Raid on private sector retirement savings unfair

Pension levy will be used to fund public sector day-to-day spending and not jobs, writes Bill Hobbs

If small nations are defined through their relationship with larger powerful neighbours then what happens when neighbours make unfair and unjust demands?  What happens when they first strip a state of its sovereignty and then insist its citizens suffer extortionate economic and social losses to protect their banking systems and citizens wealth?

Government’s decision to expropriate money from private retirement savings accounts illustrates just how serious this state and its citizens are being impacted by a monetarist doctrine designed to protect larger, more powerful nation states.

Last week an unelected senior ECB bureaucrat explicitly threatened to consign this state to an economic stone age unless it abided by his organisations objective to protect larger member states economies and their banking systems. Is the ECB bullying small states into submission? 

Having acted as a lender of last resort, the bank now finds itself backed into corner, unable and unwilling to take the next logical step, to restructure unaffordable debt. Instead, it raises the threat of an Armageddon like contagion should it even countenance restructuring.    

The stupidity of this states decision to guarantee and then socialise bank debt cannot be unravelled despite Fine Gael and Labour party pre-election promises. Having been first mugged ourselves and then been stripped of economic sovereignty, we are now told the best we can hope for is a marginal reduction in interest rates. We know that we are being sacrificed on an Atlantic Wall constructed to protect others' citizens from what are fundamental Eurozone problems.  

The inevitable consequence of being forced to socialise bank debt and stave off sovereign default is seen in the ill-advised decision to overtly raid private sector financial assets. 

Taken to its extreme, a 100% tax on private financial assets would wipe out public debt tomorrow. On its own, the 0.60% levy may appear to be a small number. It is in fact a substantial amount of money that is not being invested in job-creating assets but used to fund public sector day-to-day running costs.   

Excuses proffered by Government for raiding private sector retirement savings echoes the previous administration’s claims for the cheapest of banking bailouts. 

Despite ministers and ill-informed TD’s spin and bluster, it could not legally guarantee that it will not be forced to expropriate more savings. Once again political ambiguity was deployed to play down the enormity of what is the thin edge of a very dangerous wedge. 

The message is quite clear – there is now a real risk to private savings if left in the state. Those who can afford to will shift their money abroad and thus deny the country the productive wealth required to rebuild the economy.

While pension funds may be non-productive wealth, enforcing productive investment through state expropriation is inefficient and ineffective as the money will be channelled through a high cost, low return dysfunctional public sector bureaucracy. Suggesting expropriated savings will be ring-fenced to facilitate job creation is disingenuous as there is no direct connection between what government collects and spends.

Lateral thinking could have been used to encourage voluntary investment in specific funding vehicles and supporting frameworks for business enterprises starved of credit. Three years into a credit crunch and there is a mere hint of a small business loan guarantee scheme emanating from Government. Could private sector financial assets not be deployed to capitalise such a scheme and generate a return for investment?

Rebuilding a working banking system requires private productive wealth in the form of savings to fund new lending. The danger now is in adopting what are essentially war time-like expropriation powers, productive wealth will flee the country. Is it right to risk a flight of private capital?

If the ECB is clearly intent on protecting other states national interests and their citizen’s private wealth, is it in this state’s interest to raid private citizen’s financial assets? 

Can it be said that reparations demanded and enforced through implicit and explicit threats by external forces are in the common good? 

And is right the common good should used to reason an inequitable, unjust expropriation of private wealth?

While 0.60% may seem a small number, the decision to dip into a store of wealth to fund the state’s operating costs fundamentally impacts on the relationship between private property rights and the wider common good.

For this reason many are questioning the constitutionality of a decision largely caused and driven by less than benign external forces. 

If small nations are defined through their relationship with larger powerful neighbours then what happens when neighbours make unfair demands?              

A version of this article appeared in the Irish Examiner, Business Section, Monday 30th May 2011.      

Debt forgiveness programme must be launched

As the debt crisis worsens for consumers a programme to forgive billions in mortgages and loans will be needed to restore confidence.

