Nationalising the risks, not the assets

Brian Leeson, eirigi chairperson, presents his analysis of the crisis in the Irish financial system, of those who created it, and the choices facing Irish citizens for the future.

Bailing Out The Scum

While the Twenty-Six county government last week succeeded in rushing its emergency ‘Credit Institutions (Financial Support) Bill 2008’ through Leinster House many serious questions remain to be answered. A host of ministers have to date refused to answer these questions, preferring instead to repeat the mantra of ‘are acting in the national interest’ ad nauseum; presumably in the hope that people will get bored of asking questions that they are unwilling, or unable, to answer.

This ‘national interest’ argument has also been successfully used to rally support for the controversial legislation. While the Green Party’s Paul Gogarty may have referred to banking executives as ‘scum’ that didn’t prevent him from voting in support of a financial package which saw the same ‘scum’ remain in charge of the disgraced banking system.

Sinn Féin similarly supported the multi-billion guarantee despite Arthur Morgan’s assertion that he didn’t trust the government or have access to any of the details of the package. The Labour Party alone voted against the bill, for reasons that have more to do with elections than they have with ideology - as time will show.

Before attempting to answer some of the most pressing questions about last weeks bailout it may first be helpful to examine what actually happened in the first three days of last week.

A Timeline of Panic

Monday September 29th

Following months of sliding share prices the situation for a number of Irish banks dramatically worsens. Anglo Irish Bank is particularly hard hit with its share price dropping by 46%. Shares in all the other banks also drop dramatically. Emergency meetings are convened in government buildings in Dublin. While who exactly attended these meetings is still unclear, it appears that government ministers, senior civil servants, the head of the central bank, the financial regulator and the chiefs of the private banks were all involved in putting together a financial package to rescue the Irish banking sector. These meetings continued through all of Monday night and into the early hours of Tuesday morning.

Tuesday September 30th

In an early morning press release the Dublin government announces that it intends to guarantee the loans and deposits of the six main Irish banks, namely, Bank of Ireland, Allied Irish Bank, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide and Educational Building Society. Banks operating in the Twenty-Six counties whose parent companies are based outside of the jurisdiction are not covered by the guarantee.

Financial experts estimate the value of such a guarantee to be in excess of E440 billion. The share prices of the six guaranteed banks begin to climb as soon as the Dublin stock market opens. As the day progresses reports emerge of large cash movements out of those banks not covered by the guarantee into those banks that are.

Wednesday October 1st

As Leinster House continues to debate the emergency legislation it emerges that at least one of the main banks - whose shares had dropped dramatically on Monday - had been on the verge of collapse prior to the government intervention. Reports suggest that the bank in question was unable to repay monies that it had borrowed which were due for repayment. Financial experts speculate that had this bank collapsed at least one other would have rapidly followed. Such a double-bank collapse may well have triggered a domino effect across the entire banking system in the Twenty-Six counties.

Brian Lenihan, the Dublin Finance Minister, indicates that he is willing to include additional non-Irish banks with large Irish operations in the guarantee scheme, further increasing the liability to the taxpayer.

Thursday October 2nd

The ‘Credit Institutions (Financial Support) Bill 2008’is passed by Leinster House at 2am. Mary McAleese signs the legislation into law at 3.30pm.

E125,000 Burden for Every Man, Woman and Child

And so it came to pass that within less than seventy-two hours all of the risks of the Irish private banking sector came to be guaranteed by the exchequer. Within a week, on Thursday 9th October an additional five, non-Irish, banks were added to the scheme. By extending the government guarantee to Ulster Bank, First Active, Halifax Bank of Scotland, IIB Bank and Postbank the total potential cost of the scheme rose to at least E500billion.

This means that every man, woman and child in the Twenty-Six counties has now been saddled with a potential liability of at least E125,000 each!

Having taken on such a risk those same citizens are now entitled to the answers that the political establishment have so skilfully avoided over the last few days. First among these must be, ‘How did the banks get into such a mess in the first place?’

