Matt Cooper gets to the core.

Bailout deal saved the reckless lenders — now we need to save the people
By Matt Cooper

Friday, May 06, 2011

WHEN an American lawyer who was one of the 10 members of the Financial Crisis Inquiry Commission in the US — which investigated the causes of that country’s massive banking crisis in a public inquiry that everyone of relevance was forced to attend and give testimony — offers a point of view on Ireland it is worth listening.

Byron Georgiou was in Dublin this week (talking at a seminar organised by solicitors Mason Hayes & Curran) and he was incredulous that we have not had a similar public commission in this country that would force politicians, regulators, public servants, bankers and their advisers to give evidence about their roles in our crisis. Instead, of course, we have indulged our elite by allowing them to be the subject of privately conducted inquiries followed by reports in which individuals are not even named and blame is spread in general terms rather than being aimed at guilty parties.

He was equally aghast at the terms of the IMF/EU/ECB loan package that have been imposed upon this country. The most controversial element of that package is the insistence that in return for getting more money for our government the citizens must finance the repayment of all money that was borrowed by privately-owned banks to their reckless lenders.

But I was particularly interested in what Georgiou had to say about the people in his home state of Nevada in the US (where he is seeking the Democratic nomination for the 2012 US Senate election), where economic conditions are not far removed from here in Ireland. Unemployment has soared as a consequence of the collapse of a property bubble. House prices are down about 50% there too from their peak.

What’s a political issue in Nevada is how the state helps its citizens cope with the curse of owning houses that are now valued at far less than the loans that still have to be repaid on them. That’s an easy one as far as he is concerned. You can’t bail out banks and bankers and bust insurance companies — as happened with AIG for example, with $120bn in US government support — without doing something similar for the ordinary people. So what you do is this: you insist that the banks write off the excess debt over the new value of the property and that the borrower repays only the smaller amount.

A year ago, I made a much less far-reaching proposal about dealing with negative equity and unaffordable mortgages here. It was in a specially commissioned RTÉ programme called “Aftershock: Where to Now?” that I suggested that for social and economic reasons we had to address the issue of hundreds of thousands of homeowners struggling under the weight of mortgages that they might never be able to repay or, if they did, would require them to make payments totalling multiple of a value of the house they had purchased.

This problem is worse for those who purchased in the last decade, who mistakenly were induced into purchasing mortgages that were far too big in size and that would have to be repaid over too long a period of time. It is worse again for those who have suffered a fall in income, especially if one and sometimes two people in a house have lost their jobs. This problem is largely experienced by people in their 30s and 40s. These people’s lives will be blighted by trying to meet debt repayments and made worse by the knowledge of what they’re getting for their effort. It also means that their spare cash to spend in the economy is almost non-existent.

I suggested a form of debt for equity swap for hard pressed homeowners, which is less expensive than Georgiou’s idea of straight debt forgiveness. This would have involved banks taking part ownership of the homes of people in negative equity (where the loan is bigger than the value of the home) in return for writing off part of the outstanding debt, giving people a lower debt, more realistically related to the present value of the home, to be repaid. I did not exchange writing off debt with nothing being given in return. If, for example, a quarter of the mortgage was to be written off then a quarter share in the ownership of the home would have to be given to the state. The dweller could try to buy that back from the state in time if they could afford to do so. If they were to sell the home then a quarter of the proceeds would have to go to the state. It was only to be for homes, not for investment properties.

I was fascinated by the response that I received at the time. One was that this constituted moral hazard: people have to take responsibility for their own mistakes and do not deserve to be bailed out by those have not made the same mistakes. Why should somebody who saw that it was a bubble now have to pay bail out his neighbour who went on two foreign holidays each year, kept changing the car for a newer model, dressed in the best clothes and put an extension onto an already sizeable house?

The second was that the banks and government were bust and simply couldn’t afford to get involved in financing an idea like this. While there was logic to both objections there were counter-arguments to be put too. Many of the people who bought did so for good family reasons and never indulged in the way that is alleged. You could argue equally that some of those who indulged the most were those who took “equity release” from their homes having paid off their mortgage and bought crazy foreign properties that they flew to for holidays regularly on pensions they drew upon long before the age of 65.

THOSE in mortgage difficulty were failed by the government and state agencies such as the regulator who were negligent in the performance of their duties. Those in negative equity were persuaded by government policy that buying at inflated prices was the right thing to do, that it was okay to take out loans of enormous duration and to do so at a multiple of salary. The banks behaved recklessly in inducing customers and the regulator stood idly by.

When it comes to issue of personal responsibility you have to ask who hasn’t made mistakes in their lives? Who hasn’t followed the crowd and done what everybody else said they had to? Should the punishment be as severe as that being imposed on young people and those with families approaching middle age?

Fine Gael acknowledged this in its election manifesto when it came up with the lesser idea, of limited value, of increasing mortgage interest relief for those who bought between 2004 and 2008. Now, however, it seems that it will be next December at the earliest before this happens, if at all. Looking after the private finances of the citizens is well down the queue for this government, behind the public finances and the banks, just as it was for the previous government. We cannot dismiss people, the citizens of this state, lightly because the public finances and the banks take precedence or because those who have are unwilling to share the pain with those who do not. The failure to address this issue shows how bankrupt the IMF/EU/ECB deal was too: it was not about putting this society back on a proper footing. If it was the bank refinancing would have involved providing capital to cover the cost of sorting out the mortgage crisis. Instead all of the money was for paying back foreign lenders. We don’t an inquiry to tell us that.

The Last Word with Matt Cooper is broadcast on 100-102 Today FM, Monday to Friday, 4.30pm to 7pm.

This appeared in the printed version of the Irish Examiner Friday, May 06, 2011