Banks are paying for the abuse of belief and trust with the loss of credibility in the fiduciary system.
Today, thousands of us will go to Mass or church service. For Irish Catholics and Protestants, the central pillar of both ceremonies is the Creed. In the Creed, which in the Catholic Church and Church of Ireland is exactly the same, we profess our belief in something. In both faiths, the Creed begins with the words, ‘‘I believe in one God’’. The word Creed comes from the Latin verb credo, which means I believe or I trust. This is what we believe; this is what we find credible.
A favourite expression of my granny, when she heard something unusual on the wireless that intrigued her, was always ‘‘Would you credit that, Dathaà Lacha?” This meant not only would you believe it, but would you trust that piece of information. Do you think yer man on Radio Eireann might be pulling your leg? Would you give that any credence?
Credo is also the root of the modern financial term, credit. To accept credit meant that you trusted the person you were dealing with.
In Roman times, people associated credit with belief and trust. Gradually, the expression found its way into medieval English. The basis of the fiduciary system comes from the Roman custom of trusting or believing the person you are dealing with. Indeed, the word fiduciary comes from the Latin word fides, meaning faith.
Today, although the financial system has become increasingly complicated, the basic bedrocks of trust and faith remain immutable. The central problem with the Irish banking system at the moment is that they have been abused.
Never mind the indecipherable chatter about CDSs, CFDs and CDOs, the problem is that people lied to each other and trust has been shattered. Without trust, there is no credibility in the fiduciary system.
For Ireland, the main task ahead is rebuilding this trust because, without credit, the recession will give way to a depression. But to get credit going again, we have to recapitalise our banks because, if we don’t inject fresh money into these institutions, they will contract their lending further.
Here is the rub. Whatever recapitalisation route we choose, we have to contend with the issue of trust. And here the picture is not pretty. ] The international financial markets do not trust the management of the Irish banks – any of them. At the moment, behind the scenes, the executives of the two big banks are working away in an effort to show they are okay. They are insisting they can sell international businesses if they need to raise capital. Their body language sends the following message: ‘‘We – AIB and Bank of Ireland – are respectable, whereas there are real delinquents.”
The subtext is that the big banks were ‘‘simply caught up in a global frenzy’’ and they insist they have the capital and the networks to survive.
This is an affectation at best, misinformation at worst. If you look at the loan-to-deposits ratio of the big banks, you see that they were all at the same game. The strategy was borrowing short from the wholesale market and lending long to property.
The bet was predicated economically on Germany remaining in recession for years and the euro offering Ireland a free lunch. As long as this was the case, the management of the Irish banks believed that the property market could go only one way.
The Irish bank bonanza wasn’t limited to Ireland. The banks were confident that this ‘cross-country credit subsidisation’ involving German subvention to Ireland, would last indefinitely, so they expanded into countries without having a commensurate deposit base.
About three years ago, I became aware of this procedure when a friend in London told me about a new concept in international banking called ‘‘Irish pricing’’. By this, he meant that the Irish banks were so keen to get business and build up their loan books that they were offering much better prices to clients on deals than the big international banks could do or were prepared to do. All this money was borrowed either from shareholders or from the market.
When it all came tumbling down, shareholders lost most of their money, and the trust and faith in the system was shattered. One thing investors in the Irish banks will remember for a long time to come was that the management of the banks was doing road shows as recently as early 2008 telling investors there was nothing to worry about.
Logic suggests that the management must have had at least an inkling that loans were going sour by that stage.
To make matters worse, the investors we now need in order to recapitalise our banks are probably the same people who have lost out. Their credo and fides have been abused, and rebuilding these precious commodities will come at a price.
Perhaps an easy way to understand this is to think of a simple personal situation that involves trust, faith and credibility.
Imagine you lent €100 to someone and you were promised not only your money back, but that you’d get a capital gain of at least 10 per cent. Instead of getting €110 back, you are now looking at €10 return because the share price is down by 90 per cent.
Would you be quick to give that character money again? Not unless he had changed his ways. The only clear signal that the Irish banks have changed their ways is to admit that the problem, is not so much liquidity, but the underlying price of property.
Irish property prices need to fall by close to 40 per cent from here before we are back to our long-run average level. Until that happens, foreigners will not be keen to put new money into the Irish banks.
