Considering they had neither the financial nous to foresee the global downturn, nor the courage to release accurate figures on the state of their institutions, how can the inept leaders of our banks now expect our trust?
In 1853, an economic crisis in New York spawned a vehemently anti-Irish, anti-Catholic political group called the ‘Know Nothings’.
The Know Nothings emerged from a secret society called the Order of the Star Spangled Banner. It is thought that they took their name from the fact that, initially, whenever their candidates were asked whether they were a political party or a secret society, they answered: ‘‘We know nothing.”
The Know Nothings spread through lodges all over New York, because the local Protestant workers feared the deluge of Irish Catholic workers — who were arriving in New York at a rate of 1,000 a day.
The Know Nothings erupted on to the political scene. In 1854, only a year after the first Know Nothing candidate stood, the party garnered more than one-third of all the votes in the election for New York’s governor. The poor Irish immigrants lived in fear of the Know Nothings, whose central policy was a 21-year naturalisation period whereby Catholics could be ‘‘decontaminated’’ to become – to borrow a label used by Sarah Palin – ‘‘real Americans’’.
The sectarian Know Nothings faded as quickly as they emerged (possibly because Irish emigration to the US fell off in the recession of the mid-1850s), but their ideas remained in the Republican Party for many years.
All crises spawn new interest groups, and our present financial and economic crisis has created our own Know Nothings. These are financial Know Nothings. Every country has them after a crisis – they are the ones who never saw the crisis coming but yet are now dispensing wisdom and making pronouncements as if nothing had happened.
A decade ago, just after the Russian financial crisis, a savvy investor friend of mine was asked what lessons he drew from the event and the behaviour of the financial markets. He replied that the rule of thumb on the economy and the markets was that ‘‘you should not listen to anyone who did not foresee this crisis happening, because these people know nothing. They knew nothing then and they know nothing now’’.
The same logic applies to Ireland. If you want to preserve your capital and think your way out of this downturn, the last people you should listen to when it comes to objective advice are the people who did not foresee this crisis. This group includes every single board member and senior management figure in the Irish banking world. Let us remind ourselves that not one of these individuals predicted this calamity. Worse still, they profited by contributing to it. So why should we believe anything they say now about it?
Last Wednesday, AIB issued an update to the markets on the state of trading. Given that every statement from its management over the past year has underestimated the problems, a sceptical market dismissed the pronouncement and sold the shares down by about 15 per cent. The management of Irish banks is so far behind the markets that it is now becoming risible. How can you take a bank that was promising a chunky dividend in the summer seriously when its share price halved in four months and it couldn’t raise money?
Like Lehman Brothers, Bear Sterns and Merrill Lynch earlier this year, every time AIB’s management has said it has ‘‘come clean’’ to the market over the past 12 months, the reality has turned out to be much worse. Obviously, the stock market figured this out months ago and has dumped the stock.
The problem is simple: if the bank admitted that the problems were as bad as they were, the management and board would have to resign because they would need new capital. New investors would not trust the same people who got the banks into this mess in the first place. So we are experiencing a game of cat-and-mouse between the market and management and, all the while, share prices keep falling.
For the sake of clarity, let’s cut to the chase and do some little calculations. The reason Irish banks are in difficulty is because they are stuffed with Irish – and, to a lesser extent, British – property that nobody wants to buy. AIB has development loans in Ireland of just over €18 billion, as well as €5 billion of development loans in Britain.
In all property crashes, development land falls further in value than house prices. Let’s take a conservative view: that house prices will fall by just 25 per cent (it is likely to be far greater, but let’s be positive). This means that the development loan book of AIB will have bad debts of at least 30 per cent and, given a total development loan book of €23 billion, that means bad debts of about €7.5 billion. To date, AIB has provided for €1 billion of bad debts. So it is hardly surprising that the share price has fallen again.
