# Darag's proposal to exit Anglo at least cost



## darag (26 Mar 2010)

_I have removed this from another thread in an effort to highlight the suggestion and discuss it separately. Please stay on topic, although I agree it can be difficult. Brendan_

Ok. Here's a suggestion on how to minimize the cost to the state of folding Anglo.  This would probably require special legislation.

The first and major problem to deal with is the deposit base - it's impossible to handle the situation with the volatility and unpredictability of depositor behaviour.

One option would be to freeze the accounts;  this happens all the time in other countries when banks are being folded.  If it seems inconceivable in Ireland, that's because we haven't had to deal with retail banking collapse in living memory.  As long as there was a clear time-line, then it shouldn't cause undue hardship.

The other option would be to create a new institution and transfer the deposits to it.  (I don't think any of the other banks are healthy enough to handle taking over the deposits.)  This institution would hold an Anglo issued bond to the value of the deposits with a coupon sufficient to meet the deposit interest obligations.  The government would have to provide access to liquidity to this institution to deal with withdrawals.  If a run started and the government wasn't in a position to cover all the deposits then a withdrawal limit (100K or so) could be imposed.

Next the government needs to ensure that Anglo can limp over the line until the guarantee expires.  This means lending more money to Anglo to pay off the bonds that expire between now and September which are covered by the guarantee.  I do not know the value of these bonds but I am assuming they comprise a fraction of the overall liabilities.  Again this may require a significant level of short term government borrowing.

Once the expiry expires, then Anglo should be liquidated.  I'm not sure that there is much in the line of subordinate debt to burn through as Anglo has been buying back such bonds at a discount as far as I know.  Anyway the sub bondholders would be wiped out (the shareholders have been already) and I estimate the senior debt holders (including the new deposit holding institution and the government) would be facing a 30% or so haircut on their debts.  This way the government would lose 30% of their current exposure plus the lending require to get Anglo over the expiry - lets say 2 or 3 billion in total.  The deposit holding institution would also lose billions on its Anglo bond; the government would then have the option of putting money into to this institution to cover the shortfall or else the deposit holders would be forced to take a hit.

Of course, right from the start there has been high-level campaign to protect senior bond holders at all costs and transfer their losses to the government so a plan like this would face fierce opposition.  Simple arithmetic will tell you some-one has to pay for the losses in Anglo.  At least with this plan, the government and the senior bond holders share the pain.  The only way to completely protect the senior bond holders is for the government to bear all the loses.


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## darag (26 Mar 2010)

_duplicated thread to allow update based on new numbers_


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## Duke of Marmalade (26 Mar 2010)

*Re: Why would it cost so much to close down Anglo?*



darag said:


> I've suggested an idea in an earlier post on how to liquidate Anglo in a reasonably controlled manner. Have you any thoughts on that suggestion?


My understanding of your suggestion is that you want to protect the depositors and torch the bondholders, and we'd all drink to that. This could more easily be achieved by simply renewing the guarantee for the depositors only. 

We are not privy to all the numbers but I trust those calling this tune to be going for what they see as "the least worst case scenario" for the taxpayer. My guess is that they have rejected your suggestion for the following reasons:

1) Having to guarantee depositors is the lion's share of the liability anyway

2) You can only torch bondholders by a liquidation and this would trigger contagion effects right across the property and banking sector.


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## darag (26 Mar 2010)

*Re: Why would it cost so much to close down Anglo?*

Hi Duke.  I don't want to "torch" bondholders - I want ALL senior bondholders to be treated equally; to use a fashionable phrase, I am suggesting that the government's debts are ranked pari passu with those of the senior bondholders.  Thus all senior bondholders share the pain equally; if that means a 30% haircut for everyone (including the state), then so be it.

And Sunnyk, my idea is non-committal on the state of the depositors.  Their liabilities would be held by the separate institution who's sole asset would be an Anglo bond which of course would also be devalued after the liquidation of Anglo.  Thus this institution would only have assets (assuming the 30% haircut) to cover 70% of the deposits.  This is a separate problem which could be addressed in a number of ways.  At two extremes you have the option of the government could "recapitalise" the institution to fill the gap or simply use the existing deposit guarantee to fill the gap; at the other extreme the depositors all take a 30% hit.  In between there are lots of options: some government support and the depositors taking a "progressive" hit (e.g. full redemption of the first 10k, 95% of the next 100k, etc.)

So I agree that your point 1 could be an issue - I will try to rustle up some more up-to-date numbers for the state of Anglo's balance sheet later if I get a chance.

But I don't agree with your second point but I can imagine there are powerful special interests who will argue forcefully that this is the case.  As far as I am concerned, the sky has already fallen down despite the guarantee, the nationalisation of Anglo, the semi-nationalization of BoI, the recaps of the rest and NAMA.  You can't fix an insolvent banking sector by clinging to unrealistic valuations of their assets.


