Celtic Meltdown

                           

Chapter 10 was written in March 2009. At that stage the author was not aware of many of the issues which caused the ruination of our banking system and the destruction of some of our most valuable companies.

The most toxic of these 'weapons of mass destruction' being -

(Click on any of the three links below)

( 1 ) International Financial Reporting Standards (IFRS)

which allowed bankers to hide massive losses.

( 2 ) Accountants Ignored Company Law And Protected Bankers
.
 ( 3 ) EU negligence on accounting standards allowed Irish banks to conceal losses

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Chapter 10 - Let failed banks fail - Why not?

The Irish bankers who created this economic crisis, which has brought our economy to its knees, have walked away with millions, without an admission of guilt, an explanation, or an apology.

These same bankers are now looking for rule changes which will allow them to avoid biting the bullet and making the real decisions that will end this crisis, namely, writing down or writing off the huge amount of ridiculously overpriced assets they have built up in their loan books, otherwise known as toxic debt. These bankers tell us that the normal rules of the game should be forgone when markets ‘stop functioning properly’.
What statements like that really mean is that the bankers used these rules to pay themselves millions and in the process destroyed their banks and they now want these rules suspended so they can continue to carry on doing the same thing.

Our bankers are constantly looking for ways to make their companies’ financial statements reflect the ‘management’s assumptions’. But as long as banks are allowed to continue denying the true value of these toxic assets, the longer the current financial impasse will continue.

But, of course, if these banks are all of a sudden forced to own up to the reality of their huge losses, their balance sheets will show the true nature of the catastrophe they have created. There is no point in trying to hide this any longer: people now know what has happened and it will not go away.

The government would be very foolish to think that they can continue playing these games with the bankers, because the Irish taxpayers will only stand for so much of this kind of carry-on.
Any attempt by the government to set up a ‘bad bank’ to transfer ownership of the bankers’ toxic debt to the Irish taxpayers will simply mean that the heroin addict is being allowed to call the shots, because rehabilitation will hurt more than continued dysfunction and the prospects for finally breaking the impasse are kicked farther down the road. It is just an obvious barefaced attempt to have the bankers win again, at the expense of the Irish taxpayers.

The main problem with the banks is not a lack of liquidity.

If it were, then the government could simply provide them with funds without loan guarantees. The real issue is that the banks made bad loans in a bubble and were highly leveraged. They have lost their capital, and this capital has to be replaced.
Paying fair market values for the assets will not work.

Only by overpaying for the assets will the banks be adequately recapitalised.
But overpaying for the assets simply shifts the losses to the Irish taxpayers. In other words, the ‘bad bank’ plan only works if and when the Irish taxpayer loses big time.
It is high time the government accepted reality here and allow these failed banks to go into bankruptcy.
Back in September 2008, when the shares in major Irish banks began to fall, the bank’s senior executives told the government that this was caused by international shortsellers (people who were placing bets which were forcing the shares down) and they asked the government to ban short selling of their shares, which the government did.

The ban became effective from midnight on 17 September 2008.

On 19 September 2008:

Bank of Ireland closed up 38% to €5.20.

Anglo Irish Bank advanced by 28.7% to €5.60.

AIB increased 19.4% to €6.23.

Now, the more cynical among you could be forgiven for thinking that maybe this jump in prices was as a result of the bankers buying each other’s shares. Whatever the reason, it was short lived and within days the shares were falling again.

The shares continued to fall, because the real reason Irish
banks were under pressure was that they were carrying billions of bad property-related loans on their books. The banks did not want to admit this and tried to camouflage their own reckless lending behavior by blaming short-selling speculators.
Next, the banks went back to the government again saying that depositors were taking money out of the banks and their new story was that this was a result of scare programmes on the radio.

So the government again believed the banks and on 29 September decided to issue a guarantee on all depositors’ funds. The Finance Minister Brian Lenihan said: ‘deposits are not now in any danger and people should not be going to banks to shift their deposit accounts on the basis of unfounded allegations made on radio programmes.’

