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

Time to tackle consumer debt crisis

The state and banks' response is like using a hairdryer to thaw an iceberg

With over one third of all homeowner mortgages in negative equity, the Central Bank’s report on mortgage arrears for the first six months of this year hints at the scale of the consumer debt crisis.

Since this time last year the number of households with distressed mortgages has increased by 10,000 to 36,400. The numbers jumped by over 4,000 from April to June this year. Should this trend continue, by the end of the year the number will be close to 50,000. To put this in perspective, it’s the entire homeowner population of counties Wexford or Wicklow.

Between 2005 and 2008 banks lent €130bn in mortgage debt at peak property values. With values fast approaching or at 2001 levels, most of these loans are now in negative equity. But negative equity doesn’t of itself trigger mass default. It takes rising unemployment and a sudden drop in take home pay. Facing long term sustained unemployment levels and permanent decline in household incomes the extent of householder distressed debt is slowly becoming apparent.

If 5% of home owner mortgages are irreparably distressed then how many more have been massaged through loan modifications? Some reckon that upwards of 40,000 have been modified already. Adding the two together means that 10% of home mortgages are already troubled. Most of these are in negative equity which only increases as the interest clock is still running. And with a second round of fiscal austerity measures to come, rising bank rates and a likely increase in ECB rates, many more households will be tipped into mortgage default next year.

For every distressed mortgage banks are facing losses of between 25% and 50% if they were to formally demand repayment in full, repossess or force the sale of homes. While homeowners might legally still owe the balance, banks know full well they will have little chance of ever recovering it and would be faced with a write-off.

Collectively owing €6.9bn, the average distressed mortgage is €189,000 including arrears of €16,000. As property values have declined by at least 40%, should these homeowners sell up and move on, they would still owe upwards of €70,000 before costs. To put this another way if US style “short selling” were allowed here -where you can sell your home for what you can get and the bank writes of the balance owing- Irish banks would face losses close to €3.3bn on the €6.9bn of distressed mortgages reported on last week.

Typically as households experience a sudden drop in income they burn up savings first and only then go into arrears. And as paying mortgages is prioritised, it’s highly likely that people in trouble with their mortgage are also in serious trouble with other personal loans. Amounting to over €30bn, the Central Bank does not publish arrears data on these other loans. As credit unions who account for about €6.5bn were reporting arrears of 13% earlier this year, it’s likely that banks are experiencing similar personal loan deterioration.

Central Bank data also excludes one important sub-sector - the ubiquitous “buy to let” mortgage used by our amateur landlord class. Between 2005 and 2008 over 88,000 of these loans totalling almost €25bn were issued. How many are in distress is unknown but with the total amount owing declining, it seems that investors are either paying off their loans from savings or being forced to sell at fire sale prices.

Small business debt is also unreported on. No one knows how badly these loans have deteriorated but it’s been said that over a third are experiencing difficulties. As most are business loans are personally guaranteed they immediately mutate to personal debt once they are called in by the banks.

Central Bank mortgage arrears data merely sketches the tip of the consumer debt iceberg. Anxious to talk up the low numbers of home repossessions, Minister Eamon Ryan and the IBF praised the virtue of mortgage lenders forbearance which sees them forced to hold off on repossessions and modify distressed homeowner mortgages to make them temporarily more affordable. These measures only serve to increase the amount owing and are cold comfort for the tens of thousands who have no hope of ever repaying what they owe.

Government’s response and banks forbearance measures are no more effective than trying to thaw the iceberg with a hairdryer. It’s important for those who would talk down the problem to come clean. Informing the debate on what must be done to sort out this mess will take a lot more than the pretence that all is well as only 4.62% are in trouble and repossessions are still quite low.

Finding a solution will not be easy. One thing is for certain without allowing for the possibility of writing down mortgages to affordable levels and tying these to the current value of homes, forbearance will only make things worse.

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