The risk now is reputational risk. Credible institutions will simply not want to be associated with an outfit like Anglo Irish Bank
About a year and a half ago in ‘The Generation Game’, I wrote that “one of the big Irish banks is simply a leveraged hedge fund betting its own and its clients’ money on overvalued property” and “normally when the property market collapses, these type of outfits go bust”.
For legal reasons my publisher advised that we couldn’t print the name of the bank — Anglo Irish Bank — in yet another Irish example of stupid law protecting stupid people to the detriment of the majority. But what was right then is still right now, despite capital injections and much hot air about the “culture of Anglo”, the bank will still go bust and will be nationalised. This is likely to happen in the next few weeks.
This event will make Anglo Irish Bank the first bank in financial history to go bust with a government guarantee. This moment will be discussed for years to come.
In fact many professionals working in Ireland who up until recently parroted the idea that the banks were well capitalised or who argued that ‘property collapses don’t necessarily lead to bank failures’ will write brilliant ‘after the event’ analysis of what happened. They will muse as to why depositors did not consider the government guarantee sufficient when they decided to withdraw money en masse from the bank?
To save you listening to this hindsight in February; here’s a bit of foresight and this is what is likely to happen in the next few weeks. Corporate depositors — institutions that had kept large deposits with Anglo — will in the New Year decide that there is no point in keeping money with this bank when they can just as easily, keep their cash with one of the two big banks. The question they’ll ask themselves is ‘why should I keep my cash in Anglo?’. They are not being paid for specific Anglo risk.
But what, you might ask, is the financial risk now, if the Government is standing behind all the deposits whether they be in Anglo, AIB or Bank of Ireland?
The risk now is reputational risk. Credible institutions will simply not want to be associated with an outfit like Anglo. Reputation is about the most difficult attribute for any business to build and about the easiest to blow. Anglo has blown it.
People will shun the bank and take their deposits and business elsewhere. This is a tragic end to a business that many thought at one stage was mould breaking, but that’s the harsh way economic cycles administer justice.
Over the next few weeks this reputational stain will become more evident as horrendous news emerges from the bank in terms of bad debts and the extent to which the loan book was a one-way leveraged punt.
The capital flight from the bank will cause a massive funding problem as its loan to deposit ratio plummets further and its e80bn loan book smothers the bank in the financial excrement that the once “brilliant” bankers of the property boom misdiagnosed as assets.
Eventually, with its share price as zero, Minister Lenihan will have to nationalise the thing fully. This means that the national debt of the country will rise by e80bn (Anglo’s loan book) without a red cent having been spent on health, education or social welfare.
This will push credit spreads for Ireland out further as foreign investors will realise that they are also buying the hazardous waste of Anglo when they think about lending to the Irish sovereign.
The Minister will now face another dilemma, what does he do with Anglo? The thing is now a State liability full of loans to bankrupt developers for half-built developments all around Ireland. It will also be home to a few hundred knackered employees who have seen their dreams and, in many cases, their family’s futures implode. None of this is pretty and for most of these middle-ranking victims, none of this is deserved.
But the same process will happen all over the country as unemployment soars. One of the main reasons unemployment will soar is because of this banking phenomenon called ‘deleveraging’. While deleveraging will cause Anglo to go bust, it will have a vicious impact on credit in our country. The term is one of those horribly grainy expressions that make their way into economics. It means that the Irish banks who have presided over a most ludicrous expansion of their loan books by borrowing abroad, will have to lend considerably less in the years ahead and take in considerably more deposits to bring this ratio down to the European average.
The main Irish banks have a loan to deposit ratio of over 160. They will have to bring this figure down to between 80 and 100 in the next few years. This implies a massive contraction of credit, retail sales, tax revenue and cash in the economy. So what are we to do?
Well ironically, if we put our thinking cap on, this is where the coming nationalisation of Anglo might help the nation.
To see why this might be, let’s switch the discussion to Argentina, Brazil and Mexico. These countries suffered terribly from defaults on sovereign debt in the early 1980s. They couldn’t pay back the cash they’d borrowed.
For an entire decade they were frozen out of the global financial markets because no one would lend to them until they figured out what to do with the old debts. The lending banks realised they’d never see their cash in full again but needed a mechanism whereby they could trade these debts and possibly, see some upside from a disasterous situation. So both borrower and lender needed a way out.
Up stepped Ronnie Reagan’s finance secretary Nicholas Brady. Brady hammered out an agreement whereby the countries would undertake to pay a fraction of what they owed to the banks and the banks were satisfied with that because they were getting nothing with the market frozen. Brady also got a concession out of the countries that another portion of the debts might be paid back as long as things were going well.
