Thursday 22 March 2018

Drumm wrote to Anglo's senior executives to ask for their thoughts on how Irish banks could 'help each other' as financial crisis deepened, court hears

Former Anglo Irish Bank chief executive David Drumm pictured arriving to court on Monday February 12. Photo: Collins Courts
Former Anglo Irish Bank chief executive David Drumm pictured arriving to court on Monday February 12. Photo: Collins Courts

Andrew Phelan

FORMER Anglo CEO David Drumm wrote to the bank's senior executives to ask for their thoughts on how Irish banks could “help each other” as the financial crisis deepened in 2008, a jury has heard.

Mr Drumm (51) was passing on a request from the Governor of the Central Bank, a day before Anglo’s own share value plummeted in what was known as the “St Patrick’s Day Massacre.”

Mr Drumm's email was sent to Anglo’s head of capital markets John Bowe and forwarded to several other senior executives in the bank on March 16, 2008.

Dublin Circuit Criminal Court heard the bank was making efforts to secure more deposits to improve its cash flow as international banking went into “meltdown.”

Then Director of Treasury at Anglo, Matt Cullen was among those asked for his assistance when the e-mail was forwarded to him.

He was giving evidence in the trial of Mr Drumm, who denies taking part in a conspiracy to defraud in 2008.

Mr Drumm is charged with conspiring to defraud Anglo investors in 2008 by dishonestly creating the impression that the bank’s deposits that year were €7.2bn larger than they really were.

He is alleged to have conspired with former Anglo officials William McAteer and John Bowe, as well as Irish Life and Permanent’s then-CEO, Denis Casey, and others.

Mr Drumm is also charged with false accounting, by providing misleading information to the market on December 3, 2008. The accused, from Skerries, Co Dublin, has pleaded not guilty to both charges.

The court has heard that in conjunction with Irish Life and Permanent (ILP), Anglo organised an initiative in which money was circulated between the two banks, through Irish Life Assurance (ILA), a company owner by the ILP group. It is alleged the intention was to fraudulently create the impression that the bank’s balance sheet was stronger than it was.

Mr Drumm admits authorising the transactions but denies there was anything dishonest or fraudulent in them.

Today, Mr Cullen said he had been director of Treasury, a division that was responsible for raising funds for the bank.

Mr Cullen said one of the functions of treasury was group trading and liquidity management, whereby the division was responsible for managing interest rate risk and cash flow.

Certain cash flow ratios were given by the Central Bank and had to be adhered to, he said.

The balance sheet when he joined Anglo in 2003 was €7.5bn and it was €90bn in 2008, five years later.

This was the size of the assets, which was mostly customer lending. Mr Cullen explained to Paul O’Higgins SC, prosecuting, that a bank’s liabilities were what was owed to other people.

The bank had also built up its "Repo" business, which was a short term means of raising cash on the market by trading with government bonds as a security.

Mr Cullen also gave evidence of how the debt capital market group within the Treasury division worked, including dealings with foreign banks. People on this group reported to John Bowe.

Mr Cullen said in 2007 he himself reported to Chief Financial Officer Matt Moran, then to Willie McAteer for a time in May 2008 and after that to John Bowe.

Mr O’Higgins asked him “who decided who reported to who.”

“David Drumm,” Mr Cullen replied.

In 2007, liquidity management grew in importance because of a policy introduced by the Central Bank, Mr Cullen said.

Mr Cullen said he was on an Asset and Liability Committee (Alco) that was set up by the bank. Other members were Willie McAteer and Matt Moran, John Bowe and Pat Whelan, he said.

Mr Cullen had also attended meetings of the Board Risk and Compliance Committee, which was set up to look at risk factors.

A level above the treasury board was the senior executive board; three of the Treasury directors who were on this board were Matt Moran, John Bowe and Peter Fitzgerald, Mr Cullen said.

Mr Cullen said Anglo had limits on its transaction sizes, which varied depending on the institution involved.

These limits were breached on several occasions and if someone was looking for a breach to be authorised “ultimately it would go to the head of risk, Willie McAteer,” Mr Cullen said,

The court heard a decision was made to “test” the interbank market in 2007 by taking €6bn out of the market.

Mr Cullen agreed with Mr O’Higgins that it was no secret that there were “tremors” in the financial market from late summer 2007.

He was first aware of it when he got a message when he was in hospital with his son on July 9 that the interbank market was in trouble.

