Economics 04/05/2010: Why Anglo case is irreparable

A funny way of arguing financial returns that some of our senior 'bankers' have has been highlighted in the latest comments of the Politician-turns-Banker Mr Alan Dukes reported in today's Irish Times (comments and emphasis are mine):

“The [EU] commission came back with a whole series of questions [concerning Anglo's 'business plan' - whether a zombie can have a business plan is a matter for another debate] and we are now rejigging the restructuring plan to deal with the issues the commission has raised. One of the things we are looking at is what would be the situation if we liquidated the bank immediately? Total disaster. A total non-runner. [ Am I the only person concerned with the fact that apparently the 'new plan' will be a re-jigging of the old version or that Mr Dukes has already decided that, while the bank is still looking into liquidation option, he is sure that it will be a total disaster and a non-runner?]

“...The best prospect of getting some value out of it and reducing the total cost to the taxpayer is keeping the good bank of it, because eventually it could be sold on to the benefit of the taxpayer. If you just do a wind-down, it is losses all the way. Whereas if you can make a good bank of it, which should be a quarter of the size of the whole bank, at least you have got something viable and that can be sold off to the private sector in the fullness of time.”

Our senior banker is clearly confusing gross return with net return here. Let me illustrate:

Suppose Anglo separation into two banks - bad and good -

• Yields the value of the 'Good' Anglo at €A at the time of disposal t-years from now
  
• Winding down 'Bad' Anglo costs €B by the time of disposal t-years from now
  
• In the mean time (between now and disposal) the cost of running 'Good' Anglo will be €C
• While the current value of the 'Good' Anglo, without a workout (a fire sale, if you may prefer to call it, or a shorter winding up over 5 years as I would prefer to label it) implies the value of it of €D today.
  
• Also suppose that if we wind down Anglo today (or in the near future), the cost of winding down is €E.
• Assume that present value adjustment (bringing the value of the bank and the level of costs incurred back to today from the date of disposal) is PVadj<1. pvadj="F(Interest">

Mr Dukes says that: since €A>0 then taxpayers win from the option of splitting the bank into 2 parts.

I say that:

• if (€A-€C-€B)*PVAadj>€D-€E then taxpayer loses from the rapid winding down and gains from the breaking up of the bank (Mr Dukes preferred solution)
  
• otherwise, taxpayers gain from the opposite action of completely winding down the bank as soon as possible

Mr Dukes' vision of 'positive return' is also severely skewed by his failure to consider risks (interest rate risk, asset valuation risk, liquidity risk etc) in his assessment. A rather worrying problem since mis-pricing of risks is what got Anglo into trouble in the first place.

In other words, Mr Dukes should really have read up on

1. PDV methodology of computing real returns; and
2. Net Present Value framework for carrying out comparative valuations.

These are really basic building blocks of finance... really!

Economics 12/03/2010: Anglo's latest fun in the sun

In latest development: as Mr Alan Dukes – retired politician extraordinaire – takes over as the Chairman and Executive Chairman of the Anglo. Presumably he will no longer be acting in the interest of the taxpayers – which would, of course, be a conflict of interest for a Chairman and Executive Chairman.

There was a nice question put Mr Dukes on Newstalk – about the extraordinary €10 billion worth of ‘Master Loan Repurchase Agreements’ carried on the banks books (per Anglo’s latest annual report). Mr Dukes didn’t answer that question. But here is what we know:

MLRepos are in effect Central Bank of Ireland repurchase agreements that are so toxic, the ECB refuses to accept them as a collateral for its own discounted lending. So our Central Banks stepped in to hover these off the Anglo’s balance sheet.

Which begs several questions – and I do hope Mr Dukes actually answers these:

1. What exactly are these MLRepos and why are they held by the CB and not ECB?
2. Does Anglo continues to engage in such derivative operations vis-à-vis Irish CB?
3. Is this equivalent to the CB ripping out the decks to keep Anglo afloat – after all, in all banking finance theory, special purpose Repos held by the lowest rank lender of last resort can only be viewed as the last chance corral for a financial lender?

In a Newstalk interview, Mr Dukes did not deny the existence of the MLRepos, but said that these were not a part of the normal funding for the bank. I guess we knew this much already. Anglo, you see, is hoping to move away from this sort of shenanigans in some time in the future, when the normal property markets return, so the bank can too start lending in normal ways.

Really? How many tens of billions of taxpayers funds later would that be, Mr Dukes?

I wish Mr Dukes well in his role. And I am sad to see Donal O'Connor leaving the post - he has great experience and did his best to keep the sinking Titanic afloat.

Economics 21/11/2009: State Directors Fees

Per RTE report (here), Anglo's 'Public Interest' directors are being paid handsomely for their gargantuan efforts to... do exactly what? Steer the bank out of trouble? Not really, Anglo is not any better today than a year ago. Carry out its ordinary business? Not really, Anglo is not doing any new business at all and is in effect sitting pretty until Nama cleans up the mess. Safeguard public 'investment'? Not really, for no one sane really expects any return from this 'investment'. So what exactly do these 'Public Interest' director do? No one dares to ask. 

In the mean time, Alan Dukes and Frank Daly - two, in my view fine individuals - collect public retirement pay and are receiving €99,360 each in fees from a publicly-owned Anglo. A figure more than six times the compensation for directors of other State bodies.

But things are not much better in BofI (where Tom Considine and Joe Walsh received total fees to €102,375 and Joe Walsh's to €78,750). AIB in contrast paid Dick Spring and Declan Collier €27,375 and also topped these with €3,000 for each committee meeting attended. IL&P's public guardians, Ray MacSharry (fees of €56,250) and Margaret Hayes (€63,500) were handsomely well off as well. At EBS, Tony Spollen and Ann Riordan both receive a basic fee of €29,000 each. State appointed noble folks of Nationwide, Rory O'Ferrall and Adrian Kearns, in line with a long-running tradition at the building society to behave like a secretive private bank, simply didn't disclose their earnings to the public.

Further irony: fully state-owned Anglo pays second highest rate to its non-execs, while the Irish Government is flustered with privately held banks (AIB & BofI and the rest of privately held 5) executives' remuneration. It looks like someone (Minister Lenihan?) can't control his own organization (Anglo), while trying to play tough with organizations he has little stake in. Oh, incidentally, the fees for Dukes & co were set on the 'recommendation' by the State own 'commission' - another state body that Minister Lenihan apparently cannot reign in.

Expected annual cost (inclusive of expected, but not disclosed fees) €760,000 plus.

After having a quick chat with few friends in academia, here is a bold proposal for the Minister for Finance - you can find at least 12 senior and experienced academics and industry practitioners, including my self, who would do these jobs for €10,000 per annum plus expenses. As a real exercise in our patriotic (Minister Lenihan's words from last Budget) duty.

How about it, Minister? You promise left right and center that you will save taxpayers money. Here is a chance to do so. Some €640,000 of taxpayers money!

Oh and while we are on the topic of silly/dodgy political news - there is a recent report in the US (here) that argues that President Obama evokes Jesus and God more frequently than his predecessor. Not that I have a problem with this myself, but I wonder what all the European 'Liberals' would make of this...