Oireachtas Joint and Select Committees
Thursday, 23 April 2015
Committee of Inquiry into the Banking Crisis
Nexus Phase
Ciarán Lynch (Cork South Central, Labour)
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I now propose that, as we have a quorum, the Joint Committee of Inquiry into the Banking Crisis will now go into public session. Is that agreed? Agreed.
We commence this morning's proceedings, session 1, public hearing, and a discussion with Mr. Dermot Gleeson, former chairman of Allied Irish Banks. In doing so, I would like to welcome everyone to the 20th public hearing of the Joint Committee of Inquiry into the Banking Crisis and this morning we will hear from Mr. Dermot Gleeson, former chairman of Allied Irish Banks. Mr. Gleeson was a leading barrister and senior counsel in Ireland in the 1980s and 1990s before he became a senior Government adviser and then a businessman. He served as Attorney General of Ireland in the Government of Taoiseach John Bruton. In 2003, Mr. Gleeson was appointed chairman of Allied Irish Banks. Mr. Gleeson, you are very welcome before the inquiry this morning.
Ciarán Lynch (Cork South Central, Labour)
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Before I hear from the witness, I just wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind Members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry, which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings.
Members of the public are reminded that photography is prohibited in the committee room and to assist the smooth running of the inquiry, we will display certain documents in the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on a screen to your left and members of the public and journalists are reminded that these documents are confidential and not for publication, but will be displayed to assist the proceedings as they take place over the coming weeks.
The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents, these are part of ... these are before the committee which will be relied upon in questioning and form part of the evidence of the inquiry.
Ciarán Lynch (Cork South Central, Labour)
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Thank you Mr. Gleeson, so if I can ask you to make your opening remarks to the committee please.
Mr. Dermot Gleeson:
Thank you Chairman.
Mr. Chairman and members of the committee, I have furnished a written statement to the committee in accordance with its request to me. It may be of assistance to the committee if I say at the outset that so far as the macro story is concerned, without agreeing with every conclusion or every detail, in general I accept the broad thrust of the official reports prepared by Messrs Honohan, Regling and Watson and Nyberg, as well as the views ... most of the views anyway put forward by Dr. Donal Donovan and Professor Anton Murphy.
Irish banks, by and large, avoided the mistakes that wrought havoc in the balance sheets of American, continental European and British banks where credit derivatives and CDOs did the damage. Unfortunately, Irish banks made mistakes of their own, principally by excessive lending for residential and commercial development and these mistakes became exposed at the same time as international money markets shut up shop in September 2008.
AIB lent too much to individual developers, put too much faith in cross-collateralisation, too much faith in the large net worth of individual developers. We didn't do enough syndication or selling down of loans and, in addition, we relied excessively on risk models that proved inadequate to the cataclysmic events of '09 ... '08 and '09.
On 5 March last, the Minister for Finance and the current CEO of AIB, Mr. Duffy, made the very welcome announcement that AIB is on course to repay the total investment made by the State in the bank.
The great recession of 2008, the worst the world had seen for 80 years, didn't start in Ireland or in the Irish banks, but there's no doubt that there were decisions made in AIB which made things worse than they need have been for citizens, for employees and for shareholders. I wish to express my sincere regret for my part in those events, and to renew the apology which I made at the AIB AGM in 2009.
In analysing what went wrong at AIB, I should point out that I resigned from the board in June 2009 and my perspective is, therefore, largely limited to information that became available before my departure - I haven't worked there for the last six years - and may to that extent, be incomplete.
A country's banking system has been described as the nervous system of the economy, and in that sense the largest indigenous bank was never going to separate itself from the dominant economic activity of the society in which it functioned. In the years leading up to 2008, a principal engine of economic growth in Ireland was property and construction. It created a lot of jobs in connected trades and professions, paid lots of taxes, was encouraged by the State and the banks were fully involved in it. Quite apart from the tax incentives that I know the Committee has heard a lot about in relation to property, local-----
Marc MacSharry (Fianna Fail)
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Can I interrupt, Chairman? Have we got this statement?
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Marc MacSharry (Fianna Fail)
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Where is it? Is this the statement that you have provided?
Marc MacSharry (Fianna Fail)
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And have we a copy, no?
Ciarán Lynch (Cork South Central, Labour)
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Are you drawing from the opening statement?
Ciarán Lynch (Cork South Central, Labour)
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Please continue Mr. Gleeson.
Mr. Dermot Gleeson:
Apart from the tax incentives in property and construction that you have heard a good bit about I know already in the committee. Local authorities collected over €3 billion through development contributions imposed as part of planning permissions between '99 and 2008.
It's perfectly clear in retrospect that the appetite for risk was excessive and the lending strategy of AIB in respect of property was too expansive. That's not actually how it appeared at the time. In 2007, for instance, there was a strong national consensus widely confirmed by international commentators that Ireland was on a track of rapid sustainable expansion and development, and a good example is provided by the statements made at the launch of the national development plan in 2007. Just one detail from it: it was planned to spend €70 million a day every day for seven years on infrastructure with full employment, net inward migration, low debt-to-GDP ratio, budget surplus and buoyant tax revenue, and lots of civil servants were about to move out of Dublin. Martin Wolf, who has been described as the most respected financial columnist, expressed the view in June 2007 that the possibility of huge calamities being generated by financial markets looked remote. The IMF, in its financial stability report in 2006, expressed the view that risk dispersion as now organised in banks was less - made banking failures less likely. And of course, the reverse turned out to be the case.
In viewings with the benefit of hindsight, looking back now, it seems to me that a great deal of the issue in Ireland comes back to the question of whether at a certain stage a correction that was coming was going to arrive in the form of a so-called soft or hard landing. I think that's central to the errors. The OECD, the EU, the IMF, the ECB, the Central Bank, the Department of Finance, the ESRI, the great majority of published economists in Ireland and abroad, although not all, the risk section of AIB and the board of AIB all favoured the consensus of the soft landing and the consensus, of course, was entirely wrong.
There's a striking example or expression, I suppose, of this consensus comes from the OECD report published on Irish banks in April 2008. And I think the date is important because most of the loans ... nearly all the loans would have been made by then. And the OECD said, having looked at the Irish banks, the Irish banks were profitable and well-capitalised and provide a buffer against a future downturn. It's easy and certainly tempting to dismiss everything that went on in 2007 as irrational exuberance, but I actually think that there were - although this is not a popular thing to say - some policies, some justifications for the policy at the time, some rational justifications, and I want to briefly mention three of them. The first was the calculated demand for housing in Ireland, the second was the reassuring effect of Basel II, as it's called, and the third was reliance on risk modelling in banks.
There was hard statistical information which indicated that Ireland needed more housing. One of the things AIB did was get independent economists to come and talk to the board every year or so, and a distinguished independent economist in the middle of 2007 brought a paper to the board, which pointed out that of a selected group of European countries, Poland was below us, but Ireland was next lowest on the list in terms of dwellings per 1,000 citizens. Poland was 330 about, and we were about 370. And then Estonia, Holland, UK, were all well above us, and Denmark, France, Germany, Portugal and Spain were all over 100 dwellings per 1,000 citizens ahead of us. They were all over 470; we were at 370.
The second feature is Ireland has, as you're undoubtedly aware, a very unusual demographic history in the last century. The peak birth rate in most western European countries was in the '60s; people stopped having large families. The peak year in Ireland is 1980, so there were large groups of children born in the late 70s and early 80s and the 1980 crop will be 35 this year. So there's the feeling that there was this group of citizens coming into the ... what I would call the house purchasing age, and we took that on board. Those are the two things I want to say about housing demand, and I suppose the fact that there is now emerging something of a housing shortage in Dublin, certainly in some urban areas, suggests that this wasn't entirely irrational.
I don't want to say much about Basel II; it was promoted with banks by the Bank for International Settlements in Zurich, reinforced by the CRD, the Capital Requirements Directive. Its purpose was to ensure that banks had adequate capital. We bought into it heavily and expensively, €200 million between engaging experts and consultants and installing the systems in AIB.
It went live at the start of 2008 and frankly it wasn't much good to us when the trouble came. Part of Basel, a large part of Basel is to do with mathematical risk modelling, I remember we had to hire maths PhDs and so on to help us with this. There was a fraud in the American operation of AIB in 2002, a man called Rusnak stole a lot of money, and immediately after that, every regulator from Washington to Warsaw crawled over AIB and, we got the services in conjunction with the Irish regulator, of a man called Gene Ludwig, who had been a bank supervisor in the States and he investigated us up and down. One of his recommendations was that we needed to set up a world-class risk management system and that we needed a world-class player to head it up and we duly engaged undoubtedly distinguished and experienced risk specialists from JP Morgan in New York at a very high salary. I think ultimately 200 people came into the risk section. At the same time, on foot of the same recommendations, we got a group internal auditor from outside Irish banking, the individual in question had been director of audit for risk and finance in Barclays Bank, then gone to work for the Italian regulator for a short while and then was engaged by AIB. A third initiative at the time that I was involved in, was setting up a whistleblowing system. There's a not-for-profit in the United Kingdom called Public Concern at Work, and it will act as a facilitator, and this was published to staff; they could ring up there and their messages would come only to my office and they could preserve their anonymity if they wanted to.
Stress testing was done, installed, and in April '07 we had a stress test that looked at what would happen if things went wrong. There were two stresses: a plausible stress and an extreme shock test. The extreme shock test wrote down, for instance, unzoned land by about 60%, wrote down residential by 30% and I have the various figures if you need them ... but it went for a one in 25 year downturn and of course that wasn't enough. The stress test just didn't avail when we got a one in 100 year event. We didn't pay sufficient attention to the fact that the stress machinery didn't cater for that event and there was what I'd call an intellectual failure, for which I have to take my part of the blame, to envisage that if there was a serious property downturn in Ireland, a really serious one, and if at the same time there was a worldwide contraction of demand so that Irish businesses started doing badly, you started having unemployment and redundancy ... and at the same time as those two things, that the wholesale money markets closed up that we'd have a very serious crisis on our hands. When Lehman's failed on 15 September 2008, that in effect is what happened.
I want to say something briefly Chairman, if I can, about 2009 and what it was like. Now it's painful, it's not long ago but it's possible, in the collapsing of the historical perspective, to forget just how bad things got say from the December of 2008. In the autumn of 2008, the Department of Finance had estimated tax revenue for 2009 at €43 billion and the outturn was €33 billion. They'd also estimated the contraction in GDP in Ireland at 1%, a 1% drop in GDP, and the outturn was 11.3% for 2009, ten times worse than the prediction. In December 2008, a range of international banks were, this was unheard of before, downgraded. That included Deutsche Bank, Barclays, Credit Suisse, Citigroup, JP Morgan, Morgan Stanley. Anglo was nationalised in January 2009 and just as an indicator of how the general population felt, how public confidence had just gone at that stage, new car registrations in January '09 were 65% down on the previous year. Irish banks were downgraded in February by Fitch and then in the spring, AIB and Bank of Ireland had to get help from the Government on capitalisation.
Now you can ask the question why did everyone get it so wrong? I think it's very hard to get it right, that economic forecasting is less reliable and more complicated than people think. Credit has to be given to Professor Morgan Kelly, he detected the bubble but even he said he thought the downswing in prices in real terms would take eight or nine years. He also expressed the view that the Irish banks were well capitalised.
I'd like to say something briefly about the accounting standards that applied at the time. After the dotcom bubble, where accounting standards had given rise to alleged opacity in the accounts of public companies, IAS 39 was introduced.
It prevented banks, in very simple terms, doing what was called cross-cyclical provisioning: putting something away in the good years to save you the trouble in the bad years. It also had another effect. It insisted that certain parts of a bank book had to be marked to market, and I don't think the people who designed it ever envisioned there'd be a day when there wouldn't be a market. So you were now marking to market when there was no market and getting extraordinarily low values for assets. And there's ... the best description of this - which I think is a key dynamic of the crisis - the best description of this that I've found is in the so-called EU high level group chaired by Jacques de Larosière ... Mr. Nyberg was a member, Sir Callum McCarthy and the great and good of European financial regulation. It's a bit turgid but starting at paragraph 33, if I can read you into the record what they said. It is about five or six sentences, Chairman, if you'll indulge me:
Financial institutions understandably tried to dispose of assets once they realised that they had overstretched their leverage, thus lowering market prices for these assets. Regulatory requirements (accounting rules and capital requirements) helped trigger a negative feed-back loop amplified by major impacts in the credit markets ... Financial institutions, required to value their trading book according to mark-to-market principles, (which pushed up profits and reserves during the bull-run) were required to write down the assets in their balance sheet as markets deleveraged. Already excessively leveraged, they were required to either sell further assets to maintain capital levels, or to reduce their loan volume. "Fire sales" made by one financial institution in turn forced all ... financial institutions holding similar assets to mark the value of [those] assets down "to market" ... What was initially a liquidity problem rapidly, for a number of institutions, turned into a solvency problem.
I would like, Chairman, to say something now about the milieu in which Irish banks functioned before the crisis. Analysts and large shareholders, pension funds and stockbrokers were always interested in earnings per share and particularly where your earnings per share was going up as much as your peers. If you were going up as much as your peers that was fine but if you weren't, then your share price would drop and that meant your capacity to raise money would drop, your capacity to expand would drop, vulnerability to takeover would increase. Governor Honohan in his report in 2011 adverted to that dynamic. The other issue was Anglo being held up to us as an exemplar and you'll all be aware of that. Commentators in Ireland and abroad repeatedly said, "Anglo is the best bank. Why can't you be more like Anglo?" It was determined by one international consultancy to be the best bank of its size in the world. It was the darling not just of the Irish but of European stock exchanges generally. And I had customers saying, "Why can't you be like Anglo? Why are you always asking for more? Yourself and Bank of Ireland give slow responses and you ask for paperwork", and things like that. I think we tried in some way not to be drawn into the wake but inevitably we were, I think, in some respects. Professor Honohan described the effect of this sort of competition in a memorable statement before he was the Governor. He spoke to an economic conference in Dubrovnik in June 2009. This is what he said, "Competitive pressure on the leading banks to protect market share came especially from reckless expansion [from] one bank, Anglo-Irish whose market share among Irish controlled retail banks jumped from 3 per cent to 18 per cent in a decade".
Can I say something briefly then about the regulator? We had a perfectly professional relationship, mostly between executives and the Central Bank and the regulator. I would meet the head once or twice a year maybe. We invited the CEO and chairman of the regulator to come to an AIB board meeting and they accepted that invitation. I know there has been a lot of criticism of the regulator and that is not my business. I am wary of sporting analogies in a serious matter such as this but I did look at ... one of the witnesses I did get a chance to look at was Professor Alan Ahearne and he was in this room on 4 March. And he was asked by one of the members here what was needed at that time and he said what was needed was a more intrusive regulator - someone who behaved like a referee in a football match. And it strikes me, having reflected on it since, that that's apposite, that it's instructive ... that if you've a referee in a football match which is highly competitive - and Irish banking was enormously competitive at the time - and the referee does not blow the whistle much, then the more aggressive team tends to prosper and other people can get injured.
Just to say one more thing about the bubble. No bank could stop a bubble. If, through some amazing piece of insight or wisdom which we certainly didn't have, AIB had decided on some day during this period to close up for loans and say, "No more loans. We're not lending anymore", it would have damaged the bank at the time but not as much as the crash did. But, all of our customers who were claimants for loans would have been met within the following week by our competitors with glee, the competition was so fierce. So, the point I make is that no bank could stop a bubble inflating; only authorities can do that.
I will now turn to the night of the bank guarantee decision on 29 or 30 September 2008. The committee are in possession of three separate near contemporary records which I made of the events of that night. The main one is, of course, a seven page note, not perfect I'm afraid, but which I dictated a few days after the events of that night and which I've given to the committee. There is also much shorter paragraphs in a memo that I sent to the CA two days later just as a couple of paragraphs that recites my recollection of what went on at the night and also a letter of complaint to another chairman of another bank which has a couple of paragraphs again about my recollection of the night.
On Sunday, 28 September 2008 - this was a Sunday evening - AIB directors heard from the CEO at a board meeting at 6 o'clock that the word from the authorities was that two financial institutions in Ireland were likely to fail, the timescale was unknown and that a limited guarantee would be put in place for the remainder of the banks. I furnished you in my supplemental statement a quote from the AIB minute:
The purpose of the meeting of the 29th September which the representatives of AIB and Bank of Ireland requested with the Government was to discuss the dramatically deteriorating international situation, the apparently dire staits in which Anglo found itself and the possible repercussions of Anglo's imminent collapse for Bank of Ireland and AIB. We learned that Anglo could not open the next morning and had run out of liquidity. The banks expressed the view that Anglo and Irish Nationwide needed to be decisively dealt with in some way by the State and then [and I emphasise the "then"] for a guarantee to be provided for the remaining banks to protect the surviving banks against the turmoil which would inevitably follow from an Irish bank being either liquidated or nationalised.
The Governor of the Central Bank stated during the meeting, in the presence of the Government representatives, that it would be disorderly, or ... and I remember this expression, "or there could be a fumble if Anglo were dealt with mid-week", so what was needed, the Governor said, was for AIB and Bank of Ireland to try and provide €5 billion each in liquidity to support Anglo until the coming weekend.
Most of the evening was spent in efforts by Bank of Ireland and AIB to assemble enough liquidity to keep Anglo going until the weekend. That effort was successful and, by morning, €10 billion in liquidity, in excess of our own liquidity, half provided by Bank of Ireland and half by ourselves, had been assembled with its repayment within seven days guaranteed by the Government. I want to emphasise that AIB's representatives were not involved in discussing or the making of the decision that was ultimately made. The so-called "blanket guarantee" to include six banks, including Nationwide and Anglo, was not sought by or discussed with AIB. I make no complaint about that. I simply record the fact. The representatives of AIB and Bank of Ireland were not present in the room where the decision makers were for most of the evening, perfectly proper as well. I first learned that Anglo and Irish Nationwide had been guaranteed along with the other four banks from the media early the next morning. I acknowledge that the Government was faced with very difficult decisions on 29 September, which had to be made very urgently and I am not privy to the information or advice which was available to the Government on that evening. Two days after the guarantee, I sent a note to the CEO of AIB which included the following, and this perhaps is the most encapsulated confirmation of what I think went on:
Our name and reputation has been damaged by our perceived role in asking for the guarantee. We have maintained silence on the fact that what we asked for was that Anglo and Nationwide, what brought us all down, be taken out of the market and then for a guarantee to be put in place. What we did not ask for, and I underlined that in the original, was that Anglo and Nationwide should be boosted and baked into the system going forward.
The significance of the getting to the weekend, referred to by the Governor, is that at the weekend, the worldwide stock markets are closed for about two days, I think 51 hours, whereas during the week, worldwide stock markets are only closed at night for about three hours, between Japan ... between US closing and Japan opening. Just ... finally, Chairman, to say about other options, very briefly, during that week other options, Fortis was rescued by the governments of Luxembourg, Belgium and the Netherlands using ELA and I think that option was discussed briefly by Senator MacSharry with Professor Lane at this inquiry on 21 January.
Later that week, or maybe at the start of the following week, the Bank of England made a secret loan of Stg£63 billion to solve the allegedly critical liquidity issues at Halifax Bank of Scotland and RBS and that wasn't announced publicly until Mervyn King, the Governor of the Bank of England, said it to a Treasury select committee in November the following year. Since then, like many other countries, Ireland has enacted special legislation to deal with bank resolution, the Credit Institutions (Stabilisation) Act 2010 and the Central Bank and Credit Institutions (Resolution) Act 2011, and they obviously provide much more options for the sort of events that occurred on the that night. Those are my opening remarks, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Gleeson, and just to say your full statement will be published as part of the proceedings and that should be online some time this morning, and thank you very much for condensing that because that facilitates us in our proceedings this morning and I will be asking both members and yourself to be concise in the engagements today.
Mr. Gleeson, can you explain to the committee how AIB, which is a bank which has a history going back, I think to 1825, long before the foundation of the Irish State, a bank that was considered for ... over that period as a traditional conserving banking model, ended up during your period as chairperson being guaranteed by the Irish State and, ultimately, 99.8% owned by the Irish public?
Mr. Dermot Gleeson:
Well, Chairman, I have tried to do something of that explanation in my opening remarks and I won't repeat what I said there but the bank was divided into five divisions. We had an operation in the United States, in Poland and in the UK and then in Ireland it was divided into what is called capital markets and then Republic of Ireland, which is what people would know as the traditional bank that you've described.
Four of those divisions, by and large, came through reasonably intact through the crisis. Republic of Ireland, unfortunately, became embroiled in property lending which in retrospect ran out of control, was too expansive, was not controlled by the risk models. I suppose it's fair to say that we had, and this is not an excuse, but it is an explanation ... some of the things that I am saying today may sound like excuses, I'm not making any excuses. I am trying to assist the committee by explaining how it seemed at the time. We had installed this enormously expensive ... the best personnel system of controlling risk and I think that directors thought that - and it was advertised - as a means of measuring, monitoring and managing risk and we just had excessive faith in it. Allied to that, we went too far with individual developers. The AIB philosophy at the time, and for years before, was "stick with your customer". Try and make sure they don't go anywhere else, because we had, as you said, plenty of customers and you have to remember that big developers were often customers that we'd had for maybe 25 or 30 years; people who had often started modestly as perhaps small builders and had been successful, accumulating large personnel wealth, always repaying their loans, always coming back for more and always repaying them again. And I'm afraid we took too much comfort in that history and we weren't...our credit processes were not strict and savage enough. We looked at affordability and I think we have to take the blame for having processes that just did not match the cataclysm that came. As I say, the competition was fierce. I refer again to Professor Honohan's analysis of the competition but that's another explanation, not an excuse.
Ciarán Lynch (Cork South Central, Labour)
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And other members I'm sure will open up this debate as we proceed.
Ciarán Lynch (Cork South Central, Labour)
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Can you just clarify as well because this will assist us as we go into other questioning. Do you believe that AIB required a guarantee on the night of the guarantee? Should it have been guaranteed?
Ciarán Lynch (Cork South Central, Labour)
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And I'll come to that in a moment but the-----
Ciarán Lynch (Cork South Central, Labour)
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And-----
Ciarán Lynch (Cork South Central, Labour)
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And other members will get into that. And at what point do you believe that AIB's destiny was on the road to what was ultimately nationalisation, be ninety-nine point ... was that at the period of the ... was it already on that journey at the night of the guarantee or was that afterwards?
Mr. Dermot Gleeson:
Absolutely not, Chairman, I don't believe so. Can I answer that because, again, it's an important question? I believe AIB was solvent then but you'll ask the question, "When did AIB become insolvent?" and I don't know the answer to that. Again, we tend to collapse ... or I can make the mistake of collapsing this fairly short period. The fall in house prices has been 40% to 50% higher in some places. At 30 September 2008, the night of the guarantee, the fall in house prices was 7.7% nationally, 8% if you included apartments. The real trouble was 2009, and I don't know when in 2009-10 AIB became insolvent, because you could mark-to-market six days in a row and get different answers and if you mark-to-market and your assets were down, then you needed more capital, then you had to sell more ... nobody will ever know, I think, because of the interaction of capital requirement rules, the Capital Requirements Directive, and the accountancy rules, when the moment came.
Ciarán Lynch (Cork South Central, Labour)
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I just want to clear up one other matter before we go into the questions, Mr. Gleeson. In notes taken, I think by yourself, of events occurring on Monday and Tuesday, 29 and 30 September 2008, this is from the committee's document, which is Vol. 1, 30 March 2015-----
Ciarán Lynch (Cork South Central, Labour)
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Yes C3b, page 6. I think it's coming up on the monitor now. In that evidence book, there is a line from yourself which says "The final point I made related to the form of the guarantee-----"
Ciarán Lynch (Cork South Central, Labour)
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Yes. In ... by your report, or by your notes, you say "The final point I made related to the form of the guarantee; an nitial draft had been furnished" and then in brackets "I think by Bank of Ireland" and "was in a form which we thought was too bare; I mentioned that a guarantee had to be read correctly to technical eyes in Foreign Central Banks" and in closed brackets again "I mentioned Peru, Libia (sic), and Russia" and in closing brackets, "We ..." and in AIB's context you're saying "We furnished a more extensive formula", in brackets again, "which we brought with us". So you're proposing, or you're explaining that you came to the meeting that night with a document yourself. Closing brackets again, "as to the sort of instruments and deposits that should be covered" and then in brackets again, "This formula was eventually adopted later in the night pretty well word for word".
Now I'll come back to that in a moment, and maybe Deputy Doherty, who's coming in lead will take that. I just want to establish for the moment ... because when the committee chased up this line of inquiry, a letter came in from AIB on 21 April 2015, addressed to me, on behalf of the committee, stating from ... responding to the direction that we issued for them to get this document, saying that "AIB does not have in its possession any documents containing the formula referred to in 1 above, or the draft guarantee referred to in 2 above". They then ... AIB then go on to say, this is from Derek Hegarty, banking unit inquiry ... or banking inquiry unit ... he goes on to say "In response I confirm that, not withstanding the extensive document review exercise we conducted in response to the direction which resulted in over 47,000 pages of documentation being disclosed to the inquiry on behalf of AIB, we have not located any such documents and I can see no evidence that any such documents were generated using AIB's electronic system". Now can you just explain to the inquiry-----
Ciarán Lynch (Cork South Central, Labour)
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First of all, just ... I ... the questions in terms of content can be dealt with later. There was a document.
Ciarán Lynch (Cork South Central, Labour)
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I just want to establish there was a document on the night.
Mr. Dermot Gleeson:
There was, I think, a slip of paper, a one page piece of paper, maybe torn out of a notebook, which had a number of words on it, and my recollection, and this is not in the ..... my recollection is that before we left AIB in the afternoon ... remember this was put together in the afternoon. Richard Burrows rang me in the afternoon, and we rang the treasury people who are the people who look after liquidity, and we said that we may be asked about a guarantee. And my recollection is that there was a form of words written on a single sheet of paper in handwriting by either Eugene or me, I don't know, and it would have said, you know, something like "deposits", "bonds", and something else. But that was what was handed over.
Ciarán Lynch (Cork South Central, Labour)
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I'll get into the detail of where the document had a significance that night of ... but just for right now, Mr. Gleeson, before I bring in Deputy Doherty, I just want to establish there was a document in existence, even though AIB can't find it now, there was a document in existence that night that was brought ... or a formula of words, that was brought to the meeting that night.
Ciarán Lynch (Cork South Central, Labour)
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-----before I bring in Deputy Doherty, I just want to establish ... there was a document in existence.
Ciarán Lynch (Cork South Central, Labour)
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Even though AIB can't find it now, there was a document in existence that night that was brought ... or a formula of words that was brought to the meeting that night.
Ciarán Lynch (Cork South Central, Labour)
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All right.
Ciarán Lynch (Cork South Central, Labour)
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Mr. Gleeson, please. I'll get into the discussion-----
Ciarán Lynch (Cork South Central, Labour)
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I'll get into the discussion later.
Ciarán Lynch (Cork South Central, Labour)
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No, please, Mr. ... no, Mr. Gleeson, please. Please.
Ciarán Lynch (Cork South Central, Labour)
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No, look, please. Yes. I just need to ... I need to get the question established ... and we can get into later in the evening, and other members will talk about the evening. What I want to get established right now ... did AIB arrive that evening ... whether it was a document or a formula of words as to how you would see a guarantee being constructed?
Mr. Dermot Gleeson:
If I can just say again, Chairman, because I fear I haven't made myself clear. There was a small number of words on a slip of paper which, in my recollection, described the range that ... a guarantee that would look right from foreign central banks. That's just this bit. The bank guarantee is a 12-page legal document. In the hour before we ... there was no question of drafting a guarantee, and my note is misleading to that extent. It was this critical formula, and I know bonds were asked for. And let me say just in relation to bonds because I know that's controversial, AIB had no bonds that matured in the two-year period ... it wasn't for ourselves. We had no bonds - relevant bonds - that matured in the two-year time. But that's all I can remember. And when I say farther down the same page that you were quoting, about six lines from the end, we furnished our draft guarantee - again, it was this formula - to the Government at the very early session, I believe that slip of paper was handed over.
Ciarán Lynch (Cork South Central, Labour)
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Deputy Doherty. Deputy, you've 25 minutes.
Pearse Doherty (Donegal South West, Sinn Fein)
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Go raibh maith agat agus fáilte ag an coiste. So, the document contains a number of words.
Pearse Doherty (Donegal South West, Sinn Fein)
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A form of words.
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes.
Pearse Doherty (Donegal South West, Sinn Fein)
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No, I understand. Sorry. Sorry.
Pearse Doherty (Donegal South West, Sinn Fein)
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In most documents-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Most documents contain a number of words. Would that be correct?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. So, in relation to the number of words that were on this document-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----that were adopted word for word by the Government-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----how many words, from your recollection, were on this document?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. Well, what-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. So, you mentioned that the form ... the number of words contained "bonds". What else was-----
Pearse Doherty (Donegal South West, Sinn Fein)
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"Deposits". And how could they be adopted word for word by the Government, given that the guarantee didn't include any detail in relation to those statistics?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. So, do you have any idea ... because you took notes with the-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Notes.
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes, that's my point. You took notes within a week of the events.
Pearse Doherty (Donegal South West, Sinn Fein)
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And I appreciate that we're seven years after the event and we're relying on your notes at that time between the 3rd and the 5th and obviously your evidence here today.
Pearse Doherty (Donegal South West, Sinn Fein)
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In relation to the words that were adopted, as you said, within a week-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----of that event, the words that were adopted by the Government word for word-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----what could they ... those words have been?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay.
Pearse Doherty (Donegal South West, Sinn Fein)
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Well, the scope of the guarantee ... let's ... what was the scope of the guarantee that was on that document that you passed to the Government?
Pearse Doherty (Donegal South West, Sinn Fein)
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And what was that type of guarantee that you're suggesting?
Pearse Doherty (Donegal South West, Sinn Fein)
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So, Mr. Gleeson-----
Pearse Doherty (Donegal South West, Sinn Fein)
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What is X, Y and Z?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay.
Pearse Doherty (Donegal South West, Sinn Fein)
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So, Mr. Gleeson, you presented a document to the Government at the time which contained a formula-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----which contained words that were adopted word for word by the Government-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----and you have no recollection as to what was in that formula, the X, Y and Z issues you-----
Pearse Doherty (Donegal South West, Sinn Fein)
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And in relation to Bank of Ireland's draft guarantee that you mention-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----what was contained in their draft guarantee?
Pearse Doherty (Donegal South West, Sinn Fein)
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And your guarantee, you suggest in your notes - again taken within a week of the event - suggest that it was more comprehensive; that Bank of Ireland's notes were ... formula was bare?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. So, you saw Bank of Ireland's draft guarantee?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. You make a point in your notes ... the notes from AIB contain a reference that Bank of Ireland's draft guarantee was bare.
Pearse Doherty (Donegal South West, Sinn Fein)
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Are they your notes?
Pearse Doherty (Donegal South West, Sinn Fein)
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They're your notes. So, you take a note to say that the Bank of Ireland's draft guarantee was bare-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----but you do not know whether-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Sorry, just ... but you do not know whether you saw the Bank of Ireland's draft guarantee?
Pearse Doherty (Donegal South West, Sinn Fein)
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Did the formula of words that were adopted by the Government word-for-word contain subordinated debts?
Pearse Doherty (Donegal South West, Sinn Fein)
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Would that not be, like ... I would imagine that this is an incidental issue. As chairperson of AIB, the idea of the Government and of the bank requesting the guarantee of subordinated debt isn't an incidental matter; would you agree with that?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. I'll come back to the night of the guarantee later on, but just before I leave this point in terms of the draft guarantees, the slip of paper or whatever-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----you may call it, the draft guarantees that's referenced in the notes from both Bank of Ireland and AIB, were you aware of any pricing mechanism being undertaken by either your own institution or Bank of Ireland in relation to the cost of the guarantee?
Mr. Dermot Gleeson:
No. There was some discussion afterwards about pricing and that it should be related to the relative strength of banks, but I don't remember any ... there was ... let me ... I think there may have been some discussion between Mr. Sheehy and some officials, but I was not involved in any pricing discussion that I can recall.
Pearse Doherty (Donegal South West, Sinn Fein)
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Did Bank of Ireland discuss with you in relation to seeking Goldman Sachs to develop a possible charging mechanism?
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes, but Bank of Ireland-----
Pearse Doherty (Donegal South West, Sinn Fein)
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You're not aware of the Bank of Ireland------
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. I want to go to some of the other areas, just in relation to your evidence and some events in relation to your bank. Why did the board decide to pay an increased interim dividend, amounting to €270 million, on 26 September 2008-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----in light of the market circumstances at the time? This is three days before-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----you presented your draft guarantee to the Government.
Pearse Doherty (Donegal South West, Sinn Fein)
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Did you approve it?
Mr. Dermot Gleeson:
I approved it at the time, but it was a mistake. There was some dissent from a couple of members where they raised the question, saying, "Is this wise?" And I think the recollection was ... the reason for it, and it wasn't a good enough reason, was reassuring the markets. "We are still on track, we're okay." It was ... you probably know that earlier in 2008, there'd been Northern Rock, Countrywide in the States, and people were beginning just to peep at banks and this was a statement that all is well at AIB, but it was a mistake. Let me absolutely-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Did you personally benefit from that mistake?
Pearse Doherty (Donegal South West, Sinn Fein)
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No, I'm just asking, in relation to the mistake that you approved-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----in terms of paying out €270 million of dividends three days before you-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----if you let me ask the question, present the draft guarantee, did you personally benefit from that mistake that you approved?
