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The Saved and the Damned

I had a meeting the other day with one of Ireland’s very top bankers. This person agreed to meet me and answer a few questions on condition of complete anonymity. That this person was willing to talk to me at all was a surprise. 

One of the things we talked about was the up-coming European meeting concerning the endless bail-outs of Europe’s’ banks.  I asked what she thought was going on in the seemingly endless back and forth between France and Germany about the EFSF and the nature of the bail out and if there was going to be one at all. 

What she said is this: There is horse trading going on but not what is being reported in the press. According to this very senior banker it was now known that the plan was all but agreed to re-capitalize all the banks but to the very minimum degree. France and Germany were agreed on this. As I wrote before I left, there has been a bidding war looking for the lowest amount.

The horse trading and arguing is of a quite different nature.What is being thrashed out is a list, for use after this across the board, minimum bail out, of which banks will be saved and which will be left to die when they next have a problem. The horse trading is over who will be saved and who damned.

In other words the decision has been reached that this is the last pan-Europe, all bank bail out attempt. After this it is recognized that Europe and the IMF cannot save all the banks. And so only the most systemically vital are going to be saved and the rest will be allowed to save themselves if they can or die if they cannot.

I believe the banker who  told me was being candid. But could it really be true?

First, who would be able to draw up such a list? Who would be party to the discussions? If any news of who was on the list leaked out then it would become a self fulfilling prophecy. The ‘damned’ would see their shares and bonds crash and the ‘saved’ would shoot to the moon.  So who could be trusted? Merkel and Sarkozy could not draw up  such a list on their own. Would the heads of the central banks be consulted? Ministers of Finance? Surely if any minster at all were included then the details would leak out and the plan would crash the banks immediately. So could such a list really be drawn up?

So far I’d have to say the whole idea seems unlikely.  On the other hand we do all know, and the banker was candid and clear, that there just is no way the EFSF or the ECB or the IMF, not even of them together, can bail out everyone’s banks and so someone is going to be left out to die when they have their next crisis.  Once you accept that idea then how sensible is it to have NOT thought through which banks you will save and which you will let go? Does it make sense to allow each event to take you by surprise and to always be having crisis talks with a gun to your head?

Thinking of it this way makes the list seem not only possible but essential. Taken together the two sides of the argument seem to me to suggest that the ECB and the top European leaders would have to draw up a list of those banks in each country which they felt were absolutely systemically essential and those which weren’t. Note that it is those which are essential to the broader system of banks not to the country in which they are located. So it could be that no bank in Ireland or Portugal or Greece, for example, would be considered essential ‘for the system’.  And this is the critical point. It seems likely to me that some nations, the powerful nations, will have most of their banks on the list of the ‘saved’. While other nations, perhaps unbeknownst even to their own governments, will secretly have most of their banks on the list of the damned. The decision would already be taken that they are to be left to die. A nation in that position,  would essentially find it was to be sacrificed and crippled so that the ‘system’ would be judged to be better off.  

What it means is that as banks collapse we will see some nations in which many banks will be allowed to die and their ‘good’ assets will be canibalized first by the ‘saved’ banks from their own nation and later, if there are no large enough banks still standing in their nations, then they will be eaten by banks from those nations who are not yet in trouble.  Nations would find themselves facing default but neither their people nor even their government would have been party to the decision. They would be thinking they had been working towards saving their banks but would find them crashed, by others, for the good of others. It would not be the ‘orderly default’ we sometime hear about, it would be an ‘imposed default’. The markets would trigger the event but the outcome would have been decided and imposed by, and at the convenience of, others.

BUT in the mean time, in every nation we, the people, will continue to be forced to pour money in to the banks in order, we are told, to ‘save’ them. And yet the truth may be that many of those banks may already be on a list of the damned. The  leaders of France and Germany and maybe of the ECB and IMF, and maybe even our own prime ministers , already know that the banks into which we are pouring our wealth are already condemned. When they have their next crisis they will be left to die  but until then we will continue to ruin our nations by pouring our wealth in to the bodies of dead and condemned banks. And when they do finally go they will each take with them all the money we have poured in to them. That money, those billions, will be gone. The money will not be retrieved. The money will have gone to enrich the Bond holders.

I cannot say that this list exists. All I can say is that the banker who told me that it did exist seemed truthful to me and the grim logic of the current banking and political crisis points towards it.

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55 Responses to The Saved and the Damned

  1. D. October 24, 2011 at 6:44 pm #

    I think this is a German Powerplay – the French Banks are next in line at the heart of the European Monetary Union. Then the Germans. The French and the Germans both know this, and this is Merkel’s attempt to swing the power in the EMU back to Germany. Germany has time, and will be putting up most of the “credit” behind the fund – and so can wait and make the French sweat.

    It’s been documented that the Euro was always France’s method of shackling the DM and the feared Bundesbank.

    So, the horse trading may be banks but I think it’s also about something a little more – who will really be the senior partner in the duopoly at the heart of the Union: settled once and for all.

  2. Pat Flannery October 24, 2011 at 7:50 pm #

    Can you imagine a mainstream journo reporting such an interview?

    I suspect the “she” you spoke to knew that the regular media would have supinely checked with the bureaucratic godfathers and been given the thumbs down. Your source wanted to get the word out so “she” went directly to the blogosphere. Take it as a compliment that “she” chose you.

    Perhaps this is the first shot of the Irish banks fighting back.

    But there is something underlying all of this. Banking will not survive in its present form. Lending will become separate from high street banking. Loan funding will become the “wholesale” and loan “servicing” the retail. It is already that, just not in name.

