2008 bailouts - biggest heist in history

[TonyGosling]

Anglo Irish bankers 'tricked' government into bailout
Two top executives at the stricken Anglo Irish Bank have been caught on tape allegedly admitting that the lender suckered the Irish government into a €7bn (£6bn) bail-out knowing that far more was needed.
http://www.telegraph.co.uk/finance/financialcrisis/10139214/Anglo-Iris h-bankers-tricked-government-into-bailout.html

By Alistair Osborne, Business Editor Telegraph = 3:20PM BST 24 Jun 2013

The country’s prime minister Enda Kenny yesterday said he understood the “rage” of the Irish people at the recorded talks between two former Anglo executives laughing and joking at the height of the bank’s funding crisis in September 2008.

The partial transcripts, published in the Irish Independent newspaper, appeared to show the bank’s then head of capital markets, John Bowe, admitting that Anglo had deliberately hoodwinked the government over the size of the bailout required.

Speaking to Peter Fitzgerald, Anglo’s former head of retail banking, Mr Bowe appears to describe how the bank cynically lured the government into a €7bn rescue in full knowledge that the sum would be nowhere near enough to save the lender. The thinking, he suggested, was that once Dublin had been “pulled in”, it would have no choice but to keep picking up the tab.

In the end, the Irish government was forced to pump €30bn into Anglo and roughly the same amount into Ireland’s two other cash-strapped banks, Bank of Ireland and Allied Irish Bank – rescues that brought the entire Irish economy to its knees.

On tape, Mr Fitzgerald asks Mr Bowe how he arrived at the €7bn figure. Referring to a nickname for the bank’s disgraced former chief executive David Drumm, Mr Bowe is heard saying: “Just as Drummer would say, ‘picked it out my arse’.”

Mr Bowe apparently goes on to suggest that Anglo’s management knew €7bn would never be enough. “Yeah, and that number is seven, but the reality is that actually we need more than that,” he is recorded saying. “But you know the strategy here is you pull them in, you get them to write a big cheque and they have to keep, they have to support their money, you know.”

Explaining the alleged entrapment strategy further, he adds: “If they saw the enormity of it up front, they might decide... they have a choice. You know what I mean? They might say the cost to the taxpayer is too high. But... em... if it doesn’t look big at the outset... if it looks big, big enough to be important, but not too big that it kind of spoils everything, then I think you have a chance.”

Mr Fitzgerald is heard replying: “Yeah. They’ve got skin in game and that is the key.”

On the same tapes, Mr Bowe is heard apparently mimicking officials at Ireland’s Central Bank reacting to an initial request for a loan, saying: “There was a bit of, ‘Jesus that’s a lot of dosh... Jesus f---ing hell.”

He also claims officials reacted by saying: “‘Jesus, you’re kind of asking us to play ducks and drakes with the regulations’ and we said: ‘Yeah’.”

Mr Bowe also relates how officials demanded that “whatever you get from the regulator sorts out the issue”, to which Mr Fitzgerald is heard replying: “Oh yeah, yeah... just makes it f---in’ happen.”

The talks are thought to have taken place within days of the collapse of Lehman Brothers, when Anglo was itself in meltdown with depositors pulling out money at the rate of €1bn a day, spooked by the bank’s exposure to Ireland’s crashing property market.

As the tapes provoked fury in Ireland yesterday, Michael McGrath, finance spokesman of Fianna Fail – which led the government at the time of the Irish bank bail-outs – said: “We need to get to the full truth about the way that bank was run and the level of knowledge the bank’s executives had about its true financial position in September 2008.”

Mr Kenny said: “I understand the rage and the anger of so many people who have been affected by all of this.” He added that the government would make a decision on a public inquiry into the collapse of Ireland’s banking system in “due course”.

Both the former Anglo executives denied any wrongdoing or any attempt to mislead the government, with Mr Bowe referring to “off-the-cuff comments” and “probably gallows humour”.

In a statement via his lawyer, Mr Fitzgerald said: “I am not nor have I ever been aware of a strategy or intention on the part of Anglo Irish Bank to mislead the authorities in relation to the forecasted funding position.”

Mr Bowe said the talks, during a “period of severe and unprecedented market dislocation”, came at a time when Anglo was seeking interim funding. “We envisaged the relevant period of time to be a number of months before the bank would be able to access sufficient alternative funding.”

The furore over the transcripts comes ahead of a high-profile court case into the collapse of the bank. Anglo’s former chief executive, Sean FitzPatrick, and two ex-directors, Pat Whelan and Willie McAteer, are awaiting trial on fraud charges.

The collapse of Ireland’s banking system forced the country into a eurozone bail-out. Anglo has since been renamed the Irish Bank Resolution Corporation and is in the process of being liquidated.

[TonyGosling]

Reality check: how much did the banking crisis cost taxpayers?

