Premature evaluation: when local relationship banking attacks!

Following up on the last post, here’s a quick review of Simon Carswell’s Anglo Republic: The Bank that Broke Ireland.

Anglo Irish Bank was the biggest, noisiest, brashest, and most extreme representative of the financial crisis in Ireland, and Anglo Republic is a carefully reported history of the bank and how it got that way. One of the real standout points in it is that Anglo was the relationship bank par excellence.

Relationship banking is often seen as a good thing that we need more of, counterpoised to faceless trading-floor turbo-finance. But relationship banking was precisely what Anglo did. Anglo tended to keep clients for many years, to involve itself deeply in their businesses, and to go to extraordinary lengths to serve them. It would also take risks to win or retain them. Its unique selling point was that it would do anything to get your deal done, and it would do it quickly. They frequently closed property transactions up to a billion euros within the week. In exchange for this, its clients put up with interest rate spreads and fees that were much higher than its competitors’.

This raises a second point, which is that you know it’s a bubble when capital gains come in so fast that changing the interest rate is irrelevant.

The relationships it served so fanatically were, to the exclusion of almost all else, with property developers. Anglo bankers may have thought they were something like a local German or Italian bank serving the local speciality industry. From the outside, though, the bank was a ferociously geared-up bet on property in general, and Irish residential and UK commercial property in particular.

There was also another kind of relationship they carefully cultivated, specifically, corrupt ones. There is just an endless flow of people whose relatives turned up on the other side of the table, or in politics, or in the regulator or the central bank. Carswell tackles this with understated sarcasm and careful inquiry. He also deals with the political, class, and sectarian issues involved with delicacy and good prose. I liked the remark about the bank’s brand, in which he notes that although Anglo’s advertising sometimes implied it was an Anglo-Irish, and therefore aristocratic, company, “Anglo Irish in fact never used the hyphen”.

Its CEO, Sean Fitzpatrick, may have resisted selling the bank to Bank of Ireland because BoI was, in fact, an Anglo-Irish or at least Protestant company. However, the source for this is the same guy who suggested guaranteeing the whole liabilities of the banks, so take it as you will.

Carswell is also good on the financial guts, for example, on the key relationship with Sean Quinn, property developer and their whale client. Quinn was a huge borrower from the bank, under several different company names, a major depositor in the bank, and a shareholder in the bank. After his disastrous speculation in contracts for difference on the bank’s shares went wrong, Anglo was lending him money to meet margin calls, while at the same time worrying that he might no longer be good for the property loans, and also that if his broker had to sell him out, the stock overhang was so monumental that it might finish off the company.

Another detail that sticks out was that their private client operation largely existed to recycle some of the property capital gains into the bank’s funding, in essence juicing it with even more leverage, as most of its clients were themselves Irish property developers. If they weren’t the bank’s own executives, that is. The bank often structured property transactions so that some of its private clients could take some of the equity, somewhere between an investment banking and a brokered deposit model. This helped set up some of the transactions for tax purposes, but it mostly created an opportunity for Anglo executives to buy in. Inevitably, they tended to do so by borrowing from the bank.

Golf plays a special role in the book. Anglo was dedicated to the belief that nothing built relationships like golf, and it constantly took borrowers, depositors, competitors, regulators, analysts, journalists, and random members of Westlife* golfing. It took Irish-American clients and investors to Ireland to play golf, on courses owned by other clients, and then took its Irish clients to meet them while golfing. It gave away as much as €200,000 worth of golf balls a year. Carswell includes a table of spending on hospitality by type. Golf even surpasses drink in it, and there was plenty of that too – one banker recalls deciding to drink only bottled beer at Anglo events in order to stay relatively sober, and being told that “This is Anglo and you drink pints.” That said, at least Sean Fitz didn’t prepare for an appearance before parliament by following a vapour trail of meth and crack all the way around Grindr, like the CEO of the Co-Operative Bank, or if he did we don’t know.

Very often, the business discussed on the golf course was the creation of further golf courses. Not rarely, the clients who golfed their way to a giant loan to build a golf course got the loan because they also played golf with Bertie Ahern and could therefore help Anglo with other issues, for example, getting planning permission for golf courses. One wonders if the point of golf, anthropologically speaking, is to demonstrate that you have well-watered land to waste on totally unproductive activity.

Another interesting point is the role of good old Rabobank, famously the safest and most conservative financial institution in Europe and possibly the world, and all savey and nearly German to boot. Except when it spent ages and millions of money trying to buy not just Anglo but other gamey Irish property lenders as well, and in retrospect only avoided pulling an RBS by good fortune.

*Not actually random at all, but you’ll have to read the book.


After soziale Marktwirtschaft, the social market economy, and freie Marktwirtschaft, the free market economy, what about Weihnachtsmarktwirtschaft, the Christmas market economy?

So there’s one of those packaged German Christmas markets outside the Royal Festival Hall at the moment. I was down there last night having a bratwurst and I thought: That’s like Europe! This does remind me a bit of both Thomas “Airmiles” Friedman’s vast collection of highly informative cab drivers and also the vicar in my home village who one Christmas night preached that “Have you ever been at the airport, waiting for your luggage, watching all those strange bags come around, when suddenly, there’s yours? Well, that’s like Jesus“, but I do have an actual point here.

