The view that there is no alternative is “just wrong” he said. “There is an alternative. Play by the rules of capitalism – if you can’t pay back your debt, shareholders and bondholders lose.  If the Government puts in money, it needs to get control commensurate with the money put in. It also should get a return proportionate to the risk involved – in this case, it’s a big risk.”

For more on Prof. Stiglitz’s views see:
Trinity talk – http://www.irishtimes.com/newspaper/finance/2009/1008/1224256168742.html
State squandering money – http://www.irishtimes.com/newspaper/breaking/2009/1007/breaking45.htm
Opposition urges Nama rethink -
http://www.irishtimes.com/newspaper/breaking/2009/1007/breaking61.html

If you do not understand that then let me take on the persona of Princess Leia from Star Wars when speaking in a holomessage to General Kenobi: “Years ago, you served the planet in the Global Warming period; now your little green island begs you to help us in our struggle against the Fianna Fail-Bankers-Property developers Empire. I regret that I am unable to present the taxpayers’ request to you in person; but we have fallen passive under an attack of half-truth, financial jargon and PR speak. I’m afraid my mission to bring you to the ordinary people has failed. I’ve placed information vital to the survival of the Irish state  into the memory systems of some brave economists, business people, journalists and brave citizens. My people will know how to retrieve it. You must see this mission to destroy Nama safely delivered to the ECB.  This is our most desperate hour. Help me, Obi-Wan Gormley; you’re my only hope.”

Well, if President Obama’s opinions are anything to go by it’s not much.  Today he told an audience in downtown New York, where Lehman was  headquartered, that:

“Unfortunately, there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them,” he was quoted as saying in the Irish Times. “So I want them to hear my words: We will not go back to the days of reckless behaviour and unchecked excess at the heart of this crisis.”

Ah yes, reckless behaviour and unchecked excess. That would mean three things: the outrageous bonus structure, insufficient risk controls and lack of regulation.

Bonus bingo
Let’s start with the bonus structure. Even when I was there (working in marketing so not eligible for big money) it was normal for traders and sales people to have a relatively low base salary and a POTENTIAL bonus that was many, many multiples of that number.

For example, someone who made a 75k base salary knew that if they hit certain targets they could make up to 250k. Each year, the potential for larger bonuses multiplied. Year two it could be 350k or 500k or any “monopoly money” amount.

This was very, very seductive. As incomes rose, most people increased their spending so all those Wall Streeters have an addictive  lifestyle habit to support – private schools and ski holidays for the kids; big suburban houses, flash cars and servants for the spouse; exclusive golf club memberships, holiday homes and designer clothing, cigars and single malt Scotch for them. (Lots of my friends in New York live this lifestyle so I ain’t making it up!)

The point is that it became both very difficult for people to leave the industry - would you leave 500k sitting around for someone else to take? – and almost impossible to keep reaching the new targets. Plus, most of their friends worked at the same thing so the lifestyle – and the conflicts – seemed normal.

Playing risk roulette
When a shopkeeper runs out of things to sell, he needs to get some more. On Wall Street, they simply start to make new stuff up and call them derivatives. These financial instruments are bits of this and bits of that combined to create something new like: asset-backed securtites (See Sub-prime time or Abbatior of Debt story on this blog).

To feed the increasingly voracious market for derivatives, financial product designers went wild and created things that not even a nuclear physicist could decipher. It’s a bit like those mad outfits you see on the catwalk during London Fashion Week…entertaining and outlandish but with no tangible value in the real world.

Because these things were so darned complicated no one was able to assess their REAL risk.

Ropey regulation
Finally we come to the policemen, the gatekeepers, the regulators. They were duped but they were also incredibly lazy. If they did not understand how something was valued it was their JOB to keep asking questions. They failed us in so many ways. (See post on this blog: Toxic tips from D’Oh School of Economics)

So, if we have learned something from the collapse of Lehman Brothers we should see changes to the financial sector such as:
1. Total product transparency with clear description of risks
2. Abolition of bonus structures that reward unrealistic risk taking
3. Proper regulation of financial markets
4. Regulators who have the ability to understand – or demand explanations for – the products they are regulating

Don’t hold your breath!

