Ship of Fools

by Fintan O'Toole

  Lending these people €450 million to buy its shares and make it look to other investors as if Anglo Irish was weathering the storm might seem like the height of the bank’s effrontery. But there were further heights to be scaled and Anglo Irish was willing to climb every mountain.

  From March 2008, when Anglo Irish’s share price began its rapid descent, the bank was colluding with another major financial institution, Irish Life and Permanent (ILP), to make Anglo’s deposit base look healthier than it really was. Again, the mechanism of choice was to place a chunk of money on a merry-go-round and give it a good spin. At the end of that month, Anglo Irish put €1 billion into an ILP subsidiary and ILP in turn deposited €750 million in Anglo Irish.

  This was merely a prelude to a much larger carousel of cash in September, as Anglo’s end-of-year deadline for reporting its accounts approached. In the last week of September, Anglo’s situation was becoming desperate as €5.4 billion in corporate and retail deposits was withdrawn by anxious customers. It went back to ILP for a repeat of the March exercise on a vastly larger scale. In five separate deposits between 26 and 29 September, ILP put €3.45 billion into Anglo Irish, receiving the same sum in cash from the bank. On 30 September, the last day of Anglo’s financial year, the same trick was repeated, this time to the tune of €4 billion. (This €7.45 billion was nearly six times the entire market value of ILP itself.) Crucially, these vast sums were listed, not as inter-bank deposits, but as ‘customer deposits’. The aim, purely and simply, was to deceive anyone looking at the accounts into thinking that Anglo was still a viable bank into which sane people were depositing huge amounts of cash. In particular, the loan-to-deposit ratio, by which investors judge the soundness of a bank, was distorted. It was actually around 160 per cent. The scam made it look like a much healthier 140 per cent.

  The brazen mendacity of Anglo Irish - concealing the huge loans to FitzPatrick and other directors, rigging the sale of its own shares and doctoring its accounts to the tune of €7.45 billion - could be seen as merely the most lurid chapter in the sordid saga of Irish banking’s dodgy deals. Except that, tragi - cally, it was also the trigger for probably the most disastrous decision ever made by an Irish government.

  On the night of 29 September 2008, a small delegation of senior Irish bankers arrived at Government Buildings in Dublin to meet Cowen, Lenihan, the attorney general Paul Gallagher, the Financial Regulator Pat Neary and the governor of the Central Bank, John Hurley. Earlier that day, bank shares had taken a huge hit on the Irish stock exchange, with Allied Irish Bank falling by 15 per cent. The context was obvious enough - the international banking crisis, the known over-exposure of all the Irish banks to inflated property values and, in particular, the knowledge that Anglo Irish was in deep trouble. It was Anglo Irish shares that took the biggest fall, dropping by 46 per cent. If the banking sector as a whole was a cause for alarm, it was Anglo Irish that was the cause for panic.

  The banking delegation came from the two largest institutions: Brian Goggin and Richard Burrows of Bank of Ireland, Eugene Sheehy and Dermot Gleeson of AIB. Afterwards, the crisis meeting would be presented as an emergency summit aimed at saving those banks. But it was not that, or at least not directly. There was no immediate threat that BOI or AIB were about to go under. If they were the primary concern, the obvious course was to consult quickly with the European Central Bank and the other governments in the eurozone and to see what kind of co-ordinated intervention they were planning for what was, after all, a much broader crisis.

  The immediate issue, in reality, was Anglo Irish. While very little has been revealed about what really took place that night, one intriguing detail has slipped out. In January 2009, in angrily denying a claim in the Irish Times that his officials had recommended not attempting to save Anglo Irish, Brian Lenihan told the Dáil that in fact: ‘The only legislation before the Taoiseach and I on that evening [29 September] was a Bill which, in all material terms, is the same as the Bill before the House today.’ The Bill before the Dáil as he said this was one to nationalise Anglo Irish Bank.

  What happened, therefore, is that the Department of Finance officials went into the emergency meeting with a draft bill for the nationalisation of Anglo Irish. This in itself was hugely problematic, but it made some sense. Nationalising Anglo Irish would buy some breathing space in which the government could work with the rest of the EU on a co-ordinated response to the broader crisis. Yet, for some reason - whether an ideological hang-up about nationalisation or a residual loyalty to Seán FitzPatrick or a mixture of both - Cowen and Lenihan decided not to take this course.

  The outcome of the late-night session was a decision to leap straight into the expanding pool of darkness that was the Irish banking system. Seánie and his acolytes would be left in charge at Anglo Irish and the fiction that it was a viable bank would be maintained. Instead, all six major Irish financial institutions, including Anglo Irish, would have their ‘deposits, loans and obligations’ guaranteed 100 per cent by the Irish taxpayer. The government had effectively no idea what those obligations were or how many of the loans were likely to be repaid.

