Oireachtas Joint and Select Committees
Wednesday, 22 July 2015
Committee of Inquiry into the Banking Crisis
Nexus Phase
Ciarán Lynch (Cork South Central, Labour)
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As we have a quorum, the Committee of Inquiry into the Banking Crisis is now in public session and can I ask members and those in the public Gallery to please ensure that their mobile devices are switched off. Today we have a number of sessions and this morning's, in session No. 1, is a public hearing with Mr. David Begg, former general secretary of ICTU and non-executive director of the Central Bank and CBFSAI, and Mr. John Dunne, director general IBEC and non-executive director general bank of ... sorry, non-executive director general bank and IFSRA. In doing so, I would like to welcome everybody to the public hearing of the Joint Committee of Inquiry into the Banking Crisis today. At this morning's hearing, our witnesses are Mr. David Begg, former general secretary of ICTU and non-executive director of the Central Bank, and Mr. John Dunne, former director general of IBEC and non-executive director, Central Bank and IFSRA.
This session will focus on our witnesses' respective roles with the Irish Congress of Trade Unions and the ... and IBEC, and as non-executive directors of the Central Bank and Financial Regulator. Mr. David Begg was general secretary, Irish Congress of Trade Unions, from 2001 to 2015. He was also a non-executive director of the Central Bank from 1995 to 2010. Mr. John Dunne was director general of IBEC from 1993 to 2000, and chairman of the IDA from 2000 to 2010. He was also a non-executive director of the Central Bank and IFSRA from 2003 to 2010. Mr. Begg and Mr. Dunne, you're both welcome before the committee this morning.
Before hearing from the witness, I 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. The utmost caution should be taken not to prejudice those proceedings.
In addition, there are particular obligations of professional secrecy on officers of the Central Bank in respect of confidential information they've come across in the course of their duties. This stems from European and Irish law, including section 33AK of the Central Bank Act 1942. The banking inquiry also has obligations of professional secrecy in terms of some of the information which has been provided to it by the Central Bank. These obligations have been taken account by the committee and will affect the questions asked and the answers which can be lawfully given in today's proceedings. In particular, it will mean that some information will be dealt with in a summary or aggregate basis only, such that individual institutions will not be identifiable.
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 screens to your left and right, and members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.
The witnesses have 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 before the committee, will be relied upon in questioning and form part of the evidence of the inquiry. So with that said, if I can now ask the clerk to administer the oath to both Mr. Begg and Mr. Dunne. Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Once again, welcome before the committee this morning, Mr. Begg and Dr. Dunne, and I believe Mr. Begg will verbally make his opening remarks for us. So, Mr. Begg, please.
Mr. David Begg:
Well, thanks very much, Mr. Chairman and members of the committee. I understand that I've been asked to give evidence to the inquiry by virtue of my roles as non-executive director of the Central Bank and as General Secretary of the Irish Congress of Trade Unions. As you know, Chairman, the regulatory regime was altered radically as a result of the Central Bank and Financial Services Authority of Ireland Act 2003, which amended the original Central Bank Act of 1942. It established the Irish Financial Services Regulatory Authority as an autonomous entity and it was given responsibility for prudential regulation. The powers formerly held by the Central Bank for the regulation and supervision of the financial institutions were transferred to the regulatory authority under section 33C of the new Act. The Central Bank was left with residual responsibility for stability of the financial system and various functions related to the European system of central banks. Henceforth, the regulator was accountable to the Oireachtas and communicated directly with the Department of Finance. The regulator also published a separate annual report.
The Central Bank was opposed to the changes, as they would essentially interdict the line of sight between financial stability and the soundness of the banks. My personal view supported this evaluation and I also felt that the change was, to some extent at least, motivated by ideological considerations. I was involved with the Governor and other board members in making representations to the Minister for Finance about it. And, clearly, the 2008 crisis exposed the institutional flaws in this structure and it was reversed, as you know. With the enactment of the Central Bank and Financial Services Authority of Ireland Act in 2003, I was reappointed to the board of the Central Bank but not to the authority. Thus, I had no further involvement in supervision or regulation of the banks.
This change coincided with the advent of EMU, the financialisation of the global economy, a sea change in the volumes of financial transactions and the emergence of shadow banking. One consequence of the liberalisation of capital markets was that large financial flows looking for investment outlets contributed to keeping real interest rates low worldwide. The abundance of liquidity and low interest rates encouraged financial institutions and asset holders to try to increase the rate of return on their portfolios by increased leverage at the cost of higher risks. The global financial crisis emanated from the conjunction of widespread financial fragility and a lopsided globalisation process proceeding rapidly amidst large financial imbalances. A principles-based regulatory system was unsuitable for these circumstances, and the problem was compounded in the Irish case by competitive pressures associated with the presence of foreign banks regulated from outside the jurisdiction and also a remit to promote the financial services industry. In a sense, it was like trying to control a blaze with a mixture of both water and oil.
It is manifestly the case now that supervision was neither effective nor appropriate but principle-based or light-touch regulation was not exclusively an Irish phenomenon. It was derived from the ideas governing regulation generally in Europe and, indeed, internationally. Almost certainly, the regulator subscribed to those ideas but did not originate them. It is worth recalling that, in 2007, the IMF ranked Ireland’s regulatory system highest in a study of accountability and independence in 32 countries. The truth is that, notwithstanding the shortcomings of the Irish approach, regulatory policy was located in an international context that was deeply flawed.
The problem of assuming that self-interest – Adam Smith’s invisible hand – would make people do the right thing was that it wasn't actually correct. This is the flaw to which Alan Greenspan referred when he recanted his views about efficient markets before a US Congress committee in October of 2008. He accepted that the pursuit of self-interest, however beneficial in the economy as a whole, does not necessarily lead to financial stability. Unfortunately, Greenspan’s conversion came too late. Regulators elsewhere who followed the same set of beliefs had, for too long, taken a benign view of the banks and the risks they were taking. In Ireland’s case, this was reflected back to the assessments of macroeconomic stability by the Central Bank. Financial stability reports did identify major vulnerabilities building up in the financial system leading to credit growth and indebtedness and house prices increases and increasing repayment burdens to the household sector, but these were located in a context where the banks were assessed to be generally sound, usually in accordance with the Basel II directive, which has subsequently found to be fairly flawed.
These assessments were also made in the context of the eurozone Stability and Growth Pact. The Stability and Growth Pact failed in a number of ways to prevent deficit and debt, both public and private, problems arising within the euro area. It was overly focused on current budget balances and not enough on the sustainability of member states’ public finances or underlying economic conditions. In the case of Ireland and Spain, the criteria specified in the pact were consistently met even though the property markets were booming.
It is a matter of record also that neither the IMF nor the OECD were any more prescient. As recently as 2006, the IMF financial assessment programme concluded in relation to Ireland that "financial soundness and market indicators are generally very strong". In the years when the crisis was incubating all the international agencies - the IMF, the OECD and the ECB - took a positive view of the performance of the Irish economy. Earlier, in or around 2003, the European Commission disagreed with the Minister for Finance about budgetary policy but their case was undermined by the fact that Ireland was fully compliant with the Stability and Growth Pact while Germany and France were not. In summary, the likelihood of a gradual adjustment dominated official thinking. The soft landing hypothesis might have been possible up until the Lehman Brothers collapse but not afterwards. We were seriously exposed in the banking sector and we didn't know it. The risks to the economy were identified in the financial stability reports but they were qualified by assurances about the fundamental strength of the banks which were wrong.
Chairman, an earlier witness has told the inquiry that pre-crisis regulation was conducted within the paradigm of the great moderation. The Great Moderation described the long period of macroeconomic calm which predated the crisis. It held that, through policy alone, central banks had managed to create stable conditions of strong growth and low inflation. The great moderation was constructed on three pillars, namely: first of all, the disinflationary influence of cheap Chinese manufactured exports; secondly, a cheap credit model; and, thirdly, the change in the balance of power between capital and labour consequent upon the growth of the global labour force by about 1.5 billion people following the demise of the Soviet Union and the decision of China to become capitalist by decree. The thinking was that cheaper goods would increase purchasing power. The decline in labour's share of national income due to the weakened collective bargaining position would exert a downward pressure on inflation and could be compensated for by the ready availability of cheap credit.
This paradigm was opposed by European and Irish trade union movement, which broadly remained committed to social, democratic ideas in politics and neo-Keynesian ideas in economics. It was only to be expected that these competing paradigms would cause a degree of creative tension between me and some colleagues on the Central Bank board from time to time. But by 2004 it became clear to me, as general secretary of congress, that the economy was heading in the wrong direction. Our pre-budget submission of that year called for the removal of all property-based tax incentives. By the following year, 2005, our pre-budget submission voiced concern about overheating in the economy in the following terms, "Future economic policy should consider focusing on optimising economic growth rather than continuing the relentless pursuit of growth for growth's sake which has both economic and social down sides." In May 2005, congress made a detailed submission to the Department of Finance, arguing the case for the abolition of property tax incentive scheme. And this theme of sustainable growth was covered in a speech I made to a social policy conference in UCD in October 2005, which I've actually furnished to you with the documents, Chairman. It was a theme re-echoed in up to ten speeches and newspaper articles between 2005 and 2008. It informed my contributions to the debates in the National Economic and Social Council and, indeed, the Central Bank and it was also the subject of representations made directly to the Minister for Finance at the time.
Mr. Chairman, you wrote to me on 26 May advising that a witness had named me in his evidence and I assume this relates to the following passage in his statement. The statement was:
In fact, I should say that one member of the Board did have grave doubts about what was happening; his words ring in my ears to the effect that 'it was all a house of cards and would end in tears.' However, his views appear not to have had any impact on policy-making in the Bank.
Now, frankly, Chairman, I can't actually remember precisely that ... whether I made that statement or not, but I can confirm that I did alert the board to what I saw happening in the real economy. I argued that what was happening in the construction sector was unsustainable because Irish people were borrowing to invest in buy-to-let houses built by immigrants who were then renting the same houses and it didn't take a genius to work out that a vicious circle with a huge vulnerability was being created.
I wish to turn now to the question of social partnership because the booklet of core documents sent to me contains a lengthy extract from the 2004 IMF review in respect of which I have submitted a supplementary opening statement. I found it difficult to identify any causal relationship between social partnership and the banking crisis. It seems to me that any adverse impact social partnership might have could only be in relation to fiscal policy.
The fact is that the Exchequer was in surplus for the five years preceding the crisis and Ireland’s gross debt-to-GDP ratio was less than 25%, one of the lowest in the OECD area. Ireland did not have a fiscal crisis up to that point; it had a banking crisis. In so far as there is any link between social partnership and the 2008 crisis, it is a mitigating one. According to Fritz Scharpf, who is the director of the Max Planck Institute for the Study of Societies in Cologne, the peripheral economies found no effective way to counteract domestic booms and were driven by the cheap money effect of uniform nominal and divergent real interest rates. But he acknowledges that both Spain and Ireland did try to use the instruments of macroeconomic policy that were still available nationally, including social pacts to restrain the boom; it's just that they were insufficient.
Social partnership sometimes seem as a domestic Irish phenomenon but this is not so. In 1985 an American academic, Peter Katzenstein, in a seminal work on industrial policy in the small open economies of Europe, attributed their success to systems of democratic corporatism. Democratic corporatism is built on three pillars: a strong situation of peak organisations of both unions and employers, an ideology of social partnership and, thirdly then, a constant process of bargaining. The small open economies of northern Europe that Katzenstein studied, essentially the Nordic countries excluding Finland and the Netherlands, realised that the cost of adjustment to international market forces could not be exported, as might be the case with a larger country. You had to be internalised and the only way to manage the situation was to combine openness to trade with flexibility and high levels of social protection. Internal disputes were an indulgence that could not be afforded. The trade unions in Ireland were attracted to this approach in 1987 because it seemed like a workable alternative to the zero-sum game that industrial relations in Britain had become. By history and culture, the Irish trade union movement is closely linked with Britain. While the overall assessment of the IMF paper is positive, it is a fact that over the 22 years of its existence, some misconceptions have arisen from time to time about how social partnership operated. Foremost amongst these, and it is mentioned in the IMF paper too, is that it undermines the powers of the Oireachtas. In my experience, social partnership only ever subsisted within the space ceded to it by Government and this is especially true where coalition partners in the Government had negotiated a programme. There is no evidence that this has been a problem in the other European countries where social partnership is the norm. Where fiscal issues arose, no Government has ever made a specific commitment outside of the budgetary process.
With regard to competitiveness generally, an ESRI paper, McGuinness et al., 2010, found in a survey of 6,500 firms that social partnership agreements enhanced the country’s competitiveness. In particular, they stated "This result suggests that there have been large gains, in terms of competitiveness, to [multinational companies] that locate in Ireland" and this actually was the experience of the ICT sector in Finland as well. It is worth recalling too that the convergence criteria required for membership of EMU were managed within the social partnership process. Not alone that, but the wage terms of the various agreements held, even where the economy was growing at rates exceeding 10% in circumstances of extremely tight labour markets and where labour’s share of national income fell from 65% in 1990 to 56% in 2009. The 2004 IMF paper advocates wage flexibility, short duration agreements and the incorporation of social partnership within a medium-term fiscal framework. Now most of this was taken on board subsequently. It is the case that a sophisticated system for dealing with employer inability to pay claim .... to pay ... inability to pay claims was dealt into the ... was built into the process, that worked by way of a panel of accounting experts, appointed by the Labour Relations Commission, which could be drawn upon by the Labour Court to assess the financial health of a firm claiming to be in difficulty. And this operated, I think, in a broadly satisfactory manner.
The last of the agreements, Towards 2015, was a ten-year framework agreement with provisions for pay reviews on a two-yearly cycle, thus detaching the process from fiscal policy. The other issue of concern raised in the IMF paper is the linking of tax concessions to pay agreements in the longer terms. And, as it happens, I agree with the IMF on this point, but, perhaps, for different reasons. When I became General Secretary of Congress in 2001, I started shifting away from the wage-tax trade offs and towards pay claims based on inflation and productivity. The reason is that I wanted to try to get closer to the Nordic model where universally available, high-quality public services like, for example, child care are part of the social wage.
Having a high level of public service provision is crucial for low to middle income earners. Wage activity alone will not create conditions of equality, or anything like it, for this cohort of the population. Quality public services cannot be sustained by low levels of taxation.
Refined down to its core, the essential purpose of social partnership was to settle the distributional issues leaving Government the freedom to get on with the business of growing the economy. My personal conviction is that it is not possible to successfully manage a small open economy without embedded institutions for managing distributional conflict. Now, I think the truth of this is implicitly recognised in the recent report of the five EU presidents - that's Juncker, Dijsselbloem, Tusk, Draghi and Schulz - setting out a plan for strengthening EMU, published on 1 July. It suggests that a common template for national competitiveness authorities to guide wage negotiations and to restrain wage divergence throughout the eurozone.
So, Chairman, we are now in our eighth year of wage restraint. I cannot see that lasting indefinitely. A combination of pent up wage pressures, competition between unions, free collective bargaining and a tightening labour market suggest to me that the kind of co-ordination proposed by the five presidents will be challenging outside of a framework allowing some harmonisation of social wage issues in addition to pay.
In terms of the cost of the crisis, the most significant learning for me out of this experience relates to how EMU actually worked in practice. I did not expect that, in the event of an exogenous shock, and absent the facility to devalue the currency, that the whole burden of adjustment would fall on labour markets. The Finns were better prepared as a labour movement than we were. They used their collective agreement to negotiate buffer funds to cushion the impact of adjustment but then again such funds might have been raided to bail out the banks as the National Pensions Reserve Fund was raided.
Congress opposed austerity. We feared it would lead to deflation and a Japanese-style slump. We knew that fiscal consolidation would have to happen but we wanted it to be spread over a longer timescale, to 2017, in fact, and back-loaded, not front-loaded, to try to keep up domestic demand and let growth do some of the heavy lifting of adjustment. We also wanted the consolidation to be more focused on tax measures than public service cuts and we campaigned for this approach under the banner, the better fairer way. But would this have been better? Well, Chairman, we really ... we don't know what the counter-factual is.
During the period when Ireland was a programme country, my colleagues and I met quarterly with the ECB-IMF-EU troika. I have to say it was a dispiriting experience and utterly valueless, in my view. My impression of the troika was one of an uncaring technocracy of neoliberal zealots devoid of empathy. I exclude the IMF from this description. They were more reasonable, which was a surprise to me because I had first-hand experience of IMF structural adjustment programmes in the developing world during the 1990s but we were able to establish a useful separate dialogue relationship with the IMF.
It is clear to me also that there is no social institution to balance the independence and power of the ECB. An institution with the sole remit of price stability is not concerned with 26 million people out of work. The remit of the ECB should be changed to reflect the same range of social and economic responsibilities as the Federal Reserve Board in the United States is.
The so-called Great Moderation, upon which so many incorrect assumptions about markets were based, turned out to be a chimera. In his seminal work, The General Theory, Keynes wrote about the differences between risk and uncertainty. Risk can be quantified and therefore mitigated - uncertainty cannot be.
Ciarán Lynch (Cork South Central, Labour)
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Mr Begg, we are over time.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Mr Dunne.
Mr. John Dunne:
May I begin by thanking you, Chairman and members, for giving me the opportunity to contribute to your inquiry. By way of introduction, I referenced my period of office as director general of the Federation of Irish Employers from 1988 and as the first director general of IBEC in 1992. I retired from IBEC in 2000. At the beginning of 2000, I was appointed to the board of the IDA and subsequently in June to the position of chairman. I was reappointed chairman in 2005 and retired in 2010. I believe that my role within IBEC was a significant factor in my being asked to join the board of the Irish Financial Services Regulatory Authority and subsequently of the Central Bank. My CV did not include any specific banking or financial experience but the challenges and successful outcomes of the creation of IBEC were, I believe, viewed as relevant and useful.