    In other words only the big “saved” banks will have access to the bond market.
    In that sense the “damned” banks, like Irelands three “pillar” banks, may survive as what they already in reality are: franchise outlets for the international bond market.

  3. Charles Wheeler October 24, 2011 at 8:13 pm #

    “BUT in the mean time, in every nation we, the people, will continue to be forced to pour money in to the banks in order, we are told, to ‘save’ them … When they have their next crisis they will be left to die but until then we will continue to ruin our nations by pouring our wealth in to the bodies of dead and condemned banks. And when they do finally go they will each take with them all the money we have poured in to them. That money, those billions, will be gone. The money will not be retrieved. The money will have gone to enrich the Bond holders.”

    So, looking at it from the bondholders point of view, it all makes perfect sense: extract as much as possible before the inevitable implosion, or take a haircut now. And who’s running the show?

    Satyajit Das makes an important point when he underlines how the current bailout proposal “is driven, in reality, by political imperatives – avoiding seeking national parliamentary approval at a time when sentiment is against further bailouts and lack of support for an increase in the size and scope of the EFSF.”
    http://goo.gl/dRWDh

    These decisions are all being taken by supra-national bodies beyond the reach of national parliaments and in that sense are distinctly un- (if not anti-) democratic precisely because turkeys won’t vote for Christmas, they must be led to slaughter (or, you could substitute the image of the frog being gently brought to the boil).

    Meanwhile, economists and economic commentators continue to rationalise the irrational.
    http://bilbo.economicoutlook.net/blog/?p=16609

  4. Charles Wheeler October 24, 2011 at 10:11 pm #

    An important motive for flogging the dead horse that is Greece (or, cue the vision of Prometheus chained to a rock having his innards pecked at for eternity by vulture capitalists), is that it sends a message that default will not come easy – pour encourager les autres – just in case eyes start turning to Argentina or Iceland, the Nemesis of bond-holders.

    But it also maintains focus on the ‘prodigal’ sons of Europe, who’ve only got themselves to blame for their past behaviour, taxing too little, spending too much, living high on the backs of ‘more responsible’ Europeans, amplifying the notion that the problem is fundamentally one of sovereign, rather than private banking sector debt.

    And yet, the papering over of the cracks in Greece’s public finances were achieved by the same players (the big banking corporations, a corrupt political leadership and their backers among the wealthiest elite) now calling for austerity to pacify ‘the market’.

    So, it’s always useful to remember how this crisis was caused – which wasn’t through too many Greek public sector pensioners splashing out up on some ouzo-fuelled bacchanalia. The facts are a little different:

    In reality, the Greeks have one of the lowest per capita incomes in Europe (€21,100), much lower than the Eurozone 12 (€27,600) or the German level (€29,400). Further, the Greek social safety nets might seem very generous by US standards but are truly modest compared to the rest of the Europe. On average, for 1998-2007 Greece spent only €3530.47 per capita on social protection benefits–slightly less than Spain’s spending and about €700 more than Portugal’s, which has one of the lowest levels in all of the Eurozone. By contrast, Germany and France spent more than double the Greek level, while the original Eurozone 12 level averaged €6251.78. Even Ireland, which has one of the most neoliberal economies in the euro area, spent more on social protection than the supposedly profligate Greeks.

    One would think that if the Greek welfare system was as generous and inefficient as it is usually described, then administrative costs would be higher than that of more disciplined governments such as the German and French. But this is obviously not the case … Even spending on pensions, which is the main target of the neoliberals, is lower than in other European countries.

    Furthermore, if one looks at total social spending of select Eurozone countries as a per cent of GDP through 2005 (based on OECD statistics), Greece’s spending lagged behind that of all euro countries except for Ireland, and was below the OECD average. Note also that in spite of all the commentary on early retirement in Greece, its spending on old age programs was in line with the spending in Germany and France.

    In fact, Greece has one of the most unequal distributions of income in Europe, and a very high level of poverty … the evidence is not consistent with the picture presented in the media of an overly generous welfare state … Of course, these facts don’t matter. The prevailing narrative is that Greece is, in the words of the FT’s John Authers, “a country that was truly profligate”, with little in the way of data to support that assertion.
    http://goo.gl/yQS6U

  5. Neil October 24, 2011 at 11:40 pm #

    “The money will have gone to enrich the Bond holders.”

    Which poses the question of what sort of bonds are involved and who the bond holders are.

    I think you’ve done this before in relation to Ireland, David, but can you give us a general idea?

    • 23234 October 25, 2011 at 5:05 am #

      d

  6. Dave Holden October 25, 2011 at 8:33 am #

    Given the interdependence of banks it strikes me this would not be an easy job.

  7. WhistleblowerIRL October 25, 2011 at 8:54 am #

    @ Neil

    Senator David Norris tried repeatedly to name & shame the bondholders.
    Here is a link to my recent blog post which includes quotes from the protocols of the senate debates. One has to wonder in who’s interests he was silenced.

    http://whistleblowerirl.blogspot.com/2011/10/senator-david-norris-attempts-to-talk.html

    • Neil October 25, 2011 at 9:59 am #

      Thanks, whistleblower. I knew I’d seen something like that before on the blog or something connected to it.

      Could I ask what sort of bonds are involved? At the risk of showing my ignorance, are they corporate bonds?

      (I should add that I don’t hold any corporate bonds myself – except indirectly through my meagre pension funds.)

  8. Sir Harry October 25, 2011 at 9:45 am #

    @ Golem: This rumour has been doing the rounds since early September. Apparently, the UK authorities have instructed their banks pull lines from European banks in advance of such a denouement. The rationale is that there is not enough money to bail out every bank, so some will have to be let go.

