The Bankers

by Shane Ross

  Neary, listening from his home in the Dublin suburb of Ballinteer, probably stroked his moustache and purred as he heard these reassuring words. Sean made him sound positively vigilant.

  There was, of course, no mention of the rinky-dink with FitzPatrick’s concealed director’s loans. No mention either of the €7.5 billion in deposits shooting their way between Anglo and Irish Life. And in answer to a question about whether there had been a run on Anglo’s deposits before 30 September, he responded that there had been ‘nothing of a very serious nature’.

  FitzPatrick dismissed the charge of reckless lending to property developers, and he was angry at RTÉ commentator George Lee for saying ‘the banks won’t tell us what the figures are’. He riposted: ‘The banks report twice a year, interim results and final results… And they are audited by independent auditors…’ He was referring, in the case of his own bank, to Ernst & Young – who failed over eight years to notice that he was warehousing large personal loans from Anglo in Irish Nationwide.

  Brazenly he endorsed the great work of Anglo’s non-executive directors, noting that Anglo and all the other banks had ‘risk committees chaired, certainly in our case, by independent non-executive directors’. So there.

  Within four months, most of FitzPatrick’s beloved non-executive board members were gone, his auditors Ernst & Young were under scrutiny in an inquiry into the concealment of his loans, and his regulator Pat Neary was off smelling the roses.

  Perhaps the last straw for the public – in an interview of breathtaking arrogance – was FitzPatrick’s refusal to apologize. Invited by Marian Finucane to do so, the Anglo boss responded: ‘It would be very easy for me to say sorry. The cause of our problems was global so I can’t say sorry with any degree of sincerity and decency, but I do say “Thank you”.’

  That same evening FitzPatrick was the star speaker at the La Touche Legacy seminar at the Charlesland Golf and Country Club Hotel in his home town of Greystones. Also listed to speak at the dinner were developers Sean Dunne and Sean Mulryan. Both Dunne and Mulryan wisely made their excuses and stayed away: it was hardly the best of weeks for well-heeled builders to make public appearances, even if the official theme of the seminar was the benign ‘Relationship Between the Local Authorities and the Business Sector’.

  Seanie Fitz suffered from no such reticence. He astounded his audience with what one diner described as a ‘euphoric’ performance. Sean called for a review of child benefit and of the provision of free non-means-tested medical cards for the over-seventies.

  His insensitivity was staggering. Here was the man whose bank had been rescued by the taxpayer just five days earlier calling for the old and the young to lose state benefits.

  In less than three months he too was gone.

  While the threat of vanishing deposits had been averted by the guarantee, the banks had huge problems on the other side of their balance sheets: their assets – in particular loans to property developers – were of uncertain quality. Having guaranteed the banks’ liabilities, Lenihan was now faced with a more complicated task: to determine whether they were adequately capitalized and, if not, to recapitalize them. Lenihan knew that investors worldwide were now demanding that quoted banks show stronger solvency, meaning that they must carry more cash as a cushion against shocks ahead. He determined that the state would provide the cushion.

  Lenihan’s task was made more difficult by the fact that the chief executives of the two biggest banks – Eugene Sheehy of AIB and Bank of Ireland’s Brian Goggin – were in denial, at least publicly, about the state of their balance sheets. While neither Anglo nor Michael Fingleton’s Nationwide were in any position to argue the toss about their solvency, Sheehy and Goggin continued to insist that they needed no capital.

  On 14 October, a fortnight after the bank guarantee, an exhausted Brian Lenihan, facing steep drops in revenues from property-related taxes and a likely need to recapitalize the banks, introduced an emergency Budget.

  Budget measures included income levies of 1 and 2 per cent for everyone, depending on income; pay cuts for ministers and ministers of state; the end of the decentralization programme; and a raft of increases in taxes including VAT, betting tax, DIRT and motor tax.

  The most sensational of all was political dynamite: the minister withdrew the automatic entitlement of people over seventy to a medical card. Mayhem broke out among the grey vote. The government was forced into a partial retreat.

  These measures were seen as a minimum needed to bridge a widening budget deficit. But where was Lenihan to find the money to rescue the banks?

