Why is Anglo So Costly for the Taxpayer?

From today’s Sunday Times:

Brian Lenihan, the finance minister, said last week that the plight of Anglo Irish Bank was a reminder that nationalisation carried a heavy price for taxpayers.

Lenihan held up Anglo as a warning to academic economists who support the nationalisation of Ireland’s big two banks, Bank of Ireland and Allied Irish Banks.

A direct quote along these lines is reported in Saturday’s Irish Times. The Minister is quoted as saying that

Anglo’s need for capital “illustrates the point that, when nationalising a bank, there is an issue for the taxpayer”.

Ok then, perhaps I shouldn’t bother taking the bait at this point, but let’s think about this for a second.

Suppose Anglo had remained in private hands after last Autumn, perhaps with new management after Seanie and co were cleaned out.  Now they report losses that wipe out their capital base.

What would the government do at this point? No private investor would be willing to recapitalise Anglo. The government could decide to let Anglo be liquidated. However, the September 30 guarantee would then put the government on the hook for paying back Anglo’s liabilities and a disorderly asset firesale would probably only make things worse.  (Which is the government’s argument for not winding up Anglo right now.)

So, because of the September 30 guarantee, the government would be forced to re-capitalise Anglo now, whether the bank had previously been nationalised or not.  To blame the cost of re-capitalising Anglo on the decision to nationalise is putting the cart before the horse. The principle argument in favour of nationalising Anglo was that the government had guaranteed its liabilities and could not afford to keep a discredited management in place gambling with taxpayers money.

I would summarise the moral of the story here somewhat differently: When issuing blanket guarantees to troubled banks, there is an issue for the taxpayer.

15 thoughts on “Why is Anglo So Costly for the Taxpayer?”

  1. ‘Promises are given according to motive, but are fulfilled according to circumstances’. Igor Gouzenko; Fall of a Titan.

    Let the Government withdraw its guarantees – the Gov is not the legislature, hence it only represents a minority of the taxpayers. Let the majority decide what to do with the insolvent banks that were driven there by inept management. We need a viable banking system, but not the existing one. Throw them to the market wolves. Things may be a bit hairy for a while, but the unfortunate taxpayer will not be beggared for the next 30 years.

    The elected members of the legislature are there to serve the citizens, to protect us. The legislature has no right to place private companies above the rights of individual citizens. Governments can, do, and will (if allowed) place private companies before the citizen. This is a very dangerous political stance. Many shareholders have been impoverished by the reckless management of the banks. This will not be forgotten.

    Is there any solution to this problem of a (generally) insolvent financial sector, besides one which mandates that my grand-children will be paying for a ‘rescue’ package? In other words, how will the borrowed money (and its accompanying debt) be repaid? Surplus or Inflation (of money supply)?

    Someone needs to start asking some very hard questions.

    Brian P

  2. Why is a liquidation of Anglo-Irish always equated to a firesale of assets.
    Even a simple liquidation seems to last years.

    I seem to remember that Gaybo’s favourite accountant Russell Murphy presided over a liquidation that went on for more than 10 years – Dickens would have loved it.

    So we will probably be entering the next housing bubble by the time a liquidationof Anglo-irish was complete.

  3. It’s hard to believe that the Government committed €4Bn.on the Friday of a “bank holiday” without even pretending that there will be a return on the investment.

    Fine Gael is not backing this and people are coming to see that putting money into Anglo is not comparable to re-capitalising BoI or AIB. Gene Kerrigan put it very clearly in the Sindo, quoting Patrick Holohan:
    http://www.independent.ie/opinion/columnists/gene-kerrigan/servile-surrender-sowed-seed-of-doom-1756575.html

  4. @Brian Woods
    “the Gov is not the legislature, hence it only represents a minority of the taxpayers.”
    In practice,
    a) there is no separation between the Government and the legislature.
    b) the government emerges from the majority grouping in the Dáil.

    Our constitution does not separate the Government/Rialtas from the
    Legislature/Oireachtas(President+Dáil+Seanad) . It specifies that
    1. the Taoiseach, Tánaiste and Minister for Finance must be members of Dáil Eireann, (Art. 28.7.1) as must
    2. at least 13 members of the Government, the other two members must be members of the Senate (Art. 28.7.2).

    The Government controls the Dáil and the Seanad, pretty well absolutely. Our way of governing ourselves lacks checks and balances, of the sort that you seem to seek.

    For better or worse, the Government has the legitimacy conferred by having a majority of the support of those citizens who voted in the previous general election. In practice, the Taoiseach has sole initiative on the calling of general elections, within the limitation of not exceeding 5 years between elections. The Constitution ( actually allows for the Dáil to sit for not longer than seven years unless prescribed by law.

