‘The way things were done was all wrong,’ a society source said. Of one group of British property developers they said, ‘These guys would buy and sell you. They were a very tight bunch who were all interlinked. Everything was done through SPVs [special-purpose vehicles], where the loans were non-recourse. They were much smarter than anyone in the society.’ Non-recourse meant the society had lent developers money in a way that it could take back the asset only if lent for them to buy or develop. What this meant was that even though many of its London clients were incredibly rich, the society had no way of pursuing them.
Fingleton, his son and McCollum, in their eagerness to win new business, had left the society terribly exposed if anything went wrong. The board, chaired by Michael Walsh, also had a lot to answer for. ‘The thing about the directors was, they were all profits, profits, profits,’ an insider said. ‘They didn’t think about risk. How was the society protected if anything went wrong?’
It would have been bad enough untangling the society’s atrocious lending if things were not made much worse by the global financial crisis. On 30 August a financial expert with Roubini Global Economics, Jennifer Kapila, concluded:
The Emerald Isle is sinking under the weight of consistently bad news as escalating costs of Anglo Irish’s bad loans precipitated the European Commission’s third emergency capital authorization.
The next hurdle is September’s immense refinancing schedule of roughly €26 billion for the largest three banks and Irish Nationwide. Clearly, the Irish condition is no longer just a bad situation in stasis but is deteriorating and should call into question the current forecasts of capital requirements of other Eurozone banks.
Roubini Global Economics was a think-tank set up by the influential economist Nouriel Roubini, nicknamed Dr Doom. It was closely followed by international investors and fund managers, who would increasingly call the shots on Ireland in the coming months.
The scale of the economic cliff facing Irish banks was actually less than €26 billion. This was because all year Ireland’s banks had carried out smaller fund-raisings in preparation for this September deadline. But whatever the real funding challenge was, it was certainly many billions, which was looking increasingly insurmountable, particularly for Ireland’s worst institution, Irish Nationwide. The stakes were very high.
The past mistakes of Fingleton-type bankers and their cheerleaders, the international bond-holders, were now not only threatening Ireland but putting in danger the euro itself.
The situation for Irish Nationwide was becoming as ridiculous as it was dangerous. On 6 September it issued a statement saying it had ‘listed €4 billion notes under its Global Medium Term Note Programme, which are available to the Issuer as eligible collateral for central bank “repo” funding purposes. The Notes have a six-month maturity. The Notes have the benefit of the Irish Government Guarantee under the Credit Institutions.’
The society was quick to tell the Bloomberg business news service that the so-called global medium-term note programme gave it the ability to repay €4 billion in debt that was maturing at the end of September. This ‘boosts the liquidity of the society,’ a spokesperson told Bloomberg, and it ‘may use some of the €4 billion of notes to repay maturing bonds.’
Simon Carswell in the Irish Times soon afterwards saw through the society’s ruse. ‘Irish Nationwide has issued €4 billion of government bonds effectively to itself,’ he concluded. It had issued a bond that had no collateral except for the government guarantee, an instrument so worthless that only the society itself would buy it. This it did on the advice of the National Treasury Management Agency, the state body responsible for Ireland’s funding, and BNP Paribas, an international bank.
Irish Nationwide had issued its €4 billion in bonds to its property development subsidiary, Pangrove, and then bought them all back, except for €50,000. The society then headed to Frankfurt to collect its money, completing the merry-go-round. An unnamed bond analyst told the Irish Times he had never seen a funding transaction structured in such a way, as it was ‘a type of micro-quantitative easing’ or a means of allowing a central bank to print money to support an institution.
Writing in the Sunday Times, Brian Carey concluded: ‘Michael Fingleton, the former Irish Nationwide Building Society chief executive, had the look of a fairground magician, but not even the great Mephisto himself could achieve what INBS did last week: magic up €4 billion from thin air.’ It was a dexterous financial move as Ireland headed into the financial dead-zone of the final quarter of 2010.
Increasingly, the reasoning behind the state’s rescuing of Irish Nationwide at all was being questioned as more and more people realised that by doing so it had put the future of the country at risk. ‘Who really gained from not allowing it to collapse?’ was the question that now came to the forefront.
On 7 September, Fintan O’Toole in the Irish Times gave his answer.
We have been given, in all, five different explanations by the Government of why we must continue to pour money into Anglo and, lest we forget, its mini-me Irish Nationwide.
The first was that these institutions were basically sound but needed temporary rescue from a liquidity crisis. No one needs to be told how stupid that was.
The second was that we needed to give them the money to get credit flowing into the economy again. This was always a cynical line spun for the supposedly gullible masses—Anglo and Nationwide never lent significantly into the real economy and will never do so in the future.
The third reason we’ve been given is that it was vital to avoid having zombie banks. This actually has been achieved—as the Financial Times pointed out last week, Anglo is nothing as lively as a zombie. It’s a ‘rotting corpse’.
The fourth proposition was that saving Anglo and Nationwide was necessary to maintain Ireland’s ‘credibility’ with the international financial markets. In fact, watching a State borrow endless billions at high interest rates to shovel them into a grave has merely enhanced our incredibility.
