# What would happen if Anglo was wound down?



## Brendan Burgess (11 Jun 2009)

I presume that Anglo is actually being wound down but that the government is just not announcing it publicly? In other words, it is not making new loans to new customers. 

It has €60 billion in deposits, 75% of which are from overseas. If they announce it publicly and formally, most of this will leave, even if it is guaranteed.  The government would then have to replace all this money. 

It would not be a €60 billion "exposure" as Brian Cowen has described it. Presumably as their customers do repay their loans, the €60 billion would be repaid. 

So has the government any choice but to stick in €4 billion or €7 billion now? Probably not. 

When NAMA is set up, Anglo will move all its loans to NAMA in exchange for bonds. Anglo could then sell the bonds and repay the depositors. Anglo could then be wound up as there would be nothing left anyway. 

Brendan


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## MelF (11 Jun 2009)

Yes, I wondered about this too Brendan, if he calls it a €60bn exposure this suggests that Anglo is worth absolutely zilch and all its loans/assets are bad. I think the guy could do him and us a favour by explaining why putting in €7bn is the better option. As it is he's treating us all like imbeciles by not giving us the facts.


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## Duke of Marmalade (11 Jun 2009)

Two crucial steps in that process. The first has been well discussed i.e. what will be the discount on the asset transfer.

(I think) You have introduced a second haircut, _Boss_. You have finished up replacing deposit liabilities with liabilities to bond holders. This must involve large extra losses as the market will surely want a significant discount in moving from guaranteed deposits to bonds. 

Example: NAMA buys 100 of toxics at 80, using gov bonds. Crucially, since these bonds were not sold on open market but simply issued to Anglo they will be valued at par. But if Anglo tries to sell them it will probably find the market only prepared to pay 60 - another 20 hit.


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## DrMoriarty (11 Jun 2009)

Brendan said:


> Presumably as their customers do repay their loans, the €60 billion would be repaid.


Is that presuming too much, Brendan? As reported in yesterday's _Indo_:


> SOME senior staff at Anglo Irish Bank who borrowed millions from the bank to buy properties and shares are now unable to repay the loans, the lender's executive chairman revealed yesterday.
> Donal O'Connor said the bank had written off these loans to senior staff and directors and they would now have to be repaid by the taxpayer.


Would it be outlandish to suspect some causal relationship between this cheerful prospect and the government's insistence on bailing out Anglo, regardless of the ultimate cost to the taxpayer? In the same breath,


> Mr O'Connor emphasised several times that big developers would be treated just the same as other clients despite their political connections.
> Mr O'Connor declined to comment on reports in the 'Sunday Independent' which suggested former chairman Sean FitzPatrick has deposits of €23m at the bank which cannot be touched, despite Mr FitzPatrick's debts to the bank of €106m.
> Mr O'Connor cited client confidentiality.


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## Brendan Burgess (11 Jun 2009)

Hi Dr M

I should have clarified that. I am not assuming that all the loans will be repaid. But most of them will.


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## Brendan Burgess (11 Jun 2009)

Hi Duke

This haircutting is turning into a scalping. 

If the governernment/NAMA buys Anglo's loans at market value, it is assumed that it is giving them an asset at par value. 

I presume that Anglo could sell the government bonds at par. I think that the coupon on the bonds would have to be high enough to make sure that the bonds are fair value.

To use your example, NAMA is really paying only 60 for a loan which is worth 80, whether Anglo sells the bond or not. There is not much point in exchanging loans which have an uncertain value for bonds which have an uncertain value.

Brendan


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## Duke of Marmalade (11 Jun 2009)

_Boss_, I think I am getting a bit out of my depth. I also presume that the "market value" of the 80 bonds in the example would have to be 80, or else the bank regs leave a lot to be desired. But there is a big difference between issuing 80 worth of paper to a captive buyer and realising that 80 in a free market. Perhaps over a long period Anglo could carry out the process you describe and get a "fair value" for the 80.

I do very much agree with one thing. Anglo should be on a long term balance sheet diet with a view to a final painless death.


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## Sunny (11 Jun 2009)

Anglo and the other banks won't sell the Government bonds they get from NAMA in exchange for the loans. They will simply use it to repo with the ECB to get in funding and the move will also be positive for capital purposes because they are replacing high risk weighted assets with 0% risk weighted assets.