The committee will note my retirement from IBEC in 2000. I was appointed to the board of the Financial Regulator and the Central Bank as a non-executive director in 2003 and am therefore unable to comment, from an IBEC perspective, on any of the issues raised, other than social partnership to 2000, in the committee's terms of reference for my appearance before it.
I confirm that I advised the committee secretariat of the position immediately on my receipt of the committee's request for my participation in its work.
Initially, I wish to make a number of general points. Firstly, I have no interest in seeking to apportion responsibility and-or blame between the bank and the regulator. Secondly, and in view of the comments made by another witness to the committee, I wish to assure members that I have never had any political affiliations and have acted completely independently in my participation in various public sector organisations. Thirdly, I have never had any connection with banking or financial institutions or anything to do with property interests. And, fourthly, I did not on any occasion discuss the business of the IDA within the CBSIA orvice versaother than to note some areas of overlapping interest.
I believe it's relevant to outline some of the issues which impacted on the work of the new organisation. First of all, I believe there was a general consensus that emerged amongst authority members that the construct was flawed. The regulator was set up as an independent entity, but, in certain key respects, had an umbilical cord back to the Central Bank. It was housed in the bank; it had key services, notably HR and IT, provided to it by the bank; its remuneration were controlled by those of the bank; its budget was the subject of consultation with the bank and required the approval of the Minister of Finance. Cost pressures arose from the operation of the levy which was shared 50% between the Central Bank and the industry and the staff of the regulator were mainly drawn from the Central Bank. In these circumstances, the achievement of real operational independence was a major task. From the bank's point of view, the main change was a loss of the direct contact in operational areas with financial institutions and its dependence on the regulator for key information critical to its financial analysis and policy formation. And, of course, the new order created grey areas where both organisations may be said to have had overlapping responsibilities.
In addition to the above,. there were policy issues pulling in competing directions. In particular, the enhanced consumer protection emphasis, whilst entirely worthy in the overall context, sat somewhat uneasily with prudential regulation and attracted attention and priority from it, particularly in the early stages. There seemed some confusion, certainly externally, about the fundamental role prudential regulation had in the overall protection of consumer rights. Another example was the bank's mandate for the development of the financial services sector and the lack of clarity, notwithstanding the good co-operation and operational MOU which existed between the bank and the regulator over who was responsible for what.
For all these reasons, the challenge of building the new body into an effective organisation was always going to be significant. This challenge was made even more demanding for the regulator by the discontinuity caused by the loss of its initial CEO after only three years, and two years later, of its chairman, and, of course, by the scale of the crisis, which later developed internationally and domestically.
I turn now to the regulatory system. A critical issue which the committee has heard about ad nauseam from previous witnesses and which was fundamental to all that subsequently transpired was the choice of regulatory system. It is not my intention to rehearse all the points already made but I believe it is relevant that, at the formation of the new structure, I can recall no challenge to the adoption by the regulator of that principle-based system. It was, in fact, already in use by the Central Bank. It was consistent with attitudes to good regulation here at the time and it was in widespread use internationally. Specific rules were always part of the system, and these were added to over time as a result of EU and domestic decisions. The Financial Regulator laid out clearly that under the system of the ... under the system, that proper management and control of a financial services provider and the integrity of its systems rested with the board of directors and its senior management and specified the nature of the monitoring checks and inspections that the regulator would undertake. There is now no gainsaying, in the light of what happened, that the original principlescumrules based system was not adequate and, in any event, had not been implemented intensively or intrusively enough. Regulatory systems internationally have now been completely revamped since the crisis. Intensive and intrusive regulation is now the order of the day. The actions of the banks have ensured that this must be the case.
However it is, I believe, also appropriate to acknowledge the very real concern that actions or opinions which might have been taken or expressed by the regulator or the bank could have had unattended consequences - specifically, that they could precipitate the outcomes in relation to the banking system or the property market which the regulator the bank were seeking to prevent. Even although, with the benefit of hindsight, its clear that much more could and should have been done, these concerns were material in discussions at the time, particularly when the consensus amongst domestics and international commentators was for a soft landing.
I've been of the view that the international dimension has not been given sufficient weight in the various inquiries and reports into the crisis and its genesis. In my responses to the Honohan and Nyberg investigations, I raised these international issues and the passage of time has not altered the views I expressed to these bodies. I still believe there was a possibility that, without the international financial crisis which engulfed us in 2008, a "soft landing", defined as a 20% or even slightly greater reduction in property prices from the peak, might have occurred. The problems in liquidity across the financial markets changed the situation fundamentally. Other witnesses to the committee have, I believe, made the correct connection between the crisis in liquidity, dramatically caused by the Lehman's situation, and the resultant, to all intents and purposes, closure of the wholesale markets and the onset of the spectre of insolvency, pending fresh injections of capital. The capital requirements, which most commentators, both internal and external, believed were adequate in the pre-Lehman scenario, were proved inadequate once the failure of Lehman's happened. All of this was compounded by the almost immediate onset of the recession internationally.
There are three issues, which have been covered in previous testimony, on which my own views as a member of both boards and as a member of the budgets and remuneration committee of the regulator and the bank may be helpful. On the issue of contrarian views, I know of no instances were at board authority or committee levels, there was any attempt to shut down such views. I am not privy to issues of this kind if there were any arising below board or authority levels.
On the issue of resources, it is a fact that there were cost pressures at work. Within the Central Bank board, the Department of Finance representative, in particular, had quite properly a continue ... continuing interest in this area. So too had the consultative panels. In this context, the procedures of the regulator's budget and remuneration committee, known as the BRC, are important to appreciate. The committee received a draft budget from the executive, compiled from detailed discussion within the various divisions of the regulator. The proposals were then the subject of rigorous examination by the committee, and discussion between it and the executive. The outcome was the subject of agreement between the two parties. That outcome was always subject to the requirement that the agreed budget was sufficient for an organisation to carry out its functions and mandate in an efficient and cost effective manner. I was always satisfied that this procedure was sufficiently rigorous to ensure that adequate resources were in place to allow staff to perform the tasks that were asked of them under the system in place at the time. However, as mentioned in other testimony, despite the best efforts of the authority, a full complement of agreed numbers was never reached.
Finally, in regard to the operation of the authority in the Central Bank board, as a non-executive director, I believe both operated well and to their respective remits. I agree that, although a number of the non-executive directors had significant banking and-or financial skills and experience, there was a case for more specialist input. This lack of such expertise was perhaps a hindrance in the ability of the authority to engage fully with the executive in the detailed way that was necessary, particularly as regards the interrogation of credit risk data and the proper interpretation of such data. The main lack, however, was that the authority should have pushed the executive much more forcefully for outcomes in the preface ... in the face of prolonged obfuscation from some institutions.
I now address the lines of inquiry indicated by the committee. Appropriateness of the macroeconomic and prudential policy - during the period in question the Government was generally following a pro-cyclical economic policy. There was significant growth, continuing over a prolonged period, and claims from many quarters for actions whose efforts would have been ... whose effects would have been to further fuel expansionary tendencies. Low interest rates, a major problem for Ireland, were a function of the ECB. Against this background, the macroeconomic and prudential policies advocated by the Central Bank, and which formed an important conditioning environment for the regulator, whilst cautionary, were generally optimistic.
Overall these policies, whilst recognising and publically pointing to a variety of risks, nevertheless consistently pointed to a soft landing. The vehicle used was through the Central Bank's financial stability reports. Here the bank was confronted by the dynamic I mentioned in the introduction to this opening statement, that of triggering events which it was actually seeking to prevent.
Final editing of the reports was undertaken by the Governor of the bank and were nuanced to reduce the risk of unintended consequences but without changing their substance. In hindsight, it's clear that from 2005 to 2006 onwards the policies being pursued were not appropriate to the situation which was developing and understated the underlying risks in the growth of credit and related matters. Measures such as increased capital requirements were taken by the regulator but were not sufficient.
Nature and effectiveness of the operational implications of the macroeconomic and prudential policy - overall, the thrust of the financial stability reports was that the banking system was sound. They acknowledged that while there were significant risks in relation to certain key areas the capital position of the system as a whole and of individual banks was at a level which could cope with these concerns. In his evidence, the then Governor outlined the range of considerations which, in the banks view, would keep the situation under control. He also set out a number of factors which subsequently altered the scenario originally envisaged and rendered the actions made inadequate. With hindsight, it is clear much stronger action was needed.
Appropriateness of the expert advice sought, quality analysis of the advice and how effectively the advice was used - throughout my period of office, a range of external consultancy advice was sought to augment resources. Those in which I was most involved were the Mazars report on business process, resource benchmarking and the efficient use of resources and the PwC report commissioned in the aftermath of the September 2008 guarantee into the position of the main banks at that time. In both these cases, it was clearly appropriate that such advice be sought. In the Mazars case, issues around resource levels and allocation and the possibilities for a greater effectiveness were, I believe, self-evident from the earlier discussion relating to staffing levels in the regulator. The quality of the exercises was, I believe, at a high level, relevant and based on sound analysis. The overall conclusion was that resources were adequate for the system in use. In so far as the PwC exercise was concerned, this was largely necessary in the light of the guarantee. PwC had a large team working on the issues involved. I've no reason to believe that the assignment was carried out in anything but an extremely professional manner. However, the outcome, notwithstanding many caveats, was that the banks were at that specific point in time adequately capitalised, and that they would continue to be in the short to medium term. This conclusion was relied upon by the regulator as a key indicator of the health of the system at that time. The detailed views of the bank and the regulator on the PwC report was supplied to the Minister for Finance.
Assessment of what has been done, work in progress and what remains outstanding, etc. - since I retired from any association with the regulator-bank in July 2010, I cannot really comment under this heading.
Cost of the crisis and sharing of the impact - I accept the estimate of the cost of the crisis made by the current Governor of the Central Bank. The indirect costs are impossible to calculate in financial detail at this stage, but perhaps of more importance are the social implications of the crisis and the acute personal distress which so many people have endured. It's not clear to me what alternatives existed domestically for sharing the impact of the crisis consistent with the need to restore soundness to the financial system and to promoting renewed growth in the economy, with its vital social consequence of rebuilding employment levels.
Role and influence of the ECB - this is clearly an issue of substance but I can add little to the sum of knowledge already available. The political issues continue to be the subject of debates.
And, finally, options for burden-sharing - the options under this heading have also been the subject of intense debate. It seems correct that all practical options be considered, and I believe this occurred. Again, these are matters which are primarily in the political domain and which I understand are still being actively pursued.
Finally, I should say that I fully acknowledge that whilst I contributed to the best of my ability to the regulatory authority and to the board of the bank, in hindsight key issues were missed and I shall be ever mindful of the consequences of this. As mentioned earlier, the damage caused to the social fabric of the nation and to individuals has been immense and is a matter of enormous personal regret. Thank you, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Dunne, for your opening statement and also Mr. Begg.
If I can begin questions this morning and invite in Senator Susan O'Keeffe. Senator, you have 25 minutes.
Susan O'Keeffe (Labour)
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Thank you, Chair. Mr. Begg, you, I think, I understand that you met the Minister for Finance on 29 September 2008.
Susan O'Keeffe (Labour)
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So maybe you might just tell us a little bit about that meeting.
Mr. David Begg:
Well, the first thing I can say is it had nothing to do with the events which subsequently transacted in the Department of Finance that night. I met him to talk about the general budgetary situation and about, I remember pensions was an issue that we had on the agenda. I met him with a number of colleagues but it was part of a normal process of meetings that takes place around budget time between the Irish Congress of Trade Unions and the Government but there was no discussion at all about the crisis that was unfolding.
Susan O'Keeffe (Labour)
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And what was your understanding, Mr. Begg, at that point about the budgetary adjustments that might be made? How aware were you of how bad things were becoming, particularly behind the scenes and, obviously, in documents we've now seen? Were you aware at that point?
Mr. David Begg:
Certainly not the extent of the matters which were that evening discussed. I mean, I was aware, clearly, that there were problems with the liquidity situation, that the European Central Bank had been providing very large levels of liquidity in the Irish situation, that a great deal of money was being taken out of the country by corporates who had usually certain criteria about the credit ratings of institutions in which they can place money. So I mean, I was aware generally speaking that yes, that was happening. A lot of the discussion that took place between ourselves, my delegation and the Minister, was concerned about, sort of, some longer-term strategic issues, pensions being one of them, but also about how you might go about creating some kind of stimulus to the economy with a view to getting people back into employment - you remember that the construction industry, for instance, had been particularly badly hit. I think we had about 286,000 people working in the construction industry and that had really been decimated at that point in time. We were quite anxious to try to get to some point where we could have investment in infrastructure that might, you know, ameliorate the condition in the construction industry particularly. So it was around issues like that. In fact, Senator, I do, actually have a detailed record of that meeting; it just didn't occur to me to bring it with me today.
Susan O'Keeffe (Labour)
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Okay. But just to be clear, leaving aside the banking matters, were you and your group that met with the Minister, were you at that point already aware of how bad the budgetary situation was likely to be as it moved into the actual budget space, if you like, did you know how bad it already was going to be?
Susan O'Keeffe (Labour)
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Had that been indicated to you?
Mr. David Begg:
I beg your pardon, sorry, it was clearly a deteriorating situation and we had had some initiatives from the Government at that time already. I don't claim that we had precise information about the budgetary situation; we didn't, but we did know it was a deteriorating situation, we did know it was a deteriorating employment situation and, you know, the emphasis from our side was to try to see, well look, is there any way that we can ameliorate this. And actually we were speaking about it from the point of view of what could be done, what interventions could be made by Government; and I remember the Minister saying at the time, you know, we had a long kind of discussion, and one of his comments was: "I understand your analysis completely, it's a straightforward Keynesian response to the crisis."
Susan O'Keeffe (Labour)
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And so, obviously, you are saying that the Minister didn't raise the matter of the banks, it didn't come up, it wasn't part of the conversation, just to be completely clear.
Susan O'Keeffe (Labour)
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So what was your reaction on learning, then, about the events that followed? I take it you were not aware of the events that took place that night?
Susan O'Keeffe (Labour)
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Until the next morning, perhaps, on the news?
Susan O'Keeffe (Labour)
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Okay. And so, what was your response when you heard the news?
Mr. David Begg:
Well, I suppose my response was really that I couldn't evaluate quite what the significance of the guarantee was, you know, what the full ramifications of it was. It did seem to be very significant, certainly, and, you know, I suppose the thought that occurred to me was, well, look, in the ultimate could we stand over this guarantee, if it ... if hardy came to hardy.
Susan O'Keeffe (Labour)
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But, obviously, as a member of the Central Bank, you had, you were privy to a lot of information that had come down your way - in fact, this applies to both you, I'll bring you in in a moment, Mr. Dunne - over the previous year. So when you saw and heard of a blanket bank guarantee, it could have meant all manner of things to different people listening that morning but as a member of the Central Bank, was it something that you had understood might be a possibility, had it ever been discussed, or did it come out of the blue when you heard it?
Mr. David Begg:
Yes, it came out of the blue. It hadn't been discussed within the councils of the Central Bank. I should explain that it is correct that there were good many meetings in advance of that decision but, in the run-in to that period, the crisis was really handled by the ... sort of, Governor from the Central Bank point of view, the director of the regulatory authority, the people in the Department of Finance and the Minister. Like, the boards were not really involved in the run-up to that fateful decision being made.
Susan O'Keeffe (Labour)
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But just to be clear, any conversations that did take place, they didn't discuss a blanket guarantee? Did they ... I mean, I just want to be clear, did you discuss any manner of-----
Susan O'Keeffe (Labour)
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Okay. Mr. Dunne, if I might ask you, if you like, in the same way, that I trust that you equally woke up the next morning and discovered about the blanket ... or did you learn about it in a different way, perhaps?
Mr. John Dunne:
My recollection is slightly different to Mr. Begg's. There had been discussion, both in the regulator and, to my recollection, in the bank, about possibilities as the situation worsened. And there was a meeting of the regulator - I believe it was around about 16 September - when various options were discussed, if the deteriorating situation went over the cliff and became, you know, an Armageddon-type situation. And the issue of a guarantee, while not overly stated ... overtly stated, was implicitly contained as a result of that meeting. It was one of the things that was talked about and I think there was some discussion in one of the bank meetings and, as David recalls - correctly, in my view, too - there were a whole series of meetings which ran into one to another. But I think there was some discussion of options. Now, there was no finite ... to my recollection, there was no finite decisions, whatever, taken. I do recall also being phoned, I'm pretty sure, by the chairman of the regulator, Mr. Farrell - it could have been Mr. Neary but I think it was Mr. Farrell - on the day or the day before ... it must have been the day, saying that they'd been called to the meeting and that the sort of options that had been talked about would inevitably come up and had they my authority ... I understood there were calls being made to all the members of the authority, but had they my authority to pursue that line in whatever they felt was most appropriate in the circumstances. So the following day, when I read it in the newspapers, I was somewhat surprised but I wasn't completely surprised because I was aware of all these other issues. And subsequent to that, we had a briefing from Mr. Farrell and Mr. Neary and they indicated that having regard to all of the issues involved, they had come to the conclusion that the guarantee was the appropriate mechanism and they had so advised the Government.
