by Shane Ross
He was right. The artificial nature of the boom ensured a matching collapse when the worm turned.
It is not as if Fianna Fáil did not see the danger. As early as 2002 Charlie McCreevy had signalled that most of the property incentives – including urban, rural and town renewal and tax breaks on car parks – were set to be terminated by 31 December 2004. One year later, however, he extended the termination date by another eighteen months, to July 2006. The property bubble was well inflated by then. Politicians were reluctant to burst it before a general election due by May 2007. And all the time the builders had been lobbying the government frantically for a delay.
It took until February 2006 for the full Indecon and Goodbody reports to be published, more than three years after McCreevy had first announced the beginning of the end for property reliefs. The delay had bought valuable time for the builders.
Indecon’s report was brave and decisive. There was no ambiguity. It gave the thumbs down to nearly all the property breaks. The incentives did not stand any serious scrutiny. Indecon’s words – ‘the tax incentives are an extremely high-cost and wasteful mechanism to achieve objectives’ – could not have been comforting for Cowen or Ahern.
The figures cited in the report were devastating. The total cost to the Exchequer of all the property-based tax breaks granted came to €6.8 billion. The net figures were even more revealing. The consultants reported that even after all the stamp duty, the VAT and the employment spin-offs, the Exchequer – and hence the taxpayer – was a net loser.
Indecon recommended an immediate end to tax incentives for hotels, student accommodation and multi-storey car parks. Indecon asserted that it saw ‘no cause of market failure which would justify government subsidies for multi-storey car parks’.
The Goodbody Economic Consultants report revealed that the urban and rural renewal schemes had been even costlier to the state. Goodbody asserted that the rural renewal scheme, aimed at reviving counties Leitrim, Longford and certain electoral areas of Cavan, Roscommon and Sligo, had merely resulted in excess supply of housing – with a state subsidy of €59,300 per house. Surprisingly, it claimed that the urban renewal scheme had been ‘extremely valuable’ with positive impacts on dereliction and urban design, and had kick-started developments in a number of areas. It said that there had been benefits in the areas of commercial development, but the scheme had been less successful in delivering social benefits.
Goodbody then confirmed the worst fears of the government’s critics. The tax benefits had gone to a small group of high-income individuals; they had brought about ‘significant property price inflation’; and the beneficiaries had been not the ordinary people of urban and rural Ireland, but ‘landowners and property developers’.
Neither Indecon nor Goodbody asked the sixty-four thousand dollar question. Were specific political decisions on urban and rural renewal designations capable of enriching individuals at the stroke of a ministerial pen? That was beyond the consultants’ brief but it remained the elephant in the room. The power to designate whole areas as fit for urban or rural renewal lay with the Minister for the Environment. Allegations of abuse of this power have been made against Fianna Fáil in the tribunals of inquiry.
Taoiseach Bertie Ahern was at the centre of one such allegation that remained unresolved for several years. Whatever the merits of the case – which led indirectly to the discovery of the peculiar transactions that brought about Bertie’s resignation – it demonstrated the unhealthy scope for corruption in legislation that gave such power to ministers to alter the value of a potential site.
Bertie Ahern has denied a claim that he was given £80,000 by builder Owen O’Callaghan to block a rival businessman’s bid for a tax break. Tom Gilmartin, a celebrated but erratic witness in the Mahon Tribunal, claimed that he had been told by O’Callaghan that he gave Bertie the money to stop Green Property from developing the Blanchardstown Centre. Green Property was seeking to gain urban renewal status for Blanchardstown.
Blanchardstown failed to get the renewal status even though local politicians had engaged in a serious lobbying effort. Gilmartin claimed that O’Callaghan had boasted that his £80,000 bung to Ahern had ensured that Green Property failed to get the tax break. O’Callaghan denied the claim.
Numerous other cases in the tribunals showed what a political minefield the renewal designations were. Another Fianna Fáil minister, Pádraig Flynn, came under serious scrutiny from the Mahon Tribunal for his decision to designate land in Tallaght for urban renewal benefits.
