Bill Hobbs

Credit unions are paying a hefty price

2011-12-20T19:48:00.003Z

With one credit union declaring losses of close to €5m onsubordinated bank bonds, many more will be admitting to similar losses at theirannual general meetings (AGM’s).

Understandably, the Irish League of Credit Unions (ILCU) hasbeen reluctant to admit to scale of losses in bonds it once heavily promoted toits member credit unions. Estimates earlier this year put the scale of lossesat €200m.

Including consumer loan write-downs, the sector is facing totallosses of upwards of €1.5bn. While some of this will be covered by operatingincome, state bail-out funding will be needed to rebuild capital buffers.

The Government’s recent budget earmarked €500m in bail-outassistance -credit unions are to be advanced €250m in 2011 and €250m in 2012.

Just how taxpayer’s funds are to be made available is unclear.Presumably the state will not take an ownership stake as this would sunder thecredit union co-operative structure.

It is probably the case that loan funding will be providedto support viable credit union balance sheets as non-viable operations areclosed down and others are merged into better governed operations.

One question that looms large is why were Irish creditunions investing at all in long dated and perpetual subordinated bank bonds?

The root of the answer lies in 1998 when finance minister CharlieMcCreevy relaxed the type of investments trustees were permitted to make. Ascredit union investments were also governed by these rules, McCreevy’s move hadthe effect of permitting them to invest in riskier assets. This was entirely outof kilter with other countries that insist credit unions invest in the safestof assets, principally government stock and top-rated senior bank bonds.

As consumer credit boomed from 2000 onwards, credit unionswere left behind, causing a fundamental distortion in their balance sheets asloans shrank and investments grew.

Anxious to maintain high dividend pay-out rates to savers,boards placed excess funds in riskier investments, chasing higher yields.

Many credit unions unwittingly behaved as commercial for-profitenterprises, sweating their balance sheets to maximise dividends to savers. Theirony was that they were funding both the cash and capital used by banks to financethe property bubble.

Realising the growing balance sheet distortion and inherentinvestment risk, the credit union regulator looked to have the law amended toreign in risk taking.

This was rebuffed by government officials as ILCU and itsthen investment partner Davy, aggressively lobbied against the change.

Eventually after two years of consultations, the regulatorwas able to publish non-binding guidelines in late 2006. While these limitedrisk taking, it was too late and many credit unions lost money from 2007onwards. Indeed, many failed to unwind their holdings of subordinated bankbonds and suffered the consequences this year.

To date, there has been no official investigation or reporton credit union investment activity during the boom years.

Hundreds of millions were invested in imprudent products andtens of millions lost in what has all the hallmarks of a mis-sellingscandal.

Easy targets, far too many credit union boards of directorsand managers, were persuaded to invest in products their financial advisorsbarely understood themselves.

A small number of credit unions have sued their advisorswith varying degrees of success. In some cases advisors have had to make goodlosses, in others they have not. Some credit unions are deemed to be“consumers”.

Whether a credit union is a consumer or not is defined by itsturnover, which is hard to define for a credit institution. The problem is this:If a credit union is marginally under the threshold it is covered underconsumer protection regulations. If it’s over the threshold, it is not.

But it’s not a matter of defining a credit union as aconsumer or not a consumer.

A credit union board is charged with responsibility andaccountability for prudent governance which means making safe and soundinvestment decisions.

As it is a responsibility that cannot be outsourced to athird party, it should be within the competence of a credit union’s board andmanagement to understand balance sheet risks, including investment risk.

Competence, responsibility, accountability and fiduciarycare are at the heart of good governance of all credit institutions. Fitnessand probity means having the competence and experience to understand andcontrol for all risks the enterprise faces. Bond losses are symptomatic of poorstandards of care and indicator of why the credit union sector needs to be reformed.

As credit union members attend AGMs this year, they shouldbe aware of one fact. Credit union bond losses arise from an ill-advised boom-timestrategy to chase higher yields.

They might be mindful to ask searching questions and demandthat their credit union insists that its regulatory authority investigates and reportson just how so much money was needlessly lost.

A version of thisarticle appeared in the Irish Examiner, Business Section, Monday 19^thDecember 2011.

Vested interests stand in way of bank reforms

2011-12-12T12:56:00.000Z

Has Government’s banking policy created a reformed regulatorysystem captive of banks vested interests?

With its focus on just two dominantcommercial banks, not only has its pillar banking strategy amplified the too-big- to- fail dilemma, it has also created an uncompetitive, anti-consumerbanking environment.

If major banks are far too important to be allowed to fail,then is it not the case that executive government, public servants and thecentral bank become captive of banks vested interests? If so then we may haveshifted from one form of political and regulatory capture to another.

The boom-time relationship between central banking,commercial banking, civil service bureaucracy and executive government was partially addressedin reports into the banking crisis. At best the reports hint at how mutuallyreinforcing vested interests literally brought the house down. Politician’seconomic policy, public servants ideology and banking’s vested interestcombined with regulatory captivity to cause both the banking and economiccrisis.

In theory, banks should be regulated by independentauthorities whose governing technocrats, guided by public interestconsiderations, should act free from political interference. While the reformedCentral Bank addresses what was wrong with the previous regulatory systemthrough its new structures and risk control approach, just who defines what’sin the public interest?

It appears at one level the bank’s new approach to bankingregulation and supervision should act as an early warning system, allowing itto take prompt corrective action to head off problems. But it could be the casethat intrusive engagement could result in even greater captivity as both bankerand central banker focus on building functioning banks. Both will want to see areturn to sustainable profitability.

If the central bank’s consumer protectionactivity does not include product level regulation or price controls then howwill banker’s marketplace behaviours be controlled for?

Is it in the public interest that banks exploit competitiondynamics and engage in anti-consumer loan pricing behaviours? Is it in thepublic interest that so many people in debt are left on their own to negotiatewith powerful institutions without any financial safety net?

Yet it could be the case that current banking policy may beembedding a different form of political and regulatory capture of vestedinterests. It’s clearly in the public interest that commercial bankingfunctions again. But there’s a conflict within the wider public interest, as consumersare being asked to pay for banking rehabilitation costs in two ways. The firstis explicit within the enormity of the taxpayer bail-out funding of banks.Billions in consumer derived tax revenues are being used to pay the interestcost of bank bail-out funding. The second is implicit within higher rates andfees being charged by banks. Not only have banks increased loan rates, they arealso increasing fees on their utility banking services.

It’s fair to say that Government’s response has fallen wellshort of appreciating and responding to the impact of its own policy. It seemsthat it has quite deliberately rendered consumer protection absolutelysubservient to banking profitability. In effect its banking policy is a shieldprotecting banks from competition and consumer interests. As the banking systemhas shrunk, consumers have become captive of remaining bank’s pricingbehaviours.

For example consumer mortgage captivity is particularly acute. Peoplecan no longer shop around as no one is open for business. Those that are openare rationing credit and cherry picking.

As Government has done nothing to balance vested interests,its banking policy is inherently anti-consumer by design. For example both theCooney and Keane expert groups comprised bankers, regulators and publicservants – three sets of vested interests. The groups did not include forconsumer advocates with the reputational standing and professional competenceto insist the consumer interest be accommodated.

Is it the case that both political and regulatory system capturehas become more and not less embedded in the post-boom environment?

The evidence so far compels a closer examination andunderstanding of the relationship between banks, regulatory and executive governmentvested interests which have become a mutual re-enforcing survival compact.Insisting banks pass on interest rate reductions is simply a political reactionto public concern.

All too often politician’s focus on near term gains comes atthe expense of longer term sustainability of their social and economicpolicies. Recognising how large, dominant banks operating in ananti-competitive environment can exploit their “too big to fail status” willtake more that political insistence on rate reductions.

How can a central banktechnocracy effectively balance bankers and consumers vested interests when thereis no consumer protection representation?

A version of this article appeared in the Irish Examiner, Business Section, Monday 12th December2011

We need a National Debt Advice Service

2011-12-05T08:42:00.001Z

The brutal reality of the impact of fiscal austeritymeasures means that thousands of households will slide into long term financialdistress, joining over 100,000 others who have no hope of ever repaying whatthey owe in full.

The consumer debt crisis is a unique event requiring aunique response that can only be provided by the Government. With over 150,000 peopleneeding help, resolving billions in unaffordable debt will require hundreds ofthousands of debt settlement agreements with multiple creditors such as banks, credit unions, revenue, localauthorities and utility companies.

No one existing service provider has theresources or operational competencies to do this and leaving it to the privatesector is not a realistic option.

With no consumer protection regulations governing theprovision of debt advice, resolution negotiation and settlement, current service offerings fragment across a statefunded agent, not- for- profit services and a host of differing commercialoperations.

MABS, through its national network of independentself-governing autonomous offices, is doing its best to respond. The demand foradvice has spawned a plethora of commercial debt advisers. Some are chargingfees of people in debt. Others are using free advice as a lead generation toolto sell life insurance and credit products.

Many are using exploitative tactics, baiting people withemotional marketing and misleading promises. Some are deliberatelyplaying on people’s fears by falsely claiming they will instantly relieve psychologicalstress. Fabricating client testimonials to sell their services, they usesuicide and clinical depression statistics to market free financial advice.

Debt advice, resolution and settlement services areregarded as high risk consumer protection activities as there is a heightenedrisk of exploitative business practices, including the provision of bad adviceand predatory selling of unsuitable products and services.

Yet, exploitative marketing claims and misleading statements are being made by regulated financial intermediaries who are subject to consumerprotection codes of conduct when selling financial service products. The verypeople who became quite skilled at getting people into unaffordable debt arenow claiming they are skilled at getting them out of it.

The provision of debt advice/resolution services is anexpensive, inherently unprofitable business unless it’s paid for by creditors.No operator has the financial resources or capacity to deliver on the scaleand scope of services required to deliver a comprehensive service.

Even if a privatecommercial operation could charge enough, it would need well over 50,000customers to break-even. The likelihood of any private company having theresources to invest in achieving this scale is non-existent. Furthermoreprivate operations cannot provide the scope of professional debt resolution servicesrequired.

It is also the case that the sheer scale of the need foradvice and resolution is the result of a one off, non-recurring event. Anyservice response will have to have the capacity to deal with large numbers ofcustomers and their multiple creditors using standardised, efficient andeffective processes. Achieving this will need improved codes of conduct andprotocols governing debt enforcement and resolution.

The principal of the “All Debt” approach has been widelyaccepted as the appropriate service model. All debt includes mediatingresolution agreements with the full range of principal creditors-creditinstitutions, revenue, local authorities and utilities. The service should provideadvice, financial affordability assessment, recommend solutions, draft multi-creditorsettlement proposals, make representations and negotiate realistic settlementswith creditors.

The only realistic solution is for the Government toestablish an independent, all debt advisory and resolution service.

Designed tofit with whatever non-judicial mechanism and process is finally legislated forit should be governed and operated on a not-for-profit, commercial basis and should include for two components - secured home mortgage debt andother debt. How the unaffordable elementof mortgage debt is resolved is not really an issue. The key is that all debtsare dealt with, through an integrated approach.

Working with other stakeholders, the debt resolution serviceshould be empowered to improve the existing consumer protection framework, ensuring that people are afforded the professional representation they need,protection from abusive enforcement tactics and standardisation of creditorcollection and settlement approaches.

The current situation with hundreds of debtadvisors, offering varying degrees of service, in an unregulated market, is arecipe for consumer exploitation.

As the scale of the crisis and scope ofservices required by people means that only one agent has the power andresources to respond to their needs, will Government act to create a nationaldebt advice and resolution service and allocate the funding needed in thebudget ?

A version of this article appeared in the Irish Examiner, Business Section, Monday 5th December 2011.

It's all about the debt, stupid.

2011-11-30T08:59:00.001Z

With German taxpayers being asked to fund Irish civil servants salary increments, no wonder they are pissed off with us.

Once again the surreal world of bland consensus forecasting hascaught up with reality. And guess what, the ESRI has confirmed what we all knowto be the case – we cannot slash and burn this economy and society back torecovery status.

Austerity is an economic Verdun, consuming the futures of thebrightest and the best. 70,000 people will leave for futures elsewhere nextyear. To make matters worse, 30,000 will come here to take up skilled jobs weare not qualified to fill.

Economist’s use of benign language to ease the pain, is likeusing a hug and a kiss to treat serious illness. All the headline targets areheading in the wrong direction. Things have moved from being a slowing down in thepace of decline, to a quickening in the pace. National domestic income, thestuff Government relies on to generate its revenue, is heading into negativeterritory while the Croke Park agreement remains intact.

Let’s face facts here. The agreement was struck using an optimisticanticipation of recovery by a bunch of discredited politicians, who have since losttheir jobs. The biggest bunch of bluffers in the history of this state, were blindto their collective hubris. They labelled economic banditry a “boom”.

Some of these bandits were the public service trade unions, whichis why the Croke Park agreement cannot stand and Kenny & Co better come clean beforeyear end.

Public sector wage rates have to be slashed again with cuts thistime targeted at the medium to higher paid ranks and higher paid pensioners.

The obscenity of the partnership approach resulted in unproductiveswathes leveraging enormous income benefits for no return. The senior civilservice were delighted to see lower ranks pay increased as their rising tide liftedtheir boats. And they were very good at benchmarking their salaries to privatesector correlates. But theirs is an aberrant version. Upward only salaryreviews are unique to the public sector. In the private sector, wages are slashedrates when profits decline.

It’s frankly obscene to argue for increments when the moneyto pay for them has to be borrowed by a Government with no credit rating. With German tax payers being asked to fund Irish public sector wage increments, no wonder they are so pissed off with us. And no wonder they are so unwilling to let the ECB fund our sovereign debt given so much of it results from banditry.

While none will admit to it, we are once again using the traditionaldefault jobs strategy – exporting people. Do we think because we have a sovereignboundary, that the geographic reality of being a small island within the shadowof a larger one and off the cost of mainland Europe someway meant we could evereconomically succeed in generating jobs for all the people, all of the time.

We managed to generate jobs for all of the people some ofthe time, only because we built houses for them to live in. And to do this weborrowed billions from abroad, much of which will just have to be written off.

The brutal reality is we have too many people living on thisisland for it to work as anything more than a small, specialist regional economy.National sovereignty means nothing when you cannot afford it.

We might get to sustainable sovereign independence, where we generatejobs for most of the people most of the time and accept that some will leave togo somewhere else. But we can only do this when the debt we used to give a jobto everyone has been slashed – and as we cannot generate enough income torebuild and repay – we have two choices. Either we starve to pay the mortgageor feed ourselves and pay what we can off our debts.

Someone better tell the well paid cohorts within the protected public sector that “it’sall about the debt, stupid”. We cannot afford to pay you what you think you areentitled to.

Bruton must take a leaf out of business

2011-11-28T09:16:00.001Z

Why are our political and permanent governmental systemsgrossly ineffective in responding in real time to real time crisis?

Last week, ISME lambasted the Government’s latest announcement of asmall business loan guarantee scheme, calling for more action and less waffle.

“Lesswaffle” reflects private sector anger and frustration at Governmental lassitudeand inability to deliver.

Should we expect better of what is a centralisedmachine bureaucracy? The design of bureaucratic organisational systemscreates a culture of obedience, deference to authority, silo behaviours and inwardlooking political managerial systems that organise around task-drivendimensions.

Frequently rewarding tenure and rigid adherence to rules and procedures,such systems are incapable of change or innovation. Skilledat incompetence, their managers zealously defend the status quo when threatenedwith change. When it does happen, change is far too slow to matter. Such systems appear to exist in a parallel universe where time moves far more slowly.

We have one of the most centralised of public sector machinebureaucracies. Designed to ensure that all power rests with executivegovernment, its enabling self-perpetuating, self-governing, permanent civilservice administration is incapable of innovation and change. Promoting changemeans rocking the boat. And as innovators know their careers will be shortenedif they stick their heads up over the parapet, no one kicks up the dust.Instead they knuckle down or leave.

Politics itself is a transformation show-stopper. Transformationalleadership competencies are not part of the successful politician’s CV as they hinder the attainment and retention of power. Politicians delivercompromises that are almost always mere shadows of what should be delivered.

Recent history is littered with politician’s appeasement, compromise and disastrouspolicy decisions influenced by permanent public administrators who have neverworked in the real world. In the real world time is a precious commodity. Inbusiness anything that wastes time is a value destroyer.

A prime example of value destruction wrought by thepolitical and public administration’s parallel universe is seen in the recentannouncement of a “Temporary Partial Loan Guarantee” scheme for small business.

It’s been 39 months since the full blown collapse of the banking system duringwhich thousands of viable small businesses have needlessly failed with tens ofthousands of jobs lost. In this time, two elected political administrations andthe permanent administration system have done absolutely nothing to respond.Despite tens of millions spent on staffing job creation organisations little ofany relevance has been achieved. Previous enterprise minister, Mary Coughlansaid she was “looking into it”. Her successor Batt O’Keefe announced “detailed planning”was in train 14 months ago for a loan guarantee scheme.

No matter how well intentioned people are , no matter howintellectually committed to creating jobs, they will be stifled, inhibited andde-motivated by the very system they work in. The culture, values and “howthings are done around here” along with managerial behaviours frustrateinitiatives, sucking the energy from those who would lead and implement initiativesin real time.

While serious about facilitating job creation, RichardBruton may founder in achieving stretching jobs goals using the organisationalsystems he has at his disposal. Instead of leaving it to administrators, he should considertaking a leaf from the world of business where good things get done in real time.

In the private sector, business leaders realise thatfrequently new initiatives are best build on green field sites. They create thespace allowing innovators to develop and launch new businesses. To preventexisting business systems and cultures contaminating innovation, theyphysically locate their innovators in a separate location. They bring togetherthe brightest and best, equip them with resources and then get out of theirway. Riding shotgun, business leaders prevent their line managers from interfering with progress.

The public service is different – because it can never goout of business if it fails to deliver, it can never deliver fast enough whenfaced with real world challenges.

Instead of leaving new initiatives to slowlygrind through the cogs of a machine bureaucracy, Minister Bruton could takea leaf from business and set up an enterprise innovation system –staffed withand led by the very best people from both the private and public sector. Itshould have the money, resources and power to cut through red tape, force thepace of change, build innovative solutions and ensure they are implemented. Itshould have the capacity to cut across silo behaviours and the skilled incompetenceof the machine bureaucracy.

It’s disappointing that things that could have and shouldhave been done in the first 100 days of this Government have not been done. A loan guaranteescheme is but one of the many immediate deliverables that will take far toolong to get over the line.

A version of this article appeared in the Irish Examiner, Business Section, Monday 28th November 2011

National loan 'blue flu' may just work

2011-11-21T13:12:00.001Z

As the consumer debt crisis escalates, unless it acts toprotect consumers soon Government is acutely exposed to a very real threat of aborrower’s run on the banks.

During twelve weeks of this summer, another 5,630householders technically defaulted on their mortgages. With about 63,000 troubledloans - allowing for secondary top up loans - according to Central Bankestimates, close 55,000 households are in technical default. It says theproblem is not confined to those in negative equity, as many distressed homeownershave some equity remaining.

By including restructured “performing” loans together withthose yet to reach the critical 90-day default threshold, the number of distressedhouseholders increases to over 115,000. The bank says it’s trying to work out howmany more households are vulnerable. But as its published data only covers homemortgages, no one has any idea how bad other consumer loans, buy- to-let loansand personally guaranteed business loans are.

Once again worsening mortgage arrears news was positivelyspun. Politicians and bankers said that 90% of loans are performing. Imagine respondingto news that road deaths trebled in two years, by saying that it’s okay aseveryone else is still alive. Their positive spin on “low” repossessions is likesaying its okay to keep clinically dead accident victims on life support systemsto keep the numbers of deaths down.

By insisting on keeping dead loans alive onbanks’ balance sheets, thousands of people are needlessly suffering. In aproperly working debt resolution system, repossessions would number over 9,000a year. What we are seeing in the data is the outcome of a surreal, fabricatedscenario as we all know banking won’t work again until unsustainable loans havebeen written off.

Yet some banking commentary implies arrears are worsening becausepeople are deliberately defaulting on their mortgages in anticipation of a debtsettlement deal. What’s called strategic default happens when people who can’tpay, lose their willingness to repay once they realise their situation ishopeless.

With German parliamentarians better informed on our taxationpolicy then we are, it seems that Government is no more fiscally empowered thana local county council. But is it powerless to direct banks get down to thebusiness of debt settlement and control their oligopolistic loan pricing behaviour?

Apart from those struggling with distressed debt, tens of thousands more are payingthrough the nose for variable mortgages. They are captive of their lenders price gouging as the mortgage market isno longer functioning.

In the third quarter of 2006 lenders made 54,603 loanstotalling €10.9bn. In same quarter this year they made only 3,607 new loanstotalling €623m. In normal times, this level of mortgage lending would justabout keep one medium sized mortgage bank ticking over. As competitive marketforces that should cause a fair market for mortgage rates are non-existent andwill be for some time to come, banks are free to charge what they can get awaywith.

Politician’s excuses for non-intervention in what is abroken market don’t cut the mustard and hinting at passing the buck to thecompetition authority is a cop out as is the banking regulator’s position onnot wanting to control prices. Should a banking regulator not want powers toset prices, surely some other body should be empowered to ensure fair pricesare set.

Given the numbers struggling with declining incomes,negative equity, joblessness and increasing taxes, a highly educated andincreasingly vocal cohort of concerned citizens realise how disenfranchised theyhave become. They know banks have been pump primed with billions to get themworking again. They know that these funds are not being used to either generatenew loans or write down unsustainable ones. They know the money is being investedin Government bonds whose yields give a better return than loans. Yet while banksare profiting from a massive infusion of tax-payer funds, they are unwilling topass through ECB rate reductions.

Under its "twin pillar bank" strategy, Governmentpolicy has consigned competition and consumer protection to third rate status. Disillusionedand angry, reform-driven leaders are beginning to emerge. Using real lifestories, theirs is a powerful narrative evidencing the undignified treatment ofpeople who through no fault of their own cannot pay what they owe. They aredemanding laws that allow people earn a fresh start and force bankers to treatpeople fairly.

While they may not be able to influence the politicalprocess, they know that collectively people have the power to reform banking’srelationship with society. Should they get enough people to threaten to take aloan payment holiday, then banking behaviour would have to be rapidly altered. Sucha national loan “blue flu” would strike at the heart of the EU/ECB/IMFprogramme and could threaten to become a European wide phenomenon.

Will over a quarter of a million beleaguered mortgageholders remain silent? Unless Government comes up with meaningful response itrisks spawning a grass roots movement that could succeed where it is currently seento be failing.

A version of this article appeared in the Irish Examiner, Business Section, Monday 21st November 2011

We need an integrated approach to solve debt crisis

2011-11-14T17:20:00.001Z

Leaving debt resolution to individual creditors and 'case by case' arrangements is a recipe for disaster, writes Bill Hobbs

Most people have no idea of how to plan a way out of unaffordabledebt. Even where they access information and advice, they will not have the expertiseand skill to negotiate with their many lenders.

Convened last week to consider the Keane report on mortgagearrears, Social Protection Minister Joan Burton’s stakeholder forum heard fromconsumer protection advocates of the urgent need to adopt an integratedapproach to resolving the consumer debt crisis.

They maintain that as mortgagedebt cannot be dealt with in isolation, any consumer protection response mustdeal with all debts. Participants also highlighted how, despite the CentralBank’s mortgage arrears resolution process and improved consumer protectioncodes, lenders are treating indebted consumers as wallets to be sweated tomaximise loan repayments. If the intention is to ensure fair treatment, itseems that regulatory codes and supervision are not having the desired effect.

