Coase versus Pigou and Eurozone Bank Resolution Policy

This post was written by Gregory Connor

Brian O’Kelly and I have a new policy paper on Eurozone bank resolution; it is in the Special Papers series produced by the Financial Markets Group at LSE.

R.H. Coase showed that public externality costs can be mitigated by completely assigning property rights (including the right to produce an externality) and then allowing everyone to exchange full-information efficient contracts. A.C. Pigou espoused a more traditional approach, in which the government uses its sovereign power to effect an efficient solution by taxing or regulating externalities.

This classic Coasean-Pigouvian distinction has relevance to bank resolution policy in the Eurozone. We show that the economic costs of bank distress can be represented as a public externality. We argue that in the case of the Eurozone (with its weak central government) the Coasean approach to mitigating this externality is superior to the Pigouvian one.

We argue that the Eurozone-wide regulator should be granted effective ownership rights that prevent private parties from writing contracts which might induce bank distress. This ownership right of the central regulator should be embodied in European law, and any private contract provisions which over-ride it should be treated as null and void. We explore the implications of this Coasean approach for bank resolution policy.  It has strong implications for bank debt claims in the event that a bank approaches financial distress.

46 Responses to “Coase versus Pigou and Eurozone Bank Resolution Policy”

  1. DOCM Says:

    An exceptionally coherent and timely paper which is comprehensible to an audience wider than that of economists versed in the technicalities of the subject matter.

    It is to be hoped that President Van Rompuy will find the time to read it (and the leaders convening next week or, at least, their advisers).

    http://www.euractiv.com/priorities/van-rompuy-tables-key-report-ahe-news-516495

    Merkel, by all accounts, is not best pleased with the Van Rompuy paper needing, it seems, the period until after the federal election for reflection on how to proceed.

  2. DOCM Says:

    From the Van Rompuy paper (cf embedded link in Euractiv report).

    “The need for a single resolution mechanism

    Establishing a single resolution mechanism is indispensable to complete an integrated financial framework:
    § It would ensure a timely and impartial decision-making process, focused on the European dimension. This would mitigate many of the current obstacles to resolution, such as national bias and cross-border cooperation frictions. This would reduce resolution costs, as early and prompt actions contribute to maintaining the economic value of banks that need to be resolved.
    § It would make resolution costs as low as possible and break the bank-sovereign nexus. A strong andindependent resolution authority, backed by an efficient resolution regime, would have the financial, legal and administrative capability as well as the necessary independence to carry out effective and leastcost resolution. By ensuring that the private sector bears the primary burden of bank resolution costs, the authority would increase market discipline, and minimise the residual costs for the taxpayers of bank failures.
    § The single resolution mechanism would complement the SSM by making certain that failing banks are restructured or closed down swiftly. The SSM would provide a timely and unbiased assessment of the need for resolution, while the single resolution authority would ensure actual timely and efficient resolution.”

    Your paper has a better grasp of the political and administrative possibilities or, rather, limitations, it seems to me, than the collective brains behind the Van Rompuy text.

  3. David O'Donnell Says:

    Still waiting for the Hermeneutic ‘insider account’ from Brian Kelly on internal AIB processes and what he might add to our understanding of its collapse.

    Best piece of Pigou that I recollect is that ‘the villians should pay’. +1

  4. DOCM Says:

    To be added to the mix; the views of Draghi. They differ in a number of important respects from those in the Van Rompuy paper with the authorship of which he is nominally associated. He is clear that the existing treaty Article 127.6 is more than an adequate basis for legislation, considers that all banks must be covered under the SSM and volunteers no views by the ECB on the requirement strongly expressed by Schaeuble on the need for a “Chinese wall” between monetary and supervisory functions of the ECB.

    http://www.ecb.int/press/pressconf/2012/html/is121206.en.html

  5. john gallaher Says:

    @David the paper has been available for some time,DOCM here is the link.
    http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/134069.pdf

  6. Joseph Ryan Says:

    A very interesting paper, even if I struggled with the meaning ‘externalities’ for a while.

    That the existence of a State’s right (over property or actions) to prevent economic catastrophe has to be argued for is somewhat surprising. What is the purpose of the State if it cannot freely prevent, in so far as it can, catastrophe befalling its citizens.

