The nationalisation of Anglo Irish Bank, less than four weeks after the government unveiled a €1.5bn recapitalisation for Ireland's third-largest bank, marks a further terrifying escalation in the banking crisis, writes George Garvey.
Even at the time the Government announced its plans to pump €1.5bn into Anglo Irish on December 21, there was a feeling that the bank's problems went much deeper than that. Indeed UCD economist Morgan O'Kelly went so far as to suggest that the Government would have been better off to incinerate the money.
Even so the speed, just 18 days, with which the Anglo recapitalisation unravelled still came a surprise. It is now clear that it will take more, a lot more, than €1.5bn to plug the huge hole in Anglo's balance sheet.
All of the Irish-owned banks have been brought to their knees by the collapse in property prices. Between them, the six Irish-owned banks have total loans of about €420bn. Approximately €320bn, more than three-quarters, of this is secured against property.
All of the Irish-owned banks are heavily exposed to property lending with more than 70pc of Bank of Ireland's lending being property-based and almost 60pc of the AIB loan book being tied up in bricks and mortar.
However, it is Anglo Irish's exposure to property lending that is the greatest cause of concern. A large proportion of both AIB and Band of Ireland's property-based lending consists of relatively low-risk residential mortgages. This means that "only" a third of AIB's total loans and a quarter of Bank of Ireland's are to builders and property developers, by far the riskiest type of property-based lending.
Compare this to the situation at Anglo Irish. Unfortunately Anglo doesn't publish a meaningful sectoral breakdown of its loan book. However, it is not a player in the residential mortgage market and former finance director Willie McAteer stated at the publication of the bank's half-year results last May that: "all lending [is] secured, cross collateralised with personal recourse".
Translated from banker-speak into plain English that meant that virtually all of Anglo's €72bn loan book was to builders and property developers, by far the riskiest type of lending to have on your books when property prices are collapsing.
With its share price in free-fall Anglo was forced to give more information on the composition and state of its loan book when it published its full-year results last month. This belated disclosure did nothing to ease investor fears about the state of Anglo's balance sheet.
At the end of last September Anglo was owed €5.8bn by housebuilders in Ireland and a further €2.2bn by builders in the UK. It is owed €6.2bn by Irish MBOs, €3.9bn by Irish hotels and €500m by pubs. These numbers confirmed that Anglo had a disproportionate exposure to just about every type of high-risk lending.
No-one was surprised when then chief executive David Drumm warned investors that Anglo would have to write off between €1.7bn and €2.5bn in bad loans over the next three years.
Since then the news coming out of Anglo has become much worse. The resignation of chairman Sean FitzPatrick, chief executive David Drumm and finance director Willie McAteer following revelations that FitzPatrick had concealed loans of €87m from Anglo for eight years confirmed the widely-held suspicion that Anglo Irish was a cowboy bank.
With Fine Gael promising to oppose the recapitalisation when the Dail resumes the government was left with no option but to nationalise Anglo.
Brian Lenihan is likely to inherit an absolute mess at Anglo. The bad debt levels predicted by Drumm last month will almost certainly be vastly exceeded by the time all of the bills for Anglo's decade of reckless lending come due. Already some analysts are predicting that up to a fifth of Anglo's loan book could turn sour. If these predictions are accurate the cost to the taxpayer of nationalising Anglo could hit €15bn.
While the nationalisation Anglo is likely to be quickly followed by a break-up of the disgraced bank with its good assets being flogged off to other banks, taxpayers will be paying to clean up the Anglo mess for years to come.