by Shane Ross
The Irish Trust Bank was dispensable: it had not established itself as a vital artery of the Irish banking system. Depositors in Bates’s bank were in danger of losing their money. But happily for them, a general election beckoned. Fianna Fáil’s shadow finance minister, George Colley, offered to bail out the lucky depositors if his party was returned to power in 1977. It was. And Colley delivered.
According to Simon Carswell’s excellent book Something Rotten: Irish Banking Scandals, as recently as 2005 Bates reminisced that his ‘only regret’ about his days in Ireland was that ‘we didn’t make Irish Trust Bank into what Anglo Irish Bank is today. We tried to merge them at one point and call it the Anglo Irish Trust Bank.’
The mind boggles.
Bates has little contact with Ireland nowadays. By chance, former Irish Life & Permanent chief David Went bumped into him in Cape Town in January 2009 and told me, ‘Bates is in fine fettle, still telling tales of how he took on the Central Bank back in the seventies.’
If Bates slipped into Dublin’s banking swamp below the radar, Patrick Gallagher was a starry-eyed local youth who ended up in a Northern Ireland prison, a convicted thief.
In 1974 Gallagher inherited Merchant Banking Ltd from his father, Matt Gallagher. He was only twenty-two and hadn’t a bull’s notion about banking but simply ran his Merchant Banking as a personal fiefdom to fund some high-wire property plays and his infatuation with horse racing.
Gallagher was a sad case. He was hugely impressed by his late father’s buddy, Charles J. Haughey, and was one of the first businessmen to put his hand in his deep pockets to bail out the Fianna Fáil Taoiseach when he faced a crisis with his bankers early in his premiership.
Gallagher was besotted by the high life. He was regularly seen wearing his loud blue pinstriped suit and smoking a cigar in the high-society Bailey restaurant in Dublin’s Duke Street or in the Royal Hibernian Hotel. He kept the company of big developers, auctioneers and politicians. Initial success went to his youthful head. He contracted one of the worst doses of folie de grandeur to infect any of the mohair-suited brigade of the sixties and seventies. Within eight years his family business had incurred unsustainable debts of £28 million. He was bust.
Bad personal property investments were his downfall. He had bought the Phoenix Park racecourse, Straffan House (now the K Club) and other trophy properties in an orgy of self-aggrandizement and speculation. His vehicle for the purchases, the Gallagher Group, was being funded by, among others, Merchant Banking – a private piggy bank for his own use and in some cases to help out old friends, such as Charlie Haughey. When Merchant Banking collapsed, it emerged that Haughey owed the failed bank over €17,000. No effort had ever been made by Merchant Banking to seek repayment over the six-year life of the loans. Gallagher’s other creditors closed in and put the Gallagher Group and Merchant Banking into liquidation. Patrick Gallagher ended up serving a two-year jail sentence in Northern Ireland for theft, having pillaged clients’ personal accounts to bolster his doomed ventures.
Gallagher’s story is a personal tragedy of a young man, infatuated with the trappings of wealth, whose head was turned by the glamorous lifestyle and powerful connections handed to him by his father. He paid a lifelong penalty. In his later years he was seen around Dublin, sometimes intoxicated, broke but lacking in bitterness. He would often inhabit old haunts like the Shelbourne Hotel, regaling acquaintances with fantasy plans, one of which was to build a Charles Haughey Memorial Hospital. He died in the spring of 2006 aged just fifty-four.
The lesson of Gallagher’s unhappy story was not lost on the critics – and the beneficiaries – of a loose banking regime in Dublin. Although Gallagher had been sentenced to prison in Northern Ireland, he was never charged with as much as the theft of a paperclip in the Republic. Paddy Shortall, the liquidator of Gallagher’s companies, reported that Gallagher had broken the law in over twenty places. In his findings Shortall included accusations of false accounting, fraudulent statements and both bribery and corruption. His report to the Director of Public Prosecutions listed seventy-nine possible criminal offences. No prosecution was ever taken.
Patrick Gallagher’s friend Charlie Haughey was to resurface yet again in the story of Joe Moore. Wherever there was money or a dodgy bank, Haughey turned up like a magnet.
