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Morgan – Government recapitalising plan will reward rich investors at the expense of the economy

18 December, 2008


Sinn Féin Economy spokesperson Arthur Morgan TD speaking during the Dáil debate on recapitalising the banks said: "If the Government proceeds with the inclusion of private equity investors, they will have used the Irish tax payers guarantee to subsidise a tiny number of investors in making quick profits at the expense of our economy."

Deputy Morgan said:

"There is little confidence in the Government's ability to deal with one of the greatest economic challenges to face us in a lifetime. Home repossession rates are soaring and small and medium businesses are shedding workers daily. Over the past two months we have seen one state after another launch a recapitalisation scheme to save their deteriorating economic circumstances, while our government dithered.

"The Government has said that the interests of the tax payer are paramount. But based on signals it has made, this is clearly not the case.

"Amongst my core concerns is in relation to the use of private equity investment. The involvement of 'corporate raiders' in the Irish banking sector has been described by even the most right wing economists as one of the worst things that the Government could do. If the Government proceed with the inclusion of private equity investors, they will have used the Irish tax-payers guarantee to subsidise a tiny number of investors in making quick profits at the expense of our economy. Sinn Féin will oppose any recapitalisation plans that support the involvement of foreign private equity.

"Any involvement of private investors threatens the public interest as we will not be in a position to restructure the banking sector in way which is necessary to secure our economic future.

"There is nothing in the Government's statement that suggests a radical overhaul of the banking business model which created the type of irresponsible and reckless lending behaviour that has brought our economy tumbling down. The culture of banking is going to have to change forever to ensure stability and if this is not addressed the banks may well go on acting irresponsibly and recklessly.

"The banks should not get a single penny from recapitalisation until there are wholesale changes in their senior management and those who are accountable for the mess that we are now in should be sacked, without any type of golden handshake, before the banks can even commence their applications to be recapitalised.

"One of the most disappointing aspects to the Government's approach is its refusal to use the leverage of recapitalisation to protect the people who are paying for it. We have all heard the news this week that 13,391 mortgage accounts were three months in arrears by June, 2008. This was an increase of 11,252 from December 2006. The numbers of repossession orders that are being heard at the High Court is increasing at an alarming rate while there may a substantial number of voluntary repossessions that we will never hear about. Sinn Féin has been calling for a moratorium to ensure that no foreclosures take place on properties of people who get into financial difficulties for the duration of the Guarantee Scheme.

"The Government missed the boat at the time of the Guarantee Scheme to make this happen. But there is another opportunity with recapitalisation to help the hundreds of thousands of families whose homes are now threatened.

"Another crucial measure which must be taken is to open up credit streams for small and medium businesses. A recent ISME survey showed that half of its members were being refused credit. These were not unknown companies but well established businesses who have long established relationships with their banks. The result is that a large number of SMEs are now in serous financial difficulties. Only yesterday it was reported that almost half of all firms in the small and medium sector experienced a fall in employee numbers in the last three months.

"While all of this is happening the banks are continuing to sit back. The sector has been moving at a snail like pace in dealing with the credit crisis, negotiations are still ongoing with the EIB in relation to its small operational fund while the banks have done really nothing to capitalise themselves.

"If we are really to place the public interest at the core of recapitalisation the issues of mortgage repayments and credit for our SMEs must become core conditions.

"There is no guarantee that the banks will lend out the funds as opposed to sitting on them. This was a problem that the Roosevelt administration had faced when it stepped to recapitalise the banks in 1933.

"For this reason, the Government will have to ensure that the state becomes a major shareholder in our banking institutions to get credit going again. This will have to be done through part or full nationalisation of our banking sector, with the Government retaining ownership of one of our major financial institutions to protect our national interest.

"It is clear for even the most right wing of economists who have suddenly decided that the state must intervene in our economy- that the public interest can only be prioritised if the state play a leading role in our financial sector." ENDS

Full text of Deputy Morgan's speech follows:

It is now 80 days since the Finance minister stood in the house and announced his Bank Guarantee Scheme. Even though he then promised that he was not "protecting the interests of the banks" but was instead "safeguarding the economy and everyone who lived and worked in this country" there has been an air of inevitability about recapitalising Irish banks.

