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Playing the blame game
Sunday, February 15, 2009 By Cliff Taylor
Running for cover - that’s the tactic this weekend following the latest extraordinary revelations about dealings between Anglo Irish Bank and Irish Life & Permanent (IL&P).

Anglo and IL&P are pointing fingers at each other about the structure of the deal on deposits. The Central Bank and Financial Regulator are saying that they never approved of the arrangement.

Finance minister Brian Lenihan is saying that, even though he did not read the particular section dealing with the deposits issue in the PricewaterhouseCoopers report on Anglo, his officials did refer it to the Financial Regulator.

With the disclosure of dealings between Anglo and IL&P, the events of the last few months have been thrown into a somewhat different light, leading to new questions.

What exactly happened on the night of September 29/30 last year, when the government decided to guarantee the banks?

The story which circulated at the time when the government guarantee was implemented was that Anglo was in trouble, but also that there was a ‘‘systemic’’ threat to the Irish financial system.

So serious was the situation, we were told, that the chairman and chief executives of AIB and Bank of Ireland - the two major banking groups - jointly met Lenihan and Taoiseach Brian Cowen to tell them they had to act, following massive falls in bank share prices and the emergence of funding pressures.

However, the revelations of the extraordinary support provided by IL&P to Anglo during September suggest the crisis at the now-nationalised bank was even more serious than was thought. According to information published last Friday, IL&P took in €3.45 billion from Anglo and reinvested it as a customer deposit in the bank early in September.

Immediately after the government guarantee of the banking system was introduced, a further €4 billion went the same route, on an overnight basis. This had the effect of bolstering Anglo’s customer deposits significantly, as they totalled about €51 billion at the end of the year. Without those deposits, Anglo’s total customer deposits would have been down sharply on the previous year’s figure.

On the night of September 29,the two main banks went to the government with a specific proposal - nationalise Anglo and recapitalise the two big banks. This, of course, would have suited their own agenda. Clearly the government decided that the blanket guarantee on deposits and most debt funding was a more preferable route. On the night of the negotiations, the banks were told to keep as much cash to hand as possible, as no one knew what lay ahead.

Some sources believe the main banks were informally told to have short-term funding ready in case Anglo needed it. Both main banks have said that no such funding was provided, but clearly IL&P did step in. IL&P’s motivation remains unknown though it has emerged that it also cooperated with Anglo on funding arrangements to its benefit.

The regulator has said that, while it did encourage what it called normal inter-bank lending to maintain liquidity, it did not know of, or approve of, the kind of circular transaction in which Anglo and IL&P became involved.

Why did the government ever think Anglo had an independent future?

Given the parlous state of Anglo’s finances at the time and the fact the bank was losing deposits at a rapid rate, why did the government reject the nationalisation route proposed by the other banks? Presumably it was worried about the damage to Ireland’s financial reputation from having to take a bank into state ownership.

The government persisted with the idea that Anglo had an independent future - and proposed a €1.5 billion investment in the bank - even after the Department of Finance had received the report from PricewaterhouseCoopers outlining the problem areas that had emerged at Anglo.

Those problems were numerous - the concealment of loans to former chairman Sean FitzPatrick, the unwinding of the major stake held by businessman Sean Quinn and the IL&P transaction.

Eventually, however, it decided to change course, as the full scale of these became clear and as Anglo faced another run on its deposits last month.

Why did nothing happen about the Anglo/IL&P affair until it started to emerge in the media?

Lenihan has said he was unaware of those details as he did not read all of the PricewaterhouseCoopers report when it first came into his department.

Rather, his department officials read the report in October and drew the attention of the Financial Regulator to the extraordinary transaction involving IL&P and Anglo. The regulator appears to have then queried it with the two banks. The regulator said that it was continuing to investigate and it appears the plan was to make it public when Anglo published its annual report this week.

Will further action now follow?

We have still to see what action, if any, will follow from the revelation that FitzPatrick concealed loans by moving them ‘‘off balance sheet’’ to Irish Nationwide. This has already led to the departure of FitzPatrick and former Anglo chief executive David Drumm.

The manner in which Quinn’s stake was unwound last summer - and particularly the purchase by about nine or ten investors of a 10 per cent stake in the bank - is also still to be explained. Anglo extended loans to these investors to buy the shares, many on a non-recourse basis, or on the basis that the recourse was only to the shares, which are now virtually worthless. Thus, much of the money may never be repaid.

There are also serious questions about how and by whom this consortium was organised. Some of these may be answered on Friday, when the government will publish a summary of the PricewaterhouseCoopers report into Anglo. The Director of Corporate Enforcement is also investigating and the appointment of a High Court Inspector is seen as likely.

What are the wider implications for the financial sector?

The problem is that the extraordinary events of recent days and weeks convey the impression of a cosy club of bankers and regulators. This is not helped by the slow pace of resignations in the Irish banking sector, despite the collapse in shareholder value.

The international press has been full of comments about ‘‘crony capitalism’’ - the influential Lex column in the Financial Times has written about Irish bankers and regulators comparing their golf handicaps at the club. Last week, in the wake of the recapitalisation, it referred to the ‘‘Irish bank executive self-preservation society’’.

It is important to draw a distinction here between the actions of the institutions.

Anglo has been clearly implicated in wrongdoing, seemingly facilitated by Irish Nationwide in the case of the FitzPatrick loans, and by IL&P in the latest fiasco.

The boards and management at the other banks can be heavily criticised for their lending practices and their over-exposure to the property bubble.

This has had huge implications for the economy and is likely to see many of them depart, but is different from the kind of misconduct centred on Anglo.

Privately, senior bankers have expressed frustration at the latest revelations and feel that - together with the public finance crisis and wider fears about our banks’ exposure - these will deepen the ‘‘fear factor’’ now attached to all things Irish on international markets.

If this persists, it will make it difficult for the banks to attract ongoing funding and more expensive - and possibly also more difficult - for the government itself to raise borrowings.

‘‘It doesn’t read well internationally - that is the feedback we are getting,” a senior banker said last week.

More nervous days lie ahead.

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