Karl Whelan has posted on this question, querying the non-removal of Anglo management after the guarantee at end-September 2008. One rather strange manouevre has been commented on by Cliff Taylor in the Sunday Business Post (I can’t locate the piece: Cliff writes a lot, for an editor).
What appears to have happened is this. In May 2008, Anglo borrowed in Yen to finance an asset position in £ Sterling, and ran the position uncovered. There was some tax angle. Yen interest rates were well below sterling rates. By end-September, the Yen/Sterling exchange rate had moved adversely but not disastrously. But the movement accelerated and the deal was unwound at substantial cost a few months later. The following is from Anglo’s 2009 accounts, page 62.
Included within foreign exchange contracts is the impact of a non-trading Japanese Yen financing arrangement, which was first
entered into in May 2008 and ended during December 2008 and January 2009. The financing arrangement was intended to
reduce the Group’s overall net cost of funding and was structured in a manner which was anticipated to result in no net after
tax loss for the Group arising from currency fluctuations. In the six months to 31 March 2009 the arrangement resulted in a pretax
loss of €181m but an after tax benefit of €17m. However, due to the significant operating losses incurred by the Group in
the nine months to 31 December 2009, €97m of taxation benefit has not been recognised resulting in a pre-tax loss for the
fifteen month period to 31 December 2009 of €181m (30 September 2008: €31m) and an after tax cost of €80m
(30 September 2008: gain of €6m). The potential benefit of these losses carried forward is a component of unrecognised
deferred tax assets in note 35.
Not being an accountant, I am unable to translate this into English, but it looks like an uncovered foreign exchange carry-trade punt that went wrong. Of the €181m hit, €150m occurred after end-September 2008, at which point there could have been no plausible expectation of profits to shelter, assuming that the tax angle is, or was, serious. Thus Anglo would appear to have run a naked forex position post the guarantee, and dropped €150 m in the process. No doubt there is a more detailed explanation to be given, but it sure looks like gambling for redemption. On October 5th. 2008, I wrote the following in a piece in the SBP:
‘All six of the domestic banks have been given an identical vote of confidence and none has been allowed to fail. This is both unjust and potentially costly, since any bank close to insolvency now has an incentive to throw more dice, without capital at risk’.
The Commission of Inquiry will have a long agenda, but this costly Anglo forex manouevre deserves a slot somewhere.
18 replies on “Post-Guarantee Events at Anglo”
More worrying would be what other trades could have been placed over that time. That derivative book is worrying and far larger than any of the other banks
Well, it’s not larger than the other banks, but it is larger by assets. And it is, or was, also larger by the breakdown between hedging and trading:
and other posts in the thread. A bit dated now, but they do give a flavour of how Anglo tried to trade its way out of trouble on its derivative book.
The book size rose 70% between 2007 and 2008 and another 70% between 2008 and 2009 (chased interest rates up and then chased them down again).
Wan wonders sometimes if Anglo could end up costing more than its assets are worth, never mind adding its liabilities in.
Burn 1.5 bn on St. Stephen’s Green? We should be so lucky. I’m still waiting for Mr. Burgess and Mr. Keenan to apologise for thinking that was somehow “sensational”.
“Not being an accountant, I am unable to translate this into English”
I’ll translate it for you (although I know you know it).
It’s called the Yen carry trade.
It was (is) a derivative.
It blew up.
NAMA took on €14,600,000,000 (gross value) of derivatives.
This has just begun.
It will end with the destruction of the “Irish State”.
“The Commission of Inquiry will have a long agenda, but this costly Anglo forex manouevre deserves a slot somewhere.”
What do you think this is a democracy?
At 2:28 Hitler declares “I have therefore, refused to come before the people to make cheap promises”
Oldspeak for “hard decisions” and no “by-elections”?
Thank God for Newspeak.
I look forward to the Ministry of Truth (Minitrue) saving the “Irish State” by the introduction of Crimethink.
The “Irish State” must pay the rigged casino derivative gambling debts of the sociopathic vain because the “Irish State” created them.
The €14.6bn of derivatives that NAMA has taken on (on our behalf) pales in significance to the €167bn gross value derivatives on the balance sheet of Anglo Irish Bank at 31 December 2009 (page 79).