Monarch Properties, well-known supporters of Fianna Fáil, had been sitting on the land in Tallaght until Flynn used his powers as minister to designate it as eligible for urban renewal. These included mouth-watering 100 per cent capital allowances for investors, double rent allowances and rates remission. The anchor tenants, including Dunnes stores, were entitled to write off their capital costs against tax over five years.
When Flynn appeared before the tribunal in 2006 he insisted that three meetings he held around that time with Phil Monahan of Monarch Properties were only courtesy visits. When asked how he reconciled this claim with the detailed preparation of land rezoning material for these meetings by his staff, he replied that he had no recollection of discussing rezoning.
Phil Monahan had made a £25,000 contribution to Fianna Fáil in 1991 and other individual contributions to Fianna Fáil candidates’ campaigns.
Goodbodys and Indecon found that the net tax forgone by the Exchequer in relation to the various incentive schemes was €2.8 billion. Combined, the property tax breaks, the urban renewal schemes and the rural renewal schemes had been a drain on the taxpayer; but they had been a bonanza for the builders, an election-winning formula for the government and a godsend for the bankers.
In June 2006 Cowen signed an order to phase out urban and rural renewal together with many of the more controversial tax breaks. Most would end by December 2006, but transitional arrangements remained in place until June 2008. It took Fianna Fáil politicians five and a half years to phase out the main legislative measures that had blown up the property bubble.
Despite the tribal relationship between Fianna Fáil and the builders, many of the property developers proclaim no party allegiance, pleading that they are practical people and must deal with those in power. ‘Fianna Fáil is always in power. Politicians are a channel for getting things done. So we deal with Fianna Fáil,’ says one of them. It worked.
It also rings true. When Fine Gael last came to power for a brief period in 1994 their debt was almost instantly cleared by their main fund-raiser, Michael Lowry. The scent of power brought a flood of money. A multimillion-pound party debt was cleared in a matter of months. Some of the subscribers were the same builders who had supported Fianna Fáil a few months previously.
But one Fine Gael insider remembers that it was the bankers, not the builders, who gave the party a dig-out once they enjoyed their period in power, however brief. She recalls that Bank of Ireland suddenly gave Fine Gael much better terms, writing off interest once they were in office. ‘AIB under Tom Mulcahy changed its attitude to us too. We saw money from the banks. At the time the builders were nothing like as flush as they were to be ten years later.’
She remembers that Richard Burrows, then chief executive of Irish Distillers, was particularly sympathetic at the time. Ten years later, Burrows was to become governor of the Bank of Ireland.
Burrows seems to have been a political neutral. In 2002 Irish Distillers’ name cropped up as a supporter of Fianna Fáil. The drinks company, where Burrows was chairman, held a fund-raiser for Fianna Fáil. They sent the party €750 from the fund-raiser followed by a €5,078 donation.
Richard Burrows’s name surfaced again in support of another Fianna Fáil campaign, this time as a banker in 2004. Mary McAleese was soliciting funds for her re-election. Eyebrows were raised when directors of the Bank of Ireland flocked to the Fianna Fáil candidate’s flag. Burrows personally ponied up €2,500 for Mc
Aleese. A diplomatic move, as he was next in line for the governorship and McAleese’s re-election fund-raising committee was chaired by none other than the governor at the time, Laurence Crowley. Two other directors of the bank, Terry Neill and chief executive Brian Goggin, sent McAleese a €2,500 personal donation towards her campaign. Their decision looked like a three-line whip imposed on the top brass. Goggin was never – before or since – known to have as much as a hint of a party-political preference.
Crowley told me that, ‘I personally asked them for the contributions. I was chairman of President McAleese’s re-election fund-raising committee. I think she is a fine person and I knew her husband Martin from our Stokes Kennedy Crowley accountancy days. I admire their efforts to bring the communities in Northern Ireland together. At the end of the day all the money was returned as she was elected unopposed.’