Evidently, the major problem facing Irish banks in their efforts to recapitalise is that no one believes them. The state naturally wants to get them lending again but, as money is tight, the state wants its own exposure to any recapitalisation to be at a minimum.
Minister Brian Lenihan’s objective must be to get the minimum investment the state can make and the maximum return for that investment.
There is still plenty of money in Ireland that could participate in this venture. Indeed, the world is full of money waiting to be committed. However, the world is also full of bargains, and a battered and bruised Ireland is by no means the best opportunity.
Therefore, whatever structure we decide on for the great Irish bank recapitalisation, that structure must be right. We won’t get a second chance to do this. If we undertake a half-baked recapitalisation, the state’s credibility and its credit will go up in smoke.
If that came to pass, expect churches to be full again with people who swapped God for Mammon in 1999, back inside, belting out the Creed as if the boom had never happened.
To grow, you have to take risk. If the risk taken by Irish banks occurred outside the realm of regulatory frameworks, you have a breach of trust. But since you’re not postulating that any of the Irish banks did anything illegal, just exactly what do you want? Do you want a tighter regulatory framework that we all help to fund? Nothing is going to change until the regulators restrain the practises we watched behind recent Irish economic expansion.
Greetings! Another very good and informative article, David. And once again you put the finger on the sore point: Can we trust our banks? For the time being I have my serious doubts. And so have many others. On my own weblog I am running a poll since the banking crisis began. The simple question is “Do you trust Banks?” and so far 93% of those you answered said NO. This even beats a second poll – “Do you trust the Irish government?” – where so far 89% have voted NO. Of course these polls are not ‘scientifically selective’ as… Read more »
My comment is only a short one. But the most telling sign of all to Joe Public is that the banks are finally giving out 20 Euro notes at ATM machines, for nearly a year a 50 Euro note was the lowest you could get even though there was an option for 20 Euro. How soon before they have to revert to giving 5 Euro & 10 Euro denominations…….they need get real about their customers needs….banking on Saturday and open 5pm! It may seem like a small step but it is about credibility and being customer orientated….
Hit the nail on the head again David. The established churches will make you a Papal count or somesuch award for beating the moneylenders in the Temple. But when are the Four Horsemen of the Apocalypse, McWilliams, Ross, Kelly and McCreevy, going to horse? The imminent climbdown on CGT renders this budget and it’s architects defunct. The grinding and gnashing of teeth in Leinster House exceeds the EU noise regulations. We’re teetering on the edge of the abyss but can be rescued with a descent from the Mount by our best economic brains. An apostolic union to show the way,… Read more »
David – another excellent article hitting directly on the crux of the issue. There is a bigg issue of credibility. I propose that the banks replace a lot of the unsavoury characters who caused the banks their ‘immoral decline’. However the best hop of this comes from bank shareholders. I have watched Shane Ross trying to get some transparency – and he has been checked at every turn. There is a transparency problem. You know the problem. Most people on this site know there is a problem and are prepared to trust your deductions on the matter. But there is… Read more »
Hi everyone I would just like to know since the value of property is dropping: will revenue be giving people a refund on the capital losses made, basically the opposite of the Capital Gains Tax? Is this a loophole in the Irish tax system, and would it mean serious trouble for Revenue in the coming years? It just seems like if you make a capital gain, you pay your tax, so if you make a capital loss, should you not get a refund? Will this not be the case for developers next year who are knocking 100k + off their… Read more »
I have been abused by a prime national bank in Ireland when in my professional capacity as a qualified accountant and public auditor I reported verbally a percieved crime to the bank only to be jailed afterwards and subsequently released after questioning and then charged on false evidence ( perjury ) given by the bank . It was heard in court and and dismissed by the judge .The bank was investigated by the fraud squad subsequently and submissions sent to director of public prosecutions who decided not to prosecute or give reason to .The Central Bank do not consider the… Read more »
David, youre being far too ‘nice’ .. No mention that the banks exist only because we saved them, its as if it would be rude to talk about 500 billion The banks are untrustworthy lying incompetent scum, they have proven this over the years. Nobody believes them any more, if I was arranging to meet my bank manager and he said tomorrow will be sunny, I would turn up with an umbrella. If he recommended somewhere to put my money, I would tell him to f*** off. Same for international investors, they know our banks are lying. The only thing… Read more »
John ALLEN – you need to talk with Senator Shane Ross. He is also crusading to ensure all financial bodies are behaving within the remit of Irish and EU legislation. Any business that is infected with such a culture should not be receiving tax-payer bailouts – because it’s culture is already enough of a liability to the taxpayer/consumer/citizen. And it is better than we get reformed of such behaviours. Better for the banking sector, better for the economy and better for the society as a whole. It is in everybody’s interest.
