Don't Panic: Understanding Personal Debt

Nick Leeson

• Publisher: THP Ireland
• Year: 2013
• Print ISBN: 9781845888084
• eBook ISBN: 9780750952170
• Topic: Business
• Subtopic: Finance
• Index: Business

The issue of personal insolvency, how individuals can address its various aspects, what steps they can take and what options are available to them, is one of the most pressing issues in Irish society at the present time. This aim of this book is to provide answers, direction and, above all, reassurance, to those people affected by what has become a very common problem. Taking in the new insolvency legislation and its implications, together with providing details of the many available avenues for assistance, this book provides factual and professional advice to those who need it most.

1

How Did We Get Here?

It was evident from the general tone of the whole party, that they had come to regard insolvency as the normal state of mankind, and the payment of debts as a disease that occasionally broke out.

Charles Dickens, Little Dorrit

 

I moved to Ireland in January 2003. At that time, Ireland was a land of unlimited opportunity, in which European Union money had kick-started a boom in the economy that could be seen everywhere you looked; huge improvements were being made to the infrastructure of the country, the Punt had recently been swapped for the Euro, interest rates were the lowest that they had ever been and falling further, and credit was available in abundance. There was a tangible sense that there was no end to the millions and a million ways to make them. And, of course, a lot of houses were being built. These factors combined to paint a picture of economic prosperity that was the envy of European nations. It sounds idyllic, and for many it was, but for each of those positives there was a negative lurking in the shadows.

Swapping the Punt for the Euro was, in retrospect, the first step in losing control over fiscal responsibility and direction. Low interest rates convinced everyone that they had the time to pay and that it only made sense to borrow. And when you did apply for credit, it was so readily available that the decision-making processes were not always as robust as they might have been.

The sum of those three situations was that the day of reckoning was never really far away. Nobody had any idea quite how calamitous the sequence of events would prove to be, or how damaging the impact would become, but it was always coming. We have all learned that to our cost.

Recent revelations have also compounded the widely held suspicions that some bankers were reserving a particular brand of contempt for the governments and regulators. Bonus time was always going to come around, so leverage up or stay at home. This was a party, and it was never, ever going to stop.

That rings a chord with me, I have to admit. I was out of control during my time in Singapore. I was continually buying myself time, postponing the realisation of the losses that were mounting in my illegal trading account, but as long as I had access to money and funding for my illegal positions, I could keep going.

More money was always available. The bank I worked for, Barings, would find some way of arranging it as they believed, like many of us, that we were on a gravy train that knew no end. They felt that they had stumbled on a golden goose that was making money hand over fist in Singapore and, as a result, keeping me happy and trading was at the top of the agenda.

Very few questions were ever asked when the coffers ran dry. More money was borrowed from Barclays and Citibank, their principal lenders at that time. Money was coming from the Head Office in London and the treasury department of Barings, and was readily available as long as I reported a healthy profit. There was very little control.

Eventually, though, the bank did run out of money. Barings was, in the scheme of things, only a small bank. Its capital base of £250 million was minimal in global banking terms, and by the end of 1994, the losses in my illegal account must have been getting close to £500 million, twice the capital base.

As long as the funds were available I kept going, in the increasingly forlorn hope that I would be able to turn the position around and get back to normality. From a high of 39,995, the Nikkei 225 Futures (the most widely used of the Japanese stock market indices) had fallen to half that value and the market was falling with increasing pace.

Barings’ Head Office finally had no more money to send, and the banks that were lending to them to facilitate my positions in Singapore had closed shop, unwilling to loan any more. My number really should have been up at that stage but, rather than ask difficult questions, the bank looked for new ways to find money. They went to the stock market and issued a bond for £100 million, which went exactly the same way as the rest, which was into my illegal trading account and out through the losses that were ballooning out of control. Eventually all the money – Barings’ own, the loans from Barclays and Citibank and any bondholders involved – was all hoovered up into the £862 million worth of losses, which ultimately signalled the collapse of the bank.

In part, the role played by the board and those responsible for running Barings bore similarities to those in charge at Anglo Irish Bank. They weren’t really worried where the money was coming from as long as the bank was able to continue. Over time, the attempts to raise funds got more and more desperate. The similarities to the situation do not end there. Lending was sometimes reckless in the extreme, controls failed to function and were sometimes brazenly ignored, regular audits failed to highlight the problems and systems could be overridden when they needed to be.

The markets that I used to trade in are often described as complex. I suppose it is a matter of opinion but the activity that sparked the major problems in Ireland, lending, is as simple as can be. The parameters are tried and tested over hundreds of years and, if adhered to, they generally work. In Ireland, during the decade before the property crash, those parameters were breached time after time after time, with brutal consequences.

