Anglo: what could have been done to cut the losses?

Good history lesson but what about today?

Anglo apparently writes off €110m on Siteserv loan whilst shareholders walk away with a reported €5m. And we learn Siteserv pays its CEO €401,000 – double the NAMA limit which has attracted so much flak. And good old IBRC pays its chief executive a package which totalled €866,000 last year.

History is all very well, but what about today and Anglo’s future and is there anything that can be done to mitigate losses or even get some value back for the bailout.

Alan says:

“Losses were eventually imposed on Anglo’s subordinated debt, but not on long-term senior bonds. Of the €10bn that Anglo owed to senior bondholders in September 2008, €6bn was repaid in full during the two-year period of the blanket guarantee. The remaining €4bn reverted to unguaranteed debts of the bank after September 2010, but this money is also being fully repaid at the insistence of the European Central Bank.

…..As a reference, 50pc would have been the discount had the bank been put into liquidation and losses shared equally across the bank’s unsecured creditors.

The exclusion of senior bonds in the guarantee, therefore, might have saved €3bn for the State. Of course, it may be that the ECB would have blocked any move to impose losses on senior bonds during this period, as they have done since. In that case, the exclusion of senior bonds from the guarantee would have made no difference to the allocation of losses.”

That choice of logic is too convenient. It ignores the fact that the Irish guarantee for these bonds was at the time it was announced, greeted with incredulity in the markets, and it itself created its own precedent for a ‘new reality’ for senior bond holders – Ireland had promoted them up the seniority ladder to at least as high as sovereign bonds.

This facilitated the ECB’s pressuring for senior bonds to be regarded as an endangered species to be protected at all costs. Ireland’s own actions in guaranteeing them, and its government’s position of spinning that it was the only responsible thing any government, anywhere, at any time could do, made it very difficult for it to garner support (not that it asked) to resist pressure to keep on paying everything senior out at 100%.

So the idea that whatever about the bonds that were initially guaranteed, the ECB would have ‘made’ Ireland pay out the remaining 4bn unguaranteeds in full – and therefore the maximum saving could have been half of 6bn, not half of 10bn seems contrived, particularly so when later in the article he is willing to consider this:

“Of course, the Government could have considered allowing Anglo’s losses to fall entirely on the bank’s unsecured creditors. This would have meant losses for depositors of between €20bn-€25bn, implying discounts of nearly 50pc on their deposits.

The reality is that the Government could not have protected Anglo’s depositors in full without a large capital injection into the bank. The economic implications of imposing large discounts on bank deposits are rarely discussed by those who advocate such a policy. That said, it does not necessarily follow that the Irish State should bear the full burden of rescuing Anglo’s depositors, since many of them are based abroad.”

As Grumpy says, the guarantee is assuming a very different role in AH’s article than it did in real time. It remains the case that Official Ireland can’t come to terms with the fact that a guarantee given in the belief that the banking system was solvent might not have been such a good idea when it turned out the banking system was insolvent. They gave insurance after the car was already ploughed into the pole and they want to maintain it was still a good idea.

Alan’s comments re overseas depositors indicate a hint that he thinks that Iceland! (Official Ireland version) may actually have been a good idea.

The unexpectedly deep recession and collapse in property values resulted in huge losses on Anglo’s assets.

Guess we’re lucky Alan never thought property had a long term economic value…

Oh wait…

Having reflected on this contribution by Brian Lenihan’s adviser, it is a little annoying to see this implied admonishment

“It’s time for more facts and less fiction.”

Perhaps Alan, who came on board in DoF in March 2009 might help with a little mystery which has some bearing on the ultimate cost of Anglo. According to the Wikileaks cables released last year it was “hinted” by Kevin Cardiff to US embassy staff on 7th April 2009 that the discount on NAMA acquired loans would be 50% rather than 30% and we all know that property continued to decline in value between April 2009 and December 2009 when NAMA legally came into being. So if it was 50% in April, it would have been 60% in November 2009.

