Tuesday, December 22, 2009

The Blame Game

The Consultative Consumer Panel published their Submission on the Performance Review of the Financial Regulator 2008/2009. The 12-page report can be read here. It is a "hard hitting" report but that takes aim at the performance of the Financial Regulator and it's now departed Chief Executive, Pat Neary. Mr. Neary, it seems, is the one to blame for virtually all the ills in the economy. The report states:

The Financial Regulator's failure to ensure sound financial services providers has hurt consumers hard. They have suffered from negative equity on their homes, falling share prices, poorer returns on pension funds and the lack of availability of credit. The cost of bailing out the banking system has contributed to rising unemployment, wage and social welfare cuts and higher tax rates. Those negative effects have been only partially offset by lower mortgage rates, adjusted asset prices and higher deposit rates.
Is your home in negative equity? It's Pat Neary's fault.
Has your investment portfolio or pension fallen in value. It's Pat Neary's fault.
Are you finding it difficult to get a loan. It's Pat Neary's fault.
Have you lost your job? It's Pat Neary's fault.
Has you Social Welfare been cut? It's Pat Neary's fault.

It is clear there was huge problems in the Financial Regulator's office but this 'blame game' or point scoring approach is of little use. Also if you actually look at the points the report makes under it's five key headings it is clear that most have them relate to consumer banking and have little to do with the banking crisis we have now.

The consumer banking sides of our main banks are incredibly healthy. There are some issues with the information provided and 'advice' given to consumers but consumer banking did not lead us into this mess - property development and investment banking did that. What we actually need is not a Consultative Consumer Panel Report but a Consultative Investor Panel Report.

In the first six months of 2009 AIB posted an operating profit of €1.7 billion. For the first half of it's financial year BOI recorded an operating profit of €787 million. These figures are huge relative to the value of the banks.

Looking at yesterday's closing share prices we see that AIB has a market capitalisation of about €1 billion and BOI of about €1.2 billion. If you borrowed to buy these banks you would have the loans paid off with less than 12 months operating profit from the banks and would have essentially gotten the companies for free.

Obviously, these banks have huge problems on their balance sheets with huge amounts of their assets (issued loans) worth only a fraction of their book value. The banks' problems are not on the consumer side. They are on the investor/developer side. This nice little video sums it up but note that it is investment loans that are the main problem in our case.


The banking crisis here is different to that in the US which was primarily caused by sub-prime mortgage lending in the consumer sector. The size of this problem has consequences across the financial world. Here it is explained with champagne flutes so loved by our former banking and property development high-flyers.


The report published by the Consultative Consumer Group is useful but some of their shots go 'out-of'bounds'. Consumers are being hurt by the financial and economic situation as today's figure on mortgage arrears reveal. However, we have got to be careful where we are laying the blame, or more accurately, how we are laying the blame.

Currently 'the only show in town' to find our way out of the banking crisis is the National Asset Management Agency (NAMA). The only loans the NAMA will be looking at are investor/developer loans. The €4.8 billion in residential mortgages in arrears of more than three months or the residential mortgages in negative equity will not be part of the NAMA solution.

The investigation that Prof. Patrick Honohan is calling for into the banking sector in Ireland will be paying little attention to consumer banking, if the type of investigation he is looking for is set up. We got snippets of this in Primetime Investigates on RTE last night.

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