What would happen if Anglo was wound down?

thehill said:
Now finally, what will all this money be used for?
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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.
 
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)
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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.
 
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.
 
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.
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A billion here, a billion there...

Just rescind the blasted guarantee and the state has a chance of survival.
 
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
 
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
Subordinate debt: €4.9 bn

Wind-up cost: €47 bn or €42.1 bn excluding subordinate debt.

I believe from the Anglo balance sheet, there is another €14.5 bn available for wind-down costs:
Cash: 266 mn
Loans and advances to banks: 6,698 mn
Available for sale assets: 7,761 mn

Giving a total cost of: €27.6 bn

This assumes that the derivatives book can be sold off/unwound at zero net cost. I believe, though, that this is an unsafe assumption. However, I haven't included any derivative cost anywhere else, so the money for it will have to be found anyway.

So, the government proposes giving Anglo an immediate injection of €4 bn. With Anglo wanting a further €3.5 bn and maybe another €1.5 bn more in the forseeable future (I judge this to be within six months given the myopic forecasting ability of everyone involved).

That's €9 bn.

Let's assume that NAMA buys the loans at 85% of book value. The loan book is €66 bn, so that would give Anglo €56 bn. As Anglo is currently insolvent, it would require an immediate cash injection for the €10 bn that it's just lost. So we are up to €19 bn.

Given that 20% of the Anglo loan book is already distressed and we haven't reached peak stress yet, I think Mr. Lucey's figures are accurate. So the NTMA is going to see a loss of €21 bn on the €56 bn it paid for the Anglo loans.

Um, we're up to €40 bn already...

So by semi-random numbers, it is cheaper by €12.4 bn to just close Anglo down.

Am I missing anything?

[broken link removed]
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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.
 
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
 
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
 
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.
 
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.
 
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.

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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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.
 
Brendan said:
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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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.
 
Brendan said:
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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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?
 
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?
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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
 
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.
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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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