Where do we go from here?
As the State stepped in this week to avert a collapse of the Irish banking system, Joe and Mary citizen were left pondering a very uncertain future...
'WE ARE WHERE we are. It's time to move on. Just do the vote. Just . . . just get it done. Okay?" blustered a Wall Street trader last Monday, minutes after the US Congress rejected the $700 billion (€505 billion) bailout for the banks.
The CNN interviewer persisted with a question about the rage bubbling under Main Street USA. The tetchy trader ignored it. "We are where we are," he repeated. "It's time to move on. Just do the vote."
Sound familiar? It should. The mantra was snapped up on this side of the Atlantic this week and used to quell the rabble demanding that the Irish masters of the universe be made to account for themselves before Ireland Inc's reputation was sold to save their necks. "Listen. We are where we are," snapped one cheerleader dismissively, "all that's for another time." "Look," said another, as if addressing a slow child, "this is where we're at. We'd all have been back to living on turnips without this [€400 billion] Government guarantee."
It was classic arrogance, the kind that assumes that the Main Street rabble just don't get it. "Wall Street has not grasped the fundamental reason for the emotive reaction of the people," wrote Kansas business lecturer Kara Tan Bhala to the Financial Times . "For years, people have watched (with some fascination, admittedly) the extravagant lifestyles of the uber-wealthy. The extreme wealth was accepted with little envy because people believed the success of the financial elite was a result of hard work and expertise, and that it was achieved on a level playing field. Instead we discover that much of this fabulous wealth was garnered through a system of smoke and mirrors . . . The bailout is difficult but not impossible for the country to accept. Main Street, in the main, is comprised of good people. Perhaps they simply want an apology for rotten behaviour and the mess it caused."
To put that €400 billion in perspective: it would be more than enough to eliminate starvation and malnutrition globally by 2015, according to World Bank estimates; or it could feed and educate the world's poor for seven years. It is the equivalent of more than €100,000 for every Irish man, woman and child and well over double our GDP.
It is not "costless", as some have argued; Government borrowing will cost more because of it. Sure, it will safeguard bank investors but it will not cover the banks' bad debts. And these are the great imponderables. The Financial Times noted that, at Anglo Irish Bank, "80 per cent of the loan book is secured against fast-fading UK and Irish property; Bank of Ireland (71 per cent) and Allied Irish (60 per cent) are not a whole lot more diversified . . . As AIG's implosion showed, guarantees can be cheap to give but ruinous to honour."
On Tuesday, a former director of Hibernian insurance group, after lunch with a group of current and retired fund-management people, admitted that the cost to the taxpayer of the guarantee was "unknowable". "The only thing you can say is that it would be much worse for the consumer if we don't do it," said Eddie Shaw. "But make no mistake, this is the end of the financial system as we know it. It's not the end of capitalism but we're certainly moving into capitalism phase two. And it's going to have to be better."
For Joe and Mary Citizen's perspective, reel back a few weeks to September 18th and a Liveline programme centred on the security of savings. Media reports suggested that a bunch of nervous nellies were prodded into a stampede by Joe Duffy; in fact, the show featured one worried caller after another, who had already withdrawn their money from banks, and were stuffing it in the mattress or burying it in the garden. One woman had shifted hers into prize bonds. She was one of many, as anyone attuned to the conversation of middle Ireland would have known. A national crisis of trust was evolving. The banks and the Minister had been adamant that Irish banks' fundamentals were sound, yet any sensate creature was aware that the banking system across the western world was teetering. A salient feature of financial reporting over several months was the lack of trust between banks; they were even refusing to lend to each other. Foreign banks, in particular, didn't want to lend to ours. It wasn't due to a sudden turn against red hair and freckles, but because they suspected that vast dung heaps of toxic, property-related debt were steaming, undeclared, below the surface.
A couple of days before the Liveline show, the business editor of The Irish Times , John McManus, wrote that what we really needed to know was "whether the banks are refusing to face up to the problems in their property loan books, and whether the Central Bank is letting them away with it?" In short, absolutely no one - neither experts nor amateurs - trusted the banks or their guarantees, a point made by Joe Duffy.
