Tuesday 16 October 2018

David Drumm told colleagues their €5bn customer funding target was 'magic number' they had to make, court hears

Former CEO of Anglo Irish Bank, David Drumm Picture: Collins
Former CEO of Anglo Irish Bank, David Drumm Picture: Collins

Andrew Phelan

FORMER Anglo Irish Bank CEO David Drumm told colleagues their €5bn customer funding target was a “magic number” they had to make as the 2008 financial crisis unfolded, a court heard.

Mr Drumm sent the e-mail to Anglo executives as the markets deteriorated that year, asking for a senior level discussion to “zoom in on what has to be done” to make the number.

He later wrote about “what the Governor asked us to look at - how the Irish banks could help each other,” before Anglo entered into a deal with Irish Life and Permanent (ILP).

The emails were shown to the jury as Anglo’s former Chief Financial Officer, Matt Moran gave evidence in Mr Drumm’s trial today.

Mr Drumm (51) is pleading not guilty to conspiring to defraud Anglo investors by dishonestly creating the impression that the bank’s customer deposits in September 2008 were €7.2bn 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 multi-billion euro interbank loans which circulated between Anglo and ILP at the height of the financial crisis.

The money went through Irish Life Assurance (ILA) and back into Anglo where it was treated as customer deposits, which are considered a better measure of a bank’s strength. Mr Drumm admits he authorised the transactions but denies they were fraudulent.

Today, the jury at Dublin Circuit Criminal Court heard of the “genesis” of the Anglo and ILP transfers and was given evidence of earlier transactions between the two banks that are not part of the charges.

Mr Moran said Mr Drumm joined the bank in 2005, having worked in the US. He ran the Irish lending operation for a period and was then appointed CEO.

A senior executives board was disbanded at the end of 2007 and its role was taken over by a smaller grouping of executive directors from the main statutory board - Mr Drumm, Pat Whelan, Wille McAteer and Tony Campbell, who ran the US business.

The bank was much more focused on lending than treasury. Mr Moran said to Mr Drumm and others at the time that the equilibrium of the team had been reduced by the fact that it was made up purely of lenders.

After the risk function of the treasury division, the Assets and Liabilities Committee (ALCO) was there to provide a further level of oversight to lending.

Anglo had grown rapidly from having a balance sheet of around €20bn in the early 2000s to over €100bn in 2008. The role of the ALCO lagged that growth and was less well formed than in a more “universal” bank, Mr Moran said.

Anglo had sought to fund itself much more widely than its lending base. The finance division ran the overall interaction with the auditors and there was a regulatory reporting team with monthly and quarterly returns to the Financial Regulator, Mr Moran continued.

Mr Moran had contact with the Central Bank but John Bowe and head of treasury Matt Cullen had more contact. He then recalled the beginning of the financial crisis in summer 2007, when capital markets began to become “dislocated” and liquidity was affected.

At the time Northern Rock was in trouble, Matt Cullen flagged to him that that calendar year end was “going to be difficult.”

Mr Moran said there was an array of deals banks would look at to raise additional funds and increase capital for their year end “snapshot”, to ensure they had as strong a balance sheet as possible.

In November, 2007 Matt Cullen told him he had been approached by ILP. A short term bridging facility was supplied to ILP as it awaited cash from bonds that had yet to mature.

There was a sense in the market that smaller banks were of more help to each other, Mr Moran said.

Anglo gave approval to go ahead and assist ILP and “David Drumm was involved in that approval,” he told the court.

December 2007 proved not to be as difficult for Anglo as had been predicted and a liquidity “squeeze” did not seem to materialise.

On February 11, 2008 Mr Moran emailed Peter Fitzpatrick about an initiative to contact “various sectors to get deposits,” Mary Rose Gearty SC, prosecuting said. Banks were looking at funding avenues and Mr Moran told the court he was involved in approaching PLCs.

David Drumm began meetings in his office to look at the bank’s funding position and other matters.

Given the fragility in the market, people looked at share price as a proxy to risk, and other indices that were not known outside capital markets before became a matter of focus, Mr Moran said.

These meetings morphed into wider meetings around funding and there were concerns about getting money into the bank.

Aside from securing corporate deposits the bank was also engaged in other initiatives to improve its half-year end position, including special balance sheet reporting initiatives.

Ms Gearty asked Mr Moran if he recalled the genesis of the transactions with ILP.