Government’s response to the consumer debt crisis needs to appreciatethe totality of consumer protection solutions needed. While the Keane reportrecommended the establishment of an “independent mortgage advice function”which would “advise and support mortgage holders in assessing their options”,its response falls far short of the protection supports required. Critically itfailed to frame its solutions within a properly constructed debt mediation approachthrough which people are ensured fair treatment and proper standards ofcustomer care by their lenders.

This is to be expected as one of the problems experts haveis they cannot know what ordinary people don’t know. Because financial andlegal experts know too much they cannot put themselves in a position of knowingnothing and will always assume people are more skilled than they are. Mostpeople do not have the experience or competence to assess their financialsituation. Nor do they have the skills to propose the solutions needed and they donot have the bargaining power or status to negotiate agreements with their manylenders. They are, in effect, powerless and acutely exposed to lenders' exploitative behaviour within a non-transparent system that accommodatesbankers’ insistence on a “case by case” approach.

Can all bankers be trusted to treat people fairly andequitably and not to favour some over others? There are indications that somebanks would welcome a “total debt” mediation and settlement system that theycan themselves can rely on.

It makes absolute sense that mortgage affordability cannotbe dealt with without also dealing with all other debts. The scale of debt settlements and scope ofsolutions needed to work out billions in unaffordable debt and unsustainablemortgages is seen in what little data is being made publically available. Withbanking and credit union consumer expected loan losses amounting to over €13bn, chancesare that close to 100,000 people will need to arrange over well over 300,000debt settlement agreements with dozens of creditors that include not only banksand credit unions but revenue, utility companies and local authorities.

Leaving debt resolution to individual creditors and their“case by case” arrangements is a recipe for a social and economic crisis. It’sin Government’s, lenders, other creditors and consumers best interests that atransparent system is established through which people can arrange to settletheir debts and creditors can face up to the business of debt settlement.

Consumers will be best protected by a dedicated, expert debtadvice and resolution system that proposes and achieves debt settlementarrangements and agreements on their behalf. Such a system would see competent,experience, qualified advisors proposing and agreeing realistic mortgagesolutions and other personal debt settlement arrangements with a consumer’screditors. Properly structured this approach would ensure fair treatment andhigh standards of customer care. It would also integrate with the state’s newinsolvency regime which will see a legally enforceable non-court based debtsettlement regime through which people will earn a fresh start after a shortperiod of time. Indications are this regime will include for mortgage debt andallow a fresh start after three years.

The focus of a debt advisory and resolution service shouldbe on establishing and mediating sustainable agreements and getting lender’sagreement on these. It should also be a consumer protection advocate with thestatus and muscle to get banks and others to treat people fairly and ensurebest practice in consumer protection.

But such a system cannot be shoe-hornedinto existing state supports as they are not designed to provide the scale anddepth of expert based service required. Many observers consider existing serviceshave become captive of banker’s interests.

Any new national debt advice and settlement mediationservice will have to be built as a new service and not a bolt-on to existingservice providers. It should also have the reputational standing and status ofa senior stakeholder with powers to ensure fair treatment.

A version of this article appeared in the Irish Examiner, Business Section, Monday 14th November 2011.

Reform of business practices is essential

2011-11-08T09:48:00.000Z

Revelations over the weekend that civil service managers areunable or unwilling to implement a performance management system designed to ensure higherstandards of employee performance come as no surprise.

Illustrating a twin culture of entitlement and subservientacquiesce to preserving a carefully constructed status quo, it’s an admissionof leadership failure. As turkeys don’t vote for Christmas, it’s unlikely thatcivil service managers would ever act to reign in their own salaries, least ofall within a system designed to ensure its own sustainability no matter whatpolitical administration is in power.

Crafted through years of “partnership” agreements thatprevented real change, this state’s largest employer, Government is stuck in arut of its own making as the latest partnership manifestation, the Croke Park agreement, ensures that undeserved entitlements are ring fenced and protected.

Ifthis is the case, then there cannot be any real transformative change. We arestuck with funding a dysfunctional civil service unless real transformativeleaders emerge.

These are the people who change the way people act by usingnarrative intelligence to ensure others are enthusiastically engaged. They getpeople to change by getting them to imagine and act out a better future. Butwho is responsible for crafting a fit for purpose civil service?

Politicians should admit to a fact of life, they cannot betransformative leaders. Theirs is the business of compromise, the consensusagreed to ensure re-election. Characterised by the acquisition and retention ofpower, successful politicians are the ones who are elected and re-elected. Theymake flexible, generalised campaign promises, to appeal to the broadestelectorate and then renege on them. If a politician tries to persuade people todo something different, to show transformational leadership, they guaranteetheir own demise.

Should we expect politicians to be leaders when we electthem to preside over the body politic? After all what is a minister other thanthe political head of an administrative department? A Taoiseach, a “prime”minister, who administratively heads the government?

The parable of the boiled frog which remains in the water asthe heat is being turned up to be boiled alive is apt. Are we being boiledalive to protect bond holders’ wealth base or is it a case of a collectivelyhoping a regressive economic cycle will end and people once again feelconfident enough to go out and spend money?

As the citizens of Berlin don’t elect Dublin politicians, theirnarrative differs. In Berlin it’s all about getting errant states to pay theirway to protect the might of core EU engine, the German economic model. InDublin it’s all about regaining economic sovereignty by agreeing to what Berliner’swant: Both hope that we will start spending again. Both act as if economicactivity strong enough to pay off borrowings and fund recovery is possible.Both are unwilling to make the decisions needed to re-craft the euro project.

Economist Constantin Gurdgiev says we owe too far too muchto have any hope of economic recovery. It seems we will be unable to grow fastenough to fund recovery and fund debt repayments. Translating this to familiesmeans the burden of state and personal debt repayments will stifle recovery andgovernment’s austerity programme will snuff out ability to repay.

The biggerpicture is one of some nation states who have excess money and those that don’thave enough. Rebalancing this equation means that as creditor states are as capturedas debtors states, debt settlement will have to be shared equally.

Rarely has business, politics and family collided as theyhave in the past three years. We are living with what happens when business isused by others to achieve their instrumental objectives – wealth and statuswithin a political economy designed to further these business objectives. Butit seems this is about to change – not because of transformational leadership –but caused by the social and economic consequence of un-repayable debt.

Government’s muted new insolvency regime indicates adecision that people are to be allowed to fail and get back on their feetagain. If a measure of an entrepreneurial society is its capacity to forgivepersonal failure and allow people to rebuild their lives then it’s a move thatshows some responsiveness to a dilemma posed.

That dilemma is encapsulated by a sovereignty status largelydictated by external political forces we have no control over but also framedwithin our own willingness and capacity to encourage transformational changewhere we can.

For that to happen ways have to be found to ensure that notonly is the civil service reformed but that the society and economic model it’sdesigned to support is also defined. So far all focus has been on austerity withlittle or no thought applied to what will be the outcome of years ofausterity.

A version of this article appeared in the Irish Examiner, Business Section, Monday 7th November 2011

We need to build business we can trust

2011-10-31T14:47:00.002Z

The presidential campaign surfaced a need to reconnect the economy with society and ethics.

President elect Michael D Higgins believes there is a needto “recognise the need for a reflection on those values and assumptions, thathad brought us to such a sorry pass in social and economic terms, for whichsuch a high price has been paid and is being paid”

In reminding us of what goes so badly wrong whenindividualism married to a facilitating political elite pursues wealth creationwithout consideration for wider society, Higgins believes we need to reconnectthe economy, society and ethics.

Never again should small groups of influential insiders beallowed to garner wealth at the expense of society. The powerful influence ofbusiness people seeking to exploit position to further their own aims must be temperedfor the greater good. After all the freedom afforded business to operate withina system that advances and facilitates ease of enterprise-creation exists onlyas citizens through elected representatives permit it. When public representativesbecome captive of sectional interests and are influenced by cheque booklobbying, democracy is usurped to benefit the few and disenfranchise the many.

Recasting the legitimate and ethical role of business andcrafting a new economic model will take more than talking up the national advantageof a young educated population, the best of who are once again emigrating. Anynew economic model must exist within a society that exposes values of decency,integrity, egalitarianism and equality. And it must be a society where ethical businessbehaviour does not simply mean mere legal compliance.

The shallow narrative and imagery promoted by somepresidential candidates failed to grasp that authentic leadership requires messagesrooted in the values Higgins and those who elected him espouse. Riven with deliberatelyambiguous messages, spun to garner votes from as broad a population as possible,other candidates’ leadership aspirations were rejected.

Sean Gallagher’s hope inspiring narrative threatened tobecome a triumph of style over substance until this time last week when hiscarefully crafted independent status was undone, largely by his own hand. Bestdescribed as a motivational brand image, his message was cleverly communicated towin votes. A disingenuous melange of enticing promises that no president couldever have delivered on also contained a leadership blind spot.

Gallagher’s blind spot was his failure to respond to thepowerful imagery created by his use of the word “envelope”, falteringrecollection, his subsequent “bagman” denial and obfuscation in explainingbusiness accounting transactions.

Once the thin veneer of motivational wallpaper was strippedback, people saw an unreconstructed, unrepentant businessman and member of theFianna Fail’s boom time elite. Gallagher was caught in that grey area betweenpolitics and business. People sensed he was an unrepentant boom-time journeymanand promoter of materialistic individualism.

During his interview with Mike Murphy last week, journeyman-in-chiefBertie Ahern enunciated his own unrepentant construct that Ireland’s economiccollapse wasn’t down to his leadership failings but others inability to openhis mind to what was going so badly wrong. Hubris, that belief in self-imageand vision are the hallmarks of poor leadership, as is a lack of humility inaccepting responsibility and accountability for things when they go wrong.

Unfortunately for Gallagher, he seemed to represent the sameunquestioning commitment to individualism that was so responsible for thedestruction of national wealth.

Perhaps we should be thankful to Gallagher as he unwittinglyshone a light on a dark place others would prefer to keep hidden. We shouldalso be thankful that the media forced into the open a past that must never againbe repeated.

The lingering concern is that wealthy people continue tohave greater access to politicians based on the value of their bank accounts.If this is so, then all talk of reform is meaningless unless the lessonsstarkly illustrated by Gallagher’s undoing are learned by this Government.

Higgins’ election represents a triumph of substance overstyle, deep wisdom over shallow individualism. It illustrates how ordinarypeople realise that out of the chaos of an economic collapse we must craft abetter society. One built on what we are good at and one intolerant ofunfettered individualism and political clientelism.

The ability of business to be a force for the good requiresthat trust be rebuilt in business. The same is true for politics. This meanshonest, open repentant acknowledgement of what went so badly wrong and a demonstrablecommitment to achieving higher ethical standards today.

A version of this article appeared in the Irish Examiner, Business Section, Monday 31st October 2011.

'Muddle through 'approach must cease

2011-10-25T15:02:00.003+01:00

Anyone interested in appreciating how the Government needsto urgently come up with a national strategic response to the consumer debtcrisis should read an important contribution made last week in a statement on“Personal and Mortgage Debt” published by a group of legitimate, expertconsumer representative organisations, New Beginning and leading academics.

Available on www.flac.ie, theFLAC (Free Legal Aid Centres) website, the statement “urgently calls for anational strategy to be put in place to resolve over-indebtedness and to fostera responsible credit market that would prevent a similar crisis from occurringfor future generations”.

Correctly arguing for an “All Debt” approach, FLAC andothers set out nine important principles. They want to see a national DebtResolution Agency and nationwide network of expert consumer advocates who will workwith people to arrange debt settlement solutions for all their debts.

Byincluding for mortgage and other debts, they say that people should be providedwith a legally robust mechanism to establish sustainable mortgages and pay whatthey can afford off other debt for a defined period of time, after which thebalance would be written off. Pragmatically,the group recognises that for unsustainable mortgages, people may need tobecome tenants rather than owners.

The statement leaves no wriggle room for moral hazard hawks - those who hold that decent,honest people will deliberately render themselves insolvent to benefit fromdebt settlement writedowns.

The group says that Government’s “muddling along in the hopethat things will get better” is no longer acceptable as the social costs are“potentially enormous as families and communities disintegrate under the weightof financial pressure and the uncertainty of what the future will bring”. From an economic perspective “the lack of a plan of action and a sense ofthe state assuming responsibility hampers consumer spending and fresh lending”

By adopting the same minimalist “muddle through” approach asthe last administration, this Government has so far failed to appreciate and meaningfullyrespond to magnitude of the consumer debt crisis.

The penny appears to have dropped somewhat oncethe Keane mortgage arrears report was seen as being as ineffective as itspredecessor the Cooney report. But by inviting othersolutions, Taoiseach Enda Kenny seems not to have understood the scope anddepth of what is a long term unaffordability crisis and not just a temporary mortgagearrears problem.

Government’s response can no longer rely on a conveniently packagedbundle of “extend and pretend” sticky plaster solutions to be supervised by theCentral Bank.

The bank’s primary mandate to ensure banking system stability andregulate and prudentially supervise individual banks conflicts with its mandateto protect consumers. No matter how many consumer protection codes of conductit publishes and polices, it will always be captive of its primary mandate. Thebigger issue is that the bank cannot impose solutions and cannot cover non-bankconsumer debts such as rent, utility and revenues arrears.

It is clear from Oireachtas committee testimony last weekthat the Cooney and Keane reports failed to accommodate the views of legitimateconsumer representatives.

Consumerists’ language and narrative is all about affordingpeople a fresh start earned over time through an organised just and fair debtsettlement process. They see this as providing for two alternative pathways.

The first allows for non-judicial, legally binding debt settlement agreements organisedthrough expert consumer advocate advisors; the second, a quick bankruptcy processfor hopelessly insolvent people and complex high value cases.

These pathwaysare also recommended by the Law Reform Commission in its report on personaldebt management and enforcement.

While new insolvency laws are in the works, if Government isserious about responding it shouldn't wait for legislation to slowly windthrough the political system. It can respond today by establishing an interimDebt Resolution Agency. Using existing regulatory and legal frameworks and workingwith all consumer protection regulators it could oversee, direct and synergisean inter-agency focus on consumer debt resolution. It could also start buildingthe national network of expert advocates so urgently needed to provide peoplewith the professional representation they deserve.

A good starting point would be to appoint people with the credibilityand expertise to design and deliver on such a just and fair national debtresolution strategy. People like FLAC’s Paul Joyce and Noeleen Blackwell,experienced consumer advocates and others like them who are likewise committedto consumer representation, simply must be involved from now on.

A version of this article appeared in the Irish Examiner, Business Section, Monday 24th October 2011

No credit due to the credit union sector

2011-10-17T15:19:00.000+01:00

The publication of the interim report of theCommission on Credit Unions is the first phase of a major effort to transformthe viability of the sector.

The credit union regulator is finally about to get thepowers it needs to properly regulate and supervise credit unions.Recommendations contained in the credit union commission’s interim report if implementedin full will establish the type of modern regulatory framework that ensuredcredit unions elsewhere evolved as robust financial service firms.

Comprising academics, the credit union regulator, tradeassociation representatives and other individual expertise, the commission’s recommendationsshould create an effective modern credit union regulatory system and improvecredit union governance and risk management capabilities. It is the first phasein what will be a major transformation programme to transition credit unions toa new operating model and network structure.

With over 200 operating under regulatory directionrestricting lending - over 100 of which are no longer fully functioning creditinstitutions as they cannot pay a dividend- can credit unions ever become efficientmobilisers of household savings using their existing business model?

The commission is silent on this key question, as itwill consider a strategy for the future of the sector in its next instalment. However,its interim report includes financial performance data, publically madeavailable for the first time, confirming analysts’ predictions that significantconsolidation will be required if credit unions are to fulfil their function assavings and loans institutions.

While the aggregate data indicates reasonable levelsof capital reserves which the commission puts down to regulatory leadership,the outcome of Central Bank’s PCAR stress tests and Grant Thornton’s review is notgiven. It’s likely the state recapitalisation requirement of €500m-€1b recentlyannounced by Minister Noonan is derived from these tests, as financialperformance continues to trend downwards across all sizes of credit unions.

In this instalment, the commission’s recommendationsare focussed on the immediate and urgent need to resolve non-viable creditunions, stabilise troubled but viable ones, strengthen the regulatorystabilisation and resolution framework and make significant improvements in creditunion governance and risk management capabilities.

While it says its report “does not impact on the independence of theCentral Bank in the performance of its statutory functions” and is “withoutprejudice to the performance by the Central Bank of its statutory functions”, the authors confirm the effectiveness of theregulatory interventions pursued to date, and support the strategy proposed bythe bank in its recent communications and seen in recent amendments to bankingresolution legislation.

Conscious of the need for urgent remedial action, it wants the CentralBank’s new resolution powers to be applied to non-viable credit unions. Thesepowers include appointment of special managers, enforced mergers andliquidation. It also wants the bank to set up and manage a stabilisationmechanism and fund for viable credit unions and wants credit unions to pay intothe fund. It’s likely that this will be the mechanism through which up to €1bnin state recapitalisation funding could be made available.

The report however is silent on what happens to thecontroversial ILCU stabilisation scheme and current stabilisation assistance.

In what is a watershed recommendation, in keeping withrobust regulatory systems elsewhere, the commission says the bank should introducea prudential rule book which would set out in detail what is required of creditunions with rules derived from its new regulation making powers.

Other recommendations include a fitness and probityregime, risk management framework, new internal audit functions and minimumcompetency requirements. These are clearly designed to improve governance andmanagement capacities.

As credit union trade bodies have strenuously resistedthe widening of regulatory powers and insisted that the setting of regulatoryrules be a matter for the Oireachtas and not their regulator, it remains to beseen if they are fully supportive of these recommendations.

ILCU’s more recent denial of credit union financialfragility and its accusations that the Central Bank is driving people into thearms of moneylenders only serve to undermine public confidence. The Taoiseach’sand Minister for Finance forthright rebuttal of these accusations and supportfor the Central Bank along with the commission’s position mean the era of lighttouch credit union regulation is over.

When implemented in full, the commission’srecommendations will bring to an end a decade of governmental ambiguity andindifference to the credit union sector and in particular its regulation andsupervision.

Incomparison to their international peers, Irish credit unionists were quitereckless during the boom. For nearly a decade most they engaged in imprudentdecision making and exposed balance sheets to increasing risks. When appointedin 2003, the credit union registrar, emasculated by inadequate legal powers,civil servant indifference and trade body political lobbying did what he couldto reign in credit union risk taking.

Whilebanking regulators were asleep at the wheel, he was trying to get then FinanceMinister, Brian Cowen and his officials to wake up to systemic risks. Effortsto reign in investment risk were frustrated by trade body lobbying againsttheir regulators proposed investment code.

Whenthey were eventually published, the registrar’s voluntary investment guidelinescame too late and credit unions lost tens of millions when their high riskinvestments plummeted in value in 2008.

Similarlyin 2006, the registrars’ promotion of a deposit guarantee and stabilisationsystem which would have provided the wherewithal to minimise lending risks, wasrebuffed by Cowen and his officials and he was told to talk to ILCU aboutapproving its self-regulatory system.

HadCowen supported his regulator and acted on others warnings, including mine, creditunions may not have destroyed so much community capital.

Such is the background and context for government andCentral Bank intervention and reason why so much public money will be madeavailable to recapitalise them.

A public policy response in recognising the importanceof credit unions may finally provide the wherewithal to the credit unionregulator to ensure the right thing is done. It’s a pity it’s taken an economiccrisis to do so.

A version of this article appeared in the Sunday Business Post, Markets Section, Sunday 16th October 2011

Temporary Debt Solutions Not Enough

2011-10-17T15:14:00.000+01:00

The Governmentneeds to realistically respond to the biggest economic and social issue facingthe country – the consumer debt crisis.

Banks aredragging their heels on dealing with it, the central bank hasn’t the powers toget them to behave themselves, and the mortgage modification programme is nomore than an “extend and pretend” mechanism to protect bank capital. TheCentral Bank’s threat to look for powers to cap interest rates on variable ratemortgages was reported on as a consumer protection initiative. It could equallybe considered a bank capital protection measure.

Mortgagelenders loan pricing behaviour is just one of many anti-consumer issues thathave been conveniently ignored within a process carefully calibrated anddesigned to protect bank balance sheets. Both the “Cooney” and “Keane” mortgagearrears groups, which the central bank participated in, did not raise mortgagepricing behaviour as a policy issue.

There areother “kick the can” examples. In response to a MABS’ proposal on the voluntarysurrender of family homes, the central bank said that as it had given the banksan undertaking not to review the mortgage arrears consumer protection code fora year and a half, it would not consult on the MABS recommendation until 2012.It seems consumer protection clocks in Dame Street tick as slow as they alwayshave done.

The Government’spolicy response in insisting that mortgages are repaid in full totally conflictswith its policy on insisting that homeowners are not turfed out of their homes.That conflict can only be resolved by either permitting wholesale repossessionsor implementing a proper loan modification programme including debt forgivenesssolutions.

But modifyingmortgages is a solution to one half of the consumer debt problem – the otherhalf includes personal loans, investment property loans, personally guaranteedsmall business and commercial property loans, revenue and utility debt.

If theCentral Banks’ stress test is applied to all categories of consumer lendingthen under benign economic conditions, lender’s loan losses could amount to €5.5bnin home owner mortgages and €7.7bn in other loans of about €175bn in totalconsumer debt. While excluding other personally guaranteed loans that morphinto personal debts once called in, the numbers are useful as they illustratethe size of a problem that no one has overarching responsibility for. Dealingwith it piecemeal by focussing solely on home owner mortgages won’t work.

The Keanemortgage group report was not disappointing if what you were expecting was afive humped camel – a camel of course being a horse designed by a committee. Theearlier Cooney report on mortgage arrears, a cousin of the Keane five humpedcamel, completely ignored personal loans which are just as distressing forindebted householders and just as toxic on bank balance sheets.

The mostglaring omission of the Government’s “Cooney/Keane” approach has been the conceptof debt forgiveness. Cooney/Keane harps on about moral hazard. Yet the LawReform Commissions proposals which are built on the debt forgiveness concept,clearly and unambiguously set out how moral hazard can be minimised.

Why isorganised debt forgiveness being ruled out? The problem for bankers is once theconcept of debt forgiveness is introduced then they will have to deal with the loanlosses they are hiding within their forbearance programmes. It seems that insolvencylegislation is another can being kicked down the road to protect bank balancesheets.

LastThursday, at the Central Bank’s conference on mortgage arrears, BlackrockSolutions presented on international mortgage modification programmes. It believesthat certain types of loan modifications seem to work better than others and thatU.S. experience suggests that principal forgiveness is more effective thatother types of loan modifications. It also maintains that house prices aresignificant driver of defaults in “non-recourse” and recourse markets and thatnegative equity matters in all the markets it’s studied. It also observed thatEuropean loan modifications seem to be driven by accounting or capitalpreservation.

Called debtforgiveness here, principal forgiveness is an inevitable consequence of loanunaffordability and negative equity. While Blackrock leans towards negativeequity as the key driver of loan defaults, the central bank leans towardsaffordability. Given the scale of distressed, unaffordable mortgages, impact ofnegative equity and negative long term impact on affordability it’s as clear asa pikestaff that principal forgiveness will have to be factored into loanmodification programmes here.

