Anglo Wind-Up Debate a Distraction

A common pattern when an important economic story comes along is that the media and politicians decide quickly what the issue boils down to and then, even though they’ve got it wrong, this sets the tone for weeks.  Recent examples of this phenomenon include the February\March “do we need a bad bank?” debate, which was followed by the equally specious “NAMA versus nationalisation” debate. 

Over the last few days, the media and political debate about Anglo Irish Bank has largely focused on the question of whether the bank should be wound down or kept on as a going concern.  Those who favour winding down the bank appear to view the funds the government has committed to re-capitalising Anglo as the cost of keeping the bank going and, on that basis, they argue strongly for the wind-down option as being cheaper for the taxpayer.

An example of this line of reasoning is an article in today’s Irish Independent (titled “Taxpayer getting bullied into saving Anglo Irish”) by new Fine Gael TD, George Lee. George puts the case for winding up the bank along these lines:

The problem, of course, is that the people associated with the bank, including the Government, are refusing to bury it … Instead of pumping billions into a failed bank that will never, ever again be profitable, it is much better to wind Anglo down.

I do not think that this is a useful way to characterise the decisions facing the government in relation to Anglo Irish Bank, for a few reasons.

First, the question of whether the bank is put through an “orderly wind down” or kept as a “going concern” is largely one of semantics.  As members of the Anglo board noted at yesterday’s Oireachtas Finance Committee, the bank has barely made a new loan since nationalisation and is looking to transfer most of its loan book to NAMA.  Donal O’Connor also noted at yesterday’s meeting that the scaled-down down bank would then have far smaller capital needs, so one can assume that management is planning to use the funds from NAMA to pay off the bank’s liabilities as they come due. 

At some later point, a decision may then be made to close the bank or not.  However, to my mind, the process described by the Anglo board members yesterday is essentially an orderly wind down, albeit one that maintains some advantages associated with keeping the bank officially labeled as open for business (such as maintaining access to ECB lending.)

Second, the principle reason the Anglo debacle is going to end up being costly for the taxpayers is the almost blanket liability guarantee given to the bank by the government on September 30. The vast majority of Anglo’s liabilities must be covered by the state no matter what decisions are taken. 

The liability guarantee was, of course, issued with the full support of Fine Gael, so I reckon George is being a bit cheeky when he writes that Fine Gael “from the outset, highlighted the folly of propping up Anglo Irish.”  “From which outset?” one may ask.

Finally, the somewhat pointless “wind-up versus going concern” debate obscures the fact that there really are some very important decisions to be made regarding sharing of losses at Anglo.  In particular, there are important decisions to be made regarding the treatment of Anglo’s €2.8 billion in unguaranteed subordinated debt as well its €2.1 billion in currently guaranteed subordinated debt, all of which matures beyond September 2010.  However, to date, Patrick Honohan’s important contribution discussing this issue has received little attention from the media.

55 thoughts on “Anglo Wind-Up Debate a Distraction”

  1. “First, the question of whether the bank is put through an “orderly wind down” or kept as a “going concern” is largely one of semantics.”

    Considering that the “orderly wind down” scenario was used to threaten the taxpayer with a 50B bill yesterday, I’d beg to differ.

    If youre an employee…. or someone who owes a lot of money but whose interest is being rolled up as a performing loan in a going concern bank, I reckon there are real implications there.
    Of course you could be both…..

    “Finally, the somewhat pointless “wind-up versus going concern” debate obscures the fact that there really are some very important decisions to be made regarding sharing of losses at Anglo.”

    Agreed that thats the central issue… but I think share is putting it too gently.

  2. Thanks for putting that in a nutshell KW. I totally agree with your analysis of how the debate on our economic crisis is careering down cul-de-sacs and not addressing the important areas.

    These debates really are specious. There are two possible explanations:
    – Firstly, that the opposition parties are playing politics with these issues knowing they will press the public’s buttons.
    – Secondly, that the opposition is ill-informed and does not have a proper grasp of the situation.

    I expect it is a bit of both. I note that the seemingly illogical criticism comes from George Lee rather than from the more measured Richard Bruton who seems to have a proper grasp of the unguaranteed debt-holders issue. While I do not agree with much of what Richard Bruton says I have faith that he is focussed on solving the problem. I do not have the same confidence in his party colleagues.

    The guarantee which FG supported nobly has put us in a difficult position. Not only did FG support the guarantee but they also did not oppose with any vehemence previous unsustainable economic policies. It is only now that they have produced (to their credit) comprehensive policy documents. I make this point because it seems deeply unjust to me that the only party which opposed unsustainable economic policies in Ireland an internationally was the Green party, and they are now the party being punished the most.