As everyone knows, the Irish economy expanded rapidly during the Celtic Tiger years of 1994–2007. In part this was due to a low corporate tax rate and low European Central Bank interest rates as mentioned, but there was another set of systemic factors that created anomalies in the way the Irish State was governed. These included an extremely soft surveillance of banking supervision against the Basel Core Principals adopted in most other European nations, and the adoption of poor policies such as a corporate tax system that fostered non-tradable goods and services through the construction industry. The credit expansion that this resulted in was unrivalled, which then fuelled the property bubble that followed. This, in turn, started to experience problems from 2007 onwards, and these problems gathered pace throughout the ensuing global financial crisis and reached its zenith in September 2008 on the night the infamous guarantee was put in place.

In the period from 2004–2008, Irish banks’ foreign borrowings rose from €15 billion to €110 billion. The banks were lending long term to borrowers, principally the larger property developers, and borrowing themselves on a three-month roll-over basis. The properties that the loans were based upon would not typically be sold for several years so, when the property crisis hit and they could not be sold at all, due to massive over-supply and limited demand, the result was a classic mismatch of assets and liabilities. When government and banking officials met in September 2008 and decided to issue the bank guarantee, this was, of course, an attempt to stem the crisis and the hugely damaging uncertainty around the financial system. The banks were said to be illiquid (but not insolvent) by €4 billion. This turned out to be quite a significant underestimation.

The bill to bailout the banks was to eventually be astronomical.

Anglo Irish Bank was the first to fall. A boutique lender to builders and developers, the bank had made a succession of highly leveraged bets on the future of Ireland’s increasingly unsustainable property market, and its spectacular collapse made it the poster child across the world for banking profligacy and short-sightedness. The eventual bill to the Irish taxpayer was reported to be in excess of €29 billion.

All of the banks, however, bore some responsibility for the size and scale of the crash. Irish Nationwide Building Society (INBS) had been a more traditional lender that morphed into a major player in the commercial property market. Many questions have been raised about the nature of the corporate oversight, practices and internal policies which ultimately allowed INBS to cost the State over €5 billion. Allied Irish Banks (AIB) and Bank of Ireland, the ‘pillar banks’ of the Irish economy, were both to receive €3.5 billion and AIB remains almost fully nationalised as a result.

How the mighty have fallen. From the peaks of the economic boom to the troughs that many of us are now facing, the contrast could not be starker. Before the recent banking meltdown in Cyprus, the Irish banking crisis was the most costly of modern times and accounted for about 40% of the country’s GDP. The crisis will rank as one of the biggest banking failures in history, a stark example of poor regulation and an example of how banking, property and government that became far too closely entwined, compromising the fundamental principles of all three in the process.

By the end of 2007, the economy and the government finances were already showing signs of impending recession. Tax revenues were falling short of the annual budget forecast by €2.3 billion, and stamp duty and income tax fell short by €800 million. This resulted in the 2007 general government budget surplus being wiped out in a stroke. Winter was coming and mid-2008 government deficits had begun to snowball out of control, unemployment had increased and many businesses were being forced to close their doors. The Irish Stock Exchange Quotient (ISEQ) fell to its lowest level in years and migrant workers left in droves. Much of the native Irish workforce also began to look abroad, out of necessity. The acceleration into recession, and ultimately depression, was too much to take for many individuals, and the drain of some of the best Irish entrepreneurial minds from these shores continues.

The headline figures of the debt problem that have resulted are quite astounding. Approximately 180,000 home-loan and buy-to-let borrowers are now behind on their payments. By the end of March 2013, 12.3% of residential mortgages were three months or more in arrears and this figure is increasing quarter upon quarter. The rather more worrying figure is that almost 26,000 of these loans had been in arrears for over two years. And these figures are rising. These numbers, while staggering, are also not a surprise. They do, however, suggest both the extent of the problem and how much and how little is being done about it.

The government are now pinning a lot of the hope of recovery on the new Personal Insolvency Regime. It is hoped that it will help the country get a grip on the deep household and home-loans debt crisis that is stalling economic recovery. Part of that process will involve ensuring that the options available are very clearly understood and the most appropriate route for each individual is taken. The Insolvency Service of Ireland (ISI) becomes the centre piece of these new debt solution laws which will hopefully allow for the distressed borrower to reach a deal with their bank. The overriding ambition will be to provide a solution to all people with unsustainable debt and provide a platform whereby they can be restored to solvency from their current distressed position.

There is little point in beating around the bush on this matter. Ireland is facing one of the deepest personal financial debt crises anywhere in the world. In my opinion, the true extent of the problem remains only partially discovered. Many banks have effectively been sitting on their hands, waiting for something to happen. I’ve personally seen episodes where banks have allowed mortgages to go unpaid for as long as four years, which is hard to comprehend. As much as the borrowers have been putting their head in the sand, so, it seems, have the banks, hoping – like I did nearly two decades ago – that some Eureka moment would arrive and everything would correct itself. But it won’t.