How this isdone is also important as any mortgage modification programme cannot beconsidered in isolation to other distressed consumer debt. Principalforgiveness and not capital preservation simply has to become a policy responseto dealing with the consumer debt crisis. What’s more responding to mortgageson their own without dealing with other loans at the same time won’t work. Itwill take a complete solution including non-judicial debt settlement agreementsand empowered consumer protector to oversee the totality of consumer debt – notjust bank debt.

A version f this article appeared in the Irish Examiner, Business Section, Monday 17th October 2011

Credit union restriction was warranted

2011-10-10T08:15:00.001+01:00

Had credit unions been regulated, governed and managed tostandards found elsewhere they would not need to be bailed out by the state. Recentcriticism of the Central Bank’s intervention to stabilise credit unions is bothunfounded and unwarranted.

About one hundred credit unions - one in every four- are nolonger fully functioning credit institution as they are unable to paydividends. Along with two hundred others they have had their lending restrictedby their regulator.

When credit unions can no longer function they are eitherclosed down or their business is transferred to viable operations. And as it costs money to do this, if creditunions don’t have it, the state typically funds the costs.

For some reason the Irish League of Credit Unions (ILCU), atrade body considered by many partly responsible for the distressed financialfragility of so many credit unions, maintains that no credit unions at presentare in financial difficulty or trouble.

About this time last year I wrote that state support ofabout €650m would be needed. Last week Minister Michael Noonan confirmed thisanalysis when he referred to a taxpayer bail-out fund of between €500m and€1bn. Taking to the airwaves, ILCU said there are “no credit unions at present whoare in financial difficulty” and the bailout is a restructuring fund.

Maybe it’s concerned that despite a guarantee of €100,000should savers lose confidence in their credit union they may move their moneyelsewhere en-mass and cause local runs. But this hardly squares with accusingthe Central Bank of driving people to moneylenders as it only serves toundermine public confidence in their credit union.

It could have been different had regulatory attempts toreign in risk taking not been emasculated by civil servant indifference andtrade body political lobbying.

Since established in 2003, the registrar of credit unionshas struggled with limited powers to reign in risk taking. Between 2005 and2007, concerns raised by the regulator and others to then finance minister, BrianCowen, and his senior civil servants were discounted and ignored.

The Central Bank, which considers only 46 credit unions “lowrisk”, is finally to be given the powers it needs to properly regulate andsupervise credit unions.

Initially, close to 90 non-viable credit unions will havetheir business transferred to viable operations. Using new resolution powers,the bank will manage state funding to stabilise post-merger balancesheets. In time consolidation may seethe network consolidate down to less than 100 larger, sustainable credit unions,while maintaining most of the existing branch footprint. Wisely used, statefunding could restructure credit unions into a modern credit co-operativesystem and be repaid in time.

In recent weeks there has been a concerted campaign toportray the Central Bank’s lending restriction imposed on three out of four creditunions as a primary cause of their problems.

Local politicians have accused Mathew Elderfield of drivingpeople into the arms of loan sharks. Perhapsthey should consider why lending has been restricted. It is important to distinguish between acredit union and the people who govern and manage them.

If all credit unions face the same challenges what are theother one- in- four doing that they haven’t been restricted? Addressing this, in a recent speech, thecredit union regulator said “it might be convenient to put stresses now evidentin many credit unions down to difficult macro-economic environment we are nowexperiencing and there is much truth in that. However, this is only partly thereason.

For those increasing number of credit unions who now findthemselves in financial difficulty there is a recurring trend – they have beenpoorly governed by boards and management and effective oversight by theirsupervisory committees has been non-existent”

Credit union activists here would have people believe they areheavily regulated. The truth is they are not regulated anything like creditunions in other advanced countries where they are subject to regulations andsupervision every bit as robust as banks.

Were it not for regulatory leadership and intervention since2008, hundreds of credit unions would have been forced to close their doors bynow. Had the regulator the powers it is now getting, it could and would haveprevented credit union boards and management imprudent risk taking andprevented the destruction of so much community capital.

Before local politicians criticise the Central Bank fordoing its job maybe they should consider why so many credit unions are infinancial trouble and why others are not.

A version of this article appeared in the Irish Examiner, Business Section, Monday 10th October, 2011

Time to regulate commercial debt management firms

2011-10-03T12:03:00.002+01:00

Thecollapse of Home Payments Ltd highlighted the urgent need to regulate commercialfee-charging debt management firms.

Highlycontroversial, these firms sell products called debt management plans to distressed,vulnerable consumers. Like Home Payments, they provide a payment service inhandling and distributing people’s money to their creditors.

Since2009, any firm making payment services available to consumers has to be authorisedand regulated by the Central Bank under the European Payment Services Directive.Regulations require firms to establish whether or not they should be authorised.

Shouldthe Central Bank hold that debt managers must be authorised firms, they could beinstructed to cease making payments on behalf of consumers. It’s a move that wouldundermine their profit model which is entirely dependent on hefty fees deductedfrom money handled for consumers. Firms operating from Britain wouldalso have to cease handling money, unless authorised by the British FinancialServices Authority.

Askedof its position, the Irish Bankers Federation, which is on record for some timein calling for the regulation of commercial debt management companies, said itbelieves they “should be regulated as payment institutions under the PaymentServices Directive where appropriate and this position was made known to theCentral Bank in the past.”

Thesector is heavily populated by British/Irish joint venture firms and firmsoperating directly from Britainwhere they have come in for stinging criticism from the OFT (Office of FairTrading) which licenses them as high risk consumer protection operations.

Since the Home Payments scandal broke, theCentral Bank has sought to clarify the debt manager business model. It says it “has written to banks andinsurers seeking details on firms that may be acting as payment agents forcustomers and to advise their customers that any money held by such firms arenot covered by the Deposit Protection Scheme.” Having identified a list of “approximately adozen companies” that appear to be offering debt management/debt advice typeservices to consumers, it is writing to inform them “that they need toestablish whether their activities require authorisation under the PSD, and ifsuch activities are undertaken by the firms they will have to ceaseimmediately.”

Whencontacted, Moneyvillage Ltd, a domestic joint venture operation set up inJanuary last year, said that it has responded to the bank saying its positionis that it does not have to be authorised. The company which handles anddistributes consumer’s money, is a founding member the Debt Managers Associationof Ireland, a trade body set up last year to advocate for regulation.

Aspokesman for Irish Mortgage Corporation, which recently closed down its standalone debt management firm Credycare, believes that debt managers should beregulated and people’s money protected.

Heexplained Credycare closed as it found it couldn’t charge the level of feesrequired to become profitable. It’s a move that begs questions of the viabilityof other operations. If it’s the case that these firms cannot achievecommercial viability then they may not pass muster with the Central Bank’s stringentauthorisation criteria.

MABSalso wants to see commercial debt managers regulated. As they only deal withunsecured debt and not the totality of consumer indebtedness, it believes they riskmaking problems worse and not better for people. The Consumer AffairsAssociation, seriously concerned at the lack of consumer protection said “theway is clear for struggling consumers to be burned severely and yet the dangeris being ignored”

TheCentral Bank may have a quite effective mechanism to respond to calls forregulation without the need for new legislation or regulations. By requiring commercialdebt managers to be authorised payment service agents, they would be regulated andsupervised for solvency, fitness and probity and commercial viability. Workingwith the National Consumer Agency, the bank could issue strict guidelines onother consumer protection aspects such as misleading advertising and unfairterms. This approach was brought to the attention of both bodies by me inFebruary 2010.

Itseems that with a little bit of lateral thinking, fee-charging commercial debtmangers could be regulated and a glaring gap in consumer protection closed off.

A version of this article appeared in the Irish Examiner, Business Section, Monday 3rd October 2011

Overdraft woes put more pressure on already hard hit businesses

2011-09-26T08:18:00.000+01:00

Accessing affordable credit on favourableterms is almost impossible for all but the best small business borrowers. Manyare struggling with credit restrictions as their bankers reign in on years ofloose lending.

SME’s have significant challenges. Increasing delays in receivingpayments when added to unsold stock has resulted in an endemic shortage ofworking capital and decrease in cash and liquidity. Rising defaults andinsolvencies are leaving many without a key supplier and uncollectable baddebts. A drastic drop in demand for goods and services has been amplified as Government’sausterity programme undermined consumer confidence.

In a recessionary environment it istremendously difficult for small businesses to grow their way out of trouble. Andin a creditless environment, many viable businesses have no hope at all ofsurviving. Mostcannot downsize as they are already small. With limited financing options they areheavily dependent on bank credit. Overdrafts, the principalsmall business working capital finance tool, are being rigorously re-assessedby bankers anxious to limit their exposure in a recessionary economy.

In many cases businesses are being forced torefinance all or part of their overdrafts as term loans. While it’s always beenprudent banking practice to require businesses to fund the long term workingcapital element of their cash flows through term lending, today, this policyhas become a risk limitation tool to manage out boom-time hardcore debts builtup in overdraft facilities.

Bankers have two problems. The first relatesto allocating scarce capital to unused overdraft limits. They will be inclinedto roll back on limits to better manage their capital. The second relates toSME lending risks which are continuing to worsen. From experience, bankers knowthat as most small business owners are not financially sophisticated, they willgamble for resurrection by using overdrafts to fund their bad debts. All toooften by the time the overdraft is called in, the business is already bust. Tocounteract this problem bankers insist that businesses convert hard-coreoverdraft debt into term loans and reduce their overdraft limit. The danger isthat aggressive overdraft hardcore management by bankers will undermine viablebusinesses.

A recent story of AIB insisting on businesseshaving to match their overdraft limits with cash deposits – termed compensatingbalances, was denied by the bank which said it was not its lending policy torequire compensating deposit balances for business overdrafts. When asked if itwas reducing outstanding limits to better manage its capital, an AIBspokesperson said “reducing the number of outstanding limits is not at all partof the motivation or the decision making process when converting overdrafts toterm loans.” He explained, “when a hardcore builds upin an overdraft, its standard practice for the bank and for the customer thatthe overdraft or a portion of it be converted to a structured term loan tobetter facilitate the repayment of borrowings”

While banks may not have a formal policy ofrequiring overdraft compensating balances, it’s likely that when reviewing andrenewing overdraft limits, their managers are pressing businesses to placemoney on deposit with them.

As banks have responded by toughening up oncredit terms, business trade bodies have been pleading for a range of responsivemeasures from the Government since 2008. The Government’s response has been toinsist banks lend money to small business and to establish the credit reviewoffice to second guess banker’s unfavorable loan decisions. It’s fair to saythat its response has been about as useful as a foot pump on the Titanic.

Access to financing has always been one of the most significantchallenges for SME establishment, growth and survival. Since2008, the Governments’ meek response to a funding crisis facing small businesscontrasts starkly with small business support systems introduced in othercountries. Elsewhere, countries have implemented extensive measures forSME’s, including credit guarantee schemes designed to allow banks to make goodloans to good borrowers.

Other measures include export credit guarantees,credit mediators who mediate between businesses and their bankers, favourabletax regimes such as accelerated depreciation schedules, employment subsidies,faster payment by state and public bodies and payment forbearance in “profitinsensitive taxes” paid regardless of whether or not a business is making aprofit. These measures target three areas: stimulating demand for goods andservices, preventing depletion of working capital and liquidity and helping tomaintain capital investment levels.

Months into a new administration, we have yetto see a cohesive policy response to the immediate and long term fundingproblems faced by viable small businesses. The only reference from thisGovernment so far has been a suggestion that something may be done for viablebusinesses that are threatened by their owner’s boom-time property gambles.While a job protection measure, it falls well short of the imaginative responseneeded if small businesses are to be an engine of economic recovery.

Aversion of this article appeared in the Irish Examiner, Business Section,Monday 26^th September 2011.

Slimmed down credit unions should grasp reform opportunities

2011-09-19T11:50:00.000+01:00

Afterdelaying consolidation for years, credit unions are about to have it foisted onthem.

Central Bankofficials are making ready to apply regulatory triage by taking dozens of non-viablecredit unions into care. Using its extensive resolution powers, the bank can appointspecial managers to take over the running of credit unions, remove their boardsand managers, order the takeover of one by another and where required,temporarily fund balance sheet rehabilitation costs.

While there’smention of numbers shrinking from 409 to about one hundred, fewer than fiftyare likely to be viable operations at this time. These numbers are the outcome ofboom-time complacent sectoral leadership and poor governance when credit unionbalance sheets were increasingly exposed to risks. Concerned only to maximisesaver’s dividends, their boards of directors and managers did not invest in buildingsustainable businesses and balance sheets capable of withstanding the economicrecession.

Consequently,to prevent them pouring petrol on fires they built in their own backyards, closeto three hundred credit unions have had their lending capacity restricted bythe Central Bank.

Last week, in what was probably an orchestrated campaign, tradebody representatives and local politicians publically criticised the CentralBank, claiming it was driving people into the arms of moneylenders. They gottheir response in Taoiseach Enda Kenny’s robust defence of the Central Bank’s interventionsto protect savers funds. Its interventions, which also include insisting creditunions account properly for asset values and come clean on losses, are drivingthe need to stabilise the network by consolidating it down to a viable and sustainablesize.

Consolidationis an inevitable outcome of credit union maturity. In the U.S., Canadaand Australiawhile numbers of credit unions have been declining for years, customer numbersand branches have grown. In these countries, induced by crisis events far lessserious than here, consolidation was driven by governments and their regulatoryagencies. And credit union leaders responded positively. Consolidation allowedthem to realise scale economies to invest in modern technologies and establishthe centralised shared services required to offer a full range of high quality financialservices. The same is true of co-operative banking consolidation in mainland Europe.

Today weare seeing similar crisis induced, regulatory leadership by the Central Bank’s experiencedcredit union regulator the Registry of Credit Unions. It has acted to controlinvestment and lending risks and while insisting on proper reserves, has permittedloan modifications and established a robust resolution system to enable the sectorto survive and prosper. It has done so in the face of objections by creditunion representative bodies who blame external forces and regulatoryintervention for causing financial instability problems. The reality is thatthe root cause stems from credit union board rooms. An aging generation of longserving directors and their managers focused solely on maximising saversdividends and ignored the sustainability of the credit union itself.

Crisisinduced, regulatory imposed consolidation won’t work unless it’s framed withina broader strategic context. At a recent conference for managers and auditors,Professor Ray Kinsella spoke of the need to “bail in” credit unions as distinctto “bailing out” banks. At this conference, I illustrated one possible “bailin” approach when I presented on my paper “A Co-operative Banking Strategy for Ireland”recently submitted to the Commission on Credit Unions. It’s available on myblog, billhobbsie.blogspot.com.

Credit unions are economically important as they mobilise householdsavings as loans and socially important as they help create community social capital.Guided by a philosophy, which is best seen in their consumer advocacy values,the fundamental business purpose is to provide high quality financial servicesat fair prices to anyone who wants them. By excelling at this purpose they buildthe capital reserves needed for business sustainability, and realise their widersocietal objectives. They are a vital store of intergenerational, monetarycapital and facilitator of community social capital.

As yet,credit union leadership has not come up with a “bail-in” strategy that makessense. With the Government and Central Bank intent on stabilising the sector, creditunions need to stop looking at this as a threat and realise the opportunity itproposes.

A version of this article appeared in the Irish Examiner, Business Section, Monday 19th September 2011

Pressing need for consumer debt tsar

2011-09-12T12:34:00.000+01:00

The Government should appointa Debt Tsar to build and oversee a national debt management regime capable of settlingbillions in un-repayable consumer debt.

Despite our Dickensian debtenforcement system being hopelessly inadequate, the official response has beento tweak the system to solve a problem it was never designed to deal with. Thismyopic response has seen regulatory officials trying to get lenders to use poorlydesigned extend and pretend mortgage solutions assembled by “expert” groups.

It’s high time to stop “tweaking”.The scale and scope of consumer indebtedness is so large nothing short of aco-ordinated national response will do.

Imagine an adult populationthe size of Cork City owing at least €13bn more than willever be repaid. This money is owed to hundreds of separate creditors who areall individually pursuing repayment. As every financial fragile household has adistressed mortgage and a number of equally distressed debts, they are beingpeppered with collection letters and phone calls every month. Some arereceiving multiple phone calls daily. Many have had their mortgages modified,mostly on interest only terms as their mortgage lenders pretend the debt isbeing managed. Three in 10 households risk losing their homes. If they do, theywill still owe on average €90,000 each on top of thousands more in unsecureddebt.

Nine out ten people do nothave the skills or know-how to deal with their indebtedness. Most are still indenial as are their lenders. While some but not all banks are sticking to theCentral Bank’s troubled mortgage code, court lists are groaning under theweight of theirs and others legal actions which will only ever recover cents inthe euro on unsecured loans.

Imagine a national debtmanagement agency and system that would ensure consumers and creditors reachresponsible settlement agreements – while limiting tax payers’ costs. Designedfor a more benign economic environment, the Law Reform Commission set out amajor component part of a national blue print. Its design, which did notconsider mortgage debt, would see a responsible, non-court based debtsettlement system with a new bankruptcy regime for hopelessly insolventindividuals. People would reach a binding collective agreement with their manyunsecured creditors to repay what they could over a period of time after whichany balance outstanding would be forgiven.

But dealing with troubledmortgages separately from other debts is like trying to make an omelettewithout breaking the egg. The totality of household indebtedness must beconsidered and agreements established to manage mortgage and other debts at thesame time. Any debt resolution agent should holistically establish twocomponent plans; a mortgage resolution plan and an unsecured debt settlementplan which could include for un-repayable mortgage debt.

The Central Bank cannot actas a debt resolution oversight agency as its mandate cannot cover the fullbreadth of consumer indebtedness. Consumers also havedistressed utility bills, tax debt and other legally enforceable debt. Inrecent commentary the Central Bank acknowledged this, when in ruling outregulating for specific mortgage resolution solutions, it raised the notion ofa debt settlement agency.

One proposal would see a debt settlement/management agency led by a debt tsar empoweredby Government to build an integrated national debt management regime. Implementingthe Law Reform Commission blue print and working closely with the Central Bankand other state agencies, it would set binding rules to drive the business processesrequired to resolve and settle billions in un-repayable household debt. Thesewould include specifying the range of solutions, setting mandatory terms andconditions and ensuring absolute transparency. With a mandate broad enough tocapture the totality of consumer/creditor relationships and debt solutions, it shouldbe established on an independent footing, similar to the central bank.

A version of this article appeared in the Irish Examiner, Monday 12^thSeptember 2011.

A stylised consumer/creditor relationship is illustrated in the diagram below:

People have debts with multiple creditors not only lenders. These creditors may pursue debts using legal debt enforcement procedures. The Central Bank through its consumer protection codes requires the firms it regulates to comply with rules of conduct (excluding credit unions). These codes do not apply to other creditors nor cover multi-lender relationships.

The proposed Debt Tsar and resultant debt management system is illustrated below:

Here a national debt resolution agency would oversee the totality of the consumer/creditor non-judicial debt enforcement/settlement relationships. The model includes two elements (1) a mortgage resolution process based on the waterfall concept through which people would resolve their troubled mortgage debt and (2) the LRC's non-judicial debt settlement process. The debt resolution agent would work with the Central Bank and other state agencies to strengthen consumer protection codes and establish clear rules of engagement regulating for binding multi-creditor debt settlement arrangements. This approach could include for a mandatory requirement for consumers and their creditors to engage in the process.

The waterfall concept for mortgage resolution would see a cascade of interventions driven by loan affordability which would be based on a realistic assessment of income sustainability. The diagram below illustrates one version of this:

The risk of a borrowers' run is growing

2011-09-05T10:32:00.002+01:00

If this Government does not get to grips with an unprecedented consumer debt crisis, there could be aborrowers’ run on the banks. They happen when ordinary people, realising howweak banks are and becoming suspicious of political interference in arranging cosyinsider deals, stop repaying their loans. Mass defection from “willing to pay”to “won’t pay” has the same disastrous effect as a depositor run.

In pouring cold water onany suggestion of an organised personal debt settlement/forgiveness regime,Government heightened public disquiet.

Furthermore, when rulingout a mortgage forgiveness programme, Minister Michael Noonan said his cabinetcolleague Richard Bruton was looking into doing something to help viable “familyfirms” whose owners lost money on “property plays”.

While ring-fencing viablebusinesses from their owner’s property losses may be a worthy job protectionmeasure, it could also be construed as a political party acting in theinterests of its traditional farmer, business owner and professional classessupport base.

Unless there’s a nationaldebt settlement regime that people can trust in, such worthy initiatives couldamplify the risk of a borrowers’ run. It’s inevitable that there will have tobe some form of debt resolution agency to oversee the forgiveness of anythingup to €16bn in direct and indirect un-repayable consumer debt. And, as it willhave to be a regime that people can trust, it must be free from political,institutional and sectional interests and influence.

Leaving debt settlement to bedealt with through current institutional arrangements risks undue political interference,cosy insider deals and serious social unrest. Maintaining that vulnerablepeople should be left to deal with their banks on a case by case basis is apolitical cop-out.

Such a national debt resolution/settlementagency should be independent from the Government and Oireachtas, similar to saythe central bank and judiciary. Its mandate would be to establish the groundrules for and oversee the execution of a national debt management system andits quasi-judicial processes through which where ordinary people settle debtsthrough multi-lender debt settlement agreements. While this may seem a prescriptionfor another monolith such as NAMA, the alternative scenario is less palatable.

Firstly, the judicial debtcollection system with its antiquated legal framework, including inhumane bankruptcylaws, is wholly unsuited and incapable of dealing the scope of solutions andmagnitude of agreements required to work out billions in unaffordable debt.

Secondly, creditors notonly include state funded banks but other credit institutions and utility firmsowed money by indebted consumers. As each firm will have its own debtcollection policy, some may act to favour some customers over others, cuttingthem better deals. Already there’s an emerging disparity with some banks saidto be agreeing to debt forgiveness while others continue to pile on legal debtcollection pressure.

Thirdly, Governmentofficials have had three years to get to grip with the problem. Not only has the consumerdebt can been kicked down the road through extend and delay forbearance tactics– everyone is trying to kick the can onto someone else’s patch.

Last weekGovernment’s compassionless commentary starkly contrasted with the horrendouspersonal stories told on the Joe Duffy show by honest people. Mr. Noonan talkedof yet another interdepartmental “expert group” which, while taking intoaccount bankers’ institutional interests, once again does not include for robustconsumerist representation.

Similarly constituted, the previous“expert” group failed to meaningfully address the unprecedented scale of aconsumer debt crisis for which there are no international precedents to drawon. While established to consider mortgage and personal debt it focussed exclusively onmortgage “arrears” and not the wider systemic crisis. Still it may be the casethe new “expert group” will finally come up with a meaningful response. Manysuspect all it will do is to cobble together another set of sticky plasters. Ifso, it may be only a matter of time before ordinary people decide enough isenough and trigger a borrowers run.

Aversion of this article appeared in the Irish Examiner, Business Section, on Mondaythe 5^th September 2011.

Penny drops on debt management

2011-08-30T09:35:00.005+01:00

A national debt management scheme with quasi-judicial powers is welcome, says Bill Hobbs

It’s taken a long time for the penny to drop but it seems that the Government is finally responding to those of us who have been advocating for a national debt management system to deal with the enormity of the consumer debt crisis.

It appears that it’s to consider re-organising MABS (the Money Advice and Budgeting Service) into a personal debt management agency with quasi-judicial powers. If so, then the state’s response may finally mature to match the scale of the problem faced by tens of thousands of financially fragile people and their families.

