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Bash The Banker, Not The Bank

Posted on: September 15th, 2008

Is your money safe in the bank? My telephone has been ringing all week. Not the usual angry auctioneer giving out dog’s abuse. Nor the bitching banker. This past week it was worried widows; parents of small children; even the cute guys who piled out of property, out of equities and are now flash with cash.

Suddenly, even the smug are sweating. Their life savings are buried in their local bank. The dogs in the street are asking: should we still trust the last bastion of financial stability, Ireland’s banks? Is the mattress the answer?

My stock response has been: never trust a banker; but keep the faith in the bank. These highwaymen have been ripping us off for so long that they have built fortresses around themselves. Their edifices were erected to ensure big salaries, perks, the lot. Safe in their fortresses, big bankers robbed us blind. Ironically, all the fat that they have guzzled — our fat — could work in our favour. The fortresses are now empires, deeply embedded in Ireland’s ether. Just like the black economy of old, today the banks are too entrenched to be allowed to implode.

Northern Rock gave savers collywobbles. Bear Stearns in the US made it worse. Last week Fannie Mae, Freddie Mac and Lehman Brothers added fuel to the fire.

Where will the next collapse come?

Savers have been scared stiff that a banking crisis will hit Ireland. So they ring up any old bluffer, like me, for comfort. They desperately need reassurance.

There has been idle chatter for months about one or two Irish banks going belly-up. Last week Reuters news agency jumped the gun. As Irish journalists competed to break the story of a bank biting the dust, Reuters went walkabout. It published a fable about the Irish Nationwide Building Society, suggesting that it was in talks with its bankers about closing down the shutters.

Reuters, once the blue blood of journalism, must have known the consequences of its story. If it was true there would be a run on the Nationwide. Happily for small savers, it was nonsense.

Back in March, Ireland’s financial regulator gave legs to rumours about Anglo Irish Bank and Irish Life & Permanent. The watchdog, that sometimes seems not to know its posterior from its elbow in the world of stock markets, announced an inquiry into share dealings and rumours circulating about the two companies.

Unwittingly, the regulator had fuelled the rumours. Not averse to a good headline, it flagged its now long-running probe. Anecdotal evidence suggests that withdrawals from Anglo followed.

Our financial regulators are relatively new to the wild ways of stock markets. Someone should have told them that selling stocks “short” is normal, not new. Rumours are not a sin, but the lifeblood of markets.

The financial watchdog had barked, in the process spooking depositors; but its target — sharp shooting market dealers — traded away, unimpressed. The initiative had boomer-anged, causing confusion in the minds of savers.

Its ill-judged inquiry is now limping to a close. Do not expect a blaze of publicity when it admits defeat. The regulator was firing blanks at phantoms.

These well-meaning novices could do a lot better by sticking to the knitting. Instead of diving in at the deep end, they should be offering sound advice to vulnerable depositors. They are good at providing information, tables, rates, reassurance where it is appropriate and warnings where it is not. Their website is a mine of facts and figures.

They could tell savers, for instance, that there is a compensation fund; that they are indemnified up to €20,000 in any one bank; that there is a sensible case for spreading funds around. They should explain the benefit of a government guarantee. Perhaps small savers should consider buying government stocks which are underwritten by the taxpayer, just as Fannie Mae and Freddie Mac are now backed by the mighty US Treasury. Such a service would be far more useful than high-profile press releases.

In tense times punters panic. The false alarm at the Nationwide was not helped by a reduction in its credit rating from Moodys. The Reuters fiasco followed. In turn this prompted the watchdog to ring around newsrooms trying to muscle in on the act.

Similarly, bad news hit another building society last week. The troubled EBS reported miserable figures. Its profits were down 37 per cent. It has reduced staff numbers (its hard-working employees are the unappreciated, but most wonderful asset, of the EBS). Union sources suggest that unprecedented numbers are joining the Unite union.

To top up the EBS’s woes it emerged that the ailing outfit had resorted to the European Central Bank’s funding system for €2.2bn in loans last year.

All sour fodder for EBS members. If EBS was quoted on the market, the share price would have bombed; its members’ stake is devalued; its board is a joke. But that hardly means it is insolvent, any more than AIB is in peril because its boss, Eugene Sheehy, and his cohorts are overpaid.

EBS depositors should not be worried about their savings even if they are accepting lousy rates.

While bankers’ ethics are non-existent, their commercial judgment has been diabolical. In particular, their exposure to property has been reckless.

Yet the masters of the dark art of lending, as always, will escape unpunished. Why? Because, just as today’s hopelessly indebted property developers have their bankers over a barrel, in turn the bankers have the Government in a squeeze.

Neither party can allow the other to collapse. The shareholders may be savaged; the depositors and the borrowers will, as always, be fleeced; the institutions themselves will survive.

Face the truth. If one of the banks goes to the wall, the Government will bail the depositors out. If the US government can guarantee Fannie and Freddie, if the UK can underwrite Northern Rock, the Irish Government will not allow AIB or Bank of Ireland to sink.

Smaller banks are not believed to be in such an impregnable position but there is no reason to fear for their safety.

Yet if punters remain nervous they might consider other avenues.

If An Post was not such a sleepy monopoly, it might be worth entrusting with a few bob. Any decent commercial outfit with such explicit government backing could sell itself as a safe haven. An Post is as secure a home as you will find, but its products are hardly the sexiest toys in town.

We should remember there is always an efficiency downside for taking the semi-State road.

Influential voices are today urging the Government to remove the uncertainty. They are proposing that all deposits should now be State guaranteed.

If the BofI and AIB are now too big to be allowed to sink, a State guarantee of all deposits might put an end to damaging rumours and resolve the problem of having a lame financial regulator. It would not kill the free market.

Certainly it would mean more regulation, but banks could still go bust. Happily, shareholders and well-heeled bankers would take the hit, but depositors would be safe. It is worth a debate.