Credit unions must be reigned in for all our sakes, writes Bill Hobbs
Having funded boom time consumer spending, including first time buyer down payments, credit unions are experiencing rapidly increasing bad debts as their customers struggle with unaffordable debt. It’s a time bomb ticking in credit unions backyard which the Financial Regulator is trying to disarm. With only twenty eight staff to supervise 414 credit unions, the best it can hope for is to limit collateral damage when it goes off, as it inevitably will. But if credit unions and their trade bodies had their way, it would not be given the tools to limit the damage.
Last year credit union trade bodies lobbied for extended loan limits to reschedule short term non-performing loans into performing longer term ones. In the middle of one of the world’s worst economic contractions and consumer debt crisis, loan rescheduling is like treating a festering ulcer with a sticky plaster and a hug.
Yet the Central Bank Act 2010 includes a section which will effectively allow credit unions to apply the sticky plaster. It also provides their regulator with preventive tools to control for lending, liquidity and solvency risks. However credit unionists are now up in arms at the safety conditions attached by their regulator. They argue they should not have to make the bad debt provisions required. They maintain that once a non-performing loan is rescheduled the risk of non-repayment disappears. And true to form they are engaged in typical credit union political lobbying, refusing to deal objectively with substance but arguing instead from an emotionally charged subjective basis. The substance is quite stark – credit unions will not be able to trade their way out of trouble and the sector is on the cusp of a crisis it may not survive. It seems the regulatory cure may kill the patient.
As regulated credit institutions, credit unions are expected to set aside money in reserves as insurance against unexpected losses and to set aside money in bad debt provisions to meet current and anticipated loan losses. From last year they must set aside an amount equal to 10% of total assets in regulatory reserves. The regulator set this target to prevent them from raiding their reserves to pay dividends to savers and allowed for an interim target of 7.5% for struggling credit unions. It also wants them to set aside money to fund future loan losses. The problem is many can’t generate enough profit to fund reserves, pay for losses and pay a dividend to savers. Overall, solvency and liquidity levels may appear relatively healthy. But with a far too high cost base from failing to modernise over the 20 twenty years, individually a growing number of credit unions are in quite serious financial difficulty.
Should a large credit union fail, collateral damage will be hard to contain and the states creditworthiness, its sovereign debt rating, could be undermined. Recently news that Spanish authorities had to rescue one if its co-operative savings and loans outfits, called Cajas, undermined its sovereign debt rating. Luckily for the Spanish they had the good sense to have a special resolution system in place to manage the rescue. Elsewhere regulators and deposit guarantee managers intervene, taking prompt action to stabilise a troubled credit union. Frequently they order its amalgamation with another and fund its solvency stabilisation costs. Such prompt corrective action and stabilisation is required to manage a financial stability crisis. As is a reliable system raise funding and cycle excess cash and capital from one credit union to another. But here there is no statutory, legally reliable and effective resolution system for Irish credit unions.
Yet since September 2008, the state and taxpayer has effectively guaranteed every cent of the €11.5bn in household savings in credit unions under the revised deposit guarantee scheme which will compensate savers up to €100,000. With ineffective regulation, weak resources to effectively control risk taking, inability to set mandatory rules of business conduct and prudential safety standards and lacking a resolution system permitting prompt corrective action, moral hazard risk exponentially increased once the deposit guarantee was provided.
Some politicians do not appear to understand the nature of credit union hazard threatening the entire sector. During the Oireachtas ERA (Economic and Regulatory Affairs) committee hearing last week, the credit union regulator was upbraided for doing its job and asked why it couldn’t wait for the outcome of a strategic review before taking preventative action to control risks. It was a clash between rational prudential regulation and parochial credit union political lobbying. Despite the regulator revealing serious financial stability concerns, some members of the committee appeared to argue for a soft touch.
It is against this backdrop of rapidly worsening bad debts, failing business model and a badly designed ineffective, under resourced regulatory system that politicians are being asked to consider a soft touch response.
The regulatory cure for the festering sore may trigger a chaotic shambles as credit unions begin to fail. Similar crisis elsewhere led to orchestrated state and regulatory intervention that led over time to the ordered consolidation of credit unions which enabled them to professionalise, improve governance and expand their products and services. Time has run out here. What’s required is a policy response and resolution regime to rescue credit unions from themselves which may mean the tax payer will have to fund the costs.
A version of this article appeared in the Irish Examiner, Business Section, Monday 31st May 2010
Monday, May 31, 2010
Tuesday, May 25, 2010
Drowning in a sea of unaffordable debt
The state seems content to consign people to a lifetime of indebtedness, says Bill Hobbs
There's to be no relief for people suffering unaffordable indebtedness from this Government. Requiring banks to forebear on home repossessions and juggle loan repayments to make them more affordable, whilst buying time, increases overall costs to beleaguered homeowners, consigning them to a constant state of indebtedness. A new class of indentured servant is emerging, one which this state, or at least its executive arm of Government, is prepared to do allow.
Owing far more than this state can ever hope to repay, facing a decade of austerity, with a near bust economic model, a threatened loss of tax haven status and potential for sovereignty dilution, Justice Minister Ahern appears happy to consign a generation of workers to debt servitude.
Commenting at the launch of the Law Reform Commissions interim report on personal debt and debt management, Mr. Ahern appeared to rule out any prospect of a just, fair and equitable response to what has become a social disaster. RTE reported the Minister saying “that as debt was money owed to somebody, and it was not for the Government to pass laws saying the debt was not there anymore.” He added the Government would try to ensure that people having problems paying debts would be looked at “favorably”.
