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The lies of the EBA about how safe our banks are.

Some time ago in the Propaganda War series (Markets don’t Fail, Risk Weighted Lies, Balance Sheet Instabilities,  Toxic Bloom of Lies and The Banker’s Mexican Standoff ), I questioned the system of jargon which banks and their regulators use to assure us, and perhaps themselves as well, about the risks they run, and their claims of having it all under control. I suggested that the concepts, for all their pretensions to mathematical precision, were dangerously stupid and actually little more than self-serving piffle.

In Toxic Bloom of Lies, I looked in particular at the technical sounding notion of Risk Weighted Assets. A bank’s Risk Weighted Assets are just the amount the bank expects to make back on the loans it has given out, multiplied by some estimate of the risk that some or all of the income from the loan  might not be paid back. Not that complicated really but essential if you want to really know how solid a bank is. Of course the obvious question is who gets to set the risk factor? 

And the answer is, part of  Europe’s Basel II banking regulations called the Internal Ratings Based System (IRB), allows the banks themselves, subject to ‘approval’ of course, to decide how risky their assets are and how much they think they might be in danger of losing on them. In Toxic Bloom of Lies I wrote and then quoted from the legislation,

They decide their own risk according to their own model… but subject to approval.

All institutions using the IRB approach will be allowed to determine the borrowers’ probabilities of default while those using the advanced IRB approach will also be permitted to rely on own estimates of loss given default and exposure at default on an exposure-by-exposure basis.

Advanced IRB as well! Of course the models being used are proprietary and therefore NOT open to scrutiny by any outside experts. What do you think, if the bank’s experts came up with two possible models one of which gave a lower over-all risk weighted total which do you think the bank would go for? And if another bank came up with a model that shaved just a little bit more off the risk weighting do you think there would be a subtle pressure to match the undoubted brilliance of their competitor’s model? I leave you to decide

When I wrote that I did so as just another disgruntled pleb. Today the  FT reported,

Fears rise over banks’ capital tinkering

Concern is growing that banks in Europe and elsewhere are moving to meet new tougher capital requirements by tinkering with their internal models to make their holdings appear less risky.

The article went on to explain,

So many of them are instead trying to reach the required ratios through … what they call “risk-weighted asset optimisation”. In some cases, that means selling or running down risky assets, but in others, it means changing the way risk weights are calculated to cut the amount of capital that will be required.

The same article reports that in 2010 Lloyds bank reduced its risk weighting on various overseas assets and suddenly found it needed to hold £16 B less capital against them. Convenient. Turns out Santander is doing the same, as is Commerzbank after its merger with Dresdener Bank and even Spain’s second largest Bank BBVA finds that the present turmoil in Spain is no barrier to reducing the risk weighting of it assets as well.

All the banks have to do is create their own proprietary computer model with which to model their assets and their risk and like some bought and paid for oracle it tells the world the bank is more solvent and its assets less risky than anyone had suspected. Of course I am being terribly one sided in my description. I have not said a word about the fact that these risk models and the results they hand the banks will be overseen not only by national regulators but by the European Banking Association (EBA) as well.

As the article concludes,

Supervisors in the UK and elsewhere also said they will be looking carefully at bank plans to reach their new capital requirements and intend to come down hard to anything they see as cheating.

Of course we might reflect that it was the EBA with national regulatory authorities which only last year ran a second bank stress test on 90 of Europe’s banks about which the EBA said in its final report,

The 2011 EU wide stress test contains an unprecedented level of transparency on banks’ exposures and capital composition to allow investors, analysts and other market participants to develop an informed view on the resilience of the EU banking sector. (P.3)

‘Unprecedented transparency’. We are not worthy! But wait there’s more,

The results were scrutinised and challenged by home country supervisors before a peer review and quality assurance process was conducted by EBA staff with a team of experts from national supervisory authorities, the European Central Bank (ECB) and the European Systemic Risk Board (ESRB). (P.2)

‘Scrutinized’, ‘challenged’ and peer reviewed by ‘teams of experts’ from places mere mortals have never even heard of. Let us raise a hymn to them! ….And yet…

However, the EBA has relied on the quality review work of national authorities and on the internal processes of the banks to assess such areas as earnings trends, asset quality, model outcomes and the magnitude of the impact on assets and liabilities. (P.2)

The ‘internal processes of the banks’ were relied upon for assessing ‘such areas’ – as if these were just a few peripheral details – ‘asset quality’, ‘model outcomes’ and ‘the magnitude of impact on assets and liabilities’.  In other words the banks were ‘relied upon’ for everything of substance. The banks tested themselves and  the only things scrutinized by all those experts from the EBA and elsewhere was the lunch menu.

Or am I being unfair? Let me see. What did all those experts conclude? Oh I know. Not one Spanish Bank was thought to require any additional capital beyond what was already planned. They were all fine. Not just fine as they were then, but fine even under the test’s most adverse scenario. Bankia was one of those all the experts looked at and declared fit as a fiddle. Now look at it. First it was fine. It even declared a profit. Then suddenly it was bust and needed the tax payers to give it €3B. That figure doubled. Then it doubled again. Now no one is sure. 

What happened to all that risk weighting? A little out were we? A few assumptions short of reality? Bankia is the ugly reality that heaves to the surface when all the expert computer modelling and pompous assurances of risk weighting are done and over. It won’t be the last. Why should anyone have faith that the  EBA’s oversight of other banks, their models and their risk weighted lies was better than it was for Bankia?

There was no transparency. There was no honesty. No integrity. No honour. What we have is an aristocracy who lie and connive together to shower us with the shit of their wastrel lives. 



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73 Responses to The lies of the EBA about how safe our banks are.

  1. Chris May 30, 2012 at 1:00 am #

    Bracing stuff as ever.

    A recent Bankia piece on Zerohedge claimed that Deloittes refused to sign off Bankia’s accounts – does anyone know if this is true?

    • gatopeich May 30, 2012 at 10:37 pm #

      That is true, according to Spanish press. And they seem to have been signing those off for years, only this time they probably saw it coming.

  2. Peter Whale May 30, 2012 at 9:07 am #

    Too big to fail banks will turn into countries and the EU failing and falling apart amid widespread default. Name me one consortium that has improved by top down centralization of all decisions? The guy at the top gets richer the worker at the bottom takes the fall. Same with National entities.

