12/6/16: Few Thoughts on Anglo Trial Verdicts

A friend recently did me a small service by summing up my comments on twitter on the Anglo Irish Bank - Irish Life & Permanent roundabout loans verdict:

I have provided an expert testimony on the matter in April in a court case involving the Central Bank, the Department of Finance and the Attorney General of Ireland, focusing precisely on the nature of the relationship between the Irish Financial Regulation authorities and the misconduct by banks and banks boards prior to 2008 Global Financial Crisis.  Quoting from my expert opinion:

"Part 4: Regulatory enforcement effectiveness and efficiency

46. In my opinion, and based on literature referenced herein, objectives of the function of enforcement in financial regulation are best served by structuring enforcement processes and taking robust actions so as to:
1. Target first and foremost the core breaches of regulatory and supervisory regimes, starting with systemic-level breaches prior to proceeding to specific institutional or individual level infringements [Targeting];
2. Timely execute enforcement actions, both in the context of market participants’ timing and timing relevant to the efficiency and effectiveness of uncovering the actual facts of specific alleged infringements [Timely execution];
3. Prevent or at the very least reduce, monitor and address any potential conflicts of interest in enforcement-related actions [Conflict of interest minimisation];
4. Assure that enforcement actions are taken within the constraints of the regulatory regime applicable at the time of alleged committing of regulatory breaches, while following well-defined and ex ante transparent processes [Applicability and quality of regulation and enforcement];

5. Assure that regulatory enforcement actions do not contradict or duplicate other forms of enforcement and remedial measures, including legal settlements [Consistency of legal and administrative frameworks]."

In simple terms, systemic lack of imposition of meaningful sanctions on senior policy, regulatory and supervisory decision-makers active in the Irish financial services in the period prior to the Global Financial Crisis severely undermines the signalling and deterrence functions of regulatory enforcements. Convicting bankers for mis-deeds is fine, but not sanctioning regulatory and supervisory officials is not conducive to establishing any tangible credibility to the regulatory enforcement regime. Worse, it establishes a false sense of security that the system has been repaired and strengthened by convictions achieved, whilst in reality, the system remains vulnerable to exactly the same dynamics and risks of collusion between regulators and supervisors and the new financial services executives.

It is, perhaps, telling that my counterparts providing expert opinions in the case on behalf of the Central Bank, Department of Finance and the Attorney General of Ireland have based their analysis on the axiomatic assumption that no regulatory, supervisory and enforcement staff can ever be held liable for their actions or inactions in the events and processes that led to the Global Financial Crisis. No matter what they have done or refused to do. Full impunity must apply.

13/5/2014: No, Johnny the Foreigner didn't do it... our own Government did...

Ah and so it rolls, Irish national media obsession with who (from abroad) pushed (presumably unwilling) Irish Government (so deeply concerned with national wellbeing) to guarantee bondholders (presumably the elderly investors from pension funds and teachers, nurses and fire(wo)men) back in September 2008 (because, you know, the Government did not beat the 'Great Irish banks Inviolable drum for the good part of 2008).

The latests instalment is on the role of Timothy Geihtner (based on his book) and it is available here: http://www.irishtimes.com/business/economy/timothy-geithner-keeps-it-short-when-it-comes-to-haircuts-1.1792498.

So we know the drill:

1. IMF called for haircuts. Well, I am not so sure. IMF does include haircuts in some of its 'rescues' and it is a part of the tool kit. But IMF never played an active part in Ireland or for that matter in the euro area. Just compare and contrast the Fund manhandling of Hungary against its waffling on in Greece. My internal IMF sources told me that staff was surprised Ireland did not burn the bondholders the way Iceland did. But then again, one's dismay is not Fund's advice, and Fund's advice is not Fund's order (oh, and IMF does issue 'orders').
2. ECB barked at the idea of haircuts. Again I am not so sure. We do know ECB opposed them, but that is not a reason not to try them, is it? The argument goes that if Ireland were to go against ECB's will, the skye would fall onto us and the moon will no longer exert its tidal push and pull force on the Irish sea, making the entire island uninhabitable. Truth is, we have no idea what ECB would/could have done. Stop funding of Irish banks? Lots of good that funding did to us, I'd say - apparently even with ECB lending we had to bankrupt the nation to mummify the zombies (you wouldn't call this a rescue operation, since our banks are still zombies five and a half years into the mess).
3. EU balked at the idea. Which means what? Olli Rehn had hiccups for breakfast? Both EU and ECB were, allegedly, powerless midgets incapable of stopping the spread of contagion from the inter-galactically important Irish banks (if they were just simple banks, why all the huff about their systemic importance) and thus needed Irish people to bite the missile (you would hardly call a guarantee the size of 2.5 times the nation's GDP a bullet) for them. So who exactly held the trump cards? 
4. US and UK went apoplectic (although as we now know, Geithner did not oppose haircuts in principle, though he was against their timing). I must confess, I noticed no such reaction from Treasury and BofE officials I encountered in briefings around the time of the Guarantee and there after.
5. Irish Government reluctantly, tragically, with tears in their eyes, was forced to introduce a guarantee of all liabilities. 

