The run-up to Christmas 2009 saw a frenzy of activity with NAMA and the banks (NAMA incorporated 19th December, NAMA board appointed 22nd December, first NAMA board meeting on 23rd December, unreported unlawful written financial undertakings by Minister for Finance Lenihan in respect of INBS and Anglo on 22nd December – unlawful because the undertakings constituted unauthorised state-aid though both undertakings were subsequently approved by Commissioner Almunia with diplomatic slaps on the wrist)
This year has been no different with a cluster of NAMA developer plans awaiting approval (that is, by both the developer and NAMA in writing – NAMA might have a different definition of “approval”) and the conclusion of Paddy McKillen’s appeal hearing at the Supreme Court on Wednesday but it has been the banks that have taken the headlines – AIB’s transfer of €9.3bn of loans last Monday to NAMA which will have created a massive capital hole, Sr Almunia’s approval of further injections into INBS, Anglo and AIB on Tuesday, the Council of State meeting and President McAleese’s decision that the Credit Institutions (Stabilisation) Bill was constitutional (and for those that think Mary was playing the cute hoor by refraining from referring the Bill to the Supreme Court thereby allowing certain passages of the Act to be challenged in future, that is not our president’s remit) and then on Wednesday we had a low point in Irish jurisprudence as a judge, Ms Justice Maureen Clark, acquiesced to a demand from the government to exclude witnesses – journalists and a solicitor for an interested party – from a key hearing on the recapitalisation of AIB, €3.7bn taken from our pension reserve and pumped into a bank with little prospect of a practical return, all agreed to, away from the public gaze. That didn’t stop speculation about bank runs, undeclared loan losses and derivatives landmines.
So despite the holidays and Christmas, St Stephen’s Day and New Year there will be some activity to keep things alive on here but it will be quieter for the next week, though there might be a review or two of the year.
During the past week, there were quite a few visitors on here from a German finance forum, wert-papier.de and on their forum someone had posted a Swiss-produced seasonal image of a Christmas tree. Sadly for copyright reasons I am unable to reproduce it directly here – pity because I wanted to add the caption
Greek bird to Irish bird “Is it true your Minister for Finance says this is snow?”
You can view the cartoon here (you need scroll down the page)
I wish you all a safe, peaceful and happy Christmas.
NAMA Wine Lake 
[…] See the rest here: Happy Christmas from NAMAwinelake « NAMA Wine Lake […]
President McAleese did not decide that the Credit Institutions (Stabilisation) Act was constitutional. To use your own phrase (of which more below) that was not her remit. Her remit is simply to sign a Bill into law unless she wants the Supreme Court to confirm whether it is constitutional or not. Her own opinion on that is for her to know and the rest of us to speculate about. All that the Constitution requires is that she consult the Council of State before deciding to refer or not.
Note that the President can think a Bill is unconstitutional and still sign it (no-one can stop her) or that it is perfectly constitutional and refer it.
The Council of State can be of the view that a Bill should be referred to the the Supreme Court, or the opposite, but either way the President is not obliged to follow its view. She is only obliged to consult it, not obey it.
So, to return to your phrase, you say
“… for those that think Mary was playing the cute hoor by refraining from referring the Bill to the Supreme Court thereby allowing certain passages of the Act to be challenged in future, that is not our president’s remit)”
I am not saying that the President *was* motivated one way or another. But the motivation suggested most certainly cannot be ruled out, and is entirely plausible.
You also say:
“…we had a low point in Irish jurisprudence as a judge, Ms Justice Maureen Clark, acquiesced to a demand from the government to exclude witnesses” .
I must admit that was my first reaction. But then I learned that the court was simply applying the law. What else would anyone have her do ?
She could, you might say, have done what the President failed to do: take the constitutional point. Yes, but she, we must presume, was not of the view that holding that particular hearing in camera infringed the Constitution.
You – or even I – may disagree as to this particular instance, but in camera hearings are not always unconstitutional, and I would not necessarily accept that this represented “a low point in Irish jurisprudence”.
Arguably, we have together achieved a new low in Irish blogging, though, by having this conversation on Christmas morning.
True words, happy Christmas to you Fergus.
Happy Christmas, NAMAwinelake. Like yourself I’ll be digesting more than the Christmas lunch over the next few days as I think we’ll need to hit the ground running in the New Year.
Hope you have some good relaxation too after all the hard work on this invaluable blog in the last year.