Which leaves us with the fifth reason for the strategy, and the only one that makes any sense: that the European Union, and more specifically the European Central Bank, have decided that no European bank should be allowed to fail.
Strip away the drivel and the spinning and this is the one truth left standing.
On Sunday 12 September the Sunday Business Post broke the story that the European Commission planned to pull the plug on Irish Nationwide by vetoing its plan to reinvent itself as a mortgage and savings provider. The move came less than a week after the government announced that Anglo Irish would be banned from any new lending and instead would be split into a savings bank and an asset recovery unit.
The paper also reported that Anglo Irish would cost a maximum of €30 billion—considerably more than the €24 billion the state had last estimated but less than the €35 billion that Standard and Poor’s rating agency had recently predicted.
Irish Nationwide was to be banned by the EU Commission from engaging in new lending (though it could lend to existing customers to help them finish projects) and instead would concentrate on collecting repayments on its €2 billion residential loan book while managing its €4 billion book in a separate vehicle. Putting the deposits into a new unit would allow the government to move them more easily to prop up one of its remaining banks when required.
The society was now officially dead. Any dream of it living on, either as part of a so-called third force or going back to its roots as a small lender, was now over.
Reacting to the news of Irish Nationwide’s closure, Brian Cowen told RTE radio later that day that ‘horrendous mistakes’ had been made by Irish banking, and he was prepared to take his ‘full measure’ of responsibility for his role as former Minister for Finance. There were, he said, ‘liquidity issues for the whole banking system right throughout 2008,’ but ‘there was no suggestion that what we ended up with was around the corner.’ He said he had not knowingly misled the Dáil when he said t
he banks were well capitalised. ‘The regulatory system in our country and in the IMF and elsewhere were not suggesting we had an under-capitalisation problem. And if there was such a proposal, that we did have a problem on the capitalisation side, obviously it would have been incumbent upon us to do something about it.’
Soon afterwards Irish Nationwide appointed a former Bank of Scotland (Ireland) executive, Antoinette Dunne, to review its fifty branches. While her decision was some time away, she could only conclude one thing: they would all have to close. The hundreds of employees in those branches were on their way to losing their jobs—another price paid by others for Fingleton’s profligacy.
On 30 September, Brian Lenihan delivered a speech with the rather unexciting title of ‘Minister’s statement on banking.’ Its contents, however, were devastating, revealing yet again that Ireland’s banking black hole was much larger than expected. Within minutes, the news wires were abuzz about the day that would become known as Black Thursday. The news agency AFP gave the speech an initial headline of ‘Ireland reveals full horror of banking crisis’ before updating it to ‘Shocked Irish see years of financial pain ahead’ as the full extent of the losses being announced sunk in.
The total cost of the banking bail-out was put by Lenihan at €50 billion. This equated to €11,000 per person, or €100,000 per household. Ireland’s budget deficit was lifted to a record 32 per cent of gross domestic product, or ten times EU guidelines for member-states. The projected cost for Anglo Irish alone came in at €29.3 billion.
The Financial Times concluded: ‘The rescue costs for this one bank represent a staggering 21 per cent of Irish GDP, more than the entire bill for sorting the Japanese banking crisis of 1997 and almost twice the cost of the Finnish crisis in the early 1990s.’
AIB would now have a majority state ownership, Lenihan said, as it needed a total of €7.9 billion even after deducting what it had raised from selling off its Polish operation. AIB’s managing director, Colm Doherty, and its chairman, Dan O’Connor, both announced their intention to resign.
Bank of Ireland, Lenihan said, would not need fresh capital, and this had been confirmed by the Central Bank.
Then it was Irish Nationwide’s turn. The society, Lenihan said, was now under state control. The state had already pumped €2.7 billion into the society, and now it needed even more.
The NTMA has recommended that I provide a further €2.7 billion representing a prudential estimate of the capital required to cover expected losses on INBS’s residual loan book and bringing the total capital support to €5.4 billion. I have accepted the NTMA’s recommendation in order to establish a ceiling on the level of support provided to the Society consistent with the objective of providing final clarity on the public support required by the Irish banking system.
He said that Irish Nationwide, like Anglo Irish, would enter talks with some of its subordinated bond-holders to try to force them to share some of the pain being saddled on the taxpayer. ‘I expect the subordinated debt-holders to make a significant contribution towards meeting the costs of Anglo [and Irish Nationwide],’ he said. Senior bond-holders, however, whose debts have equal ranking with depositors, remained safe, despite having provided the kerosene that the Irish banks poured on property. To suggest asking them to share in Ireland’s pain, Lenihan said, was ‘completely unreal.’
We are not going to tell the bank manager we are going to default prior to asking for more money. Were we to impose haircuts on senior bond-holders, equivalent haircuts would require to be imposed on depositors. We have to bring closure to this matter, and that is what we have done today. Yes, of course these figures are horrendous, but they can be managed over a ten-year period, and they will be managed.
Patrick Honohan said that yet more billions going into Anglo Irish would require a ‘reprogramming’ of the country’s budget plans. Although he did not use the term, it was clear that austerity was going to be needed to pay for bank gambling.
