A Tale of Bank Robbers

Regular readers may have noticed that I use this blog to try out different writing styles, from self deprecatory humour to in depth analysis of current affairs. This is designed to give me an escape from the drudgery of my daily existence and train me for my future career as Ireland’s next Roddy Doyle. Or more likely, the world’s next Enid Blyton.

Today I want to delve into the world of financial journalism, in the knowledge that this will bore the socks off most of my regular readers. But it is a subject close to my heart and gives me an opportunity to satisfy one of the other purposes of this blog - to get things off my chest.

I want to talk about Anglo Irish Bank and what the people of Ireland should do about it. Anglo (which means “English” but we won’t go there) is a merchant bank with about 400 staff and a debt that would put an African dictator to shame. During Ireland’s boom years, Anglo was the poster boy of the financial industry. They borrowed money from bondholders and the European Central bank (ECB) and loaned it to developers to fuel the property boom. Now that the property market has crashed, Anglo is as insolvent as the last person holding tulips during the Dutch mania of the 17th Century.

There is now a debate as to what should happen to Anglo. Should it be allowed to go bust, or as the Irish Government proposes, should it be kept alive by tax payer investment?

I should nail my colours to the mast first. I work for a bank that would have gone bust but for a Government bail-out and I’m a dyed in the wool Socialist who questions the whole premise of Neo-Liberal Capitalism. But I’ll try to be as dispassionate as possible.

Banks aren’t like normal companies. They are so embedded into the overall economy that we need to give banks some wriggle room during recessions but can’t allow them to lose the run of themselves either. They are supposed to have a large Capital base which would protect them from the slings and arrows of economic downturns. And they are supposed to have lending limits (max 85% loans etc) and diversified lending so that they don’t have exposure to a single sector (like construction). This would allow them to absorb bad debts in a particular sector while making money elsewhere - the old argument that shops should sell umbrellas and ice cream.

Now think about what happened in Ireland. They allowed banks to lower their capital base because they were able to borrow unlimited funds from the ECB and Bondholders. Lax regulation allowed the banks to lend to anybody, regardless of credit status, to give 100% loans and to concentrate this on one sector (Property Development). When the property bubble collapsed, it took the whole house of cards with it.

Ireland now has banks with an over-reliance on International markets for funding because they outgrew the domestic deposit base by chasing asset growth. These markets leant to Anglo, but also to retail banks like AIB and BOI who also chased the same drug of cheap credit.

So that’s where we are. But the bigger question is how do we get out of this mess? The normal arguments for protecting banks from going bust are that:

1. They employ a lot of people.
2. Banks lend to Mams and Dads and hold deposits from little old ladies.
3. Allowing a bank to go bust spooks the International Markets and would make it difficult or expensive for other banks in that market to borrow funds. This is the Law of Unexpected Consequences.

In the case of Anglo, I don’t buy the first two arguments above. It employs hardly anyone and some may say that those that are there are partly culpable for the mess the company got into in the first place. It doesn’t have a deposit base among ordinary people. In fact it hardly has a deposit base at all. And it only lends to developers who attract as much sympathy in the general public as tax collectors..

There are two arguments for saving Anglo which might apply. Developers went crazy over the last ten years building ghost estates, multi storey car parks in small rural towns and showpiece vanity projects along Dublin’s quays. For the big stuff, they borrowed from Anglo and for the smaller stuff they borrowed from AIB and BOI.

The Government argues that if Anglo goes bust, it will bring down all the developers on its books at the same time. These developers as I mentioned above are also large borrowers from AIB and BOI. The argument is that if they go bust they could bring those domestic banks with them.

You could also argue that if Anglo goes bust, it will spook the International markets and AIB and BOI will find it impossible to borrow and the economy will grind to a halt.

In reality, if developers go bust, it will put pressure on AIB and BOI but it would be cheaper for the Government to lend money to these banks than it will cost them to bail out Anglo.

And as for International Markets and Bondholders, if they get burned, they’ll moan for a while but pretty soon they’ll be back if they think there is money to be made. And what harm is it if this disaster teaches the international markets to be more cautious in the future?

So who pays? I think it would have been better to let Anglo go bust, which would screw their bond holders. This might result in most Irish developers going bust, which is no bad thing either as they would be forced to sell all those helicopters and speed boats. This will have a knock effect on AIB and BOI, but the government can apply its help there and not at the top end.

The other option is to follow the government’s approach. Protect the markets and international bond holders and saddle the Irish people with a huge burden for the next twenty years. Is that the Ireland that we want?