..Yet Dan O’Brien’s revelation in The Irish Times on Monday last (June 28th) badly holed the argument that what was lacking was expert knowledge, this time in the Department of Finance.

O’Brien referred to an EU report of 2007 which showed that Ireland came last out of the 19 countries studied for its deficiencies in having arrangements in place to manage the public finances. Furthermore the report found Ireland to have a total lack of foresight capacity, having not one of the five measures that insulate the public finances from crisis or set warning lights flashing if one approached. So the Department of Finance was alerted to the deficiencies of its regulatory and supervisory arrangements and did nothing about it. The question therefore is clearly not lack of expert knowledge but rather why the knowledge available was not acted upon. To this extent, there is a neat parallel between the crisis of ecclesiastical authority in the Catholic Church, where senior churchpeople didn’t act on their knowledge of the activities of sexual predatory priests and brothers, and the inaction of senior officials in the Department of Finance and the regulatory authorities.(link for full article)..

….Prof Ruane said the ESRI did not know what was going on behind “the wall of banking”.

Ruane says this despite the fact that it is well-known, or at least is on the public record, that she is a former non-executive director of Depfa, the German bank whose collapse was responsible for the biggest rescue of an Irish-based bank in history. Fortunately for the Irish government when Depfa was bought up by Germany’s second largest bank, Hypo Real Estate prior to the problems in the credit markets, it’s operation was no longer based financially in Ireland. There was some pressure at the time from the German government for Ireland to help out with the €102bn bailout of Hypo Real Estate. This is because the problems that lead to its instability were apparent to the German and Irish regulator at a time when Depfa was operating out of Ireland. Such a burden would have probably collapsed the Irish economy completely….

…But its not like those Irish directors were given positions on the board of a German bank – that it should be noted, did no business in Ireland and was only availing of the soft regulatory regime and low corporation tax – because they knew what they were doing!  (Link to full article)

By focusing on his criticism of open-ended bank guarantees, most commentators have glossed over Morgan Kelly’s central policy suggestion. Critically, he does not advocate default on the guarantee. Rather, he calls for the Government to follow best international practice and put in place a special resolution regime (SRR) to deal with insolvent or seriously undercapitalised banks after the original guarantee expires.

As things stand, the only way the Government now has to impose losses on bank creditors is to liquidate the bank. (Creditors might “voluntarily” agree to a debt restructuring such as a debt-equity swap, but they would only do so given a credible threat of liquidation.)

But liquidating a bank could be incredibly disruptive and would make it hard to protect depositors and other short-maturity bank funders, increasing the risk of bank runs. This risk in turn takes away any leverage the Government might have, and allows creditors to dump their losses on the public.

An SRR would give the Government special authority beyond the existing bankruptcy code to differentiate between creditors and also keep systemically important banks as going concerns. The Government’s back is then less against the wall, allowing it more scope to put the losses where they belong.

While Morgan Kelly is right to push this policy, I think he overestimates what it can save. His target is the stock of bonds that will be outstanding when the guarantee expires – some €65 billion by his estimate. These bondholders would be subject to a debt-equity swap, forcing losses on creditors and recapitalising the banks in one swoop.

The limitation of this approach is that banks would have to fall below some critical capital adequacy threshold before triggering the resolution tools. The stress tests done by the Central Bank combined with capital-raising efforts suggest that both AIB and Bank of Ireland – where the bulk of the outstanding bonds lie – are likely to pass basic capital adequacy tests.

Not so for Anglo of course. But unfortunately, the over-broad guarantee will have allowed most of the bondholders to escape by September, leaving at most €7 billion of bonds at risk. Not the kind of money we might hope for, but still very much worth pursuing.

The coming months will test Ireland’s creditworthiness. International debt markets are in a capricious mood.

I believe Ireland is fundamentally solvent, but unfortunately this is not always enough to stop a run. While putting in place the special resolution regime machinery to impose legitimate losses, it is essential not to waiver on the commitment to meet the letter of all sovereign obligations.  (link to full article)

Gurdgiev as usual does not pull any punches in relation to the news from the EBS…

Well, as of today we, the taxpayers, own another banking institution – the EBS – which, up until now was regarded as the least sickly of the Irish banks. Per Irish Times report today: “The Government’s move came after the society failed to attract private investors. The State now seems set to invest up to €875 million in total over the next 10 years.”

Pardon my French, but what the h***ll is going on in our circles of power? One would naturally expect the Government and the regulators responsible for the banking sector to be in a daily contact with the institution, like EBS, while it is engaged in a major talks with potential buyers. And one would expect the talks to progress over time, with some clear indications as to whether the deal was likely or not. A sudden release of this new information is, therefore,

* either a reflection of the fact that our banking sector authorities did not have a clue as to the progression of the talks – in which case they once again failed to ‘keep their hand’ on the patient’s pulse; or
* they have at the very least did not disclose pertinent information to the markets and the public as to the state of these talks.

