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



## Brendan Burgess

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 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.



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.



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?


----------



## Duke of Marmalade

*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.


----------



## Brendan Burgess

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?


----------



## Brendan Burgess

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…..





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….



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?



And [broken link removed]



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



At least "Stuart Blythman" isn't sure


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


----------



## sunrock

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.


----------



## Duke of Marmalade

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.


----------



## Brendan Burgess

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. .



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.


----------



## Bob_tg

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 !!


----------



## dubrov

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


----------



## Duke of Marmalade

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.


----------



## dubrov

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


----------



## Sunny

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...


----------



## Duke of Marmalade

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...


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?


----------



## Sunny

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?


 
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??


----------



## Brendan Burgess

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

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


----------



## Carolina

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]


----------



## Carolina

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


----------



## Duke of Marmalade

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.


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


----------



## Kine

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!


----------



## Brendan Burgess

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 



                         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.
                         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


----------



## Brendan Burgess

_This was published in the business supplement of  today's Irish Indpendent. I can't find it online. _The title and the intro were not written by me.


*Let’s debate Anglo without the howlers *

The arguments over what to do about Anglo Irish Bank grow by the day. Brendan Burgess , an accountant, founder of the askaboutmoney.com website and a member of the Government’s Expert Group on Indebtedness, says Prof Brian Lucey of TrinityCollege is €20 bn short in his plan to wind down the troubled bank.


  The government faces very tough choices trying to steer the country through very difficult waters which will remain very difficult for many years to come. One of the big decisions is whether to keep Anglo open or to wind it down in an orderly fashion. The government and the board have not yet managed to convince people that keeping it open will cost less than winding it down. 

  We need careful and balanced analysis. We need to challenge and question the “Keep it open” option. If winding it down is a better option, we need to be able to show this through rational argument and through numerical analysis. 

  We don’t need muddled thinking. We don’t need conspiracy theories. We don’t need opposition for the sake of opposition. 

  But, in particular, we don’t need the nonsense written by Professor Brian Lucey in last Thursday’s Irish Independent. 

  There is no simple solution to the Anglo problem. And there is no cheap solution. So it’s bizarre for Professor Lucey to suggest “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.” 

  Anglo’s  €28bn deposit book is a liability for Anglo. It is money which they owe. They can’t sell a liability. It would be the equivalent of a householder selling their mortgage and getting cash in return. Or even better, we could sell off the National Debt for cash. 

  Selling off the deposit book at a discount is not a regular event in banking. It’s not even an occasional event in banking. It simply doesn’t happen in banking. 

  In 2008, Bradford & Bingley transferred €21 billion in deposits to Santander bank but it also transferred  €21 billion in cash and bonds to Santander to match the deposit book liability.  Anglo could transfer its €28bn deposit book to another institution, but the bank would have to pay €28bn in cash to be rid of these liabilities. 

  Professor Lucey’s mistake  is not a small technical error. It’s a howler of such magnitude that it just beggars belief.  The author is a Professor of Finance in Trinity, yet he doesn’t know his asset from his liability. 

  Professor Lucey had made this point the previous day in a radio debate with Alan Dukes, Garret Fitzgerald and Moore McDowell. None of them challenged him. 



  The case for winding down Anglo is seriously weakened when those advocating it,  use such bogus arguments. 

  But the readers of the article  and the listeners to the radio programme will wonder why the government and the Central Bank are not following Professor Lucey’s advice. They will assume some grand conspiracy to protect vested interests. It makes the sacrifices which we all have to make even more difficult. Why close down hospitals to save Anglo when we could simply sell off their deposits? If only


----------



## Sunny

Wow Brendan, you didn't hold back! Very well said.


----------



## Duke of Marmalade

Sunny said:


> Wow Brendan, you didn't hold back! Very well said.


Yep, I enjoyed it too.


----------



## Brendan Burgess

I will be discussing it further on Newstalk at around 12.20 today.


----------



## DrMoriarty

Live link .


----------



## Duke of Marmalade

_Boss_ did well, what a pity Brian Lucey couldn't come on, not like the professor to shun publicity.


----------



## csirl

A deposit book can be an asset, but not in the way that Brian Lucey is portraying.

The reason being is that you can lend, and therefore earn interest, using the deposit book money e.g. you are paying depositors 5% interest, but lending out the cash on deposit to others at a rate of e.g. 7% interest per annum. Therefore the deposit book is earning 2% net per annum i.e. 560m per annum. This potential €560m in earnings is an asset. A bank can sell its deposit book on the basis that the recipient will be able to derive this income from the deposits. It is reasonable to suggest that another bank would be willing to pay 2-3 times the net annual earnings to take over the deposit book. What is being missed by Lucey is that when a deposit book is sold, the deposits i.e. the 28bn gets transferred to the purchaser. 

