BoI chief praised Cowen after private dinner

ANALYSIS: Bertie Ahern and IDA chief also wrote to then minister to raise fears over legislative delays

FORMER ANGLO Irish Bank chief executive Sean FitzPatrick wasn’t the only senior banker to have access to Brian Cowen over a private dinner.

Correspondence released last week to The Irish Timesby the Department of Finance under the Freedom of Information Act shows that, in May 2006, Bank of Ireland chief executive Brian Goggin and some colleagues dined with Cowen, then minister for finance, and department officials at the bank's head office.

Goggin’s follow-up letter three days later, thanking the minister for his time, shows how this access to Cowen enabled the bank to make representations on the importance of legislation affecting the funding of the Irish banks.

The chief executive praised Mr Cowen for legislation on covered bonds, a form of IOU that allow banks to borrow from mostly overseas investors – using mortgages as collateral – to fund further lending at home.

“This particularly enlightened and innovative piece of legislation is a model for a number of significant stakeholders – political, public and private sectors – working constructively together to produce something that not just achieves its primary aim, but that also works to promote a very positive image of Ireland abroad,” Mr Goggin said.

The letter was sent at the peak of the boom when Irish banks were looking at new ways of borrowing in the global markets to fund themselves and further loan growth. Foreign borrowing by the Irish banks peaked at about €150 billion in 2007.

Excessive overseas borrowing led to the Government bank guarantee in September 2008 when these markets shut down almost overnight.

In a note to Goggin’s letter, the bank said the Asset Covered Securities Act of 2001 allowed banks in Ireland to borrow almost €45 billion on covered bonds and that Bank of Ireland had seen demand from investors to lend it €10 billion, of which it had borrowed €4 billion on two covered bonds.

Goggin’s letter is one of many sent to Cowen in 2006 pressing him to amend legislation to put the Irish banking industry on the same playing field as other global financial services centres in relation to covered bond business.

Growing concerns about delays in changes to the legislation led to a concerted lobbying campaign by bank representative groups, the Irish Bankers’ Federation and the Federation of International Banks in Ireland.

Even the then taoiseach Bertie Ahern and IDA Ireland chief executive Sean Dorgan wrote to Mr Cowen to express concerns about the legislative delays which might lead international banks in Ireland to bring their business elsewhere.

Ironically, two German-owned banks that lobbied Mr Cowen in correspondence – WestLB and Dublin-based Depfa – both had to be bailed out in Germany after their funding dried up during the September 2008 financial crisis.

IBF chief executive Pat Farrell told Cowen in a letter dated October 6th, 2006, that one of the benefits of building an Irish covered bond market was it would allow Irish lenders to fund the demand for mortgages. Mortgage lending was then running at almost €40 billion a year. This has now collapsed to about €5 billion.

The subsequent 2007 amendment to the legislation allowed domestic banks to expand the scope of their own borrowing.

It also helped Anglo Irish Bank, which, until then, did not enjoy the same funding benefits as its rivals because covered bonds had previously only allowed residential mortgages as collateral. Anglo was a commercial property lender and did not lend residential mortgages.

The Asset Covered Securities (Amendment) Act 2007 allowed commercial mortgages to be used as collateral for borrowing through covered bonds.

Delays in the passage of the legislative amendment had prompted David Drumm, Anglo’s chief executive, like other bankers, to write to Cowen in October 2006. Anglo’s loan book was growing at a ferocious annual rate at the time. It stood at about €50 billion in October 2006 and would reach €72 billion two years later.

Cowen’s private secretary wrote back to Drumm the following week, saying that the legislative amendment would be enacted “as soon as possible”.

“The minister shares your assessment that the further modernisation of the legislative framework for covered bonds is critical to developing the competitiveness of Ireland as a base for the issuance of such securities and also as an alternative source of long-term funding for our banks,” he said.

The legislative changes came into force in April 2007.

By September 2008, Anglo was close to collapse and the bank was trying to push ahead with plans for a covered bond to plug the gap created by lost deposits.

The following month, after the bank guarantee, Anglo set up a subsidiary bank to issue bonds backed by its commercial property loans.

The bank later borrowed €4 billion on a covered bond backed by €6.4 billion of commercial property loans.

These bonds are now used as collateral for some of the €17 billion borrowed by Anglo from the European Central Bank to cover deposits lost by Anglo and to keep the bank – and, in turn, the State – afloat.