Now if we had known before NAMA started its work that Anglo was going to have €20bn of NAMA-imposed losses which would mean Anglo was hopelessly insolvent, then would we as a nation have said in April 2009, “hang on a second, what exactly are we getting into here” And might we have decided on different paths if we knew Anglo, INBS, EBS and AIB would be nationalised? Would there ever have been a NAMA, or would we have gone down the UK route which is set to cost far less.

Maybe Alan can enlighten us. After all, “It’s time for more facts and less fiction.”

“The unexpectedly deep recession and collapse in property values resulted in huge losses on Anglo’s assets.”

“Unexpected”? By whom? By those, who were then rewarded with pivotal influential roles, whose advice failed to prevent blanket guarantees, NAMA , Croke Park Deals, and “No bond holder will be left behind”, all of which have put us further down the sink hole.

http://www.youtube.com/watch?v=7inIiXeROpU

The first part of the program is 2010 the second part is 2007.

Alan writes of a possible loss of ¢25 bn 50% loss by depositors, ¢3 bn loss by senior bondholders as the alternative to the PN’s. He also calls for more facts and less fiction but doesn’t explore the merits of depositors taking losses against taxpayers taking those losses.

But his article ignores another scenario which can be divided into two parts. The first part refers to the options available at the time. Were they the two simply described by Alan, or were there other options.

I believe there were. Christine Lagarde, the French Finance Minister, Alistair Darling, Chancellor of the Exchequer at the time, I’m sure, if consulted, would have come out with other options.

The ECB itself which has since devised the retro fitting of banks with LTRO and which also has the EFSF and future ESM, would, I’m sure, if given the role arrogantly assumed by the Irish players, would have given different advice.

But it was hobbled by the decision to guarantee leading to the inevitable reductio ad absurdum of the two choices described by Alan, the way of guarantee or the way of burning ¢25 bn of depositor money alongside ¢3 bn of senior bondholders.

At the very least, if ECB advised on saving Anglo rather than burning bondholders and depositors, we could hold them to making good on their advice. As it is, we have ourselves to blame for Anglo (we = DOF, Regulator, FF, NTMA, who else?).

It should have been the role of ECB to come up with a package to defend both depositors and taxpayers. ECB were somewhat to blame in not policing Anglo or the Regulator who allowed a bank with fire in the hold growth rates of 40% to burn out of control and lead other banks to duplicate what the Regulator in any part of the world, would have seen as alarm bells.

Latterly with EFSF and ESM we’ll have to wait until 2 weeks before the referendum on the Compact to see the bundle EFSF can put together that will be an improvement on PN’s, that will save this country from the default liquidator, but we’ll have to wait that piece of information which will prove that, yes, there is a cheaper way than PN’s.

Neither Anglo nor the decision to guarantee nor the setting up of NAMA has been fully investigated, in the manner of a ‘The Financial Crisis Inquiry Report Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States’ which eg thoroughly examined Fannie Mae, in a way we have yet to be seen through a proper investigation of Anglo.

“Finally, it is sometimes claimed that the promissory notes are an expensive way to recapitalise Anglo. This is simply false. Those who repeat such claims ought to think a little more deeply about the ultimate source of the funds being borrowed to recapitalise Anglo and the associated interest rate. It’s time for more facts and less fiction.”

I can assure, Alan, those critical of the Anglo bailout, have indeed thought deeply about the matter. They’ve obviously gone deeper than Alan and can see many more ways of skinning the Anglo cat that he outlines, both in dealing with the original Anglo problem and in dealing with the current problem it has left us with. We do need more facts and less fiction.

One day I hope 10 large developers or a random sampling of properties from 100 of Anglo developers will be fully investigated in a report on how they got their money, who their loans were developed, where spent. Bottomline should be the matching of actual losses with real losses as I, for one, would like to see exactly on a case per case basis, where those those were made 🙂

@Grumpy,

Careful. Thou shalt not impugn the professional integrity or honesty of the contributors listed on this blog. I’ve had a comment removed and received a wigging for being deemed to be a transgressor.