    During the 1980s crisis, two friends and I proposed an explicit separation between the Government and the legislature (A Design for Democracy Administration 34/2, June 1986). It is available here
    http://193.120.95.144/politics/design-for-democracy.pdf

    My view then and now is that the tie between the two branches of government must be cut in order to improve both.

  5. @ lefournier

    “putting money into Anglo is not comparable to re-capitalising BoI or AIB”

    Unfotunately this is untrue. Both involve throwing away money (in aggregate our entire NPRF to date (3.5+3.5+7.5 falls just short of the 15.5 in the NPRF at 31/12/08).

    The clearest example is BOI. It had 6.4 billion of equity in october, the govt gave it 3.5 but it has 6.9 billion in equity at 31/3/09. THis might sound mathematically impossible without making a loss of 3 billion (instead of reporting a break even result) unless you are an accountant. Thankfully BOI employs some and it used perfectly legitimate acountancy standards to put the great bulk of these 3 thousand million of losses into negative movements in retained earnings rather than through the income statement. THis is contained in black and white on page 33 of their preliminary statement releasd last week in a document called a “statement of recognised income and expense”which states that amounts recognised in equity (as against in the income statement) were 2.821 billion.

    Out of the 6.9 that remains, I believe that they are estimating 4.6 of impairment in the two years to 31/3/11 (this may be wrong but I believe that the correct way to calculate is by subtracting the 1.4 billion they reported in the year from their 6 billion for the three years to 31/3/11.)

    This would appear to means that, before profits on ongoing business (helped considerably by borrowing at 1% and lending at 5%), equity at 31/3/09 net of anticipated impairment is only 2.3 billion !!! (6.9 less 4.6) including the 3.5 the government put in – i.e. the equity of this bank would be negative without the 3.5 billion that the taxpayer literally threw away for a warrant to buy 25% of the bank

    (I ignore the coupon coupon as, in my understanding, the coupon can be paid in shares and not in cash until such time as the bank declares a dividend).

    Lastly all of these figures would appear to assume the existence of NAMA which is the credit card the govt will use as it’s out of cash.

    If Karl’s description of the “long_term econoomic value” (LTEV)methodology being considered for NAMA is what BOI used to come up with the 6 billion (which must be at least a plausible interpretation of different public statements made) then, without NAMA, one would need to take off the difference between LTEV and market value to get to a true net equity position for BOI. I find it difficult to imagine that this difference would be less than the 2.3 billion (above) they have left.

    In conclusion:
    1) A large chunk of the 3.5 is already gone,
    2) If NAMA doesn’t happen it may well be all gone, and perhaps some more besides,

    If we don’t get at leat 15 billion offf the AIB and BOI bondholders it would be a sin.

  6. It has taken a long time for “it’s the bondholders, stupid” to become accepted.

    FG policy since December (at least) is only now gaining wider acceptance.

    I always wondered just who are the Anglo-Irish bondholders that unLucky Lenihan is so relectant to burn.
    Susprise surprise but the weekend papers includes Seanie Fitz for over 6 million of Anglo-Irish.

  7. The government acted in good faith with regard to Anglo (benefit of doubt here) however, Anglo were pulling all sorts of stunts. The golden circle, the 7 billion deposit from Irish Life and Permanent, loans to Sean Fitzpatrick going back on and off the books, non recourse loans to the golden circle all to prop up share prices and hide the rapid decent of the bank into chaos and bankruptcy.

    It takes two parties to have a contract when one party acts illegally and recklessly and covers up their modus operandi unknownst to the other party surely that party, in this case the government, cannot be made to enforce the now illegal contract. I believe this is one of the basic tenets of contract law! The government should walk away from this bank and let them sort out their own billion Euro loans to each other! This was and is a sub prime bank and anyone that invested in should be prepared to loose their investments. This bank has excluded itself from any government guarantees and it is reckless in the extreme of the government to proceed as if nothing has happened since september the 30th 2008.

  8. One thing I have been wondering about for some time is whether Anglo was really of systemic importance – that was the reason the government did not let it go bust (or so they told us). Perhaps it was of systemic importance for property developers but we also know (knew) that they were in big trouble anyway. Would we be better off if the government had not stepped in to save Anglo??

  9. Edgar, Anglo is NOT critical. You, I and the rest of the populace have been hoodwinked by the Pols. There are indeed reasons why the Pols say what they are saying – their skins depend on it!!! Its power. Stay in power as long as possible.

    Now IF our precious financials WERE really critical – then they would have been very closely monitored, yes?. Well, no. They were ‘allowed’ to run amok. Hence they are NOT critical.