And after all, England Rugby League legends Sam and George Burgess were hitting the bratwurst about the same time and you know they’re right:

Obviously the beer was imported. So were the sausages. But even the bread rolls came out of a box from “Der Heimatbäcker” that promised 80 Stück of Turbobrötchen. All the cooking gear had German brand names on it. The only local contribution was labour, either British, Portuguese, or Polish. It reminded me of a post on my own blog about the introduction of Passivhaus building standards into the UK, and the problem that for a long time this is likely to be a drag on the economy because until the supply chain builds up, it’s basically importing houses.

However, this has much wider applicability. As I keep blogging, ever since 2009 or thereabouts, the core of the EU’s economic problem is trade. It’s not just me; the official line on Spain and Italy’s problems is that they’ve got to move their current accounts towards balance or indeed surplus. That is why they’re ordered to wreck as many generations as it takes to achieve internal devaluation.

The problem, though, or rather one of the many problems, is the Christmas market economy. Getting final products out that compete with the world’s top exporter depends on intermediate products out of the supply chain. And one thing we know is that a hell of a lot of small industrial companies have died the death in southern Europe over the last few years.

One of the worst things about deflations is that they kill the rich ecosystem, the so-called industrial commons, that supports the tall trees of the industrial canopy. This happened in the UK in the 1980s and 1990s, and it’s one of the reasons why trying to reduce the UK’s trade deficit has been so difficult. In the 1970s, the Treasury was astonished by how much of industry was in “Engineering: Not otherwise classified” and concluded that the statistics were useless. But I think an important lesson since then was that the losses to those everything-is-miscellaneous small manufacturers in the 80s permanently weakened the economy.

So, Spain, Italy, and UK “rebalancing”: même combat. Of course, the UK has options that aren’t available to the others here – like devaluation, reflation, and QE.

Update: Another example of the Weihnachtsmarktwirtschaft is Apple’s iGadget production in China. It used to be widely believed that only design lived in Cupertino and all the work was done in China, and this was either disgraceful or brilliant depending on partisanship. In fact, Apple owns and sometimes even invents the tools, both at the Foxconn final assembly line and in the German, Japanese, Korean, and British suppliers. A corroborating lesson is that the other behemoth of mobile to survive the shakeout is Samsung, which produces components on an enormous scale and is of course a key supplier to Apple. As a result, very little of the value content in an iPhone is actually Chinese.

The fact that cheap final assembly elsewhere in Europe with the high value intermediate manufacturing as well as the design work staying in Germany would suit German manufacturers as much as it does Apple should be too obvious to need saying. This is of course largely what the German auto industry does in Poland, Slovakia, and the Czech Republic.

Can demography explain Portugal’s growth slump before the crash?

The above still comes from a recent Financial Times video entitled “Portugal’s Brain Drain”, which can be found here, and which I encourage everyone to watch. The issue being raised revolves around the current acceleration of emigration from countries on the EU periphery, largely towards the EU core. Typically the emigrants are young educated people who can’t find work. There is nothing especially surprising in this, since the tendency has long existed for people to move from more depressed areas to economically more dynamic ones. The exodus from Detroit in the United States immediately comes to mind. Or Scottish people getting on the bus to make the fateful journey from Edinburgh or Glasgow to London. The Schengen accord simply extends this process which used to take place within nation states to single market zones, or currency unions. But does this extension have consequences for the participating states which were not anticipated at the outset, and are these consequences all benign?

In addition, this time round in an important sense something is different since these movements are occurring in the context of a long and difficult economic adjustment, indeed one could almost argue that the people leaving form part of that adjustment. What’s more it is hard to accept that this is the kind of adjustment that countries like Spain and Portugal really need. Renovation in these countries implies these people and their talent are injected into the local economy to dynamise it, and not shot out the side like water from a high pressure hose with holes in it. So the big question I want to ask here is whether the economic programs which are being implemented in these countries take sufficient account of the demographic impacts they are inducing, and of the fact that the population loss involved – which most likely will become permanent – is going to cast a long shadow over the history of the countries concerned. Continue reading

As Good As It Gets In Latvia?

For Maurice Pialat, champion of the marginal centre.

“This raises a final question, which, while not central to the issues of this paper, is nevertheless intriguing: How can a country with a low minimum wage, weak unions, limited unemployment insurance and employment protection, have such a high natural rate [of unemployment]?”