    Great post as usual Golem

  3. Desmond Dillon May 30, 2012 at 10:33 am #

    wow Golem you’ve excelled yourself with this one. thanks you. is there no bottom to the quicksands? or are they really all radioactive. black holes comes to mind. it inspired a ditty.

    Masters or Greed

    the ‘masters of the universe’ are the gods of greed
    who just need more from the poor
    upon whose little wealth they feed.
    by taking money for debt
    there’s an interesting conundrum
    where the sum of riches amassed
    turn out to be not gold or even brass
    because it takes a very special class
    to gather wealth from debt
    that absolutely must be paid
    or else there are no riches to be made.

    then the ‘masters of the universe’
    who are the gods of greed
    turn out as thuggish debt collectors
    who are desperately in need
    of getting it all back again with utmost speed
    or at least be getting interest on the debt thats owed
    from the people pledged to pay
    by politicians in their day
    who sought to further their careers
    and serve: ‘the masters of greed.’

    • Phil June 10, 2012 at 6:31 pm #

      great stuff!

  4. Ken Lorp May 30, 2012 at 10:47 am #


    An excellent piece and you’re now homing in on some of the lesser understood weaknesses of the system. I spent a number of years at a major European bank where we developed these advanced IRB models for more complex structured credit tranches.

    In short, I would describe the approach of the bank as twofold:
    1) Figure out how to game the system and come up with plausible reasons why it’s valid to do that – remember that the regulators/supervisors weren’t as smart of the people arrayed against them; and
    2) Cheat. Make some changes to your model that benefit you, but don’t tell anyone.

    Funnily enough that bank ended up needing some taxpayer support, but it was done very quietly.

    With Bankia, the alarm bells should have been ringing when they announced a profit last year. If you merge the worst banks in your country, you’re not going to end up with a good bank, you just end up with 1 (big) bad bank.


    • Golem XIV May 30, 2012 at 10:53 am #

      Morning Ken,

      Thank you for the insight and confirmation that it’s not wild eyed conspiracy to suggest that the banks ‘game’ the system.

      Any chance you’d be willing to email me at the address in my profile? If you felt able, I’d love to talk to you off the record to hear more of your experiences and views. If not, I understand.

      And thanks again.

  5. richgb May 30, 2012 at 8:43 pm #

    If credit ratings worked properly then they would indicate the level of confidence in a bank’s assessment of its own risks. A large part of the rating calculation should involve past as well as future performance.

    The EBA should act like the good project manager who adjusts the time estimates given to him based on past performance of the team members. I would like the EBA to create a league table for the 30 largest European banks, ordered according to confidence. We can then make our own judgements.

  6. AndyC May 30, 2012 at 9:26 pm #

    Yea and the EBA gave Dexia a clean bill of death…health I meant…and look how well they didn’t do.


  7. John Souter May 31, 2012 at 7:20 pm #

    The way things are heading it looks as though we should be spreading the scramble nets round the cliff edge.

    • Golem XIV May 31, 2012 at 8:21 pm #

      Hello John,

      Someone on another stand complained that I had not been appreciative enough of your contributions nor those of Charles Wheeler. If I have given the impression of not valuing your contributions please let me say now that I always read your contributions and vaiue them.

      I may not always comment – often because I often feel that to do so would be for me to intrude into a conversation as if I thought that everything everyone says was directed to and for me – but I do read and think about what contributors say just like everyone else.

      • John Souter June 1, 2012 at 12:59 pm #

        David – No need for any explanation – the blog is on my daily visit list.

        Actually I’ve noticed the absence of Charles and can only wish all’s well with him.

        In my case the absence is purely down to the demands of a case currently going through the courts. – to clarify, I’m not a lawyer, more a Mackenzie bloody nuisance on welfare reforms and the establishment.

        • steviefinn June 4, 2012 at 8:33 pm #


          I second your thoughts on Charles.

        • Charles Wheeler June 4, 2012 at 9:18 pm #

          All OK here, thanks John (but it’s gratifying to be missed!).

          Just been catching up on Bagehot’s Lombard Street – once again it’s a case of plus ca change as he wrestles with the basic conundrum of modern banking – i.e. the fact that ‘there is no such thing as liquidity of investment for the community as a whole’ [Keynes, General Theory, V]. Bagehot argued that the only option for a central bank was to ‘lend … most freely in time of apprehension’ and to do this hesitantly – as he argued the BoE had done in contemporary crises, ‘is to incur the evil of making them without obtaining the advantage’ – i.e. of stemming the panic: ‘They ought to know that this bold policy is the only safe one.’ As he claims: ‘Every banker knows that if he has to prove that he is worthy of credit … his credit is gone.’

          It seems like, 150 years later, we’re still trying to fathom out this basic paradox of banking. Which, perhaps, sums up the schizophrenic approach of the ECB in trying to pump liquidity into a system while imposing conditions that ensure that operation cannot succeed – and ending up with the worst of all worlds.

          See: http://www.gutenberg.org/ebooks/4359

          • Charles Wheeler June 4, 2012 at 9:53 pm #

            p.s. Good piece on the flaws of securitization: ‘The current situation is a heady cocktail of perverse incentives, lax supervision and bewildering complexity.’ http://goo.gl/I0P9Z (we seem to have forgotten what caused the crisis in all the confusion of the firefighting that’s followed – but the breaking of that fundamental link between the originator and borrower must go down as one of the major contributors to the problem of moral hazard).

            Also: Stiglitz’s appeal to the self-interest of the 1% on the issue of inequality (something even the IMF have begun to acknowledge – in their reports, if not their policies and edicts): http://goo.gl/kfLA1

          • Gary June 5, 2012 at 9:21 pm #

            The banking paradox under fractional reserve banking is that at all times the banks are technically insolvent and in certain times they are absolutely insolvent.

            The problem is that banks only hold in reserve a fraction of deposits , but they promise that ALL their customers can withdraw(demand) their deposits at ANY time. So, when(not if) one day the depositors ask to withdraw an amount equal to that held in reserve + 1, then the bank cannot make good on its promise and then the word gets out and you have a good old fashioned bank run. A bit like musical chairs , where instead of only being one chair short, these leveraged banks only have one or two chairs.

