The finance manager who tried to play by the rules


The experience of this former IFSC banker is a parable of Celtic Tiger Ireland, illustrating the culture of light-touch regulation that led the country to Nama and bank bailouts

JAMES IS not his real name. He has to conceal his identity because of a written warning from his former employer, a major financial services group based at the Irish Financial Services Centre in Dublin, that any repetition of his story “to a third party would constitute grounds for a claim of defamation which we would not hesitate to pursue”.

When James joined the company in May 2007, he brought glowing references from his previous employer, another financial services company, stating that he was “a person of high integrity, an honest, capable and hard worker and a good team player”. Neither he nor his new bosses realised that the first of those qualities (the high integrity) would come into such sharp conflict with the last (the good team player). The tragedy, not just for James but for Ireland, is that, in the world of Irish banking, it was scarcely possible to be both. At a simple and personal level, James’s story is, in microcosm, the reason why every Irish family has been saddled with a debt of €50,000 to pay for the recklessness and sometimes outright criminality of our banking and regulatory systems.

James’s job with his new employers was that of “risk manager”. It demanded a head for figures (he is a trained economist) but, he says, it was a simple enough task. “I was just a glorified book-keeper. My job was just to say ‘these are the figures’, but I had a reputation of being credible. The be all and end all of risk management is to see everything and touch nothing.”

His employer’s business was often complex, but James’s job came down to the basics – how much money was going out and how much was coming in. Under Irish banking regulations (and indeed under any conceivable regulatory regime) the most fundamental rule was that a bank had to have enough money coming in to pay for its cash outflows. This is what is called “liquidity”.

And when James took up his job, the Financial Regulator had a new liquidity rule: at all times, cash inflows had to equal at least 90 per cent of cash outflows. While the Regulator was notoriously unconcerned about wider banking ethics, this was bread-and-butter “prudential” stuff. In soccer terms, this wasn’t about Thierry Henry’s handball, it was about having 11 players on each side and a round ball.

James compiled reports at the close of business every day and at the start of business next morning. And he quickly noticed that the figures were not hitting the essential 90 per cent. “I was getting 75 per cent, even 65 per cent, not occasionally, but day in, day out. I thought: ‘Is it my fault?’ Then I asked questions and was told ‘it’s a system error’, or ‘a trader forgot to book a deal’ or ‘it’s complicated. Give it a bit more time and you’ll understand. It will be fine’.”

So James signed the required daily liquidity reports and his company’s chief executive endorsed them.

BUT IT WASN’T FINE. James looked again at the Regulator’s rules. They were as clear as they were, from his point of view, alarming. First, they said that the degree of deviation from the 90 per cent rule that could be permitted at any given time was 1 per cent. He was seeing deviations on a regular basis of up to 40 times what was allowed. Second, the rules said that any failure to meet the requirements had to be reported to the Financial Regulator “immediately”. And third, they said that any breach of the liquidity rules “by act or omission” was a criminal offence that could result in up to five years in prison.

Perhaps because he is not Irish, James took this warning at face value. “I didn’t feel like seeing the inside of Mountjoy. This is not me being Mother Teresa. It’s just me not wanting to go to jail.”

After weeks of pressure, James eventually insisted that the chief executive inform the Regulator of the breaches. In late July 2007, James personally delivered a letter from his company to the Regulator, stating that its liquidity ratio stood at just 70 per cent, but promising to fix the problem immediately.

James expected that in response the Regulator would move in to his office and demand to see all of its books. What happened instead was precisely nothing. The Regulator took no action, and James’s daily reports continued to show the company falling far below its liquidity requirements.

In a final effort, James brought in an independent risk management agency from London to look at his company’s books. Within a matter of days, they were able to inform him that he was wrong. The true liquidity ratio was not 70 per cent. It was 50 per cent. In September 2007, James wrote to his chief executive to tender his resignation.

THE ONLY PERSON who has suffered as a result is James. He is on the dole, having become effectively unemployable within the banking industry. No one at the bank has been prosecuted. The company itself has not been penalised by the Regulator. No one at the Regulator has had to answer for the failure to act on the knowledge that a large institution was breaking some of its most basic rules.

“The only hope we have,” says James, “is to re-establish credibility by having accountability, particularly in relation to regulation. Bankers are greedy by nature, so we pay the regulators to ensure that we don’t bear the costs of their criminality. But we are paying those costs and there’s no attempt to come clean.”

Light regulation: the lure of the IFSC

CATASTROPHIC as this week’s banking bailout figures are, they could actually have been much worse. It is a matter of sheer luck that in 2007, before the credit crunch, a Dublin-based bank called Depfa was bought by the German financial group Hypo Real Estate. Very few people in Ireland had ever heard of Depfa. Although it was as German as sauerkraut, it was actually the largest bank in Ireland – bigger than AIB. It was, in legal and regulatory terms, an entirely Irish company. When the financial crisis unfolded, Depfa brought down Hypo. The cost to the German government so far is €102 billion.

The IFSC, where Depfa was based, provides 25,000 jobs, and at its height brought in well over €1 billion a year in taxes. The downside was that, as well as low corporate taxes, part of the attraction for foreign banks was light regulation. And the need to keep these banks sweet reinforced the ultimately disastrous idea that all our regulators should fight in the featherweight division.

Ireland already suffered, as the Dáil’s Dirt inquiry report put it, from “a particularly close and inappropriate relationship between banking and the State and its agencies . . . [who] were perhaps too mindful of the concerns of the banks, and too attentive to their pleas and lobbying.”

Those lobbies were immensely strengthened by the growth of the IFSC. The problem was that, as well as having many legitimate operations, the IFSC also contained brass-plate tax-avoidance operations that earned it the title of “Liechtenstein on the Liffey” and sharp operators that led the New York Times to label it “the Wild West of European finance”. Yet, even after IFSC-based companies were involved in three spectacular frauds – Europe’s biggest corporate collapse (Parmalat); a $500 million fraud by the American Insurance Group; and the largest single bankruptcy in Australian history – there was no attempt to enhance the regulatory regime. Banks like Anglo Irish couldn’t be subject to serious regulation without imposing the same rules at the IFSC. And the absolute understanding was that no one at the IFSC was to be given the slightest cause for anxiety.


“WE WILL never get rid of original sin. We all fall down at times. We are not in the business to make sure everyone who falls is punished.”

Liam O’Reilly, chief executive of the Financial Regulator, May 2005

“Our wealth creators should be rewarded and admired, not subjected to levels of scrutiny which convicted criminals would rightly find intrusive. This is corporate McCarthyism and we shouldn’t tolerate it.”

Sean FitzPatrick, chairman of Anglo Irish Bank, June 2007

“We must resist the temptation to rush to regulate every time an accident occurs . . . Many of us in this room are from the generations that had the luck to grow up before governments got working and lawyers got rich on regulating our lives. We were part of the ‘unregulated generation’ . . . Don’t try to protect everyone from every possible accident.”

Charlie McCreevy, EU commissioner and former minister for finance, in a speech at the Financial Regulator’s annual dinner, October 2005

“The pronounced moves towards greater control and regulation could squeeze the life out of an economy that has thrived on intuition, imagination and a spirit of adventure. There are those who appear to want to establish Ireland as the perfect model in corporate policing and regulation . . . But why? What has been done here over the past decade that demands such a reaction?”

Seán FitzPatrick at the Irish TimesProperty Advertising Awards, September 2005