Silver lining for those caught in debt nightmare

Law Reform Commission offers hope to those mired in Dickensian debt noose, writes Bill Hobbs

Last week, the Law Reform Commission unveiled a small silver lining from within a very dark consumer protection cloud that should force the snail like pace of Irish legislative reform.

In its 416 page report, the commission recommends fundamental change in the relationship between those who owe money and those who are owed money. Designed to redress laws derived from Dickensian societal norms, its proposals include a draft bill that should be law by this time next year, given this state’s solemn undertaking to revise its antiquated insolvency laws under the IMF/EU agreement.

With over 100,000 households experiencing significant mortgage debt problems, official statistics merely hint at the scale of wider unaffordable indebtedness. There is no financial safety net – no way for someone to earn a fresh start, to get out from underneath the unbearable burden of unaffordable debt save lifelong insolvency, bankruptcy, permanent emigration or death.

This is all about to change. The commission’s fundamental aim is to ensure that people who cannot pay off unsecured loans in full are provided with a statutory financial safety net mechanism to earn a “fresh start” - to become once again “economically active members of society”. In considering international principles and precedents it has designed an equitable and just non-judicial system for 21st century Ireland.

This design would see the establishment of a debt enforcement and settlement office to oversee the workings of a centralised debt recovery system and a new debt settlement scheme.

The scheme would be administered through a national network of licensed and regulated personal insolvency practitioners whose role would be to act as independent objective mediators in advising, arranging and administering debt settlement plans between consumer and small business debtors and their creditors.

Under these plans, people will agree to make debt repayments based on what they can afford to repay over a period of upwards of five years. Estimates of affordability will allow for a basic standard of living above social welfare rates while protecting a person’s ability to earn an income. Allowing people space to rebuild their financial affairs, should incomes improve then only 50% of future increases will be allocated to repayments.

Providing 60% of a person’s creditors by value agree to a settlement plan, then it will become legally enforceable. The schemes rules will protect people against manipulative creditor practices and its moral hazard measures will prevent people unjustly benefitting. Providing people stick to the plan, they will earn a fresh start when it concludes, as any balance left owing will be written off.

Provision is also made for “no assets and no income” or NANI cases. An order can be made preventing legal action by creditors and wiping out debts owing after twelve months. Other changes include shortening bankruptcy from twelve to three years, increasing the minimum qualifying threshold from €1900 to €50,000 and limiting priority debts including excluding revenue debt. 

The commission predicts most people will opt for debt settlement agreements as bankruptcy would be reserved for the wealthy or “once wealthy” category. In a radical step, it also says that nobody should be jailed for non-payment of debts including those who can pay, but refuse to pay – they would be subject to community orders.

While the commission did not deal with secured debts, its recommendation on dealing with the largest element of secured household debt – home mortgages- is quite interesting. It says that once called in, as the portion the loan owing over and above the value of the property becomes unsecured, it should form part of a debt settlement agreement. 

This could open the door to a mortgage option where a lender agrees to mark down the value of a loan to the current home market value and allows balance to be dealt with through the debt settlement plan. Treating unsecured mortgage balances in this way could provide a mechanism through which unaffordable negative equity is settled within five years.

The commission is quite strong on creditors paying the costs of operating the system. It also says debt collectors and money advisors should be licensed and regulated. While the Central Bank has a role in both, the boundary is somewhat blurred between these actors and personal insolvency practitioners. Establishing the correct compliance framework will be critical to make sure that regulatory white spaces don’t emerge where state agencies drop the ball, believing others are running with it.

There are far too many people suffering needlessly from failure of legislators to act in the past. Any new government must implement the commission’s reforms and resolve key policy areas such as priority debts and enforcing costs on creditors. 

Most importantly any statutory regime must have the powers to enforce compliance by personal insolvency practitioners, including setting their reasonable remuneration. Prevarication and dilution of the proposed reforms to favour sectional interests cannot be allowed to happen.

A version of this article appeared in the Irish Examiner, Business Section Monday 20th December 2010

Government finally puts thorny issue of credit union restructuring firmly on the table

The Minister for Finance may now nationalise credit unions and transfer their business to a bank. Credit Unions have been included in the Government’s draconian new powers to restructure the domestic banking system, the Credit Institutions (Stablisation) act, because of worsening trends in financial stability due to both their current and potential loan and investment losses.

The minister may nationalise a credit union by requiring it to issue special shares providing him with overarching powers to direct a credit union’s affairs over those of a credit union’s shareholding members. It is how he currently controls the direction of the two building societies. The same approach with a credit union could see both the injection of tax-payer funds and subsequent transfer of its entire business to another credit institution. The Minister may also appoint a special manager to take over the running of a credit union, who may remove its board and management.

The act includes one important legal provision bound to upset credit unions and their trade bodies. The Minister will be able to direct the transfer of a credit union’s business to another credit institution, which may not only be a credit union but also a building society or a bank. Legal provision has been made to convert a credit union’s share accounts to deposit accounts where its business is being transferred. In essence takeover protection afforded to credit unions can be set aside to best protect people’s savings.

This sudden and unexpected development no doubt reflects concern for the stability of the sector’s 410 independent autonomous credit unions. Ranging in size from €1m to €350m in assets, they collectively hold €11.9bn of household deposits - mainly held in dividend earning share accounts. Early indications are that close to one hundred credit unions will be unable to pay a dividend this year, with close to two hundred paying less than 0.50%. As the ability to pay a dividend is a key financial stability indicator, these figures suggest some quite serious issues emerging.

Importantly then the EU/IMF financial support programme on restoring financial sector viability deals with credit union regulation and stability. Specific action steps required of the state include having a loan assessment (a structural benchmark) completed and comprehensive restructuring strategy in place by April 2011 and legislation on a strengthened regulatory framework including effective governance and stablisation requirements submitted to the Dail by December 2011. The Central Bank’s recent technical note on its Prudential Capital Assessment Review includes plans for the significant strengthening of the regulation and stability of the sector by the end of 2011.

Last June the bank invited submissions on its consultation paper on stabilisation - a resolution regime for credit unions. Unusually the bank has not published these submissions on its website. It said that they would be factored into its strategic review currently entering its second phase. This is an unusual development as, abiding with the principles for better regulation, it has undertaken to publish such submissions.

Perhaps the reason is contained in a recent speech, when in referring to stablisation the credit union regulator said that adverse trends emanating from the sector were suggesting “that even greater reform may be required than those envisaged in our recent consultation paper. We intend to bring forward proposals in this area early in the New Year”. He also warned of contagion risks to the sector.

What happened to change the bank’s view? Four significant things have occurred since last June.

The first is the bank’s stress test requiring credit unions to assess loan losses under differing risk scenarios. I wrote in this paper on the 15th November of how my own stress test analysis established a potential state solvency support funding of between €200m and €650m.

The second has been independent reviews reported to the bank of credit union loan books which have found they are on average 40% underprovided for bad debts.

The third relates to the strategic review’s first phase, financial stability analysis completed by Grant Thornton, a leading credit union audit firm.

While the bank has not published results of its stress test or the first phase of the strategic review, it’s clear it’s considered its June stablisation proposals are insufficient.

Finally and perhaps most relevant of all, credit unions have extensive investments in bank bonds which are or may become exposed to haircuts.

It shouldn’t come as a surprise, given the sector’s importance in the overall banking system, that credit unions have been included for in the banking stability bill or in the IMF/EU agreement. In ensuring it has the necessary powers to stabilise and reconfigure the banking system and to deal with the inevitability of some credit unions failing the Government has finally put credit union restructuring firmly on the table.

A version of this article appeared in the Irish Examiner, Business Section Friday 17th December 2010.

AIB bonuses Workers paying for unethical looting

Ethical egoism has very little to do with the good running of banks, writes Bill Hobbs

At its epoch, in what can only be described as immoral and unethical looting, boom time Ireland’s senior bank managers were paying themselves obscene salaries.

Looting occurs when managers manipulate organisational resources for short term gain at the expense of their company’s long term sustainability. In terms of ethical frameworks, looters adopt a minimalist ethical position called ethical egoism, where their self-interest regards the interests of employers and shareholders as paramount.

This is seen in arguments used by senior managers to justify their salaries. They carefully craft a business case to demonstrate how they deliver on shareholder value. Indeed our government ministers and senior public servants have also used ethical egoism to justify their own bloated salaries. Zealously protecting freedom to manage as they see fit, they argue that an enterprise culture, freed from all but the most minimal of constraints, best ensures equality. But it’s an equality balanced in favour of the personal enrichment of an elite.