Bank guarantee shock
The full details of the government bank guarantee were not released until a month later, on 15 October 2008, and it revealed something far different from a guarantee covering depositors’ funds.
Under the scheme, Irish taxpayers had been made liable for debts in all the major banks, up to a mind-blowing €485 billion.

The banks covered were AIB, Bank of Ireland, Anglo Irish Bank, Irish Life & Permanent, EBS Building Society and Irish Nationwide.
Game, set and match to the bankers.

The Central Bank said the decision was taken to protect financial stability and to enable financial institutions to access funds and to provide credit to companies and households (which never happened).
The Department of Finance said the step was being taken to remove any uncertainty surrounding banks and that it was a very important initiative by the government, designed to safeguard the Irish financial system.

"The Government’s objective in taking this decisive action is to maintain financial stability for the benefit of depositors and businesses and is in the best interests of the Irish economy," they said.

"This very important initiative by the Government is designed to safeguard the Irish financial system and to remedy a serious disturbance in the economy caused by the recent turmoil in the international financial markets," the statement concluded.


So, according to the government, the whole episode was the result of "the recent turmoil in the international financial markets" and had nothing to do with the Irish banks’ reckless lending in bringing their companies to ruin and destroying the wealth of their shareholders.

Minister Brian Lenihan warned that any banking collapse would have catastrophic economic consequences for the State and he went on to say that one of the key provisions contained in the guarantee bill would be measures to prevent abuse of the scheme and a new committee would oversee bonuses and pay of directors and executives.
But, on 4 March 2009, the government defeated an opposition motion to cap bankers’ pay and at the end of March 2009 the same minister, Brian Lenihan, said he had no control over bankers’ pay and bonuses. The bankers had really pulled the wool over the government’s eyes and were now free to go off and borrow more money in the international markets without any accountability to the Irish taxpayers who bailed them out.
Then, on 21 December 2008, the government agreed to give AIB €2 billion in funding and the bank was to raise government-underwritten equity of €1 billion.

But, in spite of the government guarantee, AIB failed to raise the €1 billion.

AIB’s explanation for this failure was: "This factor has been exacerbated by negative market sentiment following developments in the UK banking sector and the nationalisation of Anglo Irish Bank."

AIB might have been pulling the wool over the Irish government’s eyes, but international investors were not so easily fooled. They were well aware that AIB had too much debt and very few sound assets.
Back in 2006, AIB had sold off their branch network, including their headquarters in Dublin, on sale and leaseback deals. In March 2009, AIB chief executive Eugene Sheehy said that between thirty and forty big names accounted for half the bank’s €10.8 billion-worth of outstanding property development loans. He said they were working on the assumption that the bank will write off between €5.95 billion and €6.45 billion of bad loans, mainly as residential development loans turn sour, but warned loan losses could reach €8.5 billion.


If bank debts were this low, why did they require a government guarantee of €485 billion? Could it be that this was another false and misleading statement from an Irish banker perhaps?
Also at this time, credit rating agency Moody’s downgraded AIB’s long-term credit rating, saying the move was due to expectations that its bad debts would increase substantially.
But, not to worry, the Irish government was still a soft touch and it next agreed to give AIB and Bank of Ireland €3.5 billion each of Irish taxpayer’s money.

Eugene Sheehy said: "I welcome this initiative and consider that it strongly supports the vital objective of improving market confidence in Ireland, our banking system and AIB. I thank the Government for the positive and commercial approach taken in reaching this agreement."

I bet he did.

You will notice he never thanked the Irish taxpayers who gave the government the bailout money.
Around this time, AIB also admitted that Irish zoned land could fall in value by 70 per cent; unzoned land, 80 per cent; zoned land with planning permission, 70 per cent; and existing office, retail and industrial buildings could halve in value. It is no wonder the Irish banks support the idea of a government-created ‘bad bank’ which would buy up all their illiquid rancid, junk-debt.
Why the government was shoveling billions into these imploding banks was a complete mystery.

In March 2009, Eugene Sheehy said that he "regretted some of the lending decisions that [his] bank, AIB, made in recent years and that the company could have made better decisions."

