# What will we do with Anglo?  The costs and benefits of the various options.



## darag (18 Apr 2010)

Brendan asked me a while back to subject my suggestion (see the "Darag's proposal to exit Anglo at least cost" thread) to wind-up Anglo to analysis in the context of number in the very useful summary of Anglo's assets and liabilities Key Posts.  I've finally had a chance to do so.

I've started a new thread because I'd like to reflect a broadened scope; it makes little sense to estimate the cost of a single proposal in isolation if the idea is to try to figure the best way out of this mess.

I'd like that the basis for this discussion is strictly that "we are where we are" and ignore completely past decisions.  This thread (hopefully) will be about numbers only.

The figures I used previously were based on semi-remembered numbers from Anglo's published 2007 consolidated balance sheet.  I guess it is not surprising that things have changed quite significantly since then which affect my analysis: particularly Anglo's repurchase of some of its own sub-debt but even more significantly NAMA.

I still have questions regarding the summary of assets and liabilities given in the other threads, but let's roll with it for the moment.  I've consolidated some of the figures as a simplification.

I have to say, I do not know all the relevant numbers - in such cases I have tried to identify and highlight my assumptions and would welcome input to correct or verify them.  I'm sure there is a tonne of mistakes in this but I'm hoping that with others' input, this thread could evolve into something useful.  It's not just the numbers but also some of my reasoning could be faulty.  I'm just hoping I haven't made a blunder as embarrassing as that made by a certain Mr Lucey recently.

But at least it might be a start.  Also I've rounded the figures in many places.

Our assumptions:

Assets:
    Customer loans (realistic valuation): 20B
    NAMA bonds: 18B
    Loans to banks: 13B
    Government bonds: 3B
    Bank bonds: 4B
    Investments (including derivatives): 6B
    Government promissory note: 8B

So the total liquidation value of Anglo would be 72B.  However I'm not sure that the capital promissory note can not be counted among the other assets in the event of liquidation; I'll talk about this again below.

Liabilities:
    Sub debt: 2.4B
    Guaranteed notes: 7.4B
    Unguaranteed medium term notes: 6.7B
    Short term notes: 1.5B
    Derivatives: 2.7B
    Retail deposit: 15B
    Commercial deposits: 12B
    Other bank deposits: 9B
    Central Banks: 24B

So the total liabilities would be let's say 80B.

Sunny pointed out a flaw in my previous reasoning: we can simply forget about the previous equity the government put into Anglo (4B was it?).  It's gone no matter what is done with Anglo.

Now the options:

Option 1 - immediate liquidation.

Because the government has guaranteed practically all the liabilities of the bank, this means the government stepping in to cover the hole in the balance sheet.

This is the easiest to calculate - we've 80B worth of liabilities and 72B worth of assets.  

So seemingly for 8B, the government could completely liquidate Anglo and ensure ALL depositors and bond holders were fully paid off.  Given that we seem to be facing a huge capital injection bill (10/12 billion?  please correct me here), this actually looks quite attractive (to me anyway).

However, I think there is a problem here. I'm not sure but I don't believe that the government's capital promissory note can be sold in this situation and even if it can then the state will have to stump up 8B to the purchasers.  My understanding is that this note is purely to support the capital ratio of the bank and is only required if the bank is to remain operational.  If it were planned to liquidate Anglo, then you there is NO need to maintain any capital reserves and I presume promise would expire (please correct me?).  Actually it does not affect the numbers either way.

In effect, selling Anglo's assets would only raise 64B.  So the true cost of this option would be 16B.

*Summary:*  The benefit is that all depositors and bond holders get paid off.  No fear of contagion; i.e. no transferring the problem to other state backed (directly or indirectly) institutions like the ICB or other Irish retail banks.  The *cost to the state would be 16B*.  (Anglo are claiming it would cost 27B? where did they get this figure?)

Option 2 - liquidation on/at the expiry of the guarantee.

This is where the usual process of haircuts, etc. are applied to debt holders when there is a shortfall.  This is a trickier calculation than the above.

Again, I am assuming the promissory note is worthless in the event of liquidation.  So we we are starting with 64B of cash from asset sales to cover 80B worth of liabilities.

How would this pan out?  Sub-debtors get burned (2.4B) leaving 77.6B of liabilities to be covered without touching our 64B of cash.

