Irish Life executive was 'uncomfortable' after he was approached to carry out deal with Anglo Irish Bank
AN IRISH Life executive was “uncomfortable” with multi-billion euro back-to-back cash transfers with Anglo Irish Bank during the 2008 financial crisis as they were “not normal,” a court heard.
David Gantly, Irish Life and Permanent’s then Group Treasurer, said the deals involved “re-categorising” the money when it went back to Anglo, bolstering the bank’s corporate deposits.
Mr Gantly was giving evidence today in the trial of Anglo’s former CEO David Drumm.
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.
Mr Gantly told Mary Rose Gearty SC, prosecuting, that ILP’s balance sheet grew substantially between 2001 and 2008, more than doubling in size to in excess of €50bn.
He was a member of the Irish Life group’s “top team,” which included Denis Casey, Finance Director Peter Fitzpatrick and Irish Life Investment Managers (ILIM) CEO Gerry Keenan.
Mr Gantly had predicted in emails to colleagues in 2007 that costs would be significantly higher the following year and this would put a strain on meeting liquidity requirements “as sure as night follows day.”
Problems in the US sub prime market were a “clear signal”.
“There was a sense that the cavalry were going to come over the hill at any time, and we just didn’t see it,” he said.
There was an “absolutely chronic” liquidity crisis in 2008, when many short term funding sources stopped renewing. What happened that year was a “one in a hundred year event,” he said.
ILP would increasingly drew down European Central Bank Funding but the Central Bank was “uncomfortable” at the use of that “safety net,” Mr Gantly said.
He met officials from the Financial Regulator and Central Bank in March 2008 and the impression he got was not only were they not happy with ILP relying too much on ECB finding but also “openly telling the market.”
Within days Mr Casey and Mr Fitzpatrick had had further discussions with the Central Bank and Mr Gantly heard about the “green jersey agenda” - Irish banks helping each other.
Mr Gantly said he was instructed by Mr Casey to contact his counterparts in the other major banks including Anglo, where head of treasury was Matt Cullen.
His conversations with other banks were about trying to divert interbank flows going abroad back into the domestic market and no other concrete proposals emerged at that time, Mr Gantly said.
He was then approached by Mr Cullen about a transaction with Anglo.
“My memory of that is they were looking to target a specific figure for their corporate deposits at their half year end,” Mr Gantly said.
It would be usual for treasuries over reporting dates to target corporate deposits, Mr Gantly said, and he believed the expression was “window dressing.”
“They were losing some corporate deposits which came as no shock and they were targeting a certain number.”
Mr Gantly said he would have been aware that it was short term and he thought the number floated was in the region of €750m. The initial approach was that Anglo was looking to get increased deposits generally from Irish Life. The context was that ILP had been receiving a lot of additional funding from Anglo.
Mr Gantly said he had no control or input into that decision but that he would reflect the request to Mr Fitzpatrick and Mr Casey.
“My recollection is that the concept of increasing deposits from ILIM was not entertained and the concept of doing a back-to-back arrangement was mooted.”
This would involve Anglo placing a deposit with ILP bank, which would place these funds with ILP’s subsidiary assurance company ILA, which would then put the funds back into Anglo. From Anglo’s perspective this would have bolstered corporate deposits and increased interbank lending.
“They were looking to re-categorise them, essentially,” Mr Gantly said.
The ECB had put €100bn in short term funding into banks so “you knew there was something cataclysmic happening.”
The back-to-back would involve no bonds and would be “cash-collateral,” he said. This was non-normal and the more standard type of arrangement would involve bonds as collateral, he said.
There was “an element of discomfort” but that was true of the market in general at the time. When they discussed it, he made it clear that it was “not a normal type transaction,” albeit in abnormal market conditions.
The feedback he got was they had been encouraged by the Regulator to do this, and Mr Fitzpatrick stated this in a mail.
“From the word go,” ILP wanted to make sure they had no credit exposure from the transaction so no money would be sent out until the cash was in from Anglo first.
“We stipulated that was the only way we would do it,” he said.
Mr Gantly understood from a meeting with Mr Casey that the transaction was “best kept tight on a need to know basis” with senior management.
Mr Gantly said he understood there was to be “no idle chit chat” and he did not think this request was too unusual be in the context. Rumours were rife in the market and confidence was key, he said.