Using my figures (which are not real - used for illustration purposes) if someone bought the Anglo loan book, they would pay Anglo e.g. 1.5bn and Anglo would transfer the 28bn in customer accounts. While this would generate an instant profit for Anglo on holding the accounts, it would obviously lose them a lot of liquidity. Selling the deposit book is something that would only be done in the event of closure of the bank.


----------



## Duke of Marmalade

We're tending to forget the other side of this massive blunder.  What was BL going to do with his Miracle 49Bn.  He was going to pay off NAMA with 16bn.  But NAMA *owes* Anglo 18bn.


----------



## shanegl

Csirl, that example makes sense if the assets funded by the deposits were performing. If that were the case in Anglo we wouldn't have a problem.


----------



## AgathaC

Good article, Brendan.


----------



## Duke of Marmalade

csirl said:


> A deposit book can be an asset, but not in the way that Brian Lucey is portraying.


But that is precisely the way Brendan is denouncing, any other interpretation is irrelevant. Of course one hears of deposit books trading at 95c in the euro. This means you might be able to *pay* someone 95c/euro to offload your deposit liabilities for the reasons you state and also the franchise value. But OMG the professor thinks it means *receiving* 95c/euro. He decided to go all prudent and suggest Anglo only accept 75c in the euro.

BTW some awful stuff being said about Brendan's Newstalk interview on the Propertypin. I would give a link but it would surely breach AAM guidelines. These academics and their fellow travellers don't like being made fools off, especially when it is of their own making.


----------



## Brendan Burgess

Lucey gets another hammering in today's[broken link removed]from Donal O'Mahony of Davy's.



> For example, Brian Lucey’s latest condemnation (Country’s future  staked on most volatile of markets, Opinion and Analysis, April 1st) of  those who “do not know a subordinated bond from a Smartie” needs to be  juxtaposed with his own basic misunderstanding of how the process of  Nama financing will proceed.
> 
> 
> Far from engaging in “funding short  to borrow long, the very tactic that brought down Lehman”, Nama will in  fact continuously match its assets (loans) and liabilities (bonds) with  Euribor-based variable interest rates, the positive spread between which  ensuring that performing loans trump non-performing loans in rendering  Nama cash-flow positive on an operational basis.
> 
> 
> Lucey’s other  suggestion elsewhere last week that Anglo’s €28 billion deposit book  should be trade-sold for circa €21 billion was equally misplaced, such  proposition appearing to confuse the bank’s assets with its liabilities.


----------



## Sunny

Amazing how silent he has gone isn't it. This isn't a game we are playing here. If people are going to allow themselves to be used by the media to offer opinions and criticism on NAMA and the banking crisis, the least they can do is make sure they have their facts straight. And if they get it wrong, they should be man enough to write a retraction.

No wonder public sector workers and the ordinary man on the street get annoyed when they read from a Professor of Finance at Ireland's top university that Anglo can be wound down very simply and the Government can save billions if they just follow a few simple steps. Let's not let the truth get in the way of getting your name in the paper though.


----------



## rob67

"Far from engaging in “funding short to borrow long, the very tactic that brought down Lehman”, Nama will in fact continuously match its assets (loans) and liabilities (bonds) with Euribor-based variable interest rates, the positive spread between which ensuring that performing loans trump non-performing loans in rendering Nama cash-flow positive on an operational basis."

Can someone please explain, in simple terms, what this means


----------



## Sunny

In simple terms, they will pay out six month Euribor on their liabilities (nama bonds) and receive in six month Euribor plus a spread on their assets (loans). So therefore they get in more money than they spend. They will use swaps to deal with any mis-matches e.g. Fixed rate loans etc. 
However, it's not as straight forward as O'Mahony makes out. He neglects to mention the fact that a lot of loans are going into NAMA are not performing i.e. not paying anything so there is no guarantee that it will be cash flow positive. NAMA seem convinced though.


----------



## Brendan Burgess

Sunny

I didn't understand Brian Lucey's point "funding short to borrow long, the very tactic that brought down Lehman". 

Did he mean, funding short to _lend _long? 

I thought that this was a problem for all the banks during the Credit Crunch, and not just Lehmans.


