In Banksters, RTE business correspondent, David Murphy, and Martina Devlin, columnist with the Irish Independent, seek to chart the rise, collapse and rescuing of the Irish banking system. The story they tell is split into four parts – the origins of the crisis, an overview of each of the banks and the key banking officials, the crisis, and the fallout. Their tale can essentially be boiled down to the following:
1) In the early 2000s, Irish banks stopped using their deposits to underpin loans and started to borrow money from other (international) banks and to offer easier forms of credit to home buyers (such as 100% mortgages over longer time spans) and investors (such as deferred interest payments).
2) Property prices, especially development land spiralled exponentially and unsustainably upwards (and did not meet stress test criteria) and yet the bankers kept lending money to developers driven by personal bonus schemes and inter-bank rivalry to generate record annual profits.
3) Regulation was very light and the financial regulator failed to intervene in poor and suspect banking practices or overheated property speculation; the Irish Central Bank could not directly influence consumer spending as it did not have control of interest rates (which resided with the European Central Bank); and the political establishment were in cahoots with the developers and were not only blind to the potential problem but poured scorn on anybody who tried to warn of the impending disaster. Crony capitalism was in full swing.
4) As property markets slowed and financial crash hit, international banks stopped lending Irish banks money.
5) Banks thus didn’t have funds to lend to investors and businesses, nor did they have the means to pay back loans to international banks.
6) This prompted a share price collapse. (Between May 2007 and November 2008 Irish shares fell in value from €55b to €4b).
7) Which in turn spooked depositors who, worried that the bank might fail, withdrew their deposits to move them to a more secure institution.
8 ) This took all the liquidity out of the Irish banking system and reduced the share price further.
9) A run on the banks thus became inevitable without intervention which, given that the Irish government had decided that the banks could not be allowed to fail, came in the form of the Irish government underwriting the entire banking network (to the tune of €440b), thus halting the outflow of deposits.
10) By guaranteeing the banks, the Irish government in turn put the country’s future on the line, making tax payers liable for all bad debts.
11) Once the brake was in place the Irish government needed to decide how to proceed to put liquidity into the banking system. Initially it wanted to avoid recapitalisation and nationalisation and instead it tried to force mergers between financial institutions to gain economies of scale and to recapitalise the banks through private equity investment.
12) Ultimately though it had to nationalise Anglo-Irish Bank and partly recapitalise the others, taking the role of a preferred shareholder, and also created NAMA (National Assets Management Agency) – the world’s largest, state-owned, property portfolio – to take the bad debts off the banks’ books.
Like Frank McDonald and Kathy Sheridan’s, The Builders, Banksters largely focuses on individual actors (bankers, regulators, and politicians), their careers and their decisions. It is certainly the case that Ireland had some maverick bankers – Sean FitzPatrick at Anglo Irish Bank and Michael Fingleton at Irish Nationwide Building Society – who used their institutions as their own private finance houses and were loose and fast with banking practice. It is also the case that there were many other bankers who lost sight of the long-term as the euro signs clouded their vision and who became much too cosy with developers. It may well have also been the case that the chiefs of the Central Bank and the Financial Regulator were not strong enough to take on the bankers. But all that said, whilst individuals did play a role, it was a systemic failure of financial governance that lies at the heart of the banking crisis, and the responsibility for that rests with government. Individuals act within an institutional and legal system which is framed by policy. If the system and policy framing is inadequate or flawed then problems will inevitably arise.
Reading between the lines, and moving beyond the actors, what Banksters ultimately demonstrates – and Dubai is now also illustrating – is that it is extremely dangerous to use a property bubble as an engine of growth, especially within a neoliberalised economy where regulation is essentially left to the free market. If history has taught us anything, it is that bankers and developers – the arch-capitalists and short term, greed merchants – cannot be trusted to work for the greater good of society. If left to their own devices they line their own pockets. And yet, we chose to ignore history; to be suckered into thinking that this time round it would be different – that banking could be left to the bankers. It may well have been the case that 980 people worked in the Central Bank and Financial Regulator but they didn’t have the mandate or the tools to rein in what the banks were doing, and government policy was one of free-market, pro-growth. The lesson, once again, is that banking is too important to be left to bankers. And while politicians, developers and bankers insist that they were victims of a global financial meltdown, this is highly disingenuous given that were many countries, such as Canada, Spain, and Australia, that weathered the storm reasonably well because they had properly overseen their banks.
Banksters is what I’d call an okay read. It provides an overview of the banking crisis to date in Ireland, but by focusing on individual actors and a day by day account of the crisis it fails to move beyond description to explain in detail why the crisis arose. The narrative is a little uneven in places, with a couple of chapters being noticeably weak, and the ordering of the material seems a little odd at times. The first two and last two chapters are the strongest, providing a coherent summary of the crisis and raising important questions that need to be reflected on and answered. Overall, the book sets out the crisis in an engaging fashion and easy to understand terms, helping to expose in limited terms how Ireland’s Celtic Tiger was a cleverly disguised paper tiger.