So finally a banker was willing to admit, partially, that it was its own reckless lending practices and not ‘international market instability’ which was to blame for the catastrophic destruction of wealth that had occurred at the bank. You will notice of course that Eugene Sheehy blamed ‘the bank’ and NOT himself as chief executive for having made the ‘bad decisions’.

Between 2004 and 2008 while this disaster was happening, and while Eugene Sheehy was in charge of AIB, he had paid himself €5.6 million, including bonuses of €2.15 million and conditional share awards, which were worth €6.8 million at the time they were granted. In the same period, Brian Goggin of Bank of Ireland paid himself €23.5 million, and David Drumm of Anglo Irish paid himself €21.4 million.


In March 2009, despite AIB’s share price being almost wiped out, Sheehy said he had no intention of quitting his post. ‘I see myself as being an experienced banker who wants to work through this cycle,’ he said. I wonder how the shareholders, who had watched Sheehy preside over the destruction of their investments, felt about that little quip.


Reality check

In March 2009, the Irish government decided to give Bank of Ireland and Allied Irish Banks €7 billion of taxpayer’s money.
In March 2009, you could have bought all the shares in the two banks for €1.25 billion.
In addition to this taxpayers’ handout, the Irish retail clearing banks tapped the European Central Bank (ECB) for a record €29.5 billion in February 2009. So between February and March the Irish banks got cash bailouts from those two sources of €36.5 billion. In addition, in January Anglo Irish Bank (they haven’t gone away, you know) raised €10 billion through an Asset Covered Securities Programme.
What have these banks been doing with these huge amounts of money?

We, the taxpayers, have no idea. But these failed banks could not raise one penny if it was not for the Irish taxpayers guaranteeing their debts. There is something terribly wrong with what is happening in Irish the banking community and our Minister for Finance seems to be selling the Irish taxpayers down the river. The taxpayers’ guarantee on bank debts should be removed immediately, just as quickly as it was introduced. Then the three banks – AIB, BOI and Irish Life – should be allowed to fail immediately.
The shareholders will be wiped out, but the banks’ senior management have already destroyed that wealth. The bondholders will also be wiped out, but they knew the risks they were taking when they invested in these ‘zombie’ banks.

These failed entities are destroying, with each passing day, our borrowing capacity with the ECB without any accountability whatsoever as to what they are doing with the money. The Irish taxpayers are responsible for most of the capital the banks have today, yet the taxpayers have no control over how these banks are run.
The government could very easily have said ‘not one penny of taxpayers’ bailout funds are to go towards executive salaries and bonuses without first being cleared by the Finance Minister’.

But the government did not do that, because it is weak and ineffective.

This government has done tremendous damage to the Irish economy in the way it has handled this crisis. If a new Irish bank had access to the €36.5 billion that these failed banks have got their hands on, it could immediately extend credit to ‘productive’ Irish businesses. Such a new bank, free of ‘toxic debt’ could leverage this capital of €36.5 billion by a factor of six, to give it reserves of €219 billion.

This new bank would then be in a position to bail out the Irish residential mortgage holders, who are much more deserving of bailout than the bankers who created this entire mess (for more on this, see next chapter).

Debt reduction
We must reduce the face value of home-owner debt. This would be the quickest way to restart the economy. It would put money directly into householder’s pockets and would immediately boost consumption.
Current estimates put outstanding Irish residential mortgage debt at about €120 billion.
Most of these mortgages are held by AIB, BOI and Irish Life. By letting them fail, the new bank could pick up their housing assets for 50c on the Euro, costing about €60 billion, reduce the value of these mortgages by the 50 per cent they had acquired them for and then refinance them with long-term mortgages that their owners can afford to pay.
This could replace the current government mortgage-interest tax relief scheme and would not cost the government very much in real terms, but it would make a dramatic difference to the amount of disposable income available to Irish consumers each week. Just one quick fix, and that’s it: bankrupt banks go bankrupt; Irish householders are bolstered back into consumption mode. Housing becomes more affordable and a floor is finally put under house prices. It would stabilise the property market and stabilise the debt associated with that market.

