Sins of the Father (29 page)

Gerry McGinn, chief executive, Irish Nationwide, 20 May 2011.
⁹

On 1 July 2011 Irish Nationwide was taken over by Anglo, with the new merged entity named Irish Bank Resolution Corporation (IBRC). The chief executive of Anglo, Mick Aynsley, said that the name change was ‘of symbolic importance to all of us as we move on from the past.’
¹⁰
The Minister for Finance, Michael Noonan, echoed the sentiment, adding that the merger would ensure ‘a concentrated and vigorous work-out of the existing loans.’
¹¹
The purpose of IBRC was to fully dispose of the existing loan book over a ten-year period.
¹²

The 2010 bailout terms had included a call for ‘swift and decisive action’ to be taken ‘to resolve the position of Anglo Irish Bank and Irish Nationwide Building Society’ in a way that protected depositors and strengthened the banking system.’
¹³
The Irish State had already recapitalised Anglo with €29.3 billion and Irish Nationwide with €5.4 billion.
¹⁴
On top of this, it paid €16.8 billion via NAMA for loans from Anglo and Irish Nationwide.
¹⁵
This meant that the State had committed at least €51.5 billion to these two failed entities. It had taken funds from the pension reserve and State coffers to do so, as well as creating promissory notes to allow the banks to draw down funds from the Central Bank of Ireland. Now, two years after the crisis began, and with the transfer of private debt onto public shoulders all but complete, the time was now right for ‘swift and decisive action.’ And in the case of Anglo and Irish Nationwide, that action took the form of a new bank.

Anglo specialised in commercial real estate loans in Ireland, the UK and the United States. Its lending was underpinned not only by deposit ratios, but also by wholesale funding – the type of funding that dried up in the period leading up to, and after, the collapse of Lehman Brothers in 2008. The bank also held somewhere between 30 to 40 per cent market share of wealth management in Ireland.
¹⁶
The main business of Irish Nationwide was also commercial property, which accounted for up to 80 per cent of its loan book at the time of the crisis.
¹⁷

Despite the fact that commercial property was the crucial element in the collapse of these banks, mortgage-holders were routinely listed as the root cause of the problem. When Brian Lenihan said on RTÉ’s
Prime Time
in November 2010, ‘let’s be fair about it: we all partied,’ he was referring to wage-workers and home purchasers, and not to those tied up with the speculative and securitised land-banks, hotels and office blocks that destroyed Anglo, Irish Nationwide and indeed the Irish banking system.
¹⁸
The damage done by commercial property can be seen in NAMA, where the government concentrated the riskiest part of Irish bank portfolios. This was highlighted by the EU Commission in its decision on NAMA in February 2010, when it stated that ‘the assets targeted by the measure are all loans issued for the purchase, exploitation or development of land as well as loans either secured or guaranteed by land, and some of their associated commercial loans.’
¹⁹
There is no mention of a mortgage or residential crash. In the end, of the 230,000 permanently vacant housing units recorded in the 2011 State census, only 4,000 ended up in NAMA.
²⁰
Unless you bought a bottle plant in Ringsend or a power plant in London, chances are you are not one of those ‘who partied’.

Anglo and Irish Nationwide had about €3.8 billion in senior unsecured, unguaranteed bonds outstanding at the time of the merger. On 2 November 2011, the first of these bond repayments was due, a figure of $1 billion or around €720 million. As IBRC did not have sufficient funds to meet the payment, it drew upon the Central Bank of Ireland and the exceptional liquidity assistance (ELA) procedure to meet the call. The bank’s main sources of income were repayments from outstanding loans, its collection of government promissory notes, and the proceeds of the sale of Anglo’s US loan book for somewhere between $7-8 billion.
²¹
The
Irish Times
reported that the bond in question traded at 50 cent in the euro in early 2011, ‘amid investor fears that the new government would force losses on Anglo’s senior unguaranteed bonds after the February election.’
²²
These concerns were based on the public pronouncements of opposition politicians who were all but certain to form the new administration.

