Can government reform the banks to stop them taking too much out of the economy

golfwallah

In a previous thread “Why the economic recovery cannot be sustained”, discussion took place around a presentation by Jon Moynihan, outgoing chairman of PA Management Consulting Group, to the LSE in 2012. In this presentation he identified a number of key solutions needed to avoid economic catastrophe in the West, one of which is the banking sector. He concluded that banks are still paying themselves too much as a percentage of GDP and recommended reform. He is not the only prominent businessman or economist to arrive at this conclusion. So too have:

Ben Bernake, Chairman of the Fed in the USA, on the subject of “too big to fail”,:

took an activist view of sorts by plumping for a return to regulatory reform and advocating that banks need to pay higher surcharges to help the country bail them out if things go wrong.

http://www.theguardian.com/commentisfree/2013/mar/21/ben-bernanke-federal-reserve

Colm McCarthy, Irish economist: see recent Sunday Independent articles in which he points to the slow pace of reform in the banking system, as a missing key ingredient in recovery for the Irish economy.

Simon Johnson, former chief economist of the International Monetary Fund:

In the United States and Europe, the financial system proved able to destabilize the real economy. Risks were created and mismanaged on a grand scale. The largest banks were quickly and repeatedly among those in the most trouble. The problem was not any lack of smarts, but rather that people were paid based on their return on equity without appropriate adjustment for risk. In that context, the clever thing to do is to borrow as much as possible, particularly if you think that downside insurance will be available in some form from the government.

http://economix.blogs.nytimes.com/2014/01/02/the-rich-country-trap/

Saying that the banking sector needs reform and doing something about are different things altogether. The government medium term economic strategy 2014-2020, P34, states

Ireland must have a financial system that engages effectively with, and serves the needs of the real economy.

It’s all a bit vague really and gives our senior bankers all the wriggle room they could ever want to change nothing as regards how they reward themselves, whilst continuing to have their risks back-stopped by the taxpayer, should things go wrong again.

There must be a better way to run a country, never mind an economy – any ideas?

Scofflaw

golfwallah wrote:

It’s all a bit vague really and gives our senior bankers all the wriggle room they could ever want to change nothing as regards how they reward themselves, whilst continuing to have their risks back-stopped by the taxpayer, should things go wrong again.

There must be a better way to run a country, never mind an economy – any ideas?

One acronym - IFSC.

I know you're not suggesting that real reform is likely, but I would say that it's not just not likely, but would require a radical rethink of a major economic policy plank of the Irish State.

One of the major policies of the Irish State is to become - or, now, continue to be - a hub for financial services. That's been the case for 25 years now, since the IFSC was founded under Haughey. That's why the IFSC Steering Group meets in the Department of the Taoiseach, and is chaired by a senior civil service official.

We will regulate to the extent that we are forced by international pressure to do so, and while we probably won't go as far as the Brits in preferring the interests of our bankers to our interests in Europe, it will only be because our financial services industry isn't several centuries old and largely home-grown.

If we're lucky, we might see some micro-prudential regulation of our own banks in the matter of mortgages and property loans - something which wouldn't be off-putting to the international finance industry - but even that relies on breaking the land-politics link which has been a feature of Irish political life for over a century.

So, not really very sanguine, personally. Not terribly convinced about the appetite for it out there internationally, either - that seems to me to be a temporary feature of the crisis, and the politicians have been thoroughly indoctrinated with the idea that the banks are the beating hearts of the modern capitalist economy. And, to be fair, they are that, which is why arrhythmia and seizures are so damaging.

cordially,
Scofflaw

golfwallah

Scofflaw wrote: »

One acronym - IFSC.

I know you're not suggesting that real reform is likely, but I would say that it's not just not likely, but would require a radical rethink of a major economic policy plank of the Irish State.

One of the major policies of the Irish State is to become - or, now, continue to be - a hub for financial services. That's been the case for 25 years now, since the IFSC was founded under Haughey. That's why the IFSC Steering Group meets in the Department of the Taoiseach, and is chaired by a senior civil service official.

We will regulate to the extent that we are forced by international pressure to do so, and while we probably won't go as far as the Brits in preferring the interests of our bankers to our interests in Europe, it will only be because our financial services industry isn't several centuries old and largely home-grown.

If we're lucky, we might see some micro-prudential regulation of our own banks in the matter of mortgages and property loans - something which wouldn't be off-putting to the international finance industry - but even that relies on breaking the land-politics link which has been a feature of Irish political life for over a century.

