An inspector is called for

A range of inquiries into the Anglo Irish Bank crisis could lead to the appointment of an inspector, writes  COLM KEENA, Public Affairs Correspondent

THERE ARE now a range of reasons to support the appointment of an inspector to Anglo Irish Bank, according to Labour Party spokeswoman Joan Burton.

The scale of the disaster at the bank, and the implications it has had for the banking sector and the economy generally, are a valid reason for such an appointment, she said. “This is the biggest financial scandal in the history of the State, and the notion that it should be swept under the carpet and we learn nothing from it is not sustainable.”

The bank is currently the subject of a range of inquiries with varying terms of reference. These include inquiries being conducted on behalf of the bank’s new board, inquiries by the office of the Financial Regulator and the Irish Auditing and Accounting Supervisory Authority, as well as inquiries by the Office of the Director of Corporate Enforcement, Paul Appleby.

The last is considered the one most likely to lead to an approach to the courts for the appointment of an inspector. Appleby first became involved with the bank in the wake of the revelations concerning the bank’s former chief executive and chairman Seán FitzPatrick, who had, over a period of eight years, been hiding the extent of his loans from the bank. However, Appleby’s inquiry may have widened its brief since then.

Burton said the disclosures concerning FitzPatrick’s loans were, in themselves, reason for the appointment of an inspector. She said it is not known what FitzPatrick was using the loans for.

She said the bank’s “extraordinary symbiosis” with the Dublin Docklands Development Authority is another cause for legitimate concern.

FitzPatrick’s loans included money used in a joint venture or ventures with a non-executive director of the bank, Lar Bradshaw. Bradshaw was chairman of the Dublin Docklands Development Authority up to 2007, a period when FitzPatrick served as a non-executive director on its board.

The authority has quasi-judicial powers in relation to the development of the docklands area, and Anglo Irish has been involved in significant commercial developments there.

An office complex currently being constructed by developer Liam Carroll, using funding from Anglo, was to become Anglo’s new headquarters. What will happen now that the bank has been nationalised is not clear. The involvement of FitzPatrick and Bradshaw in such interlocking directorships was unusual, as was the decision to allow FitzPatrick, who had been chief executive of the bank for two decades and was so closely associated with its culture and expansion, to become chairman after he stood down from the chief executive’s position four years ago.

Donal O’Connor, currently chairman of the bank, was a non-executive director of Anglo and chairman of the docklands authority at the time of FitzPatrick’s and Bradshaw’s resignations late last year.

He was appointed to the board in June of last year, having been appointed chairman of the docklands authority a year earlier, at the end of Bradshaw’s 10-year term.

O’Connor resigned as chairman of the docklands board after his appointment as the bank’s new chairman, recognising the potential for perceptions of conflict of interest.

He was senior partner with PricewaterhouseCoopers when it moved to a custom-designed 22,000sq m building built by Treasury Holdings on Spencer Dock in 2007.

Even with FitzPatrick hiding his loans – which at one stage were in excess of €100 million – the directors’ loans at Anglo were huge when compared with those of other banks. At the end of 2007, the 13 directors declared loans from the bank totalling €41 million.

“We have not been told what directors got them and what they got them for,” said Burton.

She said the whole issue of the accumulation of a 25 per cent stake in the bank by businessman Seán Quinn and his family, and the circumstances surrounding how he came to unwind that position, are a further reason for the appointment of an inspector.

“What was the investment for? Was it in order to take over the bank?”

The Financial Regulator appears both to have known about FitzPatrick’s practices in relation to his loans, and to have known, at least by early 2008, about the Quinn family’s stake in the bank. The stake was held by way of contracts for difference (CFDs), which did not impose a disclosure obligation on the Quinns.

However, rumours about the stake held by the Quinns appeared in the media and it became a force for instability as short-sellers factored it into their attacks on the bank’s shares, raising the prospect of a share price collapse and a run on the bank. At the time, the bank’s share price was falling.

It is understood the regulator’s concern about the Quinn family stake was raised directly with the bank. It was also brought to the attention of the Minister for Finance. It is not clear whether this occurred prior to or after Brian Lenihan took up that position from the Taoiseach, Brian Cowen, in May of last year.

The Quinn family members began to settle their CFD accounts some time in the middle of 2008. The Quinn group had loaned money to the family to allow it make the investments and, as a result, the group has since written off €959 million.

But instead of simply walking away from its disastrous involvement with Anglo shares, the Quinn family at this stage bought a direct 15 per cent stake in the bank. This would have cost it further hundreds of millions and the shares may now be worthless.

At around the same time, July 2008, the bank took out charges on Quinn group shares that would give it a 17.7 per cent stake in the event of default, and control of the holding company’s board. The charge that would give it control of the board was undone within weeks, but the charge on 17.7 per cent of the ordinary shares still appears to exist.

What lies behind all of this has not been explained by the Quinn family or the bank.

Meanwhile, there remained the issue of the remaining 10 per cent shareholding in the bank that had not been taken up directly by the Quinn family. These shares were bought up by a small group of wealthy business figures who were also significant customers of Anglo.

The bank had a practice of seeking very strong collateral for the loans it issued but it advanced limited recourse loans to the businessmen so they could purchase these shares. In other words, the backing for the loans was limited, to some extent, if not entirely, to the shares. It appears, therefore, that the bank was taking the risk involved in investing in its own shares, at a time when the release of a 10 per cent block onto the marketplace, would have added to the downward momentum in the share price.

It the share price had rebounded, however, the bank’s customers would have been entitled to the profit.

On one analysis, it could be said the taxpayer will now have to accommodate the losses arising from these loans. However, it is understood the individuals involved are heavy borrowers from the bank and their other loans are highly collateralised. The taxpayers’ loss will be an academic one if it proves to be the case that the individuals involved are now effectively bankrupt.

Different versions of the extent to which the regulator’s office was aware of the terms and conditions associated with the loans have been given by informed sources.

From comments made by the Minister for Finance, it appears that he did not know of the conditions attaching to these loans until they were reported back to him following a due diligence inquiry into the bank late last year.

This week at a hearing of the Oireachtas Joint Committee on Economic and Regulatory Affairs, Frank Daly, the former Revenue chairman who has been appointed by Lenihan to the Anglo board, confirmed that the bank had made loans to customers that were used to buy Anglo shares. He would not elaborate.

Burton believes that the way the bank was allowed develop rapidly specialising in lending to developers in the context of a property boom, is another reason why the appointment of an inspector who would in time publish a report on his or her findings, is appropriate. “The best way to clear up the reputational damage that has been done to Ireland is to have an inspector look at the issues and clear it all up,” she said.