Next, pending an answer to Duke's question in the "summary of liabilities" thread, lets assume that the Central Bank loans are fully collateralized so that it is impossible to realise the 64B from selling off assets without repaying them.  So the ECB/ICB gets 24B.  That leaves us with 40B to cover the remaining 53.6B of debts.

I'm not sure about the derivative liabilities (2.7B) but I imagine that they are closely entwined with the derivative assets so - like the repo situation with the central banks, I'm not sure the latter can be sold/liquidated without also unwinding Anglo's obligations in this regard (please correct me here).  So we have to pay these off.  That now leaves us with 37.3B of cash to pay back 50.9B of debt.

Unless we default on our national debt, the guaranteed note holders (7.4B) have to be paid off.  Our cash pile is now 29.9B and our outstanding debt obligations come to 43.5B.

That leaves deposit holders and bond/commercial paper holders.  These have to be treated equally so they get paid 68c in the euro.

The cost to the government depends on how much of this bond dept is held by state even if it is indirectly: assume that nearly all of the 9B deposits with the other banks are held by other banks covered by the government guarantee (is this realistic?).  Let's say that the write-down will cost the other banks 3B which the state will have to indirectly pay for.

*Summary:* The *cost to the state would be about 3B* (on the other bank deposits write-down); *individuals with deposit accounts would be hit* (just under 5B); commercial deposit holders get hid for about 4B (which *may hurt vulnerable businesses* in this fragile economy) and institutional bond/note holders would lose 3-4B.

Option 2b - option 2 but with a compensation package for deposit holders.

This is basically the "darag" suggestion.

The government would offer a compensation package for deposit holders but the cost depends on how generous the state wants to be in this regard.  The total depositor loses would be roughly 8B (commercial and retail but not "other bank" which are already accounted in the 3B cost of option 2).  This gives the government some flexibility which importantly would provide some important political capital.  I think 3-4B would be generous.

Summary: as above but *the cost to the state would be 6/7B* depending on how generous the government want to be.

Option 3 - continue to run the bank hoping a future profit stream will fill the hole.

This seems to be the option currently planned and favoured by the government.  I personally am very skeptical that Anglo will discover some new profitable banking niche but even in stating this I am deviating from my own stipulation that this thread be about numbers only.

So let's try some whatifery:  there's a 8B hole in it's balance sheet and it is relying on a 8B government promissory note to allow it to trade as a bank at all.  It needs the equivalent of 16B in present value cash - which (being generous I think) translates to a future income stream of about 1B a year (very rough estimate - depends on the banks cost of capital - say around 6%?).

So if Anglo can generate about 1B a year in profits then it could easily service the hole in its balance sheet and provide an equity cushion to operate as a bank with a reasonable capital ratio.

The state would have to come up with a capital injection first though.  Let's say it needs 8B to fill the balance sheet hole and 8B equity injection to meet capital ratio requirements (currently in the form of a promissory note).   So if things went sour we are looking at writing off all this equity - *the state would lose 16B of state exposure* in present value terms.

Summary: the *cost to state would be either zero IF the bank can generate 1B a year profits* or *over 16B if it fails to achieve profitability*.

Conclusions.
I want to hold off making any conclusions until I have more confidence in my reasoning and numbers here.


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## Duke of Marmalade (18 Apr 2010)

_darag_ a number of comments:

Option 1:

The subbies get nothing under this option, they do not enjoy the guarantee as they mature beyond its expiry. Similarly you would save on some of the seniors but not much.

The main problem with this option, so far as I am understanding the arguments, is that you would have a fire sale of the remaining customer loans - probably triggering a further 10Bn write down 

A further problem is that those NAMA bonds would need to be replaced with real cash wich would need to be funded from real government borrowing at much higher rates than 1.5%

Option 2:

This one is IMHO an illusion. Nobody currently subject to a guarantee is going to sit like a rabbit in the headlights until its expiry. This is the fundamental fault line in the original 2 year guarantee - it has to be in effect a rolling open ended guarantee, except for those who have amounts due beyond the expiry date. In summary Option 2 is really no different from Option 1.


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## darag (24 Apr 2010)

Hi Duke.

How are you so sure that none of the sub debt is covered by the guarantee?  Surely all of it existed when the guarantee was announced and so it would be guaranteed?  Anglo have hardly been selling non-guaranteed sub debt since then - they've been buying it up as far as I know.  The nominal sub debt value has gone from 4.9B to 2.4B in the space of a single year (2009).  Do you have access to the expiry profile of the sub-debt?

