What Goes on Between Big Banks and Big Investors

Normally I don’t write about a the story from a single article in a newspaper, but today there is an article in the London Financial Times that is so outrageous I have to write about it. This article shows the epitome of the craziness going on in the saga of what rich banks and wealthy investors are doing to themselves, this country, and to the world.

Most Americans will never know about this story because it is taking place in Ireland. And that’s unfortunate!

Scylla v. Charybdis

These were my two favorite monsters from Greek literature.  These two sea monsters awaited Odysseus (Ulysses) on his way home from the the battle by the Greeks to retrieve beautiful Helen from her captors in Troy. Scylla was an enormous rock shoal near Sicily. Charybdis was a gigantic whirlpool that was so close to Scylla, ships could not get through the gap. Odysseus had to sail between these two sea monsters in order to get himself and his crew home to Ithaca.

Odysseus was caught “between a rock and a hard place”. He had to choose one. For the “good of the many” as Star Trek puts it, Homer’s story of the ten-year Odyssey back to Greece reveals that Odysseus chose Scylla, the rock. He risked losing a few of his crew, rather than take the “all or nothing” course and risk falling into Charybdis, the whirlpool, and destroying all of his twelve ships and his men.

Today taxpayers are the modern variants of the crew on the Odyssey, and we too are having a hard time surviving. As this Irish tale shows, the reason is that bankers and investors are locked in a destructive battle that threatens to take all of us down underwater.

You might think that situation arose because because corporations have become too big to fail. But I don’t think that is the whole story. The bigger story is that the owners of corporations have become too big to fail.

The original purpose of the small corporation was to insulate its owners’ income from liability if the corporate venture (say, building a new bridge or toll road in early America) failed. Now corporations are giants, employing millions of people (i.e., taxpayers). It is the corporation that needs to be saved, to be insulated, from the actions of its owners, not the other way around.

An Irish tale (a true one!)

Jamie Smyth, in the “Fall of ‘Mighty Quinn’ mirrors Irish collapse” traces the incestuous relationship between the richest man in Ireland and the Anglo Irish Bank. Quinn, worth six billion Euros at his peak, was the owner of The Quinn Group (ROI), a giant privately-owned registered corporation in Derrylin County Fermangh, Northern Ireland.

The Quinn Group owns all kinds of manufacturing businesses, financial services, along with hotels and commercial properties in many countries across Europe and the Middle East. Quinn Energy also owns the biggest electric power station ever built in Ireland.

The Anglo Irish Bank is an investment bank specializing in businesses and commercial properties. The bank developed a shaky reputation. Under The Anglo Irish Bank Corporation Act of 2009, the bank was nationalized. And in a move similar to what the FDIC did with so many American banks, the government of Ireland separated the Bank into two entities: one with loans that could be sold as assets, and the other one held its customer deposits.

The bank was next combined with a second shaky bank, and the new entity was given a new name to neutralize the stigma attached to the old names of both banks. On July 1, 2011, the Irish government officially merged the Anglo Irish Bank with the Irish Nationwide Building Society, and it renamed the integrated two-bank entity, the Anglo Irish Bank Corporation Ltd. This process wasn’t cheap for the Irish taxpayers!

By 2010, a year before the two banks were formally merged, the Irish government had invested Euro 12.3 billion into the Anglo Irish Bank. According to Smyth’s article in the Financial Times this merger cost Irish taxpayers an estimated total of twenty-five and thirty billion Euros.

The epic battle: big bank vs. big investor

Sean Quinn, the “Mighty Quinn,” this week finds himself in bankruptcy court in Belfast. Quinn’s worth has plunged from 6 billion Euros down to 11 thousand Euros in his bank accounts and $563 million (415 million Euros) in debts. Mr. Quinn claims that all he has left is a plot of land worth 35 thousand Euros he owns with his wife, and a 2004 Mercedes.

And the Anglo Irish Bank? It did even worse; it claims Mr Quinn owes it over two billion Euros that it loaned him during the 2000s! That 2 billion+ Euro debt, of course will be more money out of Irish taxpayers’ pockets. Anglo is now suing the Quinn Group in court. The Quinn Group, however, has been largely shattered by Quinn’s debts to the Bank, and it is suing the Bank.

