Department of Finance officials, contrary to popular wisdom, have not spent the past year obsessing over what happened to Northern Rock, the nationalised British mortgage lender which became the first victim of the freeze-up in credit markets in 2007.
The bank that everyone in Merrion Street knows intimately is Bradford & Bingley, the former building society which became the property of the British Treasury on 29 September last.
When mention is made of Anglo Irish Bank and its escalating problems, officials working in the department mention, almost wistfully, the recent history of Bradford & Bingley.
The officials in the banking section and in other parts of the department regard Bradford & Bingley as a very attractive model for how governments can extricate themselves from problem banks without damaging the wider economy or the government's finances.
In September last year, Bradford & Bingley was effectively nationalised and its deposit book sold off to Santander subsidiary Abbey. Its mortgage book was mothballed and has gone into effective run-down. None of this is particularly remarkable and the US agency, the Federal Deposit Insurance Corporation (FDIC), carries out similar operations all the time throughout the United States.
What Irish officials admired about the Bradford & Bingley nationalisation and run-down was the lightning speed at which it was done. "It was a midnight raid," one official said last week.
Unlike the lead-up to the nationalisation of Anglo Irish, the Bradford & Bingley changes were made within a few days. The wider banking sector and the stock market never got a chance to catch a breath, and before anyone could tease out the long-term implications, the UK Treasury presented the nationalisation and deposit sell-off as a fait accompli.
The impact on British public finances or sovereign risk was virtually nil, and since then the government has extricated itself further by reducing the scale of the liabilities it has to stand over because of its nationalisation of Bradford & Bingley. Last week the former building society said it won't make interest payments on £325m of subordinated bonds and observers in the market believe it is likely payments on other subordinated bonds will be suspended.
The rationale is simple: every interest payment deferred or suspended is one extra pound saved for the UK taxpayer.
Until Friday and the Anglo Irish results, the government here was looking on at the Bradford & Bingley example and wishing it could copy it. Finance minister Brian Lenihan has taken a battering since he nationalised Anglo in January, not least for his decision not to nationalise the bank in September when the guarantee was agreed.
In private, the Department of Finance realises it has to stand behind Anglo Irish, but how it wishes it weren't so. The difficulty remains the sheer scale of the Anglo Irish balance sheet. It's worth remembering Anglo was Ireland's third-largest bank before nationalisation. While its shares eventually collapsed to 21 cent, at the height of the market's infatuation with Anglo in June 2007, the stock was trading at €17.39.
Based on its 2008 annual report, Anglo Irish has bond debt of over €20bn. This represents serious heft in terms of liabilities. Based on Ireland's pre-crash GDP, it represents 8% of GDP. Based on Ireland's more modest GDP for 2009, it will be a far higher exposure. This is the problem for Lenihan and his advisers. Even the subordinated bonds at Anglo have a par value of €4.9bn, although the bank has been shrinking itself a little in terms of bond liabilities.
The problem for the Department of Finance is that, no matter what it does with subordinated debt, the senior debt is non-negotiable and coupons must be paid.
The bond debt of Anglo, via its medium-term note programme, amounts to €10.6bn, according to its annual report. It also has smaller liabilities by way of covered bonds, certificates of deposit and a big dollop of short-term commercial paper which it must roll over.
Propping up the wall of debt is €72.1bn of loans to customers, mainly developers, with many of them sitting on land banks that have plunged in value. This loan book is obviously losing its value rapidly, as disclosed by the bank's results, covering its first-half and released on Friday.
While the loan book has effectively been mothballed already, putting Anglo Irish into an effective run-off situation, as in the case of Bradford & Bingley, would be a huge and risky undertaking.
The bank needs pre-provision profits and fresh areas of business to mop up the bad debts, which are escalating at a faster rate than for any other Irish bank.
The bank had turnover in its last full year of €6.3bn, but interest payments and similar charges ate up €4.4bn of this. It's a decent cushion in a boom, but when your write-offs are growing on the scale that Anglo's are, the picture begins to darken.
So a run-off situation would be difficult to arrange. The National Asset Management Agency would effectively be putting Anglo into run-off if it removes all property loans from its balance sheet. That would leave a shell of a bank behind, with a massively shrunken balance sheet, but it would also be a balance sheet requiring gigantic flows of new capital.
Obviously a sale of the deposit book would reduce this requirement, but a sale of the deposit book only makes it more difficult for the bank to fund itself, and that once more affects the amount of capital needed.
However, if Nama is taking most of its loan book away from it, surely the subsequent capitalisation of the bank should involve only those sums needed to redeem bonds as they come up for redemption? Considering how broke the Anglo business model is, any capital injections beyond this must be considered highly questionable and lead to worries about throwing good taxpayers' money after bad.
Also who could buy the deposit book? AIB? Bank of Ireland? Both banks seem more interested in buying up their own debt, rather than purchasing deposit books of former rivals. There is also a concern about the health of the Anglo deposit book. Large chunks of the book are concentrated in non-demand deposit accounts and when their renewals come up those deposits may dry up.
The price paid by Santander for Bradford & Bingley's £20bn deposit book – £612m – meant the Spanish bank was paying a 3% charge on the value of the book. If that was applied to Anglo, its customer deposit book would go for €1.5bn. It's not a huge amount of money considering the size of the loan book write-offs to come for Anglo. Whatever the government ends up doing, its going to be risky and costly.