    The Pols are so addicted to spending ‘other peoples money’ that they are (all parties) completely incapable of dealing with a crisis which mandates reduction of Gov expenditures. Observe the Oliver Twist like behaviour of IFA, IBEC, etc. etc. “Please Taoiseach – may we have some more” – all you need to do is reduce social welfare, education and health spending”.

    If all tax breaks were eliminated – how much additional revenue would be raised?

    Brian P

  10. @Robert Browne

    Whatever about September 29th, the government knew all of these things, indeed we all did as it was in the public domain, when it decided to nationalise Anglo-Irish Bank.

    It could have decided then, as FG advocated to simply wind it up.

    In relation to September 29th, if I remember correctly, we know that the regulator knew about Seanie Fitz massaging his year end directors loans because he knew about it from INBS and also because he got quarterly returns from Anglo-Irish Bank. He also knew about the share support scheme.

    I can’t fully remember but I think the ILP deposit was made the following day and I believe the regulator again knew.

    Of course if the regulator (who was at the famous September 29th meeting) chose not to tell the Minister of Finance, that is another matter.

    So at all stages the government either knew or should have known what was going on in Anglo.

    So why did they make those decisions?

  11. @ Maurice O’ Leary
    “It could have decded then, as Fina Geal advocated to simply wind it up”

    If they did advocate it they didnt follow through when they voted in favour of the guarantee scheme.
    Im not a member of Labour but they were the only ones who trusted their instincts.

  12. @Eamonn Moran
    I didn’t make it clear, but “then” was at the time of nationalisation.

    In fact, FG advocated winding up before the preference share offer in December and has been totally consistent.

    Without being too partisan, labour opposition to the guarantee in September was pure grandstanding.

    Their support of nationalisation is even dumber as it implicitly rescues the subordinated bond holders.

    You could look at the following blog by ever informative Robert Peston of the BBC.

    http://www.bbc.co.uk/blogs/thereporters/robertpeston/2009/06/spanking_bank_investors.html

    Labour are proposing a Northern Rock scenario where sophisticated bond holders get paid while Irish welfare recipients lose their xmas bonus.

    FG policy equates to B&B where there is an orderly windup and the bondholders wait and see if they get anything.

  13. @Joe,

    The €4Bn. for Anglo-Irish is indeed different from the recapitalisation of AIB and BoI for the reason I mentioned: the Government don’t even pretend that there will be a return on the investment. That is not to say that all is well with AIB or BoI and Your comments about the captial write-offs in BoI particularly are very interesting but, despite these difficulties, there is a fundamental political difference between the process whereby these banks are being recapitalised and the decision to commit €4Bn. to a nationalised zombie bank.

  14. @ lefournier

    I agree that the two types of losses (Anglo Irish v. AIB/BOI recapitalisation) are different.

    I would however suggest that the difference is that Anglo involved unconciously throwing away money (I fear Karl is correct in his lead article and that the anglo story was over on Sept 29th, before the govt began to obtain a glimmer of understanding) whereas the AIB/BOI recapitalisations involved conciously throwing away money, which is perhaps a little less forgiveable (I don’t know if there’s a Richter-type scale for national wealth destruction shocks but it would be at an extreme end, just short of NAMA).

    One illustration of this is the crowing on the business pages in the last couple of days about the 1 billion euro gain that BOI is apparently making on buying back it’s sub-debt. This is a direct, incontrovertible transfer from the public finances to the shareholders of BOI.
    1) The bank is using the taxpayer money injected at par to buy back debt at a discount,
    2) The State could have, alternatively, bought the debt at a discount and converted it into preference shares + warrants if it really wanted thrashy paper like this and saved 1 billion in the process.
    3) Unfunnily enough, the State could even have bought the debt more cheaply as the injection of preference capital subordinate to it increased the value of the sub-debt !!
    4) Lastly, it’s worth thinking about the idea that providers of debt are getting out of our main banks at down to 1/3 of nominal value and that the markets feel that the shares of the banks are worth 4 billion. A simple look at the banks’ balance sheets illustrates that only extreme distortions introduced by government intervention make this possible.

    The degree of incompetence that the Irish State showed in spending 1/2 our national pension fund on these recapitalisations is staggering. It did it in its own time, after mature reflection. That’s what’s so damning – at least with Anglo they can claim stupidity and lack of preparation, it’s much harder to defend the recapitalisations.

    NAMA, in my view, is the recapitalisations squared – the transfer of wealth on recapitalisation and the anticipated transfer of wealth through the NAMA buyout process form more than the entire value of the equity of the two main Irish banks (combined they have driven aggregate market capitalisation from 400 million to 4 billion in 3 months – as 7 billion has gone in in between times that gives some indication of the disaster).

    They know not what they do

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