Today's stopgap Bill is too little, too late. It is too late because the horse has bolted since the expiry of the original bank guarantee, and too little because it does nothing to address the treatment of liabilities other than subordinated bondholders. It fails to address the issue of senior bondholders now out of the guarantee, the debts for whom amount up to €20 billion. Had a resolution regime been in place when the crisis struck in 2008, much of the cost of the banking crisis that is now being borne by taxpayers could have been avoided. Indeed, I have called for the introduction of a special resolution regime for our banks on a number of occasions since the bank guarantee was first introduced.
In the US, which has a long-standing bank resolution framework, it is not uncommon for officials from the Federal Reserve or the Department of the Treasury to go into a failing bank over a weekend, close it down, clean it up and sell it on. Depositors are protected. Losses are apportioned on the basis of creditors' seniority. Business continues as normal when the bank reopens on the Monday morning, often under new owners. There is only recourse to taxpayers' funds in the event that the excess of liabilities over assets cannot be made good. The wind up of Washington Mutual, where even senior bondholders were made to share some of the burden, is a case in point.
It is now 113 weeks since the night of the bank guarantee, and nearly two years since the UK introduced its own special resolution regime for banks in February 2009. If a limited bank guarantee had been introduced in September 2008, covering all depositors, interbank loans and new debt issues, time could have been bought for the introduction of a resolution regime for the banking sector. Arguably, a general framework for bank resolutions should always have been in place. At the latest, this should have happened back in late 2008 and early 2009. Instead, two years on, the Government is trying to lock the stable door after the horse has bolted and many of the bondholders have already been repaid.
When any private company goes bust because of reckless trading, its private investors are supposed to lose out if they made a bad bet. If the shortfall between assets and liabilities is greater than shareholders' capital, not only do shareholders lose their shirts, but losses are passed up the line to other creditors depending on their seniority — first to subordinated bondholders and then to other unsecured creditors, including senior bondholders. These are the fundamental rules of a functioning market economy. Using State funds to bail out private investors would be a cynical example of socialism for capitalists.
Banks are not like all other private companies. They play a crucial role in the wider economy, facilitating payments, transactions, savings and investments. Thus, the disorderly collapse of a bank could have severe ramifications, potentially setting off a chain of events and a run on the banking sector as a whole. Banks are also unique in that they hold the savings of almost the entire population. Irrespective of any regime to wind up or restructure credit institutions, this important economic and social role must be recognised with the protection of depositors from financial loss. The people in the Department of Finance and various institutions seem to have no idea of the transition that has taken place between managerial capitalism and the new financial capitalism. They seem to be at sea about this and about the globalisation of markets. Even though banks are different from other private companies, the principle still holds that private and professional investors in banks should lose out in any restructuring arrangement before any taxpayers' funds are put on the table. It is for this reason that we need our own special resolution regime for our banks.
Deputies will remember the rising sense of anxiety around the country in the period to the end of September 2008. People were worried about their savings, and there was evidence that people were taking cash out of the banks. An Post experienced a surge in new savings. This all happened again recently, as the Minister knows. Older people in particular were contacting my office to ask if their savings were safe or to tell me that their savings were now under the proverbial bed. What started as a trickle threatened to become a flood. In mid-September 2008, before things got out of control, I proposed in a letter to the Minister and in public statements an enhanced guarantee of at least €75,000 for depositors. Far from the Fianna Fáil rhetoric that the Labour Party would not countenance any form of bank guarantee and was willing to put depositors at risk, we were in fact the first to propose a strengthened guarantee specifically for depositors. What we could not accept was a bailout of professional investors, a free lunch for bondholders and a blank cheque for Fianna Fáil.
Professor Patrick Honohan, Governor of the Central Bank, in his seminal report on the banking crisis published last summer, made this very point. He is on the record as saying, before his time as Governor of the Central Bank but after the introduction of the bank guarantee: "Mature reflection by the financial markets would recognise that a country honouring its debts and guarantees to the letter — and not beyond — was more creditworthy than one which handed over money lightly to unguaranteed risk investors." This is a core problem for the Government. It lacks fundamental credibility in terms of the soundness of its approach to banking, hence the continued destruction of our reputation here, in Europe and around the world.
Bondholders in Ireland had nowhere to run. Even if the Government of the day was convinced that the banks were facing merely a liquidity crisis, which was suggested, it has never explained why it saw fit to guarantee locked-in investors. This would do nothing to affect liquidity in the short term but, as Professor Honohan pointed out in his report, the decision narrowed the Government's margin for manoeuvre in resolving the banking crisis while protecting the interests of taxpayers. As a result, Anglo Irish Bank alone is likely to cost Irish taxpayers upwards of €30 billion when all the dust has settled.
All of the details have not yet been filled in on the bank guarantee blank cheque, but from what we have seen so far, it could reach half of our diminishing national income or more. Writing inThe Irish Times on 3 April this year, Professor John McHale of NUI Galway mapped out how a special resolution regime could be introduced in Ireland before the expiry of the guarantee on 29 September as an alternative to the Government’s gratuitous no-bondholder-left-behind policy. He wrote:
A critical element is that the Government puts in place an American or UK-style special resolution regime (SRR) for failing banks. This regime should be ready to go when the existing guarantee expires and would affect unguaranteed bondholders whose bonds have yet to mature.
The SRR would provide options for a bank to seamlessly continue in operation under new ownership (eg, AIB or Bank of Ireland) or for a gradual winding down (eg, Anglo or Irish Nationwide).
If a bank cannot meet specified capital adequacy requirements on its own, it should be resolved in a manner that is least costly to the taxpayer, while also ensuring that all creditors do at least as well as under a normal bankruptcy procedure. One option would be for bondholders to become owners of a now well-capitalised bank through a debt-equity swap.
