Speaking in the Dáil yesterday, on Labour’s Private Members’ Motion on Supporting Small-and-Medium-sized-Enterprises, Deputy Joan Burton emphasised the need to ensure businesses can access the working capital they need to stay in business. She called on the Government to bite the bullet on recapitalising the banks, but warned against throwing them to the private equity sharks.

She also insisted that the Government use its leverage under the bank guarantee scheme to encourage the covered banks to access dedicated SME loan funding from the European Investment Bank.

Last September, the European Investment Bank, EIB, announced a new package of loans amounting to €30 billion for small and medium sized businesses in Europe. Some €15 billion of that sum will be made available during 2008 and 2009. Despite the acute difficulties faced by Irish small and medium sized businesses in accessing working capital and investment financing, there has been no sign of the banks making their share available to firms. The Minister of State gave no indication that there has been a change in the position of Irish banks, or that they would make available the EIB funding. This must happen as a matter of urgency.

The Labour Party has tabled questions to the Tánaiste and Minister for Enterprise, Trade and Employment, Deputy Mary Coughlan, on the matter. She has referred to discussions with the banks and, apparently, some of the banks are considering this action. It seems the reason the banks do not wish to make these funds available is that the profit margin from such activity is not high enough. If the banks are not prepared to do it, perhaps the Minister of State, an enterprising person, could do so in the spirit of Mr. Seán Lemass? Some 22 European countries are using this fund but Ireland is not. The matters referred to by the Minister of State make no difference in this regard.

At present, small and medium enterprises throughout the country are being squeezed hard. We heard yesterday there will now be a 6% differential between our VAT rate and that charged in the North, some 90 minutes drive north of Dublin, Athlone, Sligo or Donegal. One can shop in the North a good deal more cheaply that here and such a price differential is what we are competing against.

We acknowledge there is an international situation which makes the position of Irish banks especially difficult. However, it is our own home-grown construction bubble which has caused major problems.

What is the solution with which Fianna Fáil and the Minister for Finance are so taken? The Minister wants to invite private equity funds such as the Carlyle Group and JC Flowers to rescue the Irish banks. This is like being rescued from a whale by a shark. What is the difference? If these groups take a stake in the Irish banks they will require the investment to be turned over or flipped within a period of three to five years. There will be substantial job losses in the short term in what was previously considered good, stable employment in the banking sector.

At the same time there is a National Pensions Reserve Fund and a National Treasury Management Agency about which the Government often boasts. However, the Government has decided to sideline these agencies rather than have them take an active role in providing a flow of credit to Irish businesses, small and large throughout the country. Those is Fianna Fáil would be well-advised to be wary of the day private equity funds come knocking on the door, posing as good samaritans to respond to our financial difficulties.

The solution to our problems lies partly within our own resources. We should also take up the invitation from the European Investment Bank to use the funds it has made available. However, we should look to the resources of the State and make an equity injection into the banks that are profitable and sound, but which need to be recapitalised.

Is it some kind of bizarre ideology that is holding Fianna Fáil back when even people such as George Bush are acknowledging that some kind of State investment in the banks may be appropriate to save a sound financial system? Does the Minister not recognise that if this State made an equity investment, for example, through preference shares with a coupon rate, it would be possible to convert these and then sell them at some profit to the taxpayer when we experience the upturn we know will eventually come?

What I find terrifying is the mention of “made men” in all the weekend papers. They are suggesting that the former Taoiseach and people with Drumcondra affiliations are, to quote Royston Brady in the television documentary, “like something out of “Goodfellas””. Made men are circling the Irish banks to offer their help by selling us out not just to venture capitalists but to vulture capitalists. Is that all the Government has to offer?

The Minister for Finance now has unprecedented powers to pressure the banks to act in the national interest He by resuming the orderly provision of credit. Viable businesses, large and small, and credit-worthy individuals trying to buy a family home are being starved of credit. He must act without delay to relieve this credit famine.

The Minister has been holding late-night behind-closed-doors meetings with financial moguls. Despite the drip-drip of information, it is unclear what exactly the Government’s intentions are.