----------



## Brendan Burgess

O'Mahony's article gets analysed on [broken link removed]

Here is the relevant bit to our discussion



> Donal responds to Brian  Lucey’s criticisms of the policy of NAMA’s bonds being linked to Euribor  as follows:
> Nama will in fact  continuously match its assets (loans) and liabilities (bonds) with  Euribor-based variable interest rates, the positive spread between which  ensuring that performing loans trump non-performing loans in rendering  Nama cash-flow positive on an operational basis.​ However, to generate  ongoing cash flows from loans, people have to be paying them back. Loans  going into NAMA from AIB that are past due or impaired account for  fifty five percent of the original face value of the transferred loans.  The corresponding figures for Bank of Ireland and Anglo are fifty six  percent and eighty three percent respectively. It’ll  be some class of loaves and fishes act to turn that stuff into a  cash-flow positive operation. NAMA, I suspect, may not have quite as  clean a face as we were lead to believe.


----------



## Sunny

Brendan said:


> Sunny
> 
> I didn't understand Brian Lucey's point "funding short to borrow long, the very tactic that brought down Lehman".
> 
> Did he mean, funding short to _lend _long?
> 
> I thought that this was a problem for all the banks during the Credit Crunch, and not just Lehmans.


 
To be honest Brendan, I don't get the 'funding short to borrow long' comment either. Would have thought it was fund short to lend long as well. It was a problem for all banks because they relied on capital markets funding to grow their balance sheet. They borrowed say 5 year money to lend on 40 year mortages and so there was always re-finance risk. Northern Rock is a perfect example. NAMA doesn't have that refinancing problem as it is unlikely they will have to pay back the NAMA bonds that they gave the banks. As Moody's said, it is pretty ingenious. 
I have a feeling Lucey was talking about interest rate mis-matches but that can be managed through swaps.


----------



## rob67

"In simple terms, they will pay out six month Euribor on their liabilities (nama bonds) and receive in six month Euribor plus a spread on their assets (loans). So therefore they get in more money than they spend. They will use swaps to deal with any mis-matches e.g. Fixed rate loans etc. 
However, it's not as straight forward as O'Mahony makes out. He neglects to mention the fact that a lot of loans are going into NAMA are not performing i.e. not paying anything so there is no guarantee that it will be cash flow positive. NAMA seem convinced though. "

Sunny, Thanks


----------



## Duke of Marmalade

A reminder of the collected wisdom of Professor Lucey:

1) 28Bn of deposit liabilities can be exchanged for 21Bn of assets (doesn't know his asset from his liability - DKHAFHL)
2) Anglo should pay 16Bn to NAMA so as to have the NAMA bonds removed from its books (DKHAFHL)
3) NAMA bonds will result in a six monthly 50Bn roll-over requirement (doesn't understand the difference between maturity term and interest setting period)
4) NAMA is exposed to rising interest rates (doesn't understand that interest applies to both sides of a balance sheet and it is standard practice to manage any mismatches by swaps)
5) "Funding short to borrow long" DKHAFHL
6) AIB should be forced to hold on to its foreign subs at the taxpayers' expense (contrarian for its own sake, you can bet that if AIB were resisting these sales the professor would be breathing fire about AIB execs using taxpayers money to cling to empire)
7) House prices would continue to be buoyant until 2010 (written for an estate agency concerned at the growing rumble about soft and hard landings back in 2007)

Donal O'Mahony's article was excellent. It is really perplexing that Professor Karl Whelan posts a churlish critique on the Irish Economy. Yet he doesn't raise a whimper about his fellow professor's howlers.


----------



## shanegl

Just a reminder that FillYerBoots and his blind followers were talking out of their collective hoops:









						Anglo to sell most of deposit book to AIB
					

ANGLO Irish Bank is to sell most of its deposit book to Allied Irish Banks in a further move by the Government to wind down the institutions.




					www.irishexaminer.com


----------



## NoRegretsCoyote

Joe Brennan is Ireland's best financial journalist but even he talks about selling deposits here:



> Belgian financial services giant KBC Group is poised to release about €1 billion of expensive capital tied up in its Irish operation *as it sells its loans and deposits *to exit the market, according to an analysis by a European brokerage.
> .........
> Mr Kluis said he expected the planned *sale *of KBC’s almost €9 billion of performing loans and €5 billion of *deposits *to [broken link removed], as well as the disposal of €1.4 billion of non-performing loans, to be completed in the first half of next year.



How does this get published?


----------



## Brendan Burgess

Because there is nothing wrong with it!

It's very clear that they are selling the net value to Bank of Ireland.

They are not selling it for €14 billion. They are selling it for €4 billion.

Brendan


----------

