Saturday, May 17, 2014

17/5/2014: The Banking Inquiry Shopping List...

This is an unedited version from my Sunday Times article from May 4, 2014.

This week, the Government announced the establishment of a banking inquiry.
The idea is to take a definitive, conclusive and final shot at identifying the events and the actions that have led to the historically and internationally unprecedented financial crisis that has ravaged our economy, society and the lives of millions of our citizens.

Some would say this was long in coming. But, in reality, we have been here before.

Between 2010 and 2011 we had the Nyberg Report, the Honohan Report and the Regling-Watson Report. All were full of generalist discourse about technical and systemic failures, but contained few specifics. In July 2012 we had the PAC report into the crisis. This set out the framework for the current inquiry, but also fell far short of bringing the matter to a closure.

All of these reports and inquiries suffered from similar problems. They were limited in scope, restricted in terms, covered only sub sets of the crisis history and virtually nothing in terms of the crisis fallout, and were disempowered to deliver conclusions in excess of anodyne academism. None of the reports to-date delivered final definitive answers, named names and specific actions by actual players.

This nation, told to pay for the banks and other domestic and foreign actors’ reckless practices, was never given a chance at establishing impartially and substantively the truth about the causes and the drivers of the crisis.

The Anglo Three trial, concluded this week, served as a logical denouement of the aforementioned processes of obfuscation of the causes of the crisis. It loomed large in public minds as a possible source of closure. Excessively technical in nature, restricted in scope and legalistic in terms of discovery, it naturally fell short of achieving that closure. With this failure, public trust in core institutions of this state has been stretched too thin. Even our public representatives now see the urgent need for some sort of a broadly based, non-partisan and open inquiry.

To be effective, the inquiry must mark a clear-cut departure from the past.

It has to be open and broad. Its remit must cover years prior to the crisis, preferably starting from the regulatory, monetary and market foundations laid out in the late 1990s, reaching beyond the night of the 2008 Guarantee, all the way to today.

The inquiry must cover not only the actions of the banks, but also those of our regulators, supervisors, the Department of Finance, the Department of Taoiseach, the roles played by the IFSC-based institutions and the Social Partners. It must deal with technical issues, such as, amongst others, liquidity rules breaches, macro prudential risks build-up and transmission of risks from Government policies to the banking sector and property lending, investment practices violations, and funding risks.

The inquiry must dig deep into the underlying culture, strategic choices and decision-making in our banking system, broader financial services, and economy and policymaking at large.

It must name key names. It must place responsibility on the shoulders of individuals involved - those still serving and since retired. The inquiry must distinguish and allocate legal, regulatory, professional and ethical responsibilities, identifying not just potential violations of the law and regulations, but also systemic weaknesses in competencies, incentives and performance.

The inquiry must achieve clarity as to the role played by banks auditors, consultants, advisory committees and boards, as well as by banks executives, including mid-ranked professionals, such as economists, risk analysts, and lending managers.

We need to know and understand the roles played by European and potentially US policymakers, organisations and investors in fuelling the credit bubble here in Ireland and in structuring the disastrous fallout from the credit bust.

Ireland paid some 40 percent of the overall cost of the euro area financial crisis. The inquiry at least should tell us, who benefited from these payments and who owes us a refund.

Above all, the inquiry must be robust, open, and reflective of the public appetite for closure. It must leave behind evidential record of errors made, strategies adopted, actions taken, regulatory breaches unaddressed and expert opinions supplied. In other words, it will have to break an entirely new ground in terms of all past inquiries ever conducted in the history of this state.


Brian O' Hanlon said...


By far and away, the most funny thing about the whole crisis in banking and finances in Ireland, in the last few years,... is that three separate reports (four counting the Public Accounts Committee report published in July 2012),... is that they all go into the problems in the Irish banking collapse,... and not a single one of those reports, asked a single individual from any one of the property professionals to contribute a single bit of input, into any of them.

It is like property professionals in Ireland, don't even exist.

Despite the fact, that hundreds of billions of euros of the problems that we are currently dealing with in the credit supply and financial system, are tied directly to property and construction related things.

