Theory-crafting on the conspiracy behind the Bank Guarantee Scheme

Lately I've been mulling over the whole bank guarantee scheme and the subsequent nationalisation of Anglo Irish Bank. There's a lot about it which doesn't sound or feel right, so in order to progress this along, I'm going to talk about the elements involved and as a consequence, a theory that I wish to proffer for your entertainment.

Let's start with some assumptions.

1. We know that in 2008 INBS bonds were rated just one level above junk status. We know that numerous issues involving the running of the bank had been raised at AGM level and in all the national media. We know that Brian Cowen had gone out of his way to facilitate INBS to be demutualised. In short, this was a financial organisation that was allowed to do whatever it felt appropriate without any objectivity from the financial regulator or the Central Bank, let alone the Minister of Finance.

2. We know that in 2008 Anglo-Irish was in huge trouble. The bond markets had given their verdict during Drumm's attempts to raise more capital in his US roadshow in the summer of 2008; there were no takers. Of all the indigenous financial institutions on ISEQ, Anglo were looked upon as being the weakest link, and by targeting the bank, the markets were effecting all said institutions.

3. Now we move to the night of the 29th of September 2008. Apparently no record or minutes were ever taken to explain or substantiate what happened that night. But it does appear, at least from my perspective, that a decision was already place before that fateful night. We know that the various executives and chairmen of BoI and AIB were entertained, albeit briefly, before they were informed of the governments decision. But it is quite clear, that nothing that the banks representatives said or did, had any bearing on the final decision to guarantee all the liabilities of all the indigenous lending institutions.

4. It's interesting that the bank guarantee scheme is unique to Ireland. Other countries nationalised or part-nationalised their financial institutions who were suffering difficulties. Most countries offered some form of guarantee on deposits. But nobody went to the altar of cojones on the block like we did.The reactions to the newly announced scheme varied from hostile (the UK), to perplexed and surprised (the ECB) to wholehearted support (the US and financial markets).

5. It is possible to believe that Brian Cowen and Brian Lenihan were unaware of the seriousness of the banks financial position in September 2008. Certainly there can be no doubt that the banks had systemically lied about their capitalisation to all and sundry. What's not possible to believe however, is that in the four months from guarantee to nationalisation for Anglo Irish, that the Finance minister (presumably having eventually read the auditors reports) considered the institution to be of systemic economic importance to the State.

6. The guarantee scheme spawned the nationalisation of Anglo and the subsequent strain on our finances in conjunction with the recapitalisation of INBS. Everyone agrees that the other financial institutions are systemic to our economy and worth saving, regardless of the price. Only the government seems to think the same applies to Anglo and INBS. Under the terms of the scheme we are stuck to this course of action until Sept 2010 when a new guarantee scheme will be put in place. We are told that the new scheme will be a watered down version, but little detail has been discussed. Is there an implicit threat that the government will rescind its guarantee to bondholders in Anglo and INBS and use that to wind down the banks and give only a percentage back to the bondholders? No one can say, but the threat, if real, remains.

7. In the meantime, our borrowings are forecast to explode over the next few years as we play catch-up with Greece. Now there is no comparison between the two countries if we are to be honest. We don't have to borrow €50b or so for each of the next three years. We haven't systemically lied about our financial situation. We are in the middle of an approved austerity program organised to get our deficit under some control. And yet, don't you find that we get an enormous amount of credit from the international financial community? That we are held as some international paragon in comparison to the pariah state that is Greece. The markets aren't stupid, they know only too well how bad the situation is, and will be, in Ireland, much as they knew how bad things were in INBS and Anglo.

8. Which brings us to the government bond auctions by the NTMA. They are always, repeat always, a stunning success. Always oversubscribed, always 100% facilitated, a great pat on the back for the financial and economic strategies of this government.

9. So this brings me to my thesis. It is my belief and opinion that prior to Sept 2008, we have done a deal with the international markets. From a conspiracy perspective you can argue that this was facilitated by the Bilderberg Group, or the Wandering Jew, or Jesse Ventura. It doesn't really matter. What we have here is the biggest quid pro quo in Irish financial history. In this we, the people, as represented by B&B, are guaranteeing all the liabilities of the banks, and specifically, all the international bondholders. In return for having all their bonds guaranteed by the state, these same institutions are beholden to make encouraging noises about our fiscal strategy and of course, buy up our auctions of government bonds.

10. So far this dance of financial symbiosis has been adhered to by both parties. The government, because of the 2 year duration of the guarantee scheme, and the bondholders/investors because of the uncertainty of what happens when the guarantee is up.

The Real Politik behind Quinn Group

Anglo are proposing to pay off the bondholders in QI €550m to ensure that QI stays in the group. The alternative is that QI gets sold for a fire sale price with Anglo last in the queue to get any financial return. That leaves Quinn Group, less the cash cow, owing Anglo €2.8b + whatever has still to be paid to the other banks.

Quinn Group is now insolvent and the carcase gets stripped down and sold for more fire sale prices to the other banks and finally, Anglo get to pick over what's left. Net return on their €2.8b, not an awful lot. In addition we have the politically unpalatable scenario of the Quinn Group collapsing with a large amount of job losses, companies being shut down and the finger of blame being placed on the government.

The alternative that Anglo are proposing is that for another 25% worth of debt in the company (€550m for the bondholders and €150m equity for QI), and bringing the net amount owed to Anglo to €3.5b, they get a controlling interest in the entire group. Sean Quinn remains as chairman, but realistically Anglo will be putting in their own management team.

The thinking behind this means that Anglo are now in a position to sell off the components of Quinn at the most suitable time, using the cash cow of QI to support the areas of the business that aren't functioning. In my viewpoint, this increases their chances of making some money back, and is a better option than the current one, sitting on the sidelines waiting for the vultures to finish off Quinn.

There's also the political aspect behind this. For the current government, failing to save Quinn Group is likely to ferment dissension in their backbenchers, increasing the likelihood of a GE being called at the worst possible time for the governmental parties. It's also highly that the write-off in the debts to Anglo may finally kill off the bank and it will be run down.

I really wouldn't like to be the regulator now, the pressure must be enormous coming from all the interested parties. I do think the opposition should be seen getting involved in what is a critical moment for the State, but they are as hamstrung as the government are in terms of the forthcoming election, and can't be seen to doing anything that will effect their own popularity.

For the record, I do not support the government and have a reputation on the for being ABFF, nonetheless, that doesn't mean that I conveniently ignore the political and financial realism of the current situation.