  9. Antoinette October 25, 2011 at 9:48 am #

    Great piece Golem and the same theme was also taken up by the Irish commentator David Mc Williams over the weekend in the Sunday Business Post. the full article is attached here http://sbpost.ie/post/pages/wholestory.aspx-qqqt=DAVID%20MACWILLAMS-qqqs=commentandanalysis-qqqsectionid=3-qqqc=5.2.0.0-qqqn=1-qqqx=1.asp

    The important excerpt is as follows: “Sarkozy is one such politician.He wanted the rest of Europe to pay for SocGen.He does not want France to save the French banks.He wants you to save the French banks.How much has changed in three years?

    At the beginning of last week, the France of October 2011 was beginning to look like the Ireland of October 2008.By the end of the week, following Moody’s threat to downgrade France, the 5th Republic looks like a mirror image of Ireland in the dark days of 2008.The French state knows that if it undertakes to prop up its banking system now – as it urged the Irish state to do in 2008 and throughout 2009 – it will contaminate the French sovereign and French bonds will slump.

    Last week, French bond yields increased by 0.6 per cent.France wants Europe to pay French debts,yet it wants the Irish to pay for the debts of Irish banks – much of which is owed to French banks. How does that make you feel? France is now on the hook and needs a European-wide slush fund to bail out its banks. It is, of course, invoking the abstract cause of ‘Europe’ to disguise its own begging bowl.There are many who might conclude that, after a few years of lecturing the rest of Europe on how to behave, the French are getting their just desserts.”

    So for irish banks to survive they must be bailed out by the Irish state but Socgen must be bailed out by Europe. There certainly appears to be a list in operation…

  10. Neil October 25, 2011 at 10:18 am #

    Off topic, but interesting. This was started by a grass-roots movement of 2009 graduates at Harvard Business School. It is a voluntary pledge for graduating MBAs and current MBAs to “create value responsibly and ethically.”

    “THE MBA OATH

    As a business leader I recognize my role in society.

    • My purpose is to lead people and manage resources to create value that no single individual can create alone.

    • My decisions affect the well-being of individuals inside and outside my enterprise, today and tomorrow.

    Therefore, I promise that:

    • I will manage my enterprise with loyalty and care, and will not advance my personal interests at the expense of my enterprise or society.

    • I will understand and uphold, in letter and spirit, the laws and contracts governing my conduct and that of my enterprise.

    • I will refrain from corruption, unfair competition, or business practices harmful to society.

    • I will protect the human rights and dignity of all people affected by my enterprise, and I will oppose discrimination and exploitation.

    • I will protect the right of future generations to advance their standard of living and enjoy a healthy planet.

    • I will report the performance and risks of my enterprise accurately and honestly.

    • I will invest in developing myself and others, helping the management profession continue to advance and create sustainable and inclusive prosperity.

    In exercising my professional duties according to these principles, I recognize that my behavior must set an example of integrity, eliciting trust and esteem from those I serve. I will remain accountable to my peers and to society for my actions and for upholding these standards.

    This oath I make freely, and upon my honor.”

    http://mbaoath.org/about/the-mba-oath/

    And an interesting comment from the Economist (2009):

    “The 2008 debacle might have come as less of a surprise if all those MBAs had been taught that there have been at least 124 bank-centred crises around the world since 1970, most of which were preceded by booms in house prices and stockmarkets, large capital inflows and rising public debt.”

    http://www.economist.com/node/14493183?story_id=14493183

    • Hawkeye October 25, 2011 at 11:08 am #

      @Neil

      I’ve added my name to the list!

      Perhaps the “Occupy” movements should invite many of those passing business people (known for calling out witty & intellectually profound comments to protesters such as “get a job”) to sign-up to the oath.

      The protesters may not have a job, but at least they have honour, dignity and respect for true democracy and the needs of society at large.

  11. Neil October 25, 2011 at 11:52 am #

    You may, however, notice a problem with “I will protect the right of future generations to advance their standard of living and enjoy a healthy planet”…

    • Hawkeye October 25, 2011 at 12:29 pm #

      @Neil

      True. But I might then invoke the Tim Jackson “Prosperity without growth” mantra.

      Because of the current power-law distribution of income, any efforts to equalise wealth could raise living standards for more people than those adversely affected, even under stagnant or declining economic growth.

      Even Bentham (“greatest good….”) would go along with this!

      The healthy planet bit is quite tricky, but I think we blotted our copy book on that about 10,000 years ago:

      “With agriculture, and subsequently civilizations, independently arising in multiple regions at about the same time, ~10,000 years ago, indicates to Wright that given certain broad conditions, human societies everywhere will move towards greater size, complexity and environmental demand”

      http://en.wikipedia.org/wiki/A_Short_History_of_Progress#Synopsis

  12. StevieFinn October 25, 2011 at 12:50 pm #

    So there will be less predators, but probably bigger & more powerful ones. Even more of too big to fail, bail or jail. If their dog eat dog evolution isn’t stopped, will we eventually end up with one gigantic omnipotent all controlling world bank ? the eventual victor between the US & China’s megabanks ? After all warfare has always been about acquisition & the banks have now proved, with help from their political lackeys they can suck an entity dry, without the need for a physical invasion. When TPTB have to resort to invasion, which is usually the relatively easy bit, the then occupiers become a heavily armed police force, who then train the natives to control themselves, while the financial oligarchs pillage their resources. At the start of the so called “Arab spring” there were demonstrations from the newly freed, democracy endowed Iraqis, which were soon brutally put down & of course ignored by the majority of the media. Naomi Klein very well described the state the angels of democracy have made of Iraq, in “Shock Doctrine”.