In the run-up to the 2011 election, Michael Noonan told the press that ‘once Anglo ceases to have a bank licence, burden-sharing by its senior bondholders would become a reality as it would no longer be considered capable of having a contagion effect.’
²³
On 9 February 2011, while on the campaign trail, Enda Kenny said that ‘junior, and senior, and non-guaranteed bondholders are going to have to pay the price.’
²⁴
‘We are not prepared to commit any further monies, beyond that which is already committed to in the IMF/EU deal,’ he said, ‘until I see that the bondholders … are prepared to accept their share of the debacle.’ This policy statement was echoed by Fine Gael frontbench spokesperson, Leo Varadkar, at a press conference held the following day. ‘Any bank coming to us looking for more money is going to have to show how they are going to impose losses on their junior bondholders, on their senior bondholders, and on other creditors before they come looking to us for any more money,’ he told the assembled media. He finished with the emphatic statement: ‘not another cent.’
²⁵

Tough words on the campaign trail morphed into acquiescence, however, as the Fine Gael/Labour coalition soon made it clear that it would continue the policy of no senior bondholder left behind. On 31 March, three weeks after the formation of the new government, Noonan ruled out burning senior bondholders in AIB and Bank of Ireland, and said that he would not be seeking any burden-sharing with regard to Anglo. ‘Burden-sharing is not the majority opinion’ within the ECB, he said, ‘so we’re not going to go there until we go with our European colleagues.’
²⁶
The same day the government announced a €24 billion recapitalisation of AIB, Bank of Ireland and Irish Life and Permanent. It had done so ‘without attempting to force senior bondholders to share the burden.’
²⁷

By the time of the bond repayments in late 2011, however, a number of campaigns were under way which focused on the nature of the promissory notes and the fiscal relationship between IBRC, the ECB and the Central Bank of Ireland. In Ballyhea, Co. Cork, a group of protesters had been meeting every Sunday since March 2011 to demonstrate against the bank bailout. They later joined up with an umbrella organisation called Debt Justice Action. It was comprised of various groups from different sections of Irish society and was a single-issue campaign with a sharp focus: namely, suspend the repayments on the promissory notes and negotiate a write-down of what was, in their eyes, an unjust and illegitimate debt. According to the campaign’s mission statement, ‘the debts run up by the former Anglo-Irish Bank and Irish Nationwide Building Society are not the responsibility of people living in Ireland – they are the responsibility of those who supported Anglo’s reckless lending.’
²⁸

Over the next eighteen months the group ran a number of information and media events, including an application with the office of the Guinness Book of World Records for most expensive bank bondholder bailout, per capita, in history. Their actions helped to keep the issue in the public eye, and the grounding in the issues by the campaigners made it all the more difficult for the government to explain away the promissory notes as if they were normal market-based bonds. The repayments simply could not be justified. Not only that, given their structure, something could be worked out at a European level, if the political will was there. The Irish government appeared somewhat conciliatory with regard to the issue, but focused its attention on reducing the interest repayments rather than striking a deal on the actual notes themselves.

Separate to the promissory notes lay the issue of the senior unguaranteed bonds. Among those who benefited from the 2 November 2011 pay-out was a distressed debt fund manager who bought into the bond when it was trading at around 70 cents on the dollar, and ‘a New York-based fund manager who bought in over the summer at around 75 or so’.
²⁹
The Taoiseach insisted that IBRC was making these payments at the behest of the ECB and that the government was ‘not going to scuttle this ship’ by overruling the demands of the ECB. The rating agency, Standard and Poor, chipped in, saying that although the issue of the remaining €2.6 billion of senior unsecured and unguaranteed bonds was a decision for the government, it remained ‘subject to ECB approval’.
³⁰
On 8 February 2012, one year after his burn the bondholders speech, Kenny told Bloomberg TV that ‘Ireland will not seek any write-down … we’ll pay our dues in full and on time.’
³¹
He added that while it was ‘difficult for our people and challenging for our country, we know we’re headed in the right direction.’ At the same time, under the terms of the bailout, Irish banks were in the process of deleveraging their loan books by €73 billion.
³²
Along with the government’s rigid adherence to austerity, this placed more downward pressure on the Irish economy.