The new bank could also take over the failed housing schemes and apartment blocks at 50c on the Euro (or less) and put them on the market at realistic prices (50 per cent less than they are currently offered at), with affordable thirty year fixed-rate mortgages attached. This would resolve the predicament of nonperforming assets, remove the overhang of unsold housing and thereby start to breathe some life into the construction sector. Most importantly of all, it would make housing once again affordable for Ireland’s young people and maybe prevent them from emigrating. Because the country desperately needs them to stay at home and help rebuild the country.

It should also be possible for the government to pick up the mortgage payments for the unemployed temporarily. This would dramatically reduce the social impact of unemployment and if the horror of the possibility of losing the family home is removed, that person could then be compelled to participate in a government employment scheme paying €400 per week instead of €204 dole per week for doing nothing. Most importantly of all, such a scheme would help that person maintain their dignity and be useful to society, rather than being a burden on it.
Investments like this have the capacity to bring huge returns to the government. It makes a lot more sense than increasing taxation and dribbling dole out to half a million people.


If you increase taxes on an already sharply declining economy, you don’t have to be an economist to realise what effect that will have on the economic activity still remaining.
Increasing taxation when consumption is collapsing is a catastrophic mistake. When our economy is in trouble we need to stimulate demand, not choke it off. One of the major lessons from Japan was that, in 1997 when their economy was beginning to recover, they raised taxes because they wanted to get rid of their deficit, and the economy immediately sank back down into recession again.

Overleveraging, leading to bad debts, is the root cause of the crisis.

So the crisis will not end until the issue is resolved. The major Irish banks have such a mountain of toxic debt that they will never be solvent, so they can never deal with the debt issue and must be eliminated before they cause any more economic destruction. They have already destroyed their shareholders’ wealth and will destroy the Irish economy if they are allowed.

On 2 April 2009, immediately after the government gave AIB and BOI €7 billion, Ireland’s three biggest stockbrokers NCB, Davy and Goodbody said the government will have to put more taxpayers’ money into the banks because they face losses of €25 billion due to the collapse in the property market.

I can assure you here and now in 2009 that €25 billion would not scratch the surface of the Irish banks’  hidden debts.

There is currently a €485 billion bank guarantee in place to cover these debts and if any major portion of that gets called in the country will be in ruin. Does it not make a lot more sense to spend €60 billion to reduce all residential owner-occupier mortgages in the country by 50 per cent as a means of jump-starting our economy and eliminating the massive burden of debt the Irish people currently find themselves saddled with?

All this debt reduction should start at the bottom and work its way up through the price levels, so that the millionaires would be last to be bailed out, and anybody qualifying for relief would have to demonstrate that they had the ability to finance the new, reduced mortgage.

Letting banks fail

The notion of letting banks fail is unthinkable to many people.

Not so to some bankers and economists. They say bank failures, even large ones, do not necessarily hurt and may even help the economy. They say the end result will be a stronger, healthier banking system. This does not mean, however, that economists are unconcerned about the banking system: they are. But there are levels of concern and there are disagreements about it.
Some say the very big banks should be saved, but others say those, too, should be allowed to go down in the flames of their own excesses. They all agree that the banking system itself must be preserved. Only the banks, they say, can really be in a position to keep the engines of the nation’s economy working: almost all Irish households and most of its businesses use banks to borrow money and, through current accounts, to pay for what they buy. Without such credit and smooth flow of payments, the economy quickly halts.

But there is no evidence that the Irish banking system is in any danger of collapse, mainly because in Ireland we have plenty of choice between banks, building societies, credit unions and Postbank. Because of the new options open to consumers, the major banks are not as important as they once were.
Although most commentators find no evidence that the banking system is in any danger of collapse, virtually all agree that there are serious problems with some of the bigger banks, which must be urgently addressed.
The failure of a bank is no different from the failure of any other business; as long as the Central Bank keeps the overall quantity of money from declining, a bank failure will have no greater effect on the economy than the failure of any other commercial enterprise. In the past, the failure of a large bank created the risk that large, uninsured deposits, especially money from other banks, would be lost, causing the other banks to fail. But the Irish government’s depositor guarantee scheme has overcome that problem.