    I hope that I am letting my imagination run away with me, but the seeds are all there, & the predators do not know how to stop.

    • Neil October 25, 2011 at 1:19 pm #

      Yes, it would be ironic if the current crisis led to a smaller number of even bigger “too big to bail, fail or jail” banks (nice phrase, though size should have nothing to do with the scandalously unexercised jail option). Break up the ones that survive so that they don’t exceed a safe proportion of GDP!

    • StevieFinn October 25, 2011 at 2:20 pm #

      Re:- Invasion, better still support a rebel grouping, cheaper, no need to worry about the Geneva convention when getting rid of a tyrant. the ends justify the means, maybe not for the Libyan people, but definately for TPTB.

      Are these the kind of people that the Libyans have to rely on to bring them prosperity within the warm & safe arms of democracy ?

      http://www.cbsnews.com/8301-503543_162-20124758-503543/globalpost-qaddafi-apparently-sodomized-after-capture/

      Sorry if I have wandered off topic.

  13. Neil October 25, 2011 at 1:05 pm #

    I wasn’t, of course, questioning the right of the poor (and especially the poor in poor countries) to improve their lot. One might prefer, however, to substitute “quality of life” for “standard of living”.

    Bentham’s fundamental axiom was that it was “the greatest happiness of the greatest number that is the measure of right and wrong”. This, however, was derived from a faulty translation of the Italian jurist Cesare Beccaria’s principle that laws should be created for the “greatest happiness **shared** by the greatest number” – a rather different proposition.

  14. BHomes October 25, 2011 at 1:10 pm #

    Golem thank you a timely blog post
    Olivier Sarkosy – half brother – Managing Director and head of Global Financial Services group, Carlyle Group wrote recent article in FT saying the European banks need to generate over $800 billion each month to pay maturing bondholders – compare that to the difficulty of raising EFSF funding – conclusion is its unsustainable – only the strongest can get funding.

    http://news.google.com and search for
    “Europe’s dithering over banking risks 2008 again”

  15. Neil October 25, 2011 at 2:22 pm #

    Mystery Solved: ECB Can’t Afford The Greek Barber Shop

    Q. Why has the European Central Bank – the largest single holder of Greek debt – been resisting big haircuts on Greek bonds?

    A. Because it would make the ECB immediately insolvent.

    http://www.zerohedge.com/news/guest-post-mystery-solved-ecb-can%E2%80%99t-afford-greek-barber-shop

    See the follow-up post at http://www.zerohedge.com/news/dealbreaker-barclays-sees-50-60-haircut-cds-trigger , which suggests that nothing will emerge from the European summit, because the necessary safety-nets to catch the fall-out from a Greek “credit event” aren’t in place.

    And so it drags on, and on, and on…

    I wonder what the Bundestag will vote tomorrow on the expansion of the European bailout fund (EFSF) to a trillion euros (they’re currently paying 48% of it).

    • richard in norway October 25, 2011 at 4:35 pm #

      Reggie was pointing this out from the beginning. He said that buying Greek debt would make the ECB insolvent more than a year ago, I think.

    • richard in norway October 25, 2011 at 4:55 pm #

      If I owned a credit default swap on Greek debt I would be absolutely furious right now. How much of a haircut is needed before the cds pays out, it seems the rules are being changed all the time. Folk that bought these cds have payed out their money and they must be expecting their payout, its like if you go into the bookies and place a bet on a 50 to 1 shot but when it wins the bookies says “oh no it don’t count because it only won by a head”. If these cds aren’t paid out on then that whole aspect of banking is dead which in my book would be a good thing but for the banks it means lean times ahead and the trust in exotic products will not return for years maybe 30 or more. I can’t understand why we haven’t heard more protests from the holders of these instruments unless they have already been bought by the issuers.

      • Charles Wheeler October 25, 2011 at 6:06 pm #

        If you hold bonds and CDS it would seem to be a win-win.

        Unless you suspect that those CDS aren’t worth the paper they’re written on – in which case you’d try to screw as much out as possible before putting them to the test.

        Wasn’t it the fear of demands for default insurance that triggered the bail-out of AIG?

        • Neil October 25, 2011 at 6:16 pm #

          Wasn’t that what was happening in the run-up to 2008 in the US? Banks making loans they knew would never be repaid, because they had credit default swaps (insurance) to cover them. (And likewise selling investments they knew would go bad and were shorting.)

        • richard in norway October 25, 2011 at 7:04 pm #

          I think that if I had a cds I would be trying to sell it for as much as I could, going back to the bookies analogy I would try to sell my 50 to 1 bet for anything over what I paid for it. I think this is what is happening banks are trying to buy them up same as the bookies might try to buy my bet at a lower price and punters are offloading in fear that they won’t be paid, but some punters are holding out

      • Gordon October 26, 2011 at 3:45 pm #

        Richard,

        The FT agrees with you saying that a combination of bans on some CDS trading plus attempts to define the Greek default (which is what it is) as NOT a default for CDS purposes could spell the end of the CDS market.

        http://www.ft.com/cms/s/0/dccc8d98-ff03-11e0-9b2f-00144feabdc0.html#axzz1bt8rQDzD

        Predictably the banks are indulging in special pleading saying this would be just terrible – the authors report that banks argue that a ban might increase borrowing costs for some sovereigns.

        Actually it would be a good thing if sovereigns had to pay the proper risk-adjusted rate of interest on their loans. In the case of Greece and others this would have meant that things would have come to a head earlier when the sums at risk were much smaller and the bond market would have performed one of tits proper functions – enforcing discipline.

