This extract from Anglo Republic: Inside the Bank that Broke Ireland, explains how Sean FitzPatrick kept his multimillion-euro loans out of sight
NOVEMBER 2008
Anglo’s value: €680 million
On the evening of Thursday, November 20th, 2008, Anglo chief executive David Drumm met Brian Lenihan for the first time. The Minister for Finance had summoned Drumm and the bank’s chairman Seán FitzPatrick, along with all the other chief executives and chairmen of the six Irish banks, to the State-owned residence at Farmleigh in the northwest corner of the Phoenix Park.
Heading to Farmleigh, FitzPatrick was nervous. The last time he had met Lenihan the minister had dismissed his proposal for an Anglo/Irish Nationwide takeover. That meeting had gone particularly badly. Since then, FitzPatrick had made his ill-fated appearance on Marian Finucane’s show following the introduction of the government bank guarantee on September 29th – a public display that had got everyone’s backs up, including the government’s.
Drumm advised FitzPatrick that it would be a bad idea to drive up to Farmleigh in his Mercedes. There was a strong likelihood that press photographers would be lying in wait and it would look terrible if the two bankers showed up in a Merc. The last thing Drumm and FitzPatrick wanted was to confirm the stereotype of fat-cat bankers arriving in style to meet their political masters.
They decided to take a taxi. On their arrival they asked the driver to wait outside while the meeting went on. Lenihan kept them waiting in an anteroom for three hours as he met the chairmen and chief executives of Allied Irish Banks and Bank of Ireland. No one on the government side spoke to the Anglo bosses during that time. It was a long three hours for two bankers who were barely on speaking terms. Drumm later recounted the story to colleagues at the bank, joking that it would make a good stage play.
To ease the awkwardness of the situation, FitzPatrick started telling stories about growing up in Greystones and asking Drumm what it was like growing up in Skerries. FitzPatrick had no problem telling stories. He was highly entertaining company. From time to time FitzPatrick would jump up out of his seat, pace around the room and then sit back down again. Drumm talked about his father, who had died around the time he joined Anglo in 1993.
As the time passed, Drumm noticed that his companion was becoming increasingly restless. FitzPatrick, a diabetic, needed to eat before injecting insulin. (Colleagues remember FitzPatrick often having small spots of blood on the front of his shirt from injection pricks.) Drumm was concerned. He had seen FitzPatrick’s eyes roll in his head when his blood sugar levels dropped. The last thing he wanted was for FitzPatrick to collapse ahead of their crunch meeting with Lenihan.
Drumm found one of the attendants at Farmleigh and asked if he could bring FitzPatrick something to eat. A short time later a woman arrived with a slice of chocolate cake. FitzPatrick tucked in and then took his insulin.
THE BANKERS WERE finally shown into the meeting room some time after 9pm. Lenihan shook Drumm’s hand, saying he believed that Drumm was one of his constituents in Dublin West. Drumm thought he was mixing him up with Denis Casey, the chief executive of another financial institution, Irish Life and Permanent (ILP), who lived in Castleknock, but let it pass, not wanting to embarrass the minister at the start of their first meeting by pointing out a mistake.
Lenihan sat flanked by John Hurley and Pat Neary, as well as Pádraig Ó Riordáin, the managing partner at Arthur Cox, the law firm hired by the government to advise on legal matters relating to the banks.
The minister started at the beginning. “Now you are the Anglo Irish Bank,” he said, speaking slowly in his usual barristerial tones, looking down at a file in front of him. “And you have approximately €100 billion of a balance sheet at today’s date, is that correct?” Drumm said that was correct. Given this opening, the two bankers thought they might be there all night.
Lenihan asked if Anglo was the most exposed bank to construction-related loans. (This was the minister’s term; the banks called them development loans.) Drumm said that Anglo was not the most exposed – AIB had €25 billion of development loans, while Anglo had €16.8 billion – but this statement was misleading: Anglo had a greater share of construction loans than AIB as a proportion of its overall balance sheet.
The meeting didn’t go smoothly. Drumm challenged Lenihan’s assumptions more than once and this irked the minister. At one point Lenihan asked Drumm: “Have you got a bit of a persecution complex?” Drumm said he hadn’t – he was just trying to explain what was going on in the bank.
FitzPatrick tried to speak a few times but Drumm kept interrupting him. Drumm had been advised through a political contact close to Fianna Fáil not to let FitzPatrick speak because the chairman was persona non gratafollowing his Marian Finucane interview.
