The current tracker mortgage scandal has its roots deep in the Celtic Tiger boom when the banks went hell-for-leather to lend to anyone in order to make more and more profits.
We are talking about huge amounts of money here.
Consider the fact that it took Bank of Ireland 125 years to lend out a total of €60 billion and in only three years, from 2004 to 2007, the bank doubled that figure!
One of the products that all the banks pushed was of course the tracker mortgage, an ultra-low interest mortgage linked to the ECB rate. The banks calculated that, although they might lose money on these products, they could then “hook-in” the people who owned trackers and up-sell them more loans for cars, home improvements, and holidays, all of which would carry higher rates. The higher rates for other loans would off-set the losses on trackers and the banks would be in clover.
In short, this was all part of a plan to create a nation of “debt junkies”, tethered to the banks, in hock, and, ultimately, in the banks’ pockets.
Then came the crash, people defaulted, others ran a mile from new loans, most tried to pay back their old debts, and the great Irish banking “up-sell” floundered overnight.
Then of course, once the entire logic of the “tracker-as-gateway-drug” strategy unravelled, the banks got sneaky and reacted in the way they always do which is to screw the customer for the bankers’ own mistakes and miscalculations. As such, they tried to move as many people as possible off their trackers to mortgages on higher interest rates so that the bank could recoup more money each month.
So, they advertised one thing and sold another!
However, they got rumbled by a few tenacious customers who took them to court for “miss-selling” and now we have a deluge of complaints from thousands of customers who have been shafted.
Now the banks are facing a massive bill and, as usual, the Irish authorities – the central bank and the financial ombudsman – are squirming as evidence of their inactivity mounts. Yet again, people are asking whether anybody is regulating, protecting the customer, and overseeing the system.
However, the angle I would like to take is not regarding the inactivity of the authorities. This is a bit like blaming the cops from the mind of the criminal. Sure, we’d like them to be better at the job and be more “on the beat”, but the problem is deep in the pathology of bankers. The angle I want to take is why the people who run banks are unethical and in many cases amoral, much more amoral than people who run other businesses. This is a serious problem. What is wrong with them?
The first thing we have to accept is that the mortgage scandal is theft. When you overcharge knowingly, you are stealing. This is the crime. It is not incompetence or oversight; it’s robbery.
The best expression I’ve heard about banks is from the Californian bank regulator of the late 1980s who, when investigating yet another banking scandal, observed that “the easiest way to rob a bank is to run one”. This is definitely the case in the tracker scandal.
The second thing we need to appreciate is that banks go bad from the inside out. The rot always starts deep within the bank. Typically, banks start to take large risks, because it is in the chief’s interest as his bonus is based on lending profitably. In a reasonably competitive market, you can do this by either lending lots at low margins or lending small amounts at high margins. The tracker scandal is the latter, which is about recouping as much money as possible at high interest rates.
The issue is therefore ethics.
Now I realize this is an old-fashioned concept. When we think about ethics and morality, we move into the principles territory. Ultimately, however, people do have principles.
Organizations should equally have principles, these being the core values of the business.
Core values are, of course, a choice. You can choose to behave well or not.
The problem is that if bad ethics, such as over-charging and stealing from customers, are rewarded they will become infectious. Soon the moral boss sees the immoral ones becoming enriched and he says to himself, “Why not, if everyone else is doing it and getting rich?”.
Over time, bad ethics drive out good ethics.
This is what happened in Irish banking during the boom and it looks like it is happening again but this time in a sneakier, sleeveen way.
How do you fix it?
It seems that the entire problem is wrapped up in the endemic short-term, quarterly-results driven world with which our global financial system has become obsessed.
This would be a great explanation if it weren’t for the fact that the Irish banks are largely nationalised!
The problem is ethics which is cultural. Is it too much to demand a certain morality in the boardroom? Is it too much to ask for a few good men and women who apply morality to their business life? If not, we are in a disturbing place.