    The idea of contingent convertible debt is a very good one but how does one decide the trigger point. The ability to hide losses makes banks own figures utterly unreliable, whereas a market pricing trigger, as well as being haphazard, could also be manipulated. Ultimately a regulator, with full and continuing access to bank data, must take on the responsibility.

    The PCA idea, successful in the US, should be used in conjunction with the idea of contingent convertible debt. It is too effective a system to be ruled out because of political resistance, notwithstanding the Nevada example of the potential regional impact of the decisions.

  7. john gallaher Says:

    @Joseph,Friday night in NY,tis the season, slightly off topic but how does one ‘police’ this?
    The Irish banks and Govt. “panicked” and marked to market ‘losses’ z Germans on the other hand…most of this reporting behind pay walls but here ya go….big story here in NY all week.
    “Deutsche Bank says the allegations are “wholly unfounded” and that the bank’s valuations were “proper.” Just how Deutsche Bank allegedly hid the losses—and whether it matters—is quite confusing. (Blogger Felix Salmon tries to translate and concludes, “there’s a strong case to say ‘no harm, no foul.’”)”
    http://www.businessweek.com/articles/2012-12-06/the-deutsche-bank-whistleblower-case-may-be-just-the-beginning

  8. John Corcoran Says:

    “Fowler also collaborated fruitfully with Coase and another LSE colleague, (Sir) Ronald Edwards, Chairman of the Electricity Council, in the work of the Accounting Research Association on how the figures assembled for the balance sheets of companies could be used for economic research as a guide to the opportunity cost of resources used in production”

    There were three Ronnies at the LSE during Coase’s time–Ronnie Edwards,Ronnie Fowler and Ronnie Coase who subsequently won the Nobel prize in Economics.

  9. David O'Donnell Says:

    @John Gallagher

    Do you have a link to the Brian Kelly AIB paper?

  10. The Dork of Cork. Says:

    @Joe

    “What is the purpose of the State if it cannot freely prevent, in so far as it can, catastrophe befalling its citizens.”

    ehh Joe even under the nation state model the banks own & farm the fiat.

    However under the market state they take the piss.

    The political question thus orbits around the sustainable rate of extraction.

  11. john gallaher Says:

    @ David have not had a chance to even look,never mind read it.Is it being withheld ?
    any ‘euro’ bank supervision thingie MUST include whistle blower incentives large ones..
    @JC any ‘link’ to current,Labor AC Marie Whealan’s paper on UORR,pre election?

  12. Joseph Ryan Says:

    @John Gallagher
    re Deutsche Bank.

    It does not surprise me one bit. And it does not stop at Deutsche Bank. Many suspect that Germany’s refusal to agree to bank supervision/resolution is founded on information known to them but hidden from everybody else.

    The irony is that it was probably direct calls from big European Banks that ‘directed’ Trichet’s more- than-willing ECB to throttle Ireland in Oct 2010.

    Colm McCarthy has imho, rightly called for an ECJ case on the matter. We need all the facts and phonecalls on the table.

    Hope it’s a good night in the Big Apple!

  13. Joseph Ryan Says:

    @Dork
    Some day I may understand your insights.
    ” even under the nation state model the banks own & farm the fiat.”
    It looks like they owned enough of the nation to kill it.
    We may still have some learning to do, but we all know a lot more about banks today than most of the bankers did five years ago.
    But the banks are still,regrettably, running the show from my perspective.

  14. The Dork of Cork. Says:

    @Joe
    Its a interest bearing asset on their books (thats the fiscal debt thingy)

    Its all double entry stuff.

    There is none of this
    http://en.wikipedia.org/wiki/United_States_Note

    When a nation state devalues against another nation state the bank steals your wealth if you hold tokens
    However the nation state is much much better then the market state……

    The market state will not give you tokens to engage in any commerce.
    The market state will throw you off a monetary cliff as you run out of tokens.
    Commerce dies………..

    Listen to Riche Boucher
    The man is a rock of sense - I like his no bullshit manner

    http://www.youtube.com/watch?v=k3YkCWJIMXE

    I get the feeling he would like a politico to print…..and end this pointless shit.