Throughout the early months of 2012 the government kept to its plan to seek a settlement on the interest repayments of the promissory notes, rather than on the notes themselves or indeed the senior unguaranteed bonds. Minister Noonan said that the Troika had agreed to devise a plan to find a cheaper way of funding IBRC. He told the media in January that ‘the European Commission, European Central Bank and International Monetary Fund would seek a common policy to replace the promissory notes, or State IOUs, to cover the cost of the banks.’
³³

Later that month the head of the economics department in UCD, Dr Karl Whelan, queried the policy of repaying the promissory notes at all. ‘The liability is essentially a fiction’, he told the Dublin Economic Workshop conference. ‘Central banks can create money and they can just as easily destroy money; they don’t go bust.’
³⁴
He said that IBRC should be allowed to repay the Central Bank of Ireland slowly, and only when the Irish economy had recovered sufficiently to absorb the repayments.

The IBRC promissory notes were not market bonds in the sense of being open to investors and speculators. They were a ‘promise to pay’, an IOU, created by the Irish State for use by IBRC to raise funds from the ECB via the Central Bank of Ireland.
³⁵
In the words of Finance Minister Noonan, ‘the money which kept the IBRC where it is was provided by the European Central Bank … It is the principal creditor at one remove, although its agent in Ireland is the Central Bank of Ireland.’
³⁶
With the notes, the Irish State gave an undertaking to pay IBRC €30.6 billion, plus interest of €16.8 billion, in instalments over a twenty-year period, from 31 March 2011 to 31 March 2031.
³⁷
In turn, the IBRC, as a dead bank, would use these payments to pay its creditors – which at this stage consisted of, for the most part, the Central Bank of Ireland.

Effectively, one arm of the State (the Exchequer) was giving funds to a State bank (IBRC) in order to allow it make payments to another arm of the State (Central Bank of Ireland). The Emergency Liquidity Assistance that Anglo and Irish Nationwide had drawn down from the Central Bank had already been used to pay off bondholders and other creditors. The circularity of the promissory note payments at this stage within Irish State and ECB structures meant that a deal could be struck internally – that is, within the EU apparatus itself, with no burning of any private bondholders or causing a direct market credit event. ‘We have a technical possibility here that should be exploited openly and without fear,’ said Professor Brian Lucey of TCD at a meeting of the Oireachtas Joint Committee on Finance.
³⁸
‘If we can extend, write drown, delay – in some way reduce the impact of the promissory note on the Irish taxpayer – we can get ourselves back to health.’

The round-robin nature of the promissory notes was what made them a special case, separate from the issue of senior guaranteed and unguaranteed bonds. The Irish government’s solution was to take the notes that were at this stage an internal EU affair, and externalise them by making them sovereign – first by a bond issue in 2012, then, twelve months later, by the liquidation of IBRC. It was almost as if the Fine Gael/Labour coalition, having watched Fianna Fáil and the Green Party’s actions at the time of the 2008 Bank Guarantee, decided they needed to do something similar to give balance to this period in Irish history. And with the liquidation of IBRC and the conversion of the promissory notes into an external debt, that’s what they got to do.

On 29 March 2012 Minister Noonan used the NAMA Act to transfer €3.06 billion from the agency to IBRC, in lieu of the scheduled promissory note payment from the Department of Finance.
³⁹
Instead of the payment coming from central funds, it now came from a nominally independent statutory body which was, nonetheless, part of the State apparatus. Incredibly, the minister said that this arrangement meant that the Exchequer cash payment to IBRC due on 31 March was being ‘deferred’.
⁴⁰
It was not. One arm of the State was making the payment instead of another.