Either way, the news that the taxpayers are once again stuck for ca €1 billion in bailout funds (more than the amount of €600mln the Spanish Government had to inject in one of its banks, triggering a massive run on Spanish markets) without any, and I repeat, any public official making the matter public until the deal was done!

Of course, another remarkable thing about the deal is that it comes on foot of Nama being deployed in the market. Last year, myself, Brian Lucey, Peter Mathews, Karl Whelan and others have warned that nationalization of the failing Irish banks was the least costly option for their recapitalization that should be pursued. Nationalization of EBS would have cost no more than €650-800 million and would have led to a 100% ownership of the bank by the State. In return, we could have imposed a speedy reform on the bank’s board and management, and actively repaired its balancesheet.

Instead, we have paid countless millions for it through Nama, shelled out almost €1 billion in direct capital commitments, supplied it with a state Guarantee worth well in excess of €200 million in risk-related implicit costs, and still control only 51% of the bank. We are now left with a quasi-state asset that cannot be reformed and is at a risk of being left to linger like a zombie stuck between private markets and the politicos.

One wonders, will anyone, responsible for Nama and the rest of our banks policy ever be held accountable for this waste?  (link to full article)

Readers who are confused about exactly how much bank bond debt is due to mature by year end might like to check this piece of research by Karl Whelan of the Irish Economy.

There seems to be some confusion out there about the extent of Irish bank bond debt, about the various types and about how much is covered by the September 2008 guarantee. The document draws together the relevant information on maturity of bank debt from the annual reports of Anglo, AIB, BoI, INBS and Irish Life and Permanent.

This information isn’t completely timely or perfect: A full Bloomberg trawl is perhaps the best way to do this. Importantly, none of the banks list September 2010, the end of the guarantee, as a maturity date in their tables. Instead, they list debt maturing up to the end of this year. It is well known, though, that the vast majority of the debt of Irish banks matures prior to the fourth quarter. An advantage of these calculations is that they come from publicly available sources and we can be clear about what it is we’re discussing.

The bottom line. By my calculations based on the annual reports showing the state of play at the end of last year—and feel free to correct me if I’ve got this wrong—these five banks had €71.7 billion in bonds due by December of this year with only €0.7 billion of this being subordinated. They then had a further €51.8 billion due after 2010, €14.4 billion of which are subordinated. (go here to download report)

The phoney holiday, when Irish banks pulled in their claws during the great rescue, is nearly over. As predicted the big bank squeeze on ordinary customers is about to begin as banks turn on the taxpayers that bailed them out to fatten margins in an effort to repair their ruined balance sheets – and make their NAMA repayments.

It is the worst result for ordinary Irish depositors and borrowers that, having driven the ambulance to the scene of the accident and saved the banks from certain death, their response now is to charge us for it. Of course the butcher’s bill has been delayed while banks engaged with Government and, cut off from capital markets, desperately sought new deposits, but don’t let that fool you.

Last year that meant offering gravity defying deposit rates despite historic lows in the ECB base rate but as soon as the first tranche of NAMA loan capital is in place in a few weeks, all bets are off, as banks ruthlessly pursue every trick in the book to grow their profits. So get ready to be mugged by; (link to the bad news)

David McWilliams offers a similar depressing future for the Irish middle class who are the heaviest borrowers and now deeply in debt with no apparent way out.

We are broke. The middle aged, middle classes are rocked by the sudden unemployment of their children (30pc of our under-25s are unemployed) and the collapse in value of their second home. On top of that, their pension funds — which were invested by charlatans in the shares of Irish banks — are now worthless (and after the nationalisation of the big two, they will be wiped out altogether)….

Selling now, even if it saves money over the longer term, will crystallise the losses and leave the average family with a huge debt to the banks. So the natural tendency is to hope that something will turn up. But what if it doesn’t?

The other option is to go back to the Ahern/Cowen model of borrowing to get rich. We know that doesn’t work and anyway it has been supplanted by the Cowen/Lenihan model of the State borrowing in order to try to protect the already decimated shareholders of the banks. This leads to NAMA and the errant folly of betting the country yet again on the hope that the property market will recover to make the bad balance sheet of the banks good again.

But even looked at from first economic principles, for the Fianna Fail plan to happen, the banks have to lend out money. But the middle classes don’t want their money (even if the banks had it) because they are stuffed with debt anyway. In short, the broad middle classes still think that if we do the right thing, things will turn around. (link to article)

What does it take for the Irish middle class to rebel?

