Joining Anglo and Quinn stretches the imagination

Quinn Insurance needs a new parent, one with deep pockets and competence, writes Bill Hobbs

Can the Government consider the marriage of two of Ireland’s biggest turkeys more likely to give birth to a swan or just a bigger turkey? The struggle to get Quinn Group and Anglo Irish Bank to the altar has nothing to with wise governance or proper prudential regulation of financial service firms. It represents the socialisation of errand gamblers’ debts at the expense of the tax payer. The bill for these debts is €2.8bn which may be increased by another €700m. How much is actually recoverable is a question no one can answer or is prepared to answer.

Is the hubris and conceit of one man’s oligarchic ambition to be reconciled by this state taking control of the Quinn Group and effective nationalisation of one of its largest insurers through its state banking arm? Is there any other modern state so exposed to the disastrous investment decisions made by one man and his family interests? A man, who has never convincingly explained buying a 25% shareholding in Irelands rogue bank Anglo Irish. Did Quinn’s hubris extend to planning to own a bank? And should the state buy out bank bond holders who funded Quinn Group?

Should the state and taxpayer bail out banks that knowingly risked funding a privately owned and family controlled conglomerate of construction, glass bottling and property development interests?

The problem appears to be that Quinn Group apparently pledged Quinn Insurance assets as collateral to the banks. And it seems Quinn also used its insurance subsidiary to fund or guarantee other related and unrelated companies. No one is quite sure how much is owed, yet the state is contemplating consummating a temporary marriage of convenience to limit losses.

Quinn and his managers appear to believe that “technical” breaches of regulatory rules governing the safety and soundness of important financial service firms are permissible. This a la carte corporate behaviour in running the states’ second largest insurance undertaking and unprecedented risks taken to enhance personal wealth is at the heart a malaise that helped destroy this economy.

Banks and insurers are important to the functioning of modern society and are carefully legislated for and regulated in the public interest. Their owners and managers are expected to abide by laws and rules requiring safe and prudent husbandry of resources.

Insurers take on risks they can only guess at the outcome. Profits made today must be set aside to fund future year’s risks. Driving a couch and four through regulatory rules, Quinn Insurance is said to have traded on the margins, breaching solvency requirements so much so that competitors are said to have long complained of its unfair market abuse practices. It is the equivalent of a low cost airline using airline stewards to fly planes – it may keep costs down, allow for competitive pricing but it amplifies risk.

The financial regulator, not before time and faced with what appears to be a fundamental breakdown in trust, acted as any regulator should. No one should ever be permitted to use an insurer to fund unrelated commercial risk enterprises even if this creates much needed employment in disadvantaged areas.

It is a central tenet of regulating financial service firms that prudential regulators are required step in to rest control from errant managers and arrange for an orderly change of ownership or winding down of operations. The Quinn view has been to treat regulatory compliance with some contempt and in the process expose the entire group and its wider stakeholders, including staff and suppliers to unsustainable and unwarranted risk. Quinn’s entrepreneurial high risk culture has been socialised through the mutation of personal bets onto Anglo’s balance sheet - into debts this state and tax payers will be forced to write off in time.

Owing €4bn through a complex series of personal and inter-company loans and guarantees leaves the group exposed to breakup. And it should be left exposed. There is nothing special or of national importance within its conglomeration of interests to ring fence and protect save its insurance operation. There is no reason why its many subsidiaries could not and should not be sold off to finance its liabilities.

Quinn Insurance is said to be “profitable”, which remains to be established in the commercial courts. It may have a future as an independent entity or part of a properly run reputable insurer. But it has no future as a cash cow to be used by its owners to fund unrelated enterprise risk.

Surely the future of an insurance undertaking cannot be dictated by the personal debts of its shareholders whatever their background.

Quinn Insurance needs a new parent, one with deep pockets and competence take over operations without too much difficulty. After all it is said to be a profitable enterprise with over one million customers. It does not need Anglo, as a moribund bank parent which requires over €22bn in state aid just to stay open for business.

The marriage of two turkeys “Quanglo”, is only possible if the state underwrites €500m in bonds to buy out bank bond holders and permits Anglo to risk another €200m in tax payer’s money in bolstering Quinn Insurance solvency. All this to allow the bank recover €2.8bn owed to it by Quinn family interests. Never will have one family’s debts been so socialised at the expense of the tax payer.

Asking Anglo’s managers to run Quinn Group stretches the imagination. Is it possible to marry two turkeys and create a swan? Or is it just another boom time fairy tale ending up as a tragic farce?

