‘Wrong Maths’ Behind Ireland and Britain Banking Crisis

Inquiring minds are looking not at hubris but at “Wrong Maths” that caused the banking crises in Ireland and Britain. Yes, you read this right. “Wrong Maths”. As if it was because somebody added up the columns incorrectly:

Last week, the Irish government said bailing out its banks could cost €45bn (£39bn). The next day Fitch downgraded Irish debt by another notch and consumer confidence plunged.

The size of the bail-out was one thing, but the real problem was that, three years on, the authorities were still arguing about the causes of the crisis. Matthew Elderfield, Ireland’s financial regulator, was hauled in for questioning – did the banks lie to the regulator about loans? “I honestly don’t know,” he said.

There’s still plenty of confusion on this side of the Irish Sea too. Just a week ago, George Osborne was forced to deny renewed claims that Britain’s banks would need another big bail-out. Ed Miliband blamed capitalism; even David Cameron slammed the City.

From the start, one group of accountants has argued that they are all wrong. Hubris and excessive risk played their part but the biggest problem was far simpler: the maths was wrong.

Led by Tim Bush, a former fund manager at Hermes, the group argues that Britain and Ireland have been uniquely subjected to accounting rules that have been wrongly applied and as a result “produced false profits and overstated capital” which have “misled creditors, misled shareholders, the Bank of England, FSA and others”.

In a recent letter to the Treasury, he said the system has led to “mistakes [being made] of such severity that it is difficult to overstate”. Bush says that without scrapping the accounting regulations, no amount of tinkering with capital and liquidity, corporate governance or bonus bashing will prevent another crisis.

And there you have it. We just added the columns wrongly.


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