Morgan Kelly on Bank Robbers

I can't fully understand how one can feel that "better burning it" is over the top.

To me it simply expresses the idea of pouring good money after bad. By putting money into Anglo, the government must keep to their plan - or else seem foolish.

If one's opinion is that the hole in Anglo is large, then it is precisely correct to state that burning the 1.5Bn is a better use of the money - because that does not bring with it additional cost.

Again, and again, people miss the point on this. The decision to guarantee the liabilities of Anglo was wrong, in retrospect. But once the guarantee was made, the money had to follow.

So if you sign a contract to buy a house for €100,000 you must buy the house for €100,000. Even if the house is worth only €50,000, it is better to pay a €10,000 deposit than to burn it. If you burn it, you owe €100,000. If you pay the deposit, you owe only €90,000. Morgan Kelly missed this vital point to get a wild headline.

And this is the problem with OTT, headline grabbing analysis. Rubbish like "it's better burning €1.5 bn than paying it into Anglo" was simply wrong and not based on the facts.

I went on television when there was a run on the Irish banks. The run was a direct result of the credit crunch which was caused by the uncertainty in banks' balance sheets due to securitised sub-prime loans. Irish banks had no exposure to these, so I reckoned Irish banks were much more solvent. That was September 2008. I have never claimed an ability to predict house prices. I did not know then that Irish house prices would fall to the extent that they have since. I did not know the extent of lending to property developers. I was always under the impression that banks were cautious in their lending to property developers. I also assumed that the Banking Supervision staff in the Financial Regulator were doing their job. Banking supervision is done behind Section 33 AK of the Central Bank Act, so it's not open to public scrutiny.

The correct comprehensive personal advice would have been to say at the time
1) There is considerable uncertainty over all banks - Irish and overseas.
2) Irish banks are safe, but there is a big question mark, so take your money out
3) I don't know where you can put it though, because there is even bigger uncertainty over the non-Irish banks.

Of course,that could have contributed to the run which would have wiped out all Irish banks and their depositors.

You can read the entire interview which is here . Canice - I think you really should ask your friends on the property blog spot to quote this bit as well.

The Irish banking system adheres to the European minimum[deposit guarantee]. And my own view, my personal view on it would be that this is the appropriate amount.

There is no such thing as a free guarantee. If you raise the guarantee to 50k which the Danes provide, in the end consumers are going to pay for that. So all of the banks contribute to that fund.

Dobson: Is it not unthinkable that an Irish government or any government would allow a retail bank, a major retail bank with all these branches and with all these customers to go under?

Me: I don’t think it’s inconceivable at all. The Government regulates Irish banks but the government does not and should not guarantee Irish banks and that is a very , very important distinction.

If banks behave badly in their lending or if they are reckless in their management or whatever, they should be allowed to go to the wall and that is a fact of economic life.

It would have an effect on the economy but giving some sort of soft guarantee to a badly managed banks would be irresponsible and very bad news for the long term
If the Minister had listened to me instead of to the clamour of calls led by Joan Burton to increase the guarantee, then we would not have the current problems with Anglo and the other banks. However, and this is very important, we would have wiped out the savings of very many people. Most people think that we have bailed out the banks. We have bailed out the depositors in those banks.


As chairman of the Consumer Panel of the Financial Regulator we published reviews of their performance which were balanced. They praised some aspects - the were very critical of other aspects. Here are samples from the Annual Reports and Performance Reviews written between 2005 and 2007. The FR was furious with me personally and regarded The Consumer Panel and me as a hostile force, which we weren't. I don't recall anyone else criticizing or questioning the performance of the Financial Regulator at that time. They got quite a good review from the Comptroller and Auditor General who would have had much more resources and time than the Consumer Panel had.


The big failing of the Financial Regulator is the slow speed at which the Financial Regulator operates.

The Financial Regulator seems indecisive.

The Financial Regulator operates with undue complexity and formality.

The Financial Regulator adopts and excessively legalistic approach.

We have seen very little evidence that the Financial Regulator has the resolve to stand up to some institutions and individuals who are misbehaving. It seems that when challenged by misbehaving institutions, the Financial Regulator simply backs down.

The FR gives the impression that if it can find a reason not to act; this will be the preferred outcome. It appears to seek complexity and obstacles rather than to seek consumer oriented solutions to current and emerging problems.

