David Drumm guilty: Former Anglo CEO's 'confidence trick' on the market not just a cheat but a crime
Former Anglo boss faces 10 years' jail over €7bn con
AT its peak, Anglo Irish was one of the “best banks in the world”, enjoying spectacular growth on the back of Ireland’s Celtic Tiger economy, turbo-charged by a runaway property boom.
But in 2008, what had been the best of times for Ireland and Anglo became the worst of times as the global financial system collapsed, triggering a tsunami that quickly reached these shores.
David Drumm, the captain of Anglo’s sinking ship, led a failed attempt to save the doomed bank by frantically plugging the holes in its balance sheet with cash that didn’t exist.
Drumm argued that he was only doing what the crisis-struck Irish banking authorities had encouraged him to do, but prosecutor Paul O’Higgins argued: “you can’t cheat people to keep yourself afloat.”
Drumm and Anglo’s “cheat” was in pretending that the bank was €7.2bn healthier than it really was- and a safer bet for investors as a result. They did this through a circular deal with Irish Life and Permanent, repeatedly passing the same cash between the two banks and using the artificially-inflated figures to prop up Anglo’s sagging finances.
Over the course of a marathon 87-day trial, a jury was asked to cast its mind back a decade to those troubled times and conclude that this was not just a cheat but a crime - a “massive con” and a plot to defraud the markets and the public.
As Ireland’s biggest development lender, Anglo was acutely exposed to the coming storm, the rumblings of which began the previous year, 2007.
That summer, the US subprime mortgage crisis led to a tightening of the international money markets, and the supply of cash that banks relied on to fund their lending began to dry up.
The cash flow crisis spread and in September, when people started queuing on British High Streets to get their savings out of Northern Rock, it was the first run on a UK bank in 150 years. This was for many an early warning sign that something was deeply wrong in the financial world.
Into the following year, Anglo was among the Irish banks feeling the pressure mount.
It was committed to giving out loans of €10bn and the cash coming in to fund that was running low.
On March 12, 2008 Drumm wrote to colleagues: “Let’s have a senior level call on this...to zoom in on what has to be done now to make the magic number.”
This “magic number” was €5bn in deposits that would have to be on the balance sheet by the end of the month, Anglo’s financial half-year end.
The following day, Wall Street investment bank Bear Stearns failed, and global banking went into meltdown.
It was against this backdrop on March 16 that Drumm emailed John Bowe and other Anglo executives about a request from the Central Bank.
Mr Bowe, Anglo’s Head of Capital Markets, would later be among Drumm’s named co-conspirators in the fraud, along with Finance Director Willie McAteer, and ILP’s CEO Denis Casey.
“John, will you put some thought into what the Governor asked us, to look at how the Irish banks could help each other?” Drumm asked Mr Bowe.
This became known as the “green jersey agenda.”
Head of Anglo’s UK division, Declan Quilligan sounded a note of caution, saying Ireland was a net beneficiary of world interbank lending and asked what would happen “if we turn off/ down the tap.”
Drumm replied: “That’s the art of it, there has to be a ‘level’ of interbank placings we can get to without having the market turn on us.”
While March 17 was described as a “bad day” for all banks, for Anglo it was a catastrophe that became known as the “St Patrick’s Day Massacre” as its share price plummeted by nearly 30pc.
In the aftermath on March 21, Mr Drumm wrote to Anglo’s Chief Financial Officer Matt Moran suggesting they get together “to agree a plan of action for the coming week.”
A scramble was on to replace the funding that was now flooding out of the bank.
Maintaining confidence is crucial in banking and this comes most sharply into focus at financial half year and year ends, the dates on which banks report their performances to the market, trying to provide the best possible “snapshot” of their balance sheet. This became imperative for Anglo as it tried to hold onto departing depositors and investors in 2008.
One option to fill the funding gaps was to borrow from the European Central Bank. But the Irish banking authorities were unenthusiastic about this as the ECB was seen as a lender of last resort and it “didn’t look good” to rely on it.
Anglo began a series of negotiations with other banks in a bid to replace the lost cash through “funding initiatives.”
It had a good working relationship with Irish Life and Permanent and talks began as to how the two banks could help each other.
ILP’s Director of Treasury David Gantly told the jury he was approached by his counterpart in Anglo, Matt Cullen about a proposed transaction - initially a deposit.
