Ship of Fools

by Fintan O'Toole

  Lenihan’s and Coughlan’s statements were among the stupidest ever made by an Irish government - a significant achievement in itself. There were just two possible conclusions that any rational international observer could have drawn. One was that cooking the books is actually illegal in Ireland, but that the authorities were rushing to protect a well-got banker with strong connections to the ruling party. The other was that naked deception is perfectly legal in Ireland and that you can’t trust the accounts of any Irish-regulated company. The Independent newspaper of London reported that ‘Analysts were also stunned that the practice was not illegal in Ireland.’ The Financial Times called Ireland a banana republic. The description in 2005 by the New York Times of Dublin as ‘the Wild West of European finance’ was widely revived. The thin shred of credibility that covered the Irish banking system’s global reputation was torn asunder.

  And all of this happened because Fianna Fáil simply could not bring itself to acknowledge the emerging truth that, institutionally, Anglo Irish was as bent as a Brazilian free kick. The party went even deeper into denial when Lenihan appeared on RTE radio and tried to undo the damage. He firstly denied that he had used the word ‘disappointing’ about FitzPatrick’s resignation: ‘No, I never said I was disappointed. ’ He had in fact, he claimed, used the word only in relation to the failure of the Financial Regulator to inform his department of the loans. This was flatly untrue on both counts. Even more strangely, having tried to rewrite his own reaction to the scandal, Lenihan then went on to rewrite FitzPatrick’s contemptible statement about ‘inappropriate’ behaviour: ‘I believe it was, as he himself acknowledged in his statement, wrong, unethical behaviour.’ FitzPatrick’s statement did not contain the words ‘wrong’ or ‘unethical’ or any synonyms of those words. They would have stood out as startlingly in his self-regarding announcement as a call for a worker’s revolution. Lenihan was convincing himself, as much as his listeners, that concepts of right and wrong truly applied in the Irish financial system. What we had in effect was the surreal situation of the Minister for Finance spinning for a banker who was involved in large-scale systematic deception.

  Where did this need for denial come from? In part, it was rooted in the general cosiness of the relationship between government politicians, regulators and bankers. There was a broad ideological consensus that the free market knows best and that it was wise to let the money-makers take care of business. In spite of the often farcically lax state of regulation, a self-pitying belief that they were under siege from voracious, busybody bureaucrats was a standard item of gossip around the exclusive golf courses on which the insiders mingled.

  Seán FitzPatrick himself was the loudest champion of this world view. In one swaggering speech in 2005, at the Irish Times Property Awards, Seánie paid tribute to people like himself who had created the boom: ‘we had ideas and we had balls . . . as we worked the scene and maximised the moment, the world watched in astonishment. That is no exaggeration. ’ But there were clouds on the previously clear horizon. Where the boom had been enabled by ‘a positive environment where risk-taking was applauded and success rewarded’, there were now two forces that threatened everything. One was ‘the quite hostile approach towards business by elements in the media’. He moaned that ‘issues of compliance or general corporate conduct get coverage that is disproportionate to their importance, or the frequency with which they would arise’. The state broadcaster RTE, he complained, had given airtime to people who were critical of the running of the economy. This commentary could ‘support a political agenda that is far removed from any of our long-established political parties’. ‘This whole area’, he warned darkly, ‘needs attention.’

  The other dragon that Seánie wished to slay, though, was regulation. ‘Moves towards greater control and regulation could squeeze the life out of an economy that has thrived on intuition, imagination and a spirit of adventure.’ There were, he informed his horrified listeners, ‘those who appear to want to establish Ireland as the perfect model in corporate policing and regulation’. What, he demanded in one of the great rhetorical questions of the Celtic Tiger era, ‘has been done here over the past decade that demands such a reaction?’

  Since corporate Ireland was so patently pure and honest, demands for regulation could only come from paranoid maniacs: in a speech in June 2007 FitzPatrick actually called regulation ‘corporate McCarthyism [that] shouldn’t be tolerated’. The truth, of course, was that if the Irish financial regulator was the House Un-American Activities Committee, the US would would have been overrun by Communist infiltrators.

  But if FitzPatrick epitomised the self-image of much of the Celtic Tiger elite - men with big balls whom the world watched in astonishment while petty media folk whinged about corporate conduct - he also epitomised its arrogant disregard for either basic ethics or sustainable business practices.

