Time is money

Giving Ireland a realistic timescale in which to pay creditors isn't just morally right; it's good business sense, too. By John Clark.

In the early 1980s America was in a recession. One of the major causes was the deregulation of the savings and loan (S&L) industry which resulted in irresponsible lending, primarily to real estate developers who in many cases also had controlling ownership interest in many of these same S&Ls, or at the least had “questionable” relations with high level executives as to issues of conflicts of interest. It was not dissimilar to what we’ve seen in recent times in Ireland.

The recession, however, had a rippling effect and was hurting a number of businesses.

One day I was attending a loan delinquency meeting in the board room of a commercial bank I was working for at the time. A particular past due loan, which I happened to have first-hand knowledge of, came up for discussion. The borrower was a long-time customer who had, up to then, a stellar payment record. However, he had run into a cash flow problem and was unable to meet the demands of running his company and making payments to our bank at the same time; he did have, as I was able to determine, a plan in place that given proper time would allow him to properly service his debt with our bank.

But it was suggested by one of our loan officers that a “strong letter” be sent to the borrower notifying him that since he was technically in default, his interest rate would be substantially increased. “This ought to get his attention,” the loan officer declared.

I looked over at him and simply said, “Look, he’s either got the money to pay us or he doesn’t; and reviewing his financial condition I assure you that he doesn’t. Taking extreme measures, as you are suggesting, could push him over the edge and into bankruptcy which would not be good for either of us. He still has a viable business and if we give him time, we’ll get paid.” The president of the bank asked me, “Do I have your word on that, John?” I replied, “Yes, you do.”

At the time I was thinking of the story of A.P. Giannini, the founder of The Bank of Italy which he established in San Francisco in 1904 as a means to lend money to immigrants, primarily Italian and Irish, including my mother’s father, John Farrell, who had immigrated from Castlegregory, County Kerry to the same city in 1885. These people couldn’t get loans from the more established banks such as Crocker-Anglo and Wells Fargo, owned and operated by what were described at the time as the “White Anglo-Saxon Protestant”, or WASP, business and cultural elite of San Francisco. They wielded enormous and disproportionate, if not exclusive, financial power.

Thus, Mr Giannini gave the life blood of any business: loans to a class of citizens who otherwise could not start up businesses or expand their existing businesses. His customers were mostly fishermen, farmers and small shop owners supplying goods to the populace. He was an unusual banker in that for him it wasn’t just about money. He viewed banking as a partnership between the bank and the borrower; as if to say, “We’re in this together.”

During the Great Depression Mr Giannini refused to foreclose on these same borrowers when they were short of funds to make their normal loan payments. He chose to “carry” them so they could stay in business. He rightly figured that if he cut them off and took their fishing boats and farms he would be taking away not only their livelihoods and their ability to support their families; he would also be stuck with assets he could do nothing with. He was in the lending business and not the fishing and farming business.

It was said that he made this decision simply because it was not only morally right but was also in the best interest of the bank’s shareholders. From his point of view it just made good business sense to keep these borrowers in business. He simply said, as I was told, “What am I going to do with empty fishing boats tied up at the waterfront and unproductive farms? We’ll just have to wait for full payment until things improve.”

So, for a period of time the bank’s earnings dropped and there were no dividends declared for shareholders. For a temporary period of time money became secondary to the well-being of struggling businesses and the general welfare of the people. But over time things did improve, productivity increased and loans were brought current. And that small Bank of Italy? It eventually became the Bank of America.

Just as the investors in Mr Giannini’s bank had to wait for a return on their investments, should not the senior bondholders of Irish debts wait for their payments? After all, aren’t we—the country’s citizens who now find ourselves responsible for the nation’s debts, both sovereign and bank guarantees, and the bondholders—“in this together”?

Just like that borrower at the bank I was working for so many years ago was recognisng his debt but was unable to properly service it; so we needed to wait it out. That’s why we had a line item on our financial statements for “Loan Loss Provision”. As a result we “carried” him, took an accounting loss (not a loss in real terms), and gave him the time he needed to solve his cash flow problem. And over a reasonable period of time he eventually brought the loan current.

Ireland finds itself in a similar situation and it is up to this government, who promised before the election to put the Irish citizens first, to do just that. We simply do not have the money to properly service our debts. But we do have a track record of producing goods and services. We just need time to get our financial house in order.

If this means that the bondholders will have to wait for payments and possibly take a temporary loss on the face value of their bonds until we can recover financially, they are far better off doing that than in the case of a total and permanent default. Their loss could be recaptured over time when the economy produced sufficient tax revenue to reinstate a portion, if not all, of their original principal in the future.

To continue down the path of an enforced austerity program in the form of taking out more loans from the ECB/IMF—who up to now have ignored the human factor—to bridge the deficit gap, increasing taxes and cutting benefits, are all actions that only makes things worse. Any recovery from any recession comes from a growth in jobs and from consumption of goods and services. But if there are not enough jobs and people don’t have the money to spend, then how are we ever to have a recovery?

This whole situation is being driven by fear. We’re told that if we fiddle in any way with the senior bondholders, the whole banking system and the economy itself will collapse; but nothing of the sort needs to happen. Having the bondholders re-write their investments and taking a temporary “paper loss”, only means just that. If and when the economy recovers, then a proviso in a new agreement can be made to correspondingly reinstate portions of the “loss” that would be tied to the rate of recovery and growth.

By giving Ireland time and breathing room to redirect funds into expanding its export business, creating infrastructure projects and other capital investments, jobs will be created and tax revenues will increase. There would be a renewed faith in the government which will provide the impetuous for people to once again spend money, but more responsibly this time; and slowly the economy will grow. And for the bondholders during this time? They too have a “Provision for Losses”, real or otherwise, in their financials. As sophisticated investors knowing the risks they took, they’ll just have to wait a while. It is not only the right thing to do from a moral point of view. It’s also just good business.

John Clark is a former American commercial banker now living in Ireland.

Image top: stevec77.