  This decision stunned and enraged Ireland’s European partners and began a process by which the state would move, step by step, into underwriting all the excesses of the banks and developers over the Celtic Tiger years. At least two generations of Irish people would be made to pay for the blind folly and greed of a closed elite. But the decision to guarantee all of Anglo’s obligations was particularly breathtaking. Banks like BOI and AIB were clearly a crucial part of the real Irish economy. Anglo was a bubble bank, a chimerical creation of the years of swagger and self-delusion. Lenihan would later claim, when Anglo Irish had to be nationalised anyway, that it was ‘of systemic importance to Ireland’. The only Ireland in which it was of systemic importance was the one you could fly over in a Lear jet or a helicopter.

  The irony is that by opting to sustain the illusion that Anglo could go on as a private bank under FitzPatrick, the government made it inevitable that it would have to be nationalised anyway. As scandal after scandal was revealed, the bank became more toxic than a chemical weapons dump. Having effectively taken over responsibility for that dump, the government ended up owning it. It did so in the worst possible circumstances, making the Irish people the proud possessors of an institution that had become notorious even in a world where sleazy bankers were falling like rain.

  A crucial question here is how much the government knew about the extent to which Anglo was cooking its books. The amazing shenanigans that were going on in the bank on the days before and after the crisis meeting of 29 September would surely suggest to any sane government that Anglo should be treated like radioactive waste, to be isolated and contained, not coddled and embraced.

  The Financial Regulator certainly had a good idea of what was going on. Daily liquidity reports provided to his office by Anglo in late September and early October would have revealed that it was receiving multi-billion euro deposits. On 24 September, five days before the government decided on its guarantee, Pat Neary held a meeting with Anglo’s finance director Willie McAteer and CEO David Drumm. According to the Sunday Tribune’s account of a confidential Anglo Irish audit report, McAteer told Neary that ‘the bank would be “managing the balance sheet at year end”’, meaning that Anglo would be cooking its books to make the situation at the end of its financial year (30 September) look healthy. The report records Neary as replying, ‘Fair play to you, Willie.’

  The Financial Regulator’s office later claimed that what it understood to be under discussion at that meeting were legitimate inter-bank deposits, not phoney customer deposits. But a recording of a phone call on 1 October between Anglo and the Regulator’s office seems to indicate that the bank was quite open about what it was doing. Asked about the €8 billion in deposits that had mysteriously appeared in the previous few days, the bank official said, ‘It’s trying to manipulate our balance sheet for our financial year-end last night . . . W
e boosted our customer funding number so when our snapshot is produced at the beginning of December it will look as good as possible.’

  It is hard to believe that, right at the moment when the state was taking on Anglo’s obligations, no one told the government that the institution was systematically misleading its shareholders and investors. Brian Lenihan later told the Dáil that even though Price Waterhouse Coopers informed his officials of the back-to-back deposits in October, he did not know about them until the bank was nationalised in January 2009. Incredible as it seems, the reality that the state was making its citizens responsible for an institution whose books were the most inventive work of Irish fiction since Ulysses was not grasped by the government.

  There was perhaps a certain kind of poetic justice in all of this. A system that had spent decades not wanting to know plunged itself into decades of likely misery because of what it didn’t know. A culture of denial in which regulators learned not to raise awkward subjects and civil servants avoided subjects their political masters might not want to discuss reached its ironic conclusion. When sharp-eyed scrutiny had become a matter of national survival, the long-ingrained habit of looking the other way could not be shaken.

  EPILOGUE

  The Second Republic

  ‘When you don’t believe something, you can’t achieve it.

  You have to imagine, and make that imagination achievable.’

  - Muhammad Yunus

  It was fun while it lasted. For about six years, from the mid- 1990s until late 2001, Ireland felt free - at last. Free from the pain and bitterness of forced emigration. Free from the sense of inferiority that comes with a long history of failure (and the exaggerated, defensive national self-regard that always accompanies and shadows that emotion). Free from the hopeless feeling of being locked into an insoluble ethnic and sectarian conflict. Free from the authoritarian religiosity that compensated for the absence of civic morality. Free from the need to celebrate picturesque poverty as a way of making a virtue of grim necessity.

  In those years, Ireland was raw and sometimes vulgar. It was poorly led and hampered by a lack of long-term vision and genuine public ambition. It was chaotic, sometimes to the point of anarchy. But there was the ultimate ground for optimism. It was obvious that things could change for the better because they were in the course of doing so. People who had been unemployed were now working. People who had been forced to live in the US or the UK were coming home. Long-derelict sites were being filled, if not with fine buildings, then at least with something other than weeds and litter. Change wasn’t just in the air - it was visible and tangible.

  This was a tonic for a culture that had been steeped in fatalism. Some of the attractive sides of Irish life had been underpinned by that fatalism - the idea that things will probably be terrible in the long run, that there’s nothing much we can do about it, and that we might as well have a good time while we’re waiting. But, for a while, it seemed that the Irish could have a good time without expecting the worst to arrive eventually. There was an exuberance to Irish life, but one which seemed to be compatible with hard work and ambition. The strengths that had always been brought to bear by the Irish in exile - resourcefulness, adaptability, energy - seemed finally to have found their place at home.