    “we are not a pawnbroking business”

    Its all about the cash flow.

    Their assets are not really important be it Mortgages or fiscal debt.

    The real asset is the LEGAL RIGHT TO FARM THE FIAT

  15. Mickey Hickey Says:

    Interesting video clip in French with sub titles.
    Dec. 07th. title Financial Crisis
    jessescrossroadscafe.blogspot.ca

  16. John Corcoran Says:

    The Three Ronnies

    “William Baxter was to return regularly to LSE over the next few years and got to know the young colleagues that Arnold Plant was gathering around him. These included Ronald Edwards,and Ronald Coase and Ronald Fowler-as Baxter commented ‘the name Ronald seemed to guarantee excellence”

  17. paul quigley Says:

    Excellent and readable paper, with this very dubious assumption, however.

    ‘Therefore throughout our analysis we assume that the public authorities own the right to control public externality costs associated with bank distress’

    All economics is political economics, and all political structures are historically grounded. Powerful economic agencies will always contest the power of the state. The European nation state that we have known is a creation of organized property owners, and the struggle over state finance has always been a big part of the game.
    For those with a bit of time, Arrighi will be a great Christmas read.
    http://www.amazon.com/Long-Twentieth-Century-Giovanni-Arrighi/dp/1859840159

    The public utility functions of big banks are just one part of their purpose. They also serve as vehicles for the speculative accumulation of wealth and power. Ditto for the MNCs, which produce goods and services, in tandem with their market control monopolist/monopsonist function. The Dutch East India Company is not dead, it’s just morphed into another power. Read Philip Bobbit for example. Ref below.

    ‘The initial causality linking sovereign credit quality and domestic bank deposit flight can run in either direction. So for example in the case of Ireland, deposit flight began in late 2008 when corporate and inter-bank depositors realized the dire state of Irish banks; this was followed by a very expensive sovereign-funded bank bail-out effectively bankrupting the sovereign, which induced even more deposit flight, a credit crunch, and a deep macroeconomic slump, and eventually the effective receivership of all domestic Irish banks and the sovereign under IMF-EU-ECB auspices’

    ‘This interaction between bank bail-outs, sovereign creditworthiness, banking sector distress and lending, macroeconomic shocks, and cross-border deposit flight has made the Eurozone banking crisis more virulent than in the USA. The ongoing regional recession, destabilizing credit flows and joint sovereign-banking distress have been so severe that they have endangered the continued existence of the Euro currency. It is clear that sovereign-funded bank bail-outs are not an appropriate resolution mechanism for the Eurozone.’

    ‘The poor behaviour of some national financial regulators, e.g., the Irish financial regulator during the 2000 – 2007 period, shows how badly individual national regulators can perform in some circumstances’

    The poor behaviour was necessary from the banks perspective, because it cleared the road for speculation and systemic abuse of trust. We have powerful, developed, capital exporting states, and weaker, mal-developed, peripheral states. Our weak state has been brought down by a destabilising flow of capital from the centre, as Michael Pettis describes in the Volatility Machine.

    As Dork frequently notes, this has led, predictably, to a situation where an increasing proportion of our state’s revenue base is being captured in debt payments. As the crisis proceeds over decades, we enter, as citizens and stakeholders, into deeper debt peonage. David Graeber and Michael Hudson have published widely on the power issues involved. Dork’s clip from the PAC says it all. The helplessness of our politicians is manifest, but fair play to Stephen Donnelly for even trying.

    ‘In the USA, the inability of the regulatory authorities to quickly and successfully resolve large US dealer banks was a central component of the 2007-2008 credit-liquidity crisis. (At the time of the US crisis, most of the institutions under threat did not have banking licenses and so were not within the direct purview of the PCA regulatory code.)’

    The FDIC had to make quick decisions about the amount of resources to inject into these banks, impose changes in bank lending strategy, negotiate as to which of the banks should be promptly forced into acquisition by other banks (possibly headquartered outside the state), and which banks to close. These prompt decisions by the regulator might have long-term impact on the regional economy. State and regional political authorities in the US have almost no input into these important decisions’

    ‘The state owns the right to prevent a banking crisis and PCA is the state exercising this property right. PCA is justified by this Coasean perspective’

    The issue is which kind of state we are talking about. The US (and other) megabanks operate on the global stage, and the City of London has served as a regulatory paradise for leveraged speculation. Repeal of Glass Stegall opened the doors of hell again.

