery.wordpress.com/2010/03/01/who-would-pass-the-challenge-the-culture-test-decent-people-thats-who/ The point is that the performance of bankers, politicians, economists, journalists and other media personnel, spokespersons, managers etc. can be scrutinized and those seen to lack the competence or integrity necessary to responsible positions can be sidelined. Existence means uncertainty. Written offficial histories like this make very little uncertain. They should clarify what happened why and by whom. This does not go far enough. I have hopes the Gardai will move a little quicker, once Facthna has moved on. The problem is that there will be much scope for retribution. But like the banks that are systemic, or not, actually acting brings about effects in the present. There is no stomach for any action at the highest levels. That was clear from the start. TPTB must be delighted that Michael Somers is not around. The cost has been passed onto the taxpayer, who has voted governments into power. You get what you deserve! Donal O’Brolchain Yes. The internet should make it feasible that all official acts are on public record. A filing by offivials on every item they want kept secret should also be maintained with appeals entertained etc. In respect of the uncertainty regarding the payment to Anglo from ILP, this would mean that in similar circumstances, there would be an authorization published! Interesting eh? The market then withdraws the deposits …….. Information is how our system works. A kleptocracy at present, where OPM is very vulnerable. What do you expect when you are too lazy or stupid to manage investments for yourself? @Oliver Vandt – “The situation of Brian Cowen is untenable.” In any other country, I think you would be right but Cowen seems to continue to be in denial and his MO is to deny and deny and deny and deny and ….. If FF had any sense (I’m not suggesting they do) then their best bet at the moment is to make Cowen a scapegoat. That would give them a big boost in the so-called opinion polls (I’m not suggesting the general electorate have any sense either). @BOH The problems were not restricted to any particular generation of Irish folk on the ground either. Each and every age group, and level of society played their own part in Ireland’s downfall.” I obviously don’t want to get into an argument here but that’s a big, lazily sweeping statement and I’ve heard it from many commentators – political and media. We pay people handsomely to run our system of government, to regulate, to make sure we don’t throw around too many tax breaks, to make sure people – as can be their nature – don’t take the piss. Those people failed to do their job. I believe they played the largest part in Ireland’s downfall and not Johnny the roofer or Maggie the retired home marker who had a hankering for a cheap Chinese plasma tele. @ gadge ‘Since the decision makers had no inkling of the scale of the looming net deficiency in Anglo, this option – with its sizeable risks in an already volatile environment – did not seem worth considering. As such, it is of academic interest only’ With respect, that line of chat rings hollow. The incestuous nature of our leading groups is well described by the likes of Matt Cooper. The decision maker almost certainly heard directly, or had good reason to infer, that Anglo was a shambles. Although the arguments were no doubt presented in a carefully coded way, that is the most rational explanation as to why the decision was taken. A pre-emptive shifting of the adjustment burden from creditors to the little fish is the done thing. Business, and politics as usual. There is nothing new with these reports but they are welcome. We all know that FF deserve plenty of blame for the mess but I honestly don’t understand the opposition going after Brian Cowan. FG were calling for a reduction in stamp duty to help first time buyers to buy overpriced property right up to 2008. They were advocating selling state lands so that afforable and social housing could be built. Labour was much the same. It wasn’t just FF who failed. It was entire political, banking and regulatory systems that failed the ordinary taxpayer in this Country so the Government and the opposition should spare us the usual political bulls*it. I wonder if there is anything we can learn from science here? 🙂 “With the help of high speed video, scientists have discovered that there is far more to bursting bubbles than meets the eye. ” http://news.bbc.co.uk/2/hi/science_and_environment/10278567.stm Good timing! No insider shouted stop. Last week in response to the oil leak in the Gulf of Mexico, Tony Hayward, BP’s chief executive, admitted it had to find entirely new ways of handling “low-probability, high-impact” risks. Most times, it pays to be a coward and go with the flow. In Ireland with a culture of limited accountability in governance, a small establishment of insiders given preference on public appointments and procurement, conflict of interest seldom an issue, pervasive cronyism and corruption, the risks of standing apart from the pack were greater than in some other countries. Where else would lawyers inquiring into petty corruption, become multimillionaires in the process? It surely begs the question as to what is corruption? http://www.finfacts.ie/irishfinancenews/article_1019879.shtml I haven’t go through the report. However, it appears to me that it gets into the nitty gritty of how the Guarantee was arrived at which is important. It also explains how errors were made over a long period. The Government has to acknowledge its errors and I believe it has done so previously. (Based on my own use of ctrl+F) The Government will be relieved to see that the errors were shared by the Civil Service and by the opposition. They will also be glad to see that the conspiracy theories have been dismissed and the more prosaic truth has been set out. ” One additional element deserving of consideration is the suggestion by some commentators that the fact that some banking personages were politically well connected might have been a key factor in discouraging aggressive supervisory intervention. None of the persons interviewed during the investigation agreed with this proposition, with several noting (rightly) that it was quite predictable that senior banking figures would have political contacts. While it is easy to imagine that senior management or CBFSAI Board or Authority Members might have instinctively and almost unconsciously shied away from aggressive action to restrain politically connected bankers and developers during a runaway property boom, no evidence has been presented suggesting that this was the case. Furthermore, although the climate of regulatory deference might have been unconsciously reinforced by social interaction – modest though it might have been – organised by regulated institutions, there is no evidence or hint of corrupt regulatory forbearance. …. In the case of Anglo Irish Bank, management was seen by at least FR staff as perhaps slick and buccaneering but not as presenting a large or imminent risk. Although it became quite clear to top FR decision-makers that senior Anglo figures were well-liked in political circles, and it cannot be excludedthat this played a part in their subsequent continuation in office for some months after September, there was, until very late in the day, no perceived need to take regulatory action against them. The centralmanagement figure in INBS was seen as an overly dominating figure that needed to be surrounded by a stronger governance structure. While it was understood by all that he was politically well-connected, the failure to resolve the issue is not attributed by anyone involved to his having a privileged status. While unconscious factors may have been at work, FR management and directors agree that there is no evidence of political representations being made on his behalf aimed at influencing regulatory decisions. …. It was also felt that the adoption of a more bearish public posture by the CBFSAI in the face of growing risks would have been in the face of most prevailing public opinion which believed or wanted to believe that the property market in which so many at all income levels had invested would not suffer a severe crash. This sentiment was in turn reflected in the views expressed by many politicians across the political spectrum throughout the period. Swimming against the tide by the CBFSAI thus would have required a particularly strong sense of the independent role of a central bank in being prepared to spoil the party and a willingness to withstand