Even if large depositors begin to pull out of a big – but weakening – bank, they will still put that money into some other bank. The money stays in the banking system; it is simply redistributed from risky to safe banks.
However, the decision to provide unlimited government protection for deposits at failed banks creates perverse incentives for depositors to keep their money in risky institutions, ultimately increasing the likelihood of bank failures.

Nobel Laureate and former chief economist at the World Bank, Professor Joseph Stiglitz of Columbia University says: "Governments should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice.There is a sound argument for letting the banks go bust. It may cause turmoil, but it will be a cheaper way to deal with this in the end. Should the taxpayers have to lower their standard of living for 20 years to pay off mistakes that benefited a small elite."

Stiglitz said governments would survive the shock of such a default because it would uphold the principle of free-market responsibility. ‘Counter-parties entered into voluntary agreements with the banks and they must accept the consequences,’ he said.
Failed banks have been going bankrupt for hundreds of years; it is the only way to protect the integrity of the system.

Why should 4.5 million Irish people have to protect a small elite group of senior bank executives and their boards of directors from the consequences of their own mistakes?

The Japanese did this in the 1990s. They kept propping up ‘zombie’ banks and two decades later they’re still trying to recover from the problems caused by not letting any of their banks fail. It kept banks marginally functional through guarantees and piecemeal government bailouts. The resulting ‘zombie banks’, neither dead nor alive, could not support economic growth. The Irish government’s piecemeal approach to the banking crisis has helped financial institutions conceal losses and has favoured shareholders over the taxpayer.
Worst of all, it has crippled our credit system just at a time when many Irish businesses are on their knees and are badly in need of credit lines to maintain employment numbers.

In December 2008, the Bank for International Settlements
(BIS), which is often called the ‘central bank’s central bank’ because it coordinates transactions between central banks, pointed out that bank rescue packages have transferred significant risks onto government balance sheets, which is reflected in the corresponding widening of sovereign credit default swaps: ‘The scope and magnitude of the bank rescue packages also meant that significant risks had been transferred onto government balance sheets.’
In other words, by assuming huge portions of the risk from banks that were trading in toxic securitisation deals and by spending billions that they do not have, Central Banks have put their countries at risk from default.


On 12 March 2008, Bear Sterns bank of New York was allowed to go out of business, by way of a forced sale for a pittance to J. P. Morgan bank, and J. P. Morgan only agreed to the buyout because the government gave them the money to do the deal. Bear Stearns had a banner year in 2006 with $9.2 billion in revenue, and it made $2.05 billion of net income.Yet in 2008 it went out of business.

The huge New York bank Lehman Brothers also went out of business in 2008. When Waterford Wedgwood failed, hundreds of workers, customers, and suppliers were affected, as were their suppliers, workers, etc. Yet this was no reason to bail them out.
They were insolvent so they went out of business: that is the way the system works.
When the free market functions, and failure is allowed, people become instinctively aware of risk, with the result that they voluntarily assume less of it.

Anna Schwartz co-authored with Milton Friedman 'A
  Monetary History of the United States.' It is the definitive account of how misguided monetary policy turned the stock-market crash of 1929 into the Great Depression.

Federal Reserve Chairman Ben Bernanke has called the 888-page Monetary History "the leading and most persuasive explanation of the worst economic disaster in American history."

Ms Schwartz believes that the US central bankers and Treasury Department are getting it wrong again. To understand why, one first has to understand the nature of the current ‘credit market disturbance,’ as Ms Schwartz delicately calls it. We now hear almost every day that banks will not lend to each other, or will do so only at punitive interest rates. Credit spreads the difference between what it costs the government to borrow and what private-sector borrowers must pay, are at historic highs, she says, adding that this is not due to a lack of money available to lend, but to a lack of faith in the ability of borrowers to repay their debts. ‘The Fed [the US Federal Reserve Bank],’ she argues, ‘has gone about as if the problem is a shortage of liquidity.

That is not the basic problem. The basic problem for the markets is the uncertainty that the balance sheets of financial firms are credible.’
So even though the Fed has flooded the credit markets with cash, spreads haven’t budged because banks don’t know who is still solvent and who is not. This uncertainty, says Schwartz, is ‘the basic problem in the credit market.
Lending freezes up when lenders are uncertain that would be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue.’
This is something the Irish government has failed to realise.

