Cantillon

Inside the world of business

Can society get the banking monster safely back into its cage?

THE ENDLESS series of scandals emerging from the banking sector has become farcical with the beleaguered Irish citizenry, having already put €64 billion into the banjaxed Irish banking sector, now being faced with a (non-Irish) bank that won’t give people in this State their money.

Despite bringing about a recesssion/depression of 1930s proportions, the international banking sector has

remained unreformed in its essense, a point emphasised by the billions in losses disclosed by a JP Morgan trader in London some months back.

The fact that the head of that bank, Jamie Dimon, wasn’t thrown out on his ear spoke volumes.

The losses arising from that ill-placed bet are now, reportedly, rising towards $9 billion, and still Dimon remains in position.

In his effort to explain what had happened Dimon said the bank’s London unit “embarked on a complex strategy” that exposed the bank to greater risks even though the original intention of the operation had been to minimise its risk.

All of which goes to show that five years into the crisis, banks are still taking depositors’ money and throwing it into complex , high-risk gambles they don’t understand. Heads they win, tails everyone loses.

The debacle engulfing Ulster Bank is due to technical glitches but comes as its parent, RBS, is having to deal with being implicated in the Libor, interest rate fixing scandal, which itself has all the signs of being another symptom of an industry that is out of control.

The British prime minister, David Cameron, has announced an inquiry into the banking industry but is stuck with the fact that it is such a key component of the UK economy (while also posing a threat to that economy).

One of the major problems with the sector seems clear. The division between retail and investment banking which operated up to the 1970s and 1980s was based on sound reasoning. Its undoing has created a monster. The question now is whether society can get the monster back in its cage.

Daly discreet on Nama lifestyle management role

FRANK DALY, chairman of the National Asset Management Agency, used his speech yesterday to Royal Institution of Chartered Surveyors to cover plenty of old ground on the State loan agency’s past work and future challenges.

Again, he referred to the somewhat nebulous exercise of developers readjusting their lifestyles from the boom-time opulence when bank loans were easily got and property profits easily made.

He said that Nama believed it could work with about two-thirds of the agency’s 800 or so clients or debtors where it feels there is sufficient trust and goodwill. One of the criteria that constitutes “working with Nama” is where there is a “significant readjustment in terms of lifestyle for debtors”, Daly said in his speech.

Giving a State agency the authority to decide what is an appropriate lifestyle raises all sorts of conundrums. Clearly, flying about in private jets and helicopters is not on, given how many high-profile Nama debtors have been grounded.

Asked whether Nama had a criteria on whether debtors could chose private education for their children or private healthcare, Daly said it didn’t intrude in the lives of its debtors to that degree. It would be “a minefield to go there”, he said. Instead, Nama allowed debtors a “reasonable amount of overhead for their business” and from that they could fund their lifestyle. “The level of those overheads are not such that would, to my mind, support an ostentatious lifestyle,” Daly said.

We know from the recent court battle for the five-star Maybourne hotels in London that Nama regularly complained to Derek Quinlan about his “lavish lifestyle funded by the Irish taxpayer”. But this was a rare example of Nama’s flexing its muscles. It is still not clear, to the public at least, how far Nama wants debtors to change their ways.

Seeking elusive middle ground in interconnector row

THE COMPLEXITY of the debate around who should pay for what element of the State’s natural gas network can be boiled down to a number of points.

Over 90 per cent of natural gas used here is imported from Britain via two pipelines or interconnectors. They are seen as vital to energy security as gas is used to generate about 60 per cent of our electricity, so they are clearly critical. Keeping them functioning involves a cost and everyone who uses them has to contribute to this.

But what happens when new sources, such as the Corrib field and Shannon LNG’s liquid natural gas plant in Kerry come on stream? Such operators do not need the pipelines, so why should they pay and subsidise importers, who are also their competitors?

The argument against paying seems clear; the flip side less so. One option is to render the interconnectors obsolete, except in periods of very high demand, when they would be switched back on at prohibitively high charges. Another is that only the importers would pay for them. This could inflate prices.

The cost of the interconnectors would remain the same, but the amount of gas flowing through them would have fallen, making each unit more expensive. This could leave scope for those who do not use the interconnectors to make super-normal profits.

The Commission for Energy Regulation has ruled out these two possibilities and proposes a system that will see everyone contribute. Shannon LNG, backer of the Kerry liquid natural gas project, disagrees and warns it will endanger its €600 million investment. It has already complained to Europe, and may go to the High Court. It is not clear if it is using its clout as an investor to keep regulatory costs down or whether it is serious, only time, and its subsequent actions, will tell.

Quote of the day

"No one is more sorry, disappointed and angry about these events than I am" - Barclays chief executive Bob Diamond in a letter to employees after the bank was fined a record £290 million for manipulating the Libor market

ONLINE

You can get the latest news each business day at irishtimes.com/businessor by following us on Twitter at twitter.com/IrishTimesBiz.

We also have a Facebook page at facebook.com/IrishTimesBizwhere you can read the latest business headlines, blog posts and reader polls.

TODAY

The challenge by Treasury Holdings to the decision by the National Asset Management Agency calling in about €1 billion of its loans to be heard at the Commercial Court