What would happen if Anglo was wound down?

I presume that Anglo is actually being wound down but that the government is just not announcing it publicly? In other words, it is not making new loans to new customers.

It has €60 billion in deposits, 75% of which are from overseas. If they announce it publicly and formally, most of this will leave, even if it is guaranteed. The government would then have to replace all this money.

It would not be a €60 billion "exposure" as Brian Cowen has described it. Presumably as their customers do repay their loans, the €60 billion would be repaid.

So has the government any choice but to stick in €4 billion or €7 billion now? Probably not.

When NAMA is set up, Anglo will move all its loans to NAMA in exchange for bonds. Anglo could then sell the bonds and repay the depositors. Anglo could then be wound up as there would be nothing left anyway.

Brendan

Yes, I wondered about this too Brendan, if he calls it a €60bn exposure this suggests that Anglo is worth absolutely zilch and all its loans/assets are bad. I think the guy could do him and us a favour by explaining why putting in €7bn is the better option. As it is he's treating us all like imbeciles by not giving us the facts.

Two crucial steps in that process. The first has been well discussed i.e. what will be the discount on the asset transfer.

(I think) You have introduced a second haircut, Boss. You have finished up replacing deposit liabilities with liabilities to bond holders. This must involve large extra losses as the market will surely want a significant discount in moving from guaranteed deposits to bonds.

Example: NAMA buys 100 of toxics at 80, using gov bonds. Crucially, since these bonds were not sold on open market but simply issued to Anglo they will be valued at par. But if Anglo tries to sell them it will probably find the market only prepared to pay 60 - another 20 hit.

Brendan said:

Presumably as their customers do repay their loans, the €60 billion would be repaid.

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Is that presuming too much, Brendan? As reported in yesterday's Indo:

SOME senior staff at Anglo Irish Bank who borrowed millions from the bank to buy properties and shares are now unable to repay the loans, the lender's executive chairman revealed yesterday.
Donal O'Connor said the bank had written off these loans to senior staff and directors and they would now have to be repaid by the taxpayer.

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Would it be outlandish to suspect some causal relationship between this cheerful prospect and the government's insistence on bailing out Anglo, regardless of the ultimate cost to the taxpayer? In the same breath,

Mr O'Connor emphasised several times that big developers would be treated just the same as other clients despite their political connections.
Mr O'Connor declined to comment on reports in the 'Sunday Independent' which suggested former chairman Sean FitzPatrick has deposits of €23m at the bank which cannot be touched, despite Mr FitzPatrick's debts to the bank of €106m.
Mr O'Connor cited client confidentiality.

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Hi Dr M

I should have clarified that. I am not assuming that all the loans will be repaid. But most of them will.

Hi Duke

This haircutting is turning into a scalping.

If the governernment/NAMA buys Anglo's loans at market value, it is assumed that it is giving them an asset at par value.

I presume that Anglo could sell the government bonds at par. I think that the coupon on the bonds would have to be high enough to make sure that the bonds are fair value.

To use your example, NAMA is really paying only 60 for a loan which is worth 80, whether Anglo sells the bond or not. There is not much point in exchanging loans which have an uncertain value for bonds which have an uncertain value.

Brendan

Boss, I think I am getting a bit out of my depth. I also presume that the "market value" of the 80 bonds in the example would have to be 80, or else the bank regs leave a lot to be desired. But there is a big difference between issuing 80 worth of paper to a captive buyer and realising that 80 in a free market. Perhaps over a long period Anglo could carry out the process you describe and get a "fair value" for the 80.

I do very much agree with one thing. Anglo should be on a long term balance sheet diet with a view to a final painless death.

Anglo and the other banks won't sell the Government bonds they get from NAMA in exchange for the loans. They will simply use it to repo with the ECB to get in funding and the move will also be positive for capital purposes because they are replacing high risk weighted assets with 0% risk weighted assets.

Hi Sunny

If they get funds from the ECB based on the full value of the bonds, then they will have plenty of money with which to repay the depositors.

With AIB and Bank of Ireland, they would be expected to use the ECB funds to lend on to borrowers.

Brendan

I don't know why people keep repeating the nonsense Mr. Cowen is spouting as if it is truth.

According to the 2009 Interim report, Anglo had, as of 31 March 2009:
18 bn in retail deposits
16.1 bn in non retail
That is 34.1 bn.

It also has 14.2 bn in debt securities and 30.5 bn in deposits from banks.
The debt securities are, as far as I can see, all term securities, with 2.8 bn being commercial paper or certificates of deposit.
Of the deposits from banks, only 389 mn is repayable on demand.
23.5 bn of the deposits from banks is repo with the ECB.

Of the 34 bn in customer deposits, only 2.356 bn is repayable on demand. The rest is term deposits.

So it is simply not true to say that there is 64 bn in customer deposits that would immediately have to be repaid.

