by Shane Ross
The inquiry into Neary’s role in the fiasco painted a picture of the Financial Regulator’s office in a shambles. Staff there had stumbled upon FitzPatrick’s €87 million dodge by chance, when checking the Irish Nationwide’s returns. The report identified a ‘communications breakdown’. It even revealed that a letter from Anglo Irish to the Financial Regulator, confirming that the bank believed the movement of directors’ loans between it and Irish Nationwide was legal, had ‘gone missing’.
Neary’s resignation marked perhaps the first time during the crisis that Lenihan was seen to have influenced events, not to have been buffeted about by them. The minister could take a rare bow.
The next head on a plate was nearly Lenihan’s own. Six days later, on Thursday 15 January, I was preparing for an RTÉ Prime Time programme, ready to do a run-of-the-mill piece about the ongoing banking crisis, the prospects for recapitalization and, above all, the future of Anglo, which had an Extraordinary General Meeting scheduled the next day. Small shareholders were travelling to Dublin from all parts of the country to attend the meeting. They were worried. That Thursday had been another disastrous session on the markets for Anglo, with the shares tumbling 10 per cent to close at 22 cents. Despite the state guarantee, deposits were still flying out the door, heading for anywhere but Anglo. Some of the money was fleeing Ireland.
The only item on the official EGM agenda was a vote on the €1.5 billion of taxpayers’ money destined for Anglo, but there were scores of questions to be asked of Anglo’s new chairman Donal O’Connor.
Just as I was heading into RTÉ’s Donnybrook studios, the telephone rang. It was the Prime Time producer.
Change of plan. Could I go on with Richard Bruton and discuss some breaking news? Anglo Irish was being nationalized. The nine o’clock news would lead with it.
We struggled through the programme. The implications were mind-boggling. The shares would be suspended at 22 cents, but in reality they would be worth nothing at all.
It was a grim moment for Lenihan. He had fought to keep the banks out of state ownership. His agreement to the measure was a last resort. The recapitalization plan had failed to stem the outflow of deposits or stop the collapsing share price. Lenihan insisted that it was necessary to take Anglo into the custody of the state because the bank’s funding position was weakened and its reputation damaged by the scandals. The minister and the board also knew that Standard & Poor’s was on the verge of downgrading the bank again. The fragile edifice Lenihan had built around all the covered banks had crumbled.
The following morning, Friday 16 January, the markets attacked AIB, Bank of Ireland and Irish Life. Even though short selling was no longer allowed the shares took a pounding. Now that Anglo was off the pitch the guessing game began. Who was next for nationalization? AIB, with its enormous exposure to development loans, was in the front line.
Once again the entire banking system stood on a knife edge.
The minister decided to let the Anglo shareholders’ meeting go ahead, even though it was no longer strictly necessary. The question of whether or not to accept state recapitalization was redundant. Anglo was now fully owned by the state.
I headed for the Mansion House with broadcaster Eamon Dunphy, a co-veteran of past AGM skirmishes. We had fought the battle of Eircom together some years earlier. That had been a well-organized shareholders’ revolt. This time we merely wanted to show solidarity with the battered small investors who had little hope of salvaging anything from the wreckage of Anglo.
The only comfort shell-shocked shareholders could have found on that day was information about how everything had gone so wrong. There were about a thousand of them in the Mansion House, and their gaunt faces told it all. They knew that they would never recoup a cent. Yet, like the bereaved at a coroner’s inquest, they wanted closure. They felt that at least they deserved an explanation, to be told the cause of Anglo’s death.
The meeting was presided over by Anglo’s new chairman Donal O’Connor, who had been appointed to succeed FitzPatrick in a mad rush on 18 December 2008. O’Connor, who trained as an accountant, worked for many years for PricewaterhouseCoopers, eventually becoming managing partner before retiring and hitting the boardroom circuit.