So, not really very sanguine, personally. Not terribly convinced about the appetite for it out there internationally, either - that seems to me to be a temporary feature of the crisis, and the politicians have been thoroughly indoctrinated with the idea that the banks are the beating hearts of the modern capitalist economy. And, to be fair, they are that, which is why arrhythmia and seizures are so damaging.

cordially,
Scofflaw

Thanks for the insight.

So you think our "major banking reform" will consist of stuff that won't upset the international finance industry, such as further regulation around mortgages, etc. This is the area where the ordinary Joe has to carry the downside risk - still leaving the bankers with little or no risk, as they can depend on the taxpayer to carry the risk when things go wrong. Strike one for the bankers - Joe Public will have to pay up, as per usual!

I'd agree that banks think they are the beating hearts of capitalist economies. But most arrhythmias are not dangerous and can be controlled through medication - it's the seizures, requiring major surgery, that I'd be more concerned about. In Ireland and elsewhere, bankers are continuing to pay themselves massively, without any downside risk, i.e. no "moral hazard", which, of course, does not apply to the average mortgage holder. So, without reform / surgery, the downside risk of further seizures is still there.

Maybe it will take another Eurozone or other financial crisis, to prompt Euro politicians, particularly those in Germany, into taking a more fundamental approach. This could put the Euro on a more stable footing, akin to that operating for the US Dollar, where if one state gets into financial trouble, it doesn't threaten the overall stability of the entire currency.

But I'd agree that our guys are unlikely to do much, without being told to do so by the big hitters in Europe.

golfwallah

Banking is in need of reform, yet the political will to do anything meaningful about it is absent.

Isn't it ironic, when you come to think about it that the last really significant banking initiative take by a politician, was that taken by Charlie Haughey, in the setting up of the IFSC 25 years ago. IFSC is now a significant part of our economy, whereas Haughey is much malaigned.

No, perfect he wasn't but he was passionate about doing long term good for as many of our people as he could. It would seem that we Irish are good at biting the hand that feeds us.

The only other imaginative and passionate Irish politician I can see around right now is Stephen Donnelly He has a good grasp of high level economics and is not afraid to call a spade a spade. What a pity he hasn't yet got the power to do anything about it. Maybe one day he will succeed in forming a new political party with other like-minded politicians that will have broader appeal and a political programme driven from a desire to benefit most of our population (as opposed to a few powerful vested interests).

This is what he had to say about the so called bailout in the Oireachtas on 04/10/2012, in response to address by Mr Martin Schulz, President of the European Parliament:

€67 million is being borrowed from the troika, virtually all of which is going into the banks and almost the same amount is being given by the banks to the senior bondholders in terms of forgone losses. This is what has happened: there has been a €67 billion circle of money from the troika through Ireland to the international banks and investors. I have spoken to many people about this and have, as I am sure have President Schulz and other Members of this House, read many opinions on it. I have yet to read an opinion which says that this was morally or economically correct. Yet, it continues to happen.

http://oireachtasdebates.oireachtas.ie/debates%20authoring/debateswebpack.nsf/takes/dail2012100400011#J00500

micosoft

golfwallah wrote: »

http://oireachtasdebates.oireachtas.ie/debates%20authoring/debateswebpack.nsf/takes/dail2012100400011#J00500

Donnelly and Ross talk a good talk. But when it comes down to solutions they seem to shy off. That money was to prop up our banks. What was the alternative? Let the/a bank fail after Lehmans? Money given to us for free?
This is soapboxing and I have to say I am getting increasingly disillusioned with Donnelly as someone who gave him a first preference.

As for Haughey, on balance he did more damage then good. Arguably we would not be in the position we are today but for the toxic legacy of how Haughey ran the state with his understudy, Ahern.

macraignil

I would have thought that banks were supposed to make money and not be some sort of social service. If we follow pumping billions of euro into the banks by tying them up with more regulations are we just insuring that that money was a complete waste?

Is there a chance that the EU giving billions of euro to Ireland, to pay off bank bond holders, might be some sort of strategy to preserve euro currency stability rather than just some sort of bizarre large scale "robbing Peter to pay Paul" type scenario?

Were Irish banks forced into this situation by the government promoted pyramid scheme construction sector that saw house prices reach levels that most Irish workers are unable to afford, simply to win votes from the older members of the electorate who had already managed to find a place to live?

