On Thursday Jonathan is to testify before The Committee on Finance, Public Expenditure and Reform, and Taoiseach.  Jonathan was invited to testify some weeks ago. Now I obviously don’t know any of the confidential story.  How could I? But what I do know from Jonathan, is that it was and still is, his hope and intention to tell the  committee exactly what he knew of what led to the Irish banking collapse. If I know Jonathan he would have been very clear with those who arranged the invitation that he would not be censored nor deflected into talking of other safer topics. He would have been very clear he would testify with his first hand knowledge of  1) what happened at Unicredit, 2) How this was an example of unwise or illegal activities within the broader banking sector. I know Jonathan has always felt it was imperative that what he knew should be on the public record since what he could testify to, lay at the root of  the general banking collapse, shed valuable light upon why the government suddenly – and against professional financial advice – paid the notorious blanket, overnight bank guarantee and  how this led to the crippling public debt that was its direct result.

All Jonathan wants to do on Thursday is to tell the truth.  Too many in the major parties, the Central Bank and the Banking community have worked and continue to work very hard to keep him and a few others like him firmly shut up behind a wall of legal and financial threats.

Jonathan has tried before to get things on the record in Ireland. From the beginning he has had dealings with all the major parties telling them what he knew. Every one of them listened, made promises and later disowned him. Some even claiming they had never met him. Such is the immense fear and pressure to keep what really went on, buried.

And I fear it is happening again. The invitation was to talk about banking and its regulation – things of importance for the future of every man and woman in Ireland. But in the last days when the Central Bank and the large private – so called Pillar Banks, of Ireland – have testified the central bank particularly has chosen to talk exclusively about such pressing topics as tracker mortgages and car insurance.  So, a committee wanting to investigate banking and its regulation, calls in the Irish Central bank – the key banking regulator – which then decides it will talk about tracker mortgages? In my opinion,  the banks with the help of the Central Bank are trying to limit the agenda before Jonathan even arrives. I think they are trying to make sure that nothing of import is covered and there is nothing that could lead to any difficult questions for anyone to report or to follow up.

Why would the big private banks and the Central bank be so concerned to restrict the whole thing to set such limited agenda?  Let’s take the example of Mr Richie Boucher.  He is the CEO of Bank of Ireland. He is about to step down. You might think he might have a great store of vital, interesting and relevant things to talk about. He was, after all in the room with Lenihan and Cowan on the night the Bank Guarantee was agreed.  As was, I have been told by two separate people who claim to have knowledge – but have never had it officially confirmed –  a certain Peter Sutherland – father of the WTO and head cheerleader for globalism in general, and who was, on the night of the  guarantee, chairman of Goldman Sachs International (A post he held from 1995 and didn’t give up till 2015). So you might have thought the  committee would love to ask and be told by Mr Boucher what happened that night and what events led up to that most fateful of decisions, taken so quickly and so irrevocably by a group of men behind closed doors. But no. If you want to give yourself a headache go read his dozens of pages of testimony and I challenge you to find a single thing of vital interest to anyone wanting to understand banking regulation, or the lack of it, in Ireland.

The government can have as much shiny banking regulation as it can find paper to print it on. And shout about how wonderful their regulations are. The fact of the matter is any idiot can have paper regulation but if they chose not to ever enforce them then it is naught but a store- house of toilet paper for the banks and bankers to use.

The decision to bail out all the banks and the decisions to ignore all the warnings they were given by Jonathan and others, which led to the most momentous and far reaching decision of recent times, that has effected then lives of every person in Ireland, is still shrouded in secrecy. Do you know why the decision was taken? Would you like to know how Ireland got to the point that such a decision was ever needed?  Why are those like Mr Boucher not being forced to tell on oath what they know?  Do the people of Ireland not have a clear right to know?

If Jonathan is told he can only talk about the irrelevant topics the banks and central bank have chosen to restrict themselves to, then they will have silenced Jonathan yet again. This must not be allowed to happen.