Mr. Dermot Gleeson:
Well, if you let me answer the question, the answer is that while I was a director of AIB and chairman of AIB, I observed the good corporate governance precept of always reinvesting everything I had in the bank. I paid the tax and bought the shares with everything I earned in AIB. To that extent, I did.
Pearse Doherty (Donegal South West, Sinn Fein)
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You did. Okay.
Pearse Doherty (Donegal South West, Sinn Fein)
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That's all I'm looking for. That's all I'm looking for. You were the chairperson of AIB. Were you also involved in property development, or property speculation?
Pearse Doherty (Donegal South West, Sinn Fein)
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You weren't involved in any joint ventures with any property developer?
Pearse Doherty (Donegal South West, Sinn Fein)
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Sorry, so you would benefit from property development?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, I appreciate that. Can I take you to the question in relation to how the bank reconciled the level of lending on the property and construction sectors while being in breach of regulatory prudential lending limits for the sector? This is from July 2006 onwards; the reference to this is in the minutes of the board meeting on 27 July, AIB B2, Vol. 1, page 6, where it's clear that you had breached prudential lending limits at that stage in relation to concentration of the property and construction sectors.
Mr. Dermot Gleeson:
The answer to this will take me a little time but I'd like to give it to you if I can. It was reported, as you say, at 27 July board and in the following terms: Mr X - I'm not going to use the words of the officials if that's okay - reported that in respect of broad property, building and construction sector AIB was in breach of the limit contained in the Central Bank's licensing and supervision requirements and standards. And he said that we had ... the limit was 250% of our own funds and we had gone to 260%. He indicated that the matter had been discussed with IFSRA, who did not regard it as a significant issue. IFSRA were informed that the breach was likely to continue. He suggested that other banks were also in breach. He then advised that the concept of sectoral concentration was under discussion at the committee of European banking supervisors as well as between the Irish Bankers Federation and the Central Bank of Ireland. The board requested this issue be pursued with IFSRA-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Sorry, we're well aware of the minutes and, because of time, we're not going to read the minutes into the record. Just, your bank was in breach of regulatory minutes ... or regulatory limits in terms of concentration to property lending in 2006. How do you reconcile that?
Ciarán Lynch (Cork South Central, Labour)
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I'll give you space. Proceed.
Mr. Dermot Gleeson:
Regulatory limits are described ... there are 1995 standards is what they're known as, and they're described by the regulator in the following terms in the 1995 standards: "As many of the provisions are of a discretionary nature, the bank has set down requirements and standards which it uses to guide it in the supervision of the business carried out by credit institutions." So, it was used as guide in supervision. Now, let me say this to you: we would have been very well off not to have exceeded that sectoral limit. It's a great shame that we didn't. But if I can describe to you what was going on at the time, it was Basel II, and we were written to by the regulator in February 2007, shortly after that, and I'm going to read the first sentence ... the first two sentences. This is the regulator to our manager:
In the light of the requirements of the Capital Requirements Directive, and in particular Pillar 2 requirements on concentration risk, the Financial Regulator is currently reviewing its sectoral concentration framework. As part of this review I am contacting credit institutions that have experienced difficulties with the current sector limit.
We replied; I won't read out the reply because it's long and you've asked me to be short, but the reply did say, "We are now dealing with this under Basel." That reply was from Mr. Bhattacharya, the chief group risk officer, on 2 May, and there's two other pieces of information that I need to give you. In June of 2007 we put in our Basel II application to the regulator, a document that I'd say ran to 1,000 pages, with all sorts of mathematical formulae. The board, in June 2007, had to approve a sort of summary of it, and that summary included - and you have these papers - that summary included a section on credit concentration risk. The document is called the Basel Programme Governance Workstream. It had to be signed off and approved by the board, and that described the risk model that we were using for concentration risk, Moody's KMV portfolio manager, the one used by the Basel committee itself. And the conclusion, having applied that model to our concentration issue, was that based on the analysis conducted - I'm skipping a lot here - "AIB does not require additional capital requirement for credit concentration risk". We sent that application in and it was approved by the regulator.
Now, as I say, let me go back to basis. We'd have been much better off at the old limit.
Pearse Doherty (Donegal South West, Sinn Fein)
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I appreciate that, and you've made that point. Time is ticking on; I'm sure my colleagues will take up some of these issues. Can I take you to 7 September 2008, Mr. Gleeson, and this is AIB C3b, Vol. 2, page 41-----
Pearse Doherty (Donegal South West, Sinn Fein)
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C3b, Vol. 2-----
Ciarán Lynch (Cork South Central, Labour)
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We have a problem with them ourselves, Mr. Gleeson, so you're okay.
Pearse Doherty (Donegal South West, Sinn Fein)
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It's in page 41 to 43. It's the minutes of the board meeting of 7 September 2008. In this section ... in the minutes, when the minutes record Irish financial market, Mr. Sheehy talks about an Irish financial institution called "the institution" in the board minutes. To which institution is he referring?
Pearse Doherty (Donegal South West, Sinn Fein)
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It is.
Pearse Doherty (Donegal South West, Sinn Fein)
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Vol. 2.
Pearse Doherty (Donegal South West, Sinn Fein)
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It's on the screen there now for your convenience. So, in relation to these minutes, in relation to the Irish -----
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes, what is it?
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes.
Pearse Doherty (Donegal South West, Sinn Fein)
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In the recorded minutes ... the minutes record that Colm Doherty and Eamonn Hackett of AIB had a meeting with the Financial Regulator on Saturday, 6 September 2008. Also in attendance were senior representatives of Bank of Ireland, as well as the company secretary and treasurer of what we now know was Irish Nationwide Building Society.
Pearse Doherty (Donegal South West, Sinn Fein)
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Do you recall these events or discuss -----
Pearse Doherty (Donegal South West, Sinn Fein)
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The minutes of 7 September report Mr. Doherty as saying: "The funding profile of the institution [which is Nationwide we now know] was weak, and it was unlikely to be able to refinance funding that was maturing periodically over the ensuing year, commencing in December 2008." It goes on to say, "The quality of loans was suspect and could require write-downs ranging from a benign 13% estimated by the FR [Financial Regulator], to 30%/50% estimated by Bank of Ireland, which had previously conducted a due diligence review on the institution." End of quote. Can I ask you, Mr. Gleeson, what was the request made of AIB by the Financial Regulator in relation to Nationwide in these minutes?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, and the minutes report that Mr. Sheehy told a representative of the Financial Regulator that, "...it was his [Mr. Sheehy's] understanding that the institution's loan portfolio would required (sic) to be written-down substantially, and, accordingly, that if AIB acceded to the FR's request, AIB would, in due course, probably have to incur a write-downs (sic) of €1bn on the funding line provided." Why did AIB believe that of the €2 billion that is was asked to put into Nationwide three weeks before the guarantee, that €1 billion of it would be lost?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, and Mr. Gleeson if a bank had to write down its loans of 50%, which, based on what you're saying, is AIB concurred with this situation, would that not make that bank insolvent?
Pearse Doherty (Donegal South West, Sinn Fein)
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So, three weeks before the guarantee would I be correct in saying that AIB had a view that Irish Nationwide was insolvent?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, okay. And your view in relation to Anglo Irish Bank?
Mr. Dermot Gleeson:
We didn't have the insight here. You see we had the advantage in this conversation, Deputy Doherty, that Bank of Ireland had done a more intrusive look at this sometime in the past so there was better information there. We never got to look ... we were never asked to look inside Anglo. I just didn't know what the ... when we were told, when we got to Government Buildings, that they had no liquidity for the next day. The share price had dropped 50% that day, so the view was that there was very serious dire trouble, but I didn't get to see their books that night.
Pearse Doherty (Donegal South West, Sinn Fein)
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I will move on to something ... again going back to the night of the guarantee. Mr. Gleeson, your colleague, Eugene Sheehy, in notes of events occurring on the 29 and 30 September 2008 ... and it is again in book of evidence AIB C3b, Vol. 2, page 38. I will quote the section for your attention ... said that, in relation to the original Government draft announcement on 30 September ... and this is the quote:
There were also issues in the Government's draft which we were uneasy about relating to the attestations by the FR that the system was solvent and that all banks were solvent. We felt there was clearly a risk in this statement if market participants purchased shares in companies once the guarantee was issued and it subsequently transpired that these companies were not as strong as contended.
Are you familiar with this discussion?
Pearse Doherty (Donegal South West, Sinn Fein)
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On that night, did you see ... did AIB see a draft announcement that the Government intended to issue, that included that line ... that included that statement?
Mr. Dermot Gleeson:
We obviously saw something that said all Irish ... I think the Financial Regulator wanted to include a statement in some sort of press release, Deputy, that "All Irish financial institutions are solvent", or something like that, and we advised against it. But that is all I can recollect. This was not the next day, this is on the day.
Pearse Doherty (Donegal South West, Sinn Fein)
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And you advised against saying that the individual institutions were solvent ... for the reasons ... why ... what were the reasons?
Pearse Doherty (Donegal South West, Sinn Fein)
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You didn't think they were solvent. And the Government acceded to your request to remove that statement from their announcement?
Pearse Doherty (Donegal South West, Sinn Fein)
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Mr. Sheehy's ... Mr. Sheehy's note says that there were also issues in the Government draft. So, I take it from that there that was a draft-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----and the final announcement did not include a statement saying that the system was insolve ... solvent and the institutions were insolvent?
Pearse Doherty (Donegal South West, Sinn Fein)
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And AIB requested them to take that reference or-----
Pearse Doherty (Donegal South West, Sinn Fein)
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It's attestations by the Financial Regulator, that was what was to be in the statement.
Pearse Doherty (Donegal South West, Sinn Fein)
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Mr. Gleeson, are you familiar with-----
Mr. Dermot Gleeson:
Sorry, can I just clarify that? I won't go on long. We thought that we were going to take Anglo to the weekend. Anglo was going to be dismantled at the weekend ... and to put a statement out on Monday night saying "All Irish financial institutions are solvent" ... and then people investing in Anglo the next day and finding it dismantled at the weekend, that could cause trouble. That was the point we were making.
Pearse Doherty (Donegal South West, Sinn Fein)
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Mr. Gleeson, are you familiar with a project called Project Omega?
Pearse Doherty (Donegal South West, Sinn Fein)
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At any consideration ... did AIB consider taking over Anglo Irish Bank?
Pearse Doherty (Donegal South West, Sinn Fein)
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That wasn't ... you weren't requested-----
Pearse Doherty (Donegal South West, Sinn Fein)
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From the chairperson?
Pearse Doherty (Donegal South West, Sinn Fein)
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It was never considered.
Pearse Doherty (Donegal South West, Sinn Fein)
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It was never considered.
Pearse Doherty (Donegal South West, Sinn Fein)
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I am familiar with that, but the AIB didn't have a similar project?
Pearse Doherty (Donegal South West, Sinn Fein)
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That's fine.
Pearse Doherty (Donegal South West, Sinn Fein)
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In relation to the night of the guarantee itself, you were not informed, at the time of leaving Government Buildings, that Nationwide or Anglo were going to be also be-----
Mr. Dermot Gleeson:
No, at no stage. The slightest hint I had of it, it wasn't that at all. When I was leaving ... I can remember being in the corridor, in the Taoiseach's corridor. We'd had this discussion about the four-bank guarantee and I do remember the Attorney General, who is a professional colleague of mine - both members of the same circuit in Munster - saying to me that I shouldn't assume that the Government had decided anything in relation to any particular institution.
Pearse Doherty (Donegal South West, Sinn Fein)
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We heard evidence yesterday that the Government made their decision around 1 o'clock-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes. And can I ask you just in relation to the conversations that you presented and, indeed, Bank of Ireland presented that-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----are provided in evidence about the nationalisation of those two institutions-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----to take them down: what were the views of the participants in the room, the Taoiseach, the Minister for Finance, in relation to those issues?
Mr. Dermot Gleeson:
We didn't get views, Deputy. I mean, when we were -- when we arrived at Government Buildings, I've told you, we were ... Richard Burrows, the governor of the Bank of Ireland rang me, he said, "I think we should talk to the Government," because of Anglo's share price falling, international chaos, and so on. We went there. We were put in a waiting room. We were asked to go in and the invitation to the group that I've delineated in my written statement was to say what we thought should be done and we presented this proposal for the four-bank guarantee. You'll see that it had arisen, however, the previous day, because the AIB meeting of the previous night had learnt ... Eugene Sheehy had learnt that this solution was in prospect or being discussed.
Pearse Doherty (Donegal South West, Sinn Fein)
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The final question I have here for you is: the board's response to Dr. Alan Ahearne's May 2007 view that property prices were overvalued by 30%-----
Mr. Dermot Gleeson:
Yes, yes. Well, I remember the day ... I told you earlier that we would get independent economists and alleged experts - and I don't mean that in respect of Professor Ahearne; he is undoubtedly an expert. I have very great regard for him. But some of the other experts we had on other occasions weren't all that expert in the end. On that day, we had two economists come and talk to us. One was Professor Alan Ahearne, and he expressed the view that residential property in Ireland could be as much as 30% overvalued. On the same day we had another economist - I don't think it's any harm to name Professor John FitzGerald - and he thought that the overvalue could be 15%, and that's in the slides, and I have them here if you need to see them. Take the middle of those and it's 22%. We stress tested for 30%, and we could have borne 30% if all the rest of the things hadn't happened, but we could have borne ... our extreme stress test about the same time stressed for a drop in residential of 30%, but, of course, lots of other things went very wrong as well.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Deputy Doherty, I'll be bringing you back in later. Can I just have that for a moment? I just wanted ... there's just one issue that's a bit overhanging there that I want to deal with. It relates to core document AIB B1, page 31.
Ciarán Lynch (Cork South Central, Labour)
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It's AIB B1, page 31. It will come back up on the screen again there.
Ciarán Lynch (Cork South Central, Labour)
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It's to do about the bank's decision to pay an increased interim dividend, as Deputy Doherty related.
Ciarán Lynch (Cork South Central, Labour)
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You said at the time that you were the person that signed off on it, on the dividend was paid.
Ciarán Lynch (Cork South Central, Labour)
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Was there any reservation at any board level or at any level within the bank in regard to that dividend being paid out?
Ciarán Lynch (Cork South Central, Labour)
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And where was that coming from?
Ciarán Lynch (Cork South Central, Labour)
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It was overruled, or that objection was-----
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you very much. Deputy John Paul-----
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Gleeson. Deputy Phelan.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you, Chair. Good morning, Mr. Gleeson.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I want to refer, at the start, to 2004, and to core document, AIB B1, Vol. 1, page 16. It's a minute, again, of a board meeting from 13 January 2004, where Jim O'Leary, who was then-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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It's the only item on that page that isn't redacted.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Jim O'Leary, then a board member of AIB, suggested to the board at that meeting that a review of lending practices into the construction sector needed to take place, and I noticed earlier on in your opening statement that you were-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----vehement, or strongly, at least, pointed out that minutes tended to reflect decisions, and I just wanted you to outline perhaps firstly why you believe Mr. O'Leary brought that issue up on 13 January 2004.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Can I ask you then in light of the fact that minutes were made to reflect decisions, as you said, when did the review take place?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Can you recall, at that particular time, and I suppose I'm trying to get to the point-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----in '04, were there concerns raised by others on the board. Did you have concerns yourself about concentration of lending in particular sectors or, indeed, by senior management of AIB?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. I want to move on to 2006, again to a board meeting and minutes referenced earlier on by Deputy Doherty, AIB B2, Vol. 1, page 6, that particular ... B2, Vol. 1, page 6.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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It was a question that Deputy Doherty had raised earlier.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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B2, Vol. 1, page 6. It concerns comments from Mr. Kevin Garvey who was the then head group-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----of credit review in AIB.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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That particular ... You read out actually that part of the------
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----minute earlier.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Exactly.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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And I don't wish to go through the quote again, but I want to ask you, did it surprise you that the Financial Regulator did not regard a breach of its own standards as a significant issue?
Mr. Dermot Gleeson:
Well, when I heard it first I thought this is ... "Is this serious?" And then we were reassured that it wasn't and when I looked and, to be honest with you, I tried to look at this recently, when I looked at the way it was couched in their own terms and then, if you follow, the issue, as you know, was sectoral concentration, and the reason that they were relaxed, the reason that we were relaxed, frankly, about it was this: this was a standard which lumped a whole lot of non-homogenous properties together. You know, ten acres with no zoning outside a provincial town was treated the same as an office block in the centre of Warsaw or Dublin leased to the Government. So it was a crude, if you like, I say ... we would have been blessed if we had kept to it, or it would have helped us, but that was the case, and if you look at the Financial Regulator's reports in 2010, 2011 and 2012, they said this is a very complex issue.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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So you were not concerned, really, yourself by-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Can I ask, further on I think on that page as well, page 6, IFSRA were informed, and this is a direct quote from Mr. Garvey as well. IFSRA were-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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IFSRA were informed by Mr. ... had been informed that a breach was likely to continue.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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And had not requested that AIB changed any of its existing practices.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Again, did that raise any alarm bells at-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Would a man of your background and training .... you know, standards are standards-----
Mr. Dermot Gleeson:
Yes, but, Deputy, I did point out to your colleague, Deputy Doherty, that I looked at ... this was not a regulatory standard. It wasn't a statutory instrument or a rule; it was a guide to assist us in supervision of the banks. And we were all translating over to Basel at the time and kept ... Mr. Garvey was a highly reliable and responsible individual. I believed he truthfully and faithfully responded ... reported the response, I should say. They did not regard it as significant.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I appreciate what you're saying. The initial quote, which you read yourself in response to Deputy Doherty's original question, it gives the title of what this is, "AIB was in breach of the limit"-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----"contained in the Central Bank's Licensing and Supervision Requirements and Standards for Credit Institutions."
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes, I know, but you were not ... you were not-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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You were reassured by-----
Mr. Dermot Gleeson:
I was reassured by two things: by Kevin Garvey saying:
IFSRA are looking into it. They're thinking of changing the standard. They do not regard it as significant.
And I was also reassured by something that ultimately didn't prove enough reassurance, that we used to be told, and it was true as a fact, that this included, as I say, office blocks, property in Poland, property in the United Kingdom, and it also included zoned and unzoned land, built houses, unbuilt houses, and so on, and that this made it ... well, I've said what I need to say.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, now I want to refer to AIB, to the core document AIB B2, Vol. 1, page 13.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Vol. 1, page 13.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Stamped by the AIB board on the 9 November 2006. And I want to put a direct quote-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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B2, Vol. 1, page 13. The lower part there is a sub-heading "Credit Posture" it's called. B2, Vol. 1, page 13.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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"Snapshot at end 2006" is the original heading on the document and it's-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Page 13.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Under "Credit Posture."
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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It says, "We are at a point" and this is a direct quote, "We are at a point when we need to manage our loan book tightly-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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"-----and we are rightly concerned [about the concentration] of exposure to Property and Construction." I just want to know what did you and the board ... what action did you do or take following on from that particular point?
Mr. Dermot Gleeson:
Well I mean ... I can't remember what precise steps I took on a day in, the date again, June 2006. That is nine years ago. But, here I think it was being drawn to our attention and the "we" of course speaks for the whole organisation. We got regular updates. The group internal audit would review the property book. The chief risk officer ... remember the way we managed risk in AIB was this. There were three principles to do with risk management, just three. One, the risk is owned by the business. If you are the credit card person you own those business risks. Two, the risk function set-up under the man from JP Morgan, is an independent function to scrutinise the observance of risk management on behalf of the board. And that is what we depended on. I know that sounds like an excuse but that ... you couldn't ... I couldn't go around and check it. That was the system that we operated and the risk section was never refused resources. Whatever it needed to do their part of it, the second part. To look at the business end of it and to manage the risk on their ... to monitor the risk on their behalf.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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The reason I ask is that the bank's exposure, subsequent to that document from 9 November 2006, to construction and property increased.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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If you turn to page 17. Well, I just want to know ... I have highlighted concerns that were raised in 2000 ... as far back as 2004, this is another internal AIB document in November 2006 that says we need to look tightly at our loan book and our exposure to property-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Why was no action taken? That is-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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The exposure increased.
Mr. Dermot Gleeson:
Yes but hold on a second. "Manage it tightly" does not mean do not extend the exposure, with all due respect. "Tightly" means that you apply the proper credit standards and you know ... this was part of the bank obviously, the Republic of Ireland property book. But the property book in the Republic of Ireland never contributed more than 15% to the overall profits of the bank. It brought the bank down.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.
Mr. Dermot Gleeson:
But it was part of many businesses, most of them successful that we had. But it sometimes, I think, is informative to think ... people think, you know, all you did was give out loans to developers. I say it never ... about 10% to 13% in the relevant years is the profit contribution from Republic of Ireland property. So it wasn't the only thing on the screen as it were.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, my time is limited, so I want to move on-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----to 2007. And AIB core document again, B1 volume 2 at page 27. I'll give you-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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B1, Vol. 2, page 27.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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It is B1, Vol. 2, page 27. It should be on the screen in a moment, I hope.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Well-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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My reference is AIB B1, Vol. 2, page 27. It refers to senior management conference-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Where a report on AIB-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, I understand.
A report on AIB called "Poised on the Edge of Greatness" was presented by Oliver Wyman on 22 March 2007.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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And at the bottom of that particular page 27, a direct quote, again, it says "that size equals no obstacles" and that is in ... it is in reference to the elephants in the room at page 23 and the issues that were highlighted as being important for AIB to address and less important. And the bottom of less important was "size equals no obstacles".
I just want to know, did you share that view at that particular time? Was the size of the loan book of AIB at that juncture a concern for you and particularly exposure to property and construction?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Even subsequently-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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At any stage in 2007, did you express concerns or have concerns-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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----about concentrations-----
Mr. Dermot Gleeson:
I think the property book was big and we knew that it was concentrated. We thought it was diversified, as I have explained earlier because it had properties abroad and properties in Ireland. And we derived consolation from that and from the results of the stress tests and we were wrong.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, and I want to refer now to a different document again. A different core document AIB B2, Vol. 2, page 11.
Again, it is a presentation to the board on credit concentrations.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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On page 11.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Sorry, slightly different, it is ... it is referred I think briefly to by Deputy Doherty, "Stress Test Results" and you referenced it yourself-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----in your opening comments. The presentation to the board on 25 April 2007-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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It provides that the probability of an extreme property downfall scenario arising was 4%.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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And that even if it did, additional provisions would be up to €2 billion over three years.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I just want to know ... do you have any recollection yourself or other members of the board of probing that particular assessment at that time?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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A very expensive exercise.
Mr. Dermot Gleeson:
Indeed and you are absolutely correct, but the stress test itself I am saying, and the installation for the machinery for it was an expensive exercise, and I think, as I said earlier, that board members genuinely believed, this was after all the Holy Grail in every bank in the world. Basel II was the great answer to everything. It had been endorsed by the EU in its directive. And when we got this stress test done, and as I say, a very expensive process I think we thought this was the way to monitor and measure and manage risk.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. I want to move on before my time elapses to 2008. And again to the core document I am referencing is AIB B2, Vol. 1, page 17.
This is the document, sorry, about credit concentrations that I mentioned earlier. Do you have it in front of you?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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AIB B2, Vol. 1, page 17.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Page 17. Again it, it states that-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes, yes, that as of-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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It's at the ... it's there in front of you now.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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As of September 2008, AIB continued to be in breach of the sectoral concentration-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Where it was 200% ... the figure was 275%-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----per investment exposure and 390%-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----when confined with development. Was that a concern for you at the time, or the board, or ... you know, was there a discussion that you can recall?
Mr. Dermot Gleeson:
I can't recall the discussions. I mean, I don't know how many hours I spent in that boardroom, but recalling the discussions, I'm afraid my memory just isn't that good, Deputy, and it's no point in my pretending that it was. But we certainly discussed the Irish property book from time to time. We certainly asked questions about it; we had the property people in and asked them. We asked the group internal auditor.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I don't wish to cut you but my time is brief. The fact that the regulator's guidelines, which we discussed-----
Ciarán Lynch (Cork South Central, Labour)
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We have questions on each to get through as well.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----at length earlier, indicated that the concentrations in two related sectors should be 250% maximum.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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It was 390%-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----in September 2008.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Crucial month, we all know.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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And you don't recall whether alarm bells rang in your own head, never mind in other members of the board at that particular juncture?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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It's September 2008.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Well I wish to move on, and refer again now to a document that Deputy Doherty mentioned also. AIB, C3b, Vol. 2, page 29.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Page 29. It's the memo from the Department of Finance-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----from the night of the guarantee.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Where you were, you were marked ... yes, you were marked in attendance.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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And there's a quote, well it's not a quote it's a reference, I suppose more like, at the bottom, close to the bottom of page 29 where Mr. Sheehy, the then chief executive of AIB, is reported to have said, and the quote from this memo is that, "People we've been dealing with for decades, pulling back - 1 month we will be funding bank overnight. Bad if can't even get that, disaster - bankruptcy." What's your view on that?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Well was it bankruptcy that was facing the bank on that, on that particular night?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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So you ... do you dispute what's in the attendance note or not?
Mr. Dermot Gleeson:
I ... It's a different thing to say that I don't recall the word, Deputy, that's all I can say. I don't have a full recollection. I did the best I could to make a note a few days later, that's my contribution, I'm afraid, to this. Can I say, as you've asked me about this document Chairman, it's important that I would draw issue with some of it, just two points if I can make, Chairman, generally. You see Mr. Burrows is named, most of that is things I said, not Mr. Burrows. I think maybe the top two lines are Mr. Burrows and the rest is me; I can identify things I said, and the reference at the very end of Mr. Burrows is "heard from [Mr. Blank], Treasury", that's an AIB official. And the second thing that's ... not misleading, potentially misleading, is that there's a number of references on the next page to Mr. Neary. I met Mr. Neary in a corridor, but he was never in the decision makers' room when I was there.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Thank you for those comments. I want to refer you before I finish, again, to the same document, pages 26 and 27.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Same booklet.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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It's the letter that you issued to the then chairman of Anglo Irish Bank.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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In ... a few days later, 6 October 2008 where you wrote ... and I'm going to quote directly from the bottom of page 26, "It is frankly outrageous for you to indicate that AIB's liquidity was good for "only a matter of days"." I want you to explain the apparent contradiction between what you're saying there on 8 of ... or sorry, 6 October, and what Mr. Sheehy seems to have expressed on the night of the guarantee with regard to bankruptcy.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I will.
Mr. Dermot Gleeson:
But I didn't believe we had a solvency problem on that night, let me just say that to you. No one asked us, no one raised it, and if I'd been asked I'd have said we were solvent. I believe it and I believe it still. As I say, house prices had dropped by 7.7% at that stage. The real trouble, the real trouble hadn't really started at that stage, so I believe we were solvent and absolutely believed that. But I was complaining here because a radio interview had been given that said all the banks were the same, last Monday, AIB was in the same trouble as us, and I knew that that wasn't true. I knew that we had liquidity out beyond a month. I didn't know how much; I wasn't into the detail. I knew we had enough liquidity to be able to pull out reserves of liquidity, all this ... this was helping a competitor, to keep Anglo going until the weekend, if Governor Hurley's version had prevailed. But I certainly ... I believed I was telling the truth and I still believe I was telling the truth in the paragraph that you-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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So the note from the night of the guarantee from the Department of Finance, which referenced Mr. Sheehy as using the phrase "disaster bankruptcy", you've no recollection really of that happening at all?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes. I was going to ... I was going to reference, Mr. Gleeson, the end of your statement, 23-page statement, on paragraph 96, page 23.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes, the written statement for today.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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You said, and I quote, "there were decisions made in AIB which made things worse than they need have been for Irish citizens". What were those decisions?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Do you believe that you bear any responsibility?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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In light of the fact, 2004 Mr. O'Leary was raising concerns, at least, that were referenced in minutes, which have been given and now put to you at this, at this meeting. 2006, there were similar minutes that spoke about concentrations in particular sectors and how the guidelines of the Financial Regulator were being breached, and it went on into 2007. And as late as September 2008, you were at 390% when the guidelines said 250%. You know, what responsibility do you, as the chairman of the board of AIB at the time, bear for that?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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What-----
Ciarán Lynch (Cork South Central, Labour)
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Please, I give you enough time to ask the question, Deputy, now I need the witness to reply.
Mr. Dermot Gleeson:
The second question that you asked me is what responsibility I bear. And I was the chairman of this and I bear the responsibility. This is where the buck stopped. I can tell you, Deputy Phelan, that it's a salutary thing when you discover for the first time in your life in your 60s that doing your level best in a job is not sufficient to prevent very negative consequences ensuing. I haven't done many jobs in my life. I was a teacher; I was a barrister, outside Dublin, barrister in Dublin, I worked for the Government for three years. And the outturns there were adequate, perhaps, no more than that. But I did my level best in this job as well, and the outcome was entirely unsatisfactory and that's a responsibility that I absolutely accept and I can never get away from it.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Now just before we go to the break there, Mr. Gleeson, I just want to deal with one matter, and it's the issue of incentives and remunerations. And if I could maybe ask you the salary bonus and pension plans offered to the senior executives at AIB, they would be considered significant, certainly in today's circumstance-----
Ciarán Lynch (Cork South Central, Labour)
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-----and maybe back then. Are you, are your reflection of that, do you believe they were justified and appropriate for an Irish financial institution----
Ciarán Lynch (Cork South Central, Labour)
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-----an island of 4.5 million people paying these big sums?
Mr. Dermot Gleeson:
Well I mean, I think the answer is in the question that you've posed, Chairman. Clearly not appropriate by today's standards and looking back, they were paid much too high but that was the market rate at the time. We always got consultants from outside, expensive consultants say what is the rate. And Dr. Nyberg has commented that the salaries of the AIB chief executive was the least relative to size. Our objective was to get what the market rate was and pay a bit less than that. Clearly we paid too much.
Ciarán Lynch (Cork South Central, Labour)
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The core document there relating to is up there on the screen at the moment, so I'm not going to ... it just gives a context as a board meeting, so I'm not going to get tied up into referencing that.
Ciarán Lynch (Cork South Central, Labour)
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The ... I suppose what I'm getting to here is how performance remuneration influences the factors in the bank's lending behaviour.
Ciarán Lynch (Cork South Central, Labour)
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Was there at any time consideration relating to risk built into the measurements performance?
Mr. Dermot Gleeson:
No, I have seen that written and raised and it's a perfectly correct question to raise, these people were on performance plans which if the EPS went up a certain amount they would get a lot of extra money. The first thing to say is that hardly any of that ever vested, the test was too high. CPI plus 10% is almost impossible to do. Secondly there were components in that test that related to the market as a whole, 50 other European banks, no control over those. And so far as Irish property lending is concerned, you know going back to the statistic that I gave to your colleague, Deputy Phelan, about 15% at most of the bank's profits were provided by Irish property so lending to Irish property was never going to affect the EPS in a way that would get you this money.
Ciarán Lynch (Cork South Central, Labour)
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In layman's or laywoman's terms looking in this morning, the performance bonuses were on increased sales -----
Ciarán Lynch (Cork South Central, Labour)
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And were there bonuses for somebody who might say, "I think we need to shrink this area and underperform because it's getting risky"?
Ciarán Lynch (Cork South Central, Labour)
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Okay, but you have no recollection of that?
Ciarán Lynch (Cork South Central, Labour)
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Thank you. I now propose we break, returning at 11.25 a.m. In doing so, to remind the witness that once he begins giving their evidence, he should not confer with any person other than his legal team in relation to the evidence on matters that are being discussed before this committee. With that in mind, I will now suspend this meeting until 11.25 a.m. and remind the witness that he is still under oath until we resume. Thank you very much.
Ciarán Lynch (Cork South Central, Labour)
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We will move back into this morning's proceedings and public session. Is that agreed? Agreed. I now propose that Senator Michael D'Arcy take the next line of questioning. Senator, you have ten minutes.
Michael D'Arcy (Fine Gael)
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Thank you, Chairman. Mr. Gleeson, thank you for coming. In your opening statement, the comprehensive document, page 20, section 83 ... Mr. Gleeson?
Michael D'Arcy (Fine Gael)
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The initial portion of it is where you discuss the conversation that was being held between AIB and Bank and Ireland-----
Michael D'Arcy (Fine Gael)
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-----and there was that there would be a guarantee for four and, in your own words, that the Anglo and Irish Nationwide there would be a taking down or taking into custody.
Michael D'Arcy (Fine Gael)
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You subsequently state, "At a meeting on a subsequent occasion, when I was alone with the Minister of Finance he indicated that that was the course which he had favoured on the 29th September, but that other views had prevailed."
Michael D'Arcy (Fine Gael)
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Could you expand upon that line in terms of the conversation you held with the Minister of Finance?
Mr. Dermot Gleeson:
Well, the Minister was a professional colleague of mine and ... I wouldn't have been a close friend but I do regard him as a friend of mine ... At some meeting subsequently, I would think a few months later when we were waiting for someone else to come or maybe when he was saying goodbye to me or if it was just the two of us, I don't remember precisely, but I do remember he said, "You know, on that night, I would've been in favour of taking down those two institutions," or something like that, and there was no more than that. I didn't ask him, he didn't say anymore, and he wasn't complaining, I think he was just affording me an anecdote. I didn't find it surprising that there would've been different views on the night. This was a very difficult decision.
Michael D'Arcy (Fine Gael)
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In previous evidence, Governor Honohan, at a chapter he wrote in a book about in ... about Minister Lenihan, stated that Minister Lenihan told him he was overruled.
