ANALYSIS:BLAME FOR the financial crisis has been laid squarely at the door of the Government, the Central Bank, the Financial Regulator and the State's lenders in the two hard-hitting reports by the first investigators into the meltdown.
Neither Patrick Honohan, the new governor of the Central Bank, nor international banking experts, Klaus Regling and Max Watson, pull punches in their reports.
Both are damning accounts of how the State’s banks were allowed to run riot by a comatose Financial Regulator and Central Bank – an act that was willingly and recklessly encouraged by blinded Government policies supported by dodgy surveillance and poor understanding of the mounting risks facing the economy.
All three investigators dispel the well-worn myth in these two shocking reports that this domestic crisis – the worst in the history of the State – was somehow caused by the collapse of a financial institution on Wall Street.
This was a homemade crisis, they concluded, and a run-of-the-mill property crash funded by excessive overseas borrowings by the financial institutions, unfettered competition and a Government that failed to understand that the boom in public finances was due to a boom in “fair weather” taxes driven by the construction and property sector.
While Regling and Watson assessed how the financial tsunami which has washed over the country grew in strength, Honohan examined the strength of the State’s levees. He found that the barriers were not just hopelessly weak but that the regulators and bankers had their fingers in the dyke without appreciating the sheer scale of the growing wave.
Honohan concluded that Anglo Irish Bank and Irish Nationwide Building Society – the two most exposed to the property development sector – were “well on the road towards insolvency” by the time US bank Lehman Brothers collapsed in September 2008.
The country’s two biggest banks, AIB and Bank of Ireland, might have survived without the Government’s bailout, had international markets calmed.
While major responsibility for the crisis lies with the directors and senior managers of the banks – “the first line of defence to protect those who have entrusted them with their funds” – the Government gets first mention by Honohan.
The growing reliance on construction-related and “other insecure sources of tax revenue” contributed to unsustainable spending in the economy.
Government budgetary policy – under the stewardship of ministers for finance Charlie McCreevy and Brian Cowen – contributed to the “economic overheating” and relied to “a clearly unsustainable extent on the construction sector and other transient sources of Government revenue”, said Honohan.
The Government even encouraged the property boom with “various incentives geared at the construction sector”, he said. “This helped create a climate of public opinion which was led to believe that the party could last forever.”
There was a “comprehensive failure” of bank management and direction to maintain “safe and sound banking practices”.
Instead, the banks took on “huge external liabilities” – borrowing heavily in the international debt markets – to support “a credit-fuelled property market and construction frenzy”.
Supervision was provided by a timid regulator who treated bankers with excessive deference.
Lending levels in the Irish banking sector “should have rung alarm bells”, said Regling and Watson, as the lenders borrowed far in excess of what they took in on deposit – at a higher level than any other euro-zone country.
Honohan raises questions that remain unanswered.
Why did the Government cover €20 billion subordinated debt – funding provided by investors for a risk premium – under the €400 billion bank guarantee in September 2008 together with less-risky senior debt and deposits? Honohan said that this narrowed the options available when it came to fixing failing institutions as the State was left on the hook for the debt. The State’s negotiating hand was weakened as it was unable to force these investors to share the losses with taxpayers.
The decision “increased the State’s potential share of the losses”, he said.
Leaving us in no doubt about the cost of the crisis to taxpayers, his report later states that the State has paid for roughly half of the banking losses – standing currently at €25 billion – arising from the financial crisis; the shareholders most of the rest.
Clearly, following the publication of these reports, the elephant in the room remains Anglo and the seemingly interminable investigations into the bank by the Garda Bureau of Fraud Investigation and Director of Corporate Enforcement.
Honohan does not attempt to discuss matters being investigated at Anglo – the directors’ loans, the so-called “Golden Circle” secret share support scheme and the back-to-back deposits with Irish Life Permanent – but said these matters had “coloured” the conclusions of this report.
The commission for investigation might delve a little deeper into the causes of the crisis during its six-month assignment but the picture will not be complete until the Anglo investigation wraps up.