While the banks and their allies in Leinster House are partially correct in blaming the ‘international credit crunch’ and ‘foreign speculators’ for the near collapse of the Irish banking sector, there is also much blame to be apportioned closer to home. For a decade and a half the Irish banks have been recording record profits. As recently as May 2008 Bank of Ireland reported before-tax-profits in excess of E1.93 billion for the twelve months up to March 31.

In other words Bank of Ireland was making a profit of more than five million euro a day, every day of the year. While accepting that some of these profits accrued from outside Ireland, the vast majority did not. And Bank of Ireland is only one of the six highly profitable banks bailed out by the Twenty-Six county taxpayer.

Throughout the boom times very few journalists, economists or politicians queried how such profits were being generated or for how long they could be sustained. In 2006 the average house price in the Twenty-Six counties came close to E400,000, while land in exclusive Dublin 4 sold for more than E50 million per acre.

It is the legacy of this unsustainable property market that lies at the heart of the problems now facing both the banks and the wider economy. When the property market peaked in the summer of 2006 more than 13% of the workforce was directly employed in the construction industry. This figure moved close to 20% when those employed in construction-related activities were added.

At the same time construction accounted for 20% of all economic activity in the state, with 70% of all construction focused on house-building. Having such a high percentage of the states’ economic activity concentrated in one sector carried huge inherent risks. If the housing sector were to sneeze the entire economy would catch the proverbial cold.

The total number of house completions for 2006 crossed 92,000. That was almost one new housing unit completed for every forty people living in the Twenty-Six counties. In total more then 500,000 housing units were completed in the decade prior to 2006 -meaning that more than one third of all housing units were built over the preceding ten years with the remaining two thirds having been built over the preceding ten centuries!

Soft Landings and Hard Lessons

As the political establishment in 2006 promised a ‘soft landing’ for the property market the warning lights of an imminent hard crash were already flashing. With house prices stagnating in the Autumn of that year it was clear that the people of the Twenty-Six counties were about to learn a hard lesson about ‘free markets’ and the law of supply and demand.

When the first signs of problems in the United States property market emerged the financial regulator, the Dublin government and the banks were quick to stress that the ‘fundamentals’ of the Irish banking sector were sound. As new phrases such as ‘sub-prime loans’, ‘credit crunch’ and ‘toxic assets’ entered everyday language people were assured that these were American phenomenon’s which could never occur in the well-regulated Twenty-Six counties.

It is now becoming clear, however, that many of the Irish banks have their own dirty little secrets to tell. At least one Irish bank - the same one that nearly collapsed last week - is believed to have a very substantial amount of ‘toxic assets’.

Having seen the damage caused by ‘toxic assets’ in the USA the international financial sector have rapidly identified other places which may hold similar financial time-bombs. The Twenty-Six counties are high on that list.

Irish banks are a particularly high risk for two main reasons. Firstly there are the tens of billions of euros which have been loaned to property developers who paid massively inflated prices for land at the height of the property boom. With the collapse in demand for housing many of these developers are now unable to repay these loans and more critically, for the banks, the value of the assets against which these loans were secured is now dropping fast.

The situation in the leafy suburbs of Dublin 4 is a good, if extreme, example of this phenomenon. In 2006 land in this area was regularly selling for in excess of E50million per acre. On one occasion a site sold by University College Dublin attained the equivalent of E95million per acre. Having paid such astronomical prices for development land the developers now need to attain similarly astronomical prices for the property built on that land if they are to even recoup their original outlay. And demand for astronomically priced property has all but dried up.

Between them three of Ireland’s biggest property developers, Sean Dunne, Ray Grehan and Bernard McNamara paid out almost E940million for three sites in Dublin 4 in 2005 and 2006. These figures are all the more outrageous when one realises that they were paid for land before planning permission was even granted. If the developers are to repay these loans they will need to borrow further vast sums of money to actually build their developments. For the three sites above that will require an estimated additional E1.5billion euro. And this is the crux of the problem facing the Irish banks. Do they lend further monies to the developers or do they foreclose on land that is no longer worth the money borrowed against it?

While the Dublin 4 example may be an extreme one there are similar situations developing all across the Twenty-Six counties. In villages and towns from Donegal to Kerry and from Wexford to Louth the sight of unfinished housing estates and apartment blocks is now commonplace. And for every one of these unfinished developments there are multi-million euro bank loans to be repaid.