Mr. Dermot Gleeson:
Well, I was unsure, in my own mind, whether I should put this into my evidence at all, because in a sense, he was speaking to me in confidence and I've never told anyone, but it was on foot of Governor Honohan saying that that was a thing. It seemed to me that it would be unfair of me not to record that evidence, it having, as it were, gone public in some degree, and so I've made that decision, but I believe the Minister was speaking to me privately, as it were at the time.
Michael D'Arcy (Fine Gael)
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Thank you. In your, and I'm quoting core documents AIB C3b-----
Michael D'Arcy (Fine Gael)
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-----page 33, the memorandum of ... C2b sorry.
Michael D'Arcy (Fine Gael)
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AIB core documents, C3b, Vol. 2.
Michael D'Arcy (Fine Gael)
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Page 33 in a memorandum from yourself to Mr. Eugene Sheehy.
Michael D'Arcy (Fine Gael)
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Point 1, you state, "Two institutions nearly brought down the system." Point 2, you state, "Their [.....] went unregulated, by a hopeless regulator." You-----
Michael D'Arcy (Fine Gael)
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But this was written on 2 October-----
Michael D'Arcy (Fine Gael)
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-----and at that stage-----
Mr. Dermot Gleeson:
-----but things were pretty fraught, Senator, as you can imagine, you know. And it was preparatory to going to meet the Minister. See, we had left Government Buildings that night thinking that there were four banks going to survive with the guarantee, and ... the phrases from farther down this memo that I read out earlier, I was ... I suppose it had been presented that we had asked for a guarantee, true, but the guarantee that transpired wasn't the one we'd asked for. But we weren't going to come out and say that, obviously, that wasn't in anyone's interest. So there was an element of peevishness here, which perhaps I ... perhaps I should regret. I mean, as I said to you, I remember the next morning, Goldman Sachs came out and advertised or promoted Anglo as a buy. They said there was an upside of 50 something percent of it as a share buy. And we'd been, sort of, asked to rescue it or to assist in its rescue for a couple of days, the day before. So mixed feelings, can I put it that way.
Michael D'Arcy (Fine Gael)
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In the guarantee, going back to again, AIB C3b, Vol. 2, that same document, Mr. Gleeson.
Michael D'Arcy (Fine Gael)
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Page 41, we've discussed it previously about INBS-----
Michael D'Arcy (Fine Gael)
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-----about INBS requiring potentially €2 billion to €4 billion.
Michael D'Arcy (Fine Gael)
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You had discussed that before and you had ... was there any other previous discussion formally or informally with the Financial Regulator prior to the night of the bank guarantee that another institution may have required additional liquidity, before the night of the bank guarantee, with AIB senior officials?
Mr. Dermot Gleeson:
No. Not that I recall, but I have to say, that's a question probably more usefully directed to Eugene Sheehy, because the discussions took place through him. I mean, the assessment for us was done by Colm Doherty and he went into Nationwide, looked at it and said "Don't touch it" in effect. And he's a smart fellow.
Michael D'Arcy (Fine Gael)
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And it's clear in that document also that the Bank of Ireland due diligence certainly coloured your view upon INBS. Is that correct?
Michael D'Arcy (Fine Gael)
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And on the night of the bank guarantee, was that view expressed to the senior officials, to the people who where present on that night, that potentially there was a solvency issue with INBS?
Mr. Dermot Gleeson:
Well, the meeting proceeded on the assumption that both those institutions were finished, that they were down the drain. I mean ... I ... my statement of the night records the fact that INBS bonds were trading at 20 cent in the euro and their credit default swaps were 27% over Libor. That means the market thinks that's over.
Michael D'Arcy (Fine Gael)
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But I'm asking you was that information directly delivered from AIB, Bank of Ireland, to the officials on that occasion in relation to-----
Mr. Dermot Gleeson:
Well I said to them, part of the little introductory chat I had, was that Nationwide had got under the radar because it didn't have a share price but that its bonds were trading at 20% of their value and their credit default swaps suggested that their credit was not worth anything. And so, I mean, it was said in those terms. I don't think there was anyone in the room who didn't realise that was an institution that was in terminal trouble but what language precisely was used, other than what I said myself, I can't remember.
Michael D'Arcy (Fine Gael)
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Mr. Gleeson, you understood that a four bank guarantee was what you were requesting, is that correct?
Mr. Dermot Gleeson:
Yes, I mean it had ... the proposal didn't originate with us because you'll see the memo of the minute we had on the Sunday evening of the meeting, where Eugene reported that the authorities said "two financial institutions likely to fail" and a limited guarantee for the rest. Very succinct.
Michael D'Arcy (Fine Gael)
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It's seven years later, Mr. Gleeson, a lot of water under the bridge - in your view if the four bank guarantee had occurred as you hoped and perhaps had expected along with in your own words "the taking into custody" of the other two-----
Michael D'Arcy (Fine Gael)
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-----could AIB have survived as a going concern without Government aid?
Mr. Dermot Gleeson:
That's a question I don't feel I am equipped to answer honestly. I don't know the answer. If I was guessing I certainly wouldn't say it definitely would. That's all I can say but perhaps it would. I just don't know but you are asking me a question that's outside my information stock and competence. I understand but perhaps closed my mind down a bit on these matters from the middle of 2009.
Michael D'Arcy (Fine Gael)
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But you're probably better placed than most people to make-----
Mr. Dermot Gleeson:
I'm not so sure because this is sort of a central banking issue. You know, we went in there that night and asked for this and in a sense the decision that had to be made by the policy makers, the Government, the Governor of the Central Bank, that involved expertise that I didn't claim to have. So I think, Senator, I'd be pretending if I attempted an answer.
Michael D'Arcy (Fine Gael)
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Okay. You made a statement that one bank cannot stop a bubble.
Michael D'Arcy (Fine Gael)
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Can one bank cause a bubble?
Mr. Dermot Gleeson:
I rather doubt that. I mean ... I suppose one bank in a small country where there is only one bank, you know, maybe that could happen but I don't think one bank could cause a bubble. I mean one bank can lead a bubble. I suppose I go back to the inference of Anglo in Governor Honohan's statement at the Dubrovnik conference that reckless lending by one bank put competitive pressure, as it did. We used to think, well we're not going to copy Anglo but you know managers in country towns who see their good customers walking across the street, inevitably there's an effect.
Ciarán Lynch (Cork South Central, Labour)
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Senator you're out of time. I just ... whilst the Senator concentrated a lot on the guarantee, I want to return to a governance issue.
Ciarán Lynch (Cork South Central, Labour)
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That relates to a number of control issues arose in AIB over the years such as Rusnak and I think you referred to some of these in your opening statements this morning - foreign exchange rate settings, incorrect interest rate charges, offshore accounts, etc.
Ciarán Lynch (Cork South Central, Labour)
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In your judgment as chairperson of AIB, Mr. Gleeson, how do you reconcile these with the governance standards outlined in each of AIB's annual reports?
Mr. Dermot Gleeson:
Well, I mean, AIB had 26,000 employees. I don't know I suppose that's the working population of Waterford or Limerick, I don't know. They're not all going to be perfect but I think we made a serious effort and that I made a serious effort to try and inculcate ethical standards. There had been this disgraceful business in the 90s with foreign exchange, now this is the first foreign exchange issue and you sent me some papers on that and we sent that report to the guards.
We instituted staff training on ethical issues and did surveys about how effective it was and there was ... every year ... and I haven't been able to go back through the minutes, the AIB code of business ethics was sent to every employee and it was approved by the board every single year while I was there. Usually in the spring - I can remember this time of the year.
There was a separate initiative for senior managers who would be taking the more serious decisions and I think the only time I ever addressed a group of managers, managers were run by the CEO. That's the way it works. I run the board and he runs the bank. But I did address a group of senior managers to launch a thing called "Leadership by example" and it was about probity and obeying the law. And in July 2007 Eugene Sheehy and myself launched that so we did make those efforts. We also got an assessment done by an English organisation called the Institute for Business Ethics and they said we were above par for the financial services industry. So there was an attempt to inculcate lawfulness - can I put it that way and I believe that the vast majority of AIB employees were entirely correct in their behaviour.
Ciarán Lynch (Cork South Central, Labour)
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A general question before I invite the next questioner, Mr. Gleeson, is that the bank has governance standards, these are outlined every year in the annual report but there are a series of ... these are not small events ... they're quite significant events, the exchange rates and all the rest. At any stage was there, this is the question, that we really need to review our governance standards and by means of a process then developing, if the governance standards, were they of a particular nature that matters then relating to the guarantee were inevitably going to happen, in terms of credit concentration levels and all of the rest of it?
Mr. Dermot Gleeson:
No, I think that analysis is flawed, Chairman, I am sorry to say it but I don't think that's the way things happened. I mean I think the guarantee arose from all sorts of complex features including contribution by AIB mistakes but I honestly don't think that the historical issues, and they were real, lead to the guarantee. I honestly don't think that's what happened.
Ciarán Lynch (Cork South Central, Labour)
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Okay but can I put the question to you that there seems to have been an ethos or a culture or a repetition of error after error after error? As chairperson of AIB, did you think you changed, that you succeeded or failed in dealing with that ethos?
Mr. Dermot Gleeson:
Well, I think we need to be careful about this. I don't think there was repetition of error after error after error. There were historical events in the 90s and before I was chairman and while I was chairman this FX overcharging issue came to thing which I don't think was an offensive dishonesty or anything. Bad administration maybe but there was no-one benefitted from it and we repaid fully and we ... all our reports were always supervised by someone from the outside. We got usually a former Governor of the Central Bank come and look over our shoulder while we did those investigations.
Ciarán Lynch (Cork South Central, Labour)
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Mr. Gleeson, just to remind members whilst that we are concentrating on the guarantee at one level, there are years of events that came before the guarantee and we would need to be balancing our questionings on both areas. Next questioner, Senator Michael D'Arcy. Sorry, my apologies. Senator Marc MacSharry.
Marc MacSharry (Fianna Fail)
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And it's Michael D'Arcy.....Thanks very much, Mr. Gleeson, for being here. How did the establishment of the chairman's committee in 2004 impact on the authority of the board and what was the rationale behind the restructuring in that regard?
Mr. Dermot Gleeson:
Well, the rationale of the chairman's committee was that there were sometimes things that came up, you couldn't assemble a board, the board was international. As you probably know we had two Americans at one stage, one American always, three from the United Kingdom and then two from Belfast, people around the country. So, if there was something urgent - let's say a large plc. came and said "We are going to buy a ... do an acquisition and we need €1 billion" and the capital markets fellas looked into it and said "This is fine." You couldn't get a board together and it was over the limits, so you did it for that. You also did it for things like sometimes you might need a board resolution for appointing a receiver, sort of housekeeping stuff really. And then exceptions to the large exposure policy were sent to the chairman's committee as well.
Marc MacSharry (Fianna Fail)
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The point I want to get to in particular-----
Marc MacSharry (Fianna Fail)
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So, when exposures were being increased or there were a decision maybe between one particular borrower, did that come to this committee or did it go to the board?
Marc MacSharry (Fianna Fail)
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But typically-----
Marc MacSharry (Fianna Fail)
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Okay, so, how many times would you think that you would have made exceptions at that committee?
Marc MacSharry (Fianna Fail)
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Well say in those years, I mean, how many-----
Marc MacSharry (Fianna Fail)
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Roughly, yeah.
Mr. Dermot Gleeson:
I ... now ... this is me, without assistance, going through the minutes and trying to check. They're heavily redacted as you know so I may well have missed some, but on my account, if you include both UK property and Irish property, I'm not talking about property lending decisions, not decisions to buy out a public company or to sponsor a share, you know, other ones, but property in the UK and Ireland, I think there were 17 in those three years. About one every three months.
Marc MacSharry (Fianna Fail)
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And would that be typically ... without mentioning names, give me one example, say, of, developer A-----
Mr. Dermot Gleeson:
Well you have an example in your papers, yes. Developer A wants ... he's got a new project, or he has run into trouble in the financing of the old one. I remember one which was really quite extraordinary. There might be ... say a development was going through phases and the planning authority required the sequential phases to come back for planning. There was going to be a DART station that had to be paid for by the developer on ... or maybe a Luas station, I can't remember, and that was extra money. So you would get top-up requests, and also I'm afraid, you would occasionally get top-up requests that suggested that a developer might be getting into trouble. You know you'd loaned him €100 million and he now needed another €10 million to finish the thing out and the decision was, do you give him the extra €10 million or do you leave it unfinished? So, there were sometimes troublesome decisions.
Marc MacSharry (Fianna Fail)
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So when you took these decisions, were they routinely second-guessed then by the broader board or-----
Mr. Dermot Gleeson:
No, they were not routinely second-guessed. They were all presented and explained to the board, but, the way it worked, you see, if ... a credit like that for a developer looking for extra money would typically go, first, the lenders in Republic of Ireland division would do it, the senior lenders would look at it. Then they'd have to go to the Republic of Ireland credit committee. That's to say the credit people, who are completely independent, have nothing to do with lending and are supposed to be, if you like, scrutinising it in a sceptical way. If it got through that, and some of them didn't, it would come to the, if it was big enough, the group credit committee. Now the group credit committee had the group chief credit officer, the chief risk officer, these serious players on it, and it was then ... only then would it be promoted to the chairman's committee.
Marc MacSharry (Fianna Fail)
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Okay, so, did the board ever have to take the decision to lend somebody money or not?
Marc MacSharry (Fianna Fail)
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And how big ... what level, that'll end up in the board-----
Marc MacSharry (Fianna Fail)
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Is there any instance where the board decided "No, we're not going to do that".
Mr. Dermot Gleeson:
No I don't think so, and I mean that's a very obvious question and creates the impression that it was rubber-stamping, and it wasn't actually. I mean, when you think of it, the idea was that these credits, like the one I've just mentioned for instance, you don't have in your small papers, but I have in my long papers, because you have them as well, but ... the mark-up for that particular credit, and I have it here, 48 pages of analysis and analysis of who the independent valuers are and what they say about everything, the loan to value of every component, the track record of this customer, what their personal net worth is, their personal net worth statement, all their own assets, running to €2 billion in this case, their repayment history, so, the mark-up on a document like that would be very substantial and would give you all the history and then there would be an industry appraisal. Some of this was for office development in Dublin, "What does the office development market look like at the moment?", so it was quite a stringent process.
Marc MacSharry (Fianna Fail)
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Yesterday we had an example from the CEO of NAMA where he spoke anecdotally of a senior lender in an institution that was nameless, lending €200 million to somebody on the basis of a statement of affairs that was handwritten and put back into his pocket in a matter of months.
Marc MacSharry (Fianna Fail)
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Were there ever-----
Marc MacSharry (Fianna Fail)
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-----any such practices?
Marc MacSharry (Fianna Fail)
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You said earlier on, to do with targets, that it was never sales-related, that it-----
Marc MacSharry (Fianna Fail)
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It was profit-related.
Marc MacSharry (Fianna Fail)
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But how do you reconcile that then with individual branch managers having lending targets? Surely that's volume-related.
Marc MacSharry (Fianna Fail)
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No, again, can I just ask you to be very specific here? Is it not the practice that branch manager, or business manager A in region B, is told "your target for quarter one or two or three or the year, is so many millions, in lending"?
Marc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source
So well surely if he lent that money, would that not be an indication that he performed to target and therefore might-----
Marc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source
Okay, so in terms of remuneration ... so ... you might-----
Marc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source
I understand. So what you're saying, just so that we're clear for the record, what you said earlier maybe isn't entirely correct then.
Marc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source
No problem, we can ask ... we can ask some of the others from the bank.
Marc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source
Yes, we'll speak to him about that. You mentioned in your statement that the ECB had tools at its disposal to enforce policies that could mitigate against the negative impacts of interest rates being too low. I think you stated that they ought to have been between 6% and 12%.
Marc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source
No I know that but you did say the ECB had these tools at their disposal if I'm understanding you correctly.
Marc MacSharry (Fianna Fail)
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Yes, and what is that legal instrument? Could you explain just for people-----
Mr. Dermot Gleeson:
It's a statute ... I don't have it with me ... but it's the statute of the European Central Bank or something, and I'll certainly be able to find the reference, and what it says is, I think, is that national central banks must operate, and then there's this key phrase, "in accordance with the instructions of the ECB". All I was drawing the attention of the committee to was that it looked to me, and I might be wrong about this, is that they had power to say "Portugal has gone off the tracks, we want to tell the Portuguese Central Bank to do X, Y or Z".
Marc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source
Is this something that you realised with the benefit of hindsight or at the time do you remember thinking-----
Marc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source
In hindsight.
Marc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source
Okay, so in any event, nothing happened in Irish hands-----
Marc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source
Okay, just last question then. You spoke earlier, and indeed in your statement, of how, in a private conversation with Brian Lenihan, the late Brian Lenihan, that he had said that his preferred option was to deal in a different way with Irish Nationwide and ... and Anglo.
Marc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source
Would there be any other pieces of information that the Minister may have shared with you in private that may be relevant to us here?
Mr. Dermot Gleeson:
No. I don't think I'm keeping anything ... no ... no I ... I mean ... I don't honestly think so. I don't honestly think so. I mean the reason I've worried about that was obviously the late Mr. Lenihan can't give his version, and then, could there be an unfairness in this, but when Governor Honohan came out, I felt that the right thing to do was to tell you.
Marc MacSharry (Fianna Fail)
Link to this: Individually | In context | Oireachtas source
Okay, I have five seconds. In the room for the guarantee, on the particular night in question, was Mr. Lenihan present at all times when you were present?
Mr. Dermot Gleeson:
No, because ... there was the Taoiseach's anteroom, as I know it, because I used to work in that building myself, was where the decision makers were. The rest of us were distributed in other rooms. Now, Mr. Lenihan, when I went into that room, was present all the time. In other words when we were asked back into the decision makers, we met the same personnel, the Taoiseach, the Minister for Finance, the Attorney General, the Governor of the Central Bank until very late when he was replaced by Mr. Grimes, and departmental secretaries, Mr. Doyle, Mr. Cardiff his assistant, and ... I've listed them in the list. And when we went back in to that room, Mr. Lenihan was always there, as far as I remember.
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
Thank you very much Senator MacSharry. Senator O'Keeffe.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Many thanks Chair. Mr. Gleeson, you said at the start in response to Deputy Doherty that you had had some property yourself as part of your pension plan.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Did any of the other members of the board of AIB have any involvement in property deals, apart, of course, from owning their own house, perhaps?
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
And it was never something you might've thought was relevant, you know, that involvement by-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
-----by board members in the property market.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
You didn't ask them.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
You didn't ask them.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
When you referred earlier to the OECD and the report that it-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
-----gave and said how well-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
-----things were going, can I ... it's just a very simple answer I'm looking for. If it looked at the banks, did it look at the banks given information by the banks? Was that how they did-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
You know, did the banks supply the information to the OECD?
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
And then it made its report based on that.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
If I could bring you back again to a document you've already looked at in relation to the regulator ... it's document C3 ... book C3b, Vol. 2, 15 April.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Yes. It's the one in which somebody else has remarked about ... you know, the "hopeless regulator" remark.
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
Page number? Page number?
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
Page 33.
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
Thank you.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
You ... so, you said a "hopeless regulator". At the end of that document, you also said, "Either the new era of regulation starts with the price list to be published on Monday, or we despair of any proper regulation ever starting and act accordingly."
Susan O'Keeffe (Labour)
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When you came in this morning, Mr. Gleeson, you said you had a perfectly professional relationship with the regulator. I want to know which of these should we stand by in relation to your evidence. Did you have a perfectly professional relationship or was it a hopeless regulator and you despaired of any proper regulation?
Mr. Dermot Gleeson:
Well, I think you can have a perfectly professional relationship, Senator. It's behaving politely, doing what you're asked, not having vast rows and ... professional, I mean, in the sense of they interacted with us at all sorts of levels. I meant it in the sense that it was respectful of them.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Okay. On page ... AIB B2, Vol. 1, page 13 ... and again you've looked at-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Vol. 1, page 13. Again, it's a document you've already looked at. It's called-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
-----"Looking Ahead". I think-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
I think Deputy Phelan already drew your attention to it.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
The "Credit Posture" ... I just want to know one simple question - whether the handwriting on that-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Page 13. Take your time.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Is the handwriting ... is that your handwriting?
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Okay. That's fine, thank you. In relation to going to the bank ... to the night of the guarantee, can you just explain to us exactly how you got to be in Government Buildings? Who made-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Who made the phone calls-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
-----and who was spoken to?
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Well, just tell us, if you would, please,-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
-----because it's not entirely clear from the note.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Who authority ... in authority informed him?
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Okay. We'll ask him.
Mr. Dermot Gleeson:
And then on the ... two things happened on the afternoon of the Monday, 29th. I had a phone call from Sean FitzPatrick asking for a meeting, which I declined, and he also asked if I'd go with him to the Central Bank, I think, or to the Government. I'm not sure. Anyway, that meeting didn't happen. I later had a phone call from the governor of the Bank of Ireland and he said he thought it was ... that things were so fraught in the markets ... and this was a very fraught day. Anglo's share price had dropped by 50%. The American Congress was meeting on what's called the Paulson rescue plan. So, there was a lot of nervousness. People were, you know, very fraught. We were talking to the fellas - the officials - down in treasury department, which is the part of the bank that collects our funds. And the thing was quite fraught. Richard Burrows said, "I think we should go and see the Government." I said, "I agree." We had a quick phone call and we arrived at Government Buildings at 9.30 p.m.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
So, who did you ring and who rang who?
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Okay. Somebody else did.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Why did you have to wait until 9.30 p.m.?
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
So, off you went, the two of you, you and Mr. Sheehy.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Now, Mr. Sheehy says in his evidence-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
-----that the guarantee that the AIB piece of paper that you described to Deputy Doherty this morning-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
He says, "We had drawn up an alternative form which included language which was more specific and also included a definite timeline".
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
So, again, he seems to be also-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Yes. So, again, who ... when he says "we" ... I mean, who would've drawn that up? Did you sit-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
-----in your office?
Mr. Dermot Gleeson:
-----that they proffered a form of words which would reassure the people that they interacted with on a daily basis, people like foreign central banks. That's what I think happened. That's where I think the formula came. I wouldn't ... it wouldn't have been within my skill set to draw up such a formula.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
You say in your statement, I think, that you and Mr. Burrows - Bank of Ireland in other words - you guys had agreed going in the door that something had to be done about the other two.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Sorry. I meant ... I beg your pardon. That's not what I ... that you had agreed this. How had you arrived at that agreement? The two banks.
Mr. Dermot Gleeson:
Well, remember that the system had proffered to us the day before - to Mr. Sheehy, should I say - that two were likely to fail. We knew who they were. We knew that Anglo ... we knew who they were. It was Anglo and Nationwide. As to what was being done with them, the system had also proffered the solution that they would be "dealt with", in inverted commas. I didn't give much ... maybe ... I didn't give much reflection to how they would be dealt with. I thought nationalisation was the most likely, but maybe immediate liquidation was possible. But I had so many worries that designing the Government's solution to dismantling these ... I felt that was for the Central Bank and the Attorney General and ... you know, it wasn't one of my headaches, of which there were ample supply.
So, we went in, we were asked by the Taoiseach - very politely - to say what we thought should be done and we said that we thought they should be dealt with and then a guarantee put in place because there would be a turmoil, it would be the front page of all the financial press the next day - "Irish bank taken down" or "nationalised" or whatever it would read - and people in South Korea and Peru would be saying, "I wonder whether I want to give my money to AIB for the next two months." It was against that contingency-----
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
You've come to the last question, Senator.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
And you were asked to assemble, weren't you, liquidity? You and Bank of Ireland.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
And you went to considerable difficulty ... considerable effort to make that happen.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
All night. Why would the Government be doing that when then they were actually going to guarantee all the banks, do you think? What-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
What happened there?
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
But as you were leaving-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
-----Government Buildings at whatever hour it was,-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
-----what was in your head? Did you think, "Okay, they've done that; it's going to be four and two-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
-----somehow or other"?
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
At what time of the night do you think ... never mind what someone else has said?
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Were you surprised to discover that the NTMA was in the building and never was asked for its advice?
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Yes, but were you surprised?
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
Senator, you're about to run out of time.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
But were you surprised?
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Yes. Okay. And was there anybody else that you had a conversation with in that ... you know, that night-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
-----that you may have not remembered?
Mr. Dermot Gleeson:
I ... well, sorry. My memory is not any better now, Senator, than it was when I wrote the note. And I think I recorded all the names. I did mention that I met another partner from Arthur Cox's in the corridor. I met Mr. Neary in the corridor and had a private, like, personal chat with him. Nothing about the issues. But Mr. Neary was never in the room when the-----
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
Why nothing about the issues? There you are with the-----
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
Senator, you're out of time.
Susan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source
-----Financial Regulator.
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
You're out of time.
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
Bring it on.
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
There is a question that I believe now needs to be asked because we can ... while there is a lot of information on the guarantee, there is a period leading up to the guarantee that has to be dealt with.
And I want to discuss the business model that AIB were operating.
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
And would I be right in asking you, Mr. Gleeson, that the development of the bank's business strategy is one of the main responsibilities of the board?
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
So, it would take up a substantial part of the board's activity?
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
Okay.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Well, in my opening question this morning, a bank that was in existence going back before the establishment of the State, and I think before the Act of Union, or in around that time ... there was a business model in place.
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
Did the business model change radically in the period before the guarantee, the grow-fast model as maybe Bill Black, a witness here before the inquiry-----
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
Yes.
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
Right.
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
Okay.
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
Well, was there any time, let's say between 2002 onwards ... NAMA's testimony yesterday said that AIB's book doubled in a very short period of time.
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
Other banks' trebled or quadrupled. Was there any view at that time, at board level, that somebody was eating your lunch and that you were going to go after it?
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
Yes.
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
But the question, and I'm going to move on after this, did AIB, to your interpretation-----
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
-----radically change the type of business model that it was historically using in the 2002 period-----
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
Okay, and so-----
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
So, how did the bank double, if it didn't change its model?
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
Okay. So, were you mirroring their practice?
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
All right, thank you. Deputy Kieran O'Donnell.
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
Thanks, Chairman. I just want to touch on one or two things in the guarantee-----
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
-----and then I want to deal with earnings per share. On the night of the guarantee, the proposal that you put, your formula of words-----
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
-----what did the guarantee cover?
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
Did it cover senior bondholders?
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
So, it covered all deposits and it covered all-----
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
And all senior bondholders?
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
So, with due respect, Mr. Gleeson, that's akin to effectively a blanket guarantee.
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
Well, for instance, you're saying you'd no subordinated debt maturing?
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
So, it's akin to a blanket guarantee; would you agree?
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
Okay.
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
The question is, when the banks were going in-----
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
-----were they looking for all deposits-----
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
-----and all senior bondholders to be covered?
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
Well then, in substance, the guarantee that arose from the Government, in substance, did it basically ... outside the fact that it included the other two institutions, Anglo and Irish Nationwide, in substance, was it the proposal you put forward?
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
No-----
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
I didn't say it was a footnote, Mr. Gleeson. What I am saying is, the structure of the guarantee, outside ... apart from the participants-----
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
In principal, was it ... sorry, in substance, was it what you proposed?
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
Yes, within-----
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
But for the ordinary man, the layman-----
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
-----it covered all deposits of the banks, all senior bondholders and lower, tier 2 subordinated debt, not all subordinated debt.
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
He needs some space to answer the question.
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
Okay, sorry.
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
Mr. Gleeson?
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
Okay. Secondly, I'm referring back to AIB, B1, Vol. 2 ... CBC ... C3b.
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
C3b, yes.
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
And it's page ... page 31. It's a memo from the Department of Finance-----
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
-----for the meeting-----
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
Correct.
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
Now, there's a meeting that took place at 41 minutes past 12, so it's-----
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
It's 00.41 on the top-----
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
Okay.
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
Was that the last meeting that you had with Government on the night of the guarantee?
Kieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source
And when you left, were you under the distinct impression at that time that the guarantee that was going to be put in place would involve the four institutions, in terms of the type of guarantee that came out, and both Anglo and Irish Nationwide, as you say, would be taken our or would be dismantled?
Mr. Dermot Gleeson:
Well, that was the way the conversation with me had proceeded, but I did ... it was made perfectly clear to us that the Government were listening to what we had to say and would make their own decision. That was said in one of the meeting, "The Government are listening to what you have to say and will make their own decisions." But then we were off, trying to find this liquidity, as I explained to Senator O'Keeffe.
Kieran O'Donnell (Limerick City, Fine Gael)
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Were you ever informed that that liquidity would not be called upon by Government?
Mr. Dermot Gleeson:
We were, because I can remember someone complaining the day after, or ... we were informed the following day, I think, because I do remember, and I think it was someone from Bank of Ireland, saying "We expended some money in the effort and we won't get that back". Not very large money.
Kieran O'Donnell (Limerick City, Fine Gael)
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And on the issue of liquidity-----
Kieran O'Donnell (Limerick City, Fine Gael)
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-----and I am referring to the same-----
Kieran O'Donnell (Limerick City, Fine Gael)
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-----book, and referring to basically what Mr. Sheehy has said-----
Kieran O'Donnell (Limerick City, Fine Gael)
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-----did you have discussions in AIB on liquidity matters?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay, and what-----
Kieran O'Donnell (Limerick City, Fine Gael)
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What was your view in terms of your exposure to liquidity?
Kieran O'Donnell (Limerick City, Fine Gael)
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Problems.
Kieran O'Donnell (Limerick City, Fine Gael)
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Correct.
Kieran O'Donnell (Limerick City, Fine Gael)
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When did you anticipate you'd come under real pressure on liquidity?
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, Mr. Sheehy says that you were going to be ... you could have difficulty ... "Within one month, we will be funding banks overnight."
Mr. Dermot Gleeson:
Yes, well I don't recall that; you'd have to ask him that. I thought we were okay, I have to say. We certainly ... can I say this to you, Deputy O'Donnell: for all the time that I was chairman of AIB, down to June 2009, when I left, there was never a month when we failed to meet the regulator's liquidity requirements. Never.
Kieran O'Donnell (Limerick City, Fine Gael)
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And on the final thing in the guarantee - and it's coming from your own memo of AIB, B1, Vol. 1, C3b - if Mr Burrows had not rang you on Monday of 29 September-----
Kieran O'Donnell (Limerick City, Fine Gael)
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-----what would you have done? What would AIB have done?
Mr. Dermot Gleeson:
I don't know, it may well ... I mean, that's a counterfactual that I really just don't know. It seems to me that we would have had conversations with the Government. It's hard to think that they wouldn't have .. the Government, or the Governor of the Central Bank wouldn't have summoned us to a crisis meeting.
Kieran O'Donnell (Limerick City, Fine Gael)
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But, yes, Bank of Ireland said that they were going ... they'd go on it solo if you didn't go with them?
Mr. Dermot Gleeson:
Yes, and I thought we should go. I mean, that's all I can say. I honestly couldn't tell you, but, I mean, when the Paulson plan collapsed, I remember watching it on television out in AIB when it got the thumbs down or whatever happened, we thought, you know, this is, this is-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, did you feel any compulsion to go to Government on that night, like on that basis?
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes, but the Bank of Ireland had rang you to go?
Kieran O'Donnell (Limerick City, Fine Gael)
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Can I move on to risk? And when you did your restructuring plan, you said your decision to expand into property was "misguided, and that its risk management and internal government systems were not as effective as they should have been in controlling this risk". Now, I'd a quick look through a couple of things and it's within AIB, B1, Vol. 2 and Vol-----
Kieran O'Donnell (Limerick City, Fine Gael)
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AIB, B1, Vol. 2.
Kieran O'Donnell (Limerick City, Fine Gael)
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At page 11.
Kieran O'Donnell (Limerick City, Fine Gael)
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And it's a report that AIB commissioned with Mercer Oliver Wyman.
Kieran O'Donnell (Limerick City, Fine Gael)
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And that's dated 22 March 2007, and it says, "Poised on the edge of greatness", from AIB. And then if I go to page 22 of that document, the case study targeting risk taking. Now, this is just over a year before the guarantee, the crash-----
Kieran O'Donnell (Limerick City, Fine Gael)
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In this, yes.
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes. Page ... sorry, it's page 22, so go to page 11 of Mercer Oliver Wyman and then go to page 33.
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes, 22 of the document. And you speak about targeting risk-taking.
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes, but they obviously presented to the board.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay, so did ye commission them to do this?
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, in the amount of time ... did ye commission it as a board? Ye did.
Kieran O'Donnell (Limerick City, Fine Gael)
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The management did.
Kieran O'Donnell (Limerick City, Fine Gael)
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The case study they put forward is Anglo Irish Bank.
Kieran O'Donnell (Limerick City, Fine Gael)
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"Once poor performing subscale bank lacking strategy. Targeted higher risk ... Caught the wave of Irish property ... #1 performer." They were putting that forward as a case study.
Kieran O'Donnell (Limerick City, Fine Gael)
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And then the second thing I want to go to is AIB B5, Vol. 1, which is basically-----
Kieran O'Donnell (Limerick City, Fine Gael)
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AIB B5, Vol. 1.
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes, page 3. And that speaks about the remuneration committee and the structure ye put in play in March 2005, where you basically linked the shareholder ... the bonus for top management to the earnings per share.
Kieran O'Donnell (Limerick City, Fine Gael)
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But 50% of the share was if they ... the earnings per share, so the point is, were ye chasing the dragon? Were ye basically, with the earnings per share, looking for property? So, was your structure completely not factoring proper risk into account?
Kieran O'Donnell (Limerick City, Fine Gael)
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My question really is, is that, in all the documents, ye are saying in one breath that ye are, in this proposal, your structuring plan, that you were misguided, and yet I find the remuneration committee report here saying that you put a structure in place where the bonuses were placed around the earnings per share-----
Kieran O'Donnell (Limerick City, Fine Gael)
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-----which were driven by property------
Kieran O'Donnell (Limerick City, Fine Gael)
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Did they make it prior to ... we'll say prior to 2008?
