It was a farce and a disgrace that Fingleton’s right to privacy on what had become a very public matter outweighed the public’s right to know. Yet again the powerful were off the hook.
Regling and Watson’s report concludes that the banking crisis had ‘global influences, yet it was in crucial ways “home-made”.’ They state that it was ‘not clear’ that serious failings of corporate governance were ‘limited’ to Anglo Irish Bank.
It seems important to identify how such very serious governance failures were initiated; how and why internal checks and balances failed in restraining the management of certain banks; whether there were failures of auditorial vigilance; whether supervisors knew of the events (and if not, why not); and why the response of supervisors was not more forceful.
They called for an investigation into ‘breakdowns in risk management approaches and in some cases the unwarranted or excessive overriding of internal guidelines.’
It should be established how and why internal checks and balances failed; whether supervisors perceived the risks; and why the response of supervisors was not more forceful.
Both strands of the reassessment suggested above—policy review and formal investigation—now need to be pursued rapidly. This is important in order to identify lessons for policy in the future. It is also crucial in order to ‘clear the air,’ and thus bring public debate on the Irish banking crisis to closure.
They called for a full banking inquiry to be ‘pursued rapidly.’
On foot of these two banking reports the leader of Fine Gael, Enda Kenny, tabled a motion of no confidence in the Taoiseach, Brian Cowen. Kenny, who feared his own leadership heave, was anxious to position himself as a man tough on rogue bankers who was keen to hold people to account. The motion failed, and Cowen hung on.
It was only later, in January 2011, that Cowen finally resigned in the wake of The FitzPatrick Tapes, which revealed that he had been in repeated contact with Seán FitzPatrick, chairman of Anglo Irish Bank, during the thick of the financial crisis. They had discussed, among other things, how the country’s richest man had taken a disastrous €2½ billion punt on Anglo Irish. This was the very thing neither of Ireland’s two official reports chose to investigate: the interface between politics and banking.
After Kenny became Taoiseach in March 2011 he blustered about holding a banking inquiry. But for some reason, as the months stretched into years, it never got anywhere. A proper investigation into how men like Fingleton had cost the taxpayer €5.4 billion kept fizzling out. There was little political rush to find out Fingleton’s secrets.
On 19 April 2011 the new Minister for Finance, Michael Noonan, published yet another report, this time by the Finnish banking expert Peter Nyberg, called Misjudging Risk: Causes of the Systemic Banking Crisis in Ireland. The report had been completed in March but was delayed until after the general election that threw Fianna Fáil out of power and replaced it with a coalition of Fine Gael and the Labour Party.
This third report found that Irish Nationwide’s business model was ‘unique’, as it was ‘concentrated primarily on speculative site finance, which proved initially to be very profitable in a rising property market. The model was risky, however, and risk mitigation primarily involved selecting trusted and previously successful customers.’ Lending in the society (as also in Anglo Irish) had ‘proceeded with insufficient checks and balances during the period.’
Irish Nationwide’s situation was made worse by its reliance on wholesale funding to fuel its crazed lending. ‘As wholesale funding tends to be much more volatile than customer deposits, [Anglo Irish and Irish Nationwide] were particularly vulnerable to any doubts regarding their own solvency or that of their borrowers.’ Nyberg holds back, however, from really explaining how it was that this funding became the opiate that allowed men like Fingleton to go mad.
It would have been a brave argument to make. Europe was by then really worried about whether the euro itself would survive. It needed Ireland to carry the can for its broken banks. Any suggestion of making bond-holders pay for their stupidity in backing rogues like Fingleton would have had a knock-on effect that would have driven up the cost of raising money in the bond market for all European banks. Nyberg said:
At INBS, a number of essential, independent functions either did not effectively exist or were seriously under-resourced. The problems in Anglo and INBS in particular, were not hidden but were in plain sight of the FR [Financial Regulator] and the CB [Central Bank].
INBS’s expansion into development lending was clearly documented and the governance problems in the bank were widely known by the authorities.
The issues were ‘repeatedly’ raised but with ‘only modest results.’
While the poor state of loan documentation in INBS and insufficiency of collateral in both would have required closer inspection, such information was readily available to the FR. Had they considered it necessary or appropriate, there was sufficient information to have allowed the authorities to take more decisive action than was the case.
There it was. In black and white, Nyberg concluded that Irish Nationwide could have been stopped.
Surely now, with three reports in the bag, a full banking investigation would begin at once? At first it seemed that it might. Enda Kenny said after the publication of Nyberg’s report that after ten years of Fianna Fáil it was finally time ‘to hold persons, who by reckless greed and whatever else, lack of oversight, went off the rails completely, and the taxpayer has to pay.’ The Minister for Finance, Michael Noonan, said it was important that justice had not only to be done but to be seen to be done. ‘I think it would be proper that those who are personally culpable would be brought before an Oireachtas committee and would answer for what they have done or indeed for their omissions.’
