Wednesday 17 July 2019

Forget the useless reports... the truth is nobody knows how big the exposure is

The PwC probe did not shed new light on dodgy goings on and, instead, just fuelled public anger, writes Daniel McConnell

Daniel McConnell

Less than eight weeks after it first emerged about disgraced banker Sean FitzPatrick's controversial extraordinary loans from Anglo Irish Bank, the failed financial institution released its much anticipated annual report on Friday.

However, its publication and the release of the government's significantly flawed independent examination of the bank in the PricewaterhouseCoopers (PwC) report a few hours later, have shed little new light on the dodgy goings on at Anglo, but have succeeded in simply heaping the pressure back on embattled Finance Minister Brian Lenihan.

Since his resignation in disgrace and that of David Drumm, Mr FitzPatrick's successor as CEO in mid-December, the landscape has now utterly changed, not just for Anglo, but for the entire Irish banking sector.

Ireland is now the laughing stock of European banking, bumbling from crisis to crisis, and the drip-drip of scandal from Anglo, combined with the Government's shambolic approach to dealing with it, has led to the destruction of our international reputation.

Friday was, according to the finance minister, a watershed day for Irish banking, and for Anglo Irish Bank. In truth, it marked the latest calamity both from the perspective of the bank and the Government, with serious questions left unanswered and mounting public anger.

The reports confirmed much of what was worst feared about Anglo Irish Bank. It was too exposed to a small group of big property developers, it engaged in dodgy practices to keep itself afloat and those responsible were paid extremely handsomely in the process.

In the lead-up to Friday's events, the political agenda had been dominated all week by the identity of 10 investors, or the 'Golden Circle', who were given loans by the bank to prop up the Anglo share price.

For several days, Mr Lenihan refused to reveal who they were, saying he couldn't on legal grounds, and it was hoped that the Anglo report would shed some light on the matter. It didn't and the lack of detail given by the new Anglo board has added to the public sense of anger and grievance.

Newly appointed Anglo executive chairman Donal O'Connor confirmed in the report that the bank had engaged in the dubious practice of lending money to customers to buy shares in the bank.

He confirmed that in the run-up to the state guarantee last September, Anglo, under the direction of the most senior executives, secretly lent €451m, and not the previously thought €300m, to 10 "long-standing" clients of the bank for the purpose of buying shares in the banks through non-recourse loans.

To date, he said only €83m has been repaid, and €300m would now be written off as the security of this amount was limited to the value of shares purchased with it. Given the fact that the bank has been nationalised, those shares are virtually worthless.

The report also confirmed that despite its share-price collapse throughout 2008, a startling total of €255m was lent to Anglo directors, of which €179m is still outstanding.

Despite the dubious practices of Anglo, and in a move that is only likely to inflame public anger, it was confirmed on Friday that Anglo paid a whopping €9.5m to its directors last year.

Mr FitzPatrick got a 22 per cent pay rise last year, pocketing €525,000, while landing his bank in the greatest banking scandal Ireland has ever seen. Despite his actions, only a week before the Anglo reports came out, he managed to brazenly snub an Oireachtas committee, much to the disgust and anger of the general public.

On top of that, he received €14,000 in benefits, having received no such payment the previous year. As if by design, and by total contrast to the chaos he left back home, Mr FitzPatrick was this weekend sunning himself in a Spanish holiday resort.

David Drumm, who also resigned in December alongside Fitzpatrick, received a total of €4.65m in 2007. That's 42 per cent or nearly €1.4m more than the €3.27m the institution had indicated he had been paid in 2007. Mr Drumm elected to receive a taxable cash allowance of €1.65m in 2007 for pension benefits forgone.

Declan Quilligan saw his basic salary soar by more than 24 per cent in 2008 to €602,000. He received additional pension payments of €161,000 during the year to bring his package to over €760,000. That's just slightly more than the entire bonus he received in 2007. The bank also paid €160,000 back in 2007 in relation to Mr Quilligan's relocation to the UK. He has been appointed chief operating officer at Anglo.