Not one single, solitary RTE PrimeTime, or Vincent Browne show in the entire five years I have been watching, has ever featured an architect, an engineer or a quantity surveyor. The very people who were responsible for building every single one of the projects, that were funded by Irish banks (and let's face it, a lot of foreign banks - Ulster, BOSI, Danske, Rabo, etc), all through the boom.

I always remind myself, of the time in 2009, I was listening with interest to a lunchtime news radio broadcast, where the minister for Environment and leader of the Green party, John Gormley happened to be on the same program concurrently, with the chief executive of the Construction Industry Federation, Tom Parlon, and neither gentleman seemed to be able to communicate with the other.

I know that construction and property professionals are considered to be dodgy characters perhaps in Ireland, not to be trusted, disdained even. But I fear, that the upcoming banking inquiry will fall into the very same trap, that all of the earlier inquiries did fall into. They are just the view of outsiders trying to look into the mess that was created, and scratching the barest surface of the issues only, and then walking away whistling from the thing, saying enough of that.

The reason why we had a banking crash and a property crash, and an EU-IMF bailout in Ireland is simple. We don't consider construction or property professionals in Ireland, in any way worthy of being included 'at the table', in any conversation in regards to policy, still in 2014. This is why we keep on running head first into walls.

Everyone else in the entire island of Ireland is a born expert about construction and property,... except for the very individuals that we did send to school to learn properly about these things, to begin with. Laughable.

And it doesn't matter if Ireland as a country, destroys the livelihoods of people who work in construction and property, periodically in any case. Because there all only a bunch of dirty, dodgy builders anyhow,.. and they need to get punished, and least of all recognized for their contribution, every time that we decide in Ireland, and hand out the slaps.

Anonymous said...

"It must place responsibility on the shoulders of individuals involved - those still serving and since retired."

That is precisely what the people of Ireland decided by referendum must not be done by the Oireachtas, leaving such matters to the courts.

Brian O' Hanlon said...

Re: Don’t Laugh too Hard: Irish Economists who try to understand Land


My 'wish list', would have to include some of the following. I would put it all underneath a general heading of 'getting a clue', in this country.

Economist have, in my opinion (and it includes central banking governors and all and sundry), have done an atrocious job, post-crisis here in Ireland, in this regards. Dismal.

The problem, as I mentioned, that we have here in Ireland, is zero communication and exchange of points of view. What we have here in Ireland are a whole bunch of academic and private sector economists who try to understand land and development policy. And a whole load of land and development professionals, who try to understand economics. Never the twain shall meet, and there is a heavy price indeed, to be paid for this failure.

Alan Aherne was interviewed briefly on RTE radio by Claire Byrne and her panels yesterday afternoon. Aherne is someone who has dedicated a lot more time to studying the Irish problems and debts, crisis etc, than many have done. He did mention some thing though, in his comments on radio that certain builders in Dublin would have acquired ‘land banks’ as purchases made back in the 1990s (in other words, well before the ‘boom’ in development land prices in Dublin and Ireland as a whole).

The point that Aherne was making, was that these builders should easily be able to start construction now, and deliver product to the market for housing in Dublin, because their cost of inputs is that low. In other words, they are de-leveraged, as opposed to being highly leveraged.

However, what Aherne was saying depends on several presumptions. It depends on the notion, that people who happen to acquire land at a favourable price per acre, are also the people who are willing to take on risks associated with building construction of any kind. That is not a given. Even a house builder who operated quite a lot twenty years ago, may have moved on from that kind of enterprise today. Colm McCarthy mentioned things called ’stranded assets’, on the balance sheets of some state owned monopoly companies that manage important utilities.

A lot of land around Dublin, is like a stranded asset on the balance sheets of some companies.

When Aherne talks about the need for builders who purchased land in Dublin at 1990’s prices, he somewhat misses the point. As soon as these lands, exchange hands again, at an opportune time they get converted back into today’s prices (from the point of view of whomever is taking on the risks of construction).

And anyhow, companies that tend to own development land in Dublin, tend to treat that asset as being like ‘gold’. That is, it is there as a kind of ballast, or reserve within the organisation (a risk buffer if you like), which can be called upon at some stage, if one needs to present it as collateral, where one needs to borrow. The more valuable that the land appears to be getting, the more and more that people who happen to own land (regardless of what price per acre they acquired the land at), tend to play a wait and see game.