We need to make Irish society safe for whistle-blowers.
David, I read with interest and agreement your various columns and articles on the current problems facing the Irish economy and the difficulties facing the Irish banking system in particular. The Irish Government seems stuck in the mud at the moment. They clearly want the Irish banks to start lending again. But the banks are unable to do that because they need to finance their bad debt write-offs from future profits on existing good loans. So in the absence of new capital they will continue to curtail lending. The Government knows that if they have to finance the recapitalisation of… Read more »
David: this is a really interesting piece as it plumbs the basis for belief, which depends not on ‘evidence’ but upon ‘the irrelevance of the lack of evidence’. This underlines the fundamental difference between faith and science, the latter which of course depends on demonstrable evidence. Economics is sometimes considered a science and economists constantly appeal to evidence from the past to support their theories. However most people prefer faith to science, as the ‘willing suspension of disbelief’ is essential to having a satisfying experience with novels, theatres, films, computer games, or in being an Everton fan, long-odds backer, startup… Read more »
OK, so no one trusts the banks – given their appalling performance over the past 10 years, that’s hardly surprising. People tell me that the financial system is broken. It seems to me, that, as metaphors go, ‘broken’ is rather poor. ‘Broken’ implies that it was fine, until some ham-fisted idiot dropped it. It isn’t broken, it’s disfunctional. It doesn’t work properly. Everyone’s been warning about ‘moral hazard’, recently. We al know what it means: The moral hazard of bailing out a bank is that the bail out process becomes part of the bank’s business model, forcing them to behave,… Read more »
This is becoming surreal. The issue of the Irish banking system’s ‘credibility and trust’ was surely established before providing them with an Unlimited State Guarantee? No? Oh dear…. Why can’t the banks involved recapitalise if they‘re so sure of themselves? If Abu Dhabi’s Sovereign Wealth Fund can rescue Barclays from the clutches of the British State (albeit with a 14% preference share offer), surely some other Asian or Gulf entity can be found willing to take a punt on AIB and/or BOI? Investors calculate risk in return for reward. That’s why it’s investing, not gambling – unless there’s criminal tinkering… Read more »
Like I’ve said before, a few posts ago: Guaranteeing the loans was a mistake. Let the banks fail if that’s what the market dictates would be a far better route and have the business taken over by stronger, foreign banks.
I hope nobody minds me asking, but is there any other industry that gets recapitalised ?? If so,then mayber there might be a useful example. Looking at the TV and watching the Irish horseracing industry. The Irish horse trainers and jockeys seem to have winnability. Much more so than either the soccer team, the rugby team, etc.. Unfortunately it is impossible to have a discussion about this without an advertising clip from the betting industry, however subtle being sneaked in. But yeah it seems that the trainers are highly professional, extremely competitive, extremely cautious, and always generating astound results. From… Read more »
Obviously, this is simplistic but I saw a headline on reddit which at least gives some relativity on the figures involved:
“Goldman Sachs takes $12 Billion bailout, hands out $14 Billion in Bonuses”
Read the article here (I know its the Daily Mail)
http://www.dailymail.co.uk/news/worldnews/article-1081624/Goldman-Sachs-ready-hand-7BILLION-salary-bonus-package–6bn-bail-out.html