CENTRAL Bank numbers on home mortgage arrears continue to worsen. Just short on 50,000 loans amounting to €9.6bn are in considerable distress. Many of these have already been restructured while 37,000 restructured loans of €6bn are “performing”.

These numbers, which grew by 11% this year, illustrate a brutal reality - thousands of homes will have to be repossessed, sold-off and the balance owing written off. Thousands of other consumer loans will also have to be written off.

Clearly an organised programme will be needed to forgive billions in consumer mortgage and other loans. The money to do this has been provided. Last March’s central banks’ recapitalisation programme earmarked over €9bn to fund consumer mortgage and other loan losses in four banks. Its numbers did not include other major consumer lenders such as Ulster Bank and credit unions.

Having identified the scale of expected losses what’s needed is an effective debt forgiveness programme. Leaving the process to lenders and their customers will not work. The Law Reform Commissions recommendations, if implemented, will only work is there is a system to manage the numbers of debt forgiveness agreements required to work out billions in unaffordable debt. Yet reforming our laws and creating supporting systems is falling between the bureaucratic cracks of three Government ministers and their departments.

Any forgiveness programme must be designed to deal with tens of thousands of individual arrangements with multiple creditors. It will have to be a holistic process where people contract with their many lenders to pay what they can over a period of time and their lenders agree to suspend legal collection activity and to writing off the balance owing at the end of the debt settlement contract. And it will have to be designed to deal with unsecured loans and mortgages.

Despite worsening numbers, bankers are citing low numbers of repossessions as evidence of their compassionate social responsibility. But foreclosure forbearance is designed to buy time for banks to rebuild shattered business models and not to protect consumers. As writing down billions in mortgages to “forced sale” recovery values would trigger immediate losses, the game is to keep mortgages ticking over so as not to have to write them down. Yet banks fully realise that they will have to write down loan values yet have no process to do so.

Government policy to artificially suppress repossessions does nothing whatsoever to alleviate this crisis. Instead it amplifies the magnitude of indebtedness, ensnaring people in a virtual debtor’s prison they cannot escape from. Forbearance can only ever be a short term measure to buy time for incomes and a housing market to recover. The brutal fact that no one is prepared to admit to publically is, for banking to be made whole again thousands of homes will have to be repossessed and billions in loans will have to be forgiven.

Is it socially responsible to continue with a policy that consigns people to powerlessly dealing with their creditors as they pursue them through the courts for debts they patently cannot repay? When there is no hope of ever repaying debt, people become depressed and cease being productive members of society. Internationally, studies have long shown the psychological damage people experience when struggling with distressed debt. Draconian legal debt collection processes undermine people’s self-esteem and coping skills, causing despair and hopelessness and heightened risks of suicide particularly amongst men.

Although billions in funding is being provided for banks to write off distressed consumer debt, there’s no sign of a fair and equitable system through which to structure debt forgiveness. Instead it’s being left to ordinary people who have no influence whatsoever to deal individually with their mortgage lender and others they owe money to.

For any debt settlement system to work the effective ban on repossessions will have to cease. Mortgages should be “crammed down”, reduced to a level equating the current value of the home. Where a homeowner can afford lowered mortgage repayments they should keep their home. Where they cannot, then they should hand up possession, move out or stay on as tenants.

Negative equity, which is by definition an unsecured loan, should be managed through a debt forgiveness programme. The programme would see people using an objective, independent intermediary to arrange debt settlement agreements to pay what they can to their lenders. In turn their lenders would agree to suspend legal debt collection, freeze interest and write off whatever balance remains at the end of the agreement.

These agreements could be registered on credit bureau providing a mechanism for people to rebuild their credit rating. Where people are hopelessly insolvent, with no prospect of paying a reasonable amount off their loans, then they should be able to opt for a fast and effective personal bankruptcy programme.

A version of this article appeared in the Irish Examiner, Business Section, Monday 23rd May 2011

Having ceded sovereignty, we return to home rule

Ireland faces a real financial and social crisis, but nobody wants to talk about it. It's time for Government to take action, writes Bill Hobbs

IN WHAT has become a tragic farce, an Irish Government will plunder its citizen’s retirement savings accounts while insisting on protecting German citizens pension funds. Unable to force losses on bank bond holders, we have ceded sovereignty to a form of home rule.