Drumm felt as though they were being cross-examined and lectured by Lenihan, who had been a senior counsel and law lecturer before becoming a politician. At one stage the bankers were asked to step out of the room. When they were called back in they were told that the government needed to look at Anglo’s future capital requirements and potential bad loans.
Lenihan raised the prospect of mergers to strengthen the weakest banks. The previous day Lenihan had fuelled merger speculation by confirming publicly that private equity consortiums had made “informal approaches” to the government about investing in the banks.
Now, the minister asked the Anglo bankers their thoughts on possible mergers. Beggars can’t be choosers, said Drumm – he accepted that Anglo might have to be merged with another financial institution. Merging Anglo with AIB wouldn’t work, he said, because the two banks were both so heavily exposed to the property sector. Drumm raised the possibility of a tie-up with ILP to create a more universal bank as a possible “third force” to rival AIB and Bank of Ireland. Lenihan quickly discounted Drumm’s idea. As the meeting ended, Lenihan asked to see the bankers again on the 28th, at the Department of Finance.
The waiting taxi dropped Drumm at his car in the city centre and then headed on to Greystones, where FitzPatrick was landed with a fare of €300.
Eight days later, on Friday, November 28th, FitzPatrick and Drumm went to see Lenihan again as requested. The Anglo men were the last of the six banks’ representatives to meet the minister that day. It was a case of leaving the worst until the end, it seemed.
Lenihan met the bankers in the meeting room on the ground floor, where photographs of every finance minister since the foundation of the State line the walls.
“It was the same shit, more specifics,” Drumm reported back to his colleagues. Lenihan told the bankers that he thought Anglo’s banking model was broken, but there was no clear discussion of what might be done about it. FitzPatrick was even more nervy than he had been at Farmleigh. “He was out of his comfort zone,” Drumm reported back. He was right to be nervous. There was a major problem coming down the track towards him.
AS ONE OF Ireland’s best-paid bankers, FitzPatrick had been approached in the mid-1990s to invest in property deals through partnerships that allowed him to reduce his tax bill. Property-based tax reliefs had become hugely popular in Ireland at the time. Cash-rich investors could enjoy a double benefit: make money from the rising value of property and at the same time pay less tax.
Anglo provided many of the loans to these partnerships, and because FitzPatrick was a member of the partnerships and a director of the bank he was required, under stock market rules, to declare his loans in the bank’s annual report every year. He didn’t.
The reason, FitzPatrick told journalist Tom Lyons for the book, The FitzPatrick Tapes, was that the partnerships were structured in such a way that every member of the partnership was jointly liable for the entire value of the loans, which meant FitzPatrick's declaration in the annual report would have to refer to the entire cumulative value of the loans against his partnership investments, and not just his own proportional share of them. He claimed that this would "give an exaggerated figure of my indebtedness", though this is not quite correct: directors' loans were given as a single cumulative figure in the annual report, and so the level of FitzPatrick's personal indebtedness – exaggerated or otherwise – would not have been revealed.
In any case, FitzPatrick decided to conceal the loans. In the days before Anglo’s financial year-end, he would draw a fresh loan from Irish Nationwide Building Society and repay the money he owed Anglo; thus his borrowings from Anglo would not appear in the year-end accounts. When the year-end date had passed, he would draw down the same loans again from Anglo and use them to repay Irish Nationwide. The practice was known as “warehousing”, as the loans would be put into storage, so to speak, when the auditors checked the books. FitzPatrick would later describe it somewhat misleadingly as “refinancing”.
Avoiding the disclosure of property loans relating to investment syndicates may have been the initial motive for warehousing his loans with Irish Nationwide, but by 2001 FitzPatrick had started hiding loans unconnected with syndicates.
By 2003 the scale of FitzPatrick’s investments – and, by extension, his rate of borrowing – had moved to another level after he made €27 million selling shares in Anglo. He started investing heavily in projects outside Ireland – a Hungarian golf resort, a hospital operator in the US, a casino in Macau and buildings in Munich, among others. An internal Anglo document shows that his loans from the bank quadrupled to €122 million between 2005 and 2007.
IN EARLY 2008, during a routine site visit at Irish Nationwide, staff of the Financial Regulator discovered the warehoused loans. The regulator contacted Anglo finance director Willie McAteer, asking him to explain the loans, whether Anglo had a reciprocal arrangement for Irish Nationwide, whether they were legal, and what the bank intended to do about them.
