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Ice Cold On Planet Denial

Posted on: November 17th, 2008 1 Comment

BRIAN Goggin came out to play on RTE radio’s Morning Ireland programme last Thursday. The Bank of Ireland boss had been in the deep freeze for weeks. A guy buried in the deep freeze could convince himself of anything. And Brian did precisely that. He told RTE’s Christopher McKevitt that all is fundamentally fine at his bank. In Brian Goggin’s world everybody else is out of step. The US, the UK and Europe are out of step with Ireland. The stock market has got it wrong. Seen from the deep freeze, the Bank of Ireland does not need new capital. Poor Brian was in denial. So are his colleagues in Anglo Irish Bank, AIB and Irish Life and Permanent. The old cartel is flourishing, cohabiting on Planet Denial. Planet Denial is a cold place; but there must be plenty of the happy, happy stuff out there. On Planet Denial the entrenched aliens are paid millions while their detached shareholders lose 90 per cent of their money.

On Planet Denial, dividends have been abolished, while investors are reassured that all is well.

On Planet Denial, the natives go cap-in-hand to the Government, begging to be bailed out. At the same time they insist that “we are in control of our own destiny” — as Brian absurdly claimed on Thursday.

Brian and his colleagues in the big banks have been singing from the same hymn sheet. Yesterday’s hymn sheet.

‘Yesterday’s’ because they are all rabbitting on about yesterday’s healthy solvency ratios. In his RTE interview, when Brian was not spoofing about “deleveraging”, “optionality” and “collateralised” mortgages, he was proving that he is the King Canute of world banking. His attempt at producing evidence of the bank’s strength — pointing to the obscure solvency ratios of 6.3 per cent — is old hat.

There is a new game in town. If you want to be a player, your ratios need to be a lot better. Brian and his friends are trailing behind the UK, Europe and the USA whose solvency ratios are up at 8 per cent. The reason: overseas rivals have been injected with capital. They are a safer bet.

Planet Earth has moved on. Planet Denial is frozen.

Irish bankers’ resistance to outside or state capital is now a matter of pride. Yet they are in no position to resist anything. The global markets have passed judgment: Ireland’s financial institutions need new capital. Unless they find it, they will wither.

Most of the bosses including poor Brian, Eugene Sheehy of AIB, Denis Casey of Irish Life and Anglo’s beleaguered David Drumm, have foolishly staked their jobs on keeping the state’s capital off their backs. They are impaled on a hook.

I sense resignations in the air.

Far from being in “control of our own destiny”, Irish banks are on a government life support machine. Their rescue followed the panic visit of leading bankers to the Department of Finance on September 29, begging for a bail-out. On that dark night, the Government gave them the kiss of life in the form of an emergency guarantee. Otherwise an Irish bank would have gone bust the following morning.

Knowing of the bankers’ craven humiliation on that night, we are tired of hearing the nonsense from them and their friendly regulator, insisting that Ireland’s financial crisis was the world’s fault. We are tired of hearing them say that their solvency ratios are fine. We are tired of hearing them insist that their provisions for bad debts are realistic. Nobody believes them.

Bad debts are the real problem. Reckless loans for property are the cause. Our bankers hate talking about their exposure to property. Property, their Achilles heel, is the reason for the collapse in the share prices and for the current crisis.

Forgive a few figures. The telltale signals are flashing in the bank’s own provision for bad debts. Goggledygook calls these figures “impairments”. The Bank of Ireland’s provision for bad debts is rocketing; but it is not high enough yet.

In Thursday’s interim results, it was easy to detect an embarrassed beating of the retreat.

The B of I is finally admitting that bad debts this year could reach around €1bn. A staggering figure, but Brian prefers to express the figure in the mumbo jumbo jargon of “basis points” — whatever they are. That sort of language makes the debt sound smaller. And even better, no one on God’s earth has a bull’s notion what Brian is waffling about.

Next year, the bad debt figure may be as high as €1.56bn. And if it reaches €1.8bn the mighty Bank of Ireland will start making losses.

At last we are beginning to see the real picture of the bad debts.

But why have the numbers spiked now, so suddenly? Well, it is probably just a coincidence that a special hit squad of auditors has been sent into the bank to dig deep into the caverns of its accounts. The days of auditors taking a benign view of bad debts are over. The hit squad may be jumpy about its own reputation. The figure is rapidly being adjusted upwards.

The top brass at Bank of Ireland have been lending too much to the wrong people. Now they are trying to filter out the bad news — in stages. They are playing catch-up. Each recent statement has shown a higher estimate. The bad debt figure provided in Thursday’s interims is still far too low. The danger is all dressed up in swanky ratios, but the message is simple:

Bad debts are the reason why B of I needs help.

And help is on the way. Unwelcome though it may be.

The stubborn patients on the life support machine are protesting their good health. The only listener willing to indulge their delusions is the Irish Government, the initially uncritical surgeon who has apparently saved the patient, but told him that his diet is fine.

The surgeon has persuaded the patients to swallow a few placebos. Government-appointed directors are on the way, about to be implanted in the invalids’ bodies. The public interest will then be, theoretically, satisfied.

Minister for Finance Brian Lenihan must now install bloodhounds, not poodles. Independent bank directors have a pitiful record of going native, once elected. The minister must not allow the banks to pick patsies from panels, as originally intended. Instead, he should directly impose men and women whom the bank’s directors will hate to see sitting beside them. Des O’Malley would drive them bonkers with his relentless questioning. Olivia O’Leary would make a fearsome inquisitor. Ex-bankers should be ruled out as they will be compromised. Overseas experts should be called in.

And then, having imposed real independents, Brian Lenihan should take €12bn to €15bn from the State pension fund and inject the essential capital. That means, in the words of Charles J Haughey, that “those responsible for the debacle should take the honourable course open to them”. The bosses should be given their P45s and the boards should be cleaned out.