Our ability to fund economic recovery and respond to a real social crisis is being stifled by other state’s national interest masquerading as European unionism.


It’s ironic that some establishment figures here accept self-limiting, self-determination as being all we can expect at this time. Their position resonates with a Redmondite orthodoxy that once promoted home rule as the only way forward.

Irony aside, Government’s decision to plunder private capital to fund the public purse is a form of fiscal marshal law. It’s a bad judgement call that has opened a Pandora’s Box it cannot close. With comparisons being drawn with Argentina’s nationalisation of private pension funds, the move will amplify an already extensive flight of deposits abroad. Last week's move by the NTMA put what’s left of the national pension reserve fund after recent asset fire sales on term deposit with the banks won't help matters.

Calling its plundering a “small levy” equivalent to deposit interest income tax, was pure political spin reminiscent of the outrageous statements and haughty arrogance of the previous government.

Have politicians not learned yet that deliberate ambiguity and spin no longer holds water with people? After its poor communications performance last week, this Government has yet to demonstrate the authentic honesty and transparency it promised to deliver on.

Plundering retirement savings accounts wasn’t the only shocking story last week. The response to the Master of the High Court, Ed Honohan’s plea to do something urgently to protect vulnerable people from needlessly draconian debt laws and bankers debt collection practices was astonishing.

Demonstrating appalling arrogance, the Irish Banking Federation criticised him for daring to draw attention to people taking their own lives because of their debts. The banker’s trade body showed scant appreciation of the psychological damage wrought by an inhumane legal debt collection system and actions of unscrupulous lenders and debt collectors.

Mr Honohan was entirely correct in exposing a shocking delay in dealing with a real financial and social crisis faced by decent, honest, hopelessly indebted ordinary people.

His stark message contrasted too with Government’s stock in trade, kick for touch response which amounted to “we recognise the need to do something urgently”, so “we are planning to do something” but “we can’t tell you what that something is” and “can’t tell you when the something will be delivered on”. It threw in the usual “a group is looking into it” line and through in moral hazard risk for good measure.

Yet as it is to give billions to banks to fund consumer loan write offs (another name for forgiving debts) all that’s needed is an efficient, reliable non-court based system to arrange for debt settlement and forgiveness contracts between an indebted person and their lenders.

While a legalised system has been drafted by the Law Reform Commission, it is entirely possible to have a working system up and running within six months, while waiting for legislative backing.

Despite the overwhelming evidence and acceptance of an urgent need to do something we are not going to see changes to inhumane debt collection and personal insolvency laws until 2012. In the meantime people will continue to be exposed to unscrupulous lenders and their debt collector’s abusive behaviours and actions.

How many more decent people will take their own lives because they see no way out?

Mr Honohan’s intervention last week set down a clear marker. People’s lives are now in the hands of government minister’s, senior civil servants, lenders and their trade bodies. Talking up steps taken so far, which have manifestly failed to protect vulnerable people, is not the answer. It’s time to cut through procrastination, time to knock heads together and time to deliver.

Last week illustrates how disempowering deference to a higher authority has become. While the Government is planning to raid retirement saving accounts, it cannot provide a financial safety net for people in debt because in making Irish banks whole again, it’s promised German and other countries' pension funds will be protected at all costs. It says people must deal with their lenders on their own without the consumer protection or financial safety net they would be afforded by a humane debt settlement system which could be introduced within months.

Some have ruefully observed how a disempowering deference to one higher authority which ended barely ninety years ago, was replaced in turn by deference to a church and now we are seeing a new manifestation in the form of Irish European unionism that argues we should be grateful to accept our lot, even if this means people take their own lives as we cannot afford to provide for debt forgiveness.

