Arthur Doohan: We all had a pleasantly salacious time some days ago watching various white-collar villains being hauled before the courts and given "good talking to's" by our esteemed judiciary. In the vernacular I believe this is referred to as the 'perp walk', where the fourth estate gets to harmlessly indulge our ancient tendencies to 'hue and cry' and 'witchhunt'.
All of which amounts to slamming the stable door on a horse whose cantering about the farmyard is still damaging this economy. Bad bankers and banking has caused huge current problems for everyone in the state. The same problems are afflicting most of the developed economies concurrently and concertedly.
Banking has seldom been an asset to the state or the economy in Ireland. It has had just as poor a history of labour disputes as other sectors and it has been sufficiently unfriendly to enterprise and innovation that the state has had to set up its own banks and to establish the global model for government agencies to stimulate investment, both foreign and domestic. And all this while the banks demanded the same privileges that obtained elsewhere such as depositor guarantees and light touch regulation.
So, if we are to avoid more of the same from our banks and to help us get out of this morass, I would ask you to consider a " 'purp' walk" for banking, that is, let us take out for a stroll the notion of the 'purpose' of banking. Specifically, what are banks for, what have they actually been doing, what are they doing now and what should they be doing in the future.
What we have
We, currently, have what are called 'universal banks', that is, they do 'everything' with respect to money and quite a few other things beside. Our banks borrow money, lend money, move money, convert money, 'invest' money and advise on all of the foregoing. For all of these services they charge fees as well as potentially profiting from 'exposures' or risk taking we inadvertently allow them to enter into with our money. About the only thing they don't do is print the damn stuff, despite what some 'theorists' will tell you.
This concentration of business models into a single conglomerate is a historic accident rather than a strategic decision. It is an accident waiting to happen which it does, repeatedly, as the history of banking shows. Further, it is an 'accident' that disregards the prudential structures that exist in all other financial markets.
Nowhere else are the risk takers allowed operate the risk transfer mechanism. In plain English, in every other financial market in the entire planet either there is an 'Exchange' which is an independent entity that carries no risk or risk transfer is done multilaterally from each to each other. Only in banking are the handful of big players, who carry the most risk, allowed to operate the 'clearing system'.
Out of this strategic oversight grows the risk that allows politicians to frighten us with threats of ATM shut downs and failures to pay wages and the like. The recent systemic problems at RBS/NatWest/Ulster have shown us that the 'clearing banks' are prone to failings in this.
There is, also, an embedded conflict of interest in the fact that banks are allowed to charge 'advice fees' for selling products that they will make profits on. Is there any legislation or regulation that forces bank officials to advise clients of their competitors products or services? If there is, I assume, it is 'enforced' to the usual standard of the Irish fiduciary authorities, says he pulling his lower eyelid to the floor….
A further issue is that its 'risk management tools' (derivatives principally) and risk transfer methodology (securitisation mainly) have proven to be ineffective and actually dangerous in many cases.
Added to all of this is a star system of employment leading overpayment for what amounts rewarding people for lucky gambling outcomes and encouraging doubling up of both good and bad bets.
Lastly, our banks insist on being given a Government guarantee for their 'raw material' (our deposits) so that they don't have to take responsibility for their profligacy. This exposes us to their 'moral hazard' and gives them a free embedded option, known, on Wall St., as the "trader's put" (the trader can 'put' you into trouble but walk away untouched himself). It has been amusing to watch them turn the notion of 'moral hazard' on its head in refusing to allow borrowers some relief from the bankers mistakes while they refuse to deal with their own moral bankruptcy; amusing in a very frustrating way, that is.
So, clearly, banking is a mess but our Government is in thrall to it even if the people no longer are. Clearly, also, it has been a mess for a very long time.
It is structurally unsound, overly complicated, morally deficient, professionally conflicted, technically overreaching and given to self-indulgent excess. In parenting terms, it's a spoilt child with a cocaine habit driving the family car.….with the family on board.
What we need
Anybody can lend money to anyone else and they can charge interest for it? So, why do we lend our money to bankers rather than directly to businesses or housebuyers? On the continent people do that, they buy bonds of (lend money to) businesses and housing associations they know. Yes, they have banks as well but 1) "not so much" and 2) "not so big".
In the 'Anglo-Saxon' world of business practice that we Irish have adopted by default (a word we must judiciously use), we do have a share buying culture but not a bond buying one. We use our banks as risk diversification mechanisms for our prudential investment strategy. That is, we let the bank manager invest our money in a pool of loans and we take a reduced return in exchange for a heretofore presumed safe one.
We need to preserve this function in banking and that is the only thing we need to keep.
Getting from here to there
Domestically, we have been witnesses to Lenihan's and Noonan's 'Frankenstein-ian' misadventures in attempting to create a viable banking system by assembling bits of dead institutions into facsimiles of living ones. Even the nomenclature of 'pillar banks' has been unfortunate in that instead of being strong and supportive they are seen as immobile, hard and old-fashioned.
Contrary to the assertions of those 'on the take' from the system, neither the Guarantee, the recapitalisations, NAMA or any other of the fudged reforms has created any institution capable of advancing new credit; as the closures, redundancies and shrinking debt levels attest.
Internationally, we have only seen the Vicker's Commission in the UK consider any changes to the structure and nature of banking. The concept of 'ringfencing' has a pleasant and well-meaning 'ring' to it but it has not been shown to be either 'organic' or concretely implementable. Further, the seven year implementation timetable seems unnecessarily long for such minor reforms and seems designed to allow for a sustained lobbying process to water down the provisions which has already got under way and already has the support of the Chancellor. Fortunately, the latest wave of scandals seems likely to consign Vickers to the dustbin of inadequacy and irrelevancy.
So, having dispensed with the current situation without reference to the classic Kerryman's 'directions' joke, we have to ask what road do we take to get to a stable safe banking system.
The prescription
There was nothing wrong with 'Glass-Steagall' apart from bankers not liking it which in itself seems a sufficient reason for bringing it back. The implied principle of having separate and single 'business lines' for operations with fiduciary duties would seem a sensible one and should be extended to the fullest degree. It would make real the concept of 'ringfencing'.
This would imply the creation of a utility clearing mechanism divested from the banks. If it was good enough for the gas and electricity networks here and abroad I don't see why it doesn't apply to the banks.
It would also imply the divestiture of the banks credit card businesses. Again, there is no reason why not to and there is no good reason why we should be tolerating financial 'conglomerates'. People already hold multiple cards from multiple operators, some of which are not bank affiliates and the banks already pool credit data into separate agencies to determine credit ratings. A further advantage to separating these 'business lines' is that the credit card system is in itself a form of clearing system and if completely independent of the banks would give a strength in depth through redundancy to the economy's need for payment clearing mechanisms.
Lastly, the banks should not be allowed to dispense advice for which they charge fees which puts them into conflicts of interest. This is the same objection in principle as saying that 'audit' and 'consultancy' should not be provided to businesses by the same firms.
For those who wish to cavil about the expense implied in these reforms, I can only point to the expense we are all being put to by not having these reforms and ask which you would rather go through again.
This leaves us with the problem of morally hazardous bankers. The operational difficulty is that we 'guarantee' the deposits but the problems come from the loans. How can one guarantee the loans? You can't in practice. What you can do in practice is constrain the guaranteed banks from lending offshore.
A particular problem with the Irish banking crisis was that German and British fundmanagers seeking higher yields lent money into Irish banks who lent it to their pet developers to overpay for German shopping malls and British hotels. It has not been explained why it is the moral duty of the Irish taxpayer to compensate these 'professionals' for their greedy mistakes. I understand why the Irish must pay for the hotels and shopping malls built in Ireland but I do not see why we are liable for those bought elsewhere.
I am not suggesting that banks should not be free to lend overseas…only that they should do it via distinct legal entities and that these should not be guaranteed by the State. If the bankers complain that the won't be able to do business overseas that is their problem not that of the State or its taxpayers.
In order to square the circle of competition and robustness and redundancy, I would want to see the 'mutual' sector restored to a position of health and strength. This could be done in many ways but perhaps the simplest would be to merge the EBS and PTSB and perhaps IL&P to give a fourth 'player' in the credit advance/banking sector.
As a final flourish to wrap up everything in a neat bow tie of robust redundancy, the PostBank should be reconstituted so as to provide a third clearing mechanism.
Conclusions
These reforms would leave us with a GDP appropriate banking industry robust to shocks with enhanced transparency and competition.
