Sunday 24 September 2017

Banking beacon became a huge bet on property market

John Bowe
John Bowe
Donal O'Donovan

Donal O'Donovan

In its heyday, Anglo Irish Bank was the ultimate symbol of the Celtic Tiger. The bank's tiny number of branches belied the extent to which it had reached deep into the beating heart of the boom. When it came to property deals in particular, Anglo was involved in everything and anything.

Anglo executives were regarded as heroes by shareholders happy to watch their stock rise ever higher on the markets.

Top Anglo customers like Sean Quinn, Gerry Gannon and Bernard McNamara had gone from the business pages of newspapers to become household names.

International bond investors couldn't get enough of Anglo.

The ultimate vote of confidence came at the top of the boom. In 2007, the bank was hailed by international experts as the best bank in the world.

Anglo had grown by doing things that banks had never before been able to do. In the past, banks had only been able to lend out as much as they took in deposits. Combined with the once-strict regulation by the Central Bank, it had put a definite cap on how big a bank could get and how fast.

Entry into the euro, in particular, gave banks access to international money markets unhindered by foreign exchange issues and, at a time of historically low interest rates, changing the rules of the game. As long as Anglo could borrow on the markets and from other banks, the lending could keep on growing. And it did.

In 2002, Anglo had €2.8bn in net loans outstanding; two years later, that had more than doubled to €6.3bn. It would more than double again over the following year and by 2007 net loans had reached €18bn.

Lending to the booming construction market was the easiest game in town; on paper, the profits were rolling in.

But if Anglo's rise was swift, the collapse, when it came, was twice as fast and brutally hard.

Within 18 months of being named as a world leader, Anglo Irish Bank would be in freefall.

In 2007, the UK government was forced to rescue mortgage lender Northern Rock to calm a bank run. The writing was on the wall for Anglo but few people were ready to read it.

As the euphoria of the boom evaporated, Anglo in particular was exposed for the huge, one-way property bet the bank had become. The bank was only as good as its loans; they, in turn, were only as good as the properties they were secured on – land and buildings that had been hopelessly overvalued precisely because there was so much cheap debt to buy them.

In 2008, investors finally woke up to reality and they reacted by dumping shares on to a falling market. Worse was to come. By September 2008, when John Bowe and Peter Fitzgerald held their phone call, the world's financial markets were in the grip of the worst crisis in decades.

The overnight collapse of US investment bank Lehman Brothers on September 15 brought the crisis at Anglo to a head. Banks that Anglo had come to rely on for cheap, short-term loans were refusing to lend at any price.

Customers, fearing a collapse, were pulling out their deposits.

As head of capital markets, it was Mr Bowe's job to see that the bank had enough money to stay solvent. As head of its customer-facing retail division, it was Mr Fitzgerald's job to make sure there was cash in the ATMs and online accounts to meet the withdrawals.

By 2009, what was left of Anglo would be nationalised, but that only meant the bottomless pit of loan losses had shifted from private investors to taxpayers. Taxpayers would eventually commit €30bn to bailing out Anglo, almost half of the total cost of the €64bn banking bailout. The fatal move would eventually beggar the State itself. We simply couldn't afford it.

By 2010, international lenders would refuse to lend to us, fearing the bank losses would be more than the State could bear.

Ratings agencies stripped us of the coveted AAA borrower rating for the same reason. A country that just two years previously had been all-out debt free could not borrow on the markets just at the time when the economic downturn left us with a budget deficit.

In November 2010, the late Brian Lenihan, the same Finance Minister who took the decision to link Anglo's finances with the State, was forced to go cap in hand to the European Commission and the IMF seeking €67.5bn of bailout loans.

Earlier this year, the bank was finally placed into liquidation – but when the last Anglo assets have been sold, taxpayers can expect to see little or nothing of their "investment" back.

Irish Independent

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