A Tale of Two Anglo Borrowers and What it Tells Us About the Future

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“AN official of the former Anglo Irish Bank must swear a “yes or no answer” as to whether the bank was solvent in 2009 when it allegedly gave €88m in loans to a developer, a judge said today.

A solicitor for developer Kevin McNulty had sought court orders requiring that all documents be disclosed, or “discovered”, relating to Anglo’s solvency after September 2008 as part of his client’s defence to proceedings brought against him by a NAMA company which took over the Anglo loans.

One of the “fundamental defences” being advanced by Mr McNulty and his companies was that Anglo, which was nationalised in January 2009, was insolvent when it purported to make the alleged loans, solicitor John Larney said in an affidavit to the Commercial Court.

While there was “a wealth of evidence in the public arena” suggesting the bank was insolvent since 2008, such material woud not constitute the proof required by a court and that was why discovery was being sought, Mr Larney said.”

Meanwhile….

“Denis O’Brien, the telecoms entrepreneur, is listed as owing Anglo Irish Bank €833.8m on foot of personal and corporate loans just after the bank was nationalised in 2009, making him its then sixth largest borrower.

Denis O’Brien is the largest single shareholder in Independent News & Media, the publisher of the Sunday Independent. He has lost an estimated €500m on his 21.6 per cent stake in the media group.”

That €500m loss is the amount O’Brien borrowed from Anglo for the shares – is he going to pay back a loan for an asset he no longer has? If and when the loans are transferred to NAMA, there is a strong possibility that they will be rendered null and void. Of course, before that there is a chance that the loan will be sold on, probably at a very significant discount. Loans transferred to NAMA from AIB and Anglo had up to a 70% haircut. But with a ‘quick sale’ on the back of this rushed liquidation if someone is willing to offer to buy them at a 90% discount then the liquidator would sell them. All that someone in Denis O’Brien’s position has to do is ask someone else to offer to buy the loan for him. The Anglo loans that Denis O’Brien has includes the one that funded the €45m acquisition of Siteserv, the infrastructure and utilities support services business. As the Indo article reports:

“This purchase was controversial as the taxpayer took a €105m hit.”

This is because the sale of Siteserv to O’Brien involved a 70% haircut. With the further restructuring his loans imminent with the transfer its reasonable to assume that ultimately the haircut will be 100%. If, as speculated, Siteserv win the contract to install water metres in Irish homes, and given that the Minister in charge of it is another previous with Denis O’Brien this possibility becomes more likely.

The point here is not about Denis O’Brien the individual businessman. I refer to him because some of the detail of his dealings with Anglo have already come to light. When looking for the reasons behind the rushed legislation to liquidate IBRC and to transfer the promissory notes to a long term sovereign bond we have to investigate how this class operates and what are the real motivations behind its actions.

There is much made of that fact that the promissory note payment was politically difficult. But the promissory note had been in place since 2009 and since then the bank which had breached its banking license was operating as a normal bank despite being insolvent. The loan to Denis O’Brien to purchase Siteserv was given in March of 2012 even though IBRC acknowledged that it had breached its licence in its financial report for the first six months of 2012 (see page 18 of the report).

The wind down plan for IBRC had a target date of 2020, which Alan Dukes in November of 2012 felt could be easily achieved. Indeed he argued it happen sooner if it was possible to reduce the interest rate on the promissory notes – an option that in the end was not even sought.

However, winding down more quickly was seen as being the more expensive option, for obvious reasons:

“Mike Aynsley, chief executive of IBRC, told the Oireachtas Committee on Finance, Public Expenditure and Reform that the bank could run itself down more quickly but that could increase the cost. Mr Aynsley said the bank’s net loan book of €15 billion – after taking almost €11 billion to cover bad debts – could more than halve by 2015 and the nationalised bank hoped to have exited the UK market fully by the end of 2014.”

The speed of the legislation, its unusual powers which are now subject to constitutional challenge and the fact that controversial loans will be hidden in NAMA suggest that the reason for this action was one of self-preservation. The David Hall case, with the decision of the judge to only allow TDs to take it – a decision designed nakedly to delay the action – had the potential to show that the promissory notes were illegal. The decision to move the promissory notes into long term sovereign bonds was always an option available to the government. They could have done it at any point. The ECB had no opinion about this because it didn’t affect them. The rolling over of the ELA occurred every two weeks. The purchase of the notes by the Central Bank of Ireland means that the value of that collateral will be reviewed by the ECB once a year. From the ECB’s point of view, there is almost no difference between them.

When we look at the benefits and the costs of this manoeuvre we have to be honest about who gains the benefits and who has to accept the costs. It simply was not possible to continue to pay the 3.1 bn every year for the promissory note. However, the Irish government would have continued to do it if a challenge had not been brought against the legality of the notes. The fact that the bank was continuing to do business long after it was bankrupt suggests that for some it was considered to be useful as it was. With a court case pending it had, all of a sudden outlived that usefulness.

A legal challenge also had the potential to open up the books at Anglo Irish Bank. Once moved under the cloak of invisibility that is NAMA that danger passed.

This arrangement was not designed to reduce the cost of paying for Anglo Irish Bank and Irish Nationwide, but to protect our local bourgeois from anyone looking too closely at what those banks got up to.

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