How big is the consumer debt problem? No one knows. The only consumer indebtedness data published is the Central Bank’s mortgage arrears report. Its latest edition yesterday shows a worsening trend in both seriously troubled homeowner mortgages and performing restructured loans. If the second half of this year is anything like the first half, by next January there will be close to 70,000 serious cases and 45,000 restructured loans, mostly on interest only terms.

In its stress case scenario used to recapitalise Bank of Ireland, AIB, PermanentTSB and EBS, the central bank pencilled in €8.3bn in consumer home mortgage and other personal loan losses earlier this year. Since then billions in taxpayers funds have been pumped into the banks to enable them write off uncollectible consumer loans, along with €3.3bn in buy-to-let mortgages and €4.5bn in small business owner loans. All told the four state-backed banks have been funded up to realise €16.1bn in direct and indirect consumer loan losses. Other banks are likely to be expecting similar relative loss experiences. While such losses may not occur, the numbers illustrate the magnitude of response required by Government.

As many people have debts with multiple-lenders, it’s been abundantly clear for some time that an organised system would be needed through which thousands of individual multi-lender debt settlement arrangements could be managed. Many of these will have to include for property repossessions and balance write-offs.

Agitated over moral hazard and fearing a debt default epidemic, some commentators are busy scaremongering about debt forgiveness. No one is suggesting a blanket debt forgiveness programme. Rather what’s been suggested, for some time, is a transparent, independently objective, legal process which allows indebted consumers to pay what they can afford to repay and allows lenders to write off any residual balance. The Law Reform Commission’s recent recommendations included a high level design for a debt settlement system derived from its consideration of systems elsewhere.

In these other advanced countries, people who can’t pay in full enter into binding legal agreements where they agree to pay what they can over a period of time – typically between 3 and 5 years. Their lenders agree to accept these repayments and providing people stick to their part of the bargain, they write-off whatever residual balance is left at the end of the agreement. Called “earned debt forgiveness”, those that “won’t pay” but can pay are excluded through rigorous assessment processes.

While the design of these schemes differs from country to country, the underlying objective is to arrange for legally binding debt settlement and forgiveness. In many cases the service is state owned or backed, free to borrowers and funded by the taxpayer or lenders.

In this country there’s no mechanism through which a person can arrange a debt settlement repayment plan with their lenders. MABS’ voluntary arrangements with the Irish Banking Federations’ member banks are non-binding. The recent emergence of unregulated and unlicensed commercial debt management companies, many of which use abusive marketing tactics to sell unregulated, dangerous financial products called “debt management plans”, demonstrates the yawning gap in the state’s consumer protection and social financial safety net provisions. For this reason alone Government’s intention to re-organise MABS as a central component part of a national debt management scheme is a welcome development. I am not convinced that the MABS operational model is capable of morphing into a national debt manager capable of dealing with the scope and magnitude of the problem. A new model will have to be designed and built integrating MABS where and if appropriate.

What would a well designed system look like? Such a debt management scheme should be open to anyone to participate. It should be free to borrowers and could be funded by lenders/creditors and not the taxpayer. It should deal with all personal debts including mortgages and it should be independent of both borrower and lender. Accountable and responsible to Government and open to Oireachtas oversight, it should be run on a not-for-profit basis, commercially operated as a professional service provider and be fully staffed with the expertise required. It should also deploy modern technologies to administer and monitor debt settlement agreements. It might also act as payment intermediary between borrowers and their lenders. Many of its requirements or services could be delivered by commercial joint-venture partners.

Right now even though banks have been funded to write-off loans they are procrastinating as there are no clear ground rules. An independent debt manager operating along the lines of the above model would set the ground rules and provide the means to deliver on them.

A version of this article appeared in the Irish Examiner, Analysis Section, Tuesday 30th August 2011.

Accountable banking is real no-brainer

2011-08-29T19:19:00.002+01:00

Should banks, using taxpayers's money, be permitted to write-off billions behind closed doors?

The bankers’ siren-call “It’s a No-brainer” lured trusting customers to borrow €25bn to buy grossly overpriced “buy to let” properties. Flattered by their relationship managers’ soft sell, many parked their brain outside the door and borrowed without a seconds’ thought for risk.

Not only did they flog developer client property deals to their customers, but bankers and their family members bought as well.

Convinced by the possibility of illusory profits, the probability of losses was consigned to Pandora’s box. Once opened it, sprayed red ink all over personal balance sheets. No one knows how many vacant houses, apartments and retail outlets are owned by insolvent amateur landlords or syndicates who bought into their banker’s, accountant’s and lawyer’s “no brainer” sales pitch.

As we can’t buy property unless our bank agrees to lend us the money, it’s probably the case that cheap abundant bank credit drove property prices during the boom. The more bankers cranked over their credit engines, the higher prices went.

Between 2005 and 2008, they fed €25bn in loans to frenzied investors, stoked up by vested interests’ marketing hype. Many loan proposals just didn’t stack up as their repayment depended on unsustainable rents and rising property values. Naïve investors believed they could limit risk by flipping properties - selling them on to realise a quick buck. No doubt they now think they were flipping mad to have invested in the first place. They should be, as they will have to repay every cent borrowed.

The vast majority of loans leveraged off small equity stakes, frequently derived from properties already mortgaged. Many people borrowed on interest only terms. Their loans may have performed as rents initially funded interest repayments. But with capital repayment holidays ending, investors are realising they were sold a pup. They are beginning to understand how bankers and developers drove a chaotic ponzi scheme to its ultimate destination – one of the worlds’ most toxic, credit fuelled property asset bubbles.

Today buy-to-let investors/landlords owe about €7bn each to Bank of Ireland, AIB and PTSB. The EBS is owed close to €2bn. How badly these banks €24.5bn in loans are performing is unknown. The Central Bank has not published arrears data as it has with homeowner loans. However, its bank recapitalisation loan loss estimates range from an optimistic €2.2bn to a pessimistic €6.0bn. The expected loss rates range from 9.5% to an eye watering 26.2%. This means there’s a whole lot of financial misery to be visited on investor balance sheets before considering foreign owned banks’ profligate lending.

In the absence of any official numbers, using a sophisticated model, Morgan Kelly recently estimated that there are about 11,000 large mortgage loans over €500,000 and 2000 loans over €1m which are predominantly investor loans. In total he estimates large mortgages total about €10bn with the vast majority being interest-only property investment loans.

At peak issuance, such loans averaged €325,000. With banks inducing people to leverage off other equity on other mortgaged properties and with property values down at least 50%, the average frenzy-time investor is racking up about €127,000 in negative equity losses per loan. With banks increasing their interest rates and capital repayments kicking in and with rents softening, many investors are in quite serious trouble - particularly so if their income earning capacity is shot through by the recession.

How will defaulting investor’s negative equity be recovered? One concern looms large. Left to their own devices, banks may act as they always have by favouring certain valued customer cohorts over others. For example bank officers and their extended families borrowed heavily to invest in property and are now insolvent. Will they be afforded a lighter touch?

There are other well organised cohorts such as farmers, the professional classes and others with insider influence who will look for soft deals.

With billions of taxpayers funds ploughed into banks to make them whole again who is going to ensure that loan write downs/debt forgiveness deals are fair and equitable? Surely billions cannot be forgiven behind banking’s secretive closed doors. It’s unconscionable to think that taxpayer funds will used by banks to write off property investor loans without any public oversight.

Without oversight by a publically accountable, trusted authority that ensures fair play, the future is likely to one of suspicion, resentment and anger as people will perceive that others are getting away lightly. It’s already happening as NAMA, one of the biggest debt forgiveness agencies ever devised, gets down to the job of doing deals behind a veil of unwarranted secrecy.

What’s required is an open, publically accountable oversight system that monitors and reports on the performance of an equitable and fair personal insolvency regime through which banks and their customers settle un-repayable debt. It must be fair, seen to be fair and believed to be fair. Anything less will amount to the perpetuation of the self-serving behaviours that created the mess we are now in.

A shorter version of this article appeared in the Irish Examiner, Business Section, Monday 29th August 2011

Debt forgiveness is inevitable, accept it.

2011-08-23T01:10:00.000+01:00

With his €6bn mortgage debt forgiveness price tag, Morgan Kelly has once again lobbed a hand-grenade onto the refusniks’ patch. Refusniks are those who for the past three years, in denying the scale of the consumer debt crisis, have refused to accept the inevitability of debt forgiveness.

The refusniks’ “deny, pray and wait” strategy was solely designed to temporarily protect banks’ balance sheets from home mortgage losses. As consumer mortgage indebtedness predictably worsened, their classic kick-the-can forbearance response has been about as useful as a foot pump on the Titanic. A blind man with an abacus could reach the same conclusion as Kelly whose debt forgiveness estimate is probably a tad optimistic.

When first reported on in Sept 2009, there were 26,000 seriously troubled housing loans, totalling €4.8bn. By March this year these had grown to 50,000 totalling €9.6bn, of which 26,000 amounting to €4bn had already been restructured. On top of these are another 36,000 “performing” restructured loans of €6bn. Close to 90,000 mortgage loans of €15.6bn are extremely fragile. On average their homeowner borrowers are about €95,000 in negative equity which is by definition unsecured consumer lending. If repossessed, homes bought at peak values with maximum mortgages would result in average bank losses of close to €150,000 per loan.

When extrapolated out to all mortgage lenders, the central bank’s recapitalisation loss estimate scenarios for AIB, Bank of Ireland, EBS and Permanent TSB’s €75bn in housing loans, results in losses of between €5.5bn and €8.8bn over three years. Blackrock’s lifetime loan loss estimates, when extrapolated, yield losses of between €8.9bn and €15.8bn. So the glass half-full version of €5.5bn in losses is close to Professor Kelly’s estimate. The half-empty version could result in losses of €15.8bn.

Will banks recover such vast sums from hopelessly insolvent homeowners? They would need a fairy godmother to magic away significant debt write-offs. With no fairy godmother in sight what do these figures mean? They mean anything between 55,000 and 106,000 mortgage defaults. That’s a whole lot of houses to be repossessed and sold off. Clearing the mountain of troubled mortgages could take upwards of 60,000 repossessions over a three year period. But there are already 250,000 vacant housing units - enough to supply the housing market for some years to come. That is if anyone can raise the money to buy them.

The mortgage provider market so necessary to fund housing transactions is also broken and barring some divine intervention will be broken for some time to some.

In Q3 2006 banks made 24,000 housing loans totalling €5.5bn. Last quarter they made just 2500 loans totalling €488m. With house values already at 2001 levels and still heading south, hopelessly indebted consumer’s negative equity and by extension bank losses continue to worsen.

Billions in mortgage debt will have to be written off as irrecoverable, which of course means debt forgiveness. Kelly’s figure excludes unsecured consumer debt. The central bank has pencilled in €2.2bn in unsecured consumer loan losses which extrapolated out to the full market and including credit unions could add another €4bn or so. All told the household debt forgiveness price tag conservatively amounts to close to €10bn.

So what’s the answer? Well for many it’s an organised system through which money already given to the banks by the taxpayer is focussed on writing down consumer debt and this means an organised national debt forgiveness programme.

Let’s be clear about one thing – no one is talking about a free lunch except the dwindling band of refusniks and some boom-time cheerleaders who continue to talk about moral hazard and accuse Kelly and others of scare-mongering.

Yes, many people are angered at any suggestion of forgiving their profligate neighbour’s debts. But anger is not social or economic policy. Are we not equally angered at funding NAMA’s debt forgiveness programme or promising to repay in full bondholders’ profligate lending to Irish banks?

While we may not all have partied, most of us did enjoy the economic benefits of boom-time credit fuelled consumerism. It has come with a price tag that includes forgiving billions in neighbours’ debts. What is more, the money to do this is already sitting on the banks’ balance sheets having been provided by this state and its taxpayers.

While Kelly’s figure may be a tad optimistic, he is absolutely right on one thing. The inevitable outcome of a property bubble is debt forgiveness. And for that to happen the Government needs to design and implement an open, transparent, equitable debt forgiveness programme, one that does not rely on one-to-one behind closed door arrangements between powerful bankers and their vulnerable customers. It also has to introduce a proper personal insolvency and bankruptcy regime, one that allows people to pay what they can and have the balance owing written off.

A version of this article appeared in the Irish Examiner, Business Section, Monday 22^nd August 2011

Urgent need for debt managers consumer protection code

2011-08-15T23:40:00.003+01:00

The failure of Home Payments Ltd, a bill paying service provider, is a timely warning shot across the bows of government and consumer protection regulatory agencies.

Similar financial service providers are busy taking money from vulnerable consumers who are unaware their money is not protected or the companies they are dealing with are not regulated by the central bank or any other consumer protection agency.

Called commercial debt managers, they are a worrisome development in the consumer financial services marketplace as they are opportunistically exploiting a social and economic consumer debt crisis.

By using abusive marketing and predatory sales tactics, debt managers and their commission driven sales staff and agents are persuading vulnerable people to buy what are recognised elsewhere as quite dangerous financial products called “debt management plans”.

These outfits, using clever tricks, induce people to repay their debts using their plans which they claim will get lenders to back off legal debt collection and agree to debt write-offs. These are of course misleading and blatantly false representations as there are no laws or regulations governing collective debt settlement arrangements in this country. Yet thousands of people are being induced into buying products designed to maximise profits for their producers.

Some of these outfits are using non-transparent websites to market their services directly from Britain. Others are localised shop fronts for British operations or domestic home grown operations offering alluring “free advice” designed to generate leads for their commission driven sales people.

With no known evidence supporting the business case for debt manager’s business model, their claims of providing economic value by lowering costs of indebtedness for consumers and recovery costs for lenders are spurious.

I recently estimated that a typical debt management plan to repay €35,000 would cost about €7000 in fees. At 20% of the debt owing such exorbitant fees are a red flag for anyone concerned with consumer protection.

Just how many millions are being paid into unregulated debt management companies is unknown. Not one cent is covered under the government’s deposit guarantee scheme. What’s more as these outfits are not required to operate ring fenced client accounts, maintain adequate levels of solvency, abide by prudential standards or comply with codes of conduct and regulations governing financial service and money transmission providers, should they get into trouble consumers are wholly unprotected.

It’s known that close to 100,000 financially fragile households are struggling to make mortgage payments. But this is the only visible part of the distressed debt iceberg. Given the €9.4bn in mortgage losses and €2.6bn in consumer debt losses pencilled in by the central bank in just four banks (Bank of Ireland, AIB, PermanentTSB and EBS) and with other lenders such as Ulster Bank and credit unions continuing to post large losses, the full extent of consumer indebtedness can only be guessed at.

Ireland

remains one of the few advanced countries that does not provide its citizens with a humane debt forgiveness system regarded elsewhere as a fundamentally important economic and social safety net requirement.

The safety net concept is quite simple. It’s called “earned debt forgiveness”. People agree to pay what they can for a certain period of time after which their lenders agree to write off whatever balance is owed.

The Law Reform Commission has set out a blue print for a working system including suggesting how residual mortgage debt could be handled.

While largely thanks to IMF/ECB intervention, legislation to enable this concept is said to be in the works, little if anything is being done on organising an appropriately regulated, governed and operated debt mediation system to manage the sheer volume of individual debt settlement agreements required to work out billions in consumer unaffordable debt. Existing state funded arrangements are wholly insufficient.

Falling between the stools of three government ministers and their officials, no-one appears to be taking the lead. Yet it should be eminently possible for Minister for Social Protection Joan Burton and her officials whose remit includes MABS, to take ownership of designing and implementing a national system.

While unlikely to have the competence and resources required, MABS could become an integral component of a wider more efficient and effective system. Operated on the principle of the “polluter pays” it could be funded by banks and other lenders, governed as a not for profit enterprise and run on commercial service lines.

In such a scenario there would be little need for profiteering debt managers unless they can prove a viable business case to operate under any new personal insolvency legislative and regulatory regime. Meanwhile there appears to be nothing preventing the National Consumer Agency publishing guidelines covering debt managers and working with the Central Bank on a consumer protection code to close the yawning gap in consumer protection exposed by the collapse of Home Payments Ltd.

A version of this article appeared in the Irish Examiner, Business Section, Monday 15th August 2011.

Concerned over the abusive and exploitative aspects of commercial debt managers business model I wrote to the Minister for Finance in early 2010 urging the regulation of the sector and published a draft code of conduct to kick start the process. As expected I heard nothing back from the then Minister or his officials. Perhaps the consumer protection gap exposed by Home Payments Ltd failure will galvanise the new administration to act before its too late.

Once the herd has turned, it's hard to get it running properly again

2011-08-08T09:23:00.001+01:00

The Irish property market is nowhere near recovery, writes Bill Hobbs

If our capacity to make credit based consumerism work is based on our willingness to borrow to spend when does the party stop?

If globalisation means that states become increasingly dependent on producing goods and services that others value – should others stop valuing those goods or be restricted in buying them what happens next?

Market analysts are worried global growth will not be strong enough to finance repayments on about $150 trillion of debt-based financial assets; many fear a double dip recession is taking hold.

Consequently last week's flight to cash, downgrading of the US sovereign status and demand for higher sovereign bond yields illustrates how markets always act to limit potential losses. Once the herd has turned it’s hard to get it running in the right direction again.

Nearer to home, political leadership failure has been taken to new heights with bickering between euro partners exposing the failure of any co-ordinated policy response to recognising that non-repayable losses will have to be borne by both public (taxpayers) and risk taking private investors (banks and institutional investors).

One hundred years ago, similar leadership failings caused first a collapse in bond market confidence and then the First World War. Should any state and thus the ordinary person on the street be expected to act as insurers-of-last resort when free-market capitalism fails?

A dogmatic insistence on socialising bank debts to protect privately held wealth is backfiring as investors realise the resultant burden of public debt has undermined all but the strongest of national balance sheets. A sovereign’s balance sheet is now seen as only as strong as its banking systems financial stability or in our case, its continuing fragility.

With the slow motion train wreck of the euro project reaching its predictable crisis laden destination, we have experienced the destruction of about €230bn in household wealth, much of which is tied up in property assets.

Suffering from the same loss aversion that has plagued European policy decision making, we are equally incapable of coming to terms with what the outcome must be. Well understood, loss aversion means we fight doggedly to protect ourselves against losses even when they are absolutely inevitable. How many people are sitting on losses they will never recover and are unwilling to act to sell up now? How many are trying to sell at prices too high to attract buyers?

Our human predilection to prefer avoiding losses about as twice as much as we prefer acquiring gains, means that will forebear; we will refuse to realise losses.

In a recent financial stability report, the Bank of England warned of the dangers of banker’s forbearance, wherein, gambling for resurrection, banks act to hide the true extent of losses by cutting deals with their borrowers. It’s by no means certain that our Central Bank’s short-circuiting of this flaw in forcing banks to overcapitalise will work given two important issues.

The first is that losses were figured after economic assumptions that now appear to be optimistic and the second relates to the risk of a double dip property bubble.

Today the average sales price of a home is €196,000 down peak price of €366,000. Prices have reached 2001 levels. Predictions are prices having dropped beneath the €200,000 level may drop as low as €150,000. Attended by cash buyers, recent fire-sale auctions achieved prices as low as 60-70% off peak. Commercial and real estate property values are languishing at 1999 levels. With an estimated overhang of about 170,000 residential units and failed credit market it’s a market primed for the extend and pray approach, in others words forbearance. With about 10,000 professional investor loans of upwards of €2m each, the extent of bank and investor loss aversion can only be guessed at.

NAMA is floating a negative equity insurance scheme it intends packaging with the two pillar banks to encourage buying activity. It may provide upwards of €18,000 in negative equity insurance on the price of a house for five years. Its plan to shift its mountain of vacant residential units, including developer incentives, could distort the property market. Some say its actions may be anti-competitive as it offers what amounts to state backed insurance on its portfolio of properties.

Whatever of NAMA’s market power to distort property prices, there’s another marketplace phenomenon raised on the influential irisheconomy.ie blog. It could well be the case that more agile, non-state owned or directed banks may act as “frontrunners” and grab first mover advantage. Should they switch from “extend and pray” forbearance to getting out for what they can get now, they might sell off their controlled properties leaving domestic state controlled banks and NAMA to essentially suck on the hind tit. More so as international market tensions and herding flight-to-cash behaviour could trigger foreign controlled banks to cut losses.

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

A glimmer of hope for BoI as investors return to the pillar bank

2011-08-07T09:07:00.001+01:00

It has been a rocky road for Bank of Ireland in recent years. Is that all behind it now, asks Bill Hobbs

Bank of Ireland CEO, Richie Boucher is probably happy that the light at the end of the tunnel is not another onrushing train. Two weeks ago most people thought his bank was a dead ringer for full state nationalisation. Last week, the bank and department for finance officials succeeded in attracting €1.1bn in North American risk capital from what have been termed “long term” investors.

But the deal came at a hefty price. When done and dusted, the state will end up with a 15% shareholding costing €2bn while the canny investors will pay €1.1bn for a 34.5% shareholding. To put it another way, at current share prices, the state agreed to write off about €1.5bn playing its “get out of nationalisation” card. All told Irish taxpayers have stumped up close to €5.4bn to keep the bank’s doors open for business.

Since 2007, Bank of Ireland has eradicated two hundred and twenty five years of prudent capital husbandry during which its shares became a mainstay investment and income generator for generations of trusting retired citizens. Not only did the bank vaporise its accumulated capital, its imploding share price vaporised household balance sheets. Last Friday you could have bought twenty five of its shares for the price of a cappuccino. Four years ago it would have taken the price of seven cappuccinos to buy one share. Will ordinary people ever trust the bank again enough to buy its shares? Probably not for a long time to come.

For now, confidence is limited to a class of specialist investor willing to bet the bank will be able to extract profits using its pillar-bank market power. They are betting on the core strength of its national franchise and dominance in domestic banking. It may be the case that other investors might be attracted to buy into the bank as its debt for equity deal unravels and subordinated bond holders dump their shares on the market later this month. If in reading the tea-leaves they judge the bank a worth a punt, then Boucher will have pulled off a good deal for his bank. But is it a good deal for the taxpayer?

The consensus is the deal is a good one as it limits the taxpayers’ downside risk. How much taxpayer’s money will ever be returned is of course an unknown.

Was it planned like this? Last March, the Central Bank’s PCAR loan loss assessment exercise underpinned the €5.4bn recapitalisation target it told Bank of Ireland to raise. No explanation was given at the time for what appeared to be an apparent favourable treatment of the bank’s loan book when compared to others, particularly its close commercial high street cousin AIB.

Under the Central Bank’s stress scenario, Bank of Ireland was reckoned to incur losses of 3.9% on its €27.9bn residential mortgage book. On the other hand, its close rival AIB’s numbers came out two-and-a-half times higher at 9.9% on the same-sized book. A similar picture emerged on commercial real estate with estimated losses for Bank of Ireland of 18.8% on its €20.4bn in loans whereas AIB’s numbers were 26.2% on €19bn.

Is it the case that the bank was not as buccaneering as its rival AIB during the latter stages of the boom? Is it the case that it banked a better class of customer? Or is a case of carefully ensuring that one of the two pillar banks remained in private ownership?

Have the new investors in Bank of Ireland been sold on the possibility of extracting super-normal profits from what has become an oligopolistic banking market dominated by two banks whose liabilities are guaranteed by the state?

In the consumer “Tale of Two Pillars”, cartel-like profiteering behaviour has been flagged in the recent moves by both banks. By effectively eradicating free banking late last year, Bank of Ireland quietly squeezed up all important fee revenues. This month, AIB’s executive chairman David Hodgkinson flagged a need to increase lending margins to rebuild profitability.