  In Fianna Fáil and its hinterland, FitzPatrick inspired awe. Having joined Anglo’s precursor in 1974, when he was twenty-six and it was a tiny niche bank, he turned it into the chariot on which Ireland’s property developers would ride to the stars. In 1985, Anglo had profits of IR£286,000. In 2007, the figure was €1.2 billion.

  The graph of Fitzpatrick’s success matched and indeed surpassed the rising euphoria of the boom years. In 2001, Anglo had assets of €15.8 billion. By 2008, the assets were within touching distance of €100 billion. It had €44 billion in loans in the Republic of Ireland, €21 billion in the UK and €9.5 billion in the US. Anglo was a rocket blazing across the skies of Bertie Ahern’s Ireland, illuminating the money-strewn landscape beneath.

  FitzPatrick mattered to Fianna Fáil as an exemplar of success, but he also had a more practical importance. FitzPatrick’s bank funded the property developers who helped to fund Fianna Fáil. Big players and party supporters like Bernard McNamara (a former party councillor), Mick Bailey, Seán Dunne, Seán Mulryan, Gerry Gannon, Johnny Ronan and Seamus Ross were on Anglo’s books. Two of these men had made large payments to corrupt politicians. Bailey gave Ray Burke £30,000 or £40,000 in 1989, on foot of a promise to ‘procure’ re-zoning for a development in North Dublin - the Flood tribunal found this to be a corrupt payment. Ross gave the notorious Fianna Fáil fixer Liam Lawlor £40,000 in two tranches in 1996 to have the postal address of a new housing estate he had built changed from Clondalkin to the more upmarket Lucan - a move he believed would make the houses worth an extra £5,000 each.

  None of the other Anglo Irish clients made such payments to crooked politicians. They were, however, generous contributors of legitimate political donations to Fianna Fáil. And they often moved within the same social circles as senior politicians. Seán Mulryan’s annual Christmas parties at his Kildare stud farm, Ardenode, were just one of the social occasions when FitzPatrick and his developer clients would have mingled intimately with Charlie McCreevy and Brian Cowen. The personal connections within these circles were strong: Ross was close to Brian Lenihan and his brother (and junior minister) Conor, Mulryan to McCreevy. At the 2009 Cheltenham racing festival, for example, McCreevy and his wife shared a box (just below the royal box) with Mulryan and Mick Bailey. Seán Dunne built McCreevy’s substantial home in County Kildare. Dunne’s personal assistant, Anto Kelly, is a former election agent for the ex-minister and current Ceann Comhairle (chairman of the Dáil), John O’Donoghue.

  Fitzpatrick’s Anglo Irish was the quintessential developers’ bank. Business banking and personal banking each accounted for just 5 per cent of its loan book. Two-thirds of its lending was for ‘investment’ purposes, but these investments were almost all in property: hotels, offices, shopping centres, residential developments. A further 15 per cent was in land. And most of the rest was in development. By 2008, a quarter of Anglo’s loans, amounting to €17.7 billion, were to developers. Over €6.5 billion of this was lent for the purest form of speculation - the purchase of land which had no full planning permission for projects.

  And the bulk of the €17.7 billion was lent t
o a tiny circle of high rollers. Anglo had fifteen clients, almost certainly developers, each of whom had at least €500 million in loans. The top twenty clients owed it a total of €11.4 billion. In the UK and US markets (often in relation to the same Irish developers), the top twenty customers accounted for 46 per cent and 32 per cent of the development loan book respectively.

  Not only was Anglo far too exposed to the speculative property game, but even within that narrow field it was massively dependent on a very small number of risk-taking individuals. But FitzPatrick and his acolytes considered this a virtue. The bank’s relationship with its inner circle of clients was not just business, it was personal. As Anglo explained to Price Waterhouse Coopers in November 2008, ‘this strategy of developing deep relationships with what it deems to be the strongest operators is deliberate . . . Anglo considers itself able to attain a thorough understanding of its clients’ business, finances and relevant risks, which are continually reassessed in face to face client meetings often held weekly.’ A shared culture of macho risk-taking and go-getting, and shared hobbies like horse-racing, golf and Fianna Fáil, undoubtedly helped these ‘deep relationships’ to flourish. It may be an exaggeration to call Anglo Irish a private bank for Fianna Fáil’s more flamboyant friends, but only a small one.