Now, just for nanosecond give this a thought: the Irish Government, that spent a good part of 9 months prior to the Guarantee staunchly defending the banks and since around July of 2008 - covering up their repeated violations of regulatory requirements (liquidity ratios etc), the same Government that apparently had no desire to know what was going on in the banks shares support schemes and didn't give a damn about abuse of derivative instruments to prop up the banks valuations, the said Government that had lost no sleep over the silencing of whistleblowers pointing to systemic problems in the banks… that Government today is being painted as having been 'bounced' into the Guarantee and subsequently the Troika bailout?..

Are we serious? Let's take a hard look into the mirror. The Guarantee was an act of the Irish Government to protect and secure Irish banks connected to the Irish elite's interests. Full stop. That it rescued a bunch of unsavoury bond holders and investment funds was a cherry on the proverbial cake, not the main spoiler of the 'benevolent Government' intentions.

That we did not exercise a sovereign right to, in a national emergency, impose losses on whoever we wish to impose them is not a corollary - it is a direct evidence of intent to rescue the banks at any cost to the nation. This is further collaborated by the fact that following the guarantee, the Irish Government (not the ECB or US Treasury or the EU Commission) sat back and did absolutely nothing to impose any terms and conditions onto the banks. It is evidence by the fact when our Government at the time was forced to start doing something about reforming the banks, it went about it in the following order:

• First, losses were imposed on borrowers. Borrowers who are still (after numerous 'powder over the gaping wound' reforms of insolvency and bankruptcy codes) being milked by the banks to the loud approval from the Central Bank for every penny they might have or will have in the future.
• Second, banks were given token targets on governance reforms (changes of boards, senior executive ranks, salaries caps etc). The banks blew past these like a boy racer blows past the '30 km/h' speed sign.
• Third, the State created Nama which underpaid for the banks assets in order to secure brighter future for itself and its consultants and vulture funds (the latter now expect returns of 20% per annum and more on the assets they are buying from Nama, which Nama claims to be selling at a profit).
• Fourth, more cash was injected into the banks to cover the hole blown in them by Nama. Cash was taken off the same taxpayers, many of who are the said borrowers being pursued by the banks with the blessing of the State.
• Fifth, the banks were subsidised and protected from any competition - and still remain such: we have a massive penned up demand for credit (allegedly from top-quality SMEs and corporates and households with healthy balancesheets that everyone - from IBEC to myhome.ie claims exist all over Ireland) and we have rising lending margins, and yet we have not a single foreign bank coming into the country or expanding its operations (beyond PR releases) here. Why?

Do tell me that anything in the above suggests that the past Government shed a single non-crocodile tear in guaranteeing the banks? I simply can't believe that. It does not correspond to the facts at hand.

So to tidy things up: let's continue digging for the evidence that some Johnny the Foreigner 'bounced' Ireland into the Guarantee and the bailout and the rest of the mess we are in. Let's even keep digging for the evidence that the Martians are responsible for the original mishap of two Luas lines not being connected to each other.

But let's also remember - as a sovereign State, Irish State had choices. It made them. It made them to suit all of the objectives of supporting the banks that were consistently and persistently pursued by the State prior to the Guarantee. Subsequent to the Guarantee, Irish Government officially and repeatedly stated that it will provide all and any support needed by the banks, unconditionally, unreservedly and unceremoniously. Whatever Johnny the Foreigner did or did not do in such circumstances is secondary - interesting, important, intriguing, but still secondary. Primary is the fact that we were flushed down the proverbial banks sewer by our own.

8/10/2013: German Voters Go For Status Quo... Redux: Sunday Times September 29, 2013

This is an unedited version of my Sunday Times column from September 29, 2013.


