It would have been difficult for Merrill Lynch’s investment bankers not to know, on some level, that, in a reckless market, the Irish banks acted with a recklessness all their own. But in the six-page memo to Brian Lenihan—for which the Irish taxpayer forked over to Merrill Lynch 7 million euros—they kept whatever reservations they might have had to themselves. “All of the Irish banks are profitable and well-capitalized,” wrote the Merrill Lynch advisers, and then went on to suggest that their problem wasn’t at all the bad loans they had made but the panic in the market. The Merrill Lynch memo listed a number of possible responses the Irish government might have to any run on Irish banks. It refrained from explicitly recommending one course of action over another, but its analysis of the problem implied that the most sensible thing to do was to guarantee the banks. After all, the banks were “fundamentally sound.” Promise to eat all losses, and markets would quickly settle down—and the Irish banks would go back to being in perfectly good shape. As there would be no losses, the promise would be free.
What exactly was said in the meeting on the night of September 29, 2008, remains, amazingly, something of a secret. The government has refused Freedom of Information Act requests for the notes taken by participants. Apart from the prime minister and the bank regulators, the only people at the conference table inside the Ministry of Finance were the heads of the two yet-to-be disgraced big Irish banks: AIB and Bank of Ireland. Evidently they either lied to Brian Lenihan about the extent of their losses or didn’t know themselves what those were. Or both. “At the time they were all saying the same thing,” an Irish bank analyst tells me. “‘We don’t have any subprime.’” What they meant was that they had avoided lending to American subprime borrowers; what they neglected to mention was that, in the general frenzy, all of Ireland had become subprime. Otherwise sound Irish borrowers had been rendered unsound by the size of the loans they had taken out to buy inflated Irish property. That had been the strangest consequence of the Irish bubble: to throw a nation that had finally clawed its way of out centuries of indentured servitude back into indentured servitude.
The report from Merrill Lynch asserting that the banks were “fundamentally sound” buttressed whatever story the banks told the finance minister. The Irish government’s bank regulator, Patrick Neary, had echoed Merrill’s judgment. Morgan Kelly was still a zany egghead; at any rate, no one who took him seriously was present in the room. Anglo Irish’s stock had fallen 46 percent that day; AIB’s had fallen 15 percent; there was a fair chance that when the stock exchange reopened one or both of them would go out of business. In the general panic, absent government intervention, the other banks would have gone down with Anglo Irish. Lenihan faced a choice: Should he believe the people immediately around him or the financial markets? Should he trust the family or the experts? He stuck with the family. Ireland gave its promise. And the promise sank Ireland.
EVEN AT THE time, the decision seemed a bit odd. The Irish banks, like the big American banks, managed to persuade a lot of people that they were so intertwined with their economy that their failure would bring down a lot of other things, too. But they weren’t, at least not all of them. Anglo Irish Bank had only six branches, 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 all it did. It did this with money it had borrowed from foreigners. It was not, by nature, systemic. It became so only when its losses were made everyone’s.
In any case, if the Irish wanted to save their banks, why not guarantee just the deposits? There’s a big difference between depositors and bondholders: depositors can flee. The immediate danger to the banks was that savers who had put money into them would take their money out, and the banks would be without funds. The investors who owned the roughly 80 billion euros’ worth of Irish bank bonds, on the other hand, were stuck. They couldn’t take their money out of the bank. And their 80 billion euros very nearly exactly covered the eventual losses inside the Irish banks. These private bondholders didn’t have any right to be made whole by the Irish government. The bondholders didn’t even expect to be made whole by the Irish government. Not long ago I spoke with a former senior Merrill Lynch bond trader who, on September 29, 2008, owned a pile of bonds in one of the Irish banks. He’d already tried to sell them back to the bank for 50 cents on the dollar—that is, he’d offered to take a huge loss, just to get out of them. On the morning of September 30 he awakened to find his bonds worth 100 cents on the dollar. The Irish government had guaranteed them! He couldn’t believe his luck.
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 Guido Fawkes someho
w obtained a list of the foreign bondholders: German banks, French banks, German investment funds, Goldman Sachs. (Yes: even the Irish did their bit for Goldman.)