  Luckily for Lenihan, Charlie McCreevy had introduced a law forcing all governments to save 1 per cent of GNP for future state pensions. The fund was a no-go area, not open to a lightning raid by politicians until 2025. McCreevy had ensured that if any of his successors wanted to pillage the nation’s nest egg, they would need to pass fresh legislation.

  Lenihan never had a second thought. Legislation was drafted. Ireland’s future pensioners would have to be sacrificed in order to meet today’s needs. He originally targeted €8.5 billion out of the pool of just under €20 billion to rescue the banks: €3.5 billion each for AIB and Bank of Ireland, and €1.5 billion for Anglo. Lenihan simply ignored protests from the Big Two that they did not need capital. When at one meeting with officials they suggested that they might raise the capital from their own shareholders, no one even bothered to argue with such pie-in-the-sky delusions. There was little hope of already badly burned shareholders subscribing towards a fund-raising exercise from two banks whose solvency was questionable.

  The balance of power had now shifted in the minister’s favour. Under the bank guarantee scheme he had the right to place two directors in each bank. On the Bank of Ireland he put his recently retired colleague, dyed-in-the-wool Fianna Fáil loyalist and ex-Minister for Agriculture Joe Walsh, along with former senior civil servant Tom Considine. To the AIB board he nominated one-time Labour Tánaiste Dick Spring, who had reinvented himself as a businessman after losing his Dáil seat. Lenihan raised a few eyebrows when he appointed Declan Collier, managing director of the shambolic Dublin Airport Authority, as the other AIB director. Collier happened to be the boss of Vincent Wall, whose wife Kathy Herbert was one of Lenihan’s key advisers.

  The resistance of Goggin and Sheehy to recapitalization dimmed as international markets demanded that quoted banks hold more capital. The alternative to state bailouts was a takeover by private equity groups, which were hovering over the carcasses of the Irish banks. If the private equity groups were allowed inside the door, the board, staff and culture of the banks would have been filleted. Recapitalization suddenly seemed a trifle more appetizing.

  So far Lenihan had not succeeded in getting rid of any of the chairmen or chief executives of the six covered banks, but as Christmas approached he was tightening the noose.

  On 18 December Sean FitzPatrick swallowed the poison pill: his transferring of personal loans from Anglo to Irish Nationwide every year for eight years in order to keep the loans out of Anglo’s accounts had come to light, and his pos ition was finally untenable. Non-executive director Lar Bradshaw resigned along with FitzPatrick on the 18th; David Drumm, the chief executive, followed a day later.

  David Drumm departed having set the all-Ireland banker’s pay record: in the four years that he served as boss of Anglo he managed to garner €12.15 million in rewards. In 2008 he surpassed Brian Goggin’s €4 million figure from the previous year, with a €4.656 million package that included a €2 million bonus. The other directors had also filled their boots before the end came. FitzPatrick managed a rise of 22.5 per cent in the year to September 2008, leapfrogging back into first pos ition among bank chairmen at €539,000, just above the Bank of Ireland’s governor Richard Burrows (€512,000). Ten thousand a week for a part-time job presiding over a failing bank. The bank’s employees had an average pay of €99,000 per person in 2007, nearly double the amount taken away by AIB staff that year. E
xpense claims too were incomprehensible. Declan Quilligan, who was promoted to the top job in the UK in 2006, was given €335,000 for ‘relocation costs’.

  David Drumm departed a rich man, but he must regret that he never sold his 510,000 shares in Anglo. At one stage they were worth €9 million. When he resigned they were just about worthless.

  Drumm managed to spend some of his rich pickings on two US homes. According to Ronald Quinlan in the Sunday Independent he paid $7.2 million for two flashy houses in the top US resort of Cape Cod. The second house was bought on 30 September, the day after the bank guarantee was signed. He had been a consistent buyer of US property during the annus horribilis for Anglo.