His reported comments illustrate scant concern for a just and fair society. Did anyone explain to the minister, that tens of thousands of households have no chance of ever paying back what they owe? Did anyone explain the economic and social costs to society? If they did then the Minister appears to believe that Government has no role in allowing for a financial safety net or at least the prospect of earning a discharge from unaffordable debt.
Humane societies and their legislatures ensure that over indebted citizens are not consigned to a live a life-time with unaffordable debt. They realise that sometimes honest, hard working, good people cannot afford to repay what they owe. They realise that people have to be given the opportunity to once again become productive members of society. And they realise that the economic and social costs of not providing a safety net are horrendous.
Not so this Government, whose response has been to continue to criminalise non-payment of debt. Under Irish law a person can still be jailed for non-payment of debt. There is no non-judicial debt settlement and resolution system as found in other countries. Elsewhere, humane laws provide for systems of earned forgiveness through which a person pays what they can and the balance is written off over time. The only option here is personal bankruptcy.
Irish private sector debt, one of the highest in the western world, is captured in a telling headline. Irish banks leveraged their balance sheets from 60% to 200% of national income between 2000 and 2008. Most of this money, borrowed from abroad, financed a consumption spending boom principally in housing and construction. The legacy is quite a scary mammoth mountain of personal debt.
The big figures are reflected in the €140bn in mortgages and about €30bn in other personal debt most of which is owed by working classes. By year end, with no sight yet of stabilising property values, upwards of 350,000 households will suffer varying degrees of negative equity. Many are first timers who borrowed to buy grossly overpriced houses that no one wants to buy. A third of SME loans are in arrears which will now be personalised as banks call in business owners personal guarantees. Amateur landlords who gorged on cheap credit, buying multiple investment properties are discovering the real cost of a free lunch. Banks and credit unions are indicating hardening personal loan arrears – code speak for rising unaffordable debt. It’s debt that will have to be written off, sometime.
Over 30,000 homeowners are living on borrowed time. Switching to interest only payments creates a mirage of affordability and just delays inevitable defaults. Thousands more are in terminal arrears which will trigger foreclosures or walk away “jingle mail” options. Many will figure it’s cheaper to rent than own their home and will act accordingly. Bankers may have to concede to short selling – selling the house for what its worth and writing off the balance.
Not one jot of reliable, consolidated consumer debt data has been officially published on the extent of unaffordable indebtedness. The only way out of unaffordable debt is to declare personal bankruptcy, which in this country is too expensive, lasts 12 years. No other resolution system exists.
Late last year the Law Reform Commission in a lengthy consultation document proposed a humane debt resolution regime which would allow people earn the right to a partial discharge of what they owe over a period of time. Simply put such a system would require people to pay what they could and require banks to write off the balance over a five year period. The Commission’s interim report last week listed a 14 point action plan including clarifying the legal status of existing Regulatory codes of practice to allow courts to take non-compliance into consideration. There is no sign yet of a comprehensive debt resolution system emerging. And mortgage indebtedness remains the elephant in the room.
It’s inevitable that billions in personal loans will have to be written off by the banks, credit unions and other lenders. Some estimate write downs of between 5%-10%. If so, the bill may be well over €10bn. Who pays?
It's a massive social problem that this Government continues to brush under the carpet.
A version of this article appeared in the Irish Examiner, Business Section, Monday 24th May 2010
There's to be no relief for people suffering unaffordable indebtedness from this Government. Requiring banks to forebear on home repossessions and juggle loan repayments to make them more affordable, whilst buying time, increases overall costs to beleaguered homeowners, consigning them to a constant state of indebtedness. A new class of indentured servant is emerging, one which this state, or at least its executive arm of Government, is prepared to do allow.
Owing far more than this state can ever hope to repay, facing a decade of austerity, with a near bust economic model, a threatened loss of tax haven status and potential for sovereignty dilution, Justice Minister Ahern appears happy to consign a generation of workers to debt servitude.
Commenting at the launch of the Law Reform Commissions interim report on personal debt and debt management, Mr. Ahern appeared to rule out any prospect of a just, fair and equitable response to what has become a social disaster. RTE reported the Minister saying “that as debt was money owed to somebody, and it was not for the Government to pass laws saying the debt was not there anymore.” He added the Government would try to ensure that people having problems paying debts would be looked at “favorably”.
His reported comments illustrate scant concern for a just and fair society. Did anyone explain to the minister, that tens of thousands of households have no chance of ever paying back what they owe? Did anyone explain the economic and social costs to society? If they did then the Minister appears to believe that Government has no role in allowing for a financial safety net or at least the prospect of earning a discharge from unaffordable debt.
Humane societies and their legislatures ensure that over indebted citizens are not consigned to a live a life-time with unaffordable debt. They realise that sometimes honest, hard working, good people cannot afford to repay what they owe. They realise that people have to be given the opportunity to once again become productive members of society. And they realise that the economic and social costs of not providing a safety net are horrendous.
Not so this Government, whose response has been to continue to criminalise non-payment of debt. Under Irish law a person can still be jailed for non-payment of debt. There is no non-judicial debt settlement and resolution system as found in other countries. Elsewhere, humane laws provide for systems of earned forgiveness through which a person pays what they can and the balance is written off over time. The only option here is personal bankruptcy.