In all, the debt write offs amounted to between 50pc and 70pc of the principal. New bonds were issued to replace the old debt and thus began the era of “Brady Bonds” which heralded the beginning of the recovery of much of Latin America.
Think about this idea in the context of the Irish property market. Irish property loans issued in the past five years are about as valuable as Latin American debt in the 1980s. The cash will never be paid back, simple. So let’s accept that and get on with it.
If we took the nationalised Anglo and filled it with the toxic waste of the other banks and then started to trade these property loans as a deep discount, let’s say 20pc or 30pc of their face value, we could trade our way out of these problems. Clearly the banks would bear the brunt of the pain but it was their problem in the first place.
This is the only way out for us. And the bust, but nationalised, Anglo might just hold the key as a vehicle for the new defaulted-debt trading model. But to arrive at this conclusion we first have to get it into our heads that in 2009, Ireland is more South America than Western Europe.
The effective use of a “Brady Bond” type mechanism would provide a vehicle for such an exit strategy and indeed allow a firmer footing to be brought back to the financial system. However int he short term should such a policy be mooted this would definitely have a detrimental effect on the price of Irish Bonds if indeed the Government has fully underwriten all bank debts as it would imply that the Irish Government is in fact going to default on the agreement already given. With all of the tax incentives for hotels (that are not used) and property that… Read more »
I am in favour of the Casinos as long as we can get the upside too! In other words, we should start to lobby the FIA for a Dublin, Cork, Galway or Limerick Formula 1 street circuit round of the Championship — imagine the tourist Euros that would bring in! It is obvious from the various articles that despite the large writing on the wall there is still a hesitation among the decision makers to accept what is inevitable; as if they are waiting for the inauguration of Barrack Obama or some other such event to radically change things. They… Read more »
shirly – most of us are on the the post ‘change’ log into that
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David, Quote : If we took the nationalised Anglo and filled it with the toxic waste of the other banks and then started to trade these property loans as a deep discount, let’s say 20pc or 30pc of their face value, we could trade our way out of these problems. Clearly the banks would bear the brunt of the pain but it was their problem in the first place. Question(s) : Dunno if I am understanding this correctly. Based on the last sentence from the quoted section, presumably the banks would still have to absorb the write-downs from these discounted… Read more »
With job losses being announced nationally across a diversity of industries, I ask why there has been little or no mention of job cuts in two of the largest banks in the country. Surely, as any business in a failing economy, the day-to-day operational departments within the various banking divisions must be affected by the downturn. There is less borrowing, less spending, less growth and less money circulating then one would assume that the same demands would not be there as there have been in the past. Are the banks making provisions to reduce staff, cost cut or outsource? Are… Read more »
From our Finance Minister today;
“… my department got its calculations and projections wrong three times last year and I had to make decisions on the basis of that.”
“no one has been getting their forecasting right in the present climate”
How’s that for reputational damage?
If they had started reading this blog last September before the budget, the true forecasts were intelligently and dispassionately set out here by a combination of contributors. Not me, though I learned fast.
DMcW and the Acolytes are becoming the alternative Dept of Finance, methinks.
David: Your discussions go from strength to strength as you shed last years antlers and grow a new spread ready for rutts that could make you the dominant stag in Dublin this year. I’m sure that you’ll be gentle but firm in your approach to the banking hinds.
Beware though; Anglo-Irish Bank could be the Irish Lehman Brothers, which started a domino effect series of bank collapses. The whole pack is interdependent and the trail of destruction could extend to other countries.
Some questions need to be answered before giving ANIB a penny. i) how much will it cost ? ii) will it be really worthwhile saving a bank that is concentrated in two sectors that are going to crater in any case ? iii) Will fixing ANIB really make any difference outside of the commercial property, and property development sectors ? iv) what is the real value of the ANIB asset book – when the properties against all those loans are placed on the market. The mark down is not what is mentioned in the PTSB house price survey, or the… Read more »
Bailing out banks will not change the fundamentals of the credit crunch or the fundamentals of the fact that Ireland has a property bubble that has just burst.
