Speaking in the Dáil last night during the emergency debate on the Credit Institutions (Financial Support) Bill, Deputy Joan Burton said that delinquent banks could not be given a blank cheque to get them out of the mess they have gotten themselves into. In particular, she criticised the sweeping new powers to be given to the Minister for Finance with little Dáil oversight.
It is clear that within the Bill the Minister proposes to take the most extraordinary powers in regard to regulation. It is interesting that many of the powers referred to in the Bill require no reference, except by the Minister’s choice, to other Ministers or even to the Cabinet. In Irish constitutional law power comes from the Government and from Cabinet, not from an individual Minister, so the Bill is an extraordinary blank cheque to the Minister for Finance in conjunction with the Central Bank and the Financial Regulator to, as it were, offer terms and conditions of support and guarantees to banks in an unprecedented way. It is a blank cheque.
The Minister has only barely sketched in the details of what the cheque may involve. We know that around the country people are losing jobs at the rate of 300 a day. Firms are calling in people on a weekly basis to say they may have to let them go or put them on short time or half time. We know what Cowenomics and the slump coalition has done to people and we want to see our banks being facilitated to provide liquidity for the real economic activity of the nation, the jobs, businesses, and farms, not the speculators and fat cats who have been making a killing for the past ten years but the ordinary, decent, working families and firms.
I put the Minister on notice regarding some of the Labour Party’s requirements of the Bill prior to tomorrow’s Committee Stage debate. We want the publication of details of schemes before they come into force. The Bill purports to allow the Minister to create schemes but it appears that the details of same only have to come to the House afterwards rather than before, so that is a blank cheque.
We want to know the remuneration being provided in the compensation packages for higher executives and managers in banks and what limitations, if any, are to be put on remuneration. There is no indication in the Bill that there are to be any limitations. Could we start with a simple concept, namely, that no executive in any of the banks that are the subject of the guarantee scheme should earn in compensation more than the Taoiseach or the Minister for Finance during the years when they are getting the guarantee from Government? That would give them a compensation package of a salary in excess of €300,000 plus pension equivalents, which would be significant compared to the income of people who normally rely on the State for support and who end up on social welfare because they have lost their job. Those people are facing compensation of approximately €200 per week but we are not looking at any limitations being offered by the Minister nor any sense of proportionality about what some of the banks have done. They have celebrated the good years and Ireland has benefited from the activity of many of the banks, but some banks have acted greedily and recklessly.
We want the Minister to drop the provision for non-commercial terms and conditions that are clearly included in the Bill. We want them excluded because we do not want the Minister or any of his successors to be tempted to offer conditions that perhaps relate to relationships that apply in other locations than are debated on the floor of the House.
We want to know about positive approval rather than mere non-annulling by the Houses with regard to changes. We want to know the position of other governments. The Swedish Government faced this problem in the early 1990s and there was an agreement between the centre-right and the centre-left to have an equity stake returned to the Swedish Government, so that when banks recovered to full health the equity stake available to it could be sold so that the taxpayer could be recompensed for his or her investment in the guarantee scheme.
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. For instance, it is likely that with the proposed scheme, deposits will flood towards the Irish banks likely to be covered by the guarantees as opposed to banks operating in this country which are not covered by the guarantees. We need assurance that there is a fair playing pitch for commercial equity.
Only last week in this House the Minister for Finance assured Opposition Deputies that Irish banks were ‘risk secure’. We heard that the fundamentals were strong and that there was no sub-prime problem with Irish banks, which is correct. The phrase the Minister used was “risk secure”. What a difference a week makes.
I remember some years ago, and even this year, families in Dublin and other parts of the country suffered from a major flooding incident. They suffered the economic cost because they had no insurance. There was a question mark over the responsibility of the State to assist them. It was the so-called ‘moral hazard’ issue, the fear that a State bail-out would reward those who took foolish risks and failed to insure their homes adequately. It was a core value of public policy that those who took risks paid the penalty. Deputy Brian Cowen repeated this policy position when Northern Rock failed in the UK. As Minister for Finance he said he would not countenance a bail-out of reckless behaviour by banks.
