The Bankers Read online

  The Bankers

  How the Banks Brought Ireland to Its Knees

  SHANE ROSS

  PENGUIN IRELAND

  Published by the Penguin Group

  Penguin Ireland, 25 St Stephen’s Green, Dublin 2, Ireland (a division of Penguin Books Ltd)

  Penguin Books Ltd, 80 Strand, London WC2R 0RL, England

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  First published 2009

  Copyright © Shane Ross, 2009

  The moral right of the author has been asserted

  All rights reserved

  Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the above publisher of this book

  ISBN: 978-0-14-193911-7

  Contents

  Acknowledgements

  Prologue

  Chapter 1 Before the Bubble

  Chapter 2 Seanie

  Chapter 3 The Regulators

  Chapter 4 The Building Societies

  Chapter 5 A Deadly Triumvirate

  Chapter 6 The Mortgage War

  Chapter 7 Poodles and Spoofers

  Chapter 8 The Gathering Storm

  Chapter 9 Meltdown

  Chapter 10 Heads on Plates

  Chapter 11 The Abyss

  Epilogue

  Photo Credits

  Index

  Acknowledgements

  I am a cranky curmudgeon at the best of times. I spend my life complaining about the mistakes, impatience and inefficiencies of others. Other people are mostly impossible, lazy, unhelpful and rude.

  Writing a book makes matters worse. All human beings become intolerable. Neighbours become nuisances. Friends become enemies.

  At some stage in the middle of writing this book the penny dropped. As everyone I encountered became thoroughly obnoxious, I was reminded of an incident from my long-ago drinking days. At some time during that fuzzy period I turned to a drinking companion and let rip: ‘The more I drink,’ I declared loudly, ‘the more objectionable you become.’

  Today I happily acknowledge that it was I, not my companion, who was the problem in those distant days. It is harder, with the benefit of full sobriety, to suggest that everybody I met in recent months could have suddenly turned into poisonous old foul-mouths. Yet that is the only alternative to the less than palatable truth: writing a book turns angels into devils, saints into sinners, sane men into monsters.

  So it is probably appropriate to apologize first and to acknowledge second. Or to do both together.

  This book has been a pleasure to write. Even some of Ireland’s most despised bankers have been helpful in enabling me to put the pieces together. Happily I have been able to speak to many of the key players in this dark story. Some refused. Many have not wanted to be quoted directly but, suffice to say, there is no bank where I have not interviewed at least one director. In several cases it has been more. Senior politicians of all parties have assisted me in establishing the truth; even the walls of the Central Bank and the Department of Finance have been penetrated. Let me thank all those who wished to remain anonymous but who spent hours telling me about the shenanigans inside their workplaces.

  To my employers in the Sunday Independent, special thanks for allowing me six months off to write the book.

  More specifically, to those who laboriously helped to compile it, a deep expression of gratitude. To Nick Webb, deputy business editor of the Sunday Independent, heartfelt thanks for reading the book – chapter by chapter – and making valuable suggestions.

  To Nuala Walsh, my personal assistant, for putting up with days of intolerable tension and for giving of her own time to dig up valuable information.

  To Elizabeth O’Brien, for her patience and diligence in supplying research which provided priceless background.

  To Paul Kearney, for his calm endurance while checking the book for accuracy.

  To my good friend Ralph Benson, who took four weeks off from his job to share his expertise in a field where I was sorely deficient.

  To David Conachy, photographic editor of the Sunday Independent, for helping to select and assemble the photographs.

  To my editor at Penguin, Brendan Barrington, who made my task much more difficult by his conscientious insistence that it was important to back up my instinct for sweeping generalizations with tiresome evidence. His criticisms and suggestions have improved the story immeasurably. I am deeply grateful to him.

  To my wife Ruth, who never complained about my long absences – a tendency which, on reflection, could be a cause for alarm, not gratitude. She was endlessly indulgent of my latest little obsession and listened patiently when I complained of the daily spat with whoever crossed my path.

  I dedicate the book to my younger brother Connolly, who died suddenly in December 2007, and to my great friend Paul Tansey, who would have written it much better. Paul died equally sadly in September 2008. They are both badly missed.

  Prologue

  26 November 2008

  It was the bankers’ last supper.

  The banking crisis was at fever pitch; the nation’s finances were in peril; but Ireland’s banking elite was celebrating in a private room in a discreet hostelry near Dublin’s St Stephen’s Green.

  The occasion was ostensibly to mark the retirement of the chairman of the Financial Regulator, Brian Patterson. At the time the watchdog was in the wars, but Ireland’s bankers wanted to give Patterson a good send-off. Patterson had, in fact, retired seven months earlier, but his departure was a good hook for a meeting of allies under siege.

  Dinner with the watchdogs was part of the job; but it was important that no news of the party leaked to the media. Nor did it. The bankers were all careful not to be spotted as they entered and left. Any media story that the regulators were living it up with the bankers would have been dynamite. A view that the two groups were far too cosy was gaining credibility with the public by the day.