  It was easy to believe that the confidence and vigour of the new Ireland would have to find an outlet in political, moral and social change. It did not seem over-optimistic to imagine that this burgeoning society would quickly become impatient with a political system steeped in localism and mediocrity and patently unable to meet any of its own targets. Or that it would be sufficiently repelled by the continued existence of social squalor amid conspicuous affluence to demand at least a basic level of decency for all its citizens. Or that it would try to grasp the opportunity of having momentarily skipped to the front of post-industrial economics to reshape itself as a technologically literate and inventive culture.

  What could scarcely be imagined amid all the tingling novelty, all the buzz and brassiness of the real Irish boom, was that there was a price to be paid for skipping modernity. It was a little too good to be true that Ireland could go from the pre-modern to the post-modern without ever fully creating the structures and habits of a modern democracy. Large chunks of classic democracy were missing - the shift from religious authority to public and civic morality; the idea that the state should operate objectively and impersonally rather than as a private network of mutual obligations; the notion of the law as a universal and neutral check on everyone’s behaviour, whatever their status; the belief in an independent parliament that exists to legislate rather than to service clients and to make government accountable rather than to keep it in place at all costs.

  In retrospect, plonking a hyper-charged globalised economy on top of such an underdeveloped system of political governance and public morality was always likely to create an unbearable strain. But only the most irredeemable pessimist would have predicted that the forces that would destroy the Celtic Tiger would be nineteenth-century revenants, come back to haunt its dreams of twenty-first-century success.

  Yet, as this book has suggested, five of those forces combined to create the conditions in which the entire Celtic Tiger project foundered. A primitive, pre-modern land hunger created the new feudalism in which an elite puffed up the price of land and inflated a fatal property boom. The political system, embodied most thoroughly in Fianna Fáil, remained rooted in the Tammany Hall politics of the nineteenth-century Irish-American Democratic Party machines. Its interest in power and patronage to the virtual exclusion of all else meant that politics, when they needed to be imbued with ideas and ambition, were still defined by what ‘one of the most senior figures in [Bertie] Ahern’s administration’ told the political journalist Pat Leahy: ‘Politics is keeping enough people happy at the right time and taking the shit for the rest of the time.’ A system of patronage and personal connection continued to operate, from the constituent being ‘looked after’ by the TD to the donor being ‘looked after’ by the minister.

  In business, and especially in banking, there remained an anarchic attitude to law and morality, rooted both in a colonial habit of playing games with authority and in a religious culture that saw sex, rather than money, as the currency of sin. The bourgeoisie continued with its nineteenth-century attitude of valuing the professions above all, and certainly above science, maths and technology. And the heroic powers of denial, the ability to know and not know at the same time, that had been formed by the peculiar circumstances of Irish history, remained remarkably intact. Together these five forces created a crazed property boom, a reckless banking system, a lack of interest in the technologies that had created the boom, and a political and public mentality in which none of these realities could be grasped.

  A rather peculiar conclusion follows from these truths. It is that in order to have a future, Ireland must complete the unfinished business of its past. It cannot go backwards, of course, and it will have to function in a globalised economy and the political context of the European Union. But it has to undertake some quite old-fashioned exercises in nation building. It has to recognise that, as an isolated backwater, it missed out on the big things that happened in other Western European states after the Second World War: the construction of the welfare state and the re-establishment of a modern democracy from scratch. Almost a century after the Irish Republic was notionally declared in 1916, it needs to found a Second Republic with the same conscious determination to rebuild from disaster that most of its European neighbours had to acquire after the cataclysm of the 1940s.

  One certainty is that the impetus to do this will not come from the current establishment. In Iceland, the collapse of the banking system and the ruination of the economy led to sustained mass protests outside parliament and the central bank. The government was forced out of office and a new one with radically different policies was elected. In Ireland, which differed from Iceland only in having membership of the euro and the consequent s
upport of the European Central Bank, there has been no sign that the political system has this capacity to renew itself. Neither from the outside (in terms of mass protests) nor from the inside has there been any coherent reaction at all.

  The Irish establishment has been both remarkably (and shamelessly) resilient and fiercely determined to insist that no fundamental change has happened. The collapse of the Celtic Tiger is to be understood as a misfortune made a little worse by some minor misjudgements and bad timing. Bertie Ahern told the Sunday Independent in September 2009 that ‘All of the time that we were dealing with the property issue, Charlie McCreevy and myself thought it was manageable to bring it, from the high, down to the medium, without it being a disaster. But what happened was the financial crisis came in and the world trade collapsed. All those external shocks coming together made it impossible to manage the position.’ As for the abysmal lack of regulation, that was the fault of the regulators for not asking the government to bring in tougher laws: ‘The Central Bank and the Financial Regulator seemed happy. They were never in to us saying “Listen, we must put legislation and control on the banks.” That never happened.’ Behind this self-serving waffle, there was a steely determination to ensure that the citizens would pay for the wild spree of the bankers and developers. The collapse of the banking system has left behind a terrible legacy of debt. With its decision in September 2008 to underwrite the entire system with blanket guarantees, the government began a classic process of throwing good money after bad. It ended up proposing to take development loans of €77 billion under the wing of the state’s ‘bad bank’, the National Asset Management Agency (Nama), ensuring that the taxpayer would be saddled with the consequences of the property mania of the boom years.