Recently the Government came out rather proudly after a Cabinet meeting and said that for Waterford Glass there was no question of the Government facilitating a borrowing request which, if I recall correctly, was approximately €34 million. The Government has form on this issue. That was then and this is now. What happens in the past few days to cause such a dramatic reversal in Government policy.
What caused this flip flop in Government policy? Ministers were proud to say they did not consider any form of guarantee for the borrowing requirements of the Waterford Glass group. The same issue of moral hazard came centre stage when banks starting to fail internationally. They took reckless risks with some mortgage products and practices. The job of Government was to minimise both short-term harm to important financial institutions while protecting the taxpayer from long-term costs. At first the US and British Governments tried a modest programme to contain the fall-out. It was not enough and gave way to a plan to refinance and guarantee mortgages to a limited and controlled amount. That was still not enough. Then we had the bigger bail-outs with which we are all familiar, namely, Northern Rock, Bear Sterns, Fannie Mae, Freddie Mac and AIG. These measures have only fuelled the panic.
In the United States of America the Bush Administration chose to throw in the towel and is using taxpayers’ money to take responsibility for entire debts in a desperate effort to avoid a complete meltdown. We are being asked in this House to follow George W. Bush’s lead and offer even greater guarantees, relatively speaking, than the Bush White House. We are being asked to offer greater guarantees to Irish banks. “Moral hazard be damned” had become the centrepiece of the new orthodoxy. The core issue is the accumulation of unmarketable mortgage-backed securities and complex financial products of dubious value.
I see no reference in his legislation to the regulation of dubious financial products or even the description of dubious financial products. Now it seems governments, including our own, will set aside potentially billions of the people’s money to acquire these assets, taking them off the private sector’s hands to allow financial institutions to resume routine borrowing and lending without the fear of becoming stuck with worthless paper. The Exchequer, or some specially created public agency, may become an owner of vast amounts of dodgy debts and the property associated with them.
The Minister should be in no doubt that there is more than the powers of a guarantee in this legislation. We understand what the Taoiseach spelled out earlier today about guarantee but the powers are much wider and if the Minister chooses to exercise wider powers than merely the guarantee described, I am not satisfied that there are sufficient requirements in the legislation for him to come in and clear that with the House.
I do not doubt that drastic action, national and international, is necessary to stabilise the situation. We agree with that. The Labour Party wants the lines of credit secured to protect the jobs, the employment prospects and the firms that employ working and middle class Irish people. We share that objective with the Government but the Government has a duty to uphold the nation’s financial system. We accept that. The issue is the cost to current and future taxpayers. Many difficult questions remain and the Minister must give answers in the Dáil this week before we have a simple, dump it all on the taxpayer proposal. He says we will do this now and we will get the invoice in the post in the long term. That is not good enough.
The Taoiseach spoke today about this simply being a guarantee in regard to bank deposits and lending made by the banks from the European Central Bank and other secondary tier lending, as it is referred to, but it must be remembered that this is just one side of the bank equation. On foot of guarantees in respect of bank deposits and bank borrowing, banks can then lend out multiples. Nowhere in this legislation does the Minister make it clear how he proposes to regulate the lending practices of these banks to ensure they are saved from reckless actions in the future because those reckless actions, after this legislation, will have a cast iron, golden guarantee from the Irish taxpayer. We want an explanation in that regard.
What is the impact of this legislation on the national debt? The Minister’s officials are suggesting it is a little note to the bottom of the national debt stating that our national debt is approximately €46 billion, which is low, but we have another €400 billion of exposure to the Irish banking system. That makes the figures gallop quite quickly, so to speak.
As well as regulating senior financial executives’ pay in these banking institutions, will we finally see, for instance, the end to the practice that caused much of the construction bubble in Ireland, namely, the tax breaks that fuelled the speculative bubble? Can the Members opposite wean themselves off that at the same time they propose to bring in extra regulations for the banks?
The basic approach of the Minister has many defects. The Labour Party wants to join with the Government in protecting the legitimate interests of Irish taxpayers, Irish workers, Irish companies and Irish firms, but we are not writing a blank cheque to people who lived high off the hog during the years of plenty and did not contribute very much. We want to see them pay up and to see that clearly set out in the legislation. Nothing less than that will satisfy the Labour Party.