Banking reforms could cost the sector up to £7bn but how much did the bail-out cost taxpayers? In a new series fact-checking the biggest stories of the day Polly Curtis, with your help, investigates the true cost of the banking crisis. Email polly.curtis@guardian.co.uk or contact her on Twitter @pollycurtis

http://www.guardian.co.uk/politics/reality-check-with-polly-curtis/201 1/sep/12/reality-check-banking-bailout

9.28am: The Independent Banking Commission today sets out plans to avoid another banking crisis, recommending the ring-fencing of banks' retail arms from their investment operations and demanding that they have greater capital reserves to cushion them from any future shocks. Sir John Vickers, the report's author, suggests that it could cost the sector between £4bn and £7bn to implement. Vickers described the costs as a "pinprick" in the banks' overall assets of £6 trillion. But banks claim the real cost could be up to £10bn and that they could be forced to pass that on to customers. The reforms are designed to avoid another taxpayer bail-out of the banks. But the total cost of the bail-out to taxpayers is still disputed.
The question

How much did the banking crisis cost the UK taxpayer?

Last December, the National Audit Office published a second report into the costs of the bail-out. That report concluded:

The scale of the support currently provided to UK banks has fallen from a peak of £955bn to £512bn, but the amount of cash currently borrowed by the government to support banks has risen by £7bn [to a total of £124bn] since December 2009.

But the NAO also concluded that costs would continue for years to come. The economist Tim Congdon told the BBC today that the British state will make a profit out of its investment in the banks. We want to collate the best evidence available about the cost of the bail-out and what return the taxpayer has had so far to find the most up-to-date figure for the cost of the banking bail-out to the UK taxpayer.
The process

I will update this blog through the day as I find more evidence to answer our question, aiming to reach a conclusion by the end of the day. I plan to draw on the expertise from economists, interest groups, thinktanks and my Guardian colleagues but am also very keen to hear from people who are following this debate online who have specialist knowledge, or access to information, or an opinion about how to answer this question. You can get in touch below the line, email polly.curtis@guardian.co.uk or contact me on Twitter @pollycurtis.

12.17pm:
Evidence

All roads appear to lead back to the National Audit Office, which has been tasked with accounting for the bail-out and monitoring value for money.

My colleague Jill Treanor, the Guardian's deputy City editor and banking expert, says:


The NAO's figure of £850m was for the initial total estimate which included all the liquidity that the Bank of England poured into the system. Some of this has now been paid back. The taxpayer bought £45bn of shares in RBS and almost £20bn in Lloyds. But we are currently nursing big losses on these stakes.


But it transpires that the £850bn figure form 2009 has since been updated twice, most recently in a July report on the treasury's "financial stability interventions" by the end of the 2010-11 financial year in March. It sets out the total cash spent, guarantees made and fees received from the banks so far. We aim to add some tables in shortly setting out the full figures, but to summarise:

• Since 2007 the UK has committed to spending £1.162 trillion at various points on bailing out the banks. This figure has however fluctuated wildly during the period and by March 2011 it was £456.33bn. That total outstanding support was equivalent to 31% of GDP in March.

• The £456.33bn figure breaks down into £123.93bn in loan or share purchases, which required a cash injection from the government to the banks, and £332.4bn in guarantees and indemnities which haven't actually been paid, but were offered to shore up the failing bank system.

• Of the £123.93bn, the Royal Bank of Scotland received £45.80bn, Lloyds £20.54bn, Northern Rock a total of £22.99bn, Bradford and Bingley £8.55bn and a further £26.05bn went on "loans to support deposit".

• By March 2011 the Treasury had received £11.75bn in fees and interest on the £332.4bn guarantee schemes.

The July NAO report also reveals for the first time an estimation of the costs to government of borrowing the £124bn for the banking bail-out. In the year to March 2011 that is estimated to have been between £4bn and £5bn (as pointed out by @XXXL in the comments below). Up to now, that cost has been offset by the fees and interest paid but the NAO believe that that income is in fact due to fall, meaning the taxpayer will have to finance the banks' loans directly. The report says:

In future the government is likely to bear a net financing cost until the shares are sold and loans repaid.
Initial verdict

The Treasury has pledged to spend £1.2 trillion on the bail-out since the crisis began. But the real outlay has been much smaller. By March it was committed to spending £456.33bn: £123.93bn in loan or share purchases, which required an actual cash injection from the government to the banks, and £332.4bn in guarantees and liabilities. It costs taxpayers up to £5bn a year just to service the loan that the crisis incurred.

In cash terms the UK government has so far spent £123.93bn, but it has at various points since the crisis began been exposed to a sum 10 times larger.

The initial response from the Treasury to our question was that the bail-out would cost nothing, because the banks will pay the money back. But asked when that was likely to happen by they acknowledged that in the cases of Northern Rock and Bradford and Bingley this time span could be 20 years or longer as it depends on people paying off their mortgages.

There are outstanding questions from this data: what exactly have the banks paid back so far? And what are the losses from the stakes? I'm going to try to answer these next - can you help? You can get in touch below the line, email polly.curtis@guardian.co.uk or contact me on Twitter @pollycurtis.

I'm going to attempt to answer these points, but judging from the comments below the line and emails I'm receiving there is a lot of interest in making some kind of assessment of the knock-on effects of the financial crisis in the wider cost to the economy. Does anyone know if this has been attempted in any systematic way?