Think about it another way. The bad debt cycle in property busts normally takes four years. If we look at the British property recession of the early 1990s, the average bad debt provision was 1.5 per cent of total loans in year one, followed by 2 per cent in years two and three as the recession really bit, and, finally, another 1 per cent in year four as the situation improved.
AIB’s management has already said that 2009 and 2010 will be horrendous, so it appears this analysis is at least shared by them, if not explicitly outlined.
AIB’s total loan book is €128 billion. Taking Britain in the early 1990s as a template, it is likely that a total of 6.5 per cent of AIB’s loan book will never be paid back. This means that lenders will default on approximately €8.3 billion of loans, which the banks will simply have to write off.
The figure isn’t far above the losses on the development loan book. The extra €1.3 billion is accounted for in general defaults, such as mortgage defaults and defaults on credit cards, home improvement loans and car finance.
These basic calculations give us a much more accurate picture of reality. And there is no sign that any of our other banks will take a more realistic approach. But why, after such a horrendous year, when investors’ expectations are at such a low ebb, is the management of our banks refusing to come clean?
Well, there’s one simple answer. As always, let’s apply the cui bono test. Who benefits from a lack of clarity? Think about it.
Our bankers are petrified of the following scenario. If they admit how bad things are and make proper provisions, their tier one capital ratio will fall. The reason for this is that the more bad loans there are on the books, the more these eat into capital adequacy ratios.
If their capital adequacy ratios fall to, say, 5 per cent, when similar British banks have a ratio of 9 per cent, the game is over for the management. This means the banks will be downgraded by the rating agencies.
Some of the banks will have to look for state help to recapitalise and the positions of the management, chairman and board will be called into question.
So it’s simple: all this prevarication is about self-preservation. The banks are hoping to spoof now and recover their tier one capital ratios by reducing lending.
This is what we do not need, because our economy will seize up without credit and we may face the Japanese long recession scenario, which is precisely what the guarantee was designed to avoid.
Ireland’s financial Know Nothings – the lads who blithely brought us to the abyss – are trying to save their own skins and, in the process, are risking the future of the economy. This is the worst of all worlds.
It is known, in the animal kingdom, that rats will sometimes eat their young if their nest is put under treat. The problem for the rats is that once they have done this they have nothing left to eat and also no family to seek help from. In the banking world the rats are starting to eat their young and it won’t be long before they start to nibble on their own tails.
For a third time: It would be better for Ireland if these banks were to go under if the market would dictate that, and have the business taken over by stronger, better managed foreign banks.
When will we see a change of management in these banks ?
Unless we put major pressure on them they will continue to get away with this behaviour !!… who is for starting the campaign….remember the 300 spartans…look what they achieved !
Greetings! I am a historian by training, and not an economist. But I think that I have enough basic understanding of the economy. And what you describe, David – undoubtedly correct in all details – is in my vocabulary called FRAUD. So I am wondering where is the Garda Siochana in this? And where is the CAB? These brainless and ruthless bankers should be sitting in a prison on remand, pending the investigations of the Garda Fraud Squad, which should have teams in every bank HQ in the country. And their private assets should be frozen by the CAB, until… Read more »
He who pays the piper calls the tune and as provider of the State guarantee, the Government is the paymaster. The troika responsible for the monumental mismanagement includes the Know Nothing political leadership and a docile central bank that only deployed finger-wagging impotence until the crash. Of the three, the Government has major responsibility for fuelling the boom with tax incentives, double-digit current annual spending increases as if the windfalls from property taxes were permanent and ignorant cheerleading of high house prices. Minister for Finance Brian Lenihan this week blamed membership of the euro for the bubble and Brian Cowen… Read more »
I just noticed that I forgot to mention one other point I wanted to make. David writes that the ideas and ideology of the “Know nothings” has lived on for a long time in the US Republican Party.
