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Monday 23 February 2009

10 Angry Men – Anglo’s “Golden Circle”

[Re-posting this - I wrote it in early 2009 and took it out when I thought the blog had gotten too political but I thought todays news warranted resurrecting it given the trouble the Quinn Group is now in and also to reminisce a little about how small these sums now seem to be in light of NAMA]

Before I start ranting let me just say that when I started digging into this I thought this was a clear case of conspiracy to commit fraud but that doesn’t seem to be the case now that I’ve really looked into it. I’m pissed off that along with every other taxpayer in the country I may have to cough up a couple of hundred Euro to clear the debt these clowns got us all into but to be honest I now doubt that there’s anything illegal in what we’ve learned about so far. However the issue regarding the write off of the unpaid part of the debt is a huge issue for me – I think we all need to demand that it is either paid in full by those involved or that they are forced into personal bankruptcy if they fail to clear it completely with no exceptions.

The basics of what happened is not quite as bad as the Anglo\Irish Life & Permanent scam which I still believe was nothing short of fraud but on general principle it seems clear to me that having a bank try to artificially bolster its share price on a massive scale by issuing loans for the purchase of its own stock is a very bad idea even if it is not illegal. Given what we now know about the fundamentals of Anglo’s financial status in the middle of last year it was certainly quite bad form on the part of Anglo to get the “Golden Circle” involved in this deal but they were all financially savvy, rich and successful business people so that side of things is between them and David Drumm, presumably they wont be inviting him over for dinner so often in future.

Anyway on to the meat of the thing. Here’s how we Irish taxpayers ended up with a €375m debt because a bunch of guys decided to help a friend out when his company was in danger of having its share price collapse.

The saga started with Sean Quinn. Quinn had dug himself a huge financial hole by July 2008 on the order of a Billion Euro or so by using long Contracts-for-Difference (CFD’s, something I will be ranting about at some point in the future) to help fund the acquisition of a significant chunk of Anglo. He had taken out CFD’s on something in the range of 15% of Anglo over the previous year and a half. Quinn’s gamble had gone badly pear shaped by mid 2008. He had acquired the CFD’s when Anglo averaged about €16 per share but by July 2008 they had dropped to €4 per share and he was now being forced to meet margin calls from his CFD provider (Credit Suisse). In order to meet those calls he would have to buy the shares from Credit Suisse and then pay them the difference (between the €4 buy price at the time and the average €16 of the CFD contracts). In order to cover those losses (estimated at between €600 and €900m at the time) he would have to offload about 10% of Anglo’s shares very quickly. Since Quinn had made his problems publicly well known in July 2008, Anglo knew that a very large block of its shares would end up being dumped on the market at a time when Anglo were the target of serious negative sentiment so there was an undeniable risk that Anglo’s share price would completely tank if Quinn tried to sell such a large block of shares all at once.

To be fair to Anglo that was a very big problem and it’s not at all surprising that they wanted to prevent that happening.

The idea was that they would find a bunch of “long standing clients” (now called “The Golden Circle” for reasons that escape me) who they would help buy up the 10% of Anglo’s shares Quinn needed to offload in order to prevent them simply hitting the market and sloshing around massively depressing the stock price. The “Golden Circle” would put up 25% of the stake (€100m or so of their money), Anglo would loan them the remaining 75% and the customers would then use the total to buy up the 10% of Anglo that Quinn was offloading. We are currently being told that their names can’t be disclosed because they are entitled to the confidentiality that covers banks dealings with their clients. While that maybe so, I think that the rest of us have some other rights that should trump that confidentiality and if not then we should have, like being able to recognize people who should not be trusted with significant amounts of our money for a start. More on that later.

So the 10 coughed up their cash and Anglo used the miracle of fractional reserve banking to turn some of that (probably only €30-€40m given their reserve ratio) into the €450m or so of shiny new money that was used to cover the 10% of Anglo that Quinn needed to unload. Not only had they got a way to buy the shares but they got some additional reserves too – score! Anyway the “new money” was used to buy shares, presumably on the open market, that might have come from anyone who was holding Anglo shares and wanted to sell them at the time but certainly most of that money eventually went to Sean Quinn as he disposed of his 10% share. He presumably then used it to clear some of the losses on his CFD contracts with Credit Suisse. I’m assuming all that happened more or less in the open, if it didn’t I suppose there may be problems with that but I’ve no reason to think that part of the whole exercise wasn’t pretty much above board.

Note all of this was then used to buy Anglo Shares at around €4 per share. The “Golden Circle” now had a 10% stake in Anglo and while the money used to buy those shares was money loaned out by Anglo that had just created it out of thin air, the “Golden Circle” seems to have parted with €100m of their real money in the process (I’m not 100% sure of that to be honest, if not it only makes the whole thing worse). Unfortunately for all concerned the plan made little difference and Anglo’s shares tanked so much that the government took over a 75% interest in November and it was eventually fully nationalized in January 2009. By the time that happened the “Golden Circle’s” 10% stake in Anglo had collapsed in value to something in the range of €20m. Since it has been nationalized the shares are now worthless so they’ve pretty much lost their own €100m stake outright. Apparently €83m of the total loan has been repaid at some stage but Anglo supposedly can’t (or wont) chase them for the other €370m because that is mostly underwritten by the now worthless shares. I’m curious about the limitations of that liability – surely the bank could (in theory) just go after its former saviours and see if it could force them to liquidate some other assets. It would be very rude, of course, but basically it seems that they really should be able to. If I defaulted on a mortgage the bank in question would come after me for the shortfall after repossessing and disposing of the house underwriting the loan, even if I’d originally taken out that loan after having been persuaded to by one of their aggressive mortgage specialists so why should this particularly large underwritten loan be so different? And if they can’t be chased then the rest of us should certainly be looking for those sort of loans in future.

