Wednesday, December 2, 2009

Review of Banksters by David Murphy and Martina Devlin (Hachette, 2009)

In Banksters, RTE business correspondent, David Murphy, and Martina Devlin, columnist with the Irish Independent, seek to chart the rise, collapse and rescuing of the Irish banking system. The story they tell is split into four parts – the origins of the crisis, an overview of each of the banks and the key banking officials, the crisis, and the fallout. Their tale can essentially be boiled down to the following:

1) In the early 2000s, Irish banks stopped using their deposits to underpin loans and started to borrow money from other (international) banks and to offer easier forms of credit to home buyers (such as 100% mortgages over longer time spans) and investors (such as deferred interest payments).

2) Property prices, especially development land spiralled exponentially and unsustainably upwards (and did not meet stress test criteria) and yet the bankers kept lending money to developers driven by personal bonus schemes and inter-bank rivalry to generate record annual profits.

3) Regulation was very light and the financial regulator failed to intervene in poor and suspect banking practices or overheated property speculation; the Irish Central Bank could not directly influence consumer spending as it did not have control of interest rates (which resided with the European Central Bank); and the political establishment were in cahoots with the developers and were not only blind to the potential problem but poured scorn on anybody who tried to warn of the impending disaster. Crony capitalism was in full swing.

4) As property markets slowed and financial crash hit, international banks stopped lending Irish banks money.

5) Banks thus didn’t have funds to lend to investors and businesses, nor did they have the means to pay back loans to international banks.

6) This prompted a share price collapse. (Between May 2007 and November 2008 Irish shares fell in value from €55b to €4b).

7) Which in turn spooked depositors who, worried that the bank might fail, withdrew their deposits to move them to a more secure institution.

8) This took all the liquidity out of the Irish banking system and reduced the share price further.

9) A run on the banks thus became inevitable without intervention which, given that the Irish government had decided that the banks could not be allowed to fail, came in the form of the Irish government underwriting the entire banking network (to the tune of €440b), thus halting the outflow of deposits.

10) By guaranteeing the banks, the Irish government in turn put the country’s future on the line, making tax payers liable for all bad debts.

11) Once the brake was in place the Irish government needed to decide how to proceed to put liquidity into the banking system. Initially it wanted to avoid recapitalisation and nationalisation and instead it tried to force mergers between financial institutions to gain economies of scale and to recapitalise the banks through private equity investment.

12) Ultimately though it had to nationalise Anglo-Irish Bank and partly recapitalise the others, taking the role of a preferred shareholder, and also created NAMA (National Assets Management Agency) – the world’s largest, state-owned, property portfolio - to take the bad debts off the banks' books.

For the rest of the review see Ireland After NAMA blog.

1 comment:

Uriah Robinson said...

A brilliant summary of a terrible situation, but not for the elite who caused it.
And Gordon Brown told us Brits it was all the fault of the Americans. As soon as the election here is over, and I think Labour might still hang on to power we will be taxed and taxed again to pay for the bailout. An old phrase from the 1980s comes back to me, "If it is not hurting then it is not working." Cuts in public services and increased taxation will hurt, and hurt badly.