For taxpaying variable mortgage holders, it seems like every way you look at this you lose. For years they have been forced to pay exorbitant interest rates, partly to cover the losses made on tracker mortgages.
These were also justified as necessary to help the troubled banks turn all that red ink into black and ultimately return to the market.
Now comes news of the sharp practices of bankers trying to get tracker mortgage holders off such loans.
Compensation is in the offing, the cost of which will be stumped up by the banks. That in turn will give them another reason to explain why they need to have exorbitant rates on variable deals.
And just to add some extra spin to the vicious circle, when the banks lose out their shares lose value and their shareholders lose the potential to recoup their investment.
In the case of Irish banks, for investment read bailout and for shareholder read taxpayer. There’s no silver lining for the taxpaying variable mortgage holder.
Second bailout
Since the crash, Irish banks have been gouging variable rate mortgage holders by charging excessive rates – nearly twice the euro area average – with the seeming connivance of the Government, their main shareholder.
The premium, the banks said, reflected the elevated risk of lending into the Irish market. In reality, the higher rates were designed to compensate the banks for their loss-making tracker mortgages, which had been dished out like candy during the boom, but were now tied to rates that undercut those at which the banks could borrow.
To correct this negative differential on their balance sheets, they squeezed their variable customers, predominantly owner-occupiers, who borrowed before the boom.
In effect, variable rate customers ended up delivering a second bailout to the banks, in addition to the €64 billion injected in 2009.
This has allowed them return to profitability in super-quick time, earning Ireland its "best in post-bailout" class tag.
Scandal emerges
It is now becoming clear some banks deployed even more dubious tactics to deal with their tracker problems than we previously realised: wrongfully taking customers off contracts, applying incorrect interest rates and failing to inform customers when contracts had changed.
The extent of this activity is only beginning to emerge. So far the regulator’s trawl has turned up 13,000 cases where the banks failed to comply with their contractual obligations.
However, the number is expected to hit 20,000 and beyond, and the Central Bank has warned that thousands may still be unaware that they are victims of these so-called failures.
What’s most surprising about this debacle is the seeming impunity with which banks have been allowed to operate – KBC Ireland has still not provided data to the regulator on the number of impacted accounts – and the Government’s foot-dragging response.
It’s been 22 months since these issues first came to light but we’re only now beginning to examine them properly.
This is not hard to explain. Since the crash, the Government has had one overriding objective; the rehabilitation of the banks, viewed as necessary to restore Ireland’s credit rating and allow the Government borrow on international markets.
This was the driving force behind Michael Noonan’s tenure as finance minister. As with the variable rate issue, the banks’ drive to get trackers off their books and return to profitability fed into this objective. A healthier banking system meant a healthier credit rating.
AIB is now the most profitable bank in the euro zone based on its return on assets, recording a pre-tax profit of €1.9 billion last year. Bank of Ireland wasn't far behind, a reporting a pre-tax profit of just over €1 billion, while Permanent TSB generated a headline profit of €188 million.
Despite holding major stakes in each of these instituions – Permanent TSB (75 per cent), AIB (71 per cent) and Bank of Ireland (14 per cent) – the Government has not been minded to flex its muscles on their infractions, seemingly fearful that it will obstruct the banking system’s convalescence and spook investors in Ireland Inc.
Insisting on tighter regulation or a clampdown on tracker failures was well within the Government’s remit, but it has been surrendered to an alternative objective.
The price of this indifference could be the biggest banking scam in the State's history with a price tag of €500 million, according to estimates by Investec.