Over the past two months we have seen one state after another launch a recapitalisation scheme to save their deteriorating economic circumstances, while our government dithered. Worse still there is no good news for struggling mortgage holders today as home repossession rates soar, and neither for SMEs, the backbone of our economy, who are shedding workers daily.

The warning signs were there long before September yet again the government did nothing. Earlier this year Permanent TSB became the first of a series of banks to withdraw 100% mortgages and cut the maximum percentage of the cost of a house they were willing to lend for to 80% of the property value. The reason for withdrawing the 100% mortgage was that the bank now wanted to have "a more prudent lending policy".

In July Bank of Ireland and Irish Life and Permanent began to cut back on commercial lending and in the case of Irish Life and Permanent an early July slump in share prices saw them lose a quarter of their value in a week. Newspaper reports at the time said that IL&P had driven its lending business not through growing deposits but by borrowing from other banks and lending that money to home buyers in the buy to let market.

The British Daily Telegraph reported in the first week of July that Bank of Ireland told British customers it would take on no new commercial lending for three months. In the same week BoI disclosed that it was unable to predict future profits because of the slowdown and the problems being faced in loan repayments by some of their business customers.

The Irish Wind Energy Association reported in late June that wind farm operators were finding it difficult to finance new projects as banks were only willing to fund 70% to 75% of the constructions costs compared to over 80% before the credit crisis, and the smaller wind farm operators were being hit the most.

Faced with all these realities of a growing crisis the Government did exactly in July what it is doing today - it went on holiday.

With the amount of time that has elapsed one would have thought that the Government would be in a position to provide details of a clear and comprehensive recapitalisation project that would boost confidence in our financial institutions and inject much needed credit into our economy.

But what we got in last Sunday's announcement was a vague statement that inspired little confidence in the Government's ability to deal with one of the greatest economic challenges to face us in a lifetime.

Rather than a decisive plan of action, the latest Government announcement has been described as an 'approach to recapitalisation' with broad parameters that have left us in the dark as to what exactly it all means.

The Government has reiterated that the interests of the tax payer are paramount. But based on certain signals the Government has made, I remain far from convinced that that is the case.

Amongst my core concerns is the Government's reiteration that it will "supplement and encourage" private equity investment. The involvement of 'corporate raiders' in the Irish banking sector has been described by even the most right wing economists as one of the worst things that the Government could do, yet still even today, we do not have even have names for these private equity interests but it is pretty clear that the sharks smell easy prey and are circling ever closer.

If the Government proceeds with inclusion of private equity investors, they will have used the guarantee - which was paid by Irish taxpayers - to subsidise a tiny number of investors in making quick profits at the expense of our economy.

It is hard to see why we are not facing another Eircom debacle of five owners in seven years with ever an ever increasing debt burden, large dividends for shareholders and a failure to invest adequately in the customer network.

These vulture investors are only interested in high profits in very short periods and if they are successful in getting a controlling stake over any of our major banking institutions, we will be in a perilous situation.

Any involvement of private investors threatens the public interest as we will not be in a position to restructure the banking sector in way which is necessary to secure our economic future.

Again there is nothing in the Government's statement that suggests a radical overhaul of the banking business model which created the type of irresponsible and reckless lending behaviour that has brought our economy tumbling down.

The culture of banking is going to have to change forever to ensure stability and if this is not addressed the banks may well go on acting irresponsibly and recklessly.

Key to this, is the replacement of those senior executives in certain banking institutions who have misled us as to the true nature of their debt problems and who have encouraged the type of behaviour which has contributed to the credit crunch.

The banks should not get a single penny from recapitalisation until there are wholesale changes in their senior management and those who are accountable for the mess that we are now in should be sacked, without any type of golden handshake, before the banks can even commence their applications to be recapitalised.

While this seems to be recognised as imperative by almost everyone, the Government's failure to achieve either of these demands at the time of the Guarantee leads me to believe that very little will change with recapitalisation.