Everyone’s been yelling about the disaster of a financial meltdown, how it would throw us into another Great Depression, with pictures of grim faced women with 22 children, and so forth. The media, politicians, pundits that would put Douglas Adam’s Magic Thighs to shame, and of course the Wall Street/City of London witch doctors themselves, have been acting as if the end of the world is indeed nigh. Just minutes away. As Deco has said, banking is essentially a simple business: 1. Borrow short. 2. Lend long. 3. That’s it. So, wherefore this world-ending disaster? To me, it all smells… Read more »
AndrewG… Spot on… it is surreal And you haven’t even mentioned the government are attempting an indirect bank recapitalization scheme via their developer friends…. homechoice loans. http://www.homechoiceloan.ie/ Simply put, homechoice loan borrowers may only buy new houses which are covered by homebond. so this only applies to clearing existing stock from the big developers. Also, you must have been refused by a financial institution, so by definition its a sub prime loan. And most worrying, the valuation system is wide open to corruption… It is designed to move bad debts from big developers to the taxpayer via sub prime borrowers.… Read more »
Stephen Kenny, you’re spot on. The problem is not trust, it’s the system. There is a great video that was already posted by someone on the forum a while ago called “Money as debt”: http://video.google.com/videoplay?docid=-9050474362583451279&ei=DNP7SOqZBo2uiAKDiJ3vDg&q=money+as+debt&hl=en It explains the whole mecanism of banking and money creation. Forgive the conspirationist tone of the last 10 minutes, the rest is factually correct. This system has been governing our society for hundreds of years and yet, very few people seem to know how it works. Please, if you have a bit of time (the video lasts 52 minutes) have a look at it, it’s… Read more »
If ever there was a time for the opposition to rev up, this would be it. As commented above, the surreal nature of offering state guarantees together with a budgetary decision to finance 1st time buyers (to bail out property and banks to a degree) suggests a complete disconnect from reality. But the Greens are hanging on for dear life. I’d say a few marginal seats must be quivering right now. It only takes a few more minor mistakes and the incumbents will fall. Did I hear that the go ahead has been given for lighting up the streets with… Read more »
Cold comfort zone: Apparently the Eskimos in Greenland are rallying to the rescue of Iceland. Soon Santa will arrive on his sleigh and everything will be cool again:
http://www.icenews.is/index.php/2008/10/31/greenland-should-help-its-north-atlantic-neighbour/
I think FF and the Greens and the PD need to be left in the fire as long as possible and that FG and Labour should run for the hills until conditions improve.
FF and their lapdogs the PDs and their New Best Friends the Greens have built this house of cards since 1997 so they should at least stay in power to clean up the mess after their long and boozy party.
We are past quarter of 1 million unemployed – and this does not include under utilized contractors / sole traders. Exports and orders have dropped dramatically this October. I know we like to beat up the local banks, but the problems seem everywhere. And if recapitalisation is actually working anywhere, we have yet to see real evidence of it anywhere. I agree with DMcW’s central point about our banks here. The trust issue is a very necessary condition. But it is not sufficient. On the latter no one seems to have any real ideas. The world economy is tanking in… Read more »
Yeah well we should have prepared for the day the party ended. What we did was make an incentive for a runaway train to get faster based on greed.
Now we are in the shit and we get an almighty kick in the nuts from those who we elected to run the place.
Deco : Thanks for your encouragement .I have decided to-day, to write to The Secretary of Bank of Ireland to independently investigate this serious matter and I confirm that I have copied The Minister for Finance .Should any readers of these columns be interested I will be happy to keep you all informed . It remains to be seen what kind of real culture our bankers profess in our saintly isle.
