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

Brendan Burgess

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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
 

csirl

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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

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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

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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.
 

Duke of Marmalade

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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.:eek:

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

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Lucey gets another hammering in today's Irish Times 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

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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

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"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

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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

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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

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O'Mahony's article gets analysed on Irish Economy.ie

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

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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

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"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

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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.
 
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