During the seventies and eighties Moore built up Ireland’s largest motor insurance company, the Private Motorists’ Protection Association (PMPA). Moore was a staunch republican. His original business ideals were driven by a strong dislike of British domination of the Irish insurance market.
He started life as a consumer champion but ended up as a staunch Haugheyite. In 1979 Moore campaigned for Haughey in his Fianna Fáil leadership battle against George Colley. He was vindictive in victory; David Andrews, a Fianna Fáil junior minister under Jack Lynch and fiercely antagonistic to Haughey, was a victim. Andrews, a barrister by profession, returned to the Law Library after being sacked by Haughey. Moore had lobbied Andrews to vote for Haughey in the leadership battle; after Andrews voted for Colley instead, Moore withdrew Andrews’s PMPA briefs – and much of his livelihood – for three months as a punishment. When he was not causing political chaos, Moore was offering cut-price car insurance and carving out a formidable share of the insurance market.
PMPA owned a bank known as PMPS, the Private Motorists’ Provident Society. It took deposits and lent money to small borrowers. Buyers of shares in PMPS were offered cut-price insurance in the parent company. PMPA borrowed heavily from PMPS. The bank was at risk if the insurance company ever folded. PMPS was regulated not by the Central Bank but by the Registrar of Friendly Societies.
PMPA’s strategy of cutting premium prices to attract new customers proved fatal. PMPA began paying off claims with new premiums. It could survive as long as enough fresh premiums kept coming in to meet current claims; but it became insolvent when the economy deteriorated. Claims rose and premiums dwindled.
It was unfortunate for Moore that Haughey, his spiritual champion, was out of power when the PMPA crunch came. He had no political friends in the Fine Gael-led coalition which came to power in late 1982. The government appointed an administrator to PMPA, and the PMPS bank was brought down with the insurance company.
Joe Moore had close parallels with Ken Bates and Patrick Gallagher. There is no record of any of them having been challenged by their boards. Moore made all investment decisions at PMPA. He fought the government – not only the Fine Gael-led coalition but also the preceding Fianna Fáil government, in particular commerce minister Des O’Malley, who dubbed Moore an ‘unstable megalomaniac’. He also fought the administrator.
Moore eventually lost on all fronts, but his recklessness caused mayhem with the public finances. The government decided that PMPA was too big a company to be allowed to fold. In 1984 the state was forced to impose a 2 per cent levy on all non-life-insurance premiums to raise enough money to bridge the deficit which Moore had left. The levy lasted nearly a decade. The cost of Moore’s folly was footed by the taxpayer.
Joe Moore died in 1989, aged eighty, still convinced that the government’s decision to appoint an administrator to PMPA was motivated by the personal spleen of the minister Des O’Malley against Moore’s pal Charlie Haughey. It was not until 2005 that the final repayments were made to PMPS depositors – a twenty-two-year wait for many small savers.
One man, one bank – the fatal formula in the tales of Joe Moore, Patrick Gallagher and Ken Bates – was bad enough. One family, one building society was even more dangerous. Nothing demonstrates the folly of a financial dynasty better than the story of the Farrells.
Ireland’s building societies were originally conceived in the nineteenth century as co-operative organizations owned by their ‘members’ – i.e. their customers. They had no shareholders to satisfy with their demands for dividends or capital growth. Building societies were supposed to benefit their members by prioritizing cheaper mortgages and better savings rates over corporate profi
ts.
A great theory. The practice was different. From their humble beginnings, Ireland’s building societies were slowly hijacked. In the 1980s they began to ape the big finance houses. In the nineties they converted into full-blooded banks. As a result, building society chiefs became bankers, and very rich to boot.
The Irish Temperance Permanent Benefit Building Society was founded in 1884. In 1940, when it changed its name to Irish Permanent, Edmund Farrell Snr was the secretary of the company; by the 1950s he had risen to managing director, and he ran the society until his death in 1975. He was an autocrat who was able to dictate the identity of his successor on his deathbed. This, unsurprisingly, turned out to be his son, also Edmund Farrell.