Irish private sector debt, one of the highest in the western world, is captured in a telling headline. Irish banks leveraged their balance sheets from 60% to 200% of national income between 2000 and 2008. Most of this money, borrowed from abroad, financed a consumption spending boom principally in housing and construction. The legacy is quite a scary mammoth mountain of personal debt.
The big figures are reflected in the €140bn in mortgages and about €30bn in other personal debt most of which is owed by working classes. By year end, with no sight yet of stabilising property values, upwards of 350,000 households will suffer varying degrees of negative equity. Many are first timers who borrowed to buy grossly overpriced houses that no one wants to buy. A third of SME loans are in arrears which will now be personalised as banks call in business owners personal guarantees. Amateur landlords who gorged on cheap credit, buying multiple investment properties are discovering the real cost of a free lunch. Banks and credit unions are indicating hardening personal loan arrears – code speak for rising unaffordable debt. It’s debt that will have to be written off, sometime.
Over 30,000 homeowners are living on borrowed time. Switching to interest only payments creates a mirage of affordability and just delays inevitable defaults. Thousands more are in terminal arrears which will trigger foreclosures or walk away “jingle mail” options. Many will figure it’s cheaper to rent than own their home and will act accordingly. Bankers may have to concede to short selling – selling the house for what its worth and writing off the balance.
Not one jot of reliable, consolidated consumer debt data has been officially published on the extent of unaffordable indebtedness. The only way out of unaffordable debt is to declare personal bankruptcy, which in this country is too expensive, lasts 12 years. No other resolution system exists.
Late last year the Law Reform Commission in a lengthy consultation document proposed a humane debt resolution regime which would allow people earn the right to a partial discharge of what they owe over a period of time. Simply put such a system would require people to pay what they could and require banks to write off the balance over a five year period. The Commission’s interim report last week listed a 14 point action plan including clarifying the legal status of existing Regulatory codes of practice to allow courts to take non-compliance into consideration. There is no sign yet of a comprehensive debt resolution system emerging. And mortgage indebtedness remains the elephant in the room.
It’s inevitable that billions in personal loans will have to be written off by the banks, credit unions and other lenders. Some estimate write downs of between 5%-10%. If so, the bill may be well over €10bn. Who pays?
It's a massive social problem that this Government continues to brush under the carpet.
A version of this article appeared in the Irish Examiner, Business Section, Monday 24th May 2010
Tuesday, May 18, 2010
Justice Minister Ahern rules out debt forgiveness for the little guy
There's to be no relief for people suffering unaffordable indebtedness from this Fianna Fail led Government.
Faced with a social disaster tens of thousands of Irish citizens were consigned to near permanent second class status by Minister Dermot Ahern yesterday. Commenting at the launch of the Law Reform Commissions interim report on personal debt and debt management the Minister appeared to rule out any prospect of a just, fair and equitable response to what has become a social disaster.
RTE reported that speaking in Dublin, Dermot Ahern said debt was money owed to somebody, and it was not for the Government to pass laws saying the debt was not there anymore. But the Minister added that the Government would try to ensure that people having problems paying debts would be looked at favourably.
A senior member of previous Governments responsible for the biggest credit bubble in modern history, Ahern’s reported comments show scant concern for a just and fair society. Did anyone explain to the Minister that tens of thousands of households have no chance of paying back what they owe? Did anyone explain the economic and social costs to society? Or that people commit suicide as they lose all hope in ever living decent lives again? If they did then Ahern appears to believe that Government has no role in allowing for a safety net or at least the prospect of earning a discharge from unaffordable debt.
Humane societies and their legislatures ensure that over indebted citizens are not consigned to a live a life-time with unaffordable debt. They realise that sometimes honest, hard working good people cannot afford to repay what they owe. They realise that people have to be given the opportunity to once again become productive members of society and they realise the social costs of not providing a safety net are horrendous.
Not so this Government whose response to the little guy has been to continue to criminalise non-payment of debt. Under Irish law a person can still be jailed to non-payment of debt. There is no non-judicial debt settlement and resolution system as found in other countries. Elsewhere humane laws provide for systems of earned forgiveness through which a person pays what they can and the balance is written off over time. The only option here, personal bankruptcy, means people can remain bankrupt for the rest of their lives.
The statistics are telling: 350,000 people in negative equity, €180bn+ in personal debt of which €145bn is mortgage debt. 30,000+ households have had to negotiate debt relief mostly switching temporarily to interest only loans, thousands of new unemployed are applying for mortgage interest relief, suicides have been linked to indebtedness, joblessness effects 450,000 people, banks are reporting increasing and worsening mortgage loan defaults, small business insolvencies are triggering personalisation of business debts. Yet not one jot of reliable consolidated data has been published by Government to demonstrate the extent of unaffordable indebtedness.
The scale of negative equity allied to unemployment and negative income shocks is indicative of a massive social problem that this Government continues to brush under the carpet. It’s not surprising then for Ahern to hold the Dickensian line – you must pay what you owe or else.
Faced with a social disaster tens of thousands of Irish citizens were consigned to near permanent second class status by Minister Dermot Ahern yesterday. Commenting at the launch of the Law Reform Commissions interim report on personal debt and debt management the Minister appeared to rule out any prospect of a just, fair and equitable response to what has become a social disaster.
RTE reported that speaking in Dublin, Dermot Ahern said debt was money owed to somebody, and it was not for the Government to pass laws saying the debt was not there anymore. But the Minister added that the Government would try to ensure that people having problems paying debts would be looked at favourably.
