Open Dissent (3 page)

Who could have expected that the board, which had accepted my resignation on the grounds of protecting the reputation of the bank, would have overseen, under a new chairman and CEO, the irreparable damage done to Bank of Ireland's reputation and, more so, to the reputation of the country over recent years? The fingerprints of all those who are responsible for the failure of the bank to withstand the current crisis are easily identified. Many are still on the board. I consider open dissent to be my responsibility and obligation.

The identification and appointment of key executives and in particular CEOs has to be seen as the most important responsibility of the chairperson and the nominations committee in any public financial institution. What these examples above show is that mistakes can be made at board level in the appointment of leaders. The pattern of a respected and able leader being replaced by someone who doesn't have the capacity to take a corporation through whatever challenges arise may have to do with the successor being appointed at a time when the corporation is
confident and in a strong position. In this situation, having someone at the helm with different qualities to the previous leader is perhaps not seen as a problem. The process of succession needs to be examined in major financial institutions to see where improvements can be made to safeguard the long-term viability of the institutions.

After a lifetime of banking in the Irish and international markets, I can reflect on my experiences and offer observations and suggestions for the survival of financial institutions in Ireland in the long term. As I recount my experiences with leaders in the financial community and observe the failures of institutions, I must conclude that some institutions can become too large to manage. Perhaps it would be clearer to say that, beyond a certain size, the complexities of managing major financial institutions accentuate the multiple risks undertaken. Few executives have the experience or skill base to manage complex financial institutions, so one may conclude that constraining banks from becoming systemic risks is the best safeguard to protect the financial system in a country in the long term.

During my time at Citicorp/Citibank, Security Pacific, National Australia Bank and Bank of Ireland, a lot of time, effort and money were invested in the pursuit of the creation of a code of behaviour and the establishment of corporate values. These pursuits are often deemed to be futile by those who believe the introspective nature of these activities to be boring and tedious. But if board members and the executive management of an organisation cannot stand by its enshrined values and standards, it is unlikely
that the rest of the employees will. Within a bank, there must be a clear vision for the direction of the organisation, which is communicated clearly to all stakeholders; integrity in all dealings; a strong capital base; an acceptance of change; a culture of sensible corporate governance; an unending hunger to be best in class; and, to make all this possible, a strong leader who is respected by all.

When the dust clears on the nationalisations and bankruptcies in the banking world, an examination of those leaders who failed or came through the crisis somewhat scathed would make interesting reading. Good leadership, not just in banking but at the highest political level, is the key to our recovery.

Here are the characteristics we don't want in our leaders, but which have unfortunately been demonstrated by some of them over recent years:

• Say one thing and mean another.

• Act in accordance with hidden agendas.

• Prefer to look good rather than doing the right thing.

• Personal needs are put ahead of the good of society.

However, there are behaviours that have been accepted over time as good leadership practice across all professions and sectors of society. The one characteristic that can be identified in all good leaders is authenticity, which is reflected in the following:

• Communicate honestly and wisely.

• Their actions match their words.

• Say clearly what they believe and stand for.

• Respect and uphold people's dignity.

• Treat people fairly and equitably.

Having standards that we agree on, such as the checklist above, makes our judgment of our leaders more balanced and consistent. Some may think that it is too idealistic to have such a code of behaviour, but surely we should have something to aspire to.

Whether in the political, corporate or even domestic arenas, leaders are constantly under pressure for results from their followers. To maintain a position of power, leaders may often make decisions that favour the shortterm solution with scant regard for the value of long-term planning. Governments and companies need to maintain balance between the long- and short-term goals of their constituents in order to survive. Sustainable prosperity requires a long-term view, which frequently means that certain short-term decisions have to be subordinated in favour of long-term goals. Success is unlikely to be achieved by frequent abrupt changes in strategy, which are symptomatic of a lack of long-term vision. Simply put, leaders should articulate clear plans to the shareholders or the electorate and any short-term decisions taken should be viewed within a long-term time frame. A clear communication plan needs to be in place so that people understand that what is politically favourable cannot be put ahead of what is in the best long-term interests of society. As a leader, you shouldn't underestimate your stakeholders; they will stay with you for the long term if you explain your decisions in the context of a long-term time horizon.
This applies equally to corporate leaders and politicians and it might be best summarised in the following quote: ‘Good leaders achieve results; great leaders achieve sustainable results by serving multiple constituencies.'
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Viewing with hindsight the political and banking environments that incubated the current financial crisis, one can see that a lack of moral fibre was allowed to flourish through a culture of silent dissent. This culture, which favours silence over openness, pervades the boards of our corporations, our Government and our political parties. Bad decisions are made because good people say nothing. It is a culture deeply associated with cronyism. Silent dissent is, I believe, central to the reasons for the severity of the banking crisis in Ireland and why we got caught at a disadvantage in 2008. In this book, as a protest against this culture, I wish to exercise the opposite – open dissent.

Open Dissent
counters the culture of denial at all levels of our community, from the banking sector to the political and public sectors. Identifying the extent of our economic and financial problems is the first step to remedying them, and remedies are what this book is essentially about.

