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 ?

 The Irish Independent today reported that “Many of the loans that will today bring about the bankruptcy of former Anglo Irish chief executive Sean FitzPatrick were given by the bank on an interest-only or interest-roll-up basis”

This adds to the mystery of 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 and the auditors were satisfied that this was “in the ordinary course of business on normal commercial terms”?

Either the board (including Fitzpatrick) and the auditors were guilty of gross default of 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.

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.”

And still we wait for the wheels of justice to turn.

During my living memory, I have seen a succession of financial/commercial scandals or controversies played out in Ireland.  Some involved suspected corruption or illegality, some were the fruits of disastrous business decisions, and some were attributable to poor regulation.  I suspect that, per capita, we have far more such issues than other countries.  I also believe that the main reason for this is that the protagonists in Ireland seem to be able largely to escape the consequences of their actions, thus creating a climate where history repeats itself.

As an exercise, I sat down the other day and tried to recall all the main scandals or controversies which have blighted our commercial, financial or regulatory reputation.  I have limited this to the past 30 years or so, and thus excluded classics such as the mysterious origins of Charlie Haughey’s wealth, and the Shanahans Stamp Auctions scam. 

  • PMPA – a Ponzi type insurance bubble?
  • GPA – spectacular rise and spectacular fall
  • Goodman Group collapse (and dodgy export credit insurance claims)
  • Patrick Gallagher / Merchant Banking Limited
  • AIB/ICI and the State bailout
  • AIB/Rusnak
  • DIRT scandal
  • Bogus non-resident accounts scandal
  • Baltimore Technologies’ crash
  • Anglo-Irish Bank (and all its myriad subplots)
  • Quinn/Anglo debacle
  • DCC / Fyffes insider trading scandal
  • Bertie Ahern and his tribunal evidence
  • etc etc etc

I invite readers to add to the above depressing list, and comment upon whether it confirms that we are particularly accident-prone or corrupt.

I’m reading “Too Big to Fail“, Andrew Ross Sorkin’s colourful mega-narrative on the collapse and bail-out of the US financial system in 2008. Naturally the excessive pay packets of the main actors is luridly fascinating, and leaves one in no surprise that they lost touch with reality, and also lost the ability to countenance failure, before it was too late.

John Lanchester, in his new book “Whoops!: Why Everyone Owes Everyone and No One Can Pay” postulates that people who work with money, and thereby make lots of money, are “proved right in the most inhumanly pure way”, to the extent that they come to see themselves as paragons of rationality, free of the self-doubts that restrain mere mortals. Incidentally, his book has a wonderfully concise and witty description of the ultimate result of the development of the credit derivatives market: “It’s as if people used the invention of seat belts as an opportunity to take up drunk driving.”

But another revelation from Andrew Ross Sorkin’s book (to me at least) was just as interesting.  It seems that, when it came to the crunch, it was the appalling state of Lehman Brothers’ commercial property loan and investment portfolio that torpedoed the prospects of a merger with (i.e. rescue by) another financial institution and, in the absense of a government bailout, precipitated its bankruptcy. My (mis-)understanding had been that Lehman Brothers, in business for 150 years, had been brought down principally by its exposure to sub-prime mortgage securities.

….there was still huge disagreement over what Lehman’s assets were actually worth, especially its notorious commercial real estate assets.  While Lehman had been valuing that portfolio at $41 billion, consisting of $32.6 billion in loans and $8.4 billion in investments, everone knew it was worth far less.   But how much less?   One set of estimates….cut the estimated value of Lehman’s commercial real estate loans by about one quarter, to less than $24 billion. Others thought the situation was much worse.  A handwritten sheet with more estimations making the rounds had the numbers “17-20” – less than half the estimated value.

This has a familiar ring to it, in an Irish context.  How comforting to know that Anglo-Irish, AIB and Bank of Ireland were in good company.   Further demonstration that ridiculously large pay packages did not mean that banks were run by smart and prudent managers, but by weak, greedy and short-sighted fools.

In the UK, a Treasury Committee has published a series of reports into the banking crisis.

