The other night, I watched American Gangster, the marvellous film made about the life of Frank Lucas.
Lucas built a huge heroin dealing network, buying the heroin in Vietnam in bulk and then releasing it on to the streets of New York.
Apparently what distinguished his heroin from the competitors’ heroin was the pureness of the drug.
Unlike his competitors, Lucas had such a good source that he could afford not to cut the drug up so much and therefore the quality of the heroin marked his product out. In an effort to brand his heroin to distinguish it from his competitors, Lucas marked all his heroin bags with the name ‘‘Blue Magic’’.
The Blue Magic mark attested to the premium quality of the drug.
However, to get the premium stamp, Lucas had to employ chemists who would check the quality. It wasn’t good enough to employ addicts to verify, he had to get it properly assessed.
In the real drug world, the drug stamper is a crucial part of the drugs business.
For example, when cocaine comes into Spain from Latin America, Irish dealers, who are buying the drugs from bigger Latin American dealers, will get a ‘‘chemist’’ to verify that the drug is of a certain purity.
Once this quality has been established, the Irish drug dealers will set about moving the drugs from a warehouse in Spain to Ireland.
With the image of drug dealers in your heads, let’s talk about the banking businesses and the various characters who play their role in the money chain.
After all, the credit business, like the drug business, is all about distribution.
The money – like the drugs from Latin America – comes in at the top when the local bank, say AIB, borrows in the money market. In a credit boom once it has the money secured at the top, a bank like AIB goes about pushing the credit through the system so that it can get to the credit junkies at the bottom who will use the credit to feed their consumption habit.
But, like the global drug dealer, the international banking system needs its stamper who attests to the quality of the money or the financial product that is being peddled.
This is where the so-called ‘‘objective’’ ratings agencies come in.
And this is why I get annoyed when I hear some suit from Fitch, Moody’s or Standard & Poor’s prattle on about our credit rating.
Do these people have any credibility?
Like the whole economics and finance industry, the acid test of credibility should be how they answer the simple question: ‘‘Where were you in the boom?”
In Britain in the 1950s the question about personal character was always ‘‘Daddy, where were you in the war?” Now it should be where were you in the boom, and if you were on the wrong side I can’t take you seriously.
So where were the credit rating agencies in the boom? Were they on the right or the wrong side?
Let’s stick with the drugs metaphor to explain where the rating agencies were and what they were doing.
Both investment bankers and drugs brokers need to know the quality of the product they are paying for.
The drugs broker has a chemist. The chemist rates the purity of the consignment, gives it a triple A stamp and takes his fee.
The investment banker’s equivalent of the drugs broker’s chemist is the rating agencies.
By rating companies, banks and countries, the rating agencies should give investors peace of mind – promising them that what they buy is of good quality, unlikely to default and so won’t cause them any sleepless nights.
If the rating system fails or is compromised in any way, the foundation of every transaction collapses.
Consider the drugs world.
What would happen if the chemists were actually paid by the supplier to rate bad stuff as good stuff?
What might the drugs syndicate in Dublin do to a stamper who lied about the quality of the gear because he was in the pay of the supplier?
In the boom, this was not a concern in the banking world. Perhaps nobody ever watched a mafia movie like American Gangster. In the US sub-prime mortgage disaster, the rating agencies were paid by the banks to rate the junk they were selling as triple A.
In reality, some of the assets in this AAA toxic cocktail were worthless. Subprime debt, loans to people who had neither means nor intention of repaying money, were packaged with reliable securities, then given gilt-edged ratings by agencies in the pay of the banks. In the Irish case, our banks – just when they were blowing their balance sheets – were rated AAA by the same rating agencies who are now telling us they can rate us.
Credit was used to buy over-priced houses when there was little connection between the price of the house and its value.
But for this transaction to take place, we too needed a local stamper or verifier.
We needed someone to validate the price paid: ‘‘This is correct.
This two bedroomed terraced house in Monkstown is indeed worth €1million.