Anglo obtained advice from its lawyers, Matheson Ormsby Prentice, that characterised the transfers as legal. McAteer passed the advice to the regulator, and also said that the issue would be resolved. The regulator left the matter at that. The loans didn’t become an issue at Anglo until the bank started preparing the annual report for the year ending September 30th in late November 2008. FitzPatrick had failed to refinance or warehouse the bulk of the loans as he had been asked to do by the bank so the directors’ loans figure in the annual accounts would jump from €41 million to about €137 million. The bank would have to provide an explanation in the 2008 accounts for the enormous surge in lending to directors.
In late November 2008 Drumm and McAteer told Drury Communications executive Billy Murphy, the bank’s public relations man, about the bed-and-breakfasting arrangement for FitzPatrick’s loans but not the amounts involved. They said the bank would have to disclose the full extent of FitzPatrick’s loans in the upcoming annual report and that he would have to help them draft a note to explain them. Murphy blanched.
A short time later Drumm informed FitzPatrick that the bank would have to explain the loan transfers in the report.
On Wednesday, December 3rd Anglo announced its results for the year to September 30th. The bank’s reporting date meant that it was the first bank in Ireland or the UK to report annual results since the collapse of Lehman Brothers. All eyes were on Anglo.
The bank reported profits of €784 million after writing off €724 million for bad loans. McAteer said that under a worst-case scenario Anglo could lose up to €2.76 billion cumulatively over the following three years and still make profits of €784 million a year.
The bank was trying its best to reassure the markets, but another disclosure spooked investors. The previous March, Anglo had said that 15 per cent of the bank’s loan book, or just under €11 billion, was development lending, the riskiest type. At the December announcement Anglo said that the correct figure was €16.9 billion, or slightly over 23 per cent of the bank’s €73 billion loan book. For the first time, the full extent of Anglo’s exposure to speculative property deals had been revealed. This was an implicit acknowledgement that the bank had been pulling the wool over the eyes of investors.
Investors were stunned by the development lending figures. Anglo’s share price fell to 67 cent, the lowest level in 11 years, valuing the bank at just €509 million. At this price, there was little or no chance of the bank raising external capital. The State was the only place to turn.
On Friday, December 12th, FitzPatrick, Drumm, McAteer and Jacob met Kevin Cardiff at the Department of Finance and Pádraig Ó Riordáin of the government’s legal advisers Arthur Cox. Drumm said that the board of Anglo had decided the previous day that the bank couldn’t survive on its own and that it would need the State’s help to raise €2.5 billion in capital. (The Central Bank believed the bank would need €3 billion.)
To secure this investment, Anglo would have to disclose everything.
On Saturday, December 13th Billy Murphy was at a club rugby match when he received a call from FitzPatrick. He went to a quiet part of the ground to speak to him. FitzPatrick, who had been having difficulty getting through to Drumm, asked Murphy if Drumm had been in touch about his loans. He wanted to know from Murphy how the loans issue was going to be handled.
FitzPatrick told Murphy for the first time about the scale of the loans. He said that there was nothing legally wrong with bed-and-breakfasting loans with another institution and added that the loans were insignificant in relation to the size of Anglo’s loan book. Murphy thought FitzPatrick seemed almost flippant about the loans, but he knew it was a huge problem for the bank.
FitzPatrick later told Tom Lyons that on the same day he asked his three closest friends who were or had been on the board of Anglo – Gary McGann, Donal O’Connor and Fintan Drury – to meet him. He said he told them that he was going to resign as chairman of Anglo over the moving of his loans.
THAT SAME WEEKEND the Government announced that it was going to inject €10 billion into the banks and that the recapitalisations would be based on their “systemic importance”. This didn’t fill Anglo with confidence, as the bank always knew that the government believed AIB and Bank of Ireland to be more important.
At this stage the government had, under the terms of the guarantee, appointed “public interest” directors to the boards of the banks. Anglo’s new directors were Alan Dukes, the former Fine Gael leader, and Frank Daly, the former head of the Revenue Commissioners.
At 5.15pm on Tuesday, December 16th FitzPatrick asked to see Daly and Dukes with Ned Sullivan, Anglo’s senior independent director and chairman of the bank’s remuneration committee. The meeting was part of their induction on to the board, and FitzPatrick walked Daly and Dukes through part of the draft annual report. He said that because they were the public-interest directors he wanted to tell them about his loans. He showed them the note on directors’ loans. Dukes noticed the dramatic increase in the figure from the previous year. FitzPatrick produced a handwritten note listing the borrowings of each of the directors by name.
