TODAY marks the sixth anniversary of a €30bn unanswered question about the Financial Regulator’s conduct during the crisis at Anglo Irish Bank.
Its actions — or lack thereof — were not spotted at the time, but the recent trial of three former executives at the bank has given fresh context to what happened on May 23, 2008.
On this day six years ago, Anglo went to the market with a €30bn offer to sell secured and unsecured notes to investors.
It did this with an 88-page prospectus that spelled out its business under the disclosure requirements laid down in European and Irish law.
This prospectus was supposed to reveal to potential bondholders everything about the bank, including its trading position, the risks it faced, and the parties that controlled it.
It was a catch-all, time-restricted offer that was designed to allow Anglo to raise €30bn from the market.
The single offer could cover any number of senior or subordinated bonds up to a value of €30bn.
This note programme at the bank had grown from a €1.5bn offering in 2001 to the €30bn height it first hit in 2006.
And it was all pegged on the 88-page document prepared by the bank under the European Prospectus Directive designed to protect investors and make trading easier.
But why was this prospectus approved by the Office of the Financial Regulator, given what he knew about the bank’s extraordinary ongoing effort throughout May 2008 to rescue its share price from collapse?
The Regulator also knew that one man — then billionaire Seán Quinn — controlled 28% of the company’s share through the parallel market in contracts for difference (CfD).
Anglo knew. The Regulator knew. The investors did not. And so the taxpayers paid.
The recent trial of three former Anglo executives taught us that, when the €30bn prospectus went to market, Anglo was simultaneously engaged in a secret strategy to salvage itself.
Throughout May 2008, it was covertly trying to ‘dribble’ 800,000 CfD onto the market every single day.
This ultimately failed because only 400,000 CfDs were off-loaded in a two-week period that month.
The dribble was designed to whittle away the shocking stake Mr Quinn had built up in the bank.
The strategy did not work, as there was no appetite for its CfDs. In fewer than eight weeks, Anglo was moving on to Plan B — lending to the Maple Ten and the Quinn family to buy shares directly.
When the prospectus was approved for release, investors were not told about what Anglo was trying to do during its ‘dribble’ strategy, or the growing threat to the institution.
Instead, they were explicitly told no party had, “directly or indirectly”, a controlling stake in the bank.
“[Anglo’s] shares are publicly quoted on the Irish and London Stock Exchanges,” the prospectus read. “No one shareholder or group of shareholders has a controlling interest directly or indirectly in the Group.”
The prospectus said the largest individual stake was held by Invesco PLC (7.01%), followed by Credit Suisse (6.16%).
Crucially, under the law, this €30bn prospectus had to be reviewed and approved by the Financial Regulator, or somebody acting on his behalf.
It was approved by the Regulator.
This approval came complete with two statements that appear to jar with the entire focus of the recent criminal trial of Willie McAteer, Patrick Whelan, and Sean FitzPatrick.
These two statements also contradict the evidence given by Anglo Irish Bank, the Quinn Group, and even the then Financial Regulator, Patrick Neary.
These statements said no party had a controlling stake in the bank either directly or indirectly and the largest shareholder held 7% of its stock.
It also cited limited risks facing the bank because of a miniscule exposure to impaired loans.
“[Anglo] believes that the rigour of its risk management standards and the effectiveness with which they are applied have led to a low level of impaired loans (just 0.50% of total lending as of 30th September, 2007 of the Group), a general economic slowdown may nevertheless impair the ability of its customers to repay their loans,” said the statements.
The prospectus spent six pages discussing risks.
However, there was no mention of the fact that, for eight months, the bank had been panicking about the fact Mr Quinn controlled at least 25% of shares in the bank through CfDs.
The discussion did not allude to the fact that Anglo’s biggest borrower was having to draw down more loans to cover Mr Quinn’s margin calls on his CfDs and the bank was under pressure to release his company from the security attached to one tranche of his company’s debt.
Similarly, there was no mention of how, at the highest level inside and outside the bank, talks were ongoing for months about how hedge funds were betting against its future.
Importantly, Mr Neary knew about all this — including Anglo’s effort to try and dribble away the CFDs.
Yet it was happy to approve the prospectus as we can now see it.
As with most specific issues in the banking crisis, the Central Bank said it would not comment on the details of the €30bn note programme, the criticism of its behaviour by Judge Martin Nolan, or any effort it made to protect potential investors on May 23, 2008.
However, it did release a statement which implied satisfaction with Anglo’s disclosure regime because its prospectus had been approved.
“The Central Bank will approve a prospectus when it is satisfied that the Issuer has complied with the disclosure requirements prescribed by the Prospectus (Directive 2003/71/EC) Regulations 2005, as amended,” read its statement. “The Central Bank will not comment on the process related to such approval for any particular issuer or prospectus.”
There is technical wriggle room for Anglo and the Central Bank.
CfDs are not shares. They were attractive because they were private and avoided stamp duty. So they would not ordinarily be listed in these types of prospectus documents.
But this was no ordinary arrangement. Mr Quinn had control of 28% of the shares in Anglo by March 2008, via his CfDs. External advisors had to be brought in to draw up plans to cut his stake without killing the bank.
And, in May 2008, Anglo was in the midst of the ‘dribble’ tactic to leak 800,000 CfDs a day onto the market.