Official Ireland is getting twitchy. I can understand some of the reasons why, but the serious problems that could blind-side them in the next few months are festering within the system – and are not being caused by those of us who call out some of the nonsense that’s being propagated.

In 1999 David McWilliams told Alan and all the political elite that there was a massive property bubble. What did Alan and the the others do?.

@ John Corcoran

In 1999 David McWilliams was spectacularly wrong, the bubble occurred at least 5 years later. He was also spectacularly wrong when he hailed the blanket guarantee as a “master stroke”. In fact, it is fairly clear that he was largely instrumental in that policy, John Gormley actually asking BL during those days whether he would be going down the McWilliams route.

@Brian II
The Bubble began in 1987.

@ Paul Hunt,

Re “I’ve had a comment removed and received a wigging for being deemed to be a transgressor” Sorry you got censored there. Apparently someone has decided I and others must be protected from your views. Censorship of this kind is not a good augur in a democracy.

Me too. Its a problem. I’ve been harried and occasionally been on the receiving end of some nasty comments that were not removed. I did not complain as I can answer my critics with some depth and people can make up their own minds on the merits or otherwise of this. Others are entitled to their views as long as they keep within the bounds of laws of libel and defamation.

But, on at least four occasions having made what I regard as above board, fair comment, critical of the views of one or two contributor’s, bang, my comment is removed. Eventually, I’ll make up my mind and decide to leave or stay. Apparently, some contributors do not have the same gusto as I in regard to open debate, but debate with the immature censor button.

This brings up the question of how controlled and biased the blog is towards any persuasion in particular. I have the view the blog is skewed towards a pro europe, pro bailout, pro FG policy agenda and economic outlook. This will be a factor in my decision to stay or go.

The blog does have very good contributions by those on the right side to a large extent and contributors are to be congratulated for permitting discussion around their views subject to the criticism above of course. However, on balance the blog would benefit from a more international perspective on Irish economic affairs. In particular, sources critical of Irish economic policy decisions or point of view, should be given a greater airing. I could offer to do a round table compendium of sources critical of the current Irish position on semi regular basis if required 🙂

As it is, those of us critical of the status quo would appear to be experiencing the thundering disgrace of being censored. How endemic such censorship is in other media, such as RTE, you can make up your own mind on that one. Its also a form of arrogance to presume a right to silence others. There again, such arrogance is endemic in Irish life from even before ‘ the guarantee ‘.

So, I’m still mulling over whether its worthwhile for me to stay or go? One tip I would make, is to copy any postings you make if you feel they may not make it through 🙂

Well, at least Alan got a soft landing on thr board of thr cental bank. No doubt he can continue to write contrafactuals there.
The moment he became a prop for the evidentially rotten FF gov the moment he lost all past and future credibility, which is a pity.

@Colm Brazel

So, I’m still mulling over whether its worthwhile for me to stay or go?

Don’t let the door hit you on the ass!

Troll.

http://www.irisheconomy.ie/index.php/2012/03/22/ireland%E2%80%99s-debt-burden-the-many-stages-of-grief/#comment-257088
“Twas I, not Dorc The Good, ran Whelan The Deferential outa towen”
-Colm Brazel

@Colm B

Contributors who post items on this blog and are forced to read a mixture of comments that include on occasions, variously, well-made uncomfortable points, voluminous guff, misjudged attempts at wit along with borderline defamation, libel and aggression, are assisting in a useful project which is likely to advance at some level higher than retail news media, the popular understanding of economics as it relates to Ireland.

Some comments are unhelpful and unnecessary. Could you give it a rest please.

What could have been done to cut the losses….insert CACs into the bonds…
Seems like general acceptance from the IIF…

http://ftalphaville.ft.com/

@all

WHEN President Nicolas Sarkozy on Thursday dispatched his 34-page “Letter to the French People” to 45 million voters his main rival responded with one of the better put-downs in what has otherwise been, until recently, a most lacklustre presidential campaign.