The Financial Regulator hides behind the confidentiality clauses in the Central Bank Acts to avoid explaining its inaction

Fitness and Probity is not about form-filling.
I am using analysis based on the available published information. Of course, if this information is wrong, then the analysis is wrong.

I was not seeking headlines and publicity based on incorrect analysis.
 
How incredibly insightful.

I think that comment would have been more appropriate reaction to Jim Power's admission that he was wrong 3 years after the market turned.

There's no point in the cheerleaders of the boom coming out with this repentence now. All it is is a cynical move to try regain some credibility.

There have always been economists who try to be sensationalist to go against the grain for publicity as opposed to having any firm convictions.

If Morgan Kelly had genuine convictions, his sensationalist way of conveying them undermined his chances of being taken seriously
 
There have always been economists who try to be sensationalist to go against the grain for publicity as opposed to having any firm convictions.

If Morgan Kelly had genuine convictions, his sensationalist way of conveying them undermined his chances of being taken seriously

This is my point although I don't see why you would question his convictions?

It's hard to get the balance right.

If you do a Morgan Kelly on it, you will not be taken seriously.

But most of us didn't pay too much attention to Alan Ahearne either who made the same points, but in a more professional manner. At least now, he is influencing policy because he has been taken seriously.

Likewise, I doubt if anyone in authority will every ask David McWilliams for his opinion after his account of his meeting with Brian Lenihan.

Lucey was gas on the radio. In the same interview where he turned liabilities into assets he complained that the government had never called him for advice.
 
Brendan

You should get your storyline straight:

"If the Minister had listened to me instead of to the clamour of calls led by Joan Bruton to increase the guarantee, then we would not have the current problems with Anglo and the other banks. "

The guarantee you write of was the Irish deposit guarantee scheme which on the 16th September 2008 provided coverage of a maximum of €20,000.

According to you the Minister should have left the deposit guarantee at €20,000 and left the rational run continue to develop as it did throughout the week of the 16th September 2008 and into the following week. During this time Irish banks and credit unions were experiencing siginficant unsophisticated depositor withdrawals. (A run)

Your appearance on RTE New which you say you did, in loco parentis for the Governor and Financial Regulator, was to prevent a run on deposits.

Joan Burton and others were right to call for an increase in the deposit guarantee limit. At first Lenihan demured and then announced the guarantee increase the following weekend. It had the effect of preventing a contagious run. The following weekend the bank guarantee was introduced.

At the time the Irish deposit guaranatee was the lowest legally permissable under EU laws.

Northern Rock had been established through HMG reports, including the Run on The Rock as a high risk operation and the Brits were talking about increasing their guarantee from 32.5k to 50k.

According to the then accepted norms - governments implicitly guaranteed banks and exlicitly provided for limited deposit insurance schemes. There were documented cases of governments stepping in to provide explicit blanket guarantees to banks and entire banking systems. (Northern Rock, Sweden and Norway being a few examples at the time). It appears from your comments at the time that you were unaware of the nature of deposit insurance and how it's designed to work within the financial safety net.
 
I have discussed my record in depth on this thread and I won't be repopening it in this thread or elsewhere.

I will deal with the issue raised by Kaplan, although it has been dealt with at length before.

I am not sure why you think I did not understand the nature of the deposit guarantee scheme? I think I did and I do.

My view on the scheme was that the guarantee should not be increased. I was against the taxpayer bailing out the depositors.

I fully understand though that it was a very difficult situation, and I may well have been wrong. It really is hard to know. It makes no long term sense for the government to guarantee all deposits. Could the run on Anglo and Irish Nationwide have been stopped without the guarantee?

Looking back on it now facing a €22bn euro bill for Anglo alone, maybe the government should have let it go. Maybe it should have guaranteed AIB and Bank of Ireland only, to retain the really systematically important banks.

I argued against increasing the guarantee when it was €20,000.
When it was increased, I felt that maybe the government was right, because they had more information than I had.
Now that it is costing us at least €24bn , I am not sure.

Brendan
 
I must say that it was a terrible piece of writing.

He suggested that the government would be better off burning €1.5billion instead of putting it into Anglo Irish Bank.

And when someone makes a comment like that, it destroys their credibility.

Nothing else in the article has any validity after a comment like that.

I am surprised that the Irish Times published it.

Brendan

Yeah nice post. Makes sense. Morgan Kelly's credibility is destroyed.

He should have said burning €20 billion.
 
