Bank guarantee scheme at height of financial crisis met with 'near euphoria' by the market, David Drumm trial hears
THE Government’s bank guarantee scheme at the height of the 2008 financial crisis was met with “near euphoria” by the market, the trial of former Anglo CEO David Drumm has heard.
On the day the State stepped in, Irish Life and Permanent agreed to increase the value of a multi-billion euro “circular” deal with Anglo Irish Bank because all deposits were by then “copperfastened” by the guarantee anyway.
ILP’s then-Group Treasurer David Gantly was giving evidence today in Mr Drumm’s trial.
Mr Drumm (51) is pleading not guilty at Dublin Circuit Criminal Court to conspiring to defraud by dishonestly creating the impression that Anglo's customer deposits were €7.2bn larger than they really were in September 2008.
He is alleged to have conspired with Anglo’s former Finance Director Willie McAteer and head of Capital Markets John Bowe, as well as ILP’s then-CEO, Denis Casey, and others.
The transfers were routed through Irish Life Assurance (ILA), back to Anglo where they were then treated as customer deposits, which are a better indicator of a bank’s health.
Mr Drumm also denies false accounting, by providing misleading information to the market.
Today, the jury was played a taped phone call between Mr Gantly and Anglo’s former head of liquidity Ciaran McArdle on March 28, 2008 in which they discussed how the transaction that month would work.
“I don’t know, Ciaran, whether we need to make a few different payments just so it doesn’t look very obvious,” Mr Gantly said at one point in the call.
Mary Rose Gearty SC, prosecuting, asked to whom it was not “to look obvious.”
“Just to junior staff,” Mr Gantly replied.
He told Ms Gearty he considered it to be a circular transaction.
Mr Gantly told Mr McArdle “the call is out with Gerry Keenan,” meaning he would contact Mr Keenan, CEO of Irish Life Investment Managers (ILIM) about the proposal later in the day.
The jury heard ILIM managed ILA’s funds investment.
A call between Mr Gantly, ILP liquidity manager Paul Kane and Mr McArdle on September 15 was then played.
In it, Mr Gantly said he had been “talking to Matt” about a “kind of five billion number” and to “keep it nice and easy and simple” he suggested “if we were to do a billion” on different days.
He spoke about “taking the cash” on one day and “giving it back to you through ILIM” the next day.
“So there’s a day’s difference in the start date to the end date,” Mr McArdle said.
They then discussed doing a “repo” deal, or an agreement for the sale and repurchase of bonds. Mr Kane expressed worry about how much collateral they would have.
Mr Gantly told Ms Gearty they had decided a repo was not going to work and stuck to the transaction as originally discussed.
On September 16, 2008, Anglo's head of treasury Matt Cullen was heard in a phone call with Mr Bowe.
In it, Mr Cullen said he had spoken to Mr Gantly, who had told him four or five billion was “not going to be a problem.”
“So look, if we ask for six, I think they will do it,” Mr Cullen was heard saying.
He said Mr Gantly’s “exact words” had been: “you might as well be hung for a sheep as a lamb.”
Ms Gearty asked Mr Gantly if he had used that expression.
“It was a flippant, throwaway remark but I did use it,” he said.
He explained that he was talking in the context of having to go and get the amount approved.
In cross-examination, Mr Gantly told Brendan Grehan SC, defending, that the 2008 global financial crisis was a “systemic event the like of which had never been seen.”
It got to the stage where other banks were depositing €240bn with the European Central Bank overnight, as a “safe haven.”
Mr Gantly said the ECB was seen as a lender of last resort and the Central Bank of Ireland was uncomfortable when it was used.
Mr Grehan asked Mr Gantly and the jury to look at an email exchange between ILIM CEO Gerry Keenan and ILP Group Finance Director Peter Fitzpatrick on March 28, 2008.
“I have lined up here to do the Anglo deposit on Monday,” Mr Keenan said. “Clearly its size is way outside our limits with them so we need formal approval.”
“This is my formal approval,” Mr Fitzpatrick replied. “To be absolutely clear, this is something which the Central Bank is encouraging us to do, along with the other players in the banking sector and at 30 June we will be beneficiaries of this kind of support.”
Mr Grehan asked if it was a case of “loose lips sink ships.”
“It was a need to know basis, yes,” Mr Gantly said.
Mr Grehan asked if everybody in the sector at the time was cognisant that rumour, innuendo and gossip of any kind could affect confidence in an institution.
Referring to the run on Northern Rock in the UK, Mr Gantly said: “absolutely that is the case, yes.”
“You wouldn’t want word to filter out into the street about a transaction,” Mr Grehan said.
“I think that is fair to say,” Mr Gantly replied.
Only the number of people needed to be involved were involved, he agreed.
Mr Grehan said if looked at in isolation, the transaction with Anglo did not have a commercial rationale, but in terms of the relationship between the two institutions, it had a clear rationale.
The reference to “beneficiaries” in Mr Fitzpatrick’s mail “actually came to pass to the tune of €3.3bn” in the form of a repo deal between Anglo and ILP. This was in advance of ILP’s financial end of half year in June 2008.
Mr Gantly agreed with this and that the June transaction was to take that amount off the ECB funding on ILPs books. He agreed it was implicit that ILP would reciprocate for Anglo in September and a matching figure would be made available.
Reciprocity in banks was “nothing unusual.” Mr Gantly agreed that at some stage in August the figure became €5bn and after Lehman Bros collapsed in the US, it became €6bn.
The flippant “hung for a sheep or a lamb” was about whether the figure was four or five billion after three billion had been agreed.
There was “near euphoria” in the Irish market when the Government’s guarantee scheme covering deposits in six financial institutions was announced on September 30, Mr Gantly said.
When Anglo asked to increase the deal, this was done as all deposits were “copperfastened” anyway.
Another transaction was started in December but it was halted as the Central Bank was then querying the September transaction.
There was a lot of publicity and unease at the time around businessman Sean Quinn’s stake in Anglo, as well as the “Maple 10” issue hitting the news. The issue of former Anglo Chairman Sean Fitzpatrick’s director’s loans was also in the public domain.
The decision not to proceed with the December transaction was taken at board level, Mr Gantly said.
In November, the Financial Regulator and the Central Bank got the six banks together to discuss the issuing of bonds for sale to raise funds, Mr Grehan said.
It was stated that all the banks should support each other. Mr Gantly agreed this meant the banks would “club together” to buy each other’s bonds.
Mr Grehan then referred to the Bank of England’s intervention in Northern Rock, which was intended to calm the market but led to a run on the bank. Around the same time in October 2008, BOE gave a “secret” emergency loan of £62 bn to HBOS and RBS banks. The market was only made aware 13 months later after a parliamentary question.
The jury was shown a Bank of England document from November 24, 2009 which explained why the bank decided to limit disclosure.
“In most cases confidence can best be sustained if the bank’s support is disclosed only when the conditions that gave rise to potentially systemic disturbances have improved to a point when the disclosure itself should not be a cause of such disturbance,” it stated.
Mr Gantly agreed the September transactions did not become “controversial at all” until around January 2009.
The trial continues before a jury and Judge Karen O'Connor.