Mr Gantly took this to ILP’s Group Finance Director Peter Fitzpatrick and CEO Denis Casey and “the concept of doing a back-to-back arrangement was mooted.”
A “back to back” deal involved Anglo placing a deposit with ILP, which would transfer the funds to its subsidiary assurance company Irish Life Assurance. ILA would then place the money back into Anglo.
For Anglo, this would bolster customer deposits because ILA was not a bank and the cash could be reclassified as having come from a corporate customer.
The market saw customer deposits as a longer-term, better form of funding than interbank transfers.
Mr Gantly told the court he felt “uncomfortable” with the transactions as they were “non-standard.”
The jury heard a March 27 phone call between Mr Gantly, Mr Cullen and Mr Bowe.
“We will do that alright, yeah?” Mr Gantly said. “You put the stuff into us and we put it straight back through the other boys.”
He said on the call he was purposely not using names because “the walls have ears” and “you have to be tight as a duck’s arse here.”
The jury heard there were fears this would get out to the market.
Figures for the March transaction were agreed - one billion from Anglo and “three quarters” returning from ILP via ILA.
Ciaran McArdle, Anglo’s Head of Liquidity was told to organise the details of the deal with his counterpart in ILP, Paul Kane, who he called on March 28.
“I believe we got to do something,” Mr McArdle told Mr Kane. “I believe I’m giving you a yard (a billion.)”
“I’m giving it back to you,” Mr Kane replied, later telling him to “do a billion into us and we will take it on board and get Irish Life to sort you out.”
“I didn’t know the nature of the transaction at that time but I subsequently found out it wasn’t of any benefit to ourselves,” Mr Kane told the jury, although he agreed in cross examination that it was good for the “green jersey agenda.”
Later, Mr Gantly told Mr McArdle he had chatted with Denis Casey, who told him that “we are approved to do.”
That day, Peter Fitzpatrick approved ILP’s credit limit change for the deal.
“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 Fitzpatrick stated in a mail, referring to ILP’s own financial half year end.
On March 31, Anglo placed €1bn with ILP, which routed €750m back to Anglo through ILA. Shortly after, ILP repaid €1bn to Anglo, which in turn repaid €750m to ILA. The deal went smoothly.
The size of the transaction required a substantial hike in Anglo’s credit limit of €200m, which was signed off by Head of Treasury Risk Mike Nurse and Head of Bank and Structured Credit Tony O’Hanlon.
The March deal, the jury was told, was a “prototype” of what was to happen that September.
First though, in June, Anglo returned the favour, helping ILP reduce what one Central Bank official reportedly described as “effing reliance” on ECB funding.
The two banks carried out a much bigger, but more standard deal, a €3bn “repo” that saw Anglo provide ILP with cash through a short-term purchase of its bonds.
Despite its efforts, Anglo’s funding position weakened throughout July and August, Matt Cullen recalled.
On September 10, Drumm wrote to colleagues about a drive to reduce lending, saying: “massive push needed, guys, look under every rock, this is crunch time for us.”
The funding initiatives were now dwindling, and around 18 people within Anglo were regularly mailed with progress on them.
In evidence, Matt Moran recalled the Friday meetings of top executives in Drumm’s office at which the balance sheet initiatives were discussed “openly.”
“David was a very experienced person in the bank,” Mr Moran said. “He chaired and drove those meetings.”
There were 50 proposed funding initiatives but one by one they fell away while market conditions worsened.
On September 15 the massive US financial services firm Lehman Bros went bankrupt, a blow that proved to be the final straw for many. There was “panic” in the market and the jury heard of one banker at a foreign investment meeting crying over his Lehman’s losses.
For Anglo, the timing could not have been worse - its financial year end was approaching on September 30 and it was fast running out of cash.
By now the deal with ILP was the only funding initiative on the table and for Anglo it became not just about “window dressing” for the balance sheet but the very survival of the bank. To compensate, the size of the upcoming ILP deal mushroomed.
On the phone to Mr Bowe on September 16, Mr Cullen said he spoke to Mr Gantly and five billion, which was higher than a previously agreed figure, was “not going to be a problem for them.”
“You might as well be hung for a sheep as a lamb” Mr Gantly had told Mr Cullen.
Again, Ciaran McArdle was to liaise on the details with ILP’s Paul Kane. Mr McArdle told the jury he initially believed it was to be another “repo.”
By September 18, Anglo was in breach of the liquidity conditions of its banking licence and the Financial Regulator asked Mr Bowe to put this in writing.
