Regulation a fiasco – and we all know who loses
SO the bondholders were burned after all? No? Oh yes they were. Burned big time. Not those bondholders, the other bondholders. Big bondholders guaranteed. Little bondholders burned to a cinder.
Venture capitalists, global dealers, even hedge funds walked away from the banking crisis unscathed although they held high-risk bonds in Anglo Irish Bank. More careful savers became bondholders in Custom House Capital. They have been pauperised.
Who is responsible for the different outcomes? In both cases, the Irish Government and the Irish Central Bank. Regulation Irish-style still works for the big battalions and leaves the small investor abandoned.
On Thursday night a special Prime Time programme on RTE told the tale of Custom House Capital (CHC), the Irish "Ponzi scheme" that ripped off pensioners for many years. The Regulator emerges from the programme as a toothless, casual observer. At best.
Many punters who entrusted their savings to Custom House Capital, ended up as bondholders, all right. To be more precise they held mysterious "mezzanine bonds" that were supposedly guaranteed by the now bankrupt company. Just like the Anglo bonds were guaranteed by the Government. The government guarantee to Anglo bondholders was observed to the letter. The Custom House Capital guarantee was a fiction. Many of those small investors, told by CHC that they held the magic "mezzanine bonds", had been taken for a ride. Their money was probably used to buy speculative properties in France or Germany. It may have been used to pay off some of CHC's more alert customers wanting to withdraw their savings after listening to the rumour mill. God forbid, it may even have been used to pay for the big salaries and the high lifestyles of directors Harry Cassidy and John Mulholland. CHC was many small peoples' pension fund. It is today helplessly exposed as insolvent. Its road to insolvency was shameful.
Prime Time told the story of a Regulator asleep on the job, of auditors with questions to answer and directors whose activities have still seen no redress or prosecutions. Chief executive Cassidy was arrested but no charges were brought. Mulholland is still practising as a pensions adviser. Their victims are littered all over Ireland.
Sunday Times journalist Niall Brady wrote a superb synopsis of this scam. Nobody in authority took up the cudgel. A High Court judge called it a "Ponzi scheme" and likened CHC's activities to the Madoff empire in the US. But no one has been held accountable.
Ingrid Baugh, whose elderly mother Eithne McCowen was fleeced, told Prime Time that her mother was far from greedy. Indeed, she was risk-averse, seeking a low-risk investment with easy access to her funds. CHC had been recommended by her accountant. Like all elderly people in Ireland she would not be familiar with the world of mezzanine bonds or derivatives. Just a prudent, decent woman, happily armed with a nest egg for a rainy day because she had sold her house and handed over the proceeds to Cassidy's crew. Her money appears to have ended up in Nice, Cannes or even Bratislava. Today it is all gone. Four-and-a-half years later, Ingrid's mother remains uncompensated for her losses. She is one of the many bondholders burned in the CHC furnace.
The CHC story is not an unusual one. It invested in low- and high-risk ventures. It became overexcited by the property boom. It pillaged its low-risk investors to prop up its high-risk property losses. It issued false statements to its small clients to reassure them. Millions were diverted to plug an ever-widening hole in a European property empire. It collapsed. Unsuspecting little old ladies in Ireland were impoverished.
CHC was regulated by the Central Bank. No, not just by the old Central Bank, but by the "new" Central Bank. In 2007, as the banking crisis reached its height, the Central Bank was alerted to unease about CHC. It was given assurances by CHC directors that it would appoint a "compliance officer". An internal appointment was made. The Regulator was reassured. It believed the directors.
When the proverbial hit the fan in the 2008 property market crash, CHC began to wobble. Having paid deposits on dozens of properties, it simply lacked the money to complete or close many of its German and French property deals. So it invented the magic mezzanine bond. It offered this miracle guaranteed bond with high interest and juicy returns to its clients. According to Prime Time, many of its small customers' money was already, unknown to themselves, heavily invested in the European property casino. All the time they believed that they were in low-risk, steady-income stocks.
Irish history repeated itself. In 2009, once again it took a brave whistleblower to out the villains of a financial scandal. He or she headed for the Central Bank and blew the gaff on the mezzanine bonds, revealing that clients' money had been invested in the bonds without their permission or knowledge.
At that point the Regulator should have closed down CHC. Instead, it initiated an inquiry. It failed to find out the full truth, the dark reality that CHC was insolvent. New auditors – MKO partners – were appointed. They qualified the accounts but did not mention that clients' money might be in danger.
The Central Bank had a brainwave. It found a solution. Remove the directors and sell the firm. It took the Pontius Pilate line. Instead of digging deeper into the mysteries of CHC, it went out to the market in search of a supermug. It nearly found one.
Appian Asset Management obviously liked the CHC client base, the massive amount of funds under management and the potential profits. It was keen to buy the failing finance house. At the eleventh hour it spotted the fraud in CHC and pulled out. The Central Bank was informed.
The Central Bank, confronted with reality and a supersonic embarrassment, was this time forced to freeze CHC's investments and payments to pensioners. The High Court appointed inspectors who unveiled the awful truth: CHC was a house of cards. A liquidator was appointed. A horror story has emerged.
What went wrong to leave investors abandoned and penniless? The Central Bank is in the dock. On the Prime Time programme, the former watchdog Matthew Elderfield was heard speaking the tortuous language of regulators when explaining how the Central Bank had been given "false positives" by the CHC directors. They had relied on the directors to tell them the truth. They should have known better.
Did CHC fool the Central Bank? Is it too easy? The harsh reality is that it took a potential buyer to identify the can of worms. The Regulator was happy to approve the sale of a pup to anyone foolish enough to buy it. The Regulator may not have known the full extent of the skulduggery at CHC, but it should have unearthed the truth far earlier.
Meanwhile, the little bondholders have been burnt, while liquidator KPMG is cleaning up at their expense. Today postponement after postponement marks the progress of a solution. A long garda investigation is continuing.
Regulation in Ireland is a joke. This is the land where reassurances from bent bank directors carry more weight than the courage of whistleblowers. In the words of Ingrid Baugh whose mother's savings were raided, where is the "strict robust regulation"?
It is a myth. Director Eugene Murray and Prime Time have unmasked the reality: regulation remains a fiasco. As usual it took a whistleblower, Prime Time, Niall Brady and others to reveal reality. The establishment forces – including the gardai, the Regulator and the auditors – are on the sidelines, well-paid spectators.
Meanwhile, the burned little bondholders live in hope of a reprieve, even the return of a fraction of their original investment.
The next court hearing is due in July. Put your money on another postponement.
Sunday Indo Business