The Irish Economy

In the past couple of weeks, the Oireachtas Committe on Finance and the Public Sector met with the authors of the two forthcoming preliminary banking inquiry reports, Klaus Regling and Governor Honohan (Regling was accompanied by his assistant Max Watson). The transcripts of these meetings are now available online here and here.

I’ve been reluctant to write anything about the DCC\Fyffes\Flavin case (see here and here) despite my suspicion that it represented a very unfortunate precedent in an age in which corporate malfeasance in our leading businesses is a major issue in Irish public life. This is because I can’t claim to have read the 700 page Shipsey report and have a very limited understanding the complex legal issues involved. However, I think that Matt Cooper has done the public an important service in raising the potential implications of the case in this article and I’d be interested in hearing the opinion of some of our more legally-minded commenters as to whether Cooper’s concerns are well-founded.

Shipsey found that Flavin had done no wrong because he had taken legal advice prior to the relevant share dealings. Paul Abbleby of the Office of Director of Corporate Enforcement then concluded “There’s no way that any court would sanction a director for having followed the company’s legal advice.”

Cooper asks “So the question arises: has Shipsey set a precedent that legal advice trumps the law?” and points out how any future businessman wishing to do something illegal now only has to find a lawyer to tell him that what he wants to do is ok.

In relation to the banking crisis, Cooper points out that the defence that people believed they were behaving legally can now come to the aid of those who clearly behaved in an illegal fashion and that a public banking inquiry is likely to be our only chance to see certain individuals called to account for their actions.

As I say, I’m not a legal expert, so I’d like to hear whether those in the know think Cooper has this wrong.

The Sunday Times reports that the Information Commissioner, Emily O’Reilly, has denied their Freedom of Information request to release documents related to two meetings on the night of September 29/30, 2008, one involving senior ministers and officials and another also involving senior banking executives. The paper reports:

In making the decision, she rejected advice from Sean Garvey, a senior investigator in the Office of the Information Commissioner (OIC), who recommended that the documents be released to The Sunday Times under the Freedom of Information (FoI) legislation because of strong “public interest”.

and

O’Reilly’s decision is a victory for the Department of Finance, which fought a 14-month battle against the release of any documents related to the bank guarantee. It relented and released uncontentious material two weeks ago, but remains opposed to the release of records relating to the guarantee meetings of September 29/30.

The department had warned that it would take High Court action to prevent the release of these records after Garvey recommended their release, with some redactions. Both AIB and Bank of Ireland also opposed their release.

It appears now that we may have to wait until 2038 to see these documents.

Anyone hoping that the banking inquiry will shed light on these meetings is likely to be disappointed. My reading of comments from various government ministers (including the Taoiseach’s interview on RTE’s This Week) is that despite having a terms of reference that includes September 2008, the banking inquiry will not cover the issues related to how the government took the decision to give an almost blanket liability guarantee to the Irish banks.

I was already disappointed that the terms of reference excluded the months after September 2008, when the government consistently put forward a wildly incorrect diagnosis of the scale of the problems in the banking sector (a diagnosis that was shared by its advisers at PWC.) It is even more disappointing to think that perhaps the key policy decision in responding to the crisis will not be open for discussion.

If a major purpose of the banking inquiry is to see that banking crises don’t cost the state a huge amount of money in the future, then to my mind, it needs to come to conclusions not only about how the crisis came about but also about whether the government’s response to it was based on the best information and whether a more informed approach would have saved the taxpayer money.

Today’s Irish Times carries an excellent article by Mike Casey, formerly head of economics at the Central Bank, listing questions he believes should be addressed by the banking inquiry.

After repeatedly ruling out the idea that a banking inquiry would occur in the near future, the government has now released its own proposals for exactly such an inquiry. The formal proposals are here (this is an amendment to Labour’s proposal) while the Minister for Finance’s speech on the issue is here.

The essence of the proposals are as follows:

The inquiry will have two stages.

First, the Government will immediately commission two separate reports - one from the Governor of the Central Bank on the performance of the functions of the Central Bank and the Financial Regulator and the second from an independent ‘wise’ man or woman with relevant expertise to conduct a preliminary investigation into the recent crisis in our banking system and to inform the future management and regulation of the sector. These reports will also consider the international, social and macro-economic policy environment which provided the context for the recent crisis. I expect both reports to be completed by the end of May this year and laid before the Houses shortly thereafter.

The second stage of the inquiry will be the establishment of a statutory Commission of Investigation which will be chaired by a recognised expert or experts of high standing and reputation. The terms of reference for this commission will be informed by the conclusions of the two preliminary reports. The aim will be for the commission to complete its work by the end of this year. Its report will then be laid before the Oireachtas for further consideration and action by an appropriate Oireachtas committee.

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

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

Neither (a) or (b) seem too likely to occur.

Second, to my mind, the request that the Governor of the Central Bank be charged with writing the definitive report on its past performance puts Patrick Honohan in an invidious position in light of the fact that he will have to work on a daily basis with many of the staff who remain on from the previous regime.

Third, the terms of reference only go up to events up to September 2008. I would prefer to see the date extended at least up to early 2009 as there are serious questions to be asked about the Regulator and Department of Finance’s understanding of the scale of the problem facing our banks and the advice they received from outside sources such as PWC (see here and here).

Congratulations to Oonagh Smyth and the team at Prime Time Investigates for producing an excellent documentary on what went wrong with the Irish banks. The programme, which has insightful contributions from a number of people including Governor Honohan, is now available online here. The programme is likely to increase the pressure on the government to have an official inquiry.

Governor Honohan gave an extensive interview on last night’s The Week in Politics on RTE. A podcast of the interview is available here. I would note that the reaction from the government to Governor Honohan’s comments on an inquiry into the causes of the banking crisis has been disappointing, though perhaps predictable. The Irish Times reported:

In the Dáil yesterday, Brian Cowen said he had read what Dr Honohan had to say.

“From my point of view, the resources of the State are currently involved in ensuring banking stability and that we can deal with the economic and financial issues that arise.

“I am sure there will be economic historians and economists who will continue to talk about the failure of the regulatory system in this and other countries regarding the challenge faced by us.

“However, I would have to carefully consider such an inquiry before giving any commitment. As we know from the Abbeylara case, there are limitations on Oireachtas committees being able to inquire into questions of fact.’’

The “resources of the state” argument is weak. Essentially, this is the can’t-chew-gum-and-walk theory of government.  The “economic historians and economists” comment also has the suggestion that these are matters for academics to worry about while practical men like the Taoiseach worry about the present and the future (going forward). Still, I suspect that the government may end up having to yield to pressure for an inquiry and the foot-dragging will just mean that they will get no credit for having done so.