” …in every country the people who run the State have largely decided they no longer wish to serve the people but prefer instead to serve the interests of a Global Over-Class”.

I believe we are in the midst of an historic shift in the alignment of loyalty and political power, away from democracy. I want to make it clear I do not believe the new arrangement of political and economic power was the clear goal of some hidden cabal. I think each change had an ideological drive behind it but, to begin with at least, each change was largely opportunistic and piecemeal. These pieces have, however, added up. And as time has gone by and the different pieces have accumulated, I think some wealthy and powerful people as well as some who were ideologically driven, have seen the chance to make something they desired out of the pieces. I think those who never liked democracy-for-the-masses, but preferred something that was more like the Roman senate – a place for the sons and daughters of the already wealthy and powerful families to ensure they remained wealthy and powerful – I think those people have seen an historic chance to further their vision of the future they desire and, particularly in the last twenty or so years, have actively schemed and pushed for it. Some of them have lobbied for it from Wall Street and the City, others of the same elite have written laws for it when they were in Congress and Parliament. And always they have found affordable lackeys among our political class.

Of course no one is going to admit to this. No one wants it to be clear that this is what is happening. So what our leaders have needed for some time, is a way of  serving their new masters, while claiming to be still serving us; a way of saying,”The best, if not the only, way for the State to help you, the nation/people, is for us to first help these other people.”

The  Trickle Down ‘theory’ was an early attempt . But Trickle Down was always too clearly a political sound-bite  rather than a grand theory.  What was really needed was a new vision of what the ‘Greater Good’ should look like and a theory of how to get there. And critically it had to be something that, it could be claimed, Nations could not deliver. Not only not deliver but were actively standing in the way of. There had to be a shining future which the old order of Nation States was preventing us from reaching. And this idea has, I think, surfaced again and again in different guises, certainly since WW1, but more and more prominently  in the last three decades. The idea that Nations and nationalism are standing in the way of the progress and prosperity that only a free and unfettered global market can offer, and that the State must remedy this, by limiting the power and sovereignty of their Nations is, I suggest, one of the most powerful ideas of our age and is now maturing into  the ideology and politics the Global Over-class has been seeking.

A brief history of how the State sold out the Nation

In the aftermath of WW1 the League of Nations was created because, it was said, nations left to their own nationalistic devices could not keep the peace. The League’s stated goals were nearly all political and very little mention was made of finance or trade. Perhaps if the League had prospered it might have been adopted by the then rising power of global finance and history might have been very different. Instead the Great Depression happened and the power of global finance was set back. The regulations brought in to prevent another systemic Banking Crisis held back the unfettered growth of finance for two generations. Only finally undone at the end of the century.

After WW2, however, the idea of supra-national governance, and the inadaquacy of nationalistic governments,  rose again this time with the creation of, among other things, the IMF, World Bank, and the United Nations. This time the agenda of the supra-national powers was much more focussed on finance and trade. As US Secretary of State from 1933-44, Cordel Hull put it,

[U]nhampered trade dovetailed with peace; high tariffs, trade barriers, and unfair economic competition, with war….

Trade barriers and ‘unfair economic competition’ were the creations of national governments, free trade was, therefore, the remedy and was to be championed by the supra-national, impartial IMF and World Bank. Of course in reality the IMF and WB were not impartial. Whatever their stated purpose, the IMF and WB were tools of one ideology only , the freemarket , and were the post-war means by which the powerful nations crow-barred open the economy of any poorer nation that fell into their grasp. The attack on sovereignty had begun.

But it was little noticed in the West. In part because people were too busy being comfortable and in part because the UN was the part of Bretton Woods we saw most of in the West. The UN didn’t have an ideology – so the publicity went – other than universal declarations of human rights. It was all about aid for the starving and the rule of law. Sheltered behind this public face, however, the IMF, in particular was in every way different. It was completey ideological. And its ideology was narrowly free-market. It had the mandate and the power to force governments to alter their policies in favour of open markets and international western companies.