Organising the grass roots or, as they say there Main St, against the Wall St banking rip off looks like one of them. Link to Showdown in Chicago.

Hat tip to Ann Pettifor of debtonation.  As she says…

I am always humbled by the reminder that after the 1929 Crash, the United States turned towards progressive politicians – notably FDR – while Europe turned towards fascism.

There is a warning to us Europeans in that history.

All the arguments explaining the faulty thinking and dire consequences behind the Nama deal only added to the atmosphere of fear of September last year when Lehman’s Brothers downfall seized the bond market.  It was fear and panic that hatched the current plan.  The Fianna Fail inheritors of power had never been tested by a serious crisis and in bewilderment turned for advice to the very perpetrators of the crisis – the bankers, regulators, property valuers of the financial sector.  The chorus of criticism reinforced their bunker mentality.

What of the Greens then?  Why didn’t they see through the scam and stop the robbery ?  Stockholm syndrome has to be the answer.  The Green Party parliamentarians began to identify with their Fianna Fail captors against the threatening world outside.  How else would otherwise intelligent and principled men support Nama while declaiming  “The Greens will always do the right thing”.

Yesterday, the Nama Business Plan was revealed in the Dail.  We have to say that we underestimated the sheer bravado of the Nama heist.  In the words of Karl Whelan …

It is with great reluctance, then, that I have to say that it’s now pretty hard to see this plan as anything other than a deliberate decision to show extreme forbearance to the property developers who got us into this mess in the first place.

Also, the following is now a fact. This government has told developers that as long as its in office (the latest date for an election is 2012) they will barely have to pay back any money. Interpret this fact how you wish.” (link to article)

Dr Constantin Gurdgiev had to recrunch all his figures because it just did not strike him that the developers would be funded to build out their fantasies….

Conclusion: DofF estimates and my own estimates in my previous post (see here) do not include additional roll up charge of at least Euro6.2bn!

Thus even under the DofF original projections, Nama will yield a real loss to the taxpayers.

Now, why we made this error? Because none of us on Nama-critics side could have imagined that the Government will give defaulting developers 3 years interest-free loan to sort themselves out! And yet, this is exactly what Nama appears to be doing… what else, but a ‘gift’ or a ‘rescue’ can one call an act that deed Euro6bn worth of rolled up interest to a defaulting developer?. (link to article)

Having heard the ‘debate’ afterward and having obtained a letter from one of the Green Party parliamentary party members to a senior ranking disillusioned member of the party in which a venerable Green legislator claims, as Alan did today, that academics commenting on Nama with a critical perspective are not fully appreciative of complexities of Nama and are not offering any solutions to the porblems Nama is supposed to tackle, I can say the following:

I stand by my original estimates of losses expected from Nama. Alan Ahearne’s quoted figures are based on thin air, as Dr Ahearne has failed to produce any evidence to support his assumptions or estimations, while my (and Brian Lucey’s) balancesheet for Nama has been in public domain and under public scrutiny for over two months now,

Points raised by myself, Brian Lucey and Karl Whelan (and some others as well) about the lack of safe guards, stop0loss rules, transparency, accountability and ownership of Nama and its assets are not academic, they are as real as Dr Ahearne’s salary in the employment of the Minister. Nay, they are actually more real, because families who will be paying for Nama deserve to be the rightful owners of Nama assets and deserve to have full access to Nama operations,

As far as I know, neither Dr Ahearne, nor his masters have offered any, I repeat, any clarifications as to the amendments they plan to propose for Nama legislation. In contrast, everyone can read my proposal for Nama3.0, Karl Whelan’s proposals for changing Nama legislation, Patrick Honohan’s ideas on how Nama can be fixed and altered, and so on. None of us have been paid for doing so, unlike Dr Ahearne who, having not failed to accuse us all of being ‘academic’ has (a) called us ‘colleagues’ (surely this makes his musings on the subject also ‘academic’, and (b) has managed to produce no new ideas on Nama beyond what his masters produced in the proposed legislation.

I am having a very hard time understanding how myself and other independent observers of Nama can be labelled ‘academic’ when the questions we raised about Nama are both immediately relevant to the issue of Nama operations and are countered from the opposing side by the nonsense of unsubstantiated numbers quoting and references to us ‘not appreciating the complexities’?

