Economics 30/04/2010: Anglo Irish Bank shutdown costs

We are once again swamped with the 'new numbers' from the DofF and Minister Lenihan. This time the latest 'facts' relate to the potential cost of shutting down Anglo. Yesterday, Mary Coughlan stated in the Dail that the cost of an immediate liquidation of the bank had been prohibitive (per Irish times - here). Today, the unquestioning media squad is reporting that the cost of shutting down Anglo will be "more than €100 billion" (The Irish Independent, page 17). This figure has been floated out by the Anglo's paid-public-'experts'-turn-paid-executives, like Mr Dukes, and by the DofF talk-heads.

In reality this number is simply plain wrong, representing, simultaneously, a combination of

• bad arithmetic, and
• poor understanding of finance

Here is why. Take Anglo's balancesheet:

Assets of €72 billion:

• Loans to customers of €65 billion (with €35 billion earmarked for Nama)
• Loans in the interbank markets (loans to other banks) of €7 billion
• Risk-adjusting loans to customers to reflect an impairment charge of 60% implies recoverable loans of €26 billion (without a need to call in Nama at all).

Total recoverable assets of €34 billion.

Liabilities to customers and the ECB of €60 billion

• Customers' deposits of €27 billion
• Banks and ECB deposits of €33 billion

Thus, the real taxpayers' liability is €60bn-€34bn=€26 billion. Not €70 billion, nor €100 billion claimed by the various parties.

You might ask me 2 questions at this junction:

1. "What about bond holders?" Ok, there are €15 billion worth of senior bond holders and €2.3 billion of subordinated bond holders. These bondholders - all institutional - have been begging the State for years to keep banking sector lightly regulated. And I agree with them on this, in principle (omitting details here). As a part of their pleas, we've been repeatedly told that markets are able to price risks better than any regulator can. And I agree with them on this as well. So, as a consequence of their own stated desires and claimed powers, the bond holders should be made to bear the responsibility for their own errors in pricing risks. In other words, the Government should tell them to count their losses. This is what the market is all about and this, not the rescue by taxpayers, is what the real market participants expect from Ireland Inc. Lastly, on this point, there is not a single financial instrument or contract that legally requires the Irish taxpayers to foot the bill for non-sovereign investment undertaking. Full stop. Cut the guarantee on all Anglo bondholders and send them packing. Note: even if we are to cover bondholders in full, Anglo wind down will cost no more than €39 billion. Not €70 billion, nor €100 billion.
   
2. "How can the winding down take place?" Simple - we proceed to gradually, over the next 5 years, to sell assets. Depositors remain guaranteed, so we can rest assured they will not call in their deposits all at the same time. As we realize the value of the assets, we gradually close off the liabilities. To do this, bank staff can be reduced by over 50% and their wages (currently averaging €110,515 per annum per employee) can be cut by the same proportion. This is it, folks - simple.

Now, let me ask you two questions in return:

1. Why are Messrs Dukes, Lenihan etc are claiming that the winding down Anglo will cost €70-100 billion? Is it because (a) they have no idea and are 'inventing' numbers as they go? or (b) they have an ulterior motive to claim improbably high figures to continue dragging out this Anglo saga over 20 years?
2. Why have the Irish taxpayers paid hundreds of thousands of euros to 'consultants' who cannot come up with a simple, straight forward plan for dealing with Anglo to date, despite the fact that people like Peter Mathews (to whom I am obliged for much of the figures quoted above), Brian Lucey, Karl Whelan and myself have provided viable alternatives for dealing with the 'bank' free of charge?