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## Brendan Burgess (11 Jun 2009)

Hi Sunny

If they get funds from the ECB based on the full value of the bonds, then they will have plenty of money with which to repay the depositors. 

With AIB and Bank of Ireland, they would be expected to use the ECB funds to lend on to borrowers.

Brendan


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## z109 (11 Jun 2009)

I don't know why people keep repeating the nonsense Mr. Cowen is spouting as if it is truth. 

According to the 2009 Interim report, Anglo had, as of 31 March 2009:
18 bn in retail deposits
16.1 bn in non retail
That is 34.1 bn.

It also has 14.2 bn in debt securities and 30.5 bn in deposits from banks. 
The debt securities are, as far as I can see, all term securities, with 2.8 bn being commercial paper or certificates of deposit.
Of the deposits from banks, only 389 mn is repayable on demand.
23.5 bn of the deposits from banks is repo with the ECB.

Of the 34 bn in customer deposits, only 2.356 bn is repayable on demand. The rest is term deposits.

So it is simply not true to say that there is 64 bn in customer deposits that would immediately have to be repaid.

There is, however, a trading book of derivatives amounting to 192 bn euro that would need to be unwound.


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## z109 (11 Jun 2009)

Sunny said:


> Anglo and the other banks won't sell the Government bonds they get from NAMA in exchange for the loans. They will simply use it to repo with the ECB to get in funding and the move will also be positive for capital purposes because they are replacing high risk weighted assets with 0% risk weighted assets.


What happens when the ECB stops providing unlimited liquidity and returns to a bid system for repo?
(Not that I think it is likely in the short-term).


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## Brendan Burgess (11 Jun 2009)

> So it is simply not true to say that there is 64 bn in customer deposits that would immediately have to be repaid.



Thanks for the figures, but surely it is practically true? 

18 bn in retail deposits
16.1 bn in non retail
30.5 bn in deposits from banks. 

That adds up to €64 billion.

Only a small proportion might be repayable on demand, but most terms are very short I would imagine. Paying it immediately or paying it in three months time amounts to the same thing.


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## Duke of Marmalade (11 Jun 2009)

I like to try and understand these things by exaggerating and simplifying the actual position. After NAMA has de-toxed Anglo, its balance sheet will not be far off "all deposits on one side, all government bonds on the other". In effect it will be a conduit for the government to pay depositors premium interest rates. What is the point of that?

I'm with the _Boss_ on this. The right course, after the de-tox, is for Anglo to pursue a balance sheet diet, by selling bonds and not replenishing deposits. The ECB repo facilities can be used to facilitate this diet being orderly - otherwise Anglo could find themselves forced sellers of government bonds.

The assertion by the new chairman that Anglo is going to be nursed back to viable health is surely bluster necessitated by the fact that "he must say that mustn't he". The fact is that Anglo has been so toxed that it can never be healthy again.

We do not need a revitalised Anglo for the health of this economy - two retail banks are quite enough.

But we could not let Anglo perish immediately as (we are told) the impact on property prices and confidence would start a contagion that would cause a general collapse.


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## Sunny (11 Jun 2009)

yoganmahew said:


> What happens when the ECB stops providing unlimited liquidity and returns to a bid system for repo?
> (Not that I think it is likely in the short-term).


 
If that happens, it will mean the markets have returned to normal and there would be no problem getting repo financing elsewhere (assuming the Government still has control).


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## z109 (11 Jun 2009)

Brendan said:


> Thanks for the figures, but surely it is practically true?
> 
> 18 bn in retail deposits
> 16.1 bn in non retail
> ...


ECB repo rates are for up to a year. The ECB are talking about extending this to 18 months. As long as the crisis continues, there is no likelihood of unlimited repo being removed. If the green shoots in Europe continue to be illusory, and the banking situation in Germany, Austria and Spain looks like that will be the case, the facility will remain.

Without this facility, Anglo is so, so bust. So it is disingenuous at least to include the 23.5 bn of ECB deposits in the figure.

The point is, Mr. Cowen is raising a scare that if Anglo was to be wound down, all those deposits would immediately flee. The underlying tone of his remarks (and I've heard them a few times) is that the government would be unable to repay joe public his deposit money.

