Still Not in Favour of Gaol, But...

I here digress (again) from my apparently interminable series on Why They Should Not be Arrested - it hasn't gone away, you know (it's here) - to take a slightly different line on a related issue

Kieran McGowan is a 67-year old executive with an impressive record of success. I don't know him, but I would say that he is very well regarded in Ireland's business/professional community. His position as Chairman of the board at Ireland's most successful indigenous company, the multi-national building materials group CRH testifies more reliably to that than anything I can add. While I cannot forbear to express my opinions on his recently published views, nothing that follows below is intended to impugn the reputation that he has earned.

In Friday's "Irish Times", an interview (by Simon Carswell - yes, that Simon Carswell ) with Mr McGowan was published. The interview covered in part his time as a director of Ireland's largest home-mortgage provider, Irish Life & Permanent group ("ILP").

The group, product of a merger of two lending institutions (TSB and Irish Permanent) with a life & pensions group (Irish Life), is now effectively nationalised (though I seem to recall that there are legal issues with finalising that process). As may be gathered, I have not been paying it much attention, for reasons too detailed to recount just now. Suffice it to say that I have not regarded PTSB (ILP's banking arm) as the worst horror story of the banking sector.

The interview was significant in that, brief though it was, it is only the third public account that I have seen from one of those people who were "on deck when the iceberg hit" in 2008. (The first was Jim O'Leary's(PDF), of which, having just now re-read it, I have to say that it deserves a lot more respect and attention from all of us. The second was "The FitzPatrick Tapes".).

I wish to highlight three points from Mr McGowan's interview

1. They Couldn't Say No

   The introduction of 100% LTV home mortgages to the Irish market by Ulster Bank (part of the RBS group) was apparently greeted with horror by all at PTSB. However horrified, though, they were too fond of market share not to "join the fun". I am reminded of what I have described here as "the crux" of the Anglo story, but also of Chuck Prince's notorious dictum "as long as the music is playing, you’ve got to get up and dance".

   Consideration of this almost makes me want to change my tune on jailing the bankers.

   Imagine a trading company board member confessing after its collapse that he had presided over a policy of losing money in order to keep market share. Did these people never hear of "Turnover is vanity, profit is sanity" ? Is it what the Companies Act 1990 calls being "responsible" ?

2. Mr McGowan agrees that the PTSB decision to put market-share before prudent lending was not a good thing.(Wow !). Indeed, he confirms - I, at least, never doubted it - that the upper echelons of the bank were very perturbed about it.

   What is amazing is that he apparently still thinks that complaining to the Financial Regulator and/or to the Government was somehow an adequate discharge of their duties.

   This view, which was by no means unique either to Mr McGowan or to PTSB, clearly points up the phenomenon of infantilism by regulation. In other words, many otherwise adult bank directors thought - I hope that they no longer do - that it was someone else's job to stop them from destroying their own institutions by imprudent lending.

3. Again echoing other bank directors and executives, Mr McGowan (per Simon C.), said the bank could not attract deposits at the same rate that it was growing its loans and that this meant borrowing heavily in the international bond markets.

   "I never thought, to be honest, that wholesale lending would just come to an abrupt stop like that. In all fairness, I don't think too many people did because it was the way the world was,"

   Let me make two observations about that.

   First, I would like to know about the decision-making which led to PTSB becoming, like Northern Rock, over-dependent on the wholesale markets. Was it again an obsession with preserving its market-share ?

   Secondly, one can certainly be somewhat indulgent of a non-banker like Mr McGowan in this regard, but I find it very difficult to excuse the banking industry generally for complacency about the risks of a credit-crunch even before Northern Rock. I wonder what an examination of PTSB's activity after Northern Rock's demise in August 2007 would tell us about the ability of its guiding lights' to see clearly.

Nothing that Mr McGowan or anyone else has said seems to me to come very close to suggesting that bank directors committed criminal offences while "steering their ships over the waterfall". However, discussion - which will resume before long in my above-referenced series - of their culpability or otherwise need not be limited to the question of criminal sanctions.