A senior member of previous Governments responsible for the biggest credit bubble in modern history, Ahern’s reported comments show scant concern for a just and fair society. Did anyone explain to the Minister that tens of thousands of households have no chance of paying back what they owe? Did anyone explain the economic and social costs to society? Or that people commit suicide as they lose all hope in ever living decent lives again? If they did then Ahern appears to believe that Government has no role in allowing for a safety net or at least the prospect of earning a discharge from unaffordable debt.
Humane societies and their legislatures ensure that over indebted citizens are not consigned to a live a life-time with unaffordable debt. They realise that sometimes honest, hard working good people cannot afford to repay what they owe. They realise that people have to be given the opportunity to once again become productive members of society and they realise the social costs of not providing a safety net are horrendous.
Not so this Government whose response to the little guy has been to continue to criminalise non-payment of debt. Under Irish law a person can still be jailed to non-payment of debt. There is no non-judicial debt settlement and resolution system as found in other countries. Elsewhere humane laws provide for systems of earned forgiveness through which a person pays what they can and the balance is written off over time. The only option here, personal bankruptcy, means people can remain bankrupt for the rest of their lives.
The statistics are telling: 350,000 people in negative equity, €180bn+ in personal debt of which €145bn is mortgage debt. 30,000+ households have had to negotiate debt relief mostly switching temporarily to interest only loans, thousands of new unemployed are applying for mortgage interest relief, suicides have been linked to indebtedness, joblessness effects 450,000 people, banks are reporting increasing and worsening mortgage loan defaults, small business insolvencies are triggering personalisation of business debts. Yet not one jot of reliable consolidated data has been published by Government to demonstrate the extent of unaffordable indebtedness.
The scale of negative equity allied to unemployment and negative income shocks is indicative of a massive social problem that this Government continues to brush under the carpet. It’s not surprising then for Ahern to hold the Dickensian line – you must pay what you owe or else.
Monday, May 17, 2010
Fianna Fail laissez faire policy led to our downfall
There would have been no 'bubble to prick' if the Government had done its job right, writes Bill Hobbs
In the lifecycle of family businesses, it’s said the first generation starts the business, the second builds on it and the third destroys it. Fianna Fail’s third stage economic mismanagement may well result in the diminution of Ireland’s economic sovereignty so tellingly warned of by Richard Bruton last week.
In rightly highlighting the risks inherent in the economic integration required to retain EMU membership, Bruton was accused of reckless endangerment by Fianna Fail’s party historian Minister Michael Martin.
Attacking Bruton was rather silly. Corporate investment decisions are not informed by the cut and thrust of political debate no matter what the minister would have people believe. The EU will demand change which may include tax harmonisation whatever protection the Minister says Lisbon protocols offer.
In six years time this nation may well celebrate the 1916 centenary stripped of fiscal independence. The Minister would have been better to offer a cogent reasoned rationale for ceding fiscal sovereignty - for remaining within the European Monetary Union. The Germans want their money back with interest and Minister Martin and his colleagues will sign off on a €100bn+ mortgage to repay them. It’s a debt singularly created by his and his party’s economic mismanagement and bad leadership.
During RTE’s Frontline programme last week, Martin fingered poor advice from the guardians of financial stability, the central bank and regulator, in an attempt to absolve himself, his party leader and his party from primary responsibly and accountably. He said we had to learn how to safely “prick bubbles”. He ignored one brutal fact – were it not for Fianna Fail laissez faire economic policy, Anglo Irish Bank and INBS could not have leveraged off cheap EU funds to fuel a property ponzi scheme. And AIB and Bank of Ireland would not have followed suit and funded a consumption boom. There would have been no “bubble to prick”.
Fianna Fail policy to expand domestic consumption beyond sustainable levels was reckless endangerment. Unsustainable consumption, fed from cheap abundant credit provided largely through EMU membership, artificially swelled Government coffers creating the illusion of wealth. As manufacturing output declined, competiveness was squandered through uncontrolled income inflation which even saw Minister Martin’s salary reach obscene levels. Domestic service inflation soared as gouging the consumer became a national pastime. Anyone with a modicum of understanding of economics knew something had to give – all that was needed was a trigger event, a tipping point after which the system would rapidly spiral into crisis. That trigger, when it came, was not the Lehmans collapse – Ireland’s bust was well under way by then. The tipping point occurred in late 2006 when a statement by PD Minister Michael McDowell on stamp duty caused the runaway property market to falter. By early 2007 the property bubble began to hiss air and rapidly deflate well before Lehmans collapse.
Minister Martin’s self-absolution was a prelude to the 7000 word turgid apologia delivered by Brian Cowen to his favourite audience – the Dublin business class. Gone was the rousing patriotic jingoism that peppered previous speeches. Instead he attempted to sanitise his unique role in what really went wrong. During a subsequent interview on RTE, Brian Cowen answered searching questions not with reflective responsiveness but with one word “nonsense”. Is it nonsense to suggest that he should have known better? Is it nonsense to suggest that he should have been acutely aware of reckless endangerment inherent within an overblown property bubble, runaway income inflation and Rip of Republic? Is it nonsense to suggest that he should have been aware of the risks in banking’s explosive balance sheet expansion? It seems as Minister he relied on “advice” alluding to the IMF and OECD whom he and Minister Martin would have us believe are the real villains. During recent Oireachtas committee hearing into the banking crisis a senior civil servant, when asked what advice was provided to Cowen when Minister for Finance, declined to say and cited it was convention not to divulge the advice given. Will the two enquiries into the banking crisis uncover the advice provided? Did Brian Cowen ever listen to disconfirming information that would have told him the credit boom could come to a crashing halt?