Reflecting protectionist thinking, which is never far from the surface, he had the apparent temerity to suggest that while his bank should be free to price for credit risk – increase its lending margins - it should not have to pay the going risk rate for ordinary people’s deposits. Should banks enjoy a legal cap on deposit interest rates while rebuilding their shattered businesses?

Without enough retail deposits to fund their deleveraging balance sheets, they are forced to pay up to hold onto the deposits they have. The problem is the pillar banks remain hugely dependent on their ECB lifelines. Weaning off these will take a wee bit more than €1.1bn in fresh investment in Bank of Ireland or trying to manipulate margins by capping deposit rates. The light at the end of the tunnel is a glimmer of hope that maybe one day soon banks will begin to work again.

A version of this article appeared in the Irish Examiner, Business Section, Monday 1st August 2011.

Bad presentations are bad for business

2011-07-26T11:36:00.001+01:00

It’s been said that Al Gore lost the race for the White House in 2000 as he couldn't relate to his audience and tell his story. Years later, in his powerful presentation and narrative story telling of “An Inconvenient Truth” he showed just how to use modern multi-media communications tools. Businesses could learn a lot from Al Gore.

Tens of millions are wasted every day by business people whose presentations simply bore people to death. Businesses spend millions not only on making bad presentations but paying for their staff to attend seminars and other events that don’t work. From routine information days to high powered presentations on which success or failure depends, businesses simply fail to make the grade. Few invest in understanding how to craft and deliver effective presentations that engage their many audiences.

Gradually evolved over the 20^th century, the business presentation has become the primary and most important of communications channels. In the past twenty years, business people have become captive of one particular form of presentation, the slide deck. Rather than use modern presentation software as an aid to communicating, many have allowed the software itself to dictate how they present.

Called “Death by PowerPoint” after Microsoft’s ubiquitous presentation software, business people have learned how to excel at delivering mind-numbing presentations. They expect us to sit passively as tables of figures, lists of bullet points and, even worse, entire paragraphs are thrown up on screen across which our eyes’ are jarringly dragged. All too often the speaker, back turned to us, either reads from the slides or from pages of notes that have nothing to do with the slide at all. By the time the second slide pops up or flies in, we are left perplexed, annoyed and slightly angered. No wonder we switch off.

Addicted to stock templates that encourage the relentless, lazy use of bullet points, business organisations churn out near useless material which their highly paid people struggle to communicate to audiences fed up with being bored silly by one slide after another crammed full of largely meaningless information. More recently in an effort to spice things up, businesses have turned to graphic designers to layer boring presentations with glossy pictures, videos and flash animation.

Far too many presenters ask us to do three things our brains simply cannot accomplish. They expect us to read what’s on the screen, process the graphics and listen to their monotonous narrative at the same time. Few of them spend time in considering the one thing that matters most – their audience.

Some years ago, addressing the pervasive use of PowerPoint, leading communications expert, Edward Tufte wrote “rather than supplementing a presentation, it has become a substitute for it. Such misuse ignores the most fundamental rule of speaking. Respect your audience”.

Yet fewer than one in four business people say they spend more than two hours in preparing for an important presentation. Most say they spend less than thirty minutes. They cut and paste from their previous presentations, borrow from their colleagues’, or get their assistants to run one off. Many presentations are assembled on the fly in a last minute rush to generate enough slides to fill the allotted time.

Studies on how adults learn from multimedia presentations have found most that most business presentations cause cognitive overload. Neurological research shows how we process visual and verbal communication along two channels. Asking us to look at pictures, read words and listen overloads our short term memory. We become numbed by the sheer volume of information we try to process using our audio (hearing) and visual (seeing) channels.

In ground breaking work, educational psychologist Richard E Mayer proposed design principles for communicating using multimedia tools. These include carefully designing presentations and creatively understanding what active-learning is and isn’t. It most definitely is not treating an audience as some form of passive receptacle for a data dump.

Conservative estimates put worldwide PowerPoint users at between 250m and 400m making upwards of 30m presentations a day. With the majority boring their audiences to death, businesses are estimated to waste over €220m.

The ability to communicate, persuade and encourage people to act is a key managerial and leadership competence. A presentation well made, reflects well on the presenter who is seen as a competent manager, effective leader and skilled communicator.

Yet how many executives have taken the time to understand how to craft compelling presentations? How many know how to tell their stories using pace and narrative that inspire others to act or at least recall the message or story teller? Rather than remaining captive of a software genre that, when badly used, stifles proper communications, businesses should invest time and money in ensuring their people appreciate how to craft and deliver compelling presentations. In straightened times it would be money well spent.

A version of this article appeared in the Irish Examiner, Business Section, Monday 25th July 2011.

Credit unions must make changes to remain viable

2011-07-18T12:59:00.006+01:00

Bill Hobbs suggests that credit unions in Ireland need to consolidate like they do in other countries. But the “two becomes one” approach will only work if a new business model is adopted.

Credit unions are doing badly, but they can change this, writes Bill Hobbs.

There are far too many poorly governed and managed credit unions, which are either too small or too financially vulnerable to remain independent. If credit unions are to survive, they will need to operate on “county” and not “parish” lines by creating about 60 larger, new model credit unions from their existing 409 operations. As such a change will probably require substantial state aid, credit union leadership will need to prove that this consolidated network along with a new central shared service corporate structure can become, in time, an alternative banking system for ordinary people and small businesses owners.

Faced with the very same regulation, operational complexity and consumer sophistication, credit unions elsewhere have been successfully consolidating for decades. Consolidation has allowed them to deliver on their mission to provide ordinary people access to a full range of affordable financial services on fair terms. First established here in the 1950’s, by 1998 there were 421 registered credit unions. Today numbers here have reduced by barely 3% to 409. In comparison numbers in the United States have declined by 34%. Similarly, Canadian and Australian credit union consolidation has gone hand in hand with substantial ongoing investment in providing high quality financial services.

Had Irish credit unions evolved as their international peers have, they would have, generated the funding required to modernise operations, provided more extensive products and services and accumulated the capital buffers to withstand the losses they now face. Regrettably, along with losses in their core unsecured consumer loan business, they have also lost millions in high risk investment instruments they should never have invested in and in business loans that should never have been made.

While credit unions collectively have close to €14bn in assets, less than €7bn is out in loans. The balance is either on deposit with Irish banks, invested in bank and government bonds or risk instruments. Though funded by €11.5bn in household savings less than a third of their 2.65m members are active customers. At this level of market penetration, credit unions should have deepened existing relationships by making available better quality products and services long before now.

But they continue to offer the same basic products first introduced fifty years ago. With less than 1% of total income generated from fees, for many their undiversified, high-cost labour intensive business model is failing. With the majority of credit unions too financially vulnerable or too small to survive, the sector must achieve three important goals.

The first is to consolidate down to a realistic number. There are many ways in which to reconfigure a financial services retail network. As a credit union’s income earning assets are determined by the average amount borrowed which in turn is funded by the average amount saved by their customers, the most meaningful mechanism is to focus on the numbers of customers served. If a credit union was to say service 50,000 customers, which is about the size that allows for operational efficiencies to be achieved, then it’s possible to model a new network.

Using Central Bank data, I modelled a network of 57 credit unions ranging in size from €180m to just over €300m in assets. Interestingly it would re-configure credit unions along county lines rather than the current, far too narrow, parish common bond.

But such a re-configuration of itself would not be enough. Two other things are required. To work, larger credit unions would have to adapt to a new business model. Designed along international best practice lines, they would need to operate at higher standards of governance and managerial competence. Such “new” larger credit unions would first focus on excelling at their core business of “savings and loans” while augmenting this core business with associated fee earning products. At this scale, they would also be capable of making small business loans. In time they would develop the competencies to provide a full range of consumer financial services.

However the larger “new” credit unions would still not be big enough. Credit co-operatives evolve as full service providers by leveraging off the financial power of their combined balance sheet and pooling resources. To succeed, they would have to collectively modernise IT systems, standardise processes and products and pool spare cash and capital. To do this they would need to establish a shared services organisation similar to those found in mainland Europe, North America and Australia, where central organisations owned and operated by credit co-operatives are critical to achieving the economies of scope and scale required to excel at offering affordable financial services.

While but one model for a new credit union system, given the scale of losses, credit unions are highly unlikely to be able to fund consolidation and transformation from their own resources. The Government may be required to provide funding but only if credit unions demonstrate a willingness and capacity to change.

A version of this article appeared in the Irish Examiner, Business Section, Monday 18th July 2011.

Mortgage strike threat might just force a response

2011-07-11T13:25:00.001+01:00

Measures to alleviate mortgage distress are failing badly, writes Bill Hobbs.

So far mortgage crisis loan modifications have been about as effective as using a foot pump on the Titanic. Solely designed so that banks can delay owning up to their losses, it’s a hopeless “delay and pray” strategy given the sheer scale of homeowner financial vulnerability and growing insolvency.

With almost 100,000 home mortgages in trouble, close to 350,000 homeowners in negative equity, 200,000 variable rate mortgage holders paying twice the interest rate they should be paying and 290,000 tracker rate mortgages about to increase, it was only a matter of time before someone would float the notion of an organised civil disobedience campaign.

Last week’s call by the INMO (Irish Nurses and Midwifes Organisation) on ICTU to support its notion of a mortgage strike might be a damp squib or it could morph into a social movement comprising tens of thousands of beleaguered homeowners. It seems that the strike’s promoters intend setting up an offshore-hosted website and inviting people to register interest in threatening to temporarily withhold mortgage payments. It appears the objective is to force Government to channel some of the billions earmarked to fund banks’ mortgage losses directly to mortgage holders.

Without an organised national mortgage debt forgiveness programme that allows people rebuild their lives, most people realise that current steps to alleviate mortgage distress are not working. While mortgage strike promoters are looking for written-off billions to be targeted directly at mortgage holders and not channelled through the banks, there is a case to be made for a statutory intermediary that will objectively assess troubled mortgages and order binding solutions on both banks and borrowers.

By last March, 90,000 loans totalling €15.4bn were dangerously in arrears or had been modified. These numbers include 64,000 modified loans mostly re-set on interest only terms. Of these nearly 26,000 are non-performing after modification. The “at risk of repossession” group is close to 50,000 loans of which 35,000 are in arrears for over 180 days. Homeowners in this category owe €9.5bn on properties that have halved in value. On average they each owe almost €90,000 more than their home is worth. Given the upward trend in arrears numbers since September 2009 when they were first published, it’s expected that these numbers will worsen through this year. As the full effect of the universal social charge and interest rate increases hit home, it’s highly likely the 100,000 troubled loans milestone will be breached well before this year is out.

The Central Bank’s recent PCAR home mortgage loss rate on four covered bank’s €74bn mortgage book, if extrapolated to the full €116bn residential mortgage market, results in potential bank losses of about €6.7bn over the next three years. Ominously the banks’ expert consultants’ expected life-time or longer term loss rate translates into losses of over €16bn. Were it not for the moratorium on repossessions and hopelessly optimistic “delay and pray” loan modification strategy, repossessions would be running at well over 9,000 a year. No doubt many people in trouble would willingly hand over the keys to their home and move on if the balance owing was written off. And many others could keep their homes if their mortgage was written down to the value of their property.

Delaying and praying for property values and incomes to recover is delusional nonsense. House prices have fallen through the floor and may not recover for decades to come. The drop in values is estimated at close to 50% but with the bottom yet to be felt it could reach Professor Morgan Kelly’s prophesy of 80%. Any bank repossessing and selling today will recover less than forty cent per euro on loans owed at this time. While bankers do not want to crystallise such losses, the Central Bank is set to force them to recognise not only losses as they arise but anticipated losses as well. But recognising losses on a balance sheet does nothing for mortgage holders.

Would the threat of a mortgage strike work? Probably not. But given the pent-up anger at consistent failure by two governments to respond to the mortgage crisis, should people to sign up simply to register their support, its promoters might just get the numbers they are looking for.

For some it’s a daft idea but who knows, perhaps the threat of a mass mortgage strike will galvanise the Government to expedite a debt forgiveness programme. With people experiencing what deflation means as the rising cost of mortgage debt repayments and increased taxation reduces their disposable income, they are looking for a way to voice their anger. The idea of a mortgage strike could well become a call to action and create a social movement that addresses one key issue – how will this society protect people from becoming indentured debt servants for decades to come.

A version of this article appeared in the Irish Examiner, Business Section, Monday 11th July, 2011.

Disparity amongst mortgage holders unsustainable

2011-07-06T12:20:00.000+01:00

Variable rate mortgage holders will be paying €1.25bn more in interest than people living elsewhere.

Is it is grossly unfair and inequitable for one class of mortgage holder to effectively subsidise another as banks struggle to keep their doors open? Is there a case to be made for capping interest rate margins on variable rate annuity mortgages?

The distortions within the housing mortgage market continue to be acutely felt by those who are on variable interest rates. Of the €138bn or so of household mortgage debt about 36% or €50bn is either on a variable rate or a short term fixed rate that will shortly reset at higher margins.

Once the mainstay product, the plain vanilla variable rate annuity mortgage has become a trap few, if any, are able to break free from. Someone with a €200,000 variable rate annuity may by the end of this year pay almost 2.5% more than they would pay if living elsewhere.

Amounting to an additional €5,000 a year it represents an additional citizen’s burden. It’s a hidden, exploitative, discriminatory tax on after-tax income amounting to close to €1.25bn a year.

The gap between what should be paid and what is being demanded by zombified banks is growing. Yet there is no sign of any move to control the upward only movement of variable mortgage rate margins by lenders. And we could be seeing a shift to a permanent high margin non-competitive marketplace where most consumers are so marginalised they cannot shop around.

Mortgage rates and other consumer lending rates will be significantly higher than other Eurozone states for some considerable time to come.

Not only is this state ploughing €70bn into the domestic banking system to keep it alive but tax-payers disposable income will also subsidise banks through higher interest rates, fees and charges. In the absence of a working banking system, banks hold their customers captive. Captivity is amplified by the lack of market participants as mortgage lenders shut down or withdraw from making mortgages. The number of lenders has shrunk from nine principal firms and a clutch of sub-prime operations to three highly conservative lenders.

These remaining banks can abuse their oligopolistic power to increase rates without fear of competition. Given the scale of economic depression it’s highly unlikely that any oversees banks will be interested in entering the mortgage market. If they do they will do so by selectively cherry picking better quality loans. The implications for consumer protection are obvious.

Right now one class of mortgage holder is subsidising another class who opted for tracker mortgages. There are two sub-classes within the tracker brigade - those who bought homes and amateur landlords. Both are effectively being subsidised by variable rate mortgage holders.

To make matters even more unpalatable, many amateur landlords are in receipt of two additional tax payer subsidies. They are receiving social welfare rent subsidies amounting to about €500m a year and are also able to offset loan interest costs against rental income.

One category of borrower is directly through higher interest payments and indirectly as a tax-payer, subsidising others.

The wider problem is one of a severely depressed property market coupled with its continuing decline, now estimated to have fallen 50% from the peak. There is no sight of a bottom being reached as recent fire sale auctions demonstrate that clearance prices are far lower than real long term value. Economists use differing methodologies to assess fair value.

While none of these can predict where prices will level off, they do indicate that the have some way to go before the bottom will finally be reached. The problem with desk top macro analysis is it fails to account for buyer confidence. If people are unwilling to buy at any price then how can you attribute any value at all? The consensus if it can be called that is prices may fall by over 60%. With limited credit availability and only cash sales possible in many cases, the negative shock of recent fire-sale auctions hints that the bottom is still some way off.

Without an active property market and absence of any mortgage competition, it looks as if variable rate annuity mortgage holders have become the most discriminated against group. And as long as banks struggle with as yet unaccounted for loan losses, it seems that the hidden tax implicit in higher margins will continue unless some effort is made to protect consumers through price controls.

A version of this article appeared in the Irish Examiner, Business Section, Wednesday 6th July 2011.

Small businesses must be allowed to think big

2011-07-04T14:00:00.000+01:00

SME’s need help to compete with rivals in Europe, writes Bill Hobbs

The dramatic decline in domestic banking activity illustrates the need to redirect banking activity to funding the development of an export-orientated, medium sized indigenous businesses sector.

While the savings rate is increasing, household deposits are declining. The savings rate measures the percentage of disposable income not being spent on consumption. This money is either being stored as bank savings or used to pay down debt. And if borrowing to fund consumption drops the savings rate increases.

Since January 2010 household deposits have dropped by €7.3bn and household borrowings have declined by €10.2bn. These show that households are using less credit than before and paying down debts at a faster rate. This is also seen in the drop in spending at retail tills, with, for example, credit card usage declining by 6%.

The fall in business levels is even more dramatic. Deposits which are down €8.3bn and business loans have collapsed by €54bn, largely due to NAMA.

Overall the domestic banking loans to deposit ratio which peaked at 215% in May 2008 has dropped to about 155% but remains far higher than 2003 when it was 133%. The old adage applies: loans create deposits. As banks must continue to shrink their balance sheets, their capacity to make new loans is almost non-existent.

Furthermore given that about a third of short term consumer and small business loans need to be rolled over every year, any contraction in new lending adversely impacts on all important interest income and associated fee income. Perversely the drop in demand for loans causes prices to rise rather than decline, as banks are forced to increase interest rates to make good the fall off in new lending.

Of greater concern in terms of economic recovery is the continuing contraction in business lending and savings volumes. Businesses are not accessing longer-term loans, are increasing short-term borrowings and burning up savings in their struggle to trade through an economic depression. The drop in savings and increase in short term borrowings, principally overdrafts is indicative of worsening cash-flow pressures.

The decline in bank borrowings is a factor of two things at play. The financial stress many are experiencing as turnover drops and bank reluctance to lend to struggling but viable businesses. However credit access alone will be insufficient.

If economic recovery is to be built on exports, then it’s abundantly clear that indigenous business performance needs to exponentially improve. With the SME sector only generating only 11% of turnover and less than 5% in revenues through exporting, in comparison to other similar sized economies, Ireland has quite a poor record in building a vibrant cohort of medium sized businesses capable of competing internationally. We have too many small businesses employing less that fifty people and not enough medium sixed businesses employing between fifty and two hundred and fifty. The business sector is missing some vital ingredients.

The first is access to affordable credit and capital. The overreliance on bank credit and lack of any other market for capital hinders the best from expanding. There must be a comprehensive small business loan guarantee scheme and a supporting investment programme to fast track them to larger medium size export oriented size similar to those found in Britain and Germany whose medium sized businesses are the drivers of export activity. This could be supported by a new dedicated development bank specialising in business lending.

The second is allowing for business bankruptcy. Truly entrepreneurial societies do not penalise risk taking. If a business fails the entrepreneur is allowed to dust themselves down and start again.

In the past this country nearly failed as an independent economic entity with its policy of promoting import substitution and trade protection tariffs. There is no going back to the small closed economy that nearly failed in the 1950’s. In the same way there is no going back to the small open economy that created and sustained an explosive asset bubble.

Today the challenge is to understand that buying and selling stuff on credit – consuming goods and services won’t cut the mustard. Unless we find a way to export things that others value and are willing to buy, then we will not achieve economic independence again.

The impetus for recovery will be demand driven by international growth, which it at risk of flagging. Unless we find a way to fund and drive international export-orientated medium-sized businesses then the chances of achieving long term sustainable economic independence are slim. Maybe this time we will discover how to thrive as a small nation state by finally building meaningful sized, internationally competitive indigenous businesses.

A version of this article appeared in the Irish Examiner, Business Section, Monday 4^th July 2011.

Recession has psychological impact on consumer

2011-06-29T12:33:00.000+01:00

Spending savings is not an easy thing for the consumer, writes Bill Hobbs

In urging us to spend our savings, Minister Noonan sounded like King Canute in reverse. Instead of commanding the tide to stop coming in, he is trying to command the tide to stop going out and come back in again. The problem for the Minister is while the export sector is doing well, the domestic economy isn't. It’s continuing to contract as we save more and spend less of our reduced incomes.

The psychological impact of one of the most dramatic of economic reversals means that we will not feel safe to act as consumers for some time to come and we will probably never spend as we did in the past, ever again.

We have woken up to just how vulnerable we really are. And we may be learning how to use money wisely, particularly its most dangerous kind - credit.

Two things are happening. We are saving more and paying down debt faster than before.

During the boom, the wealthier we felt the more we spent and the less we saved. As we believed our earnings would continue to grow, we expected our future income would finance current consumption. We spent more than we earned by borrowing money.

While many of us lived comfortably within actual income, others, buying into the boom time metaphor of the irreversible high tide that lifted all boats, lived within their anticipated incomes. It was a tide that had to turn and when it did, it retreated faster than it came in.

While high tide has left its physical mark seen in part-finished housing developments and empty office buildings that are likely never to be completed or occupied, there is another mark which is just as indelible. It’s our behavioural response to the destruction of household wealth.

Because we now feel poorer, we are spending far less. And as we fear tomorrows income may be less than today’s, we are living not only within today’s income but increasing our precautionary savings.

For certain the tide will never rise as far as it did ever again. There will be no returning to credit fuelled boom time consumerism as we change our behaviours to live a new shared reality.

That reality is being created through metaphor, narrative and story telling. We make sense of things through the stories we tell each other. While we may not have lost our job, we know stories of people who have. While our incomes may not have reduced too much, we know of others who are living on social welfare having exhausted their savings and redundancy payments. While our children may have a job, we know of others who have emigrated.

We are spending less and saving more as we have learned the brutal lesson of the dark side of consumerism which only works when we borrow from tomorrow to spend today. While not all is us are poorer, we all feel and act poorer. When we are uncertain about what tomorrow will bring we squirrel away what we can and stop spending what we can. And while precautionary savings are increasing, because we fear tomorrow will be worse and not better, our spending behaviour is also changing. This change will last long after the precautionary impulse wanes. One thing is for sure as we now demand higher quality goods and services at fairer prices then suppliers will have to meet our expectations. Until prices come down to meet our expectations there will be no reversal in the decline in consumer spending.

Is there is an emerging future barely visible at this time? A future where lessons learned will be put to use. By unlearning compulsive consumption habits we will probably spend far less and save more of our disposable income for a long time to come. We will never again borrow from tomorrow to spend today. We have already started on this path. Our behaviour illustrates not just a fear for the future but a deeper shift to a more prudent, far less exuberant consumerism.

Just as King Canute couldn’t command the tide to turn back, Minister Noonan can’t command it to some back in. It’s continuing to retreat and when it does come back in it will never reach the high watermark it once reached.

If this is the case then any national plan for the future must accept that economic recovery will be different this time. Sure we will need to export out way out of this mess but we will also have to adjust our expectations of what domestic economic recovery will be like. Has a shift to the wise use of money and prudent, pragmatic, value seeking consumerism been factored into economic forecasts?

A version of this article appeared in the Irish Examiner, Business Section, Monday 27th June, 2011.

Credit unions finally face up to modernisation

2011-06-20T11:47:00.003+01:00

After a number of reports, credit unions are facing an overhaul, writes Bill Hobbs

It was announced last week that Government has tasked a credit union commission with defining the future of the sector and recommending enabling legislative and regulatory systems.

Given entrenched vested interests that have consistently frustrated reforms, it won’t be an easy task. The commission will succeed if it manages to craft a purposeful strategy having the support of all stakeholders for a comprehensive transformation programme.