            The central bank was setup knowing of this perpetual insolvency, and stands ready to put the taxpayers bodies on the line to keep up solvent appearances at the banks. Without this guarantee, the fractional reserve systems lifespan can be counted in months or a few short years. With a central bank the lifespan is a few decades.

            We are past this current system’s statistical lifespan. There is probably nothing that can be done to save it. What they will try is to loot every citizen of every penny that they posses, to postpone the inevitable.

  8. Margaret June 1, 2012 at 6:15 am #

    For the past two years one of the regular readers (who never comments). The blog and the resultant discussions have been extremely enlightening for me, even though I started out from a position of near-total ignorance of the way the current global financial system is structured. And even though I don’t always have time to read all the links, I am aware that the links provided are also usually extremely informative.
    I am an old-fashioned retired public servant (teacher) whose savings never left the same RBS branch for 50 years, with a small account in the Bank of Ireland, and currently living quietly in Greece. So you can see how I have been able to benefit in a material way from having access to the kind of information and the informed debates that take place here.
    I still find it hard to believe that the world to which I contributed my whole life has simply disappeared.
    And it isn’t just the banks.Watching the Leveson enquiry, for instance: does no one tell the unadorned truth any more? It’s a nightmare!
    So back to the vegetable plot halfway up the mountain-picked 6 kilos of cherries yesterday, 3 kilos of strawberries, and the apricots are looking good. Neighbours have sawed up old olive trees into logs for next winter, when we all anticipate having no steady supply of electricity. Here the people are accustomed to hardship, having survived near-starvation under the last brutal German occupation. A form of bartering had never really gone out of fashion, so that doesn’t even need to be set up. We’ve all got olive oil, wine and raki.
    But it’s not like that in the cities, of course. Not that the Lagardes of this world really care.

    • John Souter June 1, 2012 at 12:50 pm #

      Margaret – I think every right thinking human in this world sympathises with the people of Greece – in that regard I for one would welcome your insight on the everyday problems Greeks are suffering under.

      To me this is financial idiocy writ large – a cancer on the world which, if left unchallenged and not eradicated will morph through the generations to come into a species with completely distorted and ultimately unsustainable sets of values which will eventually lead to its demise.

      Reputedly Caesar fiddled while Rome burned – presently we have world leaders tinkering while half the world is already in flames and the other half is choking in the smoke and desperate to stop the flames igniting. And, if you will excuse the crudity, these ‘leaders’ wonder why the people want to piss on their parade – could it be because our piss is all we are left with to fight the flames created by their carnage?

      • MrShigemitsu June 1, 2012 at 7:45 pm #


        • John Souter June 1, 2012 at 8:54 pm #

          Mr Shigemitzu -what, him as well! Just goes to show how contagious idiocy can be.

  9. johnm33 June 2, 2012 at 10:47 am #

    Good read here as paul craig roberts outlines the deceit in us stats and markets that have their equivalents here and all across europe. and more http://www.marketoracle.co.uk/Article34802.html

  10. sheepshagger June 2, 2012 at 6:39 pm #

    An aristocracy who’s lingua franca is Harvard Business School’s Doublespeak.

  11. Jamie June 2, 2012 at 8:10 pm #

    ‘There was no transparency. There was no honesty. No integrity. No honour. What we have is an aristocracy who lie and connive together to shower us with the shit of their wastrel lives’

    Golem, no hammer ever hit a nail on the head so sweetly.

    Just finished an all nighter on your book ‘The Debt Generation’ and have to sincerely thank you for opening my eyes fully to the tsunami coming our way.

    Keep up the good work


  12. steviefinn June 3, 2012 at 4:13 pm #

    George Soros speech from Trento on the 2nd. EZ eventual break up unless the fat lady sings a different tune:


    • Jim M. June 4, 2012 at 11:47 pm #

      Looks like Mr Soros isn’t sure…

      In a speech in Italy at the weekend, the financier George Soros warned that Merkel had no more than three months to fix the euro, but outlined the prospect of a grim new eurozone controlled by Berlin.

      “The likelihood is that the euro will survive because a breakup would be devastating not only for the periphery but also for Germany,” he said. “Germany is likely to do what is necessary to preserve the euro – but nothing more.

      “That would result in a eurozone dominated by Germany in which the divergence between the creditor and debtor countries would continue to widen and the periphery would turn into permanently depressed areas in need of constant transfer of payments … it would be a German empire with the periphery as the hinterland.”


      A German Empire eh? We haven’t had one of them for a while!

      Empire through accident rather than design, tho. I wouldn’t trust Merkel & Co to design the bloody logo!

  13. steviefinn June 4, 2012 at 8:40 pm #

    Video of a talk given by Chris Hedges titled ” The death of the liberal class”: Walter Lipman – Manufacturing consent – Goebbels – propoaganda – the death of investigative journalism in the US – inverted totalitarianism – the commoditization of human beings & natural resources – careerism – etc etc:


    • Pat Flannery June 5, 2012 at 12:22 pm #

      Thanks for that link to Chris Hedges. He is a treasure. I attended a similar lecture he gave in San Diego in April. He is doing a book tour. I hope everybody here watches this video – at least once. He calls us to overt action. He says sitting at our computers typing is not enough. We must get out where we can be seen.

      • Charles Wheeler June 5, 2012 at 1:24 pm #

        Good interview with Chris Hedges here: http://youtu.be/7zotYU21qcU
        3 hrs long – but worth watching.

      • steviefinn June 5, 2012 at 8:08 pm #

        You are welcome Pat, don’t forget your thermals 🙂

        • Synopticist June 5, 2012 at 8:21 pm #

          Chris Hedges is a legend.

    • Pat Flannery June 5, 2012 at 1:28 pm #

      I am playing catch-up on your blog. Believe it or not I have been in the throes of moving back from San Diego to my native Ireland, after 36 years, from where I will now join the fray.

      I just read your piece and comments about forming a new party. Great! For the name I would recommend staying with some form of “99”. Numbers need no translation. Everybody in the world now knows what 99% means politically.

      As for shying away from the word “Occupy”, OK. But sooner or later to change things enough people have to go out where they can be seen and heard.

      Yes, “Occupy” means defiance, taking back, challenging the banker-state etc. etc. But “99” might succeed in carrying the same meaning without the hint of violence that could possibly be inferred to “Occupy”.

      If “99”was decided upon then it would just be a matter of choosing something like “The 99 Party”, “The 99ers” etc. Each country could easily adapt the basic theme of “99” to their particular culture; the number “99” would be the unifying tie.