ACROSS EUROPE JUST now men who thought their title was “minister of finance” have woken up to the idea that their job is actually government bond salesman. The Irish bank losses have obviously bankrupted Ireland, but the Irish finance minister does not want to talk about that. Instead he mentions to me, several times, that Ireland is “fully funded” until next summer. That is, the Irish government has enough cash in the bank to pay its bills until next July.
It isn’t until I’m on my way out the door that I realize how trivial this point is. The blunt truth is that since September 2008 Ireland has been every day more at the mercy of her creditors. To remain afloat, Ireland’s banks, which are now owned by the Irish government, have taken short-term loans from the European Central Bank of 85 billion euros. Inside of a week Lenihan will be compelled by the European Union to invite the IMF into Ireland, relinquish control of Irish finances, and accept a bailout package. The Irish public doesn’t yet know it, but, even as the minister of finance and I sit together at his conference table, the European Central Bank has lost interest in lending to Irish banks. And soon Brian Lenihan will stand up in the Irish parliament and offer a fourth explanation for why private investors in Ireland’s banks cannot be allowed to take losses. “There is simply no way that this country, whose banks are so dependent on international investors, can unilaterally renege on senior bondholders against the wishes of the ECB,” he will say.
But there was once a time when the wishes of the ECB didn’t matter so much to Ireland. That time was before the Irish government used ECB money to pay off the foreign bondholders in Irish banks.
ONCE A DECADE I experiment with driving on the wrong side of the road, and wind up destroying dozens of side-view mirrors on cars parked on the left. When I went looking for some Irish person to drive me around, the result was a fellow I will call Ian McRory, who is Irish, and a driver, but pretty clearly a lot of other things, too. He has what appears to be a military-grade navigational system, for instance, and surprising knowledge about abstruse and secretive matters. “I do some personal security, and things of that nature,” he says, when I ask him what else he does other than drive financial-disaster tourists back and forth across Ireland, and leaves it at that. Later, when I mention the name of a formerly rich Irish property developer, he says, casually, as if it were all in a day’s work, that he had “let himself into” the fellow’s vacation house and snapped photographs of the interior “for a man I know who is thinking of buying it.”
Ian turns out to have a good feel for what little I, or anyone else, might find interesting in rural Ireland. He will say, for example, “Over there, that’s a pretty typical fairy ring,” and then explain, interestingly, that these circles of stones or mushrooms that occur seemingly naturally in Irish fields are believed by local farmers to house mythical creatures. “Irish people actually believe in fairies?” I will ask, straining but failing to catch a glimpse of the typical fairy ring to which Ian has just pointed. “I mean if you walked right up and asked him to his face, ‘Do you believe in fairies?’ most guys will deny it,” he will reply. “But if you ask him to dig out the fairy ring on his property, he won’t do it. To my way of thinking that’s believing.” And it is. It’s a tactical belief, a belief that exists because the upside to disbelief is too small, like the former Irish belief that Irish land prices could rise forever.
The highway out of Dublin runs past abandoned building sites and neighborhoods without people in them. “We can stop at ghost estates on the way,” says Ian, as we clear the suburbs of Dublin. “But if we stop at every one of them, we’ll never get out of here.” We pass wet green fields carved by potato farmers into small plots and, every now and then, a small village, but even the inhabited places feel desolate. The Irish countryside remains a place people flee. Among its drawbacks, from the outsider’s point of view, is the weather. “It’s always either raining or about to rain,” says Ian. “I drove a black guy from Africa around the country once. It’s raining the whole time. He says to me, ‘I don’t know why people live here. It’s like living under an elephant.’”
The wet hedgerows cultivated along the highway to hide the wet road from the wet houses now hide the wet houses from the wet road. PICTURE OF THE VILLAGE OF THE FUTURE, reads a dripping billboard with a picture of a village that will never be built. Randomly selecting a village that appears to be more or less finished, we pull off the road. It’s an exurb, without a suburb. GLEANN RIADA, reads the self-important sign in front. It’s a few dozen houses in a field, attached to nothing but each other, ending with unoccupied slabs of concrete buried in weeds. You can see the moment the money stopped flowing from the Irish banks, the developer folded his tent, and the Polish workers went home. “The guys who laid this didn’t even believe it was supposed to be finished,” says Ian. The concrete slab, like the completed houses, is riven by the cracks that you see in a house after a major earthquake but which in this case are caused by carelessness. Inside, the floors are littered with trash and debris, the fixtures have been ripped out of the kitchen, and mold spreads spiderlike across the walls. The last time I saw an interior like this was in New Orleans after Katrina.
