'Though the management of the Bank has been overhauled, the system here in Ireland has not'
This is the resignation letter that was sent by Maarten van Eden, the former chief financial officer of Anglo Irish Bank, to the lender's chief executive Mike Aynsley and its chairman Alan Dukes in February 2011
IT is with great sadness that I tender my resignation as chief financial officer of Anglo Irish Bank. As you will know I believe that the government has made the wrong decision in winding the Bank down. From the start of this year the authorities have continued to be unwilling to engage with the management of the Bank in an open and transparent process.
I have shared with you my view that although the management of the Bank has been overhauled, the system here in Ireland has not. You will be aware that I have very bad memories of the undue pressure the authorities exerted in the context of the Nama bond valuations. I have great concerns regarding the concentration of power that the new law for the financial sector will put into the hands of the government and I do not think I will want to make myself subservient to it. I have no confidence whatsoever in the ability of government to do the right thing for the financial sector.
I came here to save the Bank and give the authorities the benefit of my experience. The latter has not been welcome and in the first objective I have failed. I believe my usefulness has come to an end. I feel very bad in letting the team down, but I am convinced it is the right thing to do to accept personal responsibility if the advice one gives is not acted upon. I am at your disposal to continue in my function as chief financial officer until the books for the year 2010 have been closed, the deposits have been transferred and INBS has been amalgamated, meaning the end of March or April, if you were to think that helpful. However, I will not in that context compromise my ethical standards.
Further to my letter of resignation I wanted to share some observations with you.
When one looks back at the last years and months of Anglo before the crisis struck in September 2008 and at the scandals that have since become public, one can discern a pattern.
(Material at this point in the letter has been redacted for legal reasons.)
New management at Anglo was brought in from outside the country, but management has consistently been kept on the outside. Management was good enough to clean out the stables and run the Bank on a day-to-day basis, but was sent up the wrong hill as far as the future of the organisation was concerned. The brief was to formulate a solution that would minimise the cost to the taxpayer and that is what management did. However, the agenda turned out to be different. Anglo had to be obliterated from the landscape. Within a very short time it seems that the new management was seen to be part of the old Anglo in spite of the radical changes implemented within the organisation. There has been a complete lack of engagement from the authorities and decisions have come out of left field. The decision making is a black box and there is no debate. One may argue for open dissent but there is none, save for a few worthy academics sadly shouting from the sidelines.
As part of the new management team at Anglo I have seen no change dealing with the authorities to the pattern I have described. The authorities are stuck in their old ways. They do not recognise nor understand conflicts of interest.
For example, they decided that Nama would pay the banks for the loans acquired with bonds, not cash. Lack of cash is everywhere and is a function of the fact that the government does not want to borrow in the capital markets at a high rate when the Central Bank makes funding available without limitation at a low rate. Thus they created an instrument with a Euribor flat coupon and an undetermined maturity date and insisted that the banks value the bonds at par. This in a market where Irish government bonds are trading at huge spreads over Euribor. With these bonds the banks can obtain cheap short-term funding from the ECB or Central Bank through repo operations. If you were to ask an arm's length investor to put a price on these bonds you would get at most 80 per cent. Valuing the bonds at par therefore, with 30 billion of these bonds on the books of the Irish banks, overstates the assets and thus the capital of these banks by 6 billion. This is called cooking the books. How can the financial sector in Ireland be reformed, and reformed it must be, with the authorities pushing misrepresentation? How can the outside world trust the numbers? Is this the way outside investment into Ireland can be enticed to come back?
Another example is the notional interest holiday on the promissory note issued by the Minister of Finance to recapitalise some of the banks. Another security issued by the government. These notes were issued with a yield equivalent to government bond yields. So far, so good. However, by recently changing the legal terms of the notes without changing the cash flows (the economics stay the same) the government has given itself an interest holiday for the next two years at the expense of a higher rate in the future. This is pure window dressing. Everyone fully accepts that the fiscal adjustment taking place is extremely painful but why put at risk the goodwill created by tackling the budget deficit head on by pretending that interest expenses for the next two years are 1.5 billion lower than they really are? Won't these misrepresentations come back to haunt you?
The expedited sale of deposits and Nama bonds is yet another example of a linked transaction that obscures pricing and transparency. The transaction gives AIB 1.7 billion of extra capital out of thin air and is a school example of an off-market related party transaction that will continue the mispricing of the Nama bonds. It forces the Bank to recognise a capital contribution (gain) on the disposal of Nama bonds and a massive offsetting loss on the disposal of our liabilities. It is outrageous and very wrong. This situation is exacerbated by the fact that the authorities desperately tried to keep the details of the transaction secret.
And what to think of the practice, pushed on to the Irish banks by the authorities, of issuing bonds guaranteed by the government, sold to no one but held on the bank's own books for repo with the ECB. This further increases the essentially unsecured exposure of the ECB to Ireland, given the high correlation of the credit risk of the banks and the government. Is this general practice for banks in Europe? What does the EC think of the availability of cheap funding through this practice in the context of competition and transparency? High correlation repos, where a bank gives his own government as collateral have been refused by the market for a long time now for any but the best credits. The ECB, however, seems to be accepting these repos for Irish banks. How transparent is this for others? How desperate is the ECB?
I think these examples are symptomatic of the way government does its business and it is therefore logical to assume that there will be many other examples in other areas.
Ireland is now in a situation where possibly the entire financial sector will be owned and controlled by government. The government does not have the expertise to run the financial sector. Mind you, nor did the bankers themselves previously. One would have thought that bringing people in from the outside is a good idea, even if they have blunt manners and do not win any prizes for cultural sensitivity.
It is very worrying that the Government owns all these institutions. How and on what basis are they going to deal with one another? The NTMA has its finger in a lot of pies, is conflicted and is a power within the State with insufficient checks. The Central Bank should be the guardian of the integrity of the financial system but instead is the government's chief provider of cheap funding. Irish banks now draw more than 100 per cent of national income from the monetary authorities.
Before the financial sector can be reformed, government and regulators must reform themselves. Ireland is a most beautiful country with an engaging, young, growing and well-educated population. It has a lot going for it. The problems are manageable, but must be addressed fundamentally and rationally. If the financial sector is not properly reformed, recapitalised and its funding placed on a firm footing, any recovery will be slow and painful. Ireland deserves better than that.
Maarten van Eden
A lifetime banker
by Ronald Quinlan
Maarten van Eden served as chief financial officer (CFO) with the new management team at Anglo Irish Bank from January 2010 until 2011.
He formally resigned his position at the bank in February 2011 citing his unhappiness with the institution's day-to-day interactions with the Department of Finance and the NTMA amongst other factors.
Prior to his engagement as Anglo's CFO, Mr Van Eden had amassed more than 30 years' experience in the world of finance, working at various international banks including HSBC, JP Morgan and Dutch group ING as well as the Dutch Ministry of Finance. Mr Van Eden holds a cum laude degree in macro monetary economics from the internationally renowned Erasmus University in Rotterdam.