Your money is safe here.” This is where the estate agents came in.
They were responsible for valuing houses.
Bizarrely, these valuations were given credence even though, like the rating agencies, an estate agent’s fee was directly related to the sale price.
So house price inflation was in the interests of the estate agents: higher prices meant higher fees.
The banks and the estate agents were hand in glove, working to hoodwink the punters.
Now the same estate agents are telling us that the property market has hit the bottom.
Meanwhile, they have Nama to pay them to value stuff they overvalued in the boom.
And what about the international ‘‘stampers’’, the rating agencies? These lads are the estate agents of the financial world.
They are now on Irish radio telling us how to run our country and what we should and should not do.
They are simply chasing the market. They are always last to know.
Now they are downgrading Irish risk when they should have been downgrading it before the end of the boom, not now when the dogs in the street know what is happening.
Most egregiously, they are given credence.
Next time a Fitch spokesperson downgrades Ireland, let’s just ask him where he was in the boom and then show him the door.
There is one thing I can guarantee: when our fortunes turn, those lads will be the last to cop on.
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David, where would company auditors fit in with your narcotics analogy? Would you consider doing an article with a financial accountant to examine the standards used by Irish (and indeed many international) auditors to assure bank shareholders that the accounts gave a “true and fair view” of the condition and performance of a bank? Would you in particular examine why banks here have uniformly declined to adopt the discretionary element of International Financial Reporting Standard 9 (IFRS 9) which will make more realistic valuations of loans mandatory from 2013, but is discretionary until then. Bank of Ireland should be a… Read more »
It’s hard to know where Ireland is going and will end up at this stage. I think people don’t know who to believe anymore. I know that when the budget gets handed down people will go crazy. To use your imagery to describe it, I have a vision in my mind of a scene from Rocky 3. It’s the one that Mr. T known as Clubber Lang appears. It’s the scene where he is making his way to the ring with the entourage and press around smothering him. He is asked by one reporter, “Klubber, what’s your prediction for the… Read more »
Ireland, the intellectual condition, the manufacturing of consent, the euphoria, the debt, the lifestyle, the stupidity and the sophistication. The denial, the anger, the empty oversized infrastructure, the chase for out-sized significance in Freudian terms. The advertising, and the lemming runs resulting. And the pride. Press the pride button and watch us turn from rational beings into total gobshites. The official leadership, a collection of politicians by family trade. Many of whom should be classified as having addiction problems. Clarity ? You can’t have clarity if your mind is a mess, if you inherited your seat and if you are… Read more »
Interesting when the drug and banking meets….
Drug money saved banks in global crisis, claims UN advisor.
Drugs and crime chief says $352bn in criminal proceeds was effectively laundered by financial institutions
http://www.guardian.co.uk/global/2009/dec/13/drug-money-banks-saved-un-cfief-claims
As for the layers of ‘property professionals’, well we know what they were up to, criminal and immoral.
Budget Day, December 7th, is also the anniversary of Pearl Harbour, both days will live in infamy.
Apparently, some people think that gambling is something that we don’t do enough of in this country. http://www.sbpost.ie/breakingnews/business/eyqlqlcwaucw/
I am begining to think the whole economy is being turned into a casino, with billions heaped on the Irish management concept to lead us out of the mess that it led us into.
If the Irish consumer is a credit addict, then are we to presume that the current government borrowing requirement of €20 Billion per year, plus all the money pumped into useless banks like Anglo and INBS, is the financial equivalent of drug replacement therapy ?
Or maybe the government is afraid to tell the addict the nature of the addiction problem ?
I actually believe capatilism is best seen through the lense of this metaphor; it’s just that we’re all junkies even if we don’t know. We are all culpable and deserve what we get. As Keynes is said to have said “Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.”
The fault lies not with the banks, rating agencies, estate agents or any other easy scapegoats, but our willing acquiescence with a system that produces these entities as a necessary evil.
Might be wrong though.
David.
Another *reality defining* article.
A Mind-blowing reality.