“It’s not a letter,” a statement from Socialist François Hollande’s campaign team said. “It’s the bill, and it’s a big one.” Touché. [today’s IT]

As Nikki’s Finance Minister Ms Largarde put it to Brian Lenihan ‘Mind your banks!’ “It’s the bill, and it’s a big one.” Touché.

Touché cubed! We woz conned by the Nikkites … “bad cess to them”, as Blind Biddy puts it.

@Colm Brazel

http://www.karlwhelan.com

@all
Tuff day at the office yesterday – Mauled by the Ulstermen and Comforted by the Ulsterwomen …. wishing both all the very best in future! That said, I much prefer the latter to the former!

@BW II
“I think you have summed up David very aptly. He has always been stating that there was a property bubble. He eventually got it right.”
Well, if the government grows a large enough pair to publish the house price database we’ll see if he was right in 1999… if prices fall, what, 20% (?) below inflation adjusted 1999 prices, then he was right in 1999…

Just adding a link to Vinny’s very apropos comment above. Had to laugh especially at the bit where the everyone voted for the guarantee because Labour only voted against it being sure it would pass.

@ceterisparisbu

‘… strengthened European crisis response mechanism’

This is IMF speak, which doesn’t only apply to Portugal, for ‘when will those merkozian and ecb ludar-amadan ideological illusionists get real on this stuff?’

@ Bond. Eoin Bond

Did I wake you from your crypt?

@Blucher

“Anglo’s accounts for 2008 show that around the time of the introduction of the bank guarantee, households held deposits of €20bn with the bank.”

The few people I knew with deposits in Anglo Irish would have been counted in the ranks of the reasonably well off with deposits of in or around 100K for buying houses, and the money was there to take advantage of Anglo’s amazingly good rates. They should by all rights have taken some losses.

It’s an absolute blast to read Brian Wood’s II remark on how fat cat depositors (great new meme) should not have been made whole while insisting that those virtuous investors in bonds had to be (it was the law you understand). No shame, no self examination and no chance whatsoever, like Alan Ahearne, of admitting to having made a mistake.

@Vinny

Add in Cowen’s self congratulatory spiff given to a group in U.S(?),lauded by the I.T.,to Ahearnes piece and you have a pen picture of the denial that still pervades the ‘elite’ who are guilty of gross ineptitude and negligence in the mismanagement of this state’s economic affairs.Nothing changes.

Those involved in the banking crisis fall into two categories, the government and civil service which never admits mistakes as a matter of principle (it would damage credibility!) and the financial sector who more baldly still still claim everyone else made the mistakes (those greedy borrowers, those profligate governments, those undeserving poor).

Its the fault of the Croke Park Agreement don’t ya know?

@ All,

What I am saying is that historians many years from now, will remark, that given the amount of opposition and attack organised from all angles in Ireland, in the post 2008 period – it is remarkable how little opposition in created to the general progression of things – and this cannot be attributed alone to any special skills, or talents that existed on the benches of the Irish national government in the post 2008 period.

The only conclusion that one can take away from this, was that the shrink wrapped policy solutions purchased by that government, with tax payers money, was the policy equivalent of an M1 Abrams, third-generation battle tank – which propelled Cowen’s cabinet and slim majority through the very worst of what academia in Ireland – could organise in opposition to the general forward policy advance.

Unfortunately, what many informed commentators such as Minister Pat Rabbitte have tended to focus on, is the relative lack of power of the parliament in Ireland, versus the cabinet. Minister Rabbitte would always argue that the cabinet has far too much power to itself. But I would extend Minister Rabbitte’s point, by saying that these battle-hardened ‘solutions’ which governments can import these days, to deal with all kinds of situations, are another part of modern democracy, which we have to face up to. BOH.

