Anglo Irish Bank

On Thursday, the Finance Minister Brain Lenihan finally put an end to Anglo Irish PLC.

However, the market had decided months before that Anglo Irish was nothing more than trash as indicated by the above share price graph profile.

Loan Book

Between 1995 and 2005, Anglo Irish Bank increased its loan book from 1.4 billion euro to 34.4 billion, with 26 billion of this lending occurring in the five year period between 2000-2005.

This lending continued to grow at this astonishing rate, with up to 72 billion euro on their books in 2008, according to their annual report.

Moreover, the Irish Independent notes that " virtually all of Anglo's €72bn loan book was to builders and property developers". As a consequence there was was no diversifitcation of its loan book and thus its fate was inextricably linked with that of the commercial property market.

The huge level of growth in their lending book was mainly funded through whole sale funding sources. This source is perfectly suitable and appropriate as long as the market has confidence in the company.

The Crash

However, confidence in Anglo began to ebb once the property sector stopped its upward growth shift and the much heralded soft landing did not materialize.

Instead property values fell of a cliff, as pointed out by CBRE in its Irish commercial property market report stating that "the value of prime development sites in Dublin fell by at least 40% during 2008". Moreover, that in 2008 "less than €500 million invested domestically compared to some €1.9 billion in 2007"

Based on this crash, the market determined that it was very unlikely that Anglo Irish Bank clients would be able to pay back the huge sums which they had borrowed, as the calculations in relations to returns which developers had done in 2005 simply did not add up in this new economic climate.

However, Anglo could not cover the hole in their accounts by seeking new capital through the bond market and then begin the process of writing down the value of their loan book with this new capital because Anglo Irish bank had so much toxic and poisonous debt created by lending on commercial property, that the level of capital required to ensure their survival would be impossible to finance in the existing market.

Blame

Anglo should never of got into this scenario. Their fanatical lending on property lending should of being controlled, regulated and stopped by the relevant authorities. But with such intervention a fall of confidence in the property sector would have definitely occurred.

Finally, it is important to highlight that the collapse of Anglo Irish Bank was not caused by the Sean Fitzpatrick loan scandal. Yes, these loans are deeply embarrassing and are another example of “cosy Irish capitalism" as described by the FT, but they are peanuts when compared to Anglo total loan book of 72 billion euro.

Most of the blame lies, with the non existent government regualtion and stupid lending practices.