Chapter 1
goes back as far as the Great Depression to analyse the origins of the banking crisis in the US. How and why the crisis has manifested itself as it has in Ireland is the subject of
Chapter 2
, while
Chapter 3
looks closely at the culture of silent dissent in this country, which leads to a discussion on corporate governance, how it has failed in Ireland and what the standards should be. The controversial
question of who should pay for the crisis is broached against the background of a discussion on fairness in society in
Chapter 4
. However, pointing the finger is not constructive in the long term; an understanding of what went wrong and how we can move forward is, of course, more important.
Chapter 5
is concerned with the conditions that will bring about recovery, including a look at changing the bankruptcy laws and encouraging informed investment. The controversial subject of the National Asset Management Agency (NAMA) is discussed in
Chapter 6
, which, if the Swedish model in the 1990s is anything to go by (
Chapter 7
), should be an effective machine to get Ireland out of the crisis, as long as transparency is respected and common sense prevails.
Chapter 8
introduces the idea for a brand new banking model, while
Chapter 9
looks at Ireland's recovery and the issue of sovereign debt in the context of the European Union (EU).

I am often asked, ‘Did you see the crisis coming?' I can respond that I have written about it and spoken to many people over the past three years on the subject, whether in the newspapers, on the radio or on TV. My comments reflected a real concern for the impending financial and economic crisis and, once we became aware of the damage done, the steps that should be taken for recovery. A second question that is often posed along with the first is, ‘If you were still in banking in recent years, would you have done anything differently?' To this I can only say that I was not there at the time decisions were being made and I therefore can take neither blame nor credit.

However, I will say that Bank of Ireland was established in 1783 and, through modest growth over 221 years, the balance sheet reached €100 billion in assets by 2004; four years later, in 2008, the bank's balance sheet had doubled to more than €200 billion. The accelerated growth can only be attributed to the ambitious desires of the executive management and board.

I often compare my mindset as a CEO of a bank to my mindset as an independent investor today. In both positions I can only be judged by the financial scorecard that reflects my gains and losses. I have no hesitation disclosing that I lost millions during this chaotic period on investments in Bank of Ireland, Royal Bank of Scotland and Allied Irish Banks (AIB). Having crystallised my losses, I have actively managed my financial position through trading in shares and foreign exchange to recover a large percentage of my capital and dividends. I would hope this activity reflects a mindset of market awareness and a penchant for action. My fingers are on the pulse of the market and all I can hope is that this keeps me better informed for investment decisions. I firmly believe that, had I still been in banking, I would not have remained in denial for long, or, if appearances are anything to go by, at least not as long as Ireland's executive directors.

It may appear strange at first glance that we need to go back to the Great Depression of 1929−1933 to find a major contributory factor to the financial crisis in Ireland today. How banking changed and evolved over the past eighty or so years owes a lot to the Banking Act of 1933, more commonly known as the Glass–Steagall Act, which was passed in the US as a reaction to the collapse of a large portion of the US commercial banking system. The repeal of this Act in 1999 helped create the banking environment that allowed for the international financial crisis that began in 2008.

While recessions are experienced throughout the world from time to time, a depression is a rarity. Defining the difference between these two economic terms is not easy for one simple reason − a universally accepted definition does not exist. A recession is when your neighbour loses his job, but a depression is when you lose yours, or so the line goes.

The standard definition of a recession is a decline in the GDP of a country for two or more consecutive quarters. It is an unsatisfactory explanation as it does not take into
consideration changes in other variables such as unemployment rates or consumer confidence. An economic recovery that doesn't lead to more employment is merely a mirage. Also, using quarterly data makes it difficult to pinpoint when the recession begins and ends.

There are those who would define a recession as a fall in business activity until it bottoms out, following a period when it had reached its peak. When business activity begins to rise again and an expansionary period is experienced, the recession has come to an end. By this definition, the average recession lasts about one year. Many economists would agree with this.

The term ‘recession' was developed to differentiate periods like the Great Depression from smaller economic declines, implying a relatively simple definition of a depression as a recession that lasts longer and sees a larger decline in business activity. So, in the context of changes in GDP, a depression occurs when real GDP declines by more than 10 per cent.

The Great Depression came about in the context of massive speculative trading coming off the back of a five-year bull market. The bull market came to an end in September 1929 and trading climaxed on Black Thursday, 24 October 1929, with almost 13,000,000 shares being traded. Panic selling followed on Monday and Tuesday, 28 and 29 October 1929, which concluded in total losses of US$30 billion – ten times the federal budget and more than the US spent on World War I. Personal and corporate savings fell from US$15.3 billion to US$2.3 billion.
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Protectionism was unlikely to have been a main cause of the Depression but it surely helped the spread of its effects throughout the developed world. Increased tariffs, intended to protect local manufacturing and farming communities, fostered global protectionism and resulted in world trade declining by 60 per cent between 1929 and 1934.
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It is often overlooked that the last depression by our definition in the US was during 1937−38, when GDP declined by 18.2 per cent.
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The effects of these economic circumstances made the US economy dependent on the war machine and military expansion to fill the domestic coffers. The sector that would create the greatest economic stimulus was armaments. Commentators have broached the subject that the US decision to enter World War II was based somewhat on economic motives. But perhaps this is a cynical take on what lay behind the political decisions at that time.

In the 1930s people were not exposed to technology in the way we are today. For example, the time it took to report one quarter's GDP figures or the previous year's figures would have been measured in months if not years. However, the evidence was clear that there was a depression being experienced by the length of the dole queues and the number of soup kitchens. The hardships and misery experienced in the 1930s laid the foundations for a more sympathetic response to the plight of the less fortunate in the US thereafter. People whose wealth had evaporated and whose life savings were depleted or were lost in a banking system that was not prepared or robust
enough to withstand the fallout of the economic disaster were faced with a bleak future.