To succeed, banking enquiry must face brutal facts

As 2009 draws to a close, the demand for a public enquiry into what went so badly wrong with Irish banking is rising. To be of any benefit a Banking Enquiry should surface the brutal facts. It should look to appreciate not only what went wrong with banking but should also address how banking, business and political interests conspired to create an unsustainable credit fuelled consumption boom.


With the dust of the international credit crisis blown away, it is abundantly certain Ireland’s problems were entirely home grown. Banks have come up with novel ways of losing money – the most recent being toxic sub-prime bonds. But Irish banks lost money in the old fashioned way - by making bad loans to people who ought never to have been given them.


There would have been no market for overpriced houses had banks not wilfully engaged in the most destructive bouts of credit creation from 2003 on. A confluence of builders, bankers and politicians interests, allied to weak central bank and regulatory supervision, meant that a small group of rogue bankers who controlled Anglo Irish Bank had a disproportionate effect on property values. The explosion in Anglo’s lending should have set off alarm bells instead of pressurising others to follow suit. Once AIB decided it wanted a greater slice of the action, the dye was cast for Banking’s destruction of the entire economy.


Professor Morgan Kelly’s argument that property prices were driven upwards by bank credit is compelling because it is brutally true. Lulled into believing in a never ending boom in asset prices, high economic growth rates and a bountiful supply of external money, bankers relaxed their lending standards promising a house for everyone who wanted one. At the height of their lending frenzy, they advanced billions in 100% mortgages for terms of over 30 years and lent billions more too amateur property investors who knew nothing of the risks they were being exposed to. Bank relationship managers were spectacularly effective sellers of the leveraged wealth creating property loan. The heady mix of credit, cement and concrete blocks, drove employment, incomes, government tax revenues and spending to unsustainable levels. By 2008 construction activity accounted for nearly one quarter of national income.


When the credit bubble burst, banks were left with three insurmountable problems. The first was the scale of speculative property lending, the second an enormous dependence on wholesale funding from abroad and the third the sheer size of mortgage credit on their balance sheets.


All Government achieved last year, through NAMA, was to try to deal with speculative property lending. But speculators can only pay back what they can afford. If as suspected, Governments assumptions on future property prices are overly optimistic, NAMA will cost the taxpayers tens of billions in years to come. While it may have stabilised a sick patient, Irish banks remain terminally ill.


Buying into Banking’s wealth creation doctrine, Ireland’s business classes borrowed billions to invest in overpriced property. Consequently many fine small and medium sized businesses are now drowning under the weight of debt they can no longer afford. Banks business bad debts will get far worse as households tighten their belts and consumption inevitably declines further next year. At the same time household mortgage defaults are escalating alarmingly.


Irish banks business model is frighteningly dependent on an abundant supply of cheap overseas funding which has now all but dried up. Propped up by the ECB, banks must shrink their balance sheets or expire. This means they must rapidly shrink their lending. New credit will be more expensive and credit supply will adjust back to 90’s levels, when banks were predominantly funded by retail deposits – ordinary people’s savings. The reduced supply of bank credit will depress property prices for years to come.


The simple fact is had there not been an abundant supply of credit there would not have been a property boom. But for every loan that ought not to have been made there was a borrower who ought not to have borrowed.


In the latter stages of the 20th century, deregulation of banking, an abundance of international liquidity and financial innovation made credit available to the masses on an unprecedented scale. In the past decade Irish consumer’s once prudent attitude and behavioural use of credit fundamentally and dangerously shifted ground. Rising incomes, reducing taxation rates, low interest rates led to a consumer spending boom. And as incomes couldn’t keep pace with spending bank debt was used to plug the gap. Overly optimistic and turning a blind eye to risks of over-borrowing, far too many households acted to plug a rising gap between income and spending by using bank credit – spectacularly so in buying overpriced houses. And as mortgage debt rose, so too did non-mortgage debt. Today households owe about €150bn with most of the loans represented by long term mortgages taken out after 2003.


Political populism wilfully fuelled rampant consumerism, raising people’s income and life style expectations whilst at the same time making people more responsible for their own financial security. Government promoted the notion of the responsible rational atomised citizen - a revenue generating economic consumption unit. Despite increasing income risks and with job security declining, many ordinary people were lulled into a false sense of financial security as double income households did not ask the question- what happens if I cannot work?


All the while central bankers and regulators ignored the dangerous explosion in bank credit and did nothing to control lending standards. The simple expediency of restricting mortgage lending would have meant there was no market for overpriced houses and the spectacularly destructive financing of property would not have occurred.


