Depfa Bank collapse and the Irish taxpayer

There seems to be almost unanimous agreement within the Irish media that had the IFSC-based Depfa Bank not been bought by another German bank just before its collapse at the beginning of the financial crisis, the bill would have landed on the Irish taxpayer. Dan O’Brien repeats this view in an article in the Irish Times on Saturday.

I am not sure that the issue is as clearcut as is supposed. Willem Buiter (pages 9-11) suggests that we are in uncharted territory in these matters.

17 thoughts on “Depfa Bank collapse and the Irish taxpayer”

  1. ‘Power’, such as ECB dictates, The Deauville Junta, etc has superceded what used to be known as international law – and democracy in the case of a few EU states. So it is ‘messy’:

    Origins and Destinations? This might help …

    http://blogs.law.harvard.edu/corpgov/2012/06/19/the-eurozone-crisis-and-its-impact-on-the-international-financial-markets/

    Minor point:
    I suggested before that we give The IFSC Vatican Status [we could term it The 2013 Lock-Out] – so that at no stage may the humble serfs around here be landed with the Unknown Unknown Potential F*ckUps that the rogue elements of the Blue Ridge Clouds in the out_of_control financial system are capable of.

  2. …. & Dodgy Derivatives

    The European Union’s securities watchdog today published draft rules to meet a December global deadline for making the derivatives market safer and more transparent.

    The $640 trillion (€512 trillion) over-the-counter (OTC), or off-exchange, derivatives market lay at the heart of the 2007-09 financial crisis, contributing to the collapse of US bank Lehman Brothers and a taxpayer bailout of US insurer AIG.

    http://www.irishtimes.com/newspaper/breaking/2012/0625/breaking30.html

    @Bond
    Over to you …

  3. “There seems to be almost unanimous agreement within the Irish media that had the IFSC-based Depfa Bank not been bought by another German bank just before its collapse at the beginning of the financial crisis, the bill would have landed on the Irish taxpayer.”

    I do recall reading Dan’s article and wondering how urban myths came about. If it is true of course….. that was some ‘hospital pass’.

    Perhaps we are all looking at the story through the optics of a detached retina?

  4. @ Frank/DoD

    the word “boll0x” comes to mind.

    Did Dan never hear of Sachsen LB or IKB Bank? Their Irish subs/conduits blew up in 2008 but had to be bailed out by the parents, despite being regulated by the Irish authorities. Ultimately the EU seemed to take on a “parent country pays” rule for banking collapses, with Depfa still very much “German” in spite of the legal and accounting technicalities involved.

    There may have been some unpleasant moment had Depfa gone kaput before it got taken over by HRE, but i dont think anyone has ever suggested that Ireland would’ve had to back stop it – its balance sheet was around €250bn at the peak and its activities had almost no interaction with the Irish economy other than the direct employment and taxes it paid.

  5. Which raises the possibility that we would have been better off had we been stuck with the bill, because with the bill obviously unsustainable from the start, we would have had to go Iceland! right away.

  6. @Bond. Eoin Bond.
    re: the appropriate word.
    +1

    Presuming that DEPFA was incorporated as an Irish company, the only law in so far as I am aware is Irish Company Law, which would have applied when or if Depfa Irl became insolvent.
    ‘Resolution’ is now the buzz-word. Liquidation or receivership is too harsh sounding to the well attuned ears of the Masters of the Universe. Its a bit like a dentist hearing his own drill, except this time he is the target.

    It is disappointing that somebody like DOB, an otherwise intelligent and capable individual, could buy into a concept like he has just articulated.

    He would do well to reflect on his reasons for commenting as he has and to elaborate on his version of Irish and EU law on these issues, as distinct from ECB threats etc.

  7. Now that DanO has been sorted out … back to the real economy:

    Digital divide: Ireland falls to lowest position yet on global broadband rankings
    25.06.2012

    New figures from Ookla Net index show Ireland has fallen to 56th position in the world for download speeds, its worst showing yet, and a clear indication as any that as the nations of the world accelerate towards faster speeds Ireland is falling behind.

    According to the Index, Ireland is 56th in the world for download speeds and 24th out of 27 in the EU (51st/24th Q1 2012).

    Ireland is 80th in the world for upload speeds and 23rd out of 27 in the EU (74th/24th Q1 2012). Ireland is 25th in the world for quality and 12th of 22 in the EU (23rd/12th Q1 2012). Ireland is 43rd in the world in terms of cost per Mbps and 25th out of 27 in the EU (43rd/26th Q1 2012).

    http://www.siliconrepublic.com/comms/item/27942-digital-divide-ireland-fal

    The ‘smart economy’ for slow-Learners … time to cut the bullsh1t – this is one serious infrastructural deficit …

    Minister Pat: NOTE

  8. “Leaders of the world’s top 20 economies (G20) have agreed derivatives reforms must be in place by December.”

    That’s postive news. The G20 need to co-operate together better to regulate global finance and global corporations.
    The interests of finance and capital are concentrated, through organisations like the Institute for International Finance, and global investment funds controlling trillions like PIMCO. They have common interests and are very powerful when they work together. Their power has been shown in the crisis through the lack of writedowns on private creditors.

    The interests of ordinary people on the other hand are not so concentrated as they are spread out over many different political systems and cultures.
    So these political systems need to co-operate to stop the ordinary people being treated unfairly by un-regullated finance.