Both Dukes and Daly were taken aback at the scale of the loans. Dukes asked FitzPatrick what was the reason for the substantial increase in his borrowings.
FitzPatrick told them that it had been his practice every year to “refinance” his loans with another financial institution. The reason for the increase at September 2008, he said, was that he was unable to secure the “refinancing” that month because of the credit crunch.
Dukes suggested to FitzPatrick that it appeared this refinancing was a manoeuvre designed to move the loans off Anglo’s books “at a material time” – in other words, on the day the bank took the snapshot that would be reported in its results. FitzPatrick became visibly agitated and said that the loans were perfectly respectable and the refinancing was done on a commercial basis and at arm’s length, and that this was all carried out on his behalf by officials within the bank. Dukes responded by asking FitzPatrick: “Who is going to say no to the chairman of the bank?”
FitzPatrick told Daly and Dukes that he would inform the Department of Finance.
That evening Daly received a phone call at home from FitzPatrick requesting that they meet. Daly agreed.
FitzPatrick was distracted at the annual Christmas dinner for Anglo pensioners later that night. He was on his mobile so often throughout the dinner that he had the phone recharging near him.
During the meal and in conversation with the pensioners afterwards FitzPatrick was in a nostalgic mood, but the difficulties at the bank were not far from his mind.
“He gave the impression that while things were tough, the cavalry were at hand,” says one Anglo pensioner who was in attendance. He gave no indication that he was about to resign, says the pensioner.
The following morning, on Wednesday, December 17th, Dukes and Daly had a quiet coffee to reflect on the previous day’s seismic meeting with FitzPatrick. They couldn’t believe what they had heard. They joked, wondering what they had gotten themselves into. “No one will touch us with a forty-foot bargepole after this,” Dukes told Daly in an exchange he recounted to colleagues.
Daly then met FitzPatrick at about 11am in Heritage House. FitzPatrick told Daly that he had seen how shocked he and Dukes had been when he told them about the loans.
“Am I finished?” FitzPatrick asked Daly, according to an account of the meeting relayed afterwards.
“If I was on the board and I found out this, either you would go or I would resign and say why I was resigning,” said Daly.
EARLY THAT WEDNESDAY FitzPatrick called Billy Murphy and told him that he had decided to step down as a result of the transfers of his loans to Irish Nationwide. He asked Murphy to meet him at the bank to help him draft his resignation statement.
Murphy spent most of the day with an emotional FitzPatrick in his office at the bank’s head office in St Stephen’s Green as he called each of the bank’s non-executive directors to tell them he was resigning. FitzPatrick then called the company secretaries of Smurfit Kappa, food company Greencore, Aer Lingus and investment company Gartmore to tell them that he would be resigning from their boards.
Murphy then returned to his office to work on the bank’s press statement, while FitzPatrick went home to draft a separate personal statement that he planned to issue.
At 7pm Drumm phoned Murphy and said that he thought the controversy surrounding FitzPatrick’s loans would be huge and cause major damage to the bank. This was in stark contrast to the view of FitzPatrick, who believed that by resigning he would defuse the issue.
Drumm was travelling on business in Edinburgh that day, with the head of the bank’s UK business Declan Quilligan, when he received a call from Ned Sullivan to tell him FitzPatrick was resigning. FitzPatrick called Drumm afterwards saying that he was going to step down because he thought that the Department of Finance was going to release details of his loans to the media.
A board meeting was called for 10pm. Drumm and Quilligan rang in from Drumm’s hotel room in Edinburgh. FitzPatrick told his fellow board members that he was very ashamed of what he had done with his loans and how he had brought shame on the bank. He apologised and confirmed that he was going to resign. It was then decided that non-executive director Donal O’Connor should be appointed to succeed FitzPatrick.
O’Connor’s appointment made sense, as he was the newest board member – relatively untainted by Anglo’s past – and had good relations with the government.
The next morning, Thursday, December 18th, FitzPatrick, Sullivan and O’Connor met senior Department of Finance officials Kevin Cardiff and Ann Nolan, who were accompanied by Pádraig Ó Riordáin of Arthur Cox. Cardiff and Nolan expressed their disappointment over the loan issue. They said that further questions remained to be answered. They asked whether the loan transfers broke any of the Financial Regulator’s rules and they sought reassurances that there were no other such issues lurking within Anglo.