        As it is the “insurance” that CDSs provide creates massive moral hazard with lenders given little incentive to perform due diligence. Also their presence means that the global financial system is dangerously interconnected and with out firebreaks. The only certainty seems to be that those who sold them will have safely retired with their bonuses before the system blows up.

  16. Maria dos Santos October 25, 2011 at 2:54 pm #

    Is that the same Harvard,that when the introduced an ethics class,sometime in the late 1980s,had three students turn up.Those three were Chinese and did not understand that the class was optional.After that the class became compulsory not that it made any difference to the level of inner ring corruption.

  17. ryanmburke19 October 25, 2011 at 4:16 pm #

    I still do not understand why most of these banks need bailouts at all. They have enough capital in the form of debt to make whole depositors and trade creditors. Which means the bailouts are for the bondholders and stockholders and not for the “economy” or the “EU” or to avoid armageddon. These banks need to be restructured and reorganized and not recapitalized with taxpayer money. Convert debt to equity and wipe out the shareholders. But then you can see that this is really about protecting the stakeholders and not the stability of the system, since the banks have said they will not raise equity at these dilutive levels and instead will sell a trillion in assets. Lets let capitalism work for once, and punish those who made bad loans (bondholders), those who made silly overleveraged investments (management). Protect the depositors and trade creditors to avoid contagion. Why is this not even an option being discussed? Certainly its better than turning France into Ireland writ large…

  18. Neil October 25, 2011 at 4:32 pm #

    One option EU officials are considering to boost the firepower of the EFSF is the setup of an special purpose investment vehicle.

    That’s SPIV for short… (I’m not joking).

    Meanwhile the FT reports that Italy’s coalition government is on the verge of collapse, because Berlusconi’s coalition partners are against raising the pension age from 65 to 67: http://www.zerohedge.com/news/ft-reports-italian-government-brink-collapse .

    If only Berlusconi had retired ten years ago…

  19. Neil October 25, 2011 at 5:12 pm #

    You may remember that the Bundestag is due to give a crucial vote tomorrow on the German contribution to expanding the EFSF. But the European finance chiefs have cancelled their talks.

    The Telegraph comments:

    “Merkel must give concrete details to her MPs, all that is conditional on Greek haircuts and bank recap. But question is can she if Ecofin has not met to agree on it?”

    The words “brewery”, “p*ss-up”, “organize” and “can’t” spring to mind.

    It would be laughable if it weren’t so serious (or perhaps it isn’t, given that what’s serious is the looming collision with the iceberg rather than the deckchair rearranging).

  20. Neil October 25, 2011 at 6:09 pm #

    I posted a link above to a Zerohedge post saying that Barclays sees a 50-60% haircut on Greek debt as a trigger for credit default swaps (http://www.zerohedge.com/news/dealbreaker-barclays-sees-50-60-haircut-cds-trigger ).

    By coincidence (?), that’s exactly the figure being discussed by European finance chiefs, according to the Telegraph, quoting their leader Jean-Claude Juncker:

    “We’ll need to see what’s the result of a voluntary participation […] we’re currently debating 50pc to 60 pc in Europe.”

    Earlier, the Telegraph’s Brussels correspondent tweeted: “EU wants 60% haircut on Greek debt (50% minimum), banks say anything over 40% is credit event. ‘Bring it on,” says one official.”

    But if that happens, as noted earlier, ZH claims this would make the ECB, as the largest single holder of Greek bonds, immediately insolvent. So is the 50-60% figure being used as a threat against the bondholders to encourage their “voluntary participation”, or what? Talk about a Mexican standoff…

    • Mike Hall October 25, 2011 at 9:45 pm #

      This commentary about the ECB becoming ‘insolvent’ makes no sense to me? ECB is the creator of Euros. Whatever else it does by way of seeking collateral, it simply created the money to buy the bonds on a keyboard – which it can do at will, anytime. There is even tacit admission of this in the plan to have a ‘leveraged’ super EFSF backed by the ECB. Albeit hidden in sufficient ‘complexity’ & spin to give the impression otherwise.

      The notion seems as totally political, ideological, as when there was wall to wall nonsense, similarly, that the US could go ‘bankrupt’. The enthusiastic buyers of US bonds throughout the entire debacle, including after the absurd credit ‘downgrade’, neither expected nor received any ‘risk’ premium whatsover.

      This is the MMT (reality) view of the current monetary system & well, if it quacks like a duck…

      Of course the ECB is not ‘mandated’ to keyboard Euros to back stop banks or sovereigns, tho’ its recent purchases of the latter’s bonds demonstrate that in some circumstances the mandate can be broken.

      The idea of some banks not being saved looks like a big fish eat little fish play – what has happened in the US in fact, big banks even more powerful. Citizens are just the mugs being sold out either way by the politicos.

      • Neil October 25, 2011 at 10:33 pm #

        You may be right in MMT theory, Mike, but it might not work out that way in practice. I’m no expert – I was only going on this (guest) post on Zerohedge:

        http://www.zerohedge.com/news/guest-post-mystery-solved-ecb-can%E2%80%99t-afford-greek-barber-shop .

        This states (with sources) that the ECB holds a (nominal) 55 billion euros of Greek debt, 5.3 billion equity and 163 billion in assets/liabilities (as of 2010) – that’s 30x leverage (perhaps this proves your MMT point – I don’t know, but is there no limit? Please answer just Yes or No, if you do answer – life’s too short).

        Quote:

        “By the end of 2010, the situation (due to unrealized losses on PIIGS bonds) was so dire the ECB had to ask national central banks (NCBs) to double its equity to 10.7bn effective 12/29/2010. However, not all NCBs could or would afford their share, and so the payment was stretched over three years (as seen in those “three easy low payments” commercials). Only 1.1bn was paid in a first installment, the remainder due at the end of 2011 and 2012 respectively.

