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Cowen concedes "mistakes" in selective defence of pre-crisis role; Auditors, regulators/ government share responsibility for Irish banking crash
By Michael Hennigan, Founder and editor of Finfacts
May 14, 2010 - 7:05:32 AM
Professor Patrick Honohan in 2009: "A very simple warning sign used by most regulators to identify a bank exposed to increased risk is rapid balance sheet growth. An annual real growth rate of 20% is often taken as the trigger. Each of the locally-controlled banks had at least one year in which this threshold was triggered. One of them, Anglo Irish Bank, crossed it in eight of nine years, and indeed its average annual rate of growth 1998-2007 was 36 per cent. Another, Irish Nationwide, crossed the line six out of the nine years, for an average rate of growth over the nine years of just above 20% (Figure 9). So this was a very obvious and public danger sign not only for these two banks, but because of the potentially destabilising effect of reckless competition on the entire sector (Honohan, 1997). The rapid growth in the market share of Anglo Irish (from 3 to 18% of the total assets of the six locally-controlled institutions that subsequently received the Government guarantee) was certainly an important influence inducing the other banks to relax lending terms to avoid losing even more market share." Resolving the Irish Banking Crisis 2009
Taoiseach Brian Cowen on Thursday admitted that "mistakes" were made, in a selective defence of his pre-crisis role as Finance Minister from 2004. He said auditors, regulators and government share responsibility for the Irish banking crash.
In a speech to the North Dublin Chamber of Commerce, at Dublin City University, he said that fundamental errors were made within the management of individual banks which led to excessive risk taking; individuals were left in dominant positions within individual financial institutions for too long a period; there were stunning failures of corporate governance and not enough turn-around in management personnel in those institutions; there was a failure to impose international stability risk assessments and protection systems which took account of the interaction of global financial systems and there was a failure to implement more intensive compliance regulation of those financial institutions which were too big to fail.
"I believe that auditors, regulators and governments all share part of this responsibility," the Taoiseach said and he acknowledged that the role of his predecessor as Finance Minister, Charlie McCreevy, in massively extending property tax incentives as the housing bubble was beginning to accelerate, had added fuel to a raging fire.
"There were property tax incentives in place over the period from the mid 1990s which, with the benefit of hindsight now, should have been abolished many years prior to my decision in December 2005 to abolish these incentives," he said.
"While Government shares responsibility for its role in these mistakes, it is noteworthy that many of the strongest critics of the Government were silent on these issues prior to the crisis and indeed were proposing measures such as the radical reduction or abolition of stamp duty which would have made the position much worse," the Taoiseach said and added: "Those who suggest I did nothing to curb the property spiral specifically ignore the fact that in presenting my 2006 budget, I announced the most radical abolition of property-based tax incentives made by any recent Minister for Finance.”
He said governments must never again intervene in property markets via tax incentives or other measures to a degree which may make possible property bubbles.
Professor Patrick Honohan in an ESRI paper in 2006: "the net import of funds by credit institutions doing business in Ireland to lend to Irish residents amounted to 41% of GDP by the end of 2005. This has changed with astonishing speed (up from about 10% at end 2003)" .
In the view of Finfacts, the chief political responsibility for the economic crash lies with former Taoiseach Bertie Ahern followed by Mary Harney and Charlie McCreevy.
As Finance Minister, Brian Cowen appointed boom cheerleader Colin Hunt, who was research director and chief economist, at Goodbody Stockbrokers, as his economic adviser.
According to Finance Magazine, Hunt had urged Finance Minister Charlie McCreevy in 2001:"Minister, don’t let the doomsayers get you down. Economic policy is on the correct course and should not be altered because of the recent deterioration in inflation readings. Rather than tightening fiscal policy, you should continue with the supply-side approach of recent years with an emphasis on using both taxation changes to enhance the efficiency of the labour market."
The Irish Independent reported last Monday that Brian Cowen had just two meetings with former Financial Regulator Patrick Neary during his tenure as Finance Minister.
The newspaper said Cowen's appointments diaries reveal he seldom met regulatory officials during his four years in charge of the Department of Finance as reckless lending spiralled out of control. Only seven meetings were recorded between 2004 and 2008, with Neary present at just two.
In contrast, Cowen's diaries record meetings with representatives of more than a dozen Irish and foreign banks in the same period. Several meetings with the construction sector and other business interests were also noted.
In his speech last night, Cowen quoted from IMF reports but he did not say what warnings were being issued in private. Such reports are subject to government pressure to tone down warnings.
Issues missing from the speech were:
Bertie Ahern's cronyism with developers and cheerleading of the housing industry giving a Finance Minister the option of going with the flow or standing on principle
Double-digit credit growth year after year
100% mortgages are introduced and the juice for the investment market, 5-year interest only mortgages, are not even tracked by the Central Bank.
Crazy competition for prime sites in Dublin: Jurys Hotel, Berkeley Court, Burlington Hotel, Tara Towers, Veterinary College, Irish Glass Bottle site etc.
Banks' foreign borrowings to fund Irish mortgages rising from 10% to 41% of GDP in 2 years
Banks beginning to sell-off their properties to fund the borrowing binge - - the biggest bank AIB selling part of its HQ to overstretched developer Seán Dunne.
The Irish becoming the second biggest investors in commercial property across Europe
Professional services firms joining the property binge big bigtime; CMC Capital a unit of a firm of chartered accountants from the West Cork town of Clonakilty, purchases one of Germany’s busiest shopping centres.
Eddie Hobbs, who came to prominence warning of price gouging in a television series, fronts a Germany property investment vehicle.
Kerry farmers on CAP welfare, acquire a €12.2m shopping centre in Saarbrücken, in south-
Cowen facilitates Michael Fingleton's desire for a trade sale of Irish Nationwide by changing a provision in the 1989 Building Societies Act. Fingleton wanted to avoid exposure that a stock market floatation would have required.
The CSO in an analysis of Census 2006,says there were 266,000 vacant dwellings in 2006 representing 15% of the total housing stock. Of these, 175,000 were houses, 42,000 were flats and 50,000 were classified as holiday homes. County Leitrim had the highest percentage of vacant dwellings (29.3%) while 11.7% of dwellings in Dublin City were vacant at the time of the census. There were 140,000 vacant housing units according to Census 2002. Why the rise?
Brian Cowen says in November 2004 that 28% of the average new house prices was tax and public levies.
Property tax as a percentage of total tax revenues rises from 4% in 1995 to 16% in 2006 a year in which the public take from the record house building, amounted to €9bn,
Prof. Patrick Honohan said in an ESRI paper in 2006 - - “To What Extent Has Finance Been a Driver of Ireland’s Economic Success?”: "Certainly, there has been a remarkable growth in the ratio of private credit to personal income from 48% in 1995 to 132% in 2005 - - about 82% of the latter figure relating to housing finance. Household mortgage borrowing amounted to less than 12% of the total value of the housing stock in 1999; by 2005 this ratio had jumped to 18 per cent (based on data in Kelly, 2006)."
Brian Cowen is like the Claude Rains character, Captain Renault, in the classic 1942 film Casablanca, who exclaims: "I'm shocked, shocked to find that gambling is going on in here!" as he is being handed a pile of money.
"Your winnings, Sir, " one of the staff in Rick's Café interjects.