“This isn’t a run but this is, I would say our worst case short of a run,” Mr Bowe told an IFSRA official.
That day Mr Bowe read the letter out to Drumm on the phone.
“The bit about the licence is signing a death warrant,” he replied.
Speaking to Mr Bowe again the next day, Drumm referred to “f**king Freddie f**king Fly down there, the Financial Regulator” and spoke about looking for money from the Central Bank.
“We need the f**king loan because we are running out of money,” he said.
"If they don't give it to us on Monday they have a bank collapse. If the money keeps running out the door.”
On September 22, Drumm was heard asking Mr Bowe about what would happen if they got “€4bn or whatever from that f**king shower of clowns down on Dame Street.”
Drumm said they needed a “ladybird-type thing” to hand out to the directors at the next board meeting to explain the situation.
They would say “this is what we think will happen, even with the 6bn fixes, which Mr f**king Denis confirmed for me this morning.”
“We’re f**ked,” he said to Mr Bowe. “The balance sheet looks shot.”
Two days later, Drumm, Mr McAteer and Mr Cullen were at a meeting with Financial Regulator Patrick Neary.
The jury heard Mr McAteer had said “we would be managing the balance sheet at year end” and Mr Neary replied either “good man” or “fair play to you, Willie.”
The next day, September 25, the first leg of the circular €7.2bn deal got underway.
First, Anglo placed STG £978m with ILP, but a glitch in the banking system meant that transaction did not go through and had to be reversed.
In a tense day, ILP’s Peter Fitzpatrick remarked in an e-mail “If this goes wrong, I would need to head to Siberia, never to return!”
The problem was fixed and the deals resumed the following day, Friday September 26. Because of the size of the transaction, there would be a number of individual €1bn transfers in “tranches” required to reach the objective of €7.2bn.
The transfers and their maturity dates, when final settlement would be made, were timed to ensure they would not cancel each other out by being netted in the accounts, the prosecution said.
The “whole point” was that accounting standards required them to be recorded gross, so instead of just one billion “it looks as if you have seven,” the jury was told.
At a meeting that day, Drumm said he had received “solid assurances” from the Central Bank that Anglo would be supported, and a funding facility would be made available if insolvency loomed.
The flows of cash continuing to leave Anglo became unprecedented for a bank of its size. A possible merger with ILP was discussed and decided against.
By Sept 29, the bank’s funding position was so dire, it would not have been able to meet its commitments when it opened for business the following morning. Anglo was now hours from possible collapse.
Mr Cullen delivered a letter to the Central Bank, signed by Drumm and Mr McAteer, seeking €1.4bn in emergency funding.
Drumm asked in a phone call: "Permo - that 6bn fix. Are we still doing that?"
“So, what happens is the money goes round in a circle,” Mr Bowe said. “We give the money to them and the dance here is that we actually get it back in time and that is becoming very very tough to do. We have to pay it into the bank and the bank has to give it to the assurance company and the assurance company has to give it to us.”
“Yeah, I know how it works,” Mr Drumm said.
“It has to go through a lot of different hands, it’s actually very hard to do but we are picking away at it,”Mr Bowe said.
“F**king journal entry would do it an awful lot quicker,” Mr Drumm said. “Willie might be auditing the books himself this year.”
€2bn was transacted with ILP that day.
At the same time, ILP turned down a separate €100m loan to Anglo.
Explaining why, David Gantly told Paul Kane on the phone senior management was “scared sh**less”.
ILP’s refusal of that loan without collateral, the prosecution argued, was because it was “real money”, unlike the circular deal.
The following morning, the Government announced a guarantee covering deposits in the six main banks, including Anglo and ILP.
This was greeted with “euphoria” in the markets and around €3.5bn flowed into Anglo’s coffers.
“When that news came out this morning from Central, there was a buzz around the place,” treasury operations manager Russ Carter told Mr McArdle in a call that day.
He also asked: “Are you more or less finished today on the funny stuff?
Anglo pressed on with the ILP deal that day, transferring €4bn.
The credit limit for transactions with ILP was then €500m, so the excess from the September deal stood at more than €6.7bn in all.
Mr Nurse told the jury on October 1, he was asked to “retrospectively” sign off on this credit limit breach, which was outside the usual procedures.
A team of bankers reporting to Mr Drumm had already approved it. Mr Nurse signed it, but the second official who was asked, Tony O’Hanlon would not.