If the bankers say that they will be 'hamstrung', I say that they have 'hamstrung' the whole economy and that they should get used to suffering like the rest of us.
The Irish economy and the Irish people need working banks much more than it needs Irish owned banks and we need banks that won't get too big for our boots.
There is a quiet discussion being held right now in the Dept of Finance about the future shape of banking in Ireland. In that 'discussion' the civil servants are responding 'how high?' when the banks talk, in exactly the same way they did when the banks rewrote our bankruptcy legislation. We need to tell our politicians to get involved in that discussion and if they won't then we should get involved in it directly.
Recap
Those reforms in bullet form are;
- Create a utility clearing function to separate credit risk from payment transmission.
- Create single business line banks by divesting credit card businesses
- Forbid advice fees
- Remove the 'deposit guarantee' from funds lent overseas
- Reconstitute a fourth major lender from the old 'mutual' entities
- Reconstitute the PostBank
This is an edited version of a post which originally appeared on Arthur Doohan's blog
Showing posts with label arthur doohan. Show all posts
Showing posts with label arthur doohan. Show all posts
Tuesday, 7 August 2012
Friday, 20 July 2012
Guest post by Arthur Doohan: Don't complain - start repairing LIBOR
Arthur Doohan:LIBOR ‘structurally flawed’ says the ‘Fed’....
Power corrupts...even a little power corrupts quite a lot...as we have seen, down the millennia and at home and abroad. Expressing disgust at traders attempting to manipulate (and I stress the ‘attempting’) rates in their favour is as false and vacuous as expressing surprise at a shark attack or a pitbull bite.
The moral vacuum of having profit as an only goal and a highly linear and transparent process for achieving that target would affect anyone, and as the ‘Zimbardo prison experiment’ has shown most people are pliable in the appropriate environment. That the environment was as biased and extreme as having a cohort of young males of a very particular class and education only exacerbated the risks and tendencies for extreme behaviour. I am not condoning their behaviour. I am saying that it is a completely predictable byproduct of the system as it was designed.
LIBOR didn’t break,the market did and blaming LIBOR is very much like shooting the messenger. And ‘shooting the messenger’ and indulging in ‘distracting defenestrations’ of flamboyant CEOs is very much what the authorities and regulators are entirely about these days. They very much want you to believe that it was individual greed and corruption that is to blame for the mess we are in. What they don’t want you doing is questioning their ability and integrity. And above all, they don’t want you questioning the utility and value of the system that provides their ‘raison d’etre’.
If you need any further evidence, I would ask to you to witness the embarrassment of Charles Goodhart, formerly of the Bank of England, on the ‘Today’ programme on BBC R4 on Tuesday 17th July, 2012 admitting that the market was still dysfunctional and that when the crisis broke 'LIBOR fell between the cracks’. The regulators weren’t even looking at LIBOR, the flagship of liquidity and transparency in their ‘light touch’ dreamscape.
If there was no market during the height of the crisis (and there wasn’t and still now it is a shadow of its former self) then the regulators are as guilty for accepting ‘lies’ they knew to be such as the banks are for trying to tell those ‘lies’. But, in the same way the Catholic Church sought to cover up child sex abuse to protect its reputation, the financial regulators preferred to sought to hide the scale of the dysfunction to preserve the myth of ‘market capitalism’ and thereby the need for regulation of it.
We are quickly learning how easily we can live without the ‘universal church of Rome’. I think it is time to understand that ‘universal banking’ is as much an entirely predictable perversion of capitalism as ‘child abuse’ was a predictable outcome of the structures and strictures of Catholicism. Neither are good for the people they claim to serve, both have been perverted to suit the ‘operators’.The ‘Fed’ is the Federal Reserve Bank, the central bank of the USA. It and the Securities Exchange Commission and their UK counterparts, the Bank of England and the Financial Services Authority are the authorities charged by their governments to oversee and develop their national financial and capital markets.
Since the end of the Bretton Woods agreement and the subsequent lifting of capital controls this work has taken on greater levels of international coordination and cooperation.
Arising from the rigour of American tax law enforcement, in the 1970s the newly dollar-enriched oil exporting states found it more expedient to place their dollars on deposit in the Cayman Islands but to transact their business in London, due to a far greater extent to their trust in English courts than their admiration for London bankers. Thus was borne the original ‘Eurodollar’ and ‘Eurobond’ markets.
LIBOR predated this accidental flowering into a second coming for a post-imperial City of London as a major financial center. It had existed for a few decades by this stage. The volumes dependent on LIBOR settings went on an exponential growth binge, which accelerated even harder with the advent of the personal computer which allowed for the rapid and accurate pricing of derivatives.
Yet, despite all of the computerisation and all of the enhanced communications facilities and capablities that followed this boom in volumes and profitablity, LIBOR continued in its accustomed fashion as an honour-based voice-reported system with no formal legal standing, other than that which contracting parties chose to endow it with, and with no mechanism for appeal or redress.
Once again, it must be stressed that LIBOR is a private convention entered into by contracting parties utilising an unpaid-for voluntary service provided by a lobbying organisation. It is to the credit of the British Bankers Association that they did develop the system with expanded panels, greater outlier discounting and some level of historic transparency.
But for over sixty years the two globally most important sets of regulators looked at this private piece of ‘plumbing’ and decided on a daily basis that it was a suitable vehicle for pricing the underpinnings of all of the derivatives and the majority of the wholesale lending that they were charged with regulating.
And, now, they have the cheek to say that it is a “flawed mechanism”.
That the authorities are seeking to distract us from their failures with individual tales of venality and spectacular defenestrations is the true measure of their moral and practical failure and further proof that have no long term interest in reforming themselves or their systems
Arthur Doohan blogs here
Power corrupts...even a little power corrupts quite a lot...as we have seen, down the millennia and at home and abroad. Expressing disgust at traders attempting to manipulate (and I stress the ‘attempting’) rates in their favour is as false and vacuous as expressing surprise at a shark attack or a pitbull bite.
The moral vacuum of having profit as an only goal and a highly linear and transparent process for achieving that target would affect anyone, and as the ‘Zimbardo prison experiment’ has shown most people are pliable in the appropriate environment. That the environment was as biased and extreme as having a cohort of young males of a very particular class and education only exacerbated the risks and tendencies for extreme behaviour. I am not condoning their behaviour. I am saying that it is a completely predictable byproduct of the system as it was designed.
LIBOR didn’t break,the market did and blaming LIBOR is very much like shooting the messenger. And ‘shooting the messenger’ and indulging in ‘distracting defenestrations’ of flamboyant CEOs is very much what the authorities and regulators are entirely about these days. They very much want you to believe that it was individual greed and corruption that is to blame for the mess we are in. What they don’t want you doing is questioning their ability and integrity. And above all, they don’t want you questioning the utility and value of the system that provides their ‘raison d’etre’.
If you need any further evidence, I would ask to you to witness the embarrassment of Charles Goodhart, formerly of the Bank of England, on the ‘Today’ programme on BBC R4 on Tuesday 17th July, 2012 admitting that the market was still dysfunctional and that when the crisis broke 'LIBOR fell between the cracks’. The regulators weren’t even looking at LIBOR, the flagship of liquidity and transparency in their ‘light touch’ dreamscape.
If there was no market during the height of the crisis (and there wasn’t and still now it is a shadow of its former self) then the regulators are as guilty for accepting ‘lies’ they knew to be such as the banks are for trying to tell those ‘lies’. But, in the same way the Catholic Church sought to cover up child sex abuse to protect its reputation, the financial regulators preferred to sought to hide the scale of the dysfunction to preserve the myth of ‘market capitalism’ and thereby the need for regulation of it.
We are quickly learning how easily we can live without the ‘universal church of Rome’. I think it is time to understand that ‘universal banking’ is as much an entirely predictable perversion of capitalism as ‘child abuse’ was a predictable outcome of the structures and strictures of Catholicism. Neither are good for the people they claim to serve, both have been perverted to suit the ‘operators’.The ‘Fed’ is the Federal Reserve Bank, the central bank of the USA. It and the Securities Exchange Commission and their UK counterparts, the Bank of England and the Financial Services Authority are the authorities charged by their governments to oversee and develop their national financial and capital markets.
Since the end of the Bretton Woods agreement and the subsequent lifting of capital controls this work has taken on greater levels of international coordination and cooperation.