    On Anglo:

    Donal O’Connor made it clear that Anglo only had a temporary derogation in relation to capital requirements and that if that situation persisted then the bank would lose its licence to take deposits and would have to repay all deposit monies.

    Going on memory, O’Connor also said that mention of a winding down would have an negative effect on the cost of funds to banks funding Anglo which would have to be met by the Exchequer. This suggest to me that BoI and AIB are funding Anglo. Am I correct in this assumption?

    Anglo is indeed a cess-pit as Eamonn Gilmore put it. The guarantee is indeed the reason we have to keep Anglo running. However, given that we have to keep it going and we know that there are public interest directors in the board, we should stop wasting time debating what to do with it.

  3. I agree with much of what has been said on this thread. But for me, the key question is this: if Anglo is indeed in run-down mode, is it really necessary to recapitalise it and put additional taxpayers’ money at risk? Does an “asset recovery vehicle”, which Anglo now is, need to meet Basle capital requirements?

    The funding remains in Anglo only because of the Guarantee, not because of any faith among depositors or markets that it is, or will be, sufficiently well capitalised to absorb future losses, or because anybody believes in the long-term future of Anglo.

    Clearly, a refusal by the Government to recapitalise the bank would be an explicit signal that the Government intends to wind the bank down. But as long the Guarantee remains credible, is there any reason to believe that funding will flee?

    If there is reason to believe that funding can be secured without recapitalisation, there is a danger that the only beneficiaries of recapitalisation will be the owners of subordinated debt and other unsecured bonds, who, after recapitalisation, will have an additional €4 billion in equity to absorb losses ahead of them.

    While many of these instruments (the dated stuff) are currently guaranteed, many are not (the undated stuff), and none will be in September 2010.

    Is there not a better way from the taxpayers’ perspective?

  4. @Andrew

    From my brief viewing of the PAC yesterday at lunch-time, I understood from Donal O’Connor that the derogation allowed by the ECB [He mentioned ECB, not just the Central Bank] from capital requirements was only temporary. I take it from this that the Government’s recapitalisation and the sale of assets will be necessary to enable the bank to comply with capital requirements in the future. If the bank cannot comply with capital requirements in the future then it will lose its licence to take deposits. This is crucial as it will trigger the repayment of €64 Billion in deposits.

    That was my take on it. As usual, I am open to correction.

  5. Sigh. I veer from panic to depression. At times like this I wish we had a presidential system and a cabinet of experts could be appointed. That wretched guarantee. WHY did they include Anglo in it? Will we ever have a Tribunal on that?

  6. Interestingly, Alan Dukes pretty much confirmed at the PAC yesterday that Anglo was and remains a systemic bank. George Lee dismisses this in the Independent on the basis that Anglo only has one branch.

    I think I’ll place my trust in Alan Dukes on this one even if George Lee says he doesn’t believe him on the basis that turkeys wouldn’t vote for Christmas.

  7. Yes, but is there an option to formally change Anglo’s status from a deposit-taking institution that must, following the temporary derogation, meet capital requirements to an asset management vehicle (a bank in run-down mode), funded by the markets and the ECB, as well as the existing capital and long-term funding, that is locked in.

    At least then, we might get to September 2010 without recapitalisation, and ensure that sub-debt holders take their fair share of the losses.

    Andrew

  8. The September 08 guarantees to the banks seems to be assumed by all commentators on this site, to be unconditional. Can this possibly be the case?
    Surely the government guarantee was based on information given to the government at the time by those institutions, and if there were material facts withheld, I would assume that these guarantees are rendered void.
    If for example I lie or withhold information on an application for car insurance the policy is worthless.
    By any standards what has emerged from Anglo since then regarding capitalisation etc., is, to say the least, inconsistent with what we were told previous to the guarantee. Not to mention the “three card trick” type loans to Seanie Fitzpatrick.
    So, unless those who put the guarantees in place had lost even the brains they were born with, the government should have no obligation to honour them. But maybe I underestimate their capacity for stupidity.

  9. @Sarah “WHY did they include Anglo in it? Will we ever have a Tribunal on that?”

    In panic mode, you had the 2 Brians with a tribal sympathy towards the builders’ bank.

    As for advice, they depended on the 2 gentlemen from Dame Street who were impressed by the “resilient” banks with their “good shock absorption capacity.”

    If Irish Nationwide, which was in hock up to 80% of its loan book on commercial property in Ireland and UK, was regarded as “systemic” then Anglo had to be too.

    Picture John Hurley for the first time in his life saying “No Minister!”