Ethical egoism was starkly illustrated in AIB’s corporate behaviour, which in the past two years saw its senior managers pay themselves close to €100m in bonuses.

Long imbedded in its organisational culture is a managerial sub-culture, a tribe whose members are self-promoted upwards to where the real gravy was at.

All large organisations have such sub-cultures. And the most influential are found at senior and middle management level. Self-serving and self-perpetuating this group knows how to manipulate organisational resources to protect their status and power. They are well able to loot companies to pay themselves well and use shareholder value creation to argue for ever higher salaries and bonus systems.

Their performance management systems favour those who buy into their vision and ambition. Does this have anything to do with running good banks well? The answer is very little. HR performance reward concepts are frequently manipulated with HR management willing participants in ramping up salaries and bonuses.

Bank directors have been rightly criticised for failing to exercise control. But in truth, control was exercised by powerful executive management teams who were free to act within policy boundaries established by their boards. There are no prizes for guessing who writes up these policies. While boards establish senior employee’s remuneration packages, what happens beneath that level is what matters most.

Senior managers define performance, pay policy and strategies. What gets measured gets managed and what gets managed gets rewarded. The problem in banking is this drove out wanted behaviours such as prudent safe lending. Salaries and bonuses were linked to performance concepts such cross selling and lifetime customer profitability. This bonus culture had a damaging effect – it broke the traditional boundary between prudent banker and customer. Bankers behaved as agents for their customers to extract value from the bank itself.

Using external salary reviews, senior managers engineered pay reviews benchmarked to how others elsewhere were being paid. Aided by specialist external remuneration experts, they used external validation to argue for ever higher salaries and bonuses. The bonused performance system became rooted in the way things were done. Banks were blind sided to risks, as their managers were hooked on the possibility of doubling, trebling and quadrupling their salaries through performance bonuses. No one questioned the effect this would have on banks internal control mechanisms, as heavily bonused high fliers ignored time honoured and tested lending policies.

It isn’t surprising then that AIB did not defend itself in the High Court. The bonus payment action taken by its employee was put through on the nod. Was this a case of a contract that had to be honoured or was it more a case of senior management deciding to ensure bonuses were legally copper fastened from challenge? Is it a case of senior managers manipulating organisational resources to achieve their own means?

Finance Minister Lenihan’s rush into the Dail stable waving a “90% future bonus tax” shovel was either another episode of being caught asleep on the job or worse a cynical attempt to kick over the traces. Ever since 2008, senior bankers have run rings around this Government in so many different ways; including the elevation and promotion of looters as their internal senior management tribes looked out for themselves.

Many honourable, hard working AIB employees were horrified to read of how once again their senior management sub-culture had gilded its cage in defiance of proper ethical and moral conduct. AIB’s corporate response fell far short of the mark in trying to draw a line in the sand between the past and the future. It ranks as a prime example of an organisational injustice as a small in-group, many of whom were responsible for the ruination of their bank and the economy, are paid a bonus while other employees are worried sick about whether or not they will have a job this time next year.

A version of this article appeared in the Irish Examiner, Business Edition Monday 13th Dec 2010

All roads lead to a painful landscape

There is a fault line running through the eurozone’s spine, writes Bill Hobbs

Banjaxed, stripped of economic sovereignty, we must we wait helplessly for Godot to arrive at the crossroads of European Monetary Union. Those who maintain the Euro was designed to be irreversible, write of the horrendous consequences of its breakdown, arguing it’s an appalling vista no one should willingly opt for. Yet one of our roads leads to a hellish landscape should we have to go it alone.

There is a structural fault line running down the spine of the Eurozone every bit as dangerous as a string of interlinking volcanoes. Some like ours have gone critical. Unless it’s decided to force bond holders to share in Eurozone bank losses, more will go critical including the Spanish caldera. To stop this chain reaction, Germany and France may have to cede economic sovereignty to a US style fiscal and monetary system. Politically unwilling to do this for now, we must wait bleeding at the cross roads.

Environment Minister Gormley’s revelation that the banking guarantee had been decided on before and not on that most infamous of nights goes to the heart of what has since been passed off as economic planning. Apart from his revelation implicating his party in the most deceptive periods in Irish political history, it illustrates a fundamental failure to recognise that ours was no ordinary recession but a deflationary depression caused by a bursting asset bubble where the usual economic recovery rules do not apply.

Our Government opened a Pandora’s Box without understanding the consequences. We lost our sovereignty that night. It took two years to formally write it up in an ECB-sponsored, EU-influenced IMF bail-out agreement. An agreement that most observers say will inevitably lead to sovereign default as we simply cannot afford to repay the scale of private banking’s debts taken onto the public balance sheet from future tax revenues.

Bond investors who knowingly provided funds to our banking system to make the boom time, boomier must have quite vicious haircuts applied if this country is to stand any chance of economic recovery. Nationally and internationally, the economic commentariat are ad idem on one issue. Adding more unaffordable debt to unaffordable debt won’t work. Unless the true bottom is reached on valuing bank assets and property values, our banks will parasitically suck lifeblood from the economy.

But unilaterally reversing out of the bank guarantees and forcing bondholders to share in losses would mean telling Godot to get lost and walking away from the EU and ECB. Such a move would trigger a flight of capital as the current slow run on deposits would become a rout with ordinary depositors shifting their money of shore - this process is already well underway as smart money is moved to safer havens.

To stop a rout and preserve the banking and national payments system Government would have to pull out of the EMU and euro. This would mean declaring a bank holiday, shutting the banking system down for at least a week, while the printing presses rolled off millions in new bank notes.

At the same time banking systems would have to be configured to handle the new currency. By the end of this, all legacy banks would have to be encased in a debt sarcophagus in which bond holders are forced to bear losses. One or two new banks would have to open holding retail deposits and good loans. The new currency would be devalued at about 20% to 50% of the euro and could possibly peg to sterling. Rigorous exchange controls would have to be re-introduced. An emergency budget would have to brutally cut expenditure and raise taxes to close the €20bn revenue spending gap. All this would trigger rampant imported inflation and higher interest rate costs.

It would mean living within our means, or what would be left of them. Does anyone want to do travel this road? As we wait banjaxed at the cross roads for our erstwhile pals to arrive in the hope they bring good tidings of recovery in our time, we may have to at least plan for it.

Rebuilding confidence in Ireland abroad will not happen until confidence at home is rebuilt in four areas. We need new working banks and they will not be the ones we have at this time. We need to have a reformed political and public service with a ruthless determination to eradicate state sponsored cronyism. We need new political, public service and regulatory systems, fit for purpose to economically manage for an equitable and just society.

Finally a new economic model must be built, one based on long-term sustainable growth with no dependency on compulsive consumerism. All this might mean becoming more German than the German’s themselves – that’s if Godot ever bothers turning up at the cross roads.

A version of this article appeared in the Irish Examiner, Business Section, Monday 6th December 2010.

National Payment System is our lifeblood

Banking’s restructuring may require the nationalisation of our national payments system to protect what is a vital strategic asset.

Faced with catastrophic, contagious runs on banks, governments frequently have no option but to order them to close their doors. In declaring what’s called a bank holiday, national payment systems would freeze up. ATM machines would stop dispensing cash and electronic fund transfer and settlement systems would be turned off.

Within days commercial activity would collapse, as business and consumers would have not have access to funds or any way of settling payments. There wouldn’t be enough cash to go around.

Such a payment system meltdown was no doubt an Armageddon scenario used to justify the disastrous banking guarantee in September 2008.

Two years on our two main clearing banks are once again in the firing line. Bank of Ireland and AIB are systemically important not just because of their size, but because of their role and ownership of a vital national resource – our national payments system.

Imagine if suddenly our electricity grid was shut down, not to be switched on again for months. Most of us could imagine the social and economic effects.

We have a national infrastructure of vital strategic resources required to keep the country working. These include the electricity grid, railway lines, road and water systems. They are so vital that most are state controlled and are managed by semi-state enterprises. Equally as important is our money transmission system.

Called the national payment system, this money grid transmits payments from Donegal to Cork, handles our salaries, utility bills, our retail purchases and settlements between firms here and internationally.

At retail level, it’s a network of differing interconnecting IT and operational systems owned by our main banks and governed by private companies.

A complex system of interconnecting stakeholders are involved including banks, utility companies, commercial enterprises, government departments the Central Bank and ECB.

The systemic risks of one part failing and contagiously infecting the rest are well understood, which is why the Central Bank has oversight of system. While in other countries, non-profit state bodies own and manage national payment systems, here our main clearing banks largely own and manage ours.

