The cost of Anglo Irish Bank

Thu, Aug 12, 2010, 01:00

ASSUME ENORMOUS costs or take on unquantifiable and potentially catastrophic risk: this is the appalling choice that has faced this State since the implosion of Anglo Irish Bank. Yet again this week, the costs of preventing the collapse of that institution grew. Every man, woman and child in this jurisdiction will pay more than €5,500 for the folly of a tiny few.

 It is an indictment of the Irish financial community and our inert system of government that a small bank in one of the smallest economies in Europe could have generated the largest losses of any bank in the world last year.

What would happen if the State were to withdraw its support for the bank and let it fail? The answer is that nobody knows with the remotest degree of certainty. In September 2008, the US authorities allowed Lehman Brothers to collapse. It was done for the right reasons, but proved to be disastrously wrong, unleashing the still-devastating international financial and economic crises. That some of the finest minds in the worlds of finance and economics were involved in that decision is indicative of the limits of our understanding of a financial system that has become too big and far too complex.

In Europe, the lessons of the Lehman collapse were quickly learned. Another earthquake could not be allowed. A financial system already on the brink of collapse might not withstand further shocks. Rules curbing the giving of taxpayers’ money to commercial entities were suspended in the case of financial corporations. Every possible measure was used to buttress the system. More recently, the bailing-out of Greece was less an act of European solidarity and more one of desperate self-preservation, designed to prevent a Lehman-like shock which could have caused the continent’s fragile financial system to crumble. The decision not to let Anglo Irish Bank fail – which is as much a matter for Brussels and Frankfurt, as for Dublin – is in keeping with this take-no-risks, pay-any-price approach to containing the financial crisis in Europe.

Debate on Anglo Irish and the Government’s handling of it will rage on – and rightly so – because of the enormity of the costs involved – €24,000,000,000 and rising – and because questions remain about decisions taken between the issuing of the bank guarantee in September 2008 and the emergency nationalisation of Anglo in January 2009. But this should not distract from addressing other issues arising from the debacle.

Legislation that would allow bank failures to take place in a more ordered framework is needed. Despite the urgings of outsiders, such as the International Monetary Fund, the Government has yet to act. Steps to tackle corporate malfeasance are even more essential. Almost two years after the banking crisis erupted, legislation on white-collar crime that would serve as a real disincentive to reckless practices remains undrafted and there is still no sign of a comprehsive whistle-blowers’ charter that would actively encourage revelation of wrongdoing. If the lessons of the current crisis are not learned, not only will the costs hobble a generation, future generations could suffer a similar fate.