OPINION: The plan to recapitalise AIB and BoI did not deal with the real problems affecting Ireland's banks, writes JOHN McMANUS
IT IS probably unfair to pick just one example of the conflicts that are rife among the people advising the Government on the recapitalisation, so let’s pick two.
The most obvious one being PricewaterhouseCoopers. They are the auditors to Bank of Ireland who are desperately trying to avoid being taken over by the State. At the same time they were hired by the Financial Regulator to asses the quality of the banks’ loans books, the bottom line being will the Government have to take them over.
Equally, Arthur Cox are advising the Minister for Finance while at the same time they are the lawyers for Bank of Ireland.
The stock response from professional firms is that such conflicts are unavoidable and they have robust rules for dealing with them which fundamentally rely on the integrity of the individuals involved. Quite so. Unfortunately, even though this may be the case, it can lead to bad decisions and poor advice.
How can PwC really take a view as to whether there is something systemically wrong with the way Irish banks are run without having to confront the possibly that there is something systemically wrong with PwC who audit one of the big two?
Equally, how can Arthur Cox advise the Minister that Bank of Ireland may have done something it should not have, without having to deal with the possibility that it was Arthur Cox that gave them the advice they could do it?
It may also seem a bit beside the point – given the scale of the banking crisis – to focus on conflicts of interest among professional advisers, but the failure of the Minister for Finance and the Financial Regulator to see the problem inherent in hiring Arthur Cox and PwC indicates a much bigger problem which is part of the reason we are in this mess. At best it implies some sort of patriotic belief that everyone is on the same team, wearing the green jersey and doing what is best for Ireland. And in fairness to Arthur Cox, PwC, the Minister and everybody else, they probably do think that. But not only is this wrong, it’s dangerous.
While the Minister for Finance and Bank of Ireland may be seeking a solution to the same problem, they have different priorities. The Minister wants, or should want, to do what’s best for the economy, while Bank of Ireland wants what is best for its shareholders. What neither side should want, but it seems to be the case, is to stay friends whatever happens.
The players trying to resolve the Irish banking crisis – from the Financial Regulator through to the boards of the banks themselves – would appear to be victims of “groupthink”, the management phenomena defined by Irving Janis in the 1970s as “a mode of thinking that people engage in when they are deeply involved in a cohesive in-group, when the members’ strivings for unanimity override their motivation to realistically appraise alternative courses of action.” Or as the American general George Patton put it: “If everyone is thinking alike, someone isn’t thinking.”
The consequences of this “groupthink” are now starting to make themselves felt. The stand-out is the failure of the Government to properly hold bank executives to account. For months there has been widespread public anger about the conduct of the management of banks and a desire to see them sanctioned. But within the nexus of senior civil servants, ministers, advisers and banking executives making the decisions, a completely different mindset seems to have taken hold. The consensus among them appears to be that they are victims of circumstance and its preferable that they – individuals who got us into this mess – are the ones to best get us out of it and should keep their jobs.
The basic point that people in position of power must do what is right, rather than what is technically legal, seems to have been lost somewhere until only recently. Of more concern is the extent to which “groupthink” may be leading to bad decisions about how to sort out the banks. There seems to be an unholy alliance between the bank executives’ obsession with keeping their jobs and the Government’s obsession with the sovereign debt rating. Somehow this has become the shared objective of the group and thus Government policy.
The outcome is bad decisions. The recapitalisation plans announced to date were obsolete before the Minister finished reading the press releases. The reason for this was that they ignored the true problem. The scheme announced last week avoided nationalisation – saving the jobs of the top brass at AIB and Bank of Ireland in the process – while minimising the hit to the exchequer and the sovereign debt rating. Unfortunately it did not deal with the real issue, how to clean up the banks’ balance sheets and make them start lending.
The truth is that our economic problems are so deep that the triple A sovereign rating has probably gone, and the best way to ensure that we don’t get it back is the failure to contemplate radical remedial action. “Groupthink” does not allow that.
