He traded contracts for differences

In Financial competency, Financial planning on 18/01/2012 at 6:19 am

Ex-billionaire made bankrupt.

Fermanagh businessman Sean Quinn has been declared bankrupt in the Republic of Ireland.

The High Court in Dublin heard the bankruptcy application made by the former Anglo Irish Bank. It was not opposed by Mr Quinn.

Last week, the bank, now Irish Bank Resolution Corporation (IBRC) succeeded in having Mr Quinn’s bankruptcy status in Northern Ireland annulled.

The Republic of Ireland has a more onerous bankruptcy regime than the UK.

Contracts for Difference (CFD) were Quinn’s undoing. They are financial products which allows someone  to bet on shares without having to own the shares. They are derivatives  because they derive their value from the underlying shares.

He tot he was clever.

CFDs have three main advantages:

Privacy – your name does not appear on the share register

Tax – you don’t have to pay stamp duty as you would if you bought the shares

Leverage – As you are not buying the shares you don’t have to put down the full amount of the money. You can ‘lever- up’ with borrowings.

But with leverage always lies danger.

Quinn was betting that the price of the shares would rise and he would profit from the difference between the price at which he bought the derivative contract and the new price. Hence ‘contract for difference’.

But when the Anglo Irish Bank share price nosedived Quinn was in trouble. He was hit with a series of ‘margin calls’ which meant he had to keep putting up more and more of his money.

Eventually things got so bad he had to crystallise his losses by buying the shares outright – which he did by borrowing the 2bn euros from the Anglo Irish Bank.

And it’s due to those borrowings that he’s bust.

BBC Online reports

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