Anglo Irish: a crash course

Anglo Irish Bank has cost the State more than €22 billion and could yet cripple our economy. How on earth did we get here – and is there any way out?

THE EARLY YEARS

Founded in 1963, Anglo Irish Bank was controlled for years by the Manchester-based Kennedy family. In 1971 it listed on the Irish Stock Exchange. By 1977 it had deposits of £2 million (€2.5 million). In 1978 the bank was acquired by City of Dublin Bank through its Irish Bank of Commerce subsidiary, leaving a division with eight staff managed by chartered accountant Seán FitzPatrick. The bank identified a gap in the finance market.

THE “SEÁNIE” CULTURE

In 1986 it enlarged to Anglo Irish Banking Corporation and FitzPatrick became chief executive, ushering in a culture previously unseen in Irish banking. Entrepreneurialism was key, with the ability to get done in a day big deals that would have taken other banks weeks. Paying its staff and executives well became another feature of the bank. Unlike established banks, where employees had to serve their time before landing senior positions, Anglo promoted a youthful culture. FitzPatrick was just 38 when he became chief executive, and in 1987 chairman Gerard Murphy boasted that its oldest senior executive was 42.

ANGLO BECOMES A PLAYER

By the mid-1990s Anglo Irish Bank was emerging as a property specialist. It set up an Isle of Man operation to support its growing sterling loan book and went on an acquisition spree to boost its international reach. As Anglo continued to grow in stature, so did its chief executive. In 1998 FitzPatrick was appointed to the board of Dublin Docklands Development Authority, and to boards of other leading Irish companies. In 2000 he was made president of the Irish Bankers’ Federation. By 2004 Anglo had become the 10th-fastest-growing bank in western Europe, having established a reputation as a niche lender with huge exposure to property developers, commercial property portfolios and construction projects. It wasn’t just in Ireland that the bank lent aggressively. Through its US private-client division it bankrolled the construction of Chicago skyscrapers and Boston shopping centres. The big domestic banks let Anglo plough its own property furrow. “They allowed us to grow because they never took us seriously enough,” FitzPatrick later said. The lack of competition meant that, from a profit of £100,000 in 1980, by 2007 Anglo recorded a “stellar” annual profit of €1 billion, despite the fact that other banks were by then emulating Anglo’s grip on the property market by wading in recklessly. Investors – who had stayed away in the early days – were delighted with the bank’s performance.

CRACKS START TO SHOW

By 2008 the Irish economy had started to slow, with the property bubble about to burst. Doubts were being expressed about Anglo, with the Daily Telegraph describing it both as “toxic” and “rather well-positioned”. Hedge funds were the first to attack, short-selling Anglo’s stock, which led to 15 per cent, or almost €1 billion, of the bank’s market value being wiped out on St Patrick’s Day 2008, as rumours circulated about exposure to bad debts. It was the beginning of the end for the bank – but, in typically bullish fashion, it blamed short-sellers for the massacre.

Over the summer of 2008, things continued to get worse for Anglo, the family of the businessman Seán Quinn taking a 15 per cent stake in the bank; it later increased this to 28 per cent before reducing it in a careful placement of stocks among 10 secret investors.

After the collapse of the US investment bank Lehman Brothers, funding markets effectively closed, which led the Government to guarantee €400 billion of deposits and debts at six Irish-owned lenders, including Anglo, amid fears that the banks risked running out of money within days. Although some advisers, such as Merrill Lynch, were against the guarantee, fearing it would damage the State’s credit rating, the Government felt it was the best way to maintain stability.

The guarantee was deemed necessary not because of the risky state of the Irish banks’ loan books but because of a “serious disturbance in the economy caused by the recent turmoil in the international financial markets”. This soon changed, however, and the Government bank guarantee remains; it is due to run out this month, but it may be extended.

Many have argued that as Anglo was not of systemic economic importance – it had a limited number of depositors and no branch network, and its exposure was mainly in property – it shouldnt have been included. But the Government decided it “could not let a bank fail”, and by guaranteeing the bank it also guaranteed the debts of its bondholders, now a major issue when determining the bank’s future.

THE SCANDALS

In an RTÉ interview soon after the guarantee, FitzPatrick refused to apologise for bankers’ reckless behaviour, but revelations that he had been moving personal loans of almost €90 million off the bank’s balance sheet and into friendly Irish Nationwide for eight years signalled the end was nigh.

By mid-December the scandal led to the resignations of both chairman FitzPatrick and chief executive David Drumm. On January 15th, 2009, the Government moved, forgoing recapitalisation of Anglo for outright nationalisation. The lender’s debts were now the country’s; Quinn was estimated to have lost €2.5 billion in the nationalisation. Runaway profits turned to record losses. In 2009 the Banker magazine ranked Anglo as suffering the worst losses of the world’s banks. As the bank has just set a new Irish record for half-year losses, at €8.3 billion, you can expect it to top that league table again in 2011.

THE “BLACK HOLE”

By 2010 the niche property lender had turned into a “black hole”. The spectacular blow-up of Anglo Irish Bank, relative to the size of the economy, puts it in a different league to banking collapses in other countries. It was originally hoped €4 billion would solve Anglo’s mess, but this soared to €22 billion with nationalisation. Since then the amount has jumped to €25 billion, with Standard Poor’s (SP’s) estimating that the total cost of bailing out the bank will rise to €35 billion.

While Central Bank governor Patrick Honohan maintains such debts are manageable, the ballooning cost of Anglo is playing havoc with Ireland’s finances. Global bond markets respond severely to every extra notch in cost, and if SP’s estimate was realised the price of Anglo alone would account for 20 per cent of Ireland’s gross domestic product.

Now attention has turned again to the bank’s future – and whether it should have one. The main options are: 1) keep some of it open in the so-called “good bank”; 2) wind-down the bank in an orderly fashion over a number of years; or 3) liquidate it.

The Government initially favoured the first option, which is also Anglo management’s choice, arguing that hiving off the €10 billion-€15 billion of the loan book which is still performing into a “good bank” would be cheaper in the long run. This “good bank” could then be sold, offering some recompense. But whether Anglo, with its property expertise, has the capacity to branch into sectors such as small-business lending is questionable.

There is growing consensus for the second option, an orderly wind-down of the bank over at least five years, or as many as 20, gradually reducing the bank’s loan book, and with luck benefiting from a property-market bounce. But if the Government was to openly declare a wind-down, would it cause remaining depositers to desert the bank, exacerbating its funding problems and so costing taxpayers more? In just the first six months of this year it lost some €4 billion in deposits.

The final option is to liquidate the bank, or close it immediately, which may be the preferred choice of taxpayers. But the cost of doing so has been estimated at about €20 billion, on top of the billions already ploughed into the bank, bringing the total cost to about €45 billion. Selling the bank’s assets in this market would amount to a fire sale.

There is also the contentious issue of whether the bank should pay off its bondholders.

So there is no easy option: each alternative presents further risk for the taxpayer. In any case, the European Commission will likely have the final say. It is expected to rule shortly on the future of the beleagured bank.