High Court performs last rites on two failed lenders

ANALYSIS:Anglo and Nationwide will soon be history. The same cannot be said for the cost of their failure

THINK OF yesterday’s High Court orders on Anglo Irish Bank and Irish Nationwide as the death notice for two failed lenders; and of the court’s approval for the auction of their deposits and corresponding assets as a transplant of their working organs to save other sick banks.

Minister for Finance Brian Lenihan used his hard-hitting banking law for the second time since it was enacted last December – he used it first effectively to nationalise AIB just before Christmas – to start the first legal steps to gradually wind down the country’s two worst lenders.

Unlike in AIB’s case, the Minister did not seek to have the application heard in camera – as he can do under this draconian law – but sought to withhold certain commercially sensitive information, namely the size of the deposits to be sold and the terms of the auction process under which they will be sold.

Responding to concerns raised by The Irish Timesand RTÉ, who were in court, Mr Justice Brian McGovern said that as much of his ruling as possible should be published as the matter was of "exceptional public importance".

Curiously, three consecutive words after the word “deposits” were redacted from the court order approved by the judge. This is thought to refer to the corresponding assets that are to be transferred with the deposits – about €10 billion from Anglo and €4 billion from Irish Nationwide Building Society.

The assets are believed to include the bonds issued by the National Asset Management Agency for some €43 billion in loans acquired from the two financial institutions.

So Nama bonds, effectively State IOUs, amounting to about €12 billion at Anglo and €3 billion at Irish Nationwide will be sold with the deposits. (Deposits are a liability on bank’s balance sheet and so must be matched by an asset when they are transferred. Other assets that could be transferred include loans, other government bonds or cash.)

Reflecting the sensitivity of the information before the court, counsel for Lenihan asked the judge to prohibit the reporting of the fact that the Minister was even in court seeking the order because of the effect the application could have on the deposits and bonds of Anglo and Irish Nationwide.

The ban on reporting was lifted as soon as the judge granted the Minister the order – less than two hours after the case was opened.

The fear was that if the Minister’s application became public, it would trigger “an event of default” which would have allowed the bondholders in the two lenders to demand repayment of their debts.

This, after all, is debt that is being traded continuously in the omnipotent bond markets by eagle-eyed, risk-based investors in debt.

Lawyers for the Minister told the court that the orders sought were necessary as the reorganisation and restructuring of both financial institutions was essential not just for their own stability but for the stability of the wider Irish banking system.

The application also meets the latest strict deadline to be met under the agreement reached by the Government with the European Commission, International Monetary Fund and the European Central Bank to lead a swift restructuring of Anglo and Irish Nationwide confirming the wind-down of the two lenders.

The reason for the transfer of the deposits out of Anglo became obvious within just two hours of the court’s ruling.

The bank has absorbed €29.3 billion of State cash and Irish Nationwide €5.4 billion.

Anglo is struggling to fund itself as depositors and bondholders seek the return of their money. The bank announced that it lost a whopping €16 billion or about 59 per cent of its deposits in 2010 and that it expected to post a loss of about €17.6 billion for the year.

The bleeding of deposits reflects the run that Anglo has endured over the past year, dragging the State down with it and forcing the Government into the arms of outsiders.

The loss brings to €30.3 billion the total lost by Anglo since September 30th, 2008, the day of the Government bank guarantee, which was introduced to save Anglo from collapse in the first instance and then the other banks.

The bank’s expected loss for 2010 beats the previous record for the largest loss in Irish corporate history – held by Anglo for the €12.7 billion lost in the 15 months to December 2009. To put the latest loss in context, it amounts to about €1 billion shy of the deficit in the public finances last year.

Releasing the unaudited figures for its 2010 financial year, Anglo said that reliance on funding from the Irish Central Bank and the European Central Bank had soared to €45 billion at the end of last year from €23.7 billion a year earlier.

Deposits stood at €11.1 billion at the end of last year and this is thought to have fallen to about €10 billion since then, with central bank funding rising by roughly the same amount to fill the gap in customer funding lost.

The figures show the necessity for a rapid restructuring of the bank. Anglo is being propped up by cheap central bank loans – €16.9 billion from Frankfurt and €28.1 billion from Dublin at the end of last year. It is little wonder that the so-called troika of external financial authorities which came to support Ireland are forcing a rapid solution on Anglo.

And to heap pain on pain, the bank’s chairman Alan Dukes said the financial system may require a further €50 billion to restore it to health pushing the cost of the banks to an eye-watering €100 billion. “A clean banking core will require something in the region of €50 billion,” he said. “A clean banking restructuring implies the acceptance of irrecoverable losses.”

And so where there were once six domestic financial institutions, there will soon be five – three of which are fully or almost fully owned by the State and a fourth, Bank of Ireland, is fighting to stay out of Government hands.

Irish Life and Permanent, which has received no State capital but is the worst funded Irish bank, is in the running for the transferring deposits. So too are Bank of Ireland and AIB as the deposits will help bring their loans closer in the line with deposits, reducing their reliance on outside borrowing.

The remnants of Anglo and Irish Nationwide – following the transfer of €36 billion and €8 billion of loans respectively to Nama – will be merged and wound down under one board and one management team.

Anglo’s once buccaneering business will be reduced to a shadow of its former self. The bank must show plans by the end of next month to close offices in the UK, Vienna, Dusseldorf and Jersey and to sell Anglo’s own private bank which tapped once cash-rich customers for its own property deals.

The future of 1,300 jobs at Anglo and some 450 at Irish Nationwide are in serious doubt as several hundred staff will be transferred with the deposits to other lenders where their roles may overlap with those of existing staff.

The merged Government-owned bank will run down over several years about €36 billion in former Anglo loans and €2.5 billion at Irish Nationwide. The toxic nameplates of Anglo and Irish Nationwide will soon be wiped from the doors of Irish bank branches. Tragically, their cost will be felt for far longer.

Simon Carswell is Finance Correspondent