  Anglo led the way in bankers’ pay, but all of the banks paid their top people at levels that are hard to understand. The common defence for the high salaries is – or was – that they needed to be paid ‘competitive’ rates to retain them at home in their current positions. Richard Burrows, governor of the Bank of Ireland, was one of the stoutest defenders of the level of pay for bankers. Speaking to the Sunday Independent on 12 October 2008, just after the government guarantee to the banks, he was adamant that pay was at the right level. (Burrows, of course, was himself being paid €512,000 a year for his part-time job.) With an endearing lack of humility, Burrows insisted that ‘we have to put in remuneration levels which allow us to retain and attract the best people to run Bank of Ireland in the interests of the shareholder. And so that means we have to compare ourselves with the pay rates not just in Ireland, but further afield.’

  It is to be hoped that Burrows read the government’s review of Irish bankers’ pay in February 2009. It found no evidence that keeping senior staff was difficult, and pointed out that many of them came from within the organization. While bonuses had increased abroad, many of these bonuses were deferred. Irish bank executives pocketed their beefed-up bonuses straight away. The review recommended cuts of up to 64 per cent in Irish bankers’ salaries.

  There is not a shred of evidence that Goggin, Sheehy, Fingleton, Drumm or Casey were ever offered jobs that might have enticed them away from the happy home patch. Indeed they were all rooted to the same bank for nearly all their working lives. No one can blame them.

  A comparison with international bankers might have proved embarrassing for Burrows. Brian Goggin’s €4 million package in 2007 and David Drumm’s €4.7 million in 2008 appear over the top, even by the generous standards of global banking. Eric Daniels, the boss at Lloyds TSB, for example, was paid less than Goggin in 2007 despite delivering three and a half times the Bank of Ireland’s profits that year.

  Goggin’s total package was 50 per cent more than that of Andy Hornby of HBOS, who collected €2.6 million in 2007. The Scottish giant made €6.988 billion that year compared to Bank of Ireland’s €1.584 billion.

  European comparisons are even less flattering to the top brass at Irish banks. Lord Terence Burns, who chaired Abbey National (a bank of comparable size to AIB and Bank of Ireland) and sat on the board of its owner, Spanish banking giant Grupo Santander, received just €135,000 for his troubles in 2007. Sean FitzPatrick, Dermot Gleeson and Richard Burrows were all paid more than three times this amount.

  Comparisons with other industries also show how Irish bankers’ pay had bolted out of hand. Michael O’Leary, the most successful Irish businessman of his generation, earned a basic wage of €595,000 in 2008, compared with Brian Goggin’s €1.2 million. The airline chief ’s total take-home package amounted to €1.2 million against Goggin’s €3 million in the same year.

  While being a banker was a licence to print money, being an ex-banker was sometimes even better. Possibly the most outrageous aspect of Irish bankers’ pay are the rewards for failure gifted to departing executives by their boards. Anglo Irish again tops the ‘hard luck’ league by a distance. The rationale for the pay-offs in Anglo is probably indefensible. In the years 2004–7 the bank paid €8.7 million to three executives when they left. All three appear to have been given these vast sums as comfort money, in sympathy for not being awarded the top job won by David Drumm. Tom Browne (€3.75 million), Tiarnan O’Mahoney (€3.9 million) and John Rowan (€1.1 million) were the lucky losers. Gary Kennedy left AIB with a €738,000 payment, plus €2.01 million for his pension fund, after being pipped at the post for the chief executive’s job by Eugene Sheeky.

  When Mike Soden, apparently voluntarily, resigned from the Bank of Ireland after breaking his own rules on viewing videos, much was made about the honourable course he was taking. He asserted that, as he had set the rules, he should be the first to obey them and to pay the penalty for breaching them. His honour was rewarded with a payment of €2.3 million and a special lump sum of €0.4 million into his pension fund.

  But possibly the most sensational pay-off of all was the €1.87 million bonanza given to EBS chief executive Ted McGovern when he resigned in September 2007 after a series of boardroom rows. McGovern’s reign at EBS was marked by infighting and boardroom turmoil. His price for leaving a ‘mutual’ building society, dedicated to the benefit of its humble members, would have done Ireland’s fattest bankers proud.

  Just before Christmas Lenihan set up another victim for 2009. As the Oireachtas closed for the festivities, he decided finally to tackle the problem of Paddy Neary. An inquiry was set up into how the Financial Regulator had missed the transfer of FitzPatrick’s loans to Nationwide over eight consecutive years. The board of the Financial Regulator appointed two of its members to find out what had happened. It was told to report in early January. There was only one possible result.

