Questions remain on Quinn-Anglo relationship

In time taxpayers may find out what happened between the bank and the businessman, writes Colm Keena

THE FINANCIAL Regulator is investigating what occurred in the middle of last year when Seán Quinn and his family offloaded contracts for difference (CFDs) in Anglo Irish Bank equal to up to a quarter of its shareholding.

It seems from what emerged this week that the regulator was aware of the size of the Quinn family involvement from early last year, and was itself involved in the steps taken to resolve the matter.

Quinn, one of the State’s most successful business figures, is a huge employer and has introduced competition to key sectors where it was needed, but would agree he is a long way from being the State’s most sure-footed investor.

He and members of his family built their stake in Anglo over a period up to early 2008 using CFDs – financial instruments that did not oblige him or his family to disclose investments.

Notes to Quinn group accounts indicate the investment grew over years. The CFDs were, apparently, purchased using brokers from outside the State, most likely for confidentiality reasons. Nevertheless, some observers had questioned how such a large stake could have been accumulated without the regulator discovering and stopping it.

Early last year word got out that the Quinn family had a large, ill-defined involvement in Anglo. So-called short sellers around the globe were at the time betting against shares in banks like Anglo. The involvement of the Quinns may have encouraged them.

Because Quinn had his investment by way of CFDs, the CFD supplier or suppliers – who owned the shares – could loan the shares to short sellers, according to one observer. The short sellers may have been encouraged to bet against the bank because falls in its share price would hurt Quinn. If he decided to close his CFD account due to his accumulating losses, the resultant placing of the shares on the market would have further depressed the share price, to the benefit of the short sellers.

The regulator, the bank and the Department of Finance all considered the Quinn CFD investment to be a force for instability. A sharp fall in the share price could spook depositors and cause a run.

In July 2008, by which time the bank’s shares had lost 70 per cent of the value they’d held a year earlier, the Quinn family announced it was going to unwind its position. But it didn’t just settle its account. It instead bought 15 per cent of the bank, three-fifths of the shareholding it had been holding by way of CFDs. Why it did this, and did not buy 25 per cent, is not known.

In July 2008 a 15 per cent shareholding in Anglo would have cost about €1.5 billion. A 25 per cent stake would have cost €2.5 billion.

On July 9th Anglo took out a huge charge on 17.7 per cent of the Quinn group holding company’s ordinary shares, which still exists. It took a charge on the preference shares. These allow the holder to appoint a majority to the company’s board. This charge appears to have been undone on July 28th.

What lies behind it all is not known, but the amount loaned by Anglo must have been huge. Why the preference shares charge was undone so soon after it was created is also not known.

In October the Quinn Group announced that exceptional charges of €829 million were incurred in 2007 and that further writedowns would not exceed €130 million. Most interpreted this to mean the family had lost at least €959 million on its CFDs.

The group said one of its subsidiaries, Quinn Insurance, advanced loans to support investments outside the group in 2008. In May 2008 these stood at €288 million and had since then been repaid, the group said. Quinn Insurance is a regulated entity. The firm was fined €3.25 million by the regulator over these loans, as they breached insurance regulations.

So the Quinns may have lost up to €1 billion on Anglo through CFD investments, and a further estimated €1.5 billion on the 15 per cent shareholding announced last July which may now be worthless.

The 10 per cent held through CFDs but not taken up by the Quinns is understood to have been taken up by a group of six to seven business figures known to the bank. Their shareholding would have cost in the region of €1 billion and may now be worthless.

Questions arise on whether Anglo advanced cash to the investors, whose investment helped prevent a glut of shares going on the market when the bank’s share price was under pressure, and what the security involved was.

A report on directors’ loans and other corporate governance matters is being prepared for the new board of Anglo, and will be forwarded to Minister for Finance Brian Lenihan. The Director of Corporate Enforcement, Paul Appleby, is making inquiries into the bank. Perhaps in time the taxpayer, who owns Anglo Irish, will find out more about what went on.