While the UN rushed aid to the starving, the IMF forced poor nations to get rid of tariffs that tried to nurture local farmers paving the way for global agribusiness. Local economies were laid bare on every hillside where global capital picked their carcasses clean. But because it was happening over there, few of us over here gave a damn. And if anyone was tempted to see any of it as an attack on sovereignty, it was given other names, such as ‘liberalization’. We weren’t attacking the sovereignty of poor peoples, we were helping them.

Their governments, we told ourselves, were corrupt and had no vision beyond a tribal nationalism. We, on the other hand, being wealthy white people, could save them. Let our companies in and we’ll lend you the money to save yourselves from nationalism and poverty. Above the entrance to the freemarket future we may as well have put a sign which read, “Shuld Macht Frei”. But we still did not think this was ever going to be our future.

We might have been less sanguine had we been more aware of what the poor relation of the Bretton Woods era, the GATT, would one day bring us.The General Agreement on Trade and Tariffs (GATT) was created in 1947 with the purpose of regulating international trade mainly by reducing “tariffs and other trade barriers”. Those other trade barriers were anything from subsidies for local industries, to environmental requirements and labour laws. In 1995 the GATT hatched the World Trade Organization (WTO). What made the GATT and WTO quite different from the IMF and WB is that it was no longer just a matter of policy as it had been with the IMF, it was now about rolling back specific laws and tariffs. AND you didn’t have to fall into debt to find yourself subject to their rule. Your government simply had to sign away some sovereignties and “voila”, your government had made you subject to rules and a world governing body you had not elected and had no power over at all. The power in the WTO very obvioulsy and clearly lay with the corporations, their lobbyists and their experts.

Thus while the IMF and WB trampled mainly on poor nations the WTO had power over any nation including the wealthy. And it was no longer purely at the level of trade policy and politics, it now opened to corporations an avenue for them to object to and challenge specific sovereign laws and tariffs. The rules of the GATT and the WTO were specifically created in order to supercede any nation’s and region’s laws where they concerned trade.

While the Conservative (Tory) party here in Britain, would rail about Europe ‘stealing away our sovereignty’, the truth was that  those same Tory politicians had been delighted, in 1995,  to sign away far more sovereignty to GATT. The difference for them was that Europe was seen as still harbouring some vaguely Socialist ideas about environment and employment rights, while the WTO very specifically did not recognize such things and in fact regarded them as exactly the sort of barriers to trade it was there to get rid of.  Such was and is the hypocrisy of the Tories, and now UKIP (UK Independence Party), about sovereignty and Europe. Labour was at least consistent in happily handing over soverignty to anyone and everyone. And the faithful western main-stream media never bothered to say a word nor to offer even an analysis let alone a critique.

Throughout the 90’s and noughties the GATT and the WTO were the primary means whereby corporate interests in one country were able to stop or roll back any rules and regulations they didn’t like, in any other country. Suddenly westerners who had never before felt threatened by international capitslism, woke up. There were suddenly ‘anti capitalist’ protests in rich nations. People who had never bothered about what capitalism did in poor nations were suddenly outraged. Now things were being done to them in their country and that was wrong! Of course there had always been those who had fought against what was done in the developing world. I don’t meant to suggest there weren’t. I am just noting how suddenly their numbers were swelled when they realized it could happen here, to them.

BUT it was still the case under the WTO rules that corporate interests could only roll back sovereign national rules and laws via their own national governments. The companies of a country could complain to their government about a foreign law or tariff but it had to be their own government, their State, which went to the WTO and filed a complaint. Thus although more corporate than the earlier IMF and WB, the WTO is still tied to the power of the State.

Which bring us nearly  up to date. The last and by far the most dangerous part of the State’s dismantling of national sovereignty, although it has its roots back in the 1970’s, has really only taken off in the last 5 years and has only in the last few months received much attention in the main stream media.

