Cantillon

Inside the world of business

US intervention on bondholders?

AS THE dust settles from Morgan Kelly’s latest missive, one of the issues he raised remains unresolved and that is whether or not the US authorities acted to nip any talk of burning senior bondholders in the bud. According to Kelly they did and his version of events chimes with that of the former finance minister Brian Lenihan.

The US authorities, insofar as they have commented on the issue, have poured cold water on the notion that Timothy Geithner nixed the idea.

The reason for the US intervention (or non-intervention depending on whom you choose to believe) was that they were very concerned about the impact on US banks that have insured the holders of Irish bonds against default through complex financial instruments knows as credit default swaps.

According to NCB stockbrokers, the net losses faced by international banks that have insured Irish bank bonds and Irish debt would only be about €6 billion in the event of a full-blown default. This is hardly enough to knock the US banking industry off its perch in the manner of the sub-prime lending crisis.

When you look a little wider though and calculate the net exposure of the international banking sector to credit default swaps – CDSs – written on European banks, the figure balloons to €108 billion. On top of that, their exposure to all European sovereign debt is a chunky €120 billion. This tells us that an Irish default leading to widespread contagion across Europe would have a very dramatic – and unwelcome – impact on the US banks.

The parallels with the subprime issue are startling.

A financial tool that was meant to disperse and minimise risk has simply spread it like an invisible virus through the banking system. Nobody wants to know what will happen if these CDSs are called on. As a result, another mechanism that was supposed to make the market more efficient by allowing defaults and protecting investors has now become one of the main obstacles to allowing events to take their inevitable and necessary course.

Lawyer mounts robust defence of legal fees

THE MANAGING partner of Arthur Cox has mounted a stout defence of legal fees and his firm’s policies on conflicts of interest in an interview in the spring edition of Parchment, the magazine of the Dublin Solicitors Bar Association (circulation: unknown).

One suspects it was not the most arduous interview that Pádraig O’Riordan has ever done. The former Harvard classmate of Barrack Obama has “been on the fast track since day one,” the Parchment tells us, before going on to gushingly wonder whether the solicitor has “got an arrangement with God for a 30-hour day”.

We are left to figure out for ourselves what a 30-hour day might mean in billable hours. O’Riordan himself is rather coy on Cox’s fees, which the Lawyer magazine estimate came to €106 million last year or €1.02 million per partner.

It is hard for the public to see what the State gets for all the money it spends on legal fees, admits the “defensive but candid” O’Riordan. He draws an analogy with that other bastion of fiscal transparency, the medical profession, pointing out that if you had a doctor working on a patient over a number of years and at the end of two years the doctor had done a decent job, “you’d be slow to change the doctor”. Quite so.

When it comes to the issue of conflicts of interest – and the firm’s role as lawyers to Bank of Ireland and the Government simultaneously in particular – O’Riordan is unapologetic despite the criticism it has attracted.

“We have entirely separate teams acting for Bank of Ireland and the State and they represent the interests of their clients as fully and robustly as separate firms would, perhaps even more so at times,” he says.

His rivals will no doubt seize on the inference that O’Riordan now seems to accept that this is not necessarily a given when Chinese walls are involved.

Fáilte economy needs more than marketing

WITH QUEEN Elizabeth due to touch down in Casement Aerodrome today for her four-day State visit, and US president Barack Obama not far behind, a major Tourism Ireland marketing drive kicks in to capitalise on the associated international media coverage.

Footage of locations being visited by the two heads of states has been delivered to media organisations on both sides of the Atlantic, advertising is running on television, radio and online in Britain and in key US press, Irish journalist Mary Kenny has been doing interviews on the BBC and other British media outlets, while a special tourism supplement will be carried with the Times in Britain at the end of the month.

Tourism Ireland hasn’t said how much it is spending on the campaign, although its global advertising account is worth more than €50 million, according to recent reports. The all-island tourism body has said the visits will generate about €150 million in free publicity.

Positive international coverage on Ireland has been a rarity in the last four years and, with up to 1,000 overseas journalists expected to travel to cover the two visits, it makes sense to try and capitalise on them.

Tourism doesn’t just bring in overseas cash, it is labour-intensive at a time when lower skilled jobs are needed. The Government acknowledged as much with its focus on the sector in last week’s jobs initiative.

However there are real issues in the sector – from Nama hotels selling below cost to local employment agreements which make it unprofitable to employ staff at times when tourist demand is highest.

Just as the smart economy hyperbole failed to deliver, if we are to switch focus to a fáilte economy, it will need more than marketing if it is to have any real economic impact.

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