Fingers

by Richard Curran

  the advantage was that here was a company or a bank that was falling, and who did the Irish government give it to? Not another bank that was going to fall but a bank who they think a lot of.

  That was what was in it for us, that it would state that we were beyond it. We were saying that if Irish Nationwide fell someone has got to pick it up because if it falls someone else will fail.

  We didn’t see it as an opportunity to create more profitability but we did see it as an opportunity to eventually paint a picture of ourselves in the eyes of the new world of aiding and abetting the state with a weak institution.

  On 16 September the US government seized control of American International Group in an $85 billion deal that showed how fearful the world’s biggest economy was that its financial system could be about to collapse.

  That night David McWilliams appeared on ‘Prime Time’ and warned that Ireland’s banks were going to go bust. In response, the Irish Banking Federation accused him of ‘loose talk.’ Driving home that night, McWilliams rang Lenihan to tell him of his fears.

  The following morning, 17 September, the Irish Times had an article by Noel Smyth, a major client of both Anglo Irish and Irish Nationwide, apparently off his own bat.

  If the Government was to persuade the Central Bank to guarantee all deposits in Irish banks operating under a banking licence from the Central Bank in the State, the effect would ensure that depositors considering investing in Ireland would know they had a State guarantee and that the banks would always ensure their money was repaid.

  A guarantee must always be unequivocal.

  None of our banks in Ireland are in the remotest area of trouble or of any concern. So surely now is the time to step in and confirm that all deposits made in our banks are fully guaranteed.

  Smyth did not disclose in his article that he owed hundreds of millions to Anglo Irish and Irish Nationwide.

  Under Irish law, deposit-holders were ranked equally with senior bond-holders. If the state fully backed deposit-holders it would have to do the same for senior bond-holders, the highest class of bond-holders, at the very least.

  McWilliams too had an article that morning, this time in the Irish Independent. ‘Put simply, we are looking into the precipice. However, there is a solution. The first should be a shotgun marriage between two of our banks.’ This might see either AIB or Bank of Ireland ‘take over one of the smaller banks,’ a reference to either Anglo Irish or Irish Nationwide, or both.

  This marriage should be forced by the Central Bank to save the system.

  The Central Bank should also look at selling one of the country’s bigger banks too if necessary.

  At the moment, the banks are playing chicken with the market, pretending that they don’t need to go to the Central Bank for money.

  If we don’t see these moves quickly, there will be serious trouble. It is highly likely that a bank will go bust and the entire financial system could come crashing down. Let’s not wait for this. Let’s not repeat the mistakes of our Irish American cousins. We can act now and do it decisively.

  After they had read these articles over their morning coffee, it was further hammered home to bankers and the state that the crisis was much closer to home than America.

  Late that Wednesday it was announced that Lloyds Bank was dramatically taking over Halifax Bank of Scotland—the parent company of Bank of Scotland (Ireland)—in a £12 billion merger. Bank of Scotland (Ireland) had been among Irish Nationwide’s fiercest competitors in paying ridiculous prices for land banks around the country.

  In that momentous week, titans of international banking fell. Would an Irish bank or building society be next? Lenihan was on a knife edge. He was being besieged with different messages from bankers, regulators, civil servants and business people and didn’t know who to trust. That night at 10:20 p.m. he turned up at McWilliams’s door to seek his advice. In his book Follow the Money, McWilliams said he ‘looked exhausted. He had been working day and night and he was trying to understand everything.’

  The Department of Finance, McWilliams wrote, was then looking at getting AIB and Bank of Ireland to take over both Irish Nationwide and Anglo Irish. AIB, however, the country’s biggest bank, was Lenihan’s biggest fear, as it was then facing huge funding difficulties. McWilliams told Lenihan that things were now so bad that he needed to guarantee not only deposit-holders but also the banks’ main source of funding: the bond-holders.

  He was worried that this guarantee idea was too radical. And I could understand this because he was the man who had to make the decision, not me.

  I told him he simply had to guarantee everything for a limited period to make sure that an illiquid dilemma didn’t lead to an insolvency catastrophe.

  But, he argued, warming to the idea, what if we got the insolvencies? We could never afford to cover all the liabilities.

  This was the risk, a huge risk, but one that could be reduced if the guarantee was not extended beyond a fixed period.

  I argued that over the two years of the guarantee, the true extent of the bad debts would become apparent as would the depth of the recession and, armed with this knowledge, he could then choose which banks to save, or not, in an orderly fashion.

  The key to McWilliams’s idea, however, which had been used in other countries, was that any guarantee should be temporary. Sadly, this is not what later occurred.

  Events continued to accelerate. On 18 September, Fingleton met the secretary-general of the Department of Finance, David Doyle. The meeting was acrimonious, as Fingleton despised Doyle. He insisted that the society was in good shape, but Doyle was sceptical.

  Later that day the office of the Financial Regulator announced that it was banning the short-selling of banks from midnight. The move was of great advantage to Anglo Irish and the other listed banks.

