29/2/16: GE 2016 - Ireland's Answers to No Questions Asked

The election 2016 is a catalyst-free contest that has been shaped by the political parties attempts to understand the mind of the electorate, while the electorate has been struggling to make up its mind about what the pivotal issues of the election should be. Compounded by the  epic gaffes of the reality-skipping life-time politicos (take that Enda Kenny pill, ye old comedian) and we had an election devoid of real ideas and ideals as far as the mainstream parties go.

Harder Left and genuine Centre-Left (e.g. Social Democrats and majority of the independents) have attempted to focus the elections on the issues relating to the lagging nature of economic recovery in the domestic sectors - an issue that, traditionally, has been the core breadwinner for the Labour. However, having completely abandoned any pretence at ideals-based, principles-rich politics, the Labour has thrown its weight behind the FG-led attempt to steer plebiscite into a debate about a general (and to majority of us abstract) notion of policy continuity and stability of governance as the panacea for the ‘continued recovery’. Topical issues and specific policies aimed at actually producing a real recovery that is not stuck in the canyons of tax arbitrage by the MNCs became the victims of this absurd departure from the world of the living into the world of FG/LP.

Even shielded from competition by being effectively the only Right-of-Centre (in the Politics of Boggerville 101-style of Enda Kenny and Michael Noonan) party, FG has managed to squander the election by such a massive margin, one has to wonder how on earth can the party continue to pretend to represent anyone other than a handful of clientilist farmers, rent-seeking businessmen and a bunch of conservative civil servants. 

Not surprisingly, the key battles of the GE2016 have been waged in the contestable space created by Labour’s departure from its social and electoral core. 

Failure of Labour and FG to consolidate Centre-Left and Centre has meant that the FF was left significant room to recover some of its electoral fortunes. In a typically FF fashion, the ‘new party of the Centre-Left’ has managed to deliver very few tangible new ideas, but provided plenty oppositional rhetoric and old-fashioned pork barrel promises.

All in, Election 2016 was dominated by the lack of big thinking, shortage of specific ideas, and a large doses of surrealism. Neither global, nor European context entered the mainstream debates; economics swung from ‘tax and don’t spend’ to ‘don’t tax and do spend’ heralding the arrival of the Celtic Tiger 3.0. The entire circus of the ‘fiscal space’ debates was yet another opportunity for Enda Kenny to play the role of a cross between the U.S. Republican contestants Ben Carson and Jeb Bush - a dynamic combo of a man who can’t run for the office and a man who doesn’t know he wants to run for the office. Money, advisers, analysts, party machines and even track record - all squandered on disconnecting from the voters.

In contrast, three smaller political groupings / parties: Renua from the Right and Social Democrats from the Centre Left and the Independent Alliance have mangled to produce far reaching, ambitious, even if, at times, poorly structured policies proposals. The Independent Alliance and Soc Dems have fielded some really strong, highly impactful candidates with ideals and occasionally ideas of their own. These three forces, relatively weak and surrounded by a sprinkling of other independents and political groupings brought into Election 2016 something missing in Irish politics - integrity, honesty, openness and debates. No matter how strong their showing in the current Election has been, they provided a crucially important alternative to the stale politics of Irish elites: the Axis of FG, FF and Labour.

The most surprising aspect of the Election 2016 is the complete and total disregard by the core political parties for the voter perception of Irish politics as a palace of parochialism, corruption and cronyism. After 5 years of the current Coalition effectively replaying old FF book on cronyism and favouritism, while droning on about the ‘New Era in Politics’, the litmus test of this electoral cycle should have been a focus on political system renewal and reforms. This simple was a task too difficult for the political system to handle and even contemplate. Which, sadly, means that our Permanent Government - the cabal of unelected advisers and senior civil servants - remain in place, aided and abetted by the school of hungry and agile piranhas from the private sector always ready to issue a research note or two about the need for continuity, the necessity of predictability, the value of stability and the fabled markets’ longing for conformity with the status quo.