This was where trouble in the markets was usually seen first, he said. In August 2007, Northern Rock collapsed after a run on that bank. Before the end of 2007, Anglo was approached by the Financial Regulator and weekly meetings were set up. At the end of September, 2007 there was a limited form of guarantee on deposits given by the government.

Mr Cullen said Monica Kearney, Mr Drumm's personal assistant contacted him about a meeting with the Governor and Financial Regulator, and after this meeting, Mr Drumm set up a group dealing with funding. He was asked to attend it.

This was described as the Incremental Funding Initiative and an e-mail that had been copied to Mr Cullen was shown to the jury.

The original mail was from John Bowe to David Drumm and it included a checklist with the initials of “key people” involved and figures totalling €4bn.

Mr O’Higgins asked how things developed after that.

On March 16, Mr Cullen said he was asked if he could come into a meeting Mr Drumm was having with the executive directors the following day.

Anglo and other banks share prices fluctuated on St Patrick’s Day and this was given the nickname of the St Patrick’s Day Massacre, the court heard.

Mr Cullen said he was aware of the Bear Stearns collapse, and there were “all kinds of rumours going around as to what was happening in the market.”

The length of time a bank could lend money dropped from a year, to monthly, to weekly, to overnight and to the minute, he said.

A March 16, 2008 email from David Drumm to John Bowe was shown to the jury. It was copied to people including Matt Moran, who sent it to Mr Cullen.

In it, Mr Drumm asked Mr Bowe “will you put some thought into what the Governor asked us, to look at how the Irish banks could help each other?”

Mr Drumm asked in the mail how it could be structured so as to be equitable to set up supports for all the banks.

Mr Moran was asking Mr Cullen and Ciaran McArdle what assistance they could give, the court heard. There were meetings but “nothing came out of it,” the court heard.

Earlier, the jury was shown charts of how billions of euros in interbank deposits were passed between Anglo, Irish Life and Permanent and Irish Life Assurance in transactions in March and September, 2008.

The jury was shown details of transactions between Anglo and ILP on March 31, 2008.

A funding analysis showed a figure of €750m from ILA. Mr Cullen said that represented a “corporate inflow.”

The transaction limit with ILP would have been “a lot less” than that figure, Mr Cullen said - the €750m transaction would have been “twice the size of the limit.”

He told the court Anglo Chief Financial Officer (CFO) Matt Moran asked him to arrange a meeting with David Gantly, Treasury Director at ILP and David McCarthy, ILP’s CFO, to thank them for their support.

Mr Cullen got a call from Bob O’Hara, head of the Central Bank’s money desk in April to ask “what we were doing with the other Irish banks, what we were doing to help each other.”

The court heard Mr O’Hara later told him the Governor had said “not to show effing reliance on European Central Bank funding.”

In June, 2008 a €3bn “Repo” transaction was carried out between Anglo and ILP.

Anglo’s funding position weakened throughout the summer, Mr Cullen said.

He said he thought the €3bn transaction was part of the “Green Jersey” agenda in relation to banks helping each other.

“We were just helping them out in the same way they helped us out in March,” he said.

He did not think there were any expectations after that.

In the following weeks and months, liquidity got tighter and funding in the interbank market tightened up further.

“Our funding figures would have worsened as time went by,” he said.

There were daily meetings with liquidity analysis reports posted within a half hour to senior management and “we would be talking to the Central Bank about this as well.”

There were also weekly meetings with a synopsis of funding initiatives on Friday mornings, followed by a meeting in David Drumm’s office.

Funding deteriorated through July. There were 50 initiatives with different banks and corporations to increase corporate funding. However, by September a lot of these initiatives had fallen away and the financial market “was going into meltdown.”

On September 15, Lehman Bros collapsed in the US.

“In the middle of September, the funding initiative with ILP increased because the other initiatives were all falling away,” Mr Cullen said.

Anglo’s liquidity ratio had fallen below the Central Bank’s ratio. This should have come up on the Central Bank’s radar but “I think they just accepted that it was the nature of the market and there was nothing we could do about it and we just monitored it,” Mr Cullen said.

On September 29, the day before the government’s bank guarantee, Mr Cullen said he delivered a signed letter to the Central Bank, signed by Willie McAteer and David Drumm.

Anglo was short of funding that day and its liquidity showed the position for the next day was it would not be able to make payments when the bank opened.

The letter was seeking €1.4bn in emergency funding.

The trial continues.

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