A gradual series of facilities extended to Quinn left the family owing Anglo €2.8bn, writes SIMON CARSWELLFinance Correspondent

FORMER ANGLO Irish Bank chief David Drumm used to remark privately to colleagues that it was the only time he saw Anglo chairman Seán FitzPatrick left speechless.

In September 2007 – when Anglo was still enjoying the spoils of the property boom – the bank’s board felt it needed to check rumours that businessman Seán Quinn had secretly amassed a large, indirect stake in the bank.

The board agreed that Drumm and FitzPatrick should meet the Fermanagh man to address this.

At a meeting in the Ardboyne Hotel in Navan, Quinn informed them he held a large stake in Anglo through contracts for difference (CFDs), amounting to about three times the level the two bankers had thought.

FitzPatrick was gobsmacked, and together with Drumm he notified the rest of the board.

The bank – in close consultation with the Financial Regulator – set about trying to press Quinn to unwind his position, which it believed would destabilise the bank due to its exposure to a single, large investor at a time of growing financial volatility.

The true picture of Anglo’s difficulties in resolving this substantial exposure is emerging this week from internal bank records seen by The Irish Times.

At its peak, Quinn’s interest in Anglo covered 28.5 per cent of the bank’s shares. The stock declined rapidly as the financial crisis worsened, eventually wiping out Quinn’s investment after Anglo was nationalised in January 2009.

Anglo’s resolution of the Quinn issue from September 2007 led to his family unwinding their CFDs and buying a direct stake of almost 15 per cent in July 2008. A further 10 per cent held indirectly by Quinn was purchased by 10 Anglo customers in a deal managed and funded by the bank to protect the share price.

That private placing of shares, the so-called Maple transaction, is now the subject of investigations by the Office of the Director of Corporate Enforcement (ODCE) and the Garda Bureau of Fraud Investigation (GBFI) that have been ongoing since early last year.

Fine Gael’s finance spokesman Michael Noonan has criticised the slow pace of the investigations, prompting Minister for Enterprise Batt O’Keeffe to announce the Director of Corporate Enforcement, Paul Appleby, had referred at least 15 Anglo files to the GBFI, as he felt they were more able to deal with them.

It is now well known that the Financial Regulator was actively involved with Anglo in the bank’s efforts to reduce Quinn’s interest.

The bank worked intensively with the regulator to fix the issue.

Central Bank governor Patrick Honohan said in his report on the banking crisis last month that the unravelling of Quinn’s CFD investment in Anglo was “a major preoccupation” for the regulator in 2008 as the crisis deepened.

The Sunday Times newspaper has reported extensively on Anglo records showing that the bank had consulted the regulator on the unwinding of Quinn’s CFDs.

Yesterday, The Irish Times reported that in July 2008 the regulator told Anglo to deduct €169 million from its shareholder funds to account for a similar sum loaned to Quinn to buy the shares in Anglo – in essence signing off on the €169 million loan to Quinn.

The regulator would argue that the letter doesn’t suggest it approved the loan, but it sought that additional capital be set aside for solvency purposes in the prudential treatment of the loan.

The investigations, when they conclude, may reveal more about the background to this matter.

That loan is now part of the €2.8 billion the Quinn family owes the State-owned bank – a large part of which was drawn down for “working capital” to meet losses on the investment in the bank.

Quinn has said that he lost €3 billion on share investments. Most of this – estimated by the bank in its own internal files at €2.5 billion – was lost on Anglo.

Anglo internal records from around the time of the bank’s nationalisation highlight the crisis that enveloped the bank from September 2007 and July 2008 in trying to resolve the Quinn issue.

The regulator, Anglo and the Quinn Group have declined to comment on the series of events.

Matters came to a head in March 2008 when the so-called “St Patrick’s Day share massacre” led to Anglo’s stock collapsing 15 per cent in one day, following the failure of US bank Bear Stearns.

Over the previous months, speculation that Anglo had a substantial CFD investor led to international hedge funds seeing an opportunity to profit by “shorting” the stock – betting on the share price falling.

The bank at the time believed hedge funds could manipulate the share price downwards, putting pressure on Quinn and forcing him to sell out, which would drive the stock down further, earning them large profits.

As the bank’s share price fell, Quinn faced margin calls from nine CFD providers he used to build his interest in Anglo. He had put money down effectively as a deposit to borrow for the investment. As the share price fell, the CFD providers demanded more cash to cover the losses.

After the St Patrick’s Day share collapse, Anglo’s board spoke regularly and agreed to provide “working capital” to the Quinn Group as the share price dropped, according to the bank’s records.