The question arises as to whether the Government has a strategic plan to re-organise and reform our banking system. That clearly must start with the unpalatable recognition that a number of banks covered by the Guarantee scheme are over-burdened with toxic loans to the construction sector. The Minister appears reluctant to force the banks’ to write down these loans. We can speculate about the political motivations for this, but the economic consequences are clear. If these loans are not written down urgently and appropriately, we risk following in the unfortunate footsteps of Japan during the 90s.

As the 3rd quarter unemployment figures published today demonstrate, the Irish economy is entering ever more perilous waters. The majority of economic forecasters now anticipate an economic decline of up to 4% in 2009, on top of an expected fall of at least 2% for 2008. This is an economic recession at levels not seen for many decades.

The suggestion that the Minister is entertaining the possibility of private equity and hedge funds playing a central role in rescuing the Irish banks is very worrying. The fact that the Minister is hiding behind a wall of silence is of deep concern.

Most taxpayers will recall the disastrous decisions made by the Fianna Fáil Government in relation to Eircom and how that led to serial private equity funds taking over the company and, in the process stripping the country of its capacity to create a modern broadband and telecommunications network.

Is the Minister ruling out any state role via the National Treasury Management Agency, using leverage from the Pension Reserve Fund, to take any equity stake in the banks?

If the Minister is working to a planned strategy, he should make this clear. The ongoing uncertainty is severely undermining confidence in the financial markets and throughout the economy. Tens of thousands of jobs in the real depend on him acting in the national interest rather, not in the interests of Fianna Fáil and its benefactors.

I welcome the announcement by the European Central Bank of a further 0.5% cut in interest rates but it is essential that the government now ensures that this reduction is passed on in full to domestic and commercial borrowers.

The ECB is doing its bit to promote economic recovery but we need to see more action from our own government.

The reduction will be of benefit to many hard pressed families who, despite a number of drops in interest rates, still face crippling mortgage repayments.
The lower rate will also reduce the cost of borrowing for small and medium enterprises, but many of these businesses are still facing huge difficulties in securing credit from the banks and other financial institutions.

I hope that there will be no delay in passing this reduction on to borrowers. It is simply not good enough for the Minister for Finance, Brian Lenihan, to depend on the good will or commercial instincts of the banks to ensure that the reduction is passed on. Particularly in the light of the generous rescue package put in place for the government, to the hazard of Irish taxpayers, he must ensure that the reduction is passed on.

Speaking in the Dáil yesterday, Deputy Joan Burton called on the Finance Minister to clarify whether the it is the state or the covered banks which would be financially liable in the event of the guarantee being called.

The Minister replied that there was no ‘cross indemnity’, meaning that the covered banks are not legally obliged to cover the full cost of any payments made under the scheme. This is understood to be a significant shifting of the goalposts as people had previously been led to believe that there was such an obligation.

Deputy Joan Burton:

“It is now some weeks since the enactment of the Credit Institutions (Financial Support) Bill 2008, which was introduced to rescue the banks, and it has been some days since the publication of the guarantee scheme. This Act has given extraordinary unilateral powers to the Minister for Finance, basically to do what he likes. Although he set out certain conditions which were to apply to banks joining the scheme, it would appear from notices on his own Department’s website that those conditions have changed.

He told us in the House that in the event of a bank’s going under, the first recourse would be to the bank itself, followed by the other banks in the scheme, and that there would be no recourse to the taxpayer. He repeatedly told us the scheme would be cost-free as far as the Irish taxpayer was concerned. However, a notice on the Department’s website indicates that apparently, arising from understandable objections by some of the bigger banks in the scheme, the banks entering the scheme were advised they would not have to unilaterally guarantee defaults by other banks in the scheme. Other Members of the House have mentioned a report to that effect in the Financial Times.

I draw to the Minister’s attention the fact that NIB, which is a Danske Bank subsidiary, has written off a significant amount of bad debt. NIB added €69 million to its impairment charge in its third quarter accounts following a review by Danske Bank. While NIB holds 4% of the total amount of Danske Bank group loans, it represents 30% of its impaired loans. This raises major concerns about banks in the scheme who have more aggressive lending practices and risk having more toxic debts, particularly with regard to the construction sector.

What is the situation now?