The second major risk to the Irish banking sector stems not from the developers but from those hundreds of thousands of citizens who were forced to take out massive mortgages to secure a roof over their heads. A combination of rising unemployment and increased costs for everything from energy to food is causing an ever-increasing number of people to flounder as they attempt to make their mortgage repayments.

The chickens of 100% mortgages, 40-Year mortgages and Interest-Only Mortgages are truly coming home to roost. Nobody but the banks themselves know how many people have already defaulted on their mortgages and given the social stigma attached to such an admission it is unlikely accurate figures will emerge. What is known, however, is that the levels of re-possession, both voluntary and compulsory, have risen steadily over the last two years.

The simple fact is that the Irish banks are largely, although not exclusively, responsible for their own current difficulties. Motivated by nothing other than base greed they have for more than a decade loaned vast sums of money to both developers and ordinary citizens knowing full well that those loans were being used to purchase hugely over-priced properties.

So when the politicians and the bankers attempt to blame international factors for the current state of the economy it should be noted that it was Irish banks, Irish estate agents, Irish politicians and the Irish media - the collective Irish capitalist class - who largely created the giant property-based pyramid scheme that is now dragging the entire economy down as it collapses. Indeed, the international financial crisis itself is only happening because of similar pyramid-schemes created by that same capitalist class within each of the major world economies.

The next question that should be answered for everyone who has recently taken on an un-requested E125,000 liability is,

‘Who will pay for the banking mess?’

In answering this question it may be easier to identify who will not pay for the current financial crisis.

Nationalised the Risks but Not the Assets

For starters it appears that the banks themselves won’t be paying. When the Dublin government so generously rescued the banks Brian Lenihan indicated that there would be ‘conditions’ attached. More than a week later it still isn’t clear what these conditions might be and it appears that the details will now not be released until after Lenihan’s budget on October 14th.

While nationalising the liabilities of the banks the Dublin government failed to nationalise any of the assets of those same institutions. The option of taking complete or partial ownership of one, or all, of the banks wasn’t exercised. Nor was the option of taking seats on the boards of the banks taken Finally the banks have not been required to pay any lump sum or royalty to an exchequer that has underwritten all of their liabilities.

Instead it has been suggested that the banks will pay interest on any monies taken from the state, but the rate of interest has yet to be disclosed. It appears that, such was the panic in Leinster House last week, the Dublin government may have overlooked what it should seek in return for taking on a E500 billion liability.

If the banks aren’t going to pay for the mess what about those who run the banks - will the bank executives be personally held to account? Did the government demand the resignations of those who walked the Irish banking sector into the current mess?

For the year ending March 31, 2007 the chief executive of Bank of Ireland, Brian Goggin, was paid roughly E4million. In the year ending March 31, 2008 he received E2.9million - roughly 88 times the average industrial wage. His counterparts in all of the other banks are all paid similar vast sums of money each year.

Whatever happens over the coming period it is certain that none of the wealth that Goggins or his colleagues have personally accrued over the last ten years will be reclaimed by the state.

For happily encouraging an entire generation into unprecedented levels of personal indebtedness they will receive no substantial punishment. Indeed more than one commentator has suggested that the bank chiefs deserve a huge bonus for negotiating the government bail-out at such little cost to the banks.

And what of the property developers who made so very much from the ‘Celtic Tiger’ property boom? Will some of their wealth be recovered by the state to offset the hard times now faced by the people of Twenty-Six counties?

Only the stupidest of developers will loose anything beyond a bit of credibility. While some projects will be postponed or abandoned and perhaps a company or two will have to close, the personal, protected wealth of the developers will remain untouched. Bank loans will be re-negotiated, limited companies will be folded and assets will be protected.

For the Bernard McNamara’s, Ray Grehan’s and Sean Dunne’s there will be no repossessions of their family homes - or their many holiday homes for that matter. For them and their cronies there will be no need to choose between turning the heating on or buying tomorrow’s dinner - choices which many families across Ireland are already having to make and many more will have to make in the near future.

Debt and Pyramid Schemes

So, if the banks, the bankers and the developers aren’t going to pay for the mess that the banking sector now finds itself in who does that leave? You’ve guessed it.