  Patterson’s chief executive at the Financial Regulator, the beleaguered Patrick Neary, was another guest of honour at the dinner. During the previous six weeks Neary had been the target of a wave of media criticism for his handling of the unfolding crisis that had caused the government to guarantee the liabilities of the Irish banks.

  Not used to the spotlight, Neary had made matters worse. A disastrous interview on RTÉ’s Prime Time programme on 2 October had exposed the normally camera-shy regulator to tough scrutiny. Two weeks later Neary had been grilled by an Oireachtas committee. Calls for his resignation were surfacing as he tried to explain his failure to cool the bankers’ lending to the property market. Michael Casey, a retired economist at the Central Bank, had broken ranks with his former employer and exposed the watchdog’s flaws. In the Irish Times of 14 October he had highlighted the cru
x of the problem: ‘Close relationships between regulators and banks – difficult to avoid in a small country – will have to be ended.’

  The hush-hush dinner was a sure sign that the relationship was still close, despite public unease about the mutual admiration between bankers and regulators. Pat Neary was in his comfort zone that night as he tucked into the strip loin of tender beef. Mary O’Dea, Neary’s high-profile number two, and Con Horan, the watchdog’s prudential director, were happily mixing it with those whom they so often supervised. Jim Farrell, Patterson’s successor in the chair, was there too, dining at the only table in the room, laid for twenty-two. Farrell was a popular choice of successor for the bankers as he himself had been one of their own over a thirty-year career with Citibank.

  Brian Patterson was not the only diner in the departure lounge on that November night. Within months many of the invitees would find that this was their last bankers’ supper.

  Eugene Sheehy, the smooth-talking head of AIB, was enjoying the evening, exuding his trademark calm amid the turmoil in the industry. According to one of those sitting close to him, ‘Nothing seemed to be ruffling Eugene.’

  Sheehy would be gone from AIB within six months, having been forced into a humiliating climbdown from his proud boast that AIB would not accept government funding.

  Close to Sheehy sat Richie Boucher, the Zambian-born chief executive of Bank of Ireland’s Irish retail division. Barely three months later Boucher would succeed Brian Goggin as chief executive after Bank of Ireland too accepted a state bailout.

  Irish Life sent along its top man, Denis Casey, a workaholic with an inscrutable manner. Casey was no great partygoer, but dinner with the regulators was a diplomatic and political imperative.

  Within three months Casey was out of a job.

  Fergus Murphy, the new chief executive of the EBS, attended this gathering of the oligarchy, nursing the fear that his own building society was another that might soon need a leg-up from the state. Murphy, untainted by EBS’s disastrous move into commercial property just as the market was peaking, would later emerge as one of the few survivors of the last supper.

  His rival at Irish Nationwide Building Society, Michael Fingleton, sent his apologies. Around the table the diners speculated that the controversial ‘Fingers’ was a no-show because he was smarting from a recent humiliation. He was the only Irish banker ever to have been fined by Neary or any other watchdog. A month earlier, provoked by constant taunting about his softness on the banks, Neary had fined Irish Nationwide €50,000 after Fingers’s son – a London employee of the building society – had referred to the Irish government’s guarantee of bank liabilities in an email seeking deposits from UK-based customers. His action was politically sensitive because Minister for Finance Brian Lenihan had already faced down opposition from the British government over its claim that the guarantee would give Irish banks an unfair competitive advantage. Lenihan made his displeasure known, and the fine followed swiftly; but it was a one-off, a token gesture.

  Anglo Irish Bank chief executive David Drumm, a regular at bankers’ bashes, accepted the invitation but pulled out at the last minute. A few months earlier Drumm had attended a similar event to honour the retiring chairman of the Revenue Commissioners, Frank Daly. In a weird twist of fate, before the end of the year Daly was to be appointed a director of none other than Anglo. On this November night, two months on from the state guarantee that was generally viewed as having been enacted to save Anglo, Drumm sent along a senior director, Peter Butler, in his place. Within four weeks Drumm would resign from Anglo when it was discovered that his chairman, Sean FitzPatrick, had been playing ducks and drakes with his personal loans from the battered bank. The Financial Regulator had never noticed.

  FitzPatrick was not invited to the dinner as it was not for chairmen like himself, AIB’s Dermot Gleeson, Irish Life’s Gillian Bowler, the EBS’s Mark Moran, Irish Nationwide’s Michael Walsh, or the clubbable Richard Burrows of Bank of Ireland.

  All bar Bowler would be shafted within months.

  Pat Neary was one of the most popular people at the party. He had been assuring all those around him that Ireland’s banks were well capitalized and that the Financial Regulator was working effectively. Neary was in denial.

  In fact, denial was the common dish at the dinner, happily shared by both bankers and watchdog. Two months earlier, on 18 September, Neary had done the bankers a big favour when he banned short selling of bank stocks. But he could not save himself. Six weeks on from the congenial bankers’ dinner he would be smelling the roses as he surveyed the carnage he left behind him.