Susan O'Keeffe (Labour)
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Documents that we have seen - and, again, obviously, we have to be careful about those - would suggest that there was ... that nationalisation, the provision of liquidity, funding and the winding down of an institution were three of the key areas that were being looked at. Does that sound-----
Susan O'Keeffe (Labour)
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That sounds familiar, okay. And in that three, the additional one of a guarantee was not included at that point?
Susan O'Keeffe (Labour)
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Were you aware, Mr. Dunne, that one of your colleagues on the board was, if you like, separately offering advice to Government at this point? Was that ever made clear to you-----
Susan O'Keeffe (Labour)
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-----in any conversation?
Susan O'Keeffe (Labour)
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Mr. Begg, were you aware?
Susan O'Keeffe (Labour)
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No. Can you recall when you might have become aware?
Susan O'Keeffe (Labour)
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So, in other words, it wasn't formally raised at any point at a board meeting? It wasn't discussed at ... Mr. Begg, do you-----
Susan O'Keeffe (Labour)
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Okay. Mr. Begg, what training did you receive to prepare you to become a board member at the bank? Do you-----
Susan O'Keeffe (Labour)
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None. Was that the normal, or were you just an exception or are you aware ... you know-----
Susan O'Keeffe (Labour)
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-----was everybody trained and you just happened to miss it or-----
Susan O'Keeffe (Labour)
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And did you ever ask for any training?
Susan O'Keeffe (Labour)
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Okay. Mr. Dunne, how about you? What was your situation in relation to training?
Mr. John Dunne:
There was some training, I think ... we ... in the sense that there were series of experts. But once the ... remember, I didn't join the board until the new organisation was set up. So I was joining both boards. I can't recall any specific issues relating to the bank. But in so far as the regulator was concerned, various experts were brought in. Normally we would ... they would come in in the evening time and they would speak to their speciality and we'd have questions and answers and so forth. So in that sense, there was some training. But I think Mr. Patterson, when he was before you, indicated that he felt there should have been a lot more and I would agree with that analysis.
Susan O'Keeffe (Labour)
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Mr. Begg, how long were you on the board of the Central Bank?
Susan O'Keeffe (Labour)
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And in terms of sort of good governance, corporate governance, how long ... is there a recommended, or are you aware is there a recommended period for which people should serve on boards?
Susan O'Keeffe (Labour)
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And do you feel that's a good recommendation in light of the fact that you were there for longer than that?
Mr. David Begg:
Well, I don't know. I have had experience in other organisations where that has applied. For instance, I was on the board of Aer Lingus for seven years and it's fine. It's probably a good idea to recirculate the ... you know, the expertise and so on, on any body. In general, I think it's a good proposition. You shouldn't stay too long on any place.
Susan O'Keeffe (Labour)
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Mr. Dunne, do you have a view on the length of time that board members should serve in this way?
Mr. John Dunne:
I think the shorter periods are appropriate. I mean, it seems to me just common sense. At the end of the day, if you are too long on something, you get too used to it and you can't really contribute in any innovative fashion. One starts to believe one's own propaganda, if you know what I mean.
Susan O'Keeffe (Labour)
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And in terms of your, if you like, service or your time at the bank, do you believe that happened?
Susan O'Keeffe (Labour)
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So that was seven years, okay. Mr. Begg, you say in your own witness statement on page 3, you say, ''We were seriously exposed in the banking sector and we didn't know it''. Do you believe that the Central Bank and its board have accountability for that?
Mr. David Begg:
Yes, well, the problem was that the affairs of the banks itself, or the banks themselves, were the responsibility of the regulator. The Central Bank itself didn't have any access there and a combination of that and stress tests that were done by the Central Bank was the basis of the assessments that the banks were okay. That was the view of the IMF as well and the banks were operating within capital adequacy ratios that were set by international standards, like the Basel committee, and, okay, it just turned out that they weren't adequate as it turned out. It's absolutely clear.
Susan O'Keeffe (Labour)
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Do you believe that there were ... the tools were available to the Central Bank which could have helped to identify and deal with the risk area?
Mr. David Begg:
Well, the system of stress tests were supposed to produce that. The stress tests have been qualified somewhat by the financial stability reports as you will have noticed, I'm quite sure. Maybe, they should have been better types of stress tests and that probably is the situation now. But personally, I wouldn't be competent to conduct a stress test of a bank, so I really don't know. I just say we had 90 economists in the bank and one relies on them to do these things properly.
Susan O'Keeffe (Labour)
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If you look ... if you consider the board now and what happened, is there an argument that boards like the board of a Central Bank should have people with more financial experience, more financial capability on it or what is your view of a mixed ability board?
Mr. David Begg:
Well, you see, I suppose from my point of view, I would be a little bit subjective about that. I mean, you know the old expression, ''War is too important a business to be left to the generals'', and the ECB board is ... consists entirely of experts, as you know. Now we can ... all of us have a different view about whether the ECB board is good or bad. I think the mixture is probably better because it is helpful I would have thought to have had some real economy experience being fed into the deliberations of any body like that. But quite where the correct level of balance is, you know, I think, is a matter of judgment.
Susan O'Keeffe (Labour)
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Mr. Dunne, do you have a view on, sort of, the mixed ability board versus, if you like, having more people with more financial experience-expertise?
Mr. John Dunne:
Well, I think there is certainly a case in the regulator and, I think, in the bank for more specialised banking experience. I mentioned in my statement that I believe that the lack of it ... of that real specialist knowledge, with the exception of one or two people, was an inhibiting factor in the interrogation of bank executives when they were presenting professional views to the board. Having said that, I also believe that a mixed board is better because there are different tasks to be undertaken and if you just have a complete specialism, then I think you begin to get a very narrow focus. But I think in this particular instance, some greater degree of specialist regulatory knowledge, in the case of the regulator, and prudential macroeconomic expertise, in the case of the bank, would have been helpful. I have no doubt about that.
Susan O'Keeffe (Labour)
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When Mary Burke, who is the head of banking supervision with the Financial Regulator gave evidence here, there were two things she raised and I will deal with them separately. She talked about what she described as meetings, informal meetings on the 7th floor of the bank where bankers came in and had informal meetings with senior managers. Was that something that you were ever aware of, were you ever included in any of those meetings? Had that ever been voiced to board members or was that news to you?
Mr. John Dunne:
I was never involved in any such meetings. I never knew they were going on. One anticipated that there would be regular meetings between various levels of staff and that there would be various levels ... various meetings between banking supervisors and bankers. I mean, at the end of that day, that's I suppose what they were about. So, it doesn't surprise me that there were meetings. It does surprise me to the extent that people felt that there were sort of secret meetings going on about which they weren't being informed. But I had no knowledge of that until I saw it in Mary Burke's evidence.
Susan O'Keeffe (Labour)
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Yes, and just to be clear, Mary Burke says on page 98, ''I don't believe ... I rarely ... if ever saw what one would call a minute" of the meetings on the 7th floor', just for clarity's sake.
Susan O'Keeffe (Labour)
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Now she also said, ''I am crystal clear here. [on page 83] We did not have the resources that were needed to supervise these banks.'', and she'll ... she gave some evidence as you are probably aware, of her own attempt to get more resources for further supervision. So, you were a board member at that point. What do you recall about that or did it come to the board?
Mr. John Dunne:
So I have some first-hand knowledge of the dealings between the executive and the committee in the preparation of the whole budgetary strategy. And that's why in my written statement I have gone to some length to describe the process because I think it's very important that the inquiry understands what the process was in determining whether the ... there were appropriate resources or not. And it's quite true that the executive would come every year with their own suggestions as to what the staff compliment should be. That would have been worked out in various meetings between the very senior management and the staff throughout the organisation. They would present that to the budget and remuneration committee. The committee would then have a discussion with the executives. Those discussions were very detailed and they were quite robust at times and I think that was quite proper and, at the end of the day, there would be an agreed position arrived at.
Susan O'Keeffe (Labour)
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But did you know, for example, Mr. Dunne, that there were only two or three people supervising, say, two of the big banks, and then two other big banks only had two or three people super ... were you aware of that detail?
Susan O'Keeffe (Labour)
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And were you happy with the level of supervision?
Mr. John Dunne:
Well, the answer was ... the answer to that question is that we never signed off on a meeting where we were fixing staff complement - and I'll come back to the issue of complement versus numbers in a minute - without saying to the executives, "Are you satisfied that you now have enough resources in the context of the current period we're talking about to do ... to do the job properly?" because we were not prepared to sign off on a basis where they did not have the adequate staff. So I disagree with Mary Burke about this matter, but, you know, that's a matter of opinion.
Susan O'Keeffe (Labour)
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Ah, okay. So Mary Burke's observation, for example, that she says, crystal clear, "We didn't have enough, even though I asked for it"; are you saying you knew that she had said that? Or were you just looking at what the executive brought to you, where they may already have made a decision to not allocate to her particular department?
Mr. John Dunne:
Well, I can't recall the statement that ... the particulars ... I've no doubt that she made it, but I simply can't recall it. But what I'm trying to suggest to you is this: that the outcome of these reviews were on the basis of an agreed position and the agreed position was not just about the, you know, the nine, ten, a specific number, it was on the basis that: "Are we now happy, both the board representatives here and the staff, that you now have the staff levels which you consider necessary to do this job?"
Mr. John Dunne:
Remember, we weren't doing - and, of course, it's proved subsequently to be a major fault line - we weren't doing intensive-type regulation. We were doing the type of regulation appropriate to a prudential-based system where the onus was on the boards. So what we're talking about is appropriate numbers in the context of a particular regulatory system.
Susan O'Keeffe (Labour)
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So ... so when ... so you disagree with Mary Burke when she said, "We didn't have enough resources".
Mr. John Dunne:
I do, and I would point out one other matter, that in 19 ... in 2007, when the staff had come looking for a very major increase in staff, I think it was in the order of 70, 70-plus, and the outcome of that discussion and debate at the end of the day was a figure of 25 new people. In that 77, by the way ... in that 75 only four people were requested for banking supervision. The rest were for various other jobs that had to be done. But in consequence of that, and in consequence of the difference, as it were, between us, the budget and remuneration committee recommended to the board that outside consultants be brought in to do a root-and-branch analysis of this whole area and that was done by Mazars and the Mazars report, which was published in 2009, indicated in a number of different ways that, both in absolute terms and on a comparative basis with other international regulators, the staffing levels as agreed, the complements as agreed, were appropriate. Now, one has ... one had ... I'm sorry, but just let me, if I may, finish this point: one of the big issues, of course, was that complement was never turned into reality, because not once from 2003 to ... until I left the board in 2010 was the staff complement approved ever reached.
Susan O'Keeffe (Labour)
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So despite, actually, what you agreed they never even got those?
Susan O'Keeffe (Labour)
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So there was a cut off?
Susan O'Keeffe (Labour)
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Okay, and why was that not then ... you couldn't pursue that any further as a board member-----?
Mr. John Dunne:
We couldn't pursue it any further because the responsibility for getting the numbers rested with the HR department of the bank. But I'm not trying to dump on the HR department because they would say, and ... that they tried extremely hard but they were constrained by remuneration levels for the bank generally and the regulator generally and they simply couldn't get the bodies from a market which was very tight.
Susan O'Keeffe (Labour)
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Finally, Mr. Dunne, you say, yourself, that there was a lack of clarity over who was responsible for what, and you're talking here about the separation of the Central Bank and the Financial Regulator?
Susan O'Keeffe (Labour)
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So that's probably ... I mean, that's quite a serious allegation to make, so can you tell us about how that manifested itself?
Mr. John Dunne:
Well, I think the biggest manifestation was in the analytical area, where in the previous incarnation the bank had it all within its own remit, so its economic staff and its regulatory staff were all in the same organisation, and the one fed into the other, as I understood it, pretty seamlessly. In the new situation, and as things developed, the pressure on the regulator for regulatory issues, as distinct from helping with the analytical side of things, was growing and growing and growing and the numbers of staff in the area of analysis was being poached, if I can put it that way, to staff up in the other areas. And so, at the end of the day, there was much greater reliance on the bank side but they felt, as I understand it now in retrospect, that they didn't get the sort of information from the regulator that they should have got and here's an example where things were falling down between the cracks under the new structure because of the confusion over who was responsible for what.
Susan O'Keeffe (Labour)
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So there wasn't a clear line of communication, are you saying, between the regulator and the bank?
Ciarán Lynch (Cork South Central, Labour)
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Yes, and can I just finish on that point before I bring in Deputy Higgins. We had the Financial Regulator's office, Mr. Begg and Mr. Dunne, and then we had the Central Bank. In the Honohan report, there's a very explicit statement, which says that despite the Central Bank's primary responsibility for financial stability, it was, in fact, the Financial Regulator side, not the Central Bank side, which took the most concrete action to intervene. Would both of you agree or contest with that statement?
Ciarán Lynch (Cork South Central, Labour)
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Mr. Begg. Or-----
Mr. John Dunne:
-----in this sense, but it's not surprising. You know, the most concrete action taken was the introduction of increased capital requirements in 2006. That was a regulatory action. It proved to be inadequate subsequently. But the fact of the matter is that, you know, that was a concrete action taken by the regulator. But I have to stress, Chairman, that I'm not in the business of trying to push blame from one side to the other side. I was a member of both bodies, so I had responsibility in both.
Ciarán Lynch (Cork South Central, Labour)
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And that's what I want to tease out with Mr. Begg. In regard to that comment by Professor Honohan, what would your own opinion be?
Ciarán Lynch (Cork South Central, Labour)
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Would that be-----
Mr. David Begg:
Well, as John said, I mean, the actual implementation was a function of the regulator to ... if it came to a question of changing the capital adequacy ratios and they did that. I mean, it might be argued that that was ... turned out to be too little and too late to seriously affect the course of events. But there was a corresponding difficulty, you see, with the ... with the Basel II directive, the capital acquisitions directive or whatever it was called, which actually allowed for the reduction in the capital ratios for certain types of lending. So, in a sense, despite it being inadequate, the Irish regulator moved in a way which was, if you like, counter to what the international trend was in making that particular adjustment.
Ciarán Lynch (Cork South Central, Labour)
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And in that regard, and I'm putting the question to both of you again, and then I'll move swiftly on to Deputy Higgins: what we're talking about here is that there was, sort of, micro behaviour taking place over in the regulator's office in regard to microeconomic factors and such. The regulator's office primary duties were in two areas; one, consumer protection and the other one is the regulatory structure in which the financial institutions would operate. The Central Bank had a broader brief, which was the responsibility of stability, and the wider stability, so was the issue of the micro activity being looked at in a stability context by the Central Bank, by your recollection? Mr. Begg?
Mr. David Begg:
Well, the ... there certainly was an engagement between the two parties on the financial stability question. That was a giant effort. Most of the work on financial stability was done by the economists in the Central Bank but it was signed off by the regulator. It had to be, that was the way it was jointly set up. Now, the problem, in a sense, was that, you know, it's a little bit chicken and egg, the financial stability reports identified all the risks to the economy but qualified them by saying that, you know, it looks as if the banks are sound. Presumably, that was based on feedback which was received concerning the banks and also, in fairness, the stress tests which the Central Bank was responsible for and the IMF was responsible for carrying out.
My own opinion of it is this that if you have a look at the financial stability report for 2006 and 2007, the 2006 report is, you know, it'd be hard to fault it, basically, in terms of looking at the risk and looking at the exposure to the banking system. In 2007 then, there was a, sort of, a pull back from that a little bit because, I think, the rate of price increases began to moderate. There was something like a 3.5% reduction in the rate of house prices, which ... of house price increase, which, I think, was interpreted as a sign that the, you know, that the, the soft landing was actually beginning-----
Ciarán Lynch (Cork South Central, Labour)
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To get harder.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Mr. Dunne?
Mr. John Dunne:
Well, I agree with what David has said. I'd also add that in the context of the decision by the regulator to increase the capital limits in 2006, that had to be a joint decision because that had impact for financial stability and, under the rules, that had to be signed off by the Governor of the Central Bank as well, and that happened. So, you know, once the regulator was going to take decisions which impacted on any ... in any way on financial stability issues, then it became a joint matter.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Deputy Higgins.
Joe Higgins (Dublin West, Socialist Party)
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Thank you, Chair. Good morning, gentlemen. Mr. Dunne, could I just ask you first, perhaps, if you could outline the process surrounding your appointment as a board member to the Central Bank, just, in relation to how you were approached? Was there a nomination of selection process, or a ... and then, later, a renomination, extension of tenure process, please?
Joe Higgins (Dublin West, Socialist Party)
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So, you were appointed to the board of the Financial Regulator then, in 2003, you were on board of the Central Bank and of the Regulator.
Joe Higgins (Dublin West, Socialist Party)
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Yes. Now, you say in your statement, Mr. Dunne, in page 1, "I believe that my role within IBEC and perhaps more especially in the successful conclusion and operation of the merged organisation [I take it that that's the Federated Union of Employers and the Confederation of Irish Industry, becoming IBEC] was a significant factor in my being asked to join the board of the Irish Financial Services Regulatory Authority, and subsequently of the Central Bank." Why would that be a significant factor?
Mr. John Dunne:
Well, I think it stems from the fact that in the case of the Central Bank and the regulator, they were setting up a new organisation out of the de-merger, if you like. They were taking one part of the bank and setting it up as a new body. In the case of the merger between the CII and the FIE it had been the opposite; we were merging distinct bodies. But it was the same sort of process, if you like. One was in reverse of the other but the same sort of issues - cultural issues, organisational issues and so forth - were present in both of those. And, there were, at the time of the creation of IBEC, lots of people who believed that this was going to be a very difficult exercise because the cultures of both organisations and their remits were very different, and yet, it had worked out reasonably well. And I believe that it was the organisational issues and people believing that I had some skills in that area that would be useful in the similar but different situation in the bank.
