It is imperative therefore that we expose the bankers’ narrative for the strait jacket of self-serving lies it is, and that we have our own.

The bankers’ version has the advantage that it is already accepted and endorsed by all wings of our political class, that the mainstream media lap up anything the super wealthy and their bankers say, and of course that the banking lobby has more heads than a hydra.

What is their version? Let’s look at one of the more recently created lobby groups the Job Creators Alliance.  According to their web site they were set up by ten of America’s present or former CEOs  for ‘…the defence of the free enterprise system…in the court of public opinion.” The web site goes on to say that it is their aim to “educate the public and policy makers…” and “…shape the national agenda….”

What is that agenda? Well its made quite clear on their web site in an article called “Markets don’t fail” in which it is declared that,

…the onset of the financial crisis three or four years ago was largely due in the US and the UK to excessive demand for mortgages from people who couldn’t afford them.

There, simple as that. Nothing to do with the banks or bankers, nothing to do with robo-signing, selling CDOs which were designed to fail so others could profit by betting against them. Nothing to do with banks lying about the worth of their assets or having a fundamentally stupid and unstable funding model. Nothing to do with insane leverage levels or ‘To Big To Fail’ institutions gambling with client’s money. None of that is to be allowed in to the public discussion. The entire discussion must be, from the bankers point of view, carefully managed.  The discussion, in so far as the public are to be allowed to partake at all, must be carefully shaped and steered, and above all, the assumptions from which it starts and by which its eventual outcome will be determined, must be set and controlled by the Bankers.

Thus it’s worth noting that the article I quoted from the Job Creators Alliance, in America, was also posted on the Adam Smith Insititute in the UK. A ‘think tank’ whose aim is, “… to promote libertarian and free market ideas.”   The  Insititute was very influential in the Thatcher Privatizations and has close links with the libertarian and Free Market US think tank, The Heritage Foundation.

The author of the article, Mr Jan Boucek, is not from either The Job Creators Alliance nor the Adam Smith Institute but from a company called  ECD which describes itself as ,

Mr Boucek is described as, “…an expert in international business communication and the finance media. He has extensive experience in message development, editing skills, coaching and personal development.” In other words he is a spin doctor.  Now anyone can write an article for another organization whose aims they share, but it does change how  we read his opinions when we know who he works for. None of this, however,  is mentioned by either The Adam Smith Insitute or the Job Creators Alliance. It seems to me there is a campaign but that those running it would prefer we not see it as such.

So the bank narrative is that the credit crisis was due to people demanding mortgages they couldn’t afford.  However, are ordinary people in a position to ‘demand’ a mortgage from a bank? It’s like that other phrase much used and approved of by the banks, ‘…people took on debts they couldn’t afford’. ‘Demand’ and ‘Took’ both try to make ordinary people the culprits and the banks the vicitms. But can ordinary people ‘demand’ and then ‘take’ a mortgage from a bank?

Al Capone took money from banks. You and I can demand all we like, but we can’t ‘take’ a loan unless the bank offers it. The fact is, the loans people couldn’t afford were  offered, advised and approved by the banks. It is the bank’s line of business to know if someone can afford a loan or not. That is what bankers do for a living. The bankers knew they were offering and ‘extending’ loans to people above what those people could really afford but did so anyway. And the bankers above them in the bonus pyramid approved.  Our guilt and greed was to ‘accept’ loans that were unwise and unstable. But we did not ‘take’ them from innocent bankers against their better judgement and advice.

Nevertheless the Bankers narrative of events is that markets don’t fail only people. Of course there have been some difficult cases of bank failure and even some cases of outright fraud. How to deal with those? Ah, well there we have the “One Bad Apple’ argument, which is usually teamed with the, ‘now under new management’, message development strategy.

One Bad Apple is from the same stable as ‘rogue trader’. Both are important strategies to ensure that any potentially damaging criticism of the system itself is deflected on to a lone or rogue element which we can then be assured, has been replaced.  Phew! Problen identified, corrected and now , if you please ladies and gentlement, just move along quietly.

And the ‘liberal’ press readily swallows both strategies. The New York Times ran an article in October 2011 in which it talked about how Citigroup had been found guilty of fraud and

“.. had to pay a $285 million fine to settle a case in which, with one hand, Citibank sold a package of toxic mortgage-backed securities to unsuspecting customers — securities that it knew were likely to go bust — and, with the other hand, shorted the same securities — that is, bet millions of dollars that they would go bust.”

As the article said, “It doesn’t get any more immoral than this.” But then just one paragraph later the author reassures us not to worry because that that was then but,

“Citigroup is under new and better management now,..”

