The True Cost of Anglo Bailout!

March 26, 2010

For interaction with other commentators I can be found under cbweb with comments on the forum attached to David McWilliams blog at e.g http://www.davidmcwilliams.ie/2010/03/22/fitzpatrick-didnt-act-alone

This post I’d like to throw out a challenge to Alan Dukes, the current chairman designate of Anglo Irish Bank, who is currently doing the rounds of media pundit with the main message for all who will listen, that the cost of saving Anglo far exceeds the cost of letting it go. Invariably because of information deficit on the figures involved the floor is deferred to Alan who will try to beguile his audience that while the cost of saving Anglo could be anything from €9 – €14 billion, the cost of letting it go would be €20 billion plus. So I’d like to invite Alan Dukes to write an article stating the factual position as represented by the Anglo claims. I’m sure the various media outlets will welcome opportunity for publication also.

I’m not in this post going into a breakdown of the relevant costs of each scenario, the cost of bailing out depositors, the cost of bailing out senior bondholders, the cost of bailing out senior debt and subordinate debt. I’ll ask Alan to cover these costs in his article. We, as taxpayers deserve to know.

What I would also like Alan to account for in his figures is the decision by Brian Lenihan to backdate the valuations on the assets backing the transfer of loans by Anglo to NAMA to Sept 30, 2009. Arguably some property assets have fallen 50% between the dates September 30, 2009 and today over six months later.

Anglo is transferring €36 billion to NAMA up from a figure of €28 only six months ago. How could they have gotten this so wrong? http://www.politics.ie/economy/126044-anglo-transfer-36bn-loans-nama-up-28bn-last-september.html We will shortly hear the haircut involved and the cost of this to the taxpayer.

But even this figure is not the true cost of saving Anglo! To get this figure we have to dig deep into the Anglo accounts. Now I’m not suggesting there is anything dodgy in the Anglo accounts, this has already been confirmed and is the cause of Garda fraud investigations. I’m not suggesting there is any Lehman’s type Repo 105 scam involved, I’d just like to see the exact figures. So we can do a little Math that will stand up. If you will, to avoid the type of floundering that goes on when Alan makes his broad prognostications and generalisations to the non illuminati on his almost blanket media outings for RTE.

The cost of saving Anglo is intimately wound up with the cost of NAMA to the taxpayer. After all, that €36 billion is being paid for through NAMA in a gamble that the economy will come good and commercial/residential property prices will rise in the short to medium term in the hope the taxpayer will make a profit. A little casino bet is involved. We buy at inflated prices in the hope that the inflated prices will be a good short to medium term investment for the taxpayer. The fact that NAMA will stifle the market, suffocate speculation and development, be unwieldy and impossible to manage given that most of its bubble portfolio is rubbish to begin with, is an argument that is ignored in this scenario. In a world economy that requires agility, cost savings, innovation and creativity among other demands, we have the Irish economy presenting in this race with Anglo and NAMA with legs tied together.

Alan in costing the bailout of Anglo cannot give us exact figures. Because not only will the cost of the bailout be in terms of the  transfer of €36 billion to NAMA, Anglo also proposes to divide into Anglo-old and Anglo-new. Alan tells us Anglo-old will be a vehicle for non performing loans and toxic assets. It too in the laundering of same will be betting on increasing values in a casino bet that values will increase from their present values over time. So we won’t know the result of this bold experiment for say 10yr. In fact, we could say Anglo is a bit of a hedge fund betting on a property derivative expected to increase in value over time. Sure wasn’t this that got us into difficulty in the first place.

Alan Dukes does gives some figures that describe foreclosure/bankruptcy of Anglo. But these figures are false being based on full payment of 100% in the pound for all creditors, bondholders, depositors, listed above. What foreclosure/bankruptcy means for those who, like this writer propose this model for winding up Anglo, means,  is a negotiated settlement based on the following factors:

1. Bondholders were not exercising due diligence in lending to Anglo. Anglo accounts should have set off alarms.

2. ECB (European Central Bank) did not exercise due diligence and oversight of monetary union issues for the euro leading to greater oversight and regulatory framework for this bank.

3. Fraud investigations and breach of acceptable banking standards by this bank.

Under the umbrella of the EC and with the support of the IMF a much neater negotiated settlement of the debt of Anglo is possible. The NAMA solution is wasteful of both taxpayers and ECB  EU financial support. What European bondholder support for NAMA and Anglo achieves is a medium to longterm suffocation of the Irish economy with consequent danger for the stability of the euro.

What is needed is a short term solution to the Anglo problem. What we have from Dukes is a solution that allows the tumour to grow over time to make further and greater damage. The cost to the taxpayer of this solution, radical surgery involving bondholder renegotiation and foreclosure of NAMA, achieved in a timeframe of 2 – 3 yrs, compared to the longterm, increasing damage and havoc created by NAMA in the Irish economy is the true comparison the facts and figures underlying Dukes position paper should address. Not the propaganda lie based on innuendo, disinformation and falsehood currently going the rounds!

How about it, Alan, instead of sniping in the grass at those of us who advocate a fast windup foreclosure/bankruptcy for toxic Anglo, give us the true figures as a position paper that will go on the record as a full accounting of the Anglo evidence for being kept on life support by taxpayers for the next decade or more? I suspect as Chairman Designate of Anglo the prospect of losing such a cosy banking position for an ex politician with such limited experience in banking,  such a position paper we will not see sometime soon!