Total economic costs of money grids are reckoned to be as high as 3% of GDP. The cash grid alone was reckoned to cost €1.6bn in 2006.

Last year the system managed 374m cheque, credit transfer and direct debit transactions totalled €803bn in addition over 10m ATM, Laser and Credit cards accounted for 490m transactions totalling another €48bn.

In any one day the gird handles nearly 2.4m transactions, totalling €2.3bn in value.

By far the largest and most systemically important component parts are Bank of Ireland and AIB’s retail payment transmission and settlement operations.

Both these banks will be subjected to the most fundamental reforms of the national banking system since the mid 19th century. Both will be surgically downsized to basic utility type retail banks, restricted to operating within the state’s national boundaries. Their foreign operations will be sold off and domestic operations slimmed down to an affordable size.

The plan is to stuff them full of capital, effectively quarantining them to pretty them up for sale to outside bidders. For the first time in the two hundred and fifty year history of banking, this country will lose control of its hitherto domestically owned national banking system and potentially control and maintenance of its national payments system.

With our main banks effectively up for sale, the only buyers with pockets deep enough to afford them are foreign banks. Bank profit maximisation conflicts with the social cost of national payment systems. Can their continuing investment in modernisation of our national payment system be relied on?

Universal access to an affordable basic bank account is long recognised as a fundamental right of all citizens without which they cannot participate in modern developed societies and their economies.

The current priorities under a national payments strategy are to reduce the reliance on cash, eliminate the use of cheques and make available a universal basic banking account. The latter was a condition of Government’s recapitalisation programme.

What’s to happen with a national payment system predominantly owned and operated by our big two banks? What is to happen to a national strategic resource without which commerce cannot survive?

If our national money grid is as strategically important as our national electricity grid what plans are being made to ensure it is maintained and enhanced?

Surely then it’s in the national interest that strategic ownership, control and future development of this states national payments system is included for in any plans to restructure banking.

Should nationalisation of the national payments system be on the table?

A version of this article appeared in the Irish Examiner, Business Section, Monday 29th November 2010

Ireland's lions led by donkeys

Ireland's taxpayers have been sacrificed on the Atlantic Wall to protect the Euro from the inevitable onslaught of the mighty bond markets overwhelming forces.

Yet were it not for ECB policy and its hubristic blind spot, Irish banks would have not been able to fuel the Irish property and consumption boom.

ECB policy designed to maintain stability and geared to support Germany unification and core Eurozone economies was wholly unsuitable for Ireland.

Its sub-office the Irish central bank and our national financial regulator bought into the grand Euro project and shared the ECB’s blindspot that permitted German banks lend hundreds of billions to peripheral countries.

Germany’s own central bank and regulator resorted to their Nelsons' eye so to be “shocked” when forced to domicile rogue Depfka’s €180bn losses on Hypos balance sheet.

Not to be outdone the Bank of England's blind spot pemitted tens of billions to flow into Ireland unchecked.
Why was it that our banks were able to raise billions more than they should ever have been allowed to raise to make loans into an overheating property market?

The fact is no one was policing the policeman. No one stood down UK and German banks reckless lending to Irish Banks. No one questioned the wisdom of fuelling unsustainable property and consumer spending booms.

We are now faced with what amounts to be an insolvency work out plan that demands we cash in our national pension fund to stuff our banks full of capital. Yet stuffing live turkeys doesn’t turn them into swans.

This time out the banking numbers had better stack up. Many rightly fear they won’t. They worry that what’s happening again is another bout of can kicking. This time the can is being kicked into ambitious economic performance targets which no sooner had they been committed to by this Government were stretched by the IMF. The addition of an extra year to achieve the 3% debt/GDP target allows for slippage that can only come from undershooting assumed growth rates or funding costs of additional bank capitalisation support.

We are still living in kick the can land. We have no idea how profitable the shrunken banks will be. One thing is for sure to reversing their deposit to loan ratios will continue to distort the market for savings and cause retail lending rates to rocket.

If banks average costs of funds is dictated by the states rating plus a margin for risk for the bank, then average government debt rates will set the floor for bank rates – at least those demanded by those who lend to our banks. The cycle is set for risk adverse credit crunch that will marginalise and consign consumers and business enterprise to penal interest rates for some time to come.

While we have been withdrawn from the Atlantic Wall, no longer a fighting force, the Portuguese are now being rushed to man the defences.

Lions led by Donkeys, Irish taxpayers have been sacrificed to buy time for others to shore up their homeland defences. The problem is the markets won't stop until they achieve total victory. It's not the first time we have fought another mans war on his turf - perhaps we would have been better off fighting it on our ground and told bank bond holders and their protective proxy you are going to have to pay.

Digging up the Punt blanks and recalibrating Sandyford's printing presses might still have to happen. One wonders if in the donkeys in Merrion Street's bunker are hatching a plan B?

In a country that must once again economically plan for emigration the words of Paddy Kavanagh probably reflects the feelings of many today. It might also be an ode to Fianna Fail's cronyist legacy

O stony grey soil of Monaghan

The laugh from my love you thieved;

You took the the gay child of my passion

And gave me your clod-conceived.

You clogged the feet of my boyhood

And I believed that my stumble

Had the poise and stride of Apollo

And his voice my thick-tongued mumble.

You told me the plough was immortal!

O green-life-conquering plough!

Your mandril strained, your coulter blunted

In the smooth lea-field of my brow.

You sang on steaming dunghills

A song of coward's brood,

You perfumed my clothes with weasel itch,

You fed me on swinish food.

You flung a ditch on my vision

Of beauty, love and truth.

O stony grey soil of Monaghan

You burgled my bank of youth!

Lost the long hours of pleasure

All the women that love young men.

O can I still stroke the monster's back

Or write with unpoisened pen

His name in these lonely verses

Or mention the dark fields where

The first gay flight of my lyric

Got caught in a peasant's prayer.

Mullahinsha, Drummeril, Black Shanco-

Wherever I turn I see

In the stony grey soil of Monaghan

Dead loves that were born for me.

State will need to rescue credit union sector

Solvency funding and state intervention will be required to stabilise and reform the sector, writes Bill Hobbs

CREDIT Unions may need tax payers’ funds of upwards of €650m over the next three years should a realistic loan loss scenario materialise.

At the very least they are likely to require well over €200m in state solvency support. In the past two years having struggled to fund loan and investment losses from collapsing profits, many are now experiencing serious solvency issues.

Currently the only solvency support fund available is ILCU’s unregulated €125m scheme which it may use at its discretion to support its 400 affiliates in the Republic and 110 in Northern Ireland.

It seems that it has already committed €45m in support of fifteen credit unions, according to a recent media report.

Last June the Central Bank published a consultation document on its proposals for a stablisation system, a resolution and funding mechanism for insolvent but otherwise viable credit unions. But credit unions affiliated to ILCU voted in support of its outright rejection of the bank’s stablisation proposals.

This month the bank said that “trends emanating from the sector are suggesting that even greater reform may be required than those envisaged in our recent consultation paper”.

It seems then its original stablisation proposals will not be robust enough to deal with risks no doubt surfaced by both its own loan loss stress testing and strategic review initiated by the Minister for Finance.

Having provided billions in largely unsecured loans to fuel boom time compulsive consumerism, credit unions are acutely exposed to the consumer debt crisis. As well as traditional loans to marginalised borrowers, their lending included financing first time house buyers’ down-payments, lending to small businesses and small scale speculative property developers.

For the past two years they have all been heavily rescheduling troubled loans. Equating to between 15% and 22% of boom lending, loan losses could amount to between €1.0bn and €1.5bn over the next three years. Depending on how well they have been governed and managed, losses will vary by credit union.

Applying regulatory loan loss stress test ratios together with likely financial performance criteria to thirty one leading credit unions, representing about one fifth of the sectors total assets, my results showed one in two incurring impaired solvency under optimistic conditions.

Under high stress loan loss and realistic financial performance conditions, thirty showed varying degrees of impaired solvency.

Extrapolating these results to the entire sector, results in a state solvency funding requirement of upwards of €200m under optimistic conditions. This rises to upwards of €650m under more realistic stressed conditions. The likely figure is probably somewhere in between.

With a moribund banking system unable to make enough good loans to ordinary people, credit unions are an important alternative source of consumer credit. Yet with an inability to mobilise household savings over the past decade, they have close to €3.5bn on deposit with the banks which should be used to make good loans.

