Why is Anglo of systemic importance?

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Duke of Marmalade

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The interesting thing in Brian L's statement is that he said at least twice that Anglo was of systemic importance to the Irish economy. This counters speculation that he was favouring only the big two when last week he said he would only be supporting banks of systemic importance.
 
Re: Seán Fitzpatrick steps down as Chairman of Anglo

From the IT :

'Minister for Finance Brian Lenihan last night reiterated his "commitment to underwrite the capital needs of Anglo Irish Bank on appropriate terms".

He said Mr FitzPatrick’s resignation would not interrupt the recapitalisation programme announced last Sunday and said his focus was to ensure the “long-term strength and viability” of Anglo Irish Bank as it has “systemic importance in Ireland”.



So basically no bank will ever be allowed fail, no matter how busted their business model nor how unethical and incompetent their management. Must be great being one of the masters of the universe.

People should really angry but it is interesting to see how Cowen and Co. are starting to talk about the economy in terms of needing years to recover, nothing like a good dose of fear to keep the baying plebs in line.
 
Forget about ethical issues, the Financial Regulator, and the rolling of heads, this is clearly the most important issue.

Why on earth is Anglo of systemic importance? Why should it be recapitalized?

It does not give working capital loans to businesses and is unlikely to do so.

It does not lend to home buyers.

It lends to property developers and property owners. Those who already have loans will be able to leave them with Anglo. Those who have loans but are not in arrears will be able to move them to another bank over time.

Depositors will be able to move their money to other banks.

The only reason for allowing Anglo to lend more money would be so that it can continue to lend to existing borrowers who need more finance to complete projects. But this should be a relatively small amount of money and could be found from existing resources within the bank without recapitalization.

The taxpayer is at serious risk already with Anglo and we should not be put at any further risk.

Brendan
 
So the Anglo situation is a bit of a mystery wrapped up in an enigma, unless someone can figure out why it appears to be of disproportionate importance to Biffo & Co.
 
Wondering if this question will be answered! "Why on earth is Anglo of systemic importance? Why should it be recapitalized"

Not Likely . . .

Anybody care to cast a guess why he would say that or do we need to wait for the Galway races to get our answer!!
 
They have probably the most exposure to the big builders. And, isn't it widely known that Sean Quinn has major exposure to them.?

Now, what if the bad debts were sold on and called?

Would it not mean an immediate collapse of the housing market?
What would/could happen to Quinn's empire should his debt be called or, he had to realise the half a billion euro loss in share value.

Just a guess of course.

Would that be your sytemic risk?
 
It's systemic, because they all are. Why are they all systemic? Because the government guarantee makes them so. The state is liable for all debts of the banks until September 2010. That makes them all systemic. It is probably cheaper to keep them limping along rather than have to pony up for all their bad debts.

So, all those posters who were trumpeting about how wonderful our government guarantee was and who were damning the naysayers, that sound you can here is the chickens filling up the coop outside.

Disgusted? I was then and I remain so now. All banks good or bad are now roped together on a cliff. The fat lad in the middle is starting to look a bit wobbly. The abyss beckons.
 
Bear in mind that all of the Irish banks are linked via their over-exposure to property. A failure of Anglo might not be as easy to achieve without severly damaging the rest of the banks.

AIB also has a big exposure to residential developers and probably does not want to see a wave of bankrupt housing supply hitting a housing market that is already on its knees. None of the mortgage banks want to see this either. I cannot see how the good Anglo assets can be transferred to other lenders as this will just increase their property exposure.

I really do not know what can be done. As yoganmahew points out the state is on the hook for this thanks to the bank guarantee. It is obvious that the state cannot afford to take the losses that it has undwerwritten hence all the banks need to be kept on life support.
 
ixus said:
What would/could happen to Quinn's empire should his debt be called or, he had to realise the half a billion euro loss in share value.
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Maybe the government’s main worry about Anglo is Quinn? Otherwise why not perform an orderly wind down of Anglo? As it is, they have not done any lending for some time now. A wind down will not affect Joe Public, but a collapse of Quinn would be major, another PMPA but on a bigger scale. Leaving no car or health insurance for thousands etc. If they are not suspended, it will be interesting to see what effect the part nationalisation will have on the share price. Percentage wise they can't go much lower from when Quinn bought them, but as long as they have some worth, Quinn might get away without crystallising his loses, which I believe would be close to 1B.

Mods, I believe share price is important to this discusson.
 