possible strong adverse public reaction.” @ Tony Owens, Beyond that, you are talking about pragmatic innovation capability-building. This is what has been sorely needed since always in Eire. Unfortunately this agenda has been hijacked by university basic and thematic research forcefeeding in recent years which is incapable of generating a commercial return in Ireland. We can agree on that Tony. I have a confession to make. I have spent the last year away from management of SME’s, which is my usual milieu. I am familiar with the daily cut and thrust, and the survival skills that most Irish SME’s try to acquire. I have spent the last year engaged in too much ‘blue sky’ thinking, learning about the ‘smart’ economy and the new focus on innovation. I was broadly in support of that goal and things such as the ‘Innovation Taskforce’. However, I have realised in the past month or two, as I turned my focus back to the SME sector, there is trouble brewing there. The situation is not healthy at all. As you explain above, the ‘innovation’ required to bring SME’s in Ireland up to international competitive standards is not earth shattering. We seem to have enormous difficulty trying to manage finances and funnel them towards the employment intensive SME sector. I am no expert on this subject, but I have done my own investigation recently to verify my claims (Without going in to specific details of companies and projects on-going). EI is not really mandated to focus on this and in any case neither it nor any other state agency or professional body has the capacity to transform SME’s attitudes and capability in this regard. That is a real problem. I agree with your point, not enough managers of Irish SME’s have experience of working in abroad, where proceedures, standards and training is high enough in standard to compete for contracting work globally. Indemnifying procurement staff in state agencies of the career-limiting effects of an occasional procurement failure would be necessary to bring this about. I agree with your point about public procurement. I have linked below something I wrote the other day, on the subject of employer involvement in projects. The employer needs a certain capability to get involved in the process. I do not understand new government procurement processes enough to know what is, or is not possible, within EU guidelines. However, I suspect in time I will gain more understanding and hopefully there will be ways to foster good team collaboration. You are correct in pointing out that some SME proprietors autopiloted their businesses during the boom years and made more from subletting commercial space to other business than they did from their own operations. This was one of the stranger findings of some research my firm did on Irish SME attitudes towards innovation in 2006. Yeah, I remember many conversations clearly. I was offered an explanation once, that McDonalds were really in a global property company. That will tell you how property focussed we were in Ireland. The global fast food industry was deemed to be frivolous. People in Ireland told themselves those kinds of stories in trendy bars and restaurants in Dublin, to reassure each other, they had placed the right bet by investing in properties. It felt good at the time to hear those stories, but they do not carry much weight now. BOH http://designcomment.blogspot.com/2010/06/electrical-design.html @zhou “They will also be glad to see that the conspiracy theories have been dismissed and the more prosaic truth has been set out.” My own reading of that piece is the polar opposite of yours. Add in the following: “The inclusion of existing long-term bonds and some subordinated debt (which, as part of the capital structure of a bank is intended to act as a buffer against losses) was not necessary in order to protect the immediate liquidity position. These investments were in effect locked-in. Their inclusion complicated eventual loss allocation and resolution options.159 Arguments voiced in favour of this decision, namely, that many holders of these instruments were also holders of Irish bonds and that a guarantee in respect of them would help banks raise new bonds are open to question: after all, extending a Government guarantee to non-Government bonds has the effect of stressing the sovereign to the disadvantage of existing holders of Government bonds; besides, new bonds could have been guaranteed separately. The argument for simplicity also is weakened significantly by the fact that an actual dividing line between covered and non-covered liabilities was drawn at as least an equally arbitrary point; moreover, such instruments were held only by sophisticated investors. 8.40 Subordinated debt holders have suffered some losses, given the buy backs that have occurred at discounted prices.160 Nevertheless, the inclusion of existing debt in the coverage of the guarantee likely increased the potential share of the total losses borne by the State. This eventuality deserved fuller consideration in advance. [8.44]was the likely deferred cost of a guarantee also perceived to be small? After all, there is a natural tendency, even for public servants, to avoid immediate crystallisation of problems even at the cost of larger likely subsequent costs. In this case, though, at the time the authorities did not believe that Anglo was heading towards insolvency. The potential for a major payout from the guarantee was not considered large, though no attempt was made at quantification. There were arguments against a blanket guarantee, including one made by the Department of Finance‘s advisors Merrill Lynch who observed that the assumption of such a large contingent liability would have an adverse effect on the borrowing costs for the State.” In addition, the cheapest guarantee in the world canard is firmly dismissed: “[8.44] This is not to underestimate the huge cost to the bailout which has ended up in excess of 15 per cent of GDP.” Finally, the 8.47-8.53 conclusion sections are particularly damning, both on the scope and the decision making involved in the guarantee. Given that the government went against its best available advice from Merrill Lynch, previous guarantee schemes, allegedly officials within the department of Finance, what are we left with other than crony capitalism? Gross stupidity? Well, it is a possibility – the tipping point of incompetence of this government having long since been reached. @Yoganmahew, I think you are being unfair. The Government did not go against the best available advice from Merrill Lynch. Merill Lynch was in favour of the Guarantee but had offered arguments against it like any good advisor does. The only really big criticism is the inclusion of sub debt which is hard to defend. Honohan says that Anglo was systemic and that not nationalising it from the start was not a big mistake that cost the taxpayer money. These are the two biggest accusations made by people accusing the Government of cronyism. Did the Government get everything right? No. But the same can be said for every Government around the world. The US would not let Lehman go if they had their chance again. Following the Debate very interesting. Can somebody please explain how independent the Regulator was. Are they and their terms of reference decided by government. For Example – If Harney was was proclaiming Ireland as “a country that belives in essential regulation but not over-regulation” (Her Boston or Berlin speech in 2000) was the role of the regulator constrained by government ideology. Also what is the role of the central bank – to monitor and report inflation only? @AMcGrath Agreed. Also he seemed to be trying to downplay the amount of subordinate debt by quoting the amount outstanding today rather than the amount that was present on the eve of the guarantee. He also mentioned the Anglo sub debt buyback as a good thing – despite the analysis of some commentors on this site that they could (and maybe should) have been completely wiped out. @YM Firstly, I wasn;t referring to the Guarantee when I referred to mistakes. I was referring to mistakes during the ‘boom’. I don’t see how you can suggest cronyism from the above. There was also concern that anything short of a comprehensive, simple to understand concept might cause confusion when markets opened and undermine the effectiveness of the Government‘s action. CBFSAI representatives did not challenge these propositions. In the event, it was decided to include dated, but not to include undated (perpetual) subordinated debt. The Central Bank did not give the crucial advice which was required. That