By any measure, last Sunday's German elections highlighted a resounding failure of the country electorate to connect with reality. Despite returning a number of historical outcomes, the voters reaffirmed the passive-conservative leadership mandate exercised by Angela Merkel since 2009. As the result, German policies are now likely to drift even farther away from the immediate needs of the euro area periphery, risking a renewal of the euro area crisis and a slowdown in the already less-than ambitious speed of European reforms. None of this is good news for Ireland.

The historical nature of the 2013 German elections is highlighted by the fact that Angela Merkel became the first euro area leader to be reelected as the head of state since the beginning of the Great Recession. And she has done it twice: first some 12 months into the crisis in 2009 and now 5 years from its onset. Ms. Merkel won the highest number of votes for her CDU/CSU party in 23 years. And she became the first German leader since the golden days of Konrad Adenauer back in 1961 to personally dominate the elections, instead of standing in the shadow of her party. Individually, all of these are rare events in modern German history. Taken together, they are probably unprecedented.

But herein lies the problem for all of us living outside Germany. The elections of 2013 have produced a strong mandate for doing nothing new when it comes to either the euro area or the larger Union reforms. The Chancellor re-elect retook the Bundeskanzleramt on a mandate of being a 'safe pair of hands'. The campaign her party waged focused on such important topics as charging foreign drivers for using autobahns. Instead of debating the core issues faced by the EU, and the role of Germany in this mess, voters largely engaged in navel-gazing. Satisfied with their relatively well-performing economy and receding immediate danger to the euro, they endorsed the leadership devoid of ideas, alternative views and aspirations. Not surprisingly, philosopher Jurgen Habermas declared the 2013 general election campaign a "collective failure" of the elites.

This means that the German elections left the core problems of the euro crisis unaddressed, raising the specter of renewed uncertainty about the future of the common currency area. This concern became immediately visible this week.

On Monday, ECB's Mario Draghi rushed to compensate for the policy paralysis signaled out of Germany by stating that the ECB is ready to deploy a new round of quantitative easing in the form of the third Long-Term Refinancing Operations (LTRO3). To remind you, the first two rounds of LTROs were the ECB’s ‘pre-nuclear option’ response to strategic threats to the euro area economy in late 2010-early 2011. The ‘nuclear option’ was the subsequent announcement of the stand-by quantitative easing programme, known as Outright Monetary Transactions (OMT). Mr. Draghi mentioning the prospect of renewing the LTRO scheme suggests that the ECB expects no change in euro area policies in the aftermath of last week’s elections.

Acknowledging this, Draghi also tried to push aside the pesky issue of the Greek Bailout 3.0. And in a direct reflection of the Berlin’s preferences, Draghi also downplayed the possibility of the ESM being licensed to provide financing cover for future bank failures.

Mr Draghi’s precautionary moves were timed perfectly. Following the elections, sovereign yields on all peripheral countries’ bonds rose relative to German bunds. Credit default swaps – insurance contracts underwriting sovereign bonds – also crept up. The markets are not buying the ‘return to status quo’ story as good news. This was contrasted by the domestic news which saw the German economic sentiment, as measured by the CESIfo index of economic conditions rise for the third month in a row. This marks fifteenth consecutive quarter of the CESIfo index reading above historical average. In contrast, euro area economic conditions index has been stuck below its historical average levels for eight quarters in a row through this September.

Since 2009 elections, Chancellor Merkel held back from directly leading the euro area and instead opted repeatedly to wait for an escalation of the crises before responding with un-prepared, often ad hoc and wrong-footed solutions. Best examples of this approach to leadership are the EU's failures in Cyprus and Greece. Both are directly linked to Ms. Merkel’s prevarication in the face of escalating crises. All were driven by swings in domestic public opinion, rather than by any cohesive principles.

For Ireland, this mode of leadership spells lack of progress on key issues.

Gauging German public opinion there is currently zero appetite to shift away from the pre-elections status quo in which the Irish crisis is seen as largely self-induced and peripheral to German interests. This means that Germany is likely to continue supporting Irish debt sustainability rhetorically, while opposing practical resolution of the debt overhang. This week, Ms. Merkel gave another loud endorsement to Irish Government policies during the crisis. As she did so, the Irish Government – usually not known for its skeptical pragmatism – was actively pushing the timeline for banking debts problem resolution out into the later months of 2014. My gut feeling is that we can expect this timeline to stretch beyond 2015. Instead of allowing restructuring of our banking debts, Berlin will nod approvingly to a precautionary line of credit for Ireland via set-aside stand-by facility at the ESM. This credit will be provided on current ESM funding terms, some 1 percent below the cost of IMF funding and with longer maturities. Which is the good news.

