15 December 2008

€ 10 Billion Rescue Programme for Irish Banks

The Irish government has announced its support for a massive recapitalisation programme of up to € 10 billion for some of the most battered credit institutions in the country.

A statement from the Department of Finance says that its objective is "to ensure the long-term sustainability of the banking sector in Ireland".
The government will support the programme "alongside existing shareholders and private investors", and it will "underpin its contribution through the availability of credit to individuals and businesses in the real economy".

That sounds rather positive and gives some hope for the Irish economy, which is not only in recession, but also mismanaged by an bunch of third-rate people whos - meanwhile only too obvious - incompetence is only matched and even outshon by their self-serving arrogance and greed.

After long meetings with bank executives the Minister for Finance Brian Lenihan (left) confirmed that money from the National Pensions Reserve Fund will be used for the new recapitalisation programme.
State investment will take the form of preference and/or ordinary shares in the institutions receiving funds, which means in fact a part-nationalisation of our major banks.

Lenihan said that State investment would be "assessed on a case-by-case basis" and all the institutions in question were being asked to submit their proposals by early next month.

A spokesperson for the Allied Irish Bank (AIB) said that the bank's board would "discuss the government announcement" when it meets later this week.

There has also been a special Cabinet meeting today, in addition to the regular meeting on Tuesday.

The Irish Business & Employers' Confederation (IBEC) has welcomed the announcement on recapitalisation.
The group's Director General Turlough O'Sullivan (right) said that "the banking sector is vital to the effective functioning of business and the economy generally".

And he is right, of course. But there remains the so far unmentioned large elephant in the room, whom neither the government not IBEC seems willing to tackle.
I am talking about the people who are fully responsible for the crisis, the chief executives and board members of the banks and building societies, who created the huge financial bubble and then let it burst without any concern for their own institutions or the nation as a whole.

If these people remain in their well remunarated - in my opion highly overpaid - positions, we can as well take the € 10 billion to the cliffs of Moher and throw them into the sea. Everyone can see the dimensions of the crisis now, and everyone agrees that only drastic measures will make a difference, save the banks and restart the economy. But it will only mean throwing in a lot of good money after plenty of bad debts if the creators of the problem are allowed to stay in charge.

The Minister for Finance must insist on the resignation of the entire boards and the chief executives of the failing banks. And should they refuse to do so, he must use his authority and remove them by force.
Only with such a clean sweep of the boards the way will be free for new and inspired leadership that can do things differently and give us hope to come out of the crisis in a reasonable time frame.

We need also to remember that the € 10 billion now offered by Brian Lenihan come from the National Pensions Reserve Fund, which is limited in seize and supposed to guarantee our future pensions. This is not money we can freely and easily use for speculations and gambling.
Only two weeks ago it emerged that there could be a deficit of between € 20 and € 30 billion in our pension system (see my entry of November 30th), which is not yet fully investigated. If we now give € 10 billion of pensions money to the banks as recapitalisation fund, we need to be sure that this money will come back - and hopefully with interest and some profit - and not be lost like the many billions the banks and their incompetent executives squandered in recent years.

Only a radical change in management and policy can secure that. No matter how much of our money the government will pump into the financial institutions, it will only do them some good if the lost confidence in the banks is restored.
With all the old duffers who were either too greedy, too ruthless or too incompetent (and in some cases all three combined) staying in their cosy jobs, there cannot be any confidence-building.

One of the main elements of the crisis is that banks are now refusing to give loans to each other.
Have you ever wondered why? Well, the answer is simple enough: Because they don't trust each other. The people who run our financial system make a relatively small group, and they all know each other only too well. And since they don't trust each other any longer - and for very good reason - it is clear that they have to go. How can the government and the general public have confidence into bankers who are no longer trusted by their peers?

Money is only one element of banking. The second - and way more important - is trust. And that is worth a lot more than € 10 billion, it is in fact priceless. I urge Brian Lenihan not to forget this and to make sure that our money is only injected into the banks after they have cleaned up their management structure.

The Emerald Islander

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