Can we extricate ourselves from the Anglo mess?

In this post, I've explained how it will be impossible for Anglo to survive until the expiry of the government guarantee as things stands.

To summarize, Anglo will need to raise 60 billion or so by liquidating their 72 billion loan book in order to meet their obligations to various classes of debtors. This looks impossible to me.

This presents a horrific vista for the Irish government as the taxpayer will be liable for the shortfall. Based on historical experience of property busts, this could be more than 10 billion euro. To put this figure into perspective this is almost a years worth of income tax receipts.

I've been trying to think of ways for the government to minimize the cost of the inevitable collapse.

One idea I've come up with is as follows. I would extend the government guarantee indefinitely but ONLY FOR DEPOSITS. (It may seem like a surprising suggestion since it is the initial guarantee which has put the government into this hole.) Hopefully this would stem any outflow of 70 billion or so of depositor funds which avoids the liquidity vice described above. At the same time a sell off of the loan book needs to be initiated immediately. We may as well accept that much of this book will be sold at a discount but the funds raised would provide the means to meet any obligations to depositors who want to withdraw their money anyway as well as the maturing wholesale debt. Hopefully this can be done in a measured and sensible way - if necessary the government would provide further funds to avoid receiving "fire sale" prices for the loan book. By following these actions, it may be possible to drag the bank over the expiry date of the guarantee; then the remaining shell would be would up and the long term debt holders would take the hit before the taxpayer picks up the rest.

Obviously this means that Anglo would cease to operate as a bank immediately and that most of their workforce would be laid off. Whether it is worth doing this depends on how much of the banks 22 billion of wholesale debt matures after September 2010 as this is the amount the taxpayers saves over allowing the bank to go bust before then.

Any opinions?

That looks to be the most sensible option, but whether it's in the governments frame of thinking is another matter. The guarantee was a bit of a joke in the first place - as if we have €40bn to cover banking losses, never mind €400bn! The only silver lining is the guarantee will run out in two years.
By letting the banks hobble along til then the disastrous effects of anyone drawing on the guarantee can be avoided, and the banks investors can be left to take the first hit as always should be the case.
Extending the guarantee for depositors will be necessary & unavoidable in any case, but at least by liquidating the banks loan book, the deposits can be used as capital to fund export-oriented businesses.

Darag,

Great post and makes alot of sense but the problem here is that sense does not seem to be coming into the equation in relation to Anglo with this government.

Willie McAteer left yesterday and he was CFO. His sidekick was Matt Moran. It was announced today that Matt Moran has landed a new big job. Unless I am going crazy does this not seem astounding.... surely Matt Moran knew all about Sean Fitzs antics... He should have walked never mind been sacked but not in Ireland.. a promotion !!??

This government needs to act on behalf of the tax payer who is propping up this bank and will end up taking the hit when it closes. Sack the whole executive board !

beekeeper said:

Darag,

Willie McAteer left yesterday and he was CFO. His sidekick was Matt Moran. surely Matt Moran knew all about Sean Fitzs antics...

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Matt Moran was and still is the cfo...mcateer was the financial director and risk manager.

Fridays report should reveal more

Agree with the above.
Still its a dilema.
The guarentee of the banks debts are suicidial for the state. It should be removed.
The subsequent sale of the assets will begin the capitulation the government is dreading as the assets of the other banks would then have to be finally be reassessed downwards.

All banks would officially be left with unsecured loans and big losses.
Wouldnt that mean the bankruptcy of all banks?

Who ultimately is responsible for the debts of the Irelands banks. Would it still be the State - guarentee or no guarentee.
Iceland is being held responsible for its banks actions - Gordon Brown seised all its assets stored in British banks.

What exactly would the consequence be of losing all our banks?

I simply don't see how any significant sell off of Anglo's loan book could be achieved in the current market for anything other than an unpalatably low price. There are few institutions out there with the ability to buy assets right now and fewer still with any appetite to take on exposure to the Irish property market (particularly in the form of the loans that typify Anglo's book). The coming months are likely to see some far more attractive assets up for sale at knock-down prices and it would require a massive discount to make this portfolio look worthwhile in comparison.