Young Ed took over at the age of twenty-eight. He had qualified as a doctor, but an inner ear infection forced him to look for another job. His father gave him his chance in the Irish Permanent. He grabbed it.
Despite the cuddliness of their stated ethos, by the 1970s building societies – which included the First National, the Irish Nationwide, the Irish Civil Service and the EBS as well as the Irish Permanent – were far from pillars of virtue. All provided happy homes for deposits destined to stay beyond the taxman’s scrutiny. They had a clear edge over the banks in that they were not compelled to return the names of their depositors to the taxman. Whereas banks sent on depositors’ details to the Revenue, building soci eties deducted tax from deposits at source and sent a cheque to the taxman. Hoards of hot money – cash on which other tax would be owing if the Revenue knew about it – headed for this more discreet home.
The secrecy of building society deposits made a mighty difference in the war to attract customers: the societies’ share of the savings market rocketed from 5 per cent in 1965 to 18 per cent in 1985. They advertised the benefits of ‘confidentiality’ for those who saved with them. High income tax and capital gains tax in the seventies and eighties had ensured that the black economy ballooned in Ireland; because they were not obliged to identify deposit holders, the building societies were nicely positioned to hoover up much of the hot money floating around at the time. Everybody knew that this was happening: government knew about it; the taxman knew about it; the Central Bank knew about it; the top brass in the building societies knew about it; the customers loved it.
There is no record of any director of these building societies expressing any unhelpful curiosity about the hot-money issue. It appears that these pillars of society, perched on the boards of financial institutions with quasi-bank status, were perfectly content to preside over tax evaders’ honeypots – and of course they were under no legal obligation to investigate the source of customer deposits or to seek tax returns before an account was opened. That was financial propriety, Irish-style. The state feared a flight of capital from the country if it demanded the identity of the depositors. Another reason for the lack of scrutiny was that the building societies were providing mortgages to a young population, offering a social service as well as making money for themselves. Too much official probing about the source of their deposits could have prompted a sudden exit of funds – and consequently fewer available mortgages. The black economy was entrenched in the financial system and underpinned the mortgage market.
If there was ever any doubt about the dodginess of many building society deposits, it was dispelled in 1994, when the Irish Permanent was floated on the Stock Exchange. Members of the now-former building society were eligible for free shares, and yet many members declined to claim them. Claiming ownership of the shares would have flushed tax dodgers out of the cupboard of secrecy. Their names would have appeared on a share register. Some preferred to forgo the shares rather than to make their deposits known to the tax authorities.
As a response to the competitive advantage of the building societies, the Bank of Ireland eventually took the ‘if you can’t beat them, join them’ route. In 1985 they bought the Irish Civil Service Building Society, partly as a means of tapping into these hot deposits. Other banks, seeing the Bank of Ireland now sporting both banking and building society hats, cried ‘Foul’. In 1986 the government levelled the playing field, putting all financial institutions on the same tax basis. In future all banks and building societies were to pay Deposit Interest Retention Tax (DIRT) at the same rate. Suddenly building societies stood to lose their hot deposits and needed capital to compete in the rapidly deregulating banking world. Ed Farrell Jr was the first of the building society bosses to launch the process of converting his institution into a bank, capitalized via a stock-market flotation – a move that would necessarily involve the forfeit of some of his vast power to run the Irish Permanent as he saw fit.
It was a ground-breaking move. Unfortunately for Farrell it meant that many of his and the society’s questionable earlier activities had to be revealed to prospective investors.
Farrell had been the beneficiary of several unusual transactions. His board had agreed a hugely generous one-off restrictive covenant payment of £300,000 to stop him working for any other building society. He was given a twenty-seven-year contract. Most bizarre of all, he had sold his mansion in Dublin’s leafy Foxrock to the building society in a deal that gave him a tenancy on ultra-generous terms and the right to buy the house back at the sale price of £275,000 – a right he exercised in 1991. In the meantime the society had spent £437,000 on improvements, and the mansion was now valued at £600,000. Such unorthodox deals might have been the norm for building societies under the thumb of one man, but were not considered acceptable behaviour for public companies.