On RTE Radio 1 that lunchtime Honohan was asked by an incredulous Seán O’Rourke, ‘The worst-case scenario involving Anglo and Irish Nationwide is €40 billion—gone?’ ‘Gone,’ agreed Honohan.
The National Treasury Management Agency announced that it was suspending bond auctions planned for October and November and that it planned to return to the markets only in the first quarter of 2011. Ireland was fully funded until June 2011, but after that it was anybody’s guess what would happen. Irish ten-year government bonds had hit a record of almost 7 per cent before Lenihan’s announcement, or 4.7 per cent more than Germany. The annual cost of insuring Irish bonds against default had also jumped sharply.
Both yields fell back a little on the news that at least Lenihan appeared to have drawn a line in the sand under Ireland’s losses. Brian Cowen said the state might have to introduce budget cuts that December ‘significantly’ more than €3 billion from public services, such as health, education and social welfare. ‘Obviously there will have to be revenue-raising as a contribution to closing that gap—it cannot all be done on the expenditure side,’ he said, in a warning that Ireland would have to sell off its crown jewels—such as its energy companies or infrastructure—to find money to put into its zombie banks. The very sovereignty of the country was now at stake.
‘This is not going to be easy but it has to be done,’ Cowen said. ‘Why does it have to be done? Because we as a country want to control our own affairs.’
The president of the European Central Bank, Jean-Claude Trichet, welcomed the government’s decision to take one for Europe by picking up the entire bill for a madness that was fuelled by German and French banks. ‘What is absolutely key for us is credibility and the delivery of this unequivocal commitment to correct the excessive deficit by 2014 as had been previously agreed. It will be key for the credibility of Ireland.’
The EU Commissioner for Economic and Monetary Affairs, Olli Rehn, added: ‘We strongly endorse Finance Minister Brian Lenihan’s handling of this issue.’
It wasn’t just Europe, which had wilfully thrown hundreds of billions at Ireland’s failed banks, that was insisting that the nation now take full responsibility for its bank debts. The Russian oligarch Roman Abramovich was also anxious that a small country on the edge of Europe should take its punishment in full. He owned subordinated bonds in Irish Nationwide, and he threatened to sue the society if Lenihan’s suggestion that these types of bonds should share the pain was carried through. The fact that subordinated bonds, by definition, were more risky than either senior bonds or actual deposits and as a result were paid higher interest no longer mattered.
‘We are fully prepared to vigorously defend our position using all possible legal avenues,’ Abramovich’s investment vehicle, Millhouse, said. The Irish government had promised to guarantee the bonds and have a strategy for the bank. ‘We now believe that we have been misled and deceived. We believe that any attempt to force losses on Irish Nationwide lower Tier 2 debt holders will result in a huge reputation loss and ultimately financial cost to the Irish and European sovereigns and financial institutions.’
The message was clear: investors would charge more if the Irish government took on even the lowest-ranking bond-holders in an insolvent and hopelessly bust building society. The owner of the world’s biggest yacht was adamant that the people of Ireland should stump up in full for Irish Nationwide’s mistakes. If social welfare or disability benefits had to be cut as a result—tough cheese.
Danny McCoy, director-general of the Irish Business and Employers’ Confederation, which had silently watched Irish bankers lend recklessly during the boom, now came out in agreement. ‘Ireland should honour its debts if it can … The country makes a living taking capital from people and looking after it, and you don’t want to get a reputation for carrying out partial defaults.’
The independent TD Maureen O’Sullivan took a very different view. ‘It appears there is a bottomless pit of money and guarantees when it comes to banks, but when it comes to the needs and
lives of Irish people, they are told they must accept the cuts and make the sacrifices.’
Writing in the Irish Independent, the economist David McWilliams said:
The Irish elite is prepared to sell the sovereignty of this country to protect the likes of Roman Abramovich and other vulture investors who bought up third-rate Irish banking debt at a discount and are hoping to get paid in full.
People such as Abramovich, like the other creditors, can be told to line up in an orderly queue and wait for the liquidator to give them the morsels that might remain from the broken Irish banking system. The crud Abramovich owns—an IOU from Irish Nationwide Building Society—is not the same thing as Irish government debt.
The last time I checked, there was a harp on the front of my passport, not a picture of Michael Fingleton.
Michael Walsh, who had remained relatively unscathed by the epic failure of Irish Nationwide, was challenged by the Irish Times a few days after Lenihan’s announcement. It was a relatively rare public confrontation of Walsh about the society’s mistakes. He agreed he was unhappy about what had happened but insisted that it ‘isn’t true’ that the society had an ineffective board, which had let Fingleton do what he want and allowed the society run out of control. He refused to comment further. He retreated into the safety of Dermot Desmond’s investment vehicle, International Investment and Underwriting, where he remained a board director and adviser. Privately wealthy, he was not one of the ordinary people that O’Sullivan was worried about.
In the first weeks after Black Thursday the world’s biggest rating agencies all caused more shivers for investors in Ireland and its evil-twin banks. Standard and Poor’s and Fitch both downgraded Ireland another notch, while Moody’s warned that it was likely to do so. Ireland was now several notches below the euro area, which retained its AAA status.
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