Bilateral Investment Treaties (BITs)

If the WTO is the State acting on behalf of corporations, then Bilateral Investment Treaties and their rules for “Investor-State Dispute Settlement” give corporations the power to challenge and over-rule nations directly. They are entirely non-democratic and stand completely outside of national based law and even outside of most of international law. They are therefore a major crystalization of the shift in power from the Nation to the Corporation and of course it has been the State which has facilitated this transfer of power.

I apologize that the preceeding history took so long and that I have therefore still not written about BITs. I just felt the context of what came before and what still today makes up a large part of the over-ruling of the Nation was important enough to do properly. I promise I will write about BITs in part 3.  I hope you’ll bear with me .

I don’t know how many of you know much about Vulture Funds, what they do and how they do it, but it forms the basis of my horrid thought.

Nations issue debt. After it is bought, it often gets re-sold on what is called the secondary market. The price of debt on the secondary market changes much as stock prices change. The market is big.

When a nation looks like it might default the price of its debt begins to sink. What was bought for full price is offered for sale at a reduced price – say 60 cents on the dollar. Buyers and sellers have to decide if they think the nation will proceed to default or avoid it. The decision is, sell now and accept a loss but avoid a potentially larger loss later, or buy now at a discount and if the nation avoids default, profit as the value of that cheaply bought debt recovers its original value.

But then there are the vulture funds. They follow a quite different path. They are creatures of the law not of finance and there are not many. One of the biggest, most notorious and best connected is Elliot Associates of Manhattan. They have very close links with the Republican Party and to Mitt Romney in particular ( They are large donors to his campaign). Another is FG Capital management. These companies are financial companies all founded and largely owned by Wall Street  lawyers. FG Capital Management was founded by a former Morgan Stanley consultant.

Vulture funds buy the bonds others have given up on. They buy what is often referred to as ‘distressed debt’. That is debt that has been defaulted upon and is, for the ordinary bond manager, worthless. The vulture buys it and then sues the defaulting nation. It is a very specialized area of the law and of finance. As an IMF study from 2003 said of vulture funds,

“Investors in this market posses specialized knowledge of bankruptcy law and international litigation and are willing to hold out for many years before seeing any recovery”

The study looked at Elliott Assciaites and others and found that those vulture funds trading in distressed sovereign debts who resorted to litigation to force repayment made profits of between 50-333% net of legal fees. Elliot Associates, for example, sued Peru.

You might wonder to what court you could take a whole nation? And what sanction could any court have over a sovereign nation? The answer is rather clever and like many clever things also simple. You sue a nation in the jurisdictions in which that nation does other sovereign business, such as transferring its sovereign funds in order, for example, to pay its debts. And where is that ?

Most nations have funds residing outside the nation most often in the global centres of finance, New York and London. All Nations have to move money around, albeit electronically, in order to conduct business, such as selling more debt to finance its on-going activities, or to pay debt. Central banks of all nations buy and sell on the foreign exchanges and debt markets in order to keep a balance of currencies  to facilitate the international trade of businesses in that nation. In all these examples the wealth of a nation is outside that nation under the jurisdiction of the place the business is being done. Vulture funds attack those points. The main one is the Southern District of New York – Wall Street’s Court.

For example, Elliott Associates sued Peru in the Southern Distric Court of Manhattan by filing to seize money Peru had in the vaults of Chase Manhattan Bank. Chase was acting as agent for Peru when Peru was paying certain other debts. Elliott argued that if Peru had money to pay other creditors then it – and more importantly Chase – had a legal duty to treat Elliott and its claim equally.  The suit held up payments and seemed to threaten Peru with financial paralysis. The threat worked. Peru paid. Elliott had bought the distressed debt for cents on the dollar and got the whole dollar plus interest. This is only one of several strategies used by Vulture funds.

Now to my horrid thought.

The ECB had been accepting lots and lots of dubious sovereign debt as collateral for ECB loans. This has been done direct from the ECB, via the ‘temporary’ bail-out fund (the EFSF), the larger temporary bail-out mechanism (the LTRO) and the other bail out mechanism (the ESM).