It's systemic, because they all are. Why are they all systemic? Because the government guarantee makes them so. The state is liable for all debts of the banks until September 2010.
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I don't agree that the guarantee makes them systemic. The best way for the government to minimise their exposure to Anglo is to arrange an orderly wind down of the bank. Giving them more money to lend is pointless. Of course, if depositors have withdrawn their money, then the government has to pump in cash to replace it.

A wind down will not affect Joe Public, but a collapse of Quinn would be major, another PMPA but on a bigger scale. Leaving no car or health insurance for thousands etc.
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Quinn's investment in Anglo is a personal investment. The insurance companies he owns are separate and adequately reserved. I don't think that there is any risk to these companies. A problem would only arise if the companies incurred heavy losses and their owner was unable to bail them out. But this risk applies to all insurance companies. In fact, one could argue that Quinn Insurance is safer because Quinn is prepared to and probably can afford to bail them out.
 
John Boy has provided the only possible explanation for the systemic importance of Anglo


But I still don't understand this. If Anglo is wound down in an orderly manner, they don't have to foreclose on their property developer clients. They might not be able to lend them any more money but they would not have to put all the property developers into receivership.
 
Rolling up interest and having interest and repayment holidays is new lending. Anglo have bond debts that they are paying interest on, bonds that they have to repay, for instance they have a lower tier 2 bond callable in June next year to the tune of 750 million, as well as interest for depositors. With a lower income stream from the developers, but ongoing expenses for the loans that Anglo has borrowed, they need new money coming in to continue to pay their debts and stay solvent.

The choice is between calling in the non-performing loans or continuing to adjust the conditions of those loans (through roll-ups and payment holidays). I fear that Anglo has become a ponzi scheme - new capital coming in is paying existing investors rather than generating returns on its own basis (I fear this is not limited to either Anglo, or to Ireland).

The problem with an orderly wind-down, is that debts are due on the debit side, with less income likely on the credit side. That means the government has to pump huge amounts of money in to achieve that wind-down. That is why the guarantee makes all banks of systemic importance. The government has said to creditors of the banks "you will be paid on time and in full by the government if the bank is unable to pay" regarless of the income that is coming into the banks.
 
That means the government has to pump huge amounts of money in to achieve that wind-down.
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I don't mind the government putting in money to help with the orderly winding down of the company. But I would object to taxpayers' money being put into Anglo to allow it get going again as normal.

If Anglo is solvent, we should eventually get back what we put in.

Brendan
 
While the coupling via the property market between Anglo and the others is somewhat plausible, my most paranoid fear is that Lenihan has been informed of the real situation in Anglo and the true nature of its balance sheet is that it is in a far worse state than we (or the even the markets) suspect. He has decided, for political and financial reasons, that winding-up Anglo would simply be too expensive. In other words Anglo is not of systemic importance to Irish retail banking but is of systemic importance to the public finances.

If this is the case, it is a nightmare situation. Not only would it constitute almost criminal reckless behaviour on the part of a finance minister to pour public money into an insolvent bank but it would also be quite scary what it would say about how deep a hole Anglo (and the exchequer via the debt guarantee) is in. It's all speculation, of course, but I've read of talk of injecting between 1 and 3 billion to keep Anglo going. If paying 1-3 billion is preferable to paying for a wind-down, then the exchequer exposure must be of the order of many many billions of euro.
 
Better late than never if that's the case, yoganmahew. To be honest, I still can't figure out what is going on. It seems Lenihan was quite deliberate; from my reading he has claimed Anglo were systemically important on more than one occasion. What sort of interpretation was he expecting when he used this phrase?

My god, what a year. I've been a property bear and and unimpressed with (to put it lightly) government economic policy for years but I never expected such a brutal unwinding.
 
The guys in the Department of Finance are fairly sharp. If the ministers follow their advice, they might well have a workable plan along the following lines:

1) Nationalise Anglo Irish Bank
2) Put extra capital into it
3) Use it to buy uncertain loans from AIB and Bank of Ireland at market price, so that the uncertainty is removed from AIB and Bank of Ireland.
4) Put some extra capital into AIB and Bank of Ireland and they can resume lending to the business sector again.
5) Wind down Anglo over the next ten years
 
Conspiracy theory time:

When Fitzpatrick resigned as CEO of Anglo and took over as chairman there was a strong favourite to be his successor (Tiarnán Ó'Mahony). Subsequent moves caught everyone by surprise... could there be any connection with who in the bank knew about the loan to Fitzpatrick and would keep it going with no questions asked?
 
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