Anglo collapse shows it's time to get real over the banks

OPINION:THE STATE is back in the banking business and looks like it will be in it for some time to come, writes John McManus

The Minister for Finance may be serious when he says that Anglo Irish Bank will be run in a hands-off commercial fashion but, if so, then he is still suffering from the same optimism that made him think he could avoid nationalising Anglo in the first place.

Speaking on the fringes of last Thursday nights’s press conference to announce the nationalisation, a senior official from the National Treasury Management Agency described Anglo’s status as analogous to a commercial state body. He was talking in the context of the impact on the national debt, but his words are prophetic.

If the Government cannot resist meddling in the affairs of Aer Lingus, an independent company of some strategic importance in which it is one of two big shareholders, what hope is there that it will not micromanage Anglo Irish – particularly when you consider how much higher are the stakes than a few slots at Heathrow?

Anglo Irish is banker to the companies and individuals at the epicentre of the Irish banking and economic crisis. The mere fact that the Government stepped in says all you need to now about the seismic effect that its collapse would have had.

Its biggest debtor is the Quinn Group, a massive conglomerate that insures hundreds of thousands and employs thousands more. The company says it’s in good shape but it has taken its hits in the past year along with everybody else, including massive loses related to investments in Anglo Irish. The rest of Anglo Irish’s balance sheet is a who’s who of Irish business and includes some of the most ambitious property developers, none of whom are immune from what is going on.

The Government is going to come under intense pressure – as the owner of Anglo Irish – to use the bank as some sort of rescue agency. The Minister has already said that, under State control, the bank will act in the national interest, which of course can be a justification for almost anything.

New Anglo chairman Donal O’Connor has done a reasonable job in difficult circumstances and, while he may not have anything coming close to an explanation for shareholders, at last Friday’s extraordinary general meeting he had the mettle to face them.

However, the chances are that he will quickly find himself in a tight spot as Anglo’s clients start to lean on the Government for special treatment. In addition, if the former PricewaterhouseCoopers managing partner is really going to run the bank in a hard-headed fashion, he is going to be making some tough decisions about his former clients and his friends.

At a very minimum he should insist on a clear and unambiguous mandate from the Government. He also needs free rein to pick a board that will be strong enough to stand up to the Government. The Minister for Finance will be saving himself a world of trouble if he gives O’Connor that freedom and O’Connor delivers.

The risk of political meddling in Anglo Irish Bank is the single biggest argument against using it as bad bank in the wider recapitalisation. In many ways Anglo is perfect for the job of bad bank, with the previous management having met the Government more than half way in this regard given their approach to ethics.

But unless the Government is prepared to let the taxpayer take a complete bath on the assets transferred into the bad bank, its management has to be empowered and incentivised to recoup every possible euro for the taxpayer. They also have to be able to make the hard decisions and crystalise losses where appropriate. That almost certainly means putting people with connections to Government out of business, if necessary. It also means putting people out of work, which is not exactly compatible with Government policy.

It is, as they say, a dirty job but some one is going to have to do it and do it quickly. It is time for everybody involved in the Irish banking sector to get real.

One bank has gone and others will follow if we persevere with the fiction that the plan announced before Christmas remains viable. Making Anglo a bad bank could be part of a new solution, but the objective is to quickly and comprehensively recapitalise AIB and Bank of Ireland. How this is done is no longer a matter for the management of these banks or their shareholders. It is a national priority.

If there is a lesson for the Minister in the Anglo collapse it’s that adopting an incremental approach that seeks agreement from the banks and their management just robs the Government of the initiative and leaves it too vulnerable to being bounced into big decisions on others’ terms.