Would effort to reform the banks be better focused on reforming the governments' commitment to high property values that make Ireland one of the worst countries for emigration, suicide and mental health problems among young people?

deblacker

"Can government reform the banks to stop them taking too much out of the economy"

No.

Scofflaw

micosoft wrote: »

Donnelly and Ross talk a good talk. But when it comes down to solutions they seem to shy off. That money was to prop up our banks. What was the alternative? Let the/a bank fail after Lehmans? Money given to us for free?
This is soapboxing and I have to say I am getting increasingly disillusioned with Donnelly as someone who gave him a first preference.

As for Haughey, on balance he did more damage then good. Arguably we would not be in the position we are today but for the toxic legacy of how Haughey ran the state with his understudy, Ahern.

I wouldn't quite agree. Haughey gets a lot of vilification, and there's little denying he was fairly bent, but in the context of the time he wasn't all that bent - he was, I think, at most 0.5 on the Berlusconi scale, if that.

Berie was less bent, although a good bit of that is perhaps the product of the times, and, in a sense, again, the strategy of the State - we had to be seen to be a clean place to do business. But Bertie was also almost completely devoid of any larger vision at all. He was one of those men that only trusts a small coterie of close people, none of whom would ever cross him, and distrusted the wider party to a really quite damaging degree. He also shied away from anything that upset the applecart, because he was already head of Fianna Fáil, and had nothing to gain - if I had to sum the two of them up, I would say that CJ was determined to be leader of Ireland, while Bertie was determined to be leader of Fianna Fáil. So for CJ there was always something more that could be done, while for Bertie there was only the possibility of disimprovement.

So the legacy of supine non-reform seems to me to be more a legacy of Bertie than CJ, the natural result of having as Taoiseach a man who had no desire to upset what appeared to be working, no ability to tell that it wasn't, and no alternative vision to offer in its place. The place was cleaned up to the extent required to make it look respectable, but it was only a coat of paint over the old lies and rot.

cordially,
Scofflaw

golfwallah

deblacker wrote: »

"Can government reform the banks to stop them taking too much out of the economy"

No.

Would be helpful to the debate if you could expand on the reasons behind your conclusion.

golfwallah

macraignil wrote: »

I would have thought that banks were supposed to make money and not be some sort of social service. If we follow pumping billions of euro into the banks by tying them up with more regulations are we just insuring that that money was a complete waste?

Is there a chance that the EU giving billions of euro to Ireland, to pay off bank bond holders, might be some sort of strategy to preserve euro currency stability rather than just some sort of bizarre large scale "robbing Peter to pay Paul" type scenario?

Were Irish banks forced into this situation by the government promoted pyramid scheme construction sector that saw house prices reach levels that most Irish workers are unable to afford, simply to win votes from the older members of the electorate who had already managed to find a place to live?

Would effort to reform the banks be better focused on reforming the governments' commitment to high property values that make Ireland one of the worst countries for emigration, suicide and mental health problems among young people?

Nobody is suggesting banks are a social service but, having pumped money into them, we should be getting a better return in the form of more effective lending, banking system reform, etc. Hence the need for banking reform as put forward by knowledgable people like Jon Moynihan, Colm McCarthy, et al. For example this is what Colm McCarthy, UCD Economist, had to say about it in the Sunday Independent on 6th October last (and repeated in similar terms a few times since):

The eurozone recession, now in its fifth year, will continue until the intertwined banking and sovereign debt crises are addressed. The European banking crisis is not resolved and many banks are still struggling to finance themselves in the markets on a sustainable basis. They are still borrowing heavily from the ECB and only the strongest banks can sell unsecured bonds. The banking system remains undercapitalised, with no obvious source of fresh capital for most. The result is a banking system unwilling to lend and pressure from regulators for a further contraction in bank balance sheets. That means a squeeze on credit to the productive sector.
While budget deficits are closing gradually many governments are still overspending and several have limited market access, in a few cases none at all. The impact is uneven – the supposed monetary union has fragmented and the peripheral members, including Ireland, are worst affected.

http://www.independent.ie/opinion/columnists/colm-mccarthy/banking-reform-must-be-high-on-ecb-agenda-29637604.html

I wouldn’t agree that the property bubble was a government promoted pyramid or vote getting scheme, either, as, despite the penchant for conspiracy theories in novels and dramas, history shows that cock ups, inertia and unwillingness to rock the boat are a lot more likely than conspiracies. My recollection of what was happening at the time was the approach of “if it ain’t broke, don’t fix it”. Unfortunately, the system was broken but those entrusted with power by the electorate didn’t want to see it (nor did the great majority of the electorate, tbh).