Cass Flower
It looks like the Austrians are getting increasingly interested in our banking circus. Given the “The curious tale of Anglo Irish Bank and its Austrian deposits” as Kathleen Barrington of the Sunday Business Post called it, and these recent questions raised in the Austrian parliament, i’de say the temprature in Lenihan’s office is about to rise.
http://kathleenbarrington.blogspot.com/2010/09/curious-tale-of-anglo-irish-bank-and.html
http://www.politicalworld.org/showpost.php?p=105082&postcount=15
http://www.politicalworld.org/showpost.php?p=105092&postcount=18
Nama Wine Lake, thank you for some very interesting commenatry in recent months.
Happy Christmas NAMAwinelake
Damien Kiberd wrote a reflective piece in the Sunday Times today that sums up the performance of Brian Lenihan and NAMA over the past 18 months. It primarily deals with Lenihan’s performance and it gives me little or no satisfation to say that I agree with every word written. A well argued and disturbing piece by a fine commentator, who has been calling it correctly all along.
From the Sunday Times:
Now that senior International Monetary Fund (IMF) and European Union executives are on the ground in Dublin, micromanaging the Irish state, they could usefully study Brian Lenihan’s management of the Irish banking system.
The ensuing learned paper, for there always is one, might be titled: A case study in excessive state intervention: how to turn a serious problem into a deathinducing crisis.
The pillars of Lenihan’s strategy have all been not just wrong, but deeply irrational and marked by an overweening belief in the power and proper scale of the state.
First, he provides the most comprehensive guarantee possible covering almost all the liabilities of the domestic bank network — a guarantee that reaches the implausible total of more than €400 billion. The fact that this guarantee cannot in extremis be honoured by a state which is in the red to the tune of €20 billion a year is ignored. Our European neighbours are informed, not consulted.
Then, aware that he alone is backstopping the entire system with imaginary money, he forces the banks to crystallise five, or even 10, years of future losses on property. They sell all their commercial property loans to the National Asset Management Agency (Nama) at a massive discount.
This telescoping of future losses and liabilities, real and imagined, is more than any business, or family, could bear. Again, the state picks up the bill, this time with floating-rate notes honoured by the European Central Bank (ECB) but ultimately owed by the government of Ireland.
Witnessing the massive destruction of capital that his toxic debt policy had inflicted on banks he has already guaranteed, Lenihan then mandates his newlyappointed Financial Regulator to increase the core capital requirements at his banks to 8% and then onwards to 12%. This is double the previous norms. Again the only subscriber of such capital, in any material sense, can be the now bankrupt government of Ireland.
Finally, Lenihan inevitably arrives at the point where he owns (though does not fully control) all the banks and is solely responsible for financing them into the future or closing them down.
This excessive belief in the proper role and financial power of the state led quickly to all kinds of aberrant developments. These include the virtual suspension of private property rights in the case of McKillen v Nama where the judiciary rubber-stamped the neo-Stalinist Nama law and government by fiat. More recently draconian bank reconstruction laws were rushed through the Dail in four hours. These confer powers so sweeping that the only precedent is to be found in the emergency laws enacted against subversion in the 1970s.
The cost of Lenihan’s rules-driven statist approach is horrendous. Following last week’s cash transfusions he is in the hole for €29.3bn at Anglo, though this could rise to €34.3bn next year. At Irish Nationwide the bill has hit €5.4bn while “well-behaved” Bank of Ireland has soaked up €3.5bn. AIB has just eaten up another €3.7bn and will likely require an extra €6bn in 2011, taking the total cost of its rescue to over €13bn. At EBS, the bill is just under €1bn.
On September 30, Lenihan railed against suggestions that senior bondholders in the banks should share the burden of their rescue.
Three months later we face the following brutal realities: Ireland can raise no money at all on global capital markets; there is a sotto voce bank run in place with the ongoing extraction of private money from the guaranteed banks, being paid for by the European and Irish taxpayer; and, the sovereign debt rating of Ireland has been thrashed as markets have now priced in an assumed default on our core sovereign debt.
Lenihan’s obsessive belief that the state should pay all the cost of supporting a banking system, whose problems have themselves been magnified by his actions, has brought the state itself to the verge of bankruptcy. He has ignored what should be the first principle of any government: it is that the duty of political leaders is to preserve the state.
The results are obvious. Ireland has had the most significant loss of sovereignty since the state was created in 1922. And the creditors of the state — the holders of Irish government stock and the ECB — can have no great confidence they will ever fully recover the monies they are owed.
Neither has the policy of unlimited largesse to banks resulted in any freeing up of credit, either for business or the consumer. The reverse is the case. The banks simply took the money — as they did in other better managed countries such as Britain and the US — and sat on it.
