Now we know just why the failure of Anglo Irish Bank is not only the biggest collapse the world has seen, but the most destructive. And why the collapse of Ireland is the biggest property failure the world has experienced.
Disclosures in Dublin on Tuesday have provided full detail and figures on the extent of Anglo’s disastrous lending and failure.
Anglo Irish Bank, aka The Black Hole of Dublin, was ordered to start selling assets and winding itself down by Irish regulators, but not before time after the bank had earlier said it expects to report a loss of €17.6 billion for last year.
That’s the biggest in Irish history and trumps its previous record of the €12.8 billion Anglo lost during the 15 months to the end of December 2009.
But the giant figure makes it hard to get a handle on just what that means to Ireland.
The Irish economy was about €167 billion in the year to September, 2010 — the Australian economy just over $1.3 trillion.
Anglo’s loss was just over 10% of Ireland’s GDP and based on that share, Anglo’s loss in Australian terms would go close to $140 billion in Australia, or more than 20 times the expected profit of the Commonwealth Bank in the year to June of about $6.6 billion. Can you now see the damage a loss of $140 billion in an Australian bank in one year would do to our economy?
And in American terms, Anglo’s loss would top $US1.4 trillion, which would be larger than all the aid given to the country’s financial sector by the government from 2007 onwards. And that’s just in one year. The loss for the 27 months would top $US3 trillion in America and to $250 billion in Australia.
So it’s wonder the government told Anglo and Nationwide, another broken lender, to start proceedings to merge with each other after the government auctions off the remaining assets and deposits to third parties.
But the detail of the update from Anglo Irish exposes the extent of the black hole the bank is in, along with the entire Irish economy.
During 2010 the Irish government injected an extra €17 billion into the now nationalised bank as customer deposits dropped 59%, to €11.1 billion and borrowings from the central bank and European Central Bank jumped to €45 billion.
Total support from the state had reached €25.3 billion (including the money injected in 2010) by the end of the year, allowing the bank stay within capital requirements set by the Central Bank. At its peak Anglo Irish had €78 billion in assets, so nearly one in three euros of assets have been lost.
At the same time a story emerged in the Irish Independent overnight that is astounding and will further enrage Irish voters and anyone else.
The paper said that instead of paying market rates to the central bank of Ireland for its emergency lending funds (which have kept the banks afloat for much of the past year), the banks (all but one are nationalised) are paying less 3% on the total €51 billion of “emergency liquidity assistance” the central bank is paying because the banks have run out of assets to sell to the ECB for support.
Compare that to the rate of about 5.5% that Ireland will be paying on its bailout fund of €85 billion and you can appreciate why there’s unease about the concessional rate. But there is an easy answer, the banks can’t afford to pay a real market rate on the money that’s keeping them alive. They are completely stuffed.
It is the first time the low rate has been disclosed and the paper says that if the banks can’t repay any or all of that €51 billion in seven-day loans, the government will have to repay the cash.
There is no word if there have been any losses taken on the emergency funding.
The flight of deposits from the banks, such as the 59% drop at Anglo Irish, saw the central bank assistance rise from around €14 billion in late August, to the €51 billion level at years’ end.
And again, to put things in an Australian context, that emergency funding would be well over $510 billion here.
Comparing it to the US, the sums are more vast. The US economy is about 11 times the size of ours, meaning in American terms, the Central Bank of Ireland’s assistance to its banks would total more than $US5.5 trillion (yes, $US5.5 trillion). The €25.3 billion of state assistance to Anglo Irish (new capital and separate to the central bank’s aid) would be equal to more than $A260 billion here and in America, more than $US2.6 trillion.
Say those figures very slowly. Of all the disasters we have seen in the GFC since 2007, several stand out, HRE in Germany (€110 billion from the German government). The $US700 billion in tarp money paid to various banks, insurers and other companies, such as General Motors, and now all but repaid. And there was about $US130 billion or so used to bailout AIG and well over $US200 billion invested in Freddie Mac and Fannie Mae, the two government mortgage companies.
Seen in terms of the larger sized Australian and US economies, there has never, ever been anything so large and so destructive as Anglo Irish Bank. Anglo’s actual losses are stunning when applied to Australia and the US, but in the proportionate comparisons, they are mind numbing.
You find yourself asking, how could anyone lose so much money, in such as small economy where everyone knows each other?
By comparing and adjusting to the greater size of the Australian and US economies, we get a good idea of why the banks sank Ireland, why the country is now stone motherless broke, and why the rest of the world should continue to watch the February 25 poll and its aftermath very quickly.
Ireland isn’t out of the woods, the election will not solve anything, the country cannot repay the €85 billion in bailout funds and certainly can’t afford to pay more than 5% to the ECB and IMF when it can’t afford to charge its own broken banks a similar rate for emergency funds.