An enquiry into banking will succeed if it truly appreciates and surfaces the dangers inherent in uncontrolled bank lending and understands how people’s behavioural use of too much credit can be controlled for. It will succeed if the lessons of the credit boom are acted on and steps taken to ensure that banking can never again become the destructive force it became.

© Thomas Crosbie Media 2009.

Ireland needs a modern equitable system to save homeowners

If we are to come out of this crisis, it is not just banks that need a bailout, we also need a NAMA for homeowners, writes Bill Hobbs

21st December 2009

Never before in this states history, have so many owned so much and yet earned so little. Tens of thousands of households face a bleak New Year uncertain and fearful for their financial security. Though scant, publicly available data illustrates how unaffordable indebtedness is rapidly reaching crisis proportions for far too many households. Will 2010 see the development of a homeowner mortgage resolution system – a “Homeowners Nama”?

Over a quarter of a million households representing nearly three quarters of a million adults are struggling with debt. Next year household financial circumstances will deteriorate further as the costs of financing the dark side of a bust economic model hits home. Mortgage affordability once aggressively promoted by bankers, real estate agents, mortgage brokers and property cheerleaders has inevitably and dramatically collapsed.

When and if finally told the story of what went wrong with Irish banking will record a time when small influential groups of senior banking executives dominated their organisations and wilfully manipulated banking resources for personal gain. Had senior bankers acted out traditional banking core values there would have been no market for overpriced houses and property.

For almost a decade, Irish banks have been captive of senior executives whose values and behaviours differed radically from traditional banking values. The vast majority of bank employees are ordinary decent professionals whose shared values are rooted in prudent banking and its wise creation of credit. But they were led, managed and manipulated by a breed of executives who eschewed traditional values for differing values – those of greed, avarice and self-enrichment. Emboldened by illusions of omnipotence, they wilfully and recklessly took risks they should never have been permitted to take. Regulators and central bankers failed to appreciate a fundamental shift in values, as bank executives dangerously expanded bank lending. Political leadership, similarly emboldened by illusions of omnipotence, actively promoted a credit fuelled consumption boom and did nothing to stave off its inevitable bust.

Most people have experienced a permanent reduction in household income, some are facing long term joblessness, and all face a permanent reduction in the value of their homes. Through no fault of their own, many have boom time loans they can no longer afford. Homeowners are struggling to finance repayments on debt on overpriced homes they were encouraged to buy. They risk losing their homes as they can no longer afford to make repayments.

There is a dire need for a homeowner mortgage resolution scheme – a “Homeowners NAMA”. Existing distressed home mortgage arrangements merely offer a temporary bank friendly solution. Insisting banks forestall on repossessions, reflects outdated social, legal and economic thinking that demands financially distressed borrowers make good their obligations no matter how long it takes and unduly favours the legal rights of creditors. And favouring banking solutions that essentially force people live long term at near poverty levels, so that they can make repayments on mortgages they can no longer afford, is neither socially acceptable nor economically viable. Advanced societies have long recognised the need for debt resolution systems that equitably adjust the balance of powers and rights between creditors and debtors.

Currently some commentators are promoting notions of shared equity, where banks or the state might take an equity share in homes rather than expect loans to be repaid in full. Whilst attractive, such solutions do not deal with the span or continuum of options required. Any legislative approach to debt resolution should appreciate the scale of the problem, identify solutions and establish a process through which people arrange to manage their debt.

A regulated homeowner debt management system should identify solutions based on what people can afford to repay and schedule their debt accordingly. It is eminently possible to identify a range of options which would be made available depending on the homeowners’ financial circumstances and disposable income. For example debt resolution systems found elsewhere propose one method of managing unaffordable debt. Typically homeowners budget for living expenses and identify what’s left over to make loan repayments. They then enter agreements to pay a fixed amount, usually monthly, to their creditors who agree to freeze interest and accept the lower amounts. The process works as both lenders and borrowers stick to the agreement.

The starting point is of course a co-ordinated Government response. It could establish a task group to create a mortgage debt resolution system and empower it to take whatever action is required. This group should reflect the interests of those owed money and those who owe money. And it should deploy the principle that ordinary people cannot be expected to repay what they cannot afford, nor should they be forced to live a life in financial stress from debt, they have no hope of paying within a reasonable period of time.

The responsibility for causing the negative equity trap and billions owed on overpriced homes has to be borne by those who wilfully and negligently made credit available and ignored the risks they were running. Banks and their senior executives had the wherewithal to understand the risks taken but chose instead to engage in reckless lending.