Credit union’s ethos to be of service to their customers who are also their owners, within their local community by offering them affordable financial services is just as relevant today as it was fifty years ago. But the business model used is not. Years of poor leadership, insular governance and management, political captivity and lethargy have combined with a consumer debt crisis resulting in an inevitable and predictable outcome.

Significant state intervention and solvency funding will be required to stabilise and reform a sector that has failed to keep pace with what’s required of modern, fit-for-purpose credit co-operatives.

In return for state aid, the Government will undoubtedly insist the sector be consolidated to a smaller network of larger, viable, better governed and managed credit unions. The outcome could see a robust, financially strong, national network of modern independent credit co-operatives participating through a centralised finance and corporate services facility. While the number of credit unions may shrink dramatically from 414 to less than 100 or so, merged unions could retain some independence, remaining open to provide a better range of affordable financial services.

Everywhere else credit co-operatives have long since consolidated, modernised and expanded their services to offer a valued alternative to high street commercial banks. Key to their success is their professional centralised finance and corporate facilities.

These provide essential services such as liquidity, access to wholesale funding markets, securitisation, internal audit, staff development, information technology platforms, process standardisation and automation, expert credit and operational risk management, legal services along with products, services, call centers and online delivery channels.

Long on the rhetoric of change but short on action, credit unions have run out of time to effect such change on their own. If the sector is to be reformed it will need a purposeful state empowered change agent to order and facilitate reform or else a crisis led enforced consolidation could result in a chaotic shambles.

A version of this article appeared in the Irish Examiner, Business Section, Monday 15th November 2010.

The public service is not fit for purpose

Chaos is the natural outcome for organisations that can't respond to the demands asked of them, writes Bill Hobbs

To convince the bond markets that the state is trustworthy to lend money to, this Government is being forced to brutally eliminate jobs in a way that will undermine the quality of public services for years to come.

It’s an evitable consequence of a political system that failed to lead the transformation of a public service. Designed for an Ireland that no longer exists, the public service hasn’t been fit for purpose for some time.

Dominated and controlled by influential groups, it’s a system hardwired not to change. It’s led by people who look in the mirror to take credit when things go well and look out the window to apportion blame elsewhere when things go wrong.

When such organisational systems, designed around the principles of collective unaccountability and non-responsibility, are faced with a crisis they spiral into dysfunctional chaos.

In any organisation there are people who are skilled at making it do what it’s supposed to do despite the best efforts of others. Rob an organisation of these people and it will quickly disintegrate into chaos as staff and managers struggle to keep its processes working. They gum up, become stuck as knowledge and experience gaps appear.

Front line staff, the people who span the boundary between the system and the people it is supposed to serve, are no longer able to drag value from it. Within health service systems as patient care deteriorates despite the best efforts of staff, people may die. Yet Health Minister Mary Harney maintains that front line services will not be affected through cost reductions which will see five thousand support staff forced to leave within a matter of weeks.

Real leadership requires leaders to communicate honestly and openly on the consequences of their decisions. Such ruthless job elimination violates two fundamental motivating precepts: a need for job security and justice.

Had politicians delivered on public service transformation in the recent past, there would be no need for the brutality of what is now being done. It’s being done not because of a political determination to transform but to convince the bond markets that the state is trustworthy to invest in.

Reforming public sector organisations requires strong political leadership, a disciplined management focus on what matters, engaging people in defining change and challenging thinking about how to do what really matters, better.

In his book “From Good to Great”, Jim Collins identifies a pre-requisite of great service providers as having the right leader and the right people on board. He says the first step is to get the right people on the bus, get the wrong ones off and make sure the right people are in the right seats and let them figure out how to drive the bus to where it should be going.

Our Government and public services are stuffed full of the wrong people who are expert at doing the wrong things far too well.

Not one of the current cabinet has worked in a meaningful business leadership position demanding accountable decision making and none have the slightest experience of the dysfunctional organisational effects of the wholesale job eliminations they are about to unleash. Nor will they be held accountable as they’ll be gone when vital public services start collapsing.

Our senior public servants succeed because they are skilled at not rocking the boat within a system that fast tracks those who display the skilled incompetence of their bosses.

Mediocrity, deficit thinking, management by the numbers, emphasis on a command and control hierarchy, blind deference to authority and little understanding of the fundamental difference between management and leadership, with a management class system based on status, rank and service, all combine to protect the system.

Public sector unions act to preserve a status quo in which work gets done at the pace of the slowest performer.

Hard workers seeing that their dedication and commitment to being of service is of little extrinsic value, internalise their perceptions and work less hard.

Such systems are rife with influential informal networks, cliques who act to subvert change. Myopic and self-serving they turn inside out - the citizen serves the system rather than the system serving the citizen.

Public service transformation will require elected politicians who do not fear failure and who will deal with brutal facts with transparent honesty, having a passionate commitment and determination to overcome obstacles.

The challenge for any new Government is to ensure the right leaders are in place, the right people are on the bus in the right seats and the wrong ones are told to get off. But how many election candidates have the experience, and ability to lead the fundamental reform required?

A critical first step will be for voters to identify and elect only those who they believe should have a seat on the bus.

A version of this article appeared in the Irish Examiner, Business Section, Monday 8th November 2011

Government's scorched earth policy is economic lunacy

In "The Valley of the Squinting Windows" written in 1918, its author satirically used a fictional village of Garradrimna to expose the parochialism of Irish life. Listening to RTE 1 this morning brought a small slice of a modern Garradrimna to life. But this time it’s not a fictional village it’s the voice from the bunker in Merrion Street as this Government ekes out its final days.

Tuning into Morning Ireland was like eavesdropping a conversation of a Garradrimnan bar stool regular. Agricultural Minister Brendan Smith blamed the international global marketplace for our woes. Has anyone told him the collapse in our domestic economy was caused by us alone? Does he not realise that it’s physically impossible to export houses and buildings?

Smith then unveiled his grand contribution to the austerity battle plan. An EU fund would be tapped to buy Irish cheese to be handed out for free to needy citizens. The single most important Government contribution to improving the welfare of citizens this week of all weeks was a headline announcement of free cheese. Free cheese parcels should be mentioned quietly by low level civil servants and not announced by senior Government Minister anxious to generate some favourable publicity. Marie Antoinette on hearing of Parisian bread riots may have asked the naive question why don’t they eat cake? Brendan Smith’s take on this is we should eat cheese.

But maybe Smith has invented agrarian quantitive easing? Getting the EU to buy up Irish cheese would prime the economy with fresh money!

In 1945, facing the ovewhelming might of invading Allied armies closing in on all sides, propaganda from Berlin's Reichstag bunker promised at first wonder weapons and later still rescue by a mythical new army being assembled. When reality finally dawned, blaming everyone else for the destruction he and his cronies had caused, Hitler ordered the wholesale demolition of German industry and infrastructure. Only the intervention of his side kick Albert Speer who countermanded this lunatic order saved Germany from total ruin.

With the bond market closing in all sides, our bunker in Merrion Street unveiled its wonder weapon NAMA which was to get banks lending. It proved a monumental failure that led to an unmitigated economic planning disaster resulting in what will probably become a €65bn tax payer banking bailout bill. Since unleashing NAMA, two rogue banks have been mothballed, another is trying to jump from the fat to the fire, the big two are all but shut for new business, one foreign owned outfit has closed down both a business bank and retail bank, the others are being drip fed loan loss capital from their parents. The credit union sector, the only partially working bit left of the banking system, is too sickly and too small to matter.

The problem for Minister Lenihan is the two banking hulks, AIB and Bank of Ireland while hauled up on the sand bank at low tide are still holed beneath the water line. The tide is rising again as they make ready to unveil a fresh round of losses.

Yet another weapon the Farmleigh gathering was supposed to lead the mythical army of the Diaspora to the rescue. It was but more propaganda which dressed up the tiniest morsel of reasonable news in Bunker Speak to herald a winning Government strategy.

This week was both eerily prophetic and pathetic. First we had the announcement of what amounts to scorched earth, economic madness. Minister Lenihan is set to cut what little meat remains off the bones of an anorexic near zombified economy. Bled almost dry of fiscal fuel more is to be drained off. Echoing Charlie Haughey he told us we would have to live within our means.

And he unveiled yet another wonder weapon! The interest roll up deal on Anglo’s IOU’s would save spending more money, for now. We were also reminded of a positive trade balance as the multinational export sector is doing well. It is at generating profits, taxable at only 12% but it will hardly generate the jobs needed for economic recovery. And balance of trade matters little to those struggling with emaciated incomes.