Even with the departure of Lar Bradshaw, the Anglo board post-FitzPatrick was woefully short of directors free of the fallen chairman’s influence. Anglo’s spinners tried to portray O’Connor – who had joined the Anglo board only six months earlier – as different, but it was a misleading picture. O’Connor had served on the panel that selected David Drumm as Anglo’s chief executive in 2004, and in June 2008 O’Connor told me that Drumm had been his own first choice. In April 2007 O’Connor had succeeded Bradshaw as chairman of the Dublin Docklands Development Authority. He was on the audit committee that had approved Anglo’s controversial September 2008 figures, with their absurdly low provision of €2.5 billion for impaired loans – a figure that would be revised upwards to €23.6 billion within six months. And in July 2009 O’Connor would reveal that he was a long-time pal and golfing companion of FitzPatrick. O’Connor resigned the DDDA chair when he took over at Anglo, stating that he wished to ensure that there ‘can be no suggestion of conflict of interest in the various roles I have’.
O’Connor was not so concerned about possible conflicts of interest just a few months earlier when he sat on the boards of both the DDDA and Anglo. The two outfits were involved in various ventures together, the common feature being Anglo’s lending to the DDDA. In one instance Becbay, a company in which the DDDA had a large stake, borrowed the bulk of a €412 million loan from Anglo. At the time the DDDA and Anglo had two common directors, FitzPatrick and Bradshaw. (The DDDA has always protested, in response to criticism of the cross-directorships, that FitzPatrick and Bradshaw left the boardroom if there was any suggestion of a conflict of interest.)
As he stood before Anglo’s shareholders that day in January 2009, O’Connor was as tight as a tick. Seated behind him on the podium were most of the old directors who had presided over the FitzPatrick loans debacle – including Smurfit CEO Gary McGann, CPL chief executive Anne Heraty and Greencore chairman Ned Sullivan.
O’Connor set a template that would be followed by other banks at their AGMs: a standard apology by the chairman followed by hours of stonewalling. O’Connor coldly refused to allow any of the board members sitting behind him to reply to questions from the floor. It seemed that accountability was not to be part of the new broom of state ownership. All O’Connor needed was to survive the meeting. After that, there would be no more AGMs, no more tiresome shareholders. Anglo would have only one tiresome shareholder – the Minister for Finance Brian Lenihan.
O’Connor played the role of coroner with ease. He refused to allow shareholders to ask questions of Ernst & Young, Anglo’s auditors, despite their presence in the Mansion House. Ernst &Young’s senior partner Paul Smith sat uncomfortably in the front row with colleague Des Quigley. When Quigley was photographed by the Irish Times photographer, he refused to give his name.
Ernst & Young took €2.2 million in fees from Anglo in 2008.
Faced with stonewalling from the platform in response to their requests for information, small shareholders were reduced to speaking of the effect the collapse of Anglo would have on their lives. They left the Mansion House devastated, without hope, O’Connor’s apology ringing in their ears.
Luckily for the citizens of Ireland, Lenihan’s two nominees to the Anglo board under the guarantee scheme were well-chosen men who had never been on the directors’ circuit: former Fine Gael leader Alan Dukes and recently retired head of the Revenue Commissioners Frank Daly. They sat on the Mansion House podium looking distinctly uncomfortable, beacons of light among the former FitzPatrick loyalists.
Within days all but O’Connor, Dukes and Daly had resigned. Five non-executive directors rolled over. Later, those among the five who also held sensitive state appointments had to step down from them too: Anne Heraty resigned from the Stock
Exchange board, from Forfás and from Bord na Móna, while Gary McGann gave up his post as chairman of the Dublin Airport Authority.
Lenihan was beginning to collect scalps. He had reason to believe he was gradually coming to grips with Anglo.
Then he blew it.
On 19 January, following the advice of the grey mandarins in the Department of Finance, he filled one of the board vacancies with a member of the old boys’ network. Maurice Keane had been top dog at the Bank of Ireland when O’Connor was at the helm at PricewaterhouseCoopers. PWC were the auditors to Bank of Ireland in 2001 when the bank paid them a record fee of €15.4 million. Keane was a hurried choice, probably the result of a perceived need to appoint a banker to a board that didn’t have one. It was two steps forward with Dukes and Daly, one step back with Keane.