One way of interpreting this policy, as I and many others have done, is to say it’s a frontal attack on democracy and justice. The transferring of the private debts of private banks, to National Central Banks and then onwards to the ECB, is a multi layered scam run by the financial and political elite to transfer their private bank debts beyond the reach of our democratic accountability.

But what if a European nation did default? What then? Well what is to stop the ECB going vulture? It has ‘bought’ up assets from various European nations at a discount. If one of those nations were to default after,… oh I don’t know – a referendum (think Greece’s disallowed attempt at democracy) or elections that might derail imposed austerity measures (think Spain’s forthcoming elections)? What is to stop the ECB or better yet one of it’s arm’s length funds turning vulture and suing the defaulting nation? Who says the major creditor nations, France and Germany, or those who are themselves hanging by a thread, like Italy, have to accept default?

Of course for Germany or France to actually pursue Greece or Spain and their people, in order to squeeze more blood from the open wounds would be ugly. Granted. But then I ask myself why was so much effort put in to creating the complicated and seemingly nonsensical funding structures of the EFSF. ESM and the LTRO? They seemed typically Eurocratic, designed just to hide and confuse the real extent of the bail-outs, the lack of actual cash underlying those bail-outs and thus the frightening extent of the empty leverage involved. BUT they did create legal entities which are arm’s length from the funding nations and the EU itself. How much less ugly if something called the EFSF were to sue the Greek or Spanish people should the default. And of course it is the threat that it could be done, rather than actually doing it, that is the main weapon.

I wonder, in the run up to the massively important elections in Spain, when the Spanish people might want to reject the slash and burn edicts of the ECB and IMF, if certain unelected financial eurocrats might not mention in passing to the leaders of the main Spanish parties what nasty creatures vultures can be.

Far fetched? Look at what our rulers have been happy to do so far. The Greek Prime Minister suggests a referndum to ask ask the Greek people for authority and legitimacy. He is removed. The referendum is killed. In Italy a wholly unelected government and new ruler – a Prime Minister in name only since he was not elected – is intalled at the head of what is called a ‘government of national unity’. Except that ‘the nation’ had no say whatsoever in its imposition. In Portugal critical and far reaching measures were pushed through by the interim government before elections took place.

Does anyoe think a result in Spain, which might reject the latest round of austerity measures, will be allowed? Unlike Ireland or Greece, a default in Spain, or an election result which would lead to one through a rejection of more austerity. could not be survived. An election result in Spain which set in motion a rejection of austerity would signal a terminal crisis for european bank debt and those nations currently hiding it. Do you really think they will allow such a result.

Our political and moral landscape has already altered. Those who rule over us have accepted without discussion, on our behalf, that some banks are  too big to fail and that inconvenient laws that threaten them can and must be routinely set aside. I see no reason why our leaders won’t also decide that certain nations whose debts are considered too big and too important for other nations, shouldn’t be seen as too big to be allowed to vote.

Towards the end of the show the host, Vincent Browne, challenged the Minister to say how exactly they were improving. Mr Browne suggested they compare Ireland with Iceland and asked the Minister if he knew what the rate of unemployment was in Iceland.  The Minister said he didn’t know. Mr Browne enlightened him. Unemployment in Iceland is 7% while in Ireland it is about 14%.  The Minister folded.

I had also been told, though not by the minister, but by a banker, that the Irish government’s plan, as various Ministers had explained it to him, was, and I quote, “To prove to the markets that Ireland is the Best of the Worst.” And having reached those dizzy heights he said, “Their plan is then to become the Worst of the Best.”  All I could think of when he was telling me, was the ‘Best of the Best of the Best” scene from Men in Black.

So how is the growth through austerity plan going for Ireland, who is after all the poster boy for the policy?

The problem is it is often difficult to make any comment as an outsider because we rarely have the figures the government has and so are always told we are uninformed or misinformed…. Then I was given an interesting document.

