The Honohan Report

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….

@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.

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.

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-/

Video interview with the governor here if anyone’s interested.

@ 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.

@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.

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/

@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/

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.

@ 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 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?

@Donal O’Brolchain
+1

@ 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

@ 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!

@ 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

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.

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?

@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.

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.

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

@ 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

@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.

@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.

@ 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”.

@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.

“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.

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

@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?

@ 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
“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.

@ 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

@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.

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 !!!!

@zhou, absence of evidence is not the same as evidence of absence.

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.

@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.

@tull
Must be a shocking accurate report so… 😀

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.

@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”.

@ 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 ?

@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.

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.

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.

@ 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.

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?

”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.

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

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.”

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.