And the high property prices and related consequences you mentioned also flowed from the credit funded property bubble – not to any government commitment to high property values. Government can only provide appropriate frameworks in the economy, it can’t control prices. But it should also ensure that these frameworks are working, which didn’t happen as far as banking regulation was concerned.

Scofflaw

macraignil wrote: »

I would have thought that banks were supposed to make money and not be some sort of social service. If we follow pumping billions of euro into the banks by tying them up with more regulations are we just insuring that that money was a complete waste?

There are both swings and roundabouts there, I think. The banks will be profitable whether they're more heavily regulated or not. Yes, maybe not as profitable if heavily regulated rather than lightly, but on the other hand not quite so likely to turn into a financial black hole for the Irish economy either.

We can let them cook with gas, or we can let them cook with TNT, if you like - the latter will lead to faster cooking, certainly, but also certain attendant risks.

Is there a chance that the EU giving billions of euro to Ireland, to pay off bank bond holders, might be some sort of strategy to preserve euro currency stability rather than just some sort of bizarre large scale "robbing Peter to pay Paul" type scenario?

Or neither, really. The EU money earmarked for the banks was never used for the banks, at least not directly - I'm still not sure why, but the money for the banks came entirely from our own resources, and the government appeared to make a point of doing it that way, possibly because they feared that outside money going into our banks might come with some additional outside powers over our banks - which doesn't exactly bode well for reform.

Were Irish banks forced into this situation by the government promoted pyramid scheme construction sector that saw house prices reach levels that most Irish workers are unable to afford, simply to win votes from the older members of the electorate who had already managed to find a place to live?

Would effort to reform the banks be better focused on reforming the governments' commitment to high property values that make Ireland one of the worst countries for emigration, suicide and mental health problems among young people?

I take golfwallah's point about inertia and idiocy, but "government promoted pyramid scheme" seems to me a pretty fair description of the part the government played in the bubble - no effort was made to divert investment away from property towards more productive uses, and every available tool was used to push investment towards property. I can't help but note that Fianna Fáil's 70th anniversary book consisted 25% of adverts from the property and construction sector.

cordially,
Scofflaw

golfwallah

The biggest issues I have with the banks is (1) the proportion of GDP that they take out of the economy for themselves and (2) accountability.

From my limited understanding, as regards (1) above, their main role is to act as a "middle man" or exchange into which savers can invest in various forms of risk vehicle for further investment in the economy. Leaving the tax implications aside, what's in it for society is the allocation of resources into productive areas (commercial enterprises, infrastructure, etc.) that will produce future income. For providing this key, valuable, economic service, which we all trust to help and/or improve our living standards, they are entitled to a reward.

As not every enterprise / investment will succeed, they also have an obligation to manage risk by not over-allocating resources to limited areas of economic activity (such as happened by investing too much in property during the boom). This reckless over-investment carried no cost premium for the downside risk (backstopped for free by the government). Unfortunately, Banks' pay reward systems for senior people were focused at short term results, which encouraged over-allocation of resources into areas like property, with negative, unintended results we all know about.

On (2) above, the senior bankers were and mainly still are accountable only to their shareholders, who were rewarding more and more short-term returns, with only "light-touch" regulation to prevent long-term misallocation of resources. When the bubble of over-valued properties finally burst, government and the taxpayer were left to pick up the tab.

This points to the need for much more effective accountability to the taxpayer (or a price premium to cover against risk of systems collapse) and sufficient regulation so as not to discourage risk-taking but at the same time to discourage recklessness.

A difficult balancing act indeed - we live in a world of scarce resources and risk. How to balance all these factors is a matter for our elected leaders and the experts they hire to get the job done. Nobody said it was going to be easy!

maninasia

I saw the amount of ridiculous charges Irish banks have reduced lately.

My question is this. Why do other banks not enter the market in Ireland? Surely they can offer a cheaper and more efficient service and should be able to extend more credit than the Irish banks? Seems like they could do very well here.

The economy is stabilised and probably on it's way to slow recovery now overall, plus they could easily hoover up lots of low hanging fruit with low credit risk.

golfwallah

However about reform, it looks like we're getting a Banking Enquiry - and already Micheal Martin is saying that government wants to use it as a show trial:
http://www.thejournal.ie/banking-inquiry-1276026-Jan2014/?utm_source=facebook_short

Geuze

When you say that the banks "take money out of the economy", what do you mean?

The interest they charge?