    On the night of 30 September 2008, Anglo Irish Bank had hidden deposits of some €7.3 billion from IL&P.

    The banking system wouldn’t have collapsed by taking 24 hours to mull on the decision.

    FDR’s first act in office was to close every bank in the US for an unspecified time!

    In GB that night, was there one among them who as leaders, had been tested by fire?

  10. Well, does Aidan have a point then? Should the Opposition be exploring a strategy whereby we can eject Anglo from the guarantee?

  11. I pointed out on Drivetime this evening that theres a moral dimension to this. It is, in my view, now immoral to put more money into Anglo. We the taxpayer are on the hook for the difference between what the assets are worth (maybe 40b on a good day) and the guaranteed liabilities (80b). This is true whether we keep it going or close it down. But pourign more money into it is a total utter waste….

  12. @Aidan and Sarah

    Well guys take a look for yourself
    http://www.finance.gov.ie/documents/publications/statutoryinstruments/2008/si4112008.pdf

    My reading of parts 13 (and 7 for the conditions banks must comply with) is that there’s no way out of this thing. There certainly isn’t any insurance-like clause about misleading the issuer of the insurance about the pre-existing level of illness.

    @Brian

    I don’t get what you’re saying. The money we’re pouring in is part of the process of filling the gap between the assets and the liabilities. The government’s argument is that the gap will widen if we have to fill all of it today. Now you know I’m no shell for the government but I reckon they’re right on this. Morality or no, it would be silly for us to lose even more money on the thing just because we like the idea of closing it down and burning its ugly building.

  13. There is a technical opt out of the september guarantee.The Constitution describes the government as collectively responsible for all its decisions and actions.
    It is considered to be a considerable restraint on individual ministers.
    As I understand it Cowen and Lenihan unilaterally took the decision to provide the guarantee.
    Really this was a guarantee given by two stressed men in the middle of the night.

    It should be pointed out that collective cabinet responsibilty was subverted to provide a guarantee to essentially the banks bond holders.
    The bondholders are responsible for the evaluation of risk associated with their bonds .

    The purpose of government and resposibilty of government under the Irish Constitution is to its citizens ,not to bank bond holders.

    Why are nt the unions,IBEC et al not pooling their collective resources and seeking legal redress through the Irish courts to negate this guarantee.?
    If social partnership means anything the future welfare of Irish citizens ,be they business owners or workers should compel them to aggressively drive this issue in a legal direction.

  14. hmm yes, isn’t there a concept of ultra vires? That a minister can act beyond is power?

  15. @Karl
    I see what your sayin but imho the gap will not widen if they move to close.

    Re the SI and cabinet collectivity, i think the cabinet held an incorporeal meeting (ie a conference call) and agreed that the 2 Brians were ok to go ahead.

  16. Guys. This thing was passed as a bill in the Dail with the support of the opposition. And it wasn’t something done by a couple of stressed ministers overnight. If you remember, after the initial announcement and debate, the detailed legislation actually took a few weeks to prepare and then was voted on in the cold light of day by our elected representatives. So I don’t think Sean O’s technical opt out applies.

  17. You are right of course karl. I think we were just fantasising there for a few minutes. Back to reality. and the deep deep hole we are in.

  18. My understanding is the facts are as I portrayed them above .Please see extract from euro commission document below regarding the guarantee.The legislation was in effect retroactive legislation for a decision already taken and in full operation from the date the two brians gave the guarantee.
    Any avenue is worth further investigation if there is any possibilty of getting out of this guarantee.

    On 30 September 2008, the Irish Minister for Finance Brian Lenihan announced a
    government decision to put in place with immediate effect a guarantee arrangement to
    safeguard all deposits (retail, commercial, institutional and interbank), covered bonds,
    senior debt and dated subordinated debt (lower tier II), with the following banks: Allied
    Irish Bank, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish
    Nationwide Building Society and the Educational Building Society

  19. “http://www.finance.gov.ie/documents/publications/statutoryinstruments/2008/si4112008.pdf

    My reading of parts 13 (and 7 for the conditions banks must comply with) is that there’s no way out of this thing. There certainly isn’t any insurance-like clause about misleading the issuer of the insurance about the pre-existing level of illness.”

    Karl from my first year business studies I remember that one of the key rules of insurance is “Utmost Good faith”. Both parties must enter into an insurance policy in good faith.

    Surely if the government can prove that Anglo withheld vital information to the contract the government could apply to the supreme court to have those who lied. ie Anglo to be removed from the gurantee scheme.

    But then they would have to annoy a whole host of high powered vested interests. So they wont.

