Does this finally mean bye-bye to Bertieland?
Just because Brian Cowen et al are proclaiming the end of crony capitalism doesn't mean it's dead yet...
They do things differently in Sweden. Up there, they pull together in crisis. They show a united face to the outside world when the chips are down. They are ideal candidates for a social solidarity pact. Out here on the far side of Bertieland, we don't have the stomach for such happy-clappy stuff.
On Wednesday, Brian Lenihan announced details for the National Asset Management Agency, or, if you will, the bad bank. This agency will take control of the property assets in the country's main banks, thus freeing up the banks to lend money to businesses. The book value of the assets, most of which are toxic, is estimated at €80bn to €90bn. Nobody knows the real value of the assets because at the moment, as nothing is selling, there is no market in which to put a price on them. The process is designed to clean up the horrendous mess caused by greedy bankers forwarding crazy loans to greedy developers.
The midwife for the bad bank is economist Peter Bacon, who pointed out that this agency could be a vehicle to do away with the crony capitalism that exists between banks and developers. He might have added that there was a third leg to crony capitalism – the government which is setting up the bad bank.
Last Wednesday, Eamon Gilmore spoke for many when he questioned Brian Cowen about our shining, new, bad bank. At leader's questions in the Dáil, Gilmore wound up to a question in the following manner.
"For six months now, in dealing with the banks and development, this government has been protecting and cosseting friends who brought down the Irish economy.
"Some of those friends have been investing and dabbling in property abroad. Guess what? They are now going to use the Irish taxpayer and government bonds to bail out the developments, the bad debts incurred for developments in Bulgaria, Dubai, Florida, Latvia and so on, none of which would have contributed anything to the Irish economy."
Brian Cowen immediately mounted a high horse to reply.
"I say to Deputy Gilmore, in all seriousness, I reject with contempt… As I said last night, we have a serious issue to deal with. We can have our agreements and disagreements on the way forward, but I will not accept from any deputy, however prominent, any suggestion that we are doing anything other than seeking to protect the public interest of this country."
In an ideal world, even in a Swedish world, this sort of stuff would not be thrown out for consumption to native or international ears. We are in crisis. We must pull together. Let's not air our dirty linen in public.
That was the way they operated in Sweden in 1992 when their banking system collapsed in the wake of a property bubble. Although there were structural differences in how the government took over the bad debt, the method deployed was similar in macro terms to our bad bank policy.
The centre left Social Democrats opposition in Sweden was not entirely happy about the set-up. They suspected that the government was letting the banks off lightly. But they knew the stakes were high. The world outside was watching.
"The only thing that held back an avalanche was the hope that the system was holding," Leif Pagrotsky, a senior member of the Social Democrats, said last year in an interview. "In public, we stuck together 100% but we fought behind the scenes."
Fissures in the body politic
On Wednesday, Gilmore obviously didn't feel any impulse to show a united front to the outside world. Whether or not it was prudent for a senior politician to expose fissures in the body politic on a matter like this is debatable. But there can be little doubt that he was articulating the feelings of huge swathes of the population.
On one level, Cowen's outrage at suggestions he was feathering developers nests is understandable. There is no reason to believe he is acting in anything other than good faith. The same goes for Lenihan, who a few weeks ago reacted with righteous indignation to similar jibes from Joan Burton. They are not consciously setting up a system to help out their developer friends.
The problem is that back in Bertieland, Fianna Fáil was unable to differentiate between the national interest and developers' interests. It was as if they had borrowed the old General Motors slogan – "What's good for General Motors is good for America" – and adopted it to local circumstances. What's good for developers was deemed good for Ireland.
So it went with emasculation of Part V of the Planning Act 2000, which had stipulated that 20% of all new developments be set aside for social and affordable housing. Noel Dempsey had the guts to bring it in, but he was soon put in his place by his successor, Martin Cullen.
The national interest was served by sorting out developers through watering down the provision. One of the most progressive measures of the planning system was thus destroyed, and the result in no small measure pumped further air into the bubble. So it went with tax breaks. If you wanted to as much as build a cow shed, tax breaks were available on the flimsiest of bases. Hotels were popping up all over the country – and particularly in Dublin – despite an obvious over-capacity pertaining.
Apartment blocks were built in fields in the middle of nowhere, because developers were incentivised by huge, tax-friendly profits to do so. This was all driven by a government policy that saw any construction activity as positive because it generated temporary employment and kept things ticking over.
There was a confluence of interests between the government and developers, and it's difficult to know where senior politicians saw the national interest beginning and that of developers ending.
Three stool legs of cronyism
The same applied to the banks. Light regulation was the order of the day because it facilitated easy lending, boosting bank profits and pumping further money into the property bubble. It was good for banks, and it was good for government.
The three stool legs of crony capitalism prospered in Bertieland. There was a confluence of interests, which, we were led to believe, coincided with the national interest.
Now we know Bertieland was an illusion. We are being asked to believe that Fianna Fáil is leaving old friends behind, that the fog has lifted, that senior members of government can finally differentiate between the interests of their friends and the interest of the nation. We shall see.
A lot of trust will have to be invested by the public in the bad bank. The valuation of property assets to be transferred to it will be crucial. Already, banking people are coming out to talk up the assets. One report from Davy Stockbrokers on Thursday suggested there should be a 15% writedown. That sounds like a mightily bank-friendly estimate in a market that has collapsed below 50% in places.
Staffing will also be crucial. The agency may well have to go outside the state to find property experts who are not both culturally and personally tainted by the demented carry-on of the past five years. Lenihan has said the agency will "go to the ends of the earth" to ensure developers cough up. International legal expertise will therefore be required to ferret out the assets of defaulters, and we know that these people have carefully spread their piles around the globe.
There are some signs that the coarser aspects of Bertieland have been consigned to the past. Peter Bacon who recommended setting up a bad bank is the same Peter Bacon who produced a series of reports on the property market over the past decade, most of which were ignored by the government because they would have involved interfering with the sacred market. Now, the politicians are gathered at his feet, all ears and pleas.
The presence of Alan Ahearne inside the tent also signals some change. He was recently appointed adviser to Brian Lenihan and his fingerprints can be seen on elements of the budget.
Back in 2006, Ahearne was among the cohort of doomsayers whom Ahern wished would kill themselves because their musings might interfere with his chances of re-election.
But a couple of boffins does not a sea change make. The jury of public opinion is still out on whether crony capitalism is now pushing up daisies.
Report by Michael Clifford - Sunday Tribune.