Arising from the rigour of American tax law enforcement, in the 1970s the newly dollar-enriched oil exporting states found it more expedient to place their dollars on deposit in the Cayman Islands but to transact their business in London, due to a far greater extent to their trust in English courts than their admiration for London bankers. Thus was borne the original ‘Eurodollar’ and ‘Eurobond’ markets.
LIBOR predated this accidental flowering into a second coming for a post-imperial City of London as a major financial center. It had existed for a few decades by this stage. The volumes dependent on LIBOR settings went on an exponential growth binge, which accelerated even harder with the advent of the personal computer which allowed for the rapid and accurate pricing of derivatives.
Yet, despite all of the computerisation and all of the enhanced communications facilities and capablities that followed this boom in volumes and profitablity, LIBOR continued in its accustomed fashion as an honour-based voice-reported system with no formal legal standing, other than that which contracting parties chose to endow it with, and with no mechanism for appeal or redress.
Once again, it must be stressed that LIBOR is a private convention entered into by contracting parties utilising an unpaid-for voluntary service provided by a lobbying organisation. It is to the credit of the British Bankers Association that they did develop the system with expanded panels, greater outlier discounting and some level of historic transparency.
But for over sixty years the two globally most important sets of regulators looked at this private piece of ‘plumbing’ and decided on a daily basis that it was a suitable vehicle for pricing the underpinnings of all of the derivatives and the majority of the wholesale lending that they were charged with regulating.
And, now, they have the cheek to say that it is a “flawed mechanism”.
That the authorities are seeking to distract us from their failures with individual tales of venality and spectacular defenestrations is the true measure of their moral and practical failure and further proof that have no long term interest in reforming themselves or their systems
Arthur Doohan blogs here
Monday, 9 July 2012
Guest post by Arthur Doohan: The facts about LIBOR
Arthur Doohan: Personally, I love a good conspiracy theory even though most of them can’t take a rinse let alone a serious ‘spin-cycle’. But matters take on a different colour when the conspiracy theory feeds a hysteria that turns people into a lynch mob.
Much of the nonsense currently in the air about ‘LIBOR’ and attempts to manipulate it for personal gain is destructive, dangerous and will leave everyone feeling foolish and looking incompetent, which, no doubt, many are but it does neither them nor us much good to have the mask of dispassionate professionalism slip so far and reveal so much.
Let us start with a few facts and inconvenient truths.
The British Bankers Association which runs the ‘LIBOR fixings’ system is a private trade representation or lobby group. ‘LIBOR’ is not part of any legislatively enacted or governmentally sponsored program. ‘LIBOR’ is a bankers convention, created by bankers for their own and their counterparties convenience. ‘EurIBOR’ is the same thing but run by the European Bankers Federation. Both systems are operated by the so far un-impeached agency of Thomson-Reuters on behalf the sponsors. If someone created a better one (and several have tried) the world and its market-makers are free to move to it. It is a banker’s shorthand that for decades was a core component of the transparency and efficiency that made London such a global financial centre. It predates derivatives all types apart from options....
I do not seek to defend bankers or their practices. I personally left investment bank trading because I found it to be morally corrosive and no longer wished to be a ‘professional gambler with other people’s money’. But we are not going understand the mess we are in with ‘universal banking’ and hyper-liquid trading of assets, real or imaginary (sorry, that should be ‘derived’...) unless we ascertain the facts. As a former ‘LIBOR submitter’ and derivatives trader there are a few facts that need emphasising. Otherwise, the authorities and politicians will once again be in error as to the real problem and, as usual, with mis-diagnoses end up prescribing the wrong treatments.
Here’s another inconvenient truth.
It has not been proven that any submissions by Barclays to the BBA LIBOR panel have materially influenced the setting of a single rate on a single day to the demonstrable cost of any borrower or derivative counterparty.
Read that again.
It has not been proven that any submissions by Barclays to the BBA LIBOR panel have materially influenced the setting of a single rate on a single day to the demonstrable cost of any borrower or derivative counterparty.
Yes. That is the truth. I do not doubt that if they could have, the traders would have manipulated LIBOR for gain but it has not been shown that they did.
Here’s some others.
The FSA ‘final notice' to Barclays admits only that there was a ‘risk’ that the integrity of the ‘LIBOR’ settings would be compromised.
The fine is a number plucked from thin air and has no material basis of calculation against any putative gain arising from malfeasance on Barclay’s part because it would not be possible establish such a figure.
Some of the evidence is inconsistent, such as asking for submissions that were so skewed that they would not be included in the calculation. What evidence there is shows that submissions were ‘manipulated’ by the startling amount of 1 one-hundreth of a per cent. In one paragraph there is a request for a ‘low submission’ when the trader states that they are ‘long’ the asset class in question, which is nonsensical in that they are asking to have a lower return on something they have a lot of.
Some further facts to bear in mind.
These rates are for borrowings and derivatives only. They have no direct impact on deposit rates. Further, they have no direct impact on borrowing for mortgages, personal finance and small businesses which are set under different criteria and adjusted less frequently.
Lastly, given the commonly complained of reality that most derivative trading is a ‘casino’ indulged in by banks exclusively then for every ‘big boy’ with a ‘long position’ there must be another ‘big boy’ with the equivalent ‘short’ whose preference will be for the submissions and consequent settings to be the opposite way round.
This is why the system discounts the extremes and takes an average of the remainder.
There is a further long section of the ‘final notice’ that is concerned with Barclay’s behaviour during the ‘liquidity crunch’, the intense phase of the crisis when there was, in the FSA’s own words, ‘ a virtual standstill’ in the money markets, ie there was no market.
At a time when the markets were dysfunctional arising from over a decade’s worth of ‘light touch regulation’ the regulator now fines Barclays over the ‘truthiness’ of its quotes at a time when other regulators and authorities were in dialogue with Barclays for a percieved excess of ‘truthiness’ in those same quotes, which ‘truthiness’ was embarassing the authorities who wished to pretend to the electorate and populace that the crisis was less severe than it actually was.
The FSA did fine Barclays for breaches of FSA rules with respect to Barclays internal procedures in the conduct of FSA regulated business and it is entitled to do so. I don’t approve of trader’s trying to ‘game’ the system but that’s akin to complaining about cats catching mice.
Barclays suffered less trauma and imposed no burden on the taxpayer arising from the crisis and made an effort to be honest at a time when others were actively promoting fictions.
In simple English, you were being lied to by a bunch of banks about the seriousness of the crisis and the authorities are now seeking to punish them for a ‘story’ the authorities took an active hand in promoting and managing and they have started this ‘show trial’ with the bank that told the smallest lies.
There have been misjudgements aplenty by all concerned; Barclays, BoE, FSA, other banks, media and lots of people wanting to blame bankers for all our problems.
I don’t understand why Barclays did not resist this penalty more vigourously. I suspect that they wanted the annoying pompous gnat of the FSA to go away, that they wanted to subscribe to and support the fiction that FSA and other regulators are ‘in charge’ and that the cost would be less to them than to the other more guilty parties, whose fines and ‘final notices’ will be made public shortly.
I don’t think they or the authorities anticipated the degree of public reaction to this story. The fact that Barclays admitted the facts and collaborated with authorities meant that their story came out first and made them the public focus. Getting a ‘rebate’ on the fine only incensed the public further as opposed to the probable intent of rewarding Barclays and promoting them for ‘good citizenship’.
True to form, once the politicians saw the ‘mob’ forming, they egged them on rather than trying to stand up for generality, due process and principle.
The eggs are still flying....there’s going to be a hell of a mess, especially on the politicians faces.
Just remember this.
No one has shown that any class of citizen or consumer has suffered a material loss from the least egregious attempts at manipulating a purely private ‘contraption’ that forms a part of the ‘plumbing’ of the financial ‘casino’ at a time when the ‘casino’ was broken and all the ‘players’ were doing the same thing.
Finally, ‘LIBOR’ is a child of an information poor age. In a time before computers and when global communications were expensive and when banking and finance were a less central and fascinating business, a ‘shorthand’ was required in order to ‘benchmark’ loans. That the system was trusted for so long is a testament to its simple elegance. But in an age of ‘big data’ and cheap communications and financial crisis organising a robust, verifiable and real LIBOR should be a trivial exercise.
I suggest we focus on making the system work for the equal benefit of all rather fixing the blame, of which there is plenty to go around.
Arthur Doohan is a former banker currently promoting a public policy debate on alternative solutions to the debt crisis in Ireland and to bank restructuring.
