Horse, meet stable door

So far in the Irish Independent's Anglo Irish tapes, the bank's former CEO David Drumm is emerging as a classic villain. But maybe the villains get the best lines. Here he is in the latest tape release [Clip 11(a) "Punch"], recounting one of his December 2008 meetings with the Department of Finance concerning how to raise capital for the bank in which the department was telling him what he had to do once he had gotten some outside investor interest --

and then when you come back, we've got a long process to go through to sort of approve you for capital, including due diligence --  which is insulting to the intelligence because they've guaranteed all our liabilities

Which is exactly right. Why was the government asking a bank to wait for due diligence when they'd already given it a full guarantee? The due diligence is done by the entity before putting the big money on the table, which they already had in September. Unless ... they hadn't!

UPDATE: Much of the initial commentary on this tape focuses on a supposed threat by Drumm to punch Brian Lenihan, then Minister of Finance. It's clear that Drumm meant it metaphorically as a demand to Lenihan to clarify whether or not Anglo was considered systemic by the government. Incidentally, Lenihan was not diagnosed with cancer till a year after this conversation, contrary to some tweets related to the topic this evening.

FINAL UPDATE: In a related clip "pregnant", Drumm unintentionally writes the epitaph for the guarantee --

When you've guaranteed somebody's entire liabilities, it's smart to write a very small cheque to stop them being called.

Note: here's a transcript of the full conversation involving both clips above.

It's like confusing Austrian with Australian

Veteran Irish economics pundit David McWilliams -- an apparent influence on the country's disastrous bank guarantee -- writes in today's Irish Independent (alt. link) in the light of the newspaper's latest disclosures about the behaviour of Anglo Irish Bank in the run-up to the guarantee:

THE brilliant English economist John Stuart Mill, writing in the 1860s, noted that "a crash doesn't destroy wealth, it merely reflects the extent to which wealth has already been destroyed by stupid investments made during the preceding boom".

With a modicum of knowledge about 19th century economics, the bogus quote detector should be going off. Those words don't sound like John Stuart Mill, they sound at best like a modern paraphrase of something he might have said. One's curiosity is further piqued when Google can't find the quote (it can find 2 other instances of McWilliams using the same quote). So then you go with the possibility that it's a paraphrase, and Voilà, the quote appears:

Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.

But that's not the only problem. That quote is not from John Stuart Mill, though various websites (from where McWilliams probably took his notes) say that it is. It was by John Mills, Article read before the Manchester Statistical Society, December 11, 1867, on Credit Cycles and the Origin of Commercial Panics, which is an important article in the intellectual ancestry of Austrian economics.

Luckily, Ireland's actual policy decisions around the time of its banking crisis were characterized by much greater diligence.

UPDATE 27 SEPTEMBER: McWilliams uses the botched quote again.

Designing the next banking crisis

The European Union Council of finance ministers was popping the Champagne last night as they reached agreement to implement a 2008 decision to beef up their authorities to wind up busted banks. In theory the deal creates large room for bail-in i.e. support from existing creditors before taxpayers have to pick up the tab. But the various thresholds which the deal imposes for these bail-ins to apply are small, and riddled with exceptions e.g.

Certain types of liabilities would be permanently excluded from bail-in: – covered deposits; – secured liabilities including covered bonds; – liabilities to employees of failing institutions, such as fixed salary and pension benefits; – commercial claims relating to goods and services critical for the daily functioning of the institution; – liabilities arising from a participation in payment systems which have a remaining maturity of less than seven days; – inter-bank liabilities with an original maturity of less than seven days.

This invites the EU's next Anglo Irish to (1) go deep, load up on such dodgy loans that you'll quickly bust through any bail-in thresholds, (2) pay your reckless managers large salaries and pensions, which are protected from bail-in, and (3) finance yourself as much possible through the payments system, especially when things are about to go pear-shaped., because payment system transactions and short-term liabilities are also protected from bail-in.

At some point, we're at the "it's not a bug, it's a feature" conclusion.