Kieran O'Donnell (Limerick City, Fine Gael)
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And finally, what view did you take on the report from ... on this report you commissioned, Mercer Oliver and Wyman?
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, what weight ... in terms of the board, what should ye have done, in hindsight, on risk, that ye didn't do on property?
Mr. Dermot Gleeson:
Well, in hindsight, I think we should not have stuck with our customers that long; we should have had more syndication and selling down of loans. We should have not depended on cross-collateralisation. The net worth of some of these borrowers was enormous sums of money, and we should have been more sceptical about them.
Ciarán Lynch (Cork South Central, Labour)
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Mr. Gleeson, I want to return to a particular line of inquiry that the committee signalled to you prior to you coming in today, and that's the adequacy of the board oversight over the internal controls to ensure that risk is properly identified, managed and monitored.
Ciarán Lynch (Cork South Central, Labour)
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Now, that's in particular regard to, under EEC ... EC Treaty, these rules, the bank was obliged ... the reference will come up there as I'm talking, so don't worry too much about that. Under the EC state aid rules the bank was obliged to submit a structuring plan to the EU Commission, and this was finalised in April 2010. I think it was then updated again in July 2011 and further revised in 2012. Now, in its revised plan - this is the 2012 EU restructuring plan - and it'll come up there as paragraph 3.9. It's in core documents AIB B17 at page 79-80, but I think it's going to be on your screen now as we're talking.
Ciarán Lynch (Cork South Central, Labour)
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Yes, and it is on the monitor above. The AIB acknowledges - and it's in brackets - "its decision to expand into property was misguided, and that its risk management and internal governance systems were not as effective as they should have been in controlling their risk." Could I ask you to comment on it?
Ciarán Lynch (Cork South Central, Labour)
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But with respect of your period.
Mr. Dermot Gleeson:
I mean, it's perfectly clear that our systems over ... I think our governance systems were good. I think the credit systems weren't strict or tough enough. I think the loan-to-value criteria should have been tougher, and I think we should not have gone as big as we did with individual developers, notwithstanding that we had 30 years' experience of them always paying back and simply getting more successful as they went along. But, I'm afraid I haven't ... this is, I say, a document that comes from after my time.
Ciarán Lynch (Cork South Central, Labour)
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Okay, but do you think that the admission in it that the bank was misguided and that its risk management and internal governance systems were not as effective as they should be; now, are you in agreement or disagreement with that-----
Ciarán Lynch (Cork South Central, Labour)
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-----because it's a judgment on your period as chairperson-----
Mr. Dermot Gleeson:
Yes. In so far as it suggests that there was a decision to move into property, I don't think that was a decision, it was just the way things developed. As to risk management, it clearly failed us and wasn't adequate. There can be no doubt about that; the proof of the pudding is in the history. It was not adequate. And I think it comes back to two things again: too much faith in the mathematical models and believing the soft landing consensus.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Deputy Michael McGrath. Deputy, ten minutes.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you very much, Chair. You're very welcome, Mr. Gleeson. Twenty billion euro, Mr. Gleeson, €20 billion is the amount of money that the Irish State had to put forward to rescue AIB. In your six years as chairman of AIB, did you ever envisage that day coming?
Michael McGrath (Cork South Central, Fianna Fail)
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And what's your reaction at a personal, at a human level, of the scale of that investment?
Mr. Dermot Gleeson:
I mean, I've said to you that it's been clearly a daunting experience. I mean, I did my level best, as I said. I prepared for this job, I worked hard at it, worked full time at it, as you would have to; became a seven day a week job. And I am extremely regretful, and that's a sentiment that's never going to leave me. I know that doesn't sound adequate to the extent of the problem. I'm greatly gratified that the new management have got to a position where they can tell you and me that they hope to pay it all back, but it doesn't take away from the terrible event and I feel it keenly, if you're asking me that.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes.
Michael McGrath (Cork South Central, Fianna Fail)
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And I'm sure you know, for example, €20 billion is more than twice what we spend every year as a country on our entire education system, for example?
Mr. Dermot Gleeson:
I accept that, Deputy. I mean, I have had a commitment in the past to education in various ways and I think it's the answer to most of the problems of the world, but I think there is, given that you're focusing on it, I think there is a tendency, not in this room but outside, to think that the banks brought down the country and that there was nothing else involved. And that was referred to this day one fortnight ago, just 14 days ago, by Governor Honohan in a speech that he made in Paris about facts and myths of the Irish banking crisis, and myth number two was, "It is chiefly the bank guarantee that brought about the nature of fiscal austerity and generally crippled the Irish economy." That's a myth, he says. He says €60 billion into the banks, €20 billion will be paid back, but the deficit that was occasioned by the mis-matching Government revenue and expenditure is €30 billion a year, something between 100 and two ... now, let's be clear: I had nothing to do with that. I am responsible-----
Michael McGrath (Cork South Central, Fianna Fail)
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Yes.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes, and that's why you're here today.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. Just can I take you to page 22 of your opening statement, paragraph 90, you say:
It seems clear now that the regulation and supervision of the Irish Banking system and of Anglo and Irish Nationwide in particular, was inadequate and that the operations of those two banks, as the most aggressive lenders in the market undoubtedly affected the way other market participants conducted their business.
Michael McGrath (Cork South Central, Fianna Fail)
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Why do you feel the need to draw a distinction there between the manner in which Anglo and Nationwide were regulated and supervised and the manner in which AIB was regulated and supervised?
Michael McGrath (Cork South Central, Fianna Fail)
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Do you think that the regulation of your bank was any less inadequate than the regulation of those banks, if that's-----
Mr. Dermot Gleeson:
No, I suppose my view is that the difficulties that arose were much more marked in the other two institutions. I mean, the extent of the loan losses was more significant in some ways.
I think that in September AIB was in better condition and if you look at the outturn Deputy, look at it simply as that. Of the €64 billion that the State has had to put out to rescue the banking system, AIB and Bank of Ireland are well ahead in paying it off. AIB will repay hopefully what is owes, but the €35 billion that went into Nationwide and Anglo, only a very small proportion of that, I understand, will be recovered. That's why there is a difference between them, that's all I say.
Michael McGrath (Cork South Central, Fianna Fail)
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And your reference there to both of those institutions -----
Michael McGrath (Cork South Central, Fianna Fail)
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Well it seems to draw a distinction.
Michael McGrath (Cork South Central, Fianna Fail)
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And your reference to both of those institutions as the most aggressive lenders in the market, undoubtedly affecting the way other market participants conducted their business, and you've told a number of anecdotes around the Anglo story and the how it, perhaps inadvertently, impacted on the way AIB conducted its business. But for ... I suppose for many people watching the proceedings, they might regard that as the "he made me do it" excuse. That Anglo "made us do it".
Mr. Dermot Gleeson:
It certainly shouldn't be, there is no excuse. I am trying to explain, I mean ... I think, you know, what am I trying to do with the committee here today? What I have thought myself is try and assist you by giving an eye witness account of what it seemed at the time. There are 300 books written worldwide about the cause of the 2008 crisis. I have nothing to add to that. All I can do is come here and try and tell you, as honestly and frankly as I can, what it seemed like at the time, from a participant. That is all I'm trying to do. I am certainly not trying to excuse what went on Deputy, and I want that to be clear.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. Can I ask you Mr. Gleeson, when you state that it was your view then, and remains your view now, that AIB was solvent at the end of September 2008. What is your definition of solvency?
Michael McGrath (Cork South Central, Fianna Fail)
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And if your assets exceed the value of your liabilities -----
Michael McGrath (Cork South Central, Fianna Fail)
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You said earlier on that the real trouble was in 2009 in terms of the collapse in property values, but can I put it to you and your assertion that AIB was solvent at the end of September 2008, that less than three months later on 21 December 2008, the Government made an announcement that there would be a capital injection of €2 billion into AIB.
Michael McGrath (Cork South Central, Fianna Fail)
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Less than three months later.
Michael McGrath (Cork South Central, Fianna Fail)
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But why was that necessary if the bank was fully solvent?
Mr. Dermot Gleeson:
I may be wrong Deputy, I mean someone asked me did I think it was solvent. I think it became insolvent later, that is all I can say to you. But nobody, neither you nor I, can work out when all the assets of AIB - if you valued them on a sort of liquidation basis - what they would have come to. It is impossible to say because of the dynamic that de Larosière described, de Larosière and Nyberg I should say.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. You describe in detail how the risk function worked within the bank and you cite for example that the risk function had between 150 and 200 people at its peak perhaps -----
Michael McGrath (Cork South Central, Fianna Fail)
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----- and you had a chief risk officer and so forth.
Michael McGrath (Cork South Central, Fianna Fail)
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And the audit committee had a very important role, and the top ten risks were presented to the board.
Michael McGrath (Cork South Central, Fianna Fail)
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Was the risk of excessive exposure to the property and development sector -----
Michael McGrath (Cork South Central, Fianna Fail)
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----- regularly featuring in that regard?
Mr. Dermot Gleeson:
Yes. Again you have been sent, although you can't have read everything, but you'll see the board dashboard. That was something that I came up with, with the chief risk officer, that every month every member of the board would get the risk dashboard. It was against the contingency that some board member would say "We were never told about this". It had the ten biggest risks. Back in 2006-07 it was "Will we be able to complete the Basel transformation?" Earlier than that, perhaps at my behest it was regulatory conformance, "Are we obeying the law in everything we do?" That was something that I was very keen on. Then subsequently it became credit risk.
Michael McGrath (Cork South Central, Fianna Fail)
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Can I ask you, Mr. Gleeson, about the issue of interest being rolled up and that practice? Because I think some light was shed on that yesterday by NAMA that, for example, of the €74 billion of par value of loans they acquired, €9 billion of that was actually just interest being rolled up and that €9 billion more or less related to the €40 billion in the land and development book. It emerged at one of your own board meetings on 8 October 2008 when questions were being asked about interest being rolled up that the bank didn't have access to that information readily.
Mr. Dermot Gleeson:
Absolutely, that was a very bad piece of missing architecture that the management information system wasn't able to produce the information on that key indicator. I agree with you, it should have been able to find that. I think what they said, I haven't got it in front of me now, but it had to be done manually I think.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes. To be fair to you it says that the information was not available from the bank's accounting system and that a manual exercise would be required to obtain that information.
Michael McGrath (Cork South Central, Fianna Fail)
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Many of those loans, as we now know, were being recorded as being fully performing, even though not a cent was being repaid on them?
Michael McGrath (Cork South Central, Fianna Fail)
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Across the system.
Mr. Dermot Gleeson:
Across the system, I don't know how bad AIB was in that respect, I just don't know enough to tell you. I think Mr. McDonagh's and Mr. Daly's evidence was across the whole banking system. I would like to think that we weren't as bad as the worst, but I just don't know is the answer.
Michael McGrath (Cork South Central, Fianna Fail)
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Very briefly Chairman. On the night in question, 29 September, you cite a number of examples whereby you had the clear impression that a different solution would be found for Anglo and INBS, that they would be either taken out or nationalised.
Michael McGrath (Cork South Central, Fianna Fail)
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Who gave you that clear impression?
Mr. Dermot Gleeson:
Well it was just ... I suppose that that was what was discussed. I mean when Governor Hurley says "Can you get €5 billion to keep Anglo going to the weekend?" it wouldn't make any sense if you were going to guarantee six banks the next morning for us to be providing liquidity to the weekend. It was inconsistent with that. And that was an effort that was ongoing, not me, but Eugene Sheehy talking to officials during the night - we are doing this or we might bid at an ECB auction tomorrow. So that idea of Bank of Ireland and ourselves saving Anglo until the big event could take place at the weekend - and public companies often go till the weekend when they have a crisis because you get 48 hours when the stock markets aren't on top of you - would be inconsistent with the six-bank guarantee, so that's why I believe that solution was in the ether late into the night.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Gleeson, you tell us in your extended opening statement that after October 2002, when you became deputy chairman of Allied Irish Banks, you went on a series of upskilling, educational programmes.
Joe Higgins (Dublin West, Socialist Party)
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You attended banking courses at University College Dublin, the London Stock Exchange, Harvard Business School, Stanford University and INSEAD Paris, which describes itself as the business school for the world. You attended educational events at the International Institute of Finance and the International Monetary Conference. No doubt in some circles these would be seen as very prestigious institutions. Can I ask you Mr. Gleeson, did the instruction include the fact that within capitalist banking internationally, systemic crises erupted with great regularity all over the world, and that these sprang from very definite causes which were therefore avoidable?
Mr. Dermot Gleeson:
Just to correct the preamble to your question. Some of the courses I did were about banking, but most of the courses were about corporate governance, running a board. In so far as I did instruction on banking, some in Dublin and some with INSEAD, I don't believe that issue was covered.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Gleeson, arguably the first speculative bubble and crash was what became known as tulip mania in Holland in 1637. Jan Brueghel the Younger has a fascinating painting about it. The impression is being given that what happened in Ireland in the crash was, you said a 100 year event. But in 1999, three years before you became deputy governor, Oxford University Press published a paper by a man called Peter Englund, Stockholm School of Economics. He wrote about a study that was done by a colleague of his, published the year before, a study of 30 major bank crises, not from 100 years ago, but from the 1980s, including three of the most advanced industrial countries in the world, namely, Norway, Finland and Sweden. The common patterns that he outlines are in paragraph 2: deregulation, overly rapid credit expansion, sustained increase in asset prices, a bubble, the bubble bursting, collapse of asset prices accompanied by non-performing loans, acute banking crises, credit crunch, government salvage banks.
Will you agree with me that that would be, or not, an uncanny synopsis of the bubble and crash in Ireland? But this was from 1999, which-----
Ciarán Lynch (Cork South Central, Labour)
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Can I just make one brief interjection, Deputy Higgins. I'm not too sure if Mr. Gleeson has read that paper before but I think you're generally ... because Bill Black, when he was in before us kind of gave a similar type of modelling.
Joe Higgins (Dublin West, Socialist Party)
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To be clear, I'm not asking Mr. Gleeson if he was aware of this-----
Ciarán Lynch (Cork South Central, Labour)
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Yes, but due process-----
Joe Higgins (Dublin West, Socialist Party)
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-----but aware-----
Mr. Dermot Gleeson:
Yes, I mean, I've seen this issue, and it is an important issue that you raise, Deputy, that to what extent do we learn from history and I've seen it written that ... by a historian within the last six months, that the only lesson we learn from history is that we never learn the lessons of history.
Joe Higgins (Dublin West, Socialist Party)
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Why not?
Ciarán Lynch (Cork South Central, Labour)
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I have to let him respond now as well, Deputy Higgins, please.
Joe Higgins (Dublin West, Socialist Party)
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Yes, but I want to ... Why not?
Joe Higgins (Dublin West, Socialist Party)
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I really don't have time for this.
Ciarán Lynch (Cork South Central, Labour)
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I have to allow the Deputy ... I'll give you a bit of time but I have to allow the witness to respond. If ... I tried to make-----
Joe Higgins (Dublin West, Socialist Party)
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Yes, but Mr. Gleeson's proposed question earlier-----
Ciarán Lynch (Cork South Central, Labour)
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Keep your questions short if you want a longer response.
Joe Higgins (Dublin West, Socialist Party)
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Why did everyone get it so wrong? They didn't, Mr. Gleeson ...this is the point I would put to you. For example, were the critiques, very perceptive of David McWilliams, an economist, ever discussed on the board of Allied Irish Banks when he was predicting that the credit expansion was just going crazy and that it would finish in tears?
Ciarán Lynch (Cork South Central, Labour)
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There's three different questions there, Deputy. I need to allow Mr. Gleeson to respond to the three of them now.
Ciarán Lynch (Cork South Central, Labour)
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Indeed, and-----
Ciarán Lynch (Cork South Central, Labour)
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-----I'll facilitate you with that right there now.
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Mr. Dermot Gleeson:
So I'm going back to your previous question, Deputy Higgins, to answer it as best I can. I was about to tell you, and you probably know this, that John Lanchester, who is a respected commentator says that economists ... that economics ... one of the reasons that economics is so bad at predicting the future is because economic history has been downgraded in economics departments in universities and that ... when I was learning my economics a long, long time ago, economic history was compulsory, but now the feeling, among some economists at least, is that it's all in the formulae, it's all in the mathematical formulae. The mathematical formulae capture the history, therefore you don't need to learn the history, and that if there was more attention to history ... so I agree with your point that attending to the history ... on the other hand, Deputy ... let me just finish. On the other hand-----
Joe Higgins (Dublin West, Socialist Party)
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The witness is talking down the clock, Mr. Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Excuse me now, Deputy, please. I'm going to make an interjection here. And I monitor the period of time that Deputies take to ask a question. I try to moderate that by facilitating the witness with the exact amount of time, if possible, and if the witness is short in his response, fair enough, but there is a due process. If there is a very extensive question being answered, or questioned and then to be answered, I will give a bit of overtime at the end of the process, but there was three questions there, Deputy. I have to allow the witness to respond to the three of them.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Gleeson, were the warnings of economists like David McWilliams ever discussed or taken seriously on the board or by yourself?
Mr. Dermot Gleeson:
Absolutely. I mean, we would have economic ... addresses from economic experts. For example, I said John FitzGerald and Alan Ahearne, two excellent people, whom I both admire ... we would bring them in and they would talk about what the economics profession felt at the time. But can I just say this: you will be aware, as well as everyone else in this room, that economists frequently disagree. I mean, you only have to open up any American journal at the moment and you'll see "Krugman versus X", and so on. There's always two schools and we did the best we could with the schools. That's all I can say.
Joe Higgins (Dublin West, Socialist Party)
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But you had historic precedents from Sweden only a few years before you became chairman. But I need to move on because of time. You put a lot of emphasis, and may I put it to you, Mr. Gleeson, you blame Anglo for a lot of things-----
Joe Higgins (Dublin West, Socialist Party)
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Yes, it's an explanation but you said it was inevitable that we were drawn too much into Anglo's wake. Now, is it really credible that, you know, in Irish banking you had a pied piper called Anglo spinning tunes of excessive credit, profiteering, etc., and that the whole pack-----
Ciarán Lynch (Cork South Central, Labour)
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Be very mindful now, Deputy. Be very mindful, Deputy. Be measured.
Joe Higgins (Dublin West, Socialist Party)
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-----were in thrall and dutifully followed. Is that credible?
Mr. Dermot Gleeson:
No, let me explain it a bit better, because I think I haven't explained it, Deputy, and your question certainly suggests that I have failed absolutely to explain it. If you were the manager, in a good sized country town, a big country town, of AIB, and you've had two big builders as your clients for 25 years and then they go across the street to Anglo, it's inevitable, I think, that you get reaction to that sort of thing. It's-----
Joe Higgins (Dublin West, Socialist Party)
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Because it affects your profits?
Joe Higgins (Dublin West, Socialist Party)
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But mainly, am I correct, it would affect the bank's profits?
Joe Higgins (Dublin West, Socialist Party)
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Mr. Gleeson, are banks not there primarily to make profits?
Joe Higgins (Dublin West, Socialist Party)
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And I haven't time to go through it but I compared your profits to Anglo profits during the bubble and you were massively ahead. How much profit did you need to be satisfied?
Joe Higgins (Dublin West, Socialist Party)
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You said, Mr. Gleeson, at an extraordinary general meeting, again if I may say, spreading responsibility, "We drank too [much] from the national cup of confidence." Would it be more honest to say that you drank too much from the bankers' cup of greed for profits and that was what drove you?
Joe Higgins (Dublin West, Socialist Party)
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Why?
Joe Higgins (Dublin West, Socialist Party)
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Why were you chasing Anglo then?
Mr. Dermot Gleeson:
I wasn't chasing Anglo. I was trying to ... as I said, my function here is to try and explain how things were at the time and you had ... this bubble grew up. Anglo had a role in it. There was some very good people in Anglo. They took some of our good people. And the price of building land moved on ... became the object of speculation, as you say.
Ciarán Lynch (Cork South Central, Labour)
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Deputy Higgins, I'll have to ask you to desist from questioning that is laden with an implied value judgment in it. Ask the question but don't make the value judgment in it please.
Joe Higgins (Dublin West, Socialist Party)
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Yes, but I'm speaking to an experienced barrister who is well able to stand up and-----
Ciarán Lynch (Cork South Central, Labour)
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And all the more reason-----
Ciarán Lynch (Cork South Central, Labour)
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I know, but all the more reason to have your question legally framed.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Gleeson, you spoke about ethical behaviour, and between 1996 and 2006, a PTSB analysis found that each year the price of an average home increased-----
Joe Higgins (Dublin West, Socialist Party)
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-----by the equivalent of the average industrial wage.
Joe Higgins (Dublin West, Socialist Party)
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To 2006.
Joe Higgins (Dublin West, Socialist Party)
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Each year, requiring young working people to have mortgages extended from 20 years' duration to 40 years, into their retirement, and at unsustainable levels. Now, can I ask you, in your view, is it moral or ethical, do you think, that inordinate profiteering and speculation in building land and in housing by banks, developers and bondholders should enslave a generation of young working people to that extent, with all the suffering and the horror that has ensued after for them? Do you think that is ethical or moral?
Mr. Dermot Gleeson:
Well, I'm not in favour of immorality or slavery or suffering. So far as your question relates to the issue of the price of building land, I think that there is a serious political and social issue as to how that should be controlled, and the price of building land, and you probably know that building land becomes the object of speculation, and you probably also know that 40 years ago, this very issue was addressed after an increase of 500% in the cost of building land in Dublin between 1963 and 1971.
This is a social resource, it should have some element of, in my view, State control. You can't increase the number of building land ... amount of building land around Dublin. And that issue - that very issue - was put to an expert committee in 1973 ... 1971, reporting in 1973, under the chairmanship of Mr. Justice Kenny.
Ciarán Lynch (Cork South Central, Labour)
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Wrap up now Mr. Gleeson, very quickly to answer the question.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you.
Joe Higgins (Dublin West, Socialist Party)
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Yes ... and I'm-----
Ciarán Lynch (Cork South Central, Labour)
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Not a new question now, Deputy Higgins.
Ciarán Lynch (Cork South Central, Labour)
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Not a new question. Not a new question, you are out of time. You are out of time.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Gleeson-----
Ciarán Lynch (Cork South Central, Labour)
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If this is a new question, I'm not taking it.
Joe Higgins (Dublin West, Socialist Party)
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Okay. All right.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Okay, I'm moving towards the wrap up because we do have a timeframe to keep to and we do indicate to witnesses as to what that general timeframe will be. There will be flexibility with witnesses with a degree of overrun, but we are not going to be repeating the whole morning session going into the afternoon. Right, Deputy Doherty and Deputy Phelan, and I am going to be tight here because I have a little bit of a wrap up to do as well. I am allotting five minutes - with a bit of flexibility each - to both of you but I will be very, very-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, I'll try and be brief. Mr. Gleeson we are going back to Project Omega.
Pearse Doherty (Donegal South West, Sinn Fein)
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You said Project Omega was quite a different project.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, so going ... to ask this question, did AIB-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Well-----
Pearse Doherty (Donegal South West, Sinn Fein)
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The question you ... the question I had earlier on, and I have got the evidence book now was, did AIB ever consider taking over Anglo Irish Bank?
Pearse Doherty (Donegal South West, Sinn Fein)
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No? Never. Now I want to refer to AIB, C3b, Vol. 2.
Pearse Doherty (Donegal South West, Sinn Fein)
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And page 45 to 47? Which is an extract of Project Omega.
Pearse Doherty (Donegal South West, Sinn Fein)
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It is a 64-page document that was reported to AIB plc on 24 November 2008.
Pearse Doherty (Donegal South West, Sinn Fein)
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And it is to the acquisition or takeover of a financial institution.
Pearse Doherty (Donegal South West, Sinn Fein)
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What is ... who is Omega in this report?
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes, you should.
Pearse Doherty (Donegal South West, Sinn Fein)
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It was Irish Life, okay. In relation to the business overview, would you have been ... would this have been presented to you as chairperson of the board? This report?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, so Irish Life, you believe that is Omega and this was the-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, well let's go to page 47. The business overview suggests that ... and we will look at the group structure. It says Omega plc, which you believe is Irish Life, had, in H1-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, page 47.
Pearse Doherty (Donegal South West, Sinn Fein)
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H1, 2008. The total assets were €101 billion, which equates to the total assets of Anglo Irish Bank at that reporting period. Well-----
Pearse Doherty (Donegal South West, Sinn Fein)
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The loans was €68 billion-----
Pearse Doherty (Donegal South West, Sinn Fein)
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But you have a 64-page report-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----commissioned by AIB-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----reported to the board of AIB eight weeks after the guarantee-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----which looked at taking over Anglo Irish Bank and advised against it, but suggested that there were benefits in doing so as well.
Ciarán Lynch (Cork South Central, Labour)
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Space to respond. Space to respond.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, let me go back-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, the document talks to the guarantee, it says in it's executive summary "While the Guarantee provides respite it does not fix the structural funding issue at Omega.", which-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Now, can I get clarity on this here? Do you now believe that this is ... Omega is Anglo Irish Bank, or not?
Pearse Doherty (Donegal South West, Sinn Fein)
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And I'll talk while you are looking for that. H1, Anglo Irish Bank-----
Ciarán Lynch (Cork South Central, Labour)
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No, no, no I-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Well the half 1 reports of Irish ...Anglo Irish Bank in 31 March 2008 reported assets of €101 billion, loans of €69 billion - in this report the loans are €68 billion - and the deposits in Anglo's reporting period was €54.5 billion ... this is €55 billion.
Pearse Doherty (Donegal South West, Sinn Fein)
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Can we now agree that this is Anglo Irish Bank that we are talking about?
Ciarán Lynch (Cork South Central, Labour)
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Okay, can I make one intervention here, because I ... I think this is material evidence and I can ... I will give flexibility to a witness if they can't ask or answer a question right here and now. But could I ask you, Mr. Gleeson, that you would revert back to this committee with your clarity actually on this.
Pearse Doherty (Donegal South West, Sinn Fein)
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I understand that.
Pearse Doherty (Donegal South West, Sinn Fein)
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No, I understand that. I understand that, Mr. Gleeson. We have a lot of evidence, as investigators, to go through ourselves. What I'm finding difficult to understand as ... as chairperson of AIB, in a report that was commissioned by AIB to take over a bank which was ... had €101 billion of assets ... that you gave testimony to this committee that you never considered such an event. You say, "I wasn't having it. Project Omega was a different project". You suggested it was another institution.
Mr. Dermot Gleeson:
It's clearly that I'm confused, Deputy, but if ... the only circumstance which I think it would have arisen is this, is that there was this discussion about the healthy banks taking ...I mentioned that earlier ... taking over some of the invalided banks, if I can put it that way. And it may be that the Government asked us to look at it at that account. But, I have to say, I can't bring it to mind.
Pearse Doherty (Donegal South West, Sinn Fein)
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Mr. Gleeson, you suggested earlier, again ... and I just want to ask you, because obviously, you know, witnesses are under oath here-----
Pearse Doherty (Donegal South West, Sinn Fein)
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And I have no doubt about that there. But did you not suggest to this committee afterwards that nobody in Government circles suggested that you take over ... look at taking over Anglo Irish Bank?
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes. There's another project, which is Project Indigo, which, I expect, refers to Irish Life, which was a takeover-----
Pearse Doherty (Donegal South West, Sinn Fein)
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I can understand the code names. But the generality of the ... this is what I'm finding ... if you could explain to the committee ... as chairperson, as somebody of the standing that you have, that you would not recollect a commissioned document reported to the board as chairperson that you would've seen, as you said, a couple of days before hand.
Pearse Doherty (Donegal South West, Sinn Fein)
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That you could not recollect a takeover of Anglo Irish Bank, which was widely in the media at that time. Indeed the report ... the report itself says that Anglo Irish Bank would need in the region of ... what is it ... "Brokers are suggesting €3.0bn - €4.6bn [losses]-----
Ciarán Lynch (Cork South Central, Labour)
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As I have already stated, and following on from Deputy Doherty's-----
Ciarán Lynch (Cork South Central, Labour)
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Yes, I would request that you would do that, Mr. Gleeson, please. Deputy Phelan.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you, Chair. Mr. Gleeson, I have two areas that I want to cover so I'll be as brief as I can and I hope you can be too, time is ... the Chairman is strict. What did you see as the main purpose, Mr. Gleeson, of the round table ... the main outcome indeed ... the round table discussions that took place with the Central Bank post the publication of financial stability reports in 2004?
Mr. Dermot Gleeson:
Well, I don't recall the round table discussions but we would have interactions with the Central Bank. I suppose we felt we were, feeding into the financial stability reports and getting feedback from it. It was that sort of thing, it was trading information about where they felt the economy and the banking system was and getting information back. But I can't bring the specific discussions to mind, I'm sorry to say, Deputy.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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The other thing ... point that I wanted to make briefly in relation to Deputy Higgins's question - and you've mentioned it several times - about good customers crossing the streets of provincial towns.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I know but Anglo Irish Bank did not have a commercial network in provincial Ireland.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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You repeated it a number of times in answer to different-----
Ciarán Lynch (Cork South Central, Labour)
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We'll take it as a general analogy.
Ciarán Lynch (Cork South Central, Labour)
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Indeed, as is eating someone else's lunch is ... is an analogy as well.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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The final area that I wanted to touch on is the issue of directors' compliance statements. I was interested in your comments earlier. You referenced Professor Ahearne's testimony where he spoke about the need for, you know, more firm regulation.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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You were often quoted in the media, prior to the collapse, as being one of the leading bankers who did not, to say the very least, favour firm regulation. Now I want to put a direct quote-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----I want to put a quote to you from The Irish Times, 1 August 2005, an article titled "Big banks oppose vetting of financial manners ... managers".
On the issue of directors' compliance statements, which the financial regulatory authority had started a consultation process----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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----first, firstly did you take part in the consultation process as chairman of AIB?
Ciarán Lynch (Cork South Central, Labour)
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Is the witness familiar with the documentation that Deputy Phelan's----
Ciarán Lynch (Cork South Central, Labour)
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Okay, sure.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Well I want to put this particular quote in excerpts of what you wrote in opposition to it, you reported in that article that I mentioned, 1 August 2005, The Irish Times, as stating that it would have, and I quote, " a chilling or discouraging effect on good tax compliant and law-abiding candidates who would simply prefer to maintain their privacy." I want to know do you stand over that? Do you stand over that comment?
Mr. Dermot Gleeson:
Firstly, I had two reservations about the compliance standards. The proposal at one stage was that you'd ask directors for details of their personal finances at a level that wasn't being asked in London by the regulator there, and we were competitors for trying to ... one of the big problems getting bankers to be directors of AIB ... you couldn't use Irish bankers, you couldn't use former AIB people, that wouldn't be good governance. You couldn't use Bank of Ireland because they would be bringing Bank of Ireland secrets, so you had to look to the UK. And we thought that having to give a much more detailed account of your personal finances in a way that you wouldn't get asked if you were a bank director in London was a bad idea.
The other reservation, which I ... on one occasion saw misrepresented - I'm all in favour of compliance and people being asked to sign up to compliance ... but I remember once, for instance ... and Chairman, this ... I'll conclude on this ... getting a draft compliance statement which said that the directors would confirm that the bank is in compliance with all statutory regulations and rules. Now, if the stairs in the bank in Ballybofey had a safety feature that they were missing - I just want to answer - I couldn't tell whether everyone was in absolute compliance all the time, no one could.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Good example there, all statutory regulations and rules. The rule that was mentioned early on about the 200% concentration and 250%, you were not in compliance with that, and if, if that requirement-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I know, I understand. But if it came out of this consultation, which you are on the record as having opposed, would that not have been a beneficial development?
Mr. Dermot Gleeson:
I think you're mixing up cows and crocodiles here, I'm afraid. I think the regulation as you describe it, the standard as the Central Bank calls it, which they used as an aid to their supervisory duties, is a different thing than having, you know, not obeying the environmental protection Act because the way you're dealing with the rubbish in a branch, or something like that.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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That's not-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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There's significant differences, that's the point.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Can I just ... to round off that point and to move towards a wrap-up, Mr. Gleeson, did you ever contact the Financial Regulator re issues arising from supervisory visits either to challenge the regulator on positions in the regulatory office, or to lobby him in regard to maybe taking a lighter touch?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you very much. Right. Can I also, just in regard to the guarantee and just to round that off-----
Ciarán Lynch (Cork South Central, Labour)
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What's your current view on the appropriateness of the guarantee?
Ciarán Lynch (Cork South Central, Labour)
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I don't want to frighten you, I just want you to answer.
Mr. Dermot Gleeson:
No, and you're not frightening me. I don't honestly think that I have sufficient qualifications to give a view on that. And I mean that, that's not dodging the question. I mean you've heard views, I know because I looked at them, there's some of the witnesses I did look at - Professor Ahearne, Governor Honohan, and Mr. Nyberg, all of whom are Central Bank experienced people. They're the appropriate people to ask. You've had other comments from people that I wouldn't rate as highly. But I don't think, given that I've been out of this space for six years, that I can usefully add to the stock of information of the committee by giving an opinion on that.