David, as the Government has now guaranteed ALL the liabilities (deposits and debts due to financial institutions) of the covered banks. If the banks write down their assets (mainly property backed loans) to ‘balance the books’ the shortfall will have to come from the taxpayer. “… the debt write offs amounted to between 50pc and 70pc of the principal. New bonds were issued to replace the old debt…” If this happened for the Irish banks then the Government would be left with the liability of the banks not covered transferring to the state. Say a 50% write-off then could amount… Read more »
I wonder what the Senior Economist at the Bank of Ireland would recommend for insolvent companies….Come on Dan…give us some advice….what is your mental model for this companies that cannot get their finances in order…
http://www.tribune.ie/archive/article/2005/dec/04/dont-pay-the-ferrymen/
Hi David, I partially read the intro of this article in the paper version of the Independent over the holiday break and was wondering if you would have it placed on this site. DMcW> If we took the nationalised Anglo and filled it with the toxic waste of the other banks and then started to trade these property loans as a deep discount, let’s say 20pc or 30pc of their face value, we could trade our way out of these problems. Clearly the banks would bear the brunt of the pain. This is your bad banks, good banks idea (as… Read more »
Minister Lenihan moves slowly once again….he has an excuse lined up for doing nothing to prevent ANIB managers giving themselves bonuses before year end…he could not overrule a decision they already made to give themselves bonuses. http://www.independent.ie/business/irish/lenihan-pledges-to-control-bank-salaries-1593826.html Also can somebody please define the exact length of “couple of weeks” in ‘governmentspeak’. The government are not in control – the clowns who approved so many absurd loans are in control. We postponed the property crash, and the banks got hhit. Now we are postponing the banking crash, and the taxpayer is getting hit. Meanwhile the multinationals must surely be wondering whether… Read more »
The government and the banks are in this together. We always knew the Dell’s of this country were short-lived in Ireland. When these companies came to Ireland we were a low cost economy, now we are not competitive enough. Next stop is Poland for as long as they remain competitive. This is capitalism. Now we all knew that it could not really last forever but we were tempted to live in denial. There are probably 100’s of Dell employees who currently have mortgages to the tune of 10 times the average industrial wage. The banks gave mortgages on the basis… Read more »
I am including this link here – because this column from David is probably closer to the topic of the link http://www.marketwatch.com/news/story/Bank-Ireland-sharply-cut-UK/story.aspx?guid=%7BB2891B73%2D24B8%2D440A%2DBC39%2D7F94EE6B194A%7D BOI are retracting their GB mortgage lending. It would be good news, had they decided to do it 12 months ago. I am not sure if this occurring as a result of direction from the Minister/Dept of Finance/C Bank/Government. In any case it will provide capital for the bank, get away from a precarious situation, and help reduce the commitment from the taxpayer. It is a welcome step from BOI – they are starting to act responsibly. It… Read more »
http://www.chomsky.info/interviews/20081127.htm
I suppose nationalisation of anglo would be very beneficial for the contributors and supporters of FF. It is probably easier to give the government the run around, than new private and foreign investors, or whoever would have bought their debts , in the case of bankrupcy. They might actually be concerned about recovering some of the money lent out, and would probably not be satisfied with a round of golf and some excuse. I suppose with the bank guarantee , the bank cant really go bankrupt, as that would force the government to have to liquidate whatever assets the bank… Read more »
Public Servants – the right to work must not be denied instead all their costs be adapted in tandem with ps costs of living thus upholding normality in our frailing decimating economics. A failure to achieve this will be the road to anarchy .Politics is for the people ,economics is about the people and proper Leadership is is a God given Right .Arise and follow MUNSTER .
David you might be interested in some of the suggestions in this link. Are these of any relevance to Ireland ?? Another article from the DT – I am picking the opposition newspaper, because they are the most likely to provide critical veiws. http://www.telegraph.co.uk/finance/economics/4210925/Six-ways-to-get-the-economic-motor-running.html Some interesting remarks concerning regulation of the banks. And an admission, that cost reduction in banks, will be necesary. This means “Fire the leading managers”, and reduce executive pay. It also means less advertising, sponsorship, an end to junkets. And a complete end to prestige projects. An end to nonsense like AIB sending managers to the… Read more »
Some good news. Goggin will step down from BOI. http://www.independent.ie/national-news/b-of-i-chief-goggin-to-quit-more-to-follow-1598237.html Now here is a real interesting bit of the article. [Senior bank sources have this weekend said that, at present, the big developers are failing even to make the interest repayments on their huge loans. However, critics of the banks have said that this move by the developers will force the banks to “get real” and abandon out-of-date valuations, which are showing a falsely positive position on their loan books. The banks intend to resist the examinership process vigorously. The move toward examinership by the builders follows a recent High… Read more »
More good news concerning public accountability and Irish Financial Instutitions.
http://www.independent.ie/business/irish/retired-garda-hero-battles-for-ebs-board-seat-1598216.html
The EBS are hopefully going to be opened up to it’s members. Hopefully they will get cleaned up, and the buffoons in charge will get undermined. Shane Ross wrote articles already pinpointing the deficiencies and deceit in the EBS.
http://www.independent.ie/opinion/columnists/shane-ross/save-your-asses-not-your-assets-1550137.html
Hopefully, we will know see one Irish financial institution get a clean up instead of a cover up :)))
Jim,
“[assuming these defaulters had a clue when they were buying]” ??