A version of this article appeared in the Irish Examiner, Business Section Monday 16th May 2011

Good leadership is key to credit union consolidation

This is a chance to create a modern credit co-operative system, writes Bill Hobbs

As predicted, Government has had to intervene to stabilise the credit union sector. Where appropriate, credit unions are to be consolidated and where warranted, consolidation will be funded by the state.

It seems outright closure for some has not been ruled out.

The Central Bank is to establish and operate a statutory resolution scheme. By the end of the month Government says it will also appoint commission on credit unions to design a strategy for the future of the sector.

Government’s intervention illustrates how the Central Bank’s, as yet unpublished, extensive diagnostic and stress test has revealed the damage wrought by the credit crisis and scale of funding required to put the sector on a firmer financial footing.

By the end of this month, the bank will produce a plan to underpin the solvency and viability of undercapitalised credit unions. It may indicate the level of state aid required to fund a large scale consolidation programme.

The bank has said consolidation could result in a hub and spoke configuration along county lines, with perhaps one credit union per county having a number of satellite branches.

The number of credit unions may shrink from just over 400 to between 100 and 150.

In a related move, in orchestrated press releases, the Central Bank and Department of Finance welcomed ILCU’s press statement on its decision to enter discussions on a statutory resolution mechanism.

Only last year it lobbied politicians to have credit union regulation removed from the Central Bank and rejected the bank’s proposals for a statutory resolution scheme in favour of its own private scheme.

After incurring significant losses in supporting a small number of credit unions, it appears leading credit unions rejected its plan to double contributions to shore up its controversial stabilisation fund.

Northern Ireland members are said to be demanding their contributions be ring-fenced from losses in the Republic. While ILCU’s decision is a welcome development, many are deeply frustrated that responsive leadership is not emerging from the sector.

Taken together, Government’s intervention, the Central Bank’s regulatory strategy and credit union commission could facilitate the creation a modern credit co-operative system similar to those found in Europe, North America and Australia where, through sophisticated networks, individual co-operatives pool resources through central corporate bodies.

These central bodies, many of which operate as wholesale banks, provide a range of services to their member co-operatives.

Customer owned, professionally managed and governed, cohesive networks provide tens of millions of ordinary people with a full range of high quality, affordable financial products and services.

Had credit unions here evolved similarly they could have generated the capital required to build a modern credit co-operative system. But for various reasons including a lack of effective leadership and committed followership, they have been unable to do so.

The Central Bank is showing responsive regulatory leadership to put credit unions on a sounder footing. However it will take responsive credit union leadership if it is to work. And while regulatory strategy may build a better, safer road, it’s also necessary to figure out where the road goes.

What credit unions of the future look like, how they will governed and managed, what products and services they provide, what enabling IT systems and operational models they deploy and how they will co-operate with each other to leverage of their combined strength, are some of the issues to be addressed by the commission.

Whatever strategy the commission recommends it can only be executed if there is effective leadership and committed followership.

As credit unions have become quite skilled at non-collaboration, solving for the vacuum in progressive leadership and followership will not be easy.

It’s important the credit union commission encourages new leaders to emerge. These will be people who are committed to building great credit unions. Only when credit unions are governed and managed efficiently and perform at the highest standards can they deliver on their objectives.

Creating a modern credit co-operative system will take resources and expertise credit unions do not have. On its own a Central Bank can only do so much. Transforming credit unions will require a leadership and decision making system capable of realising the full potential of the credit union co-operative banking model.

A change agent with powers, resources and expertise to work with the bank to ensure that transformation happens and potential is realised will be needed. Such a change agent would be tasked by Government with creating a modern federated credit co-operative system.

Governed by professional credit union stakeholder representatives, it would employ the expertise required and working closely with the Central Bank, effect the change required.

In time it could become the governing body and manager of any central corporate facility established to support a cohesive federated network of consolidated credit unions.

A version of this article appeared in the Irish Examiner, Monday May 9^th 2011.


I have previously written on issues contained in this article with ILCU responding to some of them. A list of articles and where applicable ILCU responses are here.