is not cronysim. Some of the dated subordinated debt had clauses permitting (but not obliging) the issuing bank to redeem it within the two-year period. In normal times, such debt is almost always repaid at the first permissible date, with the result that it would be seen as a sign of weakness for an issuing bank not to do so. There appears to have been some confusion about this issue on the night of 29/30 September, with some participants understanding that some or all of the dated subordinated debt would fall due before the end of the guarantee (see Annex 4). If there was confusion then the blame must lie at the door of the Central Bank, the Regulator and the DoF. The Ministers could not be expected to have this level of knowledge. ……………. I agree with the cheapest bail-out being a dead duck. The Minister retreated from this long ago saying it was the cheapest so far. It is interesting that Honohan notes that they genuinely didn’t believe ANglo was bust. This is at the root of some of the problems. @ Paul Quigley and Gadge “Since the decision makers had no inkling of the scale of the looming net deficiency in Anglo, this option – with its sizeable risks in an already volatile environment – did not seem worth considering. As such, it is of academic interest only.” I am fairly sure that the commentary in the aftermath of the night of the Guarantee some civil servants were advising that the guarantee should exclude Anglo and that, that option was on the table. The question is who advised the minister to go for the blanket guarantee and did they know the “scale of the looming net deficiency in Anglo” One interest group was the ECB. Their no bank left behind policy would mean that they would have pushed for a blanket guarantee regardless of what they knew about how bad Anglo was. Obviously all the banks would have wanted all the banks covered due to the interconnectivity of the guarantees on given by developers etc. However the man with the weight of the country on his shoulders that night was the minister. If he did know about the scale of the deficit in anglo he didn’t tell it to David McWilliams when he arrived on McWilliams Doorstep that night. Also in his statement to the Dail that he made when revealing the Scale of Anglos debt, he seemed to suggest that it was only afterwards when going through Anglo’s books, once it had been nationalised that “our worst fears were realised” and the full extent became apparent. I dont know if some civil servants just had a better gut instinct than the minister or cared less about the Bankers and the ECB but the only person who will know whether he did what he did what he did for the right motives was the minister himself. Personally i think the minister probably made the wrong move for the right reasons. But if this is the case he should take McWillims most recent advise in yesterdays indo “guarantee must be allowed lapse as originally envisaged”. @ yogan we rarely agree, but I am with you as regards Zhou spinning on behalf of “de movement” . That fact that this discussion is even in the report is remarkable. It comes as close as it ever can do to saying the FR effectiveness was curbed because Anglo and IN could do an end run around him. The contention that nobody in the room understood the concept of a dual dated subordinate bond is laughable. A quick call to a functionary lower down the scale would sorth that out. @tull Indeed. If I, as a simple former-history student, can understand the difference with ten minutes googling, what does it say about our ‘leaders’? Either they were stupid or corrupt. Neither is an appetising prospect. Both scream regime change. @Gavin S “I think you are being unfair. The Government did not go against the best available advice from Merrill Lynch. Merill Lynch was in favour of the Guarantee but had offered arguments against it like any good advisor does.” Without having the advice published, we can only go on Mr. Honohan’s references to it. I have no doubt that a guarantee was the right thing to do at the time. What is in doubt is the nature of the guarantee that should have been put in place. The government is spinning that they acted on the best available advice and had they, alas, known the true state of the banks they would have done something different. This is mendacious for a number of reasons. In the first place, the only professional advice that appears to have been taken was from Merrill Lynch and they both explicitly rejected guarantee subordinate debt and indicated that there would be a significant knock-on cost and increase in risk to sovereign debt of the contingent liabilities of the guarantee. Secondly, it appears that the government cherry-picked from the options available to them without considering the problematic elements of those options – so they chose a guarantee as envisaged by Merrill Lynch, added a further guarantee of subordinate debt as envisaged by Johnny X, the invisible advisor, and priced the guarantee at a level as envisaged by Johnny Y. Whether Mother Merrill advised guaranteeing existing senior debt is not clear. Guaranteeing fungible debt would seem obvious, but clearly it wasn’t. So who decided this should be done? Finally, in relation to the state of the banks, Mr. Lenihan had the PWC report in his hands, though whether he read it or not seems at issue. Presumably his officials did, though? If the report did not reveal the full level of risks to the banks, the government should ask for its money back. If it did, there can be no excuses. In addition to the many other documents that should be made public, this is one that an unexpurgated version of would be most welcome. “It comes as close as it ever can do to saying the FR effectiveness was curbed because Anglo and IN could do an end run around him.” It says the exact opposite. For the second time… One additional element deserving of consideration is the suggestion by some commentators that the fact that some banking personages were politically well connected might have been a key factor in discouraging aggressive supervisory intervention. None of the persons interviewed during the investigation agreed with this proposition, with several noting (rightly) that it was quite predictable that senior banking figures would have political contacts. While it is easy to imagine that senior management or CBFSAI Board or Authority Members might have instinctively and almost unconsciously shied away from aggressive action to restrain politically connected bankers and developers during a runaway property boom, no evidence has been presented suggesting that this was the case. Furthermore, although the climate of regulatory deference might have been unconsciously reinforced by social interaction – modest though it might have been – organised by regulated institutions, there is no evidence or hint of corrupt regulatory forbearance. Avril Lavigne herself couldn’t spell it out more clearly. Overall, a good job IMHO but nothing really new certainly in terms of righting the wrongs or giving people any confidence that the crisis won’t happen again. The report makes reference to moral hazard in 8.44 in the context of the guarantee as follows: “And there is a moral hazard involved in any such guarantee, though this argument does not appear to to have been made”. So, fast forward to today and we have the Chairman of Nama and the Financial Regulator suggesting that would not be possible to assist people with distressed mortgages due to “moral hazard”. Where is the moral hazard for the politicians, administrators, bankers, developers and related professionals who created the financial crisis but continue to hold positions of power, draw huge pensions, operate insolvent businesses and get massive bale-outs courtesy of taxpayers? Where is the moral hazard being applied by Nama given that it is likely to write off loans of €30+ bollion over the next decade. See my open letter to the board of Nama for more on this at http://www.planware.org/briansblog/2010/06/open-letter-to-namas-board.html Honohan not only criticises the inclusion of sub-ordinated debt in the Guarantee, but also other long-term funding and debt. He writes on p.128 that “the inclusion of long-term bonds and some subordinated debt was not necessary in order to protect the immediate liquidity position. These investments were in effect locked-in. The inclusion complicated eventul loss allocation and resolution options.” Taken together with the box on the previous page, in which he cites how the U.S. regulatory authorities force losses on non-deposit creditors in institutions that are not