Ciarán Lynch (Cork South Central, Labour)
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Okay, but you used a football analogy yourself earlier with regard to referees. You were togged out on the pitch the night of the guarantee and-----
Ciarán Lynch (Cork South Central, Labour)
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And every time I put on my television or radio there's former footballers talking about their careers and all the rest of it, and how the team today plays-----
Ciarán Lynch (Cork South Central, Labour)
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In this regard I'd like you to-----
Ciarán Lynch (Cork South Central, Labour)
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-----with regard to expansiveness or anything else-----
Ciarán Lynch (Cork South Central, Labour)
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Okay. Finally, Mr. Gleeson, just we discussed the wider bank ... wider banking sector this morning; we also spoke about the general behaviour of AIB. In regard to yourself, did you personally, in your tenure as chairperson of AIB, do you feel that you got anything wrong during that time?
Ciarán Lynch (Cork South Central, Labour)
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Okay. And particularly, is there any one regret that you have about it?
Mr. Dermot Gleeson:
Well I mean, not one moment where I could have turned off the tap, miraculously said "We're closing ... close every branch tomorrow, tell them they're ... we're not giving any more loans." I don't have reflections like that. I don't think there was a big turning point in the road but clearly the mistakes were made.
Ciarán Lynch (Cork South Central, Labour)
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Okay. And that brings me to my very final question, because you said about no more loans and in an opening comment earlier today you said no more loans either as being the approach. But could I put it to you, and particularly in light of NAMA's testimony yesterday, it was ... it would be suggested by NAMA's testimony that it wasn't to stop giving loans, but it was to change the methodology by which loans were being given in terms of looking at the cross-securitisation-----
Ciarán Lynch (Cork South Central, Labour)
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-----where personal guarantees-----
Mr. Dermot Gleeson:
Yes, I mean I think the history that is now seen in AIB, and I obviously haven't seen it because I wasn't there, but if you look at some of the reports that were done afterwards. There's one in 2009 by a Mr. Treble, for instance, it analyses that the credits ... the credit assessments systems weren't as strong as they should have been have.
Ciarán Lynch (Cork South Central, Labour)
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And there was a question I put to, I think, Mr. Daly yesterday, and he said it maybe be better placed to the banks. So-----
Ciarán Lynch (Cork South Central, Labour)
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I put a question to Mr. Daly, I think yesterday, and he said ... in his response he said maybe the banks can answer that better. And it comes back to my earlier question which was about the banking behaviour, the banking behaviours with regard to cross-collateralisations, cross-exposures, letters of guarantee and all the rest. So I asked Mr. Daly did the banks, to his view, behave in a deferential manner to major developers and lenders.
Mr. Dermot Gleeson:
In my case, absolutely not, I think I only know ... knew two developers ever, and one of them didn't bank with AIB; he was the one I knew best. And the other one I knew him only slightly as a neighbour, and I never discussed financial matters with him. So I never deferred to anybody.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you very much Mr. Gleeson. To wrap things up, is there anything further you'd like to add or comment on?
Ciarán Lynch (Cork South Central, Labour)
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We all suffer from that fault, Mr Gleeson. Thank you very much.
Ciarán Lynch (Cork South Central, Labour)
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Okay. So with that said I'd like to thank Mr. Gleeson for his participation and for his positive engagement with the inquiry. The witness is now excused, and I propose that we suspend until 2.30 p.m., at which time we will resume with Mr. Donal Forde. Is that agreed? Agreed.
Ciarán Lynch (Cork South Central, Labour)
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As we have a quorum I propose that the committee now goes back into public session for this afternoon's hearings. Is that agreed? Agreed.
We'll commence with session two, public hearing with Mr. Donal Forde, former managing director AIB in the Republic of Ireland. The Committee of Inquiry into the Banking Crisis is now resuming in public session and can I ask members and those in the Public Gallery to ensure that their mobile phone devices are switched off? We will now hear from Mr. Donal Forde. Mr. Forde served as the managing director of AIB bank, Republic of Ireland, from 2002 to 1 May 2009 and was responsible for AIB's retail banking operations in the Republic of Ireland. Mr. Forde joined AIB in 1978. During a long career with AIB, he held a variety of senior executive roles within their capital markets and retail businesses. Mr. Forde you're very welcome before the committee this afternoon.
Ciarán Lynch (Cork South Central, Labour)
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Before I hear from the witness, I just wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. I will remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry, which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings. Members of the public are reminded that photography is prohibited in the committee room.
To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screen to your left. Members of the public and journalists are reminded that these documents are confidential and they should not publish any documents as displayed. They are there to assist proceedings when evidence is being given.
The witness has been directed to attend this meeting of the inquiry into the banking crisis and you have been furnished with booklets of core documents. These are before the committee and will be relied upon at times when questioning, and form part of the evidence of the inquiry. With that said, could I now ask the clerk to administer the oath of affirmation to Mr. Forde.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Mr. Forde, if I can invite you to make your opening address to the committee please.
Mr. Donal Forde:
Thank you, Chairman, and thank you for the invitation to appear before the committee. In that invitation I was asked to give evidence relating to a number of lines of inquiry in the context of three positions which I held in my employment with the AIB Group, specifically in the years from 1999 to 2009. Those three roles were general manager of the strategic development unit in the bank, managing director of AIB Bank, Republic of Ireland, and as director of group strategy at AIB plc. I just want to take the three of these in turn for a while if I might.
I was general manager of the bank's strategic development unit from September 1999 to April 2002. That was a strategic marketing role. In that position I had no responsibility for credit management or credit strategy. I was appointed as managing director of AIB Bank in April 2002, and I held that position until February 2009, you may have mentioned May 2009 earlier. I believe it is principally in the context of this role that I can be of assistance to the inquiry. AIB Bank was the domestic retail banking division of AIB Group. As its managing director I was responsible for all aspects of the division's activity in accordance with AIB Group policies and governance. Specifically in the context of credit strategies, credit approval or credit risk management, activities were all conducted within policies that were set out by the central group risk management function, endorsed by the group executive committee and approved by the board of directors.
Thereafter, these activities were supervised by the group risk management function with support from the internal audit function. As managing director of AIB Bank, I did not have any credit discretion. My responsibility was to manage the business to the highest possible level of performance in all respects, and to do so within the credit risk policies and credit risk management frameworks that were set and ordained at group level. Let me make it clear that, in outlining the corporate governance structure within which the AIB Bank division operated, I am doing that for the purpose of clarity. I am not in any way suggesting that I am without a share of the responsibility for the failure of the bank. I was part of the group executive management committee through this period and I became a member of the AIB Group board in 2007. My voice would have been an influential one if I had questioned or challenged our credit strategy and credit positioning at these fora, but I did not do so. While I had expected a faltering of economic activity and a pull back in the property market, I simply did not foresee the scale of the collapse that was to follow. It is clear now that AIB credit policies were inappropriate at that advanced stage of the economic cycle. At the time, I believe that the economy was on a more resilient and sustainable footing than subsequently proved to be the case.
With the wisdom of hindsight, this was a serious misjudgment on my part and on the part of many others within the bank and outside. My own failing in this respect is a matter of deep personal regret and I am very conscious of the implications of that misjudgment for very many people. In late January and February of 2009, I was informed by the AIB Group chief executive that I was being moved from my post as managing director of AIB Bank to a newly created position as director of group strategy. However, that position never materialised in the way that was indicated to me at the outset. I found myself from that point completely removed from discussions at executive management and board level, and without objectives or direction in terms of a work agenda. That situation persisted until I decided to leave the bank nine months later in November 2009. Throughout my time in this role, I had no involvement in the management of the bank and very little knowledge of developments from a credit risk perspective.
Turning to the specific lines of inquiry that I was asked to address, I have addressed each of these in my written statement. In the interest of time, I will not read through the detail of the views and perspectives that I have to offer, but I am happy to elaborate on my submission in any way that the committee considers helpful. I have summarised that submission, Chairman, with my personal conclusion that the failure of the bank was primarily attributed to the failure of our credit risk management policy. Our stress testing of customers' repayment capacity was not sufficiently challenging, and our loan to value constraint on security was inadequate. The impact of these principle factors was exacerbated by an excessive weighting of property exposure in our portfolio, an undue level of exposure to individual counter parties, and there were external factors that contributed to the difficulty. There were inappropriate accounting protocols in my view for loan loss provisioning, there was unanticipated and increased funding costs, there was an external requirement for increased capital and all of these added to the strain.
I hope my statement is helpful to the committee. I have relied primarily on my recollection of events in preparing material for the inquiry and this may mean that some points of detail have escaped me. With that caveat, I am happy to address any more detailed questions that may arise. Thank you, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Forde. Our first questioner today is Senator Marc MacSharry. Senator you have 25 minutes.
Marc MacSharry (Fianna Fail)
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Thank you very much. Welcome, Mr. Forde. Can I ask what processes and actions were taken to monitor and remediate the regular approval of exceptions to the group-large exposure policy limits?
Mr. Donal Forde:
I do not think there was much action taken to remediate them. That is the truth of the situation. I think it became far too routine that exceptions were created to the large exposure policy. I think that is the case. There was not a question of remediating them. They were referred to the board, all of these, they were approved. I think we began to accept it as something routine that that policy was honoured more, I have to say, in the breach than in the observance.
Marc MacSharry (Fianna Fail)
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Is it fair to say or not that the correct checks and balances did not exist?
Mr. Donal Forde:
I would not have put it like that, in the sense that every one of these cases was scrutinised. All the documentation and the circumstance of the case would be reviewed three times - by the division, the division then referred them to the group credit committee and they would be reviewed again and then they would go to the board for final approval. So it was not that there was an absence of scrutiny on them. I think we had come to accept that large exposures to individuals who were long-established in the property and construction business were acceptable. I would put it in those terms.
Marc MacSharry (Fianna Fail)
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What would constitute a large exposure, typically?
Marc MacSharry (Fianna Fail)
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In your experience, both outside the board and in the board, was the board rubber stamping or did it scrutinise the work already done by the various committees? Or did they just rubber stamp and accept recommendations?
Mr. Donal Forde:
It felt like an intense process of scrutiny. I cannot speak for how the members of the board saw it but certainly from my point of view and certainly from the perspective of those at divisional level who were going to those, they certainly felt they were being scrutinised fairly rigorously.
Marc MacSharry (Fianna Fail)
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Was there ever an instance where one was rejected by the board?
Marc MacSharry (Fianna Fail)
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But no decline. There was no decline, was there? Just that we asked before, the previous witness, just to-----
Marc MacSharry (Fianna Fail)
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So you would have recommended adjustments, but-----
Marc MacSharry (Fianna Fail)
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-----but you don't recall saying, "No, we're not doing that."
Mr. Donal Forde:
I don't recall an outright decline where adjustments would be reasonably frequent. I ... remember, I wouldn't actually attend at those because I would be considered to be someone in conflict. So I ... it would be very infrequent that I would actually sit at those chairman's sub-committees.
Marc MacSharry (Fianna Fail)
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Except when you were at the board itself?
Mr. Donal Forde:
No. No, because it would be regarded as a conflict. I think I sat at one, I remember, where somebody had withdrawn or something but, it was always regarded as a conflict on my part given that I was coming from the division if I was to be sitting in judgment on something that those working for me were bringing forward.
Marc MacSharry (Fianna Fail)
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In your time on the board, post '07, the chairman's committee, it seemed, routinely considered these issues. Did the board rubber-stamp the recommendations of the chairman's committee typically or did they scrutinise or change or adapt or adjust or-----
Marc MacSharry (Fianna Fail)
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And do you recall at any stage, any dissenting voices to a decision of the chairman's committee?
Marc MacSharry (Fianna Fail)
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Would you like to elaborate on those?
Marc MacSharry (Fianna Fail)
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What size of the deal? I mean, developer A was borrowing ...
Marc MacSharry (Fianna Fail)
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And did that end up in a ... in a refusal or-----
Marc MacSharry (Fianna Fail)
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Okay, was there ever staff members or ...senior or junior of AIB, who would've been termed high exposure?
Marc MacSharry (Fianna Fail)
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Well let's say I'm ... Let's say I was an employee of AIB. Was there any people that owed €75 million who were on staff?
Marc MacSharry (Fianna Fail)
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Okay. Were they in senior positions?
Marc MacSharry (Fianna Fail)
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What kind of a role would that have been?
Marc MacSharry (Fianna Fail)
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And how deep was that person exposed?
Marc MacSharry (Fianna Fail)
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I mean ... How much did that person borrow from the bank to facilitate their property investments?
Marc MacSharry (Fianna Fail)
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Would there have been many staff, say, that borrowed or were involved in syndication for multi-million, say, in excess of €5 million?
Marc MacSharry (Fianna Fail)
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And were there rules that governed these issues?
Mr. Donal Forde:
There were rules in the ... there was a rule that we had a very rigorous conflict of interest policy. So I guess the judgment to be applied in that case was whether somebody, through activities like that, was conflicted in terms of what they were doing for AIB. And that conflict could arise in one of two ways: that they had an interest in one of the cases, and I was never aware of any such instance, or alternatively that they were active in some fashion in the market place in a manner that might've compromised one of the cases. There wasn't ... Never was there any evidence that that had happened. I do know there was some discomfort when one or two individuals, as I've said that I've acknowledged, but ... but, and that was the topic of some discussion, but I think we were always satisfied that they were not doing anything that conflicted in any way with the business of the bank. And, I guess there was a view that the knowledge and intimacy, I suppose, that they had with the market place, was actually of quite a benefit to us in the sense of knowing the nuances of the market, having credibility in standing in the market, so ...
Marc MacSharry (Fianna Fail)
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Are you aware of any loans or terms offered to borrowers which would be considered outside the normal commercial terms available at your institution made during the period of your tenure and if so, can you clarify the reasons why this would've happened?
Mr. Donal Forde:
That's a very sweeping question. I suppose maybe I ... maybe before I answer that, if I explain ... I wouldn't have involvement in individual cases of any description. I had no credit discretion of my own. Credit decisions, there was a ... there was a framework within which they were made. We had a chief credit officer. He sat with the committee, he adjudicated on those cases. I didn't get involved in those cases and I took the view that to do so created some danger that my opinion of a case would sway unduly members of the committee. So I didn't get involved in those. Now, I ... we're dealing with many thousands of customers and can I say that there was a case ... that there weren't cases where something exceptional might've been done? There may well have been but there would be very very few. I mean, those credit committees operated to pretty stringent guidelines from the group credit committee. The product ... their ... the output of their work and the decisions they made on the cases were frequently reviewed by the group risk management ... risk management function. So, you'll see audit reports on the documentation there. The number of exceptions that would arise to policy would be very few.
Marc MacSharry (Fianna Fail)
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And would ever any large lending decision come to you for approval? Never?
Marc MacSharry (Fianna Fail)
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Okay. So the credit committee would recommend and you would say "Okay".
Mr. Donal Forde:
No, it wouldn't even come ... it wouldn't even be referred to me. The credit committee essentially, I think I make reference to it in my statement, in the pre-2005 period, the credit committee ... our divisional credit committee had discretion up to €40 million, I think it was, so they would've approved cases up to €40 million. Approved meant approved, and that was the at the decision of the chief credit officer. If it exceeded that amount, it then had to be passed to the group credit committee, and the group credit committee would then review that case and it would pass a decision on it and if it passed a certain threshold there, it had to go to the chief executive of the board. So, I wasn't ... never had a sight of individual credit cases.
Marc MacSharry (Fianna Fail)
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Had you a role in setting targets for managers in the country?
Marc MacSharry (Fianna Fail)
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Sales, lending, yes.
Mr. Donal Forde:
Yes. I had ... certainly that was at the heart of what I did. In the way that I described here, my job was to drive the performance of the division within the policies that were set down. So yes, at the start of the year, there would be targets agreed for pretty much every aspect of the business.
Marc MacSharry (Fianna Fail)
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So in with regard to lending, how would that manifest itself?
Marc MacSharry (Fianna Fail)
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Okay. We heard earlier from former chairman, Mr. Gleeson, and he seemed to be of the case, though I did ask him to reflect and he said he may have been incorrect, that targets were only ever linked to profitability, rather than, say, volumes. So I was querying that. So are you saying that when you would be setting targets for branches or performers in ... that it would be linked to growth in lending, rather than profitability?
Mr. Donal Forde:
Well, let me ... let me explain, I suppose, the way that the process would work. We would have a divisional profit target for the year that would break down into a whole variety of different lines of business. There'd be an advance as growth target and then that would break down between an expectation of growth in margins or growth in commercial loans, each elements of the portfolio, and there would be a margin attributed to that growth. So, example, the loan book in totality was to grow by 10%. The expected margin on that was, let's say, 1.5%. So the expected profitability outcome through the course of the year would be whatever the ... whatever the rate dictates. What would go on through the course of years, obviously each of those lines would vary, so you would be endeavouring to improve the margins on lines, and as you improve the margins, then clearly there wasn't the same pressure for volume growth. But I was accountable for the totality of that, and ... the totality being the profitability that fell out of it by the ... by year-end.
Marc MacSharry (Fianna Fail)
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Let us say, on lending, who ... who would ... who reports to you, say-----
Marc MacSharry (Fianna Fail)
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From a lending point of view?
Marc MacSharry (Fianna Fail)
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So, when you'd sit down and do targets for the year and you'd say, "Right, we're going to grow lending by X per cent", that's based on volume. So by the time that gets to Joe Bloggs, the branch manager or the regional manager over three or four branches, would it say "You are to grow your lending by X on commercial and Y on residential"?
Mr. Donal Forde:
I would break the overall target down and I would then turn, for example, I would turn to the general manager who was in charge of property and construction and I would say, "Look, our expectation is that loans will grow by X, our expectation, our expectation is that we will earn margins of Y, the group is expecting profitability of Z from us, okay". And thereafter, what we would endeavour to do is to manage the margin up. We would endeavour to grow the volume but we had to grow that volume within the credit guidelines that were set out for us.
Marc MacSharry (Fianna Fail)
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Who would set the target .... you would set the margins at maybe your level? And above?
Marc MacSharry (Fianna Fail)
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So, the target that would come to you would be based on profitability, would it?
Marc MacSharry (Fianna Fail)
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What I'm asking really is, when targets are determined or for you, as managing director, do you then have to localise that then for the branch network to say "Here's what you need to do"?-----
Marc MacSharry (Fianna Fail)
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And would ... is it fair to say that that manifests itself then in sales targets in terms of mortgage products or lending products?
Marc MacSharry (Fianna Fail)
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Alright and then if that's the case, if I'm a manager or a loan officer or whatever I am in whatever branch, am I-----
Mr. Donal Forde:
No, lest I give the wrong impression, just in parallel with those would be those guidelines that I have talked about which said "Your mortgages have to fall within these parameters, they have to generate this return at an individual level, your loans have to fall within these parameters. They have to be ... they have fall within this risk framework." So I had no licence to operate outside of the framework that the group had dictated to be appropriate from a risk perspective.
Marc MacSharry (Fianna Fail)
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Of course, yes, so and how were the people remunerated then in direct sales?
Marc MacSharry (Fianna Fail)
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The front line.
Marc MacSharry (Fianna Fail)
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On profitability?
Marc MacSharry (Fianna Fail)
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But if ... would people have targets and on-target earnings?
Mr. Donal Forde:
They'd have, you see I'm hesitant to use the words "absolute target" in the sense that at the end of the year, if somebody fell short of the expectation from a volume point of view by 10% but had improved their margin by 12%, you would be very content with them and they had done a very good job. Does that make sense?
Marc MacSharry (Fianna Fail)
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Yes but, individual branch managers didn't have discretion on things like rates, for example?
Marc MacSharry (Fianna Fail)
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Well then sure --- they're the ones selling the loans, aren't they?
Marc MacSharry (Fianna Fail)
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What was the percentage growth in lending in your tenure as managing director on property and construction?
Marc MacSharry (Fianna Fail)
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And what was the contribution-----
Marc MacSharry (Fianna Fail)
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And what was the contribution of your division in terms of profitability to-----
Marc MacSharry (Fianna Fail)
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So what was that percentage in terms of the bank?
Marc MacSharry (Fianna Fail)
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The chairman, the then chairman, Mr. Gleeson, told ----
Marc MacSharry (Fianna Fail)
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-----told us earlier that property and construction contributed maybe 10% to 13%, I think, if I am quoting him correctly, this morning-----
Marc MacSharry (Fianna Fail)
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Of the profit.
Marc MacSharry (Fianna Fail)
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Okay. When targets were being determined, it was being driven purely by profitability, at your level. But that manifested itself in the branch network then.
Mr. Donal Forde:
Forgive me, I am just careful to say that within the constraints from a risk perspective that had been ordained. So it wasn't as if we could go out and create any number of loans on terms that weren't consistent with the risk guidelines that were given to us. So my objectives formally would be to manage loan growth within the credit risk guidelines that had been laid out for me and then to endeavour to reach the targets that had been set for me. I think that's fair to describe it in those terms.
Marc MacSharry (Fianna Fail)
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Yes. In terms of an earlier question there, in terms of anybody getting special deals or situations that it would be outside the norm, I mean the individual discretion of branch managers, how high would that go?
Marc MacSharry (Fianna Fail)
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They wouldn't have one.
Mr. Donal Forde:
They wouldn't have one, you know, we did become very centralised, I mean I think I describe it in my statement. The divisional chief credit officer had a discretion of €40 million. Below that we had senior lending and sorry, forgive me, the divisional chief credit committee had a discretion of €40 million. The chief credit officer, I think, had €20 million, from memory and then we had a number of senior lending executives who had the order of €8 million to €10 million and pretty much after that, you know, they within their teams might pass that down one level more but we were dealing with a pretty centralised system where the local branch manager would have no discretion.
Marc MacSharry (Fianna Fail)
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Was there ... would it have been possible for a manager in pursuit of a target to procure a purchaser for land that they were aware was on the market and approve a loan for that amount of money?
Marc MacSharry (Fianna Fail)
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Well, a lending manager.
Mr. Donal Forde:
No. The way the system worked was I described the sector that dealt with the relationships in property and construction. Their job was to originate the loan, okay, on terms that were consistent with our guidelines and that would then be brought either to the senior lending executive or to the divisional credit committee for approval. So, you couldn't originate and approve as one individual.
Marc MacSharry (Fianna Fail)
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Were independent valuations always sought?
Marc MacSharry (Fianna Fail)
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But up to then, up to 2006-----
Marc MacSharry (Fianna Fail)
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And after 2006, if it was anything under €4 million it wouldn't be. As a matter of routine.
Marc MacSharry (Fianna Fail)
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It wasn't prescribed so it was possible then for a person to go in and say "You know me, I'm a good builder I want to borrow €4 million, that's the property, there's the brochure" and theoretically, your credit committee could say "No problem here's the money".
Marc MacSharry (Fianna Fail)
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They wouldn't be valuers, would they?
Marc MacSharry (Fianna Fail)
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Okay, so they were guessing or were they? I mean, what did they do? I mean, how did they evaluate without a valuation?
Mr. Donal Forde:
Well, I think, the way a loan officer does this is they look at this from first principles. So if there is a piece of property, you look to see what's the potential productivity of that piece of property, so is it to be used for residential development, how many houses can be built on it, what's the price of those houses, what's the cost of building those houses, what will the density be, how long will it take for the money to be realised. They're meant to work it out from first principles and then stress test that and that determines the value of the property. I think I made the point in my statement that perhaps there was less of that and too much of the reliance on "the auctioneer up the road says this is worth €4 million" because I'm not sure what value attached to that in some respects. But the loan officer's job and he would be coming with 20 years' experience to this, would be to look at that asset and establish what seemed like a fair value for that asset and in many respects, the getting or the seeking of an independent valuation would be confirmatory more than anything else. I mean, more value would attach to that senior lending officer's valuation of that asset frequently than would to the external-----
Marc MacSharry (Fianna Fail)
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Do you think that was wise?
Mr. Donal Forde:
In hindsight, I actually think that the focus we started putting on external valuations was part of our undoing. Because it was something of a house of cards, I mean, one auctioneer says it worth four, one says five and then a certain solidity begins to attach to that from a lending point of view when prior to that, I think there'd be a lot more rigour about saying "Actually well, we need to work out ourselves what this piece of land is worth" and I think more effort and more scrutiny and more challenge maybe went into it in the earlier stages when you didn't have the comfort of an external valuer saying this is worth X.
Marc MacSharry (Fianna Fail)
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So external valuation was poor practice?
Marc MacSharry (Fianna Fail)
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Or not, or not?
Mr. Donal Forde:
I think that's being a little ... I think what I'm saying is that both are proper, both are important inputs into a lending decision.
I think we began, perhaps, to sway a little and to put too much weight on the externals and maybe less weight on the internals. Both done properly should give you the best result, clearly.
Marc MacSharry (Fianna Fail)
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Okay. I'm nearly there. Just moving to the guarantee for a second. In your view was the guarantee the best solution, in your opinion, and did you believe in advance ... did you anticipate that it was going to be a blanket guarantee?
Mr. Donal Forde:
I suppose the first thing to say is I'm - and I use the word guardedly - but I'm something of an onlooker on the process in the sense that my division wasn't in the line of fire from a liquidity point of view at that stage. The leakage of deposits from the bank was primarily from our capital markets division and from our UK division because it was the external players, particularly, who were losing confidence in the system. So I wasn't witnessing, in my particular area of responsibility ... I wasn't witnessing extensive leakage of deposits.
Marc MacSharry (Fianna Fail)
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But what did you ... just ... I have only a minute left ... what's your opinion?
Mr. Donal Forde:
I was surprised by how "sweeping", I think was the phrase I used. I ... my expectation, I had been led to expect, from the internal discussions, was that two institutions might necessarily be taken out of the market and then the guarantee would be restricted to the remaining institutions, and perhaps a more restrictive guarantee. So it was a surprise to me when it was-----
Marc MacSharry (Fianna Fail)
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On the morning of the guarantee ... of it being announced ... it was a surprise. And looking back, what's your current view of the appropriateness of the guarantee?
Marc MacSharry (Fianna Fail)
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No, no, but you're a professional with a lot of experience so it's just your view of the appropriateness - given that experience - that may be of value to the committee.
Mr. Donal Forde:
It's easy to judge these things in hindsight. I can understand the view that a more sweeping and radical response often has the impact of giving the market confidence and, sort of, dealing with the issue decisively there and then. So, overkill sometimes is good to deal with market negativity. Perhaps that was the mindset. So I would be slow to criticise, I wasn't there, and-----
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Senator. Deputy Eoghan Murphy - 25 minutes.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman. Thank you, Mr. Forde. You're very welcome. Just to clarify, Mr. Forde, if I may, you were managing director of AIB in the Republic of Ireland from 2002 to February 2009. Did you have an opportunity to hear Mr. Gleeson's evidence this morning?
Eoghan Murphy (Dublin South East, Fine Gael)
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In the written statement he provided to us he said that - under the heading "Quality of the Business Model Setting Process" - "Four of the five business divisions, came through the crisis relatively intact. The exception was the largest division namely Republic of Ireland." And then in his oral presentation he said "ROI brought the bank down". Would you like to comment on that?
Eoghan Murphy (Dublin South East, Fine Gael)
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Coming to your opening statement ... just to get some clarification ... you said that in January-February '09, you were completely removed from discussions at executive management level and board level, and without objectives or direction in terms of a work agenda, and nine months later you left the bank. Could you please clarify what happened here and why you think it happened?
Eoghan Murphy (Dublin South East, Fine Gael)
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In terms of that move being made, at that time.
Mr. Donal Forde:
Well, my understanding, when it happened, was that the chief executive, I think, thought that fresh eyes and fresh perspective on the division would be a helpful thing at that point in time - that, I expected was his mindset - and I didn't have a quarrel with that. You know, I was disappointed clearly to be stepping aside when business that I had been intimately involved with for seven years before that, but I understood his rationale. The position that I understood I was taking up, I thought, given, in a way, the difficulties in which the bank found itself at that stage, that it's ... a perspective on strategy would be an interesting ... and a role in which I could make a contribution, and in some sense help with the situation that I was part of creating. The role simply never materialised. I think the bank got into crisis, ever more intensively, from that point onwards. Whatever ambitions he had for that role to develop just never materialised and-----
Eoghan Murphy (Dublin South East, Fine Gael)
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And do you think that move, that you made, do you think it was a result of a particular action on your part, or connected to the performance of the bank in the Republic of Ireland, under your tenure?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Thank you.
I'd like to move to just a few months prior to that, when you appeared in front of an Oireachtas finance committee in December 2008. And you said:
With regard to the recapitalisation of banks, part of the difficulty in the debate is that banks are banded together as if we are all the same. We are not. AIB has made it clear it does not believe it needs capital and that additional capital will not do anything for the business for which I am responsible.
Then in February, two months later ... February 2009, there was a capital injection into the bank from the Government. Can you please explain the difference between your statement and the actual subsequent action?
Mr. Donal Forde:
I can. I think you'll see in the documentation that we were given, there's a stress test that was done there on the property and construction portfolio in '07, and that was done by the risk management function in the bank ... by the most qualified people we had in the risk management discipline. And you'll see in that, that their downside scenario, their extreme case scenario, was a loss of €2 million of the bank's capital. Well actually not of the bank's capital ... a loss of €2 million which would substantially erode the profitability of the bank, and might ... might require, I suppose, it's capital adequacy to be boosted. But this was the extreme view, so, when I was asked in '08, I was still leaning on that understanding of our portfolio. That was my view of the risk that attached to the business that I was responsible for. And I answered the question, and anything I would have said would have been informed by that perspective, which I now accept was wrong, but that's what guided those answers at the time.
Eoghan Murphy (Dublin South East, Fine Gael)
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You weren't ... sorry, were you instructed to make that statement, at the finance committee, about AIB not requiring capital?
Mr. Donal Forde:
Well I wouldn't say I was instructed, I mean, I think ... there would have been discussion going on at the executive management team and the issue of capital would have been under discussion because at that time there was an expectation in the market, essentially, that we needed capital. And I think ... like ... and I remember seeing some of the minutes here in the documents. I think the view of the finance team was that there were some steps we could take to improve our capital position, but not going so far as a capital issuance. So I was persuaded by that view, and I ... that's what informed ... so ... so I wouldn't say I was instructed, I would say I accepted the view of the finance team at that stage.
Eoghan Murphy (Dublin South East, Fine Gael)
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But was there a discussion at management level as to how to present the bank's position to the Oireachtas at the time?
Eoghan Murphy (Dublin South East, Fine Gael)
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And then moving just two months later from you making that very express statement in a finance committee, two months after the guarantee, the bank does not need capital, it then requires a €3.5 billion injection from the Government, in a two-month window.
Mr. Donal Forde:
Yes. I think ... I make the point I think, in my statement, that in my last act, if I can express it in those terms, of the MD of the division, was that the chief executive has asked me to do a very rigorous assessment of what the scale of loan losses could be. This was in late January, early February of '09. And I did that at the time and I did it ... that was ... that was done in close collaboration with the chief credit officer and the risk executives. And the product of that was, at that time, to suggest that the loan losses could be of the order of €2 billion to €3 billion. That was my last picture of the division before I, in a sense, stepped aside. Now that would have not led to that order of capital requirement that subsequently came. Now things deteriorated so quickly and so sharply after that, that from one month to another the situation changed, so I can understand how ... I mean, at that stage ... I recall when that was being done, the worry and the concern from a credit point of view was that houses weren't selling, sales of completed office developments had stopped. The worry was not so much about the fall in value as it was about the suspension of economic activity. At that stage values were back ... house values were back 25%. Clearly from then, to a period 12 months later, things changed very dramatically. So, if you'll forgive me, I think asking me whether something, an evaluation of the loan portfolio, was done in February or done in April is very material given what was happening. And the last one I saw was what was done in late January and February and that was the product of it.
Eoghan Murphy (Dublin South East, Fine Gael)
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And that work you did talked about a, at maximum, €3 billion loss on the loan book in the Republic of Ireland division, and you said that would've changed dramatically again two months subsequent to that.
Mr. Donal Forde:
Well, I stepped out from there, but I'm saying I can understand how, month to month thereafter, given the pace at which things deteriorated ... the point at which you looked at that portfolio, you would get a different and more adverse result every second month, I think, if you looked at it.
Eoghan Murphy (Dublin South East, Fine Gael)
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Just to clarify, then - your statement to the Oireachtas committee in December 2008, as far as you're concerned, was true at the time.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Thank you. I want to take you back, then, to your management of the increase in property lending in the Republic of Ireland prior to the 2008. The rate of increase in property lending in the AIB Group was magnified in the Republic of Ireland division, and on exposure to property, property lending grew in the Republic of Ireland from €10.1 billion in 2004 to €33.3 billion in 2008. Can you explain this imbalance with other divisions in the AIB Group? Why was it magnified? Why was it so much greater in RoI?
Mr. Donal Forde:
Because the heart of our franchise ... we were Ireland's biggest ... well, we still are Ireland's biggest business bank. The core of AIB's franchise in the Irish market was with business customers and the greater part of economic activity that was afoot at these times was in property and construction. So, I think an added statistic for that period, Deputy, was that our market share wouldn't have changed during that period. So, what happened was, we kept pace with the level of activity in the market. We continued to service and support those customers through that time. Mistakenly, I now accept, but we didn't feel we were stepping more intensively into the market. We felt we were keeping pace with the requirements of our customers.
Eoghan Murphy (Dublin South East, Fine Gael)
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You had two different CEOs during that period 2004 to 2008. Did either of them express concerns with that magnification in property lending?