In the 1930s, as Schwartz and Friedman argued, the country and the Federal Reserve was faced with a liquidity crisis in the banking sector. As banks failed, depositors became alarmed that they would lose their money if their
bank, too, failed. So bank runs began, and these became selfreinforcing:
‘If the borrowers hadn’t withdrawn cash, they [the banks] would have been in good shape. But the Fed just sat by and did nothing, so bank after bank failed. And that only motivated depositors to withdraw funds from banks that were not in distress,’ which deepened the crisis and caused still more failures.
But, says Schwartz ‘that’s not what’s going on in the market now’. Today, the banks have a problem on the asset side of their ledgers: ‘all these exotic securities that the market does not know how to value.’ Why are they ‘toxic’?
Schwartz says, ‘They’re toxic because you cannot sell them, you don’t know what they’re worth, your balance sheet is not credible and the whole market freezes up.’

Former US Secretary of Labor Robert Reich says:
"Despite all the money going directly to the big banks, despite all the government guarantees and loans and special tax breaks, despite the shot-gun weddings and bank mergers, despite the willingness of the Treasury and the Fed to do almost whatever the banks have asked, the reality is that credit is not flowing."

Why?

Because the underlying problem with the banks isn’t a liquidity problem, the problem is that lenders and investors don’t trust they’ll get their money back because no one trusts that the numbers that purport to value securities are anything but wishful thinking.
The trouble, in a nutshell, is that the financial entrepreneurship of recent years – i.e. the derivatives, credit default swaps, collateralised debt instruments, and so on has undermined all notion of true value.
Many of these fancy instruments became popular over recent years precisely because they circumvented financial regulations, especially rules on banks’ capital
adequacy. Big banks created all these off-balance-sheet vehicles because they allowed the big banks to carry less capital.’

The Irish government should wake up to these facts and stop listening to the bankers, who have run their companies into the ground and will do the same to the Irish economy if the government allows them to. The current Irish banking crisis is not a liquidity problem, it is an insolvency problem.
Our government should take the pain; let these failed banks go out of business and start over; it is the only way.

Let the fittest survive and the ones who are terminally ill die off.

Otherwise we will be permanently tapped for stimulus packages by failed banks, which will only burden future Irish generations with enormous debts and taxes. The hard reality is that the banks that created this mess have to take their medicine if we are to have any chance of avoiding a deep recession that drags on for years. Some will be wiped out in the process, but propping up banks that have massive quantities of toxic debt on their books only delays the inevitable day of reckoning.

Bailout plans are a subsidy to investors at taxpayers’ expense.

Those investors took risks to earn profits and must now also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise and flawed. Fundamentally weakening the financial markets in order to calm short-run disruptions is very short-sighted.
The government must cleanse the financial system of those banks which are over-leveraged and holding worthless assets and then create a new, revitalised banking system that works far better than the insolvent one which exists today.
The current insolvent banks are the past and a whole new banking institution is the future. To give the existing banks more money is only going to increase the national deficit.
There will be no return for the Irish taxpayers, because these banks are going out of business anyway. By continuing to give them more money, we are simply adding to senior bank executive’s retirement funds.

In future, we should separate deposit-taking banks from more risky investment banks, whose sophisticated clients should take individual responsibility and run the risk that they might end up losing their shirts. This was the way America’s 1933 Glass-Steagall Act worked. That law was passed by the US Congress after the 1929 Depression.
Glass-Steagall survived for more than sixty years prior to being repealed in 1999. The result of that reform was that America’s largest retail and commercial banks could use their huge deposit bases from businesses and individuals to engage in mortgage securitisation, and then selling those securities on to investors. It created enormous growth and huge bonuses for a small elite group, but it bankrupted the banking system in the process.
We now need a modern-day Glass-Steagall Act in Ireland to restrain future greedy bankers. Retail banks would then be permitted to only taking deposits and lending to individuals and businesses. Investment banks would be allowed to exist, but if they failed, taxpayers would not bail them out.

