Though I’m sure you didn’t intend it that way, there may be some merit to your suggestion to “blow up interbank lending”.

If all surplus bank resources in the EMU were placed with the ECB and this latter institution conversely extended its “unlimited liquidity” to banks (this is largely already the picture ito some extent) everybody would get a counterparty they could accept. The necessary constraint would have to be the ECB receiving (i) guarantees from the banks receiving liquidity (overcollateralisation of funds advanced + general guarantee) and (ii) a government guarantee in countries with banks in as perilous a state as ours.

The ECB would essentially be a clearing house that enabled banks to stop worrying about their brethren (fraternal relations being fraught). It is similar to the idea that you need to go through Dublin to get from Sligo to Galway by train. It is also similar to Mr Geithner’s plans for derivatives.

Yeah, it’s an “accounting trick”
Lets use market values for everything, declare everything insolvent, blow up Interbank unsecured lending and make Lehmans look like a little bit of gas from a spicy curry.

As for Nama, doomed from the very start is one considers the Basel 2 requirments on 100% risk weighted assets.

I think a key distinction is that there’s no money up front. 50bn+ bonds at 5%+ p.a. over 10+yrs adds up.

The post-nama levy will be very difficult to implement. If given the opportunity, banks could contest every workout. I expect it will be dropped within a year in order to get credit flowing (of course).

In placing the assets in an spv, it is possible to define operating procedures for loan modifications and workouts. So yes, losses could be delayed but forced at loan maturity.

This seems quite good to me, so I must be missing some angle.

In accounting terms it involves the non-recognition of actual losses (marked to market) on the basis that they will be covered by (contingent) future profits.

This is simply not possible under accounting rules (the events generating the future profits have not yet occurred, and may never occur).

The interesting point about this scheme which I haven’t seen commented upon is that it effectively allows the banks in question to operate with negative capital as, if they were to consolidate the SPV’s into their consolidated financial statements showing the CDOs at market value, they would in all likelihood show negative net equity.

Germany appears to be relatively Zen about this as long as it gets them past an election and, one imagines, liquidity can be achieved by discounting these SPV bonds with the ECB.

These two points:
1) Flexibility on capital requirements, and
2) ECB liquidity

would appear to form the core of the German response in establishing their bad bank.

Denial can’t be an approach to problems of this magnititude (apparently the full figure is over 800 billion euros, the 180 is just the first, simple, tranche) however the flexibility being shown by the German government in this regard may hold some indications of a path that could be followed (though by no means as far) in Ireland.