Anglo Irish destroyed the economy, the lives and careers of thousands of people (and it only had six branches in the whole of Ireland!) all on its own, and yet is was helped by its peers, such as the Bank of Ireland and Allied Irish Banks, which engaged in a similar bout of unchecked lending on property.
And remember, the way the government of Ireland reacted to this and other black holes in October 2008 forced governments around the world to back their banks, and remain the effective underwriters of last resort.
The Anglo Irish, its board and management of incompetents, plus the Irish government and regulators have a lot to answer for around the world. We should be cursing them.
If debt-financing of real estate were banned, financial institutions would be forced to develop products for financing real estate with equity instead of debt. That should take them about a week. They’ve already managed to develop mortgage-backed securities, which are equity in debt backed by real estate. Why not cut out the middleman?
No debt: no defaults, no negative equity, no financial crises.
@GRP
Good comment, and why not extend that to business lending.
If banks were compelled to lend unsecured to businesses then there may not be any forced sales of property either. The Basil 2 agreements have effectively put the kybosh on Australian banks to lend more freely to Australian businesses, if at all….the net effect of this on employment in this country will be staggering.
Why can’t banks take an equity position with both larger companies and SME’s alike?….this would stimulate our economy and create good-will and better banking relationships beyond our imagination, while puting an end to mortgagee foreclosures.
The banks should be our servants and not our masters.
(Disclaimer: I work for a bank so any comment I might have on this subject is likely to be self-serving. Caveat emptor.)
@Like a Beer:
Banks don’t provide equity funding because that’s not their job. Banks primarily raise debt funding, either from retail sources like depositors or from wholesale lenders and bondholders, and provide debt funding.
If regulators and governments forced banks to provide equity funding, they would need to change the mix of their own funding because debt holders/depositors don’t want to take equity risk – they accept a lower interest-like return precisely because they are happy to forego equity upside.
If you as a potential property purchaser or entrepreneur are happy to give away equity upside, there is nothing stopping you from looking for a co-investor/partner etc. There are plenty of investors who will provide equity funding for investments that they believe in. The hard part is finding them and convincing them that your business plan is going to lead to a payoff.
I can see why you are proposing that banks be forced to invest equity in SMEs – banks are easy to find and approach, unlike venture capitalists who don’t usually have branches in every suburb with easy to identify logos and signage.
What isn’t clear from your proposal is whether you think banks should apply the same level of scrutiny and due diligence as an equity investor, and hence should also have the ability to reject proposals they don’t believe in, or whether you think they should be forced to invest equity in every proposal they receive including the ones they think are going to be money-losers.
If the former, it’s not likely this will lead to a massive expansion of funding to SMEs because equity investors have even fewer protections than lenders – in other words, if an SME can’t convince a bank that it will be profitable enough to cover its interest and principal repayments, it’s going to be even less likely to be profitable enough to generate a dividend and hence a pay-off for the capital that it would be risking. So you can force the banks to give people a hearing, but you can’t force them to invest.
If the latter, then you are virtually suggesting that banks hand out free money to anyone with the energy to put together a business proposal, no matter how unworkable.
That sounds an awful lot like the kind of behaviour that got AIB into trouble…
€167 billion in the year to September, 2010 — the Australian economy just over $1.3 trillion. To compare – @72cents =A$ means the Irish GDP is A$228 and, as Oz has 5 times the population = A$1.114 trillion so that’s very close.
Again, we should be attaching ‘thank you’ notes to every lump of coal China deigns to buy.
Thankyou Eugene, but you only replied to the second part of my comment and only offered your view towards the banking equity position.
Banks like to give the impression that they lend unsecured, but this is only window-dressing and is far from reality. I would love to see banking ratios of business lending from fully secured/part secured to unsecured…it would be abyssmal I am certain.
There is a problem in the current market place with many owners of SME’s and smaller companies who can’t raise finance for expansion or even debt consolidation, or even to pay their taxation liabilities, due to what the banks see as asset depreciation.
In other words, and you as a banker will obviously realize, that this means the equity in the assets pledged for security are no longer sound enough for the banks to keep faith. Right across the board, we are in the midst of substantial assest depreciation.
This problem is not going to disappear and will probably get a lot worse before it begins to get better…it’s a serious issue for both the banks and it’s corporate customers, not to mention the social cost on the wider community.
How are the regulators going to deal with this?…simple, compel the banks to write down their balance sheets and lend atleast partially unsecured in order to maintain equity levels.
Being a banker, I will probaly lose you here, but Western academics have long been interested in Islamic banking because of the system’s emphasis on the non-payment of interest.
The idea of a financial structure operating without a rate of interest was odd to many accustomed to a fractional-reserve banking system, but this system/model of banking that proposes the taking of an equity position rather than debt and interest based funding, has proven very successful throughout Asia, Africa and obviously the Midle east.
It’s obviously not the sum- total-answer, but there are points within this system of banking that are worth considering.