The *free enterprise* system is overrun by Arthur Daleys.
They are everywhere. Behind every bank desk, real estate agency desk, they are in the legal profession, governing, etc etc.
Middle men moving paper.
Men in tall hats.
Cultural meltdown.
Confidence, perception, if people arn’t confident to spend, are told ‘bad times ahead’, they’ll hoard and save like crazy, thus choking the lifeblood of an economy. That’s why speed is of the essence. From 2008 until 30 Sept 2010 we’ve had drip, drip spiced with ‘government confidence building’ by Lenny. Our fiscal situation far worse than we were being told. So the naysayers have been proved right. NAMA like a Hungarian dam holding back toxic commercial/residential property is creaking at the seams. Now we have a ‘consensus building’ four year budget on the cards, its not going to work! We… Read more »
I got an idea, let’s generate income and legalise the illegal drugs.
Coffee shops Dutch style, loads of tourists and loads of extra resources for the criminal justice system as it doesn’t need to spend millions prosecuting/imprisoning users.
Make everyone responsible for their actions in charging smokers/drinkers/drug users a higher medical insurance premium.
Enforce dui to the max.
It is interesting that capitalism and “the markets” are the scapegoat for all our woes. Irresponsible government over the last 60 years has been at least as culpable for where we now find ourselves. Alan Greenspan artificially kept dollar interest rates too low in response to that politically motivated creation of the EU-SSR, the euro. Bill Clinton repealed the Glass-Steagel Act and his Assistant Housing Secretary, Roberta Achtenberg forced the US bank to provide sub-prime loans to those with no incomes. All of the commentary is about greedy bankers but why did the Government not just guarantee bank deposits and… Read more »
Blue Magic : When a flame burns it is normally ‘yellow’ until it is fed with an oxy substance to enhance the heat inside and then it becomes ‘blue’. Thus Blue is the colour of passion and purity.
All of our woes come from the property boom both commercial and residential and prices are still falling ( 11% this year so far ) that means more losses for the banks as borrowings turn sour. Developers have used limited liability vechicles to absolve themselves from any personal loss however many private mortgage holders have been left with the total loss. borrowing to invest is madness, would you borrow money to gamble on the stock exchange?…no you would not yet people borrowed money to gamble on property. Prices are still grossly overvalued , in 5 years time a 3 bed… Read more »
Stooge politicians in league with toxic developers, toxic bankers, a weakened DoF farmed out to Merrill Lynch/Goldman Sachs ‘where were you during the boom’ advisors and other ‘financial experts’, were top feeders.
The bottom feeders were the gombeen councillors:
Paul Melia of the Indo hits it on the head:
http://bit.ly/dhmEni
Can’t we just hand the keys to the empty houses in the ghost estate over to the bondholders? Let them have the over-priced bricks and mortar and the fallow fields.
Or to say it simply . Who rates the ratings agencies ?
Rating agencies, ‘independent’ commentators, like physcians of old, bleeding already sick patients as part of the necessary ‘medicine’. Think it is apparent democracy is dead and we are slaves to the hidden hand of the market…..where government decisons are influenced by the vagaries of the various and unaccountable financial indices with unelected talking heads appearing with greater frequency in our media (timing is everything). Quite a world that has been created but then just ask developing countries when fuel and food prices fluctuate with deadly consequences. http://www.youtube.com/watch?v=dLkxg1k07fE The cheer leaders of this system abound and hold positions of power and… Read more »
Its a weird article to be honest . David has spent months writing articles about how bust we are and what an exoensive folly NAMA is and the madness of pumping billions in Anglo . And now he gets annoyed when a ratings agency downgrades Ireland ? I don’t get it .
Much more interesting is the currency wars between the US and China . Here is a guy who has something to say .http://www.youtube.com/watch?v=nkux40HUTtc
New IMF , China with more of a say and goodbye to the G7
http://www.youtube.com/watch?v=nkux40HUTtc
The West has simply run out of money . I have a relation who is a recently qualified Doctor in the US . She was telling me that she had to get her parents to co sign for a modest mortgage . She earns $250,000 a year !