I can tell them it won’t work. Too many people are watching. Too many are aware of what went on and whose necks are at risk. And not least, Jonathan, despite being hounded relentlessly, is not one to back down.  He has kept his powder dry and what a store of powder it is.

Jonathan already, a few weeks ago, bearded Draghi in his den.

You can see Jonathan testify in the Eu parliament here

And hear the question that skewered Draghi here

And here is the list of Bond holders that Jonathan and I tried twice, through the good offices of Senator Norris, to get read in the parliament – both times being prevented.  These are some of the bond holders the Irish government was so determined to bail out that it decided it would crush a generation of its own people with crippling austerity.

When will the People of Ireland make their voices heard and demand that the truth and the whole truth be told, and damn those who have profited from its suppression?

A Prosecution service (such as a Director of Public Prosecution) will occassionally grant Immunity to someone so they can testify against others without what they say being used to implicate themselves in wrong-doing.  The idea is generally to use a small fish to catch a larger one.

The only other kind of immunity I know of is that ‘granted’ by those who are about to be testified against. It usually involves something terminal such a car crash ( Karen Silkwood , Michael Hastings, Paul White: All whistleblowers all died in car crashes), being beaten to death in police custody (Sergei Magnitsky) , unaccountably dropping down dead  (Alexander Perepilichnyy –  A Magnitsky case Whistleblower)  or a simple bullet to the head (Yves Coulon Agip Affair). These are very effective but slightly drastic and can attract unwanted attention,

The Irish it seems may have invented a third possibly better kind.  It’s called the Immunity-so-you-don’t-ever-have-to-testify – against anyone.

Back in 2008 Mr Matt Moran was the Chief Financial Officer at Anglo Irish Bank. He was, therefore, intimately involved in all aspects of the debacle that was and still is Anglo. His various florrid opinions on the parlous state of Anglo’s finances prior to its implosion, how the wealthy of Ireland were removing their money from the bank and from Ireland, and sending it abroad, his considered opinion of Mr Seán Quinn (Ireland’s most notoious property tycoon and sometime Anglo investor and customer)  and how, with just a bit of drink and a beer mat he could get 5 billion euros out of  a British fund manager, are all available to hear in the Anglo tapes or read exceprts from here.

Mr Moran is in some ways the kind of witness for whom immunity was invented – he certainly would know who did what and when.

No surprise then that the Irish DPP granted Mr Moran immunity. But the Irish DPP appears to have taken a novel approach. It turns out the Immunity was granted two years ago though no one at the time was told. The information only came to light when the Irish Times revealed it in September 2013. Why it came to light then I shall come back to.

But what is a little odd is that during that whole two years, no prosecution starring Mr Moran has taken place. No date set, as far as I know for any trial of former Anglo CEO and Mr Moran’s boss, Mr David Drumm. The only trial with a start date is that of

,,, former Anglo directors and executives Seán FitzPatrick, Willie McAteer and Pat Whelan for providing unlawful financial assistance to 16 individuals – 10 long-standing customers of the bank and six members of Seán Quinn’s family – to buy shares in the bank is scheduled to begin in January.

This would be a trial looking at illegal share manipulation only.  Unless the charges were widened, which I doubt will happen, this trial would very carefully avoid looking at any issues of reckless lending, materially misleading clients and regulators as to the real value of assets, of securities or the real nature of collateral accepted for loans granted and most importantly, would avoid any issue lifting the lid on improper dealings between the banks officers and the government of the day such as may have happened in the sale of Anglo’s Austrian subsidiary to Private Austrian bank Valartis. In other words it would be a show trial.

