State would have major losses if Anglo liquidated

ANGLO IRISH Bank was advised that a liquidation of the bank would lead to substantial losses for the State and increase borrowing costs for the Government and the other Irish banks.

The State-owned bank was advised by its investment banking consultants who worked with accountants KPMG and Deloitte in assessing the bank’s future options for an EU Commission report, that the State would have to inject capital to dissolve the bank and fund it in a liquidation.

Liquidating the bank immediately or over a one-year period were among a number of options considered by the bank’s senior management and advisers in advance of submitting a five-year restructuring plan to the commission last month under the terms of the €4 billion Government bailout.

Among the other options considered by Anglo for its future were an orderly wind-down over five years, “a far-reaching restructuring” and running the bank as a going concern with major restructuring, which is the preferred option outlined to the EU.

Anglo staff were briefed last week on the bank’s plans to create a good bank and bad “asset run-off company” after its problematic property development loans are moved to the National Asset Management Agency (Nama) next year. The bank will transfer about €28 billion of loans to Nama, leaving the nationalised lender with loans of €44 billion.The bank also holds about €8.5 billion of treasury assets on its books.

The new structure, which has been proposed in the plan submitted to the EU at the end of last month, awaits commission approval and may change following discussions with Brussels.

Minister for Finance Brian Lenihan said “an expedited process was under way” to review the restructuring plan.

Anglo’s investment banking advisers provided a cost analysis of both a liquidation involving an immediate firesale of the bank’s loan, securities and bonds, and a liquidation over a one-year period.

In addition to increasing the borrowing costs of the Government and other Irish banks, Anglo was also advised that in a liquidation, the bank would forgo about €20 billion in bonds from the sale of loans to Nama and the State would have to make up this funding.

A liquidation would also technically result in the triggering of the Government’s bank guarantee, increasing the cost to the State.

The bank’s advisers said liquidation would also sharply depress asset values across the Irish market and ignite capital concerns for other banks, leading to severe disruption across the domestic banking sector. The bank was told the cost to the Government in a liquidation would be massive compared to restructuring and running it as a slimmed-down going concern.

The bank also asked its advisers to assess the possibility of winding down the bank over five years or a more prolonged period. The bank asked the consultants at KPMG’s headquarters in Holland to find another bank of Anglo’s size that had faced a similar situation.

They were unable to find a bank the size of Anglo’s balance sheet that held the same size share of domestic banking market as the nationalised lender.

The closest was a failed Swedish bank in the 1990s with €8 billion in assets.

The bank’s management were advised that a wind-down would damage the bank’s ability to sell off its loan books in the UK and the US and it would be faced with a similar scenario as liquidation.

Anglo found that the loss to the State in a wind-down would be lower than in a liquidation but that there could be significant pressures on funding with deposit outflows and difficulties refinancing securities in the capital markets.

The bank was also advised that there would be operational risks in a wind-down as the bank would find it difficult to retain staff.

Mike Aysnley, Anglo’s chief executive, told staff last month the bank and its advisers “have concluded that both liquidation and wind-down scenarios would have a severely negative and long-term consequence for our numerous stakeholders and the entire Irish financial system”.

The bank plans to wind down assets in the “old Anglo” division “over time”, while the “new bank” division will focus on business lending.