Why do people expect Estate agents to have some kind of moral code . They are sales people who get a commission based on the price of the house . Same as used car salesmen or some guy in Harvey Norman selling you a sofa . Whats the estate agent supposed to do ? Sell for a lesser price and commission ? The government were supposed to regulate the banks and they failed . Is it any surprise that banks went wild ? If you removed speed limits tomorrow would it be a shock if there was a rise in… Read more »
I had this conversation many years ago with David Andrews, a man I have respect for.. I put it to him. “The fundamental problem with democracy is, business and politicians need to get into bed with each other” – He agreed. Like local elections, most politicians can only think about their local elections and this is, I suppose one of the issues. I hate the idea that an independent in Kerry that claims 1300 euro to come to Dublin wields such power too. Massive political reform is required. There are good men (and women) in Irish politics, men (and women)… Read more »
What a fantastic article David.
Brilliant metaphor to use; Mr Dukes won’t be best pleased about this.
*REPEAT OF POST FROM PREVIOUS ARTICLE* Look, I know I suggested this last year and then buggered off to America, but wouldn’t anyone be interested in meeting up before Christmas and trying to get some sort of movement going. We’ve been debating (some better than others) here for the past year or two since I subscribed and I’m sure long before. I am a student now and a man of simple means. One day I’ll go back to the Caribbean but for now I’m contributing what I can in a postive way to Irish society. It sounds romantic to storm… Read more »
Variation in RATINGS: While Fitch seems to agree with the Government’s figures for the total cost of the banking bailout, c. €50 billion, I note that S & P are suggesting €90 billion: http://www.reuters.com/article/idUSTRE67O1DO20100825 “S&P said it expects Ireland will need to spend 90 billion euros to support its banking system, up from its prior estimate of 80 billion euros including capital used to improve the solvency of financial institutions and losses taken from loans the government acquired from banks.” €40 billion is too big a disparity for the Government or opposition to overlook without seeking a reconciliation of the… Read more »
Cowen/Lenihan: ‘Everything is on the table!’ ….Really, how about a sales tax on Cannabis? I vividly remember the head shops burning last year, selling ‘rat poison’ to kids all night long. I am sticking my head out here, fully aware that from here on I will be marked by certain people as stoned per see, and my future remarks on the economy and social political developments to be understood as under the influence. Legalize cannabis use in Ireland. Impose a sales tax, besides income tax for sellers, and have quality controls in the market. Why? First of all, let us… Read more »
I have just finished “The Road to Wigan Pier” when he discusses Socialism/Collective
ism
I highly recommend this book.
As has been said many times on this site, to understand the scoundrels, you need to understand what’s going on in their head. Do read this book if you get a chance. Especially those Socialists who post alot here.
http://synonblog.dailymail.co.uk/2010/10/is-this-how-the-eu-got-a-yes-to-lisbon-from-the-irish.html
It’s no wonder Prionsas De Rossa and the like loves the EU so much
Deco In response to your observation posted at 12:38 today, I just wish to add a few thoughts as follows: I emigrated to Germany following qualification and worked in Berlin for ten years. I returned to Dublin 10 years ago and as of last year, I work for a German company [not a bank!!] here in Dublin. I am shocked and utterly disgusted at the events which have unfolded over the past decade. The croneyism, dishonesty, and disregard for us ordinary Joe Soaps is sickening. Commentators such as David, Paul McWilliams, Karl Whelan, Morgan Kelly et al have ben widely… Read more »
…Seond last sentence should read ‘the recent ad for a certain newspaper’ [cupboard..]
Sub: (I just can’t find any inspiration in rehashing old stories.)
“He who puts hand to plough etc. etc.”