Well, looking at them, and at the people they select for leadership – e.g. G. W. Bush and Sarah Palin – they are still the “know nothing” party. Or, as Paul Krugman, winner of this year’s Nobel Prize for Economics, has put it: “The Republicans have become the party for stupid people.”
I have been interested in house price inflation ever since I lived through the UK property bubble of the early 90’s. I remember seeing an outspoken Robert (Bob) Beckman, an economist and investment analyst on morning TV discussing the house price bubble, which he equated with the Tulip bubble of 17th century Holland saying it was not a great idea to buy into the escalating housing price bubble. Property is not an investment vehicle, it is a living standards vehicle. It is a non productive expensive illiquid life experience. You can’t sell it forward at a guaranteed price and you… Read more »
Ste – if you want to catch a Rat and you have cornered it ….it has no choice but to go for your throat ……..patients have been known to arrive at hospitals with a live body frozen rat ‘in fright’ hanging from the throat
Emerald Islander – I totally agree with your prognosis of Fraud and High Treason ….and its rampant and stinks at the highest level ……I have a letter from senior management of Bank of Ireland …..’to sue’…. the Garda Fraud Squad ……( wait for it ) ….. for Fraud and High Treason that bank commited ……am I to assume from David …that FF …..is and was a …’know nothing ‘ party ….I hope not ….however time will tell …..
David – the term ‘know nothing’ would be accurate to describe many of those who have gone completely silent since the big bailout was announced. From reading the points in your article, I agree that it is the term to describe the leadership if Irish banking. But I going a bit cynical of the way the entire body of Irish society is ‘led’. The term ‘know nothing’ would probably be accurate to describe the leadership of this country in politics, in the public sector, in commerce, and in the media. When large swathes of the population were living beyond their… Read more »
Of course, we have a Taoiseach who knows nothing about economics or finance. We have a Minister for Finance who knows nothing about Economics or Finance. But Dublin 4 has already decided that he will be the next leader of Fianna Fail. We have a Minister for Industry and Commerce who knows nothing about Industry or Commerce (she trained to be a social worker). We have a Minister for Social Welfare who knows very little at all. We have a Minister for the Environment who knows all about the rainforest. (no idea about public utilities however). And then we have… Read more »
It looks as if even “Ross O’Carroll Kelly” is leaving, with no intention of returning.
http://www.independent.ie/national-news/emigrants-abandoning-luxury-cars-at-airport-1530012.html
Amazing, considering this element has the country destroyed on the rest of us – again ! This country is turning rotten with selfishness.
David: There was a breath-taking example of bankers’ ‘Know nothing’ thinking yesterday when Sir Peter Burt, formerly of the Bank of Scotland, and Sir George Mathewson, ex-head of the Royal Bank of Scotland said they should be appointed to lead an independent HBOS, rather than have it taken over by Lloyds TSB. Thus the same guys who shared responsibility for their own banks failures still have the sheer gall to think they are qualified to repair the damage caused when they took over the Halifax. Of course, these knavish knights are Scottish bankers from the Edinburgh elite. On the face… Read more »
Another laser guided article by the man himself.
Damning.
Brendan Keenan’s column on the Indo has effectively called the situation “Shit” this morning.
Strong words from all the commentators. The McWilliams Movement is gathering pace at delightful speed.
Theres a test today for the FF backbenchers before the Jabba The Hutt gets back to the HSE. Dump her now. There’ll never be a better chance, whatever trickery she’s up to.
Permanent tsb list Gillian Bowler as Chairman as its board of directors. She is the successful founder of Budget Travel but it is difficult to see what specialist financial expertise she has to offer this bank. This is of course a question that should be asked by our political representatives but in the ‘ you scratch my back and I will scratch my back that is Irish politics ‘ such questions are avoided as thet might lead to the questioning of the suitability of local and national politicans and their friends to sit on the boards of a variety of… Read more »
The greatest snub for DMcW, Prof Kelly and doubtless many others I’m not aware of, is the Sekretariats use of Merrill Lynch for strategy advice. Do they not realise these “advisors” report not only to their boards but also to foreign security services. Whats wrong with using our own people?