Listening isn’t easy. It’s hardest when you are faced with information that disconfirms your world view. Great leaders not only listen, they actively seek out dissenting voices. They are aware of their own blindspots. Did one mans’ blindspot, his indecisiveness, his inability to listen and respond to dissenting information lead to economic ruin? Probably not, but as Finance Minister, Brian Cowen did have the levers to “prick the bubble” in his hands.
The ability to sense when something is wrong and guard against group think is a hallmark of great leadership. It includes questioning the status quo, being mindful of sycophantic advice - keeping your ears and eyes open. It also includes a humility and ability to admit to mistakes and the integrity to stand down when compromised.
Leadership is also about inspiring hope, defining purpose and providing a reason for people to follow. Apologies should be frank, unambiguous and free of blame. Accepting errors requires integrity and grace to acknowledge a fundamental reality – were it not for economic policy mistakes there would not have been an asset bubble. Leadership also requires high ethical standards. Regretfully many Irish politicians consistently behave as if they are above standards of decent dignified leadership behaviour.
In a fit of pique Fianna Fail Senator Leydon angered at the scuffle at the gates of parliament, abused privilege and accused an eminent journalist of inciting a riot, which is a criminal offence. Senator Leydon also provided a unique insight as to why the Greens should cross the floor of the house. Defending his outrageous allegation he left the cat out of the bag. He spoke of a Fianna Fail government supported by the Greens and independents.
If it waddles and quacks like a duck it probably is a duck. Is it time too for the Greens to cross the floor? Authentic leadership demands no less.
A version of this article appeared in the Irish Examiner, Business Section, Monday 17th May 2010
In the lifecycle of family businesses, it’s said the first generation starts the business, the second builds on it and the third destroys it. Fianna Fail’s third stage economic mismanagement may well result in the diminution of Ireland’s economic sovereignty so tellingly warned of by Richard Bruton last week.
In rightly highlighting the risks inherent in the economic integration required to retain EMU membership, Bruton was accused of reckless endangerment by Fianna Fail’s party historian Minister Michael Martin.
Attacking Bruton was rather silly. Corporate investment decisions are not informed by the cut and thrust of political debate no matter what the minister would have people believe. The EU will demand change which may include tax harmonisation whatever protection the Minister says Lisbon protocols offer.
In six years time this nation may well celebrate the 1916 centenary stripped of fiscal independence. The Minister would have been better to offer a cogent reasoned rationale for ceding fiscal sovereignty - for remaining within the European Monetary Union. The Germans want their money back with interest and Minister Martin and his colleagues will sign off on a €100bn+ mortgage to repay them. It’s a debt singularly created by his and his party’s economic mismanagement and bad leadership.
During RTE’s Frontline programme last week, Martin fingered poor advice from the guardians of financial stability, the central bank and regulator, in an attempt to absolve himself, his party leader and his party from primary responsibly and accountably. He said we had to learn how to safely “prick bubbles”. He ignored one brutal fact – were it not for Fianna Fail laissez faire economic policy, Anglo Irish Bank and INBS could not have leveraged off cheap EU funds to fuel a property ponzi scheme. And AIB and Bank of Ireland would not have followed suit and funded a consumption boom. There would have been no “bubble to prick”.
Fianna Fail policy to expand domestic consumption beyond sustainable levels was reckless endangerment. Unsustainable consumption, fed from cheap abundant credit provided largely through EMU membership, artificially swelled Government coffers creating the illusion of wealth. As manufacturing output declined, competiveness was squandered through uncontrolled income inflation which even saw Minister Martin’s salary reach obscene levels. Domestic service inflation soared as gouging the consumer became a national pastime. Anyone with a modicum of understanding of economics knew something had to give – all that was needed was a trigger event, a tipping point after which the system would rapidly spiral into crisis. That trigger, when it came, was not the Lehmans collapse – Ireland’s bust was well under way by then. The tipping point occurred in late 2006 when a statement by PD Minister Michael McDowell on stamp duty caused the runaway property market to falter. By early 2007 the property bubble began to hiss air and rapidly deflate well before Lehmans collapse.
Minister Martin’s self-absolution was a prelude to the 7000 word turgid apologia delivered by Brian Cowen to his favourite audience – the Dublin business class. Gone was the rousing patriotic jingoism that peppered previous speeches. Instead he attempted to sanitise his unique role in what really went wrong. During a subsequent interview on RTE, Brian Cowen answered searching questions not with reflective responsiveness but with one word “nonsense”. Is it nonsense to suggest that he should have known better? Is it nonsense to suggest that he should have been acutely aware of reckless endangerment inherent within an overblown property bubble, runaway income inflation and Rip of Republic? Is it nonsense to suggest that he should have been aware of the risks in banking’s explosive balance sheet expansion? It seems as Minister he relied on “advice” alluding to the IMF and OECD whom he and Minister Martin would have us believe are the real villains. During recent Oireachtas committee hearing into the banking crisis a senior civil servant, when asked what advice was provided to Cowen when Minister for Finance, declined to say and cited it was convention not to divulge the advice given. Will the two enquiries into the banking crisis uncover the advice provided? Did Brian Cowen ever listen to disconfirming information that would have told him the credit boom could come to a crashing halt?