“There was a huge fire-fighting exercise going on every day to cope with the level of outflows we were seeing,” he said.
A sum of €750m, which later became a billion, would be lodged by Anglo with ILP and in turn ILA would lodge €750m with Anglo.
The transaction would be co-ordinated by ILP liquidity manager Paul Kane.
“You said you were uncomfortable with the proposed transactions as they were non-standard,” Ms Gearty said.
“Yes,” Mr Gantly replied.
“It’s not something you had seen before,” Ms Gearty said.
“No,” Mr Gantly said.
The jury was shown an e-mail from Gerry Keenan to Peter Fitzgerald on March 28, 2008.
“I have lined up here to do the Anglo deposit on Monday,” Mr Keenan said, “Clearly its size it way outside our limits with them so we need formal approval,” he said.
Mr Fitzpatrick mailed back his approval for the transaction.
“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 said in the mail.
In the afternoon, the jury heard Anglo placed €1bn with ILP that March and ILA placed €750m back with Anglo.
A €3bn “repo” transaction, or an agreement to repurchase bonds was carried out with Anglo in June.
The deal that was undertaken in September, however, was “identical” to the March transactions, Mr Gantly said.
The request from Anglo came through Mr Cullen. Mr Gantly said he was expecting Anglo to look for some support at their year end. The original amount that was mentioned was €4bn or €5bn.
At that time Lehman Bros had collapsed in the US and that was “another huge event, another bomb going off,” Mr Gantly said.
Not unlike in the March trade, it would have been a non-standard transaction and “would have been something I was uncomfortable with” given the quantum of the deal, which was considerably larger, Mr Gantly said.
He understood the market had deteriorated and why they wanted to do a larger amount. Ms Gearty asked him what reassured him.
Mr Gantly replied that the transactions were fully recorded on their systems, open to the Regulator and subject to audit.
Because of “the scale of it,” it needed to be signed off “CEO to CEO.”
The jury was shown an email sent by Denis Casey to Mr Gantly on September 5, 2008.
“Re liquidity breach, we need to flag this in advance to the board so they know what’s happening and don’t get spooked,” Mr Casey said.
On September 15, Mr Gantly mailed Mr Casey saying: “we discussed the Anglo proposal for their year end, they want to place up to 5bn with us and we would route this back through ILIM to bolster their corp deposits. Did you discuss this with David (Drumm) today? I am suggesting to them we do 10 times 500m euro deals where they place cash with us for set term and ILIM place the amount for one day less. This removes intra day and settlement credit risk for us.”
Credit limits had to be changed and once the €5bn had been approved, it was operationally easier to do the transaction in smaller amounts.
Mr Gantly could not recall the right of set-off being raised as a topic. The transactions happened on Thursday and Friday September 25 and 26, and again on Monday and Tuesday 29 and 30.
At 3am on September 30, Mr Casey told him about the Government’s guarantee scheme covering deposits in the six major financial institutions. This was an “incredible initiative from the State," the bank went from a weak single-a credit rating to a triple-a and there was a significant inflow in the short term, although the impact would be short-lived as the property market collapsed and attention in the crisis went from funding to assets.
During September 30, Anglo asked to increase the transactions from €5bn to €7bn. Mr Gantly said he took a “more sanguine” view of that in the context of the guarantee when he discussed it with Mr Casey.
The jury was shown an email from Peter Fitzpatrick to ILP's Chief Risk Officer Hilary Flood on January 26, 2009.
“Group Treasury has confirmed that in the case of maturity of each of those six €1bn amounts, no physical payment was made or received by Treasury. Instead the payable and receivable amounts were netted to zero on the instruction of dealers and Swift payment instructions produced by system were “binned” - held to one side and filed separately,” the mail said.
Asked if ILA had €7.2bn at the time, Mr Gantly told Ms Gearty his perception was “they would not have that much cash.”
The March and September transactions had “zero” commercial value to ILP, he said, but the June “repo” would have reduced ECB reliance, he said.
The jury was then played a March 25, 2008 phone call between Mr Gantly and John Bowe.
Mr Bowe said Mr Gantly had been “talking to Matt” and “we appreciate and will do everything we can to reciprocate.”
In a call on March 27, 2008, Mr Gantly was heard telling Matt Cullen: “just to be clear, you put the stuff into us… we will just put it straight back through our other boys.”
The trial continues before a jury and Judge Karen O’Connor.