Bank boards should include consumer advocates

Consumer advocates on bank boards would minimise the risk of mis-selling and mis-buying of dangerous products. Most banking 'innovation' increases prices and exposes us to risks we don't understand, writes Bill Hobbs

GOVERNMENT must ensure banks and other financial product providers never again engage in abusive marketing and misselling of dangerous financial products to consumers.

As he recruits a panel of possible bank directors, Finance Minister Noonan should insist every bank board has at least one director who has a non-conflicted reputation for consumer advocacy and the skills to ensure bankers behave themselves.

Previous political policy which promoted the fiction of self-regulating free markets, created fertile ground for the systemic exploitation of peoples desires to improve their financial well being. The explosive growth in consumer credit could only have occurred through wholesale misselling and misbuying of credit products.

Why did so many people borrow so much and why did banks lend so much to them? What caused the catastrophic misselling and misbuying of bank credit? Why were people induced to invest vast sums in equities including bank shares? These questions remain unanswered. 

There is no doubting that banks and other firms engaged in marketing quite dangerous financial products to consumers throughout the boom.

However reports into the banking crisis are largely silent on banker’s exploitation of known consumer behaviours through their marketing and product “innovation” activities.

The Financial Regulator put great store in educating people in the wise use of money and warning them of risks. But its protection efforts were always bound to fail. Knowing something, intellectually, doesn’t mean we will ever act on it. It’s why even when they know smoking kills, smokers keep on smoking. Financial education, information and risk warnings are not sufficient.

When properly understood what government officials, bank regulators, central bankers and economists consider irrational behaviour is in fact entirely rational human behaviour. No matter how well educated most of us are hopeless at mental accounting. As borrowers we have overly optimistic repayment affordability expectations and as investors’ overly optimistic capital growth expectations. Most of us don’t understand financial products and the risks we take with money and its most dangerous manifestation - credit.

Banks and others exploit this. By deliberately increasing product complexity they know we will give up trying to educate ourselves and buy their heavily marketed products. By the time regulators catch up with the latest marketing wheeze, the damage has been done. The market is full of consumer products so complex that professional advisors struggle to understand them. And if they don’t understand them, how can they recommend them as suitable for consumer use?   

While the reformed Central Bank may prevent banks from ever again destroying money and wealth, will it be able to protect consumers from the exploitative marketing and selling of dangerous financial products by financial product producers and intermediaries? 

And what of protecting ourselves from our own unwise use of money? How do we best protect ourselves from ourselves? Should protection be left to a state agency or should we demand our banks embed consumer advocacy and protection within the way they do business?

While product producers, such as banks, must comply with regulatory consumer protection “codes of business conduct”, these focus on product information, health warnings and “knowing your client” advisory process. As the codes do not require products to be fit for consumer use, it’s entirely possible to sell dangerous products as long as protection codes are complied with.

Product providers don’t like consumer protection codes and maintain financial innovation benefits consumers as it leads to better quality products at cheaper prices. They deliberately make their products more complex then they need be and then load them full of tricks to induce people to buy.

Yet most financial innovation increases prices and exposes people to risks barely understand and should not be exposed to. By producing ever more complex products, banks increase compliance and monitoring costs as inevitably legislators and regulators are forced to act to protect consumers.  

Is putting consumer interests onto the board table and requiring banks to behave as good corporate citizens concerned for consumer financial wellbeing an appropriate response to misselling?  Internationally, leading consumerists argue that producing less complex, simpler products has two benefits. Risks of misselling and misbuying of dangerous products are decreased and compliance costs are reduced.  They say that it’s in a bank’s interests to ensure products are simplified and consumer’s misbuying behaviours guarded against. It seems this is an approach that could be adopted here.

This government could require banks to embed consumer advocacy values within the way they do business. State appointees to bank boards should be able to demonstrate how they will reform a culture that considers consumer protection a hindrance to profit making.

Boards could be tasked with ensuring that consumer protection is reflected within the way banks do business and consumer advocacy is appreciated, understood and practiced by management. They could be required to simplify their products and protect people from misusing them. 

A version of this article appeared in the Irish Examiner, Business Edition, Monday 2nd May 2011