“It’s hard to make a man understand something when his livelihood depends on him not understanding it” : Dukes and Aynsley’s recommendations for Anglo’s future.

Page 1 of the Anglo half year report issued today has a table of contents. Page 2 has some contact information for Anglo. And it was when I got to page 3 today that I started to suspect that we were in for a grand display of spin. For the first item and graph on page 3 shows the commercial property capital values graphs for Ireland, the UK and the US. They chose the IPD index for Ireland which had a 5% drop in H2, 2010 as opposed to the Jones Lang Lasalle graph which would have shown a 6.7% decline – a small difference to be sure but representative of the approach taken many times in the report. The second graph on page 3 shows the spread between 10-year government bonds (Ireland versus Germany) and despite the report being signed yesterday the 31^st August, 2010, no mention is made of recent record spreads and the supposed cause for the record high yield spreads  : Anglo!

Anglo’s new-ish Chairman, Alan Dukes who took over from Donal O’Connor on 14^th June, 2010 is first off to bat for Anglo from page 4. His second and third sentences “I am acutely aware of the Board’s mandate to run the Bank in the public interest and in a manner that minimises the cost to the taxpayer. Everything that we do is with that objective in mind and it is the overriding priority of all parties involved.” blithely ignores the deliberate non-co-operation of Anglo with the Office of Corporate Enforcement and Anglo’s attempts to stop NAMA taking over badly-needed performing loans – both events taking place or continuing after Mr Dukes took up his post.

Next up we have the loss for the six months itself – €8.2bn. We don’t know if that is an Irish record. Anglo’s report in 2009 was for 15 months – the six months from Oct 2008 – March 2009 produced a loss of €4.1bn and the subsequent nine months threw up a loss of €8.6bn to give an overall loss for the 15 months of €12.7bn – but we can guess that €8.2bn is a record. However if we examine the level of provision made against both NAMA and non-NAMA loans, then it wouldn’t be unreasonable to add another €5-10bn to that loss figure (see below). Truly frightening.

We are then treated to some spiel on the preferred restructuring option for Anglo and surprise, surprise the €250,000 chairman (who to be fair apparently volunteered a €100,000 reduction to bring his annual fees to €150,000) and the reputedly-paid €0.5m CEO argue for a perpetuation of Anglo through a Newbank (capital “N” because that’s what the new bank has been called in the recent submission to the EU for restructuring). Now the restructuring finances are commercially confidential, dontchaknow but it seems that they seek to justify their Newbank split on a number of grounds including on the basis that “it offers the prospect of participation in the reconstruction of the banking sector while safeguarding the stability of the Irish financial system and it provides credible options for the Government to exit by way of a future sale with a potential return for the taxpayer” – the financial impact of these features wouldn’t be commercially confidential and I would dearly love to see the workings.

Next the Chairman’s report tells us that the Minister for Finance upped the promissory note last week but later on we learn that he gave a commitment to Anglo on 30^th June 2010 to shore up its capital. That letter on June 30^th, 2010 was of course unlawful absent EU approval of additional State-aid. However we wouldn’t expect anything as vulgar as that little peccadillo to be highlighted in a report that constantly refers to the “Shareholder” ie the State as if it were a deity.

The Chairman does tell us that with respect to the accounts “it is important to remember that impairment provisions under IFRS are not intended to predict loan discounts on transfer, which are calculated on a different basis”. Fair enough, compliance with IFRS 9 on loan impairments is not mandatory until 2013 but Anglo fails to include any up to date estimate of overall losses. And at this stage, Anglo is not fooling anyone. We’re like the patient with some new exotic but fatal disease and we’ve researched the disease to the extent that we know about as much as the doctors – in other words, if Anglo won’t use its expertise and experience to project its future loan losses, there’s no shortage of people who will do just that.

The CEO’s review is remarkable for completely omitting the shambles that was the first Anglo restructuring plan submitted to the EU in November 2009 during which time, the CEO Mike Aynsley was in charge. Mr Aynsley tells us that commercial property values have dropped by “more than 50%” – indeed they have – almost 58% to the end of June 2010 according to the IPD index with falls accelerating in the second quarter. He tells us that the UK commercial has improved  “having risen by 15% from the mid 2009 nadir” – that statement is spot-on accurate but take a look at the IPD press release which confirms the 15%, it goes onto say “UK commercial property capital appreciation has eased to its slowest quarterly growth since Q3 last year” and the outlook in the near term in the UK is not good – the recent EU bank stress test base scenario was that commercial prices in the UK would grow by 2% in the 12 months of 2010. However such qualification would only interfere with the Anglo optimism. At least Mr Aynsley does confirm “on 30 June 2010 the Minister wrote to the Chairman to confirm his commitment to increase the principal amount of the promissory note to ensure the Bank had sufficient capital to continue to meet its regulatory capital requirements.” though again it would have been vulgar to point out that the Minister did give the commitment without EU sanction. He concludes with an overview of the options for Anglo’s future and he argues for the Newbank split – well, he would, wouldn’t he?

There is an interesting footnote to the CEO’s review with respect to “legacy” matters and “as part of the review the Bank will have to examine a substantial amount of historical customer loan documentation before it can reliably estimate the amount of any liability that arises to customers who may have been adversely affected.” So some Anglo customers might be getting demands for under-calculated interest. The review deals with the period “period prior to July 2004” so there might be some shocks in store. UPDATE. 1st September, 2009. Simon Carswell at the Irish Times interprets this “legacy”matter to mean that Anglo customers may have been overcharged and may be due a refund and indeed a further aticle by Simon Carswell today seems to confirm that it is Anglo who might face a bill of €50m for overcharging interest on loans.

Overall though, the CEO and Chairman duo put in a Trojan effort in portraying Anglo in its best light and to be fair to them they are in their posts for a relatively short time trying to sort out a catastrophe that they had no hand in creating. But they are hardly the most independent participants in the Anglo saga and so we certainly shouldn’t rely on their recommendations for Anglo’s future. As Upton Sinclair once said “It’s hard to make a man understand something when his livelihood depends on him not understanding it”