Anglo should have been allowed go under, but it wasn’t and the taxpayer is now on the hook. As unpleasant a vista as it may be, I have to think we are in it for the long haul. Significant writedowns are inevitable but a long and orderly workout of the portfolio is likely to do least damage to the taxpayer.

It strikes me that serious consideration should be given by the Government NOW to extricating the tax payers of Ireland from the Anglo mess. Would the Government have taken the action it did in guaranteeing Anglo's deposits had it known about the inappropriate transfer of director/chairman loans? I think not and as this vital information was witheld by a clever transfer scheme, and was not disclosed to the Government, the guarantee should be revoked.

Please please do not bring this country down for the sake of Anglo. I know the Government has agreed to pump money into Anglo in mid Jan. Again this was agreed before the Government was aware of the director/chairman loans. This should not go ahead, it will not save this bank anyway and only waste tax payer money.

First it would be great if it were just the Anglo mess but it isn't.

The level of debt incurred on various schemes across several institutions and the effective privatisation of debt as it shifted from the national debt to personal debt are also a source of concern. Who would take in the valuations now from the Bank of Ireland report which dealt with personal wealth in Ireland?

Meanwhile we have a an army of civil servants looking after the constituencies of every minister and minister for state and we are looking to see what health, welfare or education area in which the government can cut spending. Public service reform-let the government look in the mirror first.

Does anyone remember the 7 fat years and 7 lean years and what you are supposed to do during the fat years?

Fine Gael are saying that Anglo Irish should be wound up:

[broken link removed]

I started this thread before the nationalisation but I think it's still interesting to try to think of how to minimize the damage caused by Anglo. Unfortunately while nationalisation was probably inevitable it only replaces one set of problems with another.

The government is in an awful bind. According to EU accounting rules, Anglo has to be run as an independent commercial entity otherwise their debts are considered part of the national debt. If the latter was to happen our national debt would double at a stroke with the attendant damage to our reputation and a likely increase in the cost of servicing government debt. In addition once the long term debts are effectively transfered to the national balance sheet, presumably the will have to be paid regardless of the existing bank liabilities guarantee.

On the other hand, to be run as a "commercial" entity, capital ratios at Anglo will have to be maintained. This will cost the government a fortune; admittedly they can defer this bill by allowing Anglo to issue more debt under the guarantee scheme. In any case, somewhere between 11 and 17 billion of government money will have to be injected into Anglo before the guarantee expires. This also ignores the real risk of depositors getting spooked at some stage.

So here is my prediction; at some stage the government will attempt to extend the bank liability guarantee scheme perhaps in a modified form. Doing this will allow Anglo to borrow in order to maintain their capital cushion and stagger on in a world where their business model is busted - presumably until the next election. In this way the government at least will only have to inject money in order to cover operational losses which can be minimised by deferring properly revaluing the loan book. The horrible downside of this approach is that any chance of the long term debt holders picking up some of the tab will disappear. Thus upping the bill to the taxpayer by 5-11 billion.

Am I being too cynical? I think the government really need to think about the long game here and figure out a way to engineer it so the long term debt holders to take a hit. It may be difficult politically and financially to pump maybe 20 billion of tax-payers money in to Anglo in order to push it over the expiry of the guarantee but this is the only way to cut the overall bill to the exchequer by somewhere between 5 and 11 billion.

(Note I've used ranges in the figures as there seems to be conflicting information on Anglo's debt maturity profile. Reuters seem to suggest a 17/5 billion split between short and long term debt while Sunny posted that Bloomberg has it that 11 billion matures before the guarantee expiry with the other 11 billion expiring after.)

The elegant solution is to run the bank down gradually retiring the guarantee - the option of dumping on subordinated debt holders isn't really on as it would be akin to defaulting on national debt. Solving for the toxic overhang will require a bad bank anyway or some form of loa insurance - it all depends on interbank exposure whether through syndication or otherwise the extent of which is unknown but likely to be quite large. The future of Anglo is a given, its business model is bust and it is unlikely to be able to fund transformation and write offs at the same time - if it could it dosen;t have the staff resources or scale to do it. It;s simply too small a bank even with its balance sheet. Look at the customer numbers 5000 Irish borrowers - its a very thin base to work off given most of them are underwater at this time. I believe the real dilemma is without a floor on the property market its impossible to calculate the scale of losses that will have to be written off. I don't believe that either BOI or AIB could have predicted the loan loss rates last November with any great degree of accuracy and as economic indicators have worsened considerably since their estimates are probably too low. Furthermore lagging consumer debt has still to feed through as households burn up savings - could be we will see spike in homeloan arrears later this year setlling at a far higher level afterwards. Unsecured debt will spike first and signs are this is happening as MABS is inundated with calls - Anlgo;s loans of course aren't consumer driven but a fair amount of cash flows funding loan repayments are. Finally it is likelly to experience a significant level of good customer defection as its larger loans will move elsewhere.

