Regulator stumbled on loans during inspection of rival bank's books

BACKGROUND:THE FINANCIAL Regulator first stumbled across the loans of €87 million drawn by Anglo Irish Bank chairman Seán FitzPatrick last January when inspectors from the regulator's offices carried out a routine inspection of the loan book of a rival lender, Irish Nationwide Building Society.

During their visit to Irish Nationwide, the inspectors noticed that a large loan was provided to Mr FitzPatrick and later repaid. It later discovered that similar loans were provided to Mr FitzPatrick in September and repaid in October.

The regulator raised the issue with Mr FitzPatrick and Anglo, and discovered further details showing loans being transferred back and forth between Anglo and Irish Nationwide over an eight-year period.

It emerged that Mr FitzPatrick had – over the eight years to the bank’s year-end on September 30th, 2007 – repaid loans owing to his bank with new loans drawn from Irish Nationwide. Once Anglo’s reporting year-end had passed, he repaid the loan from the building society with fresh borrowings from Anglo.

Keeping loans off the books of Anglo every year for eight years meant that the €87 million in loans did not emerge in the snapshot of the bank that the independent auditors, Ernst Young, take every year for the purposes of compiling Anglo’s annual report.

The practice is known as “warehousing”. It is also described within financial circles as “a bed and breakfast” deal, though this term is generally applied to share transactions where stock is sold and repurchased shortly after the start of a new tax year, allowing shareholders to register a loss or profit for tax purposes while retaining ownership of the shares.

The regulator began investigating whether Mr FitzPatrick’s loan transfers breached its regulations. It consulted the Office of the Director of Corporate Enforcement to see whether any aspects of company law had been broken.

The regulator kept the matter under investigation, though it appears to have been distracted by the international credit crisis.

Further contacts were made between the regulator and the bank last September, before Anglo’s reporting year-end fell on the last day of the month, in order to ensure that the loans would be included in the 2008 results.

Assurances were given that the loans would not be transferred off the bank’s balance sheet again, but the regulator decided to launch its own investigation to ensure the loans would be listed in the accounts. The regulator sent a team of inspectors into Anglo’s headquarters on St Stephen’s Green in Dublin last Monday to examine loans to Mr FitzPatrick and other directors of the bank.

The regulator’s inspectors are still conducting their inquiry.

A spokesman for the Department of Finance said it was advised on Wednesday evening that representatives of Anglo’s board wished to meet department officials early on Thursday. The department was informed that the regulator had in recent days been reviewing the bank’s loans to directors.

The spokesman said that, on Tuesday, before his meeting with Anglo chief executive David Drumm and Mr FitzPatrick, Minister for Finance Brian Lenihan asked the regulator to check out the loans.

This request went to the regulator after the Minister noticed significant differences in the size of directors’ loans at the various guaranteed institutions, according to the Department of Finance. This may have prompted the regulator to send in its team of inspectors. “Neither the Minister nor the department were advised of the issue earlier in the year,” the spokesman said.

On Thursday morning, the department was informed that Mr FitzPatrick was considering resigning and that Anglo’s board would meet later. The Minister was told this by his officials on a confidential basis and on the understanding that the Anglo board had not yet met.

In a statement released late on Thursday announcing Mr Fitzpatrick’s resignation, the bank said: “The transfer of loans did not breach banking or legal regulations. It was, however, inappropriate from a transparency point of view.” The bank added that its other directors had “confirmed that they have not engaged in this or in any other inappropriate action in relation to their loans.”

The regulator said: “While it does not appear that anything illegal took place . . . the Financial Regulator was of the view that the practices surrounding these loans were not appropriate.

“We continued to monitor . . . this . . . We advised Anglo Irish Bank to ensure that these loans are reported in the annual accounts for 2008.”

While the regulator continues to investigate the bank’s loans to its directors, Anglo is preparing to publish the bank’s annual accounts for the year, outlining for the first time details of €87 million in loans owing by Mr FitzPatrick and a further €63 million loaned to other directors of the bank.