The major banks have convinced the government that if they go bust the whole financial system will fall. They should be asked to explain that statement. Each bank in turn, AIB, Bank of Ireland and Irish Life, should be asked to explain, in detail, how their demise would be so catastrophic for the Irish economy. We need to know if this is fact, or just fear mongering.

The banks’ problems are not just the reckless loans they made to builders and developers during the property bubble, and their problems are not static; they are growing larger every day. As a result of rising unemployment, estimated at half a million by year end, sub-prime property, prime property, commercial property, credit cards, and car loans are all going to have increasingly high default rates. Even for those still in jobs, the rapid decline in house prices means that people now have no equity left in their houses, and many are even in negative equity. This means that their collateral has been destroyed.
All these problems will block recovery, until some way is found to deal with them.
The macro fundamentals are going to trump everything at the end of the day.
We cannot expect our insolvent banks to come up with a solution. They were the ones who created the problem in the first place, by giving ever larger loans to people who had no hope of repaying them, on houses that were grossly overvalued.

Nobody is going to invest in these banks any more because of the massive write-downs they have to face. That is why they have to be allowed to go into bankruptcy.

If a bank is insolvent, creating a ‘bad’ bank to soak up some of its toxic debt, by transferring these debts to the taxpayers, is only delaying bankruptcy and we will end up with zombie banks on life-support as happened in Japan.
We must decide if we are to continue looking backwards by pouring more taxpayers’ money into insolvent banks, with no effect on lending and increasing the national deficit, or if we are finally going to begin looking forward.
To have wasted the time since the banks were saved from bankruptcy in September 2008 means the mountain we have to climb is now so much higher.
Continued failure to confront the bankers and the banking industry, who have brought our economy to its knees, is going to create some very serious questions to be answered by this government.

Most economists predict the world economies will be in recession until the second half of 2010. We should use this period to sort out our credit and banking systems. These are at the very heart of the economy and there should be no more delays in facing up to the fact that our current ethically challenged bankers have no further role to play in the development of the Irish economy.
The current financial crisis has been caused by a lack of transparency by the banks and a lack of regulation by the government and economies which want to be first out of this crisis will need to demonstrate to international investors that they have comprehensively dealt with these two problems.
Ireland needs to purge its financial system of ‘crony capitalism’ and will have to start with a clean-out of the banking system.

The quality of the staff in the new Financial Regulator’s office will have to be of much higher calibre than in the past.
These will need to be qualified economists, with international banking experience, and not civil-servants, who have dismally failed us in the past.
But by the spring of 2009, there was no transparency on the part of the banks.
Their boards of directors were still in place, as were most of their senior executives.
They were getting billions in taxpayers’ funds, but providing absolutely no information as to how this money was being used. The banks were also borrowing billions from the European Central Bank, and other sources, on the back of the taxpayers’ guarantee and we also had zero information as to how these incredible amounts of money were being used. The banks were also failing to disclose the level and nature of their toxic debts.

This was an appalling situation and the government was
completely to blame, as they were the only ones with the power to rectify the problem.
The banks had no notion of reforming, or introducing transparency in their dealings. They were simply continuing to bleed the Irish economy dry without any accountability whatsoever and the government stood idly by.

They seemed afraid to ask the bankers anything, and when they needed answers to questions they hired expensive accountancy firms to ask the questions for them. The government was making no attempt to determine which banks were solvent and which were not.
This could have been very easily done by compelling the banks to disclose the true value of their toxic debts. They should have required the banks to auction a sample of these debts as a means of determining their true value. If a bank is insolvent and even if they sell their debts at true long-term value, they are still going to be under water.
The Irish economy will not recover until we have a properly transparent banking system and the sooner we get to grips with this problem, the sooner we will have recovery.
A lot of solutions need to be applied to a lot of problems in the Irish economy, but nothing will begin to work until the banking system is reformed.
Irish bankers gambled massively and lost, they must now pay the penalty for having lost.
Any Irish government which attempts to transfer these massive gambling debts on to the Irish taxpayers should be driven from office and not allowed into government again in the lifetime of this generation.