Joe Higgins (Dublin West, Socialist Party)
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Yes, but then you say, a little bit further on, Mr. Dunne, "I was appointed to the Board of the Financial Regulator - the Authority as it was called - as a non-executive director in 2003 and am therefore unable to comment from an IBEC perspective on any of the issues raised in the Committee's terms of reference for my appearance before it." There's a, kind of, a contradiction there, I would-----
Mr. John Dunne:
No, I hope I haven't confused the inquiry. I'm simply saying that, since I was no longer a member of ... since I was no longer in the employment of IBEC - I had retired in 2000 - therefore, from that date onwards, I'm not in a position to say what IBEC might think about certain matters. It's as simple as that.
Joe Higgins (Dublin West, Socialist Party)
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Okay. Mr. Dunne, both the regulatory authority and the Central Bank board had some common membership. Can you remember how many members of the regulator board was also on the Central Bank?
Joe Higgins (Dublin West, Socialist Party)
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Okay, and in the ... what ... why were they on the Central Bank board and what did they bring to the board?
Joe Higgins (Dublin West, Socialist Party)
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And then, in the course of the 2000s, Mr. Dunne, in what is commonly now understood to be the blowing up of a very big bubble in property and lending, were you aware of the extent of lending by banks for the property sector?
Joe Higgins (Dublin West, Socialist Party)
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Was that discussed in great detail on either of the two boards?
Joe Higgins (Dublin West, Socialist Party)
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What were ... what was the feeling in relation to this?
Mr. John Dunne:
Well, the feeling was one of concern, and the discussions inevitably went around dealing with, you know, the questions which were arising - Is this going to get out of control? What ... where is it going to end? But in every case, the professional advice from the staff was to the effect that these were concerns, no question about it, but that the buffers present in the Irish banking system were adequate to deal with any of the issues that were arising. And, as David Begg has said earlier on, that view was supported by all the international expertise.
Joe Higgins (Dublin West, Socialist Party)
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At the same time, Mr. Dunne, you were a vastly experienced person in business. I mean, would you have been aware of the experience in the Scandinavian countries, for example, in the 80s and 90s, of a significant bubble and bank crash that caused quite considerable problems for the peoples of those countries?
Joe Higgins (Dublin West, Socialist Party)
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Yes, but shouldn't lights had been flashing, very, very strongly?
Mr. John Dunne:
Well, I wouldn't deny that lights should have been flashing. Of course, they should have been flashing. All I'm saying is that the concerns that board members had, in both the regulator and in the bank, were ameliorated and mitigated to the extent that we pushed those concerns aside in a way that we shouldn't have by the strength of the advice that was coming from within the bank itself and from the external commentators. I mean, we had, not just the professional staff of the bank telling us that the buffers were sound, we had the ESRI, we had the IMF, we had the OECD, all of these bodies telling us that, despite those concerns, which were very real concerns, and despite the fact that they were being discussed in the boards as major concerns, nonetheless, that was the weight of the professional advice.
Joe Higgins (Dublin West, Socialist Party)
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Was it a factor, Mr. Dunne, as several witnesses have given evidence, that there was a predilection for so-called light-touch regulation, and a reluctance to interfere with the capitalist marketplace? Was that a factor?
Mr. John Dunne:
No, I don't believe that was a factor at all. I dislike the term "light-touch regulation" because it suggests that people really weren't doing their job. I mean, we were operating a system of principles-based regulation, which ... the rules of which were quite clear, and I think that was the major part of the problem. But there was no pressure, in my recollection, for anybody to say, "Look, hands off this" or "hands off that", for any reason.
Joe Higgins (Dublin West, Socialist Party)
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But perhaps. Mr. Dunne, was it in the ether of the establishment thinking? And, for example, as a representative formerly of a big business organisation yourself, would you be predisposed to very little regulation?
Mr. John Dunne:
No, I wouldn't. As it so happens, in my term within IBEC, and remember now I retired in 2000, the issue of the new type of regulatory process that came in after the McDowell report hadn't been a feature, but if it had been a feature, I would have been supportive of the Central Bank view, which was that it was better housed in a single authority. And I think that the ... all the events of the day, which have seen the issue turn full circle, suggest that that was correct.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Begg, if I could just ask yourself the ... the same question to begin with - the process of appointment as a board member to the Central Bank how you were approached, was there a nomination or selection and what was the process for renomination or extension of your term?
Mr. David Begg:
Yes, well, it was pretty much the same as John has explained this. Somebody from the Minister's office phoned me and asked me if I would be willing to serve, and I said I was, and then I had a formal appointment from the Minister, that was in the initial appointment in 1995. And, in terms of reappointments, it was just simply the Minister rang me and said he was reappointing me.
Joe Higgins (Dublin West, Socialist Party)
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And why were you appointed, do you think?
Joe Higgins (Dublin West, Socialist Party)
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Then, Mr. Begg, you became General Secretary of the Irish Congress of Trade Unions in 2010.
Joe Higgins (Dublin West, Socialist Party)
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Yes, of course, 2001. Excuse me. Did you see yourself as a representative of workers on the board of the Central Bank from then on?
Mr. David Begg:
Well, now I said explicitly, I think in my written statement, that I was not a representative of the Congress of Trade Unions ... of the Central Bank, and there was a considerable time lapse between my appointment to the bank and the time that I became General Secretary of Congress. There was a period of six years, and I never discussed, you know, the business of the Central Bank with the executive council of Congress, or anything like that. I didn't----
Joe Higgins (Dublin West, Socialist Party)
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So you didn't report to the Irish Congress of Trade Unions in relation to ... I'm not saying confidential stuff, but the issues of the day as they would affect working people?
Mr. David Begg:
I never reported to them on the deliberations of the Central Bank. I gave them a report every month at the executive council meetings on the state of the economy as I saw it, and various trends and so on that were there, and I spoke about that publicly. And I've given you, I think, fairly detailed, you know, evidence of my public pronouncements about economic matters.
Joe Higgins (Dublin West, Socialist Party)
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But with respect, Mr. Begg, how ... I mean, considering the decisions of the Central Bank and, indeed, the regulator, have such profound effects on working people, how could you, kind of, separate the two?
Mr. David Begg:
Well, you could separate them operationally in the sense that I wouldn't report back. That simply wasn't acceptable. That was, you know, something that was covered by the confidentiality rules of the legislation governing the bank. But in terms of my values or my belief system, I think I've made it quite clear that I brought that to my work in the Central Bank. And I did say in my evidence, even this morning, that there was some tension between, you know, what I believed in and the prevailing orthodoxy of the time. I mean, the prevailing orthodoxy was one located in the context of the Great Moderation and a belief in new macroeconomic management and efficient market hypothesis. I, on the other stand, was broadly a Keynesian, and there was ... these were two separate paradigms, and they did come into tension from time to time and, you know, that was ... that happened at the board of the bank. I said what I thought, other people said what they thought and we didn't agree always, but, you know, that's not unusual.
Joe Higgins (Dublin West, Socialist Party)
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But you didn't see yourself, specifically, as a representative of working people and their interest in how you operated on the board?
Joe Higgins (Dublin West, Socialist Party)
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Trade union movement meaning hundreds of thousands of workers, is-----
Joe Higgins (Dublin West, Socialist Party)
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Just moving on, Mr. Begg, would ... to quote from your statement:
With the enactment of the Central Bank of Financial Services Authority of Ireland Act in 2003, I was re-appointed to the board of the Central Bank but not to the Authority. Thus I had no further involvement in supervision or regulation of the Banks.
And then again you say:
The 2003 Act was fairly specific about the respective roles of the Regulator and the Central Bank. The Regulator was autonomous in his powers and responsibilities. The only areas of joint engagement was in relation to sign-off of Financial Stability Reports and shared services such as IT and HR.
But that's not what the legislation dictates, is it?
Joe Higgins (Dublin West, Socialist Party)
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You ... the ... well, maybe we could put up the memorandum of understanding-----
Ciarán Lynch (Cork South Central, Labour)
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What page is that, Deputy?
Joe Higgins (Dublin West, Socialist Party)
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Yes, it's page 3.
Ciarán Lynch (Cork South Central, Labour)
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Of which document is that?
Joe Higgins (Dublin West, Socialist Party)
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This is a memorandum of understanding between the Central Bank board and Governor and the Financial Services Regulatory Authority.
Ciarán Lynch (Cork South Central, Labour)
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On the right hand corner of the page.
Joe Higgins (Dublin West, Socialist Party)
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Yes, we ... it's coming up.
Ciarán Lynch (Cork South Central, Labour)
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Thank you
Joe Higgins (Dublin West, Socialist Party)
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Yes, if we see there that the board's responsibilities, therefore, involve-----
Ciarán Lynch (Cork South Central, Labour)
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Which page are we there, Deputy?
Joe Higgins (Dublin West, Socialist Party)
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We're on the page, yes.
Ciarán Lynch (Cork South Central, Labour)
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Yes, okay. Fire away.
Joe Higgins (Dublin West, Socialist Party)
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The highlighting is actually making more difficult. I'll just go to point 3 there, Mr. Begg:
... responsibilities therefore involve:
iii) overview of the domestic financial system as a whole. The Governor and-or Board will advise all relevant parties on the implications for financial stability of developments in domestic and international markets and payment systems. and assess the impact on monetary conditions of events;
And the next paragraph:
iv) analysis of the micro-prudential - where appropriate - as well as macro-prudential health of the financial sector. In this context, the Governor and/or Board's objective is to identify developments which could endanger the stability of the system as a whole, and will advise accordingly;
Isn't it very clear that the board of the Central Bank had a responsibility in relation to issues such as developed in the exponential lending and the property concentration in the bubble?
Joe Higgins (Dublin West, Socialist Party)
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But Mr. Begg, you said in your statement, your referred to a witness here saying that a member of the board says, "It was all a house of cards and would end in tears". And what you said is you're not sure if it was you, but it could have been you because that's how you felt. So how did you feel at the time?
Mr. David Begg:
Yes, that's ... I did feel that because I could see on the ground that you had a situation where a lot of people were investing money, borrowing money to invest in houses, which, as I said, were, in many cases, being constructed by people who had come here to work in Ireland who, in turn, were renting those houses, and it seemed to me that it was creating a, kind of a, spiral, which was, ultimately, not likely to be sustainable, or, at least, had huge vulnerabilities built into it.
Joe Higgins (Dublin West, Socialist Party)
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Can we look at the ... the Allied Irish Bank document that I've just put up there? And this is a review by AIB in relation to the amounts of lending from 1998 to 2008, and you see there that general loans and advances increased by 330% in AIB, 325% in Bank of Ireland, Anglo 1,950%. Now property advances, which is the next series - 935% at AIB, 2,884% in Bank of Ireland, and 2,155% in Anglo, and the final two columns is the property concentration, which rapidly increased, exponentially. That happened from '98 to 2008.
Was ... was the board of the Central Bank aware of this exponential level of lending and how it related to what was going on in the property market, including the price of houses?
Mr. David Begg:
Yes, well, the board was pretty much aware of the general conditions in the property market. It was debated, as John said. I made my own inputs in relation to that, from my own experience. I think there were other people who had different views, certainly. There was one particular view I remember a board member had, somebody who had worked in the property sector for a long period of time and who felt that, you know, Ireland was somewhat unique in that Ireland had never had a property collapse, unlike Britain and the Scandinavian countries and so on. There were other people who were extremely worried by it and, you know, there were general debates about this into which I contributed my own particular views.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Begg, the price of a home, we had evidence here, for an ordinary working person from '96 to 2006 increased each year by the equivalent of the average industrial wage; each year. Were you screaming about that as a worker's representative in the inside of the Central Bank?
Mr. David Begg:
Well, I spoke about it not just inside the Central Bank but in the National Economic and Social Council and very publicly and I've given you the evidence of that, where I said that, "Look, this level of growth in the economy is, in the longer term, likely to be damaging." We would have been better to have tried to adjust the economy to grow to maybe twice the European Union average, which would have been around 3% or so, because, in the long term anyway, we were outpacing the capacity of our infrastructure to meet some of these requirements and, in fact, people ... you know, it affected my own family, people were moving 50 and 60 miles away-----
Joe Higgins (Dublin West, Socialist Party)
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Yes, well, obviously-----
Joe Higgins (Dublin West, Socialist Party)
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Mr. Begg, you would have related that, I'm sure, then to the exponential explosion in lending by the ... the banks. The mortgage going to 35 to 40 years, even for young people, being absolutely shackled and saddled, but you - and Mr. Dunne, indeed - you were on the board of the Central Bank, what did you do to try to stop it?
Mr. David Begg:
Well, I mean, we put in our point of view. The board's decision was a synthesis of the different views that it heard from different directors and from the expert people it had working for it, plus the international feedback, plus the stress tests. And you can see that those concerns that I raised specifically about, you know, the construction sector and immigration and its effects on borrowing and so on are actually addressed in the financial stability report for 2007, but the conclusion at that time was that the banks were resilient enough and strong enough to withstand any shock that might emerge arising from that.
Joe Higgins (Dublin West, Socialist Party)
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Did you consider retiring ... resigning at any time from the board because there wasn't progress being made in the interests of controlling the ... house prices, for example?
Mr. David Begg:
No, I never considered it. Generally speaking, it's something I don't generally do ... is resign from things. I think you have to stay and get ... look, I mean, I was coming from a different value system than most of the people on the board but that simply wouldn't have helped ... to resign from that. It is much better to stay engaged and to try to influence in-----
Joe Higgins (Dublin West, Socialist Party)
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Okay.
Joe Higgins (Dublin West, Socialist Party)
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Could I ask you both then, gentlemen, in relation to the 2007 financial stability report, would you say it's fair to say that it was a report that was at variance, manifestly, with the reality of what was happening in the property market at the time?
Mr. David Begg:
I wouldn't say it was manifestly at variance for this reason: that the risks were all identified, but the risks were, if you like, qualified by this view that the banks were able to handle them and also that the price levels of ... the rate of increase in housing was tapering off at that stage and the view taken in the report, I suppose, was that that meant that things were improving a little bit and it was not as strong as the 2006 financial stability report concerning the risks of the banking sector.
Joe Higgins (Dublin West, Socialist Party)
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Well, Mr. Honohan, the Governor of the Central Bank said in his report, "The central conclusion of the 2007 FSR regarding a likely "soft landing" for the housing market does not appear to have been based on specific quantitative evidence or analysis." And he says further, "quantitative analytical evidence was not provided in support of the key conclusion [...][of] a soft landing." And, gentlemen, can I say, you had the benefit of, for example, the Morgan Kelly analysis early ... at the end of 2006, but especially in 2007, did that make an impact on you that should have required this report to be majorly different?
Mr. David Begg:
Well, can I say for my part, I mean, I have put my views on the public record about the difficulties in the economy, particularly in the construction sector. I didn't see the international conditions which would bring about the crisis, certainly that is true, but I did see the difficulties with the overheating of the domestic economy and, you know, I've given you comprehensive evidence about that, about my statements about that. And, in fact, if you want, I can make more of them available because, I've just said to you this morning, what I've said there I've said at least ten times in newspaper articles and in speeches and so on over that period between 2005 and 2008.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Dunne, just in relation to the same point, but also Governor Honohan says that:
[M]any participants - at all levels - in the [financial stability reports] drafting process have indicated that [...] highly "nuanced" messages conveyed [to them] reflected an institutional desire at senior levels in the organisation to adopt a cautious approach [...] This message was conveyed to staff working on FSR matters and, given the [...] hierarchical culture, was clearly a factor inhibiting staff presentation" Were you aware-----
Ciarán Lynch (Cork South Central, Labour)
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Where is that now, Deputy?
Joe Higgins (Dublin West, Socialist Party)
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This is Governor Honohan's report, I've quoted from two or three different pages which I don't have time to bring up, Chair, but what I've said are quotes from the Governor's report. Were you aware of this, Mr. Dunne, of pressure on the staff essentially to modify and tone down, perhaps, fears they had about where the property bubble was going?
Mr. John Dunne:
No, I wasn't. I'm quite clear about that. I mean, the process again is important to understand. The detail of the financial stability reports were discussed between the staff, the senior staff responsible on the economic side of the Central Bank's house and the boards of the Central Bank and the regulator. So, at the end of the day, the staff concerned had every opportunity to say whatever they wanted to say but what they said was ... was what appeared in the reports. Now, in my own statement, I make the point that the ... the Governor of the bank was responsible at the ... at the last, as it were, for editing the reports. And the reports were nuanced in a way which ... the final reports, that is, were nuanced in a way to try and ensure that the very things that the bank and the regulator were seeking to protect, namely, to achieve a soft landing and not have the collapse that we eventually saw, that nothing in the report would ... would actually precipitate that and-----
Joe Higgins (Dublin West, Socialist Party)
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Well, were they compromising the truth then, Mr. Dunne?
Joe Higgins (Dublin West, Socialist Party)
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Were they compromising the truth?
Ciarán Lynch (Cork South Central, Labour)
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Final question now, Deputy. Final question.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Joe Higgins (Dublin West, Socialist Party)
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No, but you seemed ... I'm just trying to tease this out ... in final, Chairman ... that you seem to say, and, indeed, it's in your statement already, the same point that you just made there.
Joe Higgins (Dublin West, Socialist Party)
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But are you saying that they hid the truth - the real truth - for fear of spooking the so-called markets?
Mr. John Dunne:
No, I'm not saying that. I'm saying that there ... the chapter and verse was in the reports but they were written in a way which didn't cause a collapse in property prices or a run on the banks. I mean, if we had ... if the result of the reports had been to do either of those, we wouldn't be even sitting here talking today.
