The scale of the bank's losses on treasury investments took a long time to be revealed, writes SIMON CARSWELL

IN THE early phase of the financial crisis in 2007 – before the days of heavy domestic property losses – the primary concern surrounding the Irish banks was how exposed they were to toxic investments linked to the high-risk US subprime mortgage market.

While most of the €12.7 billion in losses incurred by State-owned Anglo Irish Bank for the 15 months to the end of last year were due to horrific property lending, some €471 million of impairments relates to toxic treasury assets.

These were complex investments such as collateralised debt obligations (CDOs) and collateralised loan obligations linked to the US subprime loans that threatened many global investment banks at the peak of the crisis.

In December 2007, Anglo’s then chief executive David Drumm said the bank was “erring on the prudent side” by writing down half the value – amounting to €67 million – of the bank’s holdings in structured investment vehicles, another toxic product hurt by the credit crunch.

A year later, Drumm – in one of his last acts as chief executive – published preliminary results for the year to September 2008 in which the bank set aside €155 million for losses on treasury assets.

These results have since been widely discredited as the bank made provisions of €724 million to cover bad loans for the year. By the time the new management team had assessed the scale of the carnage at Anglo last March, this figure had surged to €14.4 billion.

Anglo’s level of provisions made under Drumm and his team has proven to be wholly inadequate and failed to acknowledge the large holes in the balance sheet.

Even a month after the nationalisation of Anglo in mid-January 2009, the bank’s new management team maintained the impairment charge on treasury assets at €155 million when they published the bank’s 2008 annual report.

Drumm told reporters in late November 2007 that he did not expect the credit crisis to ease until early 2008 when the major investment banks laid their 2007 audited accounts on the table for all to see their exact exposure to US subprime mortgage debt.

It took another two years and four months before the true scale of the losses on treasury assets were revealed by the new management at the nationalised bank.

Anglo had treasury assets of €8.1 billion at the end of September 2008 out of a total balance sheet of €101 billion. This fell to €7.9 billion out of a balance sheet of €85 billion at the end of 2009.

Some €6.2 billion of the treasury assets were rated AAA or AA at the end of last year. Another €316 million of the assets were graded at a BBB+ credit rating or weaker at December 2009, compared with €197 million rated at these levels 15 months earlier under Drumm and his team.

Members of the treasury department believed after the nationalisation of the bank that some financial investments still carried some value, despite obvious losses on other “available for-sale” assets.

On January 28th, 2009 – a fortnight after the bank’s nationalisation – Steve Lowe, a senior manager overseeing Anglo’s credit investments, acknowledged in an e-mail to the bank’s head of finance, Colin Golden, and head of finance reporting, Kevin Kelly, that some of the investments were “wiped out”.

Lowe, who has since left the bank, referred to a CDO summary issued by US investment bank JP Morgan, one of the most bearish on asset valuations.

“Whilst not suggesting for one moment that the 2006 and 2007 BBB subprime MBS are anything other than wiped out, the measures being taken are positive for the performance of higher grade bonds, and older (pre-2006 vintages),” he wrote in his e-mail.

“The sentiment contained in the summary also lends some weight to the hope that the price falls in CDO of ABS are largely behind us (excepting possible deal specific issues).”

A month later, Anglo’s executive chairman Donal O’Connor and his management team published the bank’s annual report for the year to September 2008, maintaining impairments on the treasury assets at €155 million, the level set under Drumm’s tenure.

Maarten van Eden, who joined Anglo as chief financial officer last January, said the bank’s treasury investments were “to some extent ill-chosen in the past”. He said he could not understand why a bank with such a large exposure to property on its own loan book would “double up” on its risk with assets linked to the US property market.

“If they think that they took a very severe view of their investments, I beg to differ,” he said.

Van Eden concedes that many overseas banks were caught out by such assets. “They thought they were high quality and liquid, and they turned out to be anything but,” he said. The purpose of holding treasury assets – to trade and manage liquidity at a bank – was lost due to the type of the investments made, he said. “They lost their ability to function and they became a burden,” he said.