      Therefore I think “99” could be a great universal icon around the world for the democracy awakening that MUST happen before we can begin to win back control of our lives from the global corporations that have hijacked each of our governments by using “pretend” voting systems in each country.

  14. nell June 5, 2012 at 10:20 am #

    I too am glad to see Charles Wheeler back. Like the posts and the links, always informative. I am in the middle of Keen’s Debunking Economics. From the perspective of a scientist I am shocked at the state of economics as an academic discipline. According to Keen (and his arguments with evidence are pretty convincing), the fundamental ‘laws’ of economics are false. Not only are they false, the discipline as a whole has refused to listen. This is not the behaviour of sciencists. The analogy of mainstream economics as a religious faith seems apt.
    I really hope that the minnows in the discipline start to rebel and start to teach their students the critique rather than present the fundamental neoclassical models as fact.
    On a related note, just read Ha Joon Chang’s peice in the guardian. He is beginning to sound desperate. I hope he teaches his students to be critical of economic dogma.
    Ha Joon Chang:
    ‘Do we want a society where 50% of young people are kept out of work in order to bring the deficit down from 9% of GDP to 3% in three years? A society in which the rich have to be made richer to work harder (at their supposed jobs of investing and creating wealth) while the poor have to be made poorer in order to work harder? Where a tiny minority (often called the 1% but more like the 0.1% or even 0.01%) control a disproportionate, and increasing, share of everything – not just income and wealth but also political power and influence (through control of the media, thinktanks, and even academia)?’
    Hats off to the dissident economists.

    • Charles Wheeler June 5, 2012 at 1:21 pm #

      Ha-Joon Chang’s Bad Samaritans is a must-read for anyone interested in a debunking of the authorized version of ‘free market’ capitalism: http://goo.gl/he60i

      This paper gives a flavour: http://goo.gl/EjXHf

      It includes this quote from President Grant: ““For centuries England has relied on protection, has carried it to extremes and has obtained satisfactory results from it. There is no doubt that it is to this system that it owes its present strength. After two centuries, England has found it convenient to adopt free trade because it thinks that protection can no longer offer it anything. Very well then, Gentlemen, my
      knowledge of our country leads me to believe that within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade.”

      (Ulysses S. Grant, president of the United States, 1868–1876, cited in A.G. Frank, Capitalism and Underdevelopment in Latin America, New York, Monthly Review Press, 1967, p. 164).

      A bit like playing a game of Monopoly, building hotels on all your streets, then inviting the neighbours round to join half-way through – all bound by the same rules of ‘free trade’!

  15. peterms June 5, 2012 at 9:08 pm #

    Also see comments by Andy Haldane at BoE about how banks bend the rules of accounting to conceal their parlous position, and are allowed to do so. News report:


    And original piece (not much longer, includes defence by accountant):


  16. backwardsevolution June 5, 2012 at 9:33 pm #

    From Simon Johnson, formerly with the IMF, now a professor at MIT:

    “Europe’s rich capital markets and banking system, including the market for 185 trillion dollars in outstanding euro-denominated derivative contracts, will be in turmoil and there will be large scale capital flight out of Europe into the United States and Asia. Who can be confident that our global megabanks are truly ready to withstand the likely losses? It is almost certain that large numbers of pensioners and households will find their savings are wiped out directly or inflation erodes what they saved all their lives. The potential for political turmoil and human hardship is staggering.

    For the last three years Europe’s politicians have promised to “do whatever it takes” to save the euro. It is now clear that this promise is beyond their capacity to keep—because it requires steps that are unacceptable to their electorates. No one knows for sure how long they can delay the complete collapse of the euro, perhaps months or even several more years, but we are moving steadily to an ugly end. […]

    Unfortunately for all of us, our politicians refuse to go there—they hate to admit their mistakes and past incompetence, and in any case, the job of coordinating those seventeen discordant nations in the wind down of this currency regime is, perhaps, beyond reach.

    Forget about a rescue in the form of the G-20, the G-8, the G-7, a new European Union Treasury, the issue of eurobonds, a large scale debt mutualization scheme, or any other bedtime story. We are each on our own.”


  17. steviefinn June 6, 2012 at 12:24 am #

    Just another example of lying bankers :


    • backwardsevolution June 6, 2012 at 3:03 am #

      Propublica is a great site. They’ve done a lot of excellent investigative work. Oh, if only the government would listen!

  18. Guido June 6, 2012 at 6:18 am #


    Yes, absolutely, once again you are spot on. All true.

    But… there is a perfectly logical reason why things are the way you portray them. Till we do not attack the primary cause, we can whinge and moan all we want but nothing will change. You do not attack a fire by dousing the flames.

    The monetary system must be changed.

    Imagine an economy of two people. One of the two is bestowed the privilege to create money.

    By law, the second person can only borrow the currency created by the first person. There is no other legally accepted currency in existence.

    So the second person borrows $1 at interest. Great.

    Now think what happens when the second person wishes to pay back the $1

    Do you see the problem? The second person can repay the $1 he borrowed. Fine. But now he also owes interest. So, where does the second person get the money to pay the interest on the $1 he borrowed?

    In our current real life monetary construct interest can never be repaid. The second person (society) must continually borrow the interest upon which it will owe further interest.

    This simple arithmetical reality has well defined outcomes:

    Skipping through the various stages, the gradual debasement of the currency ensures two things.

    – The productive capacity of society is progressively pledged to the financial industry

    – As the competitiveness of the economy declines, government must perforce become the largest actor in the economy

    – As it expands and as the enforcer of monetary policy, government must perforce initially tolerate and then progressively instigate till, towards the end, it must collude and eventually carry out illegal practices in order to maintain the system alive.

    The monetary system is the culprit.

    We must attack the monetary system; we must attack both heads of this monetary system – Debt Based Fiat Money and Fractional Reserve Banking

    Bill Gross came close to the truth last week. Few in the main stream press and the establishment even know what a monetary system may be let alone have an opinion on it. Niall Ferguson wrote an entire book about money but nowhere does he mention the monetary system. Most bankers and finance professionals have no idea what the monetary system may be. You don’t believe me? Go on, ask your contacts in the banking and finance industry. Ask them what is the monetary system employed in the West. See what they say.