Also, something else that Minister Rabbitte has tried to grabble with. Question: Is the ‘system’ at fault, or not.

http://www.irisheconomy.ie/index.php/2012/03/22/tiny-plays-for-ireland-guest-post-by-gavin-kostick/#comment-257136

Since Mr. Ahearne has issued a call for facts, here are some:

For Anglo-Irish bank as of March 31, 2008
– The deposit/wholesale funding mix was 62%/38%
– Anglo’s depositor profile was (in €bn)
Ireland non-retail 9.6
Ireland retail 7.4
UK non-retail 14.5
UK retail 9.2
Jersey/Isle of Man 6.1
Europe 7.3
USA 0.4

– 31% of Anglo’s deposits were sourced in Ireland, 69% outside.
– 38% of Anglo’s deposits were retail, 62% non-retail
– in March 2008, there were 220,000 retail customers, with an average balance of €114,000 in Ireland and £51,000 in the UK. At the end of 2008 there were 300,000 retail customers, 72,000 (24%) in Ireland
– in March 2008, there were 10,500 non-retail customers with an average balance of €4,000,000. At the end of 2008 there were 11,000 non-retail customers, 3,500 (32%) in Ireland

In March 2008 the deposit guarantee scheme (DGS) in Ireland stood at €20,000. This was increased to €100,000 in Sept 2008. Until the increase, the DGS in the UK was greater at £35,000. The UK government was responsible for the top-up (i.e. the difference between the Irish and UK amounts)

On the wholesale funding side
– senior debt 11.2
– covered bonds 5.0
– short-term interbank lending, commercial paper, CDs etc. 17.2

There was plenty of scope here for a winding down of Anglo that did not pay 100% to everybody. The €6bn in Isle of Man/Jersey deposits paid in full was hardly widows and orphans stuff. Much of the money was paid to non-Irish creditors, where Anglo was subject to host country supervision from regulators and central banks as well has home country supervision by the CBI/Financial Regulator, yet 100% of the liability ended up in Ireland. The blanket guarantee caused a run on UK banks, and burned a lot of bridges with the UK government and regulators, where most of Anglo’s creditors were.

It is hard to think of a sequence of events that could have been more costly in terms of euros, and in terms of reputation, than that taken by the Irish government from March 2008 onwards – complete inaction; unilateral guarantee given in a panic; continued denial of reality; pay everyone back in full. Since most of Anglo’s creditors were non-Irish, the strategy should have been to internationalize the problem, while pointing out that the Irish government was prepared to meet all its obligations in full (on deposit guarantees), but no more. This would have been a far stronger negotiating position than surprising everyone with an insane guarantee that hugely restricted everyone’s options, and triggered hostility that is still evident today.

@ What goes up, @ Bond, @ Grumpy

Good to see both your comments and mine got left in. ‘Bond’ and ‘What goes up’ both have a record of inflammatory comments on various opEds both against myself and other posters. Flame wars burn out quickly as no one likes them but censorship can last forever.

I don’t have a problem with them remaining as they reveal more about themselves than others. Bond, in particular, seems to lose it when he’s not getting the better of an argument 🙂 Interesting times make for passionate views and sometimes sparks fly and none of us is perfect.

Re “What goes up”

““Twas I, not Dorc The Good, ran Whelan The Deferential outa towen”

This was a rather wry comment from me at the absence of Karl Whelan following an inflammatory post from him that the list was full of trolls. Unfairly, a comment was made attributing the absence of KW to The Dorc.

The wryness was directed at a lengthy series of posts I’d previously made in former posts on the lists on ELA based on research through documents provided by the ECB on ELA. The posts I’d made were of a technical nature but got zero traction on the list from KW or others. It left me with the impression KW regarded as a troll anyone disagreeing with his point of view; in particular a view that was the product of research I’d bothered to make.

This gave me the view expressed ‘badly’ in the above phrase that KW simply didn’t want interaction based on anyone disagreeing or challenging his views.

Anyways, apologies to anyone I may have hurt through any of my posts. I actually learn from people I disagree with and often enjoy their posts and the information they have on the subject we feel impassioned about. Dare I say such posts often give me a good laugh 🙂

Still hold the irisheconomy is rather one sided in its postings and lacks the probity it should give to alternative views other than the apparent status quo of pro ECB, pro Compact, pro euro, but I do value the blog as providing good information to sources that stance is occupied with.

