IRISH LIFE & Permanent’s placing of €7 billion on deposit with Anglo Irish Bank before the the bank’s financial year-end last September took a fresh and highly controversial twist yesterday as it emerged that the money had actually originated with Anglo Irish.
In a circular transaction, Anglo Irish made a loan of €7 billion to Irish Life & Permanent (IL&P) last September, which, in turn, was placed on deposit by ILP subsidiary Irish Life Investment Managers (ILIM) with Anglo Irish.
The mechanism used for the transaction, which was massive in terms of the Irish banking system, enabled Anglo Irish to categorise the deposit as a customer or corporate deposit rather than a short-term “inter-bank” deposit.
It allowed the bank to disguise the heavy loss of customer deposits during the course of September in its annual results presentation last December.
This is significant given that Anglo Irish’s survival had been in question in September following the collapse of US bank Lehman Brothers and the liquidity crisis.
The Financial Regulator and the Government-appointed directors at Anglo Irish are now investigating the mechanism used to move the large sums between the two institutions.
The investigation will centre on whether the transaction created a false picture in an effort to prop up Anglo Irish between September and December when there were concerns about its survival.
The practice of placing short-term deposits is known in business as a “bed and breakfast” transaction. They are often carried out to improve the financial position of an institution over a short period.
Deposit levels are a key measure of financial strength and are closely scrutinised by stock market investors and analysts, so having an additional €7 billion on a balance sheet was hugely beneficial to Anglo Irish, improving its cash position on the day its financial year ended.
This was the day the bank’s auditors, Ernst Young, took a snapshot of the company’s financial state for its annual report.
IL&P withdrew the money within a week to 10 days later. The firm said the deposits were “fully and appropriately accounted for” in its books and in its regular reports and returns to the regulator.
However, it is the method used for the transaction that has attracted the regulator’s attention.
The regulator encouraged what was known as “a green jersey agenda” among the banks, encouraging them to place inter-bank deposits with one another as the global liquidity crisis reached a crescendo in late September.
However, the regulator is claiming that it did not encourage the transaction to be conducted through the circuitous method in which it was carried out or treated as a corporate deposit by Anglo Irish. IL&P believes that the encouragement by the regulator and the Central Bank to lend between the banks gave it the blessing to conduct the transaction with Anglo Irish. However, the regulator is now concerned at the back-to-back nature of the €7 billion Anglo Irish-IL&P deal.
The ILIM deposit at September 30th comprised 8-10 per cent of Anglo Irish’s year-end deposits from customers and other banks. Being able to categorise the deposit as a customer deposit – rather than an inter-bank deposit – allowed Anglo Irish Bank to report to shareholders and the media in early December that it had actually increased its customer deposits to €51.5 billion from €49.6 billion a year earlier.
This is despite the fact that the bank admitted that it had lost €4 billion in deposits during the unprecedented financial turmoil during the month of September. Excluding the €7 billion from ILP, Anglo Irish’s loss of deposits could well actually have amounted to €11 billion over the month.
However, the short-term transaction with IL&P enabled the bank to disguise the heavy loss in customers’ deposits, which would have confirmed the widely held suspicion in the market – that Anglo Irish was close to collapse.
It would appear that Irish financial institutions were willing – at the urging of the regulator and the Central Bank – to assist one another at a time of unprecedented turmoil in banking by placing deposits with one another.
However, the Anglo Irish-IL&P transaction has added to the perception of a cosy relationships between the banks.
This cosiness has damaged Ireland’s reputation significantly after it emerged that Anglo Irish’s former chairman, Seán FitzPatrick, concealed loans of up to €122 million by temporarily moving them off the bank’s books to another domestic lender, Irish Nationwide Building Society, over eight years.
The movement of massive sums between Anglo Irish and IL&P over several weeks in September and October may have helped Anglo Irish’s funding position but the circular method used will not do Ireland’s reputation any good.