Of course you might remember Goldman Sachs did almost the same thing and had to pay $550 Million to settle its case. But importantly for the banks and bankers I cannot say Goldman was ‘guilty’ of anything because it was not found guilty. Instead it was allowed to settle the fraud case with a $550 million fine which is far less than it would have made from its trading practices.  Far more importantly, the settlement allowed Goldman to walk away “neither admitting nor denying wrongdoing”. A careful peice of ‘message management’.

Now is Goldman under new and better management? NO. But no one mentions that. Just as they don’t mention that Deutsche Bank is also up on fraud charges. So is Bank of America. All the big four accountant firms were recently or still are under investigation. I could go on.

But instead I’ll just quote US liberal magazine Mother Jones from December 2011 which said,

“…the ‘few bad apples’ argument really is worth acknowledging…”

So the bankers’ sanitized narrative is that markets don’t fail, people do and when a bank or a banker is caught doing something fraudulent or immoral it is just a bad apple which is neatly replaced. Imperative is the message that there is NOTHING intrinsically wrong with the banking/finance system as it is now constituted. THAT is their central concern and version of reality.

The other side of their strategy, which I suggest we”ll see more of in the coming months, is to suggest those who oppose them are suspect or even dangerous. Note how Jamie Dimon, CEO of JP Morgan, took time before flying to Davos to give an interview in which he said, that anti-banking sentiment was,

“…a form of discrimination that should be stopped.”

How to stop it? Well one suggestion came from US lobbying firm, Clark Lytle Geduldig & Cranford in a memo sent to the American Bank’s Association on how to discredit the Occupy Movement. According to Reuters,

The four-page memo outlined how the firm could analyze the source of protesters’ money, as well as their rhetoric and the backgrounds of protest leaders.

“If we can show they have the same cynical motivation as a political opponent, it will undermine their credibility in a profound way,” said the memo,

Now the American Banks Association (ABA) was quick to say the suggestion had not been taken up. The banks have tried to suggest that this was an unsollicted, even perhaps a ‘rogue’ memo. In a word – bollocks.  Clark Lytle Geduldig & Cranford are not fly by night chancers who send off-the-wall suggestions on spec. They are a Washington institution. They are very, very well connected. The ABA are long standing clients. Their business is lobbying. They know their clients. They know what they are thinking, what they need and what they might like to hear. Memo’s don’t get sent out to America’s bank lobby on spec by the work experience intern.

The memo would not exist at all and certainly not suggest what it does if  the partners of Clark Lytle Geduldig & Cranford did not think this was already in their clients minds.

So I think we now have a rough outline of the narrative the bankers want endorsed and promoted. I think we also have an inkling of the measures they are going to deploy against those who oppose them.

That’s ‘Them’. What about ‘Us’ and our narrative?

Well here I find I agree with Jamie Dimon on one thing. He said generalized banker bashing was wrong. I agree. Blunt generalizations are not good enough. What we need are stout reasons that can be sharpened to a fine point and then used to stab (metaphorically only of course) deserving bankers through the heart.  Fortunately there are many such reasons and an almost equal number of thoroughly deserving bankers.

But I will leave that till part 2. Picking up the boys from school now beckons.

Before I get stuck in, I want to make it clear. it is not my intent to paint Depfa as angels and HRE as devils. Depfa did stupid things.  Their funding problems were not so dissimilar to Northern Rock’s. But Depfa had far better assets.  And therein is part of the story.

So what went wrong?  And why did HRE buy Depfa when it was already going wrong?


The fact is HRE bought Depfa and did so after the debt wave had already curled and started to break.  But then again why shouldn’t the Germans be as thick as the Brits at RBS who at almost the same time bought ABN Ambro?

The question that always circles however, is did Depfa knowingly lie to HRE about their problems? Did they somehow withhold ugly problems?  Well according to one of the very senior bankers, who was there and had full and complete access to the deal, and who agreed to talk to me on condition of anonymity, it would have been very hard for Depfa to hide anything.  Inside the bank there was a secure room where ALL the bank’s data, all its books and accounts were available to the two boards of Directors during the months the deal was being negotiated.  This room was run and controlled by a senior German employee. According to my source the HRE people looked VERY carefully at EVERYTHING.

This still leaves the possibility that there was a board within the board at Depfa and this inner circle was somehow concealing things even from the rest of the bank and board.  The stuff of conspiracy stories which I am not much given to.  Could there have been a board within the board? I have evidence there was; first hand testimony from someone who was there.

Interestingly this person does not believe the purpose of an inner group was to hoodwink HRE. If anything it was to keep some of Depfa’s own board slightly out of the loop.

All in all it does not seem as if Depfa lied to HRE or concealed any hidden debts.  So if HRE didn’t buy Depfa because they were sold a pup, why did they? And particularly why did they pay 2 billion over its book value!

