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Spare us the Anglo Porkies

Posted on: June 14th, 2009

IN Ireland, we are fed porkies by the barrowful. Like Taoiseach Brian Cowen endlessly repeating that “the fundamentals are sound”.

Or Tanaiste Mary Coughlan rabbiting on about how our economic crisis is due to “global factors”.

Or company chairmen insisting that their little basket case is “well-positioned for the recovery”.

All that is run-of-the-mill guff — although last weekend’s polls suggest we are beginning to rumble the oligarchs who rule us.

The masses have always been fair game for porkies.

Investors should not be so easy to fool — but that does not stop cute operators from trying.

Last week I revisited one of the biggest porkies in Irish corporate history.

Does anyone remember Anglo Irish Bank’s full-year figures for 2008?

They were released just six months ago. A lot has happened since.

The figures showed a profit of €784m. They painted a picture of a healthy bank in the hands of a group of wise and honest men.

The wise men of Anglo provided an initial €379m for bad debts. Then they set aside an extra €500m for more bad debts. What prudence.

And Anglo still made a profit of €784m.

Last December, on RTE’s Morning Ireland, one of Anglo’s wisest — David Drumm — told John Murray that the figures for bad debts were “ultra conservative”.

What a porkie.

Bad debts are a matter of judgement. Company bosses can estimate them at any figure they like, provided that they can squeak it past the audit committee, the auditors and the directors.

Obviously David managed to jump these three hurdles at Anglo. We do not know if anyone put up resistance to the bad loans figure, nor if anyone even suggested that the provision should be higher. Certainly no one resigned over it.

Of course the lower the provision, the bigger the profits. So bosses like to see low provisions. A higher provision for bad debts might have forced Anglo into losses. That would never have done. And it might mean smaller take-home pay for the big cheeses.

Fast forward to last week at the Oireachtas Committee on Finance and the Public Service.

Enter Donal O’Connor, today’s executive chairman of Anglo Irish Bank. Donal presented slides to explain the perilous state of Anglo at the end of March this year.

Everything suddenly looked so different.

The €784m profit was now a loss of €4.1bn. Quite a turnaround. Nearly five billion in six months!

Donal explained that things had changed a bit since last September.

One of his slides was staggering. It revealed that impaired loans (that is, dodgy debts by another name) had multiplied nearly 10 times in a six-month period. Total dodgy loans had rocketed from €2.5bn to €23bn.

In six months?

Yes, in six months.

That was a bit puzzling. The property market has been plunging for about two-and-a-half years all right, but it has not lost 90 per cent since September 2008.

Donal’s explanation was in the script.

Since September, there had been a “rapid deterioration in global economic conditions and outlook”. True.

There had been a “significant reduction in property values, particularly in Ireland”. True.

Plus a few other items of unmitigated rhubarb. True.

Donal was not presenting a false set of accounts. Far from it.

He was telling the awful truth.

Anglo was bust.

How come it went from boom to bust in just six months?

It didn’t.

It was bust in September.

The September accounts, presented by David Drumm, were a fantasy.

The figure for impairments — dodgy debts — in September was far from “prudent” or “conservative”, as Drumm had described it. It was a piece of wishful thinking. It was a mere appetiser for the main course.

What Donal and his fellow directors Alan Dukes and Frank Daly were doing at last Tuesday’s meeting was correcting the sins of the past. €4bn was probably far nearer the correct figure for Anglo’s losses. And €23.5bn was probably a far more accurate number for dodgy loans than September’s €2.5bn fairytale.

Dukes and Daly were not directors in September. So they bear no responsibility for the magic dust sprinkled on the autumn figures.

Donal was a director at the time. Indeed, as a former topdog at PwC accountants he might have challenged these rock-bottom estimates for “impaired loans”. But they passed the O’Connor test of impairment. Indeed, Donal was a member of the audit committee. So today he is obliged to stand over them.

Not an easy thing to do. Bad and all as the economy was during the six-month period, the bad news was not confined to that little window. Property had been in decline since February 2007.

The result of such low provisions in September was a bloated profit figure of €784m.

They were David Drumm’s figures. And Sean FitzPatrick’s figures. And Willie McAteer’s figures. And Donal O’Connor’s figures.

All Donal’s former comrades have been purged. Donal alone survived the FitzPatrick era.

Last week at the committee meeting, when I asked Donal how come he was the only survivor of the FitzPatrick regime, he insisted that he was there because the Minister for Finance, Brian Lenihan, had asked him.

Not a good reason. Lenihan has indeed proved skilful at removing bank chiefs. Some of his replacements have been wonderful, others woeful.

Donal is one of the woeful ones.

We know that at one time Donal was a friend of FitzPatrick and an admirer of David Drumm. Maybe the Drumm magic was still working when the September accounts came to the audit committee and the old board for approval.

The accounts were full of tricks. Based on the March accounts, one-third of the income came from interest due, but not paid. Unpaid rolled-over interest was rolled into profit. Some of this rolled-over interest will never be paid.

So the profits were massaged on the double.

September was a great month for porkies.

But porkies have overflowed into the summer ether. Last Tuesday, O’Connor was still waffling on about Anglo being a ” going concern”. Technically he is right , because it is covered by the government guarantee. That probably fireproofs it from liquidation.

But it is a zombie bank. There is little happening at Anglo’s St Stephen’s Green headquarters except an effort at taking deposits. Even with the government guarantee, Anglo is being forced to offer higher rates than the other banks. On Friday, Anglo was quoting double the rate for overnight money being offered by AIB. Anglo is desperate for funds. It is lending nothing.

According to Donal, Anglo Irish Bank is seeking a chief executive and preparing a business plan.

Fancy notions that Anglo could transform itself into a small business bank are bonkers.

More waffle from Donal that they are “derisking ” and “stabilising” the bank, “shrinking the balance sheet” and in time “achieving sustainable profitability” are code for closure. He says he wants to create “a viable, efficient and respected bank to provide the minister with a range of options”.

This is either another porkie or else a visit to cloud-cuckoo-land.

The only option open to the minister is closure. Whether that is done with an orderly wind-up or an early liquidation will be a political decision.

In the meantime, let us pray that we are treated to no more porkies.