Joe Higgins (Dublin West, Socialist Party)
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But does that suggest, Mr. Dunne-----
Ciarán Lynch (Cork South Central, Labour)
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I'll be bringing you back in the wrap-up. I'll be bringing you back in wrap-up. You're opening a new line of questioning, I'll bring you in the wrap-up. There is just one short supplementary. Okay, thank you.
Okay, Mr. Begg, if I can just deal with a couple of questions with yourself there and if I can just get a ... this is a ... crisis management key findings from the five reviews - the five reviews being the Honohan report, Nyberg, the PAC, Regling and Watson and the Wright report. And if I can just ... is it coming up there, is it?
This is just a summary document and it's a note to witnesses. If we can just move on to 005 of that document there, it's a bit further in. There we go, that's it. Thank you. Yes, that's the one. Mr. Begg, if maybe, if I could begin with yourself, that various reviews of the banking crisis refer to the phenomena of groupthink in the lead up to the crisis. Maybe if I can begin by putting the question to you, do you believe that social partnership, with its emphasis on consensus, created its own form of groupthink between government, trade unions, employer bodies, in terms of policy analysis and recommendations?
Mr. David Begg:
No, I don't think that. I suppose I would say that wouldn't I? But I don't genuinely think that. I mean, the social partnership process had its ups and downs over the years and its fair share of conflict and so on. I mean, I just remember for instance myself being involved in a very long industrial dispute in the post office in 1992, which you know, certainly wouldn't have suggested any groupthink on the part of the parties involved. So, no, I don't think that. If you have anything specific in mind, though Chair, I'd just-----
Ciarán Lynch (Cork South Central, Labour)
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Yes, sure-----
Ciarán Lynch (Cork South Central, Labour)
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Okay. Mr. Dunne?
Mr. John Dunne:
No, I don't think there was. I mean there were very significant differences of approach between the business community and the trade unions over the period and they were reflected in negotiations, and outcomes were achieved. There were no groupthink in ... to my way of thinking. Except perhaps-----
Ciarán Lynch (Cork South Central, Labour)
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Sure.
Mr. John Dunne:
-----on the first programme, the programme for national recovery, where there was, I think, a measure of agreement from the beginning that certain things needed to be done and the issue really turned out ... the big question turned out to be whether from the business community, we could expect and trust that we would get delivery. And that was the big question mark. And once we were satisfied that delivery was possible, then I think we were buying into the process.
Ciarán Lynch (Cork South Central, Labour)
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If I could maybe just refer on the ... there's two statements there; I just want to address. One is from the Wright report and it's under the heading there - whether income was a cause. Just a mid-paragraph analysis.
Wage settlements accelerated markedly from the late 90s, in absolute and in relative terms. The "trilateral" wage agreements continued but became less relevant as workers negotiated supplementary wage increases against the background of full employment and an overheating economy. Compensation per employee, which had grown more or less in line with the euro area average until 1996, increased at two to three times the euro area average from 1997 to 2008. In nominal terms, annual gross wages in Ireland in 2007 were the highest in the euro area except Luxembourg. Ireland had also the highest price level in the euro area according to Eurostat statistics. Competitiveness deteriorated significantly.
That's from Regling and Watson.
On the next column below it there, and I'll just take the mid-paragraph out of that, it says:
But budgetary policy veered more toward spending money while revenues came in. In addition, the pattern of tax cuts left revenues increasingly fragile, since they were dependent on taxes driven by the property sector and by high consumer spending. Ireland was also unusual in having tax deductibility for mortgages, and significant and distortive subsidies for commercial real estate development, yet no property tax.
Now, the premise that could be presented by these statements is that social partnership was a win-win for everybody and everybody was going to get something out of the pot. But that, in reality, the pot wasn't big enough to accommodate everybody's needs and there wasn't enough in there and eventually it would come asunder. The ... those five reports are quite critical of the social partnership model to all parties associated, not just workers, but business and all the rest. How would you respond to those criticisms, do you think that they're valid, or that they're inaccurate or would you like an opportunity to address the criticisms that have been raised in those reports, Mr. Begg?
Mr. David Begg:
Well, I would reject them quite frankly. First of all, I think, in terms of wage movements, that wage movements only tracked inflation over the period of those agreements and inflation was running at around 4.5% on average. And that was against the cost of living situation, which was 29% higher than the European Union average. So I don't think that there was anything, kind of, irrational or immoderate about all of that and I think the significant thing actually is that the wage agreements held in circumstances of very tight labour markets at a time when the economy was growing at over 10%. I mean, it's very easy with the detached people to take a critical view of something like that. But I very well remember the first serious crisis I had to deal with as General Secretary of the congress was when I took over in 2001 when the secondary teachers had actually left the congress of trade unions at that time, over disagreements essentially with congress about what the levels of pay should be and about moderation. And if I may, for a second, just quote to you a statement made by the president of SIPTU at an ICTU conference at that stage, which encapsulates this and which precipitated that great difficulty for me. He said, in relation to the aspirations of people, particularity in the teaching profession at the time, and I quote him now. He said:
You don’t live on the moon. Don’t expect that private sector workers are going to sit back and see you going in for your special, and your other special and your other special, plus the other national pay agreements and say, "That’s grand. We don’t notice". Survival into the next millennium is entirely dependent on our ability to manage success effectively. We mustn't take our eye off the ball of social wage. If we descend into mere sectionalism, if we descend into the worst form of dog-eat-dog capitalism, because that is what it is, the strong will succeed and the poor will go to the wall.
Now, that wasn't me. That was said before I went in but I think it does demonstrate a very responsible, long-term view about what the trade union movement was trying to achieve. The other thing I would say, Chairman, in relation to it as well is that this was at a time when significant productivity improvements were taking place in Ireland. Ireland was about 30% ahead of the EU in terms of the rate of increase or productivity. And it was happening also at a time when that was taking place while labour share of national income actually drifted down by about 10% in the period between 1990 and 2009. So I absolutely reject that and there are alternative pieces of academic research which contradict that and I've cited to you McGuinness et alof the ESRI who clearly showed that there was very significant gains in social partnership from the point of view of the high-tech industries locating their-----
Ciarán Lynch (Cork South Central, Labour)
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I just want to go back to one point. I just want to bring in Mr. Dunne and ... because we know that going into 2000, there was a ... 2008, the social partnership was still looking to extract more from the pot and the ... later in the year, it was showing that the income wasn't actually there. But returning to the earlier point, Mr. Dunne.
Mr. John Dunne:
Well, I have difficulty in dealing with anything after 2000 because I wasn't around. In the period up to 2000, I find it difficult to subscribe to that, but I think those series were looking into the period way beyond 2000. So, you know, for my money, up to 2000 those issues certainly wouldn't have been relevant.
Ciarán Lynch (Cork South Central, Labour)
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So, just to return then, to your own time, Mr. Begg, at the latter end, as were facing into the crisis and a bailout was coming into ... on the horizon, a banking guarantee was becoming more evident, as we saw from discussions here, was there a desire in social partnership, from your experience, from all the parties not just the union sides but employers and so forth, that there needed to be a moderation and maybe a pull back, rather than an increase?
Mr. David Begg:
Well, in fact, I mean there was a very prolonged negotiation in 2009, concerning the public service dimension of this, which, you know, we understood that the terms of a settlement had largely been agreed, but in fact it wasn't accommodated or it wasn't accepted at a political level at the time. And the position of IBEC, far be it for me to speak for IBEC, but I'm just recalling what the position was, that IBEC stayed in the agreement for much longer after the collapse of those talks because they hoped that it could be kept going. But with the Government out of it, it was very difficult for them to do that. And in an overall sense though, to be fair to everybody I think, there was a difficulty that the analysis which the Government was working on, which was essentially the analysis imposed centrally from Europe to a large extent, was at variance with our view of what would be the best road forward. Our view was that we wanted to try to do the fiscal adjustment over a longer period of time and to try to back-load it rather than front-load it, in order that we wouldn't collapse domestic demand due to deflationary pressures.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Okay. If I can just revert to yourself, Mr. Dunne. In your opening statement - and if I can get it up there please - you ... and this is related to your earlier engagement with Deputy Higgins, you state that the bank was confronted by the dilemma of ... then going on, triggering events which it was actually seeking to prevent and then going on to say again specifically that they ... they could precipitate that very ... the very outcomes in relation to the banking system and the property market which the regulator of the bank were seeking to prevent. Now, there's overall ... in ... just come back to your statement again there. In the ... I think it's the fourth paragraph up from the bottom, you kind of ... you're in the same space here. You were saying:
Overall these policies whilst recognising and publicly pointing to a variety of risks nevertheless consistently pointed to a 'soft landing'. The vehicle used was through the Central Bank's Financial Stability Reports. Here the bank was confronted by the dilemma mentioned in the introduction to this opening statement - that of triggering events which it was actually seeking to prevent.
One could ... would have to test the question here - were the banks through the financial stability reports, as Deputy Higgins, kind of, indicated, in a position that if they scared the horses here that it would become a self-fulfilling prophesy and what was being tried to be avoid would be indicated if the banks were more specific in their stability reports at that time? What would your response be to that thesis?
Mr. John Dunne:
I think that's a fair thesis. There was real concern that if the issues were wrongly stated then you could have had consequences which were absolutely unintended and which would have been the opposite of what the bank was trying to do and in retrospect, I think that that was too dominant a concern and that in the circumstances which we now know were developing at that particular point in time, we should have erred on the side of incaution or uncaution, rather than caution.
Ciarán Lynch (Cork South Central, Labour)
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And in that cautionary environment that you just explained to us, Mr. Dunne, did that create an environment where ... and the events that were happening that the bank was trying to prevent details of the discussions on these issues or whether, with hindsight ... we discussed that they could have actually triggered them through a self-fulfilling prophecy, but was there, if not an explicit, an implicit editorial policy with how the financial stability report would present to the outside world?
Mr. John Dunne:
No, I don't think so. I think that to be fair to everybody that the reports were signed off on the basis that they contained the appropriate concerns and warnings about credit control ... credit risk and so forth and so on but the attempt was made to do that in a way which didn't cause panic-----
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Okay. My apologies as well for that interruption. Mr. Begg, would you have a different or a similar view-----
Ciarán Lynch (Cork South Central, Labour)
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-----with regard to the difficulties that that ... as outlined by Mr. Dunne?
Mr. David Begg:
The only thing I'd add to what John said was that there were a lot of pressures at the time, even from the political system, about a concern that the construction sector would decline quickly. I mean, I remember one senior person in politics actually calling for, I think it was the halving of stamp duty in order, to sort, of give a boost to the construction industry at the time, you know, so, okay, the manage ... I suppose, what the bank was trying to do was to manage the situation down into what would be hopefully a soft landing, which, of course, might have happened had the international circumstances not arisen. I do think to some extent too, you know, probably people were conditioned a little bit by their beliefs. I mean, there was an extraordinary buy-in to the international orthodoxy of the time about new classical macroeconomics and efficient markets hypothesis and so on, and to go against that would have been, sort of, the equivalent of apostasy on the part of the Pope's private secretary almost, do you know what I mean?
Ciarán Lynch (Cork South Central, Labour)
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Finally ... and what I propose we might just take a five-minute break at that stage and then we can return as we've a busy schedule, but I just need to maybe call a short break. Finally, to yourself, Mr. Dunne, the IDA publication "Winning direct" ... or, sorry, "Winning Foreign Direct Investment 2015-2019" states "A critical element of IDA Ireland's new strategy will be a continued strong focus [of the international] key sectors of [financial services]" and so forth. Just in the last paragraph there ... this is actually the document itself, page 2 of it, the very last paragraph says:
As a result Ireland's challenge is to be strategic and central to business development plans. Strategic to international companies who are often under huge pressure from shareholders and more generally financial markets. Fortunately, Ireland has remained central to leading global corporates for many decades. IDA Ireland's aim in this strategy, is to ensure that Ireland continues to be one of the most developed, ambitious and welcoming locations in the world for our existing and new clients and a highly supportive environment for future growth.
Mr. Dunne, during your tenure at the IDA, how important was Ireland principle-based or light-touch regulation, as it has been alternatively referred to ... that regime, how ... how often was that used and how much was it a basis, as a marketing tool, to attract financial services from ... for foreign direct investment to Ireland in the financial markets?
Ciarán Lynch (Cork South Central, Labour)
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Yes, but this was a forward ... projected document that-----
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Mr. John Dunne:
My only recollection of it was that at a particular period in time ... I'm trying to think, it must have been around about 2005-2006, there was a joint ... well, there was a mission of the IDA in the United States aimed at promotion in the financial services sector and the issue of regulation was on the agenda and the way in which that was put to the investors was that this was a fast, efficient, effective type of regulation and so on, which would be appropriate to the innovative type of industries which the IDA wanted to get down into the IFSC but-----
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Ciarán Lynch (Cork South Central, Labour)
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And by your familiarity ... we've had this discussion here as well - I think it was with Mr. Roux from the Central Bank when he was before us recently - where it was discussed that principles-based regulation was a global principle - it wasn't something that was unique to any geographical location in Europe or worldwide. In, kind of, sporting parlance, there was a code for playing football and this was how the game was going to be played on the international stage. However, Ireland's end result of the principles-based regulations process is unique in lots and lots of ways. Was there a time when, to your knowledge, that the presentation of Ireland's interpretation of principles-based regulation ... that there was a different type of interpretation from Ireland if you come here that you will get anywhere else in the developed world?
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. With that said - it's 11.38 a.m. - I propose that we suspend until 11.45 a.m., if that's agreed. And in just suspending the meeting, to remind Mr. Dunne and Mr. Begg that you're both still under oath. You can revert to your own legal people or advisers if they're here with you and I propose that we will return at 11.45 a.m. Is that agreed? Agreed.
Ciarán Lynch (Cork South Central, Labour)
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So, I now propose that we go back into public session. Is that agreed? And we complete our engagement with Mr. Begg and Mr. Dunne of today. And in doing so, I'll invite Deputy John Paul Phelan. Deputy Phelan, you've ten minutes.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you, Chairman. Good afternoon, or good morning, I think, still gentlemen. I only have ten minutes so I'd ask you to be as brief as you can. Firstly ... for you both, briefly, you both subscribed, I think, in your statements to the view that there would have been a soft landing, economically, for the country were it not for economic ... other external economic factors. Do you both still subscribe to the view that Ireland would have had a soft landing were it not for those external factors? Mr. Begg first, please.
Mr. David Begg:
Now, I mean, in ... in fact ... if you ... what I was trying to say in 2005, in that speech I made to the conference in UCD, was actually trying to engineer the soft landing ...of saying that "Look, do we want to go for the rate of growth that we have at the moment? You know, is it a mantra, is it something we have to go for at all costs? Or could we not try to target back ... to pare back the rate of growth, to something that would maintain full employment", which would have been around 3%, right. In which case we would lead in, perhaps, to the soft landing. And, similarly, in the submission that I made in 2005 to the review group that the Minister for Finance had set up to look at the tax situation, you know, where we, kind of, identified the property taxes as, essentially, inflating some of the heating that was going on in the economy ... to try to get back ... at those. So that would have been the ideal position to be able to do that. In the end, the point I was making is it might still have been possible to have achieved a soft landing if the international conditions hadn't changed, but we'll never know that really, you know.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Mr. Dunne?
Mr. John Dunne:
Well, I mean, I've had the view right from the very beginning that the Lehman's thing was just an extraordinary event, which nobody anticipated and which had such devastating effects in such short order that it just wiped the board clean of any possibilities that the soft landing - which people were still saying, right through the piece, was going to happen - actually could happen. I don't know whether, you know, if it hadn't ... if Lehman's hadn't occurred, whether we would have got the soft landing or not. I don't know.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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What was the basis of your view that Ireland would have a soft landing? And where were you looking internationally that you felt that in Ireland ... we've heard examples from other witnesses, that the soft landing has almost just been a theoretical thing, that, in practice, hard landings were the order of the day more than soft landings. Where ... where ... what did you base your view on?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Mr. Begg, do you have ... what was the basis of your soft landing theory as well or was it the same?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes. Okay.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Well, can I then just maybe turn to the issue of groupthink, which was mentioned in several of the reports that have been referenced already. I'm being Devil's advocate slightly, Chairman - I'm sure that you'll correct me if I'm wrong - but for those who might look from the outside at your evidence today, you were two key players at different times in the social partnership process. And with regard to your terminology - your use of language - there might be some marked difference but in terms of your economic outlooks, representing employers and trade unions, there doesn't appear to be the width of a sheet of paper between your views. And you referenced - and, in particular, Mr. Dunne referenced - external and internal organisations and bodies that were talking about the soft landing. Is that not just a classic example that you were part of this groupthink that took over?
Mr. John Dunne:
Well, I mean, that's an interesting hypothesis. It's clear that there was groupthink across a wide spectrum of ... of contributors. I'm not sure that was the case in the bank but ... or, indeed, the regulator, but, I think, at the end of the day we were getting a weight of professional advice and that professional advice was being supported all around the place. I wasn't an expert banker and, therefore, I was probably more likely to take the professional view than if I had been a professional banker. You know, as far as I was concerned, that was the professional view and unless somebody was going to challenge it big time, then I was going to accept it.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Mr. Begg, do you?