The summary of Anglo assets that Brendan wrote already discounts the value of the remainder of the loan book (post NAMA) by 50%.  Did you miss this point or are you arguing that this is still too generous?

There should be no issue with the NAMA bonds in any liquidation scenario; they could be used to pay off the ICB and/or other NAMA participating banks in lieu of cash.  Floating rate government backed bonds are quite attractive to a significant class of investors - there would be no problem finding buyers privately.  For example the other Irish banks should love them - they can repo them from the ECB and pocket the 1.5% difference risk free; free money effectively.

If you can address the above, I will adjust my figures and analysis.

On the substantive issue and having thought about it I must agree with you that option 2 is not a runner at all.  Effectively to hit any of the demand deposits, no matter how you engineered it would constitute a renege of the guarantee of some form; for example, freezing access in order to wriggle out of the terms of the guarantee.  So I think no matter what, we are facing compensating all demand deposit holders 100%.  The only hope to lessen the government losses in this regard would be to hit term deposit holders; while I know Anglo sold term deposits aggressively I have no idea of the amount or expiry profile of such accounts.  I don't see any issue hitting such accounts; you gave Anglo your money knowing it was locked in until after the guarantee expired.

However, I don't see how you can claim that option 1 and option 2 are the same as the non-deposit debt holders get hit with option 2 but not with option 1.  Even with a 100% depositor compensation scheme, you'd save over 3B over the cost of option 1.

So in summary we have: the cost to the state of:

1. Immediate liquidation: cost *16 billion*.
2. Liquidation post-guarantee expiry (but with 100% compensation for deposit holders): *12.5 billion*.
3. Running the bank as a going concern: *at least 16 billion* if the bank fails to quickly start generating profits of about 1 billion a year.

Option 2 remains the least cost option available to us.  Option 3 is a long-shot gamble.  Option 1, despite popular demands is the least attractive.


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## tiger (24 Apr 2010)

I suspect the powers that be may be looking at some form of option 2, but are playing their poker face at the moment.
Depending on how the global markets & the Irish economy pan out over the next 6 months, some level of 'default' may be 'acceptable'...


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## darag (24 Apr 2010)

I'd like to hope so, tiger, but I am not very optimistic.  A >16 billion loss down the road might be more politically attractive than facing an immediate bill for 12/13 billion.  Also, if there were a plan for option 2, the government would have (should have?) blocked Anglo from buying back any of its sub-dept which provides cushioning in a winding-up situation.  Ok - so they have been able to buy the debt back at a discount but it doesn't make sense to pay anything at all for it if liquidation was planned as the debt would become completely worthless in that situation.


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## Duke of Marmalade (25 Apr 2010)

A few points _darag. _You correctly ask for a maturity profile of subbies (see below) but your opening comments seem to suggest that you believe that it is the origination profile which counts. Nothing which is due after the expiry date is guaranteed irrespective of when the comitment was entered into. Immediate liquidation does not alter that.

Option 2 will only differ from Option 1 if some liabilities guaranteed under the latter would not be guaranteed under the former. Any maturities will simply walk if there is no renewal of the guarantee so there is no saving here.

Maybe Central Banks would accept NAMA bonds on a semi permanent basis, though this is quite different from accepting them as short term repo collateral and would need ECB approval.

Whether to pull the plug quickly seems to be a trade off between the following factors:

*For*: there could be some saving on dated seniors and subbies, 5bn maybe??

*Against*: Liquidation would precipit a firesale in assets with immediate hits for the taxpayer and collateral damage to the economy and the rest of the banking sector and as a secondary some damage to the national credit rating. 

The *For* is reasonably quantifiable; the *Against* is a matter of judgement. I think the name of the game is to quietly pack the bags and by 2014 when the subbies mature pull the plug, at which time the firesale of assets may be less of a worry.


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## darag (25 Apr 2010)

Duke of Marmalade said:


> A few points _darag. _You correctly ask for a maturity profile of subbies (see below) but your opening comments seem to suggest that you believe that it is the origination profile which counts. Nothing which is due after the expiry date is guaranteed irrespective of when the comitment was entered into. Immediate liquidation does not alter that.