It could not be done “retrospectively,” Mr O’Hanlon told the jury. “I had concerns about the way this bank was run, I had concerns about their systems, their policies, their procedures,” he went on to say.
The limit change was signed off by Willie McAteer.
Later that day, Mr McArdle was on the phone to the Financial Regulator’s office when he was asked about the corporate figure.
“It’s trying to manipulate our balance sheet for our financial year end last night, what we have done is we have boosted our customer funding number which we didn’t include in our liquidity number so when our snapshot is produced at the beginning of December, it looks as good as possible,” Mr McArdle said on the tape.
“It’s not a real number. I wouldn’t read too much into it.”
On maturity in October, the transactions were actually settled net on agreement between Anglo and ILP. Paul Kane told the jury this was done for operational reasons and there was no advance intention to do it.
The Financial Regulator had by then commissioned a review of the health of Irish banks including Anglo called “Project Atlas,” to be carried out by PriceWaterhouse Coopers.
On October 24, Anglo’s board was given PWC’s report, which “simply recorded that the transaction occurred,” the jury heard.
Anglo’s external auditors Ernst & Young were briefed before they came on site for a full audit.
The bank’s Head of Group Finance Colin Golden said he and Head of Financial Reporting Kevin Kelly spoke to audit partner Vincent Bergin who “shrugged his shoulder and said he believed it was ‘technically sound” when told about the ILP transaction.
Mr Golden had also noted what was said in a phone call with Mary Burke of the Irish Financial Services Regulatory Authority (IFSRA) on October 25.
“I said I was led to believe that the transaction had been approved (by the Financial Regulator),” his note stated. “She sniggered and said she didn’t know but led me to believe someone more senior was knowledgeable.”
Mr Kelly told the jury IFSRA was given “A high level overview… which I believed was sufficient to give an understanding of the nature of the transactions.”
On November 12, after speaking to Mr Moran, Drumm wrote to colleagues about getting together a team with “war cabinet urgency” to manage the key issues facing the bank - “including YE audit."
Ultimately, Anglo’s auditors Ernst and Young gave the accounts a “clean opinion” which meant they considered them “true and fair.”
On December 3, Anglo published its preliminary results - a summary of its year-end performance, released to the stock market.
It reported customer funding of €51.5bn and acknowledged a “challenging outlook” for the bank.
Share price plunged, halving within two days.
With no end in sight to Anglo’s troubles, Chairman Sean Fitzpatrick resigned on December 18, followed by Drumm on December 19.
Although the ILP transactions were being queried late that year, it was not until the first weeks of 2009 that “controversy blew up” about them.
Matt Moran was among the Anglo officials called to a meeting in the Financial Regulator’s office in mid January. Patrick Neary had by then resigned and they were met by Con Horan, Donncha Connolly and Bernard Sheridan.
Mr Moran’s impression was of suddenly “being asked questions as if the Financial Regulator knew nothing about the transaction” and he was “shocked at the hostile reaction.”
He described it to gardai as an “ambush.”
Mr Moran explained in detail the circumstances and nature of the September transactions to Anglo’s January 13, 2009 board meeting, and minutes showed he confirmed the Central Bank and Financial Regulator “were fully aware of both sides of the transaction at the time it occurred.”
The next day, January 14, 2009, Drumm mailed Mr Moran and said Mr Drumm said IFSRA and the Central Bank were “fully aware of what we were doing to protect ourselves.”
“We had been encouraged on a number of occasions, particularly by the Governor who felt strongly about it that we should be engaging with the other Irish banks to find an intra-Ireland market to create some liquidity. I would relish the opportunity to sit in front of Con (Horan, IFSRA) and ask him to tell me to my face that he didn’t know about this. If they insist on killing the bank with this for no reason and try to protect themselves, I will go public with it. It’s not just Con, there was always a room full when you went down there to Dame Street.”
“I certainly didn’t know the detail of the transaction because when I found out on January 13 it was a shock to me,” Donal O’Connor told the jury.
Mr O’Connor had by then replaced Sean Fitzpatrick as Anglo’s Chairman, having been a Non Executive Director (NED) during the crisis.
Through 2008, he had sat on the audit committee along with other NEDS, Gary McGann and Michael Jacob. Its role was to oversee management - checking their “homework” as the prosecution put it.
With questions being asked about the ILP deal, what had been said about it at the audit committee’s meetings in the run up to the reporting date came in for closer scrutiny in early 2009.