Redressing the dominant supplier power of banks is an accepted principle in all debt resolution systems. The principle of shared costs is also present- where borrowers pay what they can and lenders are forced to accept lower repayments – and are forced to write off debt should borrowers stick to their agreement. It is a principle not yet recognised by Government although the Law Report Commission proposals on personal insolvency may result in an equitable system based on sharing economic costs and addressing the unequal power relationship between bankers and homeowners in trouble.

© Thomas Crosbie Media 2009.

Growing plague of Bullying in the Irish workplace

Growing Plague of Bullying in the Irish Workplace

In the current climate with many companies downsizing and cutting costs, bullying is likely to escalate, writes Bill Hobbs

Ireland’s toxic workplaces with their abusive behaviours are about to get a lot worse. And many more people may experience one of modern Irelands’ worst organisational attributes – bullying in the workplace.

Mary was once a senior, well respected and liked manager until she became the target of a bully. Within two years she went from being an outgoing, confident, personable, competent employee to a sullen, withdrawn, depressed individual who was shunned by her colleagues. Mary’s family suffered as she became increasingly irritable and short tempered at home. Losing all interest in her work and family life, she dreaded going to her office each day. Only after confiding in a close friend, an organisational psychologist, did Mary understand what was happening to her. She had become the target of a bully, her boss, whose behaviour towards her escalated from sarcasm, intimidation, exclusion, isolation, denial of meaningful work to eventually refusing her annual salary increase without explanation. While her company had a bullying policy, Mary realised it was a worthless piece of paper as she learned of others who had also been similarly targeted by her boss. On looking into the sudden departures of previous employees, Mary learned of millions paid by her organisation in discreet termination agreements and legal fees.

Management training, including business school educators, emphasise the positive aspects of organisational leadership. But managers do not learn of the dark side of leadership when bullies thrive and are promoted to senior positions. As managers, bullies are skilled at manipulating HR policies and financial resources. Their organisations typically exhibit high levels of sudden staff departures, absenteeism, low morale, intimidation and harassment. More often than not bullying cascades down from one or two senior managers to supervisors and becomes acceptable and unchallenged behaviour. Not only are those targeted by bullies traumatised but others who witness bullying are also affected.

When Mary eventually complained her boss to her HR manager, he responded by instigating disciplinary action accusing Mary of poor performance and making false allegations against him. On her doctor’s and lawyer’s advice she removed herself from her toxic workplace and stayed at home. Her legal action for bullying and harassment was quietly settled, without admission of liability, by her employer. Mary had to sign a gagging clause promising not to talk to anyone, except her family, of her experience. She is not alone, as in the vast majority of cases, the person who is being bullied is left with no option but to leave their job. Mary didn’t get an equivalent position elsewhere and remains deeply affected by her experience.

Mary’s story, whilst fictionalised, illustrates how bullying is known to cause people to suffer long term medical and psychological illness where they develop symptoms similar to post traumatic stress disorder. With over 100 suicides a year linked to bullying in the workplace, employers and their trade organisations fear successful bullying law suits. Cases are settled quietly and bullying remains an insidious aspect of far too many public and private organisations.

Bullying, intimidation and harassment is known to worsen when organisations experience dramatic change, in particular downsizing. Unless an organisations values and management behaviours stress employee integrity and dignity, chances are bullying will feature. It’s not enough to have a bullying policy in place - it must also be rigorously practiced. Unchecked, the bully boss or manager creates an environment in which others adopt the normative behaviours of the bully.

The social manifestation of bullying escalates from sarcasm, threats, verbal abuse, intimidation, bad-mouthing, manipulation, duplicity, unpleasant assignments, demeaning jobs, exclusion, isolation, and in extreme cases physical violence and forced resignation.

At any one time between 10-15% of adults are said to be genetically predisposed to sociopathic type behaviours which sees them consistently bully others. Bullying is also nurtured within certain types of organisations, whose leaders fail to understand what it is and pay lip service to employee rights to be treated with dignity and provided with a safe place to work. And it’s reported as being more prevalent in larger organisations than smaller ones.

Documented behaviours include changing and devaluing work, excessive and unreasonable demands, social isolation, withholding information, excessive monitoring, personal attacks, ridicule, insults, verbal threats, spreading rumours , cyber bullying, undermining, humiliation, intrusion, unreasonable assignments and deadlines, harassment, exclusion and blaming people for things beyond their control.

Bullying usually occurs where there is an imbalance of power. More often than not behind closed doors. The most reported incidents occur amongst middle and senior ranking males in their 30’s and 40’s. But only because they are more aware of what bullying is and correctly identify when they are being bullied. Studies are likely to underreport bullying as many people don’t know when they are being bullied.