Byron Georgiou, a member of the Financial Crisis Inquiry Commission that produced a report on the American crisis and who has represented investors in Enron and WorldCom, told Tom Lyons in the Sunday Times that he was flabbergasted at the slow pace and the anonymity of Ireland’s banking investigations. ‘It serves a public purpose to identify individuals who were responsible and to identify institutions that failed in their mission, both in the private sector and the public sector. Unless we do that we run a serious risk of it occurring again in our lifetime. That would be a terrible tragedy.’ He said he could not understand why the Nyberg commission did not carry out its interviews with bankers, regulators, civil servants and politicians in public. America’s inquiry had publicly interviewed Alan Greenspan, former head of the Federal Reserve System (central bank), Hank Paulson, former Secretary of the Treasury, and senior bankers from Goldman Sachs, Bank of America and Morgan Stanley, among many others, as well as publishing thousands of documents.
It seems to me when we have so many people unemployed, so many people who have lost their homes, so many at risk of losing their homes, so many people whose mortgages are well in excess of the value of the property today, so many people who have lost their retirement savings … they are entitled to have a glimpse into what happened.
The fact that Ireland had granted a blanket taxpayer bail-out to banks like Irish Nationwide, he said, made this even more pressing here than in America. He could think of no legal reason for keeping Nyberg’s 120 interviews and 200,000 documents secret.
Why shouldn’t [the public] get it now? I don’t understand the argument that bankers who at the risk of losing their entire franchise begged the Irish taxpayers to bail them out, how they should have standing to object when the taxpayers want a window into what happened so they can avoid this happening to their children and their grandchildren.
The principal actors in Ireland’s economic collapse, such as Michael Fingleton, by asking the public to pick up the bill for their mistakes had ‘lost their right to privacy,’ Georgiou believed.
However, there was a legal hitch before an effective inquiry could take place.
——
In November 2001 thirty-six gardaí succ
essfully challenged an Oireachtas inquiry into the shooting dead of John Carthy in Abbeylara, Co. Longford. In its judgement the court found that such inquiries had not got the power to make findings of fact or expressions of opinion adverse to the good name or reputation of citizens. Enda Kenny decided to hold a referendum to change the constitution to ensure that an Oireachtas committee would have the power to hold bankers to account. ‘The clarity of the advice given to the Government by the Attorney-General,’ he said, ‘means I have no intention of going down a road in which the Oireachtas literally would be laughed out of court by attempting to pursue something that it cannot do because of the inadequacy of its powers.’
The referendum was set for October. It would have allowed reports into Irish Nationwide, such as the Ernst and Young report, to finally see the light of day. Fingleton had had a six-month reprieve, but now it appeared that things were going in the right direction.
Days before the referendum was due to be voted on, eight former attorney-generals wrote a public letter that warned that granting these powers to politicians would seriously weaken the rights of individuals to their good name. Among the signatories were Dermot Gleeson, former chairman of AIB; Paul Gallagher, who had advised the state on the night of the guarantee; and Peter Sutherland, chairman of Goldman Sachs, which had advised Irish Nationwide. The independent presidential candidate Mary Davis, a former director of a subsidiary of Bank of Ireland, also came out against it. ‘I have real concerns that this change—if approved—will undermine and dilute the rights of every citizen of this state,’ she said.
The Minister for Justice, Alan Shatter, was quick to call their concerns ‘nonsense’ and ‘simply wrong.’ However, it was too late. The public were justifiably deeply distrustful of politicians, and 53 per cent of them voted against the measure on 30 October 2011. An incredible opportunity to expose bankers like Fingleton and the people who facilitated their costly recklessness was lost. The special powers of the Oireachtas, if used correctly, could have introduced a new level of transparency and accountability into public life.
The Committee of Public Accounts, after the three reports, tried to hold an investigation, but because of legal concerns as well as political infighting it kept being put off. Years went by without any answers to the many questions posed by Irish Nationwide.
In November 2012 the Irish Times reported that ‘the promised Oireachtas inquiry into the State’s banking crisis is unlikely to begin until early 2014 at the earliest, according to an indicative time limit prepared for the Oireachtas Public Accounts Committee.’ Despite the outrageous cost to the public of the banking collapse, and that of Irish Nationwide in particular, the public were still none the wiser about their worst bank.
——
Irish bankers were not the only ones enjoying anonymity and unaccountability for their actions. The really big winners were the hedge funds. They too not only enjoyed being nameless and unanswerable to anyone in Ireland but also enjoyed mega-profits as the Irish taxpayer poured the country’s wealth into Irish Nationwide’s black hole.
It didn’t have to be this way. In March 2011, for example, Irish Nationwide announced that it planned to buy back two outstanding lower-tier bonds at 20 per cent of par or face value. The offer was voluntary, but almost unanimously all the holders of the bonds, which had a face value of €250 million, signed up. At a stroke, Irish Nationwide had saved the taxpayer €200 million by doing what the public were told was impossible: it burned some bond-holders.
It was the very thing Europe was preventing the society doing with its other big bond-holders, who remained protected by the government guarantee.