On a slightly related point, some things are unclear from the preliminary reports - we don't know the book value of the assets that Anglo has repo'd to get the 23.5 bn (we don't know what the haircut is). There is also an amount that is collateral to commercial paper and long-term debt. So we don't know what assets Anglo has that are unencumbered, i.e. that can be sold to NAMA without unwinding the existing situation.


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## Sunny (11 Jun 2009)

I agree that Anglo doesn't seem to have any future. The problem is that I can't see a prefect solution to the problem. And either can the Government. I think they have decided that an orderly deleveraging of the balance sheet and see where that leaves it is the best way and carries the least risk. I tend to agree.


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## z109 (11 Jun 2009)

Sunny said:


> If that happens, it will mean the markets have returned to normal and there would be no problem getting repo financing elsewhere (assuming the Government still has control).


But at what cost? At 1%? I think it is unlikely, myself...


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## Slim (12 Jun 2009)

It may be much worse: 

"On June 9th Anglo’s Chairman responding to questions from The Public Accounts Committee states that Anglo may need a total of *€7.5 billion* in cash but it could be higher depending on property price falls and reveals that 84% of its loans are linked to property. " (from eddie Hobbs's newsletter today.)


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## Brendan Burgess (12 Jun 2009)

I don't think that the €1.5billion was handed over. They nationalised it instead. 

Anglo needs two types of money. 

1) It needs ordinary money with which to repay its depositors if they withdraw their money.

2) It needs capital. A bank must retain reserves or shareholders' funds of around 10% of the loans they have made. 

It's a cushion so that if the 10% of the loans go bad, the bank will still be able to pay back its depositors.

If the bank loses a lot of money through writing off loans this reserve ratio of 10% falls and must be replenished through fresh input of capital.


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## Nermal (12 Jun 2009)

Question: why not de-nationalise, rescind the guarantee and immediately let it go bust?

Retail depositors are are reimbursed up to EUR100K.

Other depositors get to fight over the corpse or get whatever NAMA can get back from the loans. So they don't get back their deposits on time or in full - so what?


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## z109 (13 Jun 2009)

thehill said:


> Now finally, what will all this money be used for?


As Morgan Kelly said, you might as well burn it on Stephen's Green. The money will be used to cover losses. It is gone. It is ex-money. Anglo is the Norwegian Blue of banks.... not dead, just stunned.


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## Brendan Burgess (15 Jun 2009)

Brian Lucey discusses this issue in today's [broken link removed]. 

His numbers confuse me. A table would have been a great help. 



> The total cost of closing Anglo is the difference between what the loans are worth (€35billion) and the cost of the liabilities which must be met (€78 billion)



So the cost will be €43 billion. He accuses Brian Lenihan of misleading us because this is "considerably less" than €60 billion. 

If Brian Lucey's numbers are correct i.e. that the loans are worth only €35 billion, then I think it's well worth investing €7 billion now in the hope that the final loss will be less than € 43 billion.

And the Minister is not throwing away the €7 billion. It is really a down-payment of the €43 billion cost. 

If Anglo is formally wound down now, we will save only the bit of the debt which is not guaranteed which Brian Lucey says is €4 billion. In the context of a €43 billion loss, that is not significant.


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## Duke of Marmalade (15 Jun 2009)

Brendan, those were exactly my thoughts when I read that article. €43Bn losses on Anglo alone!! Throw in the other 5 and we must get near losses of twice that. This is far far beyond the worst prognosis' of any of the professional independent analysts such as Morgan Stanley and far beyond that of PWC who actually saw the books. 

Academics such as Brian Lucey and Morgan Kelly have lost all credibility so far as I am concerned. That letter from the 20 of them should be binned.


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## Nermal (15 Jun 2009)

Brendan said:


> If Anglo is formally wound down now, we will save only the bit of the debt which is not guaranteed which Brian Lucey says is €4 billion. In the context of a €43 billion loss, that is not significant.



A billion here, a billion there...

Just rescind the blasted guarantee and the state has a chance of survival.


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## Brendan Burgess (15 Jun 2009)

I think that the €43billion is a huge overestimate of the problem, but the reality of it is that none of us knows the size of the problem. 

