Wednesday, 25 January 2012

Dr Who, Banksters & The Minister

In Dr Who, for all the time travelling ability of The Doctor, there are fixed points in time that do not change, that are too important. In the horrendous story of Anglo Irish bank there are also such points. There are questions that arise from those points that have not yet been properly asked or answered.

On April 24th 2008 Brian Cowen, Minister for Finance, had dinner with the board & management of Anglo Irish Bank at the bank's HQ on St Stephen's Green. Cowen was one of the most popular politicians in the country and, other than Bertie Ahern,the man he would replace,unopposed, as leader of Fianna Fail a fortnight later, the most powerful. His abysmal ignorance of the disaster he had helped to create for his country was fully intact. He wined and dined with his usual gusto, the management at the bank had every reason to make sure he had a very good time.

Sean Fitzpatrick, the chairman of Anglo Irish Bank, cannot have been as sanguine about the future as Mr Cowen. Although management consulting firm Oliver Wyman had named Anglo "the best bank in the world"   (OW have removed reference from their own site,  their league table can be seen below) in January 2007*, the share price of the bank had been on a steady slide since May 2007. 

The share slide eroded confidence in the bank & depositors took their money out, as large depositors fled the bank confidence eroded & the share price declined....

Two reports had made that slide worse. A report by a Merrill Lynch analyst,released on March 13, said Anglo were at particular risk from the collapsing London property market as late arrivals who lent very aggressively. On St Patrick's Day the bank lost €1billion in market capitalisation in a single disastrous day after the Financial Times columnist had named Anglo as being over exposed to the risky commercial property market. 

 The ML analyst, Cambridge zoology graduate Phillip Ingram had been influenced by an articles written by  Dr Morgan Kelly, articles that had provoked Cowen's boss, Bertie Ahern, to say that people who talked down the economy should commit suicide. Ingram had visited Dr Kelly and had simply applied the "mosaic theory" to the Anglo story. Mosaic Theory is the idea of collecting evidence/views from  wide variety of sources by finance professionals to come to some conclusion about the value of a company's securities. Although Ingram named ALL 3 big Irish Banks as risky,Anglo,BoI & AIB. Merrill Lynch retracted the report on the day & by the end of the year Ingram was no longer an employee there either.....

These reports were not the only worry the bank's senior management had about share price. Sean Quinn was, in the early months of 2008, about to bankrupt himself & the bank because of the bet he had made on the bank's shares. Quinn wanted to takeover Anglo without the full publicity of a stock exchange bid so he took out Contracts for Difference on a large amount of the banks shares. CFD's are a bet that the share price will move in  particular direction: Quinn bet that the share price would not fall. Worse again it appears he may have made that bet with money borrowed from the bank.

Quinn & Anglo were caught in a bind. Short-selling, the practise selling shares overnight, & buying them back in the morning (mostly with borrowed shares) was a huge issue for many banks in the wake of the Northern Rock & the near collapse of Bear Stearns. Short selling drove down share price but in Anglo's case the holders of Quinn's bet had every reason to help drive the price down:  the more the shares fell, the more Sean Quinn owed them, profits from the short selling & collecting off Quinn's bet was a double whammy.

Instead of investigating the bank after the horrendous share price drop on St Patrick's Day the Financial Regulator began to investigate stock brokers & the Governor of the Central Bank issued a statement supporting this investigation & supporting  Anglo as a sound bank.......

The senior management at Anglo were in no doubt that they were funding Quinn's speculation. Dara O’Reilly,Quinn's financial controller has testified to the numerous phone calls he made drawing down "development loans" that the bank was well aware was money to cover margin calls. 

Most CFDs contain a "stop loss", a point beyond which the bet pays out no more, this limits the level of margin calls . Quinn had put no stop loss on his bet. In the end he had no choice but buy out the shares. He did this with money borrowed, at least in part, from Anglo.  Quinn could not afford to hold his massive stake in Anglo so now those shares overhung an already fragile market. If Quinn tried to sell on the open market there would be catastrophic decline in the share price. Such a catastrophic decline would spell the end for the bank, deposit withdrawals & a near valueless share would mean insolvency. 

So as he handed Brian Cowen the gin & tonic  before the meal that Thursday night Fitzpatrick had to be painfully aware that Anglo Irish Bank in Wile.E.Coyote territory. To do a road runner they needed deposits & the government's National Treasury Management Agency had proven very reluctant to place funds on deposit with Anglo. 

Michael Somers , head of NTMA, was deeply suspicious of a bank growing at 45% per annum when the best banks interregionally did between 6-7%.

Why none of the trio directly concerned, Brian Cowen as minister, Patrick Neary, Chief Executive of the Financial Regulator or John Hurley, Governor of the Central Bank  had not noticed this suspiciously explosive growth rate has never been made clear. 