    PCA plays an important role in stabilizing the US domestic economy, with its historically dispersed network of local and regional banks. The Federal Government bails out both bank and state, because that preserves the functioning of the domestic and international system.

    354bn sounds like a lot but it’s a miniscule fraction of the global speculative asset pool, where bailout requires monetary debauching in some form or other. Wall St is not Main St, where the state owns the bank in a crisis. The view in Wall St (which is nowadays a virtual rather than a strictly geographic phenomenon) is that the bank owns the state in a crisis, and the pols must do as they are bid.

    We have an unprecedented mountain of debt and malinvestment so the decisions to be taken involve, as so many times before, the allocation of the resulting losses. The ECB is the focus of struggle between the strongest political authorities and the core banks, who are sitting on a pile of dud assets.

    The problem is being ‘solved’ by attacking the nation state, which, as Pierre Bourdieu has often pointed out, is the repository of accumulated historical rights. Weaker states, as well as weaker banks, are being squeezed mercilessly in the struggle for survival. For many of younger European citizens, including our own, the right to a decent job scarcely exists now.

    As Dork puts, it, we are witnessing capital export, extinction of domestic money supply and transfer of effective demand for physical energy inputs elsewhere. Notwithstanding Stephen Pinker’s cheering account of the decline of violence in society, it looks like we are in for some rough stuff, for which the historical precedents are well illustrated in the Shield of Achilles.

    Refs to follow

  18. paul quigley Says:

    http://www.amazon.com/The-Shield-Achilles-Course-History/dp/B0006BD89S

  19. paul quigley Says:

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

  20. paul quigley Says:

    http://www.amazon.com/dp/1455883115

    And h/t to DOD, I think it was,. for the Arrighi reference some months ago. Ni neart go cur le cheile

  21. The Dork of Cork. Says:

    @Paul
    Donnelly is a very good informed politican but politicos without printing power are as useful as tits on a bull.
    Boyd Barrett asked Riche boy

    “did we not give you the money already” ………or something along those lines….

    Riche Boy quite rightly said it was not money - the state needed a return on their investment……………..so the state needs to screw people also..

    There is another way…………..

    Some call it financial repression………

    The Anglo countries are engaging in the production of synthetic greenbacks sending interest on their books back to the Treasury.

    So government debt is really getting close to becoming base money in the US.
    The Irish CB can only return Seigniorage on cash and stuff.

    Government debt needs to become base money.

    This in conjunction with capital control like taxes.
    I would have put all the tax burden on private car VRT ALL OF IT

    The money otherwise spent on interest can be spent in the national economy on rational rail capital projects.

    Ireland is merely bailing out the core so that when the flow is increased they will have the mechanisms to capture it

    line 2 of Dijons tram system was opened today……….

    http://bourgogne.france3.fr/2012/12/07/dijon-j-1-avant-l-inauguration-de-la-ligne-2-du-tram-160445.html

    The periphery is merely buying time for the core.

    In the end we will have nothing NOTHING.

  22. The Dork of Cork. Says:

    @Mickey

    “we have a GRIP on inflation”

    The Euro boot camp vs the American debt star………….

    But are those euro grunts merely $ Stormtroopers

    The Anglos really need the Eurozone not to consume……..to they can consume.

    UK vs Euro trade data is screaming a zero sum game……….

    http://www.zerohedge.com/contributed/2012-12-06/economic-imperialism-highest-stage-capitalism-or-simply-modus-operandi-coloni

  23. The Dork of Cork. Says:

    Sorry
    “so they can consume”

    There is monetary chaos because there is no final settlement.

    Jesse is correct on that score…….