There was more good news from the bunker – the live register was down! Things are still getting worse but more slowly it seems. And then the best wonder weapon of all was revealed. It was the stock Fianna Fail response to economic woes, that most traditional of all Irish export businesses – the business of exporting young people. Are we the only country on the planet that economically plans for emigration?

Well if Minister Lenihan is serious he could always front load emigration by paying people to go – a grant worth two years job seekers allowance would probably work.

The Bunker has spoken. Free cheese, emigration for an anorexic anaemic economy, and interest roll ups were the order of the day. We have to wait a few more weeks to hear of the rest of its battle plan while parochial politics plays out its end game in Donegal.

Regulate debt managers before it's too late

Financially vulnerable consumers have no protection from unregulated debt management companies, writes Bill Hobbs.

 

It is said that regulators always arrive far too late and out of breath at the scene of an accident. And what an accident to arrive at! Financial service firms’ marketing of dangerous products destroyed hundreds of billions in household wealth, including people’s pensions and left tens of thousands of insolvent households struggling to pay loans they can no longer afford.

 

Responsible for consumer protection, will the Financial Regulator act to protect the most vulnerable of all – people struggling with unaffordable debt who are being exploited by a new form of financial service firm, the commercial debt manager?

 

Leading consumer protection experts maintain financial service firm regulation conflicts with consumer protection. Yet Government maintains the regulator should both ensure firm’s safety and soundness and protect people from their predilection to maximise profits from marketing dangerous products. But the regulator says regulating products for safety would stifle innovation. Instead its protection focus is to ensure firms are satisfied consumers appreciate and understand what they are buying from them.

 

It is now talking of a new sub-category of consumer it calls the “vulnerable consumer” whom it says should be afforded higher levels of protection. Everywhere else consumer advocates maintain that all consumers are vulnerable unless proved otherwise. They say financial products are far too complex and should be simplified using clear unambiguous contracts. They see financial innovation for what it really is – the opportunistic marketing of dangerous products.

 

Financially vulnerable consumers have no protection at all from a recent, potentially dangerous innovation - the unregulated, unlicensed commercial debt management company. These are the outfits who say they negotiate affordable debt repayment plans with lenders. Busy exploiting a gap in consumer protection, many are abusively marketing products to vulnerable people leading them to believe they will arrange to write off their debts but only if they buy their debt management plans. They can charge over €500 to negotiate a plan and during its lifetime levy thousands in fees based on how much people pay over to them monthly to be disbursed to lenders. Many are mortgage brokerage operations that, having profited from boom time reckless mortgage origination, are now looking to profit from a bust time household indebtedness they helped to create.

 

Search for “debt advice” or “debt managers” on the internet and a plethora of new businesses pop up. Few bother identifying who they are and some brazenly imply they are “regulated”. Others are saying they self-regulate. Some are subsidiaries of mortgage brokers and investment intermediaries. Others are non-transparent thin fronts for British based operators. Many claim they can have people’s debts written off. Those that don’t, verbally assure their customers that buying their debt management plans will result in debts being written off. Sales tactics used to hook vulnerable consumers include talking up how their products relieve the psychological stress of debt. Many are blatantly piggy backing the good work done by MABS and others who have long campaigned for a proper debt resolution system.

 

Commercial debt managers pose two quite serious consumer protection risks that must be regulated. The first is they are in the business of profiting from providing financial products and financial advice. If they were advising on borrowing or investing money they would have to be regulated, comply with business conduct rules and consumer protection codes. Their directors and managers would have to be fit and proper individuals. Their staff would have to be qualified financial advisors and they would have to divulge their fees and charges. They would have to be licensed to operate and subject to sanctions if they broke the rules. Their products would carry health warnings and their customers would have the right to complain to the Financial Ombudsman.

 

The second and most glaring consumer risk relates to the way in which they handle people’s money. Debt managers make their profits from getting people to pay over to them their monthly loan repayments which they then disburse to lenders. They charge a fee for this service based on a percentage of the amount managed. This is a money transmission business that should be regulated. Payment service providers here must be licensed by the Central Bank and regulated under its rules. In other countries such as South Africa, debt counsellors are banned from handling client’s money. Not so here, where their product provider, financial advisory and money transmission operations are currently outside of our regulatory bailiwick.

 

How have the Financial Regulator, the National Consumer Agency and relevant Government departmental officials responded? It seems no one is interested in bringing these businesses under their wing. Is this another case of waiting for an all too predictable public scandal, when people’s money has been lost before acting? I should hope not. Rushing into the stable after the horse has bolted and demanding shiny new shovels is no longer an acceptable form of consumer protection.

 

A version of this article appeared in the Irish Examiner, Business Section, Monday November 1st 2010.

There will be no returning to compulsive consumerism

Governments four year austerity programme will not work unless people feel safe to spend money again. Even then they may not spend as compulsively as before.

In our Celtic Twilight, the lights will be dimmed, not to be turned up again for a long time to come. Consumer sentiment is one measure of just how dim they have and will become. How safe or vulnerable we feel both predicts and causes changes in consumption behaviour. As billions are sucked from the economy to shrink the gap between what is paid into and out of the public purse, the cure for economic woes may turn the lights too far down and undermine recovery for years to come.

In recent commentary the ESRI warned of a deflationary spiral should consumers and businesses pull too far back from spending. Acutely aware that more pain is to come from a hair-shirt austerity programme, people are budgeting to spend less and save more.

The link between positive sentiment, wealth and consumer spending is well understood. This positive wealth effect, seen more with increasing housing prices than increasing financial asset values, is understood to directly affect consumer behaviour. The wealthier we feel the more we spend and the less we save. And young people tend to spend more than older people. We spend more as we believe our earnings will continue to grow – we expect our future incomes will finance the costs of our current consumption. While some peoples’ mental accounting has them budget to live comfortably within monthly income, others spend to live within their anticipated income. It some it triggers compulsive consumption.

Household liquidity, unlocked using bank credit, fuels spending which in turn fuels growth and rising incomes. This positive multiplier lulls people into a false sense of security. Collapse asset values and deflate income expectations and a negative multiplier causes deflationary spirals lasting years. Should governments strip liquidity through taxation and reduction in spending then a tipping point is reached beyond which deflation undermines any chance of meaningful growth. Taxation revenues shrink, requiring further borrowing pushing nations towards default.

Here we have treated housing as both a store of wealth and a tradable financial asset to be tapped into to fund lifestyle costs. By late 2007, households held over €330bn in financial assets (shares, pensions & savings) with houses worth about €630bn. With €200bn of household debt, of which €140bn was in mortgages, housing equity was about €490bn.

It was the high tide mark of a compulsive consumerism fooled by expectations of ever rising incomes. No more so than a younger generation, the under 35’s, who borrowed more and saved less then any previous generation. Abundant cheap bank credit delayed the inevitable pain of paying for lifestyle purchases. Our national love affair with property as a store of liquidity and tradable financial asset treated homes as cash horde to be tapped into at will. But it was illusory liquidity that could only be unlocked by using bank credit. A dangerous mix of consumer’s compulsive consumption and bankers compulsive gambling created an illusion of wealth and household liquidity that in turn fuelled higher levels of spending.

Within three short years total housing wealth has imploded. The positive income expectation that was an impetus to spend more has become a negative expectation of increasing financial vulnerability causing us to save more. No one knows what the deflationary impact of a massive reduction in household wealth allied to fears for the future, higher marginal taxation rates, declining real incomes and shrinking numbers at work will be. We may still be worth about €520bn but as we still owe €200bn, we feel a lot poorer.

With careers stretching in front of them, younger people spend more and save less. As vanguard lifestyle consumers, their positive sentiment and willingness to spend fuels economic growth encourages business to invest, creates jobs and swells the public purse.

Relative to others we have a larger percentage of younger people whose wealth and liquidity has all but evaporated. Many owe far more than they can ever hope to repay. With the amount of take home pay required to finance debt escalating, they are now caught in a deflationary spiral. The adverse psychological effects on a generation of young skilled professionals both employed and unemployed may cause a permanent shift in behaviour to precautionary saving and prudent spending. There may be no returning to compulsive consumerism.

By unlearning compulsive consumption habits and relearning how to prudently budget, people will probably spend far less and save more of their disposable income for a long time to come. Has this shift to pragmatic value seeking consumerism been factored into economic planning?

The Government’s austerity programme will act as a black hole sucking in a large chunk of what’s left of household wealth and liquidity never to be seen again. Should it dim the lights too far, fatally undermining what confidence remains then ESRI warnings will come to pass. The Celtic Twilight may become a far darker place and last far longer than it’s being planned for.