    And by the way. Debasing a currency also has real and direct effects on the devastation of the environment and the depletion of resources through the misallocation of capital and excess consumption.

    Fix the monetary system and you fix a number of other things too including social ills such as crime and marginalization.

    …. sorry for the rant…

    • Charles Wheeler June 7, 2012 at 8:45 pm #

      “Few in the main stream press and the establishment even know what a monetary system may be let alone have an opinion on it. Niall Ferguson wrote an entire book about money but nowhere does he mention the monetary system. Most bankers and finance professionals have no idea what the monetary system may be. You don’t believe me? Go on, ask your contacts in the banking and finance industry. Ask them what is the monetary system employed in the West. See what they say.”

      Extraordinary, but true. As JK Galbraith put it: “The process by which banks create money is so simple that the mind is repelled.” (Money: Whence It Came, Where It Went (1975))

  19. DANIEL June 6, 2012 at 10:15 am #

    From the Daily Telegraph
    , The old ‘Tequila Trap’ as named by Henry CK Liu, how to rape a country,see Mexico ’94, Asia ’97, Argentine 2002, Brurnazil & Russia ’98. Now it is Europes turn.
    There’s a stronge editorial by Ignacio Camacho on Spain’s ABC which shows exactly how the troika inspectors and austerity measures which come part and parcel with European bailouts are seen:
    They call it a rescue, but in reality it is a kidnapping; they take over the sovereignty of the nation concerned and wire it up to shock treatment, until the now-happy patient relaxes a little. They are the Men in Black, the flying emissaries from the dreaded EU troika, the commissioners that Merkel sends to impose her airtight budgetary discipline. It’s a pitiless brigade whose presence always sparks panic in governments when things start to go the way they are going in Spain.
    Starting with pensions and unemployment benefits, they move on to taxes and civil service salaries and end up selling off all the assets that can be bought. When they finish, they leave the economy burned to the ground and politics mowed down to stubble, and depart arm-in-arm with the patient brushing the dust off their shoes. They may be able to clean up a nation that has sunk, but if there is any possibility of recovery they will leave it buried it under the rubble.
    It is certainly not Merkel behind the Troika, but the International financiers on their usual rape and pillage of a country, this time the European continent.

    • backwardsevolution June 6, 2012 at 5:30 pm #

      Yes, as Naomi Klein said so well in her book entitled ‘Shock Doctrine’.

      • backwardsevolution June 6, 2012 at 5:45 pm #

        It’s been some time since I read “Shock Doctrine,” but I seem to recall a mention in the book of a man who was going to assist the U.S. government in helping Russia after its collapse.

        He was all ready to go, wanted to get started, and couldn’t understand why the authorities were resisting. Correct me if I’m wrong, but I seem to recall that the authorities wanted to let Russia twist in the wind, wanted to let her “go down” before they stepped in. This assured that assets could be picked up cheaply. Chaos assures favourably cheap prices.

  20. Wirplit June 6, 2012 at 11:10 am #

    Another great post Golem so many thanks…

    On the matter of lying from banks…to the obvious lies of commission and lies of omission ….there can perhaps be added what George Soros is getting at in his ideas on “fallibility”… a near inevitable partial failure of true perception and “reflexivity” the continuing development of this trend further and further from reality.

    ( I suppose a halfway house between crime or cockup theory of history!)

    He gave a talk on this which was subsequently pulled from the web but which is an interesting read ( forgive me if already seen or posted already)

    On the euro crisis he says:

    “The process culminated with the Maastricht Treaty and the introduction of the euro. It was followed by a period of stagnation which, after the crash of 2008, turned into a process of disintegration. The first step was taken by Germany when, after the bankruptcy of Lehman Brothers, Angela Merkel declared that the virtual guarantee extended to other financial institutions should come from each country acting separately, not by Europe acting jointly. It took financial markets more than a year to realize the implication of that declaration, showing that they are not perfect.

    The Maastricht Treaty was fundamentally flawed, demonstrating the fallibility of the authorities. Its main weakness was well known to its architects: it established a monetary union without a political union. The architects believed however, that when the need arose the political will could be generated to take the necessary steps towards a political union.

    But the euro also had some other defects of which the architects were unaware and which are not fully understood even today. In retrospect it is now clear that the main source of trouble is that the member states of the euro have surrendered to the European Central Bank their rights to create fiat money. They did not realize what that entails – and neither did the European authorities. When the euro was introduced the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital; and the central bank accepted all government bonds at its discount window on equal terms. Commercial banks found it advantageous to accumulate the bonds of the weaker euro members in order to earn a few extra basis points. That is what caused interest rates to converge which in turn caused competitiveness to diverge. Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. Other countries enjoyed housing and consumption booms on the back of cheap credit, making them less competitive. Then came the crash of 2008 which created conditions that were far removed from those prescribed by the Maastricht Treaty. Many governments had to shift bank liabilities on to their own balance sheets and engage in massive deficit spending. These countries found themselves in the position of a third world country that had become heavily indebted in a currency that it did not control. Due to the divergence in economic performance Europe became divided between creditor and debtor countries. This is having far reaching political implications to which I will revert.

    It took some time for the financial markets to discover that government bonds which had been considered riskless are subject to speculative attack and may actually default; but when they did, risk premiums rose dramatically. This rendered commercial banks whose balance sheets were loaded with those bonds potentially insolvent. And that constituted the two main components of the problem confronting us today: a sovereign debt crisis and a banking crisis which are closely interlinked.”

    The whole thing can be found HERE

    By way Golem had a talk with someone who runs an University backed institute in the City who was very interested in the European wide 99% party idea… seemed willing to let you drum up support using it or give a launch meeting using it as a space if you interested.

    • Charles Wheeler June 7, 2012 at 9:57 pm #

      Miles Kington on the Maastricht fiction: http://goo.gl/6FU7F

      • Charles Wheeler June 7, 2012 at 10:11 pm #

        Wynne Godley on Maastricht (1992): http://goo.gl/KMXb3

        ” It needs to be emphasised at the start that the establishment of a single currency in the EC would indeed bring to an end the sovereignty of its component nations and their power to take independent action on major issues.

        The incredible lacuna in the Maastricht programme is that, while it contains a blueprint for the establishment and modus operandi of an independent central bank, there is no blueprint whatever of the analogue, in Community terms, of a central government.