John ALLEN – you are encouragement to us all. If you are not happy with progress, you can contact Shane.Ross@oireachtas.ie – as he is also trying to clean up Irish banking practices. the banks. I presume that he is entitled to parlaimentary privelege, and thereby free to issue his mind on the matter. I think that the Department of Finance would be obliged, in current circumstances to get the issue resolved. If you are not satisfied, you can call an opposition TD. This usually has a good effect. Because of the exposure to the taxpayer, from the banking system, we… Read more »
thanks Garry and Deco………it might be useful to note I included a seperate registered letter and enclosure to Jean Claude Trichet if that does not work I dont know what will
thanks lorcan…….i still have faith in irish democracy and state laws and they must be seen to work and be transparent and accountable …this is an acid test ….will it turn blue or will turn red …..time will tell
John ALLEN, I hope the acid test shows a good result. The EU is putting Ireland between a rock and a hard place and anything could happen over the coming months raging from the lads doing the “right thing” or Ireland leaving the EU. This is no mere recession or depression we are looking at…we have in the space of 5 months (July is really when the doo doo started getting really visible) gone from not great to a complete disaster where Ireland as a sovereign country will have its credit worthiness written down as a junk bond. Could the… Read more »
from Lorcan’s ref: http://www.rte.ie/business/2008/1103/eu.html “Taoiseach Brian Cowen admitted that Ireland’s budget position had worsened ‘considerably’ this year as the economy reels from the global credit crunch.” These sorts of comments could be deemed to indicate a certain refusal to face up to the reality of the situation. The economy isn’t reeling from the Global Credit Crunch (TM), it’s reeling from it’s own excesses. Reading the article, you get the impression that if “them out there” sort themselves out, then we’ll automatically revert to the seemingly sunny days of a few years ago. You get idea that it isn’t our, collective,… Read more »
Thanks Philip its noted …actually u can make a bet with Paddy Power ‘Ireland out of Eurozone ‘ is resigned or expelled by 31.december 2008 20 / 1 31st December 2009 6 / 1
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I agree with your post AndrewGMooney. I would’ve just written the same thing. Indeed I have in response to previous articles. David, lets forget about the banks (for a moment). What steps can be taken to get this economy back on track and quickly? We cant live at a deficit of 6.5% GDP. I’m all on for a cull of the public sector, their wage reduction, and increase taxes at the upper levels, etc. Reform of the public sector is a key, and that includes Local Government. Value for money is sorely needed. The country needs to do things, and… Read more »
MK1
The difficulty, it seems to me, is first, to get broad agreement that the problem cannot be solved by ‘more of the same’.
There is still a belief that once these rather obstruce financial problems are solved, then all will be well again. How many people are saying ‘can’t wait for property prices to fall, then I’ll get in and really clean up’, or something to that effect? Too many, I would hazard.
After that, well, creating a strong economy is another problem.
If you are waiting for prices to fall and to clean up you didn’t learn your lesson the first time.
We need strong businesses not coast to coast soft furnishing and decking.
David said the banks’ body language sends the following message: ‘‘We – AIB and Bank of Ireland – are respectable, whereas there are real delinquents.” However, Bloomberg’s CDS ratings from 20th September are as follows (leaving out the compete basket cases from Iceland and elsewhere): Credit Suisse 118.3 HBOS 115.4 Bank of Ireland 111.3 RBS 102.5 Barclays 100.0 Allied Irish Banks 84.8 Lloyds 80.8 Standard Chartered 80.0 Fortis 79.8 Santander 79.7 HSBC 65.0 The higher the rating the riskier is investment in the bank. Recently, HBOS, Barclays, RBS and LLoyds have had capital infusions from UK Government and Abu Dhabi… Read more »
MK1 > What steps can be taken to get this economy back on track and quickly? While I don’t think ‘quickly’ will be an option for getting the economy back on track, we could certainly be doing more to set the foundations for the future economy than we are. The recession cannot be denied anymore, so there should be a change of tack by the government. Saving the banks could have made a difference if it meant preventing a prolonged recession. But that horse has now bolted. All indicators point towards a long downturn, from commodity prices and the baltic… Read more »
……..forelorn…the Euro will soon be no more ….have u ever been to the ring fort ( 10,000 years old ) on inish more and watch the remaining half circle standing perched alongside the wild atlantic and wonder what happened to the rest of what was then what mankind created ………u can read its satire in a book called Da Wu Yu Code by Dee Noblesse – published in USA a few years ago ….history has a habit of repeating itself Da Wu Yu Code = the code of before time and after time of another mankind ….when we had a… Read more »
John ALLEN, interesting marketing strategy, but you could have made clear in your post that you are the author of the book..
http://www.davidmcwilliams.ie/david-offline
(2nd comment)
Hi Lorcan……..we all like a surprise …….thats the magic of life….or should i say …the currency
Lorcan – banks are required to only report the losses that they have fully incurred. Therefore we will get a reverse view. But nobody will be to be blame. In Ireland nobody is every responsible. Though the Finance Ministers contention that the Euro is to blame is amazing – no doubt the same individual was telling us, repeatedly, in May that it was imperative that we sign up to greater EU surrender of powers in the Lisbon Treaty. The inconsistencies are telling. This is completely the wrong approach. It would be more relevant if the Finance Minister started to cull… Read more »
As long as my business stays quiet I know the banks are still fight a phoney war.
We expect to be out the door busy starting in January.