        […] The ECB is basically bankrupt and would need to ask NCB’s (and those in turn their governments) again for more capital.”

      • StevieFinn October 26, 2011 at 11:00 am #

        @Mike
        Bill Mitchell gives his reasons here why they wont use the ECB as a Fed.

        http://bilbo.economicoutlook.net/blog/?p=16442

      • Mike Hall October 26, 2011 at 12:02 pm #

        @ Neil

        As the Mitchell blog in Stevie’s link shows, there’s no technical reasons why the ECB could not keyboard money in any amount. Obviously, there would be constraints at some point relating to inflation, but in a situation of deep recession & near euro-wide flatlining growth there is considerable scope at present.

        The decision to not allow a currency issuing authority to create money is a purely political one – if you or me, or anyone had a printing press we could never be ‘insolvent’. (As regards any liabilities denominated in the currency we issue.)

  21. Wirplit October 26, 2011 at 12:12 am #

    David, what I would like to ask is this.
    Does it really matter to a nation if its banks go bust? Obviously it matters for those who own shares and if the ordinary deposits are not protected to the depositors, but beyond that? As so many banks seem to be owned by other foreign entities anyhow does the nation as such necessarily suffer if its supposedly “national” banks goes?

    I am thinking of a bank like the Bank Austria, first owned by the Bavarian’s HVB which is itself now owned by italy’s Unicredit as you described. Where is the national interest in saving that now for example?

    I mean is it like National Airlines …every country had to have one but they turn out to be prohibitively expensive in the long run… Does it matter when everyone flies Ryanair anyhow?

    I mean further to this it might even be in a nation’s interests to see certain banks go down. I am thinking of how Germany might view the demise of Bayerriche Landesbank which I remember you posting that Munich prosecutors were looking at, as not much of a loss….( Your May 3 post: “A peek into one of the deepest little cesspits in Europe”)

    And would Ireland weep much if Anglo irish Bank finally keeled over and brought to an end all the troubling revelations that Whistleblower and Senator Norris have tried to bring out?

    Finally there are the banks that someone in the Market Zone might think it well worth to short… they saved Belgium’s biggest Bank Dexia already, so what chance they would bother with its second largest KBC if push came to shove? Ditto, if Italy has to save Unicredit would that inevitably mean that Intesa Sanpaulo would be edged towards the gangplank?

    Or in France say is Credit Agricole the least favoured of the big three? Could be profitable to short by the markets if they surmised that to be so…

    If this list is true ( and it must surely exist in some form as you say if just as forward what-if planning) then I can imagine some very interesting market plays on the options as this crisis continues its slow train wreck course. I await Reggie’s analysis…as the list of Most likely to Fail grows into a bookies favourite…

  22. Patrick Donnelly October 26, 2011 at 8:23 am #

    Why go to you? A test. Maybe you passed? Big woop.

    Women hardly ever get to the top in banking. Australia has one example. The worst bank. She may see things truly now. Or not. Hardly earth shattering news. FIRE has to lose 90% of employees and 80% of value of businesses to be sustainable. NAMA makes this an impure process, but is govt welfare for professionals, offspring, cronies etc.

    The Lehmans were sacrificed by those who gained most from their passing: GS. As the FIRE sector was the least liberalized in the EU, (wonder why, money laundering obviously!) it will be a political process, but the bond holders will decide and those who control them. You will not find their names on a convenient register! TBTF means the sector will now be reorganized.

    Hope she wined and dined you well!

  23. bill40 October 26, 2011 at 8:28 am #

    ” Frank Schaeffler, a rebel parliamentarian, said he was opposed to plans to boost the EFSF: “I worry that Italy will be attached to the drip. If that happens, the crisis will take on new proportions. No leveraged rescue mechanism in the world will be enough.” Daily Telegraph.

    There you have it from the horses mouth, so to speak. An outright admission that even if the minnow of Greece is sorted, it makes not one iota of difference, if Italy goes under it’s game over. I think the same could be said for Spain.

    I love it when power accidently tells us the truth.

    • Neil October 26, 2011 at 9:30 am #

      Patrick, have you considered the possibility that Golem might have changed the supposed sex of his informant to cover his tracks?

      Meanwhile, on the ECB, see The Beginning Of The European Endgame: ECB Bond-Buying Should End With New EFSF, German Motion Says , http://www.zerohedge.com/news/beginning-european-endgame .

  24. backwardsevolution October 26, 2011 at 9:30 am #

    Golem – exceptional reporting!

    One thing that caught my attention (and I don’t know if there’s anything untoward about it) is that all five of our largest Canadian banks (Royal Bank, Scotiabank, Bank of Montreal, Canadian Imperial Bank of Commerce and Toronto-Dominion Bank) have or are in the process of becoming primary dealers to the U.S. Federal Reserve. They set up branches in the U.S. (just like the European banks did, who then exchanged their junk with the Federal Reserve during QE2).

    I don’t know what’s going on, but I suspect something is. One blogger said it was to get rid of the MBS the Canadian banks held on their books (maybe they are worried that our housing bubble will be popping soon).

    Perhaps someone else could enlighten me on this.