THE INFORMATION VACUUM was real, dangerous and entirely the responsibility of the financial authorities and politicians. When an An Post employee popped up on Liveline with the useful reminder that An Post savings were State-guaranteed, was it Joe Duffy's duty to gag him? Some thought so.
In a highly unusual move, the Minister for Finance himself phoned the director-general of RTÉ, Cathal Goan, to express his outrage. According to remarkably similar reports across several Sunday newspapers, Brian Lenihan had taken the initiative when alerted by officials in his Department that the Financial Regulator and banks across the country were being "inundated" with telephone calls from alarmed customers after the programme (surely that's what the banks and the regulator are for?). In fact, people with entirely rational concerns were moving to protect their assets. Some €50 million was lodged to An Post's savings schemes in a single day.
Only then was the State guarantee on bank deposits raised to €100,000. In other words, it took a talk show to force attention onto the legitimate concerns of Joe and Mary Citizen.
It would take only 11 more days for everyone's worst fears to come to pass. The Irish banking system would have "totally collapsed" this week if the Government had not introduced legislation to underwrite it, according to Tánaiste Mary Coughlan.
So the rabble were right after all. It was another nail in the coffin of public trust, one less reason to trust the leadership the next time they come knocking.
And still no one is any the wiser. The optimists argue that the State might actually make a profit on the bank guarantees, the pessimists that troubled banks might be tempted to take a few big bets on the back of guarantees signed by the Minister for Finance (that is, you and me). Prof Morgan Kelly of UCD spelt it out: "Suppose that you are a bank that has lent €100 million each to 10 developers who are having problems meeting their repayments. What you do is bundle the loans into one asset and sell it, with Brian Lenihan's signature on the bottom, on financial markets for €1 billion. When the borrowers default, the taxpayer will be left taking up the tab." Expect bank shares to soar and the cost of Government borrowing to rocket.
It was precisely this bundling of dodgy loans into assets and their transmogrification into credit derivatives that triggered the US credit crunch and flattened Americans with a $700 billion bill for the Wall Street bailout (or "rescue plan", as the spinners took to calling it after Congress said nay). But it is the information vacuum that continues to niggle.
"I don't mind working in a recession, I've done it before - but this one feels different," says Nora Casey, owner of the Harmonia magazine group. "All summer there was the sense that this recession was to do with people overstretching themselves in property. I didn't think that would impact on us. There was a lot of talk about, but absolutely no leadership . . . Now this plan of ours feels very last-minute. The banks were looking for a big sign of confidence; our Government adopted a position of 'let's say nothing' and we became more and more uncertain. Now there's the bailout, and I understood on the one hand where it was coming from, but I'd also ask: why didn't we do it last week? There's a feeling that we've given over something that's not in our gift."
"People are nervously ignorant," said another well-read businesswoman. "There is a sense of emergency combined with a national hole in understanding about what's going on. There is no one person in authority attempting to explain how we should be feeling about this."
Ray Kinsella, professor of banking and financial services at UCD, sympathises: "People cannot internalise the magnitude of this crisis, which will metastasise into the mother of all recessions. We are headed for a place we don't want to go and what people want is some kind of direction. They are fearful, they are seriously ticked-off. They need information and they need reassurance . . . I'd be firmly of the view that there is a clear and pressing need for dialogue between the people undertaking something of such enormous importance [the €400 billion bank guarantee]; that means between people like ourselves, ordinary people going about our business, trying to live our lives, and the institutions."
JOE AND MARY CITIZEN care little that the same institutions are phoning builders and developers several times a day, demanding an update on the sale of the wife's jewellery or the 4x4, the helicopter, the Portuguese villa or the larger house of several, which may also be the family home (all of which is happening).