Of the national network of 409 credit unions, at least one in five will have to merge with others in the next year or so. It’s a long overdue rationalisation that may reduce the number of credit unions to about one hundred. While the number of credit unions will reduce, should they modernise their business model and achieve economies of scale and scope through a centralised shared service organisation, as their international peers have shown elsewhere, it is highly likely the numbers of outlets and delivery channels will increase.

Such a change would be the largest and most comprehensive rationalisation programme of any financial institution in the history of the state. If properly thought through, planned and executed, a transformation programme could result in a vibrant modernised credit union sector similar to those found in Europe, North America and Australia. It could see credit unions becoming a principle provider of high quality affordable financial services to ordinary people.

Long before 2008 credit unions were at risk of an external shock negatively impacting on financial stability. Their business model contains a number of flaws. Emphasising dividends paid from profits, the inclination of voluntary boards and their managers was to adopt risk adverse practices focused on maximising dividends and to compete with one another to pay the highest rate. This behaviour led to them eschewing investment in diversifying products and services and adopting market based pricing mechanisms. It also came at a cost of building the reserves required to ensure economic viability and sustainability and investing in improving operational competencies.

Financial fragility was exposed in 2006 when a run on a large credit union threatened to become contagious. At this time a report highlighted extremely high levels of delinquent loans which were not being provided as bad debts in annual accounts. Many credit unions were manipulating bad provisions to bolster dividend pay-out rates. Later that year credit union investments in high risk instruments they should never have invested in, became public.

What wasn’t so public was that moves by the credit union regulator to reign in risk taking were being frustrated by influential directors and managers. A worrying number were quite deliberately and knowingly breaking laws designed to protect against risk taking. As they considered laws limiting risk taking were out of date, they argued they could ignore them. Hamstrung by one of the weakest of credit union legislative regimes in the advanced world, the regulator was almost powerless to act. What limited interventions it could make were made, but its increasingly robust warnings and advice were ignored.

The banking and economic crisis are not the root cause of credit unions troubles despite what some would have others believe. In a recent speech, the Central Bank summarised why the system has become so fragile “For those increasing number of credit unions who now find themselves in financial difficulty there is a recurring trend – they have been poorly governed by boards and management and effective oversight by the supervisory committees has been non-existent. "

While chief executive of trade body CUDA, I published in late 2006 an important report on the future of the sector and called on the then government to set up a commission to see to it that long overdue reforms where implemented.

The report, “A Call to Action, re-inventing credit unions for the 21st Century”, listed eight key recommendations which if implemented would have modernised the business model, improved governance and management competencies, rationalised the sector, improved products and services, improved regulation and legislation and provided savers with a deposit guarantee.

It is telling that five years later only one recommendation has been implemented. When faced with a contagious run on credit unions in September 2008, Government extended its deposit guarantee to cover credit union savers’ funds.

It’s good that Government finally got round to setting up a commission to consider the future of credit unions. As its membership reflects vested interests, balanced by the inclusion of academic and some other expertise, will it be capable of acting as a positive force for change or will it become captive of the past and produce convenient fudge? It has to be of some concern that business expertise in credit co-operative transformation and development does not appear to have been included for.

A version of this article appeared in the Irish Examiner, Business Section, Monday 20th June 2011

Committed to a false hope and a failed union

2011-06-13T13:32:00.000+01:00

Bad leadership and ignoring the truth has trapped us in a bubble of helplessness and hopelessness, writes Bill Hobbs

Can there be any national renewal if we remain trapped within a political and economic union that willingly visits social and economic destruction on small nations to prop up larger nations banking systems?

Have our political and institutional leadership systems become victims of a confirmation bias that is amplifying our helplessness?

We have become captive the ECB’s dogmatic economic fundamentalism. In fulfilling its role to prop up our banking system, the ECB will not and cannot agree to an organised debt forgiveness programme. Its institutional hubris and arrogance is matched by a Franco/German political nexus that cannot and will not accept sharing the responsibility and cost of a dysfunctional euro system.

Anxious for re-election, German and French politicians remain unwilling and incapable of addressing the fundamental problems at the core of the euro-zone project.

Our growing sense of helplessness at the hands of the IMF/ECB/EU “troika” is exacerbated by a reluctance of Government to admit to the consequences of applying a remedy that will destroy the social and economic systems needed to rebuild a shattered economy. Is this the only response to the structural violence visited by an omnipotent central bank’s narrow mandate to protect larger more powerful Euro-zone members? Why are our leaders so willing to adopt ways of doing things that are undermining our capacity to rebuild our economy?

Even the troika’s members are conflicted. Both the IMF and some EU participants appear to favour organised debt forgiveness but the hawkish ECB and other EU participants remain rooted to a dogmatic demand for reparations.

With international and independent analysts all saying that we cannot afford to repay what we owe, why is this compelling, factual based evidence not being acknowledged and acted on?

When we are faced with news that blatantly conflicts with what we believe to be true we use the information to support our beliefs. When we think we know something to be true our immediate reaction to news indicating the polar opposite is to jump to the conclusion that there must be something wrong with the source.

When faced with overwhelming, contradictory factual evidence why do we not pause for thought? Are we thinking at all? According to one recent study of brain activity, it seems we don’t think. When processing contradictory statements, it appears that not only do we suffer from confirmation bias but the part of our brains associated with reasoning reveals no sign of activity at all. Even more startling is once we interpret news to reconfirm our beliefs, the part of our brains involved in reward and pleasure become active.

We reinforce what we believe to be true, eliminate negative emotions and activate positive ones. We reward ourselves for being able to stick with our original position. Our emotional reactions and not our thinking minds cause us to be even more passionately committed to original beliefs.

Perhaps this explains our Government's passionate commitment to repaying every cent we owe even when others know we cannot. Is the overwhelming evidence that the Euro project is failing being perversely used to confirm a commitment to the Euro project?

Our Government is committed to do what needs to be done to regain economic sovereignty even if this means enforcing the structural violence demanded of external “partners”. Could it be that it’s conformational bias blinds it to other alternatives and its communications are reinforcing a belief in helplessness and its dangerous twin, hopelessness?

One of today’s glaring institutional vacuums is a singular lack of transformational leaders that sets out a clear inspiring goal, tells the truth, commits to change, fights for what ordinary people want, communicates using inspirational narrative and not mind-numbing detail, directs its attention to what’s right and not what’s demanded by others and elicits an enthusiasm in us all that we can build a better future.

During his Congressional address in 1862, Abraham Lincoln said “The dogmas of the past are inadequate to the stormy present…..As our case is new, so we must think anew, and act anew. We must disenthrall ourselves”

There are many who think that in dealing with the stormy present we need to disenthrall ourselves of an economic fundamentalism and its dogmatic insistence on the unnecessary and punitive destruction of our capacity to build a better future.

What is needed is transformational leadership that defines the common good not in terms of repaying debt but defends the pre-eminence of our own national right to think and act anew.

We need leaders who talk of regaining economic sovereignty not as the goal but as a means to achieving a goal.

A version of this article appeared in the Irish Examiner, Business Section, Monday 13th June 2011

Overhauls needed to rescue the credit union sector

2011-06-07T01:01:00.000+01:00

Credit Unions helped to transform Ireland in the past. With the right moves, they can help do it again, writes Bill Hobbs

Credit unions are in serious trouble, their problems are getting worse and they are struggling to respond. One in very two cannot survive much longer as independent entities. One in four is in quite serious trouble. Less than fifty are financially strong enough to operate safely in today’s stressed economic times.

It is reckoned that the Central Bank’s regulatory strategy will see the network of independent credit unions consolidating from 409 down to about 100.

While the sector has its own dedicated and appreciative regulator, on its own progressive regulatory intervention can only ever facilitate transformation through requiring higher levels of governance and management competencies and implementing robust prudential standards and rules. Business transformation will have to be led and achieved by credit unions themselves. Yet most do not fully understand the magnitude and impact of transformation required.

Unless credit unions are transformed into the type of modern credit co-operative banking system found in other advanced countries, consolidation could amplify their serious, long term problems. That supportive regulatory intervention and consolidation on their own will not solve for these problems is down to two core issues credit unions most resolve. Their business model and co-operative governance and management systems are no longer fit for purpose and will have to be radically transformed.

They will need to migrate to a modern, flexible and responsive business model and invest in enabling information technology and multi-channel branching platforms. But even when enlarged, consolidated credit unions still won’t have the financial resources, managerial competencies or achieve the scale or scope dynamics required to transform themselves. They will also have to co-operate within a cohesive network.

They will need to leverage off their collective balance sheets by ceding strategic and operational autonomy to a higher level, central organisation. Such entities, called apex organisations or central finance facilities are found at the heart of modern co-operative banking systems. They are essential to enabling credit co-operatives improve governance standards, professionalise management and offer better quality financial services to their customers.

Any transformation programme will need to include three elements - consolidation, a new business model and a cohesive network. This would allow credit unions to create a financially robust co-operative banking system, offering a wide range of quality affordable products and services on fair terms, across a multi-channel delivery network of physical outlets, ATM’s, internet and mobile technology.

In Ireland unfortunately credit co-operatives are considered the Poor Man’s banking alternative to the dominant commercial banking shareholder model. This is not the case elsewhere, where as People’s Banks, they fulfil a vital and systemic role in national banking systems.

Regretfully, a progressive proposal promoting a strategic alliance between a building society and a consolidated credit union network, to create a European style federated co-operative banking system fell on deaf ears. It’s a pity, as the proposal would have, if adopted by Government, fast tracked credit union consolidation and transformation into a robust national co-operative banking system.

If credit unions are to play a systemically important role in facilitating economic recovery, they will have to re-discover their enthusiasm for pursuing a common purpose by redefining and unambiguously stating what that purpose is. Articulating a new credit union narrative will take inspirational leadership that encourages the enthusiastic pursuit of a common purpose.

But the real problem is transformational leadership has failed to emerge. This leadership vacuum is recognised by those concerned for the future of the sector as the single greatest impediment to transformation. Solving for the future of credit unions will take people with the competence, experience and vision to define a national strategy and execute it at local level.

The magnitude of transformation required would tax larger, better resourced institutions. For this reason any national transformation strategy will require Government sponsorship through a dedicated empowered change agent that appreciates “the credit union difference”.

By excelling at delivering affordable financial services on favourable terms, credit unions enhance the financial wellbeing of the people and wider communities they serve. They made an enormous contribution to transforming Ireland in the past and can do so again. But if credit unions are to contribute to rebuilding a shattered economy, they must radically transform the way they do business while remaining true to their guiding philosophy, values and ethos.

To become relevant again they will have to do two things. Define and articulate their purpose for an advanced society and radically transform the way they deliver on this purpose. But change and transformation is almost never initiated or led by incumbent leaders who all too often suffer from confirmation bias, a proven biological disposition where despite overwhelming evidence they are in trouble, they hunker down, defensively protecting the status quo.

Many believe what’s required is a cadre of transformational leaders and facilitators who can define what a credit union’s purpose is and who can inspire the enthusiastic commitment to achieving it in others.

A version of this article appeared in the Irish Examiner, Business Edition, Monday 6th June 2011

Raid on private sector retirement savings unfair

2011-05-30T13:25:00.000+01:00

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

2011-05-24T11:30:00.002+01:00

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

2011-05-16T16:25:00.002+01:00

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

2011-05-09T08:53:00.011+01:00

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

2011-05-02T12:17:00.000+01:00

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

The cosy herd mentality needs to end

2011-04-25T17:20:00.002+01:00

How could so many smart people have been so stupid? The Nyberg banking report hints at an answer - we are hard-wired to act stupidly when we act together.

Our business, banking, public administration and political leadership failed abysmally to act on warning signals. Influential journalists and analysts acted as gate-keepers of a cosy consensus by not appreciating the warnings signs that all was not well. No one wanted to take the punch bowl away during the party as the rule of thumb “safe as houses” prevailed.

It’s not surprising. With limited computational skills and seriously flawed memories we create rules of thumb to get by and we use recent experiences to create them. As we do so, we underestimate risks and overestimate good results.

We use language to craft compelling stories which in turn dictate our actions and reactions to news. We selectively hear only what we recognise, interpret it based on past views and draw conclusions much like those drawn before. We become immune to contradictory information that tells us we are wrong to continue doing what we are doing. Together we all herd in the one direction, to a blind spot we hardly realise exists. What’s more, senior decision makers have known of these shortcomings for years.

The Nyberg banking report mentions one well known shortcoming, “groupthink”, twenty nine times. It happens when a group makes faulty decisions because group pressures lead to a deterioration of “mental efficiency, reality testing and moral judgement”. It causes amongst other things; an illusion of invulnerability which creates an excessive optimism that encourages taking extreme risks; a collective rationalisation where assumptions are not critically examined and dangers are discounted; a belief in inherent morality, where groups believing in the righteousness of their cause, ignore the ethical or moral consequences of their decisions; pressure on dissenters not to express arguments against any of the group’s views; self-censorship where personal doubts are not expressed and self-appointed “mindguards”, others who protect the group from information that is contradictory to their consensus.

Nyberg highlights symptoms such as “the pervasive assumption of continuing growth”, “failure to see growing indebtedness as a serious policy problem” “the soft landing scenario” and “unwillingness to recognise the existence of long-standing problems in some banks”. He appears to vindicate the banking guarantee decision makers as they couldn’t have known of the true extent of banking failure.

Yet the crisis was made worse by one of the most stupid groupthink decisions ever made. Good leaders guard against the dangers of groupthink by including for diverse views, testing assumptions and enquiring into alternatives when reaching decisions. The guarantee decision makers should have realised the extent of their collective blind spot. They should have realised they were suffering from groupthink and acted to guard against it.

Nyberg hints at people’s leadership culpability for not asking the hard questions when they had doubts. Some may have seen that a new reality was emerging. Some may have seen their own part in maintaining the fiction of riskless banking. Yet they did nothing. There is no more damning indictment of bad leadership than to see there is a problem and do nothing.

In all crises there are three distinct positions that can be heard. Some say “let’s return to the order of the past”. Others say “let’s just keep doing more of the same and muddle through”. Others ask “is there a way to break the patterns of the past?”

Nyberg proposes breaking from the patterns by removing the threat and danger of groupthink. Banks should no longer be too big to bail out and should have narrower mandates than before. Rules should be used to limit their risk taking and act as a break on excessive optimism.

But is there a risk that a new form of groupthink will take hold as political populism dictates a new orthodoxy? Could state owned and directed banks become excessively risk adverse, unwilling to lend at all?

The Nyberg report should signal the start of a proper dialogue on the design of the new banking system. The danger is it will be used as the excuse to ignore the lessons and blame the past on people who inhabited the past. Yet many of those who bought into groupthink consensus have been promoted to higher levels of influence and authority without being required to publically account for their behaviours and actions.

One wonders if within current leadership a new groupthink is emerging. One that insists banks are made whole without equitably and morally forcing losses where they lie.

Today is seems gatekeepers are protecting the bank bondholders who bought into the groupthink consensus, willingly ran with the herd and now expect a free lunch.

A version of this article appeared in the Irish Examiner, Business Edition, Monday 25^th April 2011

RTE "This Week" programme coverage on credit unions

2011-04-24T19:50:00.026+01:00

RTÉ News Player: This Week coverage on credit unions fast forward to 34.44 minutes into clip

Sunday’s “This Week” programme coverage included a segment in which a somewhat evasive ILCU chief executive declined to say how much he expected credit unions loan losses will be, what their current holdings in junior bank bonds are and what bail out funds were left available for use by the ILCU.
One would have thought that as ILCU projects itself as a prudential monitor under its SPS role, it should know all the aggregate numbers. It is fair to say that it has consistently downplayed and at times denied problems when a growing number of individual credit unions are known to be in quite serious trouble.

ILCU declared charges €48m on its €118m bail out fund in supporting just thirteen credit unions in its 2010 accounts.

It's notable that €11m investment losses have been incurred since 2008. According to this chart which is drawn from ILCU's published accounts, net funds available at the end of 2010 were €73m with indications that at least a further seven were to be supported. With more looking for help, estimates since of its uncommitted bail out funds indicate the amount left available are said by some to be c€30m. This is why ILCU will try to get its members to double their annual contribution to the bail out fund.

Some but not all credit unions debit their annual bail out fund fee and their annual affiliation fees to their customer’s accounts. In any event the amount of money it has to bail out troubled credit unions, which everywhere else would be closed or merged with others, is wholly insufficient. I have estimated that government could be required to provide well over €500m in capital support to credit unions – but it will only do this on the basis that credit unions reform their business model. Indeed reform is a specific requirement under the IMF programme.
How bad is the credit union sector stability problem? The aggregate estimate of loan losses is between €1.15bn and €1.45bn.
As yet further investment losses have still to materialise. Credit unions are said to hold about €1.3bn in Irish bank bonds of which e€300m is in junior bonds –these are exposed to the real risk of significant haircuts which could amount to 75%. They have already incurred an estimated €200m+ in losses in other instruments invested in during the boom. Many were high risk products credit unions elsewhere are not permitted to invest in.
One in five credit unions could not pay any dividend to savers last year and another two out of four paid less than 1%. As dividend rates are a critical financial performance benchmark or safety threshold, these numbers indicate that three quarters have problems.
The outcome of financial stress tests soon to be announced could well trigger the need for government intervention to provide capital and insist on the closure and merger of troubled credit unions.
Consolidation could see numbers reduce to about 50 or so credit unions. Recent banking stabilisation laws permit government to order a credit union be taken over by another credit institution including a bank.
Perfectly designed for an Ireland that no longer exists Irish credit unions alone amongst their international peers have failed to transition into modern credit co-operatives.
Yet it’s possible to imagine a credit union sector reformed as a modern European style credit co-operative. In return for state aid and support, credit unions would cede independent autonomy to become members of a federated network owning a central finance facility which would provide them with the resources to modernise and deliver on a better range of affordable financial services to ordinary people.

Scaremongering is little excuse for doing nothing

2011-04-19T00:36:00.000+01:00

Financial institutions need to face up to debt forgiveness sooner or later, writes Bill Hobbs

Following AIB’s reference to debt forgiveness, the airwaves were full of shrill, uninformed, misleading commentary that forgiving debt is unfair, inequitable and an unbearable cost to the taxpayer. But debt forgiveness will have to be faced up to and paid for. Bankers know this. They realise there must be an organised and effective debt settlement system through which they can plan for the billions they will have to write off as uncollectible debt.

The scale of the debt forgiveness required was starkly illustrated in the Central Bank’s recapitalisation programme which provides for consumer loan losses of upwards of €12.1bn. The total sum could amount to over €20bn when other banks, credit unions, utility companies, credit card companies and finance and leasing outfits are factored in. Home mortgage losses alone could amount to a conservative €5.5bn. Translating figures into real people is difficult. With 100,000 home mortgage loans in trouble upwards of 30,000 may have to be repossessed. Last week’s Irish League of Credit Unions’ disposable income index estimated that 735,000 people were seriously financially vulnerable.

Other countries have long provided for debt forgiveness through structured processes in which people can earn it. People negotiate a collective agreement with all their creditors to pay what they can for a fixed period of time. During this time they must live off a basic income calculated to allow them live life with dignity. The balance of what they earn is paid to their creditors. If they stick to the plan, when it concludes any balance owing is written off. Such a process has been designed by the Law Reform Commission (LRC) and should be implemented without any further delay as reforming our bankruptcy laws is part of the IMF/EU programme.

Yet AIB’s mention of debt forgiveness sparked a negative public reaction. The shrillest anti-debt forgiveness voices last week included boom time cheerleaders who now tout themselves as “experts” on consumer indebtedness. They are people who promoted and sold 100% interest only loans to first time house buyers while gagging any critique of dangerous credit products and the property boom. They are now talking up debt forgiveness “moral hazard”. They warn that people will deliberately plan to benefit from debt forgiveness. It’s a bit like saying people would willingly contract a terminal disease to get a free medical card.

Many others say “I should not have to pay for the sins of my neighbour”! But this flies in the face of reality. The vast majority who bought into our credit fuelled consumerist economy did so naively without realising the risks they were taking. Had they realised they could lose their jobs and have their incomes savagely cut, they would not have borrowed as much. Are they to be denounced as sinners for being too human? It is nonsense to suggest that people should be forced to live non-productive, miserable lives to assuage others misplaced outrage.

It’s important not to mix negative equity with loan affordability. Many can afford their loan repayments even if they are in negative equity. These people, through accident rather than design, are able to pay their way even if their neighbour cannot. As their home may not be worth what they paid for it until at least 2025, it should be possible to create a financial product through which they can manage negative equity, freeing them up to sell and move home.

If implemented the LRC’s system will allow people earn the right to get out from under the crushing weight of unaffordable debt. But its system does not deal with mortgage debt save to say that any balance owing after a house is repossessed could become part of its debt settlement process.

Current attempts to deal with unaffordable mortgage debt will fail as they do not address the core problem. People owe too much. Temporarily reducing repayments simply kicks the can down the road. The only way to deal with the problem is to write down loans to affordable levels. If people can afford to repay a loan equivalent to the current value of their home then they should retain possession. The balance could be written down through a debt settlement agreement or parked until it can be repaid. Qualifying would require rigorous stress testing using a maximum affordability level such as say 30% of gross income. Should a person be unable to make repayments then only one realistic option exists – short selling, where the home is sold for what it’s worth and the balance is written off immediately or through a debt forgiveness programme.

Whichever way you look at it, billions will have to be written off through some form of debt forgiveness programme. Moral hazard scaremongering is a thin excuse for doing nothing.

A version of this article appeared in the Irish Examiner, Business Section, Monday 18^th April 2011.

Short-term solutions produce long-term problems

2011-04-11T14:19:00.001+01:00

Banks need to address the profit taking behaviours that caused their demise, writes Bill Hobbs.

Has the curtain finally been brought down on the Great Liberalisation epoch in Irish Banking? It was a time when, thanks to Euro zone membership and friendly regulators, our banks accessed a boundless supply of cheap wholesale money to fuel a property lending boom. It was also a time when banks deliberately produced complex products to ensure consumers remained blind to the risks they were induced to take.

A consumer debt crisis is an inevitable outcome of abusive credit marketing. In the hands of abusive bankers who persuaded unsophisticated, financially illiterate consumers to buy into their misleading and negligent marketing hype, mortgages became weapons of social destruction. Irish bank’s dangerous financial innovation played a large part in causing the catastrophic property bubble.

Their marketing of cheap affordable credit induced far too many people to borrow far too much. One the canards promoted during the boom was that more banks led to greater competition and lower prices. In fact, competition between financial service firms tends to drive prices higher as firms deliberately increase product complexity as a ruse to increase prices. The more complex they make their products, the less likely people will try to educate themselves on different offerings and the more likely they will buy from the most familiar brand.

The size of the debt problem is evidence of not only a failure in bank regulation but an abject failure to protect consumers. The scale of home repossessions required to clean up bank balance sheets is finally becoming public. Faced with repossessing close to 30,000 homes, there are two generic solutions. Either banks possess and sell off these homes or they write down people’s loans to affordable levels.

Thanks to the ECB’s small interest rate increase last week, media and public attention is now focussing on home owner’s debts. Yet for over a year, banks have steadily increased their mortgage lending rates. You will now pay €4,500 more per year on a €150,000 mortgage than if you were living in Germany. Overall, Irish banks are likely to charge an additional €1.5bn per year on variable rate mortgages. It’s an indiscriminate banker’s tax, hitting those that can least afford to pay it most. Home mortgage holders are being scalped without any concern for controlling the cost of mortgage credit. It seems that protecting consumers is not on the bank restructuring agenda for now.

