Banks are still behaving badly — even after we bailed them out

THE simple straightforward mortgage is the world’s most dangerous financial product, not those complicated derivative collateralised swaps and other such exotic named and harder to explain financial instruments held to be responsible for the banking crash globally.

That, at least, was what Channel 4’s economics editor Faisal Islam, was told when he was researching his new book The Default Line. He was asked by one of his interviewees, the head of a European bank, the identity of the most dangerous financial product and was shocked to be told the mortgage. But here in Ireland it is the very obvious answer. Our banks were not ruined by the type of activity that almost wrecked Wall Street. Our banks simply issued far too many mortgages to ordinary customers, for amounts of money far in excess of what the properties on which the mortgages secured were worth, and at rates of interest that were too low. To make matters worse they themselves borrowed badly to fund this business.

Our banks were rescued of course. The State provided the capital to cover their losses on loans that could not be repaid, a total of €64 billion the State could ill afford. Bad loans to the developers who built all the properties were transferred to a specially established State organisation — Nama — with the intention of making it easier for the banks to re-establish themselves. The European Central Bank provided cheap funding to the banks that they could not secure for themselves on the normal financial markets to allow them stay in business. Some of the personnel at the top may have changed — and those who left got very generous pay-offs and pensions — but the banks themselves have been left to continue in business.