Sean Quinn and CFDs in Anglo

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joe sod

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Was watching the Sean Quinn saga on RTE last week. The one thing that interested me was his CFD in Anglo in 2008 and the timeline of that "investment ". The share price kept falling throughout 2008 but the situation was still salvageable if only he had accepted his losses earlier.
He started his investment at I think 14euros a share but even after the St Patrick day massacre the share price I think was still in the 7euro range but he kept adding to his CFD exposure
I know we like to make villains of Sean fitzpatrick and David drumm but they recognised immediately that Quinns CFD exposure was a huge problem and needed to be got out of, even if Quinn had been upfront with them earlier things could have been different. Quinn to put it mildly was an idiot and his hubris and lack of education contributed to his downfall.
I think the mentality of the celtic tiger that lowly educated builders etc knew more about everything because they happened to amass more money was prevalent, the classic reverse snobbery that we see so much of in Ireland
 
Quinn was at the time Ireland's leading industrialist, not a lowly educated builder. It's noteworthy that Ireland's two most renowned industrialists of the late 20th century, Michael Smurfit and Tony O'Reilly both also ruined themselves in later life with hubristic investment decisions.
 
Hi Joe

Many people just lost the run of themselves - Seán Quinn was not alone.

As Tommy points out, a college education does not prevent you from making mistakes.

Seán Quinn was used to everyone telling him he was a genius and brilliant. And he was. But he didn't appreciate good risk management.

It's the most important lesson I learnt on Askaboutmoney. The financial objective of people who are wealthy should be to preserve their wealth and not to maximise it. I repeat this often in the Money Makeover section.

Seán Quinn did not know that. It's a pity he did not do a Money Makeover on askaboutmoney.

Brendan
 
The one thing that confused me about all of this was that he was investing in CFDs. Therefore doesn't that mean he wasn't actually buying shares in Anglo? So how could he own 25% of the bank if he was investing in CFDs? Wasn't he betting on the share price of Anglo rather than actually purchasing shares in the bank?
 
Hi Ceist

While buying CFDs is similar to betting on a horse, it is very different. If I back a winning horse, the bookie loses. The horse is not affected.

My understanding is that "buyers" and "sellers" of CFDs is that they are matched. So if I bet on CRH going up, the issuer of the CFD has bettors on the price going down or they actually buy the shares. Unlike the bookie, they are not taking any risk other than the risk of me not paying.

Brendan
 
Ceist Beag said:
The one thing that confused me about all of this was that he was investing in CFDs. Therefore doesn't that mean he wasn't actually buying shares in Anglo? So how could he own 25% of the bank if he was investing in CFDs? Wasn't he betting on the share price of Anglo rather than actually purchasing shares in the bank?
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I think it was mentioned that he had in the order of 25% exposure to the Bank, shares and CFD's, so not strictly all CFDs. As BB mentioned, due to the size of the position the broker likely purchased shares in the market to match SQ's bet. So SQ didn't hold the shares directly, but they were effectively removed from the float. In the Anglo situation, the share price was falling. The broker would be holding the shares, however, the broker would also make the shares available for short selling, exacerbating the fall in the share price by lowering the cost to short the stock. SQ's position was underwater, so for the bank, they recognized that there was a high chance that SQ would close his positions, with the broker consequently dumping the shares they were holding, causing a further significant drop in the Share price. This what the market also suspected so traders kept up the pressure on the stock price.
 
Itchy said:
SQ's position was underwater, so for the bank, they recognized that there was a high chance that SQ would close his positions, with the broker consequently dumping the shares they were holding, causing a further significant drop in the Share price. This what the market also suspected so traders kept up the pressure on the stock
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But the bank wanted SQ to close his position and convert to a real share holding that's what they were trying to engineer.
My understanding is that by doing this and converting that 25% into a real shareholding well that was a 25% of the bank out of the control of the speculators so less pressure on the banks share price. Sean Quinn obviously was not a seller but was all in whereas the actual shareholders would be more sensitive to selling the shares as the share price fell.