        It should be frankly recognised that if the depression really were to take a serious turn for the worse – for instance, if the unemployment rate went back permanently to the 20-25 per cent characteristic of the Thirties – individual countries would sooner or later exercise their sovereign right to declare the entire movement towards integration a disaster and resort to exchange controls and protection – a siege economy if you will. This would amount to a re-run of the inter-war period.

        If there were an economic and monetary union, in which the power to act independently had actually been abolished, ‘co-ordinated’ reflation of the kind which is so urgently needed now could only be undertaken by a federal European government. Without such an institution, EMU would prevent effective action by individual countries and put nothing in its place.”

        • John Souter June 8, 2012 at 11:15 am #

          Charles – doesn’t all of these comments underline the establishments strategy of the financial and fiscal oligarchs steering the ships of state and democracy?

          • Charles Wheeler June 8, 2012 at 2:57 pm #

            Maybe from the Bernays playbook?

            “The conscious and intelligent manipulation of the organized habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country.

            We are governed, our minds molded, our tastes formed, our ideas suggested, largely by men we have never heard of. This is a logical result of the way in which our democratic society is organized. Vast numbers of human beings must cooperate in this manner if they are to live together as a smoothly functioning society.

            Our invisible governors are, in many cases, unaware of the identity of their fellow members in the inner cabinet.

            They govern us by their qualities of natural leadership, their ability to supply needed ideas and by their key position in the social structure. Whatever attitude one chooses toward this condition, it remains a fact that in almost every act of our daily lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by the relatively small number of persons-a trifling fraction of our hundred and twenty million-who understand the mental processes and social patterns of the masses. It is they who pull the wires which control the public mind, who harness old social forces and contrive new ways to bind and guide the world.

            It is not usually realized how necessary these invisible governors are to the orderly functioning of our group life. In theory, every citizen may vote for whom he pleases. Our Constitution does not envisage political parties as part of the mechanism of government, and its framers seem not to have pictured to themselves the existence in our national politics of anything like the modern political machine. But the American voters soon found that without organization and direction their individual votes, cast, perhaps, for dozens of hundreds of candidates, would produce nothing but confusion. Invisible government, in the shape of rudimentary political parties, arose almost overnight. Ever since then we have agreed, for the sake of simplicity and practicality, that party machines should narrow down the field of choice to two candidates, or at most three or four.

            In theory, every citizen makes up his mind on public questions and matters of private conduct. In practice, if all men had to study for themselves the abstruse economic, political, and ethical data involved in every question, they would find it impossible to come to a conclusion without anything. We have voluntarily agreed to let an invisible government sift the data and high-spot the outstanding issue so that our field of choice shall be narrowed to practical proportions. From our leaders and the media they use to reach the public, we accept the evidence and the demarcation of issues bearing upon public question; from some ethical teacher, be it a minister, a favorite essayist, or merely prevailing opinion, we accept a standardized code of social conduct to which we conform most of the time.

            It might be better to have, instead of propaganda and special pleading, committees of wise men who would choose our rulers, dictate our conduct, private and public, and decide upon the best types of clothes for us to wear and the best kinds of food for us to eat. But we have chosen the opposite method, that of open competition. We must find a way to make free competition function with reasonable smoothness. To achieve this society has consented to permit free competition to be organized by leadership and propaganda.”
            Edward Bernays, Propaganda 1928

  21. Neil June 6, 2012 at 1:54 pm #

    “UK banks sitting on £40bn of undeclared losses

    Britain’s banks are sitting on a £40bn black hole of undeclared losses that are preventing them from making vital loans to businesses and households.

    PIRC, the shareholder advisory group, has analysed the 2011 accounts of the UK’s top five banks to calculate how much they expect to write off as bad debt in the coming years but have yet to take against profits.

    Royal Bank of Scotland (RBS) was in the worst condition, PIRC found, with £18bn of undeclared losses that would wipe out more than a third of its capital buffer and potentially force the 82pc state-owned lender back to the taxpayer for another rescue.

    HSBC had ($16bn) £10bn in undeclared losses, Barclays £6.7bn, Standard Chartered $3.6bn (£2.3bn) and Lloyds Banking Group £3.6bn. PIRC presented its numbers to all the banks and said none disputed them.

    Profits at Britain’s lenders have been flattered by controversial international accounting standards introduced in 2005 that prevent companies from provisioning against potential losses. The rules have been attacked by the House of Lords, among others, as deeply flawed.

    PIRC said the rule was “masking the true position [of the accounts] by including fictional assets and fictional profits”.

    Dividends and bonuses are being paid out on inflated profit numbers, it added, when they should be retained to boost the banks’ capital cushions.

    Tim Bush, head of governance and financial analysis at PIRC, claimed the undeclared losses meant banks have not been clearing their balance sheets of bad debts and releasing the funds to support viable businesses and households.

    “The scandal is the fact that banks are delaying de-risking and de-gearing due to the accounting standards,” he said. “The funds are being tied up, rather than being put to work elsewhere.”


  22. John Souter June 6, 2012 at 3:05 pm #

    Today we hear one of the lesser rating agencies have downgraded the UK to AA-minus while Standard & Poors have downgraded six German Banks -given their recent fallibility in their failure to recognise a tsunami,it isn’t beyond belief they will fail to recognise the vortex when the plugs pulled out of a toxic sump of financial idiocy. So perhaps we shouldn’t be too worried by their reading of the runes. Except for one stark fact.

    This is a war – A World War where all the casualties are ‘collateral’s’ and the blitzkrieg of dominance is attempting to suck dry the life-blood of democracy – our choice is as stark and unequivocal as that.

    If we allow the money men and their gualeiters to win – no matter what system they choose to adopt – they will apply any cost in order to maintain control while maximising the husbandry of the dominated. But the real problem may occur when the dominated are deemed more of a liability than an asset – when they’re no longer viable in their marketable consumerism – what then, a cull of chance, or eugenics measured by worth?

    While capitalism is whinging to be freed from any social, moral or prudent responsibility behind a blind of disingenuous duplicity based on curdled corruption, democracy is demanding our allegiance to the responsibilities that reinforce its legitimacy and the rights and freedoms of a sustainable society worth living in.

    Do we have a choice other than to unleash the 21st Century version of WMD’s?

    No not weapons of mass destruction – that’s the money-men – we as the Weapons of Mass Democratisation.