  That night Tony Garry, head of Davy Stockbrokers, the largest firm in the business and stockbroker for Anglo Irish at the time, met David Doyle. ‘It was a private conversation between myself, David and one of my colleagues,’ Garry told Tom Lyons in the Sunday Independent in 2012. However, sources told Lyons that the economic crisis was the subject of the conversation and that the prospect of a guarantee was mentioned, among a range of solutions. No notes appear to have been kept of this meeting.

  The following day Fingleton wrote to Doyle to repeat what he had told him the day before. A ‘realistic provision’ for Irish Nationwide’s future losses, he said, would be only between ‘€60m and €100m.’ The society, he claimed, was ‘a very profitable and viable institution.’ Nothing had fundamentally changed, he insisted, and the society ‘can deliver above-average profits on an ongoing basis subject to us resolving the short-term liquidity problem.’ Irish Nationwide would make a pre-tax profit of between €150 and €175 million in 2008. Not a penny would be lost on its €1 billion European commercial loan book, while its €3½ billion British loan book was a ‘very robust and good quality book where the borrowers are extremely successful and professional.’ Only ‘a small number’ of transactions in its €2.9 billion Irish commercial loan book would lose any money, as ‘the body of the book is sound.’ This letter, Fingleton said, was written to ensure that ‘you did not leave yesterday with the impression that we envisaged any serious problems with our book on an ongoing basis.’ The letter was also circulated to the Financial Regulator, Patrick Neary.

  Everything in the letter would be shown to be entirely wrong, the only real question being whether Fingleton knowingly lied or was merely blind to the fallibility of his creation.

  On the same day the Irish Times got wind of the moves by Anglo Irish to take on Irish Nationwide. In a front-page story, which Fingleton was convinced had been placed by Anglo Irish, it said there had been talks over the previous ten days about a merger. Combined with the ban on short-selling, the news caused Anglo Irish’s share price to rally strongly. Fingleton, however, was furious, as he believed the bank was using his society for its own ends.

  He was r
ight. Ireland’s banks were battling for survival. They were prepared to play dirty against each other in order to survive.

  At about the same time that the Irish Times story was published, Anglo Irish became aware that the government had asked Goldman Sachs, the world’s biggest investment bank, to give it its views on Irish Nationwide. Goldman Sachs had advised the society when Fingleton was trying to flog it. It was familiar with its balance sheet and its problems, so in some ways the government asking it for help made sense. In other ways it didn’t. Goldman Sachs had been prepared to value the society at over €1½ billion less than twelve months previously, so it was not ideally placed to give an independent assessment.

  Anglo Irish, however, didn’t know what Goldman Sachs was going to report. It was anxious that if the investment bank was too negative this would read badly for Anglo Irish, as it had a similar loan book, only ten times the size. Drumm told FitzPatrick to ring Peter Sutherland, his pal from UCD, a former member of the European Commission and now chairman of Goldman Sachs International. FitzPatrick describes the call as a ‘soft chat.’

  ‘I sort of said, Where are the guys in Goldman Sachs going with this [review of Irish Nationwide]? We were trying to ensure that we were going to get a fair crack of the whip from them.’ Whether Sutherland expressed FitzPatrick’s views to the Goldman Sachs management is not known. Events, however, were now moving downwards for Irish Nationwide.

  On Friday 19 September, after the Irish Times article appeared, Tom Lyons of the Sunday Times submitted a series of questions to the society, asking how it could possibly pay its bond-holders as the year went on. His questions were based on a presentation the society had given to bond-holders. According to this presentation, the society needed to go to the capital markets to fund €1.5 billion of the €2.3 billion in scheduled loan repayments due the following year. The largest tranche of these, €1 billion, was due in May 2009.

  The bank told investors in June that €800 million would be funded from its existing deposits. That December it was required to pay back another €634 million to bond-holders. ‘This would not be a problem for Irish Nationwide in normal circumstances,’ a capital-markets source told Lyons, ‘but with global capital markets in lock-down this is a tremendous challenge.’

  Lyons’s questions essentially related to what the society would do if the markets did not unlock. The questions did not say the society was going to go bust immediately, but they did suggest it would really struggle to survive in the long run.

  Lyons also rang the society directly and left his mobile phone number with Fingleton’s secretary. Irish Nationwide’s spokesperson, James Morrissey, rang back and said he would endeavour to get a response from Fingleton. He came back later that day to say that Fingleton was unable to comment to anyone.

  The following morning, a Saturday, Lyons and his colleague Brian Carey wrote their story. It drew attention to the capital-raising issues, and it said there were now talks behind the scenes to try to rescue the society, which was under mounting pressure. As he was in the middle of writing, Lyons’s phone rang. It was Michael Fingleton.

  ‘Is that you, Aengus?’

  ‘No, Michael, it’s Tom Lyons from the Sunday Times. Can I ask you a question?’

  The phone went dead.

  About 4:30 p.m. that Saturday, James Morrissey rang Lyons on his mobile phone. He said the Sunday Times story was totally wrong, but he couldn’t explain why. ‘Irish Nationwide is not the problem here,’ he barked. ‘Somebody is spinning here, and you need to think who—the society is in good shape. You have to listen to me, you are wrong,’ he said. Morrissey threatened to go above Lyons’s head to ensure that the society’s side of the story was heard.

