Simon Carswell, Finance Correspondent, assesses decisions taken by the Government in its attempts to save Anglo Irish Bank

THE DECISION to effectively nationalise Anglo Irish Bank in all but name was curious given how adverse the Government was to taking control of the bank when the lender faced the greatest threat to its survival in September.

The collapse of the bank's shares on September 29th prompted the Government to consider briefly nationalising Anglo on that long night of emergency planning. Instead, it chose to protect all the banks with a blanket €440 billion insurance policy.

The dramatic resignations of chairman Seán FitzPatrick and chief executive David Drumm at Anglo Irish Bank on December 18th and 19th forced the Government to bring forward its recapitalisation plans for the three major banks and it had to move quickly to take Anglo under its wing.

The Government will inject €1.5 billion, using money from the National Pension Reserve Fund, in return for preference shares and 75 per cent control.

The only financial benefits to the State for taking over the weakest bank in the system is that the taxpayer will be paid a 10 per cent annual dividend and possibly a return of 25 per cent, or €375 million, if Anglo does not repay the €1.5 billion within five years.

Shareholders will be asked to approve the State capital injection at an extraordinary general meeting next Friday.

Announcing the cash injection on Sunday, December 21st, Minister for Finance Brian Lenihan said the State's investment was "the last step short of nationalisation".

"Were we to go the nationalisation route, we would be affirming that we have no confidence in the bank as a bank to survive," he said.

He believed the bank was "capable of paying shareholders some value over and above the remuneration that we are insisting for our preference share".

These shareholders include Seán Quinn and his family, owners of Quinn Healthcare and Quinn Direct, two of the State's most important businesses. Mr Quinn said on Wednesday that despite regretting his investment in Anglo, the family's stake in the bank remained at 15 per cent.

It is unlikely that the Government would have decided to take control of Anglo so quickly - and assume the risks taken by the most aggressive lender in the Irish property market - had there not been the dramatic upheaval at management level within the bank arising from the hidden directors' loans.

By mid-December, Anglo's languishing share price meant that if the State was to make any meaningful life-saving cash injection into Anglo, it would have to take control to protect its investment.

On the day of the guarantee, Anglo was valued at €2.9 billion, based on €3.84 a share. By the time the State agreed to inject €1.5 billion, the bank's value had fallen 90 per cent to €266 million or just 35 cents a share.

Mr Lenihan hinted in an interview on Tuesday the reason why the Government took control of Anglo. He said that the bank's deposits were again threatened in the days before Christmas following the unexpected resignations and the controversy involving secret loans of €87 million to Mr FitzPatrick.

He said the "misbehaviour by management at Anglo Irish Bank meant that, even with a State guarantee, there was uncertainty about the viability of the bank". This had forced the State to become a 75 per cent shareholder in Anglo to safeguard the deposits, he said.

Alex Potter, an analyst at London bank Collins Stewart, has said that following the Anglo deal, "it was by no means obvious that it would stabilise the institution".

He said the bank had been "implicitly underwritten" by the taxpayer but that the taxpayer had failed to get "any potential upside" as the Government had not taken any ordinary shares that could be sold at a later date if they rose.

Mr Potter said the bank guarantee was "not watertight" because the Government could only afford to cover the cost of one covered institution defaulting on its debts.

"It could afford it, but it is a massive debt burden for the Irish Government at a time when the debt burden across Europe is going through the roof because of the huge public spending," he said.

Mr Potter said a deeply discounted rights issue of new shares in Anglo, underwritten by the Government, would have been a better option, ultimately leaving the taxpayer as the owner of the bank.

"The taxpayer is taking an awful lot of risk with not much return," he added. "The deal favours shareholders above taxpayers more than most bank bailouts in Europe. It's the wrong form of bailout and it's not enough."

The €1.5 billion is an initial investment in Anglo and the Government has said it will invest more to ensure the bank's survival. It is estimated that the bank needs €2.5 billion to €3 billion.

Oliver Gilvarry, head of research at Dolmen stockbrokers, said the State's 10 per cent annual return on the Anglo investment compared unfavourably with the 4.07 per cent interest rate the Government is paying on the €6 billion bond it raised yesterday.

He said the Government could be earning more for its investment in Anglo. "It is not as rich as what it could have been."

The ranks of Anglo's senior management have been cleared out and the new chairman Donal O'Connor is moving quickly to appoint three new executive directors (including a new chief executive in the coming days) and three non-executive directors.

Finance director and chief risk officer Willie McAteer, the second most senior executive on the bank's management team, stepped down on Wednesday, becoming the fourth member of the bank's board to resign.

The Government has made it clear that it does not intend to run down Anglo's loan book, so the State is, in essence, bankrolling some of the builders that are so closely aligned to Fianna Fáil.

"You wouldn't put capital into something you are running down," said one of Mr Lenihan's senior officials on the night the bank bailout was announced last month.

The Government will also be keen that Anglo does not become a depository for bad property debts.

The Minister said last month that a restructuring plan for Anglo would be prepared after six months. "We will know exactly what the position is then, and we will plan accordingly," he said.

Mike Soden, Bank of Ireland's former chief executive, suggested that Anglo could become "the property bank for Ireland, consolidating the bad debts into one area and creating one single problem".

In the meantime, Mr Lenihan has said Anglo remains "open for business" and is "an important bank" within the financial system.

The Minister will be keen that Anglo's new management team can limit the taxpayer's exposure, even though it will inevitably grow as the bank's capital needs rise.