A matter relating to Drumm’s compensation had already caused deep suspicions within the department towards Anglo. In a previous discussion about directors’ pay at Anglo, the bank had reassured the department that Drumm would be taking a cut in his basic salary for the year to September 30th, 2008. But by the time this had come up for discussion, Drumm’s entire salary, with no reduction, had been paid.
Senior department officials became aware of this, and it created a breakdown in trust between the department and the bank.
At 12.30pm on December 18th the board of Anglo met in Heritage House. FitzPatrick read out his resignation statement and O’Connor was approved as chairman. Drumm tendered his resignation as well. He felt that the bank would not be able to raise cash from investors, which was central to the bank’s survival, if he remained on as chief executive.
O’Connor told the meeting that it was important “to draw a line in the sand” on the directors’ loans and to send out a public statement saying that no other directors of the bank were involved. Lar Bradshaw, who attended the board meeting by conference call, realised that he might have a problem.
He and FitzPatrick had taken out a joint loan of $38 million (about €28 million) from Anglo to invest in an oil field in Nigeria.What if their joint loan was one of those that FitzPatrick had moved off the books?
After the meeting, Bradshaw called FitzPatrick. “Sean, please tell me that our loan is not one of these loans,” he said. “I have to come back to you on that,” said FitzPatrick. Bradshaw was at home, nervously waiting by the phone. FitzPatrick rang back five minutes later. “That is one of the loans,” he said. Bradshaw was devastated. He knew he would have to resign too.
The warehousing of FitzPatrick’s loans and FitzPatrick’s resignation were announced to the world in two statements – one from the bank, one from the resigning chairman – at 8.44 pm that evening. FitzPatrick’s statement was predictably contrite, though it asserted that nothing he had done was illegal.
HE ADMITTED THAT the transfer of his loans was done on his own initiative. FitzPatrick said that Bradshaw had no knowledge of the transfer of their joint loan.
Half an hour later the regulator issued a statement saying that it had become aware of the loans earlier in 2008 and that the matter remained under investigation.
Despite the ructions at Anglo that day, the bank was relieved when Lenihan issued a statement saying that the government was still committed to underwriting the capital requirements of Anglo to ensure its viability “as a bank of systemic importance in Ireland”. This was the backing Anglo needed.
In the aftermath of the FitzPatrick revelations, there was surprise that Drumm had not recognised the warehousing of the loans as a serious reputational issue for the bank. The recent recruits to the board were also shocked to learn that so many people in the bank were aware of the loans. But people who knew Anglo more intimately than the new directors were less surprised.
“There was a great sense in Anglo that they could deal with anything that came their way, that was part of their culture,” says a source close to the bank. “They had a great sense of confidence. That was why, notwithstanding the gravity of the events of 2008, they didnt realize the extent of the problems with FitzPatrick until the end of the year.”
The day after FitzPatrick resigned, the Office of the Director of Corporate Enforcement said that it would start an investigation into the loans. The government expressed concerns that the regulator had known about the loans for so long and had not pursued the matter as a major concern.
Drumm announced his resignation shortly after noon on December19th, having been asked by the board to wait a day to consider his decision. He said he had to go as the bank would never be able to get the government to agree to support it if he stayed on.
Noël Harwerth, a non-executive board member, responded that investors would never come on board if he left. O’Connor and Ned Sullivan, a non-executive director, asked him not to resign immediately after FitzPatrick, believing that the last thing the bank needed at a critical time when it was trying to raise external investment was to be destabilised further with the resignation of its chief executive as well as its chairman.
But Drumm knew that the Department of Finance wanted him to go – it would just be at a time of their choosing.
He also felt that, following FitzPatrick’s resignation, the spotlight would now move to him. Outside the bank, questions would be asked about his role in the affair.
On the day of FitzPatrick’s resignation, AIB and Bank of Ireland agreed to provide Anglo with loans of €4 billion, which subsequently rose to €6 billion, to prevent the bank from having to access emergency lending from the Central Bank – a move that could have been even more damaging to the wider Irish banking system.
Ironically, almost three months after being asked to provide emergency loans to Anglo on the night of the guarantee, AIB and Bank of Ireland were finally coming to the rescue of their rival. But the money wouldn’t be enough.
This is an edited extract from Anglo Republic: Inside the Bank that Broke Ireland, by Simon Carswell, published by Penguin Ireland today
