Monday 22 October 2018

Anglo's €7.2bn interbank loans during financial crisis provided 'optical benefit', court hears

Former Anglo Irish Bank chief executive David Drumm
Former Anglo Irish Bank chief executive David Drumm

Andrew Phelan

ANGLO Irish Bank’s €7.2 billion circular interbank loans during the financial crisis created no new cash and only provided an “optical benefit,” a court has heard.

An accountant in Anglo at the time of the bailout has said there was no commercial rationale behind transactions with Irish Life and Permanent (ILP) other than to “present the numbers” as customer deposits.

Ciaran Cunningham was giving evidence today in the trial of David Drumm, Anglo’s former CEO.

Mr Drumm (51) is pleading not guilty to conspiring to defraud Anglo investors in 2008 by dishonestly creating the impression that the bank’s customer deposits were larger than they were.

He is alleged to have conspired with former Anglo officials Willie McAteer and John Bowe, as well as then-CEO of ILP Denis Casey, and others.

Mr Drumm also denies false accounting, by providing misleading information to the market.

The case centres on a series of transactions between Anglo and ILP, routed through Irish Life Assurance (ILA). The money was placed back in Anglo and treated as customer deposits, which are considered a better measure of a bank’s strength. Mr Drumm admits he authorised the transactions but denies there was anything dishonest or fraudulent in them.

Today, Mr Cunningham, a former accountant in Anglo’s Treasury department agreed with Paul O’Higgins SC, prosecuting, that where a transaction was required to be netted in accounting it “would never show in the accounts at all.”

In this case, Mr O’Higgins said, there was a series of transactions between September 25 and 30, 2008 involving Anglo, the bank’s Isle of Man division, IPL and ILA.

The amounts exchanged between Anglo and ILP were identical in terms of size and interest rates, Mr Cunningham agreed.

If they were netted in the accounts they would “simply be cancelled out” and would not appear at all, while if they were grossed, because there was no legal right of set-off, then they would appear in the accounts.

The benefit of these transactions was an “optical benefit,” Mr O’Higgins said.

Mr Cunningham agreed.

“There was no new funding generated, they were cash neutral,” he said.

The jury was shown a balance sheet analysis for September 22, 2008 which stated the customer loan to deposit ratio was 145pc, or 165pc excluding initiatives.

At that point, the initiatives were recorded as €6bn but they would ultimately be €7.2bn, Mr Cunningham said.

At the time, the balance sheet showed, Bank of Ireland’s ratio was 157pc and Allied Irish Bank’s was at 153pc.

Of a list of banks on the sheet, only Lloyds’ ratio was better than Anglo’s, at 142pc.

The jury was shown emails between Mr Cunningham and John Bowe on September 23, in which Mr Cunningham said he was preparing a balance sheet to present to the board.

He said he had “no problem” including the customer initiatives of €6bn.

Coming up to September, he would have discussed the transactions with his superior, Colin Golden.

He agreed with Mr O’Higgins that the purpose of the transactions was to boost the customer deposit figure.

On September 30, Mr Cunningham sent a mail to Mr Golden in which he said there were “too many moving parts to the balance sheet today.”

Mr Cunningham said in a mail that “trade will be done in interbank and not repo format” and that “if the Government guarantee qualifies for credit protection then it’s irrelevant.”

Mr Cunningham told the court any risk carried was then “effectively a Government risk.”

Mr Cunningham prepared a simple balance sheet analysis for the year end that showed customer deposits at €51bn, with a loan to deposit ratio of 143pc.

In an email on October 3, Mr Cunningham told Mr Golden “we are down €2.7bn” but with the €2bn ILP transaction maturing “we are really down €4.7bn.”

Mr O’Higgins asked Mr Cunningham if the ILP transactions were actually settled gross.

“They were not,” he replied, adding that they were initially settled gross but the cash flows on maturity were settled net.

Mr O’Higgins asked him when he first knew they were settled net. Mr Cunningham replied that it was in February 2009.

The jury was shown an email from Mr Golden to Mary Burke, Con Horan, Patrick Neary and others in the Financial Regulator’s office on October 24. It contained a table of the ILP transactions.

The jurors then saw a document headed “key judgemental issues” provided to a meeting of Anglo’s audit committee on November 18, 2008.

Mr Cunningham said he was involved in the “Treasury related aspects” of the document.

The transactions with ILP were set out and the effect of increasing customer accounts by €7.2bn stated.

It stated that IFRS “does not allow the group to net the financial assets and liabilities” and there was no legal right of set-off.

“In addition, on maturing all accounts were settled on a gross basis,” the document stated.

Mr O’Higgins asked if this was correct, that all accounts were settled on a gross basis.

“No, they were settled net,” Mr Cunningham replied.

After the document was supplied, he heard nothing back about it before December 3 in terms of specific feedback from the committee.

Price Waterhouse Cooper were in the bank following the guarantee “doing a check up,” Mr O’Higgins said.

In a PWC draft report, Anglo’s largest exposure after the €7.2bn was €700m. Mr Cunningham also confirmed he was in contact with the bank’s auditors Ernst and Young. Nobody from E&Y contacted Mr Cunningham about the ILP transactions before December 3, when Anglo’s preliminary results were released.

These stated customer funds were €51.5bn, representing 58pc of total funding. This was referred to in the Chairman’s statement and Chief Executive’s review.

A report of the directors gave a breakdown of the placements Anglo had with other banks. Asked if there was any detail in relation to the ILP transactions, Mr Cunningham told Mr O’Higgins they were included in one table but it did not make specific reference to them.

Mr O’Higgins asked if the transactions formed part of the €51.5bn in customer accounts.

“They do, yes,” he replied.

“Is there any reference to them?” Mr O’Higgins asked.

“No, there is not,” he replied.

He asked if there was any new cash created by the transactions.

“No, the phrase we used was cash neutral,” Mr Cunningham said.

Mr O’Higgins asked what rationale they had, to which Mr Cunningham replied they were for “balance sheet management.”

This meant “to present the numbers” as customer deposits, he said.

“Did they have any commercial rationale?” Mr O’Higgins asked.

“If the terms were identical and the interest rates were identical, no,” he said.

“And were the terms and interest rates identical?” Mr O’Higgins asked.

“Yes,” he replied.

Mr Cunningham was then cross-examined by Bernard Condon SC, for the defence.

He told Mr Condon that the “customer accounts” were included in the document for the audit committee because of the size of the transactions and where the amounts were recorded.

He agreed there had been inadvertent errors.

When he wrote about “settling gross” in November 2008, that was his understanding, he said.

There were additional disclosures in the accounts released in February 2009.

The jury heard a report by Ernst and Young stated the auditors’ opinion was that “the group financial statements give a true and fair view… of the state of affairs of the the group as of September 30, 2008.”

The trial continues.

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