Released last week, redacted briefing reports for the incoming Minister for Finance, Michael Noonan are strangely mute on how to deal with the scale of the consumer debt and consumer protection problems.

How big is the debt problem? Adding consumer losses together – home mortgages, “buy to let” and other personal loans - the total bill could reach €15bn. This is the money that will not be collected. At crisis recovery rates, the underlying loan amounts exposed to losses will be many times higher. These losses will be translated into higher fees and interest rates as bank customers will be forced to cross-subsidise bank losses.

Banks and their gatekeepers say they have to pass through their cost of funds to borrowers. But they are passing these costs through bloated operations built during the boom times.

Government policy has not yet considered how best to protect consumers in what will become a banking oligopoly. Ignorance is a source of oligopolistic power that banks will exploit to drive up profits at the expense of their customers. Unless there is a willingness to insist banks and other financial service firms produce simpler, less complex products, profit gouging will become a feature of the marketplace for years to come.

Financial institutions love complex products as they can pack them full of tricks to induce people to buy and traps to enforce loyalty. Will banks and other financial service providers be allowed to continue making it harder and harder for people to understand what it is they are selling? Or will the financial regulator insist that banks treat their customers fairly and replace complexity with easily understood terms?

Should price controls be introduced? There is nothing preventing interest rates and fees being capped. And there is nothing preventing Government from insisting that bankers live within tighter margins.

The great liberalisation of Irish banking led to a marketplace full of complex and quite dangerous credit products. Unless challenged by a robust consumer protection agency with the powers to insist on fairer prices and terms, a banking oligopoly could embed unnecessary complexity and excessive profit taking. So far it seems that Government and regulators are only concerned with restructuring banking and haven’t addressed the profit taking behaviours that caused their demise. It should be possible to insist that products are regulated and prices are controlled.

A version of this article appeared in the Irish Examiner, Business Section, Monday April 11th 2011

Home repossessions will soar if bank plan works

2011-04-04T10:58:00.000+01:00

By the end of last year nearly 45,000 loans were over three months in arrears, writes Bill Hobbs

If Government’s bank restructuring plan is to work, we could be facing home *possessions of somewhere between 10,000 and 20,000 homes a year.

Clearing the decks to get banking working again means the inevitability of wholesale possessions and sales will have to be faced up to.

The section in the Central Bank’s “Financial Measures Programme Report” dealing with mortgage loan loss assessment to 2013 starkly points to the sheer number of home possessions and sales required to make banking work again.

Between €3.5bn and €5.7bn of losses were assessed of four banks which have €74bn or 64% of outstanding mortgages. In addition to mortgage losses, the Central Bank assessed non-mortgage consumer loan losses of upwards of €2.6bn.

Curiously unexplained, Bank of Ireland’s figures were considerably lower than AIB, PTSB and the EBS. Either it was a more cautious lender or its figures are being flexed for other reasons.

As total mortgage loans are €116bn, losses could come to between €5.5bn and €8.7bn. Tellingly, last year Professor Morgan Kelly’s predictions indicated losses of €5.8bn.

Since the Central Bank did not translate its euro losses into the number of loans, the full story remains hidden from view. No detail was provided on the model it used to estimate loan losses which probably also estimated the number of expected possessions and losses per loan.

Throughout last year the numbers of troubled mortgages increased every quarter. By December close to 45,000 loans totalling €8.6bn were over three months in arrears. With arrears levels roughly equal to 2.5% of loan balances, it’s a critical stress threshold beyond which possessions become inevitable.

The Central Bank mentions that Britain’s possession experience was considered in assessing loan loss. If British experience applies then we could expect about 9,600 possessions or 3,200 a year. But any comparison is tentative as the numbers of loans in arrears were 3.8 times higher than in Britain at the end of 2010. And while British arrears were declining, ours were increasing throughout last year.

While stress test experts, Blackrock used a loss assessment model driven by negative equity, the Central Bank’s assessment was directed by household income predictions. Declining affordability drives the numbers of troubled loans and underlying property values will drive loan losses on these troubled loans. Worsening affordability and loan to property values means larger losses. By stalling possessing and selling today, forbearance increases losses.

What does this mean? The Central Bank’s three year loan loss assessment hints at how many homes will need to be possessed and sold off. In a forced sale and credit crunch environment, realised prices will be lower than current market values. Elsewhere “forced sale” discounts are between 20% and 40% of current market values. It’s not clear if the bank factored in the discounts needed to offload large numbers of possessed homes.

Using Central Bank arrears data and loss estimates, it’s possible to form a view of what the numbers of possessions will be. Estimating the loss per loan using both arrears data and loan loss assessments, under its base case economic scenario the possible number of possessions required to clear the decks comes to 59,000 from now until 2013 which is 19,600 a year for three years. It’s clear that as the number of houses in possession last year was only 585, forbearance has built up a mountainous volume of possessions that must now occur.

Putting it all together, at the very least 10,000 possessions a year would be needed to clear banks loan books on British experience. Factoring in anticipated Irish experience, possessions jump to 19,600 a year.

Inevitably property bubbles and bank crisis can only be solved by possessing and selling off houses people can no longer afford. If Government’s bank restructuring programme is to work, the current mortgage forbearance policy which was designed to hide the true scale of bank losses will have to end.

But the state has no mechanism to work out the scale of possessions required. In most cases the residual loan left after a house is possessed and sold will simply have to be written off as uncollectable. Any possession scheme must deal with the reality that as banks crystallise their losses, people will have to be given the chance to earn debt forgiveness.

Until now previous government policy was to forestall the inevitability of wholesale possessions. That policy will now have to change. Government’s plans to introduce a meaningful personal debt forgiveness regime and fairer bankruptcy laws will also have to provide for an effective and fair mechanism to deal with the scale of possessions needed if its bank restructuring programme is to work.

*possessions is the technical term for repossessed homes

A version of this article appeared in the Irish Examiner, Business Section, Monday 4th April 2011.

Never underestimate the power of stupidity in society

2011-03-29T09:02:00.000+01:00

Somewhat tongue in cheek, Carlo Cipolla's essay into stupidity provides thoughtful insights, writes Bill Hobbs

The ratio of stupid people to non-stupid people is the same no matter what size group we belong to and stupid people are the most dangerous of all. So wrote economist Carlo Cipolla, in his intriguing short essay “The Basic Laws of Human Stupidity”.

His five basic laws are that (1) a stupid person is a person who causes losses to others while deriving no gain and even incurring losses for himself/herself, (2) we always underestimate the numbers of stupid people in circulation, (3) stupidity is independent of other characteristics, whatever the size of the group and no matter how well educated we find the same fraction of stupid people, (4) non-stupid people always underestimate the power of stupid people and constantly forget that dealing with them always turns out to be a costly mistake and (5) a stupid person is the most dangerous type of person.

To illustrate the destructive power of stupidity, Cipolla wrote of groups being made up of four types of people - the helpless person who benefits others with no gain or even losses for themselves - the intelligent person who does things that benefits them and others equally and two others who appear to loom large in our public narrative -the stupid person, and the bandit or pillager.

If a stupid person causes losses for both themselves and others, then a bandit acts for personal gain at the expense of others. In the extreme, bandits pillage - transferring wealth from society to themselves. Theoretically, if a society was made up solely of bandits then that it would neither be better or worse off, as gains and losses would balance out. In the real world, Cipolla reckoned that while the fraction of stupid people was a constant, their capacity to wreak havoc was amplified by the numbers of bandits acting with overtones of stupidity.

He suggested that limiting the losses wrought by stupid people and bandits depends on a counter-weight, the number of intelligent people acting. The greater the number of intelligent people the better a country will do. However as there will always be the same fraction of stupid people, if in the remaining population there is an alarming proliferation of bandits, then the composition of stupid people and non-stupid bandits will cause a decline in a country’s well being.

He wrote of how bandits, who are not stupid people, engage in activities that become stupid. For example bandits might make payments to politicians in the expectation of some form of gain or favour. The politicians may personally incur a gain. But these gains could become a loss if the payments are found to have been corrupt payments.

Does this mean the politicians are stupid people or acting as bandits with overtones of stupidity? As a politicians’ gain at the expense of society is undone over time and they incur losses, it’s probably the latter - they gain until they are found out. Perhaps then Cipolla would rate the making and receiving of corrupt payments as the action of bandits rather than stupid people.

Somewhat tongue in cheek, Cipolla’s essay provides thoughtful insights. Particularly when combined with the way we deal with memory and recall. We are not precise at recall, nor are our memories concise. We tend to recall the gist of events and make things up to fill gaps in our fuzzy memories. We fabricate stories to support and explain our previous actions. And we will do so even when faced with proof these actions didn’t happen in the way we think they did. This process is called confabulation – we construct a story from fuzzy memories. So compelling is our narrative that we then come to believe is the true version of events.

So, much of what we hear of people’s retelling of events are their stories which are frequently based on their delusion of the past rather than what may have actually occurred. For example, if our original intent and motivation was to act as a bandit and not an intelligent person, then when challenged to explain our actions we may confabulate. And our story will become so real to us.

Recognising people’s capacity to confabulate, we seek to impartially and objectively enquire into the past - to try to discern some reality from confusion.

Cipolla wrote of how non-stupid and stupid people when acting in consort cause losses for society and undermine the development of a country. Could one lens through which to view enquiries into stories people tell of the past be to use his laws Basic Laws on Human Stupidity? They may be useful in contrasting what would be the story expected of the intelligent person to those of stupid people and bandits.

A version of this article appeared in the Irish Examiner, Business Edition, Monday 28th March 2011

Credit must flow or economy faces long downturn

2011-03-21T20:51:00.000Z

Credit supply to business is the key to growth, but the cure may be painful, writes Bill Hobbs

The outcome of a credit boom, banking crisis and real estate boom-bust cycle is what we are now seeing emerge – a creditless recovery.

Writing of creditless recoveries, the authors of a recent IMF paper found that they tend to be weaker and more protracted with economic growth on average one third lower than normal recoveries. They also report that many creditless recoveries are followed by years of stagnant growth.

It’s clear that without working banks providing a supply of affordable credit to productive enterprises and consumers, recovery here will be anaemic and largely jobless. In a creditless recovery, stagnant economic performance will push this country towards sovereign default. There won’t be enough fuel to fund the revenue tank to finance an unaffordable mountain of sovereign debt, bank losses and recapitalisation costs. Since 2008, normal financial intermediation has all but stopped and there is only one solution. And that is to get commercial banking working again at a cost this country can afford.

Economic growth rates, predicted under government’s recovery programme, are predicated on getting credit flowing again. Much of the emphasis is being put on an export led recovery. But, while multinationals don’t rely on our domestic banking system, an export led recovery won’t happen unless indigenous exporters, who are highly dependent on bank credit, have access to a supply of affordable short and long term bank loans. The same is true of almost all of the non-export sectors. Indigenous Irish businesses are acutely exposed in a creditless scenario as they have a disproportionate reliance on bank credit compared to their peers in other advanced countries. While Government is planning a small business loan guarantee scheme, it will only work if there’s a supply of credit and working banking system.

Restoring the supply of affordable credit will mean fixing some of our banks by pumping them full of fresh untainted capital to meet future trading conditions. But first their loan losses have to be paid for.

After three years of one of the worst recorded banking crisis, the wholesale destruction in collateral values underpinning banks boom time lending has not yet been accurately quantified.

The Central Bank is trying to estimate how much it will cost to make banks whole again. Its capital assessment review is expected to establish the mountain of capital required to fund expected loan losses and the higher levels required by banks if they are to retain a banking licence. Along with its close cousin the liquidity review, the outcome will set the scene for rebuilding the banking system using the new banking resolution laws.

Last week, the Bank published the base and stress case economic assumptions being used by its expert consultants to scrutinise troubled bank’s loan books. These economic assumptions have to be translated into expected loan losses. And there’s a problem as real estate collateral values are hard to pin down. Without enough people willing to buy, with banks unwilling to lend, without a national price data base and unknown future demand, it’s a classic black box. Furthermore plans to outlaw “upward only” rent reviews on commercial property will cause value to drop. And reforming bankruptcy laws - making it easier for people to earn a fresh start will negatively impact on expected loan losses. There are hints the consultants are considering a US style, property repossession loss scenario. Noises off stage are quietly softening us up for some pretty shocking figures.

The outcome will set the scene for the inevitable restructuring of banks which may include consolidating the good bits of some with others to make them whole again. Banks will also be expected to bring their loan to deposit ratios down, which is a herculean task, given that their foreign and domestic deposits continue to haemorrhage and their main largest depositors are the ECB and Central Bank.

The cost of getting banking working again and restoring the supply of credit to business and consumers will come at a price that this country simply cannot afford. The resolution for our banking system will largely depend on what happens at EU level. It could well be that the outcome of the Central Bank’s review may finally unravel the EU policy of protecting bondholders at all costs. If so bond holders would have to first share the pain of the bust, before sharing in any economic recovery. These include Irish institutional investors such as pension funds and credit unions.

Whatever the outcome over the next year, one thing is absolutely essential. To convert a creditless recovery into one that will sustain the growth required if this country is to pay its way and retain its sovereign status as a creditworthy state, credit supply to indigenous Irish businesses must be restored. And for this to happen some of the banks must be made whole again.

A version of this article appeared in the Irish Examiner, Business Edition, Monday 21st March 2011

Credit union sector needs real reform if it is to survive

2011-03-19T20:55:00.000Z

The termination by the Central Bank of a credit union strategic review process, originally requested of it by Finance Minister Brian Lenihan in late 2009, comes as no surprise.

In the intervening fourteen months, in line with expected outcomes, credit union financial stability has progressively worsened.

Predictably these outcomes are a result of a combination of credit union boom time investment strategy, poor lending practices and a post-boom economic recession. Given that a credit union’s ability to generate sufficient profits to pay a decent dividend is the primary indicator of financial stability and sustainability, the dividend outcome for last year is quite telling. Three out of four paid less than 1%. One in five was unable to pay any dividend at all.

Yet the full impact of loan losses has yet to be realised as many credit unions kicked the can down the road by rescheduling troubled loans. With loan arrears breaching 15% and heading for 20%, using last June’s regulatory stress test parameters, total sectoral losses could reach €1.7bn. This figure is the mid-range of stress tested loan losses and estimated investment losses to date.

However loss estimates could be higher. Significantly under-lent, credit unions have holdings of close to €1.3bn in bank bonds of which about €300m is in subordinated paper. These could be exposed to losses under new bank resolution rules.

Since late 2009, the worsening economic recession and Central Bank intervention have exposed badly governed and managed operations. The bank’s robust requirements of credit unions to rebuild capital buffers, provide properly for bad debts, restrict lending and manage liquidity along with the impact of escalating bad debts and collapsing demand for new loans have eroded profitability to a point where the continuing independence of many credit unions is highly unlikely. As everywhere else, badly governed and managed credit unions are either shut down or merged with others, the new bank resolution laws will provide the Government with powers to respond to this eventuality. It will have the power not only to arrange for closures and mergers of credit unions with others but will also be able to order a bank to takeover their operations.

Meanwhile the Irish League of Credit Unions, having seriously dented its small bailout fund of €119m in supporting just twenty of its over five hundred affiliates, is probably left with a little over €30m in uncommitted funds. It is now asking credit unions to double their contributions to its fund to about €16m a year. But as it’s quite clear that the fund is wholly insufficient to meet the likely scale of financial stablisation support required, tax-payer’s funds could be at stake. Depending on the severity of financial stress, the cost of state support could come to well over €500m.

In the past six months two significant developments have also overtaken the strategic review. Firstly the EU/IMF programme required the Central Bank to not only to stress test the banks but to also stress test credit unions and implement a stablisation plan by the end of the year.

Secondly, many observers considered the strategic review to have been an abdication of ministerial responsibility to define policy concerning the sector. It seems the new government considers credit unions of some importance and is to set up a credit union commission.

If taxpayers’ funds are to be committed and if credit unions are to have a role in any future domestic banking system then a commission will need to be given the powers to ensure that credit unions finally deliver on long overdue reforms.

A version of this article appeared in the Irish Examiner, Business Section, Saturday 19th March 2011.

Real people with debts need real help, not just talk.

2011-03-14T12:29:00.001Z

Ministers must start delivering solutions to the consumer debt crisis, writes Bill Hobbs

Surely a new broom means more than fitting a different handle to an old worn out brush? One new Minister when questioned over the weekend on a long delayed, important report said it would be published shortly. The word “shortly” is civil service speak for “how long is a piece of string”. What about the word “delivery”?

Delivery means responding to people’s real needs now. And it’s high time to get real about delivering solutions to the consumer debt crisis. The crisis is like an iceberg, the closer you get to it, the bigger it gets. And with two thirds hidden beneath the surface, you can only guess at its catastrophic impact.

Officially, according to the Central Bank’s visible iceberg data, nearly 100,000 households, “real” people, are suffering “real” mortgage debt stress. On average, distressed homeowners already owe €100,000 more than they can ever hope of repaying. Boom time homebuyer’s who can afford repayments, will have to wait until 2024 before their loan equals their home value when, if lucky, their home will be worth just about what they paid for it in 2007. The Central Bank’s data is silent on the mountain of distressed personal and small business loans. Utility companies are cutting off the population of a small town every month.

As the banks are not telling it as it is, no one knows how bad the debt crisis has and will become. The Central Bank has admitted Anglo Irish Bank only came clean on its debt after it had been told to wind down. Ominously, three out of four credit unions are suffering from varying degrees of financial stress as their customers can no longer make their loan repayments.

Out of every four households, one said they had or would a problem in paying their debts in 2010. Most of the rest said they did not feel financially secure. Financial vulnerability is worsening as recent tax increases are stripping households of disposable income. With people already paying 3% more on their mortgages than their European neighbours, ECB interest rate increases, rising inflation and declining take home pay many more will join those struggling with unaffordable debt this year.

Until now the official response has been to delay the impact of consumer debt losses on the banks by making it easy for them not to have to repossess homes. But debt forbearance is like freezing rancid meat in the hope it will somehow thaw out as fresh meat. Steps taken so far to respond to the crisis have been ineffective. Critical of the last Government’s mortgage debt group report, this Government’s programme for government document says it didn’t go far enough. It’s right - the group’s recommendations were merely solvency management tools for troubled banks.

Real people, have real debts they have no hope of ever repaying. Far too many have become easy prey for unregulated, profiteering debt management companies that falsely promise they can have debs written off. Meanwhile with growing queues’ MABS is struggling to respond to the demand for its debt management services. It neither has the proper mandate or resources to provide the level of professional social protection services needed to deal with the scale of the debt crisis.

Social protection means providing a proper financial safety for people faced with personal insolvency or threatened by it. There must be laws and supporting processes through which ordinary people can earn the right to debt forgiveness. After all, it’s a basic right found everywhere else. The good news is, thanks to the Law Reform Commission, the high level design is ready to go and it can be implemented within a year.

That’s if this Government for National Recovery does what it says on the tin. Delivery will require Social Protection Minister, Joan Burton to cut a swathe through three years of abject obfuscation and procrastination. Urgent and important, there’s no reason why a national debt management service should not be in place by the end of this year.

Right now there is nothing to stop the Minister from transforming MABS into a modern fit for purpose national debt management service. Applying the principle of the polluter pays, banks and other creditors should be made fund its development and operating costs. Its services should continue to be provided free to indebted customers, who should have the legal right to its services. The enabling personal insolvency and debt settlement legislation recommended by the Law Reform Commission should be fast tracked and delivered on it in tandem with the development of MABS.

A version of this article appeared in the Irish Examiner, Business Section, Monday 14th March 2011.

Failing credit unions must adapt for good of consumers

2011-03-13T23:20:00.003Z

Only fit-for-purpose co-operatives can provide a viable alternative for consumers and small businesses.

With three out of four credit unions experiencing varying degrees of financial stress and the Central Bank undertaking a full assessment of their loan portfolios by the end of April, the new government faces making a policy decision on the sector’s future. Will the reformed domestic banking system include a co-operative banking network?

Having already lost hundreds of millions in imprudent investments, credit unions are reeling from boom-time poor lending outcomes. With arrears at 15% and heading for 20%, loan losses could amount to well over €1bn.

There’s also an elephant in the room: credit unions have Irish bank bond holdings of about €1.3bn of which €300m is in subordinated paper. If they sell now they will realise immediate losses, but if they hold on they may face haircut losses under new bank resolution rules.

The Irish League of Credit Union’s, having seriously dented its small bail out fund of €119m in supporting just 20 of its troubled affiliates, is now asking credit unions to double their contributions to its fund.

Recent regulatory requirements to rebuild capital buffers, provide for bad debts, restrict lending and manage liquidity have stripped the credit union dividend cupboard bare. Dividend rates are the key indicator of financial stability for credit unions. Three quarters of them are paying less than 1% with one in five paying nothing. There is a distinct danger that the combination of assertive regulatory medicine, liberally applied since 2008 and EU/IMF programme requirements could kill off even healthy patients.

Everywhere else, badly governed and managed credit unions are either shut down or merged with others. Whether as a strategic consolidation to create a working credit co-operative system or a haphazard crisis containment exercise, closures and mergers are inevitable. Either way tax payers' funds will have to be used. Depending on the severity of financial stress, this could amount to well over €500m. Should this money be used invest in building something that works or to try to fix something irreparably damaged?

In propagating the myth that they are not banks, credit unions are claiming their ways of doing business are not appreciated by government and the regulator. But neither are they appreciated by their credit co-operative peers elsewhere, who cannot quite understand why Irish credit unions have been incapable of maturing beyond their start- up business model.

The fundamental problem is that credit unions have not been governed and managed as they should have been. With only one in ten voluntary directors having a financial background, there are far too many badly run credit unions, providing poor quality expensive products to far too few people. If they are to play an important part in a working banking system, they will have to transform - radically.

A modern, fit for purpose co-operative system, could provide a nationally owned consumer and small business banking alternative. Examples already exist. They are called federated networks and they are the heart of successful co-operative banks across the world.

These networks are distinguishable by their many small independent credit co-operatives which, through contractual obligations and cross guarantees, are leveraging off a combined balance sheet. They own a central banking operation that provides the financial resources, operational capacity and professional competence to enable them to provide a full banking service to their customers who are also their owners. The Netherland’s Rabobank is one such network.

Federated networks treat community capital as an inter-generational endowment to be protected and enhanced by one generation of owners and managers to hand on to the next generation. As their owners are also their customers, they are not driven by the short term demands of external shareholder’. Expert at governing and running co-operative banks, their long term customer advocacy focus meant they were resilient in the face of recent global and domestic challenges.

Irish credit union’s dated business model and league system acted as value destroyers of community capital. Had they been structured, governed and managed as federated banking co-operatives, over the past decade they might have generated over €2 billion in additional surpluses which would have buffered them against the economic downturn, more than covered modernisation costs and critically, provided a working banking alternative today. Instead they are financially stressed and could will incur losses of close to €1.7bn, according to some estimates.

What could a federated model look like here? Let’s fast forward to 2020. The Irish credit co-operative banking system has consolidated from 412 down to 50 independently governed, professionally managed credit unions, each with its own multi-branch footprint, offering a full banking service to consumers and small businesses. These credit unions own a central banking facility providing wholesale market access, liquidity and loan securitisation.

The facility, originally constructed from redundant commercial banking resources, also provides a full range of corporate services, acts an outsourced regulatory agent, and provides IT and operational systems along with remote and internet banking channels.