There is, however, a trading book of derivatives amounting to 192 bn euro that would need to be unwound.

Sunny said:

Anglo and the other banks won't sell the Government bonds they get from NAMA in exchange for the loans. They will simply use it to repo with the ECB to get in funding and the move will also be positive for capital purposes because they are replacing high risk weighted assets with 0% risk weighted assets.

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What happens when the ECB stops providing unlimited liquidity and returns to a bid system for repo?
(Not that I think it is likely in the short-term).

So it is simply not true to say that there is 64 bn in customer deposits that would immediately have to be repaid.

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Thanks for the figures, but surely it is practically true?

18 bn in retail deposits
16.1 bn in non retail
30.5 bn in deposits from banks.

That adds up to €64 billion.

Only a small proportion might be repayable on demand, but most terms are very short I would imagine. Paying it immediately or paying it in three months time amounts to the same thing.

I like to try and understand these things by exaggerating and simplifying the actual position. After NAMA has de-toxed Anglo, its balance sheet will not be far off "all deposits on one side, all government bonds on the other". In effect it will be a conduit for the government to pay depositors premium interest rates. What is the point of that?

I'm with the Boss on this. The right course, after the de-tox, is for Anglo to pursue a balance sheet diet, by selling bonds and not replenishing deposits. The ECB repo facilities can be used to facilitate this diet being orderly - otherwise Anglo could find themselves forced sellers of government bonds.

The assertion by the new chairman that Anglo is going to be nursed back to viable health is surely bluster necessitated by the fact that "he must say that mustn't he". The fact is that Anglo has been so toxed that it can never be healthy again.

We do not need a revitalised Anglo for the health of this economy - two retail banks are quite enough.

But we could not let Anglo perish immediately as (we are told) the impact on property prices and confidence would start a contagion that would cause a general collapse.

yoganmahew said:

What happens when the ECB stops providing unlimited liquidity and returns to a bid system for repo?
(Not that I think it is likely in the short-term).

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If that happens, it will mean the markets have returned to normal and there would be no problem getting repo financing elsewhere (assuming the Government still has control).

Brendan said:

Thanks for the figures, but surely it is practically true?

18 bn in retail deposits
16.1 bn in non retail
30.5 bn in deposits from banks.

That adds up to €64 billion.

Only a small proportion might be repayable on demand, but most terms are very short I would imagine. Paying it immediately or paying it in three months time amounts to the same thing.

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ECB repo rates are for up to a year. The ECB are talking about extending this to 18 months. As long as the crisis continues, there is no likelihood of unlimited repo being removed. If the green shoots in Europe continue to be illusory, and the banking situation in Germany, Austria and Spain looks like that will be the case, the facility will remain.

Without this facility, Anglo is so, so bust. So it is disingenuous at least to include the 23.5 bn of ECB deposits in the figure.

The point is, Mr. Cowen is raising a scare that if Anglo was to be wound down, all those deposits would immediately flee. The underlying tone of his remarks (and I've heard them a few times) is that the government would be unable to repay joe public his deposit money.

On a slightly related point, some things are unclear from the preliminary reports - we don't know the book value of the assets that Anglo has repo'd to get the 23.5 bn (we don't know what the haircut is). There is also an amount that is collateral to commercial paper and long-term debt. So we don't know what assets Anglo has that are unencumbered, i.e. that can be sold to NAMA without unwinding the existing situation.

I agree that Anglo doesn't seem to have any future. The problem is that I can't see a prefect solution to the problem. And either can the Government. I think they have decided that an orderly deleveraging of the balance sheet and see where that leaves it is the best way and carries the least risk. I tend to agree.

Sunny said:

If that happens, it will mean the markets have returned to normal and there would be no problem getting repo financing elsewhere (assuming the Government still has control).

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But at what cost? At 1%? I think it is unlikely, myself...

It may be much worse:

"On June 9th Anglo’s Chairman responding to questions from The Public Accounts Committee states that Anglo may need a total of €7.5 billion in cash but it could be higher depending on property price falls and reveals that 84% of its loans are linked to property. " (from eddie Hobbs's newsletter today.)

I don't think that the €1.5billion was handed over. They nationalised it instead.

Anglo needs two types of money.

1) It needs ordinary money with which to repay its depositors if they withdraw their money.

2) It needs capital. A bank must retain reserves or shareholders' funds of around 10% of the loans they have made.

It's a cushion so that if the 10% of the loans go bad, the bank will still be able to pay back its depositors.

If the bank loses a lot of money through writing off loans this reserve ratio of 10% falls and must be replenished through fresh input of capital.

Question: why not de-nationalise, rescind the guarantee and immediately let it go bust?

Retail depositors are are reimbursed up to EUR100K.

Other depositors get to fight over the corpse or get whatever NAMA can get back from the loans. So they don't get back their deposits on time or in full - so what?