Here’s a better anecdote for credit expansion à l’Irlandaise:

On a sleepy European island, a man named Liam decides to make money. He asks the bank to lend him €200 to buy a field and a pile of bricks, promising to sell houses on the field worth €300 and pay the bank back €200. The bank agrees and make him a loan worth €200. In order to get paid back this money, the bank knows it will have to lend the punters €300 to buy the houses, so it borrows this from abroad.

But the punters can only pay on the borrowed money if they get jobs, so Liam offers to build more houses, employing the punters. For this he needs more money, which the bank realises it will have to lend Liam. So they lend him another €200 and he sells the next batch of houses to new Polish punters, who are employed building the next batch of houses and so forth…

Eventually, Liam runs out of punters, squirrels all the hundred euros’s he’s been earning away in the Cayman Islands and defaults on his final batch of loans. The banks are left with some weedy fields, empty promises from the difficult-to-pin-down Liam, and a bunch of residential mortgages to punters who used to work in construction.

So they lean on the Minister to pass a new law which forces the punters to borrow against their grandchildren’s incomes, in order to give - for free - to the banks the money they need to make up for their losses.

Some of punters eventually emigrate, but the rest just pay up, because they stopped reading this anecdote paragraphs ago.

Liam & the bank execs lives happily ever after.

NAMA and participating banks will be under heavy scrutiny by the European Commission to prevent illegal state subsidies and breaches of competition law. Although examinership does not fall under ECJ jurisdiction, a discriminatory application of national law in the context of possible state subsides and anti-competitive practices does.

I’m not a legal expert so I look forward to your corrections and comments. Here are more details:

http://blog.jaedi.eu/2009/08/acc-bank-liam-carroll-zombie-zoe-establishment/#comment-61

Alternatively we could have ‘fairness’ to the taxpayer and burn all of the investors and bond holders, but if there was a major fallout - which i suspect there would be and it would ultimately hurt everybody more - ”

These claims are unsubstantiated. Anglo bought off some bond without all hell breaking loose. Has the government even tried to lean on the bondholders for a debt equity swap? At the very least this should have been attempted. In my opinion, the current strategy is just delaying the day of reckoning and making the eventual fallout much much worse. I would again recommend to all those interested to read “A Quiet Coup” by Simon Johnson. Unlike most of us here, he knows what he is talking about. http://www.theatlantic.com/doc/print/200905/imf-advice

Funniest thing I think I’ve ever read in the FT or on this site. Given the obvious flaw, shall we substitute the hotelier with the taxpayer?

And whom doe we sue?

if a bank is guaranteed and you nationalise it then it kind of undoes the rationale of the ‘guarantee’ and it eradicates the market process of allowing it to close - the calls for nationalisation have nothing to do with the markets and everything to do with ‘taxpayer fairness’ which i have always maintained is basically a secondary concern, we are an island economy that cannot afford to burn lots of investors all at once.

Alternatively we could have ‘fairness’ to the taxpayer and burn all of the investors and bond holders, but if there was a major fallout - which i suspect there would be and it would ultimately hurt everybody more - then would that be fair? fairness is relative and the majority of comment fails to mention where we might go if we get out of the ‘pot’ of unfairness to taxpayers, namely, into the ‘fire’ of the IMF. One way or another, the taxpayer is going to foot the bill i suggest you get used to that idea.

at this stage its about the lesser evil.

There is a glaring flaw in that popular example; I’m going to leave it up to you to find it!

(google will help if stuck..)

I am sure that Carroll hd the best legal advice available and they knew exactly what they were doing. This was afterall the biggest case in the history of the state not some two-bit company hiding from a few trade creditors.

If the necessary proofs were available, they would have provided the evidence.

But it is self-evident that any genuine expert evidence would have had to admit that the entire plan belonged in cloud cuckooland or wherever the Emperor of Shoeboxonia dreamt up his 1 page survival plan.

There is a false notion abroad that the ECJ is supreme in all matters.

I am fairly sure that the examinorship could not be appealed to the ECJ as it is a piece of 100% domestic legislation.
If it were an ECJ matter, it would have been refered to the ECJ to adjudicate on the relevant point of law.

Eamonn - - You ask: What is quantitive easing, if not reinflating the bubble?

The FT has a letter today giving a simple explanation of quantitive easing!!

Sir, In a sleepy European holiday resort town in a depressed economy and therefore no visitors, there is great excitement when a wealthy Russian guest appears in the local hotel reception, announces that he intends to stay for an extended period and places a €100 note on the counter as surety while he demands to be shown the available rooms.

While he is being shown the room, the hotelier takes the €100 note round to his butcher, who is pressing for payment. The butcher in turn pays his wholesaler who, in turn, pays his farmer supplier.

The farmer takes the note round to his favourite “good time girl” to whom he owes €100 for services rendered. She, in turn, rushes round to the hotel to settle her bill for rooms provided on credit.

In the meantime, the Russian returns to the lobby, announces that no rooms are satisfactory, takes back his €100 note and leaves, never to be seen again.

No new money has been introduced into the local economy, but everyone’s debts have been settled. Is this “quantitative easing”?