I agree that PwC and the government have a better fix on it, but they have got it wrong in the past as well. 

My argument is that if the problem is that big, then why not throw in the €7 billion as a downpayment? 

I don't understand the difference between winding it up and keeping it going as a going concern but not doing any new lending.

Brendan


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## z109 (15 Jun 2009)

I worked up some figures for thepropertypin, where there is a similar debate about the confusion of numbers, that I believe are relevant:


> Mr. Lucey's sums:
> Anglo loan book value: €35 bn (optimistic view)
> Deposits and interbank loans: €60 bn (actually, I believe this should be €64 bn
> Other liabilities: €14 bn
> ...



Note, I don't believe that the loss reckoning that Mr. Lucey has made are in any way wrong. I think, when all is said and done, that Anglo will be doing well to have a less than 50% loss on its loan book. Its collateral is near worthless (having been promised to the other banks aswell, both Irish-based and foreign. The personal guarantees will end up in court forever. But even if you think the loan book is worth more in the long term is it really worth 12 bn euro more?

As I've said already, if you can find flaws in my figures, please do.

Please also note, I don't see a necessary read-across on the loss figures to the other banks. They have far less exposure to C&D and commercial loans, which were all Anglo's business.


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## Brendan Burgess (15 Jun 2009)

Sorry Yog

I don't follow your figures or your argument.

What does "close down Anglo now" actually mean? 

We still have to pay all the liabilities, other than the €4.9 billion of bonds which are not guaranteed? 

So how is it cheaper by €12.9 billion. 

Brendan


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## Brendan Burgess (16 Jun 2009)

I have just read a separate piece in yesterday's Irish Times where Richard Bruton is quoted as saying that if Anglo is formally wound up now, then it would not need a banking license. It would then not need to maintain a level of reserves. 

So the government just pays off the bits it has guaranteed and saves itself €4 billion. 

By putting this into share capital now, it would be available to the unguaranteed bond holders before being returned to the state.

If Brian Lucey's figures are correct and we are going to lose €43 billion, then the €7 billion will be long gone before the unguaranteed bondholders come into play.

However, if the losses are less than €4 billion, then the bondholders will benefit. 

Does anyone know what the unguaranteed bonds are trading at? If they are trading at 10% of par, which I would guess they are, then the government could simply buy them in the market and remove this complication. 

Brendan


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## Sunny (16 Jun 2009)

Its interesting reading all this to see how people have different views and ideas. However, after listening to Mary Coughlan and Alan Dukes on Q&A last night, I am beginning to think that the Government and the Anglo Board are as confused as the rest of us which is a concern. I was especially disappointed with Alan Dukes. For a man of his reputation, he came out with some really stupid statements.

BTW Brendan, its hard to get prices for the unguaranteed sub debt but there is a EUR PERP trading at an indicitive price of about 19.


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## csirl (16 Jun 2009)

I wasnt happy with the answers given on Q&A. The Government is still maintaining that Anglo is a core part of our banking system and the reputation of high street banking in Ireland would be damaged if it went bust.

This is simply incorrect. Anglo is not a high street bank like the others. It does not have any branches, it does not used by members of the public for their day to day banking (wages, direct debits, car loans etc), it is not even used by businesses for their day to day banking.

The Government should stop referring to it as a normal bank. It is a specialist investment bank concentrating on a narrow range of investments (i.e. property). It's collapse would have zero impact on day to day banking for the citizens and businesses of Ireland. There would not be members of the public queing up at local branches to withdraw funds ala Northern Branches as there are NO local branches and NO members of the public using it for day to day banking. So why are they using the Northern Bank scenario to scare us all?

Investment vehicles go bust all the time, even in thriving economies when things are going well. If Anglo was left hanging, the Indo, Irish Times and Sky News would make a bit of a fuss for a couple of days, and that would be it, things would return to normal very quickly. The US didnt have any problem letting Lehmans go. In the past we've seen a couple of UK investment vehicles go bust - including banks and including companies that did have ordinary punters involved (endowment mortgages). Both economies survived ok.