Ireland’s Department of the Environment published its first audit of the country’s new housing stock in 2009, after inspecting 2,846 housing developments, many of them ghost estates. The government granted planning permission for 180,000 units, of which more than 100,000 are unoccupied. Some of those that are occupied remain unfinished. Virtually all construction has now ceased. There aren’t enough people in Ireland to fill the new houses; there were never enough people in Ireland to fill the new houses. Ask Irish property developers who they imagined was going to live in the Irish countryside and they all laugh the same uneasy laugh and offer up the same list of prospects: Poles; foreigners looking for second homes; entire departments of Irish government workers, who would be shipped to the sticks in a massive, planned relocation plan that somehow never materialized; the diaspora of seventy million human beings with some genetic link to Ireland. The problem that no one paid all that much attention to during the boom was that people from outside Ireland, even those with a genetic link to the place, have no interest in owning houses in Ireland. “This isn’t an international property market,” says an agent at Savills’s Dublin branch named Ronan O’Driscoll. “There aren’t any foreign buyers. There were never foreign buyers.” Dublin was never London. The Irish countryside will never be the Cotswolds.
WHICH WAY ENTIRE nations jumped when the money was made freely available to them obviously told you a lot about them: their desires, their constraints, their secret sense of themselves. How they reacted when the money was taken away was equally revealing. In Greece the money was borrowed by the state: the debts are the debts of the Greek people, but the people want no part of them. The Greeks already have taken to the streets, violently, and have been quick to find people outside of Greece to blame for their problems: monks, Turks, foreign bankers. Greek anarchists now mail bombs to German politicians and hurl Molotov cocktails at their own police. In Ireland the money was borrowed by a few banks, and yet the people seem not only willing to repay it but to do so without so much as a small moan. Back in the autumn of 2008, after the government threatened to means-test the medical care, the old people had marched in the streets of Dublin. A few days after I’d arrived, the students followed suit, but their protest was less public anger than theater, and perhaps an excuse to skip school. (DOWN WITH THIS SORT OF THING, read one of the signs.) I’d tapped two students as they stumbled away from the event, to ask them why they had all painted yellow streaks onto their faces. They looked at each other for a beat. “Dunno!” one finally said, and burst out laughing.
Other than that . . . silence. It’s more than three years since the Irish government foisted the losses of the Irish banks on the Irish peopl
e, and in that time there have been only two conspicuous acts of Irish social unrest. In early 2009, at AIB’s first shareholder meeting after the collapse, a senior citizen hurled rotten eggs at the bank’s executives. And late one night in September 2010, a property developer from Galway named Joe McNamara painted his cement mixer with anti-banker slogans, climbed inside the cab, drove across the country, and, after locking its brakes and disabling the release, stalled the machine between the gates of the Parliament. The elderly egg-thrower was a distant memory, but McNamara was still, more or less, in the news: declining requests for interviews. “Joe is a private person,” his lawyer told me. “Joe feels like he’s made his point. He doesn’t want any media attention.”
Before he’d parked his cement mixer in the Parliament’s driveway, McNamara had been a small-time builder. He’d started out laying foundations, and, like a lot of tradesmen from the sticks, he’d been given a loan by Anglo Irish Bank. Thus began his career as a property developer. He’d moved to Galway, into a tacky new development beside a golf course, but the source of his financial distress lay an hour or so beyond the city, in a resort hotel he’d tried to build in the tiny village in which he’d gown up, called Keel, on a remote island called Achill. “Achill,” says Ian, after I tell him that’s where I’d like him to drive me, then goes silent for a minute, as if giving me time to reconsider. “This time of year Achill’s going to be fairly bleak.” He thinks another minute. “Mind you, in the summer it can be fairly bleak as well.”
Boomerang: Travels in the New Third World Page 11