  The centrality of Anglo Irish to the nexus of connections between Fianna Fáil and the developers was recognised in appointments to key state boards. The Dublin Airport Authority was chaired by Anglo director Gary McGann. His colleague Anne Heraty was appointed to the boards of Bord na Mona and Forfas. But the plum jobs were reserved for FitzPatrick himself He was on the board of the state-owned airline Aer Lingus. Alongside yet another Anglo Irish director, Lar Bradshaw, he was also on the board of the Dublin Docklands Development Authority, giving him a direct influence on the state’s own largest property development project. Effectively, Fitzpatrick was able to fuse the interests of the DDDA with those of Anglo Irish. In 2006, the DDDA was part of a consortium led by the developer Bernard McNamara that paid a phenomenal €412 million for the 24-acre Irish Glass Bottle site in Poolbeg on the docklands. FitzPatrick at Anglo Irish put up €288 million in loans for the project. (Davy Stockbrokers, in 2009, advised its clients who had put money into the deal to write off 60 per cent of their investment.)

  For all this eminent respectability, however, Anglo Irish was a house of cards with too many knaves in the deck. Extraordinary as it was, the annual cooking of the books to conceal FitzPatrick’s vast loans from his own bank was a mere amuse-bouche. The main courses of chicanery and fiddling would be served as the bank’s inevitable collapse approached.

  Anglo Irish’s over-exposure to both developers and investments in property was inherently unsustainable. Without a perpetually rising property market in which its key clients could service ever more extravagant borrowings to fund ever more outlandish projects, Anglo Irish’s own phenomenal growth could not continue. As the air began to leak out of the property balloon, Anglo Irish was bound to lose altitude at the velocity of a falling stone.

  On 6 March 2008, almost half a billion euro was knocked off Anglo’s share value in a single day after it announced that it was taking a write-down on risky assets and adopting a more conservative approach to future lending. The very fact that the announcement that a bank intends to be careful in its lending caused a run on its shares is eloquent testimony to the fantastical nature of Anglo Irish itself. Punters realised that a cautious Anglo is like a vegetarian lion or a gentle boxer - essentially redundant. From what had been a slow descent from a high of €17.85 in June 2007, the bank’s shares tumbled steadily towards worthlessness. By October 2008 they would be worth €1.13, and by Christmas they had shrivelled to a barely visible €0.15.

  It was in the attempt to halt or at least conceal this decline, however, that Anglo really took to snorkelling in the cesspit. In its rage against the dying of FitzPatrick’s dreams of astonishing the world, his bank managed to make a fine international spectacle of itself. His notions of ‘working the scene and maximising the moment’ fulfilled themselves in two breathtaking schemes to create the illusion that Anglo was not a beaten docket but still a winning lottery ticket.

  The first of these schemes had its roots, appropriately enough, in Fianna Fáil’s extreme attentiveness to the demands of the financial industry. In 2006, in one those behind-the-scenes manoeuvres that attract no attention beyond a tiny circle of insiders, the finance lobby managed to head off a simple proposal by the Revenue Commissioners. It related to devices of whose existence 99.9 per cent of the population was blissfully ignorant: contracts for difference (CFDs). A CFD is a form of derivative instrument that allows an investor to bet on the likely performance of a particular stock, without actually owning the shares. Because the investors didn’t buy the shares, they didn’t pay stamp duty to the Revenue. To counteract this, the Revenue wanted to charge stamp duty on the shares that were actually bought to cover the CFDs. It believed that it was entitled to do this under existing law, and made an announcement to this effect.

  As well as closing a tax loophole, this measure would have had the considerable advantage of discouraging the use of CFDs. A major attraction of this form of gambling was precisely that it avoided tax. Another key incentive was that holders of CFDs did not have to declare their interest in the company whose shares they were betting on. And nowhere was this measure more necessary than in Ireland: nearly a third of the value of trades on the Irish Stock Exchange was accounted for by CFDs. From the point of view of both fairer taxation and the discouragement of casino capitalism, the Revenue’s modest proposal was obviously in the public interest.

  The then Minister for Finance, Brian Cowen, was lobbied, however, by the Irish Stock Exchange, the London Investment Banking Association, Davy Stockbrokers and Price Waterhouse Coopers. The money men got exactly what they wanted. Cowen announced that he would ‘have the matter reviewed in advance of the next Budget’. Predictably that budget slapped down the Revenue. It created a new category of tax shelter, Intermediary Relief, specifically tailored to ensure that shares bought by brokers to cover CFDs would not be subject to stamp duty. The casino would remain open for business, and the punters could retain their privacy.

