Guess Who’s Picking up the Tab?

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Ireland Calling with John Spain

Guess Who’s Picking up the Tab?

September 25, 2008

Ireland Calling by John Spain

IT’S been quite a week in financial circles in Ireland, just as it has been in the U.S. On last Thursday morning shares in the main Irish banks were falling like stones down a well. By lunch time on Thursday, everyone was waiting for the reassuring splash as they hit the bottom, but instead there was silence and the shares kept on falling and falling into the darkness.

By Thursday night they had reached a record low, so low they were well below one-third of the price they were earlier this year.

Rumors were flying that one of the two big banks here was about to be taken over by a major Spanish bank. That was untrue. What was true, however, was the news that a bank and a savings and loan company here were in talks about a takeover.

There was real fear in the air here all last week. Ordinary people across Ireland, watching what had happened to Lehmans, were getting more and more concerned about what could happen to their money in Irish banks.

Despite official statements aimed at calming things down, the worry grew across the country, and a big player in spreading the fear factor was the Liveline phone-in show on Irish radio at lunchtime everyday.

This show has a huge audience here, but it is a listenership composed mainly of retirees, the unemployed and so on, because at that time of the day most people are out at work rather than at home with the radio turned on.

So although there are a lot of them, the Liveline audience would not be the most clued-in part of the population. (Mad auld fellas and auld wans is how they have been described.) And for that reason they are easily spooked, particularly about financial matters they don’t understand.

Yet in one of the most irresponsible pieces of broadcasting I have ever heard, on one day last week Liveline devoted the whole show to the financial crisis, putting a succession of these spooked callers on air.

One after another they said they had just been down to their bank to withdraw their money. Or else they were about to do so. The presenter of the show at one point even suggested the banks could not be trusted.

There was an immediate reaction to this nonsense as many of the listeners panicked. Within 24 hours of the show around *50 million had been moved out of the main banks and put into the Post Office Savings, which may pay lousy interest rates but offers a state backed guarantee to depositors.

Fortunately the banks were able to cope with the “mad auld fellas and auld wans” rushing in to close their accounts and withdraw their money without letting any lines form. Because, of course, that’s all it takes to start a national panic, just one bank office with people lined up outside trying to withdraw their money, and one photographer from one newspaper who gets a picture of it.

Once that appears you are talking about the same panic situation that put long lines outside branches of the Northern Rock bank in Britain earlier this year. When it starts, it’s impossible to stop.

Luckily what did help to stop it happening here was the move by President Bush at the end of the week to effectively nationalize the toxic debts of U.S. banks. This restored some confidence and liquidity into the financial system and encouraged banks to start lending to each other again. By giving these banks a get out of jail card, the credit crunch was loosened up and money started to move again.

At the same time British Prime Minister Gordon Brown had organized a rescue takeover of HBOS, Britain’s biggest mortgage lender, which was facing a run on its deposits and was about to turn into another Northern Rock. In Britain short selling was banned, a move which was then followed in Ireland.

The rescue plans in the U.S. and the U.K. had an immediate effect on the markets in Dublin, and on Friday shares in the Irish banks rebounded strongly. At one point they were up around 25% over the previous day.

This retrenchment was reinforced the next day, Saturday, when Minister for Finance Brian Lenihan raised the state guarantee on deposits in Irish banks from €20,000 to €100,000. This applied to one account per person in each bank. So if you had €300,000 in deposits you could spread it across three banks and your money would be guaranteed.

That appeared to solve the problem as far as ordinary people with bank accounts was concerned. It does not mean, of course, that the banks are out of the woods here, or that there may not eventually be mergers or takeovers between some of them.

The fundamental problem is that they loaned out far too much money to the property sector, and the full extent to which these loans will fail has yet to become visible. And as far as the share price is concerned, they were seriously overvalued anyway and a correction was inevitable.

One thing that is clear is that there is no sub-prime mess here, although a lot of bank lending on property here was over the top. What this means is that there will be loan defaults and a steep fall in bank profits here.

But there are unlikely to be collapses like we have seen in the U.S. Even so, maintaining financial stability here is going to come at a huge cost.

One aspect of the international financial crisis that really makes me mad (and probably you as well) is the simple thing about who picks up the tab.

Who picks up the tab for the hundreds and hundreds of billions of toxic loans in the U.S.? Who will pick up the tab for the HBOS rescue in the U.K.? Who will pick up the tab for the state guarantee here of bank deposits?

Will it be the bankers who lent money to the Ninjas (No Income, No Jobs or Assets)? Will it be the bankers who lent money to people who did have low pay jobs but could not really afford to pay back loans unless the property boom continued and they could re-mortgage?

Will it be the bankers who racked up the leveraging of their loan book from the usual 10 times capital resources to 20 or even 30times their financial base?

No of course it won’t be the bankers. It will be you and me, my friend, the ordinary taxpayer. We are the ones who will now have to pay the tab for the greed and stupidity of the bankers who put the system into overdrive, and then pushed it beyond the limits until it went out of control.

Like me, you were probably going to work every day, paying your way, keeping your household budget straight, paying your taxes and generally trying to do things right.

Like me, you were probably doing this when many of the people who drove the financial system into crisis were earning millions every year by being reckless and living like the masters of the universe they imagined themselves to be.

So it does seem unfair that the guys who caused the mess will get away relatively unscathed instead of being locked up. It does seem unfair that the people who will end up paying the enormous tab for putting the financial system back on track will be the ordinary taxpayers who support the U.S. government and the British government and the Irish government.

Because, of course, no government has any money of its own. The trillion-dollar government rescue is not their money. It’s our money.

In the end, it all comes from the taxpayer. And the taxpayers like me and you are going to be paying the trillion-dollar tab for this mess for a long time into the future.

So where do we go from here? Well, for a start we should take all those bankers who gave out the no-hope loans and fire them.

We should take all those financial whiz kids who dreamed up bundling all these toxic loans into packages that could be sold on and send them out to work for a living. We should do the same with the short sellers and the hedge fund monkeys and all those other financial instrument geniuses who have been making millions without actually producing anything.

There has been a lot of talk, both here and in the U.K. and the U.S. in the past week about the need to return to “traditional banking values.” This is the kind of banking where the bank only lends as much as maintaining good liquidity allows, and where it only lends to businesses or developers or homebuyers who can prove in detail with evidence that they have the capacity to repay a loan.

This is the kind of banking that is constructive but conservative, the kind that builds for a solid future instead of the get rich quick schemes that go off like a rocket and eventually explode. It’s traditional banking, the kind of banking that you, me and all the other ordinary people do.

It’s called being responsible. It’s a pity that the financial giants who have tumbled in the past week or two did not feel the need to be a part of it.

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