Is there a recourse to the Irish taxpayer, or are all the banks in the scheme essentially guaranteeing that any bank in the scheme will have second recourse to the other banks in the scheme?

Is the Irish taxpayer now carrying the can, as stated in the note on the Department’s website to the financial markets?

Will the Minister publish the terms of reference of the appointment of PricewaterhouseCoopers and the review it is conducting for IFSRA?

I repeat the question I asked previously: what is the review considering? Is it examining the issue of the accounting treatment of possibly impaired bank loans given for construction purposes, in which the interest has been rolled up or expressed in shares in the company?

Minister for Finance (Deputy Brian Lenihan):

Deputy Burton has raised the issue of the serious financial consequences to the State arising from the guarantee scheme to banks and credit institutions. In the course of her contribution she raised a number of issues which do not arise within the terms of the Adjournment matter. However, I will be pleased to deal with these by way of a reply to a parliamentary question.

There can be no doubt as to the extent and depth of upheavals in international financial markets. The objective of the credit institutions guarantee scheme is to reinforce the strength of the Irish economy and the financial sector and, in particular, to protect the long-term interests of the taxpayer. Maintaining a stable banking system is at the heart of the functioning of our economy and the daily lives of everyone living in our country. The scheme is not about protecting the interests of the banks; it is about safeguarding of the economy and everyone who lives and works in this country. This support is being provided in the public interest to maintain the stability of our financial system and hence to protect the real economy from the consequences of the severe financial disruption that would otherwise arise.

In accordance with the principles of the legislation, the scheme is designed to safeguard the interest of taxpayers. The guarantee to covered institutions is being made available at a significant charge to the institutions that avail of it. The terms of the scheme will also allow the State to reclaim from a covered institution any payments under a covered institution’s guarantee.

It is currently estimated that the State will be remunerated by the covered institutions for the guarantee by an amount of at least €500 million per year for each of the two years of the guarantee. The charge is risk-adjusted and is set at a level that is based on the long-term cost to the Exchequer of providing the guarantee. Moreover, the scheme is designed to be self-financing and any financial support under the relevant legislation is intended to be recouped from the institution concerned.

The charge has taken account of Government funding costs. The giving of the guarantee is assumed to increase the cost of borrowing by the State by between 15 and 30 basis points. This is estimated to amount to approximately €1 billion on the cost of ten year funding. If the cost to the Exchequer were to exceed €l billion, the charge to the covered institutions will be adjusted accordingly.

It is clear, therefore, that the Government scheme is structured to cover taxpayer costs. This is not a free lunch for the banks. However, it is in no one’s interest to impose a charge at a prohibitive level that undermines the long-term sustainability and commercial viability of our financial institutions. A balance must be struck between ensuring that the Exchequer is reimbursed for the cost of the scheme and the financial sector is safeguarded at a time of extraordinary financial upheaval. The scheme strikes the necessary balance.

The charge on covered institutions will be substantial but not prohibitive, and will be differentiated to reflect the realistic level of risk in different covered institutions. The covered institutions also indemnify the Minister for Finance in respect of any payments made as a result of claims made under the guarantee and in respect of any costs, claims, losses or liabilities incurred by the Minister for Finance as a result of providing the guarantee. The principle as stated in the scheme is that any costs would be recouped from the sector by the State over time in a manner consistent with its long-term viability and sustainability.

I note that there has been some inaccurate comment in regard to the scheme in recent days. The scheme agreed by the Oireachtas has not been changed. The market notice published by my Department stated that no legal guarantee was required under the scheme from one covered institution in respect of any other outside its group.

As the Taoiseach and I have made clear on a number of occasions, if it was the case that a call was made under the guarantee for an institution and not recouped from that institution, the Government would ensure that any loss experienced by the taxpayer was recouped in a manner consistent with the covered institutions’ long-term viability and sustainability. That general principle is reflected in the scheme. That is the provision of the scheme. That was always the provision of the scheme and the market notice does not change that in any way.

The covered institutions have provided an indemnity to the Minister in connection with any payments made under the guarantee given in respect of the particular covered institution’s liabilities. The indemnity does not extend to amounts owing by other covered institutions to the Minister in circumstances where the Minister is required to make a payment on a guarantee given in respect of that other covered institution’s liabilities. There is no cross-indemnity. It is up to the Minister to decide how best to achieve all of the objectives of the scheme in light of the relevant factors over time.