The press release about Keane’s appointment contained an odd omission. It failed to mention that Keane was a board member of the publicly quoted industrial holdings group DCC. Keane had been a loyal supporter of DCC boss Jim Flavin, the man adjudged by the Supreme Court to have indulged in insider dealing. Paul Appleby, the director of corporate enforcement, had secured a High Court inspector to probe Flavin’s share dealing activities, and this investigation was ongoing. Keane’s association with Flavin should have raised the alarm bells. It didn’t.
In the week after Anglo’s nationalization Irish bank shares plunged to new depths. AIB was savaged, dropping from €1.94 to a week’s low of 45 cents before rallying to 74 cents, while Bank of Ireland dropped from 90 cents as low as 31 cents before recovering to 42 cents at the end of the week. Investors believed these banks were in deep trouble and were terrified of a nationalization domino effect.
Time was not on the side of those wishing to save AIB and Bank of Ireland from the same fate. The big two desperately needed funding.
The Department of Finance was in a hurry. Earlier promises by both banks that they themselves would raise a proportion of the capital needed were abandoned: no one in their right mind would invest in an Irish bank that had such a dodgy balance sheet and was a candidate for nationalization. All of the recapitalization money – €3 billion for each bank – would have to come from the government. In return, the two major banks indulged in a piece of political window dressing designed to give Lenihan cover. The banks signed up to some token increases in credit to small businesses and first-time home-buyers. In the public mind the €3 billion capital – on the point of entering the two banks – would be available for lending. In reality it would not. It was simply cushion capital, there to shield them against the bad loans which they had constantly understated.
On 6 February a revised deal was struck. AIB and Bank of Ireland were both to receive €3.5 billion. Every cent of the recapitalization was to come from the Exchequer. In return senior executives of the banks would take pay cuts of 33 per cent, with no bonuses in 2008 or 2009, while non-executive directors’ pay would be reduced by 25 per cent. In return the state was entitled to preference shares with a fixed dividend of 8 per cent per annum. These preference shares could be repurchased at par for the first five years of their life. The minister could also exercise warrants attached to the preference shares entitling him to purchase up to 25 per cent of the ordinary share capital of the banks at pre-determined prices.
The agreement also empowered the minister to appoint up to 25 per cent of the directors of the recapitalized banks.
It is difficult to credit today, but AIB strongly resisted state aid right up to the last minute. Bank of Ireland signed up earlier: Brian Goggin and Richard Burrows had accepted the need for more capital far sooner than AIB’s Eugene Sheehy (whose statement the previous October that the bank would ‘rather die than raise equity’ was haunting him more and more by the day) and Dermot Gleeson.
Burrows saw co-operation with the minister as the bank’s lifeline. Sheehy saw it otherwise. State aid meant state control. His resistance to state funds was a last-ditch attempt to hold on to AIB’s autonomy. He had staked his reputation on it. His stance was bizarre, as AIB was even more exposed to property developers than Bank of Ireland. He seemed to believe that AIB could somehow work its way out of the swamp.
On 12 February Sheehy took to the airwaves of RTÉ’s Morning Ireland to admit that AIB regretted some of the lending mistakes made in recent years. He even expressed gratitude to the government for the €3.5 billion, funding he had disdained only weeks earlier. Yet he was defiant. In a spirited performance he insisted that AIB was now ‘well capitalized’. He parried RTÉ interviewer George Lee’s questions well, admitting that bankers’ pay had been too high and pleading that he was taking a 25 per cent reduction. He went on to assert that he was not resigning and that he had the full confidence of the board. As any politician would have told him, once the votes of confidence begin, unanimous support signals mortal danger.
On the same day that Sheehy publicly ate humble pie Brian Goggin was interviewed on RTÉ television by Christopher McKevitt. Asked what his salary would be in 2008 and 2009, Goggin – apparently totally unprepared for the question – put on a hangdog look and pronounced the immortal words: ‘I think my total disclosed compensation in the report and accounts, I think, was €2.9 million.’ He then added, ‘This year it will be less than two million.’ He looked as though he expected a visit from St Vincent de Paul.