Good point, and I think it applies to other so-called “professional” amateurs of finance, such as mortgage brokers, rental agents, but most particularly auditors. How in hell were Anglo able to sign off their bare-faced insider dealing sweetheart loans? How in hell were they and PTSB able to shuffle cash about with impunity. Arthur Anderson is now a shell of the company it once was thanks to its part in the Enron and Worldcom scandals. Whoever signed off the so-called accounts for Anglo in particular should be struck off with immediate effect. Perhaps if the various banks accounts were properly… Read more »
Avoid False Ratings Prophets : This is the above heading of this article .Trying not to be false about what lies ahead before the Christmas Pudding .Our energies will need to be more focussed on whether we can roast our goose this year and eat it cooked .The week before Xmas day is foreboding a ‘frustration of energy ‘ all around us .This is serious especially because of the seasonal time of the year it happens to be and the damage it can cause easily.It can be a lack of energy and/ or the sudden explosion of it .Either way… Read more »
Here’s an interesting link re the relationship between secrecy/transparency and corruption in the banking system http://bit.ly/9cs2Qg To echo David’s points re ‘what were they saying during the boom’ Well, here’s exactly what Moody’s were saying about the Irish banks during the boom. Mind your gagging reflexes: Moody’s bank financial strength ratings (BFSRs) Following report by Pat Boyle, April 24 2007 http://bit.ly/auFuVg “The two major banks, AIB and Bank of Ireland, both had their rating upgraded from Aa3 to Aa2, while both Anglo Irish Bank and EBS Building Society were re-rated to A1 from a previous rating of A2. Irish Life… Read more »
Michael Hudson’s latest: http://michael-hudson.com/2010/10/why-the-imf-meetings-failed/ Basically he is saying that US QE is not having the intended effect (ie reviving the domestic economy as people are more interested in paying down debt than borrowing even more) but is rather causing chaos in world financial markets by providing opportunities for financial predators and leading to a flood of financial speculation. This might explain why, for example, Brazil is booming right now? “What is to stop US banks and their customers from creating $1 trillion, $10 trillion or evn $50 trillion on their computer keyboards to buy up all the bonds and stocks… Read more »
@paulmcd
http://wp.me/pBbF3-ae
Tried to post reply re Anglo bearer bonds, but it disappeared into the ether. So I’ve blogged on it above. Thx
Posters.
China floods markets with products.
EU sets up Euro.
Go for it, flood cheap credit to chase explosion of consumer goods.
Rating agencies take center stage like a policeman directing the credit traffic.
Deco. On your post with ALan42 and debt. I reckon the debts racked up are then sent over to the national debt of each country and this is more or less a built in *hidden debt delete system* but not officially recognized as one but within the insiders space implicitly understood that the debts once sent over to the national debt are done and dusted. Take for example NAMA. NAMA is actually a trojan horse to move debts which are private one way or the other and move them. Move the debts thru NAMA thru NTMA thru ECB thru and… Read more »
adamabyss has put the gun to the collective heads and no-one has responded,except colin to basically say “you’re on your own mate”.
This is getting more like the bar in killinascully every day,lots of talk and no action.
Is it a case of the man who fell into the vat of Guinness…”I know exactly what to do, I just don’t know where to start”?
Or is everyone on the ganja and staring into the toilet after the event?