A version of this article appeared in the Irish Examiner, Business Section, Monday 12th April 2010

The Hindenburg of Irish banking bids to fly again

It takes deep pockets and time to rebuild a bank. Anglo has neither, writes Bill Hobbs

Anglo Irish Bank’s future is in its past. What’s left of its post-Nama business is not enough to allow it to emerge phoenix like from the ashes of the Celtic Chernobyl. And with a business model so bust it cannot ever be revived, funding the cost of unravelling from a reckless symbiotic relationship with Quinn Group is like pouring water on a nuclear fire – it will make its meltdown far worse. Yet instead of planning to wind down the bank, it seems its board and management have been tasked with getting the Hindenburg of Irish banking flying again.

Hindenburg

Anglo, under new management, is engaging in hyperbole reminiscent of its previous boom time hubris. It plans to split into a “good” Anglo and “bad” Anglo. Buried in accounts last week is quite a brazen statement on the “good” bit ;“Our aim is to create a medium-sized commercial bank with a well contained risk appetite and stable funding base, operating in Ireland, the UK and the US. Our focus will be on making the Group viable again, then gradually growing the Ireland business while maintaining our share in other markets.” Is it serious about getting the Hindenburg flying again?

Anglo’s “mid-sized” strategy is fanciful and delusional nonsense from a bank that must have known Quinn Group, its largest loan customer, was about to implode. To be fair Anglo’s board and management appear to have had their hands tied as they have been tasked with managing the bank as a “going concern” which precludes them considering managing it for what it is - a “gone concern”. Was there any real consideration given by its board and management to winding it down in the medium term? Probably not, Anglo has been tasked with re-inventing itself as a viable, valuable bank; a banker to small and or medium sized businesses.

There isn’t one objective informed analyst who believes that Anglo has any future as a viable working bank. Suggesting the rump “good” Anglo might revive and survive on miserable diet of state ownership flies in the face of reality. Previous state owned business banks, ICC and ACC, struggled for years with inadequate capital and were eventually sold off at bargain basement prices.

Most agree it’s impossible to close Anglo down today as the State cannot afford the costs. But it’s not impossible to arrange for an ordered wind down which many suspect is the real intent. However in the absence of a bank resolution system allowing for the orderly winding down of troubled banks, we are faced with delusionary comments designed to publically obscure the inevitable so as not to undermine international sentiment.

Attempting to sprinkle pixy dust on its then melting core on 16th September 2008, thirteen days before the fateful night of the 29th September, Anglo told international investors it had 4300 loan clients who owed €69bn. Of these 2500 were Irish clients and it boasted of its “franchise strength with huge organic potential in existing markets”.

Once termed a building society on crack, does it have any franchise value left? The rump Anglo has non-Nama loans of €30.8bn of which €14.27bn are past due or impaired carrying provisions of €4.84bn. Of these loans, €12.2bn mature within one year, €13.7bn within 5 years and €5.76bn over five years. They are made up of €23bn in commercial (property), €2.2bn residential (property) and €4.5bn in business banking (probably property). 83% of its remaining loans mature within one within five years.

The bank needs an immediate €8.3bn in recapitalisation and will need at least another €10bn.

It’s hard to see what value its franchise will comprise other than a handful of surviving customers and some performing property loans in what is left of its tiny Irish customer base. Is this the basis on which to build a “medium sized commercial bank”? Of its remaining non-Nama book, €5.33bn of varying quality is represented by what it calls “business banking” whatever that means in Anglo’s categorisation. It was only ever a second line business banker, mainly a mono-lone lender financing property assets.

The rump loan book reflects its retail funding strategy. The collapse in retail deposits shows how far it has shrunk from its heady days – these have fallen from €55bn in 2008 to €27bn today where 74% is repayable within three months. €12bn of these are highly rate sensitive consumer deposits. Were it not for the government guarantee the balance would be zero.

To rebuild, Anglo will need resources it simply doesn’t have and a parent willing to supply it with fresh untainted capital.

It will need a strategy and purpose that makes sense and one which it is has the competence to execute. Without a branch network, its current product and services are geared for centralised property based lending, its IT system is probably unfit for use as a broad based commercial business bank, its people are demoralised and its core competence in property lending redundant.

Re-invention as either a bank for small or medium sized businesses would tax a better funded larger bank. It takes deep pockets and a time to rebuild a bank. Anglo has neither.

A version of this article appeared in the Irish Examiner, Business Section, Monday 5th April 2010