Depfa’s collapse was due to being unable to find funding.  In other words the same idiocy as killed Northern Rock.   But it’s the differences from Northern Rock that are important.  Let’s look at the time line.  Northern Rock collapsed in September of 2007. It did so because it could not get the short term funding it relied upon to keep its loans rolling over. The wholesale funding market locked it out. Why? Because the lenders in the market, other banks, were worried that Northern Rock’s assets were so dodgy that their ability to repay became highly doubtful.

Note that at the time the HRE/Depfa deal was being signed Depfa was NOT locked out of the markets; it was a whole year later that Depfa found itself unable to get funding.  This document by the huge law firm Herbert Smith (see p. 8), written just after the bail out in 08,  makes it clear Depfa was having problems. They had about 35 billion euros of debt that needed funding in the markets and those markets were seizing up. Both Depfa and HRE knew about this funding need before the merger. But crucially Depfa was NOT locked out. It did not collapse in 2007 but was a going concern for another year.  Why was that? What made them different from Norther Rock and others who did collapse in 2007?

The reason is simple, its funding worries were off-set by the fact that Depfa had some of the best, most solid gold assets of any bank.  As noted in part one as many as 80% of their assets were rated higher than the bank itself or the banks lending to it.  THAT is why HRE were so interested in Depfa and were even willing to buy it for 2 billion over book value.

HRE knew exactly how Depfa funded itself. There is NO WAY those details could have been hidden.  We know that both banks were aware of funding problems. Let’s just note in passing that advising Depfa on the merger/sale was Goldman Sachs.  So Goldman too would have known all there was to know about Depfa’s funding problems.  Hang on to this.

It is worth pausing for a moment to understand how Depfa funded itself. It becomes important later.  Depfa’s business was making large loans to cities and states for public works. 100% pure gold assets.  Government backed all the way. It funded them by selling Pfandbrief and later ACS (the Irish version of the Pfandbrief called an Asset Covered Security) which the Landesbanks and others bit their hand off to get hold of.  The Pfandbrief typically is a bond for 5-7 years.  But Depfa, like Northern Rock and ALL the big banks, swapped this long dated debt funding for shorter debt/funding.  The idea seems foolish now, and I think it is foolish, but the risk managers I have spoken to still adhere to the holy writ of relying on short term market funding.  I’ll explore this piece of banking some other time.  But what is important is that Depfa’s reliance on short term wholesale funding was nothing unusual. It was the norm rather than the exception.

Back to the story.

Unlike Depfa, HRE had a legacy of poor quality assets, which I wrote about in Dominoes falling from the East. HRE had also been aggressively expanding its business in Real Estate and we know from the subsequent bails of HRE’s own collapsed debts that, as this article written in 2009 makes clear,

In reality, HRE was a ticking time bomb and this is the reason it had run into liquidity problems (By the way, this is much the way I see Northern Rock – which was also nationalized by the UK government). The company has massive commercial property (CRE) exposure and the CRE market is imploding in financial centers like Frankfurt, London and Dublin and elsewhere. HRE is highly leveraged to these places.

So it’s not just me who is saying that Depfa may have triggered events but the main blast was from within HRE.  HRE was a ticking bomb and HRE’s board thought buying Depfa was the way to diffuse it.  HRE also relied on wholesale funding, but unlike Depfa, didn’t have great assets.  It was therefore more like Northern Rock than Depfa.  HRE’s poor assets would have also, and this is my speculation, have meant HRE would have started to have problems on the Repo market. Remember repo is the oxygen of overnight funding. It is also what destroyed Lehmans.  Lehman’s assets became distrusted and eventually other banks would not accept them as collateral for repo funding.

I think this is what HRE were worried about and why they were so desperate to buy Depfa.  Depfa had what HRE didn’t – assets for the all important repo market.  That is what they were trying to buy.  Remember, funding problems are a threat to survival like starvation. But being unable to repo is not being able to get just one more breath.

My source tells me that HRE thought that by buying Depfa’s absolutely top quality assets, HRE would be upgraded by the ratings agencies and be able to breath again on the repo market.  But instead, as my source said, “The minute HRE bought Depfa, the rating agencies downgraded Depfa.”

The merger ended with the worst of both worlds. Where each bank had exposure to one kind of risk HRE to credit risk, Depfa to funding  (though I think HRE actually had both)  by coming together they united the nitro with the glycerin.  Sheer banking genius.  Depfa brought funding worries to the marriage, HRE brought credit rating downgrades.  I love you too darling.

So why did the whole thing wait a year until Oct ’08 to collapse? And what finally brought it all down?

So now we come to the nub of it.  We have created the bomb with equal parts funding crisis and credit risk but even so nothing exploded for a year. During that year other banks went down. So what was it that jolted the container and set it off?