  ‘Why don’t you tell Fingleton to ring me, and not Aengus [Fanning], then, if everything is okay?’ Lyons asked. ‘Look, go ahead. Complain if you want. You won’t get anywhere.’ The conversation ended.

  Minutes later Seán Dunne rang up, unprompted. He wanted to discuss the crisis and the wild rumours circling Irish Nationwide. ‘I’m telling you, Irish Nationwide is not the problem,’ he said. ‘I hear Anglo is in real trouble.’

  Dunne seemed to have an inside track of sorts on what was going on. He made reference to contacting senior Fianna Fáil sources, who were keeping him briefed. He also said he was in touch with Fingleton, who had assured him about the strength of the society.

  ‘We’ll see,’ Lyons replied. ‘I’ve just heard the same thing from James Morrissey. He is telling me this far too late in the day—I sent him questions yesterday. The story is written. If we’re being spun he should tell me why. Now all he can say is I am wrong but can’t explain why.’

  Morrissey, however, was only partly wrong. He was right that Anglo Irish was under greater pressure and was desperately trying to turn the spotlight onto Irish Nationwide instead. But he was wrong that Irish Nationwide was much better off. At the highest levels of the state it was known that the entire banking system was under severe strain and heading towards a possible breaking-point.

  That Saturday, in the hope of calming the markets before the banks opened again on Monday, the government announced that it was increasing its deposit guarantee limit for individuals from €20,000 to €100,000. Lenihan stated:

  I want it to be known that the Government is confident about the strength and resilience of the Irish financial system. The Government is committed to the stability of our financial system, so that money placed with an Irish credit institution would not be at risk.

  As I said yesterday, the Irish Government wants to protect the whole financial system, secure its stability and ensure that all deposits in Irish financial institutions are safe.

  The Central Bank and Financial Regulator have stressed the soundness and stability of the Irish financial system. This measure provides additional reassurance to depositors in Ireland that their savings are safe. The new guarantee level is now among the highest in the EU.

  This was good news for all the banks, but especially for Irish Nationwide. The negative publicity had been scaring its older members, who were anxious to protect their nest eggs. They were constantly ringing its branches to ask if their money was safe. Irish Nationwide assured them that things were okay. But the reality was that they were right to be afraid.

  The following day, Sunday, a secret briefing by Goldman Sachs revealed that Irish Nationwide was within days of going over the edge. (This briefing document was released to the Committee of Public Accounts of the Oireachtas in 2010.) A managing director of Goldman Sachs, Basil Geoghegan, gave the presentation about the society to the Domestic Standing Group. Geoghegan had earned Goldman a hefty fee the previous year for advising the society on its aborted sale process; now he was in front of some of the most senior civil servants charged with protecting the state during this crisis.

  The high-level Domestic Standing Group was set up to ensure that all branches of the state worked together by allowing senior officials from the Central Bank, the Financial Regulator’s office and the Department of Finance to meet regularly to exchange information. Among those at the meeting that Sunday were Kevin Cardiff and Con Horan, prudential director in the office of the Financial Regulator, who was in charge of supervising the banks. Patrick Neary is also recorded as being there for part of the meeting.

  Notes kept by the group record the principal points made by Geoghegan. He said that Goldman Sachs had reviewed the society’s top thirty borrowers. ‘Lot of reassurance in those that there is real value there,’ he said. His next point, however, was the qualification that this was only ‘based on management discussions.’ Even at this late stage there was an information gap that saw the state still relying on Fingleton and his cronies. ‘Very few loans above €250m. Irish bank well diversified,’ Goldman Sachs said. Despite this, ‘KPMG are looking through a worst case scenario.’

  So far, could see hits eat through capital but nothing to suggest it would go further than that.

  Auditors do not see performance here
being worse than anywhere else.

  Management’s central case assumption is a loss of a few hundred million.

  Liquidity a big issue—at current rates reaches limits in 11 days but real danger of acceleration.

  Convinced help from authorities will be required—soon.

  Suggested range of options for discussion with pros and cons (1) nationalisation (2) stand alone with liquidity support (3) break up.

  Mark to market value right now maybe 50/60% but a lot of value in loans if worked through.

  The group listened to Goldman’s assessment. It knew that the government was planning to send the global accountancy firm Price-Waterhouse Coopers into all the banks, including Irish Nationwide, to get an independent view in the coming days.

  The following day, 22 September, Michael Walsh—without Fingleton’s knowledge—met the secretary-general of the Department of Finance, David Doyle, to ‘press his case.’ In a six-page paper he outlined four possible scenarios for the society. It provided, for the first time, an honest assessment of the perilous situation facing it.

  The first scenario, Walsh said, was ‘Do nothing.’ Capital markets were now entirely closed to the society and it was impossible to refinance its loans with other institutions.

  Assuming current market conditions prevail the do nothing option will inevitably result in the collapse of Irish Nationwide. A collapse of Irish Nationwide would have implications for the circa 180,000 depositors and result in a distressed sale of the loan books. Given the high level of property related lending in all financial institutions this could have serious consequences as valuations in all institutions might then have to be set to reflect distressed levels.