  25. Robert McDoanld October 26, 2011 at 9:57 am #

    Hi Golem: Is this vid for real?
    http://www.youtube.com/watch?v=5CZr17HLH5U&feature=player_embedded

    Be very, very scared if it is.
    Keep up the good work,
    Robert

    • Neil October 26, 2011 at 11:02 am #

      Peston asks Will Germany insure Italy against default? Why haven’t markets melted down? And why are we not seeing a wholesale withdrawal of vital finance from Europe’s banks? (Answer: rightly or wrongly, “investors are persuaded that eurozone leaders will ultimately do the right thing – and that the direction of travel to a solution is clear”. No comment…)

      “there’s only about 250bn euros left in the EFSF kitty, following the bailout commitments it has already made to Greece, Portugal and Ireland, and taking account of disbursements it may have to make for the rescues of banks.

      So there is only just enough to keep Italy afloat for the best part of a year, should the Italian government suddenly find it impossible to borrow on markets (not impossible).”

      And further to comments on the ECB’s money-creating capacities above:

      “there is no limit to what the ECB can lend, because (to state the bloomin’ obvious) it can create money at will. [As noted above, however, it’s already 30X leveraged, and can only raise capital from Eurozone national banks. – Ed.] Deploying the ECB in this way would have been the big bazooka that the British prime minister has been requesting.

      But for German politicians, sanctioning the ECB to lend directly to governments would have been the slippery slope to debasement of the euro (there’s hyperinflationary history haunting them here). So they said “nein”.”

      The reason to be fearful, says Peston:

      “There will be no stability for the eurozone without the bailout fund, the EFSF, having the resources to do its vital job of demonstrating to the world that there’s no possibility of Italy or Spain going bust – or at least not for a year or two, during which Spain and Italy ought to be able to mend their finances.

      And, right now, there is no certainty Germany will give the necessary underwriting to the EFSF, so that it will have big enough boots to bash up speculators betting on the collapse of Italy and Spain.”

      http://www.bbc.co.uk/news/entertainment-arts-15459084

      And what about the BRICS as potential saviour? Reuters reported yesterday that Brazil had rejected the idea of buying Eurobonds to boost the EFSF bail-out fund, and that India and Russia were not interested in offering more funds to help Europe while there was no evidence that China planned to chip in (http://uk.reuters.com/article/2011/10/26/uk-brazil-economy-mantega-idUKTRE79P03G20111026 ).

      According to the Telegraph today, however: “China Daily, the state-owned newspaper, is reporting today that China and other big emerging economies had agreed to contribute to the EFSF bail-out fund.”

      Make of all that what you will…

  26. Hawkeye October 26, 2011 at 11:10 am #

    This is starting to get really scary:

    “Let Bosses Sack Bad Workers, Says Report”

    http://uk.finance.yahoo.com/news/Let-Bosses-Sack-Bad-Workers-skynews-3718652371.html?x=0

    Is our country really descending into a neo-feudal kleptocracy, or am I just paranoid?

    How about Gvt policy to enforce a far more essential strategy to get us out of this mess:

    “Let Workers sack Bad Bosses!”

    • Neil October 26, 2011 at 11:31 am #

      The report was written by a venture capitalist, but it may not be quite as bad as it seems

      “Explaining how its replacement, the Compulsory No Fault Dismissal system, could be made more equitable, the report says: “The employee should be given a chance to argue his or her case, and to suggest (but not demand) that they be given time to improve or be transferred to a less demanding job at a lower wage. If no such agreement could be reached, the employee would receive the same payment they would get if they had been made redundant.”

      Background:

      “Last year, the Tribunals Service reported a 56 per cent year-on-year rise in claims to nearly 240,000.

      Employers are ordered in court to pay out about £1 billion a year – although the true cost, including tens of thousands of out-of-court settlements is thought to be far higher. It typically costs firms an average of £8,500 to defend a case at a tribunal, and an average of £5,400 to pay off an employee. Some cases cost tens, or even hundreds of thousands of pounds

      http://www.telegraph.co.uk/news/politics/8849392/Dismissal-law-stifles-growth-says-No10-report.html

      But of course there’s at least two sides to every individual story.

      • Dave October 26, 2011 at 12:35 pm #

        Neil — I’d read those two leaked pages , link here (at the bottom of page) —

        http://www.telegraph.co.uk/finance/jobs/8849420/Give-firms-freedom-to-sack-unproductive-workers-leaked-Downing-Street-report-advises.html

        Despite the ‘business-friendly’ dog-whistling , it does look like a serious suggestion to reform a wasteful and dysfunctional system and incidentally to put a lot of P45-chasing lawyers out of business, hehe. Well it ‘d be the start for a serious debate…

        A similar no-fault example is the NZ Accident Compensation Scheme, where you get compensated for injury whether in the home or at work —

        http://en.wikipedia.org/wiki/Accident_Compensation_Corporation

        Very sensible.

      • Neil October 26, 2011 at 12:37 pm #

        Telegraph on Merkel speech to Bundestag:

        Lisbon treaty must change; private sector to pay more; “permanent monitoring” for Greece; on the EFSF: nein to more cash; nein to ECB invlmnt.

        And:

        “banks will be told to seek capital from the markets first and the bail-out fund only as a last resort.

        The banks should also be subject to constraints on their dividend and bonus payments until they meet capital targets -groans from investors and bankers alike.

        Europe’s banks will have to sustain a tier one capital ratio of 9pc by June 2012. ”

        Wall Street Journal journalist comments “a recipe for credit crunch”.

        Dow Jones newswires reports that Mrs Merkel said:

        “No-one should take another 50 years of peace in Europe for granted.”!!!

        • Neil October 26, 2011 at 1:00 pm #

          “banks’ capital target 9% after accounting for *market valuation* of sovereign debt exposures…”

          The banks certainly won’t like that!

    • Charles Wheeler October 26, 2011 at 2:15 pm #

      Michael Hudson has long referred to the endgame as a return to neo-feudalism/debt peonage.

