Former Anglo-Irish Bank chief executive David Drumm, in challenging the bank’s lawsuit against him in his US bankruptcy case, said the transferring of Chairman Seán FitzPatrick’s loans of up to €120 million off Anglo’s books was “fully and properly signed off by the bank’s credit committee as well as several non-executive directors” (see for instance this report in the Irish Times).

I have written about this previously, but I continue to be mystified as to how the bank reported its “loans to key management personnel” in its annual reports to  shareholders.  Take, for instance, the 2007 report, which includes the extraordinarily incorrect statement that “Loans to key management personnel are made in the ordinary course of business on normal commercial terms”.

Here we have a bank which gave its former chief executive (a) tens of millions of euros in loans (b) on an interest-only basis, (c) without adequate security, and (d) allowed him the facility to re-draw the loans after temporarily repaying them for concealment purposes at year-end.  And the board were satisfied that this was “in the ordinary course of business on normal commercial terms”?

It seems to me that either the board (including Fitzpatrick) were guilty of a default in their duty to shareholders, and perhaps of a statutory offence, in allowing this to be published, or the management were guilty of concealing from non-executive directors what they knew about Fitzpatrick’s loans.  David Drumm now appears to be saying that the former is the case.  He could, of course, be “mistaken”.

By the way, false accounting is a criminal offence under the Criminal Justice (Theft and Fraud Offences) Act, 2001.   It arises inter alia where somebody, intending to make a gain, or to cause loss to another, “falsifies any account or any document made or required for any accounting purpose” or “in furnishing information for any purpose produces or makes use of any account, or any such document, which to his or her knowledge is or may be misleading, false or deceptive in a material particular.”

The Director of Corporate Enforcement said last week that his office is preparing a fourth file to be sent to the Director of Public Prosecutions in relation to Anglo-Irish Bank.  I would like to think that midnight oil is being burnt in the DPP’s office on this case, but I have a horrible feeling that it just ain’t so.  The DPP tried to defend his lack of speed earlier this year, but the points he made seemed to me to be less than convincing.

Incidentally, the current DPP, James Hamilton, takes early retirement this month, and the Government have appointed Claire Loftus as his successor.  She has been promoted from her role as the Head of the Directing Division in the DPP’s office, and before that she was the DPP’s chief prosecution solicitor from 2001 to 2009.  I hope she can move things forward at a faster rate than her predecessor, but unfortunately I can find no reason to believe that a long and successful career in our DPP’s office is an indicator of a dynamic and energetic character.  Maybe I will be proved wrong.  For the sake of the morale of the general populace, I hope so.

Bini Smaghi at it again

13 April, 2011

In today’s FT our “friend” from the ECB, Lorenzo Bini Smaghi,  is saying that Irish taxpayers shouldn’t complain if they have to bear heavy burdens which arose from failures in local financial regulation.   This is the same tune we have heard him singing before: ‘Ireland’s meltdown is the outcome of the policies of its elected politicians’

Just because it’s true doesn’t mean he has to keep rubbing it in….

There has developed a popular theme (meme?) in Ireland of late: namely that Germany, France and other countries must share the pain with us because it was their banks that lent boatloads of money to our banks to throw at property developers.

It certainly suits the Irish case (and character) to maintain that others must share responsibility, and only the very hard-hearted (which no doubt includes Lorenzo) would see no merit whatsoever in that argument.

But it’s a bit like the argument as to whether a bar owner bears any responsibility if he keeps selling drink to a clearly inebriated customer who then smashes himself up in a drink-driving car accident.  Is the drinker fully to blame, or does the bar owner have any legal (or moral) liability? 

In most States of the USA, under what are known as dram shop laws, a bar that lets an obviously drunk customer drive away can be held financially responsible for damage caused by that customer.   The principle has yet to be established, or legislated for, in Ireland.

Nevertheless, perhaps the Irish taxpayer should mount a lawsuit against the ECB to establish that they share responsibility for the damage caused by the Irish Government’s and Irish banks’ fiscal drink-driving.  If it would shut Lorenzo up, it might be worth a try.

I read in the newspaper that the “Nyberg” report  has found that while Anglo-Irish Bank had strong internal risk controls, these controls were ignored as the bank increased its loan book.  I also read that the bank’s non-executive directors (NEDs) have been criticised for relying too heavily on the views of management and for not having sufficient banking experience to question the policies at the bank.

One is entitled to ask why the non-executive directors, who were exceedingly well paid, did not do their job properly and act to protect the interests of shareholders.  Instead they seem to have acquiesced in the most disastrous failure of any management team in the history of Irish business, a failure that has impoverished the whole country.

Perhaps this is the wrong question.  Maybe the question should be: at what point does the level of fees paid to a NED become excessive, to the extent that his/her independence and judgement are compromised by an unwillingness to resign or “rock the boat” and thus lose out on the easy money? 

As far back as 1992, the seminal Cadbury Report on Financial Aspects of Corporate Governance advised that NED fees should “recognise their contribution without undermining their independence”. 

I don’t for a moment question the need for directors’ fees to be sufficient to compensate them for the time and commitment involved (not to mention the potential liabilities).  I subscribe to the view that a NED cannot in good faith be involved on the board of more than a handful of significant companies if he/she is to discharge his/her duties properly. So the fees involved need to be significant.

However, I believe that non-executive directors’ fees in many public companies rose to excessive levels in recent years, and Anglo was a particularly egregious example. Turn, for instance, to page 128 of the 2007 Anglo Annual Report.  You will see that total remuneration for the 7 NEDs who served for the full year was €962,000 – made up of €431,000 for the Chairman (a crazy figure in itself) and an average of €88,500 for 6 others.

