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http://hat4uk.wordpress.com/

EU CRISIS EXCLUSIVE: ‘Mario Draghi concerned about eurobank frauds’ – sources.

ECB’s Draghi….’has a nose for this kind of thing’

Dilemma for ‘more flexible’ ECB as borrowing eurobanks accused of accounting ploys

Although the European Central Bank’s new Chief Mario Draghi today signalled a ‘more flexible’ approach to the eurozone crisis, sources close to joint bailout operations in the eurozone say the Italian is privately “highly concerned” about several of the underhand machinations going on among the weaker eurobanks. These moves are aimed at maintaining access to ECB funding as the Ezone crisis escalates.  And Draghi is already attracting the suspicion of the ECB’s German faction.

Fraudulent swapping of assets, cleverly misreported funds levels – and what one source described as “harebrained risk” – are just three of the myriad methods being employed by weaker banks in Europe to stay in the ECB’s good books, senior credit sources told The Slog last night and this morning.

“We are already acutely aware of the 2008 syndrome,” an insider said, “as trust between banks fails, and more and more financial houses choose to park money at the ECB rather than lend to each other”. He was referring to identical signs in the US, prior to the Lehman collapse three years ago, which began to ring klaxons about weaker institutions becoming ‘no-lend zones’. But it seems Draghi has been most alarmed, since assuming his new post two weeks ago, at what appears to be accountancy jiggery-pokery – designed purely to enable wobbly banks to retain access to ECB funds.

“There’s a whole mountain of dissembling in play out there,” said a senior sovereign credit manager, “and while [the ECB] is aware of it, the concern is that this kind of desperation stuff usually precedes much worse news.”

The ‘stuff’ being referred to includes banks borrowing very short-term – from dubious sources at usurious rates – in order to present an apparent scene of health to justify further ECB loans….and then playing a terrifying payback game between Peter and Paul to keep the show on the road. Other more common tactics include equally strapped (but relatively friendly) banks swapping assets – to then show them in the accounts for the same reason. Commenting on this latter game, a London-based investment banker told The Slog, “This is crazy time. But it’s also very bad news indeed, because to open up to another bank – however close you might be to them – and for them to agree….these must be two absolutely desperate institutions. It’s fraud, pure and simple.”

One source speculated that Mario Draghi’s predecessor had turned a blind eye to these practices. But the primary focus was on Draghi’s reaction to the practices.

“Mario Draghi is exceptionally acute, and totally discreet,” observed a former colleague, “He has a unique nose for this kind of thing, whereas, you know – maybe Trichet was just a little less worldly. But for these rumours to be around, well, you have to think that others [apart from him] know about it. In my opinion, Mario would never brief about that sort of behaviour”.

Signor Draghi is very keen to ensure that ‘funny money’ isn’t seen to be leaking out of the ECB in the guise of other things – and thus leave him open to charges of eurozone bailout by stealth from powerful German opinion-leaders. Earlier today, the ECB boss signalled that he would display ‘more flexibility’ in reducing eurozone borrowing costs. This is already striking fear into the central bank’s German axis.

The developments are interesting, because earlier this week German central bank boss Lens Weidmann told the FT bluntly that central-bank support for government finances would be illegal, transgressing EU treaties banning the direct financing of states.

My nose tells me that, perhaps, Weidmann had ECB ‘flexibility’ in mind when he made the remarks to the Financial Times. We shall see.

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Filed under EUROBANK ECB FRAUD SENSATION

Tagged as accountancy tricks by eurobanks suggest desperation, Lens Weidmann suspicious of 'more flexible' ECB line, Mario Draghi believes weak eurozone banks cheating to get access to ECB funds, more eurosplits on horizon

Whee!

http://crookedtimber.org/2011/11/18/the-ecb-and-the-davies-folk-theorem/

The ECB and the Davies Folk Theorem

by Henry on November 18, 2011

Mario Draghi

Let me use this occasion to dwell a bit further on monetary policy in the current environment. Three principles are of the essence: continuity, consistency and credibility. Continuity first and foremost refers to our primary objective of maintaining price stability over the medium term. Consistency means to act in line with our primary objective and with our strategy both in time and over time. Credibility implies that our monetary policy is successful in anchoring inflation expectations over the medium and longer term. This is the major contribution we can make in support of sustainable growth, employment creation and financial stability. And we are making this contribution in full independence. Gaining credibility is a long and laborious process. Maintaining it is a permanent challenge. But losing credibility can happen quickly – and history shows that regaining it has huge economic and social costs.