Mr. Donal Forde:
There was a number of discussions, not ... I don't recall specific ... well, I don't recall specific discussions with the CEOs, but I recall discussions at our group executive forum and I recall a number of discussions at the board where there would be considerable discussion about the weight of our property-construction lending, and I suppose particularly a fact that it was - again, I saw reference in the documents - it was in breach of some of the guidelines from the regulator. And there was a number of board discussions to specifically address that point - were we comfortable with what we were doing in property-construction? I actually recall ... I think when that stress test in 2007 was presented to the board, that was in response, I think, to a specific request from the regulator that the board would validate and confirm its comfort with AIB's property and construction exposure. And I ... the board's response to that was to ask the risk function to do that evaluation that you've seen there and that stress test. And the output of that - mistaken, I now accept - I think left them with a false sense of security and a false sense of comfort. So, yes. I've answered that in a long-winded way. There was discussion. I wouldn't say there was concern, but the scale of our property and construction exposure featured frequently, but each time the board got to a point of comfort with it and we continued.
Eoghan Murphy (Dublin South East, Fine Gael)
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You were in breach of the limits by ... the limits were 250%, the limits you mentioned. And in 2006, you were at 260%, but by September 2008 you were at 390%. I mean, that's-----
Eoghan Murphy (Dublin South East, Fine Gael)
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I could give you a reference for that if you'd like. It's-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----AIB B2.
Eoghan Murphy (Dublin South East, Fine Gael)
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But it was a significant breach.
Eoghan Murphy (Dublin South East, Fine Gael)
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Would you not agree? 250% to-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----390%. But you drew comfort from the fact that the board was happy with this.
Eoghan Murphy (Dublin South East, Fine Gael)
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Because you were the managing director-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----in Republic of Ireland.
Mr. Donal Forde:
I, too, drew comfort. And I think, when you'll see that, if I can just lay my hands on it ... when you see the presentation that was made to the board ... this was a time when there was a lot of discussion going on about Basel II and the manner in which loan portfolios should be measured and evaluated from the perspective of what capital was required to support them. And you'll see reference in this that ... certainly, what was communicated to me, or was communicated to us, was that the regulator themselves recognised that this singular, homogenous limit was no longer appropriate and what was now required - and that was consistent with Basel II - was a segmentation of that portfolio and analysis of the different elements of it from a risk point of view. And that's the exercise, essentially, that the risk function presented. And that ... you will see a reference there that the regulator was interested in that methodology themselves.
Eoghan Murphy (Dublin South East, Fine Gael)
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Just to confirm, from your point of view, the regulator was also considering changing-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----the methodology of calculation.
Eoghan Murphy (Dublin South East, Fine Gael)
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And you were in agreement that the methodology should be-----
Mr. Donal Forde:
Yeah. In principle, it's right to say that one homogenous limit for all property is perhaps not the best way forward, so I understood the logic of that. Perhaps the alternative that we were working with didn't prove itself too well but, in principle, I could see where they were going with that.
Eoghan Murphy (Dublin South East, Fine Gael)
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If I could move now to the reliance by the bank on interbank lending, securities, short-term commercial lending and wholesale funding, were you aware of the extent of the tracker mortgage interest rate risk in AIB that you were taking on over that period and was it ever discussed with the board?
Eoghan Murphy (Dublin South East, Fine Gael)
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Yes.
Mr. Donal Forde:
Okay. Yes, we were conscious of it but, at the time, the view was that mortgages were going to be so preferentially treated under the new Basel II regulations that, actually, those margins could contract further because these ... as an asset, they were particularly favourably treated, essentially under Basel II, in a manner that perhaps in hindsight wasn't justified. And for that reason, again, the view was that those margins would continue to contract. So, as with other elements, we didn't see the risk in that.
Eoghan Murphy (Dublin South East, Fine Gael)
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I mean, that was just an accounting tool, though. I mean, more than 50% of your residential loan book was tracker mortgages.
Eoghan Murphy (Dublin South East, Fine Gael)
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I mean, in terms of the practice of having to borrow ... to lend at one rate and borrow at a higher rate and the risks inherent in that.
Eoghan Murphy (Dublin South East, Fine Gael)
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But do you think the bank understood those risks or the scale of those risks?
Mr. Donal Forde:
No, no. No, I don't think we did. No, I don't think we anticipated ... sorry - we did not anticipate the level of structural change that came about in the interbank funding markets. We had never anticipated a scenario where, essentially, you would have to borrow money at such premium in the marketplace. No, we had not anticipated that properly.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Why did the bank ... why was there a significant increase in the issuance of short-term commercial paper funding, given the short tenure and volatility of such instruments, you know, when it comes to a credit crisis? I mean, if you look at ... just to give you the figures ... in the end of the financial year 2004, AIB increased-----
Ciarán Lynch (Cork South Central, Labour)
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You've strayed into liquidity, Deputy, yes?
Eoghan Murphy (Dublin South East, Fine Gael)
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That's correct.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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Increased its commercial paper by €6.2 billion, a 300% increase year on year, to assist in funding balance sheet growth.
Eoghan Murphy (Dublin South East, Fine Gael)
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I'm sorry. There was-----
Ciarán Lynch (Cork South Central, Labour)
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If you want, I can bring up a bit of evidence on this.
Eoghan Murphy (Dublin South East, Fine Gael)
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Yeah. Well, sorry. I-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Mr. Forde, there was a significant increase in the issuance of short-term commercial paper funding in AIB when you were managing director, a 300% increase year on year. It's a risky thing to do for the reason that we've just been discussing. In a credit crisis, when people then call in these issuances where there's no lending on the interbank market, you then run into trouble in terms of your funding and liquidity if it's called upon. Were those risks appreciated by AIB at the time?
Eoghan Murphy (Dublin South East, Fine Gael)
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Why did you ... why did it increase? Why did it expand?
Mr. Donal Forde:
Because it was one of those measures by which we were trying to improve, essentially, the construct of the balance sheet. By being able to issue commercial paper, you improve your liabilities and you will ... that enhances your liquidity position. So, that was a positive step. But, if I take it in the context of the broader question you're asking, I'm not sure we fully understood. In fact, I am sure we didn't fully understand ... we did not anticipate the scale of dysfunctionality that came later in the interbank markets. I accept that point and I acknowledge it. Commercial paper would've actually been a positive feature of the work that was done to try and improve our position, or the issuance of it.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And, to your knowledge, was there a practice of restructuring criticised loans, agreeing to moratoriums, interest only, interest roll-up, extending terms and conditions in the period 2006 to 2008?
Ciarán Lynch (Cork South Central, Labour)
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This is related to solvency with the bank.
Eoghan Murphy (Dublin South East, Fine Gael)
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Yes, sorry, we're moving into the solvency issue debate ... restructuring criticised loans.
Eoghan Murphy (Dublin South East, Fine Gael)
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2006 to 2008.
Mr. Donal Forde:
I think there's always a practice of restructuring criticised loans. I mean, one of the means by which you try and remedy a loan that is not functioning is to try to restructure it, so, yes, always, not just in that period, there's a practice of trying to restructure criticised loans. But the volume of criticised loans in the period of '06 to '08 would have been very few, so I'm not sure where your question is going, but it wouldn't have been material.
Eoghan Murphy (Dublin South East, Fine Gael)
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Well, it began to increase quite quickly then, the criticised loans?
Eoghan Murphy (Dublin South East, Fine Gael)
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Yes, yes.
Eoghan Murphy (Dublin South East, Fine Gael)
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And then what does that tell you then about the quality of the loans that were being given out then in the period-----
Eoghan Murphy (Dublin South East, Fine Gael)
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I want to take you back, if I might, just to your opening statement, just to clarify something then, because you said in your opening statement, which I know you didn't get to read out in full, "The first point of failure came with the collapse of economic activity and the manner in which it undermined repayment capacity." Just elaborate on that point for me, please. When did the problems in AIB actually begin?
Mr. Donal Forde:
Okay. Well, the market began to deteriorate in early '08. Now, what I mean by deteriorate is that essentially ... well, forgive me, I'll just step back one step further. If you're managing a property and construction portfolio, you lend for a significant period of time. You've to lend through a period in which land is purchased, in which houses are built and the costs are incurred before ... the revenue only comes at the end when houses begin to sell, or the office, the commercial development that has been developed begins to sell. The loan and the cash flows are predicated on that sale happening at a particular time and, from early '08, it was obvious that activity in the market was beginning to slow; houses were not selling in the way that had been expected and what that begins to do then is it pushes out the revenues on which those loan cases are based, so, from early '08, it was obvious that there were some developers who were going ... would not meet the cash flow expectations that we had and I would describe the deterioration in the loan book through the course of '08 as that dynamic. That's what was going on and it wasn't until '09 actually that the concern of inadequate security values began to really manifest itself. It's only then that it became obvious that asset values were falling to a point that our security was going to be compromised.
Eoghan Murphy (Dublin South East, Fine Gael)
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In terms of-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Well, in terms of AIB failing, its failures as an institution, as a bank-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----were prior to that, though. AIB's failures weren't just because of a collapse in economic activity in the country?
Eoghan Murphy (Dublin South East, Fine Gael)
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That's unclear from that point in your opening statement.
Eoghan Murphy (Dublin South East, Fine Gael)
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And then, in relation to the change in management, the change in CEOs while you were MD, would you like to comment? Was there a change in style or a change in direction for the bank between 2005 and 2006?
Mr. Donal Forde:
No, I can't say that there was. I can't say that there was. I think the level of growth in the market intensified in '05 and '06, so it seemed like the pace of activity was more frantic, if I can describe it in those terms, through '05 and '06. I didn't ... I can't say that there was a change in the culture of the bank, no. I probably ... sorry, let me just amend that a small bit.
Eoghan Murphy (Dublin South East, Fine Gael)
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Yes.
Mr. Donal Forde:
I think there was a little more pressure from outside the bank for performance because I think, at that point, other banks were going through a stellar performance period and certainly I was more conscious of the pressures from analysts and shareholders to meet their expectation, so I would say it was different in that regard, but I can't say the internal culture changed.
Eoghan Murphy (Dublin South East, Fine Gael)
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Well, then other tactical changes: bank exposures needing group credit committee approval went from €40 million to €75 million, end of 2005, beginning of 2006.
Eoghan Murphy (Dublin South East, Fine Gael)
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Was that from a change at CEO level?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. I want to just come back, just finally, to Mr. Gleeson's evidence earlier today. We were talking about the roll-up of interest in the RoI division and when he was asked about ... the board went looking to find out exactly how much interest had been rolled up and he said there was a bad piece of missing architecture because management weren't able to produce it, they had to go and look for it manually, and he said that this was an indefensible gap.
Mr. Donal Forde:
Yes, I think that's fair, an indefensible gap at the level of portfolio management and understanding. In each of the individual cases, that would be well-documented on the file, so yes, that was a gap in the inability to be able to pull that together as a complete picture. I accept that.
Eoghan Murphy (Dublin South East, Fine Gael)
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Did you understand that that gap was there? Did you understand that people underneath you------
Eoghan Murphy (Dublin South East, Fine Gael)
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-----in terms of managing their portfolios weren't monitoring this?
Mr. Donal Forde:
No, that's not what I've said. People were monitoring it, at a case-by-case basis. The gap was that, from an overall portfolio management, we weren't readily able to present that picture and I guess that only became ... that only came into such ... our focus in late '08 and then it became obvious that that was a piece of information that we needed and needed a lot more ... needed to be able to access a lot more readily than we were able to do.
Eoghan Murphy (Dublin South East, Fine Gael)
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As it occurred, was it being reported to you?
Mr. Donal Forde:
No, I think it's ... can I just step back here for a second? If you take an individual property case, as I've said, if I lend money to somebody for the purchase of land, or if I lend money to somebody to develop residential housing, there's always going to be interest roll-up. There's no way of paying the interest. There's no way, until the houses begin to sell or ... so, there's interest roll-up endemic in every property loan.
Eoghan Murphy (Dublin South East, Fine Gael)
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That's one reason for interest roll-up.
Eoghan Murphy (Dublin South East, Fine Gael)
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But there are other reasons, where someone's not able to meet their repayments.
Mr. Donal Forde:
Sorry, that would be fair. That would be fair. Later on, that became a feature, I think, I would say through '09; and, late '08, there were some who were beginning, as I explained earlier on when you asked me to explain the deterioration in the portfolio, it was for that reason, that we were beginning to encounter some cases where they simply couldn't pay their interest because those sales weren't materialising. Yes, that's the case, but I would distinguish those from the concept of interest roll-up more generally.
Eoghan Murphy (Dublin South East, Fine Gael)
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Did AIB distinguish-----
Ciarán Lynch (Cork South Central, Labour)
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I'll be bringing you back in at the end, Deputy. You'll have time; okay?
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. That concludes the leads, but there is just one issue, maybe if we can just get a bit of further clarity on the appropriateness of property-related lending strategies and risk appetite in AIB. This relates to core document AIB PB2, page 6, item 4, or 4.2. Very simply, Mr. Forde, the Central Bank have a licensing and supervision requirements and standards for credit institutions and the standards provided that the credit institutions should not have risk assets amounting to more than 200% of shareholder funds; that's the own funds inside in the bank. And, in any one sector of business, or economic activity, or were considered to apply to two or more separate sectors, the limit was 250% of own funds. Now, in July 2006, the banks' exposures to the broad property, building and construction sector, amounted to 206% ... or, sorry, 260% of own funds, which was already now going over the limit and while the limit was 250% and then the bank continued to breach these limits and such lending reached the level of 390% at September 2008. Now, you were the head of AIB's Republic of Ireland's business. How do you reconcile the level of lending to the property and construction sectors while you were, at this case now, clearly in breach of regulatory prudential lending limits for the sector from 2006 onwards?
Mr. Donal Forde:
Okay, I think the first point to make is that the numbers you're quoting are for the group, not for the division, and would include our property exposures in the UK and in capital markets, okay? So, I wouldn't be able to relate to this statistic as a divisional one, it's a group-----
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Yes?
Mr. Donal Forde:
----where we were ... certainly we knew we were in breach of that limit, but that limit had ... that limit had come into question and, certainly my understanding is, as much by the regulator as by anybody else. And that that limit was a historic one that had a homogenous kind of a constraint on all aspects of ... sorry, had a constraint on all aspects of property, as if they were all homogenous.
Ciarán Lynch (Cork South Central, Labour)
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I have heard the expression kind of used sometimes, maybe on the roads of west Cork, that people would say the rules of the road are a suggestion. In this case the rules of the road are actually the law. Were these rules that were regulated, steadfast rules, or were they interpretive rules?
Mr. Donal Forde:
My understanding is that they were guidelines. I understood them as guidelines from the regulator. But, sorry, I think it's ... strong guidelines from the regulator, but my understanding, and I would have had no direct engagement with them, but my understanding was that the regulator themselves, by reason of the manner in which portfolio analysis and measurement was developing under Basel II, had questions about that limit also.
Ciarán Lynch (Cork South Central, Labour)
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I want to try to establish then, on foot of that, Mr. Forde, is, obviously whether it's a guideline or a rule, I would imagine there would be a mechanism - correct me if I'm wrong - that in AIB somebody would say, "Hang on a second, we need to be looking at this," and it gets fed up the line. How far up the line-----
Ciarán Lynch (Cork South Central, Labour)
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Fed down the line?
Ciarán Lynch (Cork South Central, Labour)
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So the board would have been aware of this?
Ciarán Lynch (Cork South Central, Labour)
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Okay. So, the ... so, at board level in authority then would feed this down the line. Okay, so what was the remedial action, because the outcome seemed to have been that you now went up to 390% by September 2008? One would imagine that the action was to break this down or to slow it down and to calm the jets, but in fact it went the other way. So, what was the action, because if the action was to slow things down, that's certainly not reflected by the figures?
Ciarán Lynch (Cork South Central, Labour)
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That's not the ... but that's not the question I'm asking you, with respect, Mr. Forde.
Ciarán Lynch (Cork South Central, Labour)
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We know that you were in an area that you were breaching, whether these were guidelines or rules and, correct me if I'm wrong, one would assume that the then desired action would be to get more congruent and in line with what the rules are, but the outcome over the two year period was to go further beyond the limits. So, was there a direction to calm things down or was there any direction at all?
Mr. Donal Forde:
Just bear with me, I suppose. The reason I was drawing attention to that was what that presentation sets out is the fact that we're in breach of the limit, then goes on to explain, however, if I can use that phraseology, that when the portfolio is analysed in the manner that Basel II required of it, break it into logical portfolios, the result was that the risk attaching to it came within levels that were comfortable for the bank. And that was fed back to the regulator, and it was that that led the board to the conclusion that the level of exposure that we had at that stage built up was acceptable to them. So, no, you're right in saying that there was no direction to stop. What there was, was, I guess, a reassessment, a re-evaluation of it under that new methodology to say, yes, it is within levels that are comfortable and prudent for the bank.
Ciarán Lynch (Cork South Central, Labour)
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I'm not going to labour over the point, but it was 260%, above 250%, which is marginally above it, but it was then 390%, which would seem to have been quite a distance. I raised this with Mr. Gleeson this morning and I'm just wondering if these figures are related to the point I was making. There was a suggestion that other banks may have been eating AIB's lunch, and particularly in the property and construction sectors. Was there a strategy during 2006 and 2008 to expand rapidly into the property and construction sectors by AIB to win back market share?
Mr. Donal Forde:
No. No, I wouldn't describe ... in fact, if there was any ... if there was any concern, it was that we were losing market share. And, I guess, as MD, if I had a concern, it was that we should be trying to remain relevant to our customers, and that meant largely trying to maintain it, but there was no ... there was no ambition to grow it, no. I think there was a recognition that to retain the position we had was as ambitious as we could be.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Deputy Kieran O'Donnell. Deputy, ten minutes.
Kieran O'Donnell (Limerick City, Fine Gael)
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Thanks, Chairman. I want to welcome Mr. Forde. Mr. Forde, can I ... is it fair comment to say that the division over which you were managing director, which was the Irish division, was the division that caused €20 billion of taxpayers' money to be invested in AIB?
Kieran O'Donnell (Limerick City, Fine Gael)
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You'd accept that responsibility?
Kieran O'Donnell (Limerick City, Fine Gael)
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And you spoke about risk, and I just want to go through the area of risk. On page 3 of your statement you have provided. Am I correct in saying that, below the level of €40 million, that there was ten executives around Ireland in AIB that could effectively both take the application and agree the loan?
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes, well, you mentioned ... you said, "...only ten executives had individual lending discretions of more than euro 8 mil and this level of discretion generally only applied to the higher grade credit cases." The question I'm asking is, were there people within AIB that, if someone came in to them in a branch anywhere, one of ten, if someone came in to them with a loan of €39 million, that they could both take the application and approve it?
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, what was the situation, then?
Mr. Donal Forde:
These ... the people that I ... the people that I make reference to there were called senior lending executives, okay. They were in the credit function, okay. So, if somebody had a loan proposition, essentially, at branch level or coming from some other quarter, that loan proposition would be presented to those people, who then had the discretion to make judgment on it. They were separate from the point of origination.
Kieran O'Donnell (Limerick City, Fine Gael)
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But were they based in the branch?
Kieran O'Donnell (Limerick City, Fine Gael)
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Where would they be based?
Kieran O'Donnell (Limerick City, Fine Gael)
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Centrally based in-----
Kieran O'Donnell (Limerick City, Fine Gael)
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But you had people that were based ... that would have discretion up to €40 million of a loan?
Mr. Donal Forde:
No. No, no, no, no. There was only one person ... there was a divisional credit committee who had discretion at that level. There was a number of people ... I'm searching for the ... if I said ten, I'm sure that's it. There was a number of people, senior lending executives, who had discretion of the order of €8 million to €10 million. All of those, I think, maybe bar one, were based in Dublin, in the Bankcentre, in the lending units. I think one of them might have been based in Cork.
Kieran O'Donnell (Limerick City, Fine Gael)
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Can you explain how that your loan book in your period ... you were CEO of the Irish division from 2002 to 2009, correct? Your loan book went up from about €76 billion, from 18% in terms of property of the overall loan book, to 37%; it more than doubled and ... which was €49 billion at the time. And, of that, €22 billion of that was land and development and €17 billion of the €22 billion was based in the Republic of Ireland. So, it meant 77% of land and development of €22 billion was based in Ireland. Why did the alarm bells not go off, and tell me how did you have a credit risk system within the bank that allowed that situation to develop?
Mr. Donal Forde:
Well, I guess an added statistic to that is that ... through that time, AIB's share of business in the market didn't grow, okay. So, the first difficulty is that through that time, the business that our customers were doing, which they required us to support, was, unfortunately, very much in the arena of property and construction.
Kieran O'Donnell (Limerick City, Fine Gael)
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And is it fair to say, Mr. Forde, that ye became salesmen rather than prudential bankers?
Ciarán Lynch (Cork South Central, Labour)
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That is leading ... can you ask would they be ... which-----
Kieran O'Donnell (Limerick City, Fine Gael)
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In the way ... in the approach that how you, we'll say, operated, were ye more concentrated ... the formula ... were you very much driven by sales growth in terms of the loan portfolio, and that the prudential, old style lending wasn't ... didn't form part ... as large a component as it would have previously. Could you comment on that?
Mr. Donal Forde:
Yes. I think I've somewhat addressed it in my comments to Senator McSharry earlier on. At an overall divisional level, I've explained the way the targets worked. And the reason I was so careful to say that while there was targets, at the same time there was a very regimental, rigorous risk management function.
Kieran O'Donnell (Limerick City, Fine Gael)
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What was the bonus system in operation with your staff, in terms of sales of ... we'll say in terms of loans? Was there a bonus system in place?
Kieran O'Donnell (Limerick City, Fine Gael)
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Can you explain what that bonus system was?
Kieran O'Donnell (Limerick City, Fine Gael)
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When you say profitability, how do you define profitability?
Kieran O'Donnell (Limerick City, Fine Gael)
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So that would be ... so, clearly, would it be fair to say, that the more loans they had out-----
Kieran O'Donnell (Limerick City, Fine Gael)
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And what was the structure of that bonus? Was it based on a percentage? How did it ... what way did it work?
Kieran O'Donnell (Limerick City, Fine Gael)
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And what was ... typically, what would it have been ... in terms of the structure, what would have been the maximum percentage of salary for a bonus?
Kieran O'Donnell (Limerick City, Fine Gael)
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So at manager level, they would-----
Kieran O'Donnell (Limerick City, Fine Gael)
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At general manager level-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Countrywide. They could get a 50% bonus based on-----
Kieran O'Donnell (Limerick City, Fine Gael)
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-----50% of their salary by way of a bonus.
Kieran O'Donnell (Limerick City, Fine Gael)
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And typically what would a general manager be on salary wise?
Kieran O'Donnell (Limerick City, Fine Gael)
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So if they were €210,000 ... let's assume they're on an average of €200,000. That means they could be getting €100,000 of an annual bonus.
Kieran O'Donnell (Limerick City, Fine Gael)
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So there was a great incentive in terms of-----
Ciarán Lynch (Cork South Central, Labour)
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Was there?
Kieran O'Donnell (Limerick City, Fine Gael)
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-----sorry ... was there a great incentive ... I will have to get you to preface my questions, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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I'm available.
Kieran O'Donnell (Limerick City, Fine Gael)
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Was there a great incentive then in terms of a general manager encouraging his staff to promote new loans?
Mr. Donal Forde:
I think the implication of your question is that would be the only means of doing that. There was ... there certainly was an incentive. Well, firstly I should say, of the eight general managers I've talked about, only four of them would be managing front-line activities. Others would be managing call centres, they'd be managing areas like electronic banking. So, there were many and different ways by which profitability could be grown, but they all had an incentive to grow profitability, yes. Of which growing loans, good loans was part of it.
Kieran O'Donnell (Limerick City, Fine Gael)
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And the bonus system, how did that filter down to staff ... we'll say, down the line? What bonus system was there for them?
Kieran O'Donnell (Limerick City, Fine Gael)
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So everyone basically ... if their own portfolio was going up, everyone gained a share of the pie.
Kieran O'Donnell (Limerick City, Fine Gael)
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And clearly up to 2007 and 2008 that was the case.
Kieran O'Donnell (Limerick City, Fine Gael)
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Can I just ... the final question I want ... you were a member of the group board from what period?
Kieran O'Donnell (Limerick City, Fine Gael)
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Was risk ever discussed at the board level?
Kieran O'Donnell (Limerick City, Fine Gael)
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And was it discussed in terms of the exposure to property?
Kieran O'Donnell (Limerick City, Fine Gael)
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Did you make your views known on it?
Kieran O'Donnell (Limerick City, Fine Gael)
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How ... for the ordinary person looking in, Mr. Forde, how can you justify that statement?
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, with due respect, right, it's very easy to say that "I'm sorry and it shouldn't have happened". The bottom line here is that the Irish taxpayer ended up putting €20 billion into AIB. I believe that-----
Ciarán Lynch (Cork South Central, Labour)
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Sorry, Deputy, you are moving into lecturing-----
Kieran O'Donnell (Limerick City, Fine Gael)
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No, no, I am making a point.
Ciarán Lynch (Cork South Central, Labour)
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Just ask a question please because you're running out of time.
Kieran O'Donnell (Limerick City, Fine Gael)
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I want to know why you didn't raise this issue. How can you justify not raising an issue when the loan portfolio-----
Ciarán Lynch (Cork South Central, Labour)
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Deputy, I am going to make an interjection here. You are running out of time and your questioning is running out of line. Can you put a question?
Kieran O'Donnell (Limerick City, Fine Gael)
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Can you go through between the period of '02 and, we'll say, '09 ... or '08?
Ciarán Lynch (Cork South Central, Labour)
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You're out of time. Question please.
Kieran O'Donnell (Limerick City, Fine Gael)
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The question is, when the loan portfolio went up so dramatically, are you saying to me that during that entire period you never ... it never arose ... discussed ... raised the issue of the exposure on risk with the loan portfolio under your direction?
Ciarán Lynch (Cork South Central, Labour)
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I'll take a very short answer on this because I've other matters that I need to be dealing with before we go to the break that maybe should be dealt with during this session.
Mr. Donal Forde:
Through that time, Deputy, I worked in an environment where the OECD, the IMF, the ESRI, the Department of Finance, the Central Bank, the majority of the domestic commentators all expected ... the worst expected was a soft landing for the Irish economy. I worked through a time when all analysis was that there was a shortage of housing stock, okay? That there was a demographic that meant the demand for houses was going to increase. So, I think I would have been wiser than most if I had seen what was coming, but I didn't see it. And it's, as I have said, a matter of great regret but I can say I acted in good conscience, in good faith. I, at no time, ever had a premonition of what was going to happen. If I did I would have acted differently, but I didn't.
Ciarán Lynch (Cork South Central, Labour)
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Taking matters a little bit back on track with you before we go back on the break there Mr. Forde, I am just delving into kind of ... just certain operations in the bank with regard to risk. And in ... the reference document for this is going to come on screen in a moment. It's AIB, Vol. 2, pages 13 and then 21. They are appropriate to staffing and training and so forth. But, in a group internal audit, a GIA report dated April 2006, concern was then being expressed that the experience levels of staff in the Republic of Ireland division - the division you headed up - would not be sufficient to manage cases through the cycle and this could lead to the bank missing significant credit events on accounts. Now, this is as things are really heating up ... it's two years out from the guarantee but we can see that the loans into different sectors are happening in particular ways. What I want to deal with you here is how ... or did management understand the importance of maintaining a balance between staff with good credit experience and more junior, more sales orientated personnel? In particular, I suppose what I am dealing with is that staffing and appropriate lending skills ... set ... these sets ... or the skillsets ...seem ... appear to have been an issue across the Irish banking industry, particularly in the mid 2000s. Were you, or how aware were you, of this problem?
Ciarán Lynch (Cork South Central, Labour)
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Maybe you might like to comment upon that.
Mr. Donal Forde:
So I was aware. Through this time, the amount of ... the degree of movement of staff - senior lending staff - from one institution to another was quite intense on occasions. So, senior lending people were highly prized assets, if I can describe it in those terms, and from time to time we in AIB lost a number ... and the loss of one or two of these was a serious blow when it happened. So, I guess I was very conscious of it and I had two concerns - one, that our remuneration was somewhere on a par with our competitors in a way that wouldn't give people a monetary incentive to move down the road, in the first instance, but that secondly that we were trying to train young people, essentially, who would be able to reinforce and step up, essentially, if that happened. It was an ongoing challenge because you don't learn credit experience overnight and one of the difficulties was that most of the people in ... many of the people, I wouldn't say most ... many of the people involved in credit management in AIB had never seen bad times. That was an anxiety.
Ciarán Lynch (Cork South Central, Labour)
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And that kind of brings me on to what will be my final question before we go for the break. As the market conditions were then deteriorating and the loan impairments began to increase, Mr. Forde, did you consider, or was there consideration in AIB at that time, that you had sufficient trained staff with the appropriate skillset to deal with the arrears collections and manage prominent loans?
It's like playing offensive football and defensive football. This was ... you were moving from very open banking now to a far more difficult type of banking.
Mr. Donal Forde:
I think we ... we didn't so much have to make that decision, if I can describe it in those terms, because from early '08, the offensive activity had stopped and, essentially, people were being put in the back line from that point forward. And you'll never have adequate resources when something of the scale of what was beginning to develop at that stage, you know, began to gather momentum. That's the truth of it. But all offensive activity stopped from early '08. From there forward, all resources were, essentially, in the back line.
Ciarán Lynch (Cork South Central, Labour)
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And that required a different type of banking, I would imagine, and that that banking would come with a skillset. How do you think AIB were coped for the skillset that that new type of banking required?
Mr. Donal Forde:
I'm not sure we had an adequate number ... you know, when ... when ... when things get that difficult you never have enough resources. So I think we tried to mitigate that as best as possible by a more centralised approach by relying more heavily on some of the senior lending people who were working, through the late 2008, 24 hours a day, so, yes, there were strains that you wouldn't consider to be appropriate at that point.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Okay, I now propose that we take a break and we take a break until 4.15. Just to remind the witness that once he begins giving evidence he should not confer with any persons other than his legal team. If I can just ask Members to remain in their seats please until I actually ... thank you.
Ciarán Lynch (Cork South Central, Labour)
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I just need to give you some advice, Mr. Forde, just before you do, okay. The witness is reminded that once he begins giving his evidence he should not confer with any persons other than his legal team in relation to his evidence on matters that are being discussed before this committee. With that in mind, I now suspend the meeting until 4.15 p.m. and remind the witness that he's still under oath until we resume. Okay, so we're now suspended until then.
Ciarán Lynch (Cork South Central, Labour)
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We are now back in public session. The next questioner is Deputy Michael McGrath who has ten minutes.
Michael McGrath (Cork South Central, Fianna Fail)
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You are very welcome Mr. Forde. You were no longer MD of AIB ROI in late January or February 2009 but you remained with the bank until November 2009. What was your position during those nine months?
Michael McGrath (Cork South Central, Fianna Fail)
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What was your day-to-day work? Did you have any responsibilities?
Michael McGrath (Cork South Central, Fianna Fail)
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Was your departure from the bank entirely voluntary?
Michael McGrath (Cork South Central, Fianna Fail)
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Can I ask about the system of regulation? Will you characterise how regulation applies, in your view, to AIB? On the system of regulation, what are your observations on how it worked? Do you believe it was adequate or inadequate?
Michael McGrath (Cork South Central, Fianna Fail)
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External; the Financial Regulator. The regulation of the bank from a statutory perspective.
Mr. Donal Forde:
The first thing to say is I would have been a little bit removed from that. Most of these things were handled at a group level but I would have had experience of it through my executive role. There was a number of events through that time from 2002 to 2009 that would shape my answer to your question. I came to the division as MD at the time of the Ruznak crisis which prompted a fairly radical governance review and overhaul within the bank and the regulator seemed to be intensively involved in that at the time, certainly. Then subsequently, in 2004 there was an FX charging issue. I was at the centre of that; it was in my division and I would regard the manner in which the regulator intervened, supervised and directed the bank as a consequence of that to be quite heavy-handed. It was very interventionist, very demanding. This, now, is in the context of consumer regulation, though, but it was quite ---
Michael McGrath (Cork South Central, Fianna Fail)
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Yes, on that specific issue ---
Mr. Donal Forde:
On that specific issue it was by no means light touch and generally I would say thereafter, as relates to matters of consumer regulation, that sort of continued. It really followed as a consequence of that but there was a great deal of pressure, intervention, review and demand, if I can use that word, from the regulator relating to fees and charges reviews and remedy of things that had gone wrong. So, it would be very wrong to characterise that as light touch, all in the context, now, of consumer regulation.
Michael McGrath (Cork South Central, Fianna Fail)
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In terms of prudential supervision at the time ---
Michael McGrath (Cork South Central, Fianna Fail)
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They weren't breathing down your neck.
Mr. Donal Forde:
No. The only thing that immediately comes to mind is their focus on property and construction. My memory of that is an April 2007 review and I recall at the time that the regulator asked that the board "confirm its comfort" with the bank's position in property and construction. That just struck me at the time as a slightly odd phraseology for a regulator, by contrast with the terminology which would frequently be used in matters of consumer regulation.
Michael McGrath (Cork South Central, Fianna Fail)
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You are drawing a clear distinction there.
Michael McGrath (Cork South Central, Fianna Fail)
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The regulation was more intrusive on consumer issues than on the supervisory side.
Michael McGrath (Cork South Central, Fianna Fail)
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Were there ongoing tensions between the bank and the regulator?
Michael McGrath (Cork South Central, Fianna Fail)
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Not on the prudential supervision side?
Michael McGrath (Cork South Central, Fianna Fail)
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Was there any fear within the bank of the regulator on the supervision side?
Mr. Donal Forde:
Yes. I think there was a fear. I think there was a general feeling that we were excessively industrious, if I can use that phrase, around all matters of charges, fee reviews and so on. Historically there was a great amount of resources tied up in it. There was no satisfying the regulator on some of those points. It seemed pretty intense all the time and demanding.