The profits they make?

Note that as the State owns several banks, then these profits accrue to the State.

golfwallah

Geuze wrote: »

When you say that the banks "take money out of the economy", what do you mean?

The interest they charge?

The profits they make?

Note that as the State owns several banks, then these profits accrue to the State.

What I am referring to is the bonuses paid to senior bankers based on the short-term return on equity they achieved for their banks without carrying the cost of an appropriate adjustment for risk. This encouraged / rewarded them to borrow as much as possible and recklessly pour it into a property bubble, safe in the knowledge that downside insurance would be available in the form of government / taxpayer bailout, if things went wrong - and we all know that they did.

Warren Buffet has also made this point, as reported in a recent Sunday Independent article "What Warren would do to change Ireland":

Punish the bankers who destroyed the country: Buffett wrote in 2010 that "the chief executives and directors of the failed companies have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behaviour of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price -- one not reimbursable by the companies they've damaged nor by insurance. CEOs and, in many cases, directors have long benefited from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well.

http://www.independent.ie/opinion/columnists/thomas-molloy/thomas-molloy-what-warren-would-do-to-change-ireland-29929463.html

Loire

maninasia wrote: »

My question is this. Why do other banks not enter the market in Ireland? Surely they can offer a cheaper and more efficient service and should be able to extend more credit than the Irish banks? Seems like they could do very well here.

This is IMO a key question that all who call for the banks to lend more should ask! Nothing stopping foreign banks opening shop here (especially when native banks are in a bind ). Therefore we can only conclude that they don't think it's profitable to lend here, i.e. get their money back and make a profit.

golfwallah

Loire wrote: »

This is IMO a key question that all who call for the banks to lend more should ask! Nothing stopping foreign banks opening shop here (especially when native banks are in a bind ). Therefore we can only conclude that they don't think it's profitable to lend here, i.e. get their money back and make a profit.

A lot of non-Irish banks that set up here during the boom got their fingers badly burned when things went wrong in 2007/8.

We all witnessed the excessive competitive issuing of credit and property bubble and bust that followed.

These banks suffered so badly that most have or are winding up their operations and loan books, contracting their business and consolidating their businesses back home. Some of these banks even required government rescue back in their home countries.

Based on this experience, they are unlikely to want to come back to the Irish market for the foreseeable future ..... unless there are others willing to give it a try. And with property prices not sufficiently above building costs, there are unlikely to be many willing to take risks in that particular segment of the economy. Those that choose to invest in other segments of the economy will be very selective, concentrating on high potential start-ups, etc.

ardmacha

Based on this experience, they are unlikely to want to come back to the Irish market for the foreseeable future ..... unless there are others willing to give it a try

This isn't really logical. Because you lost money competing against banks that were throwing money around securing on properties whose value was only likely to decline does not mean that you cannot make money in a rising economy competing against banks that are making very limited funds available.

Presuming that banks have some management skill and are not just following the herd then this would seem a good time to enter the Irish market.

golfwallah

ardmacha wrote: »

This isn't really logical. Because you lost money competing against banks that were throwing money around securing on properties whose value was only likely to decline does not mean that you cannot make money in a rising economy competing against banks that are making very limited funds available.

Don't see what logic has to do with it. Over-lending in the property sector was more to do with short-term profits, blind competition, greed and recklessness than with logic. And once bank boards decide to get out of an overseas market and revert back to concentrating on their own market, I think it will take a long time to change - particularly with the record losses recorded on their overseas ventures (often backstopped by their own governments).

Presuming that banks have some management skill and are not just following the herd then this would seem a good time to enter the Irish market.

Big assumption - based on their track record / recklessness, etc.!!

golfwallah

This is what the EU had to say about banker behaviour (and how this must change) in their recent regulation "DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the access to the activity of credit institutions and the prudential supervision of credit institutions":
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52011PC0453:EN:NOT

(47) Remuneration policies which encourage excessive risk-taking behaviour can undermine sound and effective risk management of credit institutions and investment firms. G-20 committed to implement the Financial Stability Board (FSB) Principles for Sound Compensation Practices and Implementing Standards (the FSB principles and standards) which address the potentially detrimental effect of poorly designed remuneration structures on the sound management of risk and control of risk-taking behaviour by individuals. This Directive aims at implementing international principles and standards at European level by introducing an express obligation for credit institutions and investment firms to establish and maintain, for categories of staff whose professional activities have a material impact on the risk profile of credit institutions and investment firms, remuneration policies and practices that are consistent with effective risk management.