On top of all this, the issue of disclosing CfDs was very much on the agenda and Mr Neary was well warned about the market appetite for disclosing such material.
In December 2007, the Irish Stock Exchange held a consultation process with its listed companies on the issue of CfDs. The outcome was clear.
“[It] strongly advocated the introduction of a contracts for difference disclosure regime in Ireland,” the ISE said in a recap letter two years later.
This was communicated to Mr Neary in a document submitted by the ISE to his office in March 2008, just as the Quinn exposure began telling against Anglo’s share price.
The ISE had more than a passing role in this process because, at the time, it had delegate responsibility to review prospectuses before passing them on to Mr Neary for approval.
It would not have been privy to the internal tic-tacking between Mr Neary and Anglo about its potential demise.
So when May 2008 rolled around, Mr Neary knew the bank had been compromised by a huge CfD investment by Mr Quinn and that the listed companies on the ISE had expressly asked for this material to be made public.
Yet, on May 23, 2008, the market was confronted by a €30bn investment pitch by Anglo which revealed nothing about its situation and yet it was reviewed and approved by the Financial Regulator.
Under the law, the Regulator could have allowed Anglo to omit certain information from the prospectus.
This can only be done if it is considered to be in the public interest or if it was liable to hurt Anglo.
But protecting Anglo could only be used as a reason for omitting certain information if “the omission would not be likely to mislead the public with regard to facts and circumstances essential for an informed assessment of the issuer, offeror or guarantor”.
Under prospectus law, all proposed documents are submitted to the approving authority for 10 days of review. When Anglo’s text was reviewed, the approving authority had an obligation to request any relevant supplementary information to be published with it.
As Regulator, Mr Neary had the power to oblige Anglo to mention the issues at the bank which investors could have used to make an informed opinion on where to put their money.
The recent trial over the illegal loans to the Maple Ten revealed a lot about what the Regulator was aware of in the first half of 2008.
Some of this was disputed by Mr Neary in the witness box, but even the point at which he accepted he knew about Anglo’s problems is telling.
There had been a lot of interaction prior to the approval of the prospectus. On May 8, 2008, Michael O’Sullivan (Anglo’s divisional director of lending), Pat Whelan and Con Horan (the second in command at the Financial Regulator), met and discussed reducing the exposure of the bank to Quinn.
In March 2008, Anglo executives were meeting with the Regulator’s office to discuss plans to reduce Mr Quinn’s stake. In court, Mr Neary disputed the contention that Anglo had told him about the extent of Mr Quinn’s stake in September 2007.
However, Mr Neary accepted that, on March 21, 2008, he was informed that Mr Quinn had an effective controlling stake in the bank which stood 28% at the time.
Emails disclosed in court showed that, a month earlier, the Quinn Group had detailed to staff at the Financial Regulator the extent of the CfD position. Mr Neary said he was not told about these emails.
There was also evidence that, in February 2008, the powerful Domestic Standing Group — which brought together the Central Bank, the Financial Regulator, and the Department of Finance — discussed the Quinn/Anglo situation.
Anglo directors gave evidence that its former CEO, David Drumm, was instructed in September 2007 to tell the Financial Regulator that Mr Quinn controlled 25% of their shares through CfDs.
The evidence of Anglo, the Quinn Group, and internal emails at the Regulator’s office all suggest that Mr Neary was told about Mr Quinn’s 25% stake before March 21, 2008. But, taking him at his word, March 21, 2008 is two months before Anglo went to market with its €30bn offer, which gave a different impression.
Anglo’s €30bn pitch did contain some disclosure on the risks it faced. These were no different to the self-assessment of other banks at the time and more a general interpretation of the economy than a review of trading.
“Although the Issuer believes that the rigour of its risk management standards and the effectiveness with which they are applied have led to a low level of impaired loans (just 0.50 percent of total lending as of 30th September, 2007 of the Group), a general economic slowdown may nevertheless impair the ability of its customers to repay their loans,” the prospectus read.
“The Issuer’s business activities are dependent on the level of banking, finance and financial services required by its customers. In particular, levels of borrowing are heavily dependent on customer confidence, employment trends, the state of the economy and market interest rates at the time.”
Evidence at the trial of McAteer, Whelan, and Mr FitzPatrick revealed there was a lot more going on at Anglo in May 2008.
In its statement, and in follow-up requests for clarification, the Central Bank has refused to discuss the May 23 prospectus or whether it was satisfied it protected investors.
It would not say if it had any discussion on its or the State’s potential liability if it approved an inaccurate prospectus. It would not discuss what it did when, in March 2008, the listed companies of the ISE effectively asked it to improve disclosure on the mechanisms used by Mr Quinn.
It would not make a statement on whether it should have found a way to inform the market about the risks posed to Anglo notes at the time.
Instead, its answer to the €30bn question is that, if it approved the document, it must have been okay.
“The Central Bank will approve a prospectus when it is satisfied that the Issuer has complied with the disclosure requirements prescribed by the Prospectus (Directive 2003/71/EC) Regulations 2005, as amended,” the Central Bank said.
“The Central Bank will not comment on the process related to such approval for any particular issuer or prospectus.”
Of course, the real answer to the €30bn question is: “Taxpayers will sort that out.”