Michael McGrath (Cork South Central, Fianna Fail)
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Can I ask you about the issue of losing deposits? You said in your statement that the liquidity concerns really weren't relevant to ROI. It was more capital markets and the UK ---
Michael McGrath (Cork South Central, Fianna Fail)
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In the fraught environment of September 2008, for example, you will recall the "Liveline" show covering the safety of peoples' deposits in banks on Thursday, 18 September. It was reported at the time that €50 million was placed in An Post State-guaranteed savings accounts in a 24-hour period. On 20 September Minister Lenihan increased the deposit guarantee from €20,000 to €100,000. Were you losing deposits at that time?
Michael McGrath (Cork South Central, Fianna Fail)
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At what kind of rate were you losing deposits?
Mr. Donal Forde:
Forgive me, I don't have the detail on it but not at a rate that was of major concern. I recall a number of large depositors with whom I would have had a personal engagement in an effort to reassure them about the standing of the bank. I can recall a few large deposits and yes, at a sort of low level, there was a constant movement of deposits but not of a scale and volume that was threatening.
Michael McGrath (Cork South Central, Fianna Fail)
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Corporate?
Michael McGrath (Cork South Central, Fianna Fail)
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Of course, yes.
Michael McGrath (Cork South Central, Fianna Fail)
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During your time at the bank was there ever any evidence that dissenting voices were suppressed or that anybody who raised serious concerns about the sustainability of the model didn't have a proper airing of those concerns?
Mr. Donal Forde:
No, I have only one recollection. I remember one of our board members asking that we look at the question of our property and construction positioning in more detail and asking for a presentation on it. I do remember that. It was frequently under discussion. There is no other way to describe it. We regularly revisited the logic of where we were positioned in property and construction but never in a manner that changed that position.
Michael McGrath (Cork South Central, Fianna Fail)
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You acknowledged earlier a number of failings, particularly on the issue of lending and the dependence on one sector. To what extent was AIB really chasing Anglo and chasing the spectacular growth in profits, in turnover, in dividend and in share price that Anglo was enjoying? To what extent were you trying to keep up with that?
Mr. Donal Forde:
I have seen in the last while media commentary that we were chasing Anglo. That isn't fair, I don't think. I certainly wasn't conscious that we were chasing Anglo but we were chasing the pack, if I can describe it in those terms. We were regularly being challenged by the investors, by shareholders and by the analysts as to how we were going to keep pace, not just with Anglo but with other Irish banks and with some very fast-growing UK and continental banks.
So, yes, it's true to say there was a lot of pressure for performance. But Anglo ... see I'm careful to say that because, to be fair, it's true that lending was the core of where the growth was coming from but the bank was trying to diversify away from that. Certainly one of my objectives all the time - formally given to me - was to try to diversify the earning stream of the divisions, so more fees and charges income, more from health and life insurance and the like. So there was an objective to diversify but it's true that ... that the substance of our performance was coming from loan growth.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes. Can I ask, did you have property expertise within the bank? Property experts.
Michael McGrath (Cork South Central, Fianna Fail)
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In what function? What roles did they have?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. And finally ... when loans were being extended to property development construction, are you satisfied that the bank had adequate oversight of the full exposure across the different banks of the borrowers?
Michael McGrath (Cork South Central, Fianna Fail)
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Well, it might have meant the borrower was over indebted?
Michael McGrath (Cork South Central, Fianna Fail)
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Is it your view now that some lending decisions were made without the full picture being available?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Thank you, Mr. Forde.
Ciarán Lynch (Cork South Central, Labour)
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Maybe just to round that off ... It's just on the issue of valuation. How was the expertise gathered or was ... and applied in AIB with applying valuations? It's one thing to give a loan to somebody's capacity to be able to pay it back, but a valuation has to be put on what's been purchased as well. How, what was the expertise like around the valuations?
Mr. Donal Forde:
An experienced credit person would be somebody who had been looking .... I mean, the people who were to the fore in that respect in the division and at group level were people who had been active in reviewing property cases for 20 years. Okay? And what they would bring to that consideration is, as I've said, a first-order analysis of essentially the asset that was being purchased. If it was for residential development, you know, how many houses would be built, at what cost ... you know, what was the track record of the developer in delivering these, in what timeframe? And you work it back from first principles. If you're going to sell ten houses with a net profitability on each of whatever €50,000 and you've worked that back, you can just calculate the value of the land and you discount that in some measure for safety. So it's a first principles analysis, if you like, of what the value of the asset is relative to what it's going to produce.
Ciarán Lynch (Cork South Central, Labour)
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Was the value not changing the lending model? So let's say, for instance, your ... as often is used as a kind of a barometer ... the guard married to the nurse. They were going to take a mortgage out over 20 years, whoever was the chief earner - whether it was the guard or the nurse - it would be three times their income and then the guard or the nurse's annual income applied. But ... and that would be ... that was a very set ratio. But over a period of time we saw that going into multiples of what the earning capacities were and the mortgage schedules getting longer and longer, going from 20 years nearly out to 40 years. At any stage ... was it ... did somebody say "It's not the valuations of the properties now is the issue, it's the capacity and the affordability to pay?"
Ciarán Lynch (Cork South Central, Labour)
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Yes, yes but-----
Mr. Donal Forde:
In the context of mortgages, I think you're right to some degree. I think the emphasis shifted from the simplicity of a multiple or one or the other.
It shifted to this capacity of the borrower to be able to meet the repayment. The formula was that all mortgages had to be stress tested for interest rates, if I remember, for 2% higher than prevailed to make sure that the borrower was able to meet the repayments. That sort of model did become more prevalent rather than the simple one that you described. So it is true to say, I think, that the model failed a little bit. I am acknowledging that-----
Ciarán Lynch (Cork South Central, Labour)
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Did anybody in AIB say at the time "that model, where is this going"? I mean, if one operates on the assumption that all purchasing markets are required upon - if I am selling my car tomorrow morning to buy a new car, somebody has to come in and buy a second hand car. The housing market is very much contingent upon first-time buyers to come in to allow people to trade up and trade down and all the rest of it, and that affordability for first-time buyers was becoming so difficult that the State had brought in a package of affordable housing, which was supposed to be subsidised housing. In Cork affordable housing was €250,000. This was council housing that was subsidised at €250,000. It is probably worth less than half of that in today's market. So you had this massive compounding snowballing effect. Was anybody in the bank saying that this is a concern?
Mr. Donal Forde:
If I can just step back a bit for context, I guess we were very conscious that the value of houses had become inflated. I think our difficulty, and I now accept that mistake, but our difficulty was that we did not see that changing dramatically because the view we had was that we were in an environment where there was a shortage of housing stock ... in the capital at least, in the greater Dublin area. Probably still the case today. We had an influx of people coming into the country from eastern Europe and so forth. We had a demographic where the baby boomers of the 80s were coming into house. So you had a scenario and you had - the outlook, it seemed, was one for continued economic expansion. We did not see how it was that there was going to be a significant change in the fact that houses were going to be more expensive and going to demand more of the proportion of disposable income to service them. We sort of accepted that. For that reason then, the shift in the model, I suppose, looking more at the capacity of the borrower to be able to meet the repayments even if interest rates rose became more the issue, rather than a concern about the inflated value of the house. I am not justifying our approach now in hindsight, but I am trying to rationalise the way we were thinking at the time.
Ciarán Lynch (Cork South Central, Labour)
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But it was never flagged as a problem? Okay, we can see that the prices are going up but is somebody going to say "Is there a sustainability issue here"?
Ciarán Lynch (Cork South Central, Labour)
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Senator Barrett.
Sean Barrett (Independent)
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Thank you Chairman. You are very welcome, Mr. Forde. On page 4, part of the professional valuations were frequently but not always thought by AIB to evaluate property as a security. Could I refer to AIB before Vol. 1 on page 10. You were referring to part 2006 in your statement today, but the board minutes show this problem persisted two and a half years later, 2006, 2007 and half way through 2008. There was a discussion about AIB's practice of not seeking professional property valuations, and whether this will have implications in terms of financial accounts to giving a true and fair view. So, given that the commercial property went up 14 times from €8 billion to €112 billion, and the residential, as you have been saying to us, went up much less, €25 billion to €122 billion, the practice of not doing the valuations was still of concern at board level on 24 July 2008.
Sean Barrett (Independent)
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Indeed. Thank you. It is page 10. It may be on your screen now. It is AIB, B4, it was issued to us on 31 March. The paragraph begins at the conclusion. In fact, the other two below it are redacted.
Mr. Donal Forde:
Yes, I see the piece. And the commitment that was made in the directive in '06 was that valuations over a certain, for security, over €5 million or €4 million, was to be valued. I think that would be a reference to ... that would be a reference to valuations for the ... for smaller values. So it's not ... I think it may be wrong to suggest that ... that's indicative of any ... that's indicative that the 2006 directive hadn't been covered.
Sean Barrett (Independent)
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Could I ... AIB B2 on page 6, if we could have that one up please.
Ciarán Lynch (Cork South Central, Labour)
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What volume Senator?
Sean Barrett (Independent)
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Vol. 1, thank you Chairman. As that's being sought, it refers to a board discussion, AIB's exposure to the broad property building construction sector, amounted to 260% of own funds, while the limit was 250%. And let me go on, the board requested that this issue be pursued with the IFSRA, given that the standards clearly required revision. Is that me saying I was speeding but the speed limits were wrong, kind of ... you know or ... it's a pretty strange attitude to the regulator that you assumed that at the board level, the regulator was at fault.
Mr. Donal Forde:
We sort of mentioned this previously, maybe ... my ... I wouldn't have had any direct engagement with the regulator here but my understanding was this, we were in breach of the limits ... we were in breach of a limit that set out a singular constraint on the totality of all property and construction lending. That had been in place for a long time. What was going on in prudential circles at the time, and there is reference to it here in the paragraph just before that, what was going on at the time, was the introduction of Basel II conventions to analyse, and these were new protocols that were being introduced for the assessment of risk attaching to loans, and the thrust of those was not to look on loans as one homogeneous set, but to break them into what were called logical portfolios and to look at the particular risk attributes that are attached to each of them. My understanding is that the regulator was also of the view that that's where they needed to go and for that reason that the old limit was somewhat ... somewhat redundant and were in conversation with AIB saying, "How are you doing this, and actually how are you getting comfort with the scale of your exposure and is the board comfortable with it?" And then, as part of that presentation, AIB set out how it went about assessing its portfolio in this new way under this new methodology and the board, it seems, took comfort with that and is saying, okay well, let's then make it clear in our engagement with the regulator, let's have this new formula adopted but let's not have this indecision as to what particular standard of measurement is to apply. That is my understanding of what was going on but I was not directly in discussion with them.
Sean Barrett (Independent)
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Now on B3, Vol. 1, page 17 and it's also Vol. 1 for our colleagues-----
Ciarán Lynch (Cork South Central, Labour)
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Okay, volume?
Sean Barrett (Independent)
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Yes, Vol. 1, Chairman. This deals with a proposal to revise the adjusted loan-deposit ratio. How did it get to the board? Did somebody propose it? Did somebody second it? Because it makes a 162% ratio into a 115% ratio. Was this also because we didn't like the regulator when we went over the limit? I mean, again, it seems to illustrate to me a casual attitude towards regulation. If you don't like the rules you adjust it to make it a different set.
Mr. Donal Forde:
Okay, I'm ... Let me first say that this wouldn't be my direct area of responsibility but my understand ... I don't believe that's a regulatory constraint. I don't believe there was any regulatory constraint on loan to deposit. I may be wrong on that but that's my belief. What was happening here was that the market was putting a strong focus on the loan-to-deposit ratio in different institutions, but, again, this changing methodology in the marketplace was an issue and that rather than the simplicity of this customer loans and totality over customer deposits, the market was looking for a more informed ratio, where the value of long-term deposits was recognised or the saleability or liquidity of assets was recognised in the formula and that's what this adjusted loan-to-deposit ratio achieves.
So this isn't a regulatory matter, I don't think, Senator. This is a matter of the way in which AIB presents a picture of itself to the marketplace. The marketplace was looking for something that was more nuanced and that's what was proposed.
Sean Barrett (Independent)
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Because our briefing notes were that it should have been at 120% and I appreciate what you said and thank you for the answer and so that when it went to 157%, we found a way to bring it back to 115% with many commentators suggesting that the ratio in excess of 120% to be less than ideal.
Mr. Donal Forde:
I think I would answer your question more freely in this respect. I think we were, looking back, we were going through a period right through from 2002 to 2008 when generally banks globally were being driven to more efficiency, more efficiency meaning that you were endeavouring to squeeze, if I can express it in those terms, performance out of every aspect of the business and it is right to say that I think we were being pushed and responding to a marketplace that was constantly pressing us into positions, perhaps, of more risk, of more efficiency, more leverage of assets all the time. I think that is true to say but I am just making the distinction between the previous one which was certainly coming from the regulator, this was coming from the market.
Sean Barrett (Independent)
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Now the fact that 56% discount had to be applied to AIB, only 5 points off, what does that mean about the conduct of the bank that it ended up as a silver medalist to Anglo in a competition nobody wanted to be in?
Sean Barrett (Independent)
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This is the discount that NAMA applied to what was transferred over from AIB, 56% and Anglo was 61% and Bank of Ireland was 43%.
Mr. Donal Forde:
I find it difficult to answer this, Senator, because that happened a year and a half after I stepped down as divisional managing director so I just don't know too much about the performance of the portfolio in that period of time. It's a disappointment to me and something of a surprise to me but I don't know how the portfolio was managed or how it developed in that period after I left.
Sean Barrett (Independent)
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I see the conference of management on 22 March 2007, the title was "Poised on the edge of greatness". I mean, was the board in no way anticipating what was just around the corner?
Ciarán Lynch (Cork South Central, Labour)
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Next question.
Sean Barrett (Independent)
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That is the last one, Chairman, thank you.
Sean Barrett (Independent)
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Glad to hear that. It is over your logo. Thank you very much. Thanks, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Thank you, Mr. Forde. I just need to deal with a matter there in regard to solicitor undertakings. Maybe you could explain to the committee in layman's terms what a solicitor undertaking actually is.
Mr. Donal Forde:
Okay. It's an undertaking essentially to put the security into effect, whatever that might involve and you leave that in the hands of the solicitor. He undertakes to do that for you and it's as simple as that really. You might be taking possession of deeds or might be taking possession of some documents of title and they would involve frequently work at the registry and so forth and the Land Registry and the solicitor will undertake to do those.
Ciarán Lynch (Cork South Central, Labour)
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It means a kind of securitising an asset and so forth.
Ciarán Lynch (Cork South Central, Labour)
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Okay alright. So the loan then would be issued on foot of that security being ribboned and bowed legally.
Ciarán Lynch (Cork South Central, Labour)
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Okay. There was an internal audit in AIB in April 2006 highlighting an issue relating to outstanding solicitor undertakings in the Republic of Ireland division, your division. It's the reference page, it's actually up on the screen there in front of you but just for noting purposes, it's AIB B4, Vol. 1, page 20.
And in that audit it would demonstrate that outstanding solicitors' undertakings was No. 1 in the top three outstanding internal audit issues, as late as October 2008. This was a continuous issue that was running through AIB. Was the board aware of this level of difficulty that was there in solicitors' undertakings and them being accepted, relating to property being taken as security, and the lengthy delay in perfecting security in many cases, and was there even situations that when the undertaking wasn't even complete, that the loan was being issued anyway?
Mr. Donal Forde:
Well, the loan would always be issued subject to the undertaking because you didn't have the facility to perfect the security there and then. I suppose you're ... I think I'll answer it in two ways, Chair. The first is to say that I, and I reference this in my statement, the first thing is, I suppose, to make sure that we see this issue in context. The practice for all the larger exposures was that the security was handed over to be perfected to first and second order legal firms. So they would do it for the bank. So those loan cases with greater exposures were never a problem, they were not an issue. So this issue related to the lower level cases, but yes, it was a constant difficulty, and as you see, the audit ... that audit report would have been given the board so they were aware of it, but it was one of those issues that I was always working on and we were never ... we were never in a comfortable position. But it would be important not to overstate that, as I've said, because all the larger exposures would not be at issue here.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Did AIB in all circumstances follow up and ensure that the security had in fact actually been registered?
Mr. Donal Forde:
Yes well, each loan ... each loan case was reviewed annually at least. So this was part of the work of the credit committees. A loan case would come up for review and if they had a concern about it they would stipulate that it was to be reviewed in perhaps three or six months' time. Part of that review was to confirm the standing of the security. So-----
Ciarán Lynch (Cork South Central, Labour)
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And are you aware that there are issues with NAMA when they actually took over the loan portfolios?
Ciarán Lynch (Cork South Central, Labour)
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That the registration never actually took place?
Mr. Donal Forde:
Well, I again ... I'm one and a half years removed from that point but that wouldn't surprise me that there were some issues relating to the lower level orders of exposure, around solicitors' undertakings. I'd be surprised if there's any significant issue with the higher levels because they were always considered to be in good order.
Ciarán Lynch (Cork South Central, Labour)
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But there was a roll-over at the review. There was a roll-over of this difficulty on an ongoing basis within ... and it was a significant issue between 2006 and 2008.
Ciarán Lynch (Cork South Central, Labour)
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Alright, thank you.
Ciarán Lynch (Cork South Central, Labour)
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Deputy John Paul Phelan.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you Chair. Mr. Forde, I have a few questions also. I want to refer to the evidence given earlier by Mr. Gleeson. In his testimony he was asked about AIB being caught in the wake of Anglo, and to quote him directly, he said "we tried not to be brought in the wake but in many ways we were." I just want to know, in terms of your role, as managing director of AIB from 2002 to 2009, in the Republic of Ireland, was there any direction from the board, from the chair, as to how not to be brought in the wake of Anglo Irish Bank, can you recollect?
Mr. Donal Forde:
Let me try and answer it this way, I suppose the first thing to say is I think he's ... I take his reply to mean that he's speaking in the context of the performance of the bank, such things as share price performance, and so forth. In a way that was up there, if I can describe it in those terms. At my level, Anglo was just one of a number of people that were very aggressively targeting our business. I would have gotten no direction to deal with any one competitor more than another. I would have constantly been relaying information about threats or inroads in our business from Anglo, yes, but Bank of Scotland, Ulster Bank, Danske Bank, Bank of Ireland, so I wouldn't have held Anglo in any particular place from my perspective. From his, I suspect that in terms of accounting for the performance of the bank to the investor community, would be a constant thorn in-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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There was no real discussion about Anglo or other specific competitors in terms of the Republic of Ireland business that you were managing director of.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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In response to Deputy McGrath ... he asked about lending concentrations in particular sectors and you said that they were frequently under discussion. You also said that there wasn't decisions, I suppose, taken as to how to change that. You outlined that one of your roles specifically was to diversify. How successful were you and the Republic of Ireland operation in terms of that attempt to diversify?
Mr. Donal Forde:
Not very. Well, I made that comment earlier in this respect at diversification between different lines of business, and so there was a very heavy push to try to increase the profitability from deposits, from health insurance, life insurance, from fees and charges, from electronic banking. So, the push was on from that perspective. There was also a focus on trying as best as possible to diversify the loan book. I was more successful with the first of those objectives than I was with the second, and I suppose the reason that I wasn't successful at all with the second was it's rather difficult ... in some respects, you have to respond to the business that your customers want to do. And, unfortunately, property and construction was where it was all happening, so it made it difficult.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Deputy Murphy asked ... was first, I think, to ask the question about sectoral ... the levels of lending into specific sectors, and you said - it was an interesting direct quote again - that the board "wrestled" with this issue about ... can you outline to the inquiry the nature of that wrestling? And, in the sense, is it not ... I don't want to put words in your mouth or be accused of leading you, but "wrestling with one's conscience and winning" is a phrase that might come to mind as to how the board dealt with the matter. Or it might not, just to leave it an open question.
Mr. Donal Forde:
Well, what I meant by it was that, frequently at annual planning time, there would be discussion, essentially, about the outturn from the previous year, what it had meant in terms of loan growth, and that was the point at which the expectations for the year ahead were signed off at the board. So, I can recall discussions at that time about whether this was appropriate. There certainly was a consciousness that we were intensely involved in property and construction, so I can remember discussions at that time. I can remember this discussion that's here, this stress test prompted by the regulator asking the board to validate that its weight of exposure in property and construction ... that it was comfortable with it. So, I can remember that. Certainly, no surprise in 2008, as the market began to turn down, there was discussion. So, I think it is fair to say the board wrestled with it.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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But didn't take any particular ... or did they take particular action?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. That's-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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No, my time is limited, and-----
Mr. Donal Forde:
But if I could just add just a small point to that, I think the reason we didn't change position, and the reason I didn't feel uncomfortable personally, was that stress test that I've just shown you there. We had a mistaken view, I think, of the degree of exposure that we were running.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes. Okay.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I want to specifically refer to the standards of the Financial Regulator at the time. And I ... Basel II has been mentioned a lot and the transformation that was taking place within AIB and maybe other organisations at the time, but did those rules still stand or not with regard to sectoral lending, the 200% figure and the 250% for related sectors, and the fact that AIB was at least one third over both of those headings in terms of lending into property and development? And I don't ... like, Basel II-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Who led you to believe?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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At the time, though, did ... who was leading you to believe it or was this an issue that you were wrestling with yourself at the time?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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The fact that AIB was so over the thresholds, which are described as standards in AIB's own document-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----which I quoted at-----
Mr. Donal Forde:
I think, from my perspective, I have described the engagements with the regulator in all other matters, if I can describe them like that, relating to the consumer ... which were pretty rigid, pretty uncompromising. In this regard, the fact that every bank, to my knowledge, in the country was over those limits and had an excessive exposure with property and construction and that the regulator hadn't simply said, "This isn't acceptable" suggested to me that they were not applicable.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I know. You were ... I'm asking you specifically as managing director of operations.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Did you not have any concerns yourself, though, as the popular .. or the possible exposure of your operation, which was under your management in the Republic of Ireland? That's ... I'm asking about your response?
Mr. Donal Forde:
Okay, that's fair, okay. I frequently had conversations with people within my division and people above me about the scale of property and construction. All I can say to you is, and I acknowledge the error of it, but I at no point, no point, considered that anything like what has transpired was possible. I simply didn't.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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And I understand, and the phrase you used earlier-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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----- in response to Deputy O'Donnell was, "At no point had I a premonition." That's fair enough, but I'm asking about your role as ... of oversight.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Did you use-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----your position with people more senior than yourself in the organisation to raise those concerns?
Mr. Donal Forde:
No. Well, no is the answer, but let me just put that in context. I saw ... it's not ... my responsibility wasn't a one-dimensional one, if I can describe it in those terms, so the risk in our portfolio was one; the profitability that was expected of the division would be another; our relevance to be able to meet the needs of customers was another. There was a general clamour at that time that the domestic banks, AIB amongst them, was losing position and relevance with customers and that other banks coming in from outside were far more relevant. So, in the balance of those things and with the belief that the risk in the portfolio was of the order that's outlined in the stress test that wouldn't threaten our capital, I didn't consider that we were in an imprudent place.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I've just one last, very brief question. Dr. John FitzGerald, in evidence to the committee, a number of weeks ago, expressed the view that a senior official within AIB had raised with him, at the end of October 2005, concerns with regards to stress tests and exposure to the property sector. That has since been disputed by the said senior official. Were you aware, at that time or subsequently, of that discussion and those meetings that took place?
Ciarán Lynch (Cork South Central, Labour)
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Do you have a comment or a view on that?
Ciarán Lynch (Cork South Central, Labour)
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You ... okay, okay.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Deputy Higgins.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Forde, did you see the testimony yesterday of the chief executive and chairman of NAMA?
Joe Higgins (Dublin West, Socialist Party)
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Okay. Can I put some of that testimony to you from the chairman, Frank Daly? And both made serious reference to the equality of the security that banks had or didn't have, in terms of massive loans. Mr. Daly said, "The safety zone of borrower equity usually existed only on paper. The result is that the borrower was typically not the first to lose. In the event of a crash, the banks stood to take 100% of the losses and that's what happened." He said, "The model did not appear to require a stringent approach by borrowers to analysing project feasibility." And he said, "Very little, if any, consideration was given to the inherent cyclical nature of the property markets. The attitude appears to have been that the only way was up, that somehow the forces of gravity were suspended as far as the Irish market was concerned and that the long established pattern of property market cycles was no longer relevant." Does any of that apply to Allied Irish Banks?
Mr. Donal Forde:
I think some of it applies, Deputy. I'd be the first to acknowledge that I think we did lose sight of the cycle; I think that's fair. I think the reason for that was that ... my personal view was that there was some order of economic transformation going on in the country; the number of people in employment was growing dramatically, we'd had a period of expansion, and all of the indications were that ... not at the same pace, but that it was sustainable. So, I certainly was misled into the view that we were not in some bubble but we were in some, as I've said, economic transformation that was in some way more sustainable, so I-----
Joe Higgins (Dublin West, Socialist Party)
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And some would say you were building houses for the people that were coming into ... or to build them, but we'll leave that aside for the moment. In terms of the type of rigour or non-rigour that was brought to projects that came, of a large order, before you, does the charge that the NAMA chairman and chief executive made apply?
Mr. Donal Forde:
I think it's true in some measure at least, and by that I mean this: I've set out in my paper, like, it's the manner in which we approached loan proposals for property and construction. And it was to ensure that there was security in place, to the order, generally, of 70% of the loan, but, more importantly, to make sure that in the first instance that there was a demonstrable means by which the loan could be repaid. That was done. I think where it fell down was that that challenge, if you will, to the repayment capacity of the loan was not rigorous enough at all. I do accept that.
Joe Higgins (Dublin West, Socialist Party)
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Yes. In that regard-----
Joe Higgins (Dublin West, Socialist Party)
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-----we had testimony from Professor Black. Are you familiar with Professor Black?
Joe Higgins (Dublin West, Socialist Party)
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No. He's a quite well known former regulator, academic and financial prosecutor from the United States. And he came to give us testimony, and he spoke about a similar situation, of banks or financial institutions extending loans. And he said we intervened to stop loans that we called liar loans, and the Chairman, Deputy Lynch, intervened and asked: "In terms of what Professor Black means by "liar loans", are they loans on which people more or less self-assessed themselves?" And Professor Black says: "Yes. It is US business parlance." Would you describe some of the loans that were extended by Allied Irish Bank as liars' loans in the context in which Professor Black-----
Mr. Donal Forde:
No. No, and I think it's worth me saying this emphatically: I don't think, even now with the benefit of hindsight, there was an absence of rigour, if you will, in terms of the process of looking at loans. Our weakness was in the assumptions by which we tested them and stressed them. They were just not remotely challenging enough. I don't ... there was a lot of attention, an enormous amount of attention given to loans. I think the processes were pretty rigorously followed, but the assumptions that guided those processes were wrong, they just were not conservative enough-----
Joe Higgins (Dublin West, Socialist Party)
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How much ... what total volume of loans went into NAMA from Allied Irish Banks?
Joe Higgins (Dublin West, Socialist Party)
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Twenty billion?
Joe Higgins (Dublin West, Socialist Party)
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Well, would that suggest that indeed there was a catastrophic fall down in regard to the collateral and the security that was available?
Joe Higgins (Dublin West, Socialist Party)
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You say to us today Mr. Forde:
AIB lending decisions were based on the belief, now obviously mistaken, that long established, experienced scale-players in the property market represented a better risk than smaller less experienced counterparties. They were seen to have had a track record of performance and built up significant equity."
A stunning irony struck me in relation to that, I will ask you to comment upon, that at the end of virtually every advertisement for a bank, is "past performance is no indication of future return." Was that the situation here?
Mr. Donal Forde:
Let me try and rationalise the thinking that was going on at the time, and it's this. If you can imagine ... earlier on I described I suppose a simple loan project where someone, a developer, has to buy land and go through that long period during which they pay for the land, they develop the housing stock and then they sell it. Through all that time there is no revenue whatsoever to be got. If you are dealing with a larger player that has a number of these projects afoot at one time, they tend to be at different stages of maturity so typically you'll have some projects that are closer to revenue and sales than others. That helps to make the loan a more manageable proposal from the lender's viewpoint. So the principle of working with a more diversified player that has experience and a track record in building houses on time and within budget, that stands. What fell down here was that there was such a collapse of economic activity that every element of these different businesses - whether they were involved in residential development or whether they were involved in commercial development - all of them simply weren't able to produce revenue and that logic became completely unstuck. So I am in a sense defending the principle of working with a diversified player in any industry. But it afforded us no protection here in the way things developed, as we imagined it would.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Forde, the report of the Allied Irish Banks said that in 2004 you took home a salary of €575,000 and a bonus of €600,000 - €1.75 million. Is that an inordinate amount of money, in view particularly of what happened very shortly after that? And secondly, my last question is in relation to the people out there who have been burned badly as a result of the bubble and crash and what the banks and the bondholders did. Do you understand how bitter they feel towards the bankers like yourself?
Mr. Donal Forde:
Yes. It seems an inordinate amount of money in hindsight and in the context of what happened. As I tried to indicate in my statement, I spent my professional life with AIB. I suppose it was my life, it was my career - the interests of the bank were what woke me up in the morning and took me to bed at night. So, I'm very conscious of my failure, I'm very conscious of the bank's failure and I'm hugely conscious of the implications of it for everybody concerned. I say that as genuinely as I can and looking back, I do accept that you know, the salaries we were paid now seem silly. They didn't then in the context of what people in the banking sector earned here at home and abroad. I had two job offers during that period, one domestically and one abroad that offered more money. So I had no sense that I was as overpaid as I now seem to have been in hindsight. I do fully understand that bitterness it creates. I fully understand the disappointment that there is with us. I have no quarrel with that, it is justified. I am very conscious of the manner in which we did leave people down. All I can say again is that I acted at all times in what I thought was good faith and best conscience. I never woke up of a morning with any real concern that the bank was in a position of difficulty. I am wrong on that, but I am guilty of a bad judgment, but no more than that.
Michael D'Arcy (Fine Gael)
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Mr. Forde, have you watched any of the proceedings of the banking inquiry to date?
Michael D'Arcy (Fine Gael)
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Professor Black that Deputy Higgins quoted, he had a term that he used that was crucial for lending, which was ... it's not a very academic term but it was, "grow like crazy", and when he was asked what was "grow like crazy", in terms of percentage growth, he said 30% was reckless. The expansion of the loan book of AIB for property in construction averaged 29% per annum, and that was in the sector that you were in charge of. Would you have considered your growth in that sector reckless?
Mr. Donal Forde:
I consider it ill-judged but I did not consider it reckless at the time, you know. And the reason I didn't consider it reckless was for the very reason that you'll see in those stress tests. My understanding was that the level of exposure we were running was not threatening to the bank even in an extreme case. That would be my definition of reckless.
Michael D'Arcy (Fine Gael)
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Simon Carswell, in his book, Anglo Republic, page 55, stated that there was a win-back team in AIB. I can only assume it's within your sector, to win back-----
Michael D'Arcy (Fine Gael)
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Yes. Was there a win-back team in AIB?
Mr. Donal Forde:
When I joined the division ... when I took responsibility for the division ... this would have been back in about 2002-2003, I asked three people - so the team was three people - to look at business we were losing from long-established customers and to ask if we should be competing in some way more vigorously to win it back. That's what has later been described as a win-back team or win-back strategy. I think that's far too grand a term for it.
Michael D'Arcy (Fine Gael)
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And were those three people ... were they senior executives or mid-ranking?
Michael D'Arcy (Fine Gael)
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Can I ask you, Mr. Forde, your ... you spoke a lot about the credit risk within the sector, within the institution, and they seem very much at arm's length away from yourself as the senior manager in terms of the retail sector of AIB in the Republic of Ireland. Was there any ... you also said that you did phone people in terms of deposits ... you made some phonecalls.
Michael D'Arcy (Fine Gael)
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Okay, but was there any occasion ... I suppose what I'm coming at is: it seems very pure, it seems very straight lines in terms of the independence of each sector. Was there ever an occasion that you saw a loan that you thought was-----
Mr. Donal Forde:
I ... for better or worse, I'm not sure which, I didn't get involved with individual loan cases, no, no, ever. Because my view of that was the chief credit officer had 25 years' experience in lending. He was the one we had mandated to review loans. If I stepped in to a review of a case and offered a view, well, I was going to colour that judgment potentially, and that wasn't adding any value. So I didn't look at individual cases, never had an input into one.
Michael D'Arcy (Fine Gael)
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You didn't look at them at all. They were-----
Michael D'Arcy (Fine Gael)
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Were there occasions that you thought-----
Michael D'Arcy (Fine Gael)
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But, sorry, were some of those cases that you looked at, were there occasions that you thought that this is over-the-top lending, this is very generous, that potentially there may be a problem?
Michael D'Arcy (Fine Gael)
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Were there occasions that potentially the credit officer would have said, "No," that you would have requested-----
Mr. Donal Forde:
No. I mean, generally, the cases I would have been ... they would have been ... typically would have been questions about the return on the case or some matter where there might have been conflict between one aspect of managing the case and another. My involvement would be more at that level rather than in offering a view on the credit exposure per se.
Michael D'Arcy (Fine Gael)
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Jim O'Leary, in 2004, it's been touched upon earlier, in relation to a director who had concerns about property and construction-----
Michael D'Arcy (Fine Gael)
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-----subsequently, 2007, Alan Ahearne had concerns that property in construction was overvalued by 30%.
Were you concerned at any stage during your term that with the increase of the balance sheet that there was a significant overexposure within AIB for property and construction?
