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Banks took risks because they knew they would be bailed out – Ó Snodaigh

27 April, 2010 - by Aengus Ó Snodaigh TD

Speaking in the Dáil this evening on the Central Bank Bill, Sinn Féin TD and Spokesperson for Justice Aengus Ó Snodaigh attacked the government for the limitless bailing out of banks and for the “bottomless recapitalisation offered”.

He said:

This state is being run by a cosy cartel of right wing politicians. Fianna Fáil and the Greens have been bailing out the banks with more and more tax payers money. What has this achieved what lessons have been learned by those who caused the financial crisis? Not a thing has been learnt. And the business as usual return of bonuses and pay rises proves it.

Bottom line - the banks took risks because they knew they would be bailed out and now, thanks to the bottomless recapitalisation offered by government, they know with even greater certainty that they will continue to get away with their selfish reckless practices. This government has rewarded bad behaviour when instead it should have sent the financial shysters to sit on the naughty step.

This week Goldman Sachs is being investigated in the US for fraud. It has been credibly alleged that as the banking crisis and recession took hold Goldman Sachs exploited it as an opportunity to make further profit for themselves at the expense of others. Reports suggest that while the economy was turning belly up Goldman Sachs developed and sold risky mortgage packages and then bet against them. A win – win for the wall street giant. A series of damning internal Goldman Sachs emails have been published by the US authorities one reports the “good news” that the wipeout of one security and the imminent collapse of another meant Goldman would make $5 billion from a bet against the instruments it had set up and sold itself. Even after the US authorities moved to charge Goldman Sachs with fraud against its investors to the tune of €1 billion and the German and British authorities in turn commenced investigations Goldman announced a new round of bonuses for its staff amounting to £3.5 billion.

What has this got to do with us? Well, as the government consistently remind us, in a futile effort to evade taking responsibility for the nation’s current troubles, we live in a global economy. Our banks are tied up with the international financial markets. Our banks eventually follow where their international role models lead. And Goldman Sachs analysts issue assessments of Irish banks which have consequences for their abilities to raise capital. The per-share profit estimates issued by Goldman analysts have consequences for Irish stocks. What have our government done in response to the growing evidence of fraud by this financial ogre? Have they blacklisted it from future contracts and consultancies? Have they sought to minimise the consequences for Ireland of its activities? No. The Fianna Fáil Green government sought an endorsement of its NAMA plans from Goldman Sachs and have been happy to rely on it since.

Let’s be under no illusion here Fine Gael would do no better. The slimey Fine Gael hack Peter Sutherland pumped up on his own arrogance and bloated self-importance, who would close half of Ireland universities if he got his way, is chairman of Goldman Sachs International. And Fine Gael Senator Eugene Reagan is a director of Goldman Sachs Ireland.

This world of cosy crony capitalism which both Fianna Fáil and Fine Gael inhabit is the source of our countries woes!

Bank of Ireland – today announced there intention to impose another round of interest hikes on mortgage customers this follows the 50% increase on home insurance premiums they just commenced. The government are a 36% share holder. BoI continues to enjoy the guarantee it is not acceptable that they are penalising ordinary customers. The government must intervene.

A property-lending binge was embarked upon by the Irish banks for the most part of a decade. The Government had a very pro real-estate policy. For almost 15 years the growth in bank credit outstripped the nominal growth in GNP by a factor if about 2 or 3. Poor lending standards, unregulated products and bonus bonanzas brought the Irish financial sector to its knees.

Credit was readily available as a result of a range of financial liberalisation measures including relaxation and abolition of exchange controls, interest-only mortgages, 100% mortgages, equity withdrawal, re-mortgaging and mortgaging with longer terms.

But who has suffered from the miserable excuse for regulation that was prevalent in this State? It hasn’t been any member of the Cabinet; none of the consecutive taoisigh or Ministers for Finance who presided over this regime have been held to account; It hasn’t been any of the bank directors who abused the system for their own gains; nor has it been the auditors or accountants who were blind to the abnormalities across these financial institutions. Instead it is ordinary people who are being crippled by the failure to regulate properly; the people who got 90-100% mortgages, the people who are now facing mortgage interest hikes while simultaneously losing their jobs and having social welfare cut.

The economic crisis would have been less severe had legislation or regulations to restrict predatory lending been adopted. At the time, some argued that loose lending standards would enable more individuals to become homeowners. But it should have been clear that giving a loan to someone beyond their capacity to pay is not doing a favour. The main beneficiaries were those making the loans. Now people are burdened with mortgage debt and the prospects of repossession. This is the direct effect of Fianna Fáil’s dismantling of regulation, their failure to heed warnings being made by economists and the opposition.

