Cantillon

Inside The World Of Business

Two good reports of more use than political theatrics

THE HYSTERICAL reaction of the various Opposition parties to the Government’s plan for a Commission of Investigation into the banking industry is all the proof you need that politicians should be kept as far away from the process as possible.

While it’s obviously not the priority, there is a compelling case for some sort of inquiry. Its findings will come too late to influence the short-term policy response to the crisis but the banking industry’s problems are long term and a fuller understanding of what went wrong can only improve the chances of getting the reforms right.

And if that is the objective, then the absence or otherwise of opportunities publicly to traduce various members of the Government is not really relevant, despite the protestations of Opposition politicians.

It is also necessary to dispel the notion that a Dáil committee is a useful vehicle for such an inquiry. The simple truth about the much-vaunted Dirt inquiry is that it uncovered nothing which had not been already unearthed by a painstaking “private” inquiry carried out by the Comptroller and Auditor General. The best that can be said is that it delivered a colourful exposition of the evidence, but even then chose only to highlight the bits that suited it.

It stayed well away from the area of political accountability, understandably given that the political failings unearthed by the CAG were spread evenly across all the parties. Finance ministers of every persuasion where aware of what the banks were up to with regards to Dirt and did nothing.

If the Dirt inquiry showed anything it was that an investigation – properly empowered and diligently carried out – can find out a great deal. The real issue is whether the proposed structure – two preliminary reports leading to a statutory commission of investigation – meet these criteria.

The fact that the one of the preliminary reports – on the performance of the Central Bank and the regulator – will be prepared by Patrick Honohan is a positive step. The Central Bank governor was one the first to call for an inquiry and his stewardship of the first preliminary report will be a test of whether or not he is the new broom that he promises to be at the bank.

If the Government wants the inquiry to have credibility it must make sure that the individual tasked with carrying out the second preliminary report – which will look at the wider issues – is of equal stature and not beholden to it any fashion.

Two good reports will be a far better start than any amount of star chamber theatrics on the part of our elected representatives.

It wasn’t me

So that’s okay then. Jim Flavin is a fool rather than a knave. Bernard McNamara was misled by his advisers and Barry O’Callaghan got his timing wrong.

Those, in a nutshell, are the explanations that have emerged over the last week for three of the biggest Irish corporate disasters in living memory. Jim Flavin engaged in insider trading in Fyffes shares because he honestly misjudged, on the basis of legal advice, the issue of whether information he had on Fyffes was price sensitive.

Bernard McNamara waded too deep into the property market in a large part because he believed the expert valuations put on the properties he bought.

Barry O’Callaghan has seen his investment in EMPG wiped out – along with the other Irish investors – because the credit crunch and global recession came along.

While all of the above may be true it does not negate the fact that millions – much of it borrowed money – has been lost. And somebody must be responsible. If Jim Flavin could not correctly parse legal advice, if Bernard McNamara could not value property and Barry O’Callaghan could not get his timing right, what were they doing in charge of their various enterprises?

Weaning the banks

So the European Commission has slapped a dividend stopper on Bank of Ireland, which prevents the lender paying interest on some bonds and, more importantly, the Government’s €3.5 billion 25 per cent preference-share interest.

This could trigger the Government taking an equity stake. But given that the EU wants the bank to have less State ownership, rather than more, this appears, as analysts outline, to be “an unintended consequence” of the commission’s design to wean banks off state aid.

The bank used the commission’s order as an opportunity to say that it might do another deal on its borrowings to generate capital. The commission would hardly allow the bank to generate capital by paying debt investors back with cash at a sharp discount on the liability as it sits on the books of the bank. Some €1 billion was generated from buying back debt last summer and analysts estimate that the bank could generate about €500 million from swapping new debt for old. The bank needs €2.8 billion in capital to reach the key 8 per cent equity ratio over time, but, to cite Tesco, every little helps.

There is speculation that the bank might swap debt for equity in conjunction with a rights issue following the commission’s ruling on the bank’s restructuring plan. This is not expected until next month or possibly later.

In the meantime, the banks will have to meet Nama’s February 12th deadline for the transfer of the top 10 loans of €19 billion to the agency.

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