Friday 9 December 2016

the hired gun

Pressure is on for the CEO to resuscitate Anglo but can he? For that matter, can anybody?

Published 04/09/2010 | 05:00

With his bank having announced the largest loss in Irish corporate history this week, the Government is rapidly losing patience with Anglo Irish Bank and its Australian chief executive Mike Aynsley.

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A year after he first took over the reins at Anglo, Mr Aynsley is rapidly coming to resemble Oliver Twist by continually asking for more. When he arrived at Anglo in September 2009 the Irish public were being assured that sorting out the mess at the nationalised lender would cost the taxpayer "only" €4bn.

A year later the cost of bailing out Anglo has ballooned to at least €25bn. In fact, the eventual cost may be even higher than that. Ratings agency Standard & Poor's specifically mentioned Anglo's need for further capital when cutting Ireland's credit rating last week.

So just how bad could things get at Anglo? This week Anglo announced it had lost €8.2bn for the first six months of 2010. This was the largest loss ever recorded in Irish corporate history.

The main cause of these massive losses was loan write-offs of €8.3bn. This brings to a massive €23.4bn the amount of bad loans that Anglo has written off over the past two years, almost a third of its €72bn loan book at the end of September 2008.

And there is almost certainly more bad news to come.

Bad loans

Anglo is transferring up to €36.5bn of its bad loans, the equivalent of half its peak loan book, to NAMA. When the first tranche of Anglo loans with an original book value of €10bn was transferred last May, NAMA extracted a 55pc discount. When the second tranche of loans with a book value of €6.75bn was transferred last month the "haircut" was even higher at 62pc.

The loans that have already been transferred to NAMA consisted primarily of Anglo's loans to the larger builders and property developers. There is still another €20bn of bad loans headed to NAMA. These are primarily loans to smaller builders and property developers and are of even lower quality than the loans that have been already transferred. This means that the average discount on the full €36.5bn is likely to be considerably higher than average 58pc haircut applied on the loans already transferred to NAMA.

How much higher? We will have to wait and see but even an average 60pc discount on the full €36.5bn would translate into losses of €21.9bn while an average 65pc writedown would push the losses up to €23.7bn.

And that's only on the loans that are headed for NAMA.

Under proposals submitted by the Government to the EU Commission, Anglo will be broken up post-NAMA into internal 'good' and 'bad' banks. While the 'good' bank will continue to operate as a bank, the "bad" bank will manage those Anglo bad loans that aren't being transferred to NAMA, in effect an in-house NAMA.

With as little as €12bn of the Anglo loan fit to grace the balance sheet of the 'good' bank, this means that the internal 'bad' bank will have over €20bn of bad loans on its books. At an average 60pc writedown the "bad" bank would throw up additional losses of €12bn while a 65pc writedown would raise the figure to €13bn.

Total losses

In other words, based on what we already know, Anglo is looking at total loan losses of somewhere between €34bn and €37bn. This makes it virtually inevitable that, Mr Aynsley's protestations that the total cost of bailing out Anglo was "holding" at around €25bn notwithstanding, he will be back with his begging bowl sooner rather than later.

Which is bad news for Mr Aynsley. Since he first took over as boss he has not been slow to blame his predecessors Sean FitzPatrick and David Drumm for the mess he inherited at Anglo. And well he might. With five-sixths of its loan book having turned sour and the eventual cost of bailing it out likely to exceed the equivalent of a quarter of Ireland's total annual economic output, it is clear that Anglo's previous bosses presided over the banking equivalent of Animal House.

Unfortunately for Mr Aynsley, blaming your predecessors only gets you so far. In business, as in politics, blaming everything on the previous incumbents only works as a defence for about 18 months. After that you have to start delivering the goods.

Can Mr Aynsley deliver? Based on his performance so far that remains a matter of conjecture. While there is certainly a need for a specialist business bank focused on the SME sector, the notion that Anglo's 'good' bank, with its previous history as a largely-property-based lender, can fill that niche remains a matter of serious doubt.

Not surprisingly, the ever-deepening financial black hole has led to increasingly strident calls from the opposition parties for Anglo to be wound down. So far these calls have been resisted by the Government, which has argued that closing Anglo would cost even more than the current good bank/bad bank strategy, a position that has become increasingly untenable as the cost of bailing out Anglo has grown ever larger.

However, last weekend Green Party chairman Senator Dan Boyle, who has often been used in the past by his party to voice opinions that it would be impolitic for the Greens' cabinet ministers to utter, broke ranks and called for Anglo to be wound down.

Mr Boyle's outburst came at the same time as speculation mounted that the EU Commission is set reject the good bank/bad bank strategy and insist that Anglo be wound down.

This combination of fraying government support, public anger and a likely EU rejection of the Government's proposals has made Mr Aynsley's job, which always looked a bit like a mission impossible, even more difficult.

Which may well be why he got the job in the first place. Even before the full extent of its losses emerged, Anglo's reputation in international banking circles was toxic. This meant that no high-flying banker, with his or her eye on their future career prospects, could be persuaded to touch the job.

Instead it was Mr Aynsley, an Australian who had filled a series of mid-ranking banking positions and more recently served as a banking consultant, got the job. He is believed to have been recommended by former Bank of Ireland chief executive Michael Soden, who was Mr Aynsley's boss when the pair of them worked for National Australia Bank in the 1990s.

Part of Mr Aynsley's strategy over the past year has been an aggressive PR and media campaign designed to persuade a sceptical Irish public of the merits of the good bank/bad bank plan. There have been a series of press and TV interviews where the previous management have been ritually excoriated before he duly sings the praises of the plans for a reborn Anglo.

Unfortunately, not everything has always gone according to plan. The monogrammed shirts rather cancel out the cuddly image that the carefully-positioned family photographs are intended to convey, while recent unsuccessful efforts by Anglo to exclude journalists perceived as "hostile" from its press conferences have done nothing to foster goodwill.

All of which means Mr Aynsley is unlikely to succeed in reincarnating the rump Anglo as a business bank and it is now probable it will be wound down and eventually closed. That's unlikely to worry Mr Aynsley too much. One of the hired guns of the international banking business, he will probably have secured another assignment long before that happens.

Irish Independent

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