Listening isn’t easy. It’s hardest when you are faced with information that disconfirms your world view. Great leaders not only listen, they actively seek out dissenting voices. They are aware of their own blindspots. Did one mans’ blindspot, his indecisiveness, his inability to listen and respond to dissenting information lead to economic ruin? Probably not, but as Finance Minister, Brian Cowen did have the levers to “prick the bubble” in his hands.
The ability to sense when something is wrong and guard against group think is a hallmark of great leadership. It includes questioning the status quo, being mindful of sycophantic advice - keeping your ears and eyes open. It also includes a humility and ability to admit to mistakes and the integrity to stand down when compromised.
Leadership is also about inspiring hope, defining purpose and providing a reason for people to follow. Apologies should be frank, unambiguous and free of blame. Accepting errors requires integrity and grace to acknowledge a fundamental reality – were it not for economic policy mistakes there would not have been an asset bubble. Leadership also requires high ethical standards. Regretfully many Irish politicians consistently behave as if they are above standards of decent dignified leadership behaviour.
In a fit of pique Fianna Fail Senator Leydon angered at the scuffle at the gates of parliament, abused privilege and accused an eminent journalist of inciting a riot, which is a criminal offence. Senator Leydon also provided a unique insight as to why the Greens should cross the floor of the house. Defending his outrageous allegation he left the cat out of the bag. He spoke of a Fianna Fail government supported by the Greens and independents.
If it waddles and quacks like a duck it probably is a duck. Is it time too for the Greens to cross the floor? Authentic leadership demands no less.
A version of this article appeared in the Irish Examiner, Business Section, Monday 17th May 2010
Monday, May 10, 2010
Austerity riots in Athens may easily spread
History shows us to forgive unaffordable national debt, argues Bill Hobbs
Owing more than we can afford to pay, should we agree to consign ourselves to years of austerity? Lessons from history demonstrate just why unaffordable national debt should be forgiven. The cost of First World War reparations beggared the German Weimar Republic and sowed the seeds of another war. Once likened to a post-war economy, Ireland’s reparations bill for self-inflicted damage requires the state to borrow over €100bn at a cost that will sustain unemployment levels, starve ordinary people of quality public services, force tens of thousands of young people to emigrate and leave the economy languishing in the boondocks for years to come.
The Germans and other financiers want all of their money back at today’s values plus interest. It is money willingly lent to fuel unsustainable consumer spending and asset bubbles across Europe. If they get all of their money back it’s said middle Germany will then risk its savings to fund European economic recovery. Will it?
The collective €110bn lifeline to Greece buys some time. Tremors from its debt earthquake continue to reverberate driving the risk premium demanded by government’s bankers, the bond market, through the roof. Last week a flight to quality literally froze this market. The ECB will unfreeze it by buying risky sovereign bonds from banks allowing them to continue to trade. Illiquidity may be solved but not sovereign insolvency. The inability to repay debt remains. The bond market has priced in individual EU nation state sovereign risk, and called the EU to account. Greece was a test. Sovereign debt providers do not believe the EU response is adequate and realise that eventually real action will require its leaders to usher in an era of controlled inflation to pay down debt. Either that or some countries will have to go it alone and default and restructure their unaffordable debt.
Weekend Franco-German fighting talk of seeing off “bond speculators” harkens another time when faceless bond investors were blamed for causing ruin. It’s nonsense to suggest that those charged with protecting savers capital will not act accordingly and refuse to buy dodgy debt. Realising they may have to take a bath, bond holders will want the water to be warmed up first.
But for tens of millions of ordinary people, theirs will be a ten year ice bath as they are frozen out of participating as productive members of society. Austerity riots on the streets of Athens may well be repeated across other European capitals within the next year. The underlying political systems so carefully crafted to maintain economic and social cohesion are threatened, which is why European stability will now be tested. As Germans don’t elect Spanish politicians, rising nationalism could sunder EU cohesion.
Without fundamental reform in how the EU member states collectively order fiscal as well as monetary affairs, the prospect of chaotic sovereign debt default looms large. Unless that is it’s decided to risk inflating away the real value of unaffordable sovereign debt - in short printing money to pay down debt. This may start with the ECB issuing its own bonds – building its own printing presses. Some argue that deflating the value of the Euro and inflating away debt over time is required. But this carries the risk of hyperinflation unless backed by real job creating sustainable economic growth.
Absent a believable EU response, its member states have their own nuclear option and that is to default on their promise to repay – more especially default on rogue banks promises to repay. If Brian Lenihan or Brian Cowen knew in September 2008 what they know now, would they have considered Anglo Irish Bank of such national systemic importance? Would they have decided to risk sovereign debt default all for one rogue bank? It’s not too late to undue the damage done in guaranteeing Anglo’s bond holders. It’s not too late to force debt restructuring on them. In September this year the fateful guarantee, that will cost this state at least €24bn, will expire. Why should the state continue to guarantee Anglo’s bond holders and what would really happen if it did not? As it stands holders of Anglo paper are being treated to a free lunch.
Just who are they? And why should their decision to invest in an asset bubble be any less open to loss than others? Government Ministers imply Anglo’s bond holders are predominantly Irish pension funds and credit unions. Yet credit unions are said to have only €99m invested in Anglo bonds. What of Irish pension funds? Surely pension fund managers should clarify how much invested and why? Doubts over Anglo emerged in November 2007, a full year before it imploded. Many wise investors pulled out at the time. It’s likely the actual Irish pension exposure is significantly less than Government would prefer people believe. It’s high time to reveal the identity of Anglo’s bond holders. Just who holds its tax payer guaranteed paper? Who are the free loaders who have bought this dud banks junk bonds since it was nationalised? Are they are to be provided with a one way bet at the expense of ordinary people?
