RTE is reporting that private-equity group Mallabraca is interested in offering the government €5 billion for a majority stake in Anglo Irish Bank. Now this might sound like good news and RTE is sort of reporting it in this way (For instance the story on the website tells us that Mallabraca “would assume majority control and share risks with the State” and that “It is understood any proposal that would benefit the State and stabilise the bank could be agreed”) Getting the bank back in to private hands quickly sounds like a good idea and hey that €5 billion sure would come in handy.
Before you go getting too excited, remember the old motto about things that look too good to be true. Anglo is undoubtedly insolvent, i.e. its assets are worth less than its liabilities. This means that no private investor would pay a cent to take them over. So, what lies behind the offer? As always, but particularly with this kind of thing, the devil will be in the details. And my guess is that the details aren’t pretty—that underlying this €5 billion offer from Mallabraca is a corresponding €(5+X) billion offer back from the Irish government of good stuff like over-priced loan purchases, and of course, risk insurance, courtesy of the Irish taxpayer.
Beyond the issue of whether this is a good idea, this proposed deal also raises the question of whether the Department of Finance has already worked out its philosophy on things like risk insurance (and is not really waiting for the conclusions of Peter Bacon and the NTMA) or whether the Mallabraca gentlemen have pitched an offer to the government about what goodies they’d like in return for the €5 billion. Anglo is wholly public-owned and has fully government insured deposits and other liabilities. So, we’re not dealing here with any of the sensitivities associated with takeovers of companies listed on the stock market. Given that, I would hope that the full details of this offer could be made public and open to debate before the government makes a decision.
4 replies on “Proposed Anglo Deal: Probably a Bad Idea”
Also the question arises as to who would pick up the pieces if such outside investors should have miscalculated and run out of cash again. I wrote on this aspect in the Irish Times when it was first mooted.
I think you are wrong and here is why. You are considering only the balance sheet. But a bank is much more than a balance sheet. The best thing about a deal like this would be the injection of new, valuable human capital.
The economy can deal with debt, eventually. But it can’t prosper without good banks. And what makes a good bank good is leadership.
My last comment is a little harsh! The math of what you present is of course correct. There are obviously problems with anything like this, but I am saying that there is more than just math to consider.
Why would such a rescued bank go wrong? If it is run by prudent adults?
It would be buying the bank, but it would have to have a state guarantee on any debts it took over. Anything else would just be silly.
Any deal that removes at least some of the risk from Ireland Inc’s balance sheet right now should be viewed positively.
Yes, we may be giving up the potential for a return in the future but that doesn’t matter if we cannot afford the consequences if the risks turn out to be worse that expected.
I think we should use all available private capital to help absorb the likely costs.