  23. pilibi June 6, 2012 at 4:07 pm #

    May I digress –

    Who is going to blink first – Merkel or Obama.

    Are Eurobonds inevitable – why are they the solution the US/UK appear increasingly desperate to have?

    Who supports Merkel in her determination to resist their introduction?

    Is she right?

    Are Eurobonds code for printing money?

    For the bankers and Germany, is the priority to save the Euro?

    • Hawkeye June 11, 2012 at 9:41 am #


      The priority is to preserve the Dollar as world reserve currency. If that means sacrificing the Euro, then so be it. However, as US banks and dollar denominated lending is in part propping up the Euro, then their fates are intertwined.

      “Global Minotaur” by Yanis Varoufakis is a good read on this subject.

  24. Pat June 7, 2012 at 12:09 pm #

    Paul Mason’s recent interview with Steve Keen at the LSE:


    Nice to see some heterodox economists getting a bit of MSM air time. Paul Krugman had pieces in the Guardian and the Irish Times this week as well. For all the good it will do…

  25. Gary June 8, 2012 at 5:07 pm #

    There is a shortage of money (cash or mzm-money with zero maturity) compared to debt. There is an ocean of money compared to goods and services.Most all money is currently marshaled away from bidding up prices of goods and services and instead is going to paying debt. Eg. T-bond and gilt prices keep rising. Inflation can be seen in debt. When the debt eventually,inevitably collapses (defaults) we will get instant generalized hyperinflation in the economy.

    Credit is a future claim on money or cash. So what is money ? Right now, under govt fiat, it is the central bank note, the pound, dollar, euro etc. There is a shortage of money to meet the credit claims on it. (granted some higher forms of credit may be claims against lower forms of credit, but ultimately they are all claims on cash) Take away these claims by defaulting on the credit, and then you are left with money having no demand except for goods and services(leaving aside that of taxation). Remove a massive demand while increasing the supply of anything and that thing loses value. Fast. In the case of money that equals inflation. If the inflation passes a certain point where faith is lost in the currency, then people abscond from using the currency and that currency hyperinflates. It becomes worthless.

    The more desperate the central banks are are to create central bank notes to make up for the demand on them from credit claims, and the more certain that the credit mountain is too large to ever be sated, the more certain of an eventual default and hyperinflationary event. We may already be past the 100% certainty point….

    Ultimately the fiat note(money) is also credit, a future claim on the ultimate money that is only a claim on goods and services, it is not a derivative of anything : gold. Central bank notes are the first derivative of gold, even if unofficially. If you believe in an hyperinflationary event’s inevitability, then you really should be in physical gold. IOU’s on gold ie paper gold, is just another credit (claim) derivative of gold itself.

    At the point at which we get a credit default, do you think the central banks are going to be nimble enough to mop up all the excess central bank notes , the demand for which will suddenly collapse ? You must be joking ! They patently could not see the boom, I have no faith they will see the bust either.

    But, would the demand for goods and services also collapse from a credit default, thus causing prices to collapse and negating the inflationary effects of monetary demand collapse ? No, because it is only the marginal flow of new credit that puts pressure on prices. All other credit, and that is the vast majority, has already accounted for in past purchases. But the debt obligations on ALL credit remains. IOW she stock of credit is much larger than the flow of credit. So, a credit default will disproportionately impact the price of money rather than the price of goods.

    We are in a world of trouble. It has nothing much to do with the euro, or the pound or the dollar, it has to do with the system of fractional reserve banking that is common to all these currencies. So, don’t be fooled by the anti-euro shills. They just have an agenda to try and protect their own particular fractional reserve poison. They are ALL going down. In fact, there is a case to be made that those printing the most will sink the fastest.

    What if there is never a default ? What if they manage to keep printing central bank notes forever to keep up with demand ? Because that is obviously their strategy. Then we get Japan. An interminable stagnation, coupled with increasing debt, decreasing savings , and capital destruction.Until the economy eventually dies. The time period depends on the size of all the variables at the start. Japan had enough capital, savings and trade surplus, to last for 22 years. It is now depleted of savings and probably most of its capital. I don’t think the West would last a decade IMO FWIW

  26. Jim M. June 10, 2012 at 3:43 pm #

    Even the MSM are catching up…. From today’s Telegraph:


    File under “No shit, Sherlock!”

  27. John Souter June 11, 2012 at 4:58 pm #

    Re the news from Spain – when is a bailout not a bailout – when the level of water in a sinking boat is at the same level as the sea it’s sinking in.

    To the financial alchemists it’s called parity.

  28. Charles Wheeler June 11, 2012 at 8:37 pm #

    The financial sector spent 30 years lobbying for light touch regulation, ultimately capturing the regulatory system (see Simon Johnson ‘The Quiet Coup’). They now blame govt for not saving them from themselves, and punish them for taking private debts onto the public balance sheet – without which they would’ve been sunk!

    The bottom line is: the banking sector is bust as the result of a credit bubble which has overpriced assets (classic Minsky asset-price feedback loop).

    The only way out is to write off the debt (‘Debts that cannot be repaid won’t be repaid’ Michael Hudson), but the banks – who now direct govt policy either indirectly through the bond market or directly via their technocratic alumni – are able to hold democracies to ransom to extract their pound of flesh, indifferent to the suffering and secure in the knowledge that when the proverbial does hit the fan they will be suitably insulated from the consequences of their own incompetence. [Hence the resurrection of a bastardised form of the Dawes Plan (1924) which saw the US packaging loans to Germany to enable them to begin to repay the insane level of reparations demanded by the allies (see Keynes: The Economic Consequences of the Peace* 1919) – who could then repay their debts to the US in a credit merry-go-round]

    Meanwhile, the tyranny of the expert ensures that any criticisms from outside the priesthood of economic orthodoxy can be dismissed as heresy – maintaining the insistence that debts must be repaid to maintain the disciplines of ‘the market’ in the face of the glaring moral hazard created by the Too Big To Fail banks who are running the show.

    *Keynes quotes Hardy: “Nought remains/But vindictiveness here amid the strong,/And there amid the weak an impotent rage.”

    • Gary June 12, 2012 at 11:53 am #


      All regulation was repealed , except one, the only one that matters : The taxpayers must underwrite the banks. ie the losses must be socialized. Govt decreed taxpayer underwriting via deposit insurance and the mandate of central bank money printing to handout to the banks is still very much alive.