Last week the IMF, along with people from ECFIN  (the European Directorate for Economic Affairs), was back in Dublin staying at its usual luxury hotel. Why those who are advocating austerity need to stay and dine in a hotel where the wine list is fatter than the bible and contains bottles of wine that cost 1790 euros, is beyond me. But apparently they feel they deserve it. Towards the back of the hotel is a small unremarkable room that requires a key pass to open. Inside are a couple of computer terminals. It is a ‘secure’ office space. Above one computer is a framed municipal Bond for the Ville de Kazar with two coupons missing. I mention these details so that those concerned with the document I received will recognize them.

The document is ECFIN’s Cash Balance Assesment for Ireland over the next months.  I am not sure who in the Irish parliament has seen the document. The headline is stark – at the beginning of March 2012 the Irish government will NOT have enough money to meet its gross financing needs. In March 2012 Ireland will require €10.3 billion in financing but only actually have €9.5 Billion in Treasury cash balance. The document makes it clear that despite all the austerity and all the ‘improvements’ the Minister was convinced the policy had delivered to a grateful/ungrateful people, Ireland was bankrupt unless it got the 10 billion Euros it was due in the 5th installment of the IMF/EU bail out.

As the document says,

This means that a timely provision of the Q1-2012 EU-IMF instalment is of particular importance.

The rest of the document then worries about what would happen if the 5th review did not approve the funding on time. Further on the document has a section entitled,

What could be done in case the EU and IMF cannot disburse by the end of March?

and says,

In this scenario, and without further measures, there is a risk that the Irish sovereign runs out of cash.

That they should worry that this might be a possibility, is either simply prudent or an indication that they think it is distinct possibility. I leave you to decide. The document then looks at what assets Ireland has that the government could use in an emergency. It looks at raiding the pension fund again and at “Liquidation of further assets”.

Finally the document says that the Irish figures are, it feels, robust having been made on what it calls “prudent assumptions”. But I don’t think these assumptions include what is currently unfolding in Europe. A significant Europe-wide downturn, tightening of credit to banks and to Sovereigns, the growing possibility of Greece defaulting, Berlusconi losing his grip on power and therefore his ability to keep the lies going, the truth buried and Italy as one country, and the unravelling of the entire bail out fiasco.

Every European bank exposed to Irish loans, every bond holder holding Irish debt – both bank and sovereign, and every foreign central bank concerned for the solvency of its own banks will start to crank up a barrage of propaganda and threats.  It will be top of everyone’s propaganda agenda to make sure the Irish election offers no choices that could destabilize the unexploded ordinance of European bank insolvency.

The European financial class will be desperate to ensure that the Irish have an election that is carefully constrained so as not to offer anything that might actually help them. As far as the banks, the ECB and all the leaders of nations whose banks would suffer losses if Ireland were to default or restructure, the Irish people are NOT to be exposed to ideas of default.

All parties must be told,  and if that fails to convince, made to feel directly via the bond market, the consequences of any alteration of the course followed so far. And, of course, it has already started. Here   is what senior ECB banker, Lorenzo Bini-Smaghi, said on January 15th regarding Ireland’s electoral choices.

“It would be dramatic for Ireland if just by changing government you renege on the promises that Ireland as a sovereign has made.”

Not that he would dream of making veiled threats to try to frighten Irish public opinion into choosing what would be best for the banks over what would be best for the Irish people.

No mention of Iceland there. Funny that.

The foreign press will run story after story about the dangers of ‘contagion’, of the need for responsibility and resolve.  The Irish Central bank will step in to make grave pronouncements if the political parties seem not to be holding the line.

Foreign leaders such as , Merkel, Olli Rehn, Barosso, Trichet and our British clowns, all with their own national interest, will give talks and be quoted in their papers about the need for steady fiscal responsibility and the unthinkable consequences of any waivering.