Anglo should start offering Current a/c,Credit Card etc. Why not? Match Northern Rock with 5% interest etc.

We appear to be obsessed with adopting an Anglo/American type solution to this problem.

In an interview I heard yesterday on CNN (or Bloomberg, not sure which) US investment guru Jim Rogers considers that the UK is a busted flush, and he is advocating selling sterling at any price you can get.

He views the UK bailout of their banks as catastrophic and points to the same strategy adopted by the Japanese 20 years ago. The Japanese stock exchange index is STILL lower now than it was prior to that fiasco.

He cited the approach adopted by Finland and Sweden in the 1990s of allowing the weak to fail as being the only solution.

Yes, as indicated in a previous post, this would mean AIB and BofI having to write down their books in parallel. But, they would survive.

The problem is that the puppeteers of the Galway tent are in control here. If Anglo went under, so would most of them to the tune of hundreds of millions. That can be the only reason this disasterous policy has been adopted. There is NO good business reason for it.

A UK MP recently described Ireland's corporation tax policy as something that made us look like Lichtenstein with bad weather. Given that the Robber Baron is alive and well and running this country by proxy now, I think that "Naples with bad weather" is a better desciption of Ireland in 2009.

This is the kind of environment in with the Declan Ganleys and the Shinners of this world will thrive. Will it all end up on the streets? I don't know about you lot, but I'm terrified.

D.

Perhaps we should have been on the streets all along. Take France for example. You can't go to Paris any Saturday but there's some group peacefully protesting. (And I am not talking about the petrol bombs around Gare d'Nord.)
We should have marched, demonstrated and demanded change in the good times when we had money and could have improved the education and health systems.
Alas, now we're broke.

The Institute of Directors : how many of their paid up members are involved in recent events.
Has anyone got access to the CVs of the erstwhile directors of Anglo and see if there is a pattern ?

There is needs to be leadership from civic society if we are to lift ourselves and raise standards.

darag said:

On the other hand, to be run as a "commercial" entity, capital ratios at Anglo will have to be maintained. This will cost the government a fortune; admittedly they can defer this bill by allowing Anglo to issue more debt under the guarantee scheme. In any case, somewhere between 11 and 17 billion of government money will have to be injected into Anglo before the guarantee expires. This also ignores the real risk of depositors getting spooked at some stage.

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The problem with this is that Anglo is going to have to continue to pay juicy deposit premiums for lock-in deposits to keep the deposit money from evaporating. It is likely that this will run at a loss, given reworks in an attempt to keep the asset side from distress.

So here is my prediction; at some stage the government will attempt to extend the bank liability guarantee scheme perhaps in a modified form.

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In essence, I don't think it will have to, as it has already paid out on the guarantee by nationalising Anglo and taking responsibility for its debts. You are right, though, we will see some weird stuff go on. My guess would be long-term deposits at ECB+x (higher than everyone else, less than sovereign debt price).

The horrible downside of this approach is that any chance of the long term debt holders picking up some of the tab will disappear. Thus upping the bill to the taxpayer by 5-11 billion.

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Yes, the government will be paying good money (maybe 4%?) on 70 bn of debt a year, that's 2.8 bn in interest with only a small proportion of it recoverable in DIRT, as 80% of Anglo depositors are overseas (we never did hear how much of actual deposit amounts, did you notice that?). While at the same time making a thumping loss on the asset side as the assets are revalued/wound down.

Am I being too cynical?

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Not in the slightest. A tad too optimistic about the costs, maybe, but that's about it. You may feel you've done your patriotic optimism bit!