There is a €2,000 penalty for the false use of an emergency button on a Dublin Luas tram. Press it twice and you will be liable for a greater fine than the one faced by Sean Fitzpatrick under section 60 of the Companies Act.
The comparison may be a mite unfair, though, as Fitzpatrick has been charged on 16 counts and if convicted on each one he would be open to a maximum penalty of €49,600. This works out at about 0.00016 per cent of the cost of the Anglo Irish Bank bailout.
Justice in Ireland may indeed be blind, but it is also bad at maths.
However, at least the arrest of Fitzpatrick at Dublin airport on Tuesday has returned to the front pages the issue of Anglo Irish Bank. Unfortunately for the Irish people, it’s for all the wrong reasons.
The Seán Quinn share debacle of July 2008 is not the reason why the bank melted down two months later. The problems within Anglo Irish Bank did not stem from this scramble to save equity price. The story of the hidden loans throws some light on how Irish finance operated in the months before the crisis came to a head, but that story was not the cause of the crisis. For that we need to look a little bit deeper.
The nature of banking in Ireland and across the world has been utterly transformed in the past 30 years. The notion that banks are simply intermediaries between lenders and savers – that banks recycle savings as debt and hold lenders to account – is as far from the actual dynamics of modern finance as the story of Christ is from Christmas. The world of finance is not only the largest producer of debt, it is also the single largest consumer of debt. Banks fund themselves primarily from four sources: client deposits, securitization, the inter-bank lending market, and repurchase (repo) agreements.
The recycling of client deposits as debt we are familiar with, and the inter-bank lending market has been in the news recently due to the LIBOR rate scandal. In the case of Anglo Irish Bank and its present incarnation the Irish Bank Resolution Corporation (IBRC), securitization and the market for repo agreement are of significant importance.
Since the 1990s Irish banks have been placing thousands of home mortgages at a time into standalone limited companies known as special purpose vehicles, and then using these companies as collateral for lending from other banks. This process is known as securitization and the first recorded use in Ireland took place in October 1995 when Irish Life Homeloans repackaged £100 million in residential mortgages. The company was not a retail bank – that is, its funds did not come from deposits but from the purchase of money on credit on the wholesale money markets.
The credit raised by these special purpose vehicles was then used to fund more mortgages. The mid-1990s was also the time when the price of Irish houses began to lose any sense of a link with actual wage income. By the end of 2010 somewhere in the region of €75 billion of the Irish mortgage book had been securitised in this way.
In 2001 the Oireachtas passed the Asset Covered Securities Act which allowed financial institutions to securitise commercial property loans. Anglo Irish Bank was an enthusiastic and dedicated issuer of commercial property securities. In 2006 Start Mortgages issued the first Irish sub-prime mortgage backed securities. The debt that was being pumped into the Irish economy created a profitable income stream for the financial sector. However, with no way for the Irish economy to absorb that debt through productive growth, the debt simply ended up as asset price inflation and speculative commercial and residential construction.
In 2009 Irish Nationwide Building Society, while acting under the cover of the government bank guarantee, bundled over 8,000 residential mortgages with a face value of €1.5 billion into a special purpose vehicle it named Armoin Securities. It issued shares in Armoin – which had been given a AAA+ rating by Fitches - and then proceeded to buy the shares itself. By October 2010 over 8 per cent of the mortgages were in arrears and in April 2012 Armoin was shut down by its then owners, the IBRC.
In June 2012 the minister for Finance, in a reply to a question on Armoin by the Socialist Party TD Clare Daly, said that Irish Nationwide set up Armoin in order “to access low cost funding from the ECB.” Irish Nationwide created collateral for inter-bank lending by using the government guarantee and close-to-arrears mortgages. The debt created by such procedures are now ours via the IBRC.
Banks are not producers of wealth. Only societies can produce wealth. The role of banks within a democratic society should be as custodians of the aggregate monetised wealth of a society, and as administrators of the social technology that facilitates the dynamics of that wealth – that is, money and the money circuit. Instead, under the state-owned but privately-run system we have today, banks have kidnapped that aggregate wealth for their own purposes, and use the money circuit to speculate on the wider economy. The Irish banking system is indeed back on the front pages, but for all the wrong reasons
[This is an opinion piece I wrote for the Cork Evening Echo print edition, Thursday 26 July 2012.]