    Timothy Geither blamed the U.K. for the financial crisis for starting a ‘race to the bottom’ on financial regulation to lure business from New York and Germany.
    http://www.ft.com/intl/cms/s/0/255e97ac-9048-11e0-85a0-00144feab49a.html#axzz1ysPWCXiG
    He has a point. A climb back to the top regualtion should now be made. DOB is correct in saying that this needs to be done together. Also it should be done responsibly. The Uk sadi that all their businesses would move to Singapore if that was outside any G20 agreement. Thats just irresponsible and making excuses.

    On the FTT, Ireland is just following the UK. Noonon has in fact blamed the UK and Luxemborg. If the UK jumped in the fire would Ireland follow?

  9. Me now thinks a CB can go bust if the Treasury tells the CB take a long walk off a short plank.
    No letter of comfort unless a Treasury can print as only the treasuary can truely print.

  10. Erm, I note Mr. Buiter’s paper was written before the guarantee. I also note that he is talking about NCB LOLR functions and the cost to an NCB of a failure to repay LOLR. He is not talking about direct sovereign bailouts of banks (whether through payment, nationalisation or guarantee).

    The question of Depfa requires, I believe, a look at headquartering and ownership. Where was the owning headquarters of Depfa prior to its takeover by HRE? That would determine who would be responsible for bailing it out/letting it go bust.

  11. Saw this thread a few days ago and meant to dig up some quite thorough work did on it a year or so ago. Couldn’t remember where it was or what the conclusion was – but suspect it might have been theoretically supportive of the DoB position. Still can’t , and unless there is a pressing reason to delve into this again, can’t be bothered. Have I missed a reason this matters?

  12. @grumpy
    Well I for one would be very interested and dans credibility could do with a boost. I can’t see any argument morally theoretically or practically how it could fall on Irish tax payers to bail it out. It’s business interests in Ireland were minimal and exposure was to US property market…there was never going to be the “ATM’s will run out of cash if we don’t intervene argument” and in any case hypo had purchased depfa 12 months prior….I do recall reading some shady involvement by GS in the affair where unsurprisingly they still managed to make a few quid.

  13. @ grumpy,
    I’d be interested in seeing the thorough work that’s been done on this. Dan’s argument is that the IFSC endangers us, so I think the question is of importance.

  14. Frank, v barrtet

    First, I am exhausted at the mo which is why I haven’t tried to dig it out, and the language above is loose – what I meant by thorough work I would characterise more acurately as reading the rules on this and being really pedantic as I went. From what I vaguely recall it was about the tricky definitions of ‘residence’ or some similar terms and I think I read it as IFSC could give Ireland liabilities. I think I got to the documents after wading through a lot of Buiter stuff and looking for references.

  15. The comparison of Depfa with IKB and SachsenLB is uninformed to say the least. The latter two banks operated a number off-balance sheet conduits (or SPVs), legally distinct, but ultimately tied to their parents with headoffice in Germany (this is key). With the enslaught of the credit crunch, these banks could no longer finance their long-term assets (say CDOs locked up in Dublin-based conduits) with short-term paper (say CP issued by another Dublin or Delaware SPV). These German banks, holding worthless CDOs in their credit arbitrage networks hidden in the world of shadow banking, were locked in a maturity mismatch. Leveraged to the hilt, the German authorities had to step in…

    Now, Depfa is another matter entirely. Next to Deutsche Bank, this institution exemplifies the financialization of German finance. Depfa has been in the German Pfandbrief market (an asset covered bond, a unique type of German security) for ages. Today I have been told (by one of Ireland’s best-informed scholars of Irish history and finance) that the Irish government enacted legislation in 2002 to specifically accommodate Depfa, to such an extent that Depfa relocated its HEADOFFICE (not a subsidiary, not an SPV) to Dublin (see http://www.irishstatutebook.ie/2002/en/si/0470.html, also see Depfa annual accounts 2002). Amongst oter things, the quintessential German security (the Pfandbrief) was now accommodated under common instead of civil law. A concert between bankers, lawyers and lawmakers – financial innovation at its best.

    Depfa was for all purposes a German bank – their Dublin board solely existed of German bankers (good-old Dr. Tietmeyer was on the supervisory board). However, and crucially so, LEGALLY this was an Irish bank (again, see Depfa accounts). As such, in this case the German government was not obliged to step in – in fact, it could not – as has been the case with IKB and SachsenLB. SO YES, the legal guarantor of Depfa was the Irish state. Had the music stopped in 2006, Ireland would have been governed by the IMF long before. But then again, the music didn’t stop in 2006: the credit crunch hit global finance in July 2007.

    Luckily, Hypo Real Estate (HRE) (a German bank) got the marvellous idea to takeover Depfa, thereby switching the ultimate pain from Dublin to Berlin, allowing the German government to step in and bailout Depfa, now a subsidiary of HRE. May I remind you that HRE itself was a 2003 spin-off of HypoVereinsBank (now part of Italy’s UniCredit). HRE was a bad bank stuffed with loss-making property. It made a good few financial years since, riding a wave of cheap liquidity like the rest of global finance. Interestingly, HRE bought Depfa on July 23 2007, yes, EXACTLY the moment in time when the CDO ‘piece of shit’ hidden inside IKB and SachsenLB hit the van. 

    In sum, ALL four banks (IKB, SachsenLB, HRE, and Depfa) were German run. You think that the latter two banks had no idea what was happening with their colleagues? HRE was always intended as a bad bank. Depfa was too big to fail for Ireland, not for Germany. Many have argued that this takeover was ill guided. Many argued at the time the Irish were lucky (I wonder how many still believe so in 2012). To me, like so much else in finance, it simply looks like politics. And it isn’t pretty. 

    This story has many angles worthy of investigation. To be continued.

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