One other angle on the whole Anglo scam needs some delving to unravel. Perhaps it will be covered by Mr Lenihan’s speech to the Dail on the whole government response to the banking crisis. To understand its context you have to understand the following scenario. We expect Anglo to announce losses this week around the €14 billion mark, €4 billion has already been given to them by the state, so another €13 billion at leat of taxpayers money will be needed to pour into this home. Government propaganda suggests that if liquidated over the space of a year, the cost to the state would be between €27 billion and €35 billion, lets ignore the latter on the basis that inability to project losses on this scale within a margin of 33% smacks of outlandish incompetence. Lets also pursue the main thrust of this post which is to pin down in detailed figures the precise cost of options regarding liquidation of Anglo as against the saving of Anglo. To do do, because of disinformation and lack of concrete information regarding the evaluation process we have to second guess Government figures. But, hopefully, Brian Lenihan, in his Dail speech of next Tuesday will flesh out this concrete information and provide us with the exact and sound figures we need upon which to base sound judgement and not have to rely on political propaganda. Then, for example, we can clearly see the €27bn figure above for what it is. Is it, as discussed earlier in this post, based on a 100 cent in the euro payback of All Anglo debt, and not based on a negotiated write down of bondholder debt?

Government propaganda regarding the state guarantee which runs out in September may continue to peddle the view that allowing Anglo to wind down after this date is an unacceptable danger to the Irish economy. That State borrowings will be punished by the markets with higher interest rates. This is set against the view expressed here that continuing State support of Anglo is a sign of weakness, that will slowly suffocate the Irish economy, that will punish a ‘sucker’ Irish economy in the medium to longterm. This is more damaging and dangerous than the proposed ‘saving of Anglo’.

As the figures are awaited on the Anglo bailout that will finally be given to us this week, hopefully the true cost of the bailout to the Irish economy, one other angle on this subject that needs to be addressed is the issue of  ‘Credit default Swaps’.

http://en.wikipedia.org/wiki/Credit_default_swap

In his book, ‘The Big Short’, Penguin, Michael Lewis, makes the point that for the US it wasn’t that banks per se are so critical to the economy. The failure of even a large bank might be economically tolerable but there may be the possibility if not the likelihood that such a bank may be the target of CDS speculators, so that a massive payment would be triggered by those who had sold CDS to those who had bought them.

P3, Sunday Times, 21.03.10,

“”The failure of, say, Citigroup, might be economically tolerable but it would also trigger the pay off of a massive bet of unknown dimensions from people who had sold credit default swaps on Citigroup to those who had bought them.

“There’s no limit to the risk in the market”, he(Gutfreund) said. “A bank with a market capitalisation  of  $1 billion might have $1 trillion-worth of credit default swaps outstanding. No one knows how many there are. And no one knows where they are.””

Is it possible that what on the face of it through NAMA and the saving of Anglo lies the bleakest and most loss making path for the Irish economy, that such a route masks the real intent of the NAMA and Anglo puppeteers, an undisclosed loss we have not been told about. Because if this is not the case, it is my view, that path we are taking with NAMA and Anglo represents a suicidal route for the Irish economy and for Irish taxpayers.

rgds

Colm

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3 Responses to “The True Cost of Anglo Bailout!”

  1. Thomasd said

    I personally believe that the establishment of NAMA is nothing short of selling out the Irish republics
    Independence
    Mr Allen Dukes is an old old political dinosaur and can be counted on to hold the line as long as he gets paid.
    We the people are so docile I am beginning to think we are all on some sort of medication the sort that is given out to patients in mental institutions to keep the patients “calm and happy”
    Maybe the spread of these so called Head shops has something to do with it?
    NAMA is like a massive black hold and the life blood of the Irish economy is being drained out
    to feed this massive monster.
    Only six months ago we were told that Anglo would need 28 Billion, this week we find out it is more like 36 billion
    The way this is going it would be cheaper to just pay off all household mortgages (Home) currently believed to be in the region of 48 billion.
    Without our financial independence we are just servants to foreign bondholders.
    Bailing out the Banks and top developers in this way is just socializing the huge losses brought about by the criminal activities of the Banks and Top Developers (A la Galway Tent golden circle) and with the collusion of the government.
    Cowen and his Traitors are guilty of the biggest fraud perpetrated on the Irish Nation and must and will be brought to account.
    This blatant bail out of their friends is a scandal,
    The shear arrogance of this Government is just mind boggling.
    I am 54 years old and I am ready when called to take up arms to defend our country from these Gangsters, I am also prepared to do the same to stop this NAMA .
    Thomas
    http://www.thepressnet.com

  2. Machholz said

    I personally believe that the establishment of NAMA is nothing short of selling out the Irish republics

    Independence

    Mr Allen Dukes is an old old political dinosaur and can be counted on to hold the line as long as he gets paid.

    We the people are so docile I am beginning to think we are all on some sort of medication the sort that is given out to patients in mental institutions to keep the patients “calm and happy”

    Maybe the spread of these so called Head shops has something to do with it?

    NAMA is like a massive black hold and the life blood of the Irish economy is being drained out

    to feed this massive monster.

    Only six months ago we were told that Anglo would need 28 Billion, this week we find out it is more like 36 billion

    The way this is going it would be cheaper to just pay off all household mortgages (Home) currently believed to be in the region of 48 billion.

    Without our financial independence we are just servants to foreign bondholders.

    Bailing out the Banks and top developers in this way is just socializing the huge losses brought about by the criminal activities of the Banks and Top Developers (A la Galway Tent golden circle) and with the collusion of the government.

    Cowen and his Traitors are guilty of the biggest fraud perpetrated on the Irish Nation and must and will be brought to account.

    This blatant bail out of their friends is a scandal,

    The shear arrogance of this Government is just mind boggling.

    I am 54 years old and I am ready when called to take up arms to defend our country from these Gangsters, I am also prepared to do the same to stop this NAMA
    Machholz

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