Mr. Donal Forde:
I was conscious of the weight of our business that was in property and construction. I was party to discussions above me and below me as to whether or not we were in an appropriate place. The conclusion of all of those discussions ultimately was that we were in an appropriate place and that, you know the rationale for that was the view we had of the risk which I now accept was mistaken. The fact we weren't growing at any pace that was faster than people in the market and the fact that, notwithstanding that there was one or two people who were critical, the broad mass of those who essentially were offering a view on the market and offering analysis of the market were positive about the outlook.
Michael D'Arcy (Fine Gael)
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Your ... and just very quickly as my time is running out, the Mercer Oliver Wyman report in 2007 were ... was that part of your group's ... your sector's requesting them to come in and present a seminar to AIB.
Michael D'Arcy (Fine Gael)
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A presentation, yes. Can I touch upon the solvency issue, Mr. Forde. PwC were requested by the Financial Regulator to conduct analysis into the banks. The project was called Project Atlas. They took the evaluations from within the banks and presented them to the Financial Regulator. You were there until February 2009, the report was presented to the Minister around that stage. Were you in sight of Project Atlas? You weren't.
Michael D'Arcy (Fine Gael)
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Were you ... were you contacted in relation to the valuations or anything of that nature?
Michael D'Arcy (Fine Gael)
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Can I ask, Mr. Forde, in terms of your sector ... your sector was ... from evidence from Mr. Gleeson this morning, was effectively the sector that brought the bank into insolvency.
Michael D'Arcy (Fine Gael)
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Your division. Were there people within your division who offered contrarian views and if there were was it ... Mr. Gleeson outlined an avenue in which those concerning views could go directly to him. Did that happen on any occasion within your sector?
Michael D'Arcy (Fine Gael)
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But ... I would have assumed that-----
Michael D'Arcy (Fine Gael)
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So that avenue was unused?
Michael D'Arcy (Fine Gael)
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As far as you are concerned, in your division.
Michael D'Arcy (Fine Gael)
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Did anybody come to you directly with a contrarian view?
Michael D'Arcy (Fine Gael)
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From within your division?
Michael D'Arcy (Fine Gael)
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Can I just ask you how many-----
Ciarán Lynch (Cork South Central, Labour)
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Final question Senator.
Michael D'Arcy (Fine Gael)
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Finally can how many within your division that you would have been within had your conversation with in terms of that?
Michael D'Arcy (Fine Gael)
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And finally can I ask, Mr. Forde, would that not seem unusual that everybody was on the same page? That surely there would have been somebody with a contrarian view that the loan book ... that the balance sheet was expanding too rapidly, that there was an overexposure to the group, that potentially, I mean I'm surprised that nobody took that opportunity to say it to you, I'm surprised that the avenue that Mr. Gleeson put in place-----
Ciarán Lynch (Cork South Central, Labour)
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I...you're moving into value judgment, now ask the question, please.
Michael D'Arcy (Fine Gael)
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Well, the question I'm asking is, were people afraid to offer a countering view?
Mr. Donal Forde:
I certainly don't think so. It's for others to judge, but I don't think my style was ever intimidating. I made a practice of actually having a lot of personal conversations with people and I'd like to think I was approachable, so no, I don't think they were afraid at all. I'm, I'm pretty sure of that but others would have to validate that; I would feel confident in saying that. I think ... I don't want to say that people wouldn't challenge our position. I mean at our management team there would be discussions. The discussions would more relate to what segments of the property market we should be, in a sense, more positive about, others that we should be more negative about. There was a consciousness about the totality of that exposure, and each time it went back to the debate. As I've said, it wasn't one dimensional about are we in safe place, what's the risk, what's the stress test telling us, what are ... where are our competitors, what do we have to do to try and remain relevant to our customers; what do we have to do to meet the expectations of the market place. So, we had each time the debate about the balance of those and wrongly, each time we came down to feel that we were in the right place.
Ciarán Lynch (Cork South Central, Labour)
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Senator O'Keeffe.
Susan O'Keeffe (Labour)
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Thank you Chair. Mr. Forde, how many years banking experience overall do you have?
Susan O'Keeffe (Labour)
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Okay. On the night of the guarantee were you one of the people involved in assembling the liquidity back in the bank?
Susan O'Keeffe (Labour)
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No. You had nothing to do with it at all?
Susan O'Keeffe (Labour)
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In document C3b Vol. 2, page 29, Mr. Sheehy, this was a contemporaneous note made of the meeting that Mr. Sheehy was involved with, in which he says "People we've been dealing with for decades, pulling back - 1 month we will be funding bank overnight. Bad if can't even get that, disaster - bankruptcy." So that was on the night of the guarantee, that was your chief executive. How ... what do you make of that observation that he made that was ... the contemporaneous note was made at the time?
Mr. Donal Forde:
That seems accurate to me. Again, now let me ... I'm ... I have explained that my division wasn't so directly impacted, but I was party to the management meetings at which there was conversations about the two divisions that were more directly impacted, AIB capital markets and the UK, and certainly I could see that they were having difficulty increasingly in sourcing money from the market. The term for which they were sourcing it was shortening. So it's a judgment call as to whether it was going to last for a month or six weeks, but in broad terms I can understand that as being not an unreasonable picture.
Susan O'Keeffe (Labour)
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See there isn't unreasonable?
Susan O'Keeffe (Labour)
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To go back to the salary position and the whole incentive structure, that I know you explained in great detail, in relation to yourself did you then ... were you then eligible and did you get a bonus in each of the years in which you had that position of managing director?
Mr. Donal Forde:
I didn't get it in the last few years, as you might imagine when things got more difficult, but I got it pretty consistently through the earlier years, and the incentive for me was of two forms. One was a cash bonus but the bank was progressively moving away from that and it was moving more towards the grant of share grants. And those share grants were dependent on ... and the reason it was moving there was that those share grants were dependent on two aspects of the bank's performance. They were dependent on how the earnings per share performed over a three-year period, and they depended on the performance of the share price relative to other banks. And there was another aspect which was that any grants that were given obligated me as a senior person to hold a very substantial share. So when I hear on occasions that the charge that, you know, that structure incentivised me or others to do the wrong thing or behave in a short-term way, I was a significant shareholder in the bank, so it would be illogical for me to behave in any way that wasn't in the bank's medium long-term interest. So I never felt any motivation to do anything other than the right thing in the medium to long term.
Susan O'Keeffe (Labour)
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Did you ever invest in property yourself?
Susan O'Keeffe (Labour)
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Other than investor-----
Susan O'Keeffe (Labour)
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Were you aware at any point during your employment... did the bank invest equity in any of the property transactions for which it had also provided debt finance?
Susan O'Keeffe (Labour)
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Was there anybody working in your division that was not eligible for some kind of bonus?
Susan O'Keeffe (Labour)
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They were all eligible. Okay. Did you or any of your colleagues ever partake of any hospitality with developers or with borrowers?
Susan O'Keeffe (Labour)
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Did colleagues ever talk about being involved with hospitality with borrowers, going to football matches or whatever, there were lots of-----
Mr. Donal Forde:
Well yes. The people in the property and construction sector, they were obliged to tell me if they were, and they would, frequently someone would say to me that X client has invited me to a football match, or X client has invited me here, and I would approve that. I would usually make sure that they are paying for it, or if it is excessive, that the bank is paying for it, that there was no suggestion of conflict, but you have to do that to a point. It is just a question of judgment that it doesn't go too far but I had no sense ever that it did. Certainly, by the standards, whether they were all true of what seemed to happen in some other institutions, I think we were a long distance behind.
Susan O'Keeffe (Labour)
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Going back again to the guarantee, I think you said earlier in response to one of my colleagues that you were surprised, I think, when you were asked for your opinion, you said you were surprised. You said you had been led to believe from internal discussions that two banks might have been left out of the guarantee. So just maybe talk us through what kind of internal discussions, who was involved, and at what point those discussions began to take place about that kind of dilemma.
Mr. Donal Forde:
I am operating from memory here, but in that time which was obviously pretty stressful, the management team was meeting, I recall meeting at weekends. I recall meeting very frequently. The conversations would be around liquidity predominantly, what was happening, I suppose a review of some of the developments that were taking place daily in the broader global market and potential implications. So, in all of that, I guess the view within AIB that two institutions domestically were particularly compromised was a dominant theme.
Susan O'Keeffe (Labour)
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Compromised to what end?
Mr. Donal Forde:
Compromised in the sense that the market had taken a very poor view of their sustainability and they were not attracting moneys that were needed for them to be able to ... so that particularly. Now, sometimes the view went beyond that and a question as to their substance overall in terms of the quality of their assets, but generally it was about their access, generally it was about the availability of money for those two institutions.
Susan O'Keeffe (Labour)
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So was the conversation that these two banks were going to be the ones to pull it all down or did-----
Susan O'Keeffe (Labour)
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Okay. But what about AIB and where it stood? We have already referred to Eugene Sheehy's observations. So what were you thinking?
Mr. Donal Forde:
Well. There were two things. This was my picture of it. There were two things happening. There were specific concerns about two institutions. They were giving rise to a particular focus on the Irish market, but generally, banks even beyond Ireland were having difficulty with funding and liquidity. The conversations were essentially reviewing both of those dimensions, the domestic concerns revolving around those two, and the broader global picture which was deteriorating rapidly. That certainly was what was in mind as the situation then became more acute, when engagement was going on with the Department of Finance and the regulator. The briefings at those sessions would be from the head of capital markets, from the Head of the UK division, an assessment of those by the chief risk officer, the head of finance, the chief executive, so that conversation was going on. The view that a potential remedy for it was to take out the two problematic institutions, and even then, when they were taken out, perhaps to guarantee in some limited way the liabilities of the other.
Susan O'Keeffe (Labour)
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At that point, what were AIB saying about themselves? Were you guys talking about your own capacity to be insolvent?
Susan O'Keeffe (Labour)
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Just tell us what kind of time period are we in here, August, September, mid September? Can you try and just-----
Susan O'Keeffe (Labour)
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So there was a very clear understanding at senior level in AIB that things were getting very serious-----
Susan O'Keeffe (Labour)
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-----for everybody including yourselves.
Susan O'Keeffe (Labour)
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And that it could be fatal.
Susan O'Keeffe (Labour)
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Okay. Given ... I know that you weren't directly involved with the bank guarantee, but do you ... obviously that message was taken then. That must've been a key message going-----
Susan O'Keeffe (Labour)
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Obviously for yourself, you have expressed your own regret and your own concern about what happened in your time. Do you think that you might have resigned given what happened? I mean, I know you left, but I don't think you used the word "resign", even though you acknowledged that your division took the bank down.
Susan O'Keeffe (Labour)
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I wasn't meaning to, I just-----
Mr. Donal Forde:
No, I didn't resign my position in February '09. No, at that point I was asked to move to another ... I think it became clear to me through the course of that subsequent, whatever it is, seven or eight months, that there was a lot of pressure from outside for change in personnel that someone like me who had been central to what had happened was very compromised, so I'd come to my own conclusion that, you know, banking ... time for me to move on.
Susan O'Keeffe (Labour)
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And obviously you left with your pension and all of that intact.
Mr. Donal Forde:
No, I did not because I would be unique ... because I left in my 40s. So by reason of my age, I'm a long way away from having built up my pension in the ways others had, so that was very significantly reduced, so ... So it wasn't without consequence but I'm not going there because it's nothing compared with the hardship others had to endure. But I don't want you to think it wasn't without consequences.
Ciarán Lynch (Cork South Central, Labour)
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Deputy Doherty?
Pearse Doherty (Donegal South West, Sinn Fein)
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Go raibh maith agat a Chathaoirligh agus fáilte roimh an tUasal Forde ag an fiosrúcháin. Mr. Forde, your opening statement says that "I was responsible for all aspects of the division's activity in accordance with the group policies". So, would I be right in assuming that in relation to the division in terms of the loans that were ... the policies that allowed loan ... large loans to be paid out to developers, who we know today, can't pay them back, that the buck stopped with you?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. Who did the buck stop with? Maybe it's the best way ...
Pearse Doherty (Donegal South West, Sinn Fein)
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I understand that. I just want to ask you this question, it says "I was responsible for all aspects of the division", so will you-----
Pearse Doherty (Donegal South West, Sinn Fein)
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You do. You explained the risk policy and that's on the record.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. Because-----
Pearse Doherty (Donegal South West, Sinn Fein)
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No, no, that's okay. I'm just trying to clarify it because you give evidence in terms of the risk policy committee and so on ... that you had no part in that which is very clear. But you did have responsibility in relation to overseeing the policies-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----that were in place.
Mr. Donal Forde:
If I can Deputy, I just would like to make this clear because I don't want ... hopefully I've been up front about this. I make a distinction between my obligation as the managing director, which was to manage the business of the division within the group policies. So that's one thing. My failing, more so, is that I was part of the group management committee and that was the group that was responsible to review all policies and in that respect, I certainly didn't raise a doubting voice and I fell down there.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay.
Pearse Doherty (Donegal South West, Sinn Fein)
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And in relation to the loan to value policy that AIB had in place around the period of 2007 and 2008, do you agree with the statements from Mr. Frank Daly and Mr. Brendan McDonagh yesterday, that in the ... in most cases ... in many cases, that it was actually 100%?
Pearse Doherty (Donegal South West, Sinn Fein)
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Would-----
Pearse Doherty (Donegal South West, Sinn Fein)
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The point that he makes is that, rarely if ever was it in the form of cash when they talk about the developers putting equity in place, and that's from Frank Daly's yesterday's testament.
Pearse Doherty (Donegal South West, Sinn Fein)
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Can I go to AIB B2, Vol. 1, page 35? And this is a request for approval of exception to the group large exposure policy limits. In relation to those policies - it'll come up on screen in a second, but just before I deal with the document - in relation to the policy documents, how extensive would they be? How many pages would they go in? How ... what kind of document are we looking at? You talked about ... there was a robust discussion at many occasions in relation to them. How detailed would-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes, I'm saying in relation to the document that would go to the board, how extensive would the documentation be?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. Okay. So what we're seeing here ... we have a three-page document here with a note at the bottom of it which says, "only pages 1 to 3 were" ... "only 3" ... "only pages 1 to 3 were circulated to the board".
Pearse Doherty (Donegal South West, Sinn Fein)
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This is a request for approval of exception to the large group ... large exposure-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----policy limits.
Pearse Doherty (Donegal South West, Sinn Fein)
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No, no. And in relation to the request?
Pearse Doherty (Donegal South West, Sinn Fein)
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And the board only got the three pages in this case?
Pearse Doherty (Donegal South West, Sinn Fein)
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And would that be the normal situation?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. Okay, in relation to this case. Let's just walk through this case in particular-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes.
Pearse Doherty (Donegal South West, Sinn Fein)
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I understand.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. In relation to this individual, which is one of your larger exposures ... we can see from Project Atlas in page 19 the different types of exposures you have, so this individual is definitely in the top five. In September '07, the board had approved that underwrite ... written ... €789 million. A number of weeks later, on the 5 December '07, a request came for €202 million additional to this individual. Now, the document ... if we look at page 36 of the document ... the document goes on to outline the individuals ... the bank's exposures already. They talk about a €202 million exposure. That is the request that was before the board. They talk about €228 million, which was significant pre-lets. They talk about €190 million, which was, interestingly - and there's details of this in the first page - which was €160 million to buy shares in ICG, which the board ... which was suggested represented long-term strategic investment. And I'd maybe ask you to comment ... how did that investment turn out or are you aware of how that investment turned out?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay.
Pearse Doherty (Donegal South West, Sinn Fein)
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Would I be right in saying that this was at the peak of the ICG shares in November 2007 or around that period and they started to decline at that stage?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. And €30 million was for planning ... or was for a development where planning permission refused for 737 apartments and 270,000 sq. ft. commercial space rejected by An Bord Pleanála on the basis of infrastructure and so on. Then there is €138 million to be clear in 12 months, designated site, substantially complete, €90 million for sites - and we don't know where they are - €59 million for five distinct sites, with interest being funded, €84 million for something that's 73% self-financing and takes this person's total exposure to AIB of €991 million. But of the request that was before the board that day, it was for a syndicate proposal that was going to be co-funded with NIB and another bank, which I just don't see in front of me here. There was two other banks in ... and the total request was €602 million of which ... €605 million, sorry, of which AIB were asked to put up €201 million. On this documentation, I can't see anywhere where the developer was putting in his own cash.
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes.
Pearse Doherty (Donegal South West, Sinn Fein)
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But the point that Brendan McDonagh and Frank Daly were mentioning is the point about the gearing is that most of this person's wealth and you mentioned at the start, it's mentioned at the start his net wealth worth is €3.2 billion. Is it not the case that most of this is a result of lending, by AIB, to the individual and the equity that responded from the first loan went to pay the second loan, the third loan, the fourth loan and so on and we have a domino effect, when one starts to fall, the house of cards comes in on top of the bank and the developer but the developer, as was said yesterday, has no skin in the game.
Mr. Donal Forde:
No I don't think that's entirely true. I mean, what earlier on I was describing what would typically be happening with a large-scale developer like this, there would be a whole series of different elements of business going on as is indicated by the different facilities here. Each of those would have a slightly different profile and some of them will represent, in some cases land will be purchased five, six years previously on which there is a very substantial equity today. In some cases, there's housing stock that's under construction for two or three years that's now ready for completion. So, or there may be an office development that's being developed that is now ready for sale, so they are not cash but they're near cash if I can describe some of them in that-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Many of these cases didn't work out the way that you expected.
Pearse Doherty (Donegal South West, Sinn Fein)
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One final question and it's a short one. It's in relation to and again we have a document here, the same booklet AIB B2, Vol.1, page 25. It's another advice to the board re approval of exception of group large exposure policy and this is for €11 million to increase the individual's exposure to the bank to €322 million. This is, I believe, to buy 1.75 acres in some place where he has already bought 6.5 acres at the cost of €70 million. The question I ask is the CEO or the group chief executive approved this on 22 December, just a couple of days before Christmas, because of the timescale that was required and it went to the board then for approval. Now how does that work if the chief executive approves €11 million to increase the exposure of AIB to €322 million in December. What power does the board have at that point and is that a common factor that the CEO ... did the CEO have that power, is that the power that the group chief executive had at the time?
Mr. Donal Forde:
He had, from memory, remember I described about the divisional credit committee operating up to €40 million, we then had to refer the cases to the group. I think their discretion was up to €75 million or €80 million. I think then the chief executive had a discretion over that, before it went to the board, from memory. But that was rarely practised, in fairness and I think this would arise because there was obviously some particular deadline that had to be reached. That was rare. It would be unusual that the chief executive would step in and I think it's because of the particular point in time here, Christmas, but that would be an irregular thing. That would not happen and the board would then be advised of any decisions he had made and would be asked to endorse it.
Pearse Doherty (Donegal South West, Sinn Fein)
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Thank you.
Mr. Donal Forde:
I think I haven't answered your earlier question very well and if I may just come back to it for a minute. I think there is something in what you have said and in what the NAMA representatives may have said yesterday. The difficulty if you are funding a client that is involved in a number of different property projects is that it is difficult for cash to be realised. There are always ... property of any description when it's in the development, is cash consuming and as a lender you are always faced with that challenge and it is true that in many cases the equity as we saw it, that a developer would be bringing to the occasion would be completed houses or nearly-completed houses or it might be property or land, excuse me, some of which would have been bought five or six years earlier that now ostensibly was worth very much more.
So yes, we did regard that as equity, and you're right, when push came to shove, and things ... there's was such a collapse of economic activity, all of these came unstuck.
Pearse Doherty (Donegal South West, Sinn Fein)
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But that meant, as was said yesterday, that the only person who would be caught out, in a worse case scenario, is the bank.
Pearse Doherty (Donegal South West, Sinn Fein)
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But if he hasn't put any money up-front himself, hypothetically speaking then, there's very little skin ... there might be a bit of sweat on the building site but he hasn't put any cash on the table.
Ciarán Lynch (Cork South Central, Labour)
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We can talk through what Mr. Daly actually said yesterday because I wanted to wrap this up in ... because I had it in my notes. What NAMA, to my knowledge, and I can stand corrected in this, is the biggest national asset management agency in the world, or is a company that holds the biggest portfolio, so Mr. Daly comes with a certain authority, given the job that he has as the biggest of this type on the planet, to my knowledge. So Mr. Daly's testimony yesterday, and I'll get it up on the screen there, it is page 2 and 3 of his opening statement. He says:
While internal bank lending documentation may indicate that loan-to-value ratios were, typically, less than 100% when the loan was drawn, the reality, in many cases, was that a developer's equity contribution was in the form of a rolling-up of unrealised, paper profit from other developments. This was presented as an equity position.
So it would have been presented to your bank and other banks as an equity position.
Ciarán Lynch (Cork South Central, Labour)
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He continues:
Rarely, if ever, was it in the form of cash", "Rarely, if ever, was it in the form of cash. On the face of it therefore, developers had some skin in the game, but in reality that amounted to nothing more than unrealised equity positions levered by the developer to secure funding for new transactions.
He then goes on to say, and what this means in summary:
In effect, therefore, the banks were providing all of the real cash funding for both acquisitions and development. It is safe to say that quite often the borrower's paper equity position never paid for an acre of land or concrete or scaffolding or a worker's wage at the end of the week. The safety zone of borrower equity usually existed only on paper. The result is that the borrower was typically not the first to lose. In the event of a crash, the banks stood to take 100% of the losses and that's what happened.
Is that a fair reflection of the type of banking practice that you managed for AIB in your senior role?
Mr. Donal Forde:
I think if I go back to an individual case and, so, you had a scenario typically, as I say, where a developer came with a piece of land, essentially, that had been purchased at X and was now worth 2X, okay? The bank regarded some proportion of the inherent value in that as equity, and had a position of security over it. So from a security viewpoint it's true to say that we would have relied on many occasions on non-cash assets. That is true. But in giving the loan, the proposition would be much more about what assets, essentially, were going to be created with that loan, and what they were going to sell for, and the bank would have, essentially, part of the loan agreement would be, that the proceeds of the sale, for example, of each residential development would come to the bank. So it's true to say that when things happened in the way they did, which is that office developments stopped selling, houses stopped selling, then the source of repayment for the banks, cash, that also stopped. Then the difficulty arose because the security that we held, which in many cases was equity, also began to devalue very quickly. So I think it's true to say that in the way things ultimately developed, we were left frequently where it wasn't cash that we had recourse to, but they were assets that were of much less value. But in the normal run, essentially if the assets that were produced off the back of that loan were sold, the bank would have collected the cash on those, all the time.
Ciarán Lynch (Cork South Central, Labour)
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I wouldn't purport myself to have the same level of experience and knowledge that Mr. Daly would have, and in that ... I grew up in a council estate, my parents bought their home through a tenant purchase scheme, so I don't come with any big property background, but what I hear him saying here, very simply, is, there is an issue of acceleration and deceleration in the property market, and there's an issue of inflation and deflation in the property market.
And what was happening is that inflation was running so quick in the property market and development was at a very accelerated level, so it wasn't the case that a housing development was completed and now sold. It's that there was a notional value on property that was interpreted right all the way through the process. So, a developer could develop something in a part of Cork or a part of Dublin and, even though it's now not completed - and we've seen this with housing developments as well as they were going through phases - new values were given to them. So, even before the development is completed, a valuation would be placed upon it even though it's now not even out in the market - there's no rents coming in or anything else - and that equity - notional equity, albeit - was now being used as leverage against another loan.
Mr. Donal Forde:
Yeah. I think that is fair. The only comment I'd make on that is that it wouldn't be the full value, that it would be a discounted value of it. So, in the instance that you describe where a development was near completion, a value would attach to that, but not the full value. It would be discounted, but, yes, that would be ... have been considered as equity.
Ciarán Lynch (Cork South Central, Labour)
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I'm going to move to the wrap-up. Senator MacSharry, five minutes, and then Deputy-----
Marc MacSharry (Fianna Fail)
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Thanks very much. Can I just go back to what you were discussing there with Deputy Doherty? You said that the buck ... in terms of where the buck stopped, that there was collective responsibility or there was a kind of ... the buck stopped collectively as opposed to with yourself. Would that be a fair assessment of what you were saying?
Marc MacSharry (Fianna Fail)
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Okay. So, as a result of the collective responsibility model that you described to Deputy Doherty, I mean, was there a level of trust that each of the people that reported to you within the division were all doing their job correctly, so you didn't have to check? It was a collective thing, so that ... the credit committee did their job well in terms of securities, so you didn't have to check anything and-----
Marc MacSharry (Fianna Fail)
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-----therefore, it was taken as read.
Mr. Donal Forde:
I ... trust and validate would've been the model, and that's why there was a group risk function and that's why there was an internal audit function. So, I very frequently received copies of reviews, reports, that they did. Everything was scrutinised and reported on to me and to those ... to the CEO and to the risk function. So-----
Marc MacSharry (Fianna Fail)
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And given what happened, and what the Chairman was just outlining to you there, and given the nature of the equity being paper, for want of a better expression, do you feel that that was insufficiently robust or do you feel it was robust enough?
Mr. Donal Forde:
No, it wasn't. I fully acknowledge ... I mean, as I've said, where ... in a way, the model worked so long as developers were able to sell their assets and the produce of the work that they were doing. We didn't require them to sell 100%, but we required them to be able to generate a measure of cashflow from those assets. The wheels came off when that was not possible because all economic activity got suspended some time in 2009, and the wheels came off at that point. I think it goes too far to suggest that we were allowing people just to build paper on paper, but I think we were doing that in some measure, yes.
Marc MacSharry (Fianna Fail)
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Was there ever an instance that you're aware of in the bank that a lending executive received property by way of a gift from a developer?
Marc MacSharry (Fianna Fail)
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I can imagine, but there was never-----
Marc MacSharry (Fianna Fail)
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-----any instance anyway.
Marc MacSharry (Fianna Fail)
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At the board meeting of 24 July 2008, there was a discussion about the Republic of Ireland division's practice of not seeking professional property valuations. Can you expand on this? It's on-----
Marc MacSharry (Fianna Fail)
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-----AIB-----
Marc MacSharry (Fianna Fail)
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He made reference to that exact-----
Marc MacSharry (Fianna Fail)
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Okay. That's fine. That's fine.
Mr. Donal Forde:
And I think ... I may be wrong, but I think that's a reference to the practice of not always getting valuations for the smaller assets as distinct from the other issue, which we talked earlier on, which is the board decreed that all assets of value of greater than €5 million had to be properly valued. I think that was being done. I think there was a concern that we should be doing it, perhaps, for the smaller cases also.
Marc MacSharry (Fianna Fail)
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For all cases.
Marc MacSharry (Fianna Fail)
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So that everything should be valued.
Marc MacSharry (Fianna Fail)
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Did that happen then?
Marc MacSharry (Fianna Fail)
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Which was €5 million.
Marc MacSharry (Fianna Fail)
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And who was it uneconomic for? Did the-----
Marc MacSharry (Fianna Fail)
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-----did the borrower not pay?
Marc MacSharry (Fianna Fail)
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Okay, so really it was a competitiveness thing; that if somebody, Customer A or Developer A was going to borrow €50 million-----
Marc MacSharry (Fianna Fail)
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That we were going to say, "Well, look, we don't want to lose that €4,990,000, so I'll tell you what, don't worry about the valuation, our underwriter will make the call, end of story." Was that the practice?
Marc MacSharry (Fianna Fail)
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And just in terms of your underwriting teams, or the credit committees, would they have valuing qualifications, other than their experience?
Marc MacSharry (Fianna Fail)
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Okay, so would it be street sense as opposed to the Institute of Professional Auctioneers and Valuers, or-----
Marc MacSharry (Fianna Fail)
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---chartered surveyors, or any of those?
Marc MacSharry (Fianna Fail)
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Okay. And that's better or worse, do you think?
Marc MacSharry (Fianna Fail)
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I just ... I wasn't clear, so I'm asking it again.
Marc MacSharry (Fianna Fail)
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If competitiveness got in the way, the practice became, "We'll leave the valuation out"; would that be-----
Marc MacSharry (Fianna Fail)
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All right, okay.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you very much. Deputy Murphy?
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman, and thank you, Mr. Forde. Mr. Forde, you were still on the board in September 2008. On 26 September, the board decided to pay an increased interim dividend amounting to €270 million. Did you agree with that dividend payment?
Eoghan Murphy (Dublin South East, Fine Gael)
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Did you benefit from it?
Eoghan Murphy (Dublin South East, Fine Gael)
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And did you reinvest in AIB shares?
Mr. Donal Forde:
At that point? Yes, well the dividend automatically got reinvested, I think, as part of a profit share, yes. Sorry, we would have ... I'm ... the reason I'm hesitant is I would have had an established, big established shareholding and I would have got a dividend on that, some of which would have been invested automatically; I'm not sure if all of it was. I can't say that.
Eoghan Murphy (Dublin South East, Fine Gael)
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And do you remember people objecting to the issuance of that dividend?
Mr. Donal Forde:
Yes, there was quite a bit of discussion at the board about whether that was the right thing to do. I think the ... there was different views. There was a conflicting view, one view held being that it was important at that point to demonstrate a confidence that the management felt that we were in a reasonably secure position from a capital viewpoint. There was another view with the idea that essentially we needed to conserve capital. And the view that went out was the one that we needed to make a strong statement to the market and I was persuaded by that, yes.
Ciarán Lynch (Cork South Central, Labour)
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That was optics. In terms of optics ... that you were making a statement to the world market that you were sound.
Ciarán Lynch (Cork South Central, Labour)
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Sorry, Deputy Murphy. Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chair. I just want to ... just a couple of brief questions then. The accounting standard, IAS 39 ... did you understand the flaw in that standard when it was introduced?
Eoghan Murphy (Dublin South East, Fine Gael)
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Did you express that view to anyone?
Eoghan Murphy (Dublin South East, Fine Gael)
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Were you aware that the banks in Spain were ignoring the application of that accounting standard?
Eoghan Murphy (Dublin South East, Fine Gael)
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And was there any discussion that you might follow the lead of the Spanish banks and ignore it yourself?
Eoghan Murphy (Dublin South East, Fine Gael)
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And did your bank or the auditors discuss bringing this to the regulator's attention?
Mr. Donal Forde:
I didn't personally. I wouldn't be in ... that would be the finance function that would be involved with the auditors but certainly I was party to discussions, and many of them, amongst the management team where that view was the dominant, prevailing view, and certainly would have been shared with the auditors. I don't know how pressed, in a sense, they were by the finance function to take it further.
Eoghan Murphy (Dublin South East, Fine Gael)
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And was there any discussion then of doing your own internal bookkeeping that wasn't for official accounts that would, you know-----
Eoghan Murphy (Dublin South East, Fine Gael)
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No, you'd meet these standards with your official accounts, of course, and with your auditors, but you yourself would take your own look, using a different accounting standard, to be safe?
Eoghan Murphy (Dublin South East, Fine Gael)
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No, but in terms of understanding what the potential provision might need to be under different standards?
Eoghan Murphy (Dublin South East, Fine Gael)
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But would you ever attempt to calculate what those, you know, wished for provisions might need to be?
Eoghan Murphy (Dublin South East, Fine Gael)
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Was documentation kept on that?
Eoghan Murphy (Dublin South East, Fine Gael)
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Do you remember how significant the discrepancies were between the wished-for provisioning and the provisioning under the accounting standard?
Ciarán Lynch (Cork South Central, Labour)
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Yes, a discrepancy is ... a judgment-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Sorry, the difference, the difference.
Mr. Donal Forde:
Yes, I think that suggests wrong. What I'm trying to convey here is, when times are good, a banker's instinct is to put money aside. The rules were specifically designed to disallow you from putting money aside, so we always felt that, look, this isn't a clever formula. And, with respect to the specifics, we would have been obviously of a much stronger mind to have a greater quantum aside in late '07, in '08, than would have been the case in '04, '05 and '06.
Eoghan Murphy (Dublin South East, Fine Gael)
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But the feeling that you couldn't do that was because the regulator had not permitted you to go outside of that accounting standards?
Eoghan Murphy (Dublin South East, Fine Gael)
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Sorry, you said that's why in Spain that's why they were able to do it.
Mr. Donal Forde:
No, I can't say that. We were very clear that the reason we couldn't do it was that the accounting protocols didn't allow us. You are right in that there was an instance where, in Spain, that had been set aside, I think by the regulator, but no such action had been taken domestically.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. I am now going to bring proceedings to an end, Mr. Forde. Is there anything further you would like to add by means of comment or suggestion or anything else?
Mr. Donal Forde:
I mean, perhaps no more than just to repeat what I've said at the outset, Deputy. I made it ... I hope that I've made it clear that, you know, I am party to something that went very horribly wrong, and it's not a pleasant feeling, let me say, and I'm very conscious of the implications of that. But, you know, it is a misjudgment, and it's all of that, but no more than that. I mean, there was at no point, I can say, at any time in my period as MD had I any real concern that the bank was operating in a manner that could be described as reckless. That's poor judgment, but I never had such a concern; I never went to sleep with any anxiety that I was doing the wrong thing for the bank in the medium to long term and, you know, I acknowledge the error of that and I acknowledge the consequences of it, but it's that and it's no more than that, I think, expressed in those terms.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. So, with that said, I'd like to thank Mr. Forde for his participation today and for his engagement with the inquiry, and as I'm excusing you ... just before I call an adjournment to the meeting, just to remind members that we're adjourned until 3.30 p.m. next Tuesday. The public hearing on Wednesday morning will commence at 9.30 a.m. On Thursday, to facilitate events in the afternoon the public hearing will commence at 9 a.m., so we'll be moving it a little bit forward to accommodate the break that we need to accommodate for the afternoon. So, with that now said, I propose that the meeting is adjourned until 3.30 p.m. on Tuesday, 28 April 2015. Is that agreed?