Anglo Irish – How Contracts For Difference can hit the news

Anglo Irish bank is costing the Irish state billions of euros that they can barely afford.  Not only is Anglo-Irish affected by the unprecedented tightening of the Irish economy, it is a major cause of it.  Although Contracts-For-Difference are not to blame, they’ve suddenly come into the mix.

The Anglo Irish Bank was one of Ireland’s largest banks and it became a very big player in the property boom.  Its behaviour was so aggressive that it has been dubbed a “building society on crack”. Ireland’s richest man, the hotels and insurance tycoon Sean Quinn, decided that he would build up a stake in the company.  As the financial regulator would not have allowed a direct investment, particularly with company funds, a stake was built up by using contracts for difference, which was financed by a loan from Quinn’s insurance company.

This stake built up to 25% at just the time that Anglo Irish Bank got into trouble as a result of the credit crunch.  In the end it meant that Sean Quinn had to convert the stake to ordinary equity, and sell some of it on at a loss.

What was interesting was not that this was being done, but that no one noticed until the bank got into trouble.  If this stake had been built up using Anglo Irish’s ordinary equity it would have quickly been noticed and the regulator would have got involved.

There are two things to take away from this.  The first is that using CFDs does not skirt around legal rules, such as insider trading.  The second is that although this is not likely to lead anywhere, there are probably other scandals involving CFDs that could affect a major market like London or New York, and this could lead to regulation further on.

Last Updated: January 16th, 2010