If the Minister had listened to me instead of to the clamour of calls led by Joan Bruton to increase the guarantee, then we would not have the current problems with Anglo and the other banks. However, and this is very important, we would have wiped out the savings of very many people. Most people think that we have bailed out the banks. We have bailed out the depositors in those banks.
If the Minister had listened to Joan Burton, he would not have rushed into the guarantee at all, and would have excluded Anglo and INBS. This would leave the state about €30 billion better off today.
 
Hi Complainer

Apologies to Joan Burton if I have misquoted her or quoted her out of context. I went back to the RTE News segment, but it is not playing for me at the moment. My recollection was that she called for the Deposit Insuance scheme to be increased from €20,000. I don't recall her saying that Anglo or the Irish Nationwide should be excluded. But maybe she did.

The reality was that there was no simple solution. If Anglo and the Irish Nationwide had been excluded, then the government would face a huge legal suit from their shareholders and depositors claiming that the government's action had precipitated a run on those banks.

As Kaplan pointed out, if they had not increased the guarantee, maybe all the banks would have crashed.

It was a tough decision for the government to make. No matter what they did, they would be getting abuse for it today.
 
Having made my preparations for a bank crash months beforehand, opening various €20,000 accounts in several banks to take maximum advantage of the guarantee that existed before 2008 ( and the AIB staff thinking I was like one of those mad "the End is Nigh" characters) I was very annoyed by the blanket guarantee.
Like the wise virgins, I had made good preparations, but ended up paying for those who hadn't bothered.
 
Hi Complainer

Apologies to Joan Burton if I have misquoted her or quoted her out of context. I went back to the RTE News segment, but it is not playing for me at the moment. My recollection was that she called for the Deposit Insuance scheme to be increased from €20,000. I don't recall her saying that Anglo or the Irish Nationwide should be excluded. But maybe she did.
From Joan's speech on the Dail record; http://debates.oireachtas.ie/DDebate.aspx?F=DAL20080930.xml&Node=H13&Page=7
We also wish to know the limits of the guarantee schemes, so that they do not apply, for example, in cases of subsequent acquisitions by institutions or irresponsible lending.

I really don't think it is reasonable to say 'sure it was a hard decision'. They made the wrong decision, and a generation or two of taxpayers will be footing the bill. Meanwhile, the banking industry continues to laugh at the taxpayer's expense http://www.rte.ie/business/2010/0416/boi.html - while in other countries, the bankers find themselves facing legal charges from regulators; http://www.rte.ie/business/2010/0416/boi.html

Clowenomics.
 
Having made my preparations for a bank crash months beforehand, opening various €20,000 accounts in several banks to take maximum advantage of the guarantee that existed before 2008 ( and the AIB staff thinking I was like one of those mad "the End is Nigh" characters) I was very annoyed by the blanket guarantee.
Like the wise virgins, I had made good preparations, but ended up paying for those who hadn't bothered.

Hi Gervan

Not to mention those who saved at low rates with An Post, because they wanted the security of a government guarantee.

Brendan
 
I went on television when there was a run on the Irish banks. The run was a direct result of the credit crunch which was caused by the uncertainty in banks' balance sheets due to securitised sub-prime loans. Irish banks had no exposure to these, so I reckoned Irish banks were much more solvent. That was September 2008.

I believe your quote was that banks were "well-regulated". Not that banks were solvent. I'm currently reading this book about Irish banking scandals:

http://www.amazon.co.uk/Something-Rotten-Simon-Carswell/dp/0717139727

I'm not sure if you've read this, but even though it was published in 2006 --- so manages to miss out the past couple of years of banking --- it is still damning about Irish financial regulation.

For example, it points out that of all the Irish frauds and scandals mentioned in the book, only 2 people had gone to prison - and none of those were in the Republic (one in Belfast, one in Baltimore USA). This despite the fact that in the first instance, the person commited the same fraud both in both jurisdictions - for more info, see http://archives.tcm.ie/businesspost/2006/03/19/story12705.asp).

The author Carswell also adds:

One of the most striking features in the scandals of the last 30 years is the failure of the banking policeman, the Central Bank and later the lrish Financial Services Regulatory Authority (subsequently abbreviated to Financial Regulator) to patrol the industry adequately.

[...]

Despite the fact that the Financial Regulator was set up in 2003 with a mandate for the strict policing of the financial sector, as of June 2006 it had yet to impose punitive sanctions on any bank, even though the industry had been rocked by major scandals in recent years.