Much of the nonsense currently in the air about ‘LIBOR’ and attempts to manipulate it for personal gain is destructive, dangerous and will leave everyone feeling foolish and looking incompetent, which, no doubt, many are but it does neither them nor us much good to have the mask of dispassionate professionalism slip so far and reveal so much.
Let us start with a few facts and inconvenient truths.
The British Bankers Association which runs the ‘LIBOR fixings’ system is a private trade representation or lobby group. ‘LIBOR’ is not part of any legislatively enacted or governmentally sponsored program. ‘LIBOR’ is a bankers convention, created by bankers for their own and their counterparties convenience. ‘EurIBOR’ is the same thing but run by the European Bankers Federation. Both systems are operated by the so far un-impeached agency of Thomson-Reuters on behalf the sponsors. If someone created a better one (and several have tried) the world and its market-makers are free to move to it. It is a banker’s shorthand that for decades was a core component of the transparency and efficiency that made London such a global financial centre. It predates derivatives all types apart from options....
I do not seek to defend bankers or their practices. I personally left investment bank trading because I found it to be morally corrosive and no longer wished to be a ‘professional gambler with other people’s money’. But we are not going understand the mess we are in with ‘universal banking’ and hyper-liquid trading of assets, real or imaginary (sorry, that should be ‘derived’...) unless we ascertain the facts. As a former ‘LIBOR submitter’ and derivatives trader there are a few facts that need emphasising. Otherwise, the authorities and politicians will once again be in error as to the real problem and, as usual, with mis-diagnoses end up prescribing the wrong treatments.
Here’s another inconvenient truth.
It has not been proven that any submissions by Barclays to the BBA LIBOR panel have materially influenced the setting of a single rate on a single day to the demonstrable cost of any borrower or derivative counterparty.
Read that again.
It has not been proven that any submissions by Barclays to the BBA LIBOR panel have materially influenced the setting of a single rate on a single day to the demonstrable cost of any borrower or derivative counterparty.
Yes. That is the truth. I do not doubt that if they could have, the traders would have manipulated LIBOR for gain but it has not been shown that they did.
Here’s some others.
The FSA ‘final notice' to Barclays admits only that there was a ‘risk’ that the integrity of the ‘LIBOR’ settings would be compromised.
The fine is a number plucked from thin air and has no material basis of calculation against any putative gain arising from malfeasance on Barclay’s part because it would not be possible establish such a figure.
Some of the evidence is inconsistent, such as asking for submissions that were so skewed that they would not be included in the calculation. What evidence there is shows that submissions were ‘manipulated’ by the startling amount of 1 one-hundreth of a per cent. In one paragraph there is a request for a ‘low submission’ when the trader states that they are ‘long’ the asset class in question, which is nonsensical in that they are asking to have a lower return on something they have a lot of.
Some further facts to bear in mind.
These rates are for borrowings and derivatives only. They have no direct impact on deposit rates. Further, they have no direct impact on borrowing for mortgages, personal finance and small businesses which are set under different criteria and adjusted less frequently.
Lastly, given the commonly complained of reality that most derivative trading is a ‘casino’ indulged in by banks exclusively then for every ‘big boy’ with a ‘long position’ there must be another ‘big boy’ with the equivalent ‘short’ whose preference will be for the submissions and consequent settings to be the opposite way round.
This is why the system discounts the extremes and takes an average of the remainder.
There is a further long section of the ‘final notice’ that is concerned with Barclay’s behaviour during the ‘liquidity crunch’, the intense phase of the crisis when there was, in the FSA’s own words, ‘ a virtual standstill’ in the money markets, ie there was no market.
At a time when the markets were dysfunctional arising from over a decade’s worth of ‘light touch regulation’ the regulator now fines Barclays over the ‘truthiness’ of its quotes at a time when other regulators and authorities were in dialogue with Barclays for a percieved excess of ‘truthiness’ in those same quotes, which ‘truthiness’ was embarassing the authorities who wished to pretend to the electorate and populace that the crisis was less severe than it actually was.
The FSA did fine Barclays for breaches of FSA rules with respect to Barclays internal procedures in the conduct of FSA regulated business and it is entitled to do so. I don’t approve of trader’s trying to ‘game’ the system but that’s akin to complaining about cats catching mice.
Barclays suffered less trauma and imposed no burden on the taxpayer arising from the crisis and made an effort to be honest at a time when others were actively promoting fictions.
In simple English, you were being lied to by a bunch of banks about the seriousness of the crisis and the authorities are now seeking to punish them for a ‘story’ the authorities took an active hand in promoting and managing and they have started this ‘show trial’ with the bank that told the smallest lies.
There have been misjudgements aplenty by all concerned; Barclays, BoE, FSA, other banks, media and lots of people wanting to blame bankers for all our problems.
I don’t understand why Barclays did not resist this penalty more vigourously. I suspect that they wanted the annoying pompous gnat of the FSA to go away, that they wanted to subscribe to and support the fiction that FSA and other regulators are ‘in charge’ and that the cost would be less to them than to the other more guilty parties, whose fines and ‘final notices’ will be made public shortly.
I don’t think they or the authorities anticipated the degree of public reaction to this story. The fact that Barclays admitted the facts and collaborated with authorities meant that their story came out first and made them the public focus. Getting a ‘rebate’ on the fine only incensed the public further as opposed to the probable intent of rewarding Barclays and promoting them for ‘good citizenship’.
True to form, once the politicians saw the ‘mob’ forming, they egged them on rather than trying to stand up for generality, due process and principle.
The eggs are still flying....there’s going to be a hell of a mess, especially on the politicians faces.
Just remember this.
No one has shown that any class of citizen or consumer has suffered a material loss from the least egregious attempts at manipulating a purely private ‘contraption’ that forms a part of the ‘plumbing’ of the financial ‘casino’ at a time when the ‘casino’ was broken and all the ‘players’ were doing the same thing.
Finally, ‘LIBOR’ is a child of an information poor age. In a time before computers and when global communications were expensive and when banking and finance were a less central and fascinating business, a ‘shorthand’ was required in order to ‘benchmark’ loans. That the system was trusted for so long is a testament to its simple elegance. But in an age of ‘big data’ and cheap communications and financial crisis organising a robust, verifiable and real LIBOR should be a trivial exercise.
I suggest we focus on making the system work for the equal benefit of all rather fixing the blame, of which there is plenty to go around.
Arthur Doohan is a former banker currently promoting a public policy debate on alternative solutions to the debt crisis in Ireland and to bank restructuring.
Tuesday, 22 May 2012
Guest post by Arthur Doohan (II): Debt realities
Arthur Doohan: In five years we have gone from being the "pinup stars" for EU growth to being the "posterchildren" for austerity and, like a nodding dog in the back of a car, our leaders are as clueless now as they were then about the road taken and final destination.
Some of that 'clueless-ness' can be seen in 'loose talk' going around at present about the relationship between Ireland and the EU and the other EU member countries. An awful lot of this loose talk revolves around how damaged that relationship would be if the Irish people choose not to join in the Fiscal Compact. A further chunk of the 'chit-chat' revolves around the question of where else we would borrow 'the money' from when (much more so than 'if') we need a further dose of 'austerity medicine'.
I will skip over the blatant inconsistency of a Government that insists we are on the correct path with light at the end of the tunnel under a fully funded and committed financial program while at the same time hastening to arrange the paperwork on yet more borrowings. But not without pointing out that the Taoiseach has recently reiterated and reaffirmed that the existing borrowing program supersedes the envisaged ESM facility that may be provided by the Fiscal Compact.
I will also skip over the issue of whether the Fiscal Compact is a smart or pragmatic or sensible or even a 'pro-European' step to take.
I will skip over these things to state some boring, practical banking 'facts of life'.
There is an 'old saw' from the banking world which states that if you owe the bank 400,000 you have a problem, if you owe the bank 4 million you both have a problem and if you owe the bank 40 million the bank has a problem.
By the end of 2012, all financial sectors of the Irish economy, its households, businesses and the State, will be massively in debt. The State particularly will have a debt/GDP ratio about 120%. This is the level at which it becomes a very dicey proposition for both borrower and lender to go any further into debt.
But the most important thing about this debt is that this money is ALL SPENT. It is not sitting on deposit in a Swiss bank account.
You can debate all you like about whether we did the right things with that money. You can argue until you are blue in the face about whether we can repay it and grow our economy at the same time. You cannot deny that the money is gone and that all that remains is our promise to pay it back.