On the TV and radio, we heard adverts for financial services and products with the familiar by-line “regulated by the Financial Regulator”. But looking back, what good did that do for ordinary people? From what we can see, financial regulation during the most controversial period in our economic history was redundant. In fact, it gave license to the risky and speculative financial practises that have thrown Ireland into this economic mess.
We want to see all those who participated in and encouraged the practices that brought about the current crisis held to account and criminal convictions pursued. There were early warnings of what the banks were engaging in. There was little doubt over what caused this. Little was done to improve regulation in the banking sector.
The OECD criticised Irish financial regulation and supervision especially in relation to Anglo Irish saying that the threat of enforcement was too weak and that the regulator should have been better informed and more intrusive in dealing with this institution.

The signs were ignored. Had the regulator paid any attention to the balance sheet growth of Anglo Irish, actions could have been taken to curve the crisis that was developing in the institution. Usually a 20% growth would be a catalyst for action, but in Anglo Irish the average annual growth was 36%.

When it was uncovered in 1997 that directors of National Irish Bank were acting ultra vires, it took another 11 years before they were brought to court and struck off. There should be no delays or backlogs in dealing with wrongdoings in the financial sector.
The Minister for Justice has failed to get prosecutions of bankers after 18 months of investigations.
The white collar crime and corruption that engulfed the Irish banking sector needs to be treated as seriously as any other form of crime, and needs to be prosecuted quickly and effectively. The failure of the Minister for Justice and this Government to prosecute the bankers that thrust the Irish banking sector into such jeopardy and disrepute is symptomatic of the culture of corporate wrongdoing that became the norm. Regulatory sanctions should be sufficient to encourage compliance in the first place and to penalise proportionately in cases of proven breach.
In the US Bernie Madoff was jailed on 12th March 2009, just 91 days after the authorities began to investigate. The failures of the Government to conduct thorough investigations and bring prosecutions against the bankers and financial miscreants can be attributed to the lack of political will and the fear of what will be uncovered; that these malpractices were allowed to happen because of the Government created culture at the time.
The financial regulator will need to show it has the resolve to monitor and enforce.
There needs to be a strong appetite and political support for strong enforcement action. If the regulator lacks political support needed to impose sanctions, enforcement may be severely compromised. This was the problem of principles-based regulation and it cannot be allowed continue.

There is a discrepancy between the private and social returns to lending.
The new structure of financial regulation should also seek to address complex societal problems.

We have been faced with a situation where banks have started to pull branches out of working class areas and rural communities where they perceived a potential failure to make profits based on incomes or demographics.

For example, in December National Irish Bank announced it was shutting down almost half of its branch network; whole towns are being left without banking facilities.

The Government cannot give people access to banking facilities; cannot guarantee that people will not have to travel miles away to use a bank in another town. Without Government regulation certain groups may not have access to finance.

There needs to be a new culture of banking and as such regulation should be organised on the premise that credit should be allocated to support productive activities. In this era, we need credit to be channelled to job-creating activities. Credit should be prevented from building up the kind of hyperspeculation that was characteristic of casino capitalism.

It should be the function of the new Commission to monitor the banks lending practises to ensure that credit is flowing in the economy and to make sure that the billions of euro begin pumped into bank recapitalisation is not being used for the sole purpose of repairing the banks own balance sheets by reducing the loan to deposit ratios.
One issue that I would have with this Bill is in relation to the specifications of the Code setting out standards of fitness and probity- section 21 mentions the code in reference to section 47, but there is no indication as to when this Code may be issued. Given the importance of this Code for the proper and disciplined workings of the financial sector, this Code should be brought forward as a matter of priority. This Bill places a lot of weight on this Code, yet we do not have any details as to the contents of this Code nor do we have a draft of the Code itself. How can we monitor the people delegated to perform controlled functions once this Bill is passed, yet not have the Code which is the framework for assessing employees of financial institutions.

Issues pertaining to the membership of the Commission in items 28, 34 and 36 need to be addressed further. Namely, the Minister for Finance is empowered to appoint at least 6, but no less than 8, members of the new Commission, without any inference of consultation or agreement from the Houses of the Oireachtas. Given the importance of these positions for the financial stability of this country, it is important that there is consultation from across the Houses on these appointments.

Under the appointment of Heads of Function in Schedule 1, item 36, the legislation allows for the head of function to engage in other remunerative employment, with the consent of the Commission. Being delegated the position of Head of Function is an enormous responsibility and alternative employment should not be taken up, given that it may detract from the performance of their duties.

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