When last studied in 2007, a report to Government on workplace bullying, estimated that 160,000 people had been bullied in the previous six months and bullying had increased since 2001. The highest incidence was found in the public administration, education, health, transport, communications and financial service sectors. Close onto nine people in every hundred had experienced bullying which was studied using a set of unwelcome behaviours occurring persistently over a six month period. Seven in ten people bullied, experienced bullying behaviour more than once a month and many several times a week. Having a policy on bullying in place was found to be largely irrelevant. Although 82% of pubic sector bodies had a policy in place they also had the highest incidence of bullying.

Regrettably Irish workplaces seem ripe for the dark side of leadership and abusive behaviour will become far worse. In current economic circumstances with so many organisations downsizing and cutting costs, bullying is likely to escalate. What’s more with people trapped in their jobs, unable to find employment elsewhere, many more may experience the trauma of being a target of bullying. It is a distressing outcome that needs to be understood and robustly dealt with by those whose responsibility it is to govern, oversee and manage organisations.

© Thomas Crosbie Media 2009.

Budget 2009 Bangers, Booze and Bonds won't inspire us

US President John F Kennedy, once ignited a nation by challenging people to put a man on the moon. Yesterday people were challenged to buy Booze here, trade in Bangers and invest in Bonds.


Three words – Booze, Bangers and Bonds – captured the extent of budgetary largesse. The unpatriotic Newry day tripper is to shop local for cheaper Booze. Near worthless ten year old Bangers have a trade in value of €1500 and national solidarity Bonds will give households another opportunity finance the costs of economic recovery. What’s more Government is to introduce an entirely new concept in banking – the Second Guess Agency.


To fight an oil fire you need to starve it of oxygen by spraying it with foam. In spraying billions of budgetary foam onto Irish households, Government is threatening to douse any chance of igniting economic recovery for years to come. Rhetoric about hope and the right stuff won’t make it any easier for people to manage deflating incomes and a rising cost of living.


Spraying liberal doses of economic recovery retardant, the Ministers budget will amplify household financial fragility to levels never seen before. With one in four households finding it hard to meet their financial commitments – which is about 750,000 income earners - any reduction in take home pay or increase in living costs will have a disproportionate impact on consumption. Increased consumption encourages business to invest in growth and job creation. And it provides for the all important tax revenues required to plug the huge gap in public finances.


Income reduction and higher taxes suck money from an economy and with banking unable to generate new money, it sets off a deflationary spiral. Most households are already experiencing it, as the proportion of income required to cover debt repayments and other financial commitments increases. Once discretionary income declines, people stop spending and businesses go bust.


How many beleaguered households will be able take advantage of the “cash for bangers” scheme and buy a shiny new fuel efficient car when credit is being rationed by banks?


Yet not one euro was budgeted for the states biggest economic retardant, Anglo Irish Bank, which needs billions more in tax payers funds just to keep its banking license. It’s already cost €4bn. And what of the other banks which have as yet no idea of how much they will require in state aid to keep their licenses?


The costs of financing state borrowing will jump by over €2bn next year even before the costs of finalising the bank bail out are factored in. A national solidarity bond echoes a time when governments used war bonds to finance wars. Used to finance the Napoleonic wars, British consols, issued in perpetuity, never to be redeemed, are still traded today. Government’s version will have a shorter time span and be used to underpin a worsening sovereign debt rating.


Yet by raising money through solidarity bonds, the state will compete for household savings at a time when banks are struggling to rebalance their loan to deposit ratios. Just how much Government intends to hoover up in household savings is unclear. But bankers will not be too happy. Nor should they be as they cannot create credit without raising deposits.


Not content to compete on one side of the banking balance sheet the Minister unveiled a new concept in Irish banking – the Second Guesser. It seems that should a small business or farmer be refused a loan, they can appeal to an independent government agency which might force the bank to lend. And the Minister will also write bank credit policy or at least his appointed agents will. Enterprise Ireland may have a reputation for helping small business but it has no competence as a financial intermediary or as a commercial lender.

It’s a uniquely Irish solution to an Irish problem. As banks are too big to bail out and own outright, we get creeping nationalisation. NAMA will spend billions in cleaning up bad loans. And now a Second Guess loan decision appeal agency is to make certain banks lend. Rather than building a good banking system, which is empowered to lend wisely and prudently, we are seeing an unplanned, haphazard and dangerous nationalisation of banking.

Government inaction could lead to a debt revolt

A recent poster on the influential Irish Economy blog site wondered if they’re might be a debtor’s revolt. The notion of ordinary people revolting en-masse and refusing to repay their bank debts in full is not at all far fetched.