systemically important, is it not the logical extension of this analysis that when the Guarantee on senior and sub-debt in Anglo expires at the end of September, it should not be extended? What other conclusions can be drawn from his statements on this issue? Andrew @YM I know we like our leaders to question advice given to them but I don’t like the idea of them resorting to google to second guess the DoF, Central Bank and consultants! How many other things should Brian Lenihan have “googled” that night? It is possible that the bank chiefs might have been credited with too much knowledge or perhaps too much bona fides. I think it is understandable that their views should have been taken into account in circumstances where it appears the Central Bank had gone into shock and wasn’t giving proper strong advice. We are told the Bank Chiefs only had a short meeting during which they said subordinated debt should be included. They are credited with being in denial about how bad things really were. If they knew the true state of the banks then they may well be guilty of economic treason. The fact that they managed to destroy their own institutions suggests they may just have been as ignorant as they are claiming. However, we should also note that, apart from the Anglo head honchos, the head bankers do not appear to have destroyed themselves. The head bankers were the people who should have known to exclude subbies. Their links to subordinated debt holders should be examined but the fact that ownership is opaque means it will be difficult to do this. In any event, clear and objective advice was needed. The Central Bank appears to have kept schtum while the DoF floundered. Merrill Lynch raised the issue of subordinated debt but confusion as to the maturity of such debt persisted and, in the absence of definitive advice from those state organs (DoF/CB) which should have analysed Merrill Lynch’s advice, the Govt erred on the side of caution. They overshot the ramp causing damage but they made it off the sinking ferry. A partially wrong decision for the right reasons. @Zhou – Avril Lavigne?? Didn’t she have a hit single ‘My Happy Ending’? Doesn’t seem to fit… Mind you, I think she also sang the theme tune for the recent version of Alice In Wonderland so that might be a bit closer to the situation we have here. I can certainly think of who I would cast as Tweedledum and Tweedledee. Looking glass anyone? @Joseph My Avril Lavigne collection is limited to one song (her seminal work I believe) acquired in error which I have since neglected to remove from my iPod. I acknowledge your superior familiarity with pop/cinema culture. @ Zhou, 8.39 … The inclusion of existing long-term bonds and some subordinated debt (which, as part of the capital structure of a bank is intended to act as a buffer against losses) was not necessary in order to protect the immediate liquidity position. These investments were in effect locked-in. Their inclusion complicated eventual loss allocation and resolution options.159. This does not look like a comment from someone who supports Lenihan’s guarantee. In fact, it reads as though it’s written by an opponent. Do not confuse the need to do something as tacit agreement with what was done. Unfortunately spin-doctors show no guilt in abusing nuanced comments. Lenihan’s guarantee of the existing bonds was a critical and expensive error. Zhou, what it says is that “none interviewed…agreed with the proposition”. There is no disclosure is there of who was interviewed or if other credible people who were not interviewed agreed with the proposition. Also the fact that no evidence was presented doe not preclude the existence of such evidence. The best that could be spun by a loyal servant like your good self is that the allegation is “not proven”. @zhou “I know we like our leaders to question advice given to them but I don’t like the idea of them resorting to google to second guess the DoF, Central Bank and consultants! ” Really? I don’t see any second-guessing going on. There was confusion and they made no attempt to resolve it. I’d rather they googled than say, “ah shure, feckit we’ll gar-an-tea de lot; shure what can go wrong?” One the guarantee was announced, there was no way for the government to credibly back track on any element of it. It was critical that the right decision was made that night. Indeed, it should have been obvious to have some sort of preparatory work in train instead of having to make it up in the dead of night. I do accept, though, your explanation that stupidity was at work – these were stupid people and they made stupid decisions. @ Zhou ‘It is possible that the bank chiefs might have been credited with too much knowledge or perhaps too much bona fides. I think it is understandable that their views should have been taken into account in circumstances where it appears the Central Bank had gone into shock and wasn’t giving proper strong advice’ The report set out, among other things, to dispel any notion that there was corrupt practice within the CB and FR. Fair enough, as far as that goes. Read together with Regling, it’s clear that there was deference, under-resourcing and lack of initiative. We had a regulatory system which suited the banks, the property sector, and the political class which they sponsored. Complacent Mickey Mouse governance of the sector, and blind panic when all hell broke loose. The origins of the deference to money and property lie in our history as a peasant people and our recent arrival into a secular Europe. It’s not just about banks, still less about one part or one politician. Donal O’Brolchain, Michael Hennigan and others above have rightly identified the primitive nature of our civil society. We need deep structural reform. ‘We are told the Bank Chiefs only had a short meeting during which they said subordinated debt should be included. They are credited with being in denial about how bad things really were. If they knew the true state of the banks then they may well be guilty of economic treason. The fact that they managed to destroy their own institutions suggests they may just have been as ignorant as they are claiming’ With respect, ‘economic treason’ is a dubious notion. There is no obligation on any private enterprise to manage its affairs in a way which supports any state. The sole obligation, in busines terms, is to pay taxes and trade within the laws etc. Sponsoring football teams and all that is a business decision, even though there is some element of emotion and personal loyalty in play. The notion of ‘bankruptcy for profit’ is well aired in the literature. Yves Smith’s Econned is a good read, especially the chapter on ‘looting’. Senior executives hollowing out their corporations is a well recognised and widespread consequence of ‘financialisation’. Corporate structures in professional services like law and accounting do change the traditional ethos. Whocuddanode the banks were bust ? @ Michael Hennigan, In Ireland with a culture of limited accountability in governance, a small establishment of insiders given preference on public appointments and procurement, conflict of interest seldom an issue, pervasive cronyism and corruption, the risks of standing apart from the pack were greater than in some other countries. The reason I inserted comments above about small and medium enterprise, is I suspect that in Ireland we perceive any money to be invested in anything that isn’t property, to be money squandered. There is a perception in Ireland that unless you are putting your accumulated savings into something safe, for the longer term, you are open to accusations of mis-behaviour. This attitude is equally as strong in young people in Ireland, as it is in the mature age groups. So it is nothing to do with age. The attitude is equally as strong in poorer levels of society, as it is in wealthier groups. As mentioned here at Irish Economy blog and elsewhere, much of the wealth in Ireland is new wealth. And much of that ‘new wealth’ has disappeared along with the boom. My open question to members of this community is how can we use the opportunity presented by this current investigation into Irish banking, to promote a different attitude with regard to investment and savings? I have been filling up a form for a Higher Education Grant, recently myself. I notice that it tries to close every loophole. Of course, the perception being in Ireland, that property captures indirect benefits and value appreciations, because the rental value of the land isn’t taxed. I.e. The cute boys and gals, divert all monies out of small and medium entreprise