From an article in the Telegraph (21st August’10)

“The IEA raised its concerns after the latest public finances data from the Office for National Statistics (ONS) this week, which showed that the total debt, excluding bank bail-outs, is £816bn – itself a record high. However, the figures strip out the state’s pension liabilities in a contravention of standard accounting practices.
Mark Littlewood, the IEA’s director-general, said: “The latest official national debt figure is seriously misleading. Looming in the background are pension liabilities. These should be moved to the forefront.”

Indeed, these unfunded contingent liabilities should also be moved to the foreground in Ireland accounts. Last figure I saw was a figure of 108bn back in the comptroller and auditor generals 2008 accounts.

The asset used in the repo remains on the books. What Lehman’s did was pretend they had done a true sale of the asset by exploiting an accounting rule that meant that if you bought the asset back at 105% of the sale price, the asset could be moved off balance sheet.

Like you, I had always assumed that repo transactions stayed with the beneficial owner, but the Lehmans case has made me wonder.

http://ftalphaville.ft.com/blog/2010/03/12/173241/repo-105/

Other US banks have since been accused of repo 105-like transactions. Mr. FitzcapitalP effectively did the same thing with his director’s loans.

Example before repo:
Assets: €5bn sovereign bond

Example after repo;
Assets: €5bn sovereign bond
Assets: €5bn cash
Liabilities: €5bn loan
Liabilities: €5bn repo account

This is just my guess. Please correct me if I am wrong

I’m certainly one of those commenters and I’m unrepentant.

Identifying who holds the risks associated with bonds is extremely difficult. They don’t necessarily have to show up directly on the books. Bonds are often held in nominee accounts or are bought by funds and following such chains isn’t easy. Though I wouldn’t go as far as suggesting that they’d expose funds under management to irish bonds or institutional placings of new Irish bank stock.

When the credit crunch began, investors concentrated on return OF capital rather than return on capital. However taking numbers from the NTMA website, at YE 2008 82% of bonds were held by international investors. At the end of 2009 this number had grown to 84%. At face value, and bearing in mind it’s to the end of 2009*, this is a strong vote of confidence. And it doesn’t support my contentions. (*There are reasons in 2010, that might make a 3/4yr punt on Irish bonds attractive). It does seem strange that Irish banks have such difficulty accessing interbank markets for short term debt when the sovereign appears so attractive to international markets. Yes, they are different markets, but nevertheless it would be good to see a little transfer of confidence.

I’d expect future stess tests will treat NAMA bounds as Irish debt.

You’re pushing me out of my comfort zone, but I’d hazard a guess that they had a much higher share of really toxic stuff. EU banks were exposed to quite a lot of this stuff, but much of the mess is the result of ‘common or garden’ asset bubbles and fiscal incontinence by some member-states.

I have no brief to laud the US, but, despite the current spasm of partisan polarisation, I do admire the general transparency, FoI and the extent to which government and its agencies are exposed to scrutiny.

I sense the EU is being driven to replicate aspects of these arrangements.

The discussion on this thread is unusual in that there seems to be near-unanimity about the main conclusions about the CEBS tests and yet the discussion is quite hot and heavy-handed in tone.

In my reading there seem to be two consensus-agreed conclusions:

1. The stress tests were insufficiently stressful to be claimed as “fair” tests of bank sector risk in Europe. Since 95% is a minimal confidence level accepted in this type of test this only means that the CEBS has underestimated some of the risks in the worst 5% outcomes, it does not mean that the sector is likely to collapse. A 99%-type confidence level test (if a numerical confidence level is useful at all) might be more appropriate perhaps. In either case it is the tail outcomes that are being examined not the most likely outcomes.

2. The stress tests were a useful exercise in terms of the extra information that they provided. This extra information release had a positive indirect impact on the sector.

I think “charade” is excessively dismissive of what, I believe, are genuine efforts to craft appropriate institutional arrangements. Since the EU is governed by treaty and not by a constitution there is bound to be an amount of “politcial fudge”.

And perhaps some of the commentary is slanted by US-based commentators using their own institutional arrangements to assess the EU’s approach - with a bit of crowing from the UK with its seriously limited autonomy in these matters.

Allegedly, if you put an infinite number of monkeys in a room, each with a pen and paper,they will ultimately write Hamlet. If at first you don’t succeed, try and try again.

What I think Eoin means is that it would be doubly unfortunate if the banks that had to be bailed out subsequently went bust becuase they invested in the debt of a sovereign that ultimtely defaulted because a) it had bailed out said banks & b) continued to pursue an incontinent fiscal policy which equalled an Anglo bail-out on an annual basis.

You are of course entitled to your view on the stress test but some back up for it would be welcome.