Mr Moran said he did not know the genesis but people in treasury were looking at multiple sources of potential transactions, including investment banks.

“The purpose was to position the bank in as favourable a position as possible at the end of March,” he said.

Anything that increased funding or capital, reduced risk weighted assets and reduced lending would enhance the balance sheet, Mr Moran said

Anything that would convert illiquid assets into liquid assets would be positively perceived.

In relation to involving a non-banking entity, he said interbank deposits “are generally perceived as shorter-term, less sticky deposits than corporate deposits.”

A March 12, 2008 mail from Peter Fitzpatrick to Mr Moran, Mr Drumm and others stated that the funding environment had deteriorated in line with worsening market conditions.

A target customer funding of €5bn for the end of March was mentioned in the mail.

Mr Drumm replied: “Peter, let’s have a senior level call on this...to zoom in on what has to be done now to make the magic number.”

Ms Gearty asked what this was.

“The level of deposits that would have to be on the balance sheet at the end of March,” he replied.

On March 16, Mr Drumm emailed John Bowe, asking: “John, will you put some thought into what the Governor asked us to look at - how the Irish banks could help each other.”

Ms Gearty said this was what was seen as being a suggestion that “it came from the authorities that the Irish banks might support each other.”

In another e-mail trail on March 21, 2008, after the St Patrick’s Day share price fall and the collapse of Bear Stearns, Mr Drumm said to Mr Moran: “I would like us to get together...to agree a plan of action for the coming week.”

At that point, the markets had become very nervous, Mr Moran told the court.

On March 25, an email showed Mr Moran accepting an invitation from David Drumm to a “customer funding update” meeting.

Mr Moran mentioned a “tee-off with JOD”, referring to a golf game with John O’Donnell of AIB.

Mr Moran had been asked to contact Mr O’Donnell about a transaction with AIB for the half year end, where Anglo “would place money or assets with AIB who in turn would place a corporate deposit back with Anglo.”

Mr O’Donnell responded that he would have to go to AIB’s executive and “the Regulator would have to be involved.”

That particular transaction did not go ahead.

Mr Moran was present when a phone call was made in similar terms between Willie McAteer and John Bowe about a transaction with RBS in the UK.

“I believe RBS did do some transaction with the bank and in that conversation that Willie had with the bank they asked the question was the Regulator involved or something to that effect,” Mr Moran said.

Ms Gearty asked what the response was.

“Willie said something to the effect of ‘that wouldn’t be a problem’”, Mr Moran replied.

Ms Gearty referred to Mr Moran’s statement in which he spoke of proposed initiatives in the event that customer funding fell short, and that he had also said he was involved in these discussions.

“Correct,” Mr Moran replied.

There were three counter parties in total in the proposed deals - AIB, Lehmans and Credit Suisse, he said.

A March 28, 2008 email from an Anglo banker Martina Whelan to Mr Drumm, Mr Moran and others was then shown to the jury.

Mr Moran told the court this looked at inflows that day of €1.6bn, with expected funds coming to bring a total of just over €3bn.

An ILP figure of €750m was included.

Mr Moran was asked what part he played in the development of the ILP initiative.

He told Ms Gearty he was in several of the meetings with the executive directors and others. After March 17, there had been “very significant interaction” because of what had happened in the markets and regular meetings.

The purpose of the meetings was to see where the position would be at the end of March, to look at the initiatives that would increase the corporate funding position.

The bank had constantly grown its corporate and retail deposits to fund lending and “that was where the €5bn magic number came from,” Mr Moran said.

The bigger the balance sheet at the closing date, the stronger it looks, he said.

Ms Gearty asked what actual commercial benefit that had other than “looking good.”

“You want to maximise the level of deposits that you have and show that counter parties are taking risks on your bank,” Mr Moran said.

Ms Gearty said Mr Moran may not have been aware in March but became aware later that there was a “quid pro quo” arrangement with ILP.

Mr Moran said he learned the detail to this transaction in a "look back" in early 2009.

He recalled a meeting between Anglo and ILP in April 2008, when it was said that in effect ILP had borrowed money from the Central Bank at their year end and “they didn’t want to avail of that borrowing facility at the half year end.”

This was because the Central Bank was seen as a “lender of last resort,” and they did not want to be seen by the market to be relying on that, Mr Moran said.

Mr Moran said ILP placed bonds with Anglo, which placed these bonds with the Central Bank, then placed the cash it received back for the Central Bank back with ILP.

The trial continues.

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