OPINION:The devil is in the detail and the detail on Anglo Irish Bank is missing, writes JUSTIN O'BRIEN
IN THE late evening of February 20th, 2009 the Government authorised the partial release of the confidential report into the stability of the Irish banking system conducted by PricewaterhouseCoopers (PwC). The 43-page extract focuses only on Anglo Irish Bank. In an accompanying statement, the Minister for Finance trumpeted the release as a triumph of transparency and accountability.
If only it was so easy.
The report, part of “Project Atlas”, covers three separate presentations (September 27th, November 27th and December 17th). In order to evaluate the significance of the report it is essential to remember the context.
The first report was provided in advance of the Government’s decision to provide a blanket guarantee on all banking deposits, not just those of Anglo Irish. The second report was tabled the day before the Minister for Finance concluded talks with the major banks and announced that State involvement would be weighed on a case-by-case basis. The third was tabled three days after the Government announced its recapitalisation programme. This was initially to include Anglo Irish Bank.
A day later news broke that the then chairman, Seán FitzPatrick, and the CEO, David Drumm, would resign over improper accounting for personal loans.
One cannot be definitive of just what drove Government policy over the rushed decision to provide a blanket guarantee or to recapitalise because no information is provided about the relative health or sickness of the other banks.
This is a source of extreme concern.
Yet again the Government has disappointed expectations of the need for transparency and accountability. These expectations are based on democratic and financial considerations.
Perhaps the timing of the release, too late for considered parliamentary review, was designed to allow us to first digest Anglo Irish Bank’s remarkable statements on its belief in corporate responsibility. More likely, it represented a further act of breathtaking political cynicism The sparse detail provided in the PwC report suggests reason for this cynicism. Recall that on February 11th Brian Lenihan told the Dáil that the information about the €7 billion circular transaction from Anglo Irish to Irish Life Permanent and back through the ILP subsidiary was provided in a report received by his department in October. This suggests that the Financial Regulator knew in advance of the guarantee that the transaction raised material risk issues, but failed to flag it up to the Department of Finance. This does not account for the decision to initially include Anglo Irish in the planned recapitalisation. Remarkably, this decision was made after his department was made aware of the transaction and prior to further investigation. The lack of caution and prudence is remarkable.
The presentation to Government on September 27th revealed a deleterious €5.4 billion run. It found that the bank’s available-for-sale financial assets were “difficult to value and probably illiquid”.
The initial PwC investigation found evidence of excessive concentration of risk within Anglo Irish Bank. Just 15 key account holders had individual exposure in excess of €500 million. Remarkably, the bank appeared to rely on self-certification.
“From a review of the loan files it is evident that personal guarantees and net asset statements are obtained from borrowers. While these show the borrowers’ net worth in a favourable position, it must be noted that collateral valuations, in particular property, in the current environment may be significantly lower, and realising some of these collateral assets may be difficult.” This is subprime lending on steroids.
It suggests the Government knew that investor roadshows conducted throughout October by executives within Anglo Irish were misrepresenting the solvency of the bank.
By the end of November the deficiencies in the Anglo trading model became painfully apparent. PwC notes: “Anglo considers itself able to attain a thorough understanding of its client’s business, finances and relevant risks”, however “there are a number of customers which are not currently on the Bank’s watch, notable or impairment lists all of whom exhibit potentially serious short-term liquidity issues.” Those customers, we now know include its own directors, some of whose loans were secured against the bank’s stock. Yet the Government pressed ahead with its decision to include Anglo in the recapitalisation.
The third phase of the reporting, presented on December 17th, bring us to the heart of the matter. “There is currently a large over-hang of unsold higher density residential units . . . Successful disposal of the current and ‘pipeline’ stock will take many years and appear unlikely to occur at current unit price levels. There are likely to be significant losses for individual developers.” Just how exposed are the remaining banks? We don’t know.
The fate of Anglo Irish Bank and the ‘golden circle’ of investors typify the moral bankruptcy at the heart of Irish banking. A series of unanswered questions remain. The formulaic structure of the PwC report suggests that a similar exercise was conducted for all six major banks. If Anglo Irish was an outlier, why was a blanket guarantee or recapitalisation required? Was the calculation solely on the basis of an evaluation of the Anglo accounts? If only to protect the other major Irish banks from criticism and suspicion, the Government needs to publish the rest of the document.
To date the Government has not provided a convincing explanation as to why it will not. Nor has it provided a rationale for refusing to disclose the names of the individuals provided with preferential borrowings to buy into Anglo Irish Bank with non-recourse loans, €300 million of which have now been written off.
The Supreme Court has already ruled that confidentiality cannot be assumed if there is a suggestion of wrongdoing and the public interest must be protected. If ever there was a case of the public interest trumping narrow self-interest of either the banks or the political establishment, then this is it.
Unmasking the “economic warriors” may reveal the extent to which allegedly responsible investors were duped or the extent of a criminal conspiracy. It has become a national obsession. It is equally important to emphasise that their actions are merely symptomatic of a broader malaise.
If the other banks have also been judged to have operated flawed risk-management systems that relied on self-certification, unrealistic property and land valuations and excessive risk concentration, the scale of the deception moves up a level.
This would implicate the Government itself in corporate kleptocracy. An appalling vista indeed. With major street protests ratcheting up the political tension, if only to save itself, the Government must publish the report in its entirety. Today.
Justin O’Brien is Professor of Corporate Governance at the Centre for Applied Philosophy and Public Ethics in Canberra and author of a book on the global credit crisis,
Engineering a Financial Bloodbath
, to be published in April by Imperial College Press.