    But what can one little former nation do except take back control over its own hinterland and not send funds out and surprise surprise not get any back……

  24. DOCM Says:

    @ Joseph Ryan

    I also struggled a bit with “externalities” but I doubt if the authors could have used a different description as it is intended, as far as I can see, as a description of a general phenomenon that applies in varied circumstances. Neither do I think that the approach suggested for banking resolution will find early acceptance but it should help cut through the fog e.g. by demonstrating that the link between sovereigns and their banks simply cannot be broken. They are joined at the hip unless the system of international finance is stood on its head (and all those nasty bankers and investors can no longer force governments to borrow money to fund levels of consumption out of kilter with productive capacity). “Getting rid of negative feedback loops between sovereigns and their banks”, on the other hand, which is the purpose of the exercise, fits the bill perfectly.

    Derek Scally has an excellent piece on Merkel today. Make haste slowly is her motto. He also brings put the point that the CDU and the SPD make natural partners because of the skewed nature of the German economy and its over-reliance on exports. None of this is, of course, new but it does have implications for the future timetable of events.

    The following extract from the non-technical summary of the ECB paper on imbalances (see other thread) provides an interesting pen-picture of the situation.

    “This paper has focused on the role of competitiveness. However, the existing literature suggests that external imbalances also resulted from other factors. Notably, the elimination of exchange rate risk, diverging inflation rates and a common monetary policy resulted in low real interest rates in some euro area countries, which led to increased demand pressures (e.g. purchases of real estate) which were fuelled by capital inflows from abroad and resulted in
    current account deficits. More recently, a higher cost of external financing has led to a reduction in demand and an improvement in current account deficits.

    The focus of this paper is primarily on a transitory medium-run (five-year) horizon. Indeed, while the measures analysed can potentially help to correct existing external imbalances, they may not remove them permanently. Further research is therefore needed on identifying possible permanent changes to euro area economies. However, it is likely to take time for any structural changes to lead to improvements in external balances. To conclude, there is heterogeneity in both price/cost and non-price competitiveness in the euro area and there is no one factor, but rather a range of potential factors that explain the diverging external imbalances prior to 2008. Using four different macro models, improvements in both price and non-price competitiveness were shown under certain conditions to improve external imbalances. The analysis suggests differences across countries in potential areas for adjustment
    and also heterogeneity in potential gains from improvements in competitiveness.”

    For “heterogeneity” read failure to truly implement fully the internal market.

    P.S. Steinbrueck’s campaign is imploding before it has even started as it is now known that he earned over one and a half million euro from speaking engagements and just recently has had to abandon an unwise last such engagement with another bank with questions to answer.

  25. DOCM Says:

    @ Joseph Ryan

    Herwith link to Derek Scally “Merkiavelli” article.

    http://www.irishtimes.com/newspaper/opinion/2012/1208/1224327649800.html

    If the the German economy begins to tank, one can be certain that the time-honoured remedy of short-term working - funded from well-stocked federal coffers or borrowing at zero cost until the eventual recovery begins - will be trotted out.

  26. The Dork of Cork. Says:

    Calling Occupants of Interplanetary Craft…………

    http://www.youtube.com/watch?v=ka2VhwD5LL4

    Dijon today…………
    Le Havre on Wednesday - in time for the Christmas shopping……

    http://www.youtube.com/watch?v=WRGEIMf4hO8

    Paris tramway line 3 extension next Saturday…….

    We are not exporting people so much this time (as they have very little places to go) , but our claims on capital.

  27. paul quigley Says:

    @ DOCM

    ‘….the link between sovereigns and their banks simply cannot be broken. They are joined at the hip unless the system of international finance is stood on its head (and all those nasty bankers and investors can no longer force governments to borrow money to fund levels of consumption out of kilter with productive capacity). ‘

    Oh dear. So the Florentine and Genose bankers never lent money to princes to buy arms, pay soldiers and seize the property and production of other states. And there is no profit in consumption. U cn du btr.

  28. DOCM Says:

    @ paul quigley

    It was the princes that wanted to go to war. The bankers simply facilitated them.

    By the way, among the nasty investors, I find the activities of pension fund managers particularly objectionable.

  29. DOCM Says:

    @ All

    This paper, published by the ECB, by Prof. Adalbert Winkler and a collaborator, is of interest.

    http://www.ecb.int/pub/pdf/scpwps/ecbwp1478.pdf

  30. grumpy Says:

    @docm

    What is your particular gripe against pension fund managers?

