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Usual Suspects Survive Fiasco

Posted on: October 7th, 2008

ONCE upon a time there was a little company called Lloyds of London.

Lloyds gave guarantees to big companies .

Lloyds collected members. Starry-eyed middle-class mugs queued up to join Lloyds because it offered easy pickings. Every year members were sent a cheque in return for providing security for insurance against mega disasters.

No disaster of sufficient magnitude ever happened. Members of Lloyds received cheques every year. For doing nothing.

Some members pledged their houses as security for the guarantee . Others pledged their shareholdings. Such shareholders saw their assets earn returns on the double — once from the dividend and once from Lloyds in return for giving their shares as security.

Money for jam. No risk. Well, very little risk.

One day disaster struck. A series of events shattered Lloyds. Osama bin Laden attacked the World Trade Centre. Hurricanes hit the US for $3bn in damages. Asbestos claims from Halliburton bankrupted syndicates. A fire on the Piper Alpha oil platform caused devastation.

Members of Lloyds lost their shirts, their shares, their houses, their good names — the lot.

Many were wiped out. They had always believed that mega disasters could never strike. They had wagered the ranch on it. And lost.

ONCE upon a time there was a little country called Ireland. Ireland gave guarantees to big banks.

Ireland collected all its taxpayers together to provide insurance against a mega disaster in the banks. Every year the taxpayer was sent a small cheque by the banks for guaranteeing their deposits and loans.

Like Lloyds, the banks were said to be as “safe as houses” (although houses were not so safe in Ireland). As security, the Government pledged hundreds of billions in guarantees, many multiples of the taxpayers’ income.

Money for jam for the taxpayer. No risk. Well, very little risk.

One day disaster struck …

The taxpayer was savaged.

God forbid that this will ever happen. Indeed, it probably never will.

Yet taxpayers should beware last week’s emergency legislation designed to save the banks and the bankers.

Certainly, if Ireland’s banking system was in danger last Monday, emergency action was necessary. No dispute about that.

But why this particular action?

All the early spin about the Bill suggested that deposits, small and large, were being protected. No one could fault that. Nor could anyone fault the delivery of immediate relief by giving a similar guarantee for moneys borrowed in the wholesale markets, the place where banks were refusing to trust each other.

But guarantees are not without risk. Nor without cost.

First came the euphoria. The hangover is on the way.

Start with the euphoria. On Tuesday, the moment the terms of the rescue package were announced, bank shares rocketed.

There was much rejoicing in the boardrooms of the banks. David Drumm of Anglo Irish saw his net worth increase by millions. Ditto Brian Goggin of Bank of Ireland. AIB’s Eugene Sheehy trousered paper fortunes. Even part-time AIB boss Dermot Gleeson pocketed a six figure sum overnight.

After their meeting at the Department of Finance the banking boys were back in clover.

Equity markets rallied. The guarantee had done the business.

And next, the hangover: enter the guarantors, the Irish taxpayers. How did they fare from the little plot hatched by a giddy duo of bankers, the Financial Regulator and a brace of Brians (Cowen and Lenihan) behind closed doors in Dublin’s Merrion Street on Monday?

The nation’s good name plus its total income was pledged. We were assured that this was a stroke of genius, as not a cent had been spent. The two most suspect words in the English language — “win, win” were whispered in Leinster House. The banks had been saved. At the same time there was supposedly no cost to the taxpayer.

What unvarnished bull. So where was the catch?

Not in the initial euphoria of the casino known as the Irish equity market. But a trip to the more sober global bond markets revealed an uncomfortable truth. The risk to Ireland’s credit rating among the world’s bond traders was increasing. Our Government had given such an open- ended guarantee that confidence in Ireland Inc on the lending trading floors had ebbed.

The implied cost of borrowing above Euribor had doubled overnight. Ireland had moved up to among the riskiest nations in Europe. We are suddenly perceived as riskier in the rankings than Berlusconi’s nearly-bankrupt Italy. We had tumbled below Portugal, Spain, Belgium and Italy. The guarantee was set to cost us instant millions.

The result: it will probably be more expensive for Ireland to borrow money. And just at the wrong time. On Thursday the budget deficit reached a staggering €9.4bn. In the coming year we will need to borrow billions by the bucketful. When we head for the bond markets to raise the money, they will see us coming. The taxpayer will be hit for six.

The stability of Ireland’s banks may be temporarily restored, but the taxpayer is now in the front line. And interest on the borrowed money will probably cost millions extra for years to come.

More alarming still, is the extraordinary power assumed by the Minister. Brian Lenihan and his successors are not restricted to giving limited guarantees of bank deposits or bank loans. Our liability is unlimited, just like Lloyds of London’s was.

Astonishingly, the Bill gives the Minister the power to support a bank with “a loan, a guarantee, an exchange of assets and any other kind of financial accommodation or support.” Carte blanche.

The Minister can patch up a favoured bank’s balance sheet, plug a hole, bail out some banks and let others sink. He has power of life or death over all the banks. He can wound them, prefer one over another, nurse them back to health or merge them.

Radical surgery? Not radical enough. In all the turmoil, the ancien regime lives on. The regulator, the toothless watchdog, has been inexplicably reprieved. The same offending bankers are being left in charge of the same offending banks. Those who have sat happily reassuring us that all was well for months — when in truth all was woeful — are being given a vote of confidence. And they are being left with their vast salaries to boot.

Their survival defies all logic. As TDs and Senators debated in the early hours of last Thursday, one or two seemed to have been a little touched by their nocturnal exertions.

Several said they understood that the lads commanded such huge pay packets because our bankers needed to be of top calibre. God knows, otherwise they could be poached!

So, would AIB’s Eugene Sheehy and Anglo’s David Drumm please tell the world about all those foreign bankers knocking at their doors, begging them to repeat their Irish antics in another jurisdiction?

The incestuous old club is alive, well and prosperous.

Property developers can breathe a sigh of relief. The old team is back in the saddle.

We were right to rescue the banks, wrong to rescue the bankers.