What does Brian Lucey mean by "Selling Anglo's Deposits"?

I heard Brian Lucey on Newstalk today telling Alan Dukes that Anglo should sell their deposits. He badgered Dukes demaning to know if this option had been considered. I wondered if I had misheard, but he has proposed this in an article in the Independent on 1 April. (As far as I can see, this was not an April Fool's joke)

Anglo can be wound up cheaply -- here's how. Sell the €28bn deposit book.

This is a regular event in banking, and even if it has to take a discount of 25pc that would yield €21bn.

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Anglo can sell their loan book to NAMA, because loans are assets. I understand that.

But what does selling a deposit book mean and what does the discount of 25% mean?

The [broken link removed]forced Bradford and Bingley to transfer their deposits to Abbey/Santander, but they were matched with hard cash.

The transfer of the retail deposit book has been backed by cash from HM Treasury and the Financial Services Compensation Scheme. Further details about these arrangements are set out below.

Under the Transfer Order, the FSCS has paid out approximately £14bn to enable retail deposits held in Bradford & Bingley and covered by the FSCS to be transferred to Abbey. The Treasury has made a payment to Abbey for retail deposit amounts not covered by the FSCS, amounting to approximately £4bn. In return, the FSCS and the Treasury have acquired rights in respects of the proceeds of the wind-down and realisation of the assets of the remaining business of Bradford & Bingley in public ownership.

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The whole point of keeping Anglo open is so that the government does not have to borrow a further €28 billion to fund the deposits. If they were to "sell the loan book", then the governement would have to give €28 billion cash with it.

What am I missing?

Unbelievable

I read that article three times. It is truly staggering that the TCD prof is saying that Anglo should sell its 28Bn deposits for 21Bn. I note that the Sunday Times similarly calls for Anglo to sell its deposit book. Maybe we are both missing something here. If not, surely that is BL's credibility shot to pieces and not before time.

Nah, we MUST be missing something. If you start your calcs by assuming you can exchange 28Bn of liabilities for 21Bn of assets well, that's a miracle creation of 49Bn. He would then finish up with a far too rosy outcome, and since he doesn't we must be missing something. I'll have to look at the article again and try and piece together his numbers.

Let's take this in baby steps because someone is missing something big time.

Anglo has €28 billion in deposits.
Therefore, it owes €28 billion to people.

I have a €100k mortgage with Bank of Ireland.
Therefore I owe €100k to Bank of Ireland.

I can sell my mortgage to the Bank of Lucey at a discount of 25%.

So I will end up with €75k in cash instead of owing the Bank of Ireland €100k.

I feel generous. I will sell my mortgage at a 50% discount.

Why does Anglo not raise further billions and billions in deposits and then sell them on again?

Professor Lucey had articles in the Irish Times and the Indo on the same day.

They were discussed on Irish Economy.ie and it seems to have been agreed that Brian doesn't understand the difference between assets and liabilities.

This is genunely very worrying. He is quoted as an expert on the Radio and TV all the time. He is treated as God by the Irish Times. High finance is above the head of most of us. So when we hear Lucey solving the problems of Anglo by "selling the deposit book", we wonder why the government is not doing it. Then we assume it's because they want to protect property developers.

Professor Lucey has not answered his critics. He has not corrected his error. He just continues to make the error. Anyone listening to him today on Newstalk would have full confidence in him and no confidence at all in Alan Dukes. What surprises me is that Garret Fitzgerald and Moore McDowell were also on the Newstalk programme and did not challenge Lucey's suggestion of selling off the deposit book either.

Professor Lucey complained that the government has never sought his advice. We are in bad enough trouble as it is without having someone who can't tell the difference between assets and liabilities.

I have taken out the key quotes from Irish Economy.ie on the topic

LD hits the spot exactly. Those listening to Brian Lucey will all know the answer to sorting out Anglo.

sorry to go on about the price of deposit books again, but I would like an explanation of the figures in the BL Indo article today…its the easter weekend and I will spend a lot of time with the arm chair experts whiling away the hours drinking pints….these experts quote their newspapers like encyclopedias….now all the experts will have the answer to the Anglo problem and when I disagree, they will hit me (literally) with today’s paper…..

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This is Brian Lucey's although, I don't understand this either

Isnt it funny how when someone TRIES to think of a solution it can be crowdsourced and improved? Imagine…And we could have let the “anglo closure will cost us 100b (that was our taoiseach, talking about a bank with a liability level of 85b….) and more” go unchecked. Now its a pity that more people , such as market participants and others who do this for a living (note - us guys have day jobs as well as trying to save the state from the black hole of anglo) couldnt put their minds to it.
As I said on another thread, im mostly offline for the next two weeks. Debate on….

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He is asked a simple question here

Brian, why does the Independent article read as if the Anglo deposit book is an asset worth 21bn when it is a liability of 27.2bn? Is this a misprint?

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And [broken link removed]

Deposits are a liability of anglo, you cannot sell them! Very rudimentary mistake by BL which undermines the whole argument.

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At least "Stuart Blythman" isn't sure

No expert on banking but I think you can sell the deposit book.

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Sell 28 billion of customers deposits for 21 billion. These are under the government guarantee so no problem with the depositors.
I suspect its an april 1st fools article.

Ok Brendan, I have read the article again. It is total gobbledygook.

Besides the "deposits are an asset" nonsense we have the following gems:

"Anglo will pay back its interbank loans of 16Bn to NAMA." Anglo owes nothing to NAMA. NAMA owes it 18Bn (per Karl Whelan), so there's 34Bn of that windfall reversed.

The actual interbank position of Anglo is 9 to and 7 from, almost neutral. Where does the 16 come from?