Another bank director to back the Fianna Fáil presidential candidate was Kieran McGowan, a board member of Irish Life & Permanent. No such enthusiasm was shown by AIB, where former Fine Gael Attorney General Dermot Gleeson held the chair.
Some of the usual suspects sent in similar cheques for McAleese, including four from the Durkan builders’ stable (all for €2,500) and one from Mark Kavanagh’s development company, Hardwicke.
Apart from the presidential campaign, financial payments from banks to politicians have been scarce in recent years. Local golf classics have sometimes been supported by branches, but the head offices have shunned the bigger picture, fearful of controversy or being accused of political bias.
There is a mixture of evidence that bankers kowtowed to powerful politicians, but only on a one-off basis. They buckled at the knee in front of threats from Charlie Haughey that he could be ‘a dangerous adversary’. AIB and Ansbacher banks absolved Garret FitzGerald of almost £200,000 when he lost a mint on GPA shares. (FitzGerald said in 1999 that he believed his former Attorney General Peter Sutherland, who was chairman of AIB at the time, was unaware of the deal.)
The failure of the banks to cough up large sums of money to political parties is, on the surface, a puzzle. How do they exercise huge political influence without playing the normal political game?
They are good at the game, but they play it a different way. First of all, they fund two lobby groups, not one. They have a stranglehold over both.
Bankers have been the main moneybags of the employers’ group IBEC for many decades. In 2008 AIB (€194,000), the Bank of Ireland (€200,000), Irish Life (€133,000), National Irish Bank (€64,000), Ulster Bank (€194,000), the Irish Nationwide (€14,000) and EBS (€58,000) were IBEC’s biggest contributors.
IBEC was bought long ago – and IBEC has stayed bought. The lobbying body makes representations on behalf of its paymasters to the government. It has suited all governments to keep IBEC and its most important component, the banks, onside over the entire period of social partnership. IBEC has invariably played ball with the government and the social partnership powerhouses in the Department of Finance. IBEC’s stance would have pleased its funders in the banks, anxious to keep on the right side of their traditional allies among the mandarins in Merrion Street. Successive administrations (nearly all Fianna Fáil-led) have had reason to be grateful to the banker-led employers group.
Recent returns from IBEC reveal that the influence of bankers on the employers’ ruling council is massive. Richard Burrows was IBEC president before he became Bank of Ireland governor. In 2004 IBEC’s president was Gary McGann, then a director of Anglo Irish Bank. The treasurer was Tony O’Brien, chairman of Anglo until 2002. Of the four trustees, two were bankers. Maurice Pratt, later to become chairman of the Bank of Scotland, and David Dilger, already on the Bank of Ireland board, ensured that the bankers’ ethos was well represented.
Even Eugene Sheehy, the boss at AIB, joined the happy band of bankers and ex-bankers sitting on the IBEC council. Apart from their key leverage with IBEC the banks operate their own Irish Banking Federation to lobby solely for the banking sector. Five years ago the outfit was taken over by Pat Farrell, a former general secretary of Fianna Fáil, an ex-senator and a friend of most of those in power. Farrell is able to pick up the telephone to Finance Minister Brian Lenihan at the drop of a hat. The banks have their social partnership angle sewn up at national level. They are shadow social partners. Their political lines of communication to Fianna Fáil are second to none.
But above all the banks have seen little need for direct access to politicians. In many ways they have deliberately kept their distance. Life has been good for them. As long as they remained below the radar, they were undisturbed. Opposition politicians railed against their overcharging, their monopolistic practices and their downright dishonesty, but governments mainly left them alone. They were the province of the Financial Regulator and the Department of Finance. They were there to be policed by people who supposedly understood the mystery of banking. Politicians were happy to leave oversight of the bankers to others.