(48) In order to ensure that credit institutions and investment firms have in place sound remuneration policies, it is appropriate to specify clear principles on governance and on the structure of remuneration policies. In particular, remuneration policies should be aligned with the risk appetite, values and long-term interests of the credit institution or investment firm. For this purpose, the assessment of the performance-based components of remuneration should be based on longer-term performance and take into account the current and future risks associated with that performance. In order to ensure that the design of remuneration policies is integrated in the risk management of the credit institution, the management body, in its supervisory function, should adopt and periodically review the remuneration policies in place. The provisions on remuneration reflect differences between different types of credit institutions and investment firms in a proportionate manner, according to their size, internal organisation and the nature, scope and complexity of their activities and, in particular, it could not be proportionate for certain types of investment firms to comply with all of the principles.

(49) Since poorly designed remuneration policies and incentive schemes are capable of increasing to an unacceptable extent the risks to which credit institutions and investment firms are exposed, prompt remedial action and, if necessary, appropriate corrective measures should be taken. Consequently, it is appropriate to ensure that competent authorities have the power to impose qualitative or quantitative measures on the relevant entities that are designed to address problems that have been identified in relation to remuneration policies in the supervisory review.

Quite how this is being implemented in Ireland, if at all, I have no idea - maybe someone could shed some light on this?

sock puppet

ardmacha wrote: »

This isn't really logical. Because you lost money competing against banks that were throwing money around securing on properties whose value was only likely to decline does not mean that you cannot make money in a rising economy competing against banks that are making very limited funds available.

Presuming that banks have some management skill and are not just following the herd then this would seem a good time to enter the Irish market.

Banks can't just expand as much as they like. As it is a lot of banks may not even have enough capital to maintain their current size.

golfwallah

sock puppet wrote: »

Banks can't just expand as much as they like. As it is a lot of banks may not even have enough capital to maintain their current size.

Quite! An overview of how our banking system works (Fractional Reserve Banking), its weaknesses and the alternative of Full Reserve Banking can be viewed through the following link:
https://www.khanacademy.org/economics-finance-domain/macroeconomics/monetary-system-topic/fractional-reserve-banking-tut/v/overview-of-fractional-reserve-banking

maninasia

golfwallah wrote: »

What I am referring to is the bonuses paid to senior bankers based on the short-term return on equity they achieved for their banks without carrying the cost of an appropriate adjustment for risk. This encouraged / rewarded them to borrow as much as possible and recklessly pour it into a property bubble, safe in the knowledge that downside insurance would be available in the form of government / taxpayer bailout, if things went wrong - and we all know that they did.

Warren Buffet has also made this point, as reported in a recent Sunday Independent article "What Warren would do to change Ireland":
http://www.independent.ie/opinion/columnists/thomas-molloy/thomas-molloy-what-warren-would-do-to-change-ireland-29929463.html

It's worse than you describe. The people that ran the banks didn't own the banks, and that is where the whole risk/reward equation got completely screwed up.

What's billions of OTHER people's money, especially when you don't go to jail for peeing away investors money here versus the US.

They had everything to gain and almost nothing to lose. It wasn't their money, their money was BANKED every year in the form of annual bonuses, large salaries and generous pensions no matter the outcome. They didn't even need to indulge in any fraud at all, it was completely legal to give out these vast amounts of money on speculative whims.

The guys who got caught out for fraud were the greediest idiots of the lot.

golfwallah

maninasia wrote: »

It's worse than you describe. The people that ran the banks didn't own the banks, and that is where the whole risk/reward equation got completely screwed up.

What's billions of OTHER people's money, especially when you don't go to jail for peeing away investors money here versus the US.

They had everything to gain and almost nothing to lose. It wasn't their money, their money was BANKED every year in the form of annual bonuses, large salaries and generous pensions no matter the outcome. They didn't even need to indulge in any fraud at all, it was completely legal to give out these vast amounts of money on speculative whims.

The guys who got caught out for fraud were the greediest idiots of the lot.

Indeed, as you say no senior bankers went to jail in Ireland for reckless behaviour in the 7 years since the end of the Celtic Tiger era.