  20. Thanks for the link Karl. As you point out there is no obvious safeguarding clause, which one might expect. So if it turns Anglo Irish was just a front for the Sicilian mafia we still have to honour the guarantee.
    The question then arises whether it was omitted consciously, or an oversight. If it was deliberate it must be so that Anglo would not be excluded. If not we really are run by a bunch of morons.
    I am however inclined to the optimistic view that if there is a will, and a few good lawyers it could be dismantled. This in part 8 looks open to a variety of interpretations.

    “8. The Minister may review and vary the terms and conditions of this Scheme from time to time, at no later than six-month intervals, to ensure that it is achieving the purposes of the Act of 2008”

  21. Perhaps it would be revolutionary to suggest that, in the interests of the State, the current government resign and allow the current opposition to attempt the, difficult, process of arguing that our State can’t be held liable for the lack of understanding of its previous administrators.

    This would at least allow them a small slice of a “they did the State some service” epitaph. If they were to return to power, at some future time, they might even be grateful for somebody else having done the dirty work that they are incapable of performing because of their past actions.

    It has been argued in many public fora that the danger of an election is that it would create some uncertainty in the financial markets concerning the Irish government’s intentions. Respectfully, that is what we should be trying to achieve!

    Certainty, as represented by the “ex nihilo” creation of 4 billion euros of shareholder value in our two main banks and the increasing assurance that theses banks’ senior debt will be fully repaid is exactly contrary to the Irish public interest. As others have stated, it’s a zero sum game.

    If we have the courage to play chicken on liquidity (only possible because of European Monetary Union), and thus remove the only argument for baliling out the shareholders, subdebt holders and senior debt holders, vast sums will ultimately be saved for the Irish taxpayer.

    The manner in which 85 of our turkeys voted for Christmas today gives no comfort that such an outcome can be achieved.

  22. If we want to get to the real root of not only this issue, but that of financial crises in general, and in particular this one it is down to monetary policy and leverage, yet so little is being done to get to the core of those issues.

    wind downs are expensive business, B&B wasn’t cheap, that cost about 25bn, the other ‘let em’ hang’ option of Lehman caused a wave of catastrophe, so the order of the day is ‘orderly’.

    Anglo are not lending, they are struggling to maintain capital despite offering some of the highest deposit rates in the country, nobody has been let go, there is more to ‘housekeeping’ in this issue than ‘wind down or not’.

    A good crisis should never be wasted, george lee is merely utilising something there for the taking, albeit that the trophy is populism in this case.

  23. The recent IMF Staff Position Note on the Fiscal Implications of the Global Economic and Financial Crisis (link posted by Philip Lane) shows that the guarantee issued by the two Brians expressed in percent of GDP (2008) is 261 (see Table 2.1). This is over five times higher than the guarantees issued by Sweden and the UK and dwarfs any of the other guarantees issued – all of which are considerably less than the relevant GDP figure. In the light of this, my questions are: how credible is the guarantee? were those that made the decision in their right minds? and, what is the political and moral legitimacy of the decision to provide a guarantee that amounts to over two and a half times GDP? Any thoughts to enlighten me on these questions?

  24. Given Anglo has been nationalised and the Sept’08 guarantee, we’re on the hook for losses. The guarantee puts us in a similar position to a monoline insurer wrapping subprime AAA notes. That is, we have an inadequate amount of credit enhancement (shareholder equity/some bonds & excess spread) and, although someone else has provided the funds, we pay the losses. However, there are some other ways to reduce losses. One option to look at is increasing the excess spread. For Anglo, this means exploring ways to reduce the cost of funds. If we could come to an arrangement to access funds at close to ECB rates, this would generate a greater buffer to cover losses. In a wind-up scenario, the approach to assistance might be different as the entity doesn’t gain any advantage by not existing. The bank should also try to increase margins on their loans.

    So in a strange way, it’s possible that the horrific wind-up scenario could work quite well.

  25. Tom,

    The failure of the US authorities to prevent Lehman Brothers go under triggered an enormous rise in the Ted Spread (between the interbank lending rate and the US treasury bill rate). That was a measure of the stress unleashed in the US financial system following Lehmans’ failure. That spread rose to over 4%. As bankers headed for the bunkers and prepared for Armageddon, credit for the wider economy dried up. One result is that world trade has seen its biggest drop in decades.

    A decision to bail out Lehman Brothers could have been portrayed as “crony capitalism” and a bail-out for Wall Street “fat cats”. But it might also have prevented massive damage to the wider world economy. That is the moral basis for bank rescue: by saving the bank you aim to prevent contagion and damge to the wider economy.