      If they had instead repealed ALL regulation , then the banks would have failed long before they became too big to fail. Failure of bad business is no bad thing, in fact , it is required. Unless we want to accept the absurdity that the economy should be made up of bad businesses supported interminably by welfare.

      • Charles Wheeler June 12, 2012 at 5:17 pm #

        True. But central banks were developed to limit the damage caused by the recurrent banking crises of the 19th C – which took down good with bad. Failing banks meant failing businesses and failing lives. But I agree banks should be allowed to fail – maybe along the lines of the Swedish approach: http://goo.gl/AbzPY

        Just don’t share your deregulated – in my view dystopian – vision. (For me deregulation = more exploitation; more inequality; less social/economic mobility; monopoly; oligarchy; child labour; workfare; 16 hour working days; awful working conditions; industrial accidents and disease; environmental degredation; the privatisation of public space; no healthcare/education for the masses; etc, etc. – 19th C-style laissez-faire doesn’t appeal somehow. The ‘free market’ is a mirage – see: http://goo.gl/z1Vtb)

        What will probably happen is that they will muddle through as long as the extraction process can continue – or for as long as the masses will tolerate it (which amounts to the same thing) – if for no other reason than it would be impossible to reach consensus on change.

  29. Gary June 12, 2012 at 6:53 pm #


    Regulation will be great if :

    1. The regulators have the first clue what the bankers are up to. They don’t and won’t. They never have.
    2. The bankers have not captured the regulators. They lobby and bribe the regulators.
    3. The bankers are not the regulators. They stuff the oversight panels with their own people.
    4. The bankers don’t have teams of high powered lawyers that can think up 100 ways around the latest regulation before breakfast.

    Given that to satisfy all 4 points, you are probably asking the impossible, then it is far easier and more fool-proof to turn it around and simply state : the bankers are on their own. No help , no bailouts, no special privilege, no state or central bank underwriting. It is a level playing field. The market will kill them off swiftly if they over-leverage themselves or if they cheat the public. They will be ex-bankers in a heartbeat. Nothing will focus their minds more than that.

    I have said before that opponents of the free market keep banging on about market greed, they always fail to mention the stronger free market emotion, fear. Fear , if not removed, is the most powerful regulator known. The fear of failure and personal wipe-out. Remove fear and you have untrammeled greed, but then you also do not have a free market. You have some sort of socially enabled abrogation, as we now have.

    PS : If you have a free market choice of money, people would demand the soundest money available(why would they not?), and you will almost certainly have an EFFECTIVE gold standard. Then derivatives are barely possible, because they are not backed directly by gold and volatility tends to zero. By definition. Banks would be fettered. I am not saying there won’t be crooks and failures, there will. But at least these people will swiftly be hounded out of business, where appropriate. That is the best that we can hope for. IMO

    • Roger June 13, 2012 at 2:03 am #

      I watched this movie a few weeks back its very good a metaphor on a private money creation where the unit of money is life expectancy and payment in in hours minutes and seconds not pounds shillings and pence. Would that the masses flocked to and understiood the subtext.


    • Charles Wheeler June 13, 2012 at 9:42 pm #

      Given those 4 points – how would you propose getting from here to where you want to get? Asking the impossible?

      As for: ‘I am not saying there won’t be crooks and failures, there will. But at least these people will swiftly be hounded out of business, where appropriate.’ – Wasn’t that Greenspan’s argument?

      There is, and can never be a ‘free market’.

      Would highly recommend Hobhouse Liberalism http://goo.gl/eoIHf , Polanyi The Great Transformation http://goo.gl/xH6wX & Chang Bad Samaritans for a critique of ‘free markets’.

      Given that ‘Libertarianism really is incompatible with democracy.’http://goo.gl/lnMTf – how would you get from here to there?

  30. backwardsevolution June 13, 2012 at 8:43 am #

    Karl Denninger at Market Ticker responds to Nouriel Roubini and Niall Ferguson with his post entitled, “Idiocy is Not To Be Answered with Further Idiocy”.

    “The institutions that lent money that cannot be paid back must take their losses. If they cannot then their stockholders and bondholders must be zeroed if necessary to cover depositors, and any alleged “superior” status on derivative instruments must be voided. In short, depositors must be senior to all; the rest of the capital structure falls where it does. And fall it will.

    That’s fine. These nations should, at the same time, both enact One Dollar of Capital for all institutions going forward and prosecute all banksters who blow sky high for effectively counterfeiting the currency, because that’s exactly what they did. Put them all in prison.”

    Roubini calls for, “Finally, given the unsustainably high public debts and borrowing costs of certain member states, we see no alternative to some kind of debt mutualization.”

    Market Ticker responds with:


    None of the nations who are in the Euro agreed to this. Committing public frauds for years so as to force someone else to rescue you via “mutualization” and “integration” of political systems is tantamount to the taking of political power by force from the people and giving it to those who are not elected.

    This is commonly known as an act of war and is full and fair justification for those who have this imposed upon them to take arms and repeal the literal subversion and replacement by force of their political process.”


    • John Souter June 13, 2012 at 2:56 pm #

      Who was it that said – repeating the same mistakes and expecting a different result is the logic of the lunatic.

      With regard to the present financial lunacy my question is – is it a mistake or a choreographed shambles intent on the consolidation and supremacy of the financial hegemony?

      Which leads on to a second question – If or when they end up owning the world, will they lease it back to the rest of us – will the rates be reasonable – or will they continue to squabble to achieve the alpha status only for the alpha to find the pack has lost interest and moved on?

      • backwardsevolution June 13, 2012 at 3:10 pm #

        John Souter – the more I read, the more I reach the painful conclusion that this is and has been a “choreographed shambles”.

        • Charles Wheeler June 13, 2012 at 9:51 pm #

          From HulRePublic: ‘The assault on our way of life has been carefully stage managed’: http://goo.gl/ENwR0

          • backwardsevolution June 14, 2012 at 7:47 am #

            Charles – thanks for posting that good article. What a change this world is going through!

  31. Sublime1 June 13, 2012 at 4:02 pm #

    This article is doing the rounds, despite being a few years old. Always good to see people with enough integrity to change their minds publically. The author Richard Posner is quite the bigshot in the Economic Law world.



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