All hail Tipperary North constituency for delivering much of it in a concentrated form once again… 

Which brings us around to 'predicting the future'. It will be the same as the past.  

Any coalition involving FG will be a poison chalice to either FF or FG or both precisely because although FF lacks ideas, at least it is based on the ideal of a pub-pump-politics that connects with wider ranging population. FG can't even muster as much. Despite the fact that the latter has a better pool of younger cadre than the former, in my opinion, and has been better in governance too (although here we really are setting the bar low to begin with). FG will continue to play the 'extend and pretend' card in any power deal, hoping the miracle of recovery (sooner or later, it is bound to happen in a meaningful way, or so the theory goes) will sustain them into the next election. Which means their track record will be woeful - no reforms, no change, just throwing pennies and dimes at problems as soon as Michael Noonan can rake them in. 

For FF, such a scenario won't be good enough because the party needs desperately to rebuild and re-energise its base (which it started doing in the GE 2016, but is yet to complete).

Any other coalition (involving Independents) will not be stable, as FG seniors clamour for top brass positions, while the Independents largely want the same. Competition is an unbearable condition for Irish elites that prefer to play a 'spread others' butter on your spuds' game.

Alternatively, the whole circus tent might come down and we might go to the polls once again, comes late 2016 - early 2017, especially if the 'fiscal space' gets shocked a tad.

I'd put 30-35% chance on the GE2016.2.0, an a balance on the FF/FG shotgun marriage, and a 40% change on GE2017. Though, of course, miracles of the parish priest and the publican agreeing with the AIB branch manager down at the pub on where to put that new Centra in town do happen, still... Harmony might be attained.

10/6/2015: A Bombshell Goes Off on Anglo, IBRC & Nama

Here are the excerpts from the very important speech delivered today in the Dail by Deputy Peter Mathews. And I urge you – the public and professional readers of this blog – to read through the length of this.

My focus here is one core aspect of the IBRC scandal that remains largely ignored by the Government and the media and that Deputy Mathews raises. For those inclined, full official transcript is available here. In the quotes below, bold and italics are emphasising points of major importance and are added by me.

“… I want to talk about how the so-called profits of IBRC were inflated for a period starting in 1993 and travelling forward to the present date. There were two ways this was done.”

Note, the word ‘inflated’ in relation to reported profits. If such inflation indeed take place, it would imply that Anglo reported profits were fraudulent. And this covers years from the early 1990s through 2003. That is a lot of years of potential major corporate fraud – fraud that (if proven such) would involve deliberate overcharging of clients, concealment of such overcharging and reporting this overcharging on the revenue and profits side of the company accounts.

The Act

“First was the direct manipulation of interest charges and the concealment of loaded interest, which happened in the majority of cases. An extensive exercise carried out by Bank Check revealed this. … Some 494 separate DIBOR-EURIBOR rates were reconciled and found to be loaded to a degree ranging from 0.5% in the early 1990s to between 0.03% and 0.05% in 2002 and 2003. Some 80% of all the loans examined, relating to many clients, were found to have this loading.” So the [alleged] fraud was systemic, not sporadic.

The Concealment

And it was actively concealed from the clients: “The statements which clients received never showed the breakdown of the base rate and the DIBOR 3-month rate plus a margin, which had been agreed by loan agreements, plus the reserve asset cost, RAC, if and when it applied.” Does this show an intent? For one has to ask if not intent, then how could this ‘error’ or ‘omission’ be perpetuated across 80% of examined cases?

The Size

The [alleged] fraud was also on a large enough scale to makes it material. “The quantum of the loaded overcharging was in the order of 0.3%. A margin of 1.5% would comprise two elements, namely, the amount that goes to cover overheads, which is usually about 0.9% of the 1.5%, and the remainder, 0.6%, which is the profit of the bank. A loaded secret dark pool profit of 0.3% would represent one third of the overall profits, including that dark pool profit.”