Its sooo good to be on holiday from being chased everywhere by BEB though. It must be so difficult for him to keep to his Lenten promise. Now, now, Bond, don’t be trying to wriggle off the hook, that original promise was not made as a Lenten one, it was made as a permanent one 🙂

I should also say not every post or posting around here from me or anyone else reads like a treatise on economics, nor should it:-)

@hoganmahew

There is a clear reason for this, as DOCM points out:
“It is clear that the numbers do not support statements to the effect that if Anglo’s bonds had been excluded from the bank guarantee then the country would not be in the mess that it is currently in”.

Where are the statements referred to here? Its one thing to address a problem, define it, then answer the problem. Its quite another to incorrectly define the problem and then answer a problem that wasn’t there in the first place.

Those of critical of the Anglo heist of taxpayers perpetrated by the former and present government, have other irons in the fire other than the question of burning bondholders. Our view was that the bank should have been closed down and a chapter 11 carried out. If not, the view was out there that the ECB pay the bill for saving French/German banks in unwinding Anglo. This still remains my view. Don’t care how they do it, once taxpayers not burdened with its bill.

Reducing the question of Anglo to some fantastical dichotomy between burning bondholders or burning depositors reduces the toxic Anglo question to the level of farce.

It doesn’t do justice to the critical faculties of those with better smarts able to come up with better solutions to the odious debt problem that such reductionism hangs around all our necks!

The final tally for the bank’s losses will not be known until IBRC has disposed of all of Anglo’s loans, but a reasonable projection might be in the region of €40bn.

Shareholders and those who owned subordinated debt absorbed €10bn of these losses.

Similar to many similar articles the exact circumstances surrounding shareholder losses are skimmed over.

The facts are that shareholders (except for a handful in a closed circle) were kept in the dark about the various ‘goings on’ at Anglo. These included:

‘Bed & Breakfast’ loan facilities with INBS. Deposit as loan to boost balance sheet with IL&P. Loans to directors to buy shares. Non-recourse loans given out to directors and clients. Share collateral used to raise even more loans. Share support loans schemes.

In most other ‘old’ European jurisdictions many of these practices are straightforwardly illegal.

Most readers of this blog will be on their second set of dentures before any progress is made on the legal proceedings front in Ireland it seems from reading the weekend reports about Pat Rabbitte’s frustration.

The bank was nationalized under Lenihan and Cowen with the promise that an assessor would be appointed. No assessor has been appointed. The Revenue have not unambiguously stated how the treatment of losses should be presented. It is all very Irish.

The current government has also chosen to turn a blind eye and deaf ear to shareholder requests for compensation. Meanwhile a lot of big fish are looked after.

@ Blucher

Huh? It doesn’t appear as if you had any comments above. Or at least any which were able to pass the fairly low bar required to post on here without being deleted…

Trying that again

http://www.sec.gov/Archives/edgar/data/930149/999999999708032366/9999999997-08-032366-index.htm

And one with some customer numbers

http://ec.europa.eu/eu_law/state_aids/comp-2009/n061-09.pdf

@ DoD

The problem is that the banks are near un-sellable with unknown cost of the tracker mortgages imbedded in them as is. Any other solutions?

@ DoD

to take them off the books right now would probably involve a right down of 15-20% of principal outstanding on the stuff not in arrears (the mortgage brokers estimate seems slightly simplistic in that it seems to assume there is no probability of paying it off early). Ivan Yeats noted it before that the bank bailout was a bailout if tracker mortgage holders aswell.

@BeB

In essence, we take yet another ‘known unknown’ into IBRC and onto the citizenry of the state; a twin for NAMA. This appears to be Gov Policy at the mo … and I suppose some more ‘creative accounting’ for GrossGovDebt which will certainly fool no potential buyers of any SovBonds in future.

It’s gettin worser ..