Sunday, June 07, 2009

The real reason for bailing out Anglo Irish bank.

I like Gene Kerrigan's articles in the Sunday Indo. He had 2 recently: "Servile surrender sowed seed of doom" and "Saving economy while people go down" which deal with our governments obsession with saving Anglo Irish Bank and the others at the expense of absolutely everything else. Why this is happening is a really important question. He makes a lot of sense but he seems to think that the govt are simply mesmerised by the bankers, "deferential and submissive" just as they were in the past to the church. He makes it sound like the govt is just in awe of these guys and willing to do whatever they request - the same way some politicians seem to be in awe of the "free market" and espousers free market ideology. I actually don't think it's that simple (I doubt Gene Kerrigan does either).

Mr Kerrigan says that we should let Anglo go to the wall and let the bond holders take the hit. The argument is that they gambled, they knew the risks and they lost - there is no reason for the Irish government to cover their bet. The problem here is that when they placed their bet, they were ostensibly betting on regulated a bank in a modern, Western, open democracy. As such, on paper, their risk was low and their rates of returns would have been low too (I haven't checked the rates...). On paper, such a bank, regulated by a well run EU member, should never go bust. The problem is that there was no such regulation, worse still there may even have been collusion between the bank and the regulator. For the government to then say "sorry boys you lost, thanks for playing" raises some problems. These bond holders would certainly not be happy with that and would presumably draw even more attention to the misdeeds of the bank and the regulator, possibly even taking legal actions (I have no clue what recourse they would have) and at the very least making it very hard for AIB, BOI and the other to raise capital as they were and still are under the same crappy regulatory system.

The whole thing is a bit like cheating at poker in a gentleman's casino. Ireland sat at the poker table and won hand after hand. It won because it was cheating - it didn't regulate its banks properly. Come the end of the and by now everyone knows Ireland was cheating and Ireland realises that they know. Of course "gentlemen" don't like to bring up this sort of thing in public, it's impolite. Ireland has 2 choices:

  1. it can pretend it didn't cheat, leave the casino with its winnings - in this case it will be black-balled and no one will ever play poker with Ireland again. The genetlemen might then abandon their usual decorum, call out the cheating directly and look for their money back.
  2. it can say "what a splendid evening we've all had" and leave its winnings on deposit in the casino's safe, then come back and play a losing game every night until it has lost enough to repay it's cheating debt plus interest.
Gene Kerrigan is calling for #1, this government is doing for #2.

The good news is that finance is not the same as poker. There is a third option. We can do #1 and also avoid being black-balled and banned from every table if we can convincingly promise never to cheat again. We must acknowledge the wrong doing, punish the wrong doers and put in place legislation and regulators with real powers. They must not be mates of the politicians or the bankers and they must be willing to remain adversarial. No more jobs for the boys. Without this step, #1 would be extremely dangerous for all Irish banks. That still leaves us open to attempts to recoup our ill gotten gains but the worst that can happen is we end up paying them all back, just as in #2 except.

The bad news is that Fianna Fáil certainly don't have the balls to do this. They are much happier to take #2 whereby everybody remains gentlemanly, nobody loses face and the tax payer picks up the bill (to a large extent it was the tax payer who benefited but it will not be those who benefited most who end up paying back the most). I don't believe that any of the other parties have the balls to try it either or to even contemplate it, they don't want to rock the boat and they have all shown that jobs for the is what its all about.

Incidentally, I don't believe the bond holders were dummies either. I imagine they knew how poorly regulated the bank was. However knowing that the government would feel forced to save them, they could make their bets based on the imaginary state of regulation, not the real state of it.

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