    The Irish authorities would have had Lehman Brothers very much in their minds when they made the decision to underwrite key financial liabilities of the Irish banking system. Their fear must have been that, had Anglo been allowed go under, funding would have dried up for AIB and BOI etc.

    I’m unhappy with the bank guarantees but that isn’t the point. The point is whether there were better, practical alternatives on offer? It seems to me that last September the practical options were:

    1. allow one bank default and risk contagion spreading quickly to all banks; or

    2. provide State assurance to those funding Irish banks by way of (a) a guarantee scheme along the lines we have, or (b) nationalisation.

    I don’t see that the government had any other real options available.

  26. To repeat myself, t is common for loans to exist while having deposits at an institution. Many o these liabilities are going to be assets in NaMa. Unless the fix is in and some “exscape” from captivity.

    Economists don’t figure this in, illogical as it is, as it relates to tax evasion. Loan backing isn’t always “with recourse only” to the real estate. There maybe a heap of manure here!

    Has anyone said NaMa will liaise with Revenue?

  27. The Irish State from foundation in 1922 to the end of December 2008 accrued a National Debt of Euro 50 billion. On the (conservative) assumption from Brian above, “We the taxpayer are on the hook for the difference between what the assets are worth (maybe 40b on a good day) and the guaranteed liabilities (80b)”; our government in our name therefore, remains set on a path of increasing our National Debt by 80% by the questionable decision of including the dysfunctional Anglo in the guarantee of September last. Notwithstanding their continuing, more general abdication of duty in failing to tackle their explosive deficit/spiralling debt (facilitated by a fearful ECB), surely such governmental folly must be resisted by all means possible – Brian, get back on Drivetime quick and this time get Mary Wilson to understand you!

  28. Karl,
    I agree with much of what you’ve written after the jump, but your above-it-all attitude is a little hard to take. I think people want to know why €4bn of taxpayers’ money is going into a supposedly systemic bank that hasn’t lent a penny since September; I think they want to know how that can be considered a ‘going concern’ and why the government and the Anglo board shouldn’t just accept it’s a wind down. The big funding figures you’ve seen reported are part of explaining this. How, exactly, have the media and politicians got this wrong? Why isn’t this a legit topic for discussion? Funny that you compare this supposed waste of time to the ‘specious’ Nama vs. nationalisation debate. Have you forgotten that your name was the first of 20 on the document that, um, put that particular argument into the mainstream?

  29. A distraction? Well, if Anglo are buying back their debt maybe Brian Lenihan and Richard Bruton are doing a good cop/bad cop on the debt markets. Drive down that price!

  30. The reason people making specious arguments obsessing on Anglo and “moral” dimensions of the latest cash injection are because they are humans. The system is too complex for them to understand it or to want to understand it. The complex message cannot be propogated – it does not stir the heart or get the adrenaline flowing like goodies, baddies and blame. The replies prove the point of KW’s initial piece.

    Important issues which KW and Brian Honan highlighted have remained unaddressed, viz.:
    1. How losses are borne (particularly unguaranteed bonds but also possibly including matters such as the write off of the Quinn family loans);
    2. The urgent need for Irish legislation to provide for the orderly winding up of banks.

    The above replies from lay-men and women also largely ignore the regulatory role of the ECB and the co-operation and support we require from the ECB and our international partners.

    We are lying in the back of an ambulance with a puntured lung and a fractured skull while the drivers argue over the best route to the hospital.

  31. Another technical route out of the guarantee is to assert sovereign immunity on the basis that this isn’t the State acting in a commercial manner. That it wasn’t acting in a commercial manner could be strongly argued on the basis that no commercial operator would have offered such an “insurance scheme” on those favourable terms – generally sovereign immunity would have been explicitly excluded but this wasn’t the case here, presumably due to an oversight.
    Would this simply be viewed as a sovereign default though?

  32. @John

    As I wrote, there are good reasons to keep Anglo open as a bank for the moment (even one that doesn’t lend) including continued access to ECB lending facilities. If you put the bank into liquidation, then every liability has to paid back now, irrespective of when they mature (when a business goes into liquidation, the holder of a bond that matures in ten years time doesn’t wait around ten years after you’re gone.) And the current process is essentially effecting a gradual wind up. But look, if you want to frame the discussion as “wind up versus going concern” then fire ahead.

    Have I forgotten something I wrote a couple of weeks ago? Well, um, no actually. That piece (and others that I have written on this topic) explicitly stated that nationalisation can work in conjunction with an asset management agency. To present these as straight alternatives rather than complements is misleading.

  33. zhou_enlai: People are … humans

    How enlightening. There is a moral dimension to this: people are justifiably afraid that we will be paying for this for generations to come. They are also reluctant to take the medicine from those who caused the mess in the first place.