The ‘Celtic Tiger’ property market can be likened to a giant pyramid scheme. Those who got in at the beginning of the scheme have done very well while those who joined in the latter stages - by far the greatest number - are now at risk of loosing everything. What makes the situation immeasurably worse is the fact that many people borrowed vast sums of money to get into the pyramid scheme.

Over the course of the last ten years the levels of personal indebtedness in Ireland have skyrocketed, due to large mortgages, personal loans and credit cards. The people of the Twenty-Six counties are now consistently rated as the most indebted people in the EU.

So while personal indebtedness provided one of the engines of the ‘Celtic Tiger’ it is now one of the brakes of recession. Having been forced to borrow astronomical amounts to secure a roof over their heads an entire generation of young Irish families are now finding it increasingly difficult to make ends meet as the pyramid scheme finally collapses.

Regardless of whether even one cent of the E500billion liability is actually paid out the people of the Twenty-Six counties are now in for a period of pro-longed recession - a recession that can be largely attributed to the bursting of the recent property bubble. If even one of the guaranteed banks requires the Dublin government to honour its guarantee it is these same hard-pressed people who will end up paying for the bailout.

In effect those people who have taken on forty year mortgages to enter a now collapsing pyramid scheme will have to pay for the rescue of those who set up the pyramid scheme in the first place.

The final question that the average citizen of the Twenty-Six counties is entitled to ask is

‘Will it work and will it happen again?’

Before answering the question ‘will it work?’ one must first define what the question actually means. If by ‘work’ one means that the capitalist banking system will be stabilised and it will soon be back to business as normal, it is quite possible that the government intervention will ‘work’. Given the instability and complexity of the current global financial system, however, it may not. It is just too early to say.

But if by ‘work’ one means that there will be some sort of quick-fix to the current economic crisis and that the pain of any solution will be borne equally by all, the answer is a categorical NO.

Since the time of Marx it has been known that the capitalist model is fundamentally based upon a boom and bust cycle. In recent years some right-wing economists have attempted to undermine this fundamental truth, arguing that modern capitalism can manage continuous growth - a boom without a bust.

Those same economists, and their political allies, argue that in a ‘free market’ the law of supply and demand will find a natural balance, thus creating economic stability. Events of recent weeks and months have exposed the falsehood of this argument.

Rather than bringing stability modern capitalism ensures the very opposite. The globalisation of banking and stock markets over the last two decades has simply created a vast, unregulated playing field for bankers, speculators, commodity traders and venture capitalist to accrue vast amounts of personal wealth. And this wealth does not appear from thin air, it is created by the hard labour of workers across the globe.

This reality provides an answer to the question ‘Will it happen again?’ and that answer is YES.

The only way that people in Ireland and across the globe can avoid a repeat of the current cyclical capitalist collapse is to change the overall socio-economic system. Instead of supporting a system which actively encourages human beings to prey on each other in a form of social and economic cannibalism people across the world need to actively support a socially based alternative.

Modern capitalism requires the breakdown of community. It requires people to detach themselves from their neighbours and place individual material gain above the collective good. It requires people to believe that the casting of a vote once every five years is democracy and to believe that no other socio-economic system can ‘work’.

A socialist alternative is not only desirable; it is also practical and realisable - but only if sufficient numbers of people actively support it. A socialist alternative will not be created by the corporate media, the business class or the bankers. It will instead be built by ordinary women and men coming together to challenge the status quo and replace it. Each extra shoulder to the wheel will make a difference.

So, when the right-wing economists talk about tweaking the ‘free’ market to ensure that another crisis does not happen people should ask the question just how ‘free’ are people with a crippling forty year mortgage; or how ‘free’ are those whose homes are dependent on the whim of a landlord; or how ‘free’ are those who wait for years on end for social housing; or how ‘free’ are those who are afraid to turn on their heating or visit a doctor for fear of the bills that they will be presented with.

Every person in Ireland has a choice to make. Do they support a ‘free’ market or do they support a free people? And if they choose a free people they need to make one more choice - to become politically active and join the struggle for a free, socialist Ireland.

Urgent Appeal