If there is any rumbling of popular discontent, then scape goats will be found – people upon whom some anger can be harmlessly vented.  But if that does not work then the rhetoric will get more pointed. Ireland will be reminded that ‘it’s their fault’ and they ‘have no one to blame but themselves’.  In the German press any hint that Ireland may be thinking of restructuring will be met with dark reminders of how ‘Ireland’ in the form of Depfa had to be bailed out by Germany.

In short I don’t think the Financial class is pleased that the politically unreliable (when it comes to European questions) Irish are going to have an election at this delicate time.  I think the run up to the elections will involve a lot of propaganda designed to shout down any opposition to bail outs and debt payments.

So I thought this might be a good moment to get a few things on record regarding Depfa, HRE (Hypo Real Estate) and the banking crisis blame-game.

For those who aren’t already familiar with the Depfa and HRE story, here it is in a very small nut shell.  Hypo Real Estate was the huge German bank which we were all suddenly told, back in 2008, had to be bailed out by the German State at vast cost. But, they said, they had no choice, because Hypo (HRE) was so large and its debts so huge that if it collapsed it would, at the very least, bring down German banking.  It was Europe’s AIG – to big to be allowed to fail. Then the back story emerged.  HRE had bought ‘Irish’ bank Depfa at the top of the market at almost the same time as RBS bought ABN Ambro.  Both purchases were insane and both killed the purchasing bank.

It was then put about that the collapse of HRE was in fact due to a huge funding crisis at Depfa always referred to as ‘its Irish subsidiary’.  From that came the notion that Depfa must have hidden its true state from HRE. Why else would HRE have bought a bank which couldn’t fund itself?

And that is how the story firmed up.  Irish Depfa must have lied about its true state in an effort to sell itself to Hypo, so that when Depfa’s hidden financial problems surfaced, the cost of them killed Hypo and then fell upon the German rather than the Irish tax payer.

It is sometimes easy to forget with all the sordid and ruinous business of Anglo Irish, that the beginning of the whole crisis in Ireland and in Europe was intimately tied to Depfa and HRE. Thus I think it is worth reminding ourselves of some of the misinformation and perhaps offering a few less well known facts. Facts which might help the Irish defend themselves.

It was often said, particularly in the German press, that Depfa ‘brought down HRE’. Had HRE not bought Depfa when it did in 2007, then it would have been the Irish, who had incubated the problem, who would have had to pay for it, not the Germans. There is always this undertone that somehow Depfa must have lied to or misled HRE.

Was DEPFA really an Irish Bank which the Irish should have bailed out?

Less than 1% of Depfa’s business was Irish. Virtually no Irish Banking money flowed into Depfa or its deals.  Depfa was not a major employer in Ireland. A couple of hundred jobs at most.  Few of its senior positions were held by Irish people. Thus in purely bloodless financial terms there was virtually no reason for Ireland to bail out Depfa. Depfa was not systemically important to Ireland or the rest of its banking sector. Depfa was, however, vital to the continued health of the German banking sector.  Add to this that the size of any bail out of Depfa was quite beyond what Ireland as a nation could have done. Ireland’s total IMF bailout stands at €85 billion. All on its own the HRE/Depfa bail out has already cost Merkel well over €100billion. Depfa, like one or two other banks in Ireland, was simply too big for its host. It was a financial cuckoo in the nest.

The German’s, however, would have bailed out Depfa even if it had not been bought by HRE because Depfa’s failure would have crippled something essential to the entire German banking sector – the Pfandbrief business.  The Pfandbrief is a German ‘covered bond’.  A covered bond is simply a super safe kind of bond. It is considered as safe as Sovereign bonds but gives a higher return. Germany invented the Pfandbrief and its banks relied on it.

The Pfandbrief/covered bond is considered super safe because, unlike other bonds, the Pfandbrief is backed by a ring-fenced set of assets which cover the total value of the Pfandbrief/bond. So even if the bank issuing the Pfandbrief were to go under, the Pfandbriefs themselves would never default.  And it has been the bed-rock of the Pfandbrief’s reputation that in 250 years no Pfandbrief has ever defaulted.