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## Sunny (26 Mar 2010)

*Re: Why would it cost so much to close down Anglo?*



darag said:


> Hi Duke. I don't want to "torch" bondholders - I want ALL senior bondholders to be treated equally; to use a fashionable phrase, I am suggesting that the government's debts are ranked pari passu with those of the senior bondholders. Thus all senior bondholders share the pain equally; if that means a 30% haircut for everyone (including the state), then so be it.



What Government debt are you talking about? The Government have not provided any debt financing to Anglo. They provided €4 billion of equity. Are you saying this should rank equal to senior debt?


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## Duke of Marmalade (26 Mar 2010)

*Re: Why would it cost so much to close down Anglo?*



darag said:


> Hi Duke. I don't want to "torch" bondholders...


_darag,_ first of all your plan, and it does need to be explained why it is not the "least worst", does not need the pallaver of a separate institution. Simply renew the guarantee for depositors only and liquidate the bank. This is the essence of your plan and on a purely numerical calculus it differs from the current proposals only in that senior bondholders take a haircut. Using your 30% have you a figure for how much that would save? The price of this saving is the liquidation of Anglo. We are told that Anglo is systemic to the banking system and to the international credit rating of this country. I suggest that neither you nor I can verify that one way or another. It is a question of trust that those who are making these trade offs are doing so with the best intentions and also with the best and most informed advice at their disposal.

Put another way , if the Government announced to-morrow that they were adopting the _darag_ Plan, I would say good evaluation on your part and I would concede gracefully that you are correct. To me, the very fact that the Government is pursuing the course that it is proves that in the best and most informed judgement available to us it *is the "least worse scenario".*


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## csirl (26 Mar 2010)

*Re: Why would it cost so much to close down Anglo?*



> We are told that Anglo is systemic to the banking system


 
Easy answer to this.

To say that Anglo is systemic to the Irish banking system, is to say that the absence of Anglo would have a significant negative impact on the system - that the Irish banking system could not function without Anglo. And that this negative impact would still be felt even if Anglo was a profitable company who decided to voluntarily leave the banking system. 

Based on the above, I find it hard to believe Anglo is systemically important. If it werent in debt, it wouldnt be missed.


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## Sunny (26 Mar 2010)

*Re: Why would it cost so much to close down Anglo?*



csirl said:


> Easy answer to this.
> 
> To say that Anglo is systemic to the Irish banking system, is to say that the absence of Anglo would have a significant negative impact on the system - that the Irish banking system could not function without Anglo. And that this negative impact would still be felt even if Anglo was a profitable company who decided to voluntarily leave the banking system.
> 
> Based on the above, I find it hard to believe Anglo is systemically important. If it werent in debt, it wouldnt be missed.


 
Thats not what it means at all. It means that the failure of Anglo would have led to problems in the other banks, brining down the entire financial system and the economy. I don't know if it would have or not. The Governement thought it was. The other banks thought it was. The Central bank thought it was. We can all have our opinions but we will never know if they were right.


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## csirl (29 Mar 2010)

*Re: Why would it cost so much to close down Anglo?*



> If we had let Anglo fall, it would have had a knock on affected on the other Irish Banks.


 
We keep on getting the line that the there will be knock on effects on other banks, but nobody is willing to come straight out and say what the knock on effects are.

Logic would dictate that letting Anglo fail would have a positive knock on effect on the other banks because:

1. They are rival companies - less competition for the other banks if Anglo is gone.
2. If the Government doesnt have to recapitalise Anglo, then they will be able to pump much more capital into the surviving banks.

I dont buy the "people will lose confidence in the banks" line if Anglo fails. Its not as if Anglo is a large retail bank with loads of branches and 100,000s of ordinary punters with current accounts into which their wages get paid etc. - so no danger of a Northern Rock situation. I also think that the financial markets view every PLC on its own merits. Investment/non investment in the remaining banks will be made on the merits of each of those banks, not on the financial state of a completely unconnected company i.e. Anglo.


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## Duke of Marmalade (29 Mar 2010)

*Re: Why would it cost so much to close down Anglo?*



csirl said:


> We keep on getting the line that the there will be knock on effects on other banks, but nobody is willing to come straight out and say what the knock on effects are.


I too would like a few more diagrams of what an Anglo liquidation would look like. Minister Ryan said at the weekend that it would lead us to be being dumped out of the Euro, maybe so but show us how that would happen please.

Meanwhile we can only try and visualise an Anglo liquidation. The process involves selling off all its assets (loans) and divvying out the proceeds amongst its creditors (depositors, bondholders, banks and the ECB).