These problems are for the most part a legacy of the country’s severe – and nearly fatal – banking and property ills, which forced Ireland to initially seek that bailout of €67.5 billion from the EU and IMF in late 2010. Widespread unemployment has been one of the immediate consequences, soaring to over 14% from a pre-crisis level of only 4%, a level that is accepted internationally as to be effectively full employment. Unemployment immediately compounds most problems, squeezing household incomes even further, leading to increased default on any number of credit agreements. Add austerity into this mix, with new taxes and a host of other charges, and it is easy to see how the problem has escalated so quickly.

When what follows is a squeeze on credit, the situation can become a stranglehold. This would traditionally have affected those described as ‘working class’ more significantly, but that is not the case here. This particular credit squeeze has gripped the whole country, and particularly the middle classes who have grown used to ready access to credit, and they are struggling.

The net result is that Ireland now has three classes of people: the wealthy and cash rich, who are seeing huge opportunity and getting quickly richer; a large number that are having to be exceptionally careful to keep themselves afloat; and a significant number of people who have already run out of money.

Unfortunately, the number that we see running out of money is escalating all the time and the only way to arrest this is to formulate a plan. The new Insolvency Regime will be, for many, the beginning of that process. The regime provides solutions for three types of debtors and includes a ‘Debt Relief Notice’ (DRN) for households with low income and few assets; a ‘Debt Settlement Arrangement’ (DSA) for unsecured debt; and a ‘Personal Insolvency Arrangement’ (PIA) for households with both secured and unsecured debt. The government will appoint six new judges to oversee the high volume of arrangements that will be required.

Widespread debt relief, in my opinion, was the solution but none of the Irish Banks had the capital base to withstand it, and that is probably why it has taken so long to reach this position. The process will start but it will continue to be gradual, which in itself is a reason to stay engaged with your bank and to keep them appraised of your situation. The Central Bank has now said that the banks have enough capital to deal with their customers but only on a ‘case-by-case’ basis and that the review will not lead to any widespread writing down of household debt by the lenders.

While much blame rests at the door of the nation’s lenders, and it is important that we remember how this situation occurred so it is not repeated, the focus of this book is to look at the solutions that are available to you individually. As we all suffer and try to face debt square in the face, it is important to remember much of the problem may be someone else’s doing, but there are things you can do to help yourself. Almost everyone is affected to some degree, and while debt may still be a word that is whispered in corners, it is touching more of us than you can imagine. Debt has become a subject of the mainstream, and it is time to look at the tools that will allow us to deal with it robustly, and finally move forward again.

2

The Five Emotional Stages of Debt

There are any number of events that can generate enormous stress. These can be as common and as superficially benign as moving house or changing school, or as life-altering as divorce and serious illness. I’ve often been quoted as saying that I have, unfortunately, experienced them all. In my own life I have been in the eye of several storms, and because of those times I believe I have learned some valuable lessons, which I hope might be of use to people in Ireland today. In particular, what I have noticed is that people no longer whisper the word ‘cancer’ like they used to. Due to increased communication, public discussion and better treatment, it has become something which can be talked about more openly, and this has, crucially, taken away some of the fear of the unknown.

Of course it is still serious, I can testify to that myself, but this increased openness has empowered people to seek treatment earlier, rather than bury their head in the sand, with often live-saving consequences. But what I’ve noticed is that another word seems to have replaced ‘cancer’ in this respect. It is, unfortunately, another issue which affects many of us, but yet retains a sense of stigma which leaves people isolated and afraid to address their problems, with often highly damaging results. And this word is ‘debt’.

Because of the slightly murky connotations attached to the word, it can be very easy to feel that you are on your own. The last thing you want is for the neighbours or your friends to know, so the inclination is to keep quiet, to internalise what you are feeling and try to cope alone. If you are anything like me, you may fail in this, quite disastrously.

The overriding lesson from my forty-six years of experience, including the Barings saga and my own role in its collapse, was that things might have been different had I communicated better. If I asked more questions, asked for help or advice or simply told anybody about what was happening, things might have worked out very differently. I didn’t however, and what I learned is that when you fail to engage, the situation only gets worse. Of course, in my case, the debt was larger than most, and peaked at £862 million and led to the fall of a bank. But the m...

Table of contents

• Cover
• Title
• Contents
• 1 How Did We Get Here?
• 2 The Five Emotional Stages of Debt
• 3 The New Insolvency Legislation
• 4 Debt Relief Notices
• 5 Debt Settlement Arrangements
• 6 Personal Insolvency Arrangements
• 7 Mediation
• 8 Bankruptcy
• 9 Mortgages
• 10 Where Do We Go from Here?
• List of Abbreviations
• Appendix 1 Useful Sources of Information
• Appendix 2 Tables for the Calculation of Reasonable Living Expenses
• About the Author
• Copyright