Ireland: The timidity of the lawyers

Perhaps the biggest puzzle of Ireland’s 2+ years of economic crisis is the lack of progress on restructuring the banking sector, and in particular the reluctance to follow through on the implications of having guaranteed the liabilities of insolvent financial institutions. As with many of Ireland’s problems, there is no single explanation so in this post we focus on just one — a mindset in the Irish government that springs from the legal background of several of the principals in it.

First, a detour. Use of the term “lawyer” in Ireland in any kind of smart-alec company will quickly draw a fussy explanation that the country has in fact 2 types of lawyers: solicitors and barristers, with only the former dealing directly with the client and the latter specialized to make arguments in court and provide legal opinions. Somehow this obvious restrictive practice is alive and well despite Ireland’s reputation as a liberalised economy. So this is a class that knows how to look after itself.

It’s also heavily represented at the top levels of government. One especially unflattering episode that brought this into the spotlight was when the then Minister for Defence Willie O’Dea was a little too expansive in an interview with a reporter in his home city of Limerick with gossip that a local rival had been involved in running a brothel. O’Dea denied he had made any such insinuation until the reporter produced a tape proving that he had. His memory thus jogged, he revised an earlier sworn statement to a court that he had not.

Since all this happened at a time of heightened scrutiny of the ethical behaviour of politicians, it seemed like a resigning matter. But lining up to defend him during a contentious debate in the lower house of parliament — and relying on a mix of fine legal distinctions and bluster to do so — were the Prime Minister, the Minister for Finance, and the Minister for Justice, qualified lawyers one and all, and not showing an ounce of deference to the idea that legal principles and the holding of high public office might come with the expectation of high standards. No, they had their client — their party colleague — and it was a by all means necessary approach to protecting him. Anyway, it failed.

There’s a more general issue here, which is that the Irish political system is strangely deferential when a legal argument is deployed. All that’s necessary is some muttering about a measure being potentially prejudicial, or better still, posing constitutional problems, and a form of helplessness takes over. This explains a lot. Allegations of corruption linked to property developers have circulated in Irish politics since the mid-1970s. By the mid-1990s, the various threads of these allegations had gotten to the level where they ensnared the then incoming prime minister, Bertie Ahern.

The solution — since a police investigation was deemed off the table for legal reasons — was a public tribunal. The tribunal would be restricted to findings of fact and statements made were off-limits for criminal proceedings, which would have to rely on separate investigations. 13 years later, with everyone lawyered up (sorry, solicitered and barristered up), hundreds of millions euro, there’s a mound of documents and lots of cirumstantial evidence, but not a hint that a major active political figure is any legal jeopardy. In any other country, there’s long since since been enough material for a specialized public corruption bureau to go after, but not Ireland. Need to make sure everyone’s rights were protected — except the public’s.

So let’s get back to the banks. Speaking to the lower house a couple of days ago, the Minister for Finance Brian Lenihan said

The recent substantial widening in Irish Government bond spreads since the end of October in response to market concerns relating to possible burden-sharing that might arise in circumstances that a eurozone member state accesses the proposed permanent crisis resolution fund and the requirement for a joint statement from the finance Ministers of Germany, France, the UK and Spain provides strong confirmation of the critical importance of exercising extreme care in asserting that costs can easily be imposed on senior creditors of banks. The current difficult funding position for both the Government and the banking system implies very strongly that we should be very cautious about even contemplating such a step in the current crisis, never mind whatever legal and constitutional obstacles would need to be resolved.

So note, even if the market could be settled down, there would be “legal and constitutional obstacles”. For one thing, we’re back to the historical ironies, as the minister explains that the constitution written by his party’s founder Eamon De Valera, means that Irish taxpayers have to pay full cost to foreign lenders to the country’s distressed banks.

As noted above, the Minister hasn’t hesitated to deploy his legal background in service of the cause, and one of his favourite claims (repeated by Prime Minister Brian Cowen today) is that under Irish and English law, senior creditors of Irish banks are pari passu with depositors, hence the government wouldn’t be able to inflict losses on senior creditors without hitting the grannies as well, hence that option is off the table. Leave aside that the grannies are already covered by a separate deposit guarantee scheme, this is the Irish legal-industrial complex at work again. Make a seemingly confident statement, throw in a bit of the oul’ Latin, and leave the stage to applause.