Forgive if rambling……….just responding to Dorothy Jones and Georg R. Baumann. I am neither shocked nor thankfully despairing too much (as a result of circumstance but also decisions I made), I do of course wish the 500,000 on social welfare had more support and employment solutions, that is so obvious I was almost not going to say it but government policy is determined to force them to the airports or into quiet desperation. Despite everything, I am actually quite optimistic, I think things had to come to a head, the runaway train that was the boom had to come off… Read more »
Story raises its head again “Last May, when ABN Amro Bank (now largely part of the Royal Bank of Scotland) was caught funneling money for the benefit of Iran, Libya and Sudan, it was fined $500 million, and no one went to jail. Last December, Credit Suisse Group agreed to pay a $536 million fine for doing the same. In recent years, Union Bank of California, American Express Bank International, BankAtlantic and Wachovia have all been caught moving huge sums of drug money, but no one went to jail. The banks just admitted to criminal conduct and paid the government… Read more »
It’s a nice piece Gege, and for those such as myself, very nostalgic. My problem with the whole grass-roots rhetoric is that no one every turns up, leaving it to the political activists, to take all the decisions, which, if memory serves, was the whole point of these suggestions in the first place. Being an engineer, rather than a admirer of popular rhetoric, I have to wonder who would write the agendas of these various grass root bodies, and what the quorum for any decision would be. Who would pay the support staff that such bodies would need, and what… Read more »
Davids article I think is spot on. Culture and society is malfunctioning and this article of Davids is literally holding up to the light the utter madness of what purports to be the day to day business of the community going about its diligent work day. Lets ave a look at other exapmles of MAdness. Why are houses still seriously overpriced in this country? MAdness Why are the media still dealing with what happened as if its all just an accident and will be over soon and we can do it all again? MAdness Why are the mainstream newspapers not… Read more »
COST OF U.S. BAILOUT http://www.bloomberg.com/news/2010-10-08/tarp-a-four-letter-word-for-voters-even-as-bailout-cost-estimates-plunge.html “The Treasury Department estimated this week that TARP may cost taxpayers as little as $51 billion, less than half what it took to clean up the 1980s savings-and-loan crisis. The cost could shrink to $29 billion if the U.S. reaps expected profits from its other, non-TARP aid to insurer American International Group Inc., it said.” If we take a mid-range figure of $40 bn as an end-result and scale it down for Ireland’s smaller size, then, in Ireland’s case the final cost would be 40 bn/80 = 500 million dollars = 360 million euros at… Read more »
I have just read the following comment from US Federal Reserve Dallas President Fisher. <> Now this is a very serious comment. Especially from the US Federal Reserve. Basically, he is saying that the Keynesian economic stimulus plan being pushed by Obama and all the big bosses in the US Democratic Party, endorsed by the US media, and cheered on by Wall Street – is worse than a waste of money – it is providing capital for competitors of the US to further undermine the livelihood of American workers. In other words, Keynesian economics, is diametrically counter-productive. I expect to… Read more »
Posters. Here is an excellent article on ART fraud and it reveals the level of skullduggery a fraudster will go to in order to get away with the scam. Now think BANKS and PROPERTY and RATING AGENCIES when you read thru the article in the NY TIMES. I’ve surmise the main points. http://www.nytimes.com/1999/07/18/magazine/a-20th-century-master-scam.html?pagewanted=all #The British prosecution office declared Drewe a menace to Britain’s cultural patrimony. #The scandal has not only upset the market for the artists Myatt forged, but it has also exposed the art industry as its own worst enemy — too reliant on sources of authenticity that are… Read more »
Lenny the Liar on Bloomberg yesterday:
http://www.bloomberg.com/video/63629882/
Brian, could you not tweak the corporate tax rate up from 12.5 to 12.75% – just a wee token from the corporates to help pay for community projects?
Corporate fascist government for the EU
http://english.pravda.ru/opinion/columnists/12-10-2010/115326-american_dream-0/
Skidelski lecture, http://www.ictu.ie/ Did not the one big room convention centre cost €400 and the set aside for the 16 storey children’s hospital at the Mater is €450 ml. Oh, I get it, the €450 ml is just oil on the pan, the cost overruns come later OT Person, one of the gold diggers, digs big, big hole for himself and finds he can’t get out. Another man comes along and peers in. ‘My, mmmyyyy, that’s a mighty hole there’! ‘You need to cut an arm and a leg off yourself to get out of that. After all, it was… Read more »
Gene Kerrigan from Sunday’s Sindo:
http://www.independent.ie/opinion/columnists/gene-kerrigan/gene-kerrigan-better-to-flip-a-coin-than-heed-a-tosser-2372822.html
As I said before, he was calling all this a long time ago and was never seduced by the lets-be-positive Gadarene rush of the bubble years, so much so that he was beginning to look like a crank.
Just for the record.