The Irish Times carried an article describing the relationship between Allied Irish Bank and the politicians and regulators. To say it was close is an understatement.
Disclosure of current asset and liability-level data circumvents this relationship. Market participants have access to the data for their own analysis and are not dependent on what the regulators say. The Nyberg Report concludes that disclosure would have lessened the cost of the crisis.
ON MARCH 13TH, 2008, Merrill Lynch published an explosive analysis of the most aggressive lenders in the UK commercial-property market. The report started a few fires at Anglo Irish Bank.
The London-based analyst who wrote it, Phil Ingram, had based his report on a simple straw poll of commercial-property valuers. It was more anecdotal than scientific, but the answers showed that the Irish banks had piled into the UK property market, applying the same loose credit standards that they had at home. The valuers cited Anglo as among the most aggressive lenders.
Ingram’s report noted that the UK commercial- property bubble was bursting and that banks were going to lose money. He said banks that were “late arrivals to the party” had taken “more risk for less reward” and were expected to take the biggest losses. Anglo, one of those late arrivals, was cited as the bank with the biggest credit risk. It had grown its UK loans significantly over the previous two or three years as it expanded aggressively outside Ireland.
Anglo’s chief executive, David Drumm, was hopping mad about the report. He contacted Kevan Watts, who managed Merrill Lynch’s operations in Asia and had had some recent dealings with Anglo, to complain. Drumm told him that Ingram’s study was sloppy and cynically biased towards the position Merrill Lynch’s trading desk had taken on Anglo. (Investors generally were being advised to sell out of bank stocks at this time.)...
MERRILL LYNCH and the other leading investment banks had bigger things on their minds that week than the sensibilities of Anglo Irish Bank. On Monday, March 10th, 2008, rumours began to circulate around a nervous Wall Street and the wider financial markets that Bear Stearns, an 85-year-old institution and the United States’ fifth-largest investment bank, was having difficulties repaying its lenders.
Bear Stearns had $18 billion in cash, but this didn’t reassure the panicked markets.
Breathless reports on the business channel CNBC suggested that it could be the first big American institution to fail in the crisis arising from the securitisation of US subprime debt. Other banks stopped lending to the bank, in effect causing a run on it.
The following weekend the US Federal Reserve stepped in with an orchestrated rescue: its rival JP Morgan would buy it in a deal that valued Bear Stearns at just $236 million, or 1.3 per cent of its value a year earlier. The news startled Dublin traders, though few yet believed that an Irish bank would end up in the cross hairs of frazzled investors.
The next Monday was St Patrick’s Day, and Ireland’s main stockbroking firms had skeleton staffs working, because March 17th is usually a very sleepy day of trading. Not in 2008, however.
That morning the influential Lex column, in the Financial Times , suggested that investors should examine three key areas in banking. The first was liquidity: do banks have enough to meet their day-to-day repayments and avoid insolvency? The second was capital: have banks set aside enough to cover potential bad loans and investments coming down the tracks? The third was asset quality: just how bad are their loans and investments?Regular readers know that without disclosure of current asset and liability-level data, investors still do not know the answers to these questions.
“Even minor prejudices gain significance in a panic sell-off,” wrote the anonymous columnist. “For example, nobody wants to have anything to do with banks with commercial property exposure (Anglo Irish Bank and HBOS) or buy-to-let lending (Bradford Bingley).”
The singling out of Anglo, the only Irish bank mentioned by Lex, was akin to marking the bank’s door as among the most contagious in a financial plague. Traders in Dublin watched their screens in horror as Irish banks’ share prices nosedived in the first three hours of trading.
They had never seen anything like it. The bank stocks were flashing red, signalling dramatic falls. Anglo’s share graph was descending almost vertically.
“We were caught in the headlights,” says one Dublin trader. “There were only a few of us in the office that day, and when we saw the share prices fall we were like, ‘What the f**k is happening?’ There was no Irish news flow that day, because it was St Patrick’s Day, and there were no Irish investors in the market. This was international investors, particularly in London, and the hedge funds were making a strong statement about what they thought about Anglo and Ireland.”
Rumours began to circulate that Lehman Brothers was not far off becoming the next big Wall Street bank to collapse. Worryingly, from an Irish perspective, Lehman held about 5 per cent of Anglo stock. Were the US bank forced to dump this holding, Anglo would come under even more pressure.
Anglo’s share price dropped 23 per cent before ending the day down 15 per cent, at €6.96 – some distance off its €17.53 peak, in June 2007. Almost €1 billion was wiped off the value of the bank in a matter of hours – about €1.6 million for every minute of trading that day. Investors had made a strong statement about what they thought of Anglo. Suddenly, the bank found itself on an unwelcome global stage, facing even more questions around its financial health.
Its senior managers were shaken by the catastrophic collapse in the share price. But rather than ask whether investors had legitimate concerns about the bank’s exposure to property or about its funding position, Anglo executives went looking for a bogeyman. They believed they were the victims of intense bad-mouthing in the market and a one-day short-selling raid by hedge funds.Had there been disclosure of current asset and liability-level data, all market participants would have known if there were legitimate concerns.
... As the St Patrick’s Day disaster unfolded, Anglo’s board held a conference call to consider the day’s events. One nonexecutive director suggested that they should plan what to do if depositors started to queue outside the head office, on St Stephen’s Green, and there was a run on the bank....
Drumm did most of the talking. He told the board that the bank was receiving an unusually high number of calls from concerned depositors in light of the share-price collapse the previous day and the negative commentary about the bank. He confirmed that the bank had lost some deposits as a result.