I think if this had been done months earlier it probably would have worked. For example if quinn had of bought real shares rather than cfds as the price was falling he would have taken control of more of the bank , it still would have been a bad asset to own. Because he would have owned more of the bank there would have been less shares outstanding and the speculation in the bank would have run out of energy

Another thing is that the speculators would not have known that Sean Quinn owned all those CFDs, they were just speculating against the banks share price. After all Sean fitzpatrick or David drumm didn't know so how would the speculators know?
I know the narrative is that the speculators were trying to take Quinn out , maybe they knew that one entity had a very large CFD exposure in the bank
 
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Ceist Beag said:
The one thing that confused me about all of this was that he was investing in CFDs. Therefore doesn't that mean he wasn't actually buying shares in Anglo? So how could he own 25% of the bank if he was investing in CFDs? Wasn't he betting on the share price of Anglo rather than actually purchasing shares in the bank?
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Because as the price dropped he was "margin called" meaning he had to front more cash to cover the delta between his CFD price & the actual falling share price.

Actually scratch that - I didn't read the question carefully.
 
How was one man, Sean Quinn, able to legally transfer all that money to buy the CFD's. Were others needed to sign off, can one man, owner or whatever, actually do this without anyone knowing it. Watched it and must say I feel very sorry for Sean Quinn and I know others will have a different opinion. That's fine too. Fitz and Drumm for me knew only too well what was going on.
 
noproblem said:
How was one man, Sean Quinn, able to legally transfer all that money to buy the CFD's. Were others needed to sign off, can one man, owner or whatever, actually do this without anyone knowing it. Watched it and must say I feel very sorry for Sean Quinn and I know others will have a different opinion. That's fine too. Fitz and Drumm for me knew only too well what was going on.
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It was referenced in the programme that his children had to "sign off", as many of the assets were in their names (they subsequently claimed they didn't know what they were doing). Also, some senior executives in his businesses. Very remiss the latter, but I doubt they would have remained in their positions for long if they hadn't signed off on the Chief's instructions.
Fitz and Drumm absolutely had responsibilty as far as the goings on at Anglo were concerned but they were not responsible for Quinn's reckless gambles.
 
noproblem said:
But who were the financial officers in all of this? Company auditors, bank auditors, central bank, etc. Co accounts were signed off on, don't tell me the Goverment didn't know, or certain people in the Goverment. The whole thing stinks to high heaven and for me Quinn, while no innocent in all of this, is a fall guy. Some involved in this are dead, others are far away but far from broke, a few served jail time. But was justice done? Was it hell.
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Quinn was no fall guy , he made a massive unnecessary bet and it backfired spectacularly , he was too stubborn to liquidate it when he could have and take a manageable loss.

If there were fall guys for the whole thing it was drumm and Fitzpatrick , they carried the can for all of the other bank executives and drew the ire of a nation.

They were no angels but not a whole lot worse than the rest of them.
 
Somebody mentioned Tony O’Reilly and Michael Smurfit’s financial problems.

The latter wasn’t a major victim of the financial crisis.

CFDs were useful to Quinn because:

a) They facilitated anonymity - It wasn’t obvious that he was buying the shares.

b) It enabled him to deploy leverage/borrowings. €100m deposited with someone like JP Morgan or Credit Suisse probably allowed a €2bn share position to be taken. The only problem being that, a little bit like a property, if the value of Anglo fell by 5%, his equity was wiped out and the bank demanded more cash.
 
mathepac said:
He wasn't buying shares. Had he bought shares, the catastrophe might have been avoided. He was trading in derivatives, better known as junk bonds, which have no assets backing them. It is a gamble that an asset, currency, share, or other tangible will change in value at some future date, either up or down. The bettors never own the asset(s), they are simply gambling on the value of the asset in the future.
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I get the concept of CFDs, but (and please excuse my ignorance here), if he didn’t hold actual shares, why was his position of such relevance to the sustainability of Anglo?

Was it just that he had developed too much of an interest for his position to be ignored? If his CFDs related to say 5% of shares, would this have been considered insignificant and unworthy of any intervention?
 
