Texas may not look much like Ireland. But at different times, each was deemed a model of rapid economic growth, envied and resented by neighbors. During those boom times, each had banks that went crazy, making so many speculative loans that the banking system was doomed when the bubble burst.
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Bill G. Patterson, right, with his lawyer Burke Bailey during House hearings on the Penn Square Bank in August 1982.
The difference was in what happened after the fall. The United States let the Texas banking industry collapse, with out-of-state banks picking up the pieces as the national deposit insurance fund suffered substantial losses. Ireland instead decided to bail out the banks and nurse them back to health as institutions based in Ireland, not controlled in some other country, and there was no European burden-sharing.
That decision may end up bankrupting Ireland. It certainly has led to a deep and enduring recession.
Texas banks got into their mess because of the great oil boom prompted by the Iranian revolution in 1979. In 1980 and 1981, Texas grew rapidly while the overall American economy stagnated. The banks piled in and made huge profits. Real estate prices rose, and there was a surge in construction.
When it ended, the banks gradually folded, and tales of excess became legendary. The era was exemplified by Penn Square Bank in Oklahoma, a neighboring oil producer whose economy outpaced even that of Texas in 1980 and 1981. It featured a colorful executive named Bill Patterson who became famous for, among other things, drinking beer out of a cowboy boot. He was also good at making insider loans that were never repaid.
At the time, there was hand-wringing about how Texas could function without banks.
Just fine, it turned out.
Texas ended up with a lack of bank headquarters. That may have reduced support for local charities, not to mention demand for Dallas office space, but there was no shortage of banking offices willing to take deposits and make loans. The Texas economy recovered.
Ireland’s economy was the envy of Europe a few years ago. In 2007, when France and Germany were growing at about 2 percent a year, Ireland’s growth was almost 7 percent. It was known as the Celtic Tiger and was widely celebrated for the combination of low tax rates and fast growth. The banks grew rapidly and piled on property loans. In the early part of this decade, home prices grew at rates comparable to those in Phoenix and Las Vegas.
The banker who came to epitomize that era was Sean FitzPatrick, the chief executive of Anglo Irish Bank, which grew faster than the others by focusing on property lending above all else. He is remembered as the man who, in good times, denounced bank regulation as “corporate McCarthyism.” He also turned out to be good at making secret loans to himself that did not work out.
Ireland has now taken over Anglo Irish, and it has bailed out all the other big banks.
But it is not clear how much more money will be necessary. That depends on how bad the loans are, and given the record of the banks it is easy to understand why lenders are hesitant to believe their latest numbers. The Irish banks are increasingly dependant on the European Central Bank for funding, something that makes the central bank nervous, and much of this week was spent on negotiations about some sort of European bailout.
When the crisis struck, Ireland was the first country to adopt fiscal austerity, and was widely praised for that. Such cutbacks may have been necessary, but a result has been to worsen the recession and put more downward pressure on property prices, which in turn made the banks suffer even more.
During the boom, there was a similar circle, but then it seemed virtuous. Lending enabled people to buy property at ever increasing prices, and the boom in construction made the economy keep growing. At Allied Irish Banks, the largest of the Irish banks and one that seems to have been no more irresponsible than the rest, the book of loans doubled between 2004 and 2007. More than a third of the loans were for construction or unimproved property, while a quarter were for home mortgages.
By the end of 2007, home prices had been falling for more than a year, but the bank continued to finance new construction projects and boasted that only six-tenths of 1 percent of its loans were impaired.
Now, even after dumping many of its worst loans onto a government bailout bank, a tenth of all its loans are impaired.
The bank is still private, and its shares trade as if there is a little value left. The government wants it to remain private and eventually return to being a normal bank, but it is hard to see how the bank can regain the confidence of investors. Earlier this year the bank borrowed money with a government guarantee, but still had to offer to buy back its bonds if the investor wanted. This week it disclosed that some investors did want their money back. The Irish bank bailout now looks more like the first part of a crisis, not the resolution of one.
The European Union likes to compare itself to the United States. The German finance minister, in lecturing the United States a few weeks ago, said the Americans should not worry about their trade deficit with Germany, but look instead to the country’s trade balance with the total euro zone. Nobody worried about Europe’s balance with any particular American state, he noted.
If the euro zone were more like the United States, this problem would be far less severe. At its economic peak, Ireland accounted for only 2.4 percent of euro zone gross domestic product, while Texas provided 8.2 percent of the G.D.P. of the United States when its banks were about to go down. So it should have been less of a problem for banks outside Ireland to step in than it was for non-Texas institutions to move in then.
Perhaps the attractions of the Irish retail market could have persuaded some German or French banks to take over Irish institutions. The cost to the government would still have been great, but not open-ended, and Ireland would now have a functioning banking system.
To be sure, that might not have happened. The Irish crisis came along as the rest of the world also suffered, and there were bailouts in many places. But it would have been more likely with fewer barriers to cross-border transactions. There were European banking systems that escaped relatively unscathed.
In Europe, it is every country’s banking system for itself. Ireland had the misfortune of having a banking system that was relatively large compared to the size of the country, and of having presided over one of the most speculative property booms. The rest of Europe, which still resents Ireland’s earlier apparent success, wants to offer as little help as it can without destroying the euro.
Texas greatly benefited from the fact the American economy was integrated, with a central government that could and would help out. Ireland can only wish Europe could be more like that.
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