2.15pm:
What have the banks paid back so far?

According to the NAO report, overall the banks have paid £9.1bn in fees for the government's guarantees and indemnities that have peaked at nearly £1 trillion. The government has so far not had to pay out significantly on any of these liabilities.

RBS and Lloyds, which the government bought controlling stakes in, won't pay back until they are re-privatised. Other banks have paid interest on loans:

• Of the £21.59bn outstanding loan to Northern Rock, the company paid £0.58bn in interest in the last financial year.

• Of the £8.55bn outstanding to Bradford and Bingley,the taxpayer received £0.38bn in interest last year.

• Of the £26.05bn loaned to other non nationalised failing institutions, it received £0.52bn back.

The National Audit Office has previously highlighted that this is a poor rate of interest on the loans, which is less than the government pays (around 4.2%) for the debts it has incurred in the bail-out.
And what are the losses from the stakes?

The figures, as of March 2011, are pretty bad. They show the initial cost so far for the bail-out of each bank, and what that "asset" is now worth in the table below [source: NAO]. It shows more than £12.59bn lost from the value of the banks that the country owns since they were bought.



But if you consider what has happened since March to RBS and Lloyds' share price it is even worse.

The UK taxpayer bought 90.6bn shares in RBS at 50.53p a share – an outlay of around £45.8bn.
• By March this was worth 36.97bn
• Today one share in RBS is worth 21.25p leaving the government's stake valued at around £19bn. This is 41.5% reduction since the deal was done.

The UK taxpayer also bought 27.6bn Lloyds shares at the cost of 74.4p – an outlay of around £20.54bn.
• By March this was worth £16.04bn.
• Today one share in Lloyds is worth 30.99p leaving the government's stake valued at around £8.6bn. This is a 41.9% reduction since the deal was done.

So, not only has the government bailed the banks out to the tune of £123.93bn, and at its peak had liabilities for the banking crisis of £1.2 trillion, but the value of its stakes in the biggest banks has plummeted and the interest it is receiving on the loans is relatively small. The interest collected is smaller than that the government pays on its debts, taken out to refinance the banks.

It may seem unremittingly bleak, however the NAO concluded last December:

If the support measures had not been put in place, the scale of the economic and social costs if one or more major UK banks had collapsed would be so large as to be difficult to envision. The support provided to the banks was therefore justified, but the final cost to the taxpayer of the support would not be known for a number of years.

I've had an interesting email with some research about the wider economic costs of the banking crisis, any other thoughts on that do get in touch below the line, email polly.curtis@guardian.co.uk or contact me on Twitter @pollycurtis.

2.46pm: My colleagues on the Guardian's datablog have just posted this series of graphs with all the data from the above NAO report documenting the costs of the banking crisis.

2.58pm: Some very good comments below the line.

@showmaster says:


Nobody has any clue as to how much it has or will all cost in terms of cash sums. One figure bandied about a couple of years ago was £850bn and, depending on what one includes, it really could be anything. Far better to discuss it in terms of reduction in spending power by the "average" family, reduction in overall service levels and size of offshore trust funds held by coalition members.

@gorgeouscleo asks:


If they have assets of 6 trillion, why oh why do we have to wait until 2019 before the government of the day has to put these recommendations in place?

To which @shinsei responds:



£6 trillion is a large amount but it isn't actually money the banks have sitting around in their vaults doing nothing. It's also a gross figure. A lot of that £6 trillion will be houses that the banks "own" on which they are providing mortgages.

@GreenApril, who seems to have worked in the field, makes the point that to establish the true cost of the banking crisis, we need to go wider to include:


Economic losses associated with recession driven by financial crisis. This is obviously problematic, and if you're aiming to calculate only what is it that we are on the hook for, then perhaps it should be excluded. But at the end of the day, we are on the hook for paying more benefits to those who lost work, for the emergency stimulus packages, for the bailouts of collaterally damaged industries (see Midlands car industry for example). IF you accept this crisis is one stemming from within the financial sector for shenanigans, rather than good business practices, than I think it's valid to consider this as a cost, at least in part.

3.15pm: Professor Desmond, formerly dean of Social sciences at Sussex and treasury adviser now retired, attempted to analyse the wider costs to the economy of the banking crisis in a paper he submitted to the Independent Banking Commission. He emails suggesting the true economic cost of the banking crisis is between 11 and 13% of GDP:

The costs of the crisis are not simply the costs to the Treasury important those these may be. These are indeed only a pinprick compared to the costs for all of us due to the losses of output caused by the recession and in subsequent years caused by the financial crisis. Output [GDP ] is still some 4% below the previous peak in 2008, and during the years since the crisis [2008-2011] output would have grown by around 2.5% per annum but for the crisis. Output is scarcely growing at all during 2011 and will also grow well below its trend rate in the following years [2012 and 2013].

I have estimated taking into account the losses of output that would have occurred since 2008 without the financial crisis caused by the reckless lending of the banks, and projecting the losses forward until the end of 2012, that the total cost to the economy - all of us - is around 11 to 13% of GDP.