Through contractual obligations and cross guarantees, credit unions have ceded autonomy to better serve their customers.

Can it be made happen? Yes, but credit unions will not be able to make this change on their own. They will need determined government intervention and funding through a suitably empowered change agent.

When warned of an urgent need to reform the sector as far back as 2006, the then finance minister, Brian Cowen, deftly kicked the ball onto the regulator’s pitch. Last year, his successor Brian Lenihan similarly abdicated responsibility for defining policy by requiring the Central Bank to carry out a strategic review instead. With the EU/IMF programme requiring the Central Bank to establish credit union capital adequacy requirements and implement a stabilisation plan, the review is now on hold.

For now it seems this government considers credit unions of some importance and is to set up a credit union commission. Who knows? Maybe will have the power to design and deliver on the necessary changes, which may even include transforming credit unions into modern working federated network.

A version of this article appeared in the Sunday Business Post, Markets Section on Sunday March 13th 2011

Debt-management companies must be regulated

2011-03-07T11:12:00.006Z

Vulnerable consumers need to be protected from firms making false statements, writes Bill Hobbs

Will anything be done to regulate a financial service that feeds off people’s fears and financial insecurity? Should dangerous financial products, not covered by our consumer protection laws and regulations, be permitted to be sold?

While the last Government procrastinated in responding to the consumer debt crisis, debt management companies started selling dangerous products to financially vulnerable consumers under the nose of state consumer protection agencies.

Many of these companies are engaging in abusive marketing, making false and misleading statements and not disclosing their product’s risks or costs. They market “free” advice and consultations to prospect for their commission driven sales forces. It’s a manipulative soft sell. Playing on people’s worries to deliberately heighten feelings of inadequacy, they say they relieve the stress of dealing with debt. But there is nothing “soft” about their products. They are designed to extract as much fee income as possible from financially inexperienced consumers.

Debt managers have only one objective, to sell lucrative fee earning debt management plans. Claiming they negotiate and agree affordable monthly loan repayments, their product only works if lenders agree to lower repayments, suspend debt collection and stop interest clocks running.

The product sees people pay the sum of agreed monthly loan repayments, through the debt management company. After deducting a hefty fee, the debt manager then disburses the money to their lenders. Monthly fees range from €35.00 to over €100.00 depending on, how much is paid, the number of transactions or lenders to be paid. But first, a plan “set up fee” is charged and nothing will be paid to lenders until this fee is paid in full. Set up fees range from €495.00 to over €800.00. VAT at 21.5% is charged on fees.

Contrasting a debt management plan with a “do it myself” plan, I synthesized paying off personal debts of €35,000. Assuming lenders agree to lower repayments and stop the interest clock, under my DIY plan, I would clear the debt in six years.

But should I buy a debt management plan and pay through a debt manager, it would take seven and a half years.

The debt manager would charge me €7000.00 in fees. At 20% of the debt it’s equivalent to an annual interest rate of 5.12%. And these figures get worse if loan interest clocks keep running.

Who are these outfits? Some are merely internet prospecting engines for British based operations, others are British owned Irish operations and some are home grown. Most of the latter two outfits have one thing in common – they are, or once were, commission driven mortgage brokers who used to sell mortgages on overpriced properties, frequently marketed by their real estate partners. They are now selling debt management plans to the same people they sold unaffordable credit to a few years ago.

There is no economic business case or supporting empirical evidence for commercial debt manager’s claims of providing economic value to consumers or their creditors. Their claims that they lower costs of indebtedness for consumers and costs of recovery for lenders are spurious and unproven. Many state they can arrange for substantial debt settlements. Totally unfounded in fact, such statements could be regarded as misleading, negligent and false declarations.

By using abusive marketing and emotive sales tricks, debt managers aim to induce people to buy dangerous products. Their emergence could be seen as an opportunistic exploitation of a social and economic debt crisis. If so it’s being made possible by Government’s failure to close off a dangerous gap in consumer protection.

Given they provide advice on their financial products and a money transmission service, debt managers should be subjected to prudential and consumer protection regulations. If authorised under a licensing system, they would have to comply with minimum competency requirements, consumer protection codes, fitness and probity, and prudential solvency standards. Their customers would have a right to complain to the financial ombudsman.

As it stands there is no consumer protection for people when sold debt management products or during the term of the plans. Debt management companies are not obliged to treat people fairly, to ensure they understand risks and costs, to provide proper advice or to recommend suitable products based on need, experience and affordability.

Abusive marketing of credit to consumers was largely responsible for the debt crisis. Have consumer protection lessons been learned? Surely rushing into empty stables, disclaiming responsibility for letting the door open, is part of the past. Protecting vulnerable, indebted consumers is too serious an issue to allow the unfettered development of economically unproven and ethically questionable debt management companies.

They should be required by Government to prove they have a cogent, rational business case supported by independent empirical evidence and if so, Government should ensure they are licensed and regulated as high risk consumer protection operations.

A version of this article appeared in the Irish Examiner, Business Section, Monday 7th March 2011

Turning credit unions around

2011-03-04T13:59:00.001Z

Once a success story, credit unions are stuck in the past and in dire need of rescuing, writes Bill Hobbs

Unless credit union reform is on Government’s agenda for urgent change, the future for credit co-operative banking in Ireland is very bleak.

With the way credit unions continue to be operated here, being unable to pay a decent dividend is a sign of financial instability. One in every five is unable to pay any dividend for last year. And with only one in four paying a rate over 1.00%, three quarters of the state’s 412 credit unions are experiencing varying degrees of financial stress.

It appears that the Irish League of Credit Unions has almost exhausted its small stability support fund of €115m. So far it has committed €58m to supporting twenty nine credit unions. With another seven in the pipeline requiring upwards of another €40m, all too predictably, its small fund will soon run out of money.

Clearly credit unions are going to need state support. This could see the Government providing hundreds of millions in tax payers’ funds to stabilise the sector. As part of the IMF deal, the Central Bank is currently reviewing credit unions to establish the scale of support needed. The bank must also implement a strategy to stabilise the sector. Under the deal, new laws will give the bank a statutory resolution fund and tools to close credit unions or where they are viable, merge them with others including banks. But these crisis management responses have little to do with the future role of credit unions.

Something quite important is missing - a clear, unambiguous Government commitment to transforming credit unions into a modern, well run, credit co-operative banking network.

Once an international success story, Irish credit unions have been stuck in the past for the past two decades. Perfectly designed for an Ireland that doesn’t exist anymore, their methods and ways of doing business remain rooted in the 1950’s. Unlike their peers elsewhere, they have not developed as successful full-service banking co-operatives have in say Europe, Canada and Australia.

Instead of focussing on becoming full-service co-operatives, credit unions here pursued an ill-advised strategy of maximising surpluses (profits) to pay far too high dividends to their savers. This meant they did not invest in the modernisation required to provide better quality affordable products and services. Critically they did not set aside enough money to see them through bad times.

Financial stress cracks first appeared as early as 2005 when worrying levels of bad debts were reported on in the media. Their bad loans were far too high for booming economic conditions. And unable to make enough good loans, credit unions put over half of excess savers funds into risky investments that should never have been made.

Since 2008 two things have happened. Hundreds of millions have been wiped off investment values. And boom time imprudent lending along with an economic recession have triggered rising bad debt losses that could exceed over €1bn.

The fundamental problem is that Irish credit unions have not been led, governed and managed as they should have been.

As credit co-operatives, credit unions can be thought of reservoirs of community capital to be protected and enhanced by one generation of directors and managers to hand on to the next generation. By successfully providing affordable products and services to this generation, their managers maintain and build community capital to hand on to the next generation. Because their owners are also their customers, credit co-operatives are not driven by short term demands of the market, shareholders or bond holders. Their managers become expert at running co-operative banks. This notion of inter-generational community capital twinned with managerial expertise is why credit co-operatives elsewhere were able to weather their banking and economic crisis. Their ways of doing things can be adopted here in Ireland.

Here, there are far too many badly run credit unions, providing poor quality expensive products to far too few people. If they are to play an important part in a working banking system, they will have to radically reform and change the way they do things. But for various reasons, they will be unable to make this change on their own. This is why many are convinced they have to be helped from themselves.

If the new Government considers credit unions of systemic importance to the any new banking system it must put credit union reform and modernisation firmly on its agenda for urgent and important change. Its starting point should be to establish a credit union reform authority with the power to design and deliver on the necessary changes.

A versions of this article appeared in the Irish Examiner, Analysis section, Friday 4th March, 2011.

Biting the bullet on reforming the public sector

2011-02-21T12:46:00.001Z

Runaway public spending created havoc with the nation’s finances, argues Bill Hobbs

With wages accounting for over 40% of day to day spending, Government can no longer afford to run an inefficient, overstaffed and unproductive public sector. Between 2000 and 2008 staffing levels in the wider public service grew by close to 70,000. There are now about 347,000 state employees and another 53,000 employed by semi-state companies.

About a decade ago, Big Government arrived as the economy boomed. Billions in low cost credit flushed through the banking system to fund a domestic construction boom. Private sector service and retail enterprise expanded and incomes rose. Swollen with tax revenues, governments’ coffers emitted the luring siren call of “spend me now!” An unfettered Government obliged and went on a spending spree. Once it exhausted billions on the “must haves”, billions more were expended on “nice to haves” in what became an unstoppable spending spree. The high tide mark of this credit based, illusory largesse was Bertie’s Bowl, which was to be a modern monument to mammon.

Public sector unions were quick to exercise their muscle and politicians opened the exchequer cheque book to fund salary increases for absolutely zero gain. Not only did employee numbers rocket, but Ministers competed with one another to set up one new agency after another, providing highly remunerative career paths for senior civil servants and thousands of board seats for their friends. It was Big Government on a Big Scale needing a Big Budget.

Senior state employees thought nothing of flying first class on international jollies, while private sector businessmen sat in the coach seats. If the first class ticket symbolised hubris and waste, hospital corridors full of trolleys symbolised something altogether different – leadership and management failure to change the way things were done. We had third class public service standards on first class budgets.

The problem was we were living and paying each other largely on bank credit. Worse still the public service was funded from taxes on imported credit. When taxes dried up, an enormous gap appeared between revenues and expenditure. The IMF programme may provide €50bn in funding to pay for the running of the public sector but it comes with harsh demands. Closing the gap between what we can afford to contribute in tax revenue and what Government spends on public services can only mean one thing. It only ever meant one thing - brutal surgery.

Tens of thousands of state employee jobs will have to be eliminated. The Croke Park appeasement will be replaced with a ruthless business endeavour to radically reduce numbers whilst maintaining the quality of essential services and “nice to haves” will simply have to go.

Ten years ago public servants were earning 13% more than their equivalent private sector colleagues. By 2008 the gap had risen to a stratospheric 25% which was 48% more than the average industrial wage. The disparity in wage rates between public and private sectors was one of the widest in the modern world. It still is. Last September public servants were being paid 55% more than private sector employees or just over €9 extra per hour. Yet no one argues the public sector is 55% more productive. Few can point to service improvements in the past ten years. The number of significant service breakthroughs can be counted on the fingers of one hand.

Any reform must tackle the embedded management emphasis on what’s been spent and not what’s being accomplished. Whatever funding is available must be focused on delivering what matters to the public. Key services will have to be executed flawlessly. Hard to measure long term outcomes, such as improvements in health and education will have to be matched by short term outputs that can be measured and rewarded. Key service performance measures will have to be benchmarked to real change and reform objectives and not some flowery nonsensical statements that mean anything you want them to mean.

The public service must learn to emphasise what’s being accomplished and not what’s been spent. Management and staff will have to learn how to deliver on the service value demanded by us, their customers. Routine services should be outsourced to the competitive private sector.

Political language uses words such as “change” and “reform” without any real meaning. In business they are hard words carrying real meaning. One political party is using harder business language. Fine Gael’s plan to cut public service employments levels by 10% or 30,000 jobs is but one of the many changes that will have to be imposed if the country is to have a public service it can afford. The challenge for any new political administration will be to ensure public sector employees deliver a first class service on a third class budget.

A version of this article appeared in the Irish Examiner, Business Edition, Monday 21st February 2010.

Working banking system and credit insurance needed

2011-02-14T12:29:00.002Z

Without a credit insurance scheme, small business will continue to fail, says Bill Hobbs

You would be forgiven for thinking Fogape was a coffee drink. It’s not. It’s the name of a highly regarded, Chilean state sponsored, small business loan guarantee scheme.

Years ago, with a small amount of seed capital, the Chilean government kick started a loan insurance guarantee scheme to provide viable small businesses with access to bank credit on affordable terms. In the aftermath of the global crisis, quick to realise the urgency of ensuring credit access to their small businesses, the Chilean’s beefed up their scheme.

Here, when pushed on a small business loan guarantee scheme, Minister Mary Coughlan made the usual soothing noises that her officials were “looking into it”. She even mentioned Fogape as a good model. Her successor Batt O’Keefe solemnly announced that his officials were “still looking into it”. They probably still are.

Lately Fogape has surfaced again, this time in Fine Gael’s manifesto, which mentions a self-financing, small business loan guarantee scheme.

Our banking system has become an economic black hole, continuing to suck in state capital and retail deposits never to be seen again. While the Central Bank’s fourth attempt to get to the absolute bottom of banks losses may disprove Alan Duke’s controversial estimate of an additional €15bn in state capitalisation, three years on and what’s left of the small business banking system? “Barely functioning” aptly captures those that remain “open for business”.

If we want a working banking system, one that investors will be prepared to fund, we have no choice but to continue to plough capital into Bank of Ireland and AIB. Of course their existing bond holders will have to bear the pain. But astonishingly we have yet to publish and affect special resolution laws that would allow the state to enforce an equitable restructuring. Politician’s electioneering proclamations of “not another cent to the banks” are empty rhetoric without the power to deliver.

The Danes used their powerful laws to shut down one of their own bad banks. They forced bond holders to take a sizeable bath. But they didn’t stop at bond holders. People with deposits suffered too as amounts over the Danish deposit guarantee of €100,000 had a 41% haircut applied. In the absence of the temporary extraordinary state guarantee, Irish deposit holders are similarly exposed to losses.

Internationally, the primary function of deposit guarantee schemes is to instil confidence so that people do not rush to take their deposits out at the first sign of trouble. They also pressure banks to behave themselves by demanding a hefty fee for coverage should they misbehave themselves. Participating banks effectively insure one another’s deposits, with the state providing a back-stop support. When faced with systemic failure, governments are forced to step in to guarantee all deposits and senior bonds which apparently rank equal to deposits here.

Could Irish depositors face similar losses? The answer is yes, should one of our banks fail or be closed down this would become a probability and not just a theoretical possibility. All the more reason to get banking working again and supporting the credit creation system with meaningful guarantees for viable small businesses.

Why have we not seen a Fogape type scheme implemented? The answer within a system designed not to change. In the labyrinthine corridors of executive civil service power and influence, government cannot respond quickly enough if at all.

Ask anyone who has managed to persuade government officials to do something and they will tell you of the sheer frustration of trying to get things done. They will tell you of the senior civil servant goal keeper, whose job it seems is to stop everything getting past them and cover their colleague’s behinds’. They will tell you of senior public service managers who frustrate, procrastinate and drag their heels. They will tell of people whose main contribution is to explain why things cannot be done. They will tell of draconian interpretation of compliance with EU directives and pointless red tape that prevents small business from functioning as it should. They will tell you that any new government will face an immediate battle with powerful organised internal interests that will fight tooth and nail to protect the status quo.

Fogape was a “no-brainer”, an easy to do, effective response to the credit crisis. In the private sector it would have been up and running within six months. In the public sector it could take up to six years and longer. Similarly laws allowing the state to close bad banks should also have been in place well before now.

With a political campaign in full swing, and job creation targets vying with another, small business remains largely forgotten. One thing is for sure. Without a working banking system and supporting credit insurance scheme, small business will continue to fail.

A version of this article appeared in the Irish Examiner, Business Section on Monday 14th February 2010.

We need to set "financial" prisoners free.

2011-02-07T10:38:00.002Z

Hundreds of thousands of ordinary people have become financial prisoners of banking parasites that are sucking the marrow from household wallets to keep their doors open.

Permanent TSB’s rate increase is a brutal reminder that the banking system and housing market remain broken. It’s a bank that bears enormous responsibility for fuelling the housing bubble during which it shovelled money out the front door just as fast as it could get it in the back door from the money markets. If the safe mortgage bank driving limit was 100kmph, its board and management drove at 500kmph. When the bank inevitably ran out of road, its loan to deposit ratio was a catastrophic 250%.

The damage wrought from such catastrophic negligence is now being visited on its mortgage customers who are manacled and shackled to the bank’s financial straits. Its variable rate mortgage rate will jump by 1% to a stratospheric 5.19%. With similar rates in Germany less than 2%, its customers will pay well over 3% extra just to keep PTSB bank open for business. Hot on its heels, Ulster Bank has announced its own increase of 0.50% for its similarly imprisoned customers.

Inner city commercial property hulks and rotting carcases of provincial housing estates bear testament to a time when as Michael Lewis put it in his Vanity Fair article “suddenly, among the richest people in Europe, the Irish decided to buy their country – from one another”. It was a time when many considered homes to be a store of wealth, ATM machines to be tapped to buy more property.

It was an illusion of wealth. Encouraged by government and vested interests, it was an enticing mirage many were inexorably drawn to. It worked because our banks could borrow cheap money from money markets. It worked because of chaotic property development. And it worked because there was enough fat to keep almost everyone happy. It’s now so broken no one will give our banks money any more – at least at a price they can afford. So banks are fighting each other for retail deposits. But money is flying out the door, seeking safe haven in other jurisdictions or lodged in branches of foreign banks to fund their lending everywhere else but here.

Banking’s mobilisation of household savings into affordable loans has stopped. With a home mortgage market frozen solid, no one can move their loan to another bank. Switching is not an option for the 350,000 in negative equity and only an option for those few who qualify should another bank have funds to lend. Captivity is not confined to those in negative equity, it extends to the majority of the 770,000 mortgage holders. Everyone is at the mercy of their broken bank. And all our mortgage banks are broken.

Have the property and credit bubble lessons been learned and applied? What has been the political response? One party’s proposal to create a mortgage warehouse for tracker mortgages – the ones banks cannot contractually squeeze- merely shifts a bank funding problem onto the state’s balance sheet. How will the mortgage warehouse be funded? The state’s cost of funds is 6%. It appears yet another burden to be borne by the taxpayer to rebuild the banking system.

What of price controls – capping mortgage rates and forcing banks to live on proper margins? Not one political policy document addresses the housing and related mortgage credit market. Not one addresses the growing mountain of unaffordable mortgage debt. No one has grasped the nettle and dusted off the decade’s old Kenny report that called for the regulation and control of affordable housing. No one has adequately addressed the legacy of banking’s boom time abusive marketing of mortgage credit and latter day abusive treatment of their captive customers who have no choice but to pay exorbitant rates.

The very use of the word “recovery” means achieving a previous state of being. Does economic recovery mean going back to where we once were? A time when uncontrolled housing market and credit markets combined to create one of the worst housing bubbles ever. Or are we to craft a different outcome? One that supplies decent, quality housing at affordable prices. One that has a regulated credit market free of abusive marketing practices. And controls the price of mortgage credit?

For decades politicians have mouthed platitudes about housing market regulation and control, all the while captive of powerful influential property interests. Is it time to regulate the housing and associated mortgage markets in the common good?

So far politicians’ policy documents have failed to address just how these markets will be restored to working order and how they will be managed in the common good.

A version of this article appeared in the Irish Examiner, Business Edition, Monday 7th February 2010.

This country is crying out for clear leadership

2011-01-17T12:59:00.000Z

We have had enough of spin and blind party faith – it’s time for a new direction, writes Bill Hobbs

DIRECTNESS, clarity and simplicity in expression are the hallmarks of great communicators including political leaders. Honesty, integrity, telling it as it is with sincerity and passion is what we value in our leaders. There’s an old saying that endures because it’s true. “People don’t care how much you know unless they know how much you care”.

With an ability to craft and tell a story that resonates with people allowing people to connect with one another, great communicators enlighten and encourage a higher order of public dialogue and debate. By shining a light on dark places, they speak of them with an honesty and sincerity that gives people hope for a brighter future. They show how much they care.

Last week, US President Obama provided an example of great communication - how to do it right. In a speech seeking to quell a vicious, bitter, fractious debate he spoke of the young nine year old victim whose life was taken by a deranged gunman. “I want us to live up to her expectations. I want our democracy to be as good as she imagined it”. In two short sentences, his powerful, sincere message was hope inspiring. He shone a light on a dark place – the rise of the Tea Party movement and right wing extremism.

Far too many Irish political, institutional and business leaders insist on hiding dark places. When a light is shined on these, they withdraw further into the shadows, hoping not to be caught out. They are driven to engage in ambiguity and fudge, dodging searching questions with defensive spin.

The current Fianna Fail saga, with its bitter narrative of who knew what and when, shines a light on a shadowy world of parochial loyalties and friendships that interlace Irish public and private life.

Embedded in its organisational culture are values that demand a myopic loyalty to the party. A form of parochial paternalism, it’s a system designed to ensure the unchallenging, unquestioning followership of its current leadership. Its biggest blind spot has been its collective failure to admit to making mistakes. Which is why when the lid of the Pandora’s box opened by Anglo Irish Bank’s demise is finally closed, Fianna Fail may have ceased to exist as a formidable political force.

Without the ability to tell the real story with believable integrity using a compelling, informative narrative, the snail like pace of secretive official investigations has been layered with media revelations engineered by those anxious to project an honest if ill-fated endeavour. Insiders have sought to apportion blame on external influences and regulators who bottled out.

We are left with trying to make sense of supposition, conjecture, rumour and innuendo to understand what went so badly wrong. Instead of direct active admission such as “I made mistakes” we are fed with a line passive non-statements such as “mistakes were made” carrying the subliminal subtext of “but not by me”. It should have been different.

Taoiseach Brian Cowen will probably stand down as one of the least impressive of political communicators and leaders. He will probably be remembered for his twin, starkly contrasting styles. The bellicose, stout defender, whose aggressive, pugnacious performances were cheered on by party loyalists, is one dated image. But it’s his most recent style with its meandering, jargon laden incoherence that frustrated, angered and bored the living daylights out of most of us which will endure.

Yet he is not alone. Almost every other erstwhile leader has none of the mastery required to communicate their vision, their views and opinions. None are capable of telling a compelling story, creating a narrative to help us understand why we have arrived were we are at and where we are going. None it seems have the capacity to raise the bar in public discourse. Instead we, the public are considered passive participants, receptacles for clever spin written by aides who cannot fashion a meaningful voice for their masters.

Instead of thoughtful clarity and simplicity, we have been treated to a stream of contorted language and sentences that struggle to amount to anything other than clever, informed nothingness. This style is now evolving into the typical pre-election party rhetoric of cheap point scoring, trite sound bytes with the usual claims and counter claims parroted by election candidates as one side tries to shout down the other.

Can anyone recall any single potent story, metaphor or message, one lucid sentence that sought to address the national crisis with clarity, simplicity and vision? Is this not a question to pose of Fianna Fail leadership but others as well, including those whose rhetoric remains rooted on political point scoring and inter-party faction fighting?

Has any political leader impressed? Are they capable of telling a compelling story, articulating a believable vision with the directness and simplicity in expression of great communicators?

A version of this article appeared in the Irish Examiner, Business Edition, Monday 17th January 2011