For the moment the remuneration cap remains on senior banker pay and, officially at least, there are no plans to re-introduce bonus schemes in AIB:
http://www.irishtimes.com/business/sectors/financial-services/no-plans-to-change-executive-pay-cap-at-aib-department-1.1670609

The IT article also says that

Eleven bank executives had total compensation between €400,000 and the €500,000 cap in 2012, according to a Government-commissioned bankers’ pay report by consultants Mercer, published in March

Unlike the USA, there seems to be little political appetite for jail or loss of personal wealth to befall senior executives / directors as a consequence of running their banks into the ground. We seem to be just waiting for the dust to settle before resuming business as usual. Or are we?

golfwallah

Good to see Finance Minister, Michael Noonan, calling the bluff of AIB Bankers today on Bloomberg:

“The answer is sorry guys, much better performance required before we’ll even consider” bonuses, Mr Noonan told Bloomberg today. “If any executive wants to leave AIB, I’ll shake his hand and wish him fair passage as he leaves.”

http://www.irishtimes.com/business/sectors/financial-services/noonan-says-sorry-guys-to-aib-bonus-request-1.1672207

It's about time we heard our political leaders calling a spade a spade as far as bankers are concerned!

Let's see if the same bankers can now deliver performance as required, without their bonuses and get to solving rather than causing problems for a change.

golfwallah

Here’s an interesting presentation (with 9.5m views) showing that bonus systems don’t really work anyway.

In fact, in most situations bonuses have the opposite effect to what's intended, by narrowing people's focus as regard achieving desired goals.
It seems that social scientists have known this for years but most managers and businesses don’t – or ignore it (and the US Federal Bank has also conducted studies demonstrating that bonuses don’t really work).

The presenter, career analyst Dan Pink, thankfully provides the solution in the form of “intrinsic motivation” or

the desire to do things because they matter, because people like it, because they’re interesting, because they’re part of something important.

He also believes in the principles of paying people fairly and providing an environment of “AUTONOMY, MASTERY & PURPOSE”.

Mr. Noonan, you’re on the right track – keep up the good work as regards bonuses, THEY DON’T WORK ANYWAY – and best of luck - there’s a long way to go!
http://www.ted.com/talks/dan_pink_on_motivation.html

creedp

golfwallah wrote: »

Here’s an interesting presentation (with 9.5m views) showing that bonus systems don’t really work anyway.

In fact, in most situations bonuses have the opposite effect to what's intended, by narrowing people's focus as regard achieving desired goals.
It seems that social scientists have known this for years but most managers and businesses don’t – or ignore it (and the US Federal Bank has also conducted studies demonstrating that bonuses don’t really work).

The presenter, career analyst Dan Pink, thankfully provides the solution in the form of “intrinsic motivation” or He also believes in the principles of paying people fairly and providing an environment of “AUTONOMY, MASTERY & PURPOSE”.

Mr. Noonan, you’re on the right track – keep up the good work as regards bonuses, THEY DON’T WORK ANYWAY – and best of luck - there’s a long way to go!
http://www.ted.com/talks/dan_pink_on_motivation.html

Pity IW didn't know about that before it agreed up to a 15% [guaranteed] bonus for its lucky staff. I wonder what it would take for them not to earn the bonus -- poor quality water supply, unaccpetably high levels of infrastructural leaks, high % of unpaid charges, low level of uptake of the company gym facilities, etc, etc?

Potatoeman

There is no point having regulation if you dont enforce it. Anglo and NIB were in breach of regulation but turning huge profits for years, drawing in other banks like AIB and BOI. If regulation was enforced the problem would have been far smaller in the first place.

golfwallah

Cognitive bias, groupthink and the herding mentality are put down as key factors in the rise and collapse of the last boom economy by many informed sources. These factors caused decisions to be made based on part analysis of the data available (to fit preconceived views) rather than on the basis of rational choice between alternatives.
Informed sources include the Commission of Investigation into Banking Sector in Ireland.

How to avoid these pitfalls – Awareness and Accountability.

We’re still waiting for the Banking Enquiry to be set up by government, but will it make any individuals accountable for the economic crisis?

Colm McCarthy is sceptical. His article in last Sunday’s Independent points to the commonly mistaken belief that corruption caused the crisis when the real reasons were that:
http://www.independent.ie/opinion/analysis/belief-that-corruption-is-rife-here-a-mistaken-one-30033878.html

Irish capitalism did not fail. The banks failed and they failed because they were poorly managed and poorly regulated, not because they were corrupt.