I don't get this?  I certainly don't believe that the "origination profile" (new term for me) is what counts in this analysis; I challenged your claim that none of the sub-debt was covered by the guarantee (so it doesn't matter when Anglo was wound down) by noting that NO un-guaranteed sub-debt has been sold since Sept 2008 - so that unless ALL the sub-debt expires before next september there will be sub-debt to burn through if we liquidate then.  I was interested whether you knew something the rest of us didn't concerning the expiry.



> Option 2 will only differ from Option 1 if some liabilities guaranteed under the latter would not be guaranteed under the former. Any maturities will simply walk if there is no renewal of the guarantee so there is no saving here.


I don't get this either - all of the non-deposit debt is fixed term - the holders have no option to "walk" unlike demand deposit holders?



> Maybe Central Banks would accept NAMA bonds on a semi permanent basis, though this is quite different from accepting them as short term repo collateral and would need ECB approval.


The NAMA bonds have already been created (with ECB approval) - they may have some small input into their transfer from one body to another but it's completely immaterial to the ECB.  The point was the "common perception" that the NAMA bonds would have to be discounted to be sold is simply not true - these bonds have very attractive features for some buyers.  I suspect they could be sold at a very small premium.  So your original claim that the only way for these assets could realize value would be to have the government buy them back with their own cash is not at all obvious and in fact seems a very unreasonable assumption.



> Whether to pull the plug quickly seems to be a trade off between the following factors:
> 
> *For*: there could be some saving on dated seniors and subbies, 5bn maybe??
> 
> *Against*: Liquidation would precipit a firesale in assets with immediate hits for the taxpayer and collateral damage to the economy and the rest of the banking sector and as a secondary some damage to the national credit rating.


The savings would actually be less - according to the analysis above it would be 3/4 billion.

Could you be more specific in your "against" list?  It all seems rather vague - which particular asset sale do you see causing all this damage?  And please - I hate the term "firesale" - it's meaningless in the context of what we are talking about.  When people use it (like you are using it here) you are trying to suggest that the markets are wrong and that something has a "true" value above what can be realized.  It is disingenuous as it suggests that the assets being sold are not in their original state (i.e. they have been damaged by a fire) when this is not the case at all.



> The *For* is reasonably quantifiable; the *Against* is a matter of judgement. I think the name of the game is to quietly pack the bags and by 2014 when the subbies mature pull the plug, at which time the firesale of assets may be less of a worry.


Again with the term "firesale".  I could equally argue that ala Japan (or dig out historical analysis of other property busts), the property market decline will continue for another five years at least but I'd rather not muddy the discussion with market timing voodoo.

If you want to describe a forth option (wind Anglo down in 5 years) - feel free.  We can run the numbers over it too.


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## Duke of Marmalade (25 Apr 2010)

_darag_ I presume that it is the e-medium which is causing confusion here. You seem as puzzled by my assertions as I by yours.

I am simply arguing that Option 1 is no different to Option 2 as anything which is currently guaranteed up to September is safe under both. Anything which matures beyond September is fair game under both. So the only difference is if between now and September some mugs lend beyond the expiry date, hoping that the guarantee will be extended.

Subbies mature mostly in 2014, I understand, so they are unguaranteed under either option.

The whole crisis is about the difference between the firesale value of properties and their long term economic value. How can you not see that? Let's paint an extreme picture. Let's say the banks called in all their resi mortgages immediately. In your world that would present no problem; people would simply sell their houses and pay back the mortgage. Can't you see that would not work? Similarly a liquidation is equivalent to a bank calling in all its loans including resi mortgages, development loans, commercial loans etc.


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## Sunny (26 Apr 2010)

Hi Drag,

I have only had time to scan your post. Looks interesting. I am actually doing an analysis on Irish banks at the moment for work so will be looking at Anglo more closely over the next few days. Will be able to comment then.

Just a couple of quick observations with regard to the NAMA bonds. I don't think there are any in the accounts you are using because they were only issued within the past few weeks. Also they are not the attractive asset you think they are. The bonds are designed not to be traded as you don't want NAMA bond competing with Soverign Debt. The ingenious part of the bonds is that in theory, they never have to be paid back. (This aspect of NAMA is often forgotten but is actually the cleverest part). The Government can roll the bonds every year by issuing new ones. Remember the banks are getting them in exchange for NPL's. They are not buying them. If you liquidate Anglo, no bank would hand over €25 billion cash or whatever it is to buy the bonds even if they can repo them with the ECB.

