Deception by Anglo may be at heart of State's ignorance

 

Sources say the nature of the deals put in place over Seán Quinn’s CFDs was misrepresented, writes COLM KEENA

THE STATE’S lack of knowledge about what happened when Seán Quinn’s huge contracts for difference (CFDs) investment in Anglo Irish Bank was unwound last year, was due in part to deception on the part of the bank, according to informed sources.

As the Taoiseach, Brian Cowen, made clear in the Dáil this week, the Department of Finance and the Financial Regulator were involved with the issue.

However, the nature of the deals put in place when the CFDs were being converted into direct shareholdings was misrepresented to the regulator by the bank, according to sources.

Cowen told the Dáil that when he was minister for finance in March of last year he was told that the enormous investment by Quinn in Anglo Irish Bank shares was a cause of instability for the bank.

Quinn and his family had used CFDs to build up an indirect and undeclared 25 per cent interest in the bank, which was at the time the third largest bank in the State. Quinn and his businesses were significant customers of the bank.

Although Quinn used stockbrokers outside the State to build up the position, it became known that the family had built up a sizeable stake. Short sellers were in the market, betting that the bank’s share price would fall and the knowledge that Quinn was exposed was an encouragement for them.

Furthermore, the firms that had the contracts with Quinn had bought the shares covered by the contract, and were in a position where they could loan them to short-sellers who wanted to bet against the bank.

In the Dáil on Tuesday, the Taoiseach said: “A meeting took place last March at which the governor indicated to me, as minister for finance, that a situation was developing in regard to the contracts for difference issue in Anglo Irish Bank, that had to be dealt with by the bank.”

The “large overhang of shares” was considered by the bank and the market to be a source of instability and “the institution was seeking a resolution of the issue. The details of this were a matter for Anglo Irish Bank and, as appropriate, the Financial Regulator,” he said.

Cowen became Taoiseach in May 2008, and appointed Brian Lenihan as Minister for Finance. Yesterday, Lenihan told The Irish Timeshe was briefed on a range of matters when he took up his new position in the Department of Finance in May, including the “very large stake” in Anglo held by Quinn. He was also told Quinn had made use of funds in his insurance business when buying into Anglo.

The regulator was at the time pushing the bank to have the CFD position unwound in an orderly fashion. A sharp drop in the bank’s share price on March 17th had been followed by a withdrawal of deposits and the regulator was concerned that the instability in the share price might lead to a run on the bank.

The regulator was informed that a London investment bank was seeking to sell the shares held by the CFD providers, and was approaching institutional investors and sovereign wealth funds. However, it was not until the end of June that the regulator was told that investors had been found.

On July 15th it was publicly announced by Quinn that he and his family were buying a direct 15 per cent stake in Anglo. Quinn acknowledged that he had written off close to €1 billion arising from his involvement with the CFDs. It was also announced that the regulator had imposed a record fine of €3.25 million on Quinn Insurance and €200,000 on Quinn, because money from Quinn Insurance, a regulated body, had been used as part of the Quinn family dealings with Anglo.

Why Quinn decided to invest directly in Anglo shares that were falling in value, having already lost hugely through his CFD investment, is not clear. It is not known how much this cost him. On the face of it, a 15 per cent stake would have cost him approximately €450 million. The shares are now considered likely to have zero value.

As reported in The Irish Times in October last, the Quinn Group, the largest privately owned business in the State, gave Anglo Irish Bank a charge over 17 per cent of its ordinary shares during July. It also gave the bank a temporary charge over preference shares that would have given Anglo control of the group’s board. It appears the group borrowed heavily from Anglo while sorting out its CFD position.

It was not known publicly in July that Quinn’s purchase of 15 per cent of the bank did not constitute his entire CFD investment, though this was known to Cowen and Lenihan. Lenihan also knew that a group of investors had taken up the 10 per cent of the bank not taken up by Quinn.

On Tuesday in the Dáil, Cowen said: “The Minister for Finance was advised in late July 2008 that a number of investors had invested in Anglo Irish Bank but the Minister was not advised of who the individuals were or the nature of the transaction.”

The department was told by the regulator on Wednesday, July 23rd, that the Quinn CFD position was unwound and that the balance not taken up by Quinn had gone to investors, according to sources. Finance briefed Lenihan over the following days. It is understood that at that stage there was no suggestion the bank had loaned money to the investors. Legal advice taken by the bank and shown to the regulator suggested the deal was legally sound.

The deal as presented to the regulator was an “arm’s length commercial transaction”, according to sources, but the regulator no longer believes that to be the case. This is because it has now discovered that the funds involved came from Anglo, and the collateral involved may have been fragile.

Around the time the CFD position was being unwound and Quinn and the group of 10 “investors” were taking up a sizeable stake in Anglo, the department was drafting a Bill for the nationalisation of the bank as a precaution given the growing credit crisis.

This Bill was available on the night of September 29th, 2008, when Cowen, Lenihan and their most senior banking advisers, prompted in part at least by the potential imminent collapse of Anglo, met in Government Buildings to decide what to do.

“Nationalisation was ruled out that night in September due to the perceived danger of a systemic collapse of the entire banking system, with one institution after another coming under threat,” according to Lenihan.

“The choice before Government at the time was to nationalise Anglo and guarantee the rest or guarantee the whole lot of them, which it did.”

On that logic it would appear the Government’s decision would not have been any different if it had known the full details behind how the 10 investors who bought 10 per cent of Anglo during July, funded their acquisition.

Subsequent due diligence examination of the Anglo business brought the odd nature of the deal to the regulator’s and the department’s attention. The whole issue of the Quinn CFDs and how the investment was unwound is now the subject of an ongoing inquiry by the regulator.

At this stage it appears that the so-called investors may not be forced to repay any of the money loaned. The sum will form part of the hole in the finances of the State’s banks that is going to have to be filled by the taxpayer.