As I have emphasised on several occasions, the over-arching objective of the scheme is to remedy the serious disturbance that might have otherwise unfolded for the economy. It is about taking whatever steps are necessary to ensure that we have a banking system that as a whole works effectively, efficiently and competitively in facilitating all the day to day ordinary economic transactions of commercial, business, family and social life. The Financial Regulator has extensive regulatory powers to supervise the conduct of credit institutions’ affairs. Our company law provides a strict legal framework governing the performance of the fiduciary responsibilities of boards and executives. The Government is satisfied that alongside the powers provided directly under the scheme the relevant public bodies, and in particular the Financial Regulator, have the authority and legal power to take whatever steps are necessary to continue to look after the interests of all depositors and customers, as well as that of the State and the taxpayer, which now arises on account of the guarantee.

Deputies will be aware that in order to promote the public interest covered institutions will be required under the scheme to appoint non-executive directors from a panel approved by me. I will shortly announce the membership of this panel. Deputies will also be aware that the scheme provides protection against excessive remuneration of directors and senior executives. I will be moving shortly to appoint the members of the independent covered institution remuneration oversight committee which will oversee remuneration plans in accordance with the scheme.

Speaking in the Dáil during the special debate on the bank guarantee scheme last Friday, Deputy Burton outlined several of the problems with the regulatory regime which it purports to set up. She said the Financial Regulator needs to be more pitbull than labrador.

I am sure the Minister, as a student, had an opportunity to read the greatest novel about the American depression in the 1930s, namely, The Grapes of Wrath by John Steinbeck. Maybe he remembers what John Steinbeck had to say in the novel about the poverty that came from the depression, and the failure of the bankers in the 1930s to stem their own greed, and of governments to cap their greed.

“The bank is something more than men, I tell you. It’s the monster. Men made it, but they can’t control it.”

In Ireland, we passed on controlling the banks in any tough sense. Instead, under the direction of the former Minister for Finance, Charlie McCreevy, we slavishly copied the British Financial Services Authority line for line. Even though the Minister’s former colleague, Michael McDowell, suggested that the regulation ought to be primarily from a consumer, depositor and an ordinary business point of view, and therefore should be in the Department of Enterprise, Trade and Employment, the Central Bank and the then Minister for Finance fought a successful Government battle to give all the powers to the Central Bank and the new office of Financial Regulator. They won that battle, and we are paying a terrible cost for slavishly following the British model of light regulation.

Right across the globe, the British model of regulation, which had its origin in the era of Thatcher, Reagan and the Washington consensus, is at the heart of most of the banking failures. Yet the Minister is asking us to write a blank cheque today, just as he did two weeks ago.

The Labour Party wants a functioning banking system. Every business in the country needs a banking and credit system, but the Minister asked us to write a blank cheque for the banks and we said “No”. We want to help. We want to sustain, reform and transform the system, but we do not want to write a blank cheque.

The Minister’s speech today asks us to take more on trust and to give him extraordinarily extensive powers, but we are not to ask him to tell us in detail what he is going to do. We continue to have a terrible difficulty with this because we feel we represent the ordinary small, medium or large businesses across the country for whom banking is the lifeblood of their cash flow, yet the Minister has not answered our questions.

Due to Government failures, the pensioners will suffer to the tune of €100 million. The Minister told us that his guarantee is calculated at €1 billion over ten years, which is €100 million per annum. That is the same figure. The pensioners will suffer due to Government mismanagement, but can the Minister be specific? We know the bank shareholders are suffering. We know that people who hold pension funds through bank investments are suffering. It is stunning to see how low their shares have fallen. What are the bankers suffering? Can the Minister tell us? How many of them will resign, retire, and go off on their yacht to the Cayman Islands? Will they go to the Great Blasket Island, sit out there and think about the state in which they have left the banks? What is the downside of this for the bankers? The Minister is not even talking tough and walking with a big stick. He seems to have rolled over.