and funnel it into property. The banks were compliant it seems in that kind of mindset. No one analyses where this was going. The consequence is an awful lot of ‘wealth’ which is trapped in forms, where it is of no use to anyone, to invest or grow business. I have been pondering on this question of Irish banking and its understanding of business for some time now. I don’t know all of the facts and I am only feeling my way around on this issue. Here is something worth quoting though, on this subject. On March 9th 2010, Pat Farrell of the Irish Banking Federation wrote in the Irish Times. We are committed to doing all we can to work with member banks and Enterprise Ireland in developing sectoral expertise in the growth sectors of the economy – and to continue investing in the banking services that Irish SMEs trading internationally need. http://www.irishtimes.com/newspaper/opinion/2010/0409/1224267967693.html It took me more than 10 minutes to google this. This is from the Irish Independent (http://www.independent.ie/national-news/lenihan-comes-under-fire-for-censoring-foi-papers-1399606.html) Friday June 06 2008 FINANCE Minister Brian Lenihan has been criticised for the censoring of cabinet papers released yesterday for the first time under the Freedom of Information Act. Although there were 81 records for two cabinet meetings in April 1998, more than half of them were withheld or partially released. The records blocked include minutes of cabinet meetings in which decisions were taken on house prices, appointments to state bodies and a “conference centre proposal”. Although off topic, it’s part of my cathartic process 😉 . As a clear-the-air/ whiter-than-white new era, perhaps the blocked records could be released. I remember thinking at the time what were they discussing on house prices – maybe that they were too low 🙂 @YM When the Governor says there confusion, I interpret it as a mistake being ade as to the nature of the bonds. It doesn’t mean that somebody said “we don’t know how these things work”. It more likely means somebody said “the bondholders can call these in”. I haven’t previously heard of the concept of double dated subordinated bonds despite following this blog for some months. @paul quigley I agree with most of what you say. I don’t buy into the self-loathing though. We had a typical bubble. We didn’t prick it. It has happened before all over the world, it will happened again. Economic treason is dubious. However, I think when a company asks for taxpayer support there is a implicit obligation to act in uberrima fides in such dealings. I am not satisfied to make a judgment as to whether the banks did so act in uberrima fides or not. @Ahura. Not quite the thrust of this thread, but I want to take up your “Blocked cabinet minutes” Despite my firm belief in the need for a much stronger FoI and wider application of FoI, I sometimes wonder about actually releasing the minutes of Cabinet meeting. I firmly favour the full release of all Memoranda to government, which used to be the basis ion which Government decisions were based. To that I would add, any presentations made (eg. PowerPoint) or papers that Ministers might bring in for circulation during a discussion (I gather it was such a practice, during a Cabinet meeting in May 1998, that led to us building two non-interconnecting Light Rail Transit lines – now known as LUAS – during the past 10 years. How smart is that? Nothing learnt since railways started to be built nearly 200 years ago). I am also in favour of a full release of all decisions actually made at Cabinet. My sense is that freedom of discussion in Cabinet (if things actually are discussed – as opposed to nodded through, everything having been agreed beforehand in some other fora – formal or informal) would be inhibited by release of minutes. IMO, how we govern ourselves is the issue that we have face in this crisis. In 2005, a senior public servant stated “The only reasonable conclusion, at this time, is one of overall systemic corporate responsibility and failure within the Department of Health and Children at the highest levels over more than 28 years.” in a report on “Certain Issues of Management and Administration in the Department of Health and Children associated with the Practice of Charges for Persons in Long-Stay Care in Health Board Institutions and Related Matters”. http://www.oireachtas.ie/documents/committees29thdail/committeereports2005/document3.pdf Given that we had a serious crisis of economic management during the 1980s (with An Bord Snip – Mark 1), the same reasonable conclusion of systemic failure, in more central areas, is now set out in the Honohan and Regling-Watson reports. Try substituting the Department of Finance in the above quotation and see how it fits. Release of Cabinet minutes may be part of the checks and balances we need to limit the scope for excess by the powerful and influential. Among other measures is a Fiscal Council. That said, it also take more than a Fiscal Council – no matter how well-staffed it is or how good the staff are at marshalling experienced people to comment on fiscal policy – to rebuild trust in the competence and capacity of policy-making at central Government. Lots of people here disappointed because we did not get a straightforward Politician or Banker for a Lynching !! Read Prof Honohan’s Report closely and you will find the answers ………. Prof Honohan is now falling out of favour because he did not round up the usual suspects. But then it was not in his terms of reference to finger anybody. What I learned from these Reports is that there are lots of eejits in this country particularly in the CS and related Bodies like Central Bank/Regulator which are in more urgent need of clearout than at the top of the Banks. Matthew Elderfield will be frustrated and gone from here in no time if he cannot start with a clean sheet. The D of F heads are clearly clueless so what chance has the country of pulling itself up by it’s bootstraps with their leadership which has been shown to be abysmal before during and after a crisis. If the economy was overheating in 2004 onwards they needed to be shouting STOP in the media and elsewhere – conferences etc. Then the Politicians would have had no option but to deal with the impending situation and for once look after the Public Interest………….. If only Dr TK Whittaker was 40 years younger !!!! @ Donal ‘IMO, how we govern ourselves is the issue that we have (to) face in this crisis’ +1 All economics is political economics. @ Zhou Fair enough, but self knowledge is not self loathing. We are very recently urbanised and secularised, by West European standards. The Enlightenment may have got as far as Trinity College, but that’s about it. Civic society and good governance takes time to develop. ‘I think when a company asks for taxpayer support there is a implicit obligation to act in uberrima fides in such dealings.’ All’s fair in love and war, and any state is fair game for Mr Market. @zhou, absence of evidence is not the same as evidence of absence. @TRP +1 While there may be disappointment at the lack of finger pointing, as you say, the ‘between the lines’ is clear enough. Given the nature of the language and the nature of the position of those writing, it is as damning as a government report can be. I refer you back to my tipping point of incompetence theory earlier. Let’s hope that we get to a tipping point of competence – where there are enough competent senior people that they start cascading competence through the organisations (through appointments, promotions and the like). A change in the method of promotion would appear to be essential – it is not enough to talk the talk, walking the walk is also required. The blanket nature of the bank guarantee i.e. the guaranteeing of subordinate debt, especially Anglo’s, is one of the murkiest and certainly the most costly decision of any Irish government. Honohan has written the second draft of history concerning what is now widely accepted as a massive disaster. The first draft – by the government themselves and accepted by many at the time – stated it was a triumph deserving of a ceremonial procession through Rome, which indicates how much opinion has shifted. All Honohan did – and all he could do – was to take statements and read what written records there are. It is extremely unlikely he got the full truth. But he’s not Eliott Ness, he’s an economist. A full scale American-style police investigation would have been necessary to even try to get to the bottom of what, given its scale, is the Irish Watergate. Even if we do end up paying €25 Billion for Anglo alone it is still probable, given our establishment’s crooked nature and the legal/criminal system it has created, that we won’t get a Watergate scale investigation. In fact, for reputational reasons the establishment won’t want this looked at again by anyone except historians (I wonder how many records will be left when they go to look?). FF are now wildly spinning the reports as fundamentally exhonerating them by trying to focus the entire debate on what they said about the guarantee. But Honohan’s investigation, which they agreed to with extreme reluctance, could only take a view based on the limited evidence it was able to collect. Perhaps this view is correct but it can’t be said with any certainty. It is best then, with regard to the guarantee, to treat it as only a fact uncovering exercise. It tells us much we didn’t know about it. That is all. The focus of debate should instead be on what the reports reveal about the greed, recklessness, chicanery, strokes, cronyism, arrogance, incompetence and chronic dereliction of duty that preceded the night of the guarantee. These are going to continue unless we have a governance revolution so that is what should be debated. Anyway it is only sensible that this should be the case as the government’s defence is that the guarantee was precipitated because the entire financial system, that they are ultimately responsible for, was about to collapse. Their defence is their indictment. So lets everyone discuss what I mentioned in the first line of this paragraph. P.S. I remember Newstalk’s Breakfast Show and Prime Time also heavily featuring the need for an inquiry so well done to them. @tull mcadoo There is no evidence that we know of. Nobody familiar with what happened supports the suggestion. At the same time, people are being frank and other serious failings are disclosed such as the senior regulators over-ruling junior regulators. The report provides no support for those who make such allegations of cronyism, corruption or malign politicial influence. Some people will always hear, read and see what they want to read, hear and see. These allegations remain speculation based on political bias. This report is serious for the Government. Having the failings they previously admitted spelled out in black and white does make a difference. Also, the criticism of the inclusion of subordinated bonds in the Guarantee is serious. However, the truth is always more prosaic than we think. The system failed due to the State competing with other states with light touch regulation, due to an internationally prevailing market based ideology, due to an international view that the Great Moderation was here to stay, due to structural weaknesses in the Civil Service, due to failings on the part of individuals, due to the nature of cultures in organisations, due to structural weaknesses in the accountability of bank boards, due to no effective shareholder oversight mechanisms in our banks or abroad, due to classic bubble politics where the parties all chased the electorate with gifts (FG were going to abolish stamp duty to prevent the property market slumping, Labour were going to increase the structural deficit by lowering income taxes), and due to a national attachment to property. No doubt those at the top influenced each other. Perhaps banks should not have social occasions with regulators or politicians as it can lead to group-think which can be just as dangerous as corruption. The reports reveal serious issues which need to be addressed. Spinning the report as primarily an indictment of Brian Cowen, as Enda Kenny is trying to do, has nothing to do with helping us to identify and effect the necessary changes. @zhou “The reports reveal serious issues which need to be addressed. Spinning the report as primarily an indictment of Brian Cowen, as Enda Kenny is trying to do, has nothing to do with helping us to identify and effect the necessary changes.” On the contrary. Political decisions are now having political consequences. There were three pillars of failure – the banks, the government, the regulatory authorities. Two of these, the government and the regulatory authorities, were interlinked as one appointed the other. The third, the banks, the government had the opportunity to punish for their stupidity. They chose not to. We must ensure that stupid people are not elected to important public offices. We must ensure that even if stupid people are elected, they cannot appoint other stupid people to positions of economic importance. Patronage must end. Transparency must improve. With competent people in place, the systems will take care of themselves. I don’t see how the reports can be read as anything other than a severe criticism of the current and previous governments. @ Zhou In most organisations that have seen such a massive systems failure as seen here, thos accoutable for that systems failure would be replaced. The heads of the CB, FR, various bank CEOs have all been shuffled off into comfortable retirement…undoubtedly too comfortable. In politics, the Minister of Finance who comes is for criticsism has been promoted to a higher office. Once again, I agree with Yogan. That is twice now. @tull Must be a shocking accurate report so… 😀 @tull mcadoo The Government is more accountable to the people than any of the other organisations involved. There will be an election in due course. Most people expect there to be a new Government and Taoiseach after that election. In the meantime, I don’t think the report suggests that shorter terms for elected governments will lead to better policy. The current Government can take tough decisions because they, particularly FF, are playing a longer game than the other parties. I think we should hang on to them while we can. I cannot buy into the notion that the current government are to be applauded for taking “tough” decisions, and “playing a longer game that the other parties”. The fact of the matter is that the current government has consistently underestimated the scale of the banking crisis, from its decision to give the blanket guarantee in September, 2008 through to its NAMA intervention which was intended to avoid the State having to take a majority shareholding in the banks. As Honohan points out the potential for a major payout from the guarantee was not considered large in September, 2008, though seemingly no attempt was made at quantification. The constant refrain that the crisis was precipitated by Lehman Brothers is consistent with a government that finds it difficult to face up to the fact that this is a “plain vanilla” property bubble. The fact that the government has yet to amend the Data Protection legislation so as to allow transparency in the housing market is a disgrace. @gadge Nobody disputes that it was a plain vanilla bubble. The Govt have accepted that, with hindsight, they didn’t do enough to contain/prick the bubble. There is no doubt that international factors have greatly exacerbated the consequences of our homegrown bubble to make things much worse and more difficult than they would otherwise have been. “Lehman Bros”, as annoying as the refrain is, was a watershed in terms of things going south and policy options in dealing with banks becoming much more fraught. @zhou “There is no doubt that international factors have greatly exacerbated the consequences of our homegrown bubble to make things much worse and more difficult than they would otherwise have been. ” This is just not the case. The international problems have actually made the process easier. If it had been just an Irish bubble bursting and Irish banks having problems funding themselves on the interbank market, what would have happened? I’ll tell you what – they would have all gone the way of Northern Rock – guarantee or no guarantee. The advantage we have gained from the international crisis is that the ECB has been incredibly accomodative in both interest rate and in funding terms – rates at 1%, unlimted repo operations, nice haircuts on toxic debt (as long as it is initally wrapped nicely), and now bond purchases. Never mind the “what situation would we be in if we weren’t in the euro”, think about the “what situation would we be in if we were the only ones having a bust”. There’s suspiciously few comments from der academics. Is it a.) they (per lenny)don’t like to criticise each other (prob. 20%), b.) there’s another letter on the way (prob. 80%)? @ Zhou ‘The current Government can take tough decisions because they, particularly FF, are playing a longer game than the other parties’ Is that really true ? It’s