One of the most disappointing aspects to the Government's approach is its refusal to use the leverage of recapitalisation to protect the people who are paying for it. We have all heard the news this week that 13,391 mortgage accounts were three months in arrears by June, 2008. This was an increase of 11,252 from December 2006. The numbers of repossession orders that are being heard at the High Court is increasing at an alarming rate while there may a substantial number of voluntary repossessions that we will never hear about.

Sinn Féin has been calling for a moratorium to ensure that no foreclosures take place on properties of people who get into financial difficulties for the duration of the Guarantee Scheme.

The Government missed the boat at the time of the Guarantee Scheme to make this happen. But there is another opportunity with recapitalisation to help the hundreds of thousands of families whose homes are now threatened.

Another crucial measure which must be taken is to open up credit streams for the SME sector. When the banking officials visited the Finance Committee last Tuesday I was disappointed but not surprised at their failure to appreciate how serious things have become for this sector. A couple of weeks ago an ISME survey showed that half of its members were being refused credit. These were not unknown companies but well established businesses who have long established relationships with their banks. The result is that a large number of SMEs are now in serous financial difficulties. Only yesterday it was reported that almost half of all firms in the small and medium sector experienced a fall in employee numbers in the last three months.

While all of this is happening the banks are continuing to sit back. The sector has been moved at a snail like pace in dealing with the credit crisis, negotiations are still ongoing with the EIB in relation to its small operational fund while the banks have done really nothing to capitalise themselves.

If we are really to place the public interest at the core of recapitalisation the issues of mortgage repayments and credit for our SMEs must become core conditions.

There is no guarantee that the banks will lend out the funds as opposed to sitting on them. This was a problem that the Roosevelt administration had faced when it stepped to recapitalise the banks in 1933.

For this reason, the Government will have to ensure that the state becomes a major shareholder in our banking institutions to get credit going again.

This will have to be done through part or full nationalisation of our banking sector, with the Government retaining ownership of one of our major financial institutions to protect our national interest.

It is clear for even the most right wing of economists who have suddenly decided that the state must intervene in our economy- that the public interest can only be prioritised if the state play a leading role in our financial sector.

There was a time when we had the solution to this problem in Ireland. It was called the state banking sector. For business and industry we had the Industrial Credit Corporation. For farm business there was the Agricultural Credit Corporation. For insurance there was a state owned Irish Life. An Post had a savings bank, and building societies were only allowed to lend to prospective home owners not into the buy to let market that now accounts for 36% of the housing market in Ireland.

None of this was the glitzy banking sector of today, it was boring and solid, but it worked.

None of these banks ever made a loss, the profits were not enormous but business got done, money was lent, houses were built and some businesses grew. The model and scale was very limited but the principle was established.

This cannot be done through any involvement of foreign private equity and Sinn Féin will oppose any recapitalisation plans that support this.

Finally, I would like to mention an initiative that I had spoken about during last night's PMB. I believe that the recapitalisation scheme may provide a golden opportunity to tackle the impending housing crisis that is before us.

Last October while speaking to an Oireachtas committee on the 14th of October, Patrick Neary, CEO of the Irish Financial Service Regulatory Authority told us that speculative lending to the construction and property sectors in the country amounted to €39.1 billion and that he anticipated " losses on property-related loans" and that "increased provisions and write-offs will be necessary,"

Mr Neary also revealed that a PWC audit of the six largest Irish banks had found that €15 billion of the property lending was secured on the properties. Can we learn anything form the Swedish experience in the early 1990s where a similar case of ill advised commercial lending in a property boom lead to a collapse in its banking system.

As part of the Swedish bailout the Government forced banks to write down losses and sell off the distressed assets. In the Irish case some of the assets in question are the land banks amassed by speculators, the unfinished housing estates and commercial retail ventures that should be sold off as bad debts

The Swedish Government formed a new agency to supervise institutions that needed recapitalization, and another that sold off the assets, mainly property, that the banks held as collateral.

In Ireland, we have a unique opportunity to return control of the planning process and commercial development to local government by breaking up the property cartels that have been holding Dublin and many other towns to their own development strategy wilfully thwarting local council development plans.

As property prices fall and these assets are sold, local government could have a unique route to dealing with the growing housing crisis, and the tax payer can be given a better return for the investment in the banks, rather than let cash strapped developers sit on their assets now only to make more profits in decades to come.

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