A version of this article appeared in the Irish Examiner, Business Section Monday 25th October 2010.

Kill off our Dickensian bankruptcy system

Financial institutions caused the meltdown, so make them pay for debt advice, writes Bill Hobbs

When it comes to cleaning up after man-made environmental disasters such as oil spills, chemical spills and explosions, the principle of polluter pays is widely accepted. Surely then our polluting lender’s should pay the clean up costs of the consumer credit crisis?

Chillingly the headline numbers of people in negative equity, the majority of whom are under age 40, illustrate the scale of a household debt crisis that undermines any chance of economic recovery.

Over 750,000 households are now suffering varying degrees of negative equity. 40,000 have had their loans modified and 36,000 are unable to pay their mortgages. These figures are getting worse, not better. It means the number of households needing access to a modern debt advisory, debt management and debt resolution system is somewhere between 90,000 and 750,000.

Last week two influential voices were heard. Economist Peter Bacon, highlighting how household negative equity and unaffordable indebtedness would undermine any plans for economy stability and recovery, spoke of paying down consumer debt to rebuild consumer confidence. Missing his core point, most people focussed instead in his suggestion that state assets could be sold fund the elimination of unsustainable household debt.

With nearly every household experiencing a sudden and permanent reduction in household wealth and close to a million owing the vast bulk of consumer debt, a resurgence in consumer spending some time soon is slim.


The psychological impact of unsustainable levels of consumer debt has long been understood. Credit crisis trigger long a crisis in public confidence which sees a flight to safety. People reduce spending, increase savings and pay down their debts. Confidence can only be rebuilt once people are freed from unsustainable levels of indebtedness.

Three years into one of the most catastrophic of consumer credit crisis will Government finally respond? Will it deliver on a humane just and equitable debt resolution process underpinned by a private citizen’s statutory right to earn debt forgiveness?

The second influential voice of bank regulator Mathew Elderfield, called for urgent revision of our bankruptcy system to deal with the scale of the debt crisis in speech that addressed consumer mortgage debt. It appeared to be an implicit recognition of the contagion in confidence caused by the consumer debt catastrophe and the need for process of debt resolution and forgiveness.

The principle of earned debt forgiveness is widely applied elsewhere. Not so here. We have without doubt the harshest, most inhumane debt collection and bankruptcy system. One that permits the unfettered persecution of honest people who, while willing to repay, are no longer able to repay what they owe in full.

At this time the only process that helps honest people deal with their indebtedness is a public service body established to provide assistance to the most financially excluded and vulnerable in our society.

MABS, the Money Advice and Budgetary Service, while designed to help vulnerable low income households more usually long term unemployed and low income earners, was not designed or resourced to respond to the scale and impact of a national consumer credit crisis that has plunged so many households into negative equity and unaffordable indebtedness.

The costs of funding MABS’ vital and valued public services are being paid in full by the tax payer. The Government’s budgetary allocation last year was about €18m to fund its national network of independent local companies. Severe cutbacks in public service funding under a four year economic recovery plan could mean MABS financial resources will be stretched to breaking point. But should taxpayer’s funds be used to fund its debt advice and management services at all?

When MABS services are properly understood, taxpayer’s are effectively providing an indirect state subsidy to clean up the crisis caused by our banks and other consumer credit providers. As debt advice and management services such as those provided by MABS reduce lenders debt collection costs, they are enjoying all the benefits of a taxpayer funded public service without contributing one cent.

Applying the principle of polluter pays would mean that all lenders, banks, credit unions, building societies, sub-prime lenders, finance houses, credit card companies and others should fund MABS costs. Models where debt advisory and resolution management systems are paid for by lenders exist in other countries. In these they pay their fair share which is the lion’s share.

A version of this article appeared in the Irish Examiner Business Section, Monday 18th October 2010

Public's faith in banking vital to its survival

Banking stability is unattainable until the special guarantee is removed, writes Bill Hobbs

Three years ago we trusted banks so much most of us didn’t know of the 1995 deposit protection scheme designed to guarantee compensation to ordinary people, albeit only up €20,000. Billions in household savings with credit unions weren’t covered at all. But that was then.

In 2008 a Rubicon was crossed and there is no going back. It’s not enough for banks to be safe – we need to feel they are safe. Many a bank has been forced to close, not because it was inherently insolvent but because people believed it was. As most people cannot tell a good bank from a bad bank, perception accounts for 100% of trust. Undermine perception and people will only deposit with a bank if their money is guaranteed by the state. In effect, state guarantees stand in for trust in banking and once provided take a long time to safely remove.

As trust in our deposit taking institutions evaporated it was replaced by the Government’s twin deposit guarantee mechanisms. The first is the deposit guarantee scheme which protects up to €100,000 per participating institution.

Designed for normal times, it’s a form of co-insurance system through which its member banks and credit unions insure one another. If the co-insurance system runs short of money or cannot be replenished without undermining its members, the Central Bank may step in.

The second mechanism is a special temporary guarantee for the balance of deposits over €100,000. Extended earlier this year to December, it will undoubtedly have to be extended further.

A state’s financial safety net is designed to do two things; ensure financial stability by preventing banks reckless risk taking; and persuade its citizens not to rush to take their money out at the first sign of trouble. To work the safety net has to have three parts.

Robust laws, regulations and effective prudential supervision; a lender of last resort who provides temporary liquidity support; and deposit insurance to cover some but not all of ordinary people’s savings should a bank fail. These three components are supposed to protect savers’ funds from losses by ensuring financial stability through controlling banks’ risk taking.

Prudential supervision here having failed to ensure financial stability, helped trigger a crisis and the infamous Government blanket guarantee in 2008. Had it not been for ECB lender of last resort assistance since, making available tens of billions in liquidity support, our banks and credit unions would have shut down. And given that deposit protection schemes aren’t designed to deal with a system-wide crisis, the blanket guarantee had to be extended to ordinary people to persuade them not to rush to take their money out.

Since then, both the ECB liquidity lifeline and blanket guarantee has kept our domestic banking systems’ doors open. But banks will have to be weaned off the ECB liquidity lifeline and the special guarantee retired.

For now the supervisory pendulum has swung from the pre-crisis regulatory and political captivity of banking to a post-crisis captivity of banks by the regulatory and political system.

Many bankers have a genuine and legitimate fear the pendulum may get stuck in politically inspired, risk adverse prudential supervision for the next decade. Once banks recover their ability to generate credit again bankers may be unwilling to lend as they may fear making bad loans.

State ownership exacerbates this problem as it may act to stifle normal risk taking. Conversely it may also encourage recklessness as political pressure to finance favoured industrial or services sectors could cause another credit bubble.

On the hook for guaranteeing current and future moral hazard, the Government may find it impossible to wind down the quite extraordinary and unprecedented explicit blanket guarantee when the constructive ambiguity of “we might have to step in to bail out a bank, but only if its too big to fail” became a concrete promise to bail them all out.

The bottom line is this, banking stability will not be achieved until the special guarantee is removed and banks are once again trusted as safe places to deposit money.

Government’s four year austerity programme will not work unless and until banking stability has been achieved.

For now the special guarantee carries an economic cost reflected in the states’ stratospheric bond market prices that reflect banking and economic inter-dependent risks. Bond markets and sophisticated depositors realise that like the chicken and egg, economic and banking stability are co-dependent on each other for survival.

A version of this article appeared in the Irish Examiner, Business Section on Monday 11th October 2010.

Our "lucky to have a job" fallacy has had its day

Studies show work overload combined with job insecurity undermines morale, writes Bill Hobbs

The damage wrought by the violation of two fundamental motivating precepts: our need for security and desire for justice may trigger a national malaise that, unless understood, could undermine economic recovery for years.

Called survivor syndrome, this malaise causes low levels of morale and motivation in those whose jobs are not eliminated. It’s a silent problem as should people raise genuine concerns, they are ignored and told “you are lucky to have a job”.

“Lucky to have a job” frames a problem that unless understood and dealt with will undermine morale, motivation and productivity in many private and public sector organisations. With tens of thousands of jobs already eliminated and more to come, four years of austerity budgets will have profound implications for employers and employees.

First spotted over twenty years ago, survivor syndrome takes organisations and their staff years to recover from. It’s a sickness that effects whole organisations after jobs are eliminated. The majority of Irish political and business leadership will probably knowingly or naively ignore its implications. Yet in an economy with so many of its business and service organisations having to shed jobs, its effects are only barely understood.


