Mistakes in dealing with banks costing US and Irish governments

It is not only in Ireland that governments, in dealing with bankers, have managed to inflict political damage. President Obama, surprisingly, has a lot in common with our own Taoiseach, Brian Cowen - neither has dealt with their respective banking industries particularly well. Inexplicably, the President failed to tap the widespread dismay of ordinary Americans who watched the biggest Wall Street firms, recipients directly or indirectly of federal taxpayer insurance, go on to report bloated profits and enormous bonus pools for their staff. The top three Wall Street firms started in recent weeks to pay out $30bn in bonuses for 2009. This was in a year that US jobless figures reached 10 per cent, a calamitous rate for a country with no widespread social safety net. Maybe White House advisers were far too close to the Wall Streeters in a highly challenging year. Belatedly, the Obama administration appears to want to shore up his falling popularity by moving against the giants of Wall Street. The despised investment banks emerged from a crisis of their own making in remarkably fine shape. After the collapse of Lehman Brothers in late 2008 and several mergers, there are fewer banking rivals competing with Goldman Sachs, JP Morgan and Morgan Stanley. The investment giants acted as if it was businesses as usual and generated obscene bonuses that unwisely angered the US electorate ahead of mid-term elections. But international commentators have questionably characterised Obama's plans for Wall Street as radical. Breathlessly, we were told that Obama was set to renew the protections put in place after the 1930s depression. The safeguards aim to prevent Wall Street banks - as expressed in the famous phrase 'too big to fail' - from getting so big that no administration could risk the wide economic damage by letting them go under. Some of the protections were dismantled at the industry's bidding in the late 1990s by the Clinton administration. In truth, the day after Obama announced his Wall Street plans, share prices of the big US investment banks fell by between four per cent and six per cent. These are sharp declines but hardly represent any sort of blowout. Investors appear to anticipate that the landscape of Wall Street industry will be left mostly intact. If so, Obama will have done little to drive the necessary reforms of the global financial industry and do little to shore up his political support. The banking and economic problem, worryingly, would then appear to be too big to fix. Back home, the Government has taken mistake after mistake, politically, in dealing with the banks and bankers. It got off to a bad start over a year ago by allowing the banks nominate public representatives to sit on their boards. Most of the public representatives appear to avoid media appearances. Then, last January, a banking insider secured the top job to run Bank of Ireland. After a tortuous seven-month period involving a series of u-turns by the Green Party and Minister for Finance Brian Lenihan, AIB was allowed to appoint its insider to run its bank. It was a remarkable victory for the banking board after it brought private and public pressure on the minister. Onlookers could conclude that it is was very much business as usual for the two banks. The Government's biggest error may yet be in its failure to tell taxpayers the cost of cleaning up the banks. AIB, Bank of Ireland and Anglo Irish have received €11bn from taxpayers thus far. But the Government continues to stay silent on how much additional cash will need to be injected. Everyone else seems to have a good idea. Britain's RBS, which is 80 per cent owned by the British state, has been the latest to publish estimates. International commentators like the IMF in Washington, as long ago as last June indicted that Ireland's banks would need up to €12bn in additional cash. JP Morgan analysts recently said AIB and Bank of Ireland alone would need an extra €11bn, while Morgan Stanley estimated the two banks would require €9bn. It is time the Government tells taxpayers about the challenges ahead. Already, respected commentators question whether the strategy of reducing the country's borrowing by 2014, as agreed with the European Commission, will work. Ray Kinsella, director of the Centre for Insurance Studies at UCD, believes "it is quite impossible" for the budget deficit to be cut so quickly. He told Today FM's Sunday Business Show that cutting the deficit would be "disastrous" for the Irish economy. In Ireland and the US, government mistakes in dealing with the banks could yet delay the recovery.