    And still we don’t know why Anglo is ‘systemic’, or anything about their derivatives positions. So how highly leveraged are we at the moment?

  34. @ Karl

    Perhaps you forgot this?
    “In introducing its proposals for the National Asset Management Agency (Nama), Government Ministers and Peter Bacon, the consultant who recommended this plan to the Government, have stressed that they see their current plan as likely to produce a superior outcome to nationalisation (though they concede that majority State ownership may be required).

    We disagree strongly. We see nationalisation as being the inevitable consequence of a required recapitalisation of the banks done on terms that are fair for the taxpayer.”

    That seems to present two exclusive options, no?

    On the wind-up/going concern issue, surely you see the reason it is a discussion is because the exec chair of Anglo has presented a business plan to the minister which (so he says) makes the case for the bank continuing as a going concern. The media and opposition reaction to this has been “WTF? The choice is between quick wind up and gradual wind up. Which is it going to be? Oh, quick wind up would bring all the costs forward? Thanks, I’ll report that. BTW, why do we have to put in €4bn if this sucker’s going down eventually?” This stuff may be intuitively obvious to you, but readers want to see the gears turning. How the hell else can ordinary people hope to understand what’s going on? I just don’t get why you’re being snide about even having the conversation and going through the reasons why one thing is happening and not something else.

  35. Thanks again John.

    On “That seems to present two exclusive options, no?” Well, actually no. Being against NAMA without nationalisation does not mean that one is against NAMA with nationalisation.

    On the issue of snideness, I’ll leave it others to decide which of us is guilty of that charge.

  36. Section 13 of the Credit Institutions (fFnancial Support) Scheme 2008 gives the power to the Minister for Finance to give the public 90 days notice of his intention to revoke the Guarantee to Anglo Irish Bank or any other covered institution on certain conditions, one of which is if the covered institution itself asks to withdraw from the Scheme.

    A possible scenario:

    (1) the Board of Anglo Irish are “persuaded” to ask the Minister to withdraw Anglo from the Guarantee Scheme
    (2) The Government agrees, and accounces an orderly wind-down of Anglo Irish Bank over the next 6-9 months, including break-up and asset sales to NAMA and others
    (3) At the same time, the Government prevents a run on the bank by announcing a new Guarantee Scheme for Anglo covering existing short term liabilities (less than 90 days) (including the €30 billion in ECB and other inter-bank deposits and the €34 billion in customer deposits) and new funding coming to the bank
    (4) Crucially, it does not renew the Guarantee for any longer-term liabilities that mature beyond September 2010 (certainly for the €5.0 billion in sub-debt, and possibly also for the €10.2 billion medium term bonds)
    (5) the Government applies to the European Commission for an extension to the derogation from capital requirements during the wind-down period
    (6) As the bank is wound down, and assets are sold or recovered, liabilities are paid off in the usual order of ranking – desposits and other guaranteed liabilities first, senior debt next, sub-debt after that and finally equity capital

    This approach potentially provides an additional €15 billion protection for the taxpayer than the current approach.

  37. That’s an interesting plan Andrew (though I’m not sure I’d recommend reneging on senior debt.) Slim chance of it being adopted though.

  38. @Andrew

    Do you envisage a situation where a depositor whoc omes in to make a withdrawal will be told: “Sorry, you can’t have your money until we wind down, but don’t worry because your money, which you can’t have right now, is guaranteed by the State, which can’t pay you right now.”

    What will be the cost of funds to AIB/BoI in the meantime as their deposits are frozen pending the wind down?

    What will be the effect on our Govt bonds in terms of interest payable and duration?

    The assumption that depositors would not walk away (leaving aside the assumption that the ECB will allow the bnk to hold onto its licence to hold deposits straight away) to the tune of at least €25 Billion is a bit too pie in the sky for it to become Govt policy.

    @kirghiz

    There is no morality to the cash injection to Anglo. It is a financial measure to save money and to forestall economic meltdown. The only possible moral dimension is that people might act amorally in paint it as a moral issue.

    There is a major moral issue in how we treat those who committed immoral acts which have damaged the nation. That is a different issue to the injection, which is a consequence of immoral actions rather than an immoral act of itself.

    People can rest assure that we will be paying for this for generations to come. One is lebs likely to be afraid of something one knows is unavoidable. (Babyboomers beware of the backlash though!).

    Dukes said that Anglo are systemic because they are involved in projects and in employment across the country and because of the interconnectedness of our economy. It would be better if the picture were clearer but it appears that Anglo is indeed systemic, or at leastthat the State should treat it as systemic.