The nation was outraged. Former Labour leader Pat Rabbitte said it all in the Dáil: ‘In the name of God what sort of alternative planet are these guys living on?’
Goggin had to go. He was already due to retire in June, but a few days later Lenihan announced that he would be stepping down in a matter of weeks.
Goggin will forever be remembered for his outrageous pay. The headline figure of €4 million for his overall package in 2007 is permanently embedded in banking folklore. Under Goggin, pay at the Bank of Ireland rocketed parallel with a steep upward curve in property loans. In the very year that Goggin’s salary hit the €4 million mark property exposure reached 67 per cent of the entire loan book. At the same time nearly all the top executives shared in an options orgy, while Richard Burrows and the other directors helped themselves to huge fees.
A lukewarm tribute from Burrows stating that Goggin’s decision was taken ‘in the interests of the bank’ gave the game away. In case there was any doubt Burrows went on: ‘I believe that this has motivated his decision to seek retirement this summer to make way for fresh leadership to take Bank of Ireland through the challenges which lie ahead. We wish Brian well in the future.’
Gillian Bowler, chairman of Irish Life & Permanent, was at a meeting on Tuesday 10 February when her telephone rang. It was her chief executive Denis Casey. There was a spot of bother on the horizon. The media was running with a story about Irish Life having made a large deposit to help Anglo out at its year end.
Casey reassured Bowler that the Department of Finance knew about it. The implication was that if the department knew the details, the transaction must be kosher.
There was no doubt that all Ireland’s financial institutions had been asked by the authorities to ‘wear the green jersey’ and assist their fellow Irish banks in a time of crisis. They had quietly agreed to help each other, and they had done so. Anglo was one of a number of parties believed to have provided interbank lending to Irish Life in June 2008. On the surface, the latest incident looked like a return favour. Casey initially argued that the transaction, now under media scrutiny, was simply part of this official strategy of mutual help.
Of all the bankers in Ireland Denis Casey would have seemed the most unlikely to get mixed up in a financial scandal. He was hardly visible on the public radar, and that is probably the way he wanted it to be. He started his working life at AIB in 1976 at the age of sixteen before moving to Irish Life in 1980. Having served in a number of Irish Life’s divisions, he gained the pivotal position as head of the retail business in 1999 at the time of Irish Life’s merger with Irish Permanent.
Casey had none of the ebullient spark
le of his predecessor as chief executive, David Went, although he is generally believed to have been Went’s anointed successor when he took over in 2007. Most of the limelight was stolen by Bowler, who was easier on the eye and not as camera-shy as Casey. Now he was being introduced to the Irish public in circumstances he would never have anticipated.
That evening Casey told Irish Life colleagues that he had talked to Kevin Cardiff, the banking boss in the Department of Finance. Ominously he told them that Cardiff had said that ‘structure might be a problem’ with the deposit. That must have been the understatement of the entire crisis. A ‘problem’ with ‘structure’ was finance-speak for a blatant breach of the rules.
After that, Bowler moved into overdrive. Her inquiries unearthed a nightmare for Irish Life. The €7.5 billion deal was an artificial transaction. It was calculated to help Anglo, and designed to deceive the markets. It was a catastrophic failure for Irish Life, an Irish bank that had managed to keep its nose relatively clean. Irish Life’s directors had not been told of the enormous transaction. That in itself would have been a sin, even if the deal had been above board. It wasn’t.
The facts emerged quickly. The deal was not meant to help with liquidity, the legitimate reason for the ‘green jersey’. IL&P’s executives had agreed to Anglo’s requests not just for the money but, crucially, for how and by what route it would be transferred. Anglo transferred €7.5 billion back into IL&P as an interbank loan; the only purpose of the €7.5 billion that went to Anglo was to give Anglo a mechanism to classify the injection as customer deposits rather than interbank funding, in order to make its year-end accounts look better. The IL&P executives would argue that they were not responsible for how Anglo chose to classify the funds, but they had assisted Anglo by using the peculiar mechanism that it had sought.