The letter from Mr. Morrissey’s solicitors that Deputy Mathews cites states the following: “Bankcheck has advised Mr. Morrissey that, in total, approximately EUR1 billion has been overcharged by you, the Special Liquidators, Nama, private equity and institutional buyers of former IBRC loans, IBRC and its predecessors. This is very material sum and represents a most material proportion of the bank’s declared profits over the past 25 years. You have been made aware of this on several occasions.” Note: “you” references in the above quote joint special liquidators of IBRC. And further note Nama mentioning in the above.

Boom! Remember the case against the Anglo directors that alleges wrongdoing relating to manipulations of the company accounts by means of loans and interbank deposits? Well, that is chips compared to the juicy chunk of meat contained in the above statements: thanks to over-billing of the customers, Anglo might have been over-inflating its margin by a third! Year, after year, after year. 

And, even more importantly, this information was known and is known to the current authorities and liquidators. Who did nothing with it.

Should former shareholders, current investors in ex-IBRC debt, former borrowers from Anglo, and possibly even auditors who were not given pertinent information by the Anglo and IBRC call in the legals now, the hit will be on the state.

Deputy Mathews went on: “That means the market valuation of Anglo Irish Bank in the 14 years up to 2002 when this was going on was overstated by one third. If it had been discovered by proper auditing the market would react with a collapse, …of at least one third of the value of the bank and this would affect the shareholders, creditors and depositors. That would happen irrespective of whether there was an international credit bust and a freeze of credit.”

Systemic Failure that Continues Today

“This has been brought to the attention of the NTMA, NAMA and others but it has been ignored to date. I have the evidence here and it is shocking.” Let us stress the fact that Irish authorities were and are aware of this.

• An Irish court ruled on the matter in favour of Mr. Morrissey.
• Mr Morrissey notified this to the bank.
• Mr. Morrissey also notified this to Nama and the Department of Finance in early January 2015. It was notified to the Central Bank in late January 2015, and to the Minister for Finance in early March 2015, and subsequently again to the Central Bank in early March 2015. And the case is being ignored. Per Mr. Morrissey, he received no reply to his notifications from any official body.
• Per Mr. Morrissey letter cited by deputy Mathews today, Mr. Morrissey notified the then Chairman of IBRC, Mr. Alan Dukes of overcharging as far back as in mid-January 2013. Simultaneously, he notified of the same matter the Department of Finance, the Central Bank and the Financial Regulator. 

Mr Morrissey has been ignored since then, according to the record set forth by his solicitors.

It gets worse. Recall that the liquidation of IBRC was undertaken under the procedure that all claims against IBRC were to be notified before the end of 1Q 2015. And again, the notifications in the case of Mr. Morrissey were filed on time. We are at the end of 2Q 2015 and he received no response on these notifications. So the deadline established by the IBRC liquidation procedures has now expired. And the IBRC and by extension the State have not replied to Mr. Morrissey before the expiration of that deadline, effectively undermining the very process of liquidation they themselves set out.

Is this a collusive behaviour? In economics, such actions would be viewed as potentially collusive: all parties responsible and empowered knew, none responded, the wrong remains unaddressed.

The Legal Bits

Mr Morrissey solicitors letter cited by Deputy Mathews has this to say on the matter: “It appears numerous illegalities have been carried out by Anglo Irish Bank and its successors over these 25 years [from 1990 through today]. You, Mr. Wallace, have acknowledged under oath in the US Court proceedings the overcharging of interest by the bank. As the overcharging has continued under your watch, you are jointly and severally liable for same, together with the Minister and Department of Finance, the Central Bank of Ireland and the Financial Regulator.”

And per official behaviour in response to the evidence presented: “we most strongly object to this glib attempt to absolve yourselves from responsibility and liability both for historic and current interest overcharging, or the consequences thereof, including the sustained misstatement of the bank’s publicly released annual accounts since 1990.”