In return, Quinn agreed to give the bank a personal guarantee and security over the family’s shares in his group, valued at €3.3 billion.

Over five days from March 14th 2008, Anglo provided a total of €367.5 million to Quinn under a new working capital facility.

At the end of March, after a difficult meeting with Drumm and FitzPatrick, Quinn agreed to close out or “place” 9.4 per cent of his position, and “go long” or take a direct stake of 14.9 per cent in Anglo. The remainder of the 28.5 per cent would remain in CFDs.

Investment bank Morgan Stanley was retained by Anglo to plan and execute the best way of offloading 10 per cent of the bank while not driving the share price down further and leading to depositors withdrawing funds, destabilising the bank even more.

They suggested placing the shares with a sovereign wealth fund, a state-controlled investment vehicle, in the Middle East. Dutch bank Rabobank was seen as a potential large investor, as Morgan Stanley believed Anglo could take over the bank’s Irish subsidiary, ACC, about which Rabobank had concerns. Neither option came to anything.

Anglo’s share price fell again in May 2008, and the bank received further working capital requests from Quinn. The bank approved four loans totalling €151 million, increasing his debts at the bank.

The stock declined further the next month and extra working capital facilities were needed. The bank board and the regulator were advised of this and nine instalments were drawn, totalling €232 million. This brought Anglo’s exposure to Quinn to €1.9 billion on June 30th.

Anglo files show that because two months had passed since Quinn’s agreement to sell down his stake, the regulator was contacting the bank regularly for a progress report and was anxious that the share placement succeed.

By the end of June 2008, Quinn required a facility of €200 million to prevent a breach of a loan covenant agreed with a syndicate of banks owed €1.3 billion by the Quinn Group. This was granted, bringing Quinn’s debt at Anglo to €2.1 billion.

At this stage, pressure was mounting on Anglo to place the 10 per cent stake. Anglo was also conscious that its loans to Quinn could not exceed €2.5 billion, as this would breach regulatory guidelines capping loans to one party at 25 per cent of a bank’s “own funds” (the bank’s shareholders’ funds).

Over the first two weeks of July 2008 Drumm approached 10 customers of the bank individually with an offer that they purchase 10 per cent of the bank with Anglo loans totalling €451 million.

The loans involved just 25 per cent recourse, meaning they were personally liable for his amount.

The remaining 75 per cent was secured on the value of the shares.

Internal e-mails reveal the bank’s efforts to assemble the investors as quickly as possible.

The bank has set aside €300 million to cover losses on the loans – meaning it doesn’t expect to be repaid this amount, since the banks’ shares are worthless.

The regulator has indicated that it was misled by the bank on the transactions – a key focus of the ongoing Anglo investigations.

Once the various share transactions involving Quinn and the 10 investors were completed, Anglo’s share price rose briefly before rapidly declining as the financial crisis intensified in September 2008, until the bank collapsed into State ownership four months later.

Declaring Interests: Lack of CFD requirements allowed undisclosed build-up of bank stake

CONTRACTS FOR difference (CFDs), an investment involving a type of share derivative, were hugely popular among investors during the recent boom in share purchases.

They allowed investors to speculate on stocks without owning the underlying shares and benefit from the full upside on a rising share price by putting down a deposit and borrowing the remainder. Access to leverage for CFDs was readily available.

Under transparency rules, Anglo Irish Bank would have had to disclose any major stake once it passed 3 per cent of voting rights.

There is no requirement forcing CFD holders to declare their interests. This allowed Seán Quinn to build up a 28.5 per cent in the bank without Anglo management becoming aware of it, or Quinn being required to disclose this.

Internal Anglo records dating from around January 2009 show Quinn used nine CFD providers to build his interest in Anglo as of 2005 – Cantor, Davys, IG Index, Bear Stearns, Credit Suisse, Merrill Lynch, Lehman Brothers, Dresdner and Morgan Stanley.

Most of his CFD positions – about 60 per cent – were taken in 2007, when Anglo’s share price peaked at more than €17 a share, valuing the bank at €13.3 billion.

Anglo, according to its records, estimated that Quinn had purchased his interest in the bank at an average level of €14 a share.

Each CFD provider maintained a so-called “margin” or cash sum ranging from about 20 per cent to 50 per cent of the stock’s value.

If the share price declined, Quinn had to lodge a sum with each provider to maintain the margin at the agreed level.

Anglo’s share price started to fall in June 2007 and declined heavily late that year as the financial crisis began to intensify. The bank first agreed to provide loans to Quinn in November and December 2007 under working capital facilities, in return for which Quinn agreed to sell property valued at about €500 million.