After all these nonsensical transactions BL calculates that Anglo owes the ECB 17bn for which it has assets (non NAMA loans) worth 30bn. The windfall miracle does after all shine through.

Back to those deposits. Your own helpful summary tells us that 15 of these are retail and 12 are corporate including 7.5 from Irish Life. So even in BL's Alice in Wonderland he ain't going to get anybody to pay 75% for Irish Life's deposit.

This is serious, for the reasons you have articulated. Maybe, it was an April Fools but why then does he persist in justifying himself.

Brendan, you spotted it, you must bring this to the attention of the Indo - they should not blindly publish balderdash from anybody even if they are professors.

Duke of Marmalade said:

Your own helpful summary tells us that 15 of these are retail and 12 are corporate including 7.5 from Irish Life. .

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Just to be clear, the €7.5 billion was at 30 Sept 2008 and was repaid, shortly afterwards. I had difficulty saying that in the table. i will revise it.

It can't be an April Fool trick because he was still on about it today.

Folks - I have previously questioned the credentials of Lucey here in relation to his crazy predictions on house prices in an [broken link removed] which was sponsored by a mortgage company !!

Genius! He has managed to turn a €28 Bn liability into a €21 Bn asset in one fail swoop. Net profit = €49 Bn

I owe a mate €100. I might contact Brian to see if he is interested in buying the debt from me aa knock-down price of €75

Guys, it was obviously an April Fool. It wasn't just the "deposits are assets" , the whole piece was a farce. Unfortunately the editor of the Sunday Times and John McManus of the Irish Times have turned out to be the April Fools long after it is dead and gone.

You're probably right. No one who proclaims to be an expert in the area could make that many mistakes in a single article.

That is the most bizarre article I have read in a long time. There are so many errors in there, I am not going to even begin going through how it is complete and utter rubbish. If it wasn't an April fools, TCD should seriously examine what this guy is teaching...

Sunny said:

That is the most bizarre article I have read in a long time. There are so many errors in there, I am not going to even begin going through how it is complete and utter rubbish. If it wasn't an April fools, TCD should seriously examine what this guy is teaching...

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I was waiting for your take, Sunny. I have to pinch myself every time that I think of that article. The really frightening aspect is that people like John McManus and the Sunday Times are taking up the theme. Even the fact that Alan Dukes didn't eat him alive on Newstalk. I ask myself, if I was in Alan Dukes place would I have immediately spotted that the prof was talking through his hat?

Duke of Marmalade said:

I was waiting for your take, Sunny. I have to pinch myself every time that I think of that article. The really frightening aspect is that people like John McManus and the Sunday Times are taking up the theme. Even the fact that Alan Dukes didn't eat him alive on Newstalk. I ask myself, if I was in Alan Dukes place would I have immediately spotted that the prof was talking through his hat?

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Are we missing something? I am beginning to wonder if I am stupid.. Even leaving aside the "selling of the deposit book", what is this about?

This is a regular event in banking, and even if it has to take a discount of 25pc that would yield €21bn. Sell the bonds and withdraw deposits in other banks. This gives a further €14bn, a total of €35bn, that is sufficient to cover the senior bondholders (€13bn) and the interbank deposits with NAMA (€16bn), with €6bn left over.
The €6bn can be used to pay off the ECB and the Central Bank, in part, with the remaining €17bn borrowings from these institutions secured on the remaining lending by Anglo.

The ECB and the Central Bank gave secured funding through repos. The main reason Anglo still has about €6-7 billion of a bond portfolio is so that they can repo those bonds with the Central Banks. Lucey thinks they should sell those bonds and pay back unsecured creditors. How the hell does that work?

And how the hell does Anglo owe NAMA €16 billion in interbank deposits??

I have moved the discussion of McWilliam's ideas to a separate thread.

http://www.askaboutmoney.com/showthread.php?t=135616

This is not an April fools joke. He repeated his idea to 'sell the deposit book' on newstalk on monday:


It calls the credibility of the whole public debate into question if somebody can make such a ludicrous suggestion without anyone contradicting him.

Correction from Brendan
It appears that the Monday programme was a repeat of the programme on [broken link removed]

I don't want to be cruel - but how is he a professor of finance? My jaw was on the floor during that interview.

Carolina said:

This is not an April fools joke. He repeated his idea to 'sell the deposit book' on newstalk on monday:


It calls the credibility of the whole public debate into question if somebody can make such a ludicrous suggestion without anyone contradicting him.

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Thanks for that. I can see why Alan Dukes didn't devour him. In the heat of that debate Alan thought that the professor was using shorthand for selling off the deposit book i.e. selling the deposits accompanied by the backing assets. And that is what I would have thought he meant. But, beyond all belief, the professor actually meant that we would sell the deposit liabilities and get assets in return, this is absolutely clear from his April Idiot's article in the Indo as Brendan has so clearly spotted. Unbelievable

OK, I read this this morning and didn't quite get it. However, my brain has shedded the excess chocolate from y'day and the penny has dropped.

the problem is, to the everyday punter, it makes perfect sense (Sell deposits for cash). However, as mentioend above, it doesn't work like that when you really think about it.

Astonishing!

I have just found this in the middle of a separate long Irish economy.ie thread

Brian Lucey repeats his argument early on in the thread about selling the deposit book.

He is challenged twice and while he ignores the challenges, he does respond to the other comments.

Finally

1. JL Says:
   April 1st, 2010 at 4:09 pm @BL,
   Two contributors have queried your numbers on selling the deposit book for 21bn. Yet you repeat it again w/o clarifiying your position.
2. Brian Lucey Says:
   April 1st, 2010 at 5:19 pm @JL
   Errr. where do I repeat it?
   Anyhow, im off for two weeks (family issues) so let the debate continue.

Brendan