So if Anglo “lost” €181m so far how much have they lost since?
1% of €167bn would be (oh let’s just round it up) €2bn.
You think that’s not probable?
The shoes will continue to drop. It’s not just the cred of the governing party which is slipping, it is the credibility of our leading social groups, institutions and professions.
Hard to see how we can evade a state resoution regime with the usual massive cuts in public sector numbers/pay, and social welfare.
We are heading into the process with prisons already full, so it’s a serious test for our polity and constitutional order.
[An aside: You transcribe the extract from the accounts like it was a poem!]
According to Anglo’s 2009 accounts (Note 1) derivative positions have been marked to market wherever possible. This must mean almost everywhere – they were not in the bespoke business as far as I know. How can there be unexploded bombs at this stage?
@ Colm McCarthy,
For some odd reason, the description of actions taken by Anglo Irish bank above, reminds me of the taxi trade. As I understand it, the clever blogs delay all their engine re-conditioning and paint work repairs until the end of their tax year. Then bundle it all into one large job, which is used to offset tax liabilities. What you describe at Anglo, must have been one heck of a paint and engine job. I am not sure if we have produced a road-worthy vehicle though. BOH.
“where possible” means where an index exists for the particular derivative, perhaps for some FX derivatives? Everything else is a bilateral arrangement. There aren’t published prices for them. I would be surprised if even 10% could be market to market. The rest depends on the models…
[…] recommended read of the week; Colm McCarthy on the the post-guarantee events at Anglo. What frustrating week, documents released, media tells us what everyone said, documents become […]
“How can there be unexploded bombs at this stage?”
Agree with a lot of the conspiracy theories on here but don’t think this is one of them.
The translation is that the trade produced a PBT loss but a PAT gain of 17 million. Therefore, the cash position would be positive. However, the lack of taxable profits meant that the tax benefit couldn’t be utilized and it resulted in a 80 million loss.
Think investors buying hotel rooms to buy a tax shelter and then not having the income to shelter.
Think there is a lot worse in Anglo to investigate.
Interesting post. And, as always from you, information rich.
FYI Deferred tax is an accounting concept used by accountants to even out the difference between accounting depreciation and tax depreciation. .
So, for example, if a hotel availed of accelerated depreciation for tax purposes to reduce its tax bill in its early years, the accountants would enter a balancing Deferred Tax charge in the Profit & Loss Account to reflect the underlying rate of tax (and to thus average the incidence of the tax charge over the expected life of the project). Thus someone reading the accounts would see an overall tax charge that corresponded to the average tax rate over the full life of the project.
That balancing DT charge would give rise to a corresponding Deferred Tax asset which would be written down in the project’s later years when the actual tax charge rose, the tax depreciation having been fully taken.
The problem for Anglo is that it is highly unlikely that its Deferred Tax assets will ever be realised, as its tax losses must now be absolutely huge.
here is the link to the original piece . march 1st 2009. the stuff about the yen trade is at the bottom. I think Colm’s post catches it all anyhow
The sad reality, it seems to me, is that the observation
“… after end-September 2008…there could have been no plausible expectation of profits to shelter”
is not correct.
I explain why here : http://bit.ly/bv75Mx
It is more comforting to believe that I am lead by a knave than a fool.
[…] Finance, 2008 and 2009 accounts. The 2009 accounts contain the now infamous yen loss, Colm McCarthy referred to recently. The notes to the accounts are particularly […]
not exclusively….DT can arise thru accelerated tax allowances, and expected profits/losses in the future (temporary and permanent timing differences).
this type of DT arises on gains/losses in FV of assets which are recycled thru revaluation reserves (capital part of balance sheet rather than p&l) and the DT liab or asset arising should the asset/liability be crystalised and gain/loss taken to p&l and creating a tax charge/credit.
this deal looks like it was designed by tax accountants, not treasury experts. sounds like someone going outside their comfort zone to try and pull a (legal) fast one on the revenue (i.e. reduce tax bill). anyhoo….it fell apart as the assumptions (fx rates stay the same and the interest rates in japan vis a vis london would remain unchanged) failed to hold true for the duration of the transaction.