Cowen cover-up is not on – we must have an inquiry into the banks

THE resistance to a formal inquiry into the collapse of our banking system needs to be confronted head on. Taxpayers are mortgaging their children’s future to preserve Irish financial institutions.

The core reason for this rescue is not because of the individual entities, but rather the “systemic” importance of the sector. It can’t just be systemic when it comes to a bailout and not systemic when it comes to accountability.

The level of public investment to save the banks is unprecedented. The original estimates for NAMA are €54bn. The bank recapitalisation to date has been €11bn. A consensus figure of €15bn will be required for further recapitalisation for Anglo, AIB, BoI and the third force of EBS, INBS and PTSB. There is no guarantee that the final tally will not exceed this total of €80bn. This figure exceeds our current national debt and represents approximately half our current national income. The enormity of this finance brings the obligation of the most searching investigation. The combined subject matter of all previous tribunals seem minor by way of monetary comparison.

The escape route from the woes of our financial sector cannot be secured without assistance from abroad. This comes in many forms. The NAMA modus operandi will be to exchange European Central Bank bonds for portfolios of bank debts and assets. Our membership of the euro separates us from the isolation of Iceland and its kroner.

The EU Commission has to approve the business plan for each bank. International rating agencies, bondholders and investors will all be required to give Ireland the nod of approval for normality to be restored. Our international financial reputation and our banking sector’s credibility can only be restored if we have transparency and integrity. Only an in-depth formal inquiry can ensure this.

The single most important reason for a probe is the recommendations that will emerge for the optimum new regulatory regime. This will facilitate the best possible architecture for future banking regulation and oversight. It is a no-brainer that a significant contributory factor for the credit bubble was the absence of effective independent regulation. The Office of the Financial Regulator, its board and Patrick Neary stand indicted for their failure to prevent the insolvency of our banks and building societies.

To date, the blame game has shifted from the regulator to the Central Bank, Department of Finance, Government and policy makers. All must share some culpability. The essential requirement is to ensure this can never happen again. We were promised a Central Bank commission that would subsume the role of the regulator. Reference was made a year ago to the Canadian model of supervision.

No legislation has yet emerged. Any inquiry must set out a detailed blueprint of the most effective, competent, independent supervisory structure. Of equal importance is the question of who should carry it out. All of the main players within Government and the Central Bank have a serious conflict of interest in protecting their patch. Only a parliamentary probe can be assured of adequate independence and the appropriate democratic mandate.

The law will have to be changed urgently to ensure compellability of witnesses and a circumvention of the Supreme Court decision into the Abbeylara investigation in 2002. Facilitating these changes rapidly should be given top cross-party political priority. Otherwise, the disconnect between people and politics will not be repaired in the foreseeable future.

Tribunals have failed utterly to deliver reports on time or within budget. Their work has become so out of date as to be almost redundant. Failure by the Oireachtas to carry out this review would be the last straw in the accountability relationship between parliament and the executive.

There have been calls for a preliminary report to be prepared by a special investigator. Perhaps the recent working paper, The Irish Credit Bubble, by Morgan Kelly of UCD’s economics department, would provide instructive reading.

In an excellent document, he analyses how and why we got into this mess. He reviews all possibilities and has startling conclusions. Bank lending in 1997 accounted for 60% of GNP. By 2008 this had ballooned to 200% of GNP. This explosion of credit financed the growth in construction activity from 5% to 24% of GDP. This activity created so many jobs and so much tax revenue that policymakers and politicians became intoxicated by it.

The self-reinforcing spiral was so self-evident with hindsight. Extra lending raised property prices. Higher property prices increased collateral values to leverage more borrowings. Bankers became salesmen with bonuses rather than traditional lenders. Banks departed from previous practices of relating total lending to their deposit base. Instead, they funded this extra finance from the wholesale international money markets. We convinced ourselves that our rising population and low interest rates had created a real property boom. The fundamentals were deeply flawed. When real incomes couldn’t sustain mega mortgages, the bubble began to burst. Mortgage lending had previously been based on rudimentary rules. These included a maximum 80% loan limit to house values and a maximum ceiling of three or four times the annual salary of the borrower.

The mortgage market grew to €150bn and disregarded past restrictions. AIB and BoI mortgage books rose to €33bn and €59bn respectively. Entrepreneurs were recommended to get into property speculation instead of adhering to their enterprises. The whole cycle was self-accelerating. Lending standards were relaxed. Supervision was comatose. Everybody forgot the old adage, “past performance is no indicator of future returns”.

IN the midst of this frenzy lies an individual culprit. Anglo Irish Bank transformed itself from a modest merchant bank in the 1990s to Ireland’s second largest bank in 2007. It transpires that it was a rogue bank. Any investigation must probe the particular failings of Anglo and Irish Nationwide in the context of their corporate governance, credit procedures and lending practices. The tacit support they received from politicians and regulators must come under the microscope. The subsequent chase by other banks to match their illusory balance sheets and profits copperfastened the collapse.

Based on the Japanese and Nordic experience, Morgan Kelly paints a very bleak picture about the recovery of the Irish property market. On the assumption of a growth in real incomes of 2% per annum it will take many decades for us to revert to 2006 market levels.

The extent of the state guarantee to our financial institutions and the prospective nationalisation of our banks have exposed the taxpayer like never before. After NAMA resolves the illiquidity of property developers, Kelly maintains that bank losses on wholesale liabilities to international bondholders and the further default on mortgages and business loans will wipe out the remaining capital of the banks.

This scary scenario must seize the attention of politicians who only begin redemption with a formal inquiry. The Greens must repudiate a Cowen cover-up. Past ministerial reputations are a mere speck of sand in this desert of delinquency.