Anglo's sorry tale, well told
FINANCE: WILLIAM COHANreviews Anglo Republic: Inside the Bank that Broke IrelandBy Simon Carswell Penguin Ireland, 352pp. £14.99
SIMON CARSWELL’S Anglo Republic: Inside the Bank that Broke Ireland,a thorough filleting of nearly everyone involved in the spectacular rise and fall of the renegade Anglo Irish Bank, puts one in the mind of the parable about the frog and the boiling pot of water. Toss a frog into a pot of boiling water and the frog, feeling the heat, will jump right out. Toss a frog into a pot of temperate water, then slowly turn up the heat until the water in the pot is boiling, and the frog will stay put until it meets its demise.
That pretty much sums up the story of Anglo, which slowly but surely sealed its own sorry fate at the end of the last decade with its mind-bogglingly irresponsible lending to the developer friends of the bank’s former chairman and chief executive, Seán FitzPatrick, until it was too late to do anything about it. Along the way, FitzPatrick and his hand-picked successor, David Drumm, briefly created a banking juggernaut with a market capitalisation of €13 billion. It was the envy of investors everywhere before it plunged itself and the Irish economy into a financial black hole from which the Irish people are wondering whether they will ever escape. With the infamous Celtic Tiger euthanised, austerity has become the fact of life in Ireland these days.
Unlike financial institutions in the US, where, for huge fees, Wall Street packaged up one lousy mortgage after another and sold them off as safe investments to investors the world over, Anglo was a throwback. It lost money the old-fashioned way by making one crappy loan after another to real-estate developers who convinced the bank that trees could grow to the sky. Anglo grabbed market share from its more staid competitors by agreeing to huge loans within days of being asked for them.
FitzPatrick and Drumm seemed to believe the pipedreams too. Unlike the Americans, who knew they were packaging up crap and were eager to sell it on to others (while hoping to retain as little of it themselves as possible), FitzPatrick and Drumm kept the bad loans on Anglo’s books. During the boom years the loans – and the associated fees – meant huge and growing profits for Anglo. The problem was that nearly half the loans were to come a cropper.
Using Anglo’s cash, FitzPatrick and Drumm also loaded themselves up on Anglo stock, which made them impossibly wealthy when the stock was a high-flyer and then left them morally and financially bankrupt – and the worthy targets of a nation’s ire – when then real-estate bubble burst.
Carswell’s thorough tick-tock traces the rise and fall of the bank from 1980, when Fitzpatrick was its “general manager” (total headcount, he said, four people), to 2010, when Anglo played a central role in the financial debacle that compelled the European Central Bank and the International Monetary Fund to pump billions of euro not only into the Irish banks but also into Ireland itself. (At last count, the EU and IMF had agreed to lend €85 billion.)
The story is a cautionary tale of the consequences of one wrong-headed decision after another. The greed that drove FitzPatrick and Drumm to infamy is easy to see and understand. What’s less obvious (though it is behaviour perhaps more familiar to Americans) is why the Irish Financial Services Regulatory Authority – the Financial Regulator – the government at the time and the Central Bank failed to see the trouble brewing at Anglo and among the developers the bank was so carelessly financing. The reason Carswell offers – that they were simply too tight as drinking and golfing buddies, and too wedded to the Celtic Tiger mythology to turn the battleship around – may be as good a reason as any.
For the uninitiated, or those beyond Ireland’s shores, Carswell’s narrative can seem an overwhelming barrage of unfamiliar names, far-away places and meeting after ponderous meeting. Carswell, this newspaper’s Finance Correspondent, is no Michael Lewis in the artistry department: without nearly the plethora of detail that Carswell provides, Lewis’s article “When Irish Eyes Are Crying”, in the March 2011 issue of Vanity Fair, does a better job in fewer words of conveying the unprecedented mix of ambition and pathos that came to characterise Ireland’s wild ride.
Nevertheless, Carswell’s tale is chock-full of astonishing revelations. One of the book’s most fascinating narrative threads is the one that follows the industrialist and insurance mogul Seán Quinn, once Ireland’s richest man. Not only was Quinn one of Anglo’s biggest borrowers, amassing a debt to the bank of some €2.9 billion that he could not pay back, but he was also, in effect, Anglo’s largest shareholder, controlling a stake of nearly 30 per cent through contracts for difference, an anonymous form of investment. There is a moment of palpable fear when, at the first meeting between FitzPatrick, Drumm and Quinn at the Ardboyne Hotel, in Navan, Quinn reveals the size of his stake in Anglo. That was when, Carswell explains, the bank executives realised that the fates of Quinn and Anglo had become hopelessly and fatally entwined.
Carswell shares the twin outrages of how Quinn was able to amass such a huge equity stake in Anglo without having to disclose it publicly and how the bank’s executives were able to keep that information to themselves once they discovered it. In the US, once an investor crosses the 5 per cent equity-ownership threshold, that stake must be disclosed to the Securities and Exchange Commission; failure to disclose can lead to a jail sentence. Given how important Quinn’s huge ownership stake was to the ultimate demise of Anglo, it would have been interesting if the author had probed into why Irish regulators allow this loophole, rather than just explain the rules as they exist.
Instead we get the eye-opening saga of how Anglo kept adding to the size of Quinn’s debt in order for him to cover one margin call after another on his Anglo shares as they lost value. There ought to be a law against making loans to a bank’s large shareholders.
There are other tasty treats as well. Carswell shares the story of Ffion Hague, the wife of British foreign secretary William Hague, blessing the performance of the Anglo management and its board just before all hell breaks loose. There’s the jaw-dropping saga of the “Maple 10”, a group of 10 developers and Anglo clients that Anglo executives assembled to buy big chunks of Quinn’s stake in Anglo – financed recourse-free by Anglo, of course. This was an attempt to stave off the potential danger of Quinn owning, and suddenly being forced to liquidate, his huge stake in the bank. The Maple 10 gambit, which failed miserably when Anglo was nationalised in January 2009, was never disclosed.
There’s the utterly depressing story of how Philip Ingram, a research analyst at Merrill Lynch in London, correctly wrote a report about the state of the Irish banks in March 2008, only to be forced by complaints from Anglo executives and others to retract much of it. In its place, Merrill Lynch proclaimed that the Irish banks were actually just fine. “All of the Irish banks are profitable and well capitalised,” was Merrill Lynch’s revised thinking just months before Anglo was nationalised.
In December 2008 Merrill Lynch fired Ingram. Carswell might well have mentioned that just three months before firing Ingram, Merrill itself met its own terrible fate of having to be taken over by Bank of America rather than face an inevitable bankruptcy filing.
We are left with Anglo in liquidation, a banking system in tatters and a sovereign nation in hock up to its eyeballs to foreign bankers. We are also left with FitzPatrick and Drumm disgraced and in bankruptcy, as they should be. But we are also left wondering why no criminal charges have been filed against them and why, unlike their scummy American counterparts, they werent clever enough to squirrel away millions of euro so that they could live like kings while those left holding the bag for their greed continue to suffer.
William Cohan is the author of House of Cards, about the collapse of Bear Stearns. His latest book, Money & Power, chronicles events at Goldman Sachs