Here is the offering circular for NAMA bonds

[broken link removed]


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## Sunny (26 Apr 2010)

Ok, I had a quick look this afternoon. Actually a very interesting report. First off, politicians and economists should be made read the report before coming out with suggestions like 'Liquidate Anglo' and 'burn the bondholders'. But at the same time they want to protect the depositors. 
I only had a very quick look and I can see the Governments dillema. I will post a proper anlysis in the next few days but I now accept the Government's view that a liquidation is a complete non-runner if depositors are not to lose money. And that has nothing to do with saving bondholders or Government Guarantees etc. As always,the interesting stuff is in the notes to the financial statements. Anglo have collateralised everything including the kitchen sink. There would be nothing left for unsecured creditors including depositors if Anglo was liquidated tomorrow. The taxpayer would also still be a big loser. If the Government wanted to protect depositors and senior bondholders (which they say they want to), the taxpayer would face a bill of about €35-45 billion. Even without saving senior bondholders, the cost would be over €30 billion. 

It really is in a shocking state.


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## darag (26 Apr 2010)

Very, interesting Sunny.  I'd love to see how you ended up with a 35-45 billion hole.  It would imply the summary of assets and liabilities that have been posting the the other threads were completely out of whack.  I mean, on the basis of those figures (in the other threads), the total government bill could not be more than 16 billion (from my analysis).

Great link on the NAMA bonds by the way - I've been curious about their structure for a while.  Looks like they are perpetual bonds with a callable option.  However, I don't see any restrictions on transfer in that document? This subject probably deserves a thread of its own.

Hi Duke; you are probably right about the medium.  It's very possible I am missing something obvious here - could you explain why bonds which mature after September would be fair game if Anglo were liquidated tomorrow?  Surely a liquidation within the guarantee window would require honouring these debts?


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## Duke of Marmalade (26 Apr 2010)

darag said:


> Hi Duke; you are probably right about the medium. It's very possible I am missing something obvious here - could you explain why bonds which mature after September would be fair game if Anglo were liquidated tomorrow? Surely a liquidation within the guarantee window would require honouring these debts?


That explains perfectly where we are at cross purposes. My understanding is that the Government guaranteed all contractual comitments up to 9/10. Subbies, for example, do not fall into this window and an immediate liquidation would not bring them in, I stand to be ejected on this but that is my understanding. We await _Sunny's_ assessement with interest.


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## Sunny (27 Apr 2010)

Ok, here is how I see it. I am only dealing with the accounts on the 31st Dec 2009. I am not going to back to see if Nationalising Anglo was the right thing to do or not. We are where we are and the people who made the decision had way more information than any of us. I am going to start on issues I see with the balance sheet. I will give my views on why liquidation and saving despositors without taxpayers paying the bill is impossible at another stage

So on the 31st December 2009, Anglo had the following assets:

Cash with Central Banks: €302m
Loans and Advances to Banks: €7,360m
Assets classified as held for sale: €25,892m
Amount due from shareholder: €8,300m
Available for sale financial assets: €7,890m
Loans and advances to customers: €30,852m

I am ignoring the rest as they are insignificant. I am ignoring derivatives of €2,483m because it nets out with derivative liabilities of €2,669.

On the 31st December 2009, Anglo had the following liabilities:

Deposits from banks: €32,971m
Customer Accounts: €27,214m
Debt securities issued: €15,148m
Subordinated Debt: €2,383m

So therefore on the face of it, liquidating Anglo makes perfect sense. It's assets (including the €8.3 billion given by the taxpayer) total €80,596m while it's liabilities only total €77,716m. Everyone gets paid and the taxpayer could get out having only lost what it has put in so far. But as in life, things are not that easy! I can see the following problems:

1. *Assets classified as held for sale of €25,892m:* These are the loans that Anglo intend on transferring to NAMA. The €25,892m is a net value based on a loan book of €35 billion less €10 billion of loan loss provisions. This shows that Anglo were expecting NAMA to apply roughly a 28-30% haircut on the loans. However, as can be seen recently from the information given when the first tranche was transfered, the haircut is more likely to be around 50%. This means that this item on the balance sheet probably needs to be reduced to about €18 billion.
2) *Loans & advances to customers of €30,852m: *Seeing how Anglo seriously underestimated the haircut on NAMA loans, I think it is fair to say they are probably underestimating the provisions for this section as well. Looking at the figures more deeply we can see the following. Gross Loans to customers amounted to €36,469m. They made provisions of €4,846m which gives the carrying value of €30,852m that you see on the balance sheet. However, if we look at the portfolio of loans, we can see that Anglo have classified €5,160m as loans of a lower quality but not past due or impaired, €4,760m as past due but not impaired and €9,511 as impaired. Now, it is impossible for me to be accurate with regard to this but I can't see how the €4,846m is enough to cover those loans that total €19,431m. Thats a coverage ratio of about 25%. I am going to make a guess (being generous to Anglo) that will need another €7-8 billion of provisions. Therefore in my opinion the carrying value of these loans should be about €22 billion. 