Can somebody who is getting such fees be considered independent at all?  To quote Fortune magazine from last year: “High pay for outside directors of corporations guts the whole idea of these representatives of the shareholders making independent judgments. How does a board member challenge a CEO when the director is being paid oversize amounts likely to be important to his or her lifestyle?”

I saw this headline a few days ago. Finally, I thought, some sign of life from the various criminal inquiries related to Irish banking scandals.   At last, we would see a degree of accountability and justice!

Alas, ’twas not to be.  Disappointingly, it was about two UK property tycoons being arrested in London as part of a fraud investigation into a failed Icelandic bank.

Here in Ireland, we struggle to achieve a level of accountability which is taken for granted even in Nigeria.  I don’t care how many enquiries we have under way, or how thorough they are, if they cannot move forward at a reasonable pace then they are simply a waste of time and money, while generating justifiable cynicism.

The now famous Vanity Fair article by Michael Lewis  (“When Irish Eyes Are Crying”)  is worth reading. The writing is well up to Lewis’s usual standards, as seen in The Big Short and Liar’s Poker.  Here are a few excerpts that caught my eye.

On Patrick Neary:

….. A banking system is an act of faith: it survives only for as long as people believe it will. Two weeks earlier the collapse of Lehman Brothers had cast doubt on banks everywhere. Ireland’s banks had not been managed to withstand doubt; they had been managed to exploit blind faith. Now the Irish people finally caught a glimpse of the guy meant to be safeguarding them: the crazy uncle had been sprung from the family cellar. Here he was, on their televisions, insisting that the Irish banks were “resilient” and “more than adequately capitalized” … when everyone in Ireland could see, in the vacant skyscrapers and empty housing developments around them, evidence of bank loans that were not merely bad but insane. “What happened was that everyone in Ireland had the idea that somewhere in Ireland there was a little wise old man who was in charge of the money, and this was the first time they’d ever seen this little man,” says [Colm] McCarthy. “And then they saw him and said, Who the fuck was that??? Is that the fucking guy who is in charge of the money???  That’s when everyone panicked.” ….

On our obsession with property ownership:

….. There’s no such thing as a non-recourse home mortgage in Ireland. The guy who pays too much for his house is not allowed to simply hand the keys to the bank and walk away. He’s on the hook, personally, for whatever he borrowed. Across Ireland, people are unable to extract themselves from their houses or their bank loans. Irish people will tell you that, because of their sad history of dispossession, owning a home is not just a way to avoid paying rent but a mark of freedom. In their rush to freedom, the Irish built their own prisons. And their leaders helped them to do it….

On Brian Cowen and his drinking:

…. (Four different Irish people told me, on great authority, that Cowen had faxed Ireland’s 440-billion-euro bank guarantee into the European Central Bank from a pub.) And the truth is, if you were to design a human being to maximize the likelihood that people would assume he drank too much, you’d have a hard time doing better than the Irish prime minister…..

On AIB:

…. A.I.B. even opened a unit dedicated to poaching Anglo’s biggest property-developer clients—the very people who would become the most spectacular busts in Irish history. In October 2008, the Irish Independent published a list of the five biggest real-estate deals in each of the past three years. A.I.B. lent the money for 6 of the 15, Anglo Irish for just 1, as a co-lender with A.I.B.  On Irish national radio recently, the insolvent property developer Simon Kelly, whose family’s real-estate portfolio has run up bad debts of 2 billion euros, confessed that the only time in his career a banker became upset with him was when he repaid a loan, to Anglo Irish, with money borrowed from A.I.B. The former Anglo Irish executives I interviewed (off the record, as they are all in hiding) speak of their older, more respectable imitators with a kind of amazement. “Yes, we were out of control,” they say, in so many words. “But those guys were fucking nuts.”

Anglo-Irish Bank’s 2009 annual report  tells us that the average number of persons employed during the period was 1,681 and that the related employment costs were no less than €186,000,000 (an average of €111,000 per person). 

It also advises that “as part of the Group’s restructuring process a voluntary redundancy programme commenced in November 2009, the effect of which is not reflected in the above headcount numbers. Once the redundancy programme is complete, it is expected that the Group headcount will be below 1,300.”

What are all these people doing, now that it is no longer extending any new loans, most of the old loans have been shipped across to NAMA, and depositors are unlikely to be knocking down its doors to offer them money?

For that matter, why have there been no dramatic redundancies at the other banks owned wholly or partly by the State?  Surely employees are not being kept on just to help the overall national unemployment figures?

The Irish Times reported the other day that AIB’s managing director Colm Doherty had described the price paid for their Polish bank – which Mr Doherty called their “jewel in the crown” – as “a very fulsome price”.

I actually saw him being interviewed on television, using the same word, and I winced.

My gold standard in dictionaries is The Chambers Dictionary, and it defines “fulsome” as meaning “sickeningly obsequious; nauseatingly affectionate, admiring or praiseful”.  In fairness, it goes on to add “loosely: copious or lavish; excessive; (eg of a voice or a woman’s figure) well-developed, well-rounded”.

I suffer from a sad affliction: whenever I hear people use “fulsome” when they mean “full”,  I automatically pigeonhole them as intellectually defective.  This is an unforgiveable trait, but there you go.

Yes, I know that usage has evolved and that a secondary meaning (copious, lavish) has become apparent in everyday parlance.  But if you are the chief executive of a partly-nationalised and controversial bank, witha  salary of €500,000 a year, I expect you to be aware of the original, standard meaning of such words, and avoid using them in the “wrong” context.  Why piss off pedants like me when there are perfectly good alternatives words available ?