Eric Keetch,
London W4, UK

KarlDeeter: We were told a year ago that international markets need the bank guarantee and that would solve all the problems of liquidity and so on and so forth. Overpayment by NAMA promises to do the same but there is no evidence it will actually prove to be any better than the guarantee. The piper of the markets has to be paid but you haven’t made any convincing argument why the Irish taxpayer should pay and not the shareholders and bondholders. You have called yourself a capitalist many times. Doesn’t the market require that risk and reward be aligned? A bailout at an enormous expense to the taxpayer will create a massive moral hazard. What is more it will significantly delay any recovery through the avoidance of Schumpeterian creative destruction.

On an entirely related subject, I’m thinking of running a book on whether the other banks might just put up some money to make ACC go away. I’m sure it’s no more of a gamble than NAMA in its present form is (my book that is).

As for the fairness of it all, sure hasn’t it always (since Chile, Uruguay, Brazil, etc. anyway) been about how much money the private sector (banks and the international financiers) can move out of the public purse and into their own area. ‘Bail-out’ is just another way of saying the same thing.

on the overpayment side: frank o’dwyer is merely stating what many here have failed to grasp - the wet rock off the west of europe which we call home has to pay the piper of the markets, fairness to the taxpayer is secondary, i’ve said from the start that NAMA will likely overpay and i still believe the same thing now.

i don’t think fairness really has much to do with it frankly, and even if it did and the taxpayer made a windfall, i doubt that the state would be issuing cheques to every taxpayer or doling out a ’social dividend’ or managing affairs any better than they did in the past.

In this case, if they were to liquidate Zoe they would incurr losses of about 50% (estimate) of the outstanding loans to Zoe. What they would get would be cash they could use to issue loans and reduce the liquidity crisis. However, the return they can get from lending out the recovered amount again would not (in the short term) cover the loss in issuing the loans to Zoe.

Simply put, the banks can’t recognise the losses because it is more profitable (in the short term) to hope that the situation will improve. They can’t issue more loans because they have to much tied up into similar loans, this is the liquidity crisis.

The banks managers are hired to generate shareholder value, if they were to recognise the losses they might wipe out all shareholders. The liquidity crisis will continue until the losses are recognised and I don’t think they will be recognise the losses until the banks are legally obliged to do so.

If more liquidity is to come into the market, either the banks have to realise the losses and put the recovered cash out into the market, another bank has to bypass the current banks and provide liquidity directly or someone has to take the losses away from the banks. The only way I can see NAMA doing anything to provide liquidity is if NAMA takes the losses.

“Do government backbenchers (FF,Green & others) realise which side they are on?”

Unfortunately the opposition do not seem to be too clear about whose side that they are on either!

” ..the key audience is international financial markets”

The battle line has been drawn for some time - International Financiers vs the Plain People of Ireland.

Do government backbenchers (FF,Green & others) realise which side they are on?

Another thought - The Supreme Court may have been more inclined to grant protection to Carroll’s companies if it the possibility of appealing to the European Court of Justice were not available.

http://jaedi.eu/2009/08/acc-bank-liam-ocarroll-zombie-zoe-establishment/

Getting through the next Dail session is the priority. NAMA will kick a number of problems into the long grass. Do you envisage detailed and sustained public, media and parliamentary scrutiny of the workings of NAMA over the next 3 years? Attention spans seem to be getting shorter.

The hope is that things will look better next summer. The international economy is showing signs of picking up and this will release the time-hallowed emigration safety valve.

So, no. I don’t foresee any defections on the Government side.

I liked ‘ zone of rightness ‘ Maybe NAMA will have its own language .

“An excessive haircut, with any taint of political motivation, any sense of ‘let’s stick it to these guys,’ would erode confidence.”

Are the battle lines been drawn?

Sadly, your analysis of the situation in the Oireachtas rings true to me. But is it not possible that one or two FF TDs might want to see the govt fall sooner rather than later, given the declining FF support?

After all, it would only take one or two at this stage…

For the Government NAMA = TINA (There Is No Alternative). This will be an exercise in naked, brutal political power ramming the NAMA Bill through the two lower houses of the Oireachtas. If this bill falls, the Government falls since it is a money bill squared. There isn’t one single TD on the Government side (detached, semi-detached, independent or otherwise) who will vote for early retirement - irrespective of the amount of constituent pressure exerted. Despite the superior qualities of Prof. Honohan’s NAMA 2.0 proposal there is no consensus forming in support of it on the opposition benches - nor is there likely to be one. And, even if there were, it would fail to attract the support of a single TD from the Government side.

And the bill needs to be signed into law by the President (as the third house of the Oireachtas) before it has a presumption of constitutionality. Given the doubt that has been raised about the President’s willingness to refer this bill to the Supreme Court, any action needs to take place between its formal enactment and the appointed day when its provisions start to kick in.

There can be no doubt that the most comprehensive and sustained analysis and critique of NAMA has taken place on this site. All that is required now is an actor - and not, necessarily, of the Thespian persuasion.

On the issue of legal challenge: if it is voted through in September then it will enjoy a presumption of constitutionality which will be very difficult to displace. The key, as I see it, is to convince the members of the Oireachtas that the present proposal is not in the best interests of the citizens and that an alternative proposal, such as that of Prof. Honohan’s NAMA2, is preferable to the deeply flawed current NAMA proposal.

As I write it has been announced that ACC has secured the appointment of a provisional liquidator to two Zoe companies. This may be the beginning of the unravelling of NAMA despite the DoF stance last night.