Those who lent it to us have no lien on the State. There is no court they can turn to enforce any security or charge because there is no such court and they have no security. And, once again, the money is not on deposit somewhere where they can go and seize it.
The only choice our lenders have is on what terms to lend us any more money. A refusal by them would put us into default.
So the issue is not where we can borrow. The issue is on what terms we will continue to repay.
Now, that is the hard practical business reality of it. If that is an uncomfortable truth for you, you should be aware that this is the reality that confronts every lender to every State that gets into financial difficulty. It is not some uncharted territory or some nightmare of eternally shattered reputation and financial purgatory. The experience of Iceland proves that. In fact, the experience of Ireland after it's 1993 devaluation proves that. And anyone who suggests that devaluation and default are different things betrays their hopeless ignorance of the mindset and disposition of the investment and bond trading communities.
One of three things will happen in our near term future. The happiest and least likely is that we will resume some solid growth in the economy and will slowly but steadily repay these debts over a fifteen to twenty year span. The unhappy probable outcome will be that we will have weak growth and the economy will move sideways for a decade or two. The unhappy possible third option is that there will be a default which may, or may not be, 'graceful' and 'managed'.
If and when that day comes for Ireland, some people will seek refuge in economic theories, some hope in protection of laws and regulations, some will seek solace in the arms of supra-national entities and a few will still seek help from deities. But the reality is that bankers and accountants will sit down with the politicians and thrash out what can be paid and seek to extract as much as possible for themselves and their clients.
If a country has leaders who care about it and who have some ability and some understanding of how the real world works, when they sit down to negotiate at that post-default table, then a positive and helpful result can be achieved for the people while being fair to the lenders.
Before that day comes it is still possible for leaders to start us down the path of a more sustainable debt burden that will in the end be fairer to both the borrower and the lenders by simply starting to talk realistically about these overarching realities. But they have neither the ability, the expertise, the self-confidence nor the courage to rock the 'European boat' and are content to be errand boys for the apparatchiks and the bankers by continuing on the path to default while asking us to swallow ever greater doses of pointless austerity.
Some of that 'clueless-ness' can be seen in 'loose talk' going around at present about the relationship between Ireland and the EU and the other EU member countries. An awful lot of this loose talk revolves around how damaged that relationship would be if the Irish people choose not to join in the Fiscal Compact. A further chunk of the 'chit-chat' revolves around the question of where else we would borrow 'the money' from when (much more so than 'if') we need a further dose of 'austerity medicine'.
I will skip over the blatant inconsistency of a Government that insists we are on the correct path with light at the end of the tunnel under a fully funded and committed financial program while at the same time hastening to arrange the paperwork on yet more borrowings. But not without pointing out that the Taoiseach has recently reiterated and reaffirmed that the existing borrowing program supersedes the envisaged ESM facility that may be provided by the Fiscal Compact.
I will also skip over the issue of whether the Fiscal Compact is a smart or pragmatic or sensible or even a 'pro-European' step to take.
I will skip over these things to state some boring, practical banking 'facts of life'.
There is an 'old saw' from the banking world which states that if you owe the bank 400,000 you have a problem, if you owe the bank 4 million you both have a problem and if you owe the bank 40 million the bank has a problem.
By the end of 2012, all financial sectors of the Irish economy, its households, businesses and the State, will be massively in debt. The State particularly will have a debt/GDP ratio about 120%. This is the level at which it becomes a very dicey proposition for both borrower and lender to go any further into debt.
But the most important thing about this debt is that this money is ALL SPENT. It is not sitting on deposit in a Swiss bank account.
You can debate all you like about whether we did the right things with that money. You can argue until you are blue in the face about whether we can repay it and grow our economy at the same time. You cannot deny that the money is gone and that all that remains is our promise to pay it back.
Those who lent it to us have no lien on the State. There is no court they can turn to enforce any security or charge because there is no such court and they have no security. And, once again, the money is not on deposit somewhere where they can go and seize it.
The only choice our lenders have is on what terms to lend us any more money. A refusal by them would put us into default.
So the issue is not where we can borrow. The issue is on what terms we will continue to repay.
Now, that is the hard practical business reality of it. If that is an uncomfortable truth for you, you should be aware that this is the reality that confronts every lender to every State that gets into financial difficulty. It is not some uncharted territory or some nightmare of eternally shattered reputation and financial purgatory. The experience of Iceland proves that. In fact, the experience of Ireland after it's 1993 devaluation proves that. And anyone who suggests that devaluation and default are different things betrays their hopeless ignorance of the mindset and disposition of the investment and bond trading communities.
One of three things will happen in our near term future. The happiest and least likely is that we will resume some solid growth in the economy and will slowly but steadily repay these debts over a fifteen to twenty year span. The unhappy probable outcome will be that we will have weak growth and the economy will move sideways for a decade or two. The unhappy possible third option is that there will be a default which may, or may not be, 'graceful' and 'managed'.
If and when that day comes for Ireland, some people will seek refuge in economic theories, some hope in protection of laws and regulations, some will seek solace in the arms of supra-national entities and a few will still seek help from deities. But the reality is that bankers and accountants will sit down with the politicians and thrash out what can be paid and seek to extract as much as possible for themselves and their clients.
If a country has leaders who care about it and who have some ability and some understanding of how the real world works, when they sit down to negotiate at that post-default table, then a positive and helpful result can be achieved for the people while being fair to the lenders.
Before that day comes it is still possible for leaders to start us down the path of a more sustainable debt burden that will in the end be fairer to both the borrower and the lenders by simply starting to talk realistically about these overarching realities. But they have neither the ability, the expertise, the self-confidence nor the courage to rock the 'European boat' and are content to be errand boys for the apparatchiks and the bankers by continuing on the path to default while asking us to swallow ever greater doses of pointless austerity.
Thursday, 17 May 2012
Guest post by Arthur Doohan: It's the economy, stupid
Arthur Doohan: "...most of the people ...were unhappy… Many solutions were suggested for this problem, but most of these were largely concerned with the movements of small green pieces of paper, which is odd because on the whole it wasn't the small green pieces of paper that were unhappy." - Douglas Adams.
Or to put it another way, there is nothing wrong with the Euro as a currency and plenty wrong with how much debt we expect our economies and our households and our taxpayers and our citizens to bear.
As a medium of exchange and a unit of account the Euro has been a complete success. As a store of value it is facing some challenges.
These challenges arise from the fact that we Europeans have misvalued our property assets by a considerable margin and the wealthiest of us are trying to get the poorest to bear an unfair share of the burden of those mistakes.
The property mis-valuation occurred at a time when the German economy was in the doldrums, post re-unification and post the 'DotCom bubble'. German bankers and bondfund managers were getting very little return on their Euros in the German economy. It was perfectly natural for them to seek investment opportunities abroad, especially as the newly minted currency made it easier to measure, price and transact business opportunities.
What was not perfectly natural was for them to forget the rules of prudent investing, to mimic what US and UK banks were doing and to ignore what external advisors were telling them. But as the erstwhile chair of Citigroup, Chuck Prince so neatly expressed "You've got to keep dancing while the music plays!"
That the regulators in the EU and domestic economies also abandoned their responsibilities and let the music play at an ever faster tempo at the same time is perhaps just another case of hubris in the postpartum roseate glow of the newly arrived Euro. But that does not excuse their trying to shift the blame for the coming of Nemesis.
The Euro was and is well designed. It is a fine piece of engineering, built largely by the French and the Germans, who know a thing or two about building. But the Euro is the financial equivalent of a car, not a plane or other anti-gravity device. By refusing to use it in the way it was intended to be used and by refusing to keep national debts and deficits in check by the fines and other mechanisms built into the Euro design the politicians and bureaucrats have made fools of themselves and a mockery of the patient efforts of two generations of statesmen.
What they have done is the equivalent of driving it off a cliff. What they are doing now is the equivalent of trying to ……well, actually I don't know what they are trying to do because they keep changing their minds. First, it was guarantees, then it was bank recapitalisation, then it was austerity, after that it was a 'unique bond transaction with retrospective contract changes' and now it seems we are to have 'austerity with growth'….
If a country has too much debt or is paying its civil servants and other non-exporting workers too much in salaries and benefits then changing currency in order to partially writedown those debts and reduce those costs is the equivalent of shooting yourself in the foot in order to learn to hop.