I watched a programme about the sinking of the unsinkable Titanic last week. The telegram clerk, who managed to get a place on a lifeboat and survive, claimed in the tribunal afterwards that he received and wrote down a telegram message warning of large icebergs 5kms ahead. The Captain had left the deck so the clerk gave the message to another officer. In court he claimed that he could not remember which officer and as he was not amongst the survivors, no one knew what happened. The ship sank and the passengers drowned. In the long-term the passengers vote with… Read more »
Furrylugs is right. Vodka-woman does not have a party anymore to bring into the government. FF should move here out, and bring a different independent TD in her place. Make Finian McGrath Minister for health !! – for one this is seems to know more about it. Only problem is that when all the unnecessary managers are kicked out of the HSE – they will all go back to doing what they were doing before they got cushy numbers in the HSE-trying to become PD councillors. The only hope, short of a general election, is a FF back bench revolt.… Read more »
Deco- well written …Nepotism…incestuous relationships …..and power at the top……grassroot politics voted against Lisbon Treaty to give power to the people …not to the unqualified elite …….our tradition dictates that by natural law we elect to be governed ….not caste into a greyzone and be muzzled and criminalised
Hmm. Now on the subject of Law, Article 45 (2)(iii) of the Constitution lays down,”The State shall, in particular, direct its policy towards securing;” “That, especially, the operation of free competition shall not be allowed so to develop as to result in the concentration of the ownership or control of essential commodities in a few individuals to the common detriment” Nepotism is illegal. Housing is essential. BRM is outlawed. And 45(2)(iv) “That in what pertains to the control of credit the constant and predominant aim shall be the welfare of the people as a whole” Cutting esential services such as… Read more »
reading some newspapers today this sunday i have noticed a rare concentration of articles on the subject of imprisonment for non payment of debts due to banks……………………..if we have time to enjoy what we remember to be christmas …..new year seem to promise …..hell on high waters
furrylugs – thats a fantastic contribution…..could any legal expert clarify what really Article 45 really really means ……..does it provide hope for those unfortunates so unlucky in their lifes credit path
Dunno John,
But there’s probably some latin legal term relating to the unenforcability of breaking a law where the State has failed to ensure the adequate implimentation of that law.
Like I say, no lawyer, but I can’t nick a lad for failing to adhere to a safety statement when the safety management system was mismanaged from on high in the first place.
On a lighter note, the left side of my brain is telling the right side that a Sunday afternoon bevvy is in order so I’m off to save Diageo. Any further commentary from this author today should be discounted. E&OE.
Bye now.
Furrylugs ……nevertheless……..there are many unfortunates in the country that need this article clarified at least by government …otherwise it becomes classified akin to the Lisbon Treaty ……..away above their heads and in Latin …we should demand an explanation ….and ….Now
Furrylugs – you have found something powerful. Basically government policy is completely unconstitutional. In fact it has been unconstitutional for a generation. Article 45 (2)(iii) That entire market rigging scheme of a few developers cornering the residential land banks on the outskirts is completely unconstitutional. In fact the M50 deal was signed into law and it is unconstitutional !! The taxpayer would be able to claim a massive amount of money back from NTR. Pee Flynn might even be liable for signing a law that was unconstitutional. Did the President even refer the law to the Supreme Court ? No… Read more »
Deco, Keep a weather eye on Art. 40(6)(i)
Emerald Islander said; “I am a historian by training, and not an economist. But I think that I have enough basic understanding of the economy. And what you describe, David – undoubtedly correct in all details – is in my vocabulary called FRAUD. So I am wondering where is the Garda Siochana in this? And where is the CAB? These brainless and ruthless bankers should be sitting in a prison on remand, pending the investigations of the Garda Fraud Squad, which should have teams in every bank HQ in the country. And their private assets should be frozen by the… Read more »
Ferrylugs- on that constitutional matter …..before you found it…..’we know nothing ‘…..and since ….still…’we know nothing’ …..are we culpable as bankers now ?…please furrylugs……..you have the key to make a change happen …to morrow you might tell us that …i await in anticipation ….yours etc
296………. broken but not beaten! cmon
A friend of mine asked me for my take on the ‘economic crisis’. I told him, over a few beers: “It’s really quite simple. When I was a teenager in Birmingham my hard-working Irish bus-driving Dad told me that the Trade Unions were ruining the country (Britain). He told me they were a powerful clique who had abused the trust of ordinary people, whilst claiming to ‘represent’ ordinary working families, but really, they were only interested in their own power and self-preservation. That was 1978. In 2008, all you need to know about the ‘economic crisis’ is to substitute the… Read more »
5th Column or Trojan Horse ? – beware of Greeks bearing gifts. The interpretation of secure has been contravened since 1997. Is The Mob ruling the mob ?