 That night Anglo's CEO, David Drumm, would lobby Cowen for NTMA deposits. 

As he wined and dined that night Cowen had to also be aware that this bank was in Wile.E territory: Fitzpatrick had informed him of the Quinn problem. Patrick Neary, the bank regulator & CBoI Governor John Hurley also knew.

In a Dail reply on the 17th of February 2009 Cowen said:

"A meeting took place last March at which the governor indicated to me, as Minister for Finance, that a situation was developing in regard to the contracts for difference issue in Anglo Irish Bank. That had to be dealt with by the bank. It proceeded with that and Mr. Quinn made a statement on 13 July relating to it. It was indicated at that time that the matter had been resolved."

Anglo had solved the Quinn  problem by inducing 10 major clients, referred to as the "Maple 10" by management to buy out a 10% tranche of Quinn's shares with money borrowed from the bank.  These loans appear now not to be recoverable: we have to pay them off. 

Banks are specifically prohibited from loaning money to buy their own shares. Such loans, are, by their nature, a particularly insidious fraud against the banks other investors.

Mr Cowen is a solicitor

"That had to be dealt with by the bank."  

Cowen was aware that between March & July 2008 an enormous tranche of shares had been quietly sold, "dealt with by the bank". These shares had to be placed with private investors in the teeth of a gale blowing away bank share prices, in a bank that had been close to being wiped out by a combination of lack of confidence & an insane speculation the countries richest man. 

How did Mr Cowen think, in so much that he could think on his beer-swilling, song-singing, glad-handling victory tour of Co. Offaly following his May 8th election as FF party leader & Taoiseach elect, that any investor was persuaded to buy shares in Anglo? 

How could anyone with the merest knowledge of the situation be unsuspicious of such deals?

Anyone that new of Anglo's "Quinn problem" in March 2008 would also have been painfully aware that the bank faced a rapid threat to its solvency and existence, not just to its liqudity. 

On the night of the Sunday 29th of September, faced with the certain knowledge that there would be a devastating run on every Irish bank on Monday morning Brian Lenihan held discussions with the banks, eventually at 2am Monday announcing a complete guarantee for the 6 Irish based banks. Lenihan believed the banks faced a liquidity problem:that is not enough ready money to do day to day business while the under-lying business remained sound or solvent.

Did the Taoiseach inform Mr Lenihan of  the earlier, averted crisis in Anglo?  

Cowen knew, the Governor of the Central bank knew ,the Financial Regulator knew. They all at the very least that Quinn's share overhang, an overhang that threatened the very existence of Anglo, had been purchased when bank shares were sliding and Anglo's were sliding faster than any. There is no doubt all three indicated that Anglo should solve the problem: did the question the deal done and if not, why not? If Anglo officers broke the law boosting the banks share price by loaning money  will the defence of those officers be that Cowen, Neary and Hurley cleared such a move to save the bank? Would that be a defence or an indictment?

Sean Quinn attempted to take over the third largest bank in the country by stealth. There are specific provisions in law about the ownership of bank shares. The Central Bank must give approval for any shareholder to own more than 10% of the publicly traded shares. Was such approval sought in Sean Quinn's case? Was it granted? If neither sought nor granted why was the Central bank complicit in this?

The figures for Quinn's shareholding all vary: 25-28% as final figures from a start of 6-7% in early 2007.  Although the figures vary they are remarkably consistent in placing Quinn's final holding below 30%.  If Quinn had purchased 30% or more he would have been obliged to bid for the entire shareholding.  Why were some shares put into his family members names? Are we sure he did not own or control  that fatal 30%? What investigation has been done by London & Dublin Stock Exchanges? By the state regulatory authorities here? Sean Quinn is now bankrupt and thus unamenable but others involved including the Irish State may not be so safe. 

The collapse of Anglo Irish Bank is the worst, most expensive financial scandal ever to occur in Ireland. The dimensions of the disaster and gravity of the consequences have no parallel in the history of this state. Twice the bank posted the largest corporate loss in the country's history.

Sean Quinn owes the bank over €2billion, largely as a result of his failed takeover bid.

Not alone did hundreds of honest investors,many of them small investors, lose their savings but the Irish people will be paying to mop up this mess for decades: up to 2031 when the final €7.2 billion annual payment will be made on the Promissory Note. (Anglo's only asset acceptable to the Central Bank\ECB Emergency Liquidity Assistance scheme was Government promises to pay in money)

To date no one has been charged with any crime relating to Anglo Irish Bank, its clouded share deals or its collapse.

The Oliver Wyman league table naming Anglo Irish bank the best performing bank in the world.

*Mistake! Originally this post had the date "January 2006" for the release of the Wyman accolade.In fact this was based on the banks 06 figures & was released to coincide with Davos in late January 07. The post has been amended to that effect.

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