Bashing Greeks for creative accounting and Germans for wanting their cake and eating it, conveniently ignores the fact that the consumer spending boom and asset bubble generated wealth for a generation of older Irish people, principally those over 40 - its net beneficiaries. Irish banks external borrowings funded an inter-generational transfer of wealth from a young to an older generation. In his poem September 1913, Yeats wrote of a nation of shopkeepers “fumbling in the greasy till, adding the halfpence to the pence”. Do the Nama and Anglo strategies reflect a desire to protect the value of the “greasy halfpence”? Like the Germans, an older generation of Irish savers demand the value of their savings is protected. Yet the productive assets backing this wealth are worth less than their face value, which is why billions are being borrowed in the vain hope future economic performance, will finance its repayment.
A version of this article appeared in the Irish Examiner, Business Section, Monday 10th May 2010
Owing more than we can afford to pay, should we agree to consign ourselves to years of austerity? Lessons from history demonstrate just why unaffordable national debt should be forgiven. The cost of First World War reparations beggared the German Weimar Republic and sowed the seeds of another war. Once likened to a post-war economy, Ireland’s reparations bill for self-inflicted damage requires the state to borrow over €100bn at a cost that will sustain unemployment levels, starve ordinary people of quality public services, force tens of thousands of young people to emigrate and leave the economy languishing in the boondocks for years to come.
The Germans and other financiers want all of their money back at today’s values plus interest. It is money willingly lent to fuel unsustainable consumer spending and asset bubbles across Europe. If they get all of their money back it’s said middle Germany will then risk its savings to fund European economic recovery. Will it?
The collective €110bn lifeline to Greece buys some time. Tremors from its debt earthquake continue to reverberate driving the risk premium demanded by government’s bankers, the bond market, through the roof. Last week a flight to quality literally froze this market. The ECB will unfreeze it by buying risky sovereign bonds from banks allowing them to continue to trade. Illiquidity may be solved but not sovereign insolvency. The inability to repay debt remains. The bond market has priced in individual EU nation state sovereign risk, and called the EU to account. Greece was a test. Sovereign debt providers do not believe the EU response is adequate and realise that eventually real action will require its leaders to usher in an era of controlled inflation to pay down debt. Either that or some countries will have to go it alone and default and restructure their unaffordable debt.
Weekend Franco-German fighting talk of seeing off “bond speculators” harkens another time when faceless bond investors were blamed for causing ruin. It’s nonsense to suggest that those charged with protecting savers capital will not act accordingly and refuse to buy dodgy debt. Realising they may have to take a bath, bond holders will want the water to be warmed up first.
But for tens of millions of ordinary people, theirs will be a ten year ice bath as they are frozen out of participating as productive members of society. Austerity riots on the streets of Athens may well be repeated across other European capitals within the next year. The underlying political systems so carefully crafted to maintain economic and social cohesion are threatened, which is why European stability will now be tested. As Germans don’t elect Spanish politicians, rising nationalism could sunder EU cohesion.
Without fundamental reform in how the EU member states collectively order fiscal as well as monetary affairs, the prospect of chaotic sovereign debt default looms large. Unless that is it’s decided to risk inflating away the real value of unaffordable sovereign debt - in short printing money to pay down debt. This may start with the ECB issuing its own bonds – building its own printing presses. Some argue that deflating the value of the Euro and inflating away debt over time is required. But this carries the risk of hyperinflation unless backed by real job creating sustainable economic growth.
Absent a believable EU response, its member states have their own nuclear option and that is to default on their promise to repay – more especially default on rogue banks promises to repay. If Brian Lenihan or Brian Cowen knew in September 2008 what they know now, would they have considered Anglo Irish Bank of such national systemic importance? Would they have decided to risk sovereign debt default all for one rogue bank? It’s not too late to undue the damage done in guaranteeing Anglo’s bond holders. It’s not too late to force debt restructuring on them. In September this year the fateful guarantee, that will cost this state at least €24bn, will expire. Why should the state continue to guarantee Anglo’s bond holders and what would really happen if it did not? As it stands holders of Anglo paper are being treated to a free lunch.
Just who are they? And why should their decision to invest in an asset bubble be any less open to loss than others? Government Ministers imply Anglo’s bond holders are predominantly Irish pension funds and credit unions. Yet credit unions are said to have only €99m invested in Anglo bonds. What of Irish pension funds? Surely pension fund managers should clarify how much invested and why? Doubts over Anglo emerged in November 2007, a full year before it imploded. Many wise investors pulled out at the time. It’s likely the actual Irish pension exposure is significantly less than Government would prefer people believe. It’s high time to reveal the identity of Anglo’s bond holders. Just who holds its tax payer guaranteed paper? Who are the free loaders who have bought this dud banks junk bonds since it was nationalised? Are they are to be provided with a one way bet at the expense of ordinary people?
Bashing Greeks for creative accounting and Germans for wanting their cake and eating it, conveniently ignores the fact that the consumer spending boom and asset bubble generated wealth for a generation of older Irish people, principally those over 40 - its net beneficiaries. Irish banks external borrowings funded an inter-generational transfer of wealth from a young to an older generation. In his poem September 1913, Yeats wrote of a nation of shopkeepers “fumbling in the greasy till, adding the halfpence to the pence”. Do the Nama and Anglo strategies reflect a desire to protect the value of the “greasy halfpence”? Like the Germans, an older generation of Irish savers demand the value of their savings is protected. Yet the productive assets backing this wealth are worth less than their face value, which is why billions are being borrowed in the vain hope future economic performance, will finance its repayment.