Salvadore said:
I get the concept of CFDs, but (and please excuse my ignorance here), if he didn’t hold actual shares, why was his position of such relevance to the sustainability of Anglo?
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I have a limited understanding of the complexity. But the Quinn group was also a large customer of Anglo. As the CFDs bombed the Quinns had to find hundreds of millions to fund their margin calls - or they risked collapse. That collapse would have adversely affected Anglo who in turn advanced these hundreds of millions to the Quinns to cover their losses. They also feared that if the Quinns collapsed and the CFDs were exposed there would have been an immediate total collapse in Anglo's share price and a run on the bank which they couldn't meet. They entered a death spiral together, with either one going down bringing the other with it.
 
Early Riser said:
I have a limited understanding of the complexity. But the Quinn group was also a large customer of Anglo. As the CFDs bombed the Quinns had to find hundreds of millions to fund their margin calls - or they risked collapse. That collapse would have adversely affected Anglo who in turn advanced these hundreds of millions to the Quinns to cover their losses. They also feared that if the Quinns collapsed and the CFDs were exposed there would have been an immediate total collapse in Anglo's share price and a run on the bank which they couldn't meet. They entered a death spiral together, with either one going down bringing the other with it.
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Thanks for that. So it was really the extent of the CFD exposure at the worst possible time that lit the fuse.
 
From an institutional perspective CFDs are usually created after you have bought or sold shares. So you buy 100 shares in a listed company and you tell the broker that this is a CFD (or equity swap). They will then give up these shares to a Prime Broker unless they are a Prime Broker themselves. CFDs allow for leverage, and in the UK and Ireland, are legitimate ways to avoid paying stamp duty on share pruchases. Nowadays, they are treated as equivalent to owning shares in a company for long and short disclosures.

Yes they are derivatives but someone (the broker) has to take the other side of the trade so CFDs on any instrument will be backed wholly or in part by a position in the underlying. So you cannot magic a large stake in a listed company via CFDs without buying the shares in the first place. Prime Brokers have multiple clients buying and selling the shares in the same companies every day and for those that trade as CFDs they will often net positions, and levy margin charges based on the riskiness of the client and the positions they hold.

Retail investors can lose a lot of money using CFDs but I am sure many make money too.
 
LondonIrish said:
Yes they are derivatives but someone (the broker) has to take the other side of the trade so CFDs on any instrument will be backed wholly or in part by a position in the underlying. So you cannot magic a large stake in a listed company via CFDs without buying the shares in the first place.
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Thanks for that and @Early Riser gave a good backround aswell, however from what you have said above well If the broker has to buy the stock because of the CFD betting on the share price rising well surely then Sean Quinns CFD position would be actually supportive of the share price because he is buying the other side of all those contracts that are betting on the share price falling. If anything then Sean Quinn's CFD position although disastrous for himself personally was actually supporting the Anglo share price ?
The RTE program was blase about this , its still a bit of a mystery why Anglo were so concerned about Quinn's CFD position, I think @Early Riser explanation is probably the closest. I can't remember the Anglo dealings now but was that the state's central criminal case against the Sean Fitzpatrick and David Drumm that they organised the illegal loan to try and bail out Sean Quinn, if they hadn't of done that would they have had the same status as the AIB and permanent TSB bankers , but not criminals
 
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Good article by Matt Cooper in tomorrow's Business Post about Sean Quinn's ego! (available online to subscribers).
 
joe sod said:
If anything then Sean Quinn's CFD position although disastrous for himself personally was actually supporting the Anglo share price ?
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Absolutely. That was the problem. Sean's immense "long" position in the share was essential to supporting its price. But CFDs are geared positions, meaning that as the share price falls the owner has to stomp up money to pay the debt backing the CFD. The doomsday scenario would be that Q would need to liquidate his CFD which would be a monster selling force on a share price already in freefall. It is called procyclicality.
I hope you are not suggesting that Q entered these CFDs in an altruistic endeavour to support the price.
 
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