Mr. David Begg:
Yes, well , you know, I've always had the very consistent view from an economic standpoint and that is that I think it's rather unfortunate that Ireland is so committed to the liberal market economy model. I would have much preferred to see Ireland move closer to a social market economy model on the Scandinavian basis. And that puts me in conflict with a lot of popular views here about taxation, for instance, right, and public services. I ... my view would be that you should have high quality, universally available public services in high growth ... or in a, sort of a, high productivity economy and that these can essentially ensure that. My thinking was influenced very much by a paper that was prepared by two economists at the Swedish LO in the mid-50s, Gösta Rehn and Rudolf Meidner, who came up with this distinct Nordic model, which has been extremely successful and has meant that the Nordic countries have been in the top ten from the point of view of economic efficiency, competitiveness, productivity and social cohesion. And my view is that that is really a much better place for Ireland to be, and you know, I would still try to do everything I could to shift opinion in that particular direction. Now that is not a common view in Ireland.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, well, that is fair enough. Can I ask you then in respect to your roles on the different boards that we're referring to here, that you were members of, do either of you have ... feel any sense of either collective or individual responsibility for the, what could be termed at least, abject failure in regulation that took place in the banking sector? And not just in terms of the regulator, but Deputy Higgins showed the example that the Central Bank had an overarching responsibility for financial stability, which doesn't seem to have ever been exercised in the period of time that both the regulator and the Central Bank existed. Mr. Dunne might go first.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Mr. Begg?
Mr. David Begg:
Yes, well, I would say, you know, in all of these things I did the best I could, you know. It's possible my best wasn't good enough on particular occasions, but I did the best I could. And I would say in fairness, you know, I didn't make the decision to separate regulation from financial stability; I didn't introduce principles-based regulation; I didn't introduce the Basel II capital requirements directive; I didn't continue property related tax expenditures in the economy; I didn't believe in the Great Moderation; I wasn't a member of the regulatory authority; and I did positively try to maximise attention to the problems of economic growth that I considered to be sustainable; and I did identify the vicious circle in construction and the possibility that it would end in tears. I also, by the way, correctly forecast the impact of the recession when it happened. Now, it will be for another generation of people to judge all of this. I'd say ... the people I worked for ... you know, in my day job, at least were not unhappy with my performance.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Can I ask you directly Mr. Begg: did the board, the Central Bank board, in your 15 years - particularly I suppose from the period 2002 onwards - have detailed discussions about the expansion in property lending, in particular, the expansion in the loan books of financial institutions?
Mr. David Begg:
The board of the bank was concerned certainly about the expansion of the construction sector in the economy. There were different points of view on the board. There was, as I mentioned, I think in response to the Chairman earlier on, one point of view held by somebody, one of the board members who had worked in the property sector all his life and was quite influential, and that view was that like, you know, house prices in Ireland historically have risen and plateaued and risen again when times changed, but they have never collapsed, so it's not part of our DNA, if you like, to have a collapse. Now, at the same time, there was definitely another board member who took a directly contrary point of view and then a range of members who had views, kind of, in between all of that. So, you know, it wouldn't be fair to come to the conclusion, I think, that there was no robust discussion of these problems at the level of the board.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, just to turn to Mr. Dunne briefly, you said that you were aware of the fact that there were three people within the regulator who were responsible for, I think, it was Bank of Ireland and Anglo, and three more responsible for AIB and Irish Nationwide in terms of direct regulation. You've already stated that you don't like the term "light-touch regulation". How else would you describe the fact that there was only three individuals regulating directly, on a, kind of, micro level, those institutions? What other term could you use to describe it?
Ciarán Lynch (Cork South Central, Labour)
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That question is made, Deputy. I need you to wrap up shortly with Mr. Dunne.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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He is asking me to wrap up.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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You think that three people regulating those groups of two major financial institutions with huge expansions in their loan books in the period that you were on the board of a regulator, you'd think that that doesn't fit the term "light-touch regulation"?
Mr. John Dunne:
No, it fits the touch ... principles-based regulation. And you know, the fact of the matter is that in an earlier exchange on this topic in this forum I made the point that the staffing levels within the context of the system were agreed with the staff and signed off with the staff, but subsequently, I also made the point, that they were professionally analysed and they were found to be appropriate to the circumstances of the system that we were regulating by an international firm of consultants who benchmarked our staffing requirements against those internationally.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay-----
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Can I ask the-----
Ciarán Lynch (Cork South Central, Labour)
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Deputy Murphy will take it.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman, and thank you both, gentlemen. In relation to the board meetings at the CBFSAI, there'd be discussions before you would take the position to, say, agree a financial stability report or a pre-budget letter. Can you tell me were contrarian views ever expressed and also then how was consensus reached in terms of agreeing a report?
Eoghan Murphy (Dublin South East, Fine Gael)
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To you both, please.
Mr. David Begg:
Well, yes, there were contrarian views expressed certainly in relation to it. There were a number of board members who had different views and I had different views at times myself, which I've, sort of, said earlier on. But the nature of this was that the financial stability reports were prepared by a ... initially prepared by the Central Bank economist, agreed with the executive people at the level of the regulator, at a, sort of, an interaction, a board established for that purpose, and, after a process of iteration, came to the main board for discussion. The way the main board worked, discussions were held, they were robust discussions, by and large, and then those views were taken on board and fed back into the process again, and finally the report came out. But it didn't, you know what I mean, it didn't go back and forwards to the board, if you know what I mean. It was left with the Governor and the ... well, the Governor, principally, to bring forward the final report.
Eoghan Murphy (Dublin South East, Fine Gael)
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Would either of you have been aware of contrarian views at senior management in the Central Bank not making it ... their way into the boardroom?
Eoghan Murphy (Dublin South East, Fine Gael)
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Would either of you have been aware of research being conducted and then not being included in the first draft, say, of a financial stability report?
Mr. John Dunne:
And I'd have to say that I was surprised at the evidence of an earlier contributor who indicated certain of those issues as taking place. Surprised only because the opportunity was available at the board when he was presenting at the board to indicate reservations which he personally might have had, and they didn't surface at the board.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay-----
Mr. David Begg:
I think the board would have welcomed that kind of input because, you know, you're actually, with subjects as complex as these, hugely dependent on the professional staff that you have to identify all sides of a problem. It strikes me that it must be a little bit like being in government, that a Minister would presumably want to hear all sides of an argument from his officials. So my view is it would have been welcomed by the board and there would have been no downside, as far as the board was concerned, to anybody coming forward with a contrary view.
Eoghan Murphy (Dublin South East, Fine Gael)
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Sorry to go over this again, in the 2007 financial stability report, the view was taken that there would be a soft landing in the economy and Professor Honohan, in his report, wrote that there was no analytical evidence for this conclusion in that report. So can you remember that discussion and how you decided to favour the soft landing for the report?
Mr. John Dunne:
Well, I couldn't ... I can't personally remember the discussion at this remove. But I agree fully with David about the robustness of the discussions at the board, there's no question about it, and there were contrarian views amongst the board members. But, like, as in any organisation which I've ever been part, there are different views and the job of the chairman, or whoever's the chief person at that meeting, is to get a consensus, at the end of the day, that the organisation can stand over. And that's what happened.
Eoghan Murphy (Dublin South East, Fine Gael)
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Mr. Begg, did anyone say, "Where's the evidence for this? Where's the evidence in this report for the soft landing?"
Mr. David Begg:
Well, I can think of one board member who did at least actually query, you know, the robustness of the financial position of the banks. What I think happened, actually, was this: if you reflect back on that period of time, around 2006 there was a, sort of, a tapering off which appeared to suggest, you know, that the cooling off was actually happening in the economy. There was a lot of concern publicly about this, in political circles and so on, a lot of commentary on it, and then suddenly the whole thing started to rev up again, right. But then, in 2007, it began to taper off again. So the initial, sort of, shock, I suppose, that the construction sector was in cooling was, kind of, assuaged a little bit by the trend ... the second part of that trend. And I think that's what probably gave rise to the assurances about the soft landing or the conviction that the soft landing would actually happen. But I want to be at pains to say that my personal thinking is that this all has to be located in the context of what was the international orthodoxy at the time. And my feeling is - just to finish on this point very quickly - I mean, the epitome of that was Greenspan going before the US congressional committee and saying, "There's a flaw. I didn't think there was a flaw, but there is a flaw". But everybody else was working under the flawed conditions, if you like, and people believed it.
Eoghan Murphy (Dublin South East, Fine Gael)
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Leaving the orthodoxy aside for a moment, in 2006 the financial stability report had a report on overvaluation of house prices. It didn't feature in the 2007 report. Subsequently, looking back from 2008, they saw that, had it featured it would have showed an over-valuation of more than 30%. So, being involved with the financial stability reports each year, did you not notice in 2007 ... "Where's this piece of research we normally have and why isn't it in this year?", given the kinds of discussions that you were having?
Eoghan Murphy (Dublin South East, Fine Gael)
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Concerning the lack of the research in that particular financial stability report?
Eoghan Murphy (Dublin South East, Fine Gael)
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I think it was subsequently found that had that research been in the financial stability report, you couldn't have reached the conclusion of a soft landing. So I don't think it's correct to say-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Just moving on, Mr. Begg, if I may, you were chairman of the audit committee. How long were you chairperson of that committee?
Eoghan Murphy (Dublin South East, Fine Gael)
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About ten years, okay. And what exactly did that involve then?
Mr. David Begg:
Essentially it involved auditing the internal bank systems for the ... well, a big part of it, for example, would have been the currency centre and the ... you know, there's a very sensitive area where we were printing money and printing notes and coins and so on. That would have been one part. The other part would have been managing the systems for the ECB, like the target system and the settlement systems that operate. It would have ranged across the range of systems that the bank operated and even down to things like the social clubs and social activities. All of that was ... there was an internal-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Of the Central Bank but not the individual banks?
Eoghan Murphy (Dublin South East, Fine Gael)
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Of the Central Bank but not the individual banks?
Eoghan Murphy (Dublin South East, Fine Gael)
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And did that work change at all after the Act of 2003?
Eoghan Murphy (Dublin South East, Fine Gael)
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There was two separate audit committees, one for-----
Eoghan Murphy (Dublin South East, Fine Gael)
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So as chairperson you had sight, then, as well operationally of the audit of the Financial Regulator.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And do you think there were sufficient technical skills in the audit committee to properly do its work?
Eoghan Murphy (Dublin South East, Fine Gael)
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Yes, about the committee.
Mr. David Begg:
I'll answer both, anyway. Well, as far as I know but, I mean, to be fair sure I wasn't an auditor myself, you know. And, you know, the other people ... I don't think we had any actually ... had any accountant on it as such. But we had a strong internal audit division which had about ten people as well as the head of audit. The biggest problem we tended to find there - and it links into earlier questions relating to the regulator that John mentioned - was that systems are extremely important in the Central Bank structure and the IT dimension of that was very, very critical. It was extremely hard, in a tight labour market situation, to recruit people of a high calibre - sufficiently high - to work in that particular area and there was always this concern, even from internal audit, of a slight deficit, you know, that you were never quite caught up with the ideal situation. But, at the same time, it was a strong function ... I'd say stronger than in most enterprises.
Eoghan Murphy (Dublin South East, Fine Gael)
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My final question, if I may, Mr. Begg, is in relation to your oral remarks today. You mentioned social partnership quite a bit.
Eoghan Murphy (Dublin South East, Fine Gael)
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In your opening statement.
Mr. David Begg:
When I ... my original statement to the committee, there was no mention of social partnership because you didn't raise it with me. In fact, I was wondering "Why do these good people want to see me at all?" But then when you produced your document, you know, there's about 20 pages of an IMF report on social partnership, so I felt this is of interest to you, so in that sense I-----
Eoghan Murphy (Dublin South East, Fine Gael)
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When you were coming in - and writing your written statement - to appear and addressing your role as general secretary, it didn't occur to you to address social partnership?
Eoghan Murphy (Dublin South East, Fine Gael)
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But when you were ... you have a section in your written statement talking about your role as general secretary and looking back on the crisis period.
Eoghan Murphy (Dublin South East, Fine Gael)
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And even though we've had findings in, for example, the Wright report, saying that social partnership overwhelmed the budgetary process, you didn't think to address that issue in your written statement or to comment on that?
Mr. David Begg:
If you had raised it with me, I most certainly would have done, but it didn't seem to me to be germane. Because, quite frankly, I have a difficulty trying to identify a causal relationship between social partnership and the banking crisis. Because, as I said, I mean, Ireland ... you know, if social partnership had an adverse effect, the only area you could see it having an adverse effect in was in relation to fiscal policy. But Ireland didn't have a fiscal crisis, it had a banking crisis.
Eoghan Murphy (Dublin South East, Fine Gael)
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You don't think Ireland had a fiscal crisis?
Eoghan Murphy (Dublin South East, Fine Gael)
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Until after banking crisis. So you don't accept the findings of the Wright report that social partnership overwhelmed the budgetary process?
Mr. David Begg:
No, I don't at all, because, quite frankly, what I would have seen was that over the period of five or six years leading up to the financial crisis, Ireland was running a budget surplus every year and, you know, it was quite substantial, I think, up to 2.9% at the end. And there was no adverse effect on that from social partnership that I could see. I did cite - in my supplementary statement - the evidence from Fritz Scharpf from the Cologne Institute, in which he said that in the case of Ireland and Spain, social partnership was a counter, if you like, to the trends that were happening in the economy. It was just that it wasn't a strong enough counter. And I also did indicate-----
Ciarán Lynch (Cork South Central, Labour)
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Time, Deputy.
Ciarán Lynch (Cork South Central, Labour)
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Final supplementary now, Deputy
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, We've had admissions from four members of Government, in the committee, that fiscal policies were unsustainable. Do you accept that social partnership played any role in those unsustainable fiscal policies? And also, there's a second question: if you felt that economic growth was an unsustainable house of cards, as you put it, why did you seek and agree wage increases on the back of that unsustainable growth?
Mr. David Begg:
Well, in the first case, you know, fiscal policy being unsustainable was not related to social partnership. The unsustainable element of fiscal policy was the extent to which it depended on property transaction taxes, which amounted to, I think, about 13% or 14% of total revenue.
In the case of overheating in the economy, the problem ... that didn't relate back to the wage increases per sebecause, as I say, Ireland was an extremely highly productive economy at that time. There were huge gains in product activity over the period from, I think, around 1980 to 2011 ... something like a 280% increase in productivity. There's no difficulty there ... and in ... the level of pay increase that we saw, it was simply keeping abreast of inflation, no more and no less.
Ciarán Lynch (Cork South Central, Labour)
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I need to move on. Deputy McGrath.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chair.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you very much, Chair. Mr. Begg and Mr. Dunne, you're very welcome. Mr. Begg, can I start with you and this is an issue Deputy Higgins did touch on. For most of your tenure on the Central Bank board, you were general secretary of congress. During this period, members of affiliated unions would have seen significant benefits from the economic boom. So, to what extent did your role in congress affect your attitudes towards the maintenance of economic growth and its importance in your deliberations as a member of the Central Bank board?
Mr. David Begg:
Well, I think, Deputy, it's important just to reflect that actually the wage share of national income over the period from 1990, I think, to 2009, drifted down by about 10% overall. Now, it has also to be said that was in the context of a growing cake, if you like, right. But the share that labour was receiving was not huge. The ... where it might have affected my attitude on the bank, as Deputy Higgins said earlier on, I mean, a leopard doesn't change ... he didn't say that but I say a leopard doesn't change its spots ... that whatever values you have, you don't leave them at the door, when you're going into discussions. From time to time, there were tensions ... I've adverted to that, between myself and members of the bank because I thought, for instance, that they had an undue emphasis at times - I thought they were actually obsessed by the question of the wage share, the wage issue, in competitiveness, for instance, whereas I considered it to be a much more holistic question than that. I can go into that, if you like, in more detail. So, those tensions were there between me and the bank from the other colleagues on the board of the bank from time to time. But, like, in any endeavour, you go in ... I mean, just as in this committee reflects a number of different political points of view-----
Michael McGrath (Cork South Central, Fianna Fail)
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Yes.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Both of you have raised the issue of the change to the regulatory structure in 2003 and can I put this to you first, Mr. Dunne, given that you served on the board of IFSRA and also the overall Central Bank board as well? Do you accept the overall conclusion that Governor Honohan reached on that issue? He examined the institutional structure and the changes that were made and he said in his conclusion: "Though few would now defend the institutional structure invented for the organisation in 2003, it would be hard to show that its complexity materially contributed to the major failures that occurred." Would you agree with that?
Mr. John Dunne:
In part but not in whole. I think that the division in the new set-up created problems which the single structure had avoided and the reinstituted single structure is now avoiding and I think that those problems, which were manifest, I think, fairly shortly after the new body was established didn't help.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Mr. Begg, do you want to offer a view on it? You've dealt with it in your witness statement as well.
Mr. David Begg:
Yes, I mean, I didn't think it was a good idea, quite frankly. I didn't see any particular reason for it. I think it was influenced by a strong emphasis on consumer concerns and in fairness, I suppose, it could be said that there was concerns about some of the things the banks had been doing consumer-wise in the 1990s. I think it was also influenced, though, by an international trend which was extremely liberal in its outlook and I think the Progressive Democrats were the party in power at the time who drove that initiative particularly. So, I didn't see it. I saw certain risks into it because it interdicted the line of sight between the banks' normal function for financial stability and, you know, the prudential situation as far as the banks were concerned and the rest is history, I suppose.
Michael McGrath (Cork South Central, Fianna Fail)
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Can I ask, do both of you accept that while principles-led regulation was the orthodoxy of the time, that principles-led regulation could have been more intrusive? We have heard evidence along those lines from Cyril Roux, for example, currently the deputy governor and head of financial supervision, that being principles-led did not necessarily mean light-touch. It could have been more intrusive in terms of approach. Do you accept that, Mr. Dunne?