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## Sunny (16 Jun 2009)

csirl said:


> I wasnt happy with the answers given on Q&A. The Government is still maintaining that Anglo is a core part of our banking system and the reputation of high street banking in Ireland would be damaged if it went bust.
> 
> This is simply incorrect. Anglo is not a high street bank like the others. It does not have any branches, it does not used by members of the public for their day to day banking (wages, direct debits, car loans etc), it is not even used by businesses for their day to day banking.
> 
> ...


 
I agree with all of that except the part about Lehmans. The US now accept that letting Lehmans go was a massive mistake. But Lehmans was in a completely different league to Anglo. I still struggle to see how Anglo is systemically important unless there is some relationship between Anglo and the other banks that I haven't seen. Same goes for Irish Nationwide.


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## z109 (16 Jun 2009)

Brendan said:


> Sorry Yog
> 
> I don't follow your figures or your argument.
> 
> ...


The first set of figures are for an immediate wind-down, resulting in a cost of €27.6 bn (excess of liabilities over assets, with a 40some% markdown on the loan book).

The second set of figures are for continuing operations with NAMA buying the whole loan book at a discount of 15% and then realising the same loss to 40some% over a few years. With the need to also recapitalise Anglo and make the subordinate debt good, this will cost €40 bn over the next few years (however long it takes NAMA to dispose of the loans).

That's where the difference of €12.4 bn comes from.

edit: the point is that it costs money to keep a bank going. It has to have assets in excess of liabilities to the tune, I believe, of ten percent of its balance sheet. Some of those assets have to be real and not spoof (like goodwill for example). So if the bank is kept going, all losses have to be met out of new capital as the existing reserve assets are required to keep the bank going and give it something to lend against, while if it is wound-down, the reserve assets can be used as part of the liquidation process.


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## PaulHoughton (16 Jun 2009)

Brendan said:


> Thanks for the figures, but surely it is practically true?
> 
> 18 bn in retail deposits
> 16.1 bn in non retail
> ...


Is there not a real risk that the difference between the market value of the assets and the liabilities is quickly widening and thus the longer we keep anglo alive the less there will be to salvage?


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## Brendan Burgess (16 Jun 2009)

PaulHoughton said:


> Is there not a real risk that the difference between the market value of the assets and the liabilities is quickly widening and thus the longer we keep anglo alive the less there will be to salvage?



Not really. We cannot realistically realize the market value of the assets at the moment now. The assets are loans secured on properties. The properties can't be sold as there are no buyers and no lenders will to finance buyers. 

So the true cost of Anglo won't be known for some years to come.

Brendan


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## Duke of Marmalade (16 Jun 2009)

yoganmahew said:


> The first set of figures are for an immediate wind-down, resulting in a cost of €27.6 bn (excess of liabilities over assets, with a 40some% markdown on the loan book).
> 
> The second set of figures are for continuing operations with NAMA buying the whole loan book at a discount of 15% and then realising the same loss to 40some% over a few years. With the need to also recapitalise Anglo and make the subordinate debt good, this will cost €40 bn over the next few years (however long it takes NAMA to dispose of the loans).
> 
> That's where the difference of €12.4 bn comes from.


 
There can only be two reasons for any difference:

a) Continuing operations are mounting up new losses. But since new lending has ceased this cannot be the case.

b) There are some liabilities which can be defaulted on in the former case whilst not in the latter. These seem to be at most the subords of €4.9bn.

I think your error is that you are partly double counting the future cash injections to meet the losses with the losses themselves. For example, if €10bn of capital needs to be injected it is not of itself a loss, it is replenishing a loss.

There still remains the big question as to why we do not save that €4.9bn. It is not that Anglo is systemic to the real economy but there would clearly be a contagion effect.

a) As a nationalised entity, default on any liability is not far removed from default on ordinary government debt. Ireland's credit rating would nosedive. Worse the weapon of last resort, nationalisation, would have been emasculated and we may need it some day for the truly systemic banks.

b) We are told that the liquidation process would completely collapse the property market with immediate knock ons for the other banks and the economy in general.

With hindsight, was it a good idea to guarantee Anglo's liabilities? Would the government have done so if they knew the enormous scale of the toxic abomination that we now know Anglo is? I doubt it, but we have started on a course and we have to finish. Bruton would be justified in querying that original decision, except that he supported it at the time! He is quite irresponsible to suggest that we can now reverse those decisions.


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