  31. DOCM Says:

    @ grumpy

    None at all! I was just trying to make the point that it is not justifiable to make a blanket condemnation of all participants in the world of international finance as some are inclined to do.

    cf. Professor Winkler (page 8).

    “Dual liquidity crises are confidence crises which involve the government and the banking sector. Given the quantitative importance of government debt in mature market economies and their financial systems respectively (Bini Smaghi 2010) – in the euro area government debt represents more than
    50% of total outstanding debt securities (ECB 2010, 97-98) – they are particularly dramatic as they involve a larger part of the refinancing needs of the economy than “only” a banking/private sector funding crisis. There are important qualitative aspects as well as government debt usually plays an
    important role as the most secure debt in an economy. Sovereign default is the ultimate disaster for the functioning of financial markets in any country, as it undermines confidence in the solvency of almost any other debtor.”

    Dan O’Brien spelt out the consequences of shilly-shallying with regard to the measures need in his article on the “age of austerity” last week.

    Colm McCarthy returns to this theme this morning.

    http://www.independent.ie/opinion/analysis/budget-overshoot-is-on-cards-as-is-a-dreaded-second-bailout-3319727.html

    It was possible for him to give an example of what breaking one of the elements of the self-imposed troika of conditions would mean; taxation on income. It would be desirable to accompany it with broad examples for the other two i.e. bringing public service pay and pensions and social welfare levels generally back to an affordable level (whether it is 2005 or some other year).

    “It will be alright on the night” is, however, an ingrained aspect of Irish thinking.

  32. tullmcadoo Says:

    http://budget.gov.ie/Budgets/2013/Documents/Annex%20F%20-%20Progressivity.pdf

    Hat tip to Backroom in the SBP today. Interesting paper on the distribution of the fiscal adjustment across the income spectrum. Not much comfort for the Poverty Industry here.

    A budget as framed by Prof McCarthy would have the merit of being brief. Might I suggest he consider credits and bands rather than rates.
    In addition in the interests of balance any tax increases should also be accompanied by cuts in PS pay and core SW rates of the order of 1-2%.

  33. John Corcoran Says:

    @John Gallaher

    It was the Fine Gael Landlords Association who made the decision, with the aid of comrade Gilmore,the landlords friend. The state colluded with the commercial property cartel and destroyed our economy. The cartel could not have existed without the state’s collusion.

    Many of the state’s landlords are insiders and politicans cronies and donors. Some cabinet members families are large state UORR landlords.
    It had nothing to do with Nama. The cartel spun that story and even named a DoF official as the patsy. It was all orchestrated by the political liars and their financial backers.

    Labour are very concerned about jobs—that decision will destroy tens of thousands of sustainable Irish jobs and businesses

  34. John Gallaher Says:

    Interesting paper,enjoyed the comparison to the US.Some disagreement on the PCA analysis,but that depends on ones views on where “it’s” all going.
    The Van Rompuy paper when read in the context of the LSE paper,address some of the current arguments that a PCA system is not suited.
    “I said you’d be the quiet assassin of nation-state democracy,” Mr. Farage has declared, as his target, Mr. Van Rompuy, squirmed in his seat just opposite, “and sure enough, in your dull and technocratic way, you’ve gone about your course.”

    http://www.nytimes.com/2012/12/08/world/europe/nigel-farages-anti-eu-message-finds-fans.html?pagewanted=1&_r=0

    @JC tks.looking for the current AG’s paper on constitutional implications of abolishing UORR,given her performance recently it may be time.

  35. Bklyn_rntr Says:

    So a long report about externalities and how the state should seek to prevent negative ones (Bank failures and credit crunches) in a private sector FIAT banking system while maintaining the positive ones (credit creation). We can perform this miracle and still insist that

    a) banks can be established as Limited liability entities with publicly traded equity and this won’t encourage moral hazard
    b) Governments, by assuming responsibility for avoiding externalities can control these banks and separate sovereign from public entities
    c) The stock of $600tn in derivatives already sitting on balance sheets somewhere will not suddenly implode into a pile of steaming losses once a more “responsible” regime is introduced.

