Banks selling debt to vulture funds is insane - and won't solve core issue
Two conflicting narratives are at the centre of the current controversy concerning the PTSB, Ulster Bank and other banks and the sale of 'non-performing loans' (NPLs) to vulture funds. It is the story of the Creditor versus the Debtor. And inevitably they are emotional and political polar opposites.
It is a story that offers no hiding place for politicians.
Personally, I must declare that I have skin, heart and soul in this game. My family business, Celtic Bookmakers (CB), traded from its creation in December 1987 until it went into receivership in January 2011. Starting from scratch, CB grew profitably each year for 19 years; by 2006, its profits were €4m, with more than 50 betting shops and 300 staff.
My bank, to which I'd shown total exclusive loyalty, encouraged me to expand through acquisition, rather than just through incremental organic growth.
They said I could borrow up to €16m, based on our balance sheet. I had an entirely positive banking relationship built over two decades. They successfully mentored me on our expansion plans - we were business partners.
I then made some serious strategic commercial mistakes.
While avoiding any property investment (all shops were leased), I significantly overpaid to acquire existing betting shops. I wrongly believed the betting sector could ride out the recession. I underestimated the impact of online betting on traditional retail/phone betting platforms.
By 2009, with 63 betting shops, 420 staff and company debts of €5m, we failed to sell the business to William Hill (then UK-based, the largest bookmaker in the world). So we cut costs and rationalised the business by closing shops.
In 2010, I proposed to the bank to urgently confront the worst-case scenario through receivership.
This worked well, resulting in the sale of 34 shops as a going concern, preserving 200 jobs. All shops were either sold or closed. All trading matters were concluded by the receiver. The company's affairs were finally wound up when it went into liquidation in March 2012.
My wife and I had signed a Personal Guarantee (PG) on the debts of Celtic Bookmakers. We were assured, right up to the point that the letter of default was issued (calling in the guarantee), that it was merely "red tape" or "good procedure" or a "technicality". We'd given specific personal property assets as security, which we accepted were forfeit.
We never even considered we could lose our family home. It was never mentioned.
It was only when obtaining legal advice that I realised the true extent of our total vulnerability.
The unpaid bank debt from Celtic was the same as if we'd taken out a personal loan mortgage. Despite Celtic being a limited company, under the terms of the PG, we had signed away everything.
Our family's entire future was in peril.
My response was to face up to the horror head-on. To seek to confront the debts with finality.
I hired one of the most senior, seasoned insolvency practitioners, Bernard Somers, to constructively negotiate a settlement.
Our offers to sell virtually everything bar our family homes were rejected - they required me to work for the bank indefinitely to clear the debt. My attitude was that if I wanted a job with the bank, I would have applied for it.
There is joint culpability on failed borrowings. Banks indulged in an orgy of lending, amounting to 20pc of the annual loan book growth. Their objective was to stop "Anglo Irish Bank eating their lunch". And they lent three times their deposits base. Unlimited cheap ECB capital drove a competitive feeding frenzy.
When the unsustainable credit bubble burst, 324,000 people lost their jobs, assets halved in value, resulting in State insolvency, and the Troika bailout.
But, bankers knew they were a protected species. If the banking system collapsed, the economy would implode. No one forced them to lend, but there was no 'moral hazard' for them. The bank guarantee meant State protection. My bank received €21bn from the State. It survived intact. Bankers kept their jobs.
The banks and Nama then wrote the post-crash narrative. Their interest became the government's interest, taxpayers' interest, the public interest.
All opprobrium and blame was visited upon those lunatics who borrowed the money. Debtors were demonised. Any concessions to them were akin to pilfering the pockets of taxpayers and other compliant bank customers.
Bank recapitalisations were for the specific purpose to facilitate debt settlements of impaired loans; to rectify holes in their balance sheets. Bankers systemically refused to effect personal debt forgiveness. Only debt forbearance.
The ultimate solutions to NPLs are individual debt settlement deals. It was ever thus. Since Adam was a boy, a proportion of bad debts have to be restructured by lenders. It's an accepted cyclical business norm.
One example, Eircom had €1.6bn of debt restructured. Written off.
Several billions of Euros of corporate debt has been routinely written down by lenders since 2010 - no executives/directors lost their homes.
The reason why the European Central Bank is now forcing Irish banks to reduce their remaining NPLs below 5pc of books is because Irish banks insisted on only debt forbearance, not debt forgiveness for individuals.
They'll sell to vulture funds with up to 40pc discounts (loan losses), but never, ever offer the same discount terms to the debtors, even if it's their family home. This is insane, as it'll inflict on countless people incredible mental ill-health, anxiety and distress.
The twin solutions to the hard-core distressed mortgage cases are either:
Where there's financial sustainability - to refinance the debt at current house market values, applying debt reduction; Or where there's unaffordability - provide 'mortgage to rent' option by forfeiting ownership, whereby householders become tenants or be re-housed social housing applicants, vacating the house.
Selling to vulture funds, even with enhanced, equalised Central Bank supervision/regulation, doesn't confront the core issue of a final resolution, which in each case depends on the individual asset and income situation.
I found the UK Insolvency Act 1986 provided solutions to restart my life again. Going by the banks' narrative, I was rendered a rogue poster boy for 'bankruptcy tourism' - subject to vitriolic condemnation. Vindication for me came with the Irish insolvency law now adopting that legislative model. I'm now a plaintiff in the Irish courts against my bank to retain my family home.
Politicians must decide whose side they're on.