Open Dissent Read Online Free PDF Page A

highlighted that the investment banks were aided in their frenzied development of the securities market by the extremely poor judgment of the rating agencies. The excessive use of the technique of shorting the market has contributed substantially to the acceleration of the current market instability.

    Solution:
    A reintroduction of the Glass–Steagall Act or facsimile thereof, which controls and monitors the liquidity and capital structures of the investment banks, would be the first step in a two-part strategy. The second step would be a constraint placed on the banking sector with regard to providing any monies through the interbank market to the investment banks, together with a restriction on the banks investing in any leveraged securities.

    I stand by my recommendations in the above document.

    The crisis that started in the US financial system in August 2007 was going to have far greater impact on the rest of the world than most would have imagined and forecasted. It would appear that, while we listen to forecasts and commentaries on all areas of the international markets, the tendency is to only hear that which suits our own domestic outlook. We had decided that we were in for a soft landing, because anything else would be politically unpalatable and unpatriotic.
    It is true that the Central Bank would have given warnings to the Irish banks as regards the overheating of the commercial and residential property sectors. It seems that the six Irish banks – Bank of Ireland, Anglo Irish Bank, AIB, Irish Life and Permanent, EBS Building Society and Irish Nationwide – did not fully listen to the advice of the Central Bank. It is likely that they only heard what they wanted to hear, that we were in for a soft landing. The lack of action taken by the banks was not out of disrespect for the Central Bank but more likely because of the demands for increased profits from their shareholders.
    While macro-economic factors were at play globally in 2007 and the first half of 2008, Ireland was feeling comfortable and the six banking institutions were still aggressive in their lending. No one believed that there was a liquidity problem in the Irish banks and, furthermore, there was an unquenchable thirst for credit. Developers who had been successful in Ireland over the previous ten to fifteen years found the market at home less attractive than places far away. Many wealthy Irish developers engaged in internationaldiversification, setting themselves up as property experts in places as far-flung and diverse as Dubai, Abu Dhabi, Hong Kong, Chicago and many other locations, the names of which were unfamiliar and difficult to pronounce. Developers became like Christopher Columbus looking for a New World for their ever-increasing wealth. Was this a signal for them to recognise that the Irish market had peaked and, with the assistance of bankers, they could venture abroad? Developers may not have been aware of what they were embarking on, but they were fast becoming diversified risk managers.
    On 28 September 2008 the Government of Ireland was faced with this very critical problem: major corporate wholesale deposits were being withdrawn from Anglo Irish Bank and it was clear that they could not be replaced as quickly as they were being withdrawn. The contagion effect of this was the likelihood of other banks failing and, in turn, the country being put at risk. The decision and speed of putting in place a guarantee for the debts was appropriate at that time and preserved the country from a fate worse than the alternative, which was a potential collapse of the market. Only those who were involved will ever fully understand the various forces at work and the perceived risk to the country when the decision to issue the guarantee was made.
    To understand how this situation could have developed for Ireland, one has to go back to the simple activity of getting a loan from your local bank manager. Traditionally, a borrower went with