The regulation carried out by the Financial Regulator is not regulation by a pitbull in lipstick, rather it is regulation by your friendly Labrador who wants to roll over and have his tummy patted. That seems to be the model. The Office of the Financial Regulator cost €57 million and I have no doubt that the individual who controls it is a person of the highest integrity, as is the individual who controls the Central Bank. However, do they deserve the vote of confidence that has just been given to them again? The Minister has not had a hard word to say about them. He is the Minister for Finance, so where is the big stick? The big stick was taken out on the poor pensioners, who got a belt from which they will be reeling for years. Where is the big stick with the bankers?

Has the scheme that was brought in two weeks ago worked? We know that it has helped the banks to get liquidity, but I raised the question of solvency. I asked the Minister for Finance about repairing the balance sheets of banks where there were impaired assets. We know from the financial media – thank goodness for them – that two of the six initial financial institutions to be covered by the scheme appear to have heavily impaired balance sheets, because they lent the most speculatively to the building industry. One of these was a bank, and one was a building society.

The Minister announced last night that the Financial Regulator would advertise in the newspapers today for more expert staff. I hope he is asking for pitbulls rather than Labradors. I do not know if that is the description in the advertisement, but that is what the Financial Regulator needs to do.

One of the bankers has become everybody’s favourite uncle by giving friendly quotes. Having been rescued by the Minister, Mr. Fitzpatrick suggested that we take the medical card off the old age pensioner, and the Government followed his suggestion.

n 6 July 2007, The Sunday Business Post carried an article which stated:
Anglo-Irish Bank chairman Seán FitzPatrick raised eyebrows with his diatribe against the “corporate McCarthyism” of what he saw as over-zealous regulation of businesses…. Having run the boardrooms of some of Ireland’s most prominent public companies, Seán FitzPatrick knows the value of picking his battles.

It was the old age pensioners last week and he won that battle.

So when the chairman of Anglo-Irish Bank and Smurfit Kappa launched into a tirade against what he called, “corporate McCarthyism”, he knew the sort of reaction he was likely to elicit…. FitzPatrick said that the tide of regulation had gone too far. He said the increasing burden of regulation and compliance was threatening the entrepreneurial zeal that made the Irish economy the envy of the world.

He sounds like John McCain before he became candidate to be President of the United States. What does the Minister’s little package this morning say to him or will the Minister just pick up the phone and speak privately to him and tell him to turn off the motormouth?

I have a number of specific questions to put to the Minister. The heart of the protection for the Irish taxpayer in this scheme is the Financial Regulator. When the Financial Regulator came to the Joint Committee on Finance and the Public Service on several occasions, I asked him specifically about the treatment of issues like the rolled up interest and the valuation of lending, the valuation of property-based land lending in the banks’ books, and he told me the same old story, that the fundamentals are sound.

I called down to the Central Bank offices to meet him and the Governor of the Central Bank. I asked them about the equivalent of door-to-door sub prime-type lending in Ireland. They told me that the fundamentals are fine.

I refer to the Minister’s regulations allowing for any pain they might suffer. What is the actuarial basis for the calculation of the risk? There is no evidence that the Minister carried out such a calculation. The Minister’s officials indicated it may have been done, but the scheme indicates that all those details are confidential.

Paragraph 44 of the scheme states: “A covered institution shall not pass on the costs of the guarantee to its customers in an unwarranted manner.” That is a prohibition that is meaningless as phrased and fantastic as an ambition. If the Minister wants to take something from the banks, where is the equity interest that, when hopefully we have come through all this and we have gone over to the other side, we get a return when these banks return to strength and profitability? That is an aim we share with the Minister. Where is the beef for the taxpayer? Where is the actuarial valuation?

The payments are going into a designated account in the Central Bank. On the expiry of the scheme, this account is to be paid into the Exchequer, just in time for the next general election, although I would not think the Minister had considered this.

Although the scheme provides that any call on the State to honour the guarantee will be met by a payment out of this designated account, Department of Finance officials in their briefing to me made it clear that such an event would amount to an act of bankruptcy by one of the covered banks. In that event we would be in a very different situation. The account, which the Minister says will have a maximum amount of approximately €1 billion, would not meet the liabilities that would arise if the guarantee was ever needed.