Soft language such as downsizing, restructuring and voluntary parting, glosses over the brutality of deliberate decisions to eliminate jobs. The effects on employees who do not lose their jobs, have been studied and documented since the 80’s when the illusionary benefits of a job elimination growth strategy called downsizing, were first exposed.

For years companies have practiced downsizing or re-engineering trying to increase profitability, mainly by trying to do more with fewer people. Countless studies have shown this is an illusion, as most companies do not achieve the savings or productivity planned for. Called the Productivity Paradox, it happens when organisational leadership ignores the welfare of people they continue to employ. Such companies can become anorexic, too thin for their own good and in asking far too much, from far too few staff, they fail.

Organisational psychologists were quick put their finger on why. There are three actors involved in eliminating jobs; the person who enforces the decision, the executioner; the person fired, the victim; and the person left behind the survivor. People who get to keep their jobs react negatively and it can take up to six years to recover from its psychological effects.

These effects are similar to those experienced by people who have survived traumatic events. As job elimination violates two fundamental motivating precepts; our need for security and our desire for justice, people react. They feel guilty, angered, depressed, unsafe and insecure. Work overload combined with job insecurity undermines morale as people switch loyalty to their company for loyalty to their own personal interests.

As insecurity increases, people withdraw into a defensive mode. Unwilling to voice concerns, they live in a state of learned helplessness. It explains in part why battered spouses continue to live with their partners.

Bullying, harassment and intimidation thrives as poorly trained managers are exposed as ineffective leaders. When people complain they are silenced, told they should be grateful to have a job. It’s amplified when people cannot get a job elsewhere and are trapped within the job. Employee motivation and productivity plummets.

Unfortunately there are many public and private sector organisations whose policies and practices will provide fertile ground for survivor syndrome to take hold. Poor leadership and management of job eliminations will damage employee morale, undermine productivity and take years to recover from. How big the problem has or will become is not helped by public discourse on the challenges facing the country.

One of the mistaken assumptions, promoted by politicians, few if any have ever worked in, let alone managed large organisations, is for that greater productivity using fewer resources is possible across the public service.

Trying to be more effective and efficient with fewer people is unrealistic in theory and practice. Having a depressed workforce makes it impossible.

For the past three years, the Government has glossed over the severity of the economic recession and its wholes-scale job elimination.

Its narrative, full of optimistic rhetoric has been exposed and it has lost trust and credibility. We feel less secure and perceive the injustice wrought by a political systems’ promotion of a less than competent parochial mediocrity and cronyism. Our two fundamental motivating precepts; our need for security and desire for justice have been violated.

Do we risk a national survivor syndrome that could significantly negatively impact on economic recovery?

The good news is the syndrome is understood and can be alleviated by a leadership that demonstrates an appreciation of people welfare beyond telling them they are lucky to have a job.

A version of this article appeared in the Irish Examiner, Business Section, Monday 4th October 2010.

We're playing a bad game of bluff

By withdrawing from the bond markets, the Government has entered an uneasy truce until it runs of money, writes Bill Hobbs.

Is this Government going to lose sovereign power to make decisions in the national interest? Are we to become second class EU citizens, consigned to debt serfdom for at least the next decade?

By raising a white flag and withdrawing from the bond markets, Government has entered an uneasy truce until it runs out of money sometime next year, by which time it hopes the bond markets will provide funds at affordable prices. Either that or it will be forced to look for EU sovereign bail out assistance at prices far higher than recently demanded by the bond market.

The Government’s sovereignty protection strategy depends on it producing a credible economic recovery plan, one that demonstrates an ability to repay borrowings. Unless bond markets are convinced of a willingness and capacity to deliver on an unprecedented four year draconian austerity programme, the truce will end.

Yet banking parasites continue to suck capital from the real economy. Yesterday’s Central Bank figures, which are no more than credible best estimates, show how national debt is escalating. Must we tax and cut our way to achieve a wholly unrealistic borrowing target of 3% GDP by 2014? Should we protect bank’s senior bond holders from any losses to protect our sovereign funding independence? If the banking parasite is separated from the host, would the host die? Government believes it would, which is why it’s linked bondholder protection to sovereign protection.

We are told there must be a “credible” multi-year plan to hit this target and that while growing national debt may be horrendous but it is “manageable”. But manageability and creditability is not really ours to define. It’s being defined within a set of demands set by bureaucratic proxies of the EU’s major partners and the ECB.
We are being told we must repay in full our international obligations. Unrealistic French demands of Germany ruined its post war economy in the 1920’s. Is ours to be ruined in the same way?

This Government’s agreement to insure bondholder’s investments was blindly entered into by it in September 2008 under its blanket guarantee. Never before has such a decision been made to capitulate before the first shot was fired. Subsequently faced with imploding state revenues and a monumental banking crisis, its strategy was to bluff until a global recovery kicked in, which it didn’t. Thus, we had bluffer-speak of “cheapest banking bailout”, our “banks were resilient”, “Nama will get credit flowing again” and a “remarkable recovery in the economy”. Is it bluffing to maintain “debts are manageable” when the light at the end of the tunnel may be an onrushing train?

Theoretically affordable on paper, based on optimistic assumptions, it seems we could cut and tax our way to paying our debts. But what’s the human cost of a decade of debt serfdom? What is the opportunity cost of using our borrowing capacity to plough €3bn a year for a decade into two dud banks compared to using the money to fund revenue generating job creation?

In reality we are being told to hold the line by others who are not the least concerned about what happens here. They are more concerned of the political fall-out of facing their citizens with the bill for a just and equitable share of losses.

International investors looked to Irish banks as investment vehicles for returns that could not be achieved at home. They were professionals who willingly lent money without undertaking prudent due diligence. Providing the raw material that fuelled a property boom and knowing there is no such thing as a free lunch, they have not been told they too must share in the pain.

We know that having to adjust budget parameters to offer up a free lunch to others is code-speak for more swinging cuts and higher taxation. This is why many believe we are being sacrificed to maintain a status quo that has not learned from the ruination of the Weimar Republic – demanding all your money back, beggars your neighbour.

A version of this article appeared in the Irish Examiner, Analysis Section, Friday 1st October 2010.

Ambiguity versus leadership

Ireland suffers from lack of authentic political leadership, writes Bill Hobbs

Bond markets are holding a mirror up to a brutal reality few in political life are prepared to admit to. It is a reality we sense and are reacting to. It is the absence of authentic political leadership that generates a sense of direction, inspires motivation, leads from the front by showing example and is accepted in the hearts and minds of people who are willing to follow.

Mumbled, garbled and incoherent radio interviews are potent symbols of a form of political leadership, called strategic ambiguity, which buys votes by selling messages that have a mass appeal. But by deliberately fudging policy intentions to appeal to the broadest electorate as possible, questioning of economic policy is muted. It is an ambiguity that permitted a looting of national wealth for the benefit of the few over the many.

Such ambiguous leadership will reach its nemesis next month, when the awful bill for looting national wealth is unveiled. Once this Government finally produces a believable figure on the cost of paying off rogue bankers’ debts it will lose all credibility in the hearts and minds of its electorate. Public retribution will rightly demand a change in leadership through a general election.

At one time international observers’ commentary on the success of the Celtic Tiger was used by political leadership to bolster its domestic home-grown soft landing story. The irony is these same international observers, having had their eyes opened to Irish bubble economics, are now being accused of exaggerating problems and misleading the bond markets by the same political leadership.

Bond investors are pragmatists who look to maximise gain while minimising risk. They price risk into what they are willing to pay to lend money to sovereign states. They judge the quality of political leadership and its ability to tackle national crisis. While we have a good repayment record, investors are concerned that this continues. They wonder if Irish political leadership can deliver once again on what’s needed to be done.

There is a difference between good leadership and successful leadership. Good leaders communicate good judgement with clarity. The better the judgement and clearer the communication the better the leader in the eyes of their followers. In politics while good leadership matters, successful leadership matters more.

Successful leaders know they should not be too clear – they hog the limelight to maximise support – so they dumb down the clarity introducing ambiguity to appeal to as wide an electorate as possible. Policy becomes less important as followers buy the message.

Such political ambiguity here, from a leadership that fudged, obfuscated, and compromised whilst all the while allowing looters free reign, came unstuck. The problem for politicians is they continued on message – we hear of “the cheapest banking bailout in the world”, “Nama would get credit flowing again” and “a remarkable recovery in the economy – order books are filling”. Bellicose messages on the need for unity and patriotic duty to bear pain are no substitute for clarity and sound judgement in times of crisis.

