Cash and collateral: IL&P, ILA, TSB - a question

http://www.irishtimes.com/newspaper/breaking/2009/0213/breaking12.html?via=rel


The explanation of what happened at IL&P is a puzzle to me as I do not have expertise in finance. I suspect I would be even more appalled if I did understand finance.

Specifically how does a bank provide collateral of exactly the same amount in cash as the funds provided ? On September 30th IL&P placed 4 billion on deposit overnight with Anglo through ILA in return for 4 billion placed with TSB as collateral. Huh? I really don't understand how this works.

Quote :

Deposits lodged with Anglo Irish Bank:

On 31st March 2008, at the request of Anglo, IL&P, through its subsidiary Irish Life Assurance (ILA), deposited €750 million overnight on receipt of €1 billion cash into Permanent TSB which was offered as collateral in respect of the deposit.

During September, at the request of Anglo, IL&P, through its subsidiary ILA, deposited a total of €3.45 billion with Anglo in 5 separate deposits [on dates from 26th September to the 29th September] accepting €3.45 billion of cash into Permanent TSB which was offered as collateral in respect of these deposits.

These transactions matured on the 2nd and 3rd October.

On the 29th September, IL&P was contacted by Anglo on three separate occasions requesting further advances which were declined as further collateral was unavailable from Anglo to support such deposits.

On 30th September, following the introduction of the Government Guarantee Scheme, and again at the request of Anglo, IL&P, through its subsidiary ILA, agreed to place a total of €4 billion on deposit overnight with Anglo on receipt of €4 billion into Permanent TSB which was offered as collateral in respect of these deposits. This transaction occurred in four tranches.


These transactions matured on the 1st October.

By coincidence the morning of the Bank Guarantee. This is Lenihan on the Guarantee and why it needed to be brought in that night:
(has anyone else noticed how he sounds as if he is about to vomit when he says the word "nationalise"?)

http://www.irishtimes.com/newspaper/breaking/2008/1002/breaking4.htm

Quote :

Defending the decision to introduce the emergency legislation guaranteeing bank deposits, Mr Lenihan said all of the Irish banks had "big problems" in relation to the shortening of time periods on outstanding loans.

The problem had reduced to a very short timescale by Monday evening and it required "urgent attention", he said. It was his as Minister for Finance to take "swift action" when a danger arises and that was what he had done, he said.

Thanks Cactus. I do get the political implications, not that we have a full picture there yet. I simply don't understand how, if you have cash of x billion you need cash of x billion. Were these accounts of different types in relation to end of year reporting? Did the use of subsidiaries affect the reporting of these transactions? How is cash collateral for cash? Was it like a promissory note? ............ Still puzzled

candide wrote:

http://www.irishtimes.com/newspaper/breaking/2009/0213/breaking12.html?via=rel


The explanation of what happened at IL&P is a puzzle to me as I do not have expertise in finance. I suspect I would be even more appalled if I did understand finance.

Specifically how does a bank provide collateral of exactly the same amount in cash as the funds provided ? On September 30th IL&P placed 4 billion on deposit overnight with Anglo through ILA in return for 4 billion placed with TSB as collateral. Huh? I really don't understand how this works.

Quote :

It was noted that the Financial Regulator had communicated to the Non Executive Directors of the Board in person last May that it was a policy objective of both the Central Bank and the Financial Regulator that Irish financial institutions would work to support each other in the face of an unprecedented threat to the stability of the Irish financial system arising from the international credit crisis.

However, the Board has expressed its strong disapproval of and disappointment with some of the specific measures used to support Anglo Irish Bank during 2008 and the fact that the Board itself was not informed of the specific manner in which such support had been afforded to Anglo Irish Bank.

If that had been the case with Anglo it might be a different story now. The scale of the deposit was obviously noted by a concerned Board yet the loan/deposit was approved without their consent.

There is a difference in helping each other out and helping each other out.

Not to mention ignoring some of the only functioning organs of democracy we have.

You might have seen this in the Indo on the Anglo deposits... there's also another article in there on why the Government are not going to send in the fraud squad ...

Some of your questions might be answered there - as for detailed technical ones on the banking system ....

Quote :

Financial statement fraud is a deliberate attempt to deceive users of these documents, especially investors.

http://www.independent.ie/opinion/analysis/two-anglo-transactions-were-deliberate-attempts-to-deceive-1638296.html

There are two elements to financial statement fraud -- intent and deception. Intentional misrepresentation of transactions is one way of committing financial statement fraud.

Two transactions in Anglo Irish Bank's financial statements have come to light, which I believe meet this definition.

Company directors are required to prepare accounts which give a "true and fair view". In Ireland we have a "principles-based" accounting system to ensure accounts are "true and fair". Under Irish company law, companies are required to comply with accounting standards. Not to do so is an offence.

One of the main principles of accounting is that transactions are accounted for in accordance with their commercial or economic substance. Companies should not deliberately enter into transactions whose purpose is to give a misleading or unrepresentative impression of the company's position. This is called window dressing. A common way of window dressing is two companies entering into circular transactions, in order to distort amounts in the financial statements of one or both companies.

candide wrote:

Thanks Cactus. I do get the political implications, not that we have a full picture there yet. I simply don't understand how, if you have cash of x billion you need cash of x billion. Were these accounts of different types in relation to end of year reporting? Did the use of subsidiaries affect the reporting of these transactions? How is cash collateral for cash? Was it like a promissory note? ............ Still puzzled

Quote :

In the second circular transaction, it seems that shortly before its September 2008 year end, Anglo Irish Bank put €4bn into Irish Life and Permanent (IL&P).

In turn, IL&P deposited the same money back with Anglo Irish Bank. This was put through a non-banking subsidiary of IL&P.

Presumably this was done to make it look as if the money came from customers rather than from another bank. Customer deposits are more highly regarded than inter-bank deposits. The circular transaction was unwound shortly after the year end.

The definition of financial statement fraud does not require that investors suffer a loss. But this is almost always the case.

http://www.independent.ie/opinion/analysis/two-anglo-transactions-were-deliberate-attempts-to-deceive-1638296.html

Thank you for this additional information Audi.

Isn't it interesting that the regulations already foresee these fraudulent transactions? They are clearly neither rare nor unusual.

candide wrote:

Thank you for this additional information Audi.

Isn't it interesting that the regulations already foresee these fraudulent transactions? They are clearly neither rare nor unusual.

I don't know exactly what you mean by that but I don't think the transaction was necessarily fraudulent but in this circumstance there are those questions over it.

The blessing of the Regulator was in the faith that the money was being transferred for liquidity purposes wasn't it?

If a bank is doing this to buy its own shares it would be a different story however but I don't think such a transaction in principle is necessarily fraudulent - its not within regulations at normal times, probably. How unheard of was it that the bank needed 4bn of liquidity though - it's high isn't it ?? But who knows, it could have been used to help cashflow issues.

'Intentional misrepresentation of transactions is one way of committing financial statement fraud.' accordint to your Independent reference.

While we do not yet know, and may not ever, what the intention was or whether deception was the purpose, I meant to point out that such possibilities are already there in the regulations, and consequently they are neither new nor unimagined.