Its like when I write something on gold (forthcoming, Financial Review), or on the effect of financial integration on emerging markets corporate capital structure (forthcoming, Journal of Banking and Finance) , or the ultrametrics of the eurobond market (in press, Physica A) . They are usually terribly “academic” and to most readers dull and remote. Then there’s here, or the broadsheets, or the tabloids.

I think its called communication - theres a spectrum. No one part is “better” than the other, they all serve different needs and constituencies.

rather than look at what individual commentators say about the stress tests look at what Mr Market says. Since the methodology for the stress tests was announced in early July (7th I think) the SX7P (European Bank ETF) is up about 7% while CDS spreads on individual names are generally narrower. In the intermim, we have also received more clarity on Basle 3 and some better than expected results from most European banks. In the Irish context, AIb results are horrible and BOI are less horrible.

It does not matter what individual punters say in public. The real money does not talk to Bloomberg anyway. However in the short term the market reaction to the stress tests is probably positive. Deeming them a Charade was giving a big fat hostage to fortune. Your description of them was much more circumspect and considered.

They probably also consider me more boring …

“the C word”

it used to mean cancer but now it refers to how some feel about financial stress tests. These are the times we live in i suppose!

Lets put it this way - you dont tend to use rhetorical flourishes all that much, yet can still get your point across. People probably consider you a bit more reasoned and sensible as a result. Nuff said.

Ok, I guess I’m missing something as to why the charade comment is all the things you claim it is. I can see why someone might think the exercise deliberately understated the risk stemming from sovereign debt and I can see why the C word might be used as a rhetorical flourish to describe this.

well i’ve seen a lot of comments along the lines of “they should have been so much better, but they are definitely another step along the way to full transperency”. Like i have said a few times, and as you note, you can’t actually do the above reports without the CEBS one, and im sure many investors now have their own in-house studies based on the CEBS data. Was there a bit of spin to them? Sure, but you can make your own mind up on the data yourself if you want, as the OECD and Citi have done. At worst they were a lost opportunity to clear the decks once and for all (even though no one ever actually expected this to happen, which makes the complaints thereafter somewhat pointless).

Using the word ‘charade’ (it took place on Drivetime i think, you’re more of a Spin FM man i know…) smacks of headline seeking rather than any reasoned analysis. Its either sloppy, ignorant of the facts, or deliberately misleading. You choose. I aint exepcting a(nother) clarification or retraction from the Prof.

Yes, I agree that it is a rare piece of good news from the Irish banks. There was a stage last year where a lot of commenters here were going on about Irish banks purchasing sovereign debt as a big factor in keeping the fiscal ship afloat. In fact, the banks annual reports showed very small holdings of Irish sovereign debt and relatively modest increases since 2008.

Agreed also that the CEBS exercise allowed for the OECD and Citi analysis and thus was useful.

I guess I missed charade-gate. But if the point of such a comment was to criticise the unstressful nature of the stress test, then it seems like a reasonable sentiment. Whatever about the specific guys that BL quoted above, the sentiment expressed in them does seem to me to have been pretty widespread.

Nothing wrong with Thornburgs model or the quote. I’ve known those guys since the early 90’s. They were not bottom feeders or MBS stuffers. One of the more responsible players but they got crushed by the tsunami of 3Q 2008. Basically good guys but Garreth was his own worse enemy. When he needed short term liquidity to get over the end of the Q crunch he found he had pissed off just enough people who might have given him terms to kill the company.

As for the stress tests, charade is too mild a word. I prefer the term fraud.

“said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico”

Jesus, what the hell is it with you and crazy quotes? I just finished reading ‘House of Cards’ yesterday (at the beach), and Thornburg are not the people you want to be using as your references (note, this is their mortgage arm im referring to, not the AM, but its the same guys)…

http://en.wikipedia.org/wiki/Thornburg_Mortgage

I’m pretty sure no one out ther is claiming the CEBS bank stress tests were anywhere near perfect, but the real point of the matter is that you could not have conducted the OECD or Citi stress tests without the information released via them…as such they have been incredibly useful. Indeed, from Citi’s paper…

“CEBS provided a lot of data, in a systematic way, including on banks’ sovereign exposures. And aggregate credit loss assumptions and pre-provision profits look sensible.”

The use of the word “charade” looks sillier by the day.

@ Karl

on the substantive issue of sovereign exposure, Irish banks actually appear to be very lowly exposed, even to Irish government debt! Finally some good news…

I neither work or speak for them. I merely quote from them. The commas at the start and end give that away. I merely used an authoritative source-the same firm that appears to have advised the govt against the blanket guarantee.

You quoted from i) a Californian fund manager ii) a currency strategist that has had moved job more often than Robbie Keane iii) a Japanese newspaper and iv) a bloke in the FT.