A version of this article appeared in the Irish Examiner, Business Section, Monday 10th May 2010
Tuesday, May 4, 2010
Yesterday's solutions will not solve crisis
It's vital that banks stop living in the past, writes Bill Hobbs
A version of this article appeared in the Irish Examiner, Business Section, Monday 3rd May 2010
“The best way of predicting the future is to invent it” Taoiseach Brian Cowen said recently. But for Irelands’ big two banks it’s more like “back to the past” as they are forced to sell off non-core business and stick to the knitting of domestic retail banking. EU authorities are insisting bailed out banks must sell billions of assets, close branches, cut balance sheets drastically, restrict payments to investors, executives and staff and focus narrowly on retail banking.
Bank of Ireland and AIB are currently in the throes of proposing their plans to the EU’s competition authority hoping for its endorsement of the Governments bail out strategy. The two banks are undoubtedly systemically important. Without them the economy cannot recover. And as Bank of Ireland was a tad less reckless than AIB, it seems it may not require majority state ownership to recover. Signalling it will sell off non-core business to shrink to its domestic banking base, Bank of Ireland has succeeded it seems in attracting private investment.
AIB must be envious that Bank of Ireland has managed to find a way to stave off majority state ownership even if this means the Government increases its stake to 36% at a hefty additional cost to the tax payer. But as Irish Government bond spreads widened over German bonds last week, Bank of Ireland’s good news is hardly the vote of international confidence in Ireland that Minister Lenihan would have people believe. Given continuing Greek travails and contagious threats to other countries including Ireland, international government bond investor sentiment may yet undermine the banks’ fund raising plans. Should investors consider Irish economic recovery at even greater risk they will demand a higher return to finance Government’s voracious borrowing requirement and undermine Irish banks ability to raise fresh equity.
AIB is also being forced to shrink back to its core Irish retail banking operations leaving its international banking strategy in tatters. It may be forced to sell off its valuable Polish and US businesses but the capital raised will probably not be enough. It’s likely to end up in majority state ownership as it will be unable to raise enough private investment to meet the regulators higher capital requirements.
False dawn predictions that the Nama strategy would “get credit flowing again” aside, the important thing is that both banks manage to achieve the regulators higher capital targets and then get back to the business of traditional retail banking. In time perhaps the state and tax payer will get some return from the billions invested in the two banks, which may mitigate the incalculable economic and social costs in supporting them.
It now seems that the Government considers winding down Anglo Irish Bank the only viable option. Anglo may have been of systemic importance when the blanket state guarantee was given in September 2008 but only because the state couldn’t allow it to safely fail – there was no resolution mechanism in place to arrange for its orderly winding down. There still isn’t. Anglo together with its “mini-me” Irish Nationwide, will probably destroy over €30bn in tax payers funds.
Government’s attempt to treat this destruction of money as a form of long term investment by the state was rejected by the EU which says the cost must be borne today. Its position called Government’s investment bluff and both Anglo and INBS now face the real prospect of being wound down. It’s likely that Anglo will be split into a bad bank/asset manager and its good bits corralled to be sold off. Irish Nationwide, with few good bits worth salvaging, should simply be wound down now or alternatively lumped in with Anglo’s bad bank. Last weeks contradictory statements from Finance Minister, Brian Lenihan who hinted at a wind down and Tánaiste, Mary Coughlan who stuck with the investment version did little to inspire confidence in Government’s strategy. One of the intriguing behavioural aspects of the economic crisis is the willingness of so many ordinary people to continue to put money on deposit with Anglo Irish Bank and Irish Nationwide, effectively funding their reckless loans. The Governments’ hand would be forced quite quickly if people decided to move their deposits elsewhere.
Meanwhile PermanentTSB continues to struggle with a business model designed to fuel boom time consumer credit. Its parent, Irish Life Group, touting the so called third banking force, has hung up the “for sale” sign. The third force notion has been around for years. The current version talks up a merger of PTSB, EBS and INBS along with Anglo’s good bits. The rationale for creating a broad based commercial bank large enough to compete with the big two is less than compelling and remains the stuff of stockbroker analyst’s musings.
In any event the EBS is said to be exploring a third party private investment proposition which could limit its requirement for state support. How it squares this off with its mutual status remains to be seen. Talks on an INBS/ EBS merger also appear to have foundered.
Any additional capital the banks raise, whether provided by the state or raised privately, will help them plug the gap left by NAMA’s haircut pricing and fund other loan losses, most of which have yet to be experienced. With the full cycle of bad loan yet to be factored in, the hope is this round of capitalisation will be enough to enable banking to work again.
Since September 2008 the country has had a moribund, undercapitalised, illiquid banking system that won’t have its balance sheet partially repaired by Nama until February 2011. When announced Minister Lenihan, confident a floor had been reached in property values, talked of a 30% Nama haircut. It’s currently averaging 47% as property continues to decline in value. Largely designed to head off full scale nationalisation, Nama may have worked in Bank of Ireland’s case but the other banks remain to be dealt with.
Rather than invent the future by building a new working banking system, Government is stuck with trying to fix the system using yesterday’s solutions.
A version of this article appeared in the Irish Examiner, Business Section, Monday 3rd May 2010
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