Billion euro transactions in and out of Anglo Irish Bank during financial crisis were 'useless' for bank's cash flow, court hears
Transactions that moved billions of euros out of and back into Anglo Irish Bank during the financial crisis were “useless” for the struggling bank’s cash flow, a court has heard.
A former Anglo banker said the only rationale he could see for the cash transfers with Irish Life and Permanent was to replace the inter-bank funding figure with “customer funding.”
Stephen Fox, who was head of liquidity reporting and analysis at Anglo and was not involved in the transactions, gave his explanation in a statement to gardai.
It was read out to the jury in the trial of David Drumm, who denies charges of conspiracy to defraud and false accounting.
Mr Drumm is pleading not guilty to conspiring to defraud Anglo investors in 2008 by dishonestly creating the impression that the bank’s deposits were €7.2bn larger than they were.
He is alleged to have conspired with former Anglo officials Willie McAteer and John Bowe, as well then-CEO of Irish Life and Permanent (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 circular billion-euro inter-bank transactions between Anglo and ILP, routed through ILP-owned Irish Life Assurance (ILA). The money was placed back in Anglo and treated as customer deposits, which are considered a better measure of a bank’s strength. Mr Drumm admits he authorised the transactions but denies there was anything dishonest or fraudulent in them.
Stephen Fox’s statement was was read out to the court by Sinead McGrath BL, prosecuting.
He said he was responsible for making daily liquidity reports and conducting stress tests, measuring the bank’s ability to withstand losses.
The liquidity crisis began in Summer 2007, he said; interbank lending was scarce and only available on a very short term basis.
Banks were forced to replace unsecured funding with customer deposits or more secure funding.
Throughout 2008, both the cash flow and stress test reports he was involved in were circulated widely in Anglo and were sent to David Drumm.
There were “constant rumours” about what was happening in the markets and pressure on the bank on a daily basis.
Liquidity got tighter and funds were leaving the bank, his statement continued. A number of funding target reports emailed by him to senior executives including Mr Drumm were seen by the jury.
Mr Fox said he had no material involvement in the transactions in March 2008 with ILP to improve the funding figures.
As far as managing the liquidity of the bank was concerned, they were “useless and not productive,” he said in his statement.
He said he had no knowledge of the transactions happening at the time, but saw the deposits being taken in for a short period and leaving. He did not recall the ILP transactions being discussed. He was aware that the funding target reports were being discussed on a daily basis in meetings in Mr Drumm’s office.
Funding target and funding initiative reports from July and August were then read out.
Mr Fox stated he was asked to comment on a short term placement called ILAC with a corresponding “best case” figure of €3 million. He could not comment on it because he was not aware of the nature of it at the time.
In mid September, Mr Fox recalled that events were getting worse and funding was leaving the bank post the collapse of Lehman Bros in the US.
As things got worse and worse, he said, the e-mail distribution list got smaller and smaller and he was not included.
The days leading up to Sept 30, 2008 were “some of the most stressful days” and the flows leaving were unprecedented for a bank of their size, his statement continued.
The bank lost €5 to €6bn in the day or two leading up to Sept 29.
Around €3.5bn was recovered when the bank guarantee initiative came in on September 30.
“I was under enormous pressure at what was a desperate time,” he said, adding that his focus was on the bank’s survival.
“We were hours from complete collapse,” he said.
In October 2008, he was asked by senior management to try to provide movements on the bank leading up to the guarantee.
The purpose of the exercise was to try to explain the actual funding movements in and out of the bank. This was difficult because (the figures) included the ILP transactions of €7.2bn.
On October 29, Mr Drumm asked Mr Fox to email him a summary of daily movements since September 30.
Mr Fox said in his statement he did not directly discuss the ILP transactions with anyone in the Central Bank or the Financial Regulator.
The ILP transactions in March 2008, he said, had zero impact on liquidity. Gardai asked him to explain the commercial rationale for them.
He said the rationale was to put up a higher customer funding figure, to replace interbank funding with customer funding.