Look at where they are now ……
But: “as long as the portfolio is managed properly” ………. if that is what the two Brians intend and are capable of, well, alot of people will have to EAT their predictions and we will all confess to being members of Fianna Fail in the morning. (which, I am, by the way – card-carrying and chairman of my Cumann).
I suppose it might be possible for a number of shareholders to join together in a class-action suit against Fitzy, or apply to the high court in the morning for emergency injunctive relief to prevent the adjournment of the meeting; Then, when the meeting opens, refuse to ratify standing orders for the meeting (thus, dumping the re-capitalisation plan); propose new standing orders to shift from the extant motion to a new one to hold a Q and A, and take things from there. How would the shareholders get together and “wake up a judge”? Shane Ross said tonight that 80%… Read more »
So just when the government were talking about slashing public sector jobs and salaries they suddenly take on another 1700 odd staff…ha ha now that’s Irish for you!
Anglo Irish is not the worst bank in terms of exposure to toxic property loans. That honour falls to Irish Nationwide. The bank that provided the “bed and breakfast” to Sean Fitzpatrick’s loans. A relevant question is “was the “B&B” recipricated?” Why is this a relevant question? Answer: Because the IN Chief Executive, Michael Fingleton also participates in the property market in partnership with bank customers and provides mezzanine finance to them on a large scale. Mezzanine finance, is of course, far riskier than normal lending as it provides funds for the equity that is at risk before the bank’s… Read more »
Dear Sir We now own the The Anglo Irish Bank. As I understand it the intention is to wind the bank down. Why wind it down, investors money is now safe. If Anglo Irish were to continue as a working bank I think a great deal of the Irish public might prefer it to AIB or Bank of Ireland neither of whom have shown any gratitude to the Irish taxpayer bailing them out. If Anglo Irish were to pass on in full the ECB rate reductions without delay, if it were to act honestly, morally, and ethically with its clients,… Read more »
Jasus Lads, ye wouldn’t guess who has just emerged as the largest debtor of Anglo Irish Bank!?!?! None other than possibly the biggest Irish investment poser on record, Sean Quinn, the man who has lost his shirt in what sh*tty investment was it he made again, oh Jasus, that’s right, BUYING ANGLO SHARES!!!! It looks like slowly but surely, we are getting closer to the real reasons why Anglo haven’t a pot to p*ss into and Lenihan is handing over his rusted bedpan to them… http://www.irishtimes.com/newspaper/frontpage/2009/0117/1232059657234.html I’d still can’t work out why those shareholders at the Anglo EGM in the… Read more »
The last annual report of INBS – should you chose to beleive the contents. The auditor is listed as KPMG on Page 10. Same auditors the year before. Therefore there was collusion to hide material information from the shareholders, that involved ANIB directors, ANIB head office officials, Ersnt&Young auditors, the bosses of the audit staff, IRSRA directors and officials, and possibly even staff in the Irish Central Bank. And now we know that KPMG were probably in the loop also. This means that the financial services industry is rotten with corruption. But this is not New York. We let our… Read more »
Sorry forgot the link of the INBS annual report. As if it can be believed in any case ?
http://www.irish-nationwide.com/reports/inbs/INBS%20Annual%20Report%2007.pdf
Page 10 – the auditor is listed.
And for those interested in ANIB (now taxpayer funded)….sounds really positive….as a taxpayer you have the right to demand results…like in the rest of the public sector….
http://www.angloirishbank.com/Investors/Reports/Preliminary_Results_2008/Preliminary_Results_2008.pdf
Nobody in the PAYE or public sector is going to be willing to take the cuts required to fund a sensible economic plan involving the banks at this stage, It is just not politically possible. The time for listening to a sensible and scientific economist has past in many ways. The people who drank the least at the party are not going to suffer the hangover. Let the banks fail, hang fingleton et al. I could not care less, I will strike for a year if I am put upon for this mess. I will carry as heavy a burden… Read more »