UPDATE 9 JULY: Credit where it's due, Jörg Asmussen, ECB Board member lists the ECB complaints about the above in a speech in London --

Second, the arrangements for bail-in could be more rules-based. The ECB has always argued for discretionary exclusions from bail-in to be limited so as to make the rules of the game clear for global investors. The Council approach gives the resolution authority powers to discretionarily exclude any type of liability for reasons of impossibility within a certain time frame, or to avoid wide-spread contagion. In our view, there would have been a benefit in defining ex ante the categories of liabilities that could have been excluded. This means that investors will lack certainty about how the new framework will be used, and in my view it may slow down the process of reducing financial fragmentation. For instance, there will inevitably be a political economy dimension to how national resolution authorities decide to exercise their discretion, with creditor classes that have particular importance in different national contexts likely to be favoured. This will affect the level-playing field between Member States. Moreover, the BRRD foresees that after 8% of a bank’s liabilities have been bailed-in, the national resolution authority has the option to use its resolution fund to bail-out a further 5% of the bank’s liabilities. However, some countries will have larger resolution funds than others, for instance if they have more banks paying into the fund. This means that these countries would be able to bail-out more domestic banks before they exhaust the fund than those with less resolution resources available, who would need to use more bail-in. This will also not help reduce fragmentation.

It works both ways

From the Irish Independent's Anglo tapes --

He [Bowe] also says: "If they (Central Bank) saw the enormity of it up front, they might decide they have a choice. You know what I mean? "They might say the cost to the taxpayer is too high . . . if it doesn't look too big at the outset . . . if it looks big, big enough to be important, but not too big that it kind of spoils everything, then, then I think you have a chance. So I think it can creep up." Mr Fitzgerald, the Director of Retail Banking, is heard saying: "Yeah. They've got skin in the game and that is the key."

Nassim Taleb --

Rule 5: Decision makers must have skin in the game. At no time in the history of humankind have more positions of power been assigned to people who don't take personal risks. But the idea of incentive in capitalism demands some comparable form of disincentive. In the business world, the solution is simple: Bonuses that go to managers whose firms subsequently fail should be clawed back, and there should be additional financial penalties for those who hide risks under the rug. This has an excellent precedent in the practices of the ancients. The Romans forced engineers to sleep under a bridge once it was completed.

The problem is that "skin in the game" logic quickly leads to the sunk cost fallacy -- we've already put in money, so we have to put in more -- and that's what Anglo banked on in its dealings with the Irish government.

The upwardly mobile are revolting

Financial Times analysis of the Brazil protests --

“These people view their ascension as the exclusive product of their own hard work. They are not conscious it is the fruit of policies taken by the government as well,” says Rui Falcão, president of the PT (governing Workers Party).

Você não construir isso.

Spend your dye-stained euros in Cyprus

For reasons of legal technicalities, the government of Belgium has to get European Central Bank (ECB) approval for new regulations which require currency handlers in Belgium to take out of circulation euros that look like there were stained by counter-theft measures now used in most large shipments of cash. The problem is that such notes are still legal tender. So some legal gymnastics ensues --

Nevertheless, the ECB notes that neutralised euro banknotes retain their legal tender status and that this has been acknowledged by the European Commission. In this respect, the requirements and prohibitions introduced in the draft law by the amendments would affect the legal tender status of presumably neutralised banknotes. In addition, they would effectively introduce limitations on cash payments in relation to the settlement of cash transactions where such euro banknotes are used in good faith to this end. 

Recital 19 of Council Regulation (EC) No 974/98 of 3 May 1998 on the introduction of the euro 12 states that limitations on payments in notes and coins, established by Member States for public reasons, are not incompatible with the status of legal tender of euro banknotes and coins, provided that other lawful means for the settlement of monetary debts are available. The ECB acknowledges that: (a) such other lawful means for the settlement of monetary debts, other than neutralised euro banknotes, are available in Belgium; and (b) the draft law’s objective of enhancing public security by reducing the risk of criminals’ being able to put into circulation neutralised euro banknotes in relation to a crime qualifies as a public reason outweighing the impact of the limitations on cash payments.

One strange thing is that while the ECB legal department bends over backwards to ensure that cash that might have been involved in a robbery remains legal tender in Belgium, Cyprus still has significant currency controls -- technically on the banking system rather than on cash, but in a modern economy, you can't have one without the other. Given the ECB's logic in the Belgium case, does this mean that it would be harder for Cyprus to bring in restrictions on the use of dodgy-looking euro cash since alternative forms of payment are more difficult?