A harsh mini-budget on health and education causes a swing to the Left. Former PDs and disgruntled FF will swing to SF not FG or Labour. Greens are Republican Left at soul attempting to woo the middle class using a couple of lower the carbon emissions posters. Cowen and Coughlan are Republican Left. FF, Greens and SF will be in discussions. SF in Dublin, Belfast and London would be a major coup. The financial crisis put billions in FF coffers for future aims.
30 Years is enough. FF are borne from the SF family.
The Greens TDs are border counties by birth living in Dublin. It has become very transparent. There were 15,000 British soldiers in NI. Time for democratic right.
ok except for the Left, old FF, SF, Greens, if they ever get in, in Ireland, sing a fundamentally Marxist/Leninist doctrine. Change the tune or leave the country. We are now EU with France, Germany and UK as leaders.
A Moment of Silence
Lets think about honours duties and responsibilities to our country……..the leaders of industry…….professions……politics……trade unions….and….BANKERS
Now think about our irish Soldiers in Dafur ….who in the coming months will face …Real Combat
Furrylegs/Deco:re “Article 45 (2)(iv) – where do we stand in relation to the builder bailout which establishes a price floor by supplying cheap ’subprime’ loans via the local authorities. It is a form of control of the credit market, at the expense of public funds which is detrimental to the public at large. But as a market mechanism it is devised so as to establish a price floor for developers selling housing. It is clearly unconstitutional. Money diverted from essential staffing in hospitals in order to pay for the builders bailout is unconstitutional. It is also in breach of EU… Read more »
Ferrylugs – what a week ahead you have ……how can you work….the nations watches……………will a double expresso from George Clooney make it easier …..hark hark…………………………and …thursday is a full moon
Soldiersofdestiny – making the farmers culpable for the current mess is intellectually dishonest. We have to be clear about who is responsible and who is not responsible. There Irish farmers are 0% responsible for this shambles. There have been no farmers before the Tribunals. And even if a farmer was involved in crooked dealing, then we cannot jump to implicating farmers in Waterford or Kerry in the process, when they personally gained nothing. However it fair to say Mr. Slithery (honest Tom), seems to have given up on a life of cow manure, and joined the CIF and switched to… Read more »
Guys, you are forgetting that Ireland like many other countries in the so-called developed world are comprised of shackled people. Shackled by debt. If you want a compliant nation, the best way to go about it is to ensure that all students have big loans when they leave college, meaning they become a compliant lot when they go to work. You then get your mortgage, your wife/husband and kids and you become the most flexible citizen one can get. Want (driven by consumerism) followed by consequential Debt keeps you on side. FF understand this better than anyone else and so… Read more »
we have just invented a new word in English ….. ‘to Philip’……….. is to withold repayments to banks ……as in Boycott …..in the Land League
Lets use it
Well, if developers can tell the banks and the taxpayer to buzz off…why can’t the taxpayers do it? In any event, we are facing uncontrollable rise of arrears of of people’s choice – which will probably force the issue anyway. In the end, interest accrues. Debts have to be paid. But this also applies to the country as a whole. This whole banking situation is such a mess that the sovereignty of the country is under threat by virtue of its credit-worthyness. Our borrowings are coming at a higher price. We are both cost cutting and borrowing more expensively. The… Read more »
There is a danger that the people might wake up and realise what happening. I am expecting some ‘bread and circuses’ type strategy to prevent it from happening.