The hedge funds included Millhouse, the investment vehicle owned by Roman Abramovich. Millhouse had clubbed together with other funds to try to sue the society in London and force it to pay out in full. They argued in court that Irish Nationwide was not a special case, like Anglo Irish Bank, but should be considered more like AIB, where even lowly bond-holders were being covered in full.
Even lowly Irish Nationwide bond-holders, they argued, should not have to take a hit for Ireland’s handling of the society, which ‘ultimately had fallen victim to the government’s policies that allowed for the creation of a real estate bubble and its simultaneous failure to properly supervise the bank’s management.’
They lost their case, however, when the courts decided that Anglo Irish and Irish Nationwide should be treated in the same way. This left them no real choice but to sell out. Even at 20 cents in the euro some of the bond-holders still made money, as they had bought them in some cases for even less than that. The new management of Irish Nationwide had taken on a Russian oligarch and won.
BNP Paribas, the French investment bank, advised Irish Nationwide’s new management team on how to burn its bond-holders, for a hefty fee. The same bank had accompanied Michael Fingleton and Stan Purcell down the years when they raised the money in the first place from German and French bond-holders, who threw billions at the two men with little regard for how badly they would lend it.
In 2010 Irish Nationwide’s new management had done an extensive investor road-show in order to get to know their bond-holders. It was in part intended to let them know that the society intended to burn a relatively tiny number of subordinated bond-holders. BNP Paribas had organised the tour to Paris and Frankfurt, Europe’s financial powerhouses, without whose money Irish Nationwide would never have been able to do what it did to Ireland. ‘A lot of German banks attended these meetings, but they weren’t that worried,’ a well-placed source said. ‘They had already greatly reduced their exposure to the society or even entirely sold out at that stage by selling on their bonds at a discount to various hedge funds.’
‘The government would not let the society burn the bondholders,’ a capital markets source said. ‘Europe was calling the shots. The Germans were strongly opposed to any burning and wouldn’t let the society do anything.’ Another capital markets source said:
A lot of money was there to be made. The big German and French banks were desperate to sell Irish Nationwide’s bonds as they were continually downgraded. They got out and others got in as Irish Nationwide’s senior bonds were sold off at 50c to 60c in the euro and even less. Hedge funds and private equity guys were prepared to take on the risk by buying at this level. They figured they might take a minor hit but that Europe wouldn’t let the Irish government burn them entirely. They made a total killing when the society was made pay out on most of its bonds at 100c in the euro.
The management of Irish Nationwide and the government knew that billions were being transferred from the ordinary citizens to hedge funds in London, Geneva and New York. ‘BNP handled things, the cheque went into a clearing system and was then distributed on the various funds,’ an informed source said. ‘You couldn’t see who was making the money as a result. A lot of people more than hit their bonuses. The Irish taxpayer will be paying for many years.’
As the government cut back on spending on health and other services, billions were transferred from the Irish citizen to these hedge funds, which were often domiciled for tax purposes in the Caribbean or Switzerland. It was possibly the greatest transfer of wealth from the many to the few in recent history.
In December 2012 Debt Justice Action, a lobbying group, applied to the Guinness Book of Records to have Ireland’s banking bail-out recognised as the world’s most expensive bank bail-out. It was the decision to take the hit for Europe by paying off the bond-holders in full that ensured that we were a shoo-in for the prize.
——
Behind the scenes, things were moving slowly but steadily against Michael Fingleton and his former cronies. Accountability was still some way off, but at least things were beginning to go in the right direction.
Irish Nationwide was in crisis. Its priority was trying to stabilise the society and get back what it could for the taxpayer, so its new management had few resources to put into inherited problems. There were other priorities to deal with.
/> On 10 February 2011 Anglo Irish Bank applied to the High Court to be allowed merge with Irish Nationwide, subject to approval by the European Union. A merger and gradual winding down of both banks had been a condition of the agreement between the government and the €85 billion EU-ECB-IMF bail-out.
Mike Aynsley, the chief executive of Anglo Irish, led this complex merger of Ireland’s two zombie banks. ‘It is a necessary step in enabling the possibility of a wider restructure of the banking sector to happen,’ he said.
As part of this process Irish Nationwide’s remaining €3.6 billion in deposits held by 160,000 customers was transferred to Irish Life and Permanent. Safely among these deposit-holders were the very members who had cheered on Fingleton’s recklessness and shouted down rebels like Brendan Burgess. They were happy now to shelter behind the state guarantee, which protected their deposits, which might have been wiped out if the society had been allowed to collapse.
With most of Irish Nationwide’s large property loans now in NAMA, there was little enough left. Aynsley and his management took over what he termed in a press briefing ‘Ireland’s answer to sub-prime’: a rump €2 billion residential mortgage book and some small commercial deals. In communication with Brussels around this time, Aynsley said the society planned to try to clean up this loan book before flogging it in 2015 at an estimated loss of between €220 and €330 million.
Fingers Page 39