Irish lending expertise in looting taxpayers to Greece

According to an article in the Irish Times, the staff of the Irish central bank are advising their counter-parts at the Greek central bank on how to plot a resolution of the Greek banks and restore confidence in the Greek banking system.

At first blush, this seems reasonable.  After all, the Irish banking system has experienced a similar run on its banks as the Greek banking system.

So what can the Irish central bankers advise their Greek counter-parts on?

The Irish central bankers could advise their Greek counter-parts on their experience hiring firms like BlackRock, Barclays and Boston Consulting to run a stress test and reorganize the banks.

Specifically, they could share

• how 30 million euros was paid to these firms for a solution that your humble blogger stated before the firms started would neither restore confidence nor stop the run on the banks' deposits;  

• that the run on the Irish banking system has continued months after the results of the stress test and reorganization were announced; and 

• that the ECB recently committed to paying 4 million euros for a report due in November 2011 on how to restore confidence in the Irish banking system.

Most likely though, the Irish central banker will advise their Greek counter-parts to spend lots of taxpayer money on a similar stress test and reorganization.  

Like Wall Street, the advice will be better for the advisor than for the recipient.  

• For the advisor, it provides cover lest Irish taxpayers question the wisdom of the stress test and reorganization - the central banker's defense is 'it must be a good idea because someone else did it too'; kind of like lemmings jumping off a cliff.  

• For the recipient, it provides an opportunity to loot the Greek taxpayer (or the EU taxpayers given that Greece is having difficulty repaying its debt).  After all, it cannot be justified on the grounds that it will restore confidence or stop the run on the banks.

Alternatively, the Irish central bankers could advise their Greek counter-parts that they wished they had pursued the only proven solution for restoring confidence and ending bank runs.  This solution involves implementing the FDR Framework and providing disclosure to all market participants of the current asset and liability-level data for each bank.

SENIOR OFFICIALS from the Central Bank have played a walk-on part in the unfolding Greek tragedy, prompting their counterparts in Athens from the wings on how to plot a resolution for their banks. 

Performing a role close to that of an all-knowing Irish Oracle at Delphi, two officials travelled to Athens in July and again earlier this month to advise the Greeks on how they stress-tested the Irish banks in an attempt to draw a final line under the banking crisis. 

The troika gods of the European Commission, the European Central Bank and the International Monetary Fund have looked favourably on the Irish stress tests as a winning formula for assessing risks in banking sectors in other struggling euro zone states.

Despite all evidence to the contrary that the stress tests were not a winning formula.  So maybe having Greece engage in this activity is to provide cover to the European Commission, the European Central Bank and the International Monetary Fund too!

The cost of bailing out the Irish banks has not increased since the March 2011 tests, the fifth attempt in more than two years to put a final bill on the banking disaster. 

Apparently success is defined as the Irish government not having to put more equity into the banking system for 6 months.  A measure of success that Warren Buffett would say is very similar to firing an arrow and then drawing a bullseye around where it has landed.

This definition of success has a couple of flaws.  First, it is not clear that the Irish government has access to the financial resources to put additional capital into the banks.  This is a bit of a problem given that the Irish Times reports that house prices continue to fall.  Second, bank equity is an easily manipulated accounting construct.  Simply practicing extend and pretend results in bank equity being higher than it would be if losses were realized.

As a result of the purported success of the Irish tests, the Central Bank was asked to send a delegation to Athens earlier this summer to help the Greek authorities handle their own banking woes.

"We can confirm that following a request from the Bank of Greece a small team from the Central Bank of Ireland travelled twice to the Bank of Greece to share experiences gained," a Central Bank spokesman said...

The officials advised the Greeks on the process followed in the Irish tests and how the test results influenced the reconstruction of the Irish banking system around the two "pillars" of Bank of Ireland and Allied Irish Banks. 

Two Greek banks were among eight lenders that failed EU-wide stress tests of 90 banks in July. 

Bank of Ireland and AIB both passed the EU tests the previous year, but the results were undermined when the Government was forced to seek bailout loans from the EU and IMF four months later. 

The subsequent Irish stress tests of the banks in March 2011 were not carried out exclusively by Central Bank officials, however. As part of their scrutiny, they called in consultants, including US asset manager BlackRock Solutions, to assess losses on the loan books of the Irish banks. 

BlackRock has since been recruited by the Greek central bank to evaluate the country's banks, which would be among the losers in a default by Greece. 

The Central Bank spent €30 million on external consultants to verify the tests on Bank of Ireland, AIB, EBS building society and Irish Life and Permanent. The results of the tests raised the cost of bailing out the banks by €24 billion to €70 billion. About €64 billion is being injected by the State.

And still the run on the Irish banking system continues as the failure to disclose current asset and liability-level data means that nobody knows if the banks are solvent or not.