Friday 28 October 2016

Banks screw us to cover for their loony legacy

While things are getting back to 'normal' for the big guys, says Brendan O'Connor, the little guys are still being screwed by the banks

Published 05/04/2015 | 02:30

Johnny Ronan
Johnny Ronan

Things are nearly getting back to normal, aren't they? After that unfortunate blip that went on for six, or was it seven? Maybe eight years? Car sales are up 30pc on last year which was up 30pc on the year before. In Q1, as the marketing people call the first three months of the year, 65,000 people in Ireland bought new cars. Remember how we all decided that new cars were a crazy extravagance anyway and that they lose thousands in value the minute you drive out of the showroom? Well, we're over that. They reckon 120,000 people will buy new cars this year.

  • Go To

Things are getting back to normal in other areas too. The Government has put a big push on construction, which is apparently the answer to all our problems. It will give us the houses and the offices we so badly need and it will provide the employment we need. Never mind that we decided a few years ago that we had enough buildings built to do us until the middle of this century and that we should actually be bulldozing houses. We've got over that too.

And of course the developers are back. Johnny Ronan exited Nama last week and is now free to return "to building high-quality developments in Ireland and abroad".

Sean Mulryan of Ballymore will apparently follow Johnny out of Nama before the end of the year, as will Gerry Gannon of Gannon Properties. Maybe all of this will encourage a whole new generation of young, brash developers. Not long now until people are getting the Rolling Stones to play at their kid's fifth birthday.

It's not just construction that is providing employment; apparently there are jobs appearing everywhere. As Joan Burton pointed out during the week, this Government has cut unemployment by a third, from 15pc down to 10pc, and they are well on their way to getting us back to full employment by 2018. Manufacturing employment is growing at the fastest pace in 17 years.

And then of course there are the thousands who will be employed in building a giant holiday resort in Longford. Which sounds like the kind of nutty thing we would have done during the boom. Except it's not even the crazy Irish doing it this time. It's foreigners. Center Parcs, if you don't mind.

And all around us, growth, growth, growth. Even the growth figures are growing. The Central Bank, who have never got anything wrong in their lives, say the economy will grow by 3.8pc this year. The ESRI, who have never got anything wrong either, say growth will be more than 4pc this year.

And what's more, this growth will be partially driven by domestic demand, which no one expected. Consumer spending will be up 2.2pc this year. In short, not only are we back, but we are back on our own two feet as well, rather than growth being exclusively driven by FDI and exports, which has been the pattern up to now. Indeed, consumer confidence is at its highest in years.

Given that what we experienced for the last while was essentially a demand-led recession, this is indeed a turn up for the books.

So all going well then. Back to normal. Let the good times roll again. And nobody is really paying the price for all the bad things that happened. Even all the debt that caused all the problems has been refinanced, repackaged, written down and watered down. And all the growth will apparently wash away our hitherto unsustainable national debt.

But someone always pays, don't they? And of course, while we are all paying the price for the bust, in the form of higher taxes and lack of services, lots of people are paying on the double.

Specifically, 300,000 families out there are paying a special premium to help the banks we already bailed out get ship-shape again.

The banks have a problem, you see. They need to make enormous profits. They don't like it when they don't make enormous profits. When that happens, they dissemble and then eventually come to the rest of us with the begging bowl, even though they never shared their billions of profits with us when they were making them.

And the banks have difficulties making profits right now because they have a major legacy issue. You see, back in the great madness, in their zeal to outdo each other and compete with foreign banks in lending money to people, the banks all went to war offering people cheaper and cheaper tracker mortgages. As a direct consequence of that crazed greed, the banks now find themselves with hundreds of thousands of unprofitable loans. These trackers are based on the ECB rate, which is currently close to zero. And even zero plus 1 or 2pc or so isn't enough to cover the banks' cost of funds these days.

But because the banks like to make profits and are used to the notion that the rest of us should keep them in profit if they are not managing it themselves, they have decided that the regular punter should keep them propped up again. And this time, they are doing it through variable-rate mortgages.

With interest rates lower than ever, banks in Ireland are making up for the cash they're losing on tracker mortgages (their own genius idea) by charging Irish variable mortgage holders about double what people elsewhere in the eurozone pay.

The banks will argue that this is all above board. They would no doubt characterise themselves as a discriminating monopolist in this situation. A discriminating monopoly is when a company can maximise its profits by screwing the most they can out of different sectors of the market. For example. You might charge a guy in Dublin €1 for a bottle of water, whereas you might charge a guy in Dublin Airport €2 for the same bottle of water, whereas you might charge a guy crawling through the middle of the Gobi Desert €100 for the same bottle of water. Whatever the market can bear, basically.

The banks have a fairly captive audience with their mortgage holders. Most people wouldn't know how to "refinance" their debt. Even if they did, those with any history of falling into arrears or homeowners who are in negative equity are pretty much trapped with their current lender anyway. Inertia is also a very powerful force in a market where variable rates are artificially high across all lenders. So the banks are using this situation to get variable mortgage holders to pay a massive premium to cover for the banks' past mistakes and to allow the banks to show profits where there should, perhaps, be none.

Meanwhile, the Central Bank says that it has no powers to force banks to offer fair variable rates. Indeed, the Central Bank says it doesn't want these powers. The Government says it can do nothing either except to encourage the banks to cut variable rates. This gentle encouragement is achieving nothing.

The big picture on all this is that the little guy pays again - the same mugs who are paying off every penny of their debt because they lose their houses if they don't. The ones who aren't too big to fail.

According to Ross Maguire, Senior Counsel and New Beginnings Founder, almost 50,000 households, more than the population of Cork city, currently have no solution to their situation other than repossession.

While the banks have to do business with the big guys to work things out with them, and while the big guys rarely lose their houses, it's the ordinary Joe who doesn't get a workout from the bank, who does lose his house.

And it is the little guys as well who continue to pay for everyone else's party and for the bank's legacy madness.

And while the Government is busy courting developers and builders to help them get the economy going again, they should probably give a thought to the 300,000 very angry mortgage holders who are being screwed in Ireland. Because it is those people, and not the developers, who will vote the Government back in.

Or not.

Sunday Independent

Read More