As Farrell prepared for the flotation in 1994, he recruited lieutenants to serve under him as executive directors of the new bank. These included an ex-AIB boss Roy Douglas, former consultant Peter Fitzpatrick, and Peter Ledbetter, who came from GPA, the aviation leasing company that had gone bust as a result of a botched stock-market flotation in 1992. None of them were heavyweights, but they carried sufficient street cred to satisfy the needs of investors pondering the flotation.
Stock Exchange rules required full disclosure of certain deals made in the two years preceding a flotation. Some of Farrell’s deals with Irish Permanent had taken place within the two-year period, and so he wanted to delay the flotation for long enough to avoid the need for disclosure.
Douglas, Fitzpatrick and Ledbetter took the view that it was Farrell or the flotation, and they – together with other directors – forced Farrell out. His transactions with the society had made him an embarrassment to the new arrivals on the board, who regarded him as unsuitable for the head of a publicly quoted company.
Irish Permanent floated on the Stock Exchange without Farrell. The sequel was staggering. Douglas managed to secure a mammoth £201,000 annual salary for himself. Fitzpatrick and Ledbetter pocketed £140,000 each. These were huge salaries for a building society converting into a bank in 1994. Picking at the carcass of the building society, they also helped themselves to a bonanza of share options granted at the flotation price.
Following the flotation the Irish Permanent took Farrell to court. They wanted the Foxrock house back. Farrell countersued for wrongful dismissal. After a day of spectacular charges in the High Court the two sides settled. This was wise: the lid had been lifted on Irish business practices for a day, and too many powerful people had too much to lose. Farrell kept the house and dropped his wrongful-dismissal case.
Soon after Farrell left, it emerged that Irish Permanent had owned a little-known subsidiary, a patent royalty company called Irish Permanent Technology. Farrell had received £200,000 in tax-free dividends from the company, which exploited a legal tax loophole for patent royalty income. Douglas, widely seen as a crusader for virtue after deposing Farrell, had drawn £100,000 from the same source.
Years later two of the men who had banished Farrell were to meet ends that they would not have chosen. Douglas retired unexpectedly as chairman of Irish Life & Permanent in 2004 just before being linked with an offshore sharedealing operation during his earlier career at AIB. He la
ter made a settlement of €53,000 with the tax authorities. Fitzpatrick resigned as IL&P finance director following revelations in February 2009 that the bancassurer had conspired with Anglo in a deposit swap intended to make Anglo’s year-end balance sheet look better. Farrell must have smiled as he saw his protégés-turned-adversaries toppled from their lofty towers.
If Ed Farrell was an old-fashioned autocrat, the men who deposed him turned out to be forerunners of the greed that was to destroy Irish banking in the decade to come, when some of Ireland’s biggest bankers enriched themselves to an extent that would set a standard never before experienced on Ireland’s corporate boards.
The excesses at the Irish Permanent, and the sharp practices of some small-time financiers and their finance houses, were not a one-off. The two big banks ran their own rackets. Prior to the eighties AIB and Bank of Ireland escaped allegations of scandal, but they quickly learned the ways of some of their smaller rivals. Both pursued unsavoury practices behind a façade of plummy voices, expensive education, smart suits and the cloak of noble histories.
These institutions’ pretensions to nobility were skin-deep. What they did have was size. In spades. So big were they that governments buckled at the knee when the banks rattled their sabres.
AIB escaped major controversy or scandal throughout the seventies. It watched as Bates, Gallagher, Moore and finally Farrell bit the dust. It is difficult to explain why AIB so completely lost the run of itself during the eighties and nineties. It was always more of a meritocracy than the Bank of Ireland. AIB had started to poach talent from the civil service in the sixties, while Bank of Ireland continued to recruit through its network of well-connected children of the elite. In 1983, having made a decision to diversify abroad, AIB bought into First Maryland Bancorp in the United States. In the same year it completed the purchase of Insurance Corporation of Ireland (ICI). Despite its name, ICI did most of its business from its London office, underwriting high-risk business. Its UK business was managed by a mover and shaker called John Grace, who gained a reputation as a man who would take risks, underwriting projects others would not touch.
