None the Wiser on the Anglo Irish Bank Split Bank Plan

Markets forced the Government’s U-turn on Anglo, but the jury is out on the plan, while taxpayers seem as exposed as ever, says Bill Hobbs

On Tuesday evening Anglo Irish Bank management briefed 40-odd politicians on its good bank/ bad bank plan which would have seen it carved into a bad bank to recover the bad loans and a good bank with what’s left of its good loans. Anglo was hoping to trade as a going concern. On Wednesday Government pulled the rug from beneath its feet in what appears to have been a rushed decision forced on it by the international bond markets and a run by corporate depositors.

Anglo is finished as a bank and is to be treated as a gone concern to be wound down. Government is now going to figure out how much it will cost and hopes to have this done by the end of October. As the official cost on a going concern basis was put at €23bn, this will now undoubtedly increase. No one knows how much it will cost or how long it will take to wind down. It may take tens years or more. Costs were estimated by rating agency Standard & Poor’s at €35bn before this week’s wind down decision.

So why is Anglo being split in two?
It’s mainly to protect its customer deposit base of €23bn. Over the past few weeks the bond market and corporate depositors lost patience with the Government’s inability to come clean on the costs of bailing out Anglo. The bond markets showed their displeasure by demanding a +6% return to buy government bonds and sophisticated corporate depositors started to take their money out - estimated to have been about €5bn. This threat of a major run on Anglo would have triggered its immediate closure, the loss of tens of tens of billions in large deposits and could well have sparked a run on the other banks. The split separates the deposits from the bad loans and allows them to be protected.

What’s happening to Anglo?
A bank has two sides to its balance sheet. The money it has lent and the money it has borrowed to lend. This borrowed money is made up of money raised from the bond market and from deposits from the central bank, ECB, other banks, corporates and consumers.

The split will see all the loans, the bonds along with central bank/ECB and interbank deposits shifting to an Asset Recovery Bank. Government says all the bondholders are to get their money back save one class called subordinated bonds who are owed just over €2bn. They will be paid off at a deep discount to what they are owed. This bank will try to recover as much of the €37bn in loans as it can. No one knows what the losses will be.

It seems the bond holders are to be repaid in full by the state as Government has said so. If so then all of the Recovery Bank’s as yet undeclared losses will have to be funded by the taxpayer.

Retail deposits of about €25bn will move to Funding Bank. About half are from the public and half from corporates. It seems this bank will only take in deposits but not lend money. The deposits will be lent to the Recovery Bank to balance its books. To do this the Funding Bank will issue a loan to the Recovery Bank. The Recovery Bank will issue a bond to the Funding Bank which will be secured (backed) by its assets probably by its NAMA bonds – the ones used to pay for its bad loans, Government’s promissory note (the money its has already pledged to fund Anglo’s losses). But as this is not enough it will have to use its good loans or rely on a government guarantee. So it seems depositors are to be protected from loan losses in a round about way. All this is subject to EU approval.

But where does this leave the tax payer?
For now no wiser and just as exposed to losses as Tuesday. The full cost to the taxpayer depends on two things. How bad the loan losses will become and whether or not bondholders will share in these losses. So far Government has said they will be repaid in full. It’s likely that a deal will be done swapping one form of bond for another carrying a haircut and extended guarantee. Thing is no one knows such is the paucity of information provided by the Department of Finance.

Once again it seems Government has been forced into hasty action. Its sudden U turn on supporting the good bank/bad bank Anglo plan was forced on it by the markets. The jury is out on the new split bank plan until the full costs are known, greater detail is worked out by Government and a timeline put on the wind down.

A version of this article appeared in the Irish Examiner, Analysis Section on Friday 10th September 2010