  As Lenihan celebrated Christmas 2008, he must have wondered what sort of a madhouse he had inherited when Brian Cowen asked him to take over as Finance Minister. The 2008 financial and banking fortunes of Ireland had been unspeakable.

  The Irish stock market, the most objective measure of the economy’s prospects, had lost 66 per cent of its value. At the same time the Dow in New York had only surrendered 34 per cent despite the wholesale programme of state rescues. Irish property had slumped by an official figure of 9.1 per cent. In reality it had probably lost much more, but the glut of houses on the market was not yet reflected in the index. The market was close to a standstill.

  Banking shares had suffered their worst year ever. Bank of Ireland shares, having started the year at €10.19, finished worth just 83 cents a share, a loss of 92 per cent. AIB shares dropped from €15.67 to €1.73, a collapse of 89 per cent, while Anglo’s shares lost over 98 per cent of their value, tanking from €10.94 to 17 cents.

  10. Heads on Plates

  As 2009 opened, the action had moved decisively to the Department of Finance. The boardrooms of the banks were beginning to feel the breeze; board members were squatters, digging in, plotting resistance to their removal.

  Heads on plates were high on Brian Lenihan’s agenda. And his agenda was fearsome.

  He had a banking system to salvage.

  He had an economy to rescue.

  He had a financial regulator in limbo.

  He had backbenchers to calm down.

  He had global investors to impress.

  He had no money.

  Lenihan could not even begin to tackle the economy without first stabilizing the banks. In Leinster House backbenchers had a different priority. They were screaming at him to force the banks to release loans for small businesses, many of which were teetering on the brink of bankruptcy.

  As was Ireland. Lenihan desperately needed to draw water from a dry well. His October Budget had been a flop. Another, tougher one was needed.

  His message, a mixture of common sense and misplaced patriotism, was being drowned by the Opposition’s constant cry that Ireland’s citizens were being taxed to bail out the banks. Fianna Fáil hated the charge, but it was true. The mess had been created by builders and bankers. The people were paying the bill.

  Externally, global investors were giving the thumbs down to Ireland. The cost to the state of borrowing money on
global markets was increasing by the day. Our credit rating was under threat. We were the worst risk in Europe – bar Greece, where there were riots on the streets of Athens amid mounting political and economic discontent.

  And on New Year’s Day the jury was out on the question of the competence of the Finance Minister himself. Overseas observers were less than enamoured by the troika at the top of Irish politics. Cowen, Tánaiste Mary Coughlan and Lenihan were widely seen as tribal Fianna Fáil loyalists. Cowen and Coughlan, in particular, looked far more comfortable at local Fianna Fáil cumann meetings in Offaly and Donegal than at the tables of European leaders or when making presentations to potential investors in Ireland.

  Luckily, Lenihan was as happy in Paris as in Palmerstown. He spoke French fluently. He was well equipped to understand the global angle on the crisis confronting him.

  The minister had two urgent targets. First, he needed to find billions to prop up the banks’ balance sheets. Second, he was determined that heads should roll.

  The second should have been the easy part. Normally, business failures fall on their swords. The institutions covered by the government guarantee were all led by a chairman and chief executive. They were identifiable. They bore primary responsibility for bringing Ireland to the brink of disaster.

  The two top dogs at Anglo had gone, but none of the others was showing any inclination to follow their example. As for the boards, they were chained to their chairs.

  Fergus Murphy of the EBS alone was not under threat, as he was not yet in the job when the building society took the plunge into development property. The others all feared the ministerial tap on the shoulder.

  On Friday 9 January Lenihan got his first break. The Financial Regulator Patrick Neary resigned.

  It had been an open secret that the minister was furious with Neary over a series of incidents, but the final straw was the watchdog’s failure to spot the movement of FitzPatrick’s loans from Anglo. The inquiry into how the Financial Regulator had missed this huge transfer of funds had been set up before Christmas. Its report found a conflict of evidence about whether Neary had known about them or not. One staff member told the inquiry that she had informed him. Neary denied it. He left with a healthy severance package: a lump sum of €630,000 plus a pension of €143,000 a year.