The documents released yesterday show that the government were aware in September 2008 that, at least under stress scenarios, Anglo Irish Bank was going to be insolvent.
- The Merrill Lynch report presented to the government the day they passed the guarantee states that “If one was to apply the INBS stress case scenario the writeoffs would deplete ordinary shareholders and other lower category subordinated debt by €7.5 billion.” Page 10 of the report shows that Anglo’s Tier One capital was €7.1 billion. In other words, they were considering scenarios in which Anglo was insolvent.
- On September 25, David Doyle, then Secretary-General of the Department of Finance “noted that government would need a good idea of loss exposures within Anglo and INBS – on some assumptions INBS could be 2 billion after capital and Anglo could be 8½.” I’m not sure what “after capital” means. If it means that Anglo were going to lose all their Tier One capital and then an extra €8½ billion then it means losses of over €15 billion. Even if it just means losses of €8½ billion, it still means that Finance were considering scenarios in which Anglo was insolvent.
- The government was also warned by Merrill Lynch that the situation may be worse than presented to them by the bankers. In a September 26 meeting, Merrill Lynch told the Minister for Finance and his officials to take into account that “Management teams tend to play out to the end, because Government intervention tends to change the team, the advisers etc. – their incentive therefore is to be over-optimistic.”
A number of points are worth making about this material.
First, as commenter Tull has been asking, why was Anglo’s management left in place for another three months to engage in God-knows-what in order to try to desperately save the bank? This situation, where seriously troubled banks are given government backing and so have time to gamble for redemption with house money is well known to be a recipe for disaster. Government officials knew that solvency was a serious concern and yet nothing was done to intervene at the executive level.
Second, if Merrill Lynch and David Doyle knew in September that Anglo was insolvent under stress scenarios, then what kind of analysis was performed by Price Waterhouse Coopers when the government asked them to investigate the loan books of the banks? PWC finished their fieldwork in December and concluded in relation to Anglo:
Under the PwC highest stress scenario, Anglo’s core equity and tier 1 ratios are projected to exceed regulatory minima (Tier 1 – 4%) at 30 September 2010 after taking account of operating profits and stressed impairments … We used an independent firm of property valuers (Jones Lang LaSalle) to value a sample of 160 properties held as security in relation to the top 20 land & development exposures on Anglo’s books as identified in our Phase II review and report. The results of this work indicated that impairment charges over the period FY09 to FY11 would fall in a range between the two PwC impairment scenarios but closer PwC’s lower impairment scenario.
Is it in any way credible that a bank that was clearly heading for insolvency under stress conditions in September could somehow look tickety-boo after a detailed examination of its loan book three months later?
PWC’s various analyses of the bank loan books were cited time and again during late 2008 and 2009 to support the idea that the government’s banking policies would not cost the taxpayer money. I would hope that since the Banking Commission’s terms of reference have been extended to go up to January 2009, that the Commission will investigate why PWC (and their partners Jones Lang LaSalle) provided the government with such an extraordinarily flawed assessment of the position of the bank. It would also be worth finding out whether the Department of Finance considered this analysis to be credible. A related question is whether PWC’s report was the basis for Brian Lenihan’s assertions on January 15th 2009, when Anglo was nationalised, that the bank was solvent.
Finally, this material runs counter to the line being reported in today’s newspapers that the documents show that everyone thought it was a liquidity problem. Likewise, another misleading line doing the rounds is that we can’t say Merrill Lynch warned against introducing a blanket guarantee because they said “there was no right or wrong answer”. That sentence was particularly weaselly. However, the documents make it clear that, within the range of options being considered by government, Merrill were less enthusiastic about the blanket guarantee than other options. By and large, the journalistic coverage of this story seems to be making the standard mistake of misleading people in order to conform to the journalistic goal of “being balanced.”