At the time of the Depfa bail out there were €806 Billion in Pfandbrief outstanding. The third largest chunk of the German bond market and the section that had been growing rapidly and which everyone wanted to be a part of. The German banking sector wanted to grow and compete with the British and the Americans on the international stage. They saw the Pfandbrief as an important part of their strategy. This article from 1999 gives a great feel for how the markets were then, as they stood on the cusp bubble years.

If Depfa had gone down, it would have taken the AAA rated dependability of the Pfandbrief with it.  Ireland could let that happen, Germany could not. That is why, I think, Germany would have bailed out Depfa no matter who owned it.

Why did Depfa move to Ireland if it was still a ‘German’ bank?

Depfa was always a German bank, that had simply chosen to locate itself in Ireland for funding and regulatory reasons. Does this mean that Ireland was stealing Germany’s banking sector?  No.  The best way to think of Ireland is as German’s off-shore tax haven banking centre with one significant feature – it was within the Euro zone.  Every country has one.  The UK has many. Germany needed one and Ireland was happy to oblige.  Thus it suited Germany as much as it did Ireland. It was a partnership.

Of course Ireland made itself everyone’s honey. But I think it is fair to say that of her many customers she had a special relationship with Germany. Think about it. Depfa, HRE and HVB (Now UniCredit), Deutsche Bank, LBBW, DZ bank, Commerzbank, Bankgesellschaft Berlin, Landesbank Sachsen, WestLB all gravitated to Dublin.

The fact that this arrangement/partnership has fallen apart in acrimony doesn’t alter the fact that when the money was flowing the Germany banks, German bankers and all their politicians were every happy with what was going on in their Irish subsidiary. Ireland does not owe Germany an apology.

In fact I think Ireland should be asking Germany some hard questions over the sometimes abusive relationship German banks have had, and some still have, with Ireland.  See here for how WestLB after it collapsed created an SPV called Phoenix, as a means for parking/dumping €23 billion of toxic ‘assets’ in Ireland.   This, it seems to me, is the Toxic Debt Wasteland I wrote about, becoming real.

How did the Irish Funding work?

Depfa had always raised its cash through its own Pfandbrief bank. It’s source of funding were the Landesbanks who in turn got the cash from the bottom of Germany’s banking system the Kasse, deposit banks.  They had all the cash.

But there were limiting factors. German money was the spur to Depfa’s early growth but the bank, according to a former board member I have spoken to, wanted more.  They wanted better access to international funding and international customers. Neither, as more than one German banker has told me, was readily available in Germany.

Ireland made itself a meeting place for those with money in need of investing and those looking for loans.  For Depfa in particular it was an attractive place. Depfa had decided to target Russian and East European public investments (investing in publicly funded works) and Ireland had made itself attractive to Russian and Eastern money. Money in various shades of shadiness flowed to Ireland.  The timeline of German banks and for that matter all European banks (thinking of UniCredit here) going to Ireland runs parallel to East European and later Russian money beginning to flood out of the former soviet states looking for a new home in the West.  Ireland met that need.  Ireland become THE favourite investment destination for Russian money.

Money was placed in the East. There were and are plenty of subsidiaries there who could pass it along to be funneled westward through Austria (Bank Austria) or Cyprus onward to Ireland where it could find its way to the heart of European banking in Ireland.

Depfa set up a brand new bank Depfa ACS bank, specifically to tap into all this new money.  It even got the Irish parliament, in agreement with the European authorities and German banking sector, to write a new law making it possible.  Ireland created its own version of the Pfandbrief – the Asset Backed Security. This allowed lots of new money to join with the steady flow of Germany money from the Landesbanks to unite in Ireland to the benefit of Ireland AND Germany.

Of course Europe has access to all sorts of Off Shore Banking so what made Ireland special? Ireland was physically close, was already a corporate centre, was English speaking (good for the Americans), was low tax, used English Law (good for London) and had the same ‘we can do if for you’ attitude of Luxembourg.  What gave Ireland the edge over Luxembourg was it offered faster turn arounds on setting up deals and far more lax regulation.  Ireland was perfect.

