speri.comment: the political economy blog

The power of banks

Government dependency upon the banks gives them huge political leverage

Dr Cornelia Woll, Honorary Research Fellow, SPERI, & Research Fellow, Sciences Po, Paris

Cornelia Woll

Cornelia Woll

How did we get to the massive public intervention in many countries during the banking crisis that started in 2008? When looking at the decisions and eventual costs of the bail-outs, the question on many people’s mind is: Why does finance have so much power? One of the most dramatic cases in this context is Ireland, where the direct costs of state intervention in the Irish banking sector are estimated at around €64 billion (41 per cent of GDP) according to the Irish House of the Oireachtas. As we all know, this had led to the sovereign bail-out by the IMF and the EU in 2010. The burden of this is carried by the Irish population, through taxes, pay cuts, the bankruptcy of Irish businesses and rising unemployment.

Now, if you think of this as some sort of fatality that resulted from the Irish exuberance in property investment during the boom years, think again. When we talk about the structural importance of finance, we always cite the ‘too big to fail’ logic to explain why governments rushed in to help their banks. But Anglo-Irish, the rotten apple in the Irish banking sector, was hardly too big to fail. As Michael Lewis puts it:

‘Anglo Irish Bank had only six branches in Ireland, no ATMs, and no organic relationship with Irish business except the property developers. It lent money to people to buy land and build: that’s practically all it did. It did this mainly with money it had borrowed from foreigners. It was not, by nature, systemic.’

Anglo-Irish was highly aware of this and tried to manoeuvre itself into the ‘too-big-to-fail’ category by proposing a merger with another rotten apple, Irish Nationwide Building Society, in September 2008. The proposal never went through, but Anglo-Irish did succeed in making the Irish government give a commitment to rescuing it. As a recent investigation by the Irish Independent reveals, this was in part the result of conscious tricking and covering up of information on the part of Anglo-Irish executives in interaction with the Irish Central Bank. In the call, acting Director of Treasury John Bowe explained the bank’s strategy when asking for the €7bn loan:

‘Yeah and that number is seven (€7bn), but the reality is that actually we need more than that. But you know the strategy here is that you pull them in, you get them to write a big cheque … and they have to support their money.’

Mr Bowe continues: ‘If they (Central Bank) saw the enormity of it up front, they might decide that they have a choice. You know what I mean?

They might say the cost to the taxpayer is too high. But if it doesn’t look too big at the outset … if it looks big enough to be important, but not too big that it kind of spoils everything, then, then I think you have a chance … it can creep up.’

When asked how he had arrived at the €7bn figure for the Central Bank, Mr Bowe laughs and replies:

‘As Drummer (CEO David Drumm) would say, picked it out of my arse.’

It’s actually hard to imagine a more cynical conversation about the fate of the Irish economy. A bank that was hardly systemic, poorly managed, that had 75 per cent of its assets in property development, that was involved in a circular loan scandal and that actively manoeuvred to cover up its exposure and commit the government, ended up taking the entire Irish economy down with it.

For the Irish citizens, these revelations must be profoundly disturbing.  For outside observers, they seem to confirm the already negative image of banking executives and provide a smoking gun that we might well expect to find in other countries as well.

To be sure, the audacity and carelessness of Anglo-Irish is not without equal in other countries. But the conniving tactics of its executives are rather uncharacteristic of the power of finance, as we were able to observe it in the recent crises. In fact, Anglo-Irish had to resort to such questionable means precisely because they were in fact less powerful than some of their competitors. Goldman Sachs or Deutsch Bank would probably not have to use such a strategy if they were on the brink. Important financial institutions that succeeded in obtaining government support or became part of a national scheme were, for the most part, able to convince their governments without having to lie hugely about the state of affairs.

The reason for this lies in the structural power of finance. Decision-makers will act in favour of the industry because they need finance for funding the so-called real economy, for funding the government and as a motor for growth. In addition, finance operates through a more general mind-set that not only financial experts and policy-makers, but also ordinary citizens, subscribe to through a myriad of rationalities that scholars, following Michel Foucault, have labelled ‘governmentality’.

Science and technology studies have focused on these issues by studying the evolution of concepts such as liquidity, solvability, moral hazard or limited liability. Through a series of small and seemingly insignificant items, the interests of the financial industry are today tied to those of the government and large parts of the population. In such circumstances it makes little sense to talk about regulatory capture or to look for smoking guns such as the outrageous behaviour of Anglo-Irish executives. The real grip of finance goes much, much further.

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