PTSB director's comments on excessive lending

[Brendan Burgess]

In today's Irish Times, Simon Carswell has an [broken link removed] with Kieran McGowan about the Irish Life and Permanent's board's thoughts during the mortgage boom.

As a non-executive board member of Irish Life Permanent for nine years until 2008, McGowan recalls “a very robust conversation” in its boardroom after rival Ulster Bank introduced 100 per cent mortgages in 2005.


The then chief executive David Went [who is now chairman of The Irish Times] spoke to the Financial Regulator, pressing that authority to intervene. “He telephoned to say that your role is to stop this when Ulster Bank did it. ‘If you don’t want this to get out of hand, you should stop it,’ he said. They said to him: ‘We are a principles-based regulator – we don’t do that.’ That conversation happened,” said McGowan.


But the competitive pressures of the market were too great, and this forced Irish Life Permanent to follow Ulster Bank with 100 per cent mortgages of its own.


“Irish Life Permanent had a certain market share. Market share was a big issue at the board and a big issue at the company, and they said that if we don’t follow, we are going to lose share all over the place to Ulster,” said McGowan.


If the company had failed to respond to Ulster Bank, “all of the various kinds of stakeholders would have been on your back” at the next annual meeting, he said.


Was this now a regret that Irish Life Permanent – the biggest mortgage lender during the boom – did not act differently?


“Ah yes, of course,” he said.


And could he have shouted louder as a director during boardroom discussions to stop it? “Probably . . . in relation to 100 per cent loans, I think we could have.


“I think we should have been more aggressive with the regulator really to say: ‘That is not good enough to say you are a principles-based regulator; this is what is going to happen.’ So I guess that is what should have happened.


“We should have really put our foot down and said, ‘Look, this is not good enough’, and maybe gone to [the Department of] Finance and said, ‘This is what’s going to happen; you need to step in here’.”

 

[Brendan Burgess]

I have always wondered what went on in the bank's boardrooms during the mortgage lending boom. This is the first insider view I have seen.

It seemed to have been a classic error of putting market share ahead of profitability.

 

[RMCF]

Interesting.

I recently seen a development of new houses in NI (close to the border) and the wooden placard in the grounds of it was proudly offering "100% mortgages available".

Seems we have learned nothing.

 

[DerKaiser]

‘We are a principles-based regulator – we don’t do that.’

The issue wasn't that they were principles based, it was that they didn't understand what a principle was or that you actually had to do something about it if someone broke a principle.

 

[Brendan Burgess]

An interesting piece from Fergus O'Rourke of http://www.irish-lawyer.com/journal/2011/11/13/still-not-in-favour-of-gaol-but.html (Irish-Lawyer.com.)

They Couldn't Say No The introduction of 100% LTV home mortgages to the Irish market by [broken link removed] (part of the RBS group) was apparently greeted with horror by all at PTSB. However horrified, though, they were too fond of market share not to "join the fun". I am reminded of what I have described http://bit.ly/psDfcr (here) as "the crux" of the Anglo story, but also of Chuck Prince's notorious dictum "as long as the music is playing, you’ve got to get up and dance".
...



Imagine a trading company board member confessing after its collapse that he had presided over a policy of losing money in order to keep market share. Did these people never hear of "Turnover is vanity, profit is sanity" ? Is it what the [broken link removed] calls being "responsible" ?

I worked in a company in the 1980s where as a junior accountant, I kept pointing out to the sales people that we were losing money on the sales as they were giving such high discounts. I was ridiculed by the sales team as "just a young bean-counter who did not understand how business works yet".

In a sales oriented company, the pressure to make sales, even at a loss, is huge. It's wrong, but it's very, very common.

It's hard for a Managing Director to tell people - "stop selling, the price is too low".

It's worth reading Chapter 8 of Gillian Tett's Fool's Gold to get an understanding of this pressure. Jamie Dimon was the MD of JP Morgan. They were being left behind by the other banks who were piling into sub-prime mortgages and CDOs. Brian Zeitlin of the CDO division, reported that there was no way they could crunch the numbers to make a profit. Dimon took his advice. Then he came under pressure, from his board if I recall correctly, to get into the market. The media were describing JP Morgan as dullards. Again, his guys told him that the rest of the market was wrong. He stuck by them, but Tett captures the pressure brilliantly.

 

[onq]

It seemed to have been a classic error of putting market share ahead of profitability.

No, its a classic error of following a distorted, unsustainable market - it is chasing market share and maintaining short term profitability at the cost of inflating the market to totally unsustainable levels.
Nothing in Brendan's original quotation - for which many thanks - shows any sign of the compensatory self regulation which the free market is supposed to have.
Good governance was called for and in its absence, fear of failure prompted competent people to act incompetently.
This is what happens when no regulation takes place when its needed.

It's hard for a Managing Director to tell people - "stop selling, the price is too low".

This is what my practice had to say at one point as we lost a lot of work to people who were grossly undercutting us.
Now some of these people seem to be leaving the unsustainable market they have helped create.
We find clients may be beginning to realize that value is not directly proportional to price.
Long may this trend continue.

 

[Chris]

Nothing in Brendan's original quotation - for which many thanks - shows any sign of the compensatory self regulation which the free market is supposed to have.

No matter how many times you repeat it, it doesn't become more true. There was and is no such thing as a free market in the financial industry!