Daniel Davies (on the Iraq War, but trust me – the logic travels).

At this late stage in the occupation of Iraq, many of Henry Kissinger’s old arguments about Indo-China are being dusted down. One of the hoariest and worst is that we need to “stay the course” (or some similar euphemism) in order to maintain “credibility” – to demonstrate our resolve to our enemies, who will otherwise continue to attack us. It reminds me of my one and only contribution to the corpus of game theory.

The Folk Theorem in game theory states that any outcome of a repeated game can be sustained as an equilibrium if the minimax condition for both players is satisfied. In plain language, it can be summarised as stating that “if we take strategic considerations into account, there is a game-theoretic rationale for practically anything”. This formulation leads on to my contribution, the Davies-Folk Theorem, which states that “if we take strategic considerations into account,there is a game-theoretic rationale for practically fucking anything” (it’s a fairly simple corollary; proof available from author on request).

The point being that since game theory in general provides the analyst with so many opportunities to twist himself repeatedly up his own arse like a berserk Klein bottle, if a given real-world course of action appears to have nothing going for it other than a game-theoretic or strategic justification, it’s almost certainly a bad idea. Thus it is with that bastard child of deterrence, “credibility”.

… The idea is that the war is costing huge amounts of money and lives with no real prospect of success and a distinct danger that it is making things much worse. However, to do the logical thing would send the signal to our enemies that we will give up if fought to a pointless bloody standstill. Therefore, for strategic reasons, we must redouble our efforts, in order to send the signal to our enemies that we will fight implacably and mindlessly in any battle we happen to get into, forever, in order to dissuade them from attacking us in the first place. It’s got the kind of combination of “counter-intuitive” thinking and political convenience that always appeals to the armchair Machiavelli, as well as to the kind of person who thinks it’s witty to describe things as “Economics 101” (Airmiles has been all over this one for ages, naturally). What’s it like as a piece of game-theoretic reasoning?

Lousy. It is certainly true that one of the benefits of doing something stupid is that it saves you from having to spend money on maintaining your reputation as an idiot. However, is the reputation of an idiot really worth having?

It turns out that it can be proved by theorem that the answer is no. If the game of being a belligerent idiot with no sensible regard for one’s own welfare was worth the candle, in the sense of conferring benefits which outweighed the cost of gaining it, then everyone would want to get that reputation, whether they were genuinely an idiot or not. But if everyone wanted that reputation, then everyone would know that simply acting like an idiot didn’t mean that you were one, in which case it would be impossible to establish a reputation as an idiot in the first place. The point here is that it’s one of the more important things in game theory that a signal has to be a costly signal to be credible; like membership of the Modern Languages Association, a reputation in deterrence theory is something that is worth having, but not worth getting. People who use the word “signal” in this context (usually on the basis of a poorly understood or second-hand reading of Schelling) don’t always seem to realise that they are explicitly admitting that the costs of being in Iraq are greater than the benefits.

The ECB has been buying bonds like a lender of last resort.
The European markets have not figured it out.

This is very much an hedonic act.  They must either be borrowing the funds or

breaking their rules.  In either case Germany will exit the currency.


http://krugman.blogs.nytimes.com/2011/11/18/the-bruning-thing/

November 18, 2011, 12:57 pm

The Brüning Thing

Joe Weisenthal tells us about an analyst willing to risk a Godwin’s Law citation; Dylan Grice of SocGen points out that it was the deflationary policies of 1930-32, not the inflation of 1923, that brought you-know-who to power.
Indeed. When we hear assertions that Germans are deeply hostile to loose money because of their historical memories, I always wonder why those memories are so selective. Why is 1923 seared into collective memory, while the Brüning disaster has apparently gone down the memory hole?
This is important — and there’s not much time to get the record straight.

http://www.guardian.co.uk/business/2011/nov/18/ireland-budget-leak

The markets were rather quiet today.  The Irish may yet start the crash.
The Bundestag discussed the Irish austerity budget in open session.
The budget had not yet been published or approved in Ireland.