Drumm’s placing of blame on blanket guarantee is self-serving and downplays bankers’ culpability

The latest snippets of conversation from the "Anglo tapes" over the weekend widened the range of characters and topics in the affair.

They also served to reinforce the impression of arrogance and recklessness the tapes have created. They reinforced another impression also: that what, with hindsight, has become evident to the public in the time since the crash, was evident at the time to those at the heart of the system.

It was common currency before the banking crisis to wonder about the position held by Michael Fingleton in Irish Nationwide. The controversial banker was deemed to be akin to a sole trader who got to run his own financial institution. This was well-known in journalistic and political circles, and an extract from the tapes published in the Sunday Independent yesterday makes clear that the same view was common in the financial sector.

Relative to its size, Irish Nationwide has had the most spectacular collapse of all the Irish financial institutions.

In a conversation in the wake of the 2008 bank guarantee, Anglo executive John Bowe discussed Fingleton with an unidentified English fund manager, who viewed Nationwide as the "weakest link" in the Irish financial sector, and worried whether, if something bad happened, the effect could spread to other institutions.

The fund manager said he had met with Nationwide’s management and wondered at their level of understanding. Bowe was momentarily confused by the mention of Nationwide’s management. Nationwide had a very strong chief executive (Fingleton), he said, and “it is difficult to see what the management team is beyond that”. At the time, Fingleton was in his early 70s.

Source of amusement
In the event, both Anglo and Nationwide were put into the State-owned Irish Bank Resolution Corporation, which is now in liquidation. In another excerpt from 2008, Anglo chief financial officer Matt Moran is recorded joking with Bowe about Anglo bringing "governance" to Nationwide if the two were merged. At the time Anglo was hiding directors' loans from its shareholders, among other dubious practices.

There is also mention on the tapes of AIB, the financial institution that has cost the exchequer the most in absolute terms. During a March 2008 conversation, Bowe and Drumm discussed how Irish banks' share prices were doing badly. Drumm said the Bank of Ireland was concerned it was doing less well than AIB. Bowe told his chief executive: "They think that Allied have played fast and loose with lending money to every cowboy in town – apart from ourselves also lending money to every cowboy in town. They think they've been the sensible bankers and the market just doesn't get it."

One of the key issues to be addressed by any inquiry is how AIB tried to compete with Anglo for business in the property sector, just as the property market was going from boom to bubble. This apparent decision to seek to protect its market share has cost the public dearly.

Another key element of the story of Ireland’s banking collapse entered the picture at the weekend with mention on the tapes of bankrupt businessman Seán Quinn. Quinn secretly began investing in the bank’s shares in 2007 using highly risky investments called contracts for difference. When the bank’s share price began to fall, Anglo had to shore up Quinn’s investment, pouring more than €2 billion into the margin calls triggered each time the bank’s share price fell.

By early 2008, Bowe and Moran believed hedge funds knew of Quinn’s investment and were betting against the bank. “He’s down over a bill [€1bn],” Bowe said of Quinn during the taped conversation, before calling Quinn “a stupid c**t” and saying that Quinn was putting the bank at risk.

These issues – Anglo, AIB, Nationwide and Quinn – are all key strands in the story of how the Irish banking system poured billions of euro into a property bubble, with disastrous consequences for the Irish economy. They should be key features of any comprehensive banking inquiry.

In an interview with the Sunday Business Post yesterday, Drumm argued that a misleading picture was being created by the tapes as they do not include conversations he and other Anglo executives had with the Financial Regulator, the Department of Finance and the Central Bank. The authorities knew of the crisis affecting the bank, he said, and of the bank's requirement for €7 billion for "cash flow" purposes. Drumm said the 2008 accounts for Anglo, showing a profit of €800 million, were signed off by government-appointed directors in February 2009, and showed Anglo was solvent.

This is an important point in the background to the bank guarantee and the debate over whether the Cowen government thought it was dealing with a liquidity crisis not a solvency crisis.

Misleading picture painted
But arguably it is misleading to get too involved in this issue. The former minister for finance, the late Brian Lenihan, commissioned a report on the banks from PricewaterhouseCoopers in late 2008. The report was very misleading in the picture it painted, as are, arguably, all of the banks' 2008 annual reports. The fact is that the accountancy rules for banks classified loans as performing as long as they had not breached their terms. So a loan in late 2008, issued two years earlier to fund a now half-completed shopping centre in the midlands, was deemed a good loan if the date on which repayments were due to begin had not yet arrived, even if the site workers had been laid off and the cranes were lying idle.

A drive around the country told you more about the banks’ balance sheets in 2008 than did an accountant’s examination of their loan books.

Bowe, in one of the first of the tapes made public, made an admirably accurate assessment in September 2008 when he told Anglo colleague Peter Fitzgerald that the bank was most likely facing break-up or nationalisation. He was also accurate when he said the bank would need more than the €7 billion it was seeking.

Drumm, in his interview, said Anglo wanted a deposit guarantee in September 2008 and learned of the decision to introduce a blanket guarantee from the media. He said the public needed to be told what happened the night the Cowen government decided this.

“The government’s decision to issue the guarantee covering all liabilities, and not just depositors, is the root cause of the liabilities that have been placed upon the shoulders of Irish taxpayers,” he said.

This is a description of what has happened to Ireland that many people believe is plain wrong. In the years preceding the guarantee, the banks went crazy raising money at home and abroad and using it to fund an Irish property bubble. It is hard not to come across examples of how this money was wasted (ghost estates, half-finished commercial developments, detached empty trophy homes in fields). By September 2008, a day of reckoning was coming, guarantee or no guarantee.

Reckless incompetence
The simplistic idea we were all shouldered with the fallout from the banking crisis because of the guarantee serves to shift focus from the incompetence and recklessness of those who controlled our financial institutions during the mid-noughties. Drumm's comments can be seen as self-serving or indicative of blindness to his incompetence.The issue is vital for the banking inquiry. An inquiry is political poison for Micheál Martin and Fianna Fáil, and manna for Fine Gael, Labour and Sinn Féin. An inquiry that puts an undue emphasis on the guarantee, at the expense of inquiring into the incompetent behaviour of the banks, could be attractive to the governing parties. It would also suit the senior bankers who were the prime architects of the mess we find ourselves in.