  Stepping up to the table with uncharacteristic brio was a man who had been thought of as Ireland’s most astute entrepreneur, Seán Quinn. Quinn, whose building supplies, insurance and manufacturing businesses had made him Ireland’s richest man, unaccountably decided to invest much of his fortune in Anglo Irish. At the highest point of stock market euphoria over the bank’s stellar profits, he began to take out CFDs on its shares. He gambled somewhere between €2 billion and €3 billion on Anglo Irish. In almost any other developed country, such a huge punt on the stock market would at least be an open transaction. In Ireland, because of Cowen’s capitulation to the financial lobby, Quinn’s enormous wager entered the Celtic informational twilight of things that are known but not known.

  There was no public record of the fact that Quinn, through his CFDs, effectively owned 25 per cent of Anglo Irish. But Anglo’s own board knew, and because it was unsure what Quinn was up to, it told the Financial Regulator. By March 2008, the Regulator had passed the word on to the Minister for Finance, Brian Cowen. Rumours abounded and contributed to the sharp fall in Anglo’s share price. But no one ‘knew’ anything and no one had to do anything.

  Eventually, it was Quinn himself who broke cover. With the shares losing value by the day, he decided to both regularise and reduce his 25 per cent holding in the bank. He would sell 10 per cent and convert the other 15 per cent from CFDs into ordinary shares. From this decision flowed two scandalous transactions.

  Firstly, to help pay for his 15 per cent stake, Quinn dipped into the reserves of Quinn Insurance, of which he was also chief executive, taking a loan of €288 million. This was so egregious a breach of the financial laws that even the Financial Regulator had to act: Quinn’s company was fined €3.2 million with an additional persona
l penalty of €200,000. Secondly, Anglo Irish, concerned that the sudden sale of the other 10 per cent would drive its shares even further into the ground, concocted an extravagant scam to keep them off the market and thus to artificially support the share price.

  The scheme was the apotheosis of the culture of ‘deep relationships’ that Anglo Irish had exemplified. It was also the culmination of the love of ‘back-to-back’ transactions that had been woven into that culture since the Ansbacher Cayman days. Under pressure, the Anglo Irish bosses went for a spin on a good old-fashioned carousel. They assembled a group of trusted pals and lent them €451 million so that they, in turn, could buy Quinn’s remaining 10 per cent stake in Anglo Irish. The terms of these loans were appropriately soft: 25 per cent of the money was secured against the borrowers’ personal assets, the rest against the shares themselves. In this hall of mirrors the unstable Anglo Irish shares were both the object of the loans and the supposed guarantee that they would be repaid. (Mostly, they have not been: in May 2009, Anglo - now in effect the Irish taxpayer - wrote off €308 million on the deal.)

  The names of six of the ten members of this so-called ‘golden circle’ of investors are known. One, Jerry Conlon, specialised in building and developing private hospitals and has no recorded Fianna Fáil connections. Four of the others are typical of the nexus of pro-Fianna Fáil developers whose projects were funded by Anglo Irish. Paddy McKillen, a developer, was appointed to the Construction Industry Development Board by Fianna Fáil minister Padraig Flynn in 1989 and made at least one donation to the Fianna Fáil politician Tom Kitt. Joe O’Reilly, whose €575 million purchase of a shopping centre in north Dublin in 2006 was described by the Irish Times as ‘the largest and most significant property investment ever completed in Ireland’, was a friend and financial supporter of the Fianna Fáil TD Seán Ardagh. In 2000, he was a member of the ‘Friends of Seán Ardagh Committee’ that raised IR£14,000 for the TD’s campaigns. Seamus Ross, as we have seen, gave £40,000 to Liam Lawlor. Gerry Gannon, who amassed a huge land bank around Dublin, is close to the Bailey brothers, and donated money to the then Fianna Fáil TD Ivor Callely in 2006. He was one of the small group of attendees at a private fundraising dinner given in Dublin in November 2007 by Brian Cowen. The sixth known member of the circle, the Dublin estate agent Brian O’Farrell, was one of a group of thirteen businessmen who collectively paid €65,000 for a private meeting with Brian Cowen in March 2008. He subsequently told the Mail on Sunday that ‘I am not in Fianna Fáil’ and that the meeting, in the Shelbourne Hotel, was ‘just like a normal chat’.