Well we know that Depfa’s funding was the trigger. So what happened to it?  Turns out, while other banks like Northern Rock collapsed Depfa didn’t, because it had a sugar daddy funder.  A big funder who was always happy to take Depfa’s Pfandbrief long term debt and fund it with shorter term money. Depfa’s sugar daddy was AIG’s Paris subsidiary, Banque AIG.

That should give you a bad feeling.  AIG’s problems started as far back as ’06.  Certainly by the 1st quarter of ’07 AIG had had to write down a 20 billion dollar loss.  But the Dow was still going up. So there was still plenty of money around.  By the time HRE and Depfa had kissed and exchanged vows, AIG had been downgraded and faced the first of what would turn out to be many Collateral calls.  This first one was for $14 billion.  Oops.

It was at this point that Northern Rock found there was no more funding. But HRE/Depfa survived.

Banque AIG in Paris was still in business, still funding Depfa’s needs.  Banque AIG was not a small affair. It was systemically important for many banking clients in Europe for swapping one short of funding for another, for hedging and for derivatives.  But it was also getting itself into a bit of a funding pickle.  In part this was just its share of the over all implosion AIG was undergoing world wide. In part, I think, it was Paris’s own problem.

Banque AIG in Paris was an essential part of AIG’s funding mechanism.  It was part of what was called AIG Financial Products (AIG-FP) whose notorious central office was AIG in London.  This is where all the ‘losses were made’ and where the obligatory ‘rogue’ trader-type villain, Mr Joseph “Iron Hand” Cassano was in charge. What is a little less well known is that most of,  if not all of London’s deals were routed through Banque AIG in Paris, where the deals were all supposed to be ‘reviewed’.  And we know that as far as Depfa was concerned their funding was from Banque AIG.

So why tell you this?  Well, on 31st of August 2007 a new branch of AIG-FP was set up in Ireland, AIG-FP Matched Funding (Ireland) Plc.  Why? And why then and not before?  I can’t know of course.  But this is how it smells to me.

Why did any of the banks in our story end up going to Ireland?  For access to money that liked the lax and laid back, ‘we have neither teeth nor balls’ regulatory atmosphere.  AIG had been getting funds just fine for years.  Suddenly, when AIG is in all sorts of trouble and its own funding is starting to get dicey it suddenly opens a brand new branch – in Ireland.

In under a month, on 25th September 2007 to be precise, AIG-FP Ireland issued a funding prospectus for $20 billion.  AIG was already beginning to feel the heat by now and wholesale funding had already locked out Northern Rock precipitating a bank run 11 days earlier.

To me, the fact that AIG-FP opened a branch in Ireland is a hint that its normal funding was, at the very least, in need of reinforcing, if not replacing with ‘other’ sources which could be best found in Dublin.  So now Depfa’s sugar daddy funder was alongside it in Ireland looking for the SAME money as everyone else, such as HRE, for example.  This situation does not fill me with confidence.

But would Depfa or HRE have known of this development at the time it was doing the deal with HRE? I doubt it.  AIG would not share any plans with customers. Even ones to whom it was a sugar daddy.  So did anyone know?  Well it’s just a little footnote but it turns out that none other than Goldman Sachs was arranging and advising AIG-FP Ireland on its funding adventure.

No way would Goldman have told one client (Depfa) what another (AIG) was doing. So Depfa did not know from Goldman about any troubles at Banque AIG.  But Goldman knew. Goldman was advising Depfa on merging/selling itself to HRE for 2 billion over its book value while it also knew that Depfa’s main funder was probably in more trouble than the rest of the market suspected.

I would love to know, but never will, if Goldman had any short position on the new HRE/Depfa bank it had helped broker?

In short what I hope to have shown is that Depfa did not ‘bring down’ HRE. HRE was going to collapse anyway. And buying Depfa was an ruinously ill-thought out attempt to solve HRE’s credit crisis.  The plan back-fired and made every one’s position worse than it had been.

The entity which actually brought down HRE was AIG.  It was their implosion along with the general shock of Lehmans which cut off Depfa from funding which had kept it alive for a year after other banks collapsed.  So it was the Americans who brought down HRE not the Irish if you really want a scape goat.

And the only people who perhaps knew the whole HRE/Depfa deal was destined to end in disaster and bankruptcy, were Goldman.  Goldman knew both how Depfa was funded an WHO was their lynch pin funder, while also knowing the true state of that funder (AIG-FP).

SO to circle back to where I started. It is NOT as simple case of a dodgy Irish bank bringing down a solid German one. If anything the opposite is just as true.  And therefore it is NOT the case that Ireland has some moral debt it owes to ANYONE to bail them out.

The threats are already coming thick and fast. The Irish people MUST defend themselves, their children and their country. Their leaders haven’t and won’t.