  39. @Karl

    Yes, I expressed deliberate caution on the senior debt. But even so, why should it not be adopted?

    @zhou_enlai

    The terms and conditions relating to all deposits would not change. Depositors would also benefit from a new, more targeted Guarantee. Why would they walk away? Nothing has changed.

    What would be the impact on our sovereign credit rating? Well, S&P just downgraded us again because of the likely cost to the taxpayer of bailing out Anglo under the current model. Things couldn’t get any worse.

    We’ve been around the block before on whether bond investors are rational and future-profit-oriented; or vengeful of historic losses. It’s hard to tell, but I’d go with the former. These are private liabilities, not sovereign ones.

  40. @zhou_enlai

    Have pity on us lay-people. We have come to the holy city to learn 🙂 If we were happy in our ignorance we’d be elsewhere 🙂

  41. @zhou
    “Dukes said that Anglo are systemic because they are involved in projects and in employment across the country and because of the interconnectedness of our economy. It would be better if the picture were clearer but it appears that Anglo is indeed systemic, or at leastthat the State should treat it as systemic.”

    Whatever the rights and wrongs for saving Anglo I’ve never really bought into the systemic importance of Anglo. Are they saying without Anglo no other banks would lend to the property/commercial market? I thought there were quite a few what you might call wholesale banks around – banks like KBC, ING etc. As far as I understand it Anglo has not been lending or in fact acting as a going concern for the last 6 months and is unlikely to do so in the near future.

    Presumably you could package its good business and sell it off to another bank. Other banks will lend for good viable projects. Why do we need Anglo? In my opinion Anglo will cease to exist in the next 3-5 years and the country will survive quite happily therefore it is not of systemic importance.

    The difference with AIB and BOI is their branch network and their retail operations. They are still in business and it would cause untold problems if they ceased.

    Or do I misunderstand what systemic means?

  42. It could well be the case that Anglo is only of systemic importance if it fails rather than being systemically important to allow it continue banking that is creating credit. How much of its lending directly supports busines who create jobs – lending to developers who produce building others buy as landlords to businesses that create jobs would not appear to fill the category Alan Dukes appeared to refer to – unless you count the construction jobs created by the building programmes. So apart from the building jobs what other direct job creation business enterprises was Anglo banking in a primary banking relationship? It appears to have been a business bank with a small b and a buildings banker with a big B. The country needs business banking a big B – of cousre buildings banking has already become a tiny b

  43. On a roll here – there’s something in the B’s – Bertie, Builders, see through Buildings, the two Brians, suB-ordinated debt, Banking, Boom, Bust, Bubble – one B sums it all up Banjaxed

  44. @ Karl W: so if we nationalise over two thirds of our banking system then you think NAMA is a good idea?

    I need to ask you with total sincerity if you believe that the performance of assets or institutions would be better under state control? Would it change the outcome?

    What we can see thus far with Anglo’s nationalisation is that nobody has been let go, they company is only interested in deposit business yet they are haemorrhaging money despite offering some of the best deposit rates in the country! And the bill just keeps getting bigger, the biggest loss ever for an Irish company is now an accolade held by Anglo.

    The ‘nationalisation/non-nationalisation & NAMA’ debate needs to end, let’s move on to getting NAMA up and running.

    Anglo should have been wound down from the outset, but who was calling for that at the time?

  45. @ Karl

    If you chip away at something, eventually you get an answer. That’s how the news business works. Here’s the top of Joe Brennan’s page lead in today’s Indo business section:

    “The Government may have to show the EU that Anglo Irish Bank has a chance of becoming viable again, or else outline plans for an orderly wind-down, to get the nod from Brussels for its planned €4bn bailout of the embattled lender.

    All EU banks receiving government assistance would come under new draft EU Commission guidelines which say governments must show how a bailed-out bank “will restore long-term viability without state aid as soon as possible, or if this cannot be achieved, how it will be wound up in an orderly fashion”.”

    So while it may be an economic nonsense to frame the debate as going concern vs. wind-up, it appears to be a political necessity. But that’s what you get with a nationalised bank – political necessity trumps economic rationality – a point Karl D has been hammering on here for weeks.

  46. As I have noted throughout this process, and as John Ihle notes here, its political economy.
    @ Karl d : post hoc ergo propter hoc re nationalisation and interia in Anglo Karl.

  47. I’m with Praetor Lucius on the what-if.

    Karl D, I’m interested in minimizing the cost to the taxpayer. Nationalising ticks a number of boxes. The FG proposal seems to have merit – at the very least, it appears to buy time while getting the price discovery process moving. NAMA is a mystery. It forces an immediate guess at “long term economic value” with little prospect of future redress. There’s also the inclusion of “good loans” which is unsettling*. If NAMA resulted in the state owning 95+% of the banks, I’d be satisfied.

