On 9 September 2008 Anglo Irish Bank was worth €4.3bn and its finance director and chief risk officer, Willie McAteer, was on his way to New York to speak before a galaxy of US asset managers, hedge funds and mutual fund managers about the idea of investing in the bank, then Ireland's third-largest lender.
Hosting the conference was US investment bank Lehman Brothers. McAteer and his colleagues had experienced a chastening eight months before this important conference, with the company's share price lurching from €9.80 at the start of the year to €5.70 by the time of the New York conference, a crippling slump of 42%.
Lehman Brothers itself was being increasingly targeted by short-sellers as concern grew over its exposure to securities associated with the US subprime market. By 15 September, Lehman had been forced to file for bankruptcy, the largest such filing in financial history. But that was all still to come as McAteer addressed the delegates attending the Lehman event.
Anglo was lucky to be addressing such a conference, considering how small the bank had become due to the attrition in its share price. True global giants were also presenting to the conference, including HSBC plc. Also presenting was Freddie Mac, the US home loan company, which only two days previously had been placed in conservatorship – effectively nationalised.
Despite the implosion of Anglo's share price, the gathering storm relating to Lehman and the unprecedented stresses in global credit markets (which began for banks in August 2007), McAteer's presentation seemed to come from an entirely different planet.
The bank (later nationalised in January), McAteer's presentation claimed, was all about "old-fashioned banking". It was "relationship-based" with an "emphasis on cash flow" and "strong asset quality". In an extraordinary statement in light of subsequent events, the presentation said the bank had a "strong balance sheet with a significant high-quality liquidity portfolio" and it relied on a "professional, experienced, well-capitalised client base".
To counter negative sentiment, the bank pointed out, not for the first time, that it lent "against cash flows not asset values". It had no requirement for external equity capital and the presentation highlighted in bold letters "loan book remains strong".
This was the public face Anglo Irish bank was presenting to the investment world. The government had been presenting a similar face all summer, despite the legitimate questions being asked by investors about Anglo's business model and its explosive 15% growth in earnings per share every year.
In May, for instance, Brian Cowen said the Irish banks, including Anglo, were "very well-capitalised" and there was absolutely no need for government intervention. In fact the public discourse concerning Irish banking during the summer and later was all about Anglo not being the most pressured Irish bank.
The government and Anglo presented a neat and tidy narrative: the Irish banking system was in reasonably good condition and none of the problems evident in the balance sheets of US or UK lenders was present in the Irish banks. Anglo went further in trying to distance itself from the US banks, with McAteer's presentation including the following: "We are a traditional balance sheet lender – no transactional or bought loans".
However, the public veneer was not convincing many market participants, and documents which have since been released, to this newspaper and others, show that in private the banking system was in serious trouble.
The trouble went right back to March. In the week prior to Anglo Irish's half-year end, Bear Stearns had been sold to JP Morgan in a bid to save it from bankruptcy. Interest rates were slashed in response and Anglo's share price fell by more than 15% in one day. Despite the bank's bullish exterior posture and soothing words from the government, in private the bank was suffering from what it described itself as "significant customer deposit outflows". A less generous description of this would be a "mini-run".
In March the Irish financial system was in such a desperate search for funding that the Central Bank and Financial Regulator were talking during meetings about greater "mutual assistance" being needed among Irish banks. By September the funding problems had become worse and the shorter maturities being offered to Irish banks were also related to worries over the balance sheets of some of the banks, with their property-heavy loan books creaking at the seams.
The scale of the liquidity challenges were immense, but nobody at Anglo seemed to want to tell the outside world about this. Anglo's own internal documentation, seen by this newspaper, records the bank as saying: "We understand that close to €30bn in short-term fund left Irish banks in the two weeks to 30 September 2008".
McAteer's presentation about deposits on 9 September now seems curious. It boasted about the bank's ability to fund lending with what it called "permanent" funding and a new "back-to-basics" approach. The bank trumpeted an assertion that deposits were the "predominant part of overall funding profile".
But records of the bank show that "a wide variety of customers who had large deposits with Anglo Irish in July and August withdrew deposits". Those mentioned in the bank's own records were State Street, Delta Lloyd and AIB Investment Managers. Out of this deposit flow problem grew the controversial circular transactions agreed with Irish Life & Permanent.
Interestingly, Anglo's version of these events claims that there was official support for such transactions, not just because of Anglo, but for the "Irish banking sector in general".
By 29 September, not even these kind of transactions could save Irish banks, at least not as privately-owned and controlled entities. By 30 September taxpayers were awaking to the fact that they were now guaranteeing over €400bn of liabilities.
The scale and scope of the guarantee was truly extraordinary. The government, possibly reflecting the weakness that befits a smaller economy, provided a far more generous guarantee to the banks than other jurisdictions did. For example, it guaranteed various dated subordinated bonds, even though these bonds provide a higher return to their holders precisely because they are riskier than senior bonds.
The cost of the guarantee has also been queried by Patrick Honohan, now governor of the Central Bank. He has pointed out that alternatives to the guarantee could have been considered – for example, a guarantee of specific new bond issues. While never directly criticising the decision, Honohan said in a paper a few months ago that blanket guarantees were the most "accommodating" responses to a bank crisis and they usually added considerably to the fiscal costs of such crises.
But even more remarkable is that, even a year on and post-Nama, many of the issues thrown up by the guarantee have not been tackled. The leverage of the banks remains a serious problem; capital levels are entirely inadequate, according to observers; the widespread dependence on ECB funding has not been reduced and there still has been no restructuring or consolidation of the banking system itself. Then there is Anglo...
The guarantee one year on must be regarded as ultimately an act of stabilisation, but at some point true reform will be needed if a recovery is to get under way.
Just weeks before the guarantee, Anglo finance director Willie McAteer gave a presentation to investors at a conference sponsored by (ironically) a division of Lehman Brothers. Here's some of what he told them...
"Central approval of every loan"
"Strong asset quality"
"Strong balance sheet with a significant high-quality liquidity portfolio"
"Strong performance for the full year"
"Lending underwriting model:
"Strict focus on cash flows"
"All lending secured, cross-collateralised with personal recourse"
"Asset quality outlook:
"Loan book strong"
"Resilient and strong business model"
"Consistent delivery for shareholders
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