The Minister stated repeatedly in the debate that it would never cost the taxpayer a penny but there is a hole in his scheme. If some of the banks go under, the €1 billion will not be enough so we will be back to the taxpayer. There is nothing in this scheme to suggest that the Minister will absolutely clean out the balance sheets of the banks to ensure that their assets are appropriately valued.

I welcome the notion that PWC will be undertaking a forensic examination but I suggest we wait and see what that brings up. However, a couple of days ago, the Financial Regulator came before the Joint Committee on Economic and Regulatory Affairs. My colleague, Deputy Sherlock, was at that meeting. When asked this question by Deputy Sherlock and by other members of the committee, the Financial Regulator said again that the assets of the banks are sound, and that was only one week ago.

The Financial Regulator seems to have a primary view that there is no fundamental impairment of bank assets in the long run. I regard that as an extraordinary viewpoint . Despite this extraordinary viewpoint, the Financial Regulator as the manager of the scheme is the person on whom the Minister will rely. What confidence can we have?

I do not have a difficulty with the proposal to appoint directors to the boards of the banks. However, I presume they will be drawn from the same golden circle of friends of the banks, such as retired Secretaries General of Departments. We need people who do not belong to any golden circle and perhaps some of whom come from abroad, who are tough, independent-minded and who will not be beholden to the banks in the future and were not so in the past and who will give an honest opinion. Now more than ever we need a kind of “Mr. Deeds Goes to Town”, “Mr. Smith Goes to Washington” – these were films about the Great Depression era in America, as the Minister will know. We need a Mr. Deeds who will without fear or favour sort out what is valuable in the banks and what has lost value, such as the assets which represent intense, reckless, stupid, greedy speculation in land. The Minister does not seem to have said that to the banks.

Under the scheme the Minister is taking powers to himself. I expect we can discuss this in greater detail in the question and answer session later. I ask the Minister to say whether he is satisfied that this is constitutionally possible within the framework of the scheme.

The long delayed publication today of the bank bailout scheme raises as many questions as it answers. The scheme as published does not put a monetary amount on the charge to banks for the scheme.

The scheme gives no indication that any senior bankers will be resigning, or will be removed as was the case in the UK. Nor is there any apology forthcoming from anyone in the banking sector.

The scheme is also vague at best on the question of how salaries will be limited for top executives. There will be a committee, but there is no cap on banker’s salaries. Nor does the scheme appear to indicate how the banks are to be recapitalised.

The Labour Party will be scrutinising the scheme in the run in to the Dáil debate on Friday and will be demanding answers from the Minister on these and other issues.

The announcement by the Minister for Finance, Brian Lenihan TD, that the bank bailout scheme is now to be extended to five further banks means that the extent of the guarantee being provided by the Irish taxpayer will increase by a sum of around €200bn. This is likely to bring the total exposure of the Irish taxpayer to more than €600bn.

It is a matter of concern that announcements are being made extending the bailout package to additional banks without the Dail having seen even a draft of the scheme.

It is my understanding that a number of the banks named in Minister Lenihan’s statement may also benefit from bail-out schemes introduced in countries where their headquarters are based. We need to know that steps are being taken to ensure that these institutions do not benefit ‘on the double’.

We also need to know what concessions the Minister extracted from these banks before offering to give them the benefit of the guarantee being provided at the risk of the Irish taxpayer.

Did he secure agreement on the appropriate amounts that the banks will pay for entry into the scheme?

Did the banks agree to curb the excessive reward packages being paid to executives?

Does the guarantee to these banks cover the high risk money provided by super-wealthy individuals, under the arrangement known as ‘dated subordinated debt’?

Does the guarantee extend to high risk lending for property development? What undertakings were received from these banks that they would act responsibly in terms of future lending policy?

Finally did Minister Lenihan get a commitment from all these banks that they would promptly pass on to customers the reduction in interest rates announced on Wednesday?

It is a matter of great concern that ten days after the announcement of the guarantee and a week after the government insisted on all night sittings of the Oireachtas, that we still have virtually no details of the scheme.

Nor do we know yet, when it will be brought before the Oireachtas. Whenever it does, the Labour Party will insist that adequate time is allowed for it to be considered in detail and that the Minister will answer all outstanding questions.