Michael McGrath (Cork South Central, Fianna Fail)
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So, even before 2003, the regulatory approach was principles-led?
Michael McGrath (Cork South Central, Fianna Fail)
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And had been for a number of years?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Was there ever any suggestion, Mr. Dunne, that there was a lack of powers for the Financial Regulator in his role in terms of supervising the banks and regulating the banks?
Mr. John Dunne:
Well, I don't think anybody suggested it from the outside but it's clear in retrospect that, you know, the regulator could have gone back to Government and said "We don't have enough powers and we need to get some more" because clearly that was a feature of the situation. So, I think, there was a recognition within the regulator that new powers would have been helpful but for whatever reason, we didn't pursue it.
Michael McGrath (Cork South Central, Fianna Fail)
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I suppose I have to put it to you, the thrust of the evidence so far, on the question of powers, has been that there were sufficient powers and the powers that were available were, generally speaking, not used?
Mr. John Dunne:
Well, I mean, that's true up to a point too but there are ... there's an opaqueness around this question. For example, if you take the issue of 100% mortgages. I was always of the view, right from the very beginning, that we didn't have the power to ban 100% mortgages. Now, that view has been challenged in subsequent hindsight discussion. But my view was that if we wanted to ban it, then we really needed to go to the Government to get powers because we didn't have the power to control the development of particular product lines within the banking institutions. Now, we could have got around it. Although, I have to confess, I didn't appreciate this until this inquiry started. We could have got around it by using the consumer code but we didn't think about that at the time. And so that's an example of a power that I believed would have been appropriate but we didn't have. But I think the-----
Michael McGrath (Cork South Central, Fianna Fail)
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But it wasn't sought either. It wasn't sought.
Michael McGrath (Cork South Central, Fianna Fail)
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Can I ask you both, Mr. Begg first, in the round and given your knowledge now and the experience that you hold, how do you apportion responsibility for the banking crisis?
Mr. David Begg:
Well, first of all there was the international dimension, which was very strong. I think that if, you know, you can't look at this question without looking at that international context and Ireland, as a small open economy attempting to attract in financial services industry or attempting to build a financial services industry, was very, very susceptible to that and was very influenced by it. As John has pointed out earlier on, in the trip that they went on to the United States and the inputs they had from people like Merrill Lynch and so on ... where I remember seeing something where Merrill Lynch had asked the regulator to take the lead in this area of rules-based or, I beg your pardon, the other principles-based regulation. So that is one dimension. I think that-----
Michael McGrath (Cork South Central, Fianna Fail)
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Try to give me a hierarchy if you can, in your view, of the relative-----
Michael McGrath (Cork South Central, Fianna Fail)
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That's the first one ... the international dimension.
Mr. David Begg:
I think that internally two institutional decisions that were taken - one to separate the functions that we discussed earlier. Separate the regulation and supervision from the other elements of the Central Bank was the second one. The third one was the adoption of principles-based regulation itself while, as John said, that was a continuation from what had been the case previously, I think, in circumstances post the deregulation of capital markets and the EMU with the enormous change in the financialisation of the global economy-----
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. That you've given four reasons there now and the actions of the banks in terms of their lending strategy, their concentration in property and construction, hasn't featured in your top four causes of the banking crisis.
Michael McGrath (Cork South Central, Fianna Fail)
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Well, I asked it in order of the-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----of importance so-----
Michael McGrath (Cork South Central, Fianna Fail)
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You put the international dimensions-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----at number one and not what the banks did themselves-----
Michael McGrath (Cork South Central, Fianna Fail)
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Yes, undoubtedly.
Mr. David Begg:
Because, right, the situation in Europe - the availability of huge amounts of money on the interbank markets and also the fact that you had large supplies of money looking for an investment home that this ... the combination of these two factors, you know, played into the bank situation where the bank ... the banks obviously went without or abandoned caution. Or perhaps not abandoned caution so much as felt that they had to have models, business models, which reflected Anglo Irish or reflected Northern Rock or whoever was coming into the market here that, you know, you had very experienced banks, very staid banks, very conservative banks as one would have felt previously-----
Michael McGrath (Cork South Central, Fianna Fail)
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Yes.
Michael McGrath (Cork South Central, Fianna Fail)
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Mr. Dunne-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----your assessment of where responsibility rests and-----
Mr. John Dunne:
I was hoping that you and David would both leave it at the four because I think there is not the slightest doubt that the prime source was the lending policies adopted by the banks because they had cheap money coming from Europe. But, you know, so ... my list of priorities would be the banks, the auditors, the regulator and the Central Bank, the population in general and, you know, this ... this feeling that we were on a roll and the roll was never going to stop. So, there were societal issues playing into an inappropriate lending policy by the banks and an inadequate regulation by the regulator and the enunciation of the risks by the Central Bank.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you, Mr. Dunne.
Ciarán Lynch (Cork South Central, Labour)
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Thanks very much. We are going to move to wrap things up. Senator O'Keeffe, three minutes.
Susan O'Keeffe (Labour)
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Thanks, Chair. I just have three or four questions, Chair. I know you weren't ... IBEC wasn't ... you were past ... but banks would have been members of IBEC, would they?
Susan O'Keeffe (Labour)
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Yes, okay. Can I ask you, the National Treasury Management Agency made clear to us that they left nobody in any doubt but that they were not, if you like, happy with the state of Irish banks between 2007 and 2008 and didn't place deposits with those banks, unless directly instructed by the Minister. Was that a matter that came to the Central Bank or the Financial Regulator that the NTMA was not putting deposits into Irish Banks ... particularly into Anglo as it was described as a "broken model" by the NTMA?
Susan O'Keeffe (Labour)
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It was never raised at the ... at a board meeting?
Susan O'Keeffe (Labour)
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And you weren't aware yourselves that this was happening?
Susan O'Keeffe (Labour)
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Now, Mr. McDonagh in his evidence said when the NTMA became involved in mid September 2008 as the crisis was now becoming a crisis, he said:
[It was really] it really was a bit mind-boggling, certainly to me and I think certainly ... the same with my colleagues ... that there seemed to be no real knowledge of the banks. There's one or two people on each bank. [This goes back to the financial regulation of the banks.] When I was asking questions we couldn't ... get the information ... the information couldn't be answered.
So he was, if you like, coming in as a ... pretty much as an outsider. Did you have any knowledge that, if you like, if you were to ask any questions of people working in the Financial Regulator's office about the state of the banks that information wasn't forthcoming? Was that anything that you were ever aware of?
Mr. John Dunne:
No, it wasn't. The ... there was a prudential report on the banks given to the board ... the authority ... the regulatory authority every month and it ... it seemed to contain the information which you're getting at here and that should have been available to the, the appropriate authorities.
Susan O'Keeffe (Labour)
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Oh, I think it was, he was remarking, Mr. Dunne, that when you asked more questions, he was saying ... he says ... it's his evidence is that there were not sufficient answers. But you are saying that you had prudential reports every month, okay. In October 2008, the public fine of €3.4 million against Quinn Insurance emerged. Was that a matter that was discussed at the board; either of the Central Bank or of ... at the board of the Financial Regulator?
Susan O'Keeffe (Labour)
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And was the matter of the contracts for difference and the difficulty that that ... that offered, if you like, Anglo Irish Bank ... was that something that was discussed at board level as a particular matter, Mr. Begg?
Mr. David Begg:
Yes, it was actually. Yes, we were ... in fairness when that news broke, both in respect of the Anglo Irish Bank and the Quinn Insurance, when that problem arose, that was communicated to the Central Bank at that time. So, you know, we were ... we were quite ... I was certainly quite knowledgeable about what was happening at the time and I remember being a little bit astounded that when, you know, when Mr. Quinn was unwinding his contracts for difference, his 30% or whatever it is, you know, down to a 15% shareholding in the bank, the ... an awful lot of the public commentary at the time was that Mr. Quinn was expressing his great confidence in Anglo Irish Bank-----
Susan O'Keeffe (Labour)
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But just to put it-----
Ciarán Lynch (Cork South Central, Labour)
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Senator-----
Susan O'Keeffe (Labour)
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Yes, I just want to-----
Ciarán Lynch (Cork South Central, Labour)
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-----final question-----
Susan O'Keeffe (Labour)
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It's a clarification really, Chair. When you say, ''at that time'', Mr. Begg - I mean are you talking about the time prior to the fine being made public? I'm just wondering in-----
Mr. David Begg:
Yes, well, it would have been around that time I guess. I mean there was the difficulty with the insurance company and the guarantees it had made and the exposure to the, you know, that had resulted from the reserves of the insurance company essentially having being pledged to two sets of lenders at the same time. And then there was the further evidence that ... that Mr. Quinn had taken a very large share through contracts for difference in Anglo Irish Bank which, which the Anglo Irish Bank people apparently didn't know, or they said they didn't know, at that time and to have that level of exposure, you know, to one shareholder was seen to be, sort of, a very critical risk to have. And the regulator, I know from the reports we got, was actively trying to find ways of unwinding, of getting that down to an acceptable level. So I was aware of all that. I couldn't tell you precisely-----
Susan O'Keeffe (Labour)
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Sorry, Chair, can I just ... I'm sorry-----
Ciarán Lynch (Cork South Central, Labour)
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I need-----
Susan O'Keeffe (Labour)
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-----there's one thing I just can't get to the bottom of here though, in fairness. It's one last question. In the documents we have seen, clearly it was known earlier on before the ... you know, before the ... before October, it was known in the Department of Finance that the money had been used, it was Quinn Insurance money that had been used to unwind the contracts for difference.
Susan O'Keeffe (Labour)
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Is that your ... that's your understanding?
Mr. David Begg:
Well, wait ... no, I'm not sure that it ... I can't quite recall that it was Quinn Insurance, I remember Quinn Insurance money had been pledged to one ... to ... like it had been pledged as the reserve for the insurance company but it had also been pledged to a consortium of banks for ... I can't quite remember whether it was to buy ... my recollection was actually that, that Mr. Quinn had borrowed from Anglo Irish to buy the shares. Now, not necessarily his bank but I can't remember-----
Susan O'Keeffe (Labour)
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It says at the end that the Financial Regulator was not aware that that money had been used.
Ciarán Lynch (Cork South Central, Labour)
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I don't want you to be guessing, Mr. Dunne.
Susan O'Keeffe (Labour)
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No, I don't want you guessing either. Thanks, Chair, thanks for your indulgence.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Deputy Higgins.
Joe Higgins (Dublin West, Socialist Party)
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Just one question gentlemen. You have been asked and other witnesses about the effect of a relationship of social partnership to the crisis of the banks. Now, social partnership would say that working people represented by their trade unions are supposed to be partners with big business, represented by their organisations and Government. But in relation to that evidence before this inquiry, indicated that one section of the partnership, including banks, developers and big builders speculated on ... hugely on land, profiteered exponentially in housing, for example, at the expense of a supposed second partner, which is ordinary working people and was allowed to do that by the third partner, Government and regulators which legislated and allowed this so-called light-touch regulation. Does the bubble in banking crisis show the social partnership was a fraud in fact?
Joe Higgins (Dublin West, Socialist Party)
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Well, why didn't ... did it work for the young people who were saddled with 40-year mortgages and are now in negative equity because of the profiteering that went on manifestly and objectively by sections of the industry?
Ciarán Lynch (Cork South Central, Labour)
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Deputy, as we're now over budget, the last question is made Deputy. Mr. Begg, Mr. Dunne?
Mr. John Dunne:
I think they're separate issues, to be honest. I think the social partnership issue, as far as business was concerned, and just let me make the point: you keep using the term, Deputy, "big business" when you talk about IBEC. IBEC has a membership right across the board, from people employing two and three people to people employing thousands of people, from people in schools and universities and manufacturing and all sorts of things, so it's not a big business club. It represents the broad spectrum of business. And we would have to say that ... I can only speak up to the period of 2000 but up to that point, I have no doubt that the social partnership process in the round was beneficial to everybody in the country, including employees, people on social welfare benefits, because it raised all the boats around the place, maybe not at the same level but by and large, I've no doubt that for those ... for that period of time it was beneficial across the board.
Ciarán Lynch (Cork South Central, Labour)
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Deputy Higgins?
Mr. David Begg:
Now, from my point of view, you know, social partnership was a critical engagement. It's ... it doesn't mean that everybody thinks and acts exactly the same. As I explained earlier on, we were following a model which is prevalent in the small open economies of northern Europe, and which goes back, actually, to the 1930s and it's based on a belief that, look, if you are a small, open economy and you're trying to survive the ravages of international markets, you basically ... the best way to try and do that is to be as flexible as possible, to engage with the economic conditions at the time, with appropriate social protections for the population at large. I would never contend that social partnership reached its apotheosis at any stage while I was there, in the sense of protecting those people. The point you make is quite right, that these conditions regarding housing and so on were very, very difficult, and as a matter of fact, again I refer back to that speech I made in 2008, and I ask you just to have a look at it in close detail again, because it deals with a lot of these questions and it did particularly draw attention to the need to focus on, you know, four or five or six critical objectives that were necessary in order to protect people, affordable housing being one of them. And there's a very strong critique in that speech about the difficulties of trying to make the affordable housing agency work so that ordinary working people who couldn't afford to take part in this property bubble would actually have the opportunity to get a house. And, as I explained earlier on, sure I experienced this myself in my own family, where members of my family had to go living 60 miles away from where they worked and, you know, look, it didn't work, that didn't work, I don't mind admitting that, but we definitely made a strong attempt to make something like that work. And at the end of the day, and this is my last point, Chair, sorry, I'll finish up on it, I won't say another word about this, but going back to the era of young Jim Larkin in 1916, young Jim made a speech at one stage when he was dealing with a considerable amount of wage militancy in the ... in the trade union movement at the time, and he said, as simple as this: "What do we do about poor hospitals? Ask for more wages. What do we do about poor housing? Ask for more wages. What do we do about unemployment? Ask for more wages. What do we do with underemployment? Ask for more wages." He was pointing out that you need a much more holistic approach, including the social wage, to protect people. And that's the difference here we see today. Like, we're now the recipients of a model from Germany, which appears here as hard-nosed neoliberalism. It doesn't appear that way in Germany because it is located in the context of a social market economy in Germany, where German citizens have access to all of these public services at a level that saves them quite a lot on their basic income. So that's what we were trying to do. We never got the model perfect, you know, and probably we won't at this stage, for obvious reasons, but I think it was a good thing to do and it is the right thing to do and as I indicated in my earlier evidence, I believe that's the way the country should go again in the future.
Ciarán Lynch (Cork South Central, Labour)
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Okay, I'm going to bring matters to a conclusion, unless there's any other final comment you like to make by means of closure, Mr. Dunne and Mr. Begg?
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. So with that said, I'd like to thank the both of you, Mr. Begg and Mr. Dunne, for your participation today with the inquiry, and your engagement with it. I now formally excuse both witnesses and suspend until our next session, 'til 1.05 p.m. Is that agreed? Agreed.
Ciarán Lynch (Cork South Central, Labour)
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We'll return to public session. Is that agreed? And the Committee of Inquiry into the Banking Crisis now resuming in public session and can I ask members and those in the public Gallery to ensure that their mobile devices are switched off? Today we continue our hearings with senior bank executives who had roles during and after the crisis. Our witness this afternoon is Mr. Fergus Murphy, former group chief executive officer at EBS. Fergus Murphy was group chief executive officer at EBS from January 2008 to 2011. He previously held senior positions at ACC Bank and Rabobank. Mr. Murphy is now the director of corporate and institutional banking with the AIB Group. Mr. Murphy, you're very welcome before the committee this afternoon.
Ciarán Lynch (Cork South Central, Labour)
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Before hearing from the witness, I 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're directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you're entitled thereafter only to qualified privilege in respect of your evidence and you're directed that only evidence connected to 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 mater of the inquiry. The utmost caution should be taken therefore then 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 screens to your left and right and members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed. 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 before the committee and will be relied upon in questioning and form part of the evidence of the inquiry. So with that said, if I could now ask the clerk to administer the oath to Mr. Murphy please.
Ciarán Lynch (Cork South Central, Labour)
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Once again, Mr. Murphy, welcome before the committee this afternoon, and if I can invite you to make your opening remarks to the committee please.
Mr. Fergus Murphy:
Thank you Chairman and thank you committee. I would like to say that I'm happy to be here today to answer your questions and hopefully give you my personal perspective, as someone who came back to Ireland from abroad in 2007, commencing in EBS in 2008 and spent four years leading and making the changes necessary to enable EBS to get through the crisis. Chairman, I've submitted a detailed written statement, but if convenient, I'll just take a few minutes now to make some opening remarks. By way of background, I've spent most of my career in international or European banks, including 14 and a half years in Rabobank, working in a variety of roles in treasury and capital markets, corporate banking, general management etc., including head of global treasury for Rabobank International across 44 countries and CEO of Rabobank in Asia. Prior to working for Rabobank, I worked for BNP Paribas for five years and before that, the KBC bank, the Belgian bank. I became CEO of EBS on 14 January 2008, joining the board in February 2008. I'm currently director of corporate and institutional banking at AIB, having held a number of roles on the leadership team and the executive committee of AIB over the last four years, including director of transformation and group services, which is the portfolio responsible for the majority of change management and the restructuring of the group.