Late on Friday night, amid much rancour over its delayed publication, the Department of Finance released a highly sanitised version of the PricewaterhouseCooper report into the state of Anglo Irish Bank.

The report was commissioned in the wake of the Government's state guarantee scheme announcement on September 30, and was aimed at uncovering the true extent of Anglo's exposure.

Conducted in three phases between September and December 10, the most startling aspects of the PwC report include that 15 of the bank's top customers have debts of over €500m each, with at least seven of them having debts totalling over €1bn. It also revealed that, in total, Anglo was owed almost €12bn by 20 of its biggest customers.

Alarmingly, it was confirmed that a total of €10bn was taken from Anglo accounts amid rumours of its collapse, which led its share price to plummet to less than 30c, down from its peak of €17.50 in 2007.

As the bank engaged with Irish Life & Permanent in the controversial back-to-back transaction of over €7bn, the PwC report revealed that €5bn was taken out in the days immediately before the State guarantee.

However, the most alarming thing of all is that Irish taxpayers now face bad debts of at least €5.3bn. The truth is that no one really knows how big that exposure really is.

However, not withstanding its findings into the flaws in the bank, it is clear that the PwC report itself is inadequate. Despite its clear importance in shaping the Government's decision about the banks, the report did not deal with huge aspects of the Anglo operation, and ignored loans under €330m.

According to the report, it did not include "a review of cases outside the 62 large cases. Smaller loans, less than €300m for investment loans and €150m for development loans, may have different characteristics. We do not comment on such matters in this report".

Also contained in the small print of the report, it has emerged that PwC did not review "relevant financial and management information" in various phases of its compilation.

Repeatedly in each of the three stages of its compilation, PwC also did not check any underlying information about trends or loans given to clients and the adequacy of security and valuation reporting.

The PwC team also did not have detailed discussions with Anglo management on the bank's profit and loss account, and did not discuss reasons for movements of funds on that account.

And finally, it also stated that in its examination it ignored loans under €330m, and no discussions took place about them.

What does all that mean? Essentially it means that PwC was forced into taking the word of Anglo management as the truth and, because of time constraints, could not validate the statements.

The fact that huge numbers of large loans were not examined at all by PwC means that the true level of exposure was not known.

Most significantly, the PwC report formed the basis of the Government's actions in terms of capitalising and nationalising Anglo Irish Bank.

On Friday night, Mr Lenihan said: "The Government has made clear that it will ensure its continued viability. Anglo Irish Bank will continue to trade normally as a going concern, with appropriate government support within the EU Framework."

The fact that the report itself was not the in-depth forensic examination that the Government and Mr Lenihan said it was, means their judgment on all of this must be severely questioned.

In its defence, PwC compiled its reports "in accordance with the specific instructions" of the Government which required it to focus solely on the largest customer loan exposures, the report said.

UCD Business Professor Niamh Brennan said that, given the pressurised timescale of the report's compilation, it was never going to delve into the kind of detail being talked about, but rather simply provided the minister with a big-picture scenario of the bank.

She also said that, given the time scale of the report's compilation, PwC would have had to take a lot of information given to it by Anglo management at face value.

However, she said the PwC exercise was not an audit and major areas of information were ignored. "It was not an audit, they were looking at the big picture and not at forensic detail."

Responding to the criticism, a spokesman for Mr Lenihan said yesterday: "In addition to the full PwC report, before nationalisation, a full due diligence was done, which showed up all the impaired loans. The Government was right to nationalise the bank and this report clearly shows that."

The publication of the two reports coincide with the news that at least €10bn has been withdrawn from Ireland in the past week as the impact on Ireland's financial reputation emerges.

This morning, in the wake of the Anglo scandal, Ireland is deeply wounded and those responsible have not yet been brought to task. Sean FitzPatrick is sunning himself in Spain and others responsible have exited stage left with their golden handshakes.

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