Emma Hiller of Anglo’s Isle of Man division said in a statement she received a direct email from a Mike D’Arcy in the bank’s Dublin headquarters on September 25, 2008.
He asked for STG £978 million to be transferred from the Isle of Man to ILP.
She did not know who he was and thought it was unusual and “not normal practice” because they would normally spread funding out to three financial institutions to reduce risk.
The money was transferred in three transactions of £475m, £253m and £250m.
In her statement, read out by Diana Stuart BL, prosecuting, Ms Hillier said she was not aware of any meetings being held prior to the transactions.
The usual procedure was not followed and because she had been contacted by someone directly to whom she had not spoken before, she “did find that strange.”
This afternoon, the jury heard Brian Lynch, from Anglo’s Treasury division was among the recipients of a mail from Chief Financial Officer Matt Moran on September 15, 2008.
“In light of events over the weekend, it would be useful to get a snapshot of where we are with the balance sheet initiatives,” the mail said.
Mr Lynch gave evidence that he was also requested to attend an Asset and Liability Committee (Alco) meeting, where there were a number of updates given.
Mr Lynch said he was aware of transactions in 2008, even though he had no part in them.
Mary Rose Gearty SC, prosecuting asked what drew his attention to the March transactions.
“I was in the dealing room at the time and I recall some cause for celebration in another part of the dealing room. I asked a colleague the reason,” he said. “Peter Fitzpatrick and his team were celebrating that they had achieved a customer funding target number.”
However, he said, Ciaran McArdle told him “they hadn’t really achieved it” but “he said nothing more.”
Mr Lynch was not aware of the specific mechanism of the transactions but he was aware there was a customer deposits number, which was a target.
He said he recalled David Drumm indicating that there was a €10bn lending target and he wanted to get €7bn in funding. The year end customer funding target was €55 to €56bn.
Mr Lynch said the loan to deposit ratio was one of the metrics to assess the health of a bank. Customer funds were the most stable, particular the retail end, he said, so the customer number was a “good health indicator of a bank.”
Mr Lynch said he went to many of the Friday meetings in Mr Drumm’s office, and Mr Drumm was “always there.”
The main purpose of these meetings was to get a snapshot, or forecast of the balance sheet, and to get updates of the customer funding position and other initiatives that were in play at the time.
The meetings began in June 2008 until early September, after which they became redundant because the market was very volatile and everything was done by email.
Mr Lynch said at the start of those meetings in June, there were “I guess around 10 or so” initiatives on the agenda.
By August and September, “only Irish Life was left,” he said.
The impact this had was it “increased the pressure to do more from Irish Life,” he said.
Earlier, the Irish Life initiative had only been around €1bn but it got up to €7bn.
Matt Cullen and Ciaran McArdle had specific responsibility for the Irish Life initiative, he said.
He was aware of the €7bn ILP initiatives on September 30, 2008.
Asked by Ms Gearty how it was recorded, he said he was aware it was coming through ILA and treated as a customer deposit.
Liquidity risk manager Steven Hiles said group funding reports were sent every morning to 20 to 50 people internally up until the financial crisis and after that up to date information was also provided to the financial regulator.
Speaking about an analysis for the end of the half-year provided to the regulator in May, 2008 he said the ILP March transactions were not factored in.
On August 27, 2008, Mr Hiles wrote to colleagues saying the regulator queried how the corporate deposit retention rates remained high “despite the large outflows we experienced in early April” due to certain transactions which were “simply to boost customer funding at reporting dates.”
On September 15, Mr Hiles wrote to Mary Elizabeth Donoghue in the Financial Regulator’s office saying “larger ticket” corporate deposits were excluded from the “behavioural model” analysis because it was known when the funds were received that they would be leaving the bank on maturity.
On November 4, 2008, Mr Hiles emailed Ciaran McArdle, attaching a funding strategy.
“As you can see, the corporate deposit side is pretty hammered due to the over-reliance on large ticket corporates but they would improve if we remove the IL&P €7bn form it,” the mail said.