Financial crisis became 'about survival' of Anglo Irish Bank, David Drumm trial hears
FOR ANGLO Irish Bank, the 2008 financial crisis became “about the survival of the bank” a former executive has told a court.
Declan Quilligan said there was “panic in the market” and recalled one banker at a foreign investment meeting crying over his losses following the collapse of Lehman Bros in the US.
Mr Quilligan, former head of Anglo’s UK division, was giving evidence in the trial of David Drumm, Anglo’s former CEO.
Mr Drumm (51) is pleading not guilty to conspiring to defraud Anglo investors by dishonestly creating the impression that the bank’s customer deposits were €7.2bn larger than they were.
He is alleged to have conspired with Anglo’s former Finance Director Willie McAteer and head of Capital Markets John Bowe, as well as then-CEO of Irish Life and Permanent, Denis Casey, and others. The case centres on a series of interbank loans which circulated between Anglo and ILP in September 2008.
The transfers were routed through Irish Life Assurance, returning 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, Mr Quilligan was asked by Michael O’Higgins SC, prosecuting, about Anglo’s funding initiatives during 2008.
He said there were attempts to get real deposits over the half-year and year end. Because they were referred to as funding initiatives did not mean there wasn’t work going on throughout the year, he said.
There was “heightened sensitivity” at the half-year and year ends and the initiatives would have been “extra efforts” to make the balance sheet look stronger for “that photograph that was taken at that time.”
- Read More: Anglo officials described transactions at height of financial crisis as 'funny stuff' - Drumm trial hears
Mr Quilligan was not aware at the time of any cash-backed element to the ILP transactions. He also never had any personal dealings with the Irish Financial Regulator or Central Bank. The jury was shown again an email from Mr Drumm to executives on March 12, 2008 in which Mr Drumm spoke of “zooming in” on the“magic number”. The jury had heard this was a customer funding target of €5bn.
Mr Quilligan said of the term “magic number” that “we know what market expectations are… that becomes this target.”
Mr Quilligan said a method of growing the deposit book in the UK was “tweaking interest rates.”
The jury was then shown again a mail of March 16, 2008 in which Mr Drumm asked John Bowe to “put some thought into what the Governor (of the Central Bank) asked us to look at - how the Irish banks could help each other.”
Mr Quilligan, who had been copied on that mail, replied to Mr Drumm saying he was “just wondering… the impact internationally.” In that mail, Mr Quilligan said Ireland was a net beneficiary of interbank lending and asked what happened “if we turn off/ down the tap on others and they do the same.”
Mr Quilligan told Mr O’Higgins this meant that if funding was taken away internationally, the net effect could have been damaging for Irish banks including Anglo.
The jury was shown an email from Mr Quilligan to Mr Drumm and others on July 18, 2008.
“Simple questions are required I think rather than bulls**t which will lead to a blame game,” he said in the mail. Referring to retail, corporate and wholesale between May and the year end, he asked in the mail: “how do we get a customer number with a 7 in it?”
Mr Quilligan told Mr O’Higgins the bank was looking at the September loan book growing by €10bn. They were funding in the typical way they always had done and this was what the market would expect them to do.
He recalled being aware after September 2008 of the rise in the ILP figure from €3bn, but accepted from the evidence that he must have been aware before.
His understanding of the ILP “supports” had been that they resulted from ILP’s December 2007 results which had “gone down badly in the markets” for showing significant dependence on European Central Bank Funding.
ILP had been told by the Irish Central Bank to show less dependency on the ECB and “could they not do more with an Irish bank.”
Mr Quilligan said throughout 2008, “everything was on the table.”
- Read More: David Drumm told executives to 'look under every rock' to reduce lending as financial crisis deepened, court hears
Other correspondence referred to the FSA (the UK’s financial regulator) being uncomfortable with Anglo being on the “best buy tables” and wanting all references to the Irish Government guarantee removed from Anglo’s UK website.
Mr Quilligan explained to Mr O’Higgins that Anglo was operating under a global liquidity waiver in the UK, meaning the Irish regulator could set the bank’s liquidity ratio.
After Northern Rock bank went bust, the FSA became anxious about foreign banks taking deposits from the UK market, creating competition for banks there. They were “trying to protect the British banks,” he said.
In cross-examination, Mr Quilligan agreed with Brendan Grehan SC that up to 2007, Anglo was “an extraordinarily successful bank… one of the best banks in the world.”
Funding had never seemed to be an issue, Mr Quilligan said.
The credit crisis led to competition from other banks for customer funding and Anglo tried in 2008 to rein in lending to zero. This was not possible in Ireland because of “pipeline projects” where Anglo was legally obliged to lend.
At that time, even good actions could be interpreted negatively by the market, he said. ILP’s ECB funding had been “perfectly legitimate” but they “got a carpeting” from the Central Bank because it made them look weak, Mr Quilligan told the court.
He agreed with Mr Grehan that this was the genesis of ILP looking to Anglo and people were protecting their own patch.
In 2008, the Bank of England secretly loaned €60bn to RBS and HBOS banks “because it was in the best interests of the UK banking system,” Mr Grehan said.
During the crisis, Anglo also had an “intolerable situation” in the extent of businessman Sean Quinn’s shares in the bank.
Mr Quilligan agreed with Mr Grehan that although he did not deal directly with the Central Bank or Financial Regulator “that doesn’t mean you wouldn’t be aware of what was going on here.”
Mr Grehan then asked what Mr Quilligan understood from Mr Drumm’s mail about the Irish banks helping each other.
“That the bank was being encouraged to work with other Irish banks to ensure that we all came through the credit crisis safely,” he replied.
Asked by whom, Mr Quilligan replied: “The Governor of the Central Bank.”
Mr Quilligan agreed with Mr Grehan that he was aware of the term “green jersey agenda.”
Mr Grehan said Mr Quilligan’s mailed reaction was a note of caution in terms of what was being suggested because “it might be seen as somewhat parochial for Irish banks to club together, that you might do yourselves down.”
“The retaliation could be worse,” Mr Quilligan agreed.
Mr Grehan then read out Mr Drumm’s response to this caution.
“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,” the email stated. “Since the start of the crisis, we have dramatically cut the number of banks we are dealing with so I assume the limits have gone up for some or that we have placed more with them, but I don’t know which is why I’m asking.”
Mr Quilligan agreed that the failure of Lehman Bros in the middle of September was the “final straw.”
He said he was at an investment meeting in Amsterdam the next day.
He recalled that “a guy came into the room and he was crying because he had invested in Lehmans on Friday and it was worth nothing.”
“There was panic in the market,” he added.
Mr Quilligan said as well as Anglo’s other funding initiatives falling away, the “real market” was also worse after Lehman’s went bust.
“It was about the survival of the bank, not the year end because nobody knew where this was going to end,” he said.
Mr Grehan said there was “effectively a corporate run on the bank” with money being withdrawn.
Mr Quilligan said this was not just happening in Anglo. The jury was shown again handwritten notes from an Anglo Board meeting of September 30, 2008, referring to “€7.2b Ir Life - B/S pic.”
He agreed it appeared to refer to Irish Life and the balance sheet picture.
The trial continues at Dublin Circuit Criminal Court.