    I like my dog, I even like feeding it. I hate having to pick up after it though so I have decided to have the dog regulated by the city!

  36. John Gallaher Says:

    @JC any dead cat bounce yet in retail sales?

    Cheat sheets,on Van Rompuy paper via WSJ…a bit ominous on legacy issues.
    “According to Mr. Van Rompuy’s report, such a resolution authority would ensure that a bank’s shareholders and “some creditors” take the first hit during any rescue or closure, protecting taxpayers from footing too much of the bill. Until sufficient resources have been built up through bank levies, the resolution authority could draw a credit line from the bailout fund, European Stability Mechanism.”
    http://online.wsj.com/article/SB10001424127887324640104578163301959437628.html

  37. Bklyn_rntr Says:

    @ John Gallagher
    “owners” get hit but not the managers/ceo’s/traders etc. this, imho, the real toxic element of the system and it won’t be addressed.

  38. John Gallaher Says:

    @Bklyn_rntr,oh that’s the easy bit,skin in the game and claw backs,regulatory failure or incompetence how ya fix that ?

  39. John Gallaher Says:

    @Bklyn_rntr Dick Fuld joined a very elite club when he “lost” a billion after Lehman,one of the cowboys that got away was perma tan Mozilo at Countywide,he rode off into the sunlight after selling significant amount of stock.There was a regulatory failure or incompetence with Countrywide.
    The above paper does have decent section regulators and supervision,again I don’t fully agree,the comparison to Nevada is spacious.
    @The Dork boy those links are great,went on a few train rides last night,your prose may be a tad “croisare” for some but the links….

  40. John Corcoran Says:

    @John Gallagher
    In the general election of 2011 both Fine Gael and Labour included the reform of existing UORRs leases in it’s election manifestos. In it’s program for government the new government pledged “We will pass legislation to ban upward-only rent reviews in existing commercial leases”. This reform was designed to stop the unnecessary destruction of thousands of sustainable Irish l businesses and jobs. The Irish people had spoken, democracy had triumphed.

    The cartel responded immediately and began to mobilise the oligarchs. Ireland First and Property Industry Ireland(PII),aka the Fine Gael Landlords Association,were the cartel lobbyists,among others,to ensure this reform would never be implemented. PII was established in June 2011 and many of it’s directors were Fine Gael grandees and large party donors including a former Fine Gael Taoiseach’s son Mark Fitzgerald MD of Sherry Fitzgerald auctioneers, a cheerleader of the property bubble,and the Cork based developer Michael O’Flynn. Kieran McGowan Chairman PII and David Went Chairman of the Irish Times,who together had presided over the bankrupting of Irish Life and Permanent Plc,agreed that the Irish Times would arrange the propaganda. The income from property advertising is a very significent part of it’s business model. The property editor Jack Fagan organised Bill Nowlan(W.K.Nowlan and Associates),Ann Hargaden(Lisney),Duncan Lyster(Lisney),Pat McArdle(economist) and CBRE, half page opinion pieces every Wednesday. These were the cartel’s mouthpieces. Nowlan referred to the over-rented tenants as chancers and made the Zimbabwe,Banana Republic,Armageddon comparisions.

    In July,Deputy Ciaran Lynch(Labour) began leaking proposed legislation to the Sunday Times,outlining the complexities of qualifying tenants,qualifying landlords,sunset clauses,landlords compensation,tenants compensation,receivership light etc. The u-turn was underway.
    The government and the cartel agreed on the spin,it was to blame Nama and the Department of Finance. The cartel was spinning the name of a specific DoF official who was to be the patsy. Minister Noonan mentioned landlords compensation to get Minister Shatter off the hook. Gerard Hogan SC ,the leading constitutional lawyer in the state,had dealt with this point in his legal opinion,landlords were entitled to market rents,but not to compensation. In May 2011 Minister Shatter had stated to the Irish and international media there was an emergency job crisis and under article 43.2.2 of the constitution,in the “exigencies of the common good”, banning UORRs in existing commercial leases was vital. Furthermore Minister Shatter stated it wouldn’t effect Nama’s valuations. He had a copy of the esteemed senior counsel Gerard Hogan’s opinion and Colm McCarthy’s report to support this position.
    Democracy was overturned,the cartel had triumphed–market rents were not available to legacy UORRs tenants.

