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The bank guarantee 'was the most destructive own goal in history that sunk an entire nation'

Professor William Black told the banking inquiry that the decision to issue a blanket guarantee in 2008 was “insane”.

Professor William Black before the banking inquiry this morning
Professor William Black before the banking inquiry this morning
Image: Oireachtas TV

Updated 2.20pm 

AN EXPERT IN bank fraud has said the Irish bank guarantee was “the most destructive own goal in history”.

Professor William Black, from the University of Missouri-Kansas City, said that the lack of “reliable facts” from regulators and banks in the lead up to the 30 September 2008 resulted in a blanket guarantee being issued.

The inquiry also heard the European Commission’s Mario Nava this afternoon.

Earlier, responding to questions from Fine Gael’s John Paul-Phelan, Black said he could not understand the decision to guarantee subordinated debt (junior bondholders), saying later that “you would never ever bailout subordinated debt”.

Black said the guarantee decision turned a banking crisis into a fiscal crisis “that was clearly gonna crush Ireland”. In soccer parlance, he said, this was “the most destructive own goal in history”.

At various stages during his evidence, Black described the decision to issue a blanket bank guarantee as “insane” and said it “sunk an entire nation”.

He said that the assurances that the financial regulator gave about Irish banks being solvent prior to the guarantee was “preposterous” given what it knew.

“Your regulators did an enormous disservice to the nation,” he said.

Black was speaking before the 11 TDs and Senators on the Oireachtas banking inquiry that is investigating the causes of the Irish financial crash.

Inquiry sources said beforehand that they expected his evidence to be “colourful”.

Screen Shot 2015-02-05 at 11.00.15 Ciarán Lynch (centre) is chairing the inquiry Source: Oireachtas TV

Black told the committee that Ireland was distinctive in the degree to which the average person blamed themselves for what happened:

“The Irish people are so low on the list of people responsible for the crash that the don’t much matter.”

On the euro, he said the single currency was “a disaster” and said that in issuing the guarantee Ireland had taken a hit for the eurozone.

“Ireland tried to bail out the German banks, basically, and that was never going to work,” he said.

Black is widely-respected expert in banking fraud whose central thesis is that the leading cause of catastrophic bank failures is senior insider fraud.

He described current regulations since the crisis as “clearly not fit for purpose” though said there had been “some improvements in some areas”.

The professor told the committee that the greatest risk to a bank is its chief executive, saying that history had shown they almost always “cause catastrophic losses”.

“Banks don’t feel, they aren’t real, they operate through bankers,” he said.

He said from his experience in the United States, the best deterrents for bankers was the possibility of criminal sanctions for any wrongdoing.

Screen Shot 2015-02-05 at 11.07.09 William Black before the banking inquiry this morning Source: Oireachtas TV

“You only get deterrents when you affect the senior executives who make the decisions,” Black told committee chairman Ciarán Lynch (Labour).

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In his opening statement, Black said he was probably “the only successful regulator you’ll have in front of you” and outlined his work in investigating and prosecuting bankers involved in the US Savings and Loan Crisis.

He also offered to provide a week of free training to Irish regulators and prosecutors in what US authorities did to prosecute in the scandal.

Mario Nava Mario Nava is the Director of Regulation and Supervision of Financial Institutions at the European Commission Source: Oireachtas TV

This afternoon, Mario Nava told the committee that reforms introduced at an EU level since the crisis ”equip supervisors to make future crises less likely”.

He said that the European Commission was responsible for ensuring that regulations are implemented, but said it was not a supervisory agency.

Under questioning from Fianna Fáil’s Michael McGrath, Nava said he was “not here to accept responsibility”.

Responding to Labour senator Susan O’Keeffe, Nava said he had a confidence of 9-out-of-10 in the current regulatory set up. He pointed out that there had been 41 pieces of EU legislation in the area of banking between 2009 and 2014.

Responding to Black’s earlier criticism of current regulations, Nava said he would be happy for the US academic to engage with the European Commission in the future.

More: After weeks of boredom, the banking inquiry could get very interesting today…

Read more on the Banking Inquiry here >

About the author:

Hugh O'Connell

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