The jury was told about a November 18 2008 meeting, when the deal was summarised in a handout.
An initial draft of the minutes stated the meeting was told the auditor was “brought through” the transactions and the Financial Regulator was “aware.”
Mr O’Connor, on conference call from Australia, said he never got the explanatory handout and “butted in and said ‘is that window dressing?’”
Willie McAteer then “immediately stepped in” and said it was “normal balance sheet management,” Mr O’Connor told the jury.
There was a “huge amount of discussion back and forth about what should be recorded in the minutes” before a final draft was agreed.
“I got the clear impression that they (IFSRA) were OK with this,” Mr O’Connor told the jury.
The court saw “acres” of minutes from several meetings and the prosecution maintained “the really significant information was kept out” of them.
There was nothing illegal in itself in moving money around banks, and the jury heard of other methods which were considered standard in the financial world. This included “repo” deals to sell and repurchase securities, like Anglo’s perfectly legitimate June deal with ILP.
But the prosecution maintained the Anglo/ILP deals in September 2008 were different. They began with Anglo’s own €1.2bn but after that the cash was simply moved from one bank to the next, “every time it passed go, adding another billion.”
“The money was Anglo’s, it went around in a circle and it was disguised as a customer deposit,” prosecutor Mary Rose Gearty SC said.
Happening sometimes just minutes apart, the transfers cost nothing to either bank and could in theory have continued indefinitely.
Anglo’s own head of liquidity analysis and reporting, Stephen Fox, told gardai the transactions were “useless” for Anglo’s cash flow.
The deal was not only balance sheet “window dressing” but intended to deceive the market and influence potential depositors and investors, the prosecution argued.
This was where the second charge, of false accounting came in. Anglo had been able to show a €1.9bn increase in its customer deposits figure in its December 3 preliminary results.
In those results, a Chief Executive’s review referred to the “continued strong performance” of the bank’s customer deposit base.
However, the jury heard there was nothing to link the €51.5bn customer deposits figure to loans from banks, and no specific mention of the ILP deals that formed part of the total, or their nature.
The end of year results were signed and put forward by Drumm and others on the basis that they were a true and fair reflection of the state of the bank.
But the prosecution argued Drumm’s sign-off of the results was dishonest because “he knew they weren’t customer deposits at all.”
An accountancy expert for the State, Dan Taylor, said including the ILP transactions in the balances was “misleading and inaccurate” and his opinion was that the €7.2bn had no “commercial substance” should not have been recognised in the accounts at all.
Stockbrokers who heard the Anglo executive teams give their presentation on December 3 gave evidence that they released analyses and stock purchase recommendations to investors on the basis of those preliminary results.
They said if the €7.2bn had not been included, Anglo’s loan to deposit ratio - a key metric for investors - would have been negatively affected, rising from 140pc to 163pc.
Matt Moran himself told gardai in his statement that if the €7.2bn had not been on the balance sheet it could have been “fatal” and led to a total loss of confidence in the bank.
From the outset of the trial, Drumm admitted authorising the transactions and assumed responsibility for their execution by Anglo.
He accepted all the facts about how the September transactions happened and the only issue he disputed was whether they were fraudulent, or that there was any dishonesty in their reporting.
The defence argued that there was no evidence that anyone actually lost or gained “one cent”, or that anyone made any financial decisions as a result of Anglo’s figures.
There was no plot to defraud because what happened in September came about “organically” from the circumstances of the unfolding crisis and could not have been predicted, Brendan Grehan, for the defence maintained.
By authorising the ILP deal, Drumm had “togged out for Ireland” at the Central Bank’s request, and when he signed off on the 2008 results, he did so in reliance of the auditors’ view.
The “buck stopped” with the audit committee who decided what went into the accounts, and the Financial Regulator, Central Bank, PWC and Ernst & Young all knew about the transactions, but nobody “raised a red flag,” the defence contended.
However, the prosecution maintained that it did not need to prove any actual loss or gain in a conspiracy, only the intention.
If Mr Drumm was trying to save the bank, this did not exonerate him and he was not entitled to “cheat” others to do so, they said.
The transactions were “devious” and “monumentally fraudulent” and the prosecution accepted it was “hard to understand why it wasn’t called out” by anyone in the bank.
However, Drumm was the “man who called the shots” in Anglo and the jury concluded that his “confidence trick” on the market - and the Irish public - was not just a cheat but a crime.