    *For example BOI’s 2009 annual report, pg214:
    “Financial assets renegotiated that would otherwise be past due or impaired

    Renegotiated loans are those facilities at 31 March 2009 which if not renegotiated would have been ‘Impaired loans’ or ‘Past due but
    not impaired loans’. The quantum of these loans at 31 March 2009 is €5,661 million (31 March 2008: nil) and represents borrowers
    whose loan terms and conditions have been amended in recognition of a change in the borrowers’ circumstances. Amendments would
    include, for example, situations where anticipated repayment through refinance or asset disposal on the original loan terms is not
    achievable at this time having regard to illiquid markets. Loans under this disclosure requirement are primarily included in the
    ‘Acceptable quality’ and ‘Lower quality but not past due nor impaired’ classifications and are not deemed to represent a risk of loss at
    this time.”

  48. @ John

    Thanks for the info on the piece in the Indo. To be honest, though, I don’t think the EU stuff matters much.

    The state aid laws are there to stop some government-supported banks crowding out foreign-owned competitors. Anglo is barely making loans, so there’s no worries about it grabbing market share based on state support. The government will tell the EU what it’s currenty saying. Namely, that its plan for viability is to ship most of the loans into NAMA, gradually pay off most of the liabilities and then turn the remaining small bank into a specialised operation of some form.

    The EU, unconcerned about the competition implications, will then say, that’s grand, off you go. So I don’t see this as a constraint on the government, nor do I reckon do they.

    And as for nationalised banks and political necessities, that works both ways. The motivations behind keeping the two main banks out of nationalisation could also be characterised as largely political.

  49. @Stuart

    I could imagine all sorts of ways that borrowers from Anglo could be systemic in having business interests outside of Anglo (e.g. Accountants involved in land or shares speculation) but I would prefer to wait for Ala Dukes’s comments to go up on the PAC transcripts website.

    @Karl W

    It may be a political necessity not to have nationalised banks because either
    (a) the bank will be subject to political pressure and will act imprudently and will possibly treat customers unfairly according to their political pull causing further damage to our international reputation, or
    (b) the banks will act perfectly fairly and prudently and everybody will blame the Govt for stopping their overdraft and bouncing their cheques.

    I think those are both very distasteful scenarios when the country needs the workforce’s and all tax payers’ full support.

    [I also think that there is a major incentivisation and motivation issues with nationalisation but that is another year’s work!]

  50. The more we read about Anglo Irish Bank the more frustrating the whle issue becomes. There seem to be no clear cut answers to any of the questions – everything is being deliberately fudged to thwart the powers that be.

    Normally when a person is approached to take over a business, the usual criteria would be Trading and Profit and Loss accounts for the past three years and also a look at the realisable Debtors and payable Creditors and most important would be the realisable Assets and the Current Liabilities and future Liabilities. At the present point in time, we are being dripfed with problems within Anglo and we are not talking about 200K we could be talking about billions – does anyone know exactly what is owed by Anglo and who owes this money. Where do the firm of accountants stand in all of this. Are the accounts that were produced by them over the last number of years a load of rubbish – if so, what is the position of the Institute of Chartered Accountants with regard to sanctions against this firm? Where is the accountability in any of this sorry affair.

    As for Mr Fitzpatrick, who owes Anglo €106m and apparently has €23m on deposit, which we have been informed, cannot be touched. Mr Fitzpatrick is guilty of “conduct unbecoming ” and as such should loose any entitlement to any monies held in Anglo. The Government should seize any property that was reputed to have been purchased with this money and Mr Fitzpatrick himself should be brought to justice. Again where is the accountability.

    We have read about the senior staff who borrowed money from Anglo which they then found they were unable to repay. What does Anglo do in this event – they write it off – if anyone else owed money to Anglo or any other bank they would hound you to hell and back and your credit rating would be completely destroyed. Not so for any of the senior staff.

    As far as I can make out, there is most certainly one law for the bankers and a different set of laws for everyone else.

    The saying used to be “people in high places with low morals” – nowadays is could be “people in hugh places with no morals”

    We have to have complete transparancy in this issue and once we know what the real figures, only then can we realistically set about correcting the problem. The persons who were involved in allowing this massive unsubstantiated borrowing need to be brought face to face with the reality of the result of their actions.

    Anglo Irish Bank was a beacon in the earlier years and was instrumental in aiding the growth of the economy. Where are the people who helped to make it so wrong.

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