critical to distinguish between a party which is expert at creating the illusion of social responsibility, and a party which actually demonstrates that quality when the chips are down. While the governing party has much to it credit over the decades, the crazy fling with the developers/banks may have ben the cause of its final undoing. Like the Ulster Unionist party, FF as a force may be on the way out. As someone reared to respect Dev, I get no particular satisfaction from that, but it’s better to be realistic. The decisions you mention are being forced upon the government by Mr Market and Europe. As they say in the US, it’s time to shit or get off the pot. I feel that the really tough decision would be to resign, but it seems we don’t do that sort of honourable thing in Ireland yet. Maybe we are still stuck at an adolescent ‘game’ stage of political life. @ Yogan ‘With competent people in place, the systems will take care of themselves’ The reports confirm, and everyone accepts, that there has been serious incompetence and that the situation needs to be rectified. What has not been explored is how much of that ‘incompetence’ was deliberately engineered or encouraged. The art of paying lip service to various ideals is well developed in Ireland Those ideals are found in religion, politics, business and many other spheres. In the past it was variously necessary, for progress in Irish life, to display obeisance to the landed gentry, the Church, or to some respectable and appropriate political creed. More recently the meme has been about respect for business and good business practice. And of course the wealth which it promises. It is the mark of the politically successful to be able to move smoothly through ideological climates over time, while always staying in the saddle. As the sociologist Pierre Bourdieu puts it, it is the ‘art of maintaining ones position by constantly changing ones stance’ The cute hoor knows how to applaud transparency while making sure that the real decisions get taken in secret, and preferably off the record. No fingerprints and no paper trail. Bad systems, balkanisation and bureaucracy are necessary for efficient siphoning, and protecting the public’s confidentiality often translates into protecting the insiders. A protection racket masquerading as social protection. Here’s a question for youz economists: ‘What were the major principal-agent problems which characterised our bubble, and how should they be addressed ? @YM The international crisis has not helped imho: – lost revenue and jobs, – greater difficulty in engineering a recovery in a depressed world, – exporters’ loss on currency fluctuations, – multinationals accelerating cost cutting, – international fear of contagion between financial institutions, – international concerns about sovereign debt, – huge increases in risk aversion internationally. @zhou We had a simultaneous: – Bank Collapse – Public Finance Collapse – Economic Collapse due to overreliance in every one of these areas on a massive, by international standards, property/lending bubble. Three economic collapse simultaneously and the Minister for Finance and Taoiseach for the last five and a half years doesn’t bear huge responsibility? You’re effectively saying if Cowen was just a little bit less responsible he’d almost be an innocent victim. Rubbish. The innocent victims are the unemployed, the ruined business people, the emigrants present and future, and home owners with massive mortgages and in permanent massive negative equity. Yes McCreevy, Harney and Ahern left him with a big bubble but HE MADE IT A HUGE ONE. Cowen had the power. He misused it – by his actions and inactions – on a massive scale. @pq FF knows it is destined for opposition after the next election. FF also knows there will be a long term judgment as well as a short term judgment. The short term is lost. The longer term might be salvaged. Tull, This stuff about ruthless companies sacking those who fail is just not true. Sure there have been a few sacrificed but that’s about it. This is an economists’ blog. I understand that but there’s a tendency to miss the wood for the trees. Sure, a great deal of the problem originates in ultra liberal doctrine. Sure, some of the decisions were more complex than others. However, this problem was apparent for years. It took wilfull stupidity even on the part of liberal ideologues to fail to see it. I said in a previous post that the specifically Irish part of the problem was obvious. Any fool with an eye to see realised that employment in industry was falling, that there were unsold homes in some very odd places, that people’s borrowing had reached insane proportions, that prices were silly and that the media were still on about the “property ladder” for the young and a “property portfolio” for their parents. On the wider front, sensible people shook incredulous heads as the guff about “products”, “leverage” and “derivatives” was ladled out by people who should have known better. @Ahura Mazda: “There’s suspiciously few comments from der academics. Is it a.) they (per lenny)don’t like to criticise each other (prob. 20%), b.) there’s another letter on the way (prob. 80%)?” You forget (c) it’s summer; exams are over (and may even have been marked) but there may still be grading committees and exam boards and other end-of-year stuff to be done. And then the villa in Tuscany (or the econometrics conference in Slough) beckons …. bjg My impressions is: “Right processes, wrong type of people for the positions”. & if that is the case, then to fix the problem, then the people need to be replaced. Nothing bad about the people, it is just that the positions they filled were not a match for them and a career change might be appropriate. Some of the risk people might do better in sales and some of the regulators shouldn’t be in positions where the ability to fight the unpopular but necessary fights is a major requirement for the job. It is easier to change a process than to change people. Hopefully the people will change, however, I’m not so sure it will happen. I’ll amend my previous post. Cowen took over a massive bubble and he made it a huge one. As regards responsibility McCreevy explicitly puts it all on Cowen (and Lehmans presumably). Cowen on the other hand implicitly puts the bulk of it on McCreevy et al (and Lehmans). So they both agree there IS someone responsible. But they both agree it’s someone else. Here is a thought experiment. What if either Cowen or McCreevy had been MoF between 1997 and 2008 and were now Taoiseach. Would they then accept huge responsibility for the three collapses? Even in this case I don’t think they would. FF/Ex-PDs just don’t believe in (their own) ministerial responsibility, let alone collective cabinet responsibility. My judgement is that Cowen would not accept this was a resigning matter, no matter what his actions and inactions were, or how long a period he’d been the minister. @ BOH re: SMEs I can’t resist copying here an email I sent to a friend (retired banker) this very afternoon: . . . During the boom years, it seemed to me that the “reckless lending” was mostly related to property purchases (commercial & residential) and to property development. During the boom years the property bubble sucked up most of the loans made. Other entrepreneurs have commented that their employees could easily get mortgage loans for 500k, but the business that employed all of them could not get even a small loan for 20k. (True story told to us by a very successful serial entrepreneur.) Now with tightened underwriting, it seems that ultra-tight criteria are being applied to small businesses–who were not part of the reckless lending problem in the first place. Instead of tightening primarily on the property and property-development area, banks are placing barriers on lending to what will be the dispersed engine of recovery–the numerous SMEs that had never been borrowing recklessly because the funds weren’t available to them for non-property loans, even during the boom. The SMEs are getting overly penalized by the harsh lending environment. The innovative SMEs who have a different financial profile and different financial needs are perhaps suffering the most–though perhaps that is just my bias. @ zhou_enlai The report provides no support for those who make such allegations of cronyism, corruption or malign politicial influence. Some people will always hear, read and see what they want to read, hear and see. These allegations remain speculation based on political bias. The prospect of directorships and for other non-board staff, higher