Patrick Honohan: Why Anglo bankers were never sanctioned like those at INBS

Shortly after the National Asset Management Agency (Nama) ended its operations in recent days, the death was announced of Michael Fingleton, former chief executive of the ill-fated Irish Nationwide Building Society (INBS). As memories of the banking crisis fade, it is a moment to reflect on the efforts to contain the financial cost of the crash and on the processes for holding those responsible to account; including several aspects that are not well known.Having lent insouciantly to property developers, all of our banks failed in that maelstrom and would have had to close their doors were it not for exceptional support from the State. This support started with the famous (and too sweeping) bank guarantee and continued with Nama taking over the banks’ big property loans, huge lending by the Central Bank and injections of risk capital by the government. Some of the support was only temporary, because the biggest banks were able to return to viability. Just two, INBS and the much larger Anglo Irish, account for all of the net cost to the government of ensuring that its September 2008 guarantee was honoured. That cost – my old estimate of about €37 billion still looks about right – was huge. It could have been less by a couple of billion euro if the guarantee had been more narrowly defined. But it was only part of the impact on the public finances of the crisis and of the associated recession. Indeed, government debt soared by €150 billion over a six-year period as the collapse in tax revenue and the increased cost of public services took their toll.Over the next decade, Nama managed to dispose of most of the huge pile of loans it had bought from the banks and it made a profit of more than 6 per cent per annum. Market timing in financial markets is an uncertain art. Could Nama have made more profit by waiting a bit longer before selling its assets? Hindsight suggests yes, as Irish property prices continued to rise as Nama sold off its portfolio. But that’s not certain: after all, the evolution of property prices was surely also influenced by Nama’s sales. READ MOREAnyway, the amount at stake could hardly have been large relative to the total. Some blamed the ECB for the speed of disposal, and it is true that ECB negotiators were unduly keen to see faster sales; but they did not press all that hard and, of the sales of Irish assets, less than 8 per cent of Nama’s receipts date back to the three years of the Troika programme, when the pressure was on. [ John McManus: How did Michael Fingleton get away with it?Opens in new window ]Unlike what happened around the same time in the US, it was not financial engineering that brought the Irish banks down. But a certain amount of not-very-obvious financial engineering was used in the process of getting us out of the mess, through the use of specially designed financial instruments. These included: the asset-backed bonds that enabled Nama to buy the property loans from the banks (and which were used by the banks in turn as collateral to borrow from the Euro system at very low rates); the promissory notes used to recapitalise the banks; and the long-term floating rate notes for which the promissory notes were eventually exchanged. Each of these embodied subtleties which sharply lowered interest costs. And (even though the IMF made a tidy profit on its share) the Troika programme loans also provided far cheaper funding to the government than was then available in the market.Today the public finances, enriched in recent years by an eye-watering flow of corporation tax payments by the big US IT and pharmaceutical companies, are so strong as to make one wonder whether everyone was too obsessed by the immediate post-crisis budgetary stress. We in Ireland had little choice: a programme of budgetary stabilisation was a non-negotiable precondition for accessing the funds needed to keep public services going in 2011 and 2012. What if we had known then that, in the 12 years after we stopped borrowing from the Troika, corporation tax revenue would total about €200 billion? But nothing succeeds like success, and it is fair to question whether those US companies would have continued to trust Ireland with their activities and financial operations if the government’s finances were not being stabilised. And what of the consequences for the bankers? As the banks slid into failure, enough crimes were committed to send several bankers to jail in Ireland. In some cases, however, procedural failures seemed to inhibit criminal convictions. [ David McWilliams: The Irish banking system is not working – and that rarely ends wellOpens in new window ]It is not a crime to go bust. But the recipient of a bank licence must operate the institution in a safe and sound manner. It is an offence to violate the regulations that govern the management of banks. A statutory administrative sanctions procedure permits the Central Bank as financial regulator to enforce these regulations. However, if challenged (as it was in the case of INBS), the Central Bank must prove the breaches to an independent and elaborate quasi-judicial process, which took 10 years in the INBS case. A point that puzzles many is why this sanctions case was focused on INBS, and not on the much larger Anglo Irish Bank, whose losses ended up imposing far greater costs on the taxpayer. One reason traces back to the inadequacy of pre-crisis regulatory practice. The pre-crisis engagement between the financial regulator and INBS was egregiously fraught. As far back as 2000, the regulator complained of “failings at every level” at INBS, and it demanded reforms. The remedial measures adopted by INBS in response were repeatedly found insufficient or abortive in what became an unproductive cyclical process (partly because the regulator was then too reticent to exercise its enforcement powers). That history puts culpability at INBS beyond doubt.Comparably serious deficiencies were not identified by the regulator pre-crisis at Anglo or other banks. The absence of such a background history likely made it insuperably challenging to meet the (overly?) demanding criteria of proof required by the sanctions process.It’s a mixed bag. Let’s hope Ireland is better prepared next time.Patrick Honohan was governor of the Central Bank of Ireland from 2009 to 2015