Keeping it alive will cost an arm and a leg with any upside hard to ascertain
The case against
Published 01/04/2010 | 05:00
The horrendous results revealed by Anglo are not the end of the losses that it will incur, stunning as they are. As it stands, the intent of the board and the Government (claiming to act in your best interests) is to keep Anglo alive, for as long as possible. Anglo alive will continue to bleed money.
Anglo dead will cease to bleed money. So why then does the Government insist on keeping Anglo alive? It genuinely believes that closing Anglo would be more costly than killing it. I do not agree.
Any evaluation of relative losses from closing Anglo versus keeping it alive revolves around two issues -- how much of the remaining liabilities on its balance sheet can be met by its remaining assets and how much of its liabilities will be met by the State? Anglo alive is set to swallow at least €22bn, with the prospect of more to come.
Set against that is the cost at wind-down. Anglo is now a bank with assets and liabilities of some €85bn, after the €12.3bn injection from the State. In terms of liabilities, it has some €16bn deposits from banks and €23bn from the ECB and the Central Bank of Ireland. This €23bn is secured on assets. It has €28bn of customer deposits, and €13bn senior debt. Even after NAMA it will retain loans to customers of €30bn, funds on deposit with other banks of €7bn and around the same in bonds and other financial assets. Anglo can be wound up cheaply -- here's how. Sell the €28bn deposit book.
This is a regular event in banking, and even if it has to take a discount of 25pc that would yield €21bn. Sell the bonds and withdraw deposits in other banks. This gives a further €14bn, a total of €35bn, that is sufficient to cover the senior bondholders (€13bn) and the interbank deposits with NAMA (€16bn), with €6bn left over.
The €6bn can be used to pay off the ECB and the Central Bank, in part, with the remaining €17bn borrowings from these institutions secured on the remaining lending by Anglo. There is a loss to be paid on the deposit book, and potentially on the fact that the remaining loans are not worth their book value but this is much, much less than keeping it alive. The €12.3bn is lost -- we do not have to throw indefinite money into the black hole.
If we keep Anglo alive it will make ongoing losses. It has no strategy. While having a strategy is no guarantee of making a profit, not having one is a surefire way to make a loss.
In our first-year Introduction to Business course in TCD, we expose students to a wide variety of tools for business. One of them, freely available on the web and well worth reading by the board of Anglo, is a classic paper published in 2001 called 'Are you sure you have a strategy?' This suggests a set of questions to be asked of any purported strategy, with a negative on any one suggesting that what is there is an aspiration rather than a strategy. There are five main questions that should be asked.
Firstly, what is the arena of action? In the case of Anglo it is still not clear if they wish to be a SME bank, a general business bank, remain a property player or what. Thirdly, how do we get there? Clearly, if you don't know where you are going this becomes difficult, and we are not clear if they intend, for example, to become branch based (third force model), hq based (stand alone) or to engage in divestitures or acquisitions to achieve whatever it is they wish.
A third question is what is the key differentiator from your customer -- in the case of Anglo is it to be price, reach, richness of product? It clearly cannot be reputation.
A fourth is staging -- what resources are required, in what sequence, to attain the preceding? Anglo is and will continue to be starved of human, material and financial resources and doesn't, in any case, know where it is going with what it has.
The final core question is the economic logic behind the proposed stages. How will the strategy make profit? Given that the economy, in no small part due to Anglo's prior actions, will remain mired in stagnation and that the banking industry requires to move to a much more old-fashioned business model with customer deposits at the core, it is evident that profits in the Irish banking sector will be modest to non-existent for years.
The overall consequence is that Anglo has no strategy -- this is a recipe for further unquantifiable losses. These losses, unknowable but presumably large, must be taken into account when considering whether it has a future or not. In my mind they tip the scales firmly to the NO camp. Anglo must die.