You can read the entire interview which is here . Canice - I think you really should ask your friends on the property blog spot to quote this bit as well.

"If banks behave badly in their lending or if they are reckless in their management or whatever, they should be allowed to go to the wall and that is a fact of economic life."

Brendan, imagine I say the following:

"Red Rum is going to win the 3pm race today. However, if you think it won't, you shouldn't bet on it."

I don't think the bold statement of fact in the first sentence is cancelled out by the condition in the latter sentence.

If the Minister had listened to me instead of to the clamour of calls led by Joan Burton to increase the guarantee

Are Fianna Fail in the habit of listening to Labour frontbench spokespersons? I hadn't noticed.

As chairman of the Consumer Panel of the Financial Regulator we published reviews of their performance which werep balanced.

[...]

We have seen very little evidence that the Financial Regulator has the resolve to stand up to some institutions and individuals who are misbehaving. It seems that when challenged by misbehaving institutions, the Financial Regulator simply backs down.
I'm glad you wrote such a report. I'm sure there were people who were far less critical of the FR. However, I cannot square that with your subsequent assertion that the banks were well-regulated.
 
If I could be allowed make a suggestion, regarding the now (in)famous [depending on your POV] article by Morgan Kelly.

It would be instructive to a actually quote the article correctly, instead of alleging sensationalism, in a headline which he probably didn't write himself, sub-editors job.

There is a link to the full text here:

[broken link removed]

Nowhere in the Article was the word "Burn" mentioned. The word was incinerate. Slightly longer word OK, but one which didn't convey the message the critics of MK wanted to give.

Easier for the plebs to understand.

It does indeed bear re-reading,as it was written in December 2008, just after the Blanket Guarantee to Depositors, Bond Holders and Subordinated Bond Holders was announced by he Irish MoF in September of 2008.

MK's analysis is eerily on-the-button, like these:

Then, given lending of about €80 billion to developers, it follows that Anglo Irish is facing losses on the order of €15 billion. The true figure could easily turn out to be twice as large.

With likely losses of this magnitude, the Government's proposed investment of €1.5 billion will vaporise in months, forcing it either to continue pouring good money after bad, or to repudiate Anglo Irish's liabilities. For all it will achieve, the money might as well be piled up in St Stephen's Green and incinerated.

Anglo Irish epitomised the Irish bubble economy. Its rise began a decade ago as the boom created a demand for houses and commercial property. As prices started to rise, banks made a miraculous discovery: the more they lent, the more prices rose; and the more prices rose, the more people wanted loans to get into the booming market. And the more loans that bankers made, the bigger the bonuses they could award themselves.

It was brilliant while it lasted. One of Bank of Ireland's stable of developers would buy an office block for €100 million, and sell it on a year later to one of Anglo's for €120 million, and so on: a process known to bankers as adding value.

Everyone was a genius and nobody could lose.

So much for the future. Right now, in the "nothing in the last six months has really happened" world of the Government, the bailout of Anglo Irish follows a compelling political logic. Anglo Irish funds developers, and developers fund Fianna Fá¡l.

By using taxpayers' money to acquire Anglo Irish's portfolio of dingy shopping centres and derelict development sites, the Government is squandering scarce resources that are needed elsewhere. Just as the State is putting too much money into Anglo Irish, it is putting in too little to recapitalise AIB and Bank of Ireland on which, whether you like it or not, large sectors of the Irish economy depend.

Governments tend to forget whose interests they are supposed to serve. Our Government was not elected to look after the managers, shareholders and bondholders of recklessly mismanaged banks.

Its sole duty is to Irish taxpayers: to ensure that banks that serve a useful economic purpose continue to operate, while those that serve none are swiftly closed down.

(Of course, we have not yet succeeded in finding out exactly who these mysterious Bond Holders are/were, those people to whom this Government has pawned the Nation, for God knows how far into the future, despite having the Duke of Moral Hazard in there as PID, before his elevation.)

Remember these were professional risk-takers, gamblers if you like, who took a punt, for a defined period, to make very good returns.

Could this be why the Guarantee was essential first, for the FFG Government, before inevitable Nationalisation, to protect these peoples profits and names?

This also was before the Nationalisation announcement of Anglo in mid-January 2009.

This article also bears re-reading, as Michael Hennigan provides loads of links and data.
 
Well, the IMF are now here. I wonder if anyone, Brendan or otherwise, thinks that more attention should have been paid to Morgan Kelly's articles down the years.
 
Back
Top