So far all the Irish people have been given by way of justice is a couple of Micky O’Mouse white-wash inquiries which found nothing wrong. And bear in mind that as far back as 2009 when Mr Lenihan the then finance Minister was shedding crocodile tears and expressing his “frustration” at the delays it was already being pointed out,

 …that the scandals at the now-nationalised Anglo Irish Bank emerged at the same time as crooked financier Bernie Madoff was arrested in New York. Madoff has since been jailed for 150 years while not one Irish prosecution has reached the courts.

Funny that.

In the mean time Mr Moran long ago left Anglo and is now handsomely employed at Lombard International Assurance in Luxembourg.

Such a long absense of any prosecution – not even so far as we know any depostion from Mr Moran –  looks to me rather like an immunity granted as a reward for NOT testifying.

It is especially perplexing when you look at what Irish Law says about Immunity. These quotes are taken from the law regarding Immunity in relation to Cartels as laid down in the Competition Acts of 1991 and 1996 . I have used this document simply because it is available, I don’t know under what particular act Mr Moran’s Immunity was granted, but I doubt it makes any difference because generally Immunity is the same no matter which particular law it was granted under.  If I am wrong about this I would be grateful for a lawyer to correct me.

In the section which details the requirements for being considered for immunity Irish law says in pargraph 13 the applicant must have “…terminated its participation in the illegal activity”. Mr Moran left Anglo and the bank iself is no more, so presumably he’s OK on that one.

Paragraph 15 looks more difficult:

15 The applicant… must not have coerced another party to participate in the illegal activity and must not have acted as the instigator or have played the lead role in the illegal activity. The applicant must be able to show this to the satisfaction of the Authority.

So given that Mr Moran has been granted immunity are we to take it that the DPP is quite confident, having looked in to it in detail, that Mr Moran was not the instigator of any ‘illegal activity’, didn’t play a lead role in any and did not coerce others?  And all this while he was number two at the bank? Wow!

That means Mr Drumm must have either acted alone  or coerced Mr Moran and all those below him. Ladies and gentleman are we going to see the world’s first Rogue CEO?  Will we find Drumm was a KGB agent, spent time in Cuba and was a loner with deep psychological problems?  I can hardly wait. Though I suspect I may have to.

But back to poor used, abused and thoroughly innocent Mr Moran. Let’s look at what Mr Moran would have been required to provide in return for his immunity and a free pass out of Ireland to pastures green in Luxembourg.

Section 16 says,

16  Throughout the course of the Authority’s investigation and any subsequent prosecution, the applicant must provide complete and timely co-operation. In particular, the applicant must:

a) Reveal any and all offences … in which it may have been involved;

b) Provide full, frank and truthful disclosure of all the evidence and information known or available to it or under its control, including all documentary and other records, wherever located, relating to the offences under investigation with no misrepresentation of any material facts; and

c) Co-operate fully, on a continuing basis, expeditiously and at its own expense throughout the investigation and with any ensuing prosecutions.

Let me remind you this is all from the Competition Acts but as I said the detail of immunity is unlikely to be very different in any other act. I just want you to be aware.

But taking this law as a likely indicator of the law under which Mr Moran was dealt with, it would seem that the DPP must already have details of all offences Mr Moran was aware of, all the documents and records necessary to detail and prove those offences and a full and frank disclosure of everything he knew about what went on at Anglo. Remember he was number two in the bank.

If the DPP does not have all this, then on what basis was Mr Moran given immunity from the law? If the DPP does have all this and must have had it all for several YEARS already, then what kind of bumbling half wits or conniving lick-spittles run the place that they still haven’t done a thing with it all?

The whole idea of Immunity is to use a small fish to catch a larger one. Mr Moran however was the number two at Anglo. As the Chief Financial Officer he really only reported to one man above him, the CEO, Mr David Drumm. Both of them would have been technically answerable to the board, but the dysfunction or rather non-functioning of Anglo’s board is now common knowledge. Thus by granting Immunity to Mr Moran the DPP has contrived to put one of the two TOP architects of the entire Anglo catastrophe forever beyond the reach of justice and the law.  (It remains to be seen if Mr Moran was granted partial or complete Immunity. Partial means he can’t be prosecuted using his own testimony or evidence gained because of it. But he could be prosectured if other independently acquired evidence came to light. Complete Immunity means just that. Both are common in the U.S.A but have rarely been granted in Ireland.)