“To summarize, the actual unemployment rate is still probably higher than, but close to the natural rate of unemployment. Latvia may well want to take measures to reduce its natural rate, but the recovery from the slump is largely complete.”
Boom, Bust, Recovery Forensics of the Latvia Crisis, Olivier Blanchard, Mark Griffiths and Bertrand Gruss

With these words three IMF economists (hereafter BGG) effectively signed off on their study of “what just happened on Latvia” and, they hoped, drew to a close a debate which has been going on now for some 6 years. In fact, far from closing the debate, what they may have done is effectively extend it into new terrain, since these apparently harmlesss words – “the recovery from the slump is largely complete” – have far reaching implications, as does the methodology they use for reaching it. These implications reach well beyond Latvia, and even far beyond the Baltics and the CEE in general, despite the conclusion that everyone seems to be reaching that Latvia was just a “one off”. Possibly without intending to do so, they have drawn onto the clinical investigation table issues which have been mounting  up in the theoretical lumber rooms of neoclassical growth theory for some time now, issues which begin to assume a paramount practical importance in the context of our rapidly ageing societies. What, for example, do we understand by the term “convergence” these days? And if “steady state” growth can no longer be understood as implying a constant growth rate (trend growth in developed economies is now systematically falling) should we be considering the possibility that headline GDP growth will at some point turn negative, even if GDP per capita may continue to rise, due to the fact that populations are steadily starting to shrink. And if the answer to the former question is “yes”, then what are the implications of this for the financial system, for the system of saving and borrowing, and for the sustainability of legacy debt? Not little questions these, but ones which will need to find answers and responses in countries like Latvia over the next couple of decades. Continue reading

In Spain Simply Doing Nothing Is Not An Option!

The recent IMF proposals to help stimulate growth and job creation in Spain at least deserve serious consideration.

In a blog post which sought to defend the recent IMF proposal to for a social compact involving a 10% reduction in Spanish wages and salaries, the EU Economy and Finance Commissioner Olli Rehn cited a line from Bob Dylan – “Something is happening here, but you don’t know what it is”. Continue reading

Spain – The Recession May Be Ending But The Crisis Continues

What follows is an interview I did over the summer with the Madrid based publication The Local.

Let’s start with the basics: what are Spain’s current economic problems?

Spain’s economic problems are a knock-on effect of the end of Spain’s property boom. The collapse of the property market led to a drop in incomes, depressed demand for goods and — slightly — lower wages.
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There is a tide in the affairs of men

Above a suggested choice for the single take-away chart from the presentations at the Kansas City Fed’s economic policy symposium in Jackson Hole, Wyoming. It’s from Helene Rey’s paper (London Business School). It shows all types of capital inflows expressed a percentage of world GDP on a quarterly basis since 1990, plotted against the VIX, which is a measure of perceived volatility embedded in options markets (in green, higher level=lower risk).

The argument (which has been confirmed by deeper research of herself and others) is that there is a remarkably simple (conceptually) component in capital inflows worldwide which seems to correspond to a single driver across many markets, countries, asset types, and exchange rate regimes.

As she notes, the implication is that these capital flows might need to be regulated, including by various instruments that wouldn’t have been mentioned in polite economic society a few years ago.

The open question may be that if this capital flow beast is so virulent and global, are normal means of country policy and international coordination strong enough to do anything about it? We might actually need one of these global super-regulators that people seem to think we already have.

The United States economy recovered.

So I was arguing with Jamie Kenny about Obama’s economic record.

It was Friday night, so I had no inclination whatsoever to do economics. Anyway, I got around to it.


The top, blue line is the civilian unemployment rate in %, on the left scale. The next, red line is average weekly wages, on the right scale. The next, orange line is the average hourly wages for nonsupervisory, production employees, seasonally adjusted, multiplied by 40 to be comparable to the economy-wide, weekly series. Of course, this may be misleading if there is a big difference in average hours between them, but I wanted a measure that wouldn’t be skewed by Wall Street or Silicon Valley executive salaries. And the green line, on the left scale, is real-terms GDP growth per quarter.

Growth could certainly be higher and unemployment could be going down faster, but both are going clearly in the right direction, and at least in cash-terms, wages are up. This is, in a word, recovery. It’s far from obvious from these data that it constitutes “economic royalism”, even if the economy-wide wages measure is growing faster than nonsupervisory production.

The Czech Economy That Didn’t Bounce?

The Czech republic has been making the news recently. On the one hand the country has been on the receiving end of massive, devastating floods, while on the other the country’s government was brought to the brink of collapse (and beyond)  by the resignation  of Prime Minister Petr Necas following the arrest of one of his most trusted aides on corruption charges. After the deluge I suppose.

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Why is this bank not like other banks?

From the Bank for International Settlements Annual Report, the topic is the difficulty that central banks might face in exiting from the current stance of ultra-low interest rates and massive balance sheet expansion –

Central banks also face various political economy challenges as they consider
exiting. History has shown that monetary policy decisions are best when insulated
from short-term political expediency considerations; hence the importance of
operational autonomy. This applies with particular force in extreme conditions such
as those prevailing today. On balance, political economy pressures could make exit
harder and work towards delaying it [...] Second, central banks’ finances could easily come under strain, raising questions about their use of public money, reducing government revenues and possibly even undermining the institutions’ financial independence. The public’s tolerance for central bank losses may be quite low. (p73)

Thus, the so-called “central bank for central banks” believes that central banks are essentially just regular banks that have been given a specific mandate by the government. That may reflect a loose extrapolation from the history of central banking in the USA and UK, but it’s not correct. Karl Whelan explains here. It’s no wonder that central banking attracts so much conspiracy-theorizing when central banks themselves are so obtuse about what they do.