Here are couple of questions sent to me by one senior policy person in Ireland with my quick replies to them:

Q: Apparently, in one of the debates, a pro-Nama person suggested that Banks nationalisation cannot occur before Nama is paid for because, while the ECB will do the swap for Irish government bonds as a reasonable discount, they will not give the same deal for a nationalised bank. Or if they do help us, they will insist on their pound of flesh i.e.they will do an IMF on us and we will lose all economic sovereignty. My questions about that are… a) is that really true…

A: It is true in so far as the ECB lending window is for private banks that are solvent. However, it is a technicality, since the ECB will have to offer lending facility to the governments as well. It simply has not been confronted with such a prospect before, but hey, there is always a first one.

b) if Irish government put their shares in Trust for taxpayers as per Nama3.0 – hey presto no link to government – does that get over ECBproblem?

A: Yes, it does, further, recall that I have argued that (steps 3 and 4) the Government can provide for private ownership diluting its own share holding in the banks, so the banks will be owned by a trust (Nama), plus two large groups of private investors, with the Government nowhere to be seen. We can even go further and include as shareholders in Nama some developers/investors by offering them shares in Nama in return for equity in their development projects written against the loans.

Note to Opinion Columnists: It DOES Matter How We Deal With the Banks

This post was written by Karl Whelan

There’s been a flood of recent commentary on NAMA from opinion columnists, editorial writers and broadcast journalists. Unfortunately, much of this discussion has been premised on an incorrect but apparently appealing idea.

This is the idea that it doesn’t really matter which approach we take to resolving the banking crisis because the costs to the taxpayer are going to be about the same no matter what happens. We’ve guaranteed the liabilities, these people will argue, so basically we’re on the hook no matter what. And since all the plans are going to expose us to lots of risk, let’s just get on with the plan the government has.  link to full article

In answer to our own question we remember our usual repsonse to conspiracy theorists everywhere;- never underestimate the sheer incompetence of authorities.

Smart Taxes has discussed the concept of moral hazard and how a lack of it was one of the main causes of the crisis so the findings of the report and the subsequent recommendations will come as no surprise to commentators or indeed anyone with just a modicum of common sense. What is disappointing is that the report’s author, former Bank of England Director, Sir David Walker does want these recommendations enshrined in law rather implemented via a voluntary code of code of conduct. Further, although the review was sponsored by the UK Treasury, the author was acting independently and the Treasury has no obligation to listen to any of it.

While it is positive that the reasons for the crisis are recognised a hard line approach needs to be taken both in the UK and Ireland.

After five months of analysis, he has concluded that:

1) the boards of big banks didn’t understand the scale of the risks their organisations were running;

2) that non-executives of big banks did too little to rein in the excesses of the executive directors;

3) that shareholders in banks also failed to curb reckless gambling by financial institutions, that the owners didn’t “exercise proper stewardship”,

4) and that bankers were paid in a dangerous way which encouraged them to speculate imprudently.

Recommendations include:

a) new risk committees should be set up on boards, separate from the audit committees, which would be chaired by a non-executive;

b) these risk committee would overseas all substantial transactions and would have the power to block those deemed too dangerous;

c) non-executives would devote 30 to 36 days each year to the affairs of a bank or financial institution, up from 20 to 25 days at present (many of you probably won’t believe they earn their fees of £100,000 or so a year for four to five weeks of work);

d) non-executives would be better trained, they would be scrutinised more rigorously by the FSA and they would be encouraged to hold the executives to account, in a way that would probably end the “collegial” nature of bank boards;

e) the chairmen of banks or other financial institutions would commit no less than two-thirds of their time to the business, they would have significant and relevant “financial industry experience”, and they would face re-election by shareholders every year;

f) boards would monitor more closely whether their big shareholders were selling shares and would take steps to learn why these shareholders had lost confidence in their businesses;

g) the FSA would also “be ready to contact major selling shareholders to understand their movitation”;

h) institutional shareholders would sign up for a new set of “principles of best practice in stewardship”, to encourage them to be more actively engaged in the affairs of companies, which would be overseen by the Financial Reporting Council.

Read the report in full here.

Dynastic fortunes were created. Yet the system over-reached itself and crashed. Global losses on loans and financial securities exceed $4 trillion. Governments have had to support the western financial system to the tune of $9 trillion.

British taxpayers’ share of that support exceeds $2 trillion – proportionally the largest of any country, and by a substantial margin. Yet our bankers are again insisting that they pay themselves packages wildly above those in any other industry. Stephen Hester, CEO of RBS, doubtless argues that his near £10m deal is below the going rate in financial services, and that he is making sacrifices to help the stricken bank recover. But why are personal rewards so extravagantly high in a sector that adds so little value and creates so much systemic risk that others have to bear? What kind of financial system do we want?

The Guardian suggests breaking up banks that are too big to fail, new banks created and review the long-running relationship between the City and wider British economy should be. Without root-and-branch reform a great opportunity is going begging. Read the article in full here.