The IBRC Inquiry

Deputy Mathews spoke in the context of the upcoming IBRC inquiry. But what he said is more important than an inquiry itself. Here is why. The inquiry is supposed to provide and independent and objective view of alleged, potential, possible wrongdoing at the IBRC. Deputy Mathews statement shows that in an actual, tangible, established and courts-confirmed case of misdeeds by the Anglo and IBRC, the State is unwilling to do anything to address these misdeeds. Thus, one has to ask a simple question: what’s the point of an inquiry into alleged wrongdoings, when actual wrongdoings are not being dealt with.

Now, take a trip through theory. An inquiry can come back with two possible outcomes: One: nothing found. Two: something worng is identified. In outcome One, under the above revelations about the Anglo overcharging case, one can be pretty certain that no one will believe the inquiry findings. There is no trust in our systems, there is no trust in our processes. No matter how well the inquiry works, its findings, were they to deliver inconclusive verdict, will always be subject to mistrust. In outcome Two, nothing will happen. Just as nothing is happening in the overcharging case. The outcome will be ignored. And so the inquiry, given the context of the cases such as cited by Deputy Mathews is hardly an exercise in building trust. For all its possible merits in design and execution, it is more likely going to be an exercise in further chipping at the little trust still left in this system.

Other Players in the Penalty Box

Deputy Mathews quotes from the letter from the Black solicitors, “following the John Morrissey case: “It appears numerous illegalities have been carried out by Anglo Irish Bank and its successors over these 25 years. You, Mr. [Kieran] Wallace, have acknowledged under oath in US Court proceedings the overcharging of interest by the bank. As the overcharging has continued under your watch, you are jointly and severally liable for same, together with the Minister and Department of Finance, the Central Bank of Ireland and the Financial Regulator.””

But remember, there are other players beyond Mr. Morrissey who might want to ask few questions from the Government now that the word is getting out. As Deputy Mathews notes: “This is serious stuff. There are loans that are being operationally processed by the originators of those loans. Now those loans are owned by third parties, including hedge funds, and they are calculating interest on an unlawful basis, even though it has been brought to their attention. This is shocking.”

Yes, we have on the line now:

1.  Borrowers who were [potentially] defrauded of billions in false charges;
2.  Investors in Anglo shares who were potentially defrauded by over-valuations of the bank;
3. Investors in distressed loans purchased off Anglo-IBRC who are holding hot paper with [potential] fraud written all over it – the loans of the borrowers potentially defrauded;
4. Potentially, the auditors of Anglo/IBRC who were possibly misled by non-disclosure of overcharging;
5. And on top of all of them are the underwriters of the IBRC liquidation: taxpayers, who are facing huge bills for this.

And Another Bombshell

Deputy Mathews did not end just there. 

Here is another bombshell that exploded loud and clear in the Dail today, even through the repeated interruptions: “There is other evidence that NAMA knowingly----- allowed the information memorandum ----- -----for the Chicago Spire ----- to be negligently misleading, which has resulted in unnecessary huge losses for both the Irish people and the developer. I have the evidence for that.” That’s right – you’ve read it here. There are now allegations that Nama – not subject to the inquiry – has ‘mislead’ the markets participants to the tune of [potentially] hundreds of millions on just one, repeat, just one, asset sale.

Conclusion

These are mind-blowing revelations that expose more than just a systemic fraud [potentially] being perpetrated by a rogue bank. These are the revelations that show the current system wanting in respect of acting on the established legal case judgement in addressing the systemic [potential] fraud. And the worst bit is that even that is a tip of an iceberg, for Deputy Mathews statement about potential misrepresentation of the Chicago Spire case by Nama opens up the EUR77 billion can of worms over the Grand Canal. In this context, the current planned inquiry into 2009-2013 IBRC dealings is nothing more than a fig leaf of fake decorum on a rotten corpse of the Irish Solution to an Irish Crisis.

Still feel like the IBRC inquiry over 2009-2013 deals is going to be enough? Or should we not start systemically reviewing all post-crisis dealings and pre-crisis wrong still unaddressed by all agencies involved?