paying jobs in banks, could never have influence? In the US it has been a problem and a former SEC chairman, Arthur Leviit, is almost 80 and on Goldman Sachs’ payroll as an “adviser”. For senior civil servants, the prospect of nixer assignments and agency appointments, gives them an incentive to remain quiet. The issue of cronyism was relevant through through the influence on policy; as for corruption, anyone who believes that the end of the brown-envelope era made the land rezoning bonanza free of corruption, is a fool. RTÉ’s Prime Time programme highlighted in November 2007, the involvement of elected representatives in the land, development and property business. A total of 22% of councillors dealt in or developed land through their day jobs as estate agents, landowners and builders. In Mayo, that figure rose as high as 45%; in Offaly it was 44% and in eight other counties it was 33% or more. Prime Time found that in Clare, declarations of interest showed that 97% of elected members had no beneficial interest even in their family home. In ten counties, two-thirds or more of the councillors had not declared an interest in the family home. The programme was broadcast 10 years after the establishment of a public tribunal to investigate planning corruption. Several lawyers became multimillionaires from the two State corruption tribunals; some have earned almost €10m and when they were paid an extra €1m due to a typing error, they were allowed keep it. The Department of the Taoiseach said in early 2009 that the tribunal had saved €1.1m elsewhere by paying other staff less in salaries and fees. The rich are subject to different rules! Ah! I see the strategy now. It’s all going to be blamed on the poor quality of/terrible advice given. The counter to that is obviously “well if that’s the case and you are now aware it was poor, why are you still on the same track?” …but is there a journalist in RTE who will actually challenge rubbish when it is laid out before them? This is way off topic but – because journalism generally speaking failed to feed public discourse re business practices and economic policy – here goes. It’s not a question of reform in RTE; journalism itself is a problem. When the arguments were raging about the start up of independent radio, we heard how “RTE’s monopoly” had to be broken so that we could have access to a greater range of opinion. Here’s my advice: wait until the clock comes round to a big news anchor point, then start pushing the selection buttons on your radio. What you’ll find is this: the news content, presentation and angle is the same. A similar exercise can be applied to other genres (e.g. business programmes) with the same result. Yep, if you want choice, competition won’t deliver it! ”The issue of cronyism was relevant through through the influence on policy; as for corruption, anyone who believes that the end of the brown-envelope era made the land rezoning bonanza free of corruption, is a fool.” I think the era of brown envelopes is probably dead. However the era of loans with flexibile repayments dates and terms is probably only coming to the surface now. @ Colum McCaffery It’s not a question of reform in RTE; journalism itself is a problem. Isn’t groupthink as common in every other professional group? Whether in law, journalism, teaching, medicine, the public service etc., an individual who has spent his or her whole adult life in one particular area, is likely to socialise also with similar people and share the same outlook. It’s not going to change. George Gallup twigged to this many years ago. The Indie today highlights part of Patrick Honohan’s report in which the Central Bank’s assessment that the property market was over-valued by 15% in 2006 was scotched in its published report. “It was decided in 2006 to exclude from the main text of the report data and references to a likely 15 per cent house price overvaluation that was contained in a themed research paper” Full Indie article at http://www.independent.ie/business/irish/central-bank-hid-property-crash-forecast-2218968.html Colum McCaffery On the specifics of journalism, the Irish broadcast media generally does a poor job during election campaigns. While Eamonn Gilmore will likely have a place in the main leaders’ debate, what would be more important is a lengthy one-on-one interview with all the main party leaders where an informed interviewer would forensically go through policies/aspirations in the style of the late Tim Russert of Meet the Press – – not a format where the interviewer is seeking ‘gotcha’ moments but one where viewers could see through pre-prepared spoof answers. The politicians are usually saved distress in short format interviews because interviewers often do not have the key facts on an issue. Michael, That’s fair enough up to a point. However, failure to see the advancing crisis in this instance required heroic stupidity. “Groupthink” is akin to “culture” and it is too easily accepted as an excuse. As I’ve said on my own blog (http://colummccaffery.wordpress.com/2010/03/01/who-would-pass-the-challenge-the-culture-test-decent-people-thats-who/) “It is alarming that so many people seem to think that the holder of a post is not required to take some sort of stand against wrongdoing or stupidity. It is certain that many of our scandals rest on past acceptance of this contemptible nonsense. Now it needs to be up-rooted to ensure the appointment of people of better character. Very few of us will get through life without being asked at times to make some kind of stand and it could be argued that such tests are necessary to a full life.” How far do you think your average criminal in the dock would get with a defence based on groupthink? “I’m neither innocent nor guilty. It was groupthink, a culture of robbery. We are where we are. It’s time to move on.” @ OAC, I read your comment with a lot of interest. The question remains now, why can’t the politicians in FG etc, who protest a lot in Oireachtas discussions about lending to SME’s – why can’t they sink their teeth properly into this subject? Why can’t they seem to unpack the whole debate about SME’s? We have seen a lot of innovation reports, a lot of promises for jobs, new era etc. We still haven’t seen a decent breakdown of facts with regard to SME in Ireland. I honestly don’t think we have a handle on this issue properly in Ireland. Yet everyone throws around this buzzword, SME’s as if it was understood by everyone what it means. If there was half as much effort put into defining what an Irish SME could do to improve itself in 2010, and less ‘innovation’ reports, we would be a lot better off in Ireland. Instead of tightening primarily on the property and property-development area, banks are placing barriers on lending to what will be the dispersed engine of recovery–the numerous SMEs that had never been borrowing recklessly because the funds weren’t available to them for non-property loans, even during the boom. I asked a dumb question about the distribution of loans in AIB as recorded in Morgan Kelly’s spreadsheet provided to the Irish Economy blog recently. When I had first saw Morgan’s spreadsheet and the gigantic non-domestic loan portfolio, initially I was relieved thinking it must have been invested in business and enterprise abroad. But the responses I got on that thread suggest that most of AIB’s foreign portfolio was property related also. I read David McWilliam’s article in the Sunday Business Post today, Cowen put competitiveness before compliance for banks, where he offers some suggestions as to rules regarding collateral and balance sheets which can play tricks on your eyes. It is well worth reading what McWilliams had to say. He has a point, as the asset prices are tied to lending, the more that is lent, the better the asset price gets and so forth. We really did get ourselves ensnared in that web in Ireland. BOH. http://www.irisheconomy.ie/index.php/2010/05/30/morgan-kellys-bank-loss-calculations/#comment-54484 Brian says, “as the asset prices are tied to lending, the more that is lent, the better the asset price gets”. Yes, and here’s an illustration: http://dublinopinion.com/2010/06/08/irish-housing-and-wages-portrait-of-a-scam/ Could it be that price is what people are prepared to pay? Did I read that on pg.1 of “Teach Yourself Economics in Five Minutes”? As I’ve been saying on this thread and on my own blog, nothing that contributed to this mess was either difficult to see or difficult to understand. The belief that all was well and would be well was the preserve of the complete fool. Comments are closed.