Moving with the times

Judging from the e-mail traffic around here, it looks like Ireland has found a new business line from being a preferred offshore location for structured investment vehicles of the global banking system, an activity that blew up in 2007. Now we seem to be a preferred offshore site for spam. Litigation being what it is in Ireland -- what did the EU expect when taking on the country's most powerful lobby? -- we won't name names, but a recent spam surge began with an outfit nominally complying with US law by giving a physical address on Baggot Street in Dublin.

Not even a dreary spire

Did the UK really bring the G8 leaders to Lough Erne just to have a fake backdrop at the news conferences?

Aleppo Open

A Free Syrian Army fighter wears a stylish Titleist cap as the group waits for the next go-round in Aleppo with Bashar al-Assad's Russian-equipped and Hezbollah-augmented forces.

Photo: Reuters stringer, although the same photo appears in the New York Times print version only of this story, credited to Hamid Khatib.

Offer not applicable in Syria

This is a Russian tank patrolling Grozny, Chechnya, in the year 2000, after the Russians were done demolishing the city with artillery and rockets to force Chechen rebels out of it.

Bashar al-Assad -- with Russian-trained military advisers and Russian military equipment -- has done the same thing on a small scale in Qusayr last week and is intending to the same thing to Aleppo, a rather large city. He'll probably do it in July, when the world's foreign policy elites are en vacances and the best we can hope for is a statement of condemnation tapped out on someone's Blackberry.

Don't we say Never Again after each one of these things? Heckuva job.

No Irish need apply

United Kingdom Independence Party (UKIP) leader Nigel Farage opening sentence in the Wall Street Journal --

Speaking in Essex on Monday ahead of next week's G-8 summit in Belfast, British Prime Minister David Cameron ..

The G-8 summit is not in Belfast. It's at the Lough Erne resort in County Fermanagh, which is about 90 miles from Belfast. You'd think a party that is so focused on the intrinsic brilliance of the UK would have respect for such distinctions.

Unless they're not sure whether Northern Ireland is in the UK.

G-8 summitteers, welcome to Ireland.

The consultant-industrial complex

The Wall Street Journal has been doing good reporting on the not-so-paradoxical Washington DC property market, the one that kept booming even as other markets slumped. The reason: government spending on consultants and contractors, which has fed private fortunes in the defence and intelligence businesses. Now with the Prism/Edward Snowden revelations, the government is finding out that the supposed efficiency of contracting doesn't even bring information security, whatever its (dubious) financial benefits. Also, we've been saying it for about 9 years, but there's already a word out there for the people on the government side of these transactions: Securocrats.

The kid that keeps the marriage together

New York Times on the Troika falling-out --

Only in Ireland have the troika’s policies, anchored in budget cuts and tax increases, shown much sign of working. 

Image: Amazon page for Terry Eagleton's The Truth About the Irish.

Less stubborn than the EU

Saudi Press Agency reporting (with as much relish as can be communicated in a Saudi Press Agency report) the volte-face of Sheikh Yusuf Qaradawi, long-time rhetorical bête noire of the global war on terror --

The Grand Mufti of the Kingdom of Saudi Arabia Sheikh Abdulaziz Al Al-Sheikh, who is also President of the Council of Senior Scholars, Scholarly Research and Ifta; Sheikh Saleh bin Abdulaziz Al Al-Sheikh, the Minister of Islamic Affairs, Endowments, Call and Guidance; and Dr. Mohammed bin Abdulkarim Al-Essa, the Minister of Justice, thanked Sheikh Dr. Yusuf Al-Qaradawi, President of the World Union of Muslim Scholars, who is based in Egypt, on his speech recently regarding the flagrant aggression against the Syrian people by Hezbollah of Lebanon in cooperation with the Syrian regime. They also hailed the position of Qaradawi in support of the Kingdom of Saudi Arabia's senior scholars, which was clear regarding this sectarian party since its inception. Qaradawi said he was earlier at odds with Saudi scholars on their views towards Hezbollah. 'Now I realized, they were right and I am wrong', he was quoted as saying.