  41. John Gallaher Says:

    @JC thank you for that,I knew/heard there was a “paper” prepared by the current AG stating that there were no constitutional issues with abolishing it.
    Unfortunately,it got no traction with the “media” or Joe Duffy,the direct and indirect costs to the state is simply astounding.
    Labour has to throw someone under the bus quickly,again apparently/allegedly the current AG after being comfortably ensconced in her new office changed direction.
    Don’t want high jack an excellent paper,but the issue is worth reexamining given the market rates on Grafton and elsewhere enjoyed by new entrants,specifically US multi nationals,who are foaming at the mouth to enjoy an unfair advantage over indigenous competitors.

  42. The Dork of Cork. Says:

    @John
    Sure - I guess they are a acquired taste……………

    Cars and burbs are the 20th century waste production from the free banking system which needs a asset however unproductive to inflate - people have lived so long under its shadow they cannot imagine anything other then more cars and houses.
    But when the present rate of extraction cannot continue…….the system must flow elsewhere or implode.
    Its perhaps ironic but if we are to survive we may need the remaining bits & pieces (railway cuttings) of a 19th century bubble to channel the flow.

    @DOCM
    Some bedtime reading

    http://books.google.ie/books/about/The_Medieval_Super_Companies.html?id=huhF8SqnCqwC&redir_esc=y

    http://books.google.ie/books?id=ULJIAAAAYAAJ

    As can be seen in the exchange between Riche Boy and Boyd B. where Boyd Barrett stated “did we not give you the money already” or something along those lines.
    Riche Boy stated it was not money and he was correct.

    The state must destroy its own real economy so as to get symbolic money tokens back………..now thats ironic don’t you think ?

    The country need national credit - its pretty clear.

  43. Bklyn_rntr Says:

    JG
    I’ll give you Fuld, but what about the traders at lehman who wrote the derivatives? and even Fuld was given so many opportunities to walk away with his stash that it was his stubbornness more than any active policy by Timmy etc which cost him his bn.

    also, what about AIG, Goldman, Citi, Merrill’s ………. Salamon, LTCM. The sad fact is, since the early 1980’s every investment bank that failed had moved from an unlimited liabity partnership to either a PLC or an LLC in the preceding decade. Talk about evidence.

    What you call regulatory failure is actually a feature of the system. Apparently we insist that a staff paid 100k per year will police and restrain one paid 100m. They will do that even though their bosses are likely to be ex employees, and still loyal pensioners of the companies they regulate.

    Skin in the game? look at how salaries rose when bosuses were impounded? the sad reality is that those who blame regs for poor earnings since the crisis fail to relalise that this is not a regulatory prob, it’s that the carcass has already been picked dry. there are few, if any, solvent suckers left. we see that in trading volumes.

  44. John Gallaher Says:

    @Bklyn-rntr JM at LTCM lost his ass too as did most of the ahem world renowed ‘economists’!
    Not wanting to stray too far off the above paper,the authors do point out the difficulties for the FDIC,they did not have PCA rights over any of the above.
    Big fan of ‘whistleblower’ incentives,linked a great piece by the FT above regarding DB.
    looks like someone let a ‘rabbitte’ out,not worthy of comment,enjoyed the exchange,NFL and few pints beckoning !

  45. John Gallaher Says:

    This appears to be the latest on the DB situation,with allegations that BaFin may have been aware.
    Setting up a showdown with the SEC,not sure how any of the above suggestions in the paper would or can address something like this.
    http://www.ft.com/cms/s/0/7f9dc3a0-3fc9-11e2-9f71-00144feabdc0.html

  46. chris Says:

    Interesting paper and suggestions. The contingent convertibility would raise the cost of raising debt capital for EU financial institutions. Investors would pay more attention to the health of the bank. The challenge is to get the Eu system, American system, Japanese system to work as closely together as possible to try and make a more or less level playing feild. So if it could be done on a more global basis it would work better. Ideas for making an effective resolution scheme lowering moral hazard show be examined in detail by policy makers.

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