The point that I wish to get across is that the fault is not with the Euro and is entirely with what burdens our economies are trying to carry. Abandoning the Euro does not solve Greece's problems or anyone else's. It most cases it will make them worse because the dislocation effects of the 'defenestration' and because of the knock-on effects in the wider EU.
The borrowers are being made to suffer because of the mistakes and the greed of both the borrower and the lender. This is business and it turns out to be 'bad business. There is no moral superiority of the lender over the borrower. Both are equal parties to a contract, willingly if stupidly, entered into. Making Greece jump through hoops to save the blushes of greedy bankers and feckless regulators and stubborn politicians will be fun while the 'wheels are still turning'
If Greece abandons or is forced out of the Euro the debts of Greece will still be denominated in Euro's and the only thing that will have been achieved will have been to make it harder for Greece to get Euros to pay us with.
Returning to my car analogy I will close with another Douglas Adams quote about going over a cliff….
"It's not the fall that will kill you, it's the landing…."
Or to put it another way, there is nothing wrong with the Euro as a currency and plenty wrong with how much debt we expect our economies and our households and our taxpayers and our citizens to bear.
As a medium of exchange and a unit of account the Euro has been a complete success. As a store of value it is facing some challenges.
These challenges arise from the fact that we Europeans have misvalued our property assets by a considerable margin and the wealthiest of us are trying to get the poorest to bear an unfair share of the burden of those mistakes.
The property mis-valuation occurred at a time when the German economy was in the doldrums, post re-unification and post the 'DotCom bubble'. German bankers and bondfund managers were getting very little return on their Euros in the German economy. It was perfectly natural for them to seek investment opportunities abroad, especially as the newly minted currency made it easier to measure, price and transact business opportunities.
What was not perfectly natural was for them to forget the rules of prudent investing, to mimic what US and UK banks were doing and to ignore what external advisors were telling them. But as the erstwhile chair of Citigroup, Chuck Prince so neatly expressed "You've got to keep dancing while the music plays!"
That the regulators in the EU and domestic economies also abandoned their responsibilities and let the music play at an ever faster tempo at the same time is perhaps just another case of hubris in the postpartum roseate glow of the newly arrived Euro. But that does not excuse their trying to shift the blame for the coming of Nemesis.
The Euro was and is well designed. It is a fine piece of engineering, built largely by the French and the Germans, who know a thing or two about building. But the Euro is the financial equivalent of a car, not a plane or other anti-gravity device. By refusing to use it in the way it was intended to be used and by refusing to keep national debts and deficits in check by the fines and other mechanisms built into the Euro design the politicians and bureaucrats have made fools of themselves and a mockery of the patient efforts of two generations of statesmen.
What they have done is the equivalent of driving it off a cliff. What they are doing now is the equivalent of trying to ……well, actually I don't know what they are trying to do because they keep changing their minds. First, it was guarantees, then it was bank recapitalisation, then it was austerity, after that it was a 'unique bond transaction with retrospective contract changes' and now it seems we are to have 'austerity with growth'….
If a country has too much debt or is paying its civil servants and other non-exporting workers too much in salaries and benefits then changing currency in order to partially writedown those debts and reduce those costs is the equivalent of shooting yourself in the foot in order to learn to hop.
The point that I wish to get across is that the fault is not with the Euro and is entirely with what burdens our economies are trying to carry. Abandoning the Euro does not solve Greece's problems or anyone else's. It most cases it will make them worse because the dislocation effects of the 'defenestration' and because of the knock-on effects in the wider EU.
The borrowers are being made to suffer because of the mistakes and the greed of both the borrower and the lender. This is business and it turns out to be 'bad business. There is no moral superiority of the lender over the borrower. Both are equal parties to a contract, willingly if stupidly, entered into. Making Greece jump through hoops to save the blushes of greedy bankers and feckless regulators and stubborn politicians will be fun while the 'wheels are still turning'
If Greece abandons or is forced out of the Euro the debts of Greece will still be denominated in Euro's and the only thing that will have been achieved will have been to make it harder for Greece to get Euros to pay us with.
Returning to my car analogy I will close with another Douglas Adams quote about going over a cliff….
"It's not the fall that will kill you, it's the landing…."
Monday, 13 February 2012
Guest post by Arthur Doohan: Loose lips sink ships
Arthur Doohan: The "grown-up's" will remember the opening sequence to the 'Mission Impossible' TV series, where the tape self destructs a few seconds after being played.
I have sad news for you. That technology has not been perfected.
So ... There is no way for Draghi, Barroso, Van Rompuy or Merkozy to make your Euro notes or those in the bank's ATMS disappear in a puff of smoke.
As we teeter on the brink of a possible debt crisis, there is a lot of loose talk flying around about the death of the Euro and about Ireland being thrown out of the "Euro". Such talk is ill-informed, ignorant and, at a time of distress and fear, it is scaremongering, if not actually amounting to "shouting 'Fire!' in a crowded cinema".
Money is …..whatever people deem it to be. In the past money has been: cowrie shells, temple vouchers, unopened packs of "fags" and bits of metal. Today, money is mainly electrons, some paper and a few bits of base metal "dressed as lamb". We worked hard, jointly with our European partners, to re-denominate our money into a jointly held and managed currency called the Euro.
And now, there is nothing, NOTHING, that can stop the Euro being our currency.
Firstly, we are an equal partner in the Target2 payments system that the ECB uses as a clearing house for the Central Banks of the Euro-system to make and receive payments. Further, no authority in either the EU or the ECB has said that anyone can or will be kicked out of the Euro. There is no process for so doing and there can not be under the current treaties. Again, with respect to the currency, there is, quite deliberately and by design, no way of telling a Greek from an Irish from a French Euro.
Secondly, when Argentina defaulted on her US dollar debts it did not stop the dollar being a valid currency in Japan or in the US. It did not stop the majority of Argentinian business being conducted in US dollars. It weakened the Argentinian Peso and made the overall debt burden greater. But that can't happen to us because our debts are denominated in our own currency (the Euro). Even if Ireland decided to default on some of her sovereign obligations, it would make no difference to your usage of the currency or to a German person's usage of it or to the French Government's usage.
Finally, the concept of 'leaving the Euro' is often referred to as some form of solution, as if our troubles would be over if we cast off the yoke of Euro-usage. Nothing could be further from reality and the truth.
If we left the Euro we would have to 1) print and distribute a new currency, 2) institute capital controls (in a vain attempt to stop money leaving the State, and which might now be un-Constitutional), 3)attempt to establish and then defend a value in Euro terms for this currency (with all the interest rate volatility that implies and requires), 4) institute import and export controls in order to prop up the capital controls (with all the extra costs and delays for business that implies).
Further, just who would be leaving the Euro? Probably just the State in terms of redefining exactly what 'legal tender' would be for tax and contract purposes. But the State could not seize the Euros in your bank account and force them to be changed to 'NewPunts' or whatever. So we would become like Argentina with a weak official currency for State and tax related transactions and civil service pay and an external currency (Dollars for them, Euros in our case) for 'real stuff'.
And what would we get in exchange for all that trouble? Only the opportunity to say 'We can't pay you back everything we owe you'.
I am not recommending, in this post, any particular course of action. I just want to see an end to the loose talk and the propagation of fear, uncertainty and doubt as a means for ill informed politicians to bludgeon people into agreeing with them. I have in mind particularly suggestions that our ATMs would 'run dry' if there were to be a default.
To suggest that anyone in Europe would attempt or even think of stopping Irish citizens from buying their daily bread in reaction to a problem created by Irish politicians is to display an ignorance of how such systems work, and to the people and the Commission of the EU.
The Euro is not the problem. The Euro works, and works tremendously well as its endurance of the upheavals and stresses of the last few years have shown.
The design of the 'Growth and Stability Pact' is not the problem. Since it was never enforced (and Germany was the worst and longest rule breaker) it cannot be said to have failed and all of the debt problems we now have are the exact things the GSP was designed to prevent.
The problem is the level of debt some countries are carrying. This is an old problem, and the old answer was always a currency devaluation. Since we all have the same currency now we can't do that. But a debt 'haircut' amounts to the same thing.
So, can we please take a haircut now before we all go bald?
Arthur Doohan is a former banker currently promoting a public policy debate on alternative solutions to the debt crisis in Ireland and to bank restructuring
I have sad news for you. That technology has not been perfected.
So ... There is no way for Draghi, Barroso, Van Rompuy or Merkozy to make your Euro notes or those in the bank's ATMS disappear in a puff of smoke.