We've still got it

Ireland's financial centre business moves with the times --

Reuters: Egypt this month announced a $12 billion bond programme that will include sukuk issuance in early 2014, which would be Irish-listed and governed under English law.

World Peace

Nigel Powers (from Goldmember) --

There's only two things I hate in this world. People who are intolerant of other people's cultures and the Dutch.

Istanbul resident quoted in New York Times analysis of the Turkish protest crisis --

Ms. Pacal said she and her friends believed that secular Turks were prejudiced against the pious. “What I can’t stand is people who are against us for our religion,” she said.

Potemkin village

That's a fake shopfront behind this man and his dog in Belcoo, County Fermanagh -- near where, not by coincidence, the G8 summit will be held later this month. Great* story with photography by Cathal McNaughtan for Reuters.

UPDATE: A widely circulated Calculated Risk post based on an earlier Irish Times story about the same phenomenon appears to convey that Fermanagh is in the Republic. *The Irish Times probably should have gotten a credit from Reuters.

Bottom of the heap

Atrios --

The culture clash in NYC over bikes is pretty amusing, though I really don't get why they drive some people so insane. More than that, I really don't understand longtime New Yorkers (and I mean people in the dense transit and taxi rich bits, mostly Manhattan and parts of Brooklyn), choose to have personal car-centric lives. 

One difference between those dense bits of Manhattan and Brooklyn relative to the corresponding parts of Paris and London -- from which the bike rental idea was imported -- is that way more actual city residents are in those places, whereas they've been priced out in the European metropolises. Thus the routines of daily life in a congested city -- needing to get to 5 different places to complete what would be a single errand in the suburbs -- have a lot more weight in how people think about transport in New York. And rental bikes don't help a lot with that, so the locals are not going to be especially excited about them.

It's an ill wind

Reuters report that Cyprus has withdrawn citizenship given to Assad crony Rami Makhlouf --

Makhlouf initially petitioned Cyprus for citizenship in 2009, Phileleftheros reported. His supporting documents included real estate valued at 320,000 euros on the island, and 17.3 million euros in fixed five-year time deposits in Cypriot banks, it said.

Assuming the money was still there recently, that means he took a big hit from the 40 percent haircut on bank deposits in the Cyprus bailout.

Cranky Friday

These should probably be Tweets but anyway.

1. Do we really want to be celebrating (New York Times) young teens celebrating Daft Punk/Pharrell/Nile Rodgers Get Lucky given what those lyrics are actually about? Or  do we discount that as being only in New York?

2. What's the point of the International Criminal Court*(New York Times)? Bashar al-Assad must be laughing his moustache off at the threat that he might end up there.

3. Washington Post: "Liberal hawks are silent on Syria." Have any liberals, hawks or otherwise, had anything to say on Syria? You wouldn't know it from the liberal blogs.

*In fairness to the ICC, the botched verdicts in this case are from the International Criminal Tribunal for the Former Yugoslavia.

Intellectual Property

Wall Street Journal op-ed piece by John Bruton and Kevin Murphy --

The Organization for Economic Co-operation and Development doesn't regard Ireland as a tax haven. The OECD identifies four key indicators of a tax haven and none of them applies to Ireland. The first indicator is having no taxes or only nominal taxes; the second is a lack of transparency; the third is an unwillingness to exchange information with tax administrators of OECD countries; and the fourth is an absence of a substantial activity requirement. None of these criteria describes Ireland ...In December 2012, Ireland became one of the first countries in the world to sign an agreement with the U.S. to improve international tax compliance and to implement the Foreign Account Tax Compliance Act. This type of agreement is now being hailed as the emerging international standard for the automatic exchange of tax information between countries.

Irish Times op-ed by Joanne Richardson --

The OECD identifies four key indicators of a tax haven. They are: having no taxes or only nominal taxes; a lack of transparency; an unwillingness to exchange information with tax administrations of OECD member countries; and the absence of a substantial activity requirement. None of these criteria applies to Ireland. Furthermore, in December 2012, Ireland became one of the first countries in the world to sign an agreement with the United States to improve international tax compliance and implement Fatca (Foreign Account Tax Compliance Act). This type of agreement is now being hailed as the emerging international standard for the automatic exchange of tax information.

