Thursday, April 08, 2010
THE implosion of our financial services sector just keeps giving more trauma and we have been constantly misled with only partial, minimalist, optimistic instalments of information. This has led the state to take ownership of virtually the entire indigenous banking sector and its liabilities.
The next generation of taxpayers have already had their future mortgaged by these commitments. The elastic is set to snap. The state’s comfort blanket cannot underwrite this meltdown.
We were told by Anglo bosses throughout 2008 that their bank was profitable, solvent and well capitalised. Its only problem was short-term liquidity. This resulted in the state bank guarantee of September 2008. There was systematic falsification of the year-end balance sheet, with bogus deposits being misrepresented.
The Government then sent in PriceWaterhouseCoopers to assess future Anglo losses, estimated to be €2.75bn over three years. The bank was nationalised in January without the full horror being revealed. Last summer we were assured the €3.8bn state recapitalisation would go a long way towards fixing the bank.
Last week we invented a new term, "promissory notes". This facilitates €8.3bn of our money being paid by 10 postdated annual cheques of €830m over the next decade. We are still not being told the whole truth. Brian Lenihan says a further €10bn may be needed to cover the losses on the loans that do not qualify for NAMA. We have no visibility on these portfolios. It could be a further €20bn is required. Total losses of €30bn may emerge from Anglo’s loan book of €72bn.
The past modus operandi of Anglo is now emerging. It was loan growth at all costs. The pedal was jammed on another billion of loan approvals. They were the bank that said "yes". Their banking model, risk analysis and legal securities on collateral were unsustainable. The debris of bad debt collection is falling apart and we’re left to pick up the pieces.
This bank must be wound down in an orderly fashion. The new board and management of Alan Dukes and Mike Aynsley have a narrow fiduciary responsibility just to Anglo. The Government has to have a wider perspective. In politics and business there comes a point of "force majeure". We didn’t know what we were getting into when we nationalised Anglo. The ethics of management were non-existent. The board failed to exercise any standard of corporate governance. Anglo directors were granted loans of €155m, of which €109m is now assessed to be non-collectable. The regulator was hopelessly inadequate. Auditors and other external experts didn’t grasp the enormity of the losses. The sum total of this disaster is being underwritten with Irish sovereign debt, on which we definitely can’t default. It’s time to start disengaging by negotiating with both subordinate and senior bondholders. Let’s hope for a miracle – EU Commissioner Joaquín Almunia prohibits this level of state aid – giving us a get-out-of-jail card.
The Anglo cancer spread into the wider economy. The Dublin Docklands Development Authority (DDDA) came under their spell. This body is now insolvent, with losses of up to €500m. The usual symptoms: greed, conflicts of interest and a flagrant disregard for corporate governance. The casino approach to commerce was endemic. The latest instalment is the placement of Quinn Insurance Ltd (QIL) into court-appointed provisional administration. The links between Anglo and Quinn represent two sides of the one coin. We have now reached the most dangerous point of discovery and resolution.
Seán Quinn and the Quinn Group have operated with the utmost secrecy. This was represented as personal modesty on behalf of Ireland’s richest man – a shy, retiring, self-effacing entrepreneur with the most humble of origins.
It’s time for us to get a grip on reality. This secrecy was a blatant tactic of concealment. The building up of Quinn’s stake in Anglo was done in the most furtive manner of "contracts for difference". Even Anglo management didn’t know their largest single borrower, at €2.8bn, controlled up to a 28% stake in the bank. This had to be unwound, with devastating consequences. Apparently Sean Fitzpatrick blames Quinn for the demise of Anglo.
Weekend speculation suggests Anglo has weaker security on its outstanding loans to the Quinn Group than other lenders and bondholders, out of total debts of €4bn. The prospect emerges that Anglo may now acquire the Quinn Group in a debt for equity swap.
Have we completely lost our marbles? Not satisfied with nationalising the banks and the property market through NAMA, some are seriously considering nationalising our second largest insurer. This is insanity. Matthew Elderfields’ intervention in QIL is in essence a battle between QIL and the Quinn Group. We should not be a party to ensuring Quinn can dilute insurance solvency principles in order to retain his empire.
QIL is the cash cow of the Quinn Group. It accounts for €1bn or 50% of their annual revenue. Insurance is a cash flow-rich business. You receive the premium income up front, pour the money into assets and await claims. Seán Quinn admits he lost €3bn in share investment speculation, including Anglo and McInerney. Other assets in the group in construction and hotels have been impaired. The financial regulator is seeking to protect Quinn Direct, Quinn Healthcare, its policyholders and claimants. The 40% solvency ratio is being compromised by demands for guarantees on assets by other parts of the Quinn Group.
AND this conflict of control of QIL, thereby preserving the Quinn Group as a whole, is at the heart of next Monday’s High Court hearing. The bailout of US insurance giant AIG cost $182bn. Quinn is furiously lobbying ministers to lean on the regulator and broker a deal. This seems to imply the regulator’s office was previously a political puppet. Corporate deceit was commonplace. We have no obligations to these chancers. The courts and administrators should be allowed to act independent of any political interference.
Last week’s recapitalisation of AIB and Bank of Ireland (BoI) may transpire to be unduly optimistic. BoI is set to raise €2.7bn privately. The NAMA bad loan transfers were reduced from €16bn to €12bn. The bank will have to nurse these loans. It seems bad debt provision is being minimised to avert state majority share holding. They may be back in several months for more state cash and resultant nationalisation.
AIB may have overvalued its Polish and American bank assets resulting in a further state cash call. Non-NAMA losses in Nationwide and EBS still may be underestimated. Any spare state finance will need to be kept for genuinely systemic banks. We cannot preclude another round of recapitalisation. The woes of Anglo, DDDA, Quinn Group and Nationwide are primarily about facing up to insolvency. The Government has offered unlimited protection to underwrite these liabilities. This emperor has no clothes. It’s now time to change course. We have reached the point where the solvency of the sovereign state is in jeopardy. We must plead inability to pay. The cure is worse than the disease. The "least worst" option is to allow market forces to prevail.
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