Friday, March 27, 2009

Anglo are in good company

A few weeks ago there was a minor furore over a group of investors who were given loans by Anglo Irish bank to buy shares in the bank. This group became known as The Golden Circle.

This relates back to July 2008 as Anglo Irish Bank's share price tumbled and Sean Quinn sought to offload his 25 percent share in the bank. 15 percent was converted to contracts for difference and he sought to sell the other 10 percent.

Anglo tried to entice a group of private investors to take part in a deal to try to buy this 10 percent of the bank. To do this Anglo provided nonrecourse loans to the investors— that is, loans that are secured only by the value of the assets being bought — worth up to 90 percent of the value of the shares. The remaining 10 percent came from the ten private investors who were lent over €450 million by the bank to buy shares in the bank.

As we now know the share collapsed and the bank was subsequently nationalised. A small portion of the €450 million was repaid but the rest was left outstanding. The collateral on the loan is worthless and it is now left to the State to carry the unpaid debt.

This drew furiorous reaction from many sectors, but maybe this wasn't such a bad deal after all. It now seems that the US is about to run a scheme that is uncannily similar in nature to support falling asset values in its economy. This time the assets are mortgage backed securities. Consider the following quote from this story in The New York Times:
To entice private investors like hedge funds and private equity firms to take part, the F.D.I.C. will provide nonrecourse loans — that is, loans that are secured only by the value of the mortgage assets being bought — worth up to 85 percent of the value of a portfolio of troubled assets.

The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money, according to industry officials. Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.

Should somebody tell Geithner and co how this worked out over here!

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