Now in fairness the rest of the articles have fairly different content, and the point about FATCA is a good one given that FATCA faced a well organized media campaign against it in the US and Europe before European governments realized its potential in their own assault on tax evasion by their citizens.

But, the similarities above point to the obvious: there are talking points circulating, prepared by vested interests in the current Irish corporate tax system, and finding their way into opinion pages of newspapers.

Not necessarily good or bad. Something to be aware of.

Where does hype go to die?

This week --

The Manchester City-Yankees partnership, which will no doubt antagonize the Mets, will deepen existing ties because the Yankees’ stadium concessions business, Legends Hospitality, already provides services at Manchester City’s home ground, Etihad Stadium. Manchester City, the recently deposed champion of England’s Premier League, will play an exhibition match against another British powerhouse, Chelsea, on Saturday at Yankee Stadium, and city and M.L.S. officials were eager to announce a deal before that game. “In the Yankees, we have found the absolute best partner for developing a world-class sports organization and a winning team that will carry the New York City Football Club name with pride,” said Ferran Soriano, the chief executive of Manchester City.

February 2001 --

Manchester United have consolidated their position as the richest football club in the world by joining forces with American baseball giants New York Yankees. The biggest joint-marketing deal in the history of sport, potentially worth billions of pounds, was unveiled at a press conference in Manhattan on Wednesday ... Under the deal, David Beckham and Fabien Barthez will be paraded at the Yankee Stadium, with El Duque and outfielder Bernie Williams visiting Old Trafford.

Transnational elites

Quality Woolwich-related trolling from Glenn Greenwald in the Guardian --

On Twitter last night, Michael Moore sardonically summarized western reaction to the London killing this way: I am outraged that we can't kill people in other counties without them trying to kill us!" Basic human nature simply does not allow you to cheer on your government as it carries out massive violence in multiple countries around the world and then have you be completely immune from having that violence returned.

What US military violence in Chechnya or British military violence in Nigeria was being "returned" by US permanent resident Tamerlan Tsarnaev in Boston or the two (apparently) British machete-wielders in London?

Theatre of Screams

New York Times interview with EU Commissioner for economic and monetary affairs, Olli Rehn --

He roots for Manchester United, his favorite club for decades ...

Enough said.

Arriviste

Paul Krugman takes note of a Wall Street Journal blog post praising a warning from Jaime Caruana, the general manager of the Bank for International Settlements ("the central banks' central bank) about the dangers of keeping interest rates for too long. As Krugman notes, the WSJ sees one credential for this warning being that --

the BIS is one of the few international financial institutions (some say the only one) to see the financial crisis coming and to issue clear warnings ahead of time.

Now at the institutional level, that's true. But Jaime Caruana wasn't at the BIS prior the financial crisis. He was head of the capital markets department at the IMF. And did he then see the financial crisis coming and issue clear warnings ahead of time? Here he is summarizing the IMF's Global Financial Stability Report in April 2007 --

Overall, then, we note that the structural transformations occurring in global financial markets are likely to have a positive impact on financial stability. However, the increased complexity of instruments and linkages and the very benign circumstances associated with the rapid rise in the types of institutions investing abroad and increasing global reach of financial institution suggests there may be pockets of vulnerability, and that we must continue to analyze all these trends in greater depth ... We think that over the last years the improvements in risk management techniques and processes in many financial institutions has been really very important, very relevant, and very positive, and this has contributed to strengthen the resilience of the financial system. We see these developments positively. There is liquidity in the financial system, and I would like to say that part of this liquidity comes from the innovation of the financial systems, so it is the very financial system that also is helping to create additional liquidity in the system.

If you read the whole thing and indeed his other pronouncements from that era, there are indeed enough CYA paragraphs about risks where he can say he did mention some possibility in advance. But clear warnings about an impending crisis? No way.

One side note to this is that the international financial policy elite has been a very nice landing spot for Spanish bankers whose record at home and their institutional prognostications prior to the crisis leave a lot to be desired. Now they're heralded as the people who saw it coming.

Confidence-inspiring

European Council 14 May post-meeting statement --

In summarising the discussion, the presidency noted convergence along the following points: 
[...]
- agreement amongst most member states that deposits under EUR 100,000 must be fully guaranteed;

Which member states didn't want to fully guarantee such deposits?