So where do we stand now? If we look at it if the taxpayer hadn't given the note for €8.3 billion and make the adjustments from above, we see that Anglo has assets of about €56,404m compared to liabilities of about €77,716m. Obviously the taxpayer has provided the €8.3 billion promissary note. Therefore the gap is €13,012m. Taking into account the €4 billion of equity provided by the taxpayer, the gap remains at about €9-10 billion. I think it is this gap that Lenihan was warning about when there could be a further requirement of €10 billion.

Hopefully this afternoon, I can go through why I think it is very difficult for the Government to simply shut down Anglo now. A gradual wind down might be possible.  There is some interesting stuff on the liability side. They really are in a very difficult situation.

Feel free to rip apart my figures. All of this is guess work since the Government won't reveal their figures.


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## Duke of Marmalade (27 Apr 2010)

_Sunny_, I don't know why you deducted the 4bn State equity from the shortfall. You have added up the assets and the liabilities; surely that 4bn has already been incinerated and is part of those assets.  Where else is it on the balance sheet?


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## Joody1 (27 Apr 2010)

I had this come through on a email thought it makes good reading

The next time you hear a politician use the word 'billion' in a casual manner, think about whether you want the 'politicians' spending YOUR tax money..

A billion is a difficult number to comprehend, but one agency did a good job of putting that figure into some perspective in one of its releases. 

A. -  A billion seconds ago it was 1959.  

B-  A billion minutes ago This post will be deleted if not edited immediately was alive. 

C. - A billion hours ago our ancestors were living in the Stone Age. 

D. - A billion days ago no-one walked on the earth on two feet. 

E. - A billion pounds ago was only 13 hours and 12 minutes, at the rate our government is spending it. 

Building Permit Tax , Cigarette Tax, Corporate Income Tax, Income Tax, Unemployment Tax , Fishing Licence Tax, Food Licence Tax, Fuel Tax, Petrol/Diesel Tax, Hunting Licence Tax, Inheritance Tax, Inventory Tax, (tax on top of tax), Alcohol Tax, Luxury Tax, Marriage Licence Tax, Property Tax , Real Estate Tax. Service charge taxes, Social Security Tax, Road Usage Tax , Local Tax , Vehicle License Registration Tax, Vehicle Sales Tax, Workers Compensation Tax.  

STILL THINK THIS IS FUNNY?

Not one of these taxes existed 100 years ago...And our nation (I expect it's referring to the UK) was one of the most prosperous in the world.  We had absolutely no national debt... We had the largest middle class in the world... 

And Mum stayed home to raise the kids.  What happened?

*'politicians!' 
*
I hope this goes around at least a Billion times 

What the hell happened?


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## darag (27 Apr 2010)

Yep, the 4 billion is gone and shouldn't be counted again.

As far as I can figure it, the 8 billion promissory note is just that - a promise to pay.  Fulfilling the promise will cost the state 8 billion.  The idea of the note presumably is simply to allow Anglo to trade legally as a bank by providing notional equity which can be counted in its capital ratio figures.  The state hasn't paid over the 8 billion yet but would have to in order to liquidate Anglo.

Using your balance sheet figures Sunny, I'd calculate the cost to the state of immediate liquidation it as follows:

3 billion gap excess of assets over liabilities.
8 billion cost of the promissory note.
7 billion deduction for the higher than expected NAMA haircut.
10 billion (hopefully) provisions on the remaining 30 billion loan book.

Giving a staggering total of *28 billion* just to shut Anglo down today and pay off ALL the debtors.  This is much worse than my earlier calculation.

I'm not confident or knowledgeable enough about the structure of the debt or the legalities of the guarantee to put a firm figure on how much I think can be recovered from the debt holders.  Duke thinks the sub-debt holders are toast whether you liquidated tomorrow or after the expiry of the guarantee; I had assumed the latter was a necessary condition.  I think that there will be _some_ senior debt that could be touched for a couple of billion after September but again I am not sure.  Let's say at best, we could recover 5 billion.  That still leaves 23 billion minimum.