Whichever turns out to be the case for Mr Moran, what remains unchanged is that, if he ever is called to testify, most of those he could implicate will be junior to him. The lovely Sean FitzPatrick is so far only on trail for share price manipulation.

It is unusual, to say the least, to grant immunity to the largest suspect in order to help secure evidence against lesser suspects. Was there no one, not one person, lower down the food chain at Anglo who would have gladly accepted Immunity and testified against the two top suspects? Personally I find that hard to believe.

Which brings us back to wondering why was Mr Moran given immunity and why are we learning about it now?

A few weeks ago The Village Magazine wrote an open letter to the Irish DPP saying if no case was brought against UniCredit various other banks and a rogues gallery of neer-do-well bankers then the Village would. I wonder if the Village is going to make good on this threat? I do sincerely hope so.

It is interesting however that it is after the threat was made that we find out about Mr Moran and, as the web site “Public Inquiry” notes, that the DDP, Claire Loftus seems to have fired a warning shot at The Village, its owner Michael Smith and the UniCredit whistleblower Mr Sugarman.

In the preface to the DPP annual report Ms Loftus wrote,

I want to take this opportunity to say something generally about the risks of pre-trial publicity interfering with the right of an accused person to a fair trial.

The media and commentators have a high degree of responsibility to ensure that not only do they not commit a contempt of court by publishing or broadcasting prejudicial material but also that such publicity is not the cause of a trial being postponed for a long period, or even indefinitely.

These risks increase as any trial date approaches.

As Public Inquiry then asked,

Could it be that her warning is aimed at the editor of Village magazine, Michael Smith, who issued the … challenge to Ms. Loftus and her office in the August/September issue?

A warning from the Irish DPP not to say or write anything that might prejudice a future prosecution – after so many years when even Madoff has already been goaled – seems to be taking the piss.  What are we all to wait for, the next Ice Age?! I have seen glaciers melt and mountain ranges erode faster than justice moves in ireland. It is even slower than it is in England and THAT is saying something.

The Irish authorities seized two MILLION documents from Anglo. They have had several very senior bankers trawling through the debris making sense of it all sufficient to wind it up. There are people who can piece together a great deal of who did what and when including the involvement of senior political figures.  U.S. Vulture funds connected with Elliott Associates have recently made it clear they think such documents exist and have gone to court to be allowed to find them.

Other documents relating the the infamous sale of Anglo’s Austrian subsidiary to the private bank Valartis, using money lent to Valartis by Anglo! – which spirited away hundreds of millions from any possible bail-in which would confiscated those millions, and also protected the identity of the owners of those millions from curious Irish eyes, plus the connection of that sale to a knot of allegations of high level corruption among the political elite of Austria – there are anwers to all these questions in the documents at Anglo, at Dame Street and in the heads of the who worked  at Anglo. To give any of them immunity and then never get round to making them testify is … what?

An immunity from prosecution is given when a proscutor wants to strike a deal with a witness so they can speak freely and in so doing bring about larger prosecutions. But if an immunity is given and no prosecution ever results then what is it? What was it given for really?

I would argue is is a kind of silk gag. The person doesn’t have to say a word – they’ve been given immunity.  They are free to get on with life knowing they are not going to face prosecution.  It amounts to a seal on everything they know.

The warning from the DPP about not prejudicing is a sad joke. One that reveals what justice is about in Ireland.

Bear in mind one last thing. Mr Moran never stood up and said, ‘ask me, I know who the guilty people are, I know what they did.’ Yet two years ago he was quietly given immunity and he has said not a word, not a murmur of a deposition since.  Mr Jonathan Sugarman did stand up and say, ‘help me please I know of wrong doing at the bank where I hold a senior position.’ He went to the regulator and asked for help. He told them in a letter what his conerns were. He got others to independently verify his concerns.