The regime should also allow for the clear protection for depositors and secured creditors such as the ECB. In a wind-down scenario, unprotected creditors should bear losses before any burden is placed on the taxpayer.
Had the Minister heeded Professor McHale's warning, Irish taxpayers might not be in such a deep hole. Instead, he prevaricated and let the guarantee expire.
The Minister has insisted for months that this legislation was in the pipeline, but we only saw it for the first time yesterday. The Minister is addicted to playing political games. For a Bill of this importance and complexity, this is not the right way to treat the Dáil. This Bill deserves careful consideration and scrutiny. Instead, it is being railroaded through the Dáil in less than five hours. We are told to expect a full and permanent special resolution regime early in 2011, and under the terms and conditions of the EU-IMF programme of financial support, the Government has committed to introducing legislation for such a regime by the end of March 2011. I suggest that a slimmed-down Bill be introduced, covering the bare essentials for the immediate restructuring of the banking sector, but that any of the more substantive measures should be held back for the permanent regime due early next year. To be honest, it is hard to believe that this is anything other than window dressing, with an election coming down the tracks.
In introducing any special resolution regime for the banking sector, three concerns must be paramount: providing stability to the banking sector, providing certainty to depositors and protecting the interests of taxpayers. We already have an extensive guarantee to protect depositors. This Bill seeks to bring stability to the banking sector but it brings little in the way of protection for taxpayers. The Bill contains draconian measures to transfer powers to the Minister for Finance without countervailing measures to allow for Oireachtas oversight. As I mentioned this morning, perhaps the worst example of this transfer of powers is contained in section 53, which may well be contested on constitutional grounds.
Section 53 contains two provisions. First, it provides that this Bill will override the provisions of any earlier Act, which is standard and uncontroversial. However, section 53 then goes further. It purports to empower the Minister for Finance, by order and without reference to the Oireachtas, to override Acts of the Oireachtas and to legislate contrary to their terms.
The section makes the Minister a one-man legislature, with power by order to amend or repeal the law of the land. The section is an attempt to equip the Minister with power to make orders that will have effect and the force of law, notwithstanding any Act of the Oireachtas. If we, as Members, approve such a section we might as well pack our bags early for Christmas and not come back at all in the new year. Instead, the country will be governed by ministerial diktat in a way similar to that of totalitarian regimes. Such regimes would willingly send someone here to study the powers Deputy Brian Lenihan has taken. There is nothing in the recitals of the Bill to justify the Government's attempt to seize the power of making law from the Oireachtas in this way and to seek instead to vest it in the Minister for Finance.
The Bill draws a veil of secrecy over the exercise of these extensive executive powers with a series of confidentiality clauses. There is a mania in all the emergency banking legislation that has come before the House in the crises of the past two and a half years and a need for the Department and the Minister for Finance to have secrecy and more secrecy. To close the stable door after the horse has bolted, it is now proposed to transfer a vast swathe of new powers to the Minister for Finance. That such drastic action is now needed to right our banking sector is beyond doubt. However, the need for drastic action has come about now because of monumental policy failure on the part of Government and the regulatory system, compounded by the lies, incompetence, fraud, stupidity and wishful thinking on the part of our delinquent bankers and the foolishness and folly of those in political and public administration who were supposed to have oversight and governance of them.
As a consequence of the Government's failed banking policy, its pension policy is now in tatters. The National Pensions Reserve Fund is being plundered time and again to plug holes in the banking sector. A total of €7 billion has already been pumped from the pension fund into AIB and Bank of Ireland. Under the EU-IMF bailout, a further €10 billion or more will be pledged to the banks from this source. What was to be a strategic reserve set aside for the payment of state and public sector pensions from 2025 as our population would begin to age, will soon be a crutch holding up not some elderly old age pensioner or public service pensioner but our elderly, infirm and beyond-rescue banking system.
Perhaps sensibly, section 76(c)(ii) allows for the suspension of payments into the pensions fund in 2012 or 2013. Although transfers do not impact on the general Government balance, they impact on the Exchequer borrowing requirement and it does not makes sense even if it were possible — which it is not, now that we are out of the bond markets — to borrow at 6% or more to put money into the pensions fund at a lower average annual return. Section 76(g) goes on to make provision for transfers in the other direction, back to the Exchequer’s Central Fund. The Minister has indicated that these funds taken from the National Pensions Reserve Fund back to the Exchequer could be used to fund capital investment projects.
The cynic in me wonders if the Minister's Damascene conversion has anything to do with the clock ticking down to the general election early next year. It is entirely inappropriate for a Government on the way out of office to squander the last remnants of our strategic reserve through a pre-election slush-fund for pet projects to save the skins of failing Fianna Fáil candidates. The use of the pensions fund to finance capital investment has much merit but it must be done on a structured, commercial basis. This is something the Labour Party proposed years ago to howls of derision from Government benches. In changed economic circumstances and with capital investment necessarily curtailed in the years to come, the Labour Party has proposed a strategic investment involving a modest €2 billion from the pensions fund. Setting up an investment fund takes time and must be done in an orderly way to ensure successful investment that could finance important infrastructure projects and innovative start-up and scale-up businesses. With Ireland now out of the bond market for the foreseeable future, one could have been forgiven for wondering what was to become of all the highly-paid NTMA staff who had previously fulfilled that function. Section 76 provides the answer. It further expands that nature of the pension fund's "investments" to include non-listed credit institutions, namely, the building societies. It also proposes to allow the pension fund to become a bizarre support scheme for Irish sovereign debt. It seems the NTMA is to be kept busy with one department selling sovereign bonds to another.