So the situation is horrible no matter what way you look at it.

At the same time I see no attraction in continuing to allow Anglo to be run as an institution.  There is no way that they will be able to trade their way out of a 20 billion hole like this with only 10 billion worth of performing loans (and there's no sign of a bounce in the Irish economy).  Just running the bank costs 250 million a year (though this is likely to be cut savagely) but servicing the 20 billion euro hole will cost 1 to 1.5 billion in interest alone.

If we wish to attempt to hold on as long as possible hoping that there is some long term value in the impaired loans, then why not just hand the rest of the loan book over to NAMA and start dismantling the remains of Anglo.


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## Sunny (28 Apr 2010)

Hi Duke/Darag,

I accept your point about the €4 billion. I used it because I was using the balance sheet of the 31 Dec 09 and they had that €4 billion as capital. I realise it is gone by now!

Darag, the €28 billion is a best case scenario in my view. You have to factor in that you are a forced seller of assets into a distressed market so you will probably need to take a bigger haircut. Also, Anglo have mortgaged their balance sheet to fund themselves. Pretty much all that they have down as deposits owed to banks (€32 billion if my memory serves me correctly) in secured borrowing through repos. Assuming they used the best assets as collateral, it means unsecured creditors such as depositors, senior bond holders and everyone else are left with the scraps. If the Government wants to save senior bondholders, I don't see how the taxpayer can get away with a bill of less than €30-40 billion.


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## Duke of Marmalade (28 Apr 2010)

It's a truly nightmarish position. Recall how in Autumn 2008, as the Anglo shares were tanking, Drumm produced a set of accounts assuring us everything was fine...recall how Neary told us that it was evil Brit shorters which were undermining our pride and joy and doing so blasphemously on our sacred patron's day...

If we accept that depositors, central banks, and interbanks are sacrocanct then we are only fiddling round the edges, it becomes a judgement call on timing.

Going quickly saves on some liabilities i.e. subbies and seniors but destroys any remaining assets. We also save of course on Dukes's salary.

Going at a careful pace might maximise the value of the assets though with the downside of paying some seniors and subbies. 2014 seems a good target date for having wound down the main liabilities and then offering a rump bad bank to the subbies in a debt for equity swap.


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## darag (28 Apr 2010)

Indeed this is horrific - much much worse than I expected (16 billion was my worst case scenario).  I will soon edit the first post to say that the analysis is based on stale information.

Wishing to avoid doing a rushed sell-off of the loan book should not preclude the option of liquidating Anglo; we already have a state owned vehicle/"bad bank" - NAMA.

Sell the 30 billion loan book to NAMA for 18 billion (it has already been discounted by 5 according to Sunny).

This leaves us with a 30 billion euro hole to fill.  But yes, we are scrabbling around for scraps hitting the bond holders - we might get 2 billion from the sub-dept holders.  Hitting the senior owners (and we don't know how much of the 15 billion owed last December would be "hittable" at all) would involve some tricky maneuvering to pay off the depositors and central banks.  There is a worry that much of the senior debt holders are likely to be domestic - possibly other state guaranteed institutions.

I see no reason to allow Anglo to split itself into a "good" and "bad" bank either way which is, I understand, the current plan.  Why the duplication with the state owning two "bad" banks?  Let us concentrate whatever expertise we have in a single institution - NAMA.

The problem is that makes continuing with the "good bank" part look ludicrous - it would be basically starting from scratch with no loan book at all.


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## shanegl (28 Apr 2010)

Looks like the EU has spoken and option 3 has been blown out of the water.


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## Mixednuts (29 Apr 2010)

Brian Lenihan "liquidation of Anglo is now possible " ... What's changed ? has the (30billion) penny dropped ?


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## Sunny (29 Apr 2010)

Mixednuts said:


> Brian Lenihan "liquidation of Anglo is now possible " ... What's changed ? has the (30billion) penny dropped ?


 
No, he said an orderly wind down was possible.


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## canicemcavoy (29 Apr 2010)

Mixednuts said:


> Brian Lenihan "liquidation of Anglo is now possible " ... What's changed ? has the (30billion) penny dropped ?


 
I think the EU has had a word with someone. This is the start of the backtracking.


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