Department's role in banking crisis must face scrutiny

Anglo board minutes in 2008 show tension with the department over Seán FitzPatrick's loans, writes SIMON CARSWELL

THE MINISTER for Finance decided on Wednesday to widen the scope of the banking investigation to cover events leading up to the nationalisation of Anglo Irish Bank in January 2009.

This extends the inquiry’s remit beyond the original end date of September 29th-30th, 2008, when the Government introduced the €400 billion bank guarantee.

However, Brian Lenihan has said that the investigation will not examine the handling of the crisis by Government and its officials.

Any comprehensive analysis of the events in the months leading up to the nationalisation of Anglo on January 15th, 2009, will inevitably require scrutiny of the role played by the Government and the Department of Finance in the crisis, given their pivotal position.

The part of the Financial Regulator and Central Bank must also be investigated between September 2008 and January 2009, including their knowledge and handling of the €7 billion Anglo-Irish/Life Permanent transactions at Anglo’s September 2008 year end, which helped to flatter the books of the bank at a key reporting date.

Minutes of a crucial Anglo board meeting on December 18th, 2008, show the close involvement of the department and its legal advisers in controversies arising at Anglo that led to the nationalisation of the bank four weeks later.

At this meeting, chairman Seán FitzPatrick and chief executive David Drumm tendered their resignations after Mr FitzPatrick admitted he had hidden multimillion euro loans at the bank using loans from Irish Nationwide.

The minutes of the meeting – seen by The Irish Times – reveal the tense relationship between Anglo and the department over the matter.

To put it in context, the weekend before, Mr Lenihan had announced the Government’s first recapitalisation plan involving a €10 billion fund which each of the banks would apply to draw on.

At this stage, the door was left open for Anglo and the other banks to raise private capital first.

Mr FitzPatrick and Donal O’Connor, then a non-executive director of the bank, chief executive David Drumm, finance director Willie McAteer among others participated in the meeting, while Government-appointed directors Alan Dukes and Frank Daly were also in attendance.

The minutes say Anglo directors Ned Sullivan and Mr FitzPatrick updated the other board members about a meeting with the department earlier that day attended by officials Kevin Cardiff – now secretary general of the department – and Anne Nolan, accompanied by Pádraig O’Riordan, managing partner of Arthur Cox, legal advisers to the Government.

The minutes say it was originally intended that the directors’ remuneration in the bank’s forthcoming accounts would be discussed at the meeting but proceedings were dominated by concerns about the FitzPatrick loans.

The previous Tuesday, the Minister had asked the regulator to check loans to directors at Anglo after the department noticed that directors’ loans at the bank were far in excess of loans at its rivals.

The department has said that neither it nor Mr Lenihan were advised of any issue with the loans before that date. The Minister was told that the regulator would be conducting a full review of them.

Before the Anglo board meeting of December 18th, the department was told that Mr FitzPatrick was considering resignation but that the board would meet later that day to consider the issue.

The minutes of the board meeting show that Mr FitzPatrick read out a statement and tendered his resignation to the board “which was accepted with regret”.

Donal O’Connor was then appointed chairman, a move that had the support of the department officials, the meeting was told.

“The Department of Finance had expressed their disappointment regarding the directors’ loans issue,” the minutes say. The board was told the department felt that “further questions remained to be answered at a later point”.

The department also “enquired as to any regulatory or legal breaches which may have incurred”, the minutes state.

Department officials also questioned whether the directors would be able to repay the loans.

There was also a discussion with the officials about a note on directors’ remuneration in the accounts, the Anglo board was told.

The department was in particular interested in how the bank intended to disclose “a cash payment in lieu of pension benefit for David Drumm”, the minutes state.

Two months later, in February 2009, the bank disclosed in its 2008 annual report that Mr Drumm received a €934,000 cash allowance in lieu of a pension payment after the Government introduced a pension cap in 2006.

“Department officials had also asked the board to consider what action would be taken should management’s capital-raising efforts not succeed,” the minutes say.

“In addition, they requested reassurance that there were no other issues with regard to directors’ loans.”

Mr Drumm said that “in light of recent events and in the absence of explicit Government support, the credibility of management was significantly undermined and that consequently, he felt he had no alternative but to tender his resignation”, according to the minutes.

“The board agreed that a change of management team at this point would be very detrimental to the bank’s efforts to raise capital. The board reflected that a very strong statement of support was required by the Government which would give existing management the best opportunity to raise capital from investors.”

The meeting was told that Mr Drumm would agree to draft “a term sheet for which provided a framework for Government support” for the bank.

“The board considered a range of options and agreed that the best solution for all shareholders was a capital raising from investors.”

Later that day, the Minister reiterated in a statement – issued in response to Mr FitzPatrick’s resignation – “his commitment to underwrite the capital needs of Anglo Irish Bank on appropriate terms and to ensure its long-term strength and viability as a bank of systemic importance in Ireland”.

The Government has injected into or pledged €14.3 billion for Anglo with another €8 billion to be pumped into the bank, most of which will never be recovered.