For one moment, why not imagine your Ireland. What would it look like if you had your say? Try this quick, very basic, exercise and see what you come up with!

 1.     Start with a blank piece of paper

2.     Imagine the society you would like to live in (safer, happier, healthier, well-educated, open, tolerant, more positive, entrepreneurial, socially active, community-focused, takes care of most vulnerable, more efficient).

3.     Write down some of the basic principles this society should live by: respect for others, transparency in government, efficient use of taxes/ public money…(This is your constitution)

4.     Choose a system of governance that supports this (democracy, social democracy, socialist, communist, libertarian, theocracy, dictatorship, anarchism, monarchy, republic)

5.     Choose an economic system that supports this:
a. general concept: private, state, communal?
b. level of control: hands-on or hands-off system?
c. most common types: capitalist, socialist, mixed economy. social market economy, the third way,

6.     Find the best and the brightest in the nation, ask them to govern and apply all of the above.

7.     It can happen. Make your voice heard. Write. Talk. Vote when you have the chance in every local and national election.

 For more information on our existing constitution click on: http://www.constitution.ie/constitution-of-ireland/default.asp?UserLang=EN

Ireland needs a drastic shift in cultural attitudes – away from entitlement and towards personal responsibility. The arrogant aristocracy has made taxpayers as cheap as chips.

This article was originally published in The Irish Times, Business this week, Platform column on:
March 6, 2009

The cost of “keeping up with the Fitzpatricks”

Two years ago, I wrote that the nation was like a kid who had just received pocket money for the first time: “Imagine four million children with sweaty coins in their hands waiting for the newsagents to open and you’ll get the picture.”

Spending was a thrill but now, like a youngster who has blown it all on sweets, the public and private sector are dealing with the tummy ache and asking: “Why did I do it? I should have known better!”

The easy-credit culture benefited not only those creating wealth in the private sector – entrepreneurs, small-business owners, property developers and multinationals – but the public sector as well. The number of people employed in Government swelled and those at the top, our elected Government representatives, felt they also needed to be richly rewarded for serving the people.

Arrogant aristocracy

Government generosity to itself – with our money – has created an arrogant aristocracy. Some long-serving TDs have probably forgotten how to drive, use public transport, carry cash or arrange meetings. No wonder the current Government reeks of a “let them eat cake” sense of entitlement. We have allowed it.

They live very different lives from the rest of us. We already know that our Taoiseach and many top ministers receive salaries that are higher – and completely disproportionate when judged on population size – than most of their European and American counterparts. Pensions and perks, including government cars and mileage allowances for private cars, are also overly generous. It’s a nice number in hard times.

No matter what happens, these senior civil servants will be largely unaffected by the recession. Even if they lose their seats, they’ll keep their full pensions – unlike some of the workers at Waterford Crystal.

Chances are, our elected officials’ children will not be forced to emigrate in as large numbers as their contemporaries. In fact, junior Minister for Finance Martin Mansergh told BBC television (and me) last week that his daughter was going to Australia for the experience. She was not being forced to emigrate. Lucky woman!

Fianna Fáil’s attitude and communications strategy of “radio silence” have done little to help the populace understand the seriousness of the issues we face – or to prepare for the hard cuts that are to come. We are fighting for our economic survival and dismissing media commentators who ask hard questions for the benefit of the public as “populists” does not engender confidence. After all, populists are the opposite of elitists.

Taxpayers – cheap as chips

Thanks to our light-touch regulation, the spending habits of some of our native financiers were more elaborate than the Government’s.

We still don’t know why Seán Quinn quietly bought up a 25 per cent contract for difference (CFD) or placed a high-risk bet on the direction of the share price in Anglo Irish Bank. Was he in a power play for control of Anglo from Seán Fitzpatrick & Co, was he trying to help the bank or was he just a rich man gambling big money to become even wealthier? Either way, it now seems that the chips Quinn and Fitzpatrick were playing with had “taxpayer” written on them. We’re all footing the bill for their miscalculations.