A sale of loan assets on this scale would get rock bottom prices and there is no easy NAMA option. NAMA works because it can use government paper to "buy" the loans but in a liquidation it would need hard cash. The knock on would be the total collapse of the property market. The other banks would suffer indirectly from this but also directly from receiving a haircut on its interbank loans to Anglo. Moreover, the deposit guarantee (to date still a theoretical concept, hasn't cost the taxpayer a cent yet) would be immediately crystallised and would require the very real subvention by the taxpayer in hard cash (not soft NAMA paper). In Mr. Aynesley's own a assessment - "an incineration of taxpayers' money of horrendous proportions."


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## csirl (29 Mar 2010)

*Re: Why would it cost so much to close down Anglo?*



> A sale of loan assets on this scale would get rock bottom prices and there is no easy NAMA option. NAMA works because it can use government paper to "buy" the loans but in a liquidation it would need hard cash. The knock on would be the total collapse of the property market.


 
Ok, the assets of Anglo are its deposit customers and its loans. Deposit customers will be sold on easily enough to another bank(s) or simply have their accounts terminated ala Halifax. The loan book can also be sold. Yes, some of them may be sold at nominal prices to debt collectors after a long shot, but they will be sold. But I dont get the connection between selling a loan and a collapse in the property market? Its the loan that is sold, not the property. And the amount that the loan is sold for is generally dependant on the probability of it being repaid not the value of the property. Loans that are sold are also sold as is - with the same terms and conditions that the borrower originally took out with the lender. A lot of pundits may say "but what if the borrower defaults and the property is repossessed and sold......this will have knock on effects on the property market?". This is a null argument as because the terms and conditions of the loan do not change when it is sold on, the likelihood of a default-repossession-sale does not change with the sale of the loan. Essentially, if there are going to be knock on effects on the property market, its going to happen anyway regardless of who is collecting the loan. We might as well get some value for these loans, however small, before they do default. 

And dont forget my other point about having more funds to recapitalise the other banks. Just think how positive the markets would react to a announcement that the Government is able to put in more capital than it originally anticipated because Anglo is no longer a liability.


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## Duke of Marmalade (29 Mar 2010)

*Re: Why would it cost so much to close down Anglo?*

_Csirl_ excuse my looseness of language. Under a liquidation Anglo would have to turn its assets (loans) into CASH. No point turning to NAMA, it doesn't do cash, it only deals in long term paper. Nobody is going to buy the loans, so only way to raise cash is to pursue the borrrowers i.e. repossesss and sell etc. etc.


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## Duke of Marmalade (30 Mar 2010)

*Re: Why would it cost so much to close down Anglo?*

_Csirl_, this getting a bit silly. So the liquidation proceeds as follows:

Creditors: XBn

Assets: €1

Haircut for creditors: 99.999999999999999%

Seniors are torched; Interbanks are torched; ECB is torched

Depositors are bailed out by guarantee, so taxpayers are torched

The only way to turn long term loans into *maximal cash* is to call them in, then repossess and sell in the case of those who can't meet the call, there are no realistic bidders for these loans in this quantity.

The beauty of NAMA is that long term loans are turned into long term sovereign debt for the banks which they can use to get emergency cash at the ECB's window.


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## csirl (30 Mar 2010)

*Re: Why would it cost so much to close down Anglo?*



> _Csirl_, this getting a bit silly. So the liquidation proceeds as follows:
> 
> Creditors: XBn
> 
> ...


 
Great isnt it? Taxpayers only have to pick up the tab to a maximum of 100k per depositer for the small number of people with deposit accounts at Anglo. [as liquidation wouldnt be done be expiry of deposit guarantee in Sept/].

 At the moment we're on the hook for the deposits AND the loans, doing this means we reduce the Exchequer exposure to deposits only. As I've said earlier, it is not the duty of the Irish taxpayer to bail out investors, who may include central banks, who's foolish gamble on a house of cards failed. It is better that the people who made the mistake pay the price. If heads role at the ECB due to their people not following due diligence, then so be it.



> The only way to turn long term loans into *maximal cash* is to call them in, then repossess and sell in the case of those who can't meet the call, there are no realistic bidders for these loans in this quantity.


 
If the creditors are so certain that this is the best course of action, then let them take over Anglo and do it, or alternatively, let them outbid my €1.


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## Sunny (6 Apr 2010)

Nobody is suggesting that Anglo doesn't make the sub debt holders pay. Even Anglo and the Government admit that they are not going to protect the most junior security holders. They will go into the 'bad bank' with the bad assets. 

To call them vultures of the financial paririe isn't quiet correct either. Bond investors whether senior or sub have limited upside to their holdings. They are not equity investors. The most they can get back at maturity is par no matter how good the bank does. They share the same risk/reward profile as a normal depositor.


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