After all of Anglo’s dirty business let’s clean out watchdog’s kennel

BRACE yourself. The annual report of Anglo Irish Bank will be published tomorrow. The full extent of the toxicity of this former plc and its nefarious practices from October ’07 to the end of September’08 will be exposed.

Stock markets and investors were manipulated in relation to the real state of the bank. The share price would have collapsed much earlier if the full truth was known.

A new form of colossal gambling has emerged. It’s called Contracts for Difference (CFD). London is the hub of this casino activity. The main players are Cantor Fitzgerald, IG Index and Credit Suisse. They provide a facility whereby you can bet whether an individual share stock will go up or down in price. It seems Seán Quinn bet e1.5bn in early 2008 that Anglo’s share value would rise.

When the Central Bank and the regulator (FSRA) stress-tested the Irish commercial banks in the light of the international credit squeeze, the CFDs in Anglo came to light. Anglo was told to dismantle these and convert them into conventional equity in the bank. At the time this was equivalent to 25% of the total value of Anglo. Quinn ended up with a 15% stake in the bank for e1bn.

Seán Fitzpatrick and the CEO, David Drumm, faced a crisis last July. Such an overhang of 10% of the stock would send the share price into a tailspin. They engineered a situation whereby the share price remained at more than e6 because they obtained 10 investors to divide up the stock. e300m of Anglo cash was provided for the share deal. These were ‘non-recourse’ loans using the Anglo shares as 75% of the collateral. When the share price collapsed the bank was nationalised last month. It now seems the taxpayer will pick up the cost of this chicanery of e225m on these worthless shares.

This information has leaked out sporadically. It comes on top of Anglo Irish already admitting their year-end trickery. Seán FitzPatrick knowingly and deliberately disguised the fact that he had personal director’s loans from his own bank of at least e84m.

For eight years he would ring his pal Michael Fingleton in Irish Nationwide to arrange his ‘bed-and-breakfast’ facility to warehouse his loans in Nationwide for a couple of weeks. When auditors Ernst & Young left the joint he’d bring those monies home again.

This was small beer in comparison to what Anglo did to shore up their perilous position at the end of September last year. There had been a run on their deposits internationally. They concealed this in their annual accounts. Seánie and David this time needed a digout from a bigger player. Their mate, Denis Casey over at Irish Life & Permanent, did the business. A total of e7.45bn was placed on deposit in Anglo, with e4bn crucially in situ for September 30. Anglo could now market to the investment community that their customer deposit base was secure at year end.

During last week’s executive resignations at IL&P, it emerged the Central Bank and FSRA knew all about these back-to-back financial arrangements between Anglo and IL&P. They only had to read the daily liquidity reports in September.

Moreover, it seems all the Irish banks were under pressure to support each other and wear the ‘green jersey’. We see a familiar pattern as regards FSRA. They knew as far back as January last year about FitzPatrick’s temporary loan facility with Nationwide at each year end. This mystery was never resolved because of the regulator Patrick Neary’s resignation.

The regulator’s office knew of the IL&P financial support for Anglo, FitzPatrick’s personal loan situation, and it seems they were instrumental in the arrangement to dismantle Seán Quinn’s CFD. Their total knowledge may never be revealed.

The prudential responsibility of the Central Bank and FSRA has been their paramount priority. They have been prepared, at best, to look the other way or, at worst, oblige bankers to resort to any tactic that would preserve the veneer of financial credibility.

These prudential concerns are of critical importance and should not be minimised. Adherence to liquidity ratios and capital adequacy provisions are fundamental to Irish banking in the context of our membership of the euro and compliance with the European Central Bank.

Banks globally went into meltdown. The US Federal Reserve, Bank of England and other central banks were all taking unprecedented steps to bail out insolvent financial institutions. Subprime finance and subsequent securitisation realities were unsustainable. Our own property collapse clearly signalled a bad debt crisis in the Irish banks. The State guarantee scheme was a consequent necessity.

The roof was falling in on the banking world as it was known. Top bankers and regulators felt that the end justified the means. At all costs ‘business as usual’ confidence had to be maintained. With hindsight, there was a huge conflict of interest within the FSRA. Their big brother was the Central Bank whose overriding priority was financial stability.

Corporate governance and ethics went out the window as an early casualty. Now the only way to get to the truth and obtain justice is through non-banking independent investigation and prosecution. The ISEQ authorities have proven to be toothless in providing transparency. Stockbrokers, investment managers and advisers have been cheerleaders for banks and their stock values.

The international markets were correct in seeing through the smokescreen. They forced Irish bank shares down to 5% of their highest values of a few years ago.

We’ve had a decade of tribunals without ultimate court and criminal accountability.

The latest Mahon Tribunal bill is e434m — appalling taxpayer value. It is now proposed to merge the Central Bank and FSRA. Their mandate will be responsibility for overall lending policy and prudential matters. Corporate governance should be dealt with in banking in the same manner as in any other company.

THE onus falls on Paul Appleby, as boss of the Office of Director of Corporate Enforcement (ODCE), and Fachtna Murphy, as overall Garda chief with responsibility for the Bureau of Fraud investigation, to take charge. Collectively they should be given the role to sort out who broke company law by manipulating accounts and concealing vital information. The abuse of a plc bank for personal purposes cannot be allowed recur. We need to get to the bottom of all the links between Anglo and the Dublin Docklands Authority. Rogue directors and executives should be disqualified, fined and sentenced.

Such has been the torrent of news about the financial services sector that we have become addled and confused. There is unfocused public rage in relation to bank executives pay, Neary’s whopping payoff, the recapitalisation of AIB & BoI, Ireland’s international reputational damage, the failure of auditors to do their job, the minister’s reading of the PWC report, the worsening bad debt/ property scenario and the IL&P resignations. This has generated more heat than light.

We need to separate the cosy culture of former bankers allegedly policing our financial institutions through FSRA.

Proper corporate governance oversight must apply to all companies equally, including banks. When the FSRA board have read the Anglo annual report, they should reflect on their role and fall on their sword without delay.