Over the years, I have talked about “keeping up with the Fitzpatricks” when discussing reckless spending – this has now acquired a strange new meaning.

Cultural shift

Politicians and bankers are not the only ones infected with a sense of entitlement. Even ordinary people feel they are owed something. We all know that child benefit and medical cards for the over-70s should be means tested. But how many of us refuse the payment on the basis that, although it’s nice to get when the kids are small, we don’t really need the money?

Ireland needs a drastic shift in cultural attitudes – away from entitlement and towards responsibility. The only thing citizens are owed is a Government that leads well, helps the most vulnerable in society and uses tax revenues efficiently. Sadly, we can’t say that any of those things have been achieved by the current administration.

The Government is spending our money and we have a responsibility to ensure they use it transparently and wisely. We should introduce a “Government-waste whistleblowers” campaign or organisation. Anyone who sees waste by a Government department or body – and we already know there is lots of it – can report it without fear of repercussions. It’s time to target the wasters, wherever they are, and usher in an era of personal responsibility.

True leaders know they must make real changes within themselves, and their organisations, before they can ask others to sacrifice.

Margaret E. Ward is a journalist, small-business owner and blogger www.margaretward.ie

Ten years ago, US loan providers started offering more flexible, affordable products. These included sub-prime mortgages; low introductory rates that moved swiftly upwards from year two; interest-only loans; and extending the length of the loans from 20 years to 50 years. Despite the feelgood factor it generates, these loan designs only work when house prices are rising.

Easy money is an irresistible lure for those desperate to own a home. Loose lending practices make it easy for borrowers to become victims of mis-selling. Is it really a good idea for people to proclaim an income to mortgage lenders without proving it as they can with many sub-prime loans? What about 100 per cent or more mortgages with no deposit required?

Lenders have good reason to seek out more mortgages no matter how bad a risk they might be. Home loans are more than just a nice source of income for them. They are also debt that can be repackaged and sold on to investors as a covered bond or asset covered security (ACS).

Good- and bad-risk mortgages are needed to make this work. Sub-prime is a dreadful, dehumanising word but it does describe the financial institutions attitude to these less desirable borrowers: “Listen, you’re no filet mignon buddy, you’re just the intestines, snout and ears.” So, these offal mortgages are dismembered in financial abattoirs and sold on to investors as covered bonds or ACSs.

Thousands of loan carcasses, both good quality (prime) and end-cuts (sub-prime), are cut up into pieces and repackaged to appeal to every investor.
The mortgage “variety packs” that mix good with not so good – fillet mignon, T-bone steak, liver, tongue – appeal to bond investors, who want to spread the risk and ensure a regular payment
(yield).

Offal-only (sub-prime) packs are the riskiest as they can spoil faster than more expensive cuts. Investors hoping for bigger payouts are more willing to take on this risk. Investors love these products as they are relatively stable and provide a decent regular payment.

What is good for investors is not always best for borrowers. The insatiable demand for ACSs means carnivorous companies will roam the earth looking for their next big feed and our Government will do little to stop them or protect us.

In fact, the Asset Covered Securities (Amendment) Bill 2007, recently debated in the Dáil, shows the Government is more interested in protecting big business. The amended Bill proposes increased protection for investors and ensures the competitiveness of Irish-based banks. There was no mention of protection for borrowers.

Ireland’s covered bond/ACS market is a jewel in the financial services crown. It is the sixth-largest in Europe and, in 2007, it has an estimated worth of €10 billion. That adds up to many jobs and votes.

So, what does the sparkling Emerald Isle look like to a hungry, debt-eating market? Since 1997, Ireland has experienced the highest rate of house price inflation in the developed world. “Hmm. The Irish have lots of money, are obsessed with property ownership, property sales have started to slow and it is an election year. What could be better?”

Politicians and financial institutions know that the only way to restart the stalled property market – on which our booming yet fragile economy is so strongly dependent – is to ensure loans are easier to obtain for those on the margins. “Come on in easy credit providers, the water is just fine.”