At each stage in the process Lenihan has signalled to the banks that the exchequer is a bottomless money pit that can be tapped endlessly. This has resulted in the widespread socialisation of risks that should properly be borne by the private sector where they were written. The near-unlimited absorption of those risks now visibly threatens the state itself.
The scale of each step in Lenihan’s progress has deepened the problem. When we adopt a toxic debt management scheme such as Nama it becomes the slowest and most expensive property rescue in economic history, and the biggest — €72 billion — relative to any country’s GDP.
When, inevitably, the bill for this largesse is sent to the taxpayer it is one of unprecedented scale. The €30 billion a year in cuts and tax increases imposed since 2008 and to run until 2014, is the equivalent of 55% of public spending or 20% of national output. It is not manageable, to use a phrase beloved of Lenihan.
It would be wrong to suggest that Lenihan stands alone in his bizarre use of the state as the vehicle for enforcing what might be called a right-wing “solution” to the problem of toxic bank debt.
Across the world, the “new classical” school of economics is dominant, the superiority of its intellectual case almost unchallenged for decades. Its work has been driven not just by distrust of the state but frequently by actual hatred of the state. Yet during the post-Lehman crisis each attempted remedy has found its origins in the state and in an expanded role for the state that would previously have been rejected.
The quantitative easing and asset purchase schemes approved in the US, the UK and even in the heart of Europe mean that the state (central banks) creates new online credit balances to help pump up the price of private assets.
Bank rescues and recapitalisations are widespread, again paid for by the taxpayer. These include the bailout of RBS, Lloyds and Northern Rock in the UK but also the rescues of Fannie Mae, Freddie Mac and AIG in the home of capitalism itself, the US.
Now, recognising that the explosive spending on housing triggered by the credit boom could not in any real sense be described as real “investment spending” (as we do routinely in our CSO figures), the global powers are keeping base rates permanently low in the hope of stimulating proper investment.
But cheap money at the heart of a system that has grown sick on credit expansion and where the banking ringmasters are adept at price gouging will not provide a solution, though it is assuredly better than dear money. Lenders will still demand uncommercial rates of interest that the potential investor cannot expect to earn back.
Both lender and borrower have been beaten down by their recent experiences. When this happens — as is the case right now in Ireland — the only outcome is what Keynes called “a prolonged and perhaps interminable depression”. It is what we now call debt deflation.
This absence of a more positive response from either banking systems or the private sector has been compounded by the now fashionable drive for the imposition of austerity programmes in the public sector. We see this in Ireland and the Club Med countries which might be argued to have “brought it on themselves”, but also in more rationally managed places such as the UK and Germany.
Austerity is the new black. The price will become clearer in 2011.
A man walks into a bank and says, ‘I have immediate crippling debts which I cannot possibly pay off, so please lend me the money to keep me in business and pay my debts’
The bank manager asks what collateral the man has.
The man replies that although he has many assets he cannot sell them at the moment because no one wants them, and so he cannot get a fair price for them.
The manager starts to suspect a chancer.
‘A fair price is what someone will pay for them when you need to sell,’ he explains.
‘Thats rule number one.’
The man starts to panic.
It’s an emergency.Lend me the money NOW,and I will pay you back out of the profits, and from selling my assets when they recover their worth.’
The manager is a tolerant fellow and asks to look at the man’s business model.When he looks he nearly faints. The man is truly, deepply in debt.His assets are so putrid that many of them will never recover any value. He is also leveraged to insane levels.His exposure to future losses is so high,that he has no chance of ever becoming solvent,even with the loan he is asking for.
The manager is so amazed that he indulges his own curiousity. ‘How much do you need ?. He asks.
The figure the man asks for is so large that the bank does not actually have enough itself.
The man is unmoved. ‘I suggest that you borrow the money to lend to me’ he says to the bank manager.
The manager isamazed at the brass neck of the man and asks, ‘If we do borrow the money, who will pay the interest? You?’
‘oh no’ says the man.’that’s your business, you pay your own interest.’
‘Let me see if I have got this straight’, says the manager,’You want me to go into crippling debt and for ME to pay all the interest on this debt so that I can give you money to pay off your insane debts and allow you to runa failed business model of insane leverage.Why the hell should I?’
at which the man pulls out a gun and holds it to his own head and says,’Because I am too important to fail.’
We must not be so stupid as to believe this.
(‘The debt generation’ by David Malone)
I don’t think anyone believes it, except possibly the two Brians. However we are all docile participants in the drama.
@Tirnanog33
Good parable !
You need to sort your website out a bit, though – my own glasshouse at least has thicker glass than yours IMHO ;-)