Unless of course someone is unpatriotic and starts the shooting early.
Have a look at today’s Indo farming article by Joe barry. http://www.independent.ie/farming/a-land-of-red-tape-and-bureaucracy-enough-to-sink-noah-and-his-ark-1520042.html We live in a land of Dr No. Too many people tied up doing nothing except stopping others from doing useful work in the name of the environment, health and safety etc. Nanny state nonsense. I would not mind, but little of it is to do with saving or preserving anything except rules. Is it any wonder people give up and try to find an easier way of making money…property, brokering/commissions, middlemen etc. This is the root cause of the issues we are having right now. It’s not… Read more »
Commerzbank in Germany will be using the German rescue plan. In order to do this, executive salaries must be limited to €500K per year for the two years the plan is used. As some executives of Commerzbank have already earned €750K this year, they have to pay back €250K to the State and will receive no further salary this year. Executive bonuses will be zero for the next two years. No dividends will be paid out during this period, except to the German state. Compared to this it feels like Ireland has written a blank cheque and said “chance her… Read more »
Philip, – true point. There is a massive number of health and safety at work inspectors in Ireland. Now to be honest, they do very little work. It is an easy number. Qualifications are not too strict either. In fact it is a nice clean job, with no effort, and no deadlines whatsoever. And state pay and benefits. In fact their primary job is to turn up unannounced, terrorising everybody. Most of these health and safety officers are focussed on ‘policing’ the construction sector. Even still, accidents do happen, and occupational health is not great. But in any case there… Read more »
Phillip – interesting point concerning the farming sector – everytime the public sector are asked to compromise on their demands they launch all sorts of loose cannonball shots at other sectors of the economy. One of their favourites is farmers. For some reasons they like to throw muck at farmers (if you expose the pun). The more I think about this, the more absurd I realise this policy is for the economy. Farming has a very small import component in it’s end product, so it actually an entire value chain inside the country. It is also jobs intensive – the… Read more »
“Look at this arc of prosperity, what some commentators are now calling calling the arc of insolvency: Iceland, Ireland and Norway,” Mr Murphy told a Sunday newspaper
looks like we are impresssing our neighbours
David’s headline is “Irish banks must tell the truth if they are to regain our trust” Well, AIB reported today so it provides an opportunity to assess their grasp of current reality: http://www.ibtimes.com/prnews/20081105/allied-irish-banks.htm It attempts to reassure, giving an apparently fair picture of their present position. They say: “At this time, our guidance for total bad debt provisions in 2009 is in a range of 90-110 bps (i.e. about 1%) of average loans,incorporating the expected effects on our loan portfolios of ananticipated deterioration in economic and credit conditions,including lower GDP and rising unemployment.” (Thus it thinks deterioration of the income… Read more »
Concerning the AIB announcement the Minister for Finance has disclosed that he ‘is disappointed with the results’. The indications are that he does not connect property crashes and with banking profitability declines ? This was the same individual who told us that this ‘was a terrible time to be Minister for Finance, at the end of a property boom’. He still has not sacked the Financial regulatory. Maybe the shareholders would start to ask hard questions of the banks. Because of the 500 Billion Euro bailout (‘it is not costing the taxpayer a penny’) we have all become shareholders in… Read more »
Deco, re: the ‘It is not costing the taxpayer a penny’ fallacy.
Ireland has just raised €4bn via a three year bond issue. But, to get it fully subscribed it had to offer a coupon rate that is above the average by .25%.
Over three years this leads to an extra charge of €30 million on the bonds.
In current terms €30 million doesn’t sound like much, but it is certainly isn’t ‘not a penny’.
http://www.ft.com/cms/s/0/a7afb08e-aaad-11dd-897c-000077b07658,s01=1.html
‘It is not costing the taxpayer a penny’ Where this is spent on recapitalising companies, there’s another aspect of this that seems to be ignored. Let’s consider the whole cycle: 1. Preceding the recapitalisation (share purchase), bank share prices fall significantly. 2. Every shareholder in bank shares has lost a busload of money (every pension find, savings scheme etc). 3. Recapitalisation. 4. After a decent period, government puts it’s shares in the banks up for sale. 5. Pension funds, savings schemes etc buy the shares. Result: The government has ‘bought low and sold high’, but since the major funds represent… Read more »