How did this happen? Reading between the lines of Jamie Smyth’s article, it appears that Mr. Quinn became pissed off at his bank when the Bank called in the 2 billion+ Euro loans it had made to him.  Whatever the reason, Quinn seemed to desire getting leverage over his bank. Long after he had transferred title to the corporation he built and still headed, to his five children in 2002, Quinn began gambling away their futures by taking out loans and buying more and more control over the Bank’s shares. Quinn started betting against the Bank in 2007. And Quinn did this in secret!

In Ireland there’s an anonymous form of investment called a CFD or contract for difference. This financial derivative allows a large investor to bet on price movements of a company without buying any shares of the company. In return for betting a mere 750 million Euros, which Sean Quinn borrowed from his own corporation, the Quinn Group, the “Mighty Quinn” ultimately obtained control over 30 percent of Anglo Irish Bank shares. And that was just the beginning.

Deep, deep into the mire

Quinn Group was in trouble financially during the 2000s; and by 2010 the corporation went into receivership. Quinn Group had to sell off its Insurance unit then. And of course, the Anglo Irish Bank too, like all big banks after the 2008 crisis was falling into financial difficulty as too. Its share price was dropping. At that point the Bank, kept Quinn afloat. The Bank loaned the Quinn Group another  750 million Euros, the sum Quinn took out of the Group to anonymously gain control of thirty per cent of the Bank’s own shares!

By then, both corporations, in my opinion, were caught fast in the whirlpool. Like the poem about “the Chatelaine” (i.e., housewife) and “the Beauty” who battle each other as they go up the stairs in a tower, Quinn and his bank too were locked in a do or die battle. Worse yet, Quinn’s family was sucked in too because in 2002 Quinn had transferred ownership of the Quinn Group to his children.

To sum up: the “Mighty Quinn” transferred ownership to his children of a company he ran or would soon run into debt. Then he used a loan from his children’s company to “short” shares in his bank on the margin (i.e., with very little cash involved). Owning a derivative that could profit from a decline in the value of a huge amount of shares, i.e., thirty percent of the bank’s shares, did Quinn tell the bank he would sell the 30% derivative just as the bank’s shares were tanking badly? Is that why The Anglo Irish bank loaned the Quinn’s children’s’ company the money, the 750 million Euros, to pay off Quinn’s bet against it? Or didn’t the Bank know about that anonymous CFD bet?

And wouldn’t you think Mr. Quinn’s five children would be rather angry with their father? No? After all, the bank is suing their company for over 2 billion Euros it loaned to their father. But I guess not! Read on:

The Quinn family itself is suing Anglo. They claim the bank advanced Euro 2.34 billion in loans to fund the CFD margin calls [of their father] to support its [the Anglo Irish Bank’s] share price. They allege that Anglo’s former chief executive David Drumm and chairman Sean Fitzpatrick advanced the loans to the Quinn Group in the full knowledge the money was being used to meet the CFD margin calls. They say the loans are “tainted with illegality” because they [the bankers] had an objective of market manipulation and therefore are not enforceable.

And dad, himself? Sean Quinn? What’s become of him?

“My employment has effectively terminated [without compensation],” said Mr. Quinn in the debtor’s petition he filed to the High Court in Belfast.

What a mess! Hopefully the courts can figure out who paid whom and when for what. Meanwhile, as in the story of “the Chatelaine” (i.e., housewife) and “the Beauty” in the tower,  Sean Quinn and his bank have battled it out until their resulting unmasking of each other in court shows that “one face belonged to both” – that’s the face of greed, power, and fear at the top.

The bottom line

Shareholders have given control over corporations to managers who simply give themselves huge bonuses, even when the company has done badly. Consumers, have gotten nowhere with the idea of a consumer agency to protect them from corporate shenanigans. And unions are being busted up regularly. So far taxpayers and the government have largely lost the battle to have a say over what corporations do. And then you have the controlling owners of the corporations and the banks locked in a game of “chicken” with each other.

What group that has an economic interest in corporations is really responsible for controlling what goes on with them? As far as I can see, none! Yet corporations make products and services we all want, and they deeply affect the lives of their employees. Today, a US Congressman has introduced a bill to curb corporate financial involvement in our elections. But I think that is not enough. I think we need to protect the corporation itself and the people who work for it and buy from it, and no longer protect the owners and managers of those corporations from personal and financial liability when they do damage to their own corporations!

Follow Nancy Humphreys on Twitter @brucenomics