In Iceland, the report of a parliamentary committee on the banking collapse is due in a few weeks.  The report will apportion blame for the crisis.

In the United States, the Financial Crisis Inquiry Commission will tomorrow “hold its first public hearing, in which the Commission will begin its thorough examination of the root causes of the crisis…”    The Commission has the ability to subpoena documents and witnesses for testimony.

In Ireland, the Government does nothing. 

Read the rest of this entry »

As is now well known, Patrick Honohan, the Governor of the Central Bank, has suggested that some form of enquiry into the banking crisis should take place.  On 15th December, he told the Joint Oireachtas Committee on Economic Regulatory Affairs:

“I expect that the Oireachtas will, in time, decide to authorise some form of inquiry to try to understand the deeper, underlying causes of this crisis so that wider lessons can be learnt for the future.”

I hope that such an enquiry (assuming Fianna Fáil can be persuaded to hold one) will include what, if anything, the in-house economists in the main banks were saying to their management, their risk allocators and their boards of directors during the critical years 2004 to 2006.    Read the rest of this entry »

John Kay (in the Financial Times) writes about banks that are  “too big to fail”, and as usual is worth quoting :

Their activities underwritten by implicit and explicit government guarantee, it is increasingly business as usual for conglomerate banks. The politicians they lobby sound increasingly like their mouthpieces, espousing the revisionist view that the crisis was caused by bad regulation. It was not: the crisis was caused by greedy and inept bank executives who failed to control activities they did not understand. While regulators may be at fault in not having acted sufficiently vigorously, the claim that they caused the crisis is as ludicrous as the claim that crime is caused by the indolence of the police.

This week the Public Enquiry Blog asked the question: How long before Ireland reaches accountability standards of Nigeria?   The reason for the question was that “Nigeria, one of the most corrupt countries in the world, has arrested fifteen top bankers on charges of conspiracy and money laundering.  The head of Nigeria’s Economic and Financial Crimes Commission said that the bankers were taken into custody to make sure they didn’t leave the country as officials examined banks that have piled up billions in bad debts.”

So when will we in Ireland see a representative (or two) of our own dastardly bankers do the perp walk?  To me, the answer’s clear.  I will not be at all surprised if we see action (or something that has the appearance of action) against former Anglo-Irish executives just in time to help the Government in the run-up to the Lisbon referendum. 

So mark the last week of September in your diaries.

For a balanced and informative overview of the Irish banking crisis, I recommend “Resolving Ireland’s Banking Crisis” by Patrick Honahan in The Economic and Social Review, Vol. 40, No. 2, Summer, 2009, which is available online here.  

Described as a “Policy Paper”, it is written in a calm, dispassionate manner; however, if one deconstructs the understated and analytical prose, one is left in no doubt that we taxpayers are victims of a massive failure by our highly-paid regulators to do their job properly.  Read the rest of this entry »

In The Financial Times on July 15 2009, Anthony Bolton of Fidelity International had some interesting things to say about short sellers, those notorious pantomine villains (hiss! boo!), whose activities were actually restricted by law last year, during the banking crisis.

“The shorting of bank shares was … a symptom rather than a cause of the financial crisis. Now we know what the banks were up to, it is clear that the ones that failed required no assistance in destroying their businesses. They did a perfectly good job themselves…. Read the rest of this entry »

John Kay in Wednesday’s Financial Times has gone surprisingly soft on those villainous bankers.

“Better, as so often, to follow an aphorism of Warren Buffett’s: invest only in businesses that an idiot can run, because sooner or later an idiot will. Our banks were not run by idiots. They were run by able men who were out of their depth. If their aspirations were beyond their capacity it is because they were probably beyond anyone’s capacity….. we would be wiser to look for a simpler world, more resilient to human error and the inevitable misjudgments. Great and enduringly successful organisations are not stages on which geniuses can strut. They are structures that make the most of the ordinary talents of ordinary people.”

I think John Kay is too kind to bankers.  It was not complexity but greed  Read the rest of this entry »