They won't lose sleep, either, about the travails of the glitzy charity-ball crowd, whose events often reflected the most overblown, look-at-me excesses of the boom. But next year's Toothfairy Ball has been cancelled and the million-plus it raised for three charities, including Adi Roche's Chernobyl Children's Project, will be sorely missed. "Even last June, I felt the auction was like pulling teeth. There was no money in the room," said Roche. As a result, the charity will have to dip into its emergency reserves for the first time in its existence.
Joe and Mary probably won't shed a tear either for Coca Cola, one of the companies that have decided against a Christmas party; or for the Dublin company director whose usual corporate gifts of magnums of Cristal champagne and Lynch Bages will be replaced by "a couple of bottles of something tasty and thrifty".
But what Joe and Mary cannot ignore is the distress of friends who are being squeezed by the banks, being turned down for minuscule loans, being tormented as their businesses struggle through hard times because the banks were not doing what they were there to do (as the Taoiseach pointed out on Thursday).
As the week closes on what he called a defining moment in our history, many are seeking a silver lining. Could it be that we've seen the last of the Gordon Gekko wannabes and the "greed is good" free-booting philosophy that has underpinned the past 15 years? They're unlikely to go quietly.
"It's almost as if we need a transplant into our national psyche - to trust and be trusted," says Prof Ray Kinsella. "In the words of a former economic adviser to NatWest, 'I joined a profession and I've ended up working for an industry'. A profession is trust-based, but industry commoditised all kinds of personal relationships and pushed out trust. The vast majority of bank employees are decent, good, highly moral people. The problem is that they work in a business model that is highly dysfunctional, where people are isolated and their value is measured in terms of money and stock options. They're going to a place where they can't be themselves, where they may be called upon to leave their own minds and personalities in a briefcase outside the office door."
To Kinsella, the challenge is to restore the balance between the four elements - depositors/customers, employees, shareholders and society - of banking. "Back in the 1900s, there was a shortage of capital, which meant the whole business model was skewed and rewarded the providers of capital [the shareholders] disproportionately, compared to the customer, employees and society. The whole model fixated on them, driving the obsession with quarterly earnings. People at the top were only rewarded for maximising shareholder value, the value of investments. Now, although capital is much more plentiful, the model remains the same; as soon as you get one set of targets by this quarter, it's all about next quarter's earnings. But as a model, it's economically redundant and creates all kinds of perverse effects.
"You're always looking for that little bit more; you develop that target-fixated mentality, that perverse mindset. It crowds out the person, the depositor, the mortgage-holder, the employee - and that is always, always wrong. Free markets are good and important for many reasons but that model has subverted the markets. The purpose of markets is not to make a small number of people extremely rich - it's about inclusivity. Over the years, you had banks advertising, saying to their customers, 'we are your friend, we are your safe haven, we are here to be at your service'. The real breach of trust was in that gap that was created between the perception created of front-line staff and the reality behind the counter. And it's this that has brought the system crashing down on everybody, including themselves."
And yet, he says, "the worst thing you could do is assume regulation will solve all the problems. Don't forget that this collapse has happened within the most prescriptive regulation regime - Basle II - ever known. Basle II was implemented last year after costing hundreds of millions over 10 years to set up, and was meant to be the last word in re-inforcing banks against failure. Yet it offered no protection, and that should tell you that regulation alone is no use. In the very same period that the incredibly complex, unprecedented regulatory system of Basle II was being created, the people within the system were creating the nuclear bomb that exploded this week. You simply can't regulate people into behaving ethically.
Ethics are about obedience to the unenforceable. It's not about being good all the time; it's about seeing outside of ourselves. You have to get inside the corporate mindset and convince them that an ethical approach is much more likely to be sustainable, to be profitable." He sees the two-year duration of the Government guarantee as "an incredible opportunity to reconfigure, to rethink our values and how we want our institutions to behave and to relate to us. It's really important that Irish banks remain in Irish ownership. We have to embrace this opportunity - let's use it."
And if that doesn't work? The Guardian made the case this week for a national bank to be made available through the post office network; safe, local, more democratic. How bad could it be?
Report by Kathy Sheridan - Irish Times
We are where we are - on the road to nowhere - a new world order!