Taxpayer bears burden of bank failure

ANALYSIS:Bred in the boom years, Anglo's dysfunctionality is set to grind down hard on the public

SCORCHED AGAIN. Already on the hook for €7 billion after the recapitalisation of Allied Irish Banks (AIB) and Bank of Ireland, Irish taxpayers have taken on a further burden with the Government’s plan to provide €4 billion in capital to Anglo Irish Bank.

Unwelcome, yes. But this is very unlikely to be the last time that Anglo leans on the State for capital. In Anglo’s own worst-case projection, another €3.5 billion might yet be needed to fight a brutal rise in loan losses. Auditors Ernst Young, who received €2.2 million for their work last year, signed off accounts last September which pointed to €2.5 billion in “past due” and “impaired” loans. Now that figure stands at €23.6 billion.

Anglo and its investors were arch beneficiaries of the go-go years in Ireland, but nationalisation means the bank itself is well past the point of taking its pain in the property flame-out. Although rival banks are no different, Anglo’s risks were greater.

Now it falls to taxpayers to clear up a mess made by bankers whose generous pay fuelled the rampant optimism of their lending. Blind to danger in their hunger for easy profit, they have led the State into acute fiscal peril and amplified the threat posed by unyielding global recession.

That they were supported in their zeal by lax regulation and the policies of Bertie Ahern and his finance ministers Charlie McCreevy and Brian Cowen only worsens the blow to taxpayers.

Add to Anglo’s capital requirement the possibility that AIB might need more capital when the National Asset Management Agency (Nama) starts up and the true cost of the debacle comes into view. This is to say nothing of any capital injection that may be needed to prop up the ailing Irish Nationwide Building Society or the EBS building society.

To a greater or lesser extent, all of Ireland’s big lenders swam together in the risky glow of financial innovation and entrepreneurial gumption. What singles Anglo out for special public opprobrium are the dubious dealings that accompanied its slide into the bosom of the State – scandals that are variously under Garda and regulatory inquiry.

Anglo executive chairman Donal O’Connor summed up dysfunction in its boardroom when saying he never knew the true scale of director’s loans taken out by Seán FitzPatrick, his predecessor.

A director since June last year, O’Connor didn’t know either about the extraordinary €8 billion deposits made by Irish Life Permanent to shore up Anglo’s weakened balance sheet in September.

As for the secretive placement of a 10 per cent stake in Anglo to a group of well-heeled clients, O’Connor says he heard from FitzPatrick about the transaction in July and understood it had been “agreed” from a legal and regulatory standpoint.

While we know now that the regulator says it never approved the placement, O’Connor says he would have taken at face value something that appeared reasonable. It is a given that the potential overhang presented a big threat to Anglo at a vulnerable time. Yet O’Connor cannot recall any board discussion on the placement.

That was then. The immediate existential threat posed by the obliteration of shareholder equity since nationalisation – down to €100 million in March from €4.1 billion a year previously – is such that the Government has agreed to pump €4 billion into Anglo.

This raises natural questions as to whether the State should cease its support for the business and engage in an orderly wind-up, paying off bonds as they fall due.

No, says Anglo. The bank argues such a process would make it very difficult for it to access funding, risking similar difficulties for other Irish lenders and a big escalation in Government debt: “Any wind-up option for a bank would be a very costly option for the Irish taxpayer.”

No too, says Minister for Finance Brian Lenihan, who implies there can no such thing as an orderly wind-up of a bank like Anglo. Bad as things are, the argument goes that any flight from a €64 billion deposit base would make conditions much worse for the State at large given the threat of a call on the banking guarantee.

So the Government stands fully behind Anglo for now. Still, Lenihan says the bank or some of its discrete units may yet be sold once the business is becalmed. Between then and now, however, it remains on life-support.

Post-Nama, in which Anglo will be a willing participant, the bank will be a much smaller beast. That is the thrust of a draft business plan, whose modest ambition suggests the bank is being wound up in all but name.