But is it right? One way to think about it is to consider an alternative: suppose that the Irish government was not pumping huge amounts of capital to Irish banks, through the various share purchases and promissory note schemes. Where would those banks be now, noting in particular their difficulty in functioning even with all the capital that they have received? The creditors would have been in the position of creditors to any collapsed company, picking over the carcass — in pari passu sequence, of course — to see what bits of value could be extracted.

In other words, the government seems to have had a blind spot when it came to using the bargaining power that it had from putting new money into the banks to ask the incumbent creditors to share the pain. Emphasis on the fact that the money put in the government is new money coming from the outside. Ask any bankruptcy specialist whether a new investor coming into a bankrupt company is first expected to pay off all the existing senior creditors. Yet when the scale of the Irish crisis could have warranted something like this, the lawyers huddled and came up with “sorry lads, pari passu and all, can’t be done”.

So here we are. Other countries in economic distress might be entitled to worry whether having loaded up on Ph.D. economists in positions of power was such a good idea. For Ireland, the question is where all the lawyering has gotten us.  Somehow the country never rose in importance as the client compared to the party.

15 thoughts on “Ireland: The timidity of the lawyers

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  2. “Ask any bankruptcy specialist whether a new investor coming into a bankrupt company is first expected to pay off all the existing senior creditors.”
    Exactly the point, the government has no business asking creditors to share the pain outside of bankruptcy court, and even less business to ask senior bondholders to share the pain without hitting depositors. In court, senior bondholders are pari passu with depositors, that’s what the offering prospectuses for these bonds say.

  3. Shamefully our Government are so economical with the truth that they no longer know the difference between right and wrong! All they are interested in, is what they can get out of the corrupt system they are in!

    And yes, “Lawyers”, they are, each and everyone of them!

    Shame on them! And shame on each Irish citizen for allowing them to get away with their “Lawyering”!!

  4. jck, I think that bondholders confronted with the possibility of going into bankruptcy court with a sovereign bringing new money to the table wouldn’t have like their odds very much. So there was scope to bargain about burden sharing without actually having to put Anglo etc into insolvency. I still have not heard an explanation for why 30 billion euro in new money for Anglo doesn’t bring any increase in bargaining power versus senior creditors. In court, the bond holders are pari passu with depositors in distribution of the firm’s assets. No government recap, no assets.

  5. P O Neill:
    It is simply illegal for the government to pick and choose who shares the burden outside of bankruptcy court and the very good reason why the government has no bargaining power regardless of the amount of money it puts into the banks, is that it doesn’t want to go that way (rightly so, it would be suicidal), and the bondholders know it. So, the “bondholders confronted with the possibility of going into bankruptcy court with a sovereign bringing new money to the table wouldn’t have like their odds very much” is just a bluff, it is not credible unless you want to shoot yourself in the foot and chase rabbits for the next one or two generations (i would not say it’s totally impossible, but very long shot).
    You only have to look at the damage from a token gesture, the Anglo-Irish subs debt “burden sharing” (outside of bankruptcy court): for the sake of 1 or 200 millions euros, the government has accelerated the “silent” run wrt irish banks, is going to need a massive bailout and will be unable to raise money in the market for years to come plus as a bonus will probably soon get a junk rating.

  6. In case of Ireland any kind of exit-strategy is fully absent. If Ireland will take a loan of 120% of GDP immediately (total sovereign debt will be 180-200% of GDP) to fill the banks due to deposit outflows, the money will immediately leave the lender’s money safes anyway – as continued deposit repayments and repayments to bondholders.

    What the utopia to think your banking system will be revived this way!

    You will rescue big German banks – your bondholders, but you will loss your Irish Republic!

    The only way is to let the sick banks go, and to establish a new government-owned universal bank, free of debt, which can serve Irish economy.

    If Angela is willing the bondholders share the losses, let’s it happen!

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