Banking News Network: How Anglo Irish Bank killed itself.
Anglo Irish Bank was one if Ireland's profitable banks - when times were good. And it had a share price record that, like most European banks, went up much more than it went down. What better bet, then, than to, in effect, buy its own shares. It might have worked but for the global financial crisis....
Allied Irish customer Sean Quinn had built a solid business quarrying sand and gravel from his family's farm. Between the mid-1970s and the late 2000s, he turned it into a business with a turnover running well over 1,000 million euros and covering property, insurance and manufacturing.
The bank trusted him and his money - and the security he offered: shares in The Quinn Group. So it lent him money to buy shares in itself. But he did not buy shares, per se. He bought a derivative called a contract for difference. It's a form of margin trading.
Under a contract for difference (or CFD), an investor does not buy the share: in effect he rents it in exchange for a commission. In many countries, this is attractive because the investor avoids stamp duty. When the share goes up, he keeps the profit. When it goes down, he has to stump up the loss.
Allied Irish shares didn't just "go down" they fell to zero when the bank was nationalised. But Quinn's debt - estimated at in excess of 3,000 million euros, was transferred to the successor institution, the Irish Bank Resolution Corporation.
It later transpired that The Quinn Group was itself heavily indebted to Allied Irish: the old banker's adage that a good customer is one who owes a lot of money was writ large with an estimated 1,500 million euro debt. When Sean Quinn handed over the shares to the bank,
Later, the Quinn Group went into administration. Allied blamed Quinn. Quinn blamed Allied saying they mismanaged it after he surrendered the shareholdings.
Now Quinn has issued a petition for his own bankruptcy, saying there is no chance of ever repaying the debt that remains.
But regulators appear to be overlooking the role that Allied played in its own downfall: it lent money on a risky bet on its own shares and, together with the moneys owed by the Quinn Group, the total indebtedness appears to have ended up enough to sink the bank, regardless of other indebtedness for, despite its size in the Irish market, Allied Irish was not a large bank in international terms.
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