The politicians looked after the mandarins. The mandarins looked after the Central Bankers and the regulators. (The governor of the Central Bank was paid more in 2008 than the chairman of the US Federal Reserve, as was the chief executive of the Financial Regulator.) The Central Bankers looked after the bankers. The bankers looked after IBEC. And IBEC looked after the government. The circle of oligarchs was watertight.
The builders and developers were temporary visitors to the oligarchs’ table. They were natural outsiders, but they were welcome to the table as long as they provided the vital vehicle to outrageous riches for the insiders. Once the bankers had identified the builders as a vehicle, the regulators turned a blind eye to the orgy of lending, the Department of Finance collected the property taxes and the government used the windfall to win elections. Such a loose, almost anarchic, financial order was a gift to any rogue banker plotting a quick road to riches. Anglo Irish Bank was an inevitable child of such a chaotic system championed by so many powerful vested interests. Provided they all looked after each other, no one would call ‘Halt’. Huge pay rewards, not just to the banking elite, ensured co-operation between all the participants in this largesse. Other bankers, eyeing Anglo’s easy pickings, set out in hot pursuit of the developers. It was dead easy. Every oligarch was a winner.
The banks did not need to fund the parties. In their hands they always held the ultimate weapon, the destruction of an entire financial system with its unthinkable economic and social consequences. It was not a gauntlet that any government could ever afford to pick up.
6. The Mortgage War
One day in March 1996 the telephone rang in Phil Flynn’s office. On the other line was Greg Sparks, a powerful chef de cabinet in the Irish government. Sparks was acting on the orders of the Minister for Finance, Labour’s Ruairi Quinn.
Flynn, a former vice-president of Sinn Féin, had been a trade union official for decades. Many, including Ruairi Quinn, believed he had put his republican past behind him. Quinn recalls that as Minister for Labour in the mid-eighties he had hosted a lunch in Leinster House at a time when Flynn was being ostracized by various ministers, including Quinn’s Labour Party colleagues Barry Desmond and Liam Kavanagh. But at the lunch Flynn made a speech about how he ‘no longer believed in the armed struggle’. Quinn regarded the statement as a watershed.
By March 1996 Flynn had been general secretary of two powerful public service unions, so it was not unusual for him to receive calls from Labour ministers or their fixers, like Greg Sparks, on mundane matters of business.
This call was different. Sparks had an idea to run past Flynn. He wanted the old republican to join the board of the state-owned ICC Bank.
Flynn accepted immediately. Later he met Quinn, told him he did not know much about banking, and was astonished to hear that the minister wanted him not merely as a director, but as chairman.
It was an act of faith by Ruairi Quinn. He believed in Flynn’s conversion. Not everyone did, but Flynn became an effective chairman of ICC, working happily
with Quinn and his successor as Minister for Finance, Charlie McCreevy. Perhaps his most memorable legacy as chairman was the sale of the ICC to Bank of Scotland in 2001. So skilled did he prove as a negotiator on the ICC side of the table that a hugely impressed Bank of Scotland team asked him to stay on as chairman.
Flynn had worked wonders for himself. A former supporter of the armed struggle, a trade union chief, had become chairman of the Irish subsidiary of a British bastion of capitalism.
The appointment suited the Scottish bank. After their expansion into Ireland the Scots needed some Irish faces to front the operation. None could be better than the nationalist with trade-union street cred.
By the time Flynn took the chair in 2001, the Bank of Scotland had already made a huge impression on Irish banking. Two years earlier it had announced that it would be the first foreign bank to challenge the comfortable club in the Irish mortgage market. It did so by slashing mortgage interest rates to 3.99 per cent, a high-profile reduction to below the psychological Rubicon of 4 per cent. Other banks had been charging on average 1.25 per cent higher for variable rate mortgages.
By any standards the move was groundbreaking. A cut of a full 1 per cent in variable mortgages by a single bank in one swoop was unprecedented. The Bank of Scotland’s invasion was greeted with waves of welcome in the media. The bank won the Sunday Independent ‘Business of the Year’ award, narrowly pipping rising entrepreneur Denis O’Brien for the prize.