Ireland and Luxembourg are banking competitors.  But Luxembourg is not English speaking, is slower and worst of all has a regulator who occasionally regulates. The Luxembourg regulator has all his own teeth. Ireland’s had his removed along with his balls a long time ago.

As long ago as 2005, Charlie McCreevy, Ireland’s former Minister of Finance, (another Fianna Fáil man who was at the Ministry of Finance before Brian Cowen took over that job and showed everyone how it should really be done!)  who then became European Commissioner for Internal Market and Services (nothing like failing at one job  in order to get a better job…) addressed an esteemed EU/UN gathering in New York in 2005 in which he famously stated

“As Finance Minister in Ireland I saw what great entrepreneurial energies that a “light touch” regulatory system can unleash. 25 years ago we were the sick man of Europe. Today we are among the richest countries in Europe. Ireland is indeed testimony to the fact that you don’t need to be rich in natural resources to generate real wealth.”

That was shortly before someone shouted ICEBERG!

For those of you whose German is better than mine you will enjoy this German television (ZDF) expose of German Banking in Ireland and Depfa/HRE in particular.  Apart for revealing interviews with senior people in the German banking world, it also contains a brief interview with David McWilliams who famously referred to the fact that the German bankers behaved in Ireland “like men in a brothel” – with the blind eye of the Irish Financial Regulator seeing no evil. WhistleblowerIRL’s roller coaster experience as UniCredit Ireland’s risk manager  illustrates the extent of the Irish regulator’s incompetence and/or criminality, and refusal to actually enforce regulations.

You can find more on Ireland’s regulatory cess pit and WhistleblowerIRL’s story in  Why Bank Regulation is a Joke, and Who Bankrupted Ireland.  For more the details of WhistleblowerIRL’s very much ongoing story see his blog here.

Of course if you want no regulation why not just go to the Caribbean?  The answer comes back to the German banks again.

Much of the money flowing into Europe looking to be invested would end up in Special Purpose Entities/Vehicles (SPE, SPV) or Structured Investment Vehicles (SIVs). These are the legal containers which house and run the securities in a Collateralized Debt Obligation.  You securitize debts, you  put them in a CDO you  house the CDO in an SPE/V or SIV and you need somewhere to set up and domicile the SPE/SIV.  What Germany wanted was to have the dubious advantages of off shore combined with the above board respectability of Europe. German investors, the Landesbanks, wanted their money inside the OECD cordon of respectability while getting all the perks of off-shore. Ireland provided both.

A former, very senior banker from Depfa told me the Landesbanks could not buy Depfa’s debt/Asset Backed Securities fast enough.  Any issue Depfa made would be pre-sold to and wolfed down by the landesbanks before the ink was dry.  This was a partnership.

Now before I wrap this first part up, I would just like to note that,

Another banker, based in Germany, has recently pointed out to me that in all of the discussion about the Greek-Ireland-Spain/Portugal bailouts, the debate over the tax-payers’ money that was, and still is, being poured into the now-nationalised HRE/Depfa has mysteriously been silenced. I wonder why? The banker referred me to this documentary which raises some interesting questions about why and how HRE was bailed-out. It makes the importatnt link to Akerman at Deutsche Bank and how he appears to have told, not advised, but told, Merkel what to do. Merkel might be more of a tin wind-up model of an Iron lady rather than the real thing.

As I have very basic German-language skills, I would welcome any comments readers might have about these documentaries. This would help me to learn more about the HRE/Depfa saga.

On that note I am going to break the story here to stop this becoming too large.  I will continue in the next part with the question:

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


In which we will meet once again our old adversaries AIG and Goldman Sachs.

For a few months now I have been writing about the importance of Hungary, Rumania and Bulgaria. In “Bank Bail out in the making” I suggested that Hungary’s latest actions might precipitate another European bank bail-out and one we could see unfold as it happened.