Household unaffordable indebtedness is known to cause immense social damage and incur immeasurable economic costs. Government’s budget this week will almost certainly worsen household financial fragility. Published last month, the 2009 Genworth Index, measuring financial vulnerability and security, reported Irish households as the most financially vulnerable of the countries studied. It seems four out of every ten households have difficulty in meeting their financial commitments and expect to have problems in the future. And only 2% feel financially secure.

During favourable economic circumstances and the low interest rate environment of the recent past, Irish household use of debt underwent a dramatic and fundamental transformation. Two powerful forces were at work. The first was “keeping up with the Jones’” as people emulated their neighbours lifestyles and role models promoted by mass media advertising. The second saw bankers relax prudent lending policies and broaden credit availability through financial innovation. Responding to these forces, households changed their behaviour, significantly increasing spending relative to income and consumer debt skyrocketed. People believed it was safe to borrow more and banks believed it was safe to lend more to them. Government, whose policies encouraged the debt fuelled consumption party, was blind to the twin dangers of exploding household debt and bank reckless lending to consumer and property sectors. Central bankers and regulators were lulled into a false sense of financial stability. By 2008 Government’s economic mismanagement created the conditions for a perfect storm for over-indebted households and triggered a dramatic collapse in consumption and tax revenues.

In the early 90’s a double income couple had to put 20% down and could borrow a maximum of 2.5 times one income and once the second income, to buy a home. By 2007 they could have borrowed 100% at multiples of four to fives times their income, and have two car loans, two credit cards and one or two unsecured loans. Experts argued the debt burden was affordable as incomes were rising and interest rates were quite low. They worried only about interest rates rising. Few considered a boom to bust cycle.

By 2006 household debt was running at dangerous levels – all it would take was an income shock and vulnerable households would be plunged into financial distress. This is precisely what has happened. Should interest rates rise, as they will, household financial fragility will worsen.

Experiencing increasing demand, largely from people on social welfare and low incomes, MABS offices took on 15,000 new troubled debt cases in 2009. MABS says its 30,000 active cases have average debts of about €16,500 which represents about €500m in collective debts. But with consumer loans of €140bn comprising some €110bn in mortgage debt and €30bn in other loans, the number of households experiencing financial stress requiring debt management and counselling services is likely to be considerably higher than the numbers currently going to MABS for help. Its figures are but the tip of a very large iceberg of household over-indebtedness.

Estimates put the number of overly indebted households at close to 300,000 with about 750,000 individuals experiencing problems with personal debt. By far the most vulnerable cohort is couples under age 40, with children, who have experienced a long term reduction in take home pay. Heavy users of debt many will or have become hopelessly insolvent.

So far Government has done little to understand or address the massive burden of unaffordable household debt built up during the boom years. Getting banks to forbear on home repossessions is like pouring sand on a land mine and claiming it’s been decommissioned. People’s capacity to participate in modern society depends on income security, access to affordable credit and ability to meet their financial commitments. Well documented, the social consequences of unaffordable indebtedness are dire, causing reduced workplace productivity, family breakdown, depressive illness and in some cases suicide. Stigmatised many people withdraw from being active members of society. Hopelessness and loss of self-esteem add to the misery of being unable to repay loans.

Exacerbating the problem, Ireland’s draconian debt collection law emphasises borrower’s obligations to pay debts in full and overly protects creditor’s rights. Lenders and their debt collectors are engaged in an unsecured loan collection arms race, with each one trying to get into court first to stake a claim on a debtors household income. What’s more when banks start lending again, they will tighten lending conditions, charge more for loans and refuse credit to over-indebted households. Consequently many people, once considered good borrowers, will be marginalised and financially excluded.

Other societies have long recognised the adverse social consequences and economic costs of household unaffordable indebtedness. The Danes led the way in 1984 when they introduced a landmark personal insolvency system designed to provide a full debt discharge over a reasonable period of time during which people pay what they can afford and the balance owing is written off.

NAMA whilst designed to rescue banking from failure, will write off billions in unaffordable loans over time. Most of its customers are hopelessly insolvent or unable to repay their borrowings in full. They will pay what they can and NAMA will write off billions in debt – some say it may cost well over €30bn.

But what of ordinary people who cannot afford to pay what they owe in full? People who borrowed believing it was safe to do so and who made rational decisions based on their expectation of continuing income security? Their expectations were fostered by a government that first promoted a consumption boom and then a soft landing. It could well be that ordinary people will organise into a collective group and demand a “NAMA for the little guy”. In the absence of affirmative action that promises a way out of unaffordable debt, Government runs the real risk of a citizen’s debt revolt.