Monday, October 4, 2010

Burning Anglo

One of my favorite tunes of recent times is Doomsword's Heathen Assault. It is a song about the onslaught of the Danes through medieval England and features a very simple refrain that gets the crowd singing.
Burn! England to the ground
Burn! Jorvik to the ground
To my mind this is currently the best option for Anglo Irish and their bond holders as well. And unlike what various ministers might like to portray (Mary Hanafin I'm looking at you) it wouldn't be the end of the world or some sort of treason to suggest it as a course of action.

If the government pulled the plug on the blanket guarantee of Anglo the the company becomes insolvent. At some point the creditors would get together and insist a liquidator is appointed to wind up the company as a going concern. This leaves three groups looking for money back - depositors, senior debt holders and subordinated debt holders. Remember the equity holders have already been written off when the bank was nationalized. The first two have primary call on the assets of the bank and it is unlikely that these assets would cover the liabilities to them. This leaves nothing for the subordinated holders so they get burned.

This leaves the assets of the company to be divided between the seniors and depositors. I would imagine that the assets would be split pro-rata between the two groups. So if there were say €10B in deposits, €30B in bonds and only €20B in assets then the depositors would get 25% or €5B and the bond holders the remaining €15B with each bond getting effectively a 50% hair cut. On the deposit side again the €5B would be split pro-rata amongst the depositors. All deposits would be covered up to €100k by the old fashioned deposit guarantee, but beyond that the big depositors would also end up being burned as well.

To my mind, that seems the most straight forward solution to the Anglo problem. We've had enough dumping of good money after bad into this corpse. Of course it doesn't suit those who are invested in Anglo compared to the current policy, but to be honest I don't care. They invested in a flaky company, took their high rewards and so now should have to face some of the consequences. You can't have the tax payer on the hook for all of this.

No comments:

Post a Comment