The directors discussed whether a public statement from the State’s top banking authorities about “the robustness of the Irish banks” would allay fears. The board felt this was a good idea, and agreed that the bank should ask to meet the governor of the Central Bank of Ireland, John Hurley, and the head of the Irish Financial Services Regulatory Authority, Patrick Neary.The stream of public statements attesting to the robustness of banks from top banking authorities continues unabated. If there were disclosure, it would put an end to the need for these statements.
What is remarkable is that the bank felt comfortable asking the banking authorities for a statement. If the FDR Framework were fully implemented, this would be a non-issue because governments are not suppose to offer an opinion about an investment. Saying the bank is sound is offering an opinion.
... DURING THESE panic-filled days, Fintan Drury got a phone call from Seán FitzPatrick.
The Anglo chairman asked the nonexecutive director – a friend of Brian Cowen, who was then minister for finance – whether he should call Cowen to tell him about Anglo’s problems. Cowen was away in the Far East, on a St Patrick’s Day ministerial trip.
Cowen’s ministerial diary over the period he was at the Department of Finance – September 2004 to May 2008 – shows 12 appointments with Drury. This was a significant number, given that Cowen met the governor of the Central Bank 17 times over the same period and officials from the Financial Regulator seven times, including just two meetings with Pat Neary.
Some of the meetings may be explained by the fact that Drury occasionally helped Cowen to write his speeches, including the eulogy Cowen gave at the graveside of former president Patrick Hillery on April 16th, 2008. It was a landmark speech for Cowen, who had just been elected leader of Fianna Fáil and was due to take over as taoiseach within a few weeks.
After the St Patrick’s Day Massacre, Drury thought it might be worthwhile for FitzPatrick to talk to Cowen. Drury rang Cowen to ask whether he would take a call from the Anglo chairman. Cowen called John Hurley, the governor of the Central Bank, to see whether Hurley had any objections. Hurley didn’t, so FitzPatrick phoned Cowen on his mobile. He told him about the collapse of the bank’s shares and said he believed it was connected to the shareholding Quinn had built up.
As he later told the journalist Tom Lyons, FitzPatrick told Cowen that “what was really happening was that pressure was coming from the shorters, these guys, the hedge funds, trying to get Quinn”.
THE ANGLO BOARD met again at noon on Wednesday, March 19th. The board discussed the announcement of an investigation by the UK’s banking regulator, the Financial Services Authority (FSA), into rumours about and short selling of shares in HBOS, the big UK bank formed by the merger of Halifax and Bank of Scotland, whose price had plunged 17 per cent the previous day. Like Anglo, HBOS had an enormous exposure to property.
The FSA wanted to discover whether hedge funds had orchestrated the share-price declines by spreading rumours about the bank. Anglo believed that something equally sinister was at work in the Irish market and wanted the Financial Regulator to investigate and punish those responsible.
The board also discussed an article in that day’s Irish Times which questioned the bank’s funding position, linking concerns about deposits to the huge share sell-off. “The bank was cursed by the general lack of trust in the banking sector, fears that deposits were walking out the door and rumours that troubled US investment bank Lehman’s was placing a 2.4 per cent stake in the company with a third party,” Laura Slattery had written.
“Even, as one dealer said, if there was ‘probably not’ any truth in any of it, the sickness in the financial system following the collapse of Bear Stearns is enough for investors, from institutional giants to small-time fund managers alike, to cut Anglo out of the picture, while hedge fund managers took the opportunity to short the stock.”
Slattery’s report was painfully accurate for Anglo. It touched a nerve with the board, particularly the reference to lost deposits, which the directors believed could trigger further withdrawals. For a bank, it’s a vicious circle: reports about customers withdrawing deposits lead to more customers withdrawing deposits.
Responding to concerns raised at the Wednesday board meeting about the bank’s deposits, Drumm said Anglo’s funding remained solid: despite withdrawals, the bank could still meet repayment demands on deposits.
... On Thursday, March 20th, Anglo’s board met again by conference call at 2pm. The directors agreed that they needed to push the Financial Regulator to protect the bank from what they believed were speculators making big money betting against it.
Later that afternoon Drumm called Hurley and pleaded with him to release a statement on the health of the banking system, to avoid a run on Anglo’s deposits. Hurley told Drumm that the Central Bank was considering all options.
The following day was Good Friday, the start of the four-day Easter-holiday weekend. Drumm told Hurley that if the Financial Regulator didn’t do something at once then there could be a major run on deposits when the bank reopened the following Tuesday.
Unusually, Hurley agreed to run past Drumm a draft statement the Central Bank was going to issue. Happy with it, the Anglo chief executive asked the Central Bank governor to release the statement as quickly as possible.
The first statement came later that day from the Financial Regulator. “The Financial Regulator is concerned that false and misleading rumours circulating in financial markets in recent days are connected to unusual trading patterns in Irish shares,” it said, adding that the office would be examining “certain transactions in this regard”.
Then Hurley issued his own statement, in which he “strongly” supported the Financial Regulator’s actions in relation to “investigations into trading in financial shares over recent days”. He also said, “The Irish banking sector remains robust and has no material exposures to the sub-prime market.”
The interaction between Drumm and Hurley shows how close the relationship was between the bank and the State. Drumm had pleaded with the governor for a statement to protect the bank’s share price; he’d got two.
The strong statements from Dame Street hit the mark: Anglo’s share price jumped 14 per cent, to €7.85, on the Thursday. Short sellers in the bank rushed to buy long in the stock, in a move known as short covering, to protect themselves. All told, Anglo lost €1 billion in deposits over the week of the St Patrick’s Day Massacre, but the two statements stopped a further haemorrhage of funding from the bank – for the time being.
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