He was ignored. He approached senior people in every Irish political party. They ignored him took, no action and some even tried to deny they had ever heard of him.

He was not offered Immunity. He was threatened with prosecution if he revealed what he knew.

Compare Mr Moran’s and Mr Sugarman’s treatment and you tell me what being granted Immunity looks like it’s for.

You have to hand it to Sugarman. He has a knack for giving the authorities heartburn. I wrote an update about his case at the time of the Village Magazine piece which filled in a couple of interesting details.

This time he happened to mention as an example of the total lack of financial regulatory oversight in Ireland during the bubble years the Belgian Bank KBC.  As Sugarman said, just this month KBC Belgium had to give KBC Ireland another €100 million in order to bail it out. To illustrate how KBC had got itself into the state where it is still being bailed out by the Belgian tax payer via its parent company, he told how he himself had been given a mortgage by KBC in Ireland. As he said in the interview,

“When I looked at the forms I had to fill in for KBC Ireland, it was a joke. I could have said I was Mickey Mouse and I work in La la land and I would still have a million euro to buy a house with maybe was woth 200 000 euro. Did anybody ask questions. No. The bank is growing. Where’s the problem.”

Where indeed? What he didn’t say in the interview is that the bank did not actually bother to value the property he was buying before it gave him the mortgage. It looked at the house next door and guessed.

So now given the continued bleeding and rotting going on inside KBC as well as the epic implosion of Dexia and the fact that, as in Ireland, no one has been held responsible, there are questions being asked in Belgium that powerful people don’t want asked.

Back in 2010 I wrote an article about the way German banks used Ireland as a dark pit for doing deals they could not do elsewhere. It was called Ireland was Germany’s Off-shore Tart. It seems she was Belgium’s tart too.

What Sugarman’s story reveals above all is how no one in power, whether that be financial, political or media power, wants any questions asked or truths exposed.  Sugarman has been ignored by everyone in the Irish establishment: his bank, the banks regulator, all the Irish political parties, all the newspapers and I was there when he told his story to one of Ireland’s top TV journalists only to never hear from him again.

Sugarman was the risk manager who resigned from Unicredit when his warnings to senior management, that the bank was routinely failing to hold enough capital to protect depositors from a bank run, were being ignored.

Irish law says clearly a breach of the minimum holdings of even 1% must be notified to the regulator immediately. He was finding UniCredit being routinely 19% short. When he asked an independent company to check his figures they told him the breaches were as high as 40%. This means the bank was short billions. Such a shortfall means if there was run on the bank it would not have a hope of surviving.

Sugarman was ignored and told to stop complaining. He resigned.

A month later Northern Rock collapsed when a run on the bank exhausted its cash reserves. A year later the Irish banks collapsed.

You might have thought the Irish Bank regulator would want to know what Sugarman had to say. You’d be wrong. The Irish regulator has gone out of his way to ignore him. I have been privy to all the emails and correspondence and it is a shameful and tawdry story of obfuscation, lying and threats. Meetings where he was told he could come and tell the regulator what he knew, but that if he revealed any wrong doing by the bank that occurred during the time he was there, the regulator would have to report him to the police. Despite the fact he had been the one trying to raise the alarm.

And so it is that Sugarman has been interviewded by Australian television, Belgian television, Greek television, interviewed by the major Greek newspaper Kathemarini (which is affiliated with the NY Times) which was picked up, written about and made available to an English speaking audience by the noted and respected  British financial journalist Ian Fraser on his blog,

And all the while there has been nothing in Ireland.

If it were just the banks who we had to fight for truth and justice life would be easy. But we are fighting our own political class and our media as well.

We are not all in this together. They are all in it together, against us.  We are on our own.

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.

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.