“I think the best way people could fight this is a coordinated non-payment of their debts until changes are effected. The builder/developers do this every day with impunity. You cannot lock everyone up. It’s about time this government became frightened of the people rather than the other way round.” You are absolutely right, nevertheless when the bin taxes were first brought in and fought by a small group of citizen activists only a modest number of people living in the most deprived estates in Dublin boycotted payments. Courage is only born of want & deprivation. Perhaps the coming years will… Read more »
Muintir na Tire ………are by tradition ‘ a voice for the ordinary people ‘ …and have the best structures in place to be seen to give that valid representation ….we have borrowed an old custom from our Brehon Law period known as….’meitheal ‘…..where everyone stands together to help one another ……their time has come again to be seen to act once more …hark hark…we call you
From an assessment of the Irish economy, available from Davy Stockbrokers, 10 Nov 2008. [ Bear in mind that Robbie Kelleher in Davy has been probably the only financial sector economist who predicted a housing bust – so they are as honest as you get in the finance industry – I would listen to them before I would listen to BOI, PTSB, Friends First, or other ‘Know-nothings’ – based on listening to Kelleher, I think it safe to say that the Davy assessment is usually more rigourouss, more critical, and less plucked out optimistic self-congratulationary nonsense. In other words Davy… Read more »
Sorry – the commentary of Davy was as follows:
{
Unrealistic forecasts are no basis for policy decisions
– Current official forecasts are too optimistic. The
Department of Finance expects the economy to
shrink by only 1.6% next year due partly to growth of
0.7% in consumer spending.
– In contrast, our recent forecasts suggested that the
economy may contract by 3.5% in volume next year
following a 2% decline in 2008.
}
Even Davy could be optimistic… ## Almost half of multinationals based here have told the IDA they would not choose to locate again to Ireland because of high business costs and poor infrastructure. A survey from the state agency found that 45pc of companies would choose to locate in another country, with most choosing Eastern Europe (61pc), followed by India (23pc), the UK (16pc) or other locations in Europe (11pc). The results of the survey come as the downturn in business at computer manufacturing giant, Dell, continues to have a devastating effect on its suppliers. – Irish Independent This came… Read more »
I purchased a new notebook a few weeks ago.It is made by a very aggressive and successful company based in the Far East, who have won many design awards for their computers: The technical data: Celeron T1400 / 2Gb / 160Gb / 15W – Intel T1400 Dual Core processor – Memoria: 2 GB DDR2 – Hard Drive: 160GB – screen: 15,4 pulg. WXGA LCD.DVD-super Multi DL It cost me just 395 Euros here in Spain. Dell is a great company and has carved out a huge slice of this market in recent years.However in the world of new technology nothing… Read more »
People are quick to condemn bankers as a tribe but seem reluctant to name the names of culpable “Know Nothings” who, as Economic Advisors or Directors of Irish Banks, shared responsibility for the present debacle. In obeisance to libel laws I would like to heap praise on Doctor Dan McLaughlin, MA, PhD, Chief Economist at BOI, whose perspicacity in predicting the present crisis was second to nun. –Stand up, Mother Immaculata, who taught us to say ‘Christ have mercy on us’. Also deserving a gong is Michael Buckley, MA. LPh, MSI, who as Director of AIB presided with great panache… Read more »