In exchange for this token gesture we will be required to strictly adhere to fiscal adjustment targets for 2015. We will be further subjected to a new multi-annual fiscal programme stretching into 2018-2020 to be supervised by the EU Commission. ECB – by proxy, the German government – will be watching from the shadows.

Meanwhile, as Mr. Draghi statement this week indicates, Germany will block ESM from having any powers in dealing with future banking crises. Our retrospective banks debt deal will then have to wait until a new funding facility, most likely administered by the ECB, comes into place. Pencil that for sometime in 2016. Pushing legacy debts incurred by the Exchequer as the result of rescuing our banks into the hands of the ECB is likely to cost us. Frankfurt can, and potentially will, demand something in return for this. One thing the ECB can ask for is accelerated sales of the Central Bank-held Government bonds (the fallout from the Promissory Notes deal done earlier this year).  The ECB already has the power to do so. It also has a direct incentive: the bonds are set against our banks borrowings from the euro system. Of course, this will mean that we will be trading one debt for another, as accelerated sales of bonds will erode the temporary fiscal ‘savings’ achieved by the Promo Notes restructuring.

But the cost of the EU/German ‘assistance’ for Ireland will most likely extend further than bonds sales acceleration and new fiscal targets setting. German political agenda is well-anchored to continued saber-rattling on the need for corporate tax harmonization across the EU. With the 2009-2011 Franco-German tax harmonisation initiative all but dead, the focus in the next two-three years will shift toward advancing the consolidated common corporate tax base (CCCTB) proposals that suit German interests more than any other form of tax coordination. Based on her record to-date, Ms. Merkel is a fan of the CCCTB as are all of her potential coalition partners and the German voters.

German elections are also promising to create less certainty as to the structural reforms in the European Union space. Last Sunday’s results produced strong votes for the anti-euro party, Alternative fuer Deutschland (AfD). The party also did well in the previously held local elections. The new Merkel-led coalition will have to show caution when facing any prospect of further harmonisation and consolidation of power in Brussels.

When it comes to structural reforms, German public prefers for euro area to focus on specific hard fiscal targets and on replicating Germany's own structural reforms of the 1990s. While such reforms can be beneficent to the euro area peripheral states, for Ireland they offer only marginal gains. German reforms of the 1990s have focused on two core policy pillars: increasing flexibility of the labour markets and decreasing the burden of the welfare state. These came at a cost of continued consolidation of German economy around larger enterprises and suppression of domestic demand and household investment.

Ireland today requires some reforms in the social welfare system. But we also need to break up our dominant market players in the domestic sectors and to increase our households’ spending and investment.

In short, in the wake of the German elections, there is preciously little that Ireland can expect in terms of the European support for our recovery. Europe, with German blessing, will most likely lend us a hand to help us out of the 'safe' boat of the Troika programme. Thereafter, swimming in the turbulent waters of the Eurozone crisis will be up to us. Let's hope Budget 2014 provides generously for flotation vests.

BOX-OUT:

Marking the fifth anniversary of the Banking Guarantee of September 2008, there are plenty of stocktaking exercises going around. Yet, for all the ‘Fail’ marks being rightly handed out to the Guarantee, all signs in the streets suggest we have learned next to nothing from our past errors. This week offers at least two such examples. Firstly, the crisis showed that a non-transparent system of monitoring and managing financial risks will result in the connected-few gaming the entire system. This week, Minister Noonan intervened in the process of winding down the IBRC, bending the rules that normally apply to company liquidations. Granting anonymity to the funders of the toxic banks comes as a priority in this country. Unintended consequence of this is that it also perpetuates the cronyist relationship between the financial services and the state – exactly the outcome we should have learned to avoid. Secondly, we know that principles-based regulations require swift, robust and unambiguous enforcement. Also this week, the Central Bank effectively shut the door on any further investigations into Anglo dealings with the regulators that could have arisen from the infamous Anglo Tapes. Five years in, there are zero prosecutions, and scores of closed investigations. To paraphrase Bon Jovi’s famous refrain: the less we learn, the more things stay the same…