  The dinner was hosted by Pat Farrell, the president of the Irish Banking Federation. Farrell, a former Fianna Fáil general secretary, was believed to have the ear of the Minister for Finance. Farrell welcomed everyone, uttered a few kind words about ‘Brian’ and handed over to Patterson. The departing chairman defended his tenure at the helm, insisting that the ‘principles-based’ system of monitoring the banks had encouraged overseas banks to come to Ireland. In fact, it was a euphemism for a policy of letting the bankers run their own shows.

  Here was the Irish banking aristocracy in action, wining and dining their regulators in undisturbed luxury just as a local volcano was erupting before their eyes.

  1. Before the Bubble

  Rogue bankers were not sudden arrivals to the Ireland of 2008. Regulators being fêted by bankers was nothing new. There had been bailouts before, and small cliques had frequently seized control of banks – all to the detriment of taxpayers. Nor were today’s bankers the first buccaneers to create a culture of the cavalier pursuit of quick riches. They were the inheritors of that culture.

  Ireland has a shameful banking history, not a proud one. For over thirty years Ireland has been cursed by banking scandals. While the smaller scandals and the smaller banks have come and gone, the activities of the larger ones suggest that banking skulduggery is endemic.

  For many years the two big banks in Ireland had a free run. The formation of the Bank of Ireland Group and Allied Irish Banks – AIB – in the late sixties virtually shut off commercial openings for many outsiders. A retail duopoly was born.

  AIB was formed in 1966 as a merger of three well-established banks: Provincial Bank of Ireland, Royal Bank of Ireland and Munster & Leinster. The Bank of Ireland formed the second part of the duopoly by way of a takeover by the old Bank of Ireland of the Hibernian Bank in 1958 and of the National Bank in 1965. The size of the two big banks’ balance sheets and branch operations made it difficult for others to break their stranglehold over the retail network until the foreign invaders arrived in the 1990s.

  However, the door was not completely closed. Reputable transatlantic banks –such as Citibank, Chase Manhattan and Bank of Nova Scotia – entered the Irish market, but only in niche areas. The state banks, together with ICC and ACC, meanwhile plodded along with specialist roles. ICC was set up as the Industrial Credit Corporation to assist industry, while the ACC was established to provide credit for agriculture. Alongside them the building societies lived for decades in a shadowy world of their own.

  It is often forgotten that, in the thirty-odd years prior to the crisis that enveloped Irish banking in the autumn of 2008, several small Irish banks went bust and one of the major players – AIB – was rescued by the state in 1985. AIB was too big for the state to countenance a collapse, but the same could not be said of less sizeable sinners.

  Ken Bates, Joe Moore and Patrick Gallagher are names that hardly hold an honoured place in Irish banking history. All three managed to own or operate banks in Ireland in a manner that foreshadowed the career of Sean FitzPatrick. Like FitzPatrick, all three dominated the banks they ran. And like FitzPatrick, all three went belly-up.

  Ken Bates is a character who could not be invented. He is most famous worldwide for selling Chelsea Football Club, which he had bought in 1982 for £1, to Russian oligarch Roman Abramovich in 2003, but he had a long and colourful career in a number of
different ventures before that. Born in 1931, he enjoyed early success in the concrete business, selling his company for £545,000, a staggering sum in 1963. He moved on to the exotic financial waters of the British Virgin Islands, and emerged with his pockets bulging from a massive settlement from the British government after the failure of a development project there.

  In 1971 Bates managed to bag a banking licence from Ireland’s sleepy regulators. In considering Bates’s application, the Central Bank inexplicably failed to discover a readily accessible time bomb: Bates had been connected to a publicly quoted UK company, Howarth of Burnley, that had gone into receivership – and he had not emerged favourably from the receiver’s report.

  With the Irish Trust Bank, Bates followed a well-worn path. He offered depositors higher interest rates than his competitors and attracted enough cash to make some risky investments, mostly in property; he also targeted the middlesized Irish business market.

  The Central Bank eventually found out about Howarth of Burnley and tried to remedy its mistake by forcing Bates to resign as an unsuitable director of a bank. Bates took the Central Bank to the Four Courts, where the judges ruled in his favour. Among his opponents in that case was one of Ireland’s most celebrated civil servants and central bankers, Ken Whitaker.

  As the recession of the early seventies began to bite, property prices tumbled and Irish Trust Bank started making losses. Bates’s earlier battles with the Central Bank ensured that the regulators were lying in wait, ready to ambush him. They discovered anonymous offshore borrowers and large loans to companies controlled by Bates himself while Irish Trust Bank was in the red. These discoveries, combined with a lack of transparency, made them question the bank’s solvency. In February 1976, the High Court revoked Bates’s licence. At the high point of the drama, the day that the liquidation was due to come into force, a defiant Bates was arrested for re-entering the Irish Trust Bank’s headquarters and removing files. He later returned them under orders from the court.