Instead of clarity demonstrating sound judgement and a sense of direction, strategic ambiguity continued with the Croke Park agreement and fiscal plans that underestimated the collapse in revenues and scale of cuts needed. There is no clarity on how to get people back to work save for the fuzzy logic of the smart economy and idealistic green economics. How will well healed citizen’s store of unproductive wealth be best used to fund recovery?

Clarity would induce a belief that there is certainty not about how much we will pay but how we will pay. Bond markets are looking for both good and successful leadership – that combination of clarity and sound judgement – in other words certainty. Ambiguity, fudge, bellicosity, obfuscation manifest in political cronyism and parochial clientelism belong to another time.

Certainty is best seen in clear, specific, attainable and realistic goals set within a policy framework that demonstrates sound judgement and sense of direction.

Our political leadership has failed to recognise that clarity, sound judgement, recognition of ordinary people, showing common sense and having a sense of direction are what people want to experience of their leaders. They also want to see humility, a genuine appreciation of their hardships.

Ambiguity may garner support from party members but it’s not the stuff of the authentic national leadership required. It seems we are experiencing the Peter principle which maintains that sometimes good leaders at one level are promoted upwards to their level of incompetence.

A version of this article appeared in the Irish Examiner, Business Section, Monday 27th September 2010.

State solvency plan is in credit unions' best interests

The state has no mechanism to provide emergency solvency assistance-called stabilisation- to the credit union sector.

Yet credit unions might reject moves by the Central Bank to ensure that temporary solvency can be made available to rehabilitate insolvent but otherwise viable credit unions. And they could expose the sector to a crisis in public confidence and significant losses that will have to be borne by the taxpayer.

Next weekend, credit union representatives will be asked to endorse trade body ILCU’s rejection of the Central Bank’s proposals in favour of its own plan.

This would see it spin off its controversial Savings Protection Scheme into a stabilisation subsidiary designed to regulate and supervise credit unions and monitor and control their risk taking. There is no known example of such a non-statutory, un-regulated, credit union trade body owned and controlled scheme anywhere.

Internationally a handful of privately owned solvency support funds still exist. These are administered by incorporated bodies that are supervised under specific statutes by their state’s regulatory authorities and deposit guarantee schemes.

Do credit unionists believe that an unapproved system of self-regulation that duplicates and conflicts with the Central Bank’s statutory mandate will be agreed to by Government? Yet this is what ILCU appears set to campaign for.

Without providing a shred of supporting evidence, it maintains that only a credit union owned, governed and operated solvency support system protects the “self-help” ethos of the movement. Using the same “ethos protection” argument, it recently demanded that responsibility for credit union regulation be moved from the Central Bank to the Department of Enterprise, Trade and Employment. Yet the Central Bank’s credit union regulator has a track record in effective regulation that demonstrates its understanding and appreciation of the credit union ethos and co-operative business model.

Engendering public trust in deposit taking institutions requires a credible system of state regulation, supervision and state backed savings protection called deposit insurance. This is why stabilisation systems are part of or work hand in glove with credit union deposit guarantee schemes and their regulatory authorities in other countries. Designed to protect savers funds through rehabilitating troubled credit unions, stablisation provides temporary solvency support to fund recovery plans. But as this is more often seen as paying in good money after bad, in the vast majority of cases badly governed and managed credit unions are forced to merge with others or closed down.

Calling a statutory deposit guarantee a “death fund”, for years ILCU frustrated the development of statutory deposit protection. It wasn’t until September 2008, that Government, forced by the banking crisis, extended the states deposit guarantee scheme to cover savers funds in credit unions. Why did a credit union trade body act to deny people their statutory right to a guarantee? Why is it now acting to deny credit unions a solvency support mechanism that will ensure public confidence in credit unions? Is ILCU’s plan really about protecting the credit union ethos or enhancing its trade body interests and ambitions? Is this authentic credit union leadership?

Over time how things are done becomes more important than doing things and credit unions have stagnated. Typically a new leadership cohort emerges led by professional managers and progressive directors. Once again strong leaders, lead the transition to the next phase of development and others follow.

That this leadership did not emerge here is principally due to the institutionalised dominance of a League system which, when properly understood, is more an association for volunteer directors rather than one that represents credit unions.

It is why credit union managers have formed their own association to give voice to their views. The credit union, the repository of intergenerational community reserves, is barely represented, if at all. If it had a voice, it would demand a statutory solvency support system to protect it from bad governance and management risks.

In his most recent speech, the credit union regulator, highlighting financial instability risks, urged credit union managers to show leadership in dealing with them. In doing so he put his finger on the leadership failings of a trade body representative system firmly rooted in the past.

Good leadership recognises that to move on you need to let go of what it is you should no longer be doing. It is why credit union movements elsewhere successfully lobbied for statutory state backed savings protection systems. It’s time for credit union leadership here to let go of the past and respond to the challenges of today and tomorrow. To do this they will need a well designed, effective solvency support and resolution system, one that can only be provided by the state.

A version of this article appeared in the Irish Examiner, Business Section, Monday 13th September 2010.

None the Wiser on the Anglo Irish Bank Split Bank Plan

Markets forced the Government’s U-turn on Anglo, but the jury is out on the plan, while taxpayers seem as exposed as ever, says Bill Hobbs

On Tuesday evening Anglo Irish Bank management briefed 40-odd politicians on its good bank/ bad bank plan which would have seen it carved into a bad bank to recover the bad loans and a good bank with what’s left of its good loans. Anglo was hoping to trade as a going concern. On Wednesday Government pulled the rug from beneath its feet in what appears to have been a rushed decision forced on it by the international bond markets and a run by corporate depositors.

Anglo is finished as a bank and is to be treated as a gone concern to be wound down. Government is now going to figure out how much it will cost and hopes to have this done by the end of October. As the official cost on a going concern basis was put at €23bn, this will now undoubtedly increase. No one knows how much it will cost or how long it will take to wind down. It may take tens years or more. Costs were estimated by rating agency Standard & Poor’s at €35bn before this week’s wind down decision.

So why is Anglo being split in two?
It’s mainly to protect its customer deposit base of €23bn. Over the past few weeks the bond market and corporate depositors lost patience with the Government’s inability to come clean on the costs of bailing out Anglo. The bond markets showed their displeasure by demanding a +6% return to buy government bonds and sophisticated corporate depositors started to take their money out - estimated to have been about €5bn. This threat of a major run on Anglo would have triggered its immediate closure, the loss of tens of tens of billions in large deposits and could well have sparked a run on the other banks. The split separates the deposits from the bad loans and allows them to be protected.

What’s happening to Anglo?
A bank has two sides to its balance sheet. The money it has lent and the money it has borrowed to lend. This borrowed money is made up of money raised from the bond market and from deposits from the central bank, ECB, other banks, corporates and consumers.

The split will see all the loans, the bonds along with central bank/ECB and interbank deposits shifting to an Asset Recovery Bank. Government says all the bondholders are to get their money back save one class called subordinated bonds who are owed just over €2bn. They will be paid off at a deep discount to what they are owed. This bank will try to recover as much of the €37bn in loans as it can. No one knows what the losses will be.

It seems the bond holders are to be repaid in full by the state as Government has said so. If so then all of the Recovery Bank’s as yet undeclared losses will have to be funded by the taxpayer.

Retail deposits of about €25bn will move to Funding Bank. About half are from the public and half from corporates. It seems this bank will only take in deposits but not lend money. The deposits will be lent to the Recovery Bank to balance its books. To do this the Funding Bank will issue a loan to the Recovery Bank. The Recovery Bank will issue a bond to the Funding Bank which will be secured (backed) by its assets probably by its NAMA bonds – the ones used to pay for its bad loans, Government’s promissory note (the money its has already pledged to fund Anglo’s losses). But as this is not enough it will have to use its good loans or rely on a government guarantee. So it seems depositors are to be protected from loan losses in a round about way. All this is subject to EU approval.

But where does this leave the tax payer?
For now no wiser and just as exposed to losses as Tuesday. The full cost to the taxpayer depends on two things. How bad the loan losses will become and whether or not bondholders will share in these losses. So far Government has said they will be repaid in full. It’s likely that a deal will be done swapping one form of bond for another carrying a haircut and extended guarantee. Thing is no one knows such is the paucity of information provided by the Department of Finance.

Once again it seems Government has been forced into hasty action. Its sudden U turn on supporting the good bank/bad bank Anglo plan was forced on it by the markets. The jury is out on the new split bank plan until the full costs are known, greater detail is worked out by Government and a timeline put on the wind down.

A version of this article appeared in the Irish Examiner, Analysis Section on Friday 10th September 2010