Transnational conservative elites

Boston Cardinal Sean O'Malley will not attend the graduation ceremony at Boston College because the guest is Taoiseach Enda Kenny and O'Malley says that Kenny is "aggressively promoting abortion legislation." This prompts two questions.

First, which set of Irish or Irish American pro-life activists got to the Cardinal to inspire this course of action? Second, does the answer to question 1 form his only news source on the topic?

The answer to question 2 is most likely Yes, since it will come as news to any actual pro-choice campaigners that Enda Kenny or the relevant legislation is pro-abortion. Here's the outline text (the bill is still being drafted). One hint to his eminence that he might have been misinformed should come from the bill's title: The Protection of Life During Pregnancy.

The bill legislates for abortion in highly restrictive circumstances, and the necessity to legislate for those circumstances was created by a Church-backed constitutional amendment, subsequent Supreme Court legislation, and the likelihood of further Savita-type cases which exposed the gaps in the current framework. The Cardinal needs some more diverse information sources. 

Half hidden agenda

European Commission President Jose Manuel Barroso in another of his Big Think speeches about the future of the EU --

One of Europe's most important and respected philosophers, Jürgen Habermas, recently referred to our Blueprint as "the first more detailed document in which the European Union develops a perspective for reforms in the medium and long term that go beyond the present".

Relevant section of the address by Habermas --

The Commission, the Presidency of the Council, and the European Central Bank — known in Brussels parlance as “the institutions” - are least subject to legitimation pressures because of their relative distance from the national public spheres. So it was up them to present in December 2012 the first more detailed document in which the European Union develops a perspective for reforms in the medium and long term that go beyond the present, more or less dilatory reactions to critical symptoms.

Which is a little less of an endorsement of the document in general and the Commission in particular than Barroso implies. Habermas goes on to discuss how the only logical solution to the EU's problems is a political union, which will be reached by German-led treaty changes. Somehow that part wasn't in Barroso's speech.

It's background all the way the down

The White House has given the New York Times the privileged deep background anonymous quote filled pull-back from Barack Obama's now infamous "red line" to Bashar al-Assad on chemical weapons use, which turns out to have been an invitation to the al-Assad clan to test the line both in terms of massacres and atrocities but ultimately in the use of chemical weapons itself. Anyway, there's one obvious problem with the New York Times article. If all the president's men were so uneasy about the whole concept of a red line, why were they still freely discussing it in those terms less than 2 weeks ago -- in a on-the-record background interview? --

We go on to reaffirm that the President has set a clear red line as it relates to the United States that the use of chemical weapons or the transfer of chemical weapons to terrorist groups is a red line that is not acceptable to us, nor should it be to the international community. It's precisely because we take this red line so seriously that we believe there is an obligation to fully investigate any and all evidence of chemical weapons use within Syria ... On your red line question, it is absolutely the case that the President's red line is the use of chemical weapons or the transfer of chemical weapons to terrorist groups ... So again, it’s precisely because we take the red line seriously that we feel like there needs to be clear, factual, evidentiary basis for our decisions ... But I think nobody should have any mistake about what our red line is. It is when we firmly establish that there has been chemical weapons use within Syria, that is not acceptable to the United States, nor is the transfer of chemical weapons to terrorist organizations. And the people in Syria and the Assad regime should know that the President means what he says when he set that red line.

If the concept was seen as a mistake from the start, why did the advisers dig themselves in 2 weeks ago before rushing to brief the New York Times that really they didn't like it at all?

The phrase should have been dumped once the problem was realized. Right now it's on the way to being the equivalent of the State Department's "no opinion on your border dispute with Kuwait" communication to Saddam Hussein.

The General Theory of the Future

Wading into the Niall Ferguson controversy (with Ferguson himself already having conceded defeat), Jonah Goldberg finds an old Gertrude Himmelfarb quote --

There is a discernible affinity between the Bloomsbury ethos, which put a premium on immediate and present satisfactions, and Keynesian economics, which is based entirely on the short run and precludes any long-term judgments. (Keynes’s famous remark. “In the long run we are all dead,” also has an obvious connection with his homosexuality — what Schumpeter delicately referred to as his “childless vision.”)

Above, part of the table of contents of Keynes 1930 book, Essays in Persuasion.