November 18, 2017

High & Low Finance: In Ireland, Dire Echoes of a Bailout Gone Awry

Now we learn that it was based in no small part on manipulative lies by venal bankers.

The leak of audiotapes of phone conversations between top officials of Anglo Irish Bank, which was by far the worst of a very bad lot, has stunned Ireland and damaged its relations with Germany.

It now appears that the bank lied to Irish officials about how much trouble it was in when the government, at the end of September 2008, guaranteed all the bank’s liabilities.

On one tape, John Bowe, Anglo Irish’s director of the treasury, conceded that he had no rational basis for telling the government that 7 billion euros was all it would take to rescue the bank.

“If they saw the enormity of it up front, they might decide, they might decide they have a choice,” he said to his colleagues in a tape disclosed by The Irish Independent. “They might say the cost to the taxpayer is too high.”

It was important for the problem to look “big enough to be important, but not too big that it kind of spoils everything.”

The problem certainly did “spoil everything” and continues to do so. The Anglo Irish bailout turned out to cost tens of billions of euros from Irish taxpayers and the European Union. Had Irish officials acted more wisely then, the country would still be in bad shape now, but the cost to the government would be much lower. There probably would have been less need for the continuing austerity that has, once again, caused Ireland to lapse into recession.

But by then, the basic problem had been created. Ireland had inflated a property bubble far greater than the American one, and losses were going to be immense when prices collapsed. Regulators were clueless, or worse, about what was actually happening. There seems to have been no one in the government who was truly familiar with the bank. Outside experts were called in, but it is not easy during a crisis to evaluate something from scratch.

At the time, however, it was easy to think that the situation was not as bad as it turned out to be. Irish real estate prices had not collapsed — that would come soon — and it seemed possible that the problems affecting Irish banks, particularly Anglo Irish, were temporary.

The word was liquidity. If that was the only problem a bank had — if there was a temporary difficulty in raising money to reassure depositors but the underlying loans were solid — then a bailout could work with little or no long-term cost. But if the real problem was one of solvency, a bailout risked throwing good money after bad.

Two weeks before the Irish bank guarantee, the financial world was shaken by the collapse of Lehman Brothers in the United States. It showed that large financial institutions were interconnected in ways that no one had really considered before and quickly led to a consensus that the American government had erred in not somehow keeping Lehman afloat.

We now know that Lehman was broke, but at the time it appeared to have ample capital. What was missing, one leading American regulator assured me at the time, was a requirement that the bank retain sufficient liquidity to deal with a panic.

In that atmosphere, it may be understandable that Irish officials fell for the tempting story that there was no real problem, just a bit of unfounded panic. But once they did, the power shifted to the bankers. The tapes show that the bankers were furious about government delays in releasing money once the guarantee was offered.

“You’re putting the government at risk with your delays,” said David Drumm, Anglo Irish’s chief executive, in discussing what he would say to officials at a meeting. Talk of due diligence was ridiculous. Ireland had told the world “we’re all solvent.” Now, it should simply write “a two or three billion check and get on with it.”

He described such a check as “very small.” Relative to the ultimate cost, he was right.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/07/05/business/in-ireland-dire-echoes-of-a-bailout-gone-wrong.html?partner=rss&emc=rss

Despite Accord, Spill Aftermath Shadows BP

The agreement, which included 14 guilty pleas and $4.5 billion in fines and other payments to be made over five years, almost certainly removes the possibility of further criminal charges.

But it still leaves BP vulnerable to larger liabilities, particularly fines for spills under the Clean Water Act. Depending on whether BP is found grossly negligent, a term which is open to considerable interpretation by courts, BP could be fined anywhere from $5 billion to $21 billion, or $1,100 to $4,300 per barrel spilled, analysts say. BP took a charge of $3.5 billion in 2010 for potential Clean Water Act claims.

“This is only an interim settlement,” said Stuart Joyner, an analyst at Investec in London. “Until we get the final settlement of civil claims,” he added, the blowout aftermath “is not going away for BP’s management or investors.”

Shares of the company closed at £416.60, or $660, in London on Friday, off from £425.40 on Thursday.

The civil issues are to be decided in a trial in New Orleans scheduled for late February. On Thursday, the U.S. attorney general, Eric H. Holder Jr., said, “We’re looking forward to the trial” in which “we intend to prove that BP was grossly negligent in causing the oil spill.”

During a conference call with analysts on Thursday, a feisty Brian Gilvray, BP’s chief financial officer, said that BP, too, was “comfortable” with a trial in Louisiana and that it had investors’ support. He also said that if found grossly negligent, BP would appeal, which he said would extend the process into 2014 or later.

“The feedback from our investors is that we have the support of our investors to actually fight this case unless we believe we can come up with a fair and reasonable settlement,” Mr. Gilvray said.

On Friday, Bernstein Research estimated the cost of the spill to BP at $41.9 billion to $59.4 billion, depending on the various legal outcomes. That amount comprises all fines and litigation costs, minus settlements BP has received from various parties involved in the incident.

There is also some risk that BP, because it has admitted to a range of felonies and negligence, may be barred from further contracting with the U.S. government. In a statement Thursday, the company said, “Under U.S. law, companies convicted of certain criminal acts can be debarred from contracting for the federal government.”

Mr. Gilvray said during the call that any move to ban BP would prompt it to rethink investing in the United States. The company said Thursday that it had “not been advised of the intention of any federal agency to suspend or debar the company in connection with the plea agreement.”

BP’s U.S. business is of great importance to the company. Its output of oil and natural gas in the country represented 28 percent of its global production, excluding Russia, in the third quarter, and about 20 percent of the profits in its key exploration and production unit.

BP says it has invested $52 billion in the United States over the past five years, more than in any other country, and employs 23,000 Americans.

The company’s North American center in a suburban Houston office park is a major hub of the company, housing the Americas exploration teams and a large computer center for crunching data on the difficult-to-fathom oil fields in the Gulf of Mexico and elsewhere.

The heart of its business is the Gulf of Mexico, where BP, according to the company, holds the most oil leases. BP’s operations in the gulf, which are among its most profitable, are still a long way from coming back from the spill. For instance, production from BP-operated Gulf of Mexico fields is averaging about 150,000 barrels a day of oil equivalent, according to a company spokesman, down about two-thirds from before the spill.

The slump is largely due to the drilling moratorium imposed after the Gulf of Mexico blowout, which prevented the routine maintenance drilling required to support production.

BP said it expected output in the Gulf of Mexico to be flat next year on the so-called core fields it has retained. Thereafter, it expected output to rise steadily.

Article source: http://www.nytimes.com/2012/11/17/business/global/despite-accord-spill-aftermath-shadows-bp.html?partner=rss&emc=rss