As we teeter on the brink of a possible debt crisis, there is a lot of loose talk flying around about the death of the Euro and about Ireland being thrown out of the "Euro". Such talk is ill-informed, ignorant and, at a time of distress and fear, it is scaremongering, if not actually amounting to "shouting 'Fire!' in a crowded cinema".
Money is …..whatever people deem it to be. In the past money has been: cowrie shells, temple vouchers, unopened packs of "fags" and bits of metal. Today, money is mainly electrons, some paper and a few bits of base metal "dressed as lamb". We worked hard, jointly with our European partners, to re-denominate our money into a jointly held and managed currency called the Euro.
And now, there is nothing, NOTHING, that can stop the Euro being our currency.
Firstly, we are an equal partner in the Target2 payments system that the ECB uses as a clearing house for the Central Banks of the Euro-system to make and receive payments. Further, no authority in either the EU or the ECB has said that anyone can or will be kicked out of the Euro. There is no process for so doing and there can not be under the current treaties. Again, with respect to the currency, there is, quite deliberately and by design, no way of telling a Greek from an Irish from a French Euro.
Secondly, when Argentina defaulted on her US dollar debts it did not stop the dollar being a valid currency in Japan or in the US. It did not stop the majority of Argentinian business being conducted in US dollars. It weakened the Argentinian Peso and made the overall debt burden greater. But that can't happen to us because our debts are denominated in our own currency (the Euro). Even if Ireland decided to default on some of her sovereign obligations, it would make no difference to your usage of the currency or to a German person's usage of it or to the French Government's usage.
Finally, the concept of 'leaving the Euro' is often referred to as some form of solution, as if our troubles would be over if we cast off the yoke of Euro-usage. Nothing could be further from reality and the truth.
If we left the Euro we would have to 1) print and distribute a new currency, 2) institute capital controls (in a vain attempt to stop money leaving the State, and which might now be un-Constitutional), 3)attempt to establish and then defend a value in Euro terms for this currency (with all the interest rate volatility that implies and requires), 4) institute import and export controls in order to prop up the capital controls (with all the extra costs and delays for business that implies).
Further, just who would be leaving the Euro? Probably just the State in terms of redefining exactly what 'legal tender' would be for tax and contract purposes. But the State could not seize the Euros in your bank account and force them to be changed to 'NewPunts' or whatever. So we would become like Argentina with a weak official currency for State and tax related transactions and civil service pay and an external currency (Dollars for them, Euros in our case) for 'real stuff'.
And what would we get in exchange for all that trouble? Only the opportunity to say 'We can't pay you back everything we owe you'.
I am not recommending, in this post, any particular course of action. I just want to see an end to the loose talk and the propagation of fear, uncertainty and doubt as a means for ill informed politicians to bludgeon people into agreeing with them. I have in mind particularly suggestions that our ATMs would 'run dry' if there were to be a default.
To suggest that anyone in Europe would attempt or even think of stopping Irish citizens from buying their daily bread in reaction to a problem created by Irish politicians is to display an ignorance of how such systems work, and to the people and the Commission of the EU.
The Euro is not the problem. The Euro works, and works tremendously well as its endurance of the upheavals and stresses of the last few years have shown.
The design of the 'Growth and Stability Pact' is not the problem. Since it was never enforced (and Germany was the worst and longest rule breaker) it cannot be said to have failed and all of the debt problems we now have are the exact things the GSP was designed to prevent.
The problem is the level of debt some countries are carrying. This is an old problem, and the old answer was always a currency devaluation. Since we all have the same currency now we can't do that. But a debt 'haircut' amounts to the same thing.
So, can we please take a haircut now before we all go bald?
Arthur Doohan is a former banker currently promoting a public policy debate on alternative solutions to the debt crisis in Ireland and to bank restructuring
Friday, 12 August 2011
Guest Post by Arthur Doohan: "Federalise the Debt" has become a mantra and a “meme” in recent weeks
There are many people in the world who hope that someone else can, with a few waves and strokes of an implement, make all their troubles go away. The vast majority of these people are children and they grow out of believing in fairy-godmothers and genies by the age of eight.
There is no entity that can make our sovereign debt go away, nor is there one that can assume responsibility for it.
The right to borrow money is granted to those who have demonstrated legal and economic capacity to repay it. People (investors, speculators, call them what you will) buy bonds from entities that have:
1) assets that produce an income;
2) a track record of repaying their debts;
3) are not currently overburdened with debt.
There is NO entity in the EU that matches any one of those criteria, let alone all three.
Now, we could create one but that would imply tax gathering powers granted directly to some arm of the EU, probably, the Commission because tax-gathering is the only way for sovereign or supra-national bodies to raise revenue in a reliable or efficient fashion. Other ways have been tried in the past which usually employed the legions of Rome or the divisions of the Wehrmacht but this was not only inefficient but was exactly what the EU was founded to prevent.
Further, such a debt-management body would not have a track record of repayment and would probably be seen as being overburdened with debt and so would worsen the situation rather than improve it.
The history of this entire crisis from American sub-prime mortgages onwards has been one of the commingling of good debt risks with bad ones to the eventual and ever more rapid deterioration of both. "Gresham's Law - red in tooth and fang."
A further lumping of the good with the bad and the ugly will only make it harder for debt-buyers to distinguish good from bad. It would therefore, most likely, cause bondholders to seek a higher return or abandon the Euro altogether.
So, please, would those advocates of 'debt federalization' be so kind as to complete the circle of their prognostication and tell us what institution they see as being in charge, how much of their taxes they want to send to it, what they see happening to the yield on current debts and, lastly, how would they arrange the disbursement of new debt to the huddled masses of the EU?
There is no entity that can make our sovereign debt go away, nor is there one that can assume responsibility for it.
The right to borrow money is granted to those who have demonstrated legal and economic capacity to repay it. People (investors, speculators, call them what you will) buy bonds from entities that have:
1) assets that produce an income;
2) a track record of repaying their debts;
3) are not currently overburdened with debt.
There is NO entity in the EU that matches any one of those criteria, let alone all three.
Now, we could create one but that would imply tax gathering powers granted directly to some arm of the EU, probably, the Commission because tax-gathering is the only way for sovereign or supra-national bodies to raise revenue in a reliable or efficient fashion. Other ways have been tried in the past which usually employed the legions of Rome or the divisions of the Wehrmacht but this was not only inefficient but was exactly what the EU was founded to prevent.
Further, such a debt-management body would not have a track record of repayment and would probably be seen as being overburdened with debt and so would worsen the situation rather than improve it.
The history of this entire crisis from American sub-prime mortgages onwards has been one of the commingling of good debt risks with bad ones to the eventual and ever more rapid deterioration of both. "Gresham's Law - red in tooth and fang."
A further lumping of the good with the bad and the ugly will only make it harder for debt-buyers to distinguish good from bad. It would therefore, most likely, cause bondholders to seek a higher return or abandon the Euro altogether.
So, please, would those advocates of 'debt federalization' be so kind as to complete the circle of their prognostication and tell us what institution they see as being in charge, how much of their taxes they want to send to it, what they see happening to the yield on current debts and, lastly, how would they arrange the disbursement of new debt to the huddled masses of the EU?
Friday, 15 July 2011
Guest post by Arthur Doohan: Grandmaster level chess
Arthur Doohan: In chess, the quality that separates the 'grandmaster' from the 'talented amateur' is the number of moves ahead that each player can mentally keep in mind and manipulate. Something similar is said to be true for champion tennis and snooker players.
I am not one for conspiracy theories as experience has to date shown me far more evidence supporting the 'Murphy's Law' theory of management of human affairs.
None the less, there are in all realms, whether jurisdictional or professional, at any given time a handful of competent persons with both a breadth of vision and a depth of ability.
The 'European Project' was built by men widely adjudged to be 'political grandmasters'. Adenauer, de Gaulle, Brandt, Mitterand, Delors; none of these were, or are, regarded as vain or shortsighted or incompetent. Patiently and with great care and at considerable cost and in the face of much dissent, the various layers of the EU have been put together.
Yes, there have been many compromises and the 'project' is far from complete and the final form is not clear to anyone. But there was a vision behind the efforts of these men and there was, most certainly, a bitter awareness of what the possible costs of failure could be and what the outcome of failure would look like.