The €83m of the €450m total loan that has been repaid raises its own questions. It’s odd as it means at least some of the 10 probably disposed of the shares they bought before they tanked completely in November. I suspect that it means that almost all of the shares in question were disposed of and that was all they were worth at the time. If so then it would mean that they were probably sold sometime in September when all the other shenanigans with IL&P and global financial meltdown had just started and it seems likely to me that those in Anglo who had thought up the plan had to have been fully aware that this disposal was going on. I wonder if the 10 had been given any indication at that time about how the remainder of the debt might be treated and if so whether our financial regulator was aware of the status of those loans especially since it is now a non trivial part of the toxic Anglo debt Irish taxpayers have taken over. I’m very curious to find out more about that as I can’t believe that any of the “Golden Circle” sold any of their shares without Anglo being aware. Still it is possible that no shares were sold and that some of the “Golden Circle” just wanted to clear the debt and get as far away as possible from the problematic aspects of the deal as they could. Either way there’s a lot that we have yet to find out about that part of the story and it’s unlikely to make anyone involved look good.

So here we are now as taxpayers furiously getting to work with the bailing buckets. Anglo has this €370m or so bad debt on their books now that is (hilariously) a toxic debt because the asset it is backed by is the bank itself and so is worthless. We poor Irish taxpayers have to cover this debt because the money that Anglo created in order to fund this scam was used (mostly) to pay Sean Quinn for his 10% of Anglo (in August\September or whenever) and he used it to get Credit Suisse off his back. Hopefully that whole exercise helped keep him solvent, because I’d be gutted now if he still ends up totally screwed while we owe money due to his personal financial carelessness, albeit indirectly.

So in an effort to help out their good buddy David Drumm 10 business men have lost quite a lot of their own money in a very short period of time but it is important to remember that they were, and probably still are, very rich people experienced in matters of high finance who took a risky bet that failed. They were in a position not to be stupid with their money but they made a very bad call and they lost (quite a bit of) money. That’s unfortunate but that’s capitalism and so I don’t think we should worry too much about that part, if they’d made a killing on the deal they wouldn’t be giving any of it to us after all either. And you can be sure that they thought they would make a killling when they agreed to the deal. The big problem is that this exercise has now left the cozy circle of Anglo and it’s “Golden Circle” and the rest of us now actually have to deal with the €375m of additional debt that, frankly, I never asked for. Despite the fact that they may be technically entitled to some privacy regarding the loan deal I think it is very important that we all know who the fuck they are so we can keep an eye on them in future and make sure they don’t get a chance to screw something else up so badly that we end up acquiring yet more debt that we didn’t ask for at some point. The whole exercise demonstrates just how woefully incapable they were of making sound financial decisions at a difficult time and their error means every last one of the rest of us has to eventually pay a couple of hundred Euro to cover their error and we deserve to know who it is that has taken that money from us.

Finally with regard to the recovery of the remaining €375m I heard some interesting stuff this morning regarding personal bankruptcy in Ireland. Apparently we have some quite archaic bankruptcy laws:

  • When a person becomes bankrupt all of their assets are transferred to an Official Assignee who then handles the disposal of those assets in order to clear as much of the debt as possible and those assets can include the family home.
  • They are restricted in terms of availing of any form of credit and specifically cannot get credit over €630 without declaring the fact thay they are bankrupt.
  • They cannot act as a director or participate in the management of a company.
  • If they are employed then their salary can be ‘attached’ in favour of the Official Assignee for use in clearing outstanding debts.
  • Any new assets (including property) acquired by the bankrupt after being declared bankrupt must be handed over to the Official Assignee.
  • Bankruptcy status (ie the above constraints) will not be discharged until 12 years has elapsed since the date of the bankruptcy order.

I think that we should offer all those who still have outstanding debts in Anglo (including the 11 above and the 15 others who have more than €500m outstanding each) the option of either coughing up the cash post haste or initiating the process of having them declared personally bankrupt. Seems only fair to me. I suspect that if faced with that as an alternative a lot of people would suddenly discover they actually could cover those debts.

Some background links:
The UK Sunday Times names 4 of the 10 members of the “Golden Circle”

Irish Independent – July 16 2008, Quinn says he will “convert” his 15% CFD stake into ordinary stock. Since he had a long stake CFD in Anglo the margin calls meant that he had to buy the stock outright but in order to cover the loss he would then incur he needed to sell two thirds of them in order to cover his losses. Hence the large volume of shares hitting the market that had Anglo worried.

Basically you put up a stake (anything from 1 to 30%) of the total value of a block of shares, agree to a financing charge to cover the ongoing funding of the difference between your stake and the total cost of the block of shares, and you bet either long (the shares will rise) or short (the shares will fall) and you then get the difference in value between the contract price and the current price as profit if the shares move in the direction you bet or have to cough up the difference if you’re wrong. If the difference exceeds a maximum amount the contract provider can make a margin call which basically forces you to buy the shares at the contract price. That’s what happened to Sean Quinn as far as I can tell.