Thursday, February 26, 2009
DESPITE attempts to sanitise and whitewash the full horrors of Anglo Irish Bank in the annual report, the truth is being exposed. This is the worst financial scandal in the history of our State. It is now time to compare and contrast this sorry saga with the worst financial scandal in the USA — Enron Corporation.
Enron filed for bankruptcy on December 2, 2001. Its shares dropped from $90 to less than 50 cents. It resulted in the dissolution of Arthur Andersen, at the time one of the five largest accounting firms in the world. The background to the collapse was the deregulation of the electricity and energy markets in the 1990s. This relaxation allowed Enron to keep losses and debts off the balance sheet.
The extent of the financial deception created an illusion of billions of profit while the company was actually lossmaking. The three main culprits were Jeffrey Skilling, president and chief operating officer; Andrew Fastow, chief financial officer, and Kenneth Lay, chairman and CEO.
After indictment, they went on trial and were found guilty of various types of fraud. They were convicted and each was sentenced to up to 24 years in prison.
The US Securities & Exchange Commission (SEC) took the lead role investigating Enron. They pronounced "some of the most opaque transactions insiders have ever seen". They eventually found the "black box", like that of a crashed plane. This got behind balance sheets to reveal unscrupulous actions, gambles and acts of deception to support the stock price. It eventually all collapsed like a house of cards.
Despite many assertions by the Enron top brass that all was sound, it emerged that the company had begun buying back its commercial paper to keep investors from fearing about its supply of cash. They had manipulated accepted accounting rules with the acquiescence of their auditor.
Enron’s credit rating was reduced to junk status by Moody and Standard and Poor’s. It transpired there was a "regulatory black hole". Ultimately, the other shoe dropped when vast debts were revealed.
The fallout resulted in the most radical changes to federal securities law. This has led to other countries adopting new corporate governance legislation. These provide stronger penalties for fraud, prevent plcs from making loans to management, ensure more transparent information to the public, stronger independence from auditors and having to report on their internal financial control procedures.
What are the parallels between us and Anglo? Sadly, too many. The Anglo share price collapsed from e17.53 to 20 cent. Offshore companies were not involved here. We don’t have an SEC equivalent. Instead of chapter 11, we bailed out Anglo by nationalising it. The key parallel is that, despite operating in different sectors in the economy, the culture was the same. You can substitute the names Fitzpatrick, Drumm and McAteer for those of the Enron boys.
Some of the biggest holders of Anglo stock to lose last year were big US investment groups such as Janus and Invesco. These institutional investors weren’t offered the same terms as the "Maple 10". Anglo provided the e451 million loan finance — 75% of this was on a non-recourse basis. In fact, ordinary shareholders hadn’t a clue what was really going on at Anglo. The share support scheme was improper. I fail to see how it cannot be in breach of Section 60 of the 1963 Companies Act. And now, unbelievably, the poor Irish taxpayer faces litigation from investors seeking to recover their losses.
The scenario gets worse for the taxpayer, according to the Price Waterhouse Cooper report. Anglo’s total loan book extends to e72 billion. It is expected e5.3bn will be lost in the next two years. Last autumn they lost 30% of their deposit base which had to be shored up by an inter-bank transfusion of temporary cash from Irish Life & Permanent (ILP).
There is no uncertainty about how good Anglo Irish was to their own directors and executives. Last year alone, directors took out loans of e255m, of which Seán Fitzpatrick concealed e122m. Directors’ fees amounted to e9.5m last year, including bonuses. David Drumm was the highest paid Irish CEO last year. With a package of e4.65m, he was one of the highest paid bankers in Europe. These fat cats had a staple diet of cream.
The time for protest is over. Instead we need payback. We should introduce a new law whereby any director is disqualified from holding other directorships if his or her company is nationalised because of insolvency.
Top directors of Anglo Irish such as Gary McCann, Anne Heraty and Ned Sullivan sit on a host of other prestigious corporate boards. The most effective penalty for them would be director disqualification.
The worst aspect of unaccountability relates to Seán Quinn and the Quinn Group. To date Ireland’s richest man has merely had a fireside TV chat with Tommie Gorman of RTÉ,which didn’t deliver any answers to fundamental questions. Why did a man, known for minimal stakes card games on Tuesday nights, gamble e1.5bn on Anglo Irish contracts for difference (CfDs)? Were the entire CfD investments, in effect, a sustained share support scheme? How much does the Quinn Group owe to Anglo Irish Bank? Was Quinn’s 15% stake in Anglo financed by that bank in mid-July last year? A High Court inspector should be put on this case.
We do know that Seán Quinn and his group had a record fine of e3.45m imposed in October by the Financial Regulator for the manner in which they accessed cash from their insurance reserves to invest in Anglo. We have no idea whether the contagion of Anglo’s financial meltdown will extend into the insurance sector.
In the US, AIG was engulfed in the banking collapse. Who can we trust to reassure us that our health and non-life insurance sectors are safe?
Officers of the Director of Corporate Enforcement and the Garda Fraud Bureau have raided the head office of Anglo Irish in the past week. Let’s hope they find what they were looking for on the computer programmes and bank records. Nothing less than convictions will suffice for an irate and incredulous public.
Ernst & Young are alleged to have been advising Anglo Irish on their presentation to shareholders at the EGM on December 3. They did not make any qualified audit opinion on the annual accounts. They seem to have favoured minimal disclosure to shareholders. No comment or statement has clarified if they claim they were misled by the Anglo management team. They refused to appear before the Oireachtas committee to state their case. Let’s hope John Purcell and the Institute of Chartered Accountants in Ireland will fully clarify the auditors’ culpability or otherwise.
Meanwhile, the leaked internal audit report of Anglo Irish is incredible.
Patrick Neary’s riposte "Fair play to you, Willie", in response to the open admission by the Anglo chief financial officer McAteer to "managing" its end-of-year balance sheet, is breathtaking. I can’t understand how the taxpayer isn’t looking for a refund on our e630,000 payoff. Neary’s role in the IL&P deposits does not stand up to scrutiny. The Enron disaster cleaned up American accounting. The Anglo disaster must have a similar outcome.
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