He also calls for a proper banking enquiry and the identification of the individuals responsible:

Restoration of public confidence in the political system is suffering from the absence of a proper banking inquiry.
The appointment of an Oireachtas committee is imminent but unpromising, given the risk of a politicised blame-game. It would be helpful if the committee could focus on a bank-by-bank examination of what went wrong, as well as on the circumstances surrounding the ill-fated bank guarantee. The electorate has already assigned political responsibility, justly and fairly, at the 2011 General Election.
Those who hold leadership positions in organisations of national importance have an unlegislated responsibility to display competence and to face censure when they fail. Public cynicism about the way the country has been run is fuelled by this continuing unwillingness to accept that incompetence inside the law is somehow blameless.
It is a curious feature of the Irish political culture that professional politicians, who face high levels of personal accountability, including career-ending general elections, demand so little accountability from other quarters. The restoration of public confidence in the conduct of public affairs would be well served if the forthcoming banking inquiry could focus on the identification of the individuals, in the banks and in the public administration, who dropped the ball.

Whether our political leaders take the easy route of the blame game or the tough route of a proper enquiry, backed up by changes to prevent yet more bubbles and crashes remains to be seen.

golfwallah

Minister for Finance, Michael Noonan says he can do nothing about BOI Boss Richie Boucher's massive salary of €843,000 - all because Mr Boucher was appointed before Minister Noonan came into office:
http://www.irishtimes.com/news/politics/oireachtas/boi-boucher-s-843k-package-obscene-doherty-says-1.1755703

Our Minister can do nothing and has to leave it to the PAC to ask Mr. Boucher questions about his salary?

All sounds like the Bart Simpson defence - "it was like that when I got here".

Granted government hasn't full control over the bank, with 14% share ownership - but, come on, Mr. Noonan, surely you can do better than that - at your age why worry about re-election - Where's the fire? Where's the conviction?

And here’s an extract from PAC today of Pearse Doherty’s questioning of Mr. Boucher re debt write-offs and his massive taxpayer supported salary of €843K: https://www.youtube.com/watch?v=I80obsAiaBM

The PAC don't seem to have gotten too far with making change happen! So, who's really in charge in our democracy - the government, which purports to represent the people, or the bankers, who represent themselves and their shareholders?

deere_john

golfwallah wrote: »

Minister for Finance, Michael Noonan says he can do nothing about BOI Boss Richie Boucher's massive salary of €843,000 - all because Mr Boucher was appointed before Minister Noonan came into office:
http://www.irishtimes.com/news/politics/oireachtas/boi-boucher-s-843k-package-obscene-doherty-says-1.1755703

Our Minister can do nothing and has to leave it to the PAC to ask Mr. Boucher questions about his salary?

All sounds like the Bart Simpson defence - "it was like that when I got here".

Granted government hasn't full control over the bank, with 14% share ownership - but, come on, Mr. Noonan, surely you can do better than that - at your age why worry about re-election - Where's the fire? Where's the conviction?

And here’s an extract from PAC today of Pearse Doherty’s questioning of Mr. Boucher re debt write-offs and his massive taxpayer supported salary of €843K: https://www.youtube.com/watch?v=I80obsAiaBM

The PAC don't seem to have gotten too far with making change happen! So, who's really in charge in our democracy - the government, which purports to represent the people, or the bankers, who represent themselves and their shareholders?

boucher isnt on a massive salary , he,s on a relatively modest one , the average ceo of a wall st bank is on around ten million per year

sock puppet

deere_john wrote: »

boucher isnt on a massive salary , he,s on a relatively modest one , the average ceo of a wall st bank is on around ten million per year

Reminds me of the Michael Lewis quote "You don't get rich on Wall Street, you only attain new levels of relative poverty".

golfwallah

Prof Ray Kinsella hits the nail on the head, IMO, as regards the forthcoming banking enquiry, and more importantly the changes needed to ensure our banks serve the needs of the community rather than vice versa (in this IT article):

Governance and ethics are more important because without them regulation won’t work anyway.

Pertinently, he quotes Malcolm S Salter on the collapse of Enron:

“Solutions to those problems lie not in drafting new laws, but rather in the far more complex task of creating, in company after company, organisational processes and structures that promote effective management and ethical behaviour.”

On banks being re-focussed to serve the community, he says:

The corporatist mindset – driven primarily by global investors rather than the imperatives of supporting homes and businesses – still stalks part of the system. The lesson that banks are there to serve the community from whom they get their legitimacy still has not been learned.
The mortgage resolution process is not working as it should – and for this the Central Bank bears some responsibility. A “public good” perspective is more necessary than ever. The market structure, the conduct of participants and the performance of banks benchmarked against the needs of the Irish economy provide a template for the inquiry.