1. Michael Mackey and John RichardsLaurence Crowley Discussant - Joe Pasquariello

2. 2 The Story The Lessons- Timing/Level of Scheme Payouts - Reimbursement factors - International dimension

3. 3 Background Founded 1972 5 th largest privately owned bank 15-20,000 employees 80,000+ deposits/claims 400 branches, subsidiaries and affiliates 73 countries

4. 4 Balance Sheet Assets US$m Liabilities US$m Consolidated Balance Sheet December 31, 1989 23,00022,000 Latest Management Information pre- closure 17,000

5. 5 Group Structure Government of Abu Dhabi (Majority Shareholder) and others

6. 6 Causes of failure Losses in treasury operations and poor lending Frauds Ineffective regulation Bank of Choice for Criminals

7. 7 Crisis Response July 1991 worldwide co-ordinated closure Interim legal processes – urgent control of assets/records - investigation - rescue - restructure/sale Abu Dhabi US criminal charges

8. 8 Abu Dhabi Financial interest as majority shareholder and depositor Location of head office and records Potential cross claims- proprietary claim? - complicity in management/frauds? Ad hoc depositor funding Resolution

9. 9 United States Ring fenced Assets of US$1 billion seized Criminal indictment with increasing fines – US$40 billion!! Investigations pursued against related parties Plea Agreement

10. 10 1992 – Formal Liquidation All worldwide branches/subsidiaries/affiliates invited to join Pool

11. 11 Key features and agreements Pooling Abu Dhabi United States Asset recovery Claims processing and dividends

12. 12 Pooling Theory-Branches of legal entity (2 approaches) -legal entities within group (1 approach) Branch pooling Legal entity pooling Rationale-business inextricably mixed -costs of competing for assets -costs of fighting inter-entity claims -costs through economy of scales

13. 13 Asset Recovery Majority Shareholder contribution Loan recoveries Legal claims against fraudsters and others-Adham (US$165m) -Mahfouz (US$253m) - Pharaon (US$175m) - Khalil (US$1bn judgment)

14. 14 Claims Processing and Dividends Temporary procedures and formal liquidation hiatus Non standard pooling claim forms State of records and systems Global customer dealings Creditor apathy Conflicts between jurisdictions – the set off problem Anti-Money Laundering Regulations

15. 15 The lessons for deposit insurers

16. 16 Timing/Level of Scheme Payouts Streamline the liquidation and insurance claims process Consider paying small creditors in full Perils of rapid payment - the set off problem Establish risk line between liquidation and insurer

17. 17 The set off problem UK branch sterling deposit January 1992 Insurance compensation paid June 1992 German branch DM loan discovered January 1998 Net credit/(debt) UK set off results in no dividend payable £20,000 £15,000 £(25,000) £(5,000)

18. 18 Factors affecting reimbursement Currency of compensation and dividend Deposit claim and the liquidation claim differ Repayment sources different from deposits protected

19. 19 UK Scheme Example UK branch sterling deposit£20,000 Japan branch Yen deposit£10,000 ______________________________________________________________ Liquidation claim value£30,000 Insurance claim value£20,000 ______________________________________________________________ Insurance Compensation£15,000 (75% x £20,000) Liquidation dividend @ 40%£12,000 (40% x £30,000)

20. 20 Special Cases – Joint Account A&B£20,000 Liquidation dividend paid jointly to A&B A claims B doesn’t Alternative Scheme Rules “For the purposes of …. they shall be treated as” as having separate deposits of £10,000 each V Statutory split of account for all purposes

21. 21 Loopholes Scheme Rules – 75% of £20,000 deposit ___________________________________________________ Depositor - £100,000 Insurance claim - £15,000 ___________________________________________________ Depositor assigns 4 x £20,000 Insurance claim – 5 x £15,000 - £75,000

22. 22 International Dimension Judicial/officeholder co-operation Review effectiveness of regulation for cross border bank Lobby for harmonised global insolvency initiatives - UNCITRAL - European Insolvency Regulation - COMI Lobby for harmonised global anti-money laundering requirements? USA

23. 23 Michael Mackey Telephone:+1 416 775 7200 Email:mwmackey@deloitte.ca John Richards Telephone:+44 (0) 20 7429 3402 Email:jrichards@deloitte.co.uk Laurence Crowley Telephone:+44 (0) 20 7296 2000 Email:laurence.crowley@lovells.com Discussant - Joe Pasquariello Telephone:+1 416 597 4216 Email:jpasquariello@goodmans.ca