The bank guarantee ‘was the most destructive own goal in history to sink an entire nation’

Updated 14: 20h

A bank fraud expert has called the Irish bank’s guarantee “the most destructive own goal in history.”

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

The investigation also heard from Mario Nava from the European Commission this afternoon.

Previously, responding to questions from John Paul-Phelan of Fine Gael, Black said that he could not understand the decision to guarantee the subordinated debt (junior bondholders), and later said that he would “never, ever redeem the subordinated debt.”

Black said the guarantee decision turned a banking crisis into a fiscal crisis “that would clearly crush Ireland.” In football 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 “sank an entire nation.”

He said the guarantees the financial regulator gave on the solvency of Irish banks before the guarantee were “absurd” given what he knew.

“Your regulators did the nation a disservice,” he said.

Black spoke to the 11 TDs and senators about the Oireachtas banking investigation investigating the causes of the Irish financial collapse.

Investigative sources said in advance that they expected their evidence to be “colorful.”

Ciarán Lynch (center) chairs the investigation

Source: Oireachtas TV

Black told the committee that Ireland is distinguished by the degree to which the average person blames themselves for what happened:

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

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

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

Black is a widely respected bank fraud expert whose central thesis is that the leading cause of catastrophic bank failures is insider trading fraud.

He described current regulations since the crisis as “clearly not fit for purpose”, although he said there were “some improvements in some areas.”

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

“Banks do not feel, they are not real, they operate through bankers,” he said.

He said, based on his experience in the United States, that the best deterrent for bankers was the possibility of imposing criminal penalties for any wrongdoing.

Screenshot 2015-02-05 at 07.11.09

William Black before the bank inquiry this morning

Source: Oireachtas TV

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

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

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

Mario Nava

Mario Nava is the Director of Regulation and Supervision of Financial Institutions of the European Commission

Source: Oireachtas TV

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

He said the European Commission was responsible for ensuring regulations are implemented, but said it was not an oversight agency.

When questioned by Michael McGrath of Fianna Fáil, Nava said he was “not here to accept responsibility.”

Responding to Labor Sen. Susan O’Keeffe, Nava said she was 9 out of 10 confident in the current regulatory setup. He noted that there were 41 EU laws in the banking field between 2009 and 2014.

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

Plus: After weeks of boredom, banking research could get very interesting today …

Read more about the Bank Inquiry here>

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