      Contrary to what the neoliberal textbooks tell you, oligarchy is the inevitable consequence of market fundamentalism.

      In the neoliberal world there is a symmetry between the worker’s desire for a job and the demand of the employer for labour – hence no need to interfere in a free and equal contract.

  27. richard in norway October 26, 2011 at 1:40 pm #

    It occurs to me that if such a list does exist we should be able to deduce which banks are on it by watching their stock prices, just guessing but looking at French stock prices it would seem that soc gen is on the saved list while BNP is on the dammed list, but with only a few days of trading to go on it would be a leap too far

    • Wirplit October 27, 2011 at 11:46 am #

      Reggie would agree about BNP Richard. Imagine there will be a lot of eager hedge fund shorting predators even now scanning the savanna looking for the lame bank game to pick off.

      The banks have until June so will they will be lending out money to businesses when they will be desperately scrambling to build up their capital? Seems doubtful in extreme.
      So necessary as this may well be – does this not just kick the can across the road… back to the good old credit crunch side?

  28. John Souter October 26, 2011 at 1:58 pm #

    Every one of these financial machinations have failed. And the purse they have raided and are continuing to raid to the point of penury is democracy.

    This is usury writ large – when interest are charged on capital that doesn’t exist except as electronic digits and finance made idiotic by the ‘indebtedness’ of nations is sponsered by governments who, allegedly, are representative of their people and supposedly for their people.

    The money experiment of financial wizardry is on the rocks. A proven failure socially, morally and productively with regard to the returns it affords towards the aspirations and quality of life and its sustainability for all sentient life on this planet.

    They claim the stakes are high! For them, the 1% who have turned and tuned wisdom into an oxymoron perhaps they are. But for us, the 99%, the stake their demanding is beyond high and threatening to go literally stratospheric.

    We have to grasp the nettle and by doing so prove it’s as elementally surreal as the product and industry that nourished it. They are playing a game of collaterals – their collateral security against our insecurity.

    Arguably this is not so much a game as a war. Perhaps a game for them, where the casualties, both direct and collateral are few, while for us the direct casualties will be even less, but the collateral victims will be in billions and effect the world for generations.

    Now that their idiocy has been exposed we really do need to force a change in both track and tack. If we don’t, then the idiocy will be in charge and it won’t be of an asylum it will a Hell Hole.

  29. Charles Wheeler October 26, 2011 at 2:19 pm #

    Down the rabbit hole … and round the bend …

    Gleaned from the FT:
    Along with a ban on some CDS, politicians want to ensure write-offs on Greek bonds don’t trigger ‘a credit event’
    – i.e. a clamour for CDS payouts because it ‘could put further pressure on those banks having to pay out’

    Other banks aren’t happy because this might kill the CDS market
    – i.e. trying to prevent a run on CDS might stop the issuing of more CDS

    The EU have banned ‘naked trading’ – the buying/selling of CDS without owning underlying bonds
    – i.e. the equivalent of being able to buy fire insurance on someone else’s house, which until now has been within the regulations, fuelling the speculation in CDS (as opposed to simple hedging)

    Bankers fear this will hit liquidity
    – i.e. that preventing a complete free-for-all in the CDS market will dissuade speculators

    The EU are concerned that speculation will drive up government borrowing costs
    – i.e. speculation will drive up CDS costs and therefore the cost of borrowing which the CDS market is intended to moderate by diffusing risk; thus a device designed to lower borrowing costs begins to have the reverse effect

    This will add to the pressure on banks having to pay out
    – i.e. trying to protect the CDS market will reduce liquidity, increase prices and increase borrowing costs, triggering a default the regulations are intended to forestall

    Citigroup have recommended selling French, Italian and Spanish bonds if CDS payouts on Greek bonds are not honoured
    – i.e. unless CDS on Greek debt is allowed, possibly exposing the fragility of the contracts, the major banks will provoke a domino-effect sell-off, increasing the cost of debt, threatening a larger scale CDS ‘event’

    Michael Hampden-Turner of Citigroup, says: “We have recommended selling French, Italian and Spanish bonds against CDS because fast money banned from taking shorts in CDS will likely try and reset those shorts in the bond market. There is a danger that politicians will drive up bond yields and borrowing costs because of the ban, which is an unintended consequence that could hit the peripheral economies.”
    Seamus MacGorain of JPMorgan says shorting government bonds is “one option”.
    – i.e. regulating CDS could make the situation worse

    ‘Other policymakers’ claim that CDS add pressure to bond markets and precipitate declines ‘because they move more quickly’
    Even ‘market participants’ admit CDS markets can be manipulated
    – i.e. not regulating CDS could make the situation worse

    The International Swaps and Derivatives Association ‘likely’ to rule there is no credit event if the ‘haircut’ on Greek debt is agreed voluntarily.
    Bankers say nobody would agree to 60%

    Some say a Greek default ‘may have little effect’; others that it could have a ripple effect.

    However, one thing is certain, say bankers: there is a risk that political interference in the CDS markets may end up hurting the peripheral and other economies by forcing borrowing costs higher
    http://goo.gl/tWndz

    Are these the same bankers that were bailed out by interfering politicians?
    … curiouser and curiouser.

    • richard in norway October 26, 2011 at 2:35 pm #

      This is just what I was saying the other day

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  1. Disputes ahead of European summit - Will they agree in 24hrs? - October 25, 2011

    […] the main headlines though, quite a bit is emerging….. From a plan to stop bailouts entirely: The Saved and the Damned | Golem XIV – Thoughts to: IMF Hiccup IMF GREEK PULLOUT : We’re la-la-la-looking the other way…. | The Slog […]

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