And in any case, it is just silly to try to lump together land speculators, with builders in any case. It is like saying that donkeys and horses, generally look the same, therefore they are the same species. In reality, those in the business of speculating on the risk of buying/selling land, tend to operate in a different universe, from those who speculate on the risks to do with construction and planning. They are chalk and cheese, and for Mr. Aherne to simply lump the two together, just displays in Ireland, the real lack of a conversation going on at the moment, between professionals who are birds of a different feather.

Brian O' Hanlon said...

Re: What lessons should we learn?

We have been prevented in Ireland, from really learning the lessons of the crisis, because of the fact that economists in general are too strong a lobby, and drown out all other voices. And to be honest, economists don’t really have a handle on how land markets operate, or should.

What I would like to see though, and it would greatly assist in the operation of the market for land in places such as Dublin in Ireland, is more use of derivatives and taxation. We probably do need to hold a lot less of the real tangible asset, on the balance sheets of credit institutions in Ireland.

Whether the acre of land, in Dublin is recorded as collateral, or a liability in terms of a loan to purchase land, or whatever,… it is simply a bad idea to have too much ‘land’, rattling around inside of the Irish banking system.

The inflation factors are just too high, and dangerous, to ever be kept in control,… even with the best will in the world, and the best banking expertise in the world. Ireland will never have the best banking expertise, because even the highest paid bankers in Ireland, earn only a small portion of what their equivalents earn in Great Britain and elsewhere.

What we can do, instead, of relying on bankers to manage things like development land, a thing on their balance sheet, which might decide it wants to inflate or deflate in very short periods of time, by factors of up to ten,… we can do things to reduce the amount of this asset that ends up on the balance sheets of our credit supply institutions.

(I have tried to describe above, where keeping a two decade’s worth of supply of development land for Dublin residential market alone, on the balance sheet of our banking system, can imply a volatility in the value of that asset,… of anywhere between a few billion euros and a few hundred billion euros,… for the exact same thing)

This is exactly why, when I listen to so-called banking experts, such as Alan Aherne, try to conceptualize about development land, and prices that these entities that he refers to as builder’s, paid for those assets in the 1990’s,… I really do have to get fearful.

We should look at two things therefore.

Land Taxation is one way to burn the fingers, simultaneously of anyone who tries to speculate in the market for development land in Dublin city. It doesn’t have very many fans (the argument might be, that builder’s will rush out to county Meath and so on, where they face less exposure to land taxation).

The main point about land taxation though, is when you look at the level of extremely dangerous volatility that land speculation can introduce into the Irish financial system (and it’s the main reason why we are in such a mess), is that land taxation, can actually blunt the edge off of that.

I am not saying for a minute that land taxation is perfect.

But when that pocket of land between the canals in Dublin city centre, begins to rocket upwards, through the ceiling of €100 billion, and race towards two and three billions in value (much of it appearing all of a shot, the balance sheets of lending institutions unfortunately),… and you get land changing hands in Ballsbridge at well above ten and twenty million euros an acre,… then the governments of the time, do have to race in with the fire hoses, and hose down the markets, with generous helpings of land taxation.

There has to be a point, at which that ‘kicks seriously into action’ - which obviously did not happen under previous Fianna Fail governments. We should learn the lesson of this in a future banking inquiry, and put in the fire departments that are needed to deal with this sort of a calamity. Because one thing is for sure, the Chartered Surveyors of Ireland, aren’t capable of doing anything about such fires, or any other property professional body either.

Brian O' Hanlon said...


The other thing that we can seriously look at doing in Ireland, is to develop futures and options systems of trading in development land assets for the capital city in Dublin,… in other words, traders deal less with the tangible asset,… and more at arm lengths from that, and it in turn can be financed through our banking and credit system - without blowing up the world, ever quarter of a century.

But the main thing is that we don’t allow things to get onto the balance sheets of our banking system, which have the ability to inflate as grotesquely, and destructively, as do things like land. When economists think about development land in Dublin county, think of it less as a raw material, or mere factor of production used and consumed by this creature that they call the builder. Instead, look at it more in terms of the way that they do look at gold (and all of the associated reasons that were made, for removal of monetary systems, from gold as standard, several decades back).