Monday 16 September 2019

Greed, arrogance and hubris may yet be only charges bankers face

As Mr FitzPatrick awaits his fate, other bankers will be eagerly watching the every move of gardai, writes Alan Ruddock

Sean FitzPatrick, the former chairman of Anglo Irish Bank, exists for the moment in a legal limbo world; arrested, released and now waiting to see if charges are laid against him.

Simultaneously he faces a legal fight to keep his creditors -- primarily his former employers, who want to get back €70m -- at bay. While he waits, other former bankers watch nervously.

There will be more arrests, and not all of them will be of former Anglo employees. After almost a year of investigation, the garda net is beginning to close on all those who played a role in Anglo's dramatic collapse from European banking superstar to nationalised, bankrupt hulk. Presiding over the rise and fall was Mr FitzPatrick, an ebullient, supremely self-confident entrepreneur who had turned a tiny bank into Ireland's dominant property lender.

The garda investigation has focussed on three main areas, two of which disguised the true extent of Anglo's difficulties from its shareholders and from the rest of the market. The first was a peculiar transaction between Anglo and Irish Life and Permanent, which saw more than €7bn moving between the two and ending up as a deposit on Anglo's accounts. The second was a straightforward share support scheme, where Anglo provided the finance to 10 chosen clients who used the money to buy Anglo shares. The plan, which failed spectacularly, was to shore up the share price by buying shares that were being released into the market as Sean Quinn, the insurance and cement billionaire, unravelled his holding in the bank.

Without a support scheme, Anglo's share price would have collapsed even faster than it did, destroying market confidence at its most vulnerable hour. The 10 clients expected to make easy money and were protected by the bank from most of their potential losses.

The third issue that has been the subject of garda inquiry is the series of loans advanced to Mr FitzPatrick by the Anglo, which exceeded €120m at their peak. Each year for eight years, Mr FitzPatrick hid those loans from view by moving them to the Irish Nationwide for a short time, moving them back to Anglo once its financial year end had passed.

The transactions may have broken company law, but it a complex area. The share support scheme has similarities to the attempt made by Ernest Saunders, the chief executive of Guinness, to prop up his company's share price when it was bidding for control of the distillers company in the 1980s. Saunders and some of his co-conspirators were found guilty and imprisoned for breaking Britain's anti-fraud laws. According to a report into the case published later by the Department of Trade and Industry, Saunders and the others had been involved "in the creation of a false market" and had displayed a "cynical disregard of laws and regulations . . . a cavalier misuse of company monies . . . [and] a contempt for truth and common honesty".

Mr FitzPatrick's arrest does, however, suggest that the garda investigation is reaching its conclusion. From the very moment that the gardai became involved last year, it was clear that the strategy would be to build a case and then move to arrest and charge those involved. Instead of high-profile early arrests -- an approach favoured by the authorities in the United States -- the gardai went about the task of painstakingly accumulating evidence, seizing documents and computers from Anglo's head office (though it is surprising that the search of Mr FitzPatrick's home, and the seizure of his home computer, was left until last week).

Mr FitzPatrick can be expected to mount a vigorous defence against any and all charges, and as the investigation proceeds it is inevitable that the role of the Financial Regulator and the department of Finance will come under intense scrutiny. The gardai will need to establish how much the regulator's office knew about Anglo's peculiar arrangements with Irish Life and Permanent, and how much it knew about the share support scheme. Was there a 'green jersey' agenda which saw the authorities turn a blind eye to, or implicitly support, arrangements that would shore up Anglo and hide the scale of its difficulties from the market? Did the regulator believe that Anglo's difficulties were a temporary problem that would blow over?

The true state of Anglo's balance sheet will shortly be revealed when the board releases its results. Its losses are expected to touch €12bn as it writes down the value of the loans that it will transfer into the National Asset Management Agency (Nama), and those losses will not be the end of its difficulties. The bank will need another massive injection of taxpayers' money to stay afloat -- analysts estimate that as much as €8bn will have to be invested -- but the Government claims that closing the bank would cost the taxpayer even more money. It is a banking catch-22, and the taxpayer loses on both counts.

Conspiracy theorists suggest that FitzPatrick's arrest has been orchestrated to deflect attention from the size

of the investment that the Government will have to make in Anglo Irish and into the other Irish banks, or that it was staged to sate the public's appetite for retribution. They point to the proximity of both Anglo's results and the imminent recapitalisation of AIB, Bank of Ireland and Irish Nationwide, arguing that so much money -- public money -- will flow to the banks that an arrest was essential.

It is unlikely, however, that the gardai have been influenced in any way by the political ebb and flow. They have a case to build, not a government to satisfy. They are moving at their own pace, methodical, slow and unhurried. The drama of the arrest and the media circus that followed fed the conspiracy fantasies, but the truth is likely to be far duller: Mr FitzPatrick's time had come, no more, no less.

So what happens next? More arrests seem certain, but the next significant milestone in the unravelling of the Anglo collapse comes from charges. The Director of Public Prosecutions (DPP) will not bring charges if he is not convinced that he has a robust case. That is normal, but for Anglo's defendants the bar is likely to be raised higher. The DPP will not want a high-profile case to collapse at the first hurdle, so the formulation of charges is likely to be as painstaking as the accumulation of evidence.

While Mr FitzPatrick ponders his fate and fights to stave off his circling creditors, the consequences of Anglo's crash will become far clearer when Nama takes its first loans from the bank and announces the price that it has paid for them. If the gardai are moving methodically towards their end game, so too is Brian Lenihan, the Minister for Finance. Nama, which has struggled to achieve clarity on the loans it must acquire and the quality of the collateral that underpins them, is the key to his strategy to revive the Irish banking sector. It is very far from a perfect strategy, and its credibility depends on the prices it chooses to pay for the banking sectors property loans, but Mr Lenihan will not change course at this late stage. If its pricing is brutally realistic, both about the current property market and about its medium-term future, those prices will drive the two main banks into majority state ownership and possible full scale nationalisation. While Mr Lenihan wants to avoid nationalisation, he may be forced to accept it as the only possible solution to a crisis that refuses to recede.

The cost involved is staggering -- already it has soaked up more than €10bn of taxpayers' money, with a further €15bn to come in recapitalisations at least, and a further €50bn to fund Nama. The sheer scale requires that those who brought the banking system to the point of collapse must face the consequences. Mr Lenihan knows that the public will not accept a failure to prosecute, but he cannot control the investigations that are taking place.

That responsibility for satisfying the public's demand for justice rests primarily with the gardai, yet there can be no guarantees that they will be able to build a criminal case against Mr FitzPatrick or any other bankers.

Greed, arrogance, incompetence and hubris may be the only charges that can be laid at their doors.

Sunday Independent

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