Boomerang_ Travels in the New Third World - Michael D. Lewis [48]
Across the financial markets this episode repeated itself. People who had made a private bet that had gone wrong and didn’t expect to be repaid in full were handed their money back—from the Irish taxpayer.
In retrospect, now that the Irish bank losses are known to be world historically huge, the decision to cover them appears not merely odd but suicidal. A handful of Irish bankers incurred debts they could never repay, of something like 100 billion euros. They may have had no idea what they were doing, but they did it all the same. Their debts were private—owed by them to investors around the world—and still the Irish people have undertaken to repay them as if they were obligations of the state. For two years they have labored under this impossible burden with scarcely a peep of protest. What’s more, all of the policy decisions since September 29, 2008, have set the hook more firmly inside the mouths of the Irish public. In January 2009 the Irish government nationalized Anglo Irish and its losses of 34 billion euros (and mounting). In late 2009 they created the National Asset Management Agency, the Irish version of the Troubled Asset Relief Program (TARP), but, unlike the U.S. government, actually followed through, and bought 80 billion euros’ worth of crappy assets from the Irish banks.
A SINGLE DECISION sank Ireland, but when I ask Lenihan about it he becomes impatient, as if it isn’t a fit topic for conversation. It wasn’t much of a decision, he says, as he had no choice. Irish financial market rules are patterned on English law, and under English law the bondholders enjoy the same status as the ordinary depositors. That is, it was against the law to protect the little people with deposits in the bank without also saving the big investors who owned Irish bank bonds.
This rings a bell. When U.S. Treasury Secretary Hank Paulson realized that allowing Lehman Brothers to fail was viewed not as brave and principled but catastrophic, he, too, claimed he’d done what he’d done because the law gave him no other option. In the heat of the crisis, Paulson neglected to mention the law, just as Lenihan didn’t bring up the law requiring him to pay off the banks’ private lenders until long after he’d done it. In both cases the explanation was legalistic: narrowly true, but generally false. The Irish government always had the power to impose losses on even the senior bondholders, if it wanted to. “Senior people have forgotten that the government has certain powers,” as Morgan Kelly puts it. “You can conscript people. You can send them off to certain death. You can change the law.”
On September 30, 2008, in the heat of the moment, Lenihan gave the same argument for guaranteeing the bank’s debts as Merrill Lynch: to prevent “contagion.” Tell financial markets that a loan to an Irish bank was a loan to the Irish government and investors would calm down. For who would doubt the credit of the Irish government? A few months later, when suspicions arose that the bank losses were so vast that they might bankrupt the Irish government, Lenihan offered a new reason for the government’s gift to private investors: the bonds were owned by Irish savings banks. Up until then the government’s line had been that they did not have any idea who owned the bank’s bonds. Now they said that if the Irish government didn’t eat the losses, Irish savers would pay the price. The Irish, in other words, were simply saving the Irish. This wasn’t true: it provoked a cry of outrage from the Irish savings banks, who said they didn’t own the bonds, and that they disapproved of the government’s bestowing a huge gift on those who did. A political investigative blog called