In the context of all that wisdom, ability and effort we now have to re-examine the crisis that envelopes the 'European Project'. The 'design flaws' in the single currency were clearly enunciated before its adoption. The bumpy evolution of the ERM gave ample warning of how tough life might be for some members of the monetary union.
The driving ambition of the proponents was not merely to enhance European trade or reduce the profits of foreign exchange traders. They did not seek some empty token of pseudo-unity for Europe.
What they wanted was a means of preventing a repetition of the abuse of power and the greedy expropriation of financial wealth that the US imposed on the rest of the world when it unilaterally and without warning or dialogue abandoned the Bretton Woods agreement in 1971.
The only way to achieve this would be to build a currency with the strength and depth of the 'mighty dollar'.
That level of integration has always been regarded as politically impossible to achieve and, in many ways, has been 'tabu' to both those who would propose it, as well as to its instinctive opponents.
Nobody 'walks the plank' out of choice. Standing at the end of the plank, one jumps into the water because certain death awaits at the other end and there is some hope, however slight, amongst the fish and the sharks.
The designers were well aware of the risks and the flaws of the design of the Euro. They had knowledge of, and personal experience of, financial disasters of national and supra-national scale and impact. A crisis of the type we are currently dealing with was inevitable with only its timing as a matter of debate. Almost certainly it has come sooner than most observers expected and has probably been brought on and exacerbated by the US debt crisis.
We are now hearing calls for the 'federalization' of problem debts from predictable, and from most unlikely, sources. Of course, no one mentions the corollary of this federalization which would have to be federal tax raising powers. At which point the EU project would be complete.
This is an alternative to the disintegration of the Euro and the EU as a solution to the unviability of the debt mountain that has been piled high in the storehouses of Europe. And as solutions go, while unpalatable to many, it looks less painful than the alternative.
So I leave you with this thought and a quote.
Did the designers of the Euro hope to achieve, through a crisis, a level of European integration that would never be possible by normal negotiations?
“And whether or not it is clear to you, no doubt the universe is unfolding as it should.”
- Desiderata by Max Ehrmann
I am not one for conspiracy theories as experience has to date shown me far more evidence supporting the 'Murphy's Law' theory of management of human affairs.
None the less, there are in all realms, whether jurisdictional or professional, at any given time a handful of competent persons with both a breadth of vision and a depth of ability.
The 'European Project' was built by men widely adjudged to be 'political grandmasters'. Adenauer, de Gaulle, Brandt, Mitterand, Delors; none of these were, or are, regarded as vain or shortsighted or incompetent. Patiently and with great care and at considerable cost and in the face of much dissent, the various layers of the EU have been put together.
Yes, there have been many compromises and the 'project' is far from complete and the final form is not clear to anyone. But there was a vision behind the efforts of these men and there was, most certainly, a bitter awareness of what the possible costs of failure could be and what the outcome of failure would look like.
In the context of all that wisdom, ability and effort we now have to re-examine the crisis that envelopes the 'European Project'. The 'design flaws' in the single currency were clearly enunciated before its adoption. The bumpy evolution of the ERM gave ample warning of how tough life might be for some members of the monetary union.
The driving ambition of the proponents was not merely to enhance European trade or reduce the profits of foreign exchange traders. They did not seek some empty token of pseudo-unity for Europe.
What they wanted was a means of preventing a repetition of the abuse of power and the greedy expropriation of financial wealth that the US imposed on the rest of the world when it unilaterally and without warning or dialogue abandoned the Bretton Woods agreement in 1971.
The only way to achieve this would be to build a currency with the strength and depth of the 'mighty dollar'.
That level of integration has always been regarded as politically impossible to achieve and, in many ways, has been 'tabu' to both those who would propose it, as well as to its instinctive opponents.
Nobody 'walks the plank' out of choice. Standing at the end of the plank, one jumps into the water because certain death awaits at the other end and there is some hope, however slight, amongst the fish and the sharks.
The designers were well aware of the risks and the flaws of the design of the Euro. They had knowledge of, and personal experience of, financial disasters of national and supra-national scale and impact. A crisis of the type we are currently dealing with was inevitable with only its timing as a matter of debate. Almost certainly it has come sooner than most observers expected and has probably been brought on and exacerbated by the US debt crisis.
We are now hearing calls for the 'federalization' of problem debts from predictable, and from most unlikely, sources. Of course, no one mentions the corollary of this federalization which would have to be federal tax raising powers. At which point the EU project would be complete.
This is an alternative to the disintegration of the Euro and the EU as a solution to the unviability of the debt mountain that has been piled high in the storehouses of Europe. And as solutions go, while unpalatable to many, it looks less painful than the alternative.
So I leave you with this thought and a quote.
Did the designers of the Euro hope to achieve, through a crisis, a level of European integration that would never be possible by normal negotiations?
“And whether or not it is clear to you, no doubt the universe is unfolding as it should.”
- Desiderata by Max Ehrmann
Thursday, 2 June 2011
Guest post by Arthur Doohan: The burning of the bondholders
Arthur Doohan: There is something of a scramble to jump onto the bandwagon of those seeking to attend the 'burning of the bondholders'.
What could possibly have prompted the rush to this 'auto-da-fé'?
Could it be that the institutions are afraid that the recently enacted powers under which these orders hope be enforced might be struck down in the High Court challenge brought by Messrs Abadi and Aurelius, due to be heard next week?
It could be that the banks want to make sure the schemes have some chance being allowed to stand by reason of being extant before the ruling in the event of the ruling going against the State.
That would indicate a severe lack of confidence on the part of 'our learned friends' in the strength of the primary legislation with respect to other laws and precedents.
But it could just be that the market trends and ever rising bond-yields mean that they hope the bondholders are entirely ready to throw in the towel.
Either way, an awful lot is riding on next weeks hearing.
What could possibly have prompted the rush to this 'auto-da-fé'?
Could it be that the institutions are afraid that the recently enacted powers under which these orders hope be enforced might be struck down in the High Court challenge brought by Messrs Abadi and Aurelius, due to be heard next week?
It could be that the banks want to make sure the schemes have some chance being allowed to stand by reason of being extant before the ruling in the event of the ruling going against the State.
That would indicate a severe lack of confidence on the part of 'our learned friends' in the strength of the primary legislation with respect to other laws and precedents.
But it could just be that the market trends and ever rising bond-yields mean that they hope the bondholders are entirely ready to throw in the towel.
Either way, an awful lot is riding on next weeks hearing.
Friday, 6 May 2011
Guest post by Arthur Doohan: The place to be is Mr. Justice Kelly's Commercial Court room on Monday morning
Buried in the terms of the latest buyback of AIB bonds is an explicit attempt to reverse the 'hierarchy of credit'.
Doesn't sound like much, does it?
Well how about saying that the Government have attempted to establish a precedent that would, potentially, invalidate every contract in the country. Does that get your attention?
You can read more of the details here and here.
The Government appears to have tried to slip through a change that would allow it to pay whom it chooses to pay and to not pay others if it chooses not to, despite any previous contracts entered into. It seems as if the Government has decided to try to empower itself to selectively not repay the interest on some bonds, while paying the due return on the preference shares issued to the NPRF for the stake in the banks that was forced into the NPRF.
This would set a ground-breaking precedent. Appeals have already been lodged and are due to be heard on Monday next. It the Government doesn’t have its way, it will be a huge climb-down for them. Equally, it seems unlikely that a successful appeal would be greeted with equanimity by the Troika. Something has to give.
Arthur Doohan is a former banker currently promoting a public policy debate on alternative solutions to the debt crisis in Ireland and to bank restructuring
Doesn't sound like much, does it?
Well how about saying that the Government have attempted to establish a precedent that would, potentially, invalidate every contract in the country. Does that get your attention?
You can read more of the details here and here.
The Government appears to have tried to slip through a change that would allow it to pay whom it chooses to pay and to not pay others if it chooses not to, despite any previous contracts entered into. It seems as if the Government has decided to try to empower itself to selectively not repay the interest on some bonds, while paying the due return on the preference shares issued to the NPRF for the stake in the banks that was forced into the NPRF.
This would set a ground-breaking precedent. Appeals have already been lodged and are due to be heard on Monday next. It the Government doesn’t have its way, it will be a huge climb-down for them. Equally, it seems unlikely that a successful appeal would be greeted with equanimity by the Troika. Something has to give.
Arthur Doohan is a former banker currently promoting a public policy debate on alternative solutions to the debt crisis in Ireland and to bank restructuring
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