There seems to be no limit to the misery Anglo Irish Bank is capable of inflicting on the captive Irish taxpayer. The €4bn recapitalisation price tag for filling the massive crater in the bank's balance sheet is only the beginning. That money is for repairing the unprecedented damage caused by a €4.1bn explosion in bad debt – the biggest in Irish banking history – in the six months to the end of March. The hit was so large that it knocked the bank's core capital ratio down to 1.6%, far below the minimum 4%, forcing the Financial Regulator to bend its reserves rule to keep the bank in business.
But former chairman Sean FitzPatrick and his senior-executive cohort left time bombs all over Anglo's books, most prominently in the €17.7bn development-loan portfolio, before their ignominious exits at the turn of the year as scandals broke all around them.
The destruction wrought by their toxic loans to property developers since the bank last reported results late last year is difficult to fathom. Bad-debt charges went from €724m at the end of last September – at the time a surprisingly large figure – to an incredible €4.9bn aggregate sum today. Executive chairman Donal O'Connor, with the bank only since last June, expects that number to hit at least €7.5bn when all is said and done.
Not surprisingly, all the risk is on the downside. O'Connor told reporters last Friday that a further 10% fall in the value of land and development assets – those toxic developers' loans again – would add another €1.5bn to impairments.
Even after these junk loans are transferred to Nama, there could still be as much as €3.5bn in additional writedowns according to the bank's latest stress tests.
A look at the asset quality in Anglo's latest results reveals why. Out of a total loan book worth €72bn, nearly a third – or €23.6bn – are either past due or impaired. Incredibly just 54% of the loan book is regarded as "good quality".
With such a small proportion of good loans left, Anglo has little prospect of delivering the sort of pre-provision operating profits that can absorb future losses. This is a recipe for long-term capital erosion. In other words, the government's commitment to inject €4bn in capital reserves into the bank – more than the much larger AIB and Bank of Ireland required – may not be enough.
But it gets worse. Included in the specific charge for bad debts is €31m in directors' loans. Back in December it emerged that Anglo was carrying €129m in loans to board members, a figure partially concealed in official results through questionable loan warehousing by Fitzpatrick. Now the bank is taking a 24% hit on that special portfolio, meaning the taxpayer is absorbing losses on loans the lenders themselves are not paying back.
Add to that the €308m write-off on loans advanced to the so-called Maple 10 consortium of wealthy Anglo customers to buy a huge swathe of shares left on the market by billionaire Sean Quinn in summer 2008 when he was forced to unwind a €1.5bn loss-making position in the bank's stock.
Finance minister Brian Lenihan assured reporters in April that there were no more hidden landmines in Anglo's books.
But the known hazards are detonating all around him. It is clear that debt investors and institutional depositors are still very wary of the bank in the wake of the directors' loans scandals, the Maple 10 fiasco and the revelation that the bank and Irish Life & Permanent cooperated to inflate Anglo's deposit figures last year by €7.5bn. Anglo is finding it so hard to raise liquidity in the open market that it has tripled its reliance on ECB emergency funding to €23.5bn.
This is the reason the government is propping up the bank rather than winding it down. Anglo sources say as much as 75% of its funding – or €66bn in deposits and debt securities – would evaporate in a liquidation, leaving the government with a giant tab to pick up.
Under the circumstances, €4bn in capital life support and an embarrassing waiver on basic capital requirements may be a small price to pay – for now, at least.