On taking up the role in EBS in 2008, I was highly conscious of the sub-prime crisis in the US, as I'd spent some time there in late 2007 in a role that allowed me to view the property industry closely and had developed a growing sense of the challenges confronting that industry in the US. I also, through my Rabobank experience, had a strong recall of the property correction that took place in the Netherlands in the early noughties, when property prices reduced by about 20% causing some stress in the economy. My view at the time, as an interested observer, was that there certainly were challenges ahead in the Irish economy, as it had grown so strongly in the prior decade. Property prices had risen substantially and it was noticeable on coming home how much prices had increased generally. My view at the time was that property prices in Ireland needed to, and probably would correct by about 20%. Something similar to the Dutch experience which, although a difficult correction in their economy, had been manageable. So my sense of the challenges ahead did not drown out my overall positivity, indeed my pride at taking over at the helm of a financial institution in my home country, an organisation with a strong heritage and tradition in Ireland that, like Rabobank, which I'd worked in for so long, was a member organisation. The mutual model in UK and Ireland is very similar to the co-operative banking model in continental Europe both owned by the membership and in existence to serve the membership base. EBS had been a positive force in Irish banking and financial services for decades since its foundation by Alex McCabe and a small group of teachers and trade unionists working together to help each other to buy their family homes in ... from 1935 and I was looking forward to the challenge of leading it through the upcoming challenging period and contributing to its continued modernisation and ultimate growth.
I understood at the time that one of the reasons I'd been selected to lead EBS was my international background, outside of Ireland banking experience and my capital markets experience. I had been deeply involved in a number of financial crises around the world. For example, I was in Indonesia in 1997 during the worst of the financial crisis in Asia leading a triage team to stabilise the Rabobank balance sheet in Indonesia. That was just shortly before the collapse of the Suharto regime. The EBS chairman, who himself had only taken up the role recently at the time I joined, was a modernising and progressive force and he had been ... he had given me a mandate to bring the organisation forward, look at the operating model and structure in order to create the best possible future for the organisation and its membership. As part of my own due diligence before joining, I did query the EBS exposure to commercial real estate and land and development sectors and was given comfort that although there were some challenges, overall the book was in okay condition.
However, only weeks into my tenure, there were external and internal signs of stress in the local markets. Linking some up ... linking up some of the dots, in terms of my recent and past experience, I commenced a programme of retrenchment and risk containment, which unfortunately would be the dominant activity carried out in EBS during my tenure. For example, I reversed existing plans to create a commercial property subsidiary to enable the growth and the potentially separate funding of the commercial property business, which had envisaged growing the book by circa 50% to 100%, depending upon future market conditions and opportunities. I also initiated a withdrawal from land and development lending within four months of taking office and a withdrawal from commercial property lending within six months of taking office. I addressed the funding and liquidity challenges by accelerating plans to create a covered bond bank, which is a very important structure to enable term funding in the debt capital markets by banks and building societies. We commenced a further balancing of the funding structure and profile of this society by putting a huge focus on the growth of retail deposits. EBS actually grew its retail deposits by circa €2 billion through the crisis, a notable feat when compared with the exodus of retail deposits from other institutions during this period. This particular action helped to stabilise the society and along with the actions on exiting commercial property and land and development finance and other actions, lessened the ultimate amount of capital that the organisation eventually required. I would estimate conservatively that the risk containment activities of that first month period ... first six-month period, resulted in at least €750 million of capital savings for EBS. I reviewed the basic management operating model of the society, which unfortunately wasn't fit for purpose, and I followed up by making essential changes to ensure better governance and separation of duties. For example, there had been no independent CRO function and the risk function reported to the finance director.
Within three months of me joining EBS, Bear Stearns went bust. Within six and a half months of me joining, Lehman's went bust and about a week later, the Irish Government guarantee came in to place. I learned of the CIFS legislation from a quick phone call with my chairman early on the morning of 30 September. Neither I nor EBS had any involvement in the deliberations in the period prior to this on potential guarantees or actions. And I was a little surprised by the decision, when I read about it that morning. EBS had lost some institutional and international funds and deposits and we were concerned with developments but we were certainly not in a fraught position. After the guarantee date, as it is well documented, the Irish economy, property prices and the international backdrop continued to decline through the back-end of 2008 and all of 2009. It was more than apparent that the legacy of the '03-'07 period, whereby EBS, like many other institutions, had built up an unsustainable position in commercial property and land and development finance, a large buy-to-let exposure and built a liability structure that proved fragile, was having a profound effect. However, it is interesting to note that in early 2010, the international backdrop started to improve and it was felt that after PCAR 2010, the worst was over and international markets were recovering. Most Irish commentators, including the Governor of the Central Bank and the Minister for Finance, publicly observed that the worst of the crisis was over, something I was also positive about. However, the commencement of the Greek crisis put paid to that and Ireland found itself again at the centre of a rapidly deteriorating international and local environment. Those days were extremely challenging, as liquidity, credit quality, capital adequacy and economic confidence continued to decline, leading to the troika bailout.
I ensured we at EBS worked cohesively with all Government and other stakeholders to stabilise the system and EBS. I approached every meeting with the starting point that whatever was best for the sovereign was probably the best for EBS, acknowledging that EBS, although an important financial institution with a strong market share in a number of areas and a brand that was less damaged than most financial institutions, was not systemically important in the same way as AIB or Bank of Ireland and that therefore, the solution for EBS may be different to the solution for one of the pillar banks.
As CEO, I was going to ensure that the mindset in EBS was open to any practical solution or proposal, including demutualisation, takeover of the society, etc. It was easier for me to have that frame of mind, in that I could be objective on past performance and strategy, in that I wasn't part of it.
Throughout the period, I continued to lead significant improvements in governance and operational controls in EBS, continued to lend sensibly into the residential housing marketplace and improved ... and more conservatively lent and, as mentioned earlier, grew the deposit base. A quick example of the sensible and risk-focused approach is reflected in the volume of residential lending conducted in my time in EBS. This lending was covered 1.7 times by retail deposits, ensuring a secure and locked down conservative approach. Throughout the crisis, I estimate that I spent about 60% of my time on strategic work around working out the long-term future of EBS, onshore merger-takeover, offshore merger-takeover, demutualisation, privatisation, acquisition by private equity etc. We worked on a number of parallel projects all at the one time. All of this worked culminated with a preferred bidder being selected in February 2012 after 11 months of detailed due diligence and engagement. This transaction was terminated on 28 March 2011 and EBS was informed that it was being merged into AIB on 30 March 2011. The success of that merger is, I think, evident in the positive restructuring, stabilisation and return to profitability of the enlarged group over the last four years.
I believe the Irish banks are well on the road to a full recovery. Huge lessons have been learnt within the banking sector and within the regulatory system. Indeed, lessons have been learnt right across the economic and political landscape. I hope my testimony today can add additional insight into your understanding of the crisis, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Murphy. And if I can invite our first member today for questioning. Senator D'Arcy, you've 25 minutes.
Michael D'Arcy (Fine Gael)
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Thank you, Chairman. Mr. Murphy, you're very welcome.
Michael D'Arcy (Fine Gael)
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You have considerable international experience and experience, indeed, in financial crises in other jurisdictions. Could I ask your opinion in relation to the market's view from late 2007 that the reason the Irish banks' share price was collapsing and, indeed, the liquidity crisis for the Irish banks and the Irish financial institutions was worse here than in others ... the Morgan Kelly view was because the markets understood that the balance sheets and the loans, in particular, to the commercial real estate sector were so poor that that was the real issue instead of the liquidity crisis as a result of Lehman's? Could I ask your opinion, Mr. Murphy, in relation to which was the deciding factor?
Mr. Fergus Murphy:
Okay, it's a very good question and if I could take a few minutes, Senator, thank you, to answer that one. I think the commencement of the crisis, ultimately, had its origins in the international landscape. What was happening globally ... and I'll probably simplify the illustration just to keep it as tight as I can, but ... and it's often talked about in the context of the US and China, but it's not just the US and China, it's the East and the West, but I'll just talk about the US and China for a moment. We were in a long boom, it was thought, that could be a 30-year boom, because of the improvements in technology and the productivity of the western world. The US was importing a huge amount of Chinese goods. Okay, it's not just China and the US, but, as I say, just take that example. They were paying for those goods in dollars. They were very large consumers. The Chinese took those dollars and they churned them back into the western world, for example, buying significant amounts of US treasuries. One country had a deficit, one country had a surplus; one country was an importer, one country was an exporter. And there was a virtuous symbiotic relationship between the East and the West in terms ... and I use, again, the US and China, maybe unfairly, just as the best example, where deficits in the West were being funded by, often, moneys coming in from the East.
Now, Ireland then was a little beta stock and, literally, at the epicentre of this either geographically or economically, and when I say a beta stock, I mean, you know, a stock or a country that moves disproportionately up or down to a certain event. We had had an enterprise economy and a virtuous economy up to 2003. Then we started, obviously, investing too much in property and property became a too large contributor to our GDP. We were buying and selling property to each other and thinking we were adding real value. So when this influx of liquidity across the world churning around was taking place we received, and our financial institutions received, more of that liquidity than we should have and it meant that Irish banks were able to go to the wholesale markets in a way that they never were before. For example, in 1998, the EBS balance sheet was 100% funded by retail deposits. When I took over in 2008, it was 26% funded by retail deposits. So what had happened in the interim was the effect of what I was just describing.
So you have this ... you had both push and pull factors. You had this global activity taking place, which meant that, for example, in the US, because there was so much liquidity, banks were able, and financial institutions and asset managers, in general, to structure poorly put together assets, because there was so much liquidity sloshing around and investors wanting to invest that liquidity, that they wanted some kind of a yield. So you had the formation of the sub-prime crisis in the US, with badly-structured assets soaking in the liquidity. Similarly in Ireland, the liquidity got soaked into the property marketplace in a similar way as it did in the US in the sub-prime mortgage marketplace. And so, a combination of the two yielded, unfortunately, the environment that we entered into and the shock and cliff-like environment that took place soon thereafter. But, in my view, the origins of the crisis was the global activity. We were badly prepared and badly set up for it, because of what happened in Ireland and the policies and practices, the way the banks had been run, the way, probably, the economy had been run. But the origin was the international piece, and then we were a beta stock, if I could use that analogy. When economists and experts were looking around the world for the likely red hotspots in terms of where this might happen first and what the effect could be, we did, unfortunately, stand out like a sore thumb.
Michael D'Arcy (Fine Gael)
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So do you disagree with Mr. Nyberg who said that the crisis was primarily homegrown?
Michael D'Arcy (Fine Gael)
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I think you have disagreed with him.
Ciarán Lynch (Cork South Central, Labour)
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Let the witness answer himself.
Mr. Fergus Murphy:
-----square that off for you. The backdrop was set internationally. We are responsible for our own economies. So I believe Mr. Nyberg is right because if you take, for example, the Canadian economy, it was also an international economy and it didn't let happen locally what happened in Ireland, but the crisis and the effect and the scale of the crisis in Ireland, wouldn't have been to the magnitude it was and it eventuated had there not been that international piece. We are responsible for our economy. I would agree with Mr. Nyberg that the crisis, as it eventuated in Ireland versus the way the crisis eventuated, for example, in Canada or Australia, is absolutely our fault.
Michael D'Arcy (Fine Gael)
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On the night of the guarantee, Mr. Murphy, please, what was your assessment of the liquidity versus solvency of the society that you were CEO of at that stage?
Ciarán Lynch (Cork South Central, Labour)
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Can you just explain what stickiness means, Mr. Murphy?
Ciarán Lynch (Cork South Central, Labour)
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Sure, thank you.
Mr. Fergus Murphy:
Apologies, Chairman. So our Irish corporate deposits and, more importantly, our Irish retail deposits were very stable. So that augured quite well.
In terms of the solvency of the organisation, the capital requirements and whether we had enough capital, at that point in time, Irish property prices had reduced by less than 10% from memory, and so, therefore, in my view, at that point in time, the solvency of the organisation was solid.
Michael D'Arcy (Fine Gael)
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Can I ask, Mr. Murphy ... it was reported that you were of the view that a five-year guarantee should have been put in place. Is that report correct?
Mr. Fergus Murphy:
I think that, on balance, my view was that a five-year guarantee would give more line of sight for the banks and my own preference would have been for a five-year guarantee, which, ultimately, took place. The CIFS guarantee was for two years and then the ELG guarantee, which, obviously, succeeded it, was for five years.
The only reason I say that is that the majority of guarantees that were put in place across Europe - and, of course, there were many, as you know, it wasn't just Ireland that was having problems - typically, were three or five-year guarantees so they tended to be a longer guarantee than the original CIFS guarantee. I don't think, whether the CIFS guarantee was two year, three year, four year or five year had any fundamental effect on the developments thereafter. But I think, you know, what we put in second time round, a five-year guarantee, allowed more line of sight for the banks to issue in the financial markets because typically banks will issue a three or five year or longer period, rather than a two-year one. So that would be the only reason I would feel that, you know, a five-year guarantee was probably more effective in terms of its efficiency in the marketplace.
Ciarán Lynch (Cork South Central, Labour)
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Did you actually make that recommendation, or was that just a view you had?
Mr. Fergus Murphy:
It was a view I had and I believe, Chairman, it's a view I would have imparted to the Department of Finance or to the banking unit in NAMA. In a normal way, as in, in a general conversation with them. We would have had, you know, many conversations with them, clearly, weekly, monthly and it is ... it would have been a discussion with them at a point in time.
Ciarán Lynch (Cork South Central, Labour)
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Thank you.
Michael D'Arcy (Fine Gael)
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Do you think that influenced the decision to extend the CIFS legislation into the ELG?
Michael D'Arcy (Fine Gael)
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But you did espouse that view to the Department of Finance-----
Michael D'Arcy (Fine Gael)
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In November '08 the treasury department looked for an increase in the lending lines to the other covered institutions in order to invest in their unsecured debt and to have them reciprocate. This was the green jersey. To what extent, in your view, did your board consider as appropriate to participate in the green jersey thought process?
Mr. Fergus Murphy:
Well I don't agree with the term "green jersey". It's not one that EBS used, or I had in our vernacular. I think that in terms of lending to other financial institutions in Ireland, small quantums, I think up to €200 million per bank. Now, I say that in the context of international debt markets where the numbers are typically very, very large. In the context of the Irish banks at that point in time being under a two-year guarantee, it was legitimate to increase our limit to the Irish banks for the period ... within the guarantee period to ensure that liquidity in the local domestic market was reasonable. So it would have been looked at and implemented in that context so that no exposures outside the guarantee period, the CIFS guarantee period, and working to ensure that liquidity in the local marketplace was reasonable.
Michael D'Arcy (Fine Gael)
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Can I ask you, Mr. Murphy, if you were aware that the NTMA were unwilling to place deposits into some Irish financial institutions?
Michael D'Arcy (Fine Gael)
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In April 2011 the Government decided to sell your society to AIB for €1. Did you agree with this move and did your board have any alternatives beyond the €1 sale?
Mr. Fergus Murphy:
In terms of me agreeing with the sale, I believe there were a number of viable, legitimate and credible scenarios that EBS could have gone down and one of them most definitely was a sale or on-shore merger, which is obviously what eventuated with AIB. So at the point of hearing that I felt that was a credible way forward and I think all of the actions and behaviours and values that were espoused at that point in time in terms of working with the AIB team would have reflected that. In terms of the board in general there were, as I say, a number of options that were worked through as I mentioned, actually, in my opening statement. And they were worked through for a multi-year period ... periods. You know, I would have led discussions locally and internationally with various financial institutions or private equity firms and all of them possibly could have been a transaction or could have been successful. It's very, very hard to say definitively because, of course, it's a hypothetical scenario. But there was interest across the board in EBS and it is good to see, for example, that PTSB, another one of the smaller institutions during that timeframe, during that time period, has come through and has recently been successful in getting some equity internationally. So there is a marketplace out there, there's always different options, permutations and combinations, Senator. I think the option that EBS went down was a secure and solid one and has, as I say, over the last three, three and a half years we'd be ... we would feel good that the work that's been done in EBS and AIB is coming through and building a viable institution. There may have been other options that may have also been viable.
Michael D'Arcy (Fine Gael)
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Can I ask you Mr. Murphy, you spent a lot of time with Rabo, a AAA-rated institution considered conservative and solid? The EBS, from your opening statement, changed its business model. From previous evidence from other institutions, they changed their business model at a similar time, around '01, '02. And in that period, I don't know the exact number for EBS but AIB, Bank of Ireland and Anglo were trading at about 30% year on year increase for eight years. We had Professor Bill Black - it's been a while since he's been quoted here - he would have considered that reckless, a reckless increase. Can I ask you opinion in relation to those levels of increase for a financial institution?
Mr. Fergus Murphy:
Those levels of compound growth on an annual basis are too high and clearly what happened, I think, kind of shows that. That's why I would be a very positive advocate for macro-prudential regulation where the regulator, on a top-down basis, from a top-down basis, looks at the marketplace and puts some principles in place that lock down the shape and direction of where the industry goes. At the point in time of that growth period, Senator, had we had macro-prudential regulation of the nature, of the type that the regulator brought in at the back end of last year around mortgage lending, it would have been helpful in terms of cooling down the economy and cooling down the banking system in general. So those kind of compound growth numbers are too high and would have struck me as such now and at that time.
Michael D'Arcy (Fine Gael)
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On page 3 of your opening statement, your full written opening statement, you itemise 11 actions. Those are pretty substantial actions, Mr. Murphy. Was that another change in the business model of EBS?
Mr. Fergus Murphy:
I think that from coming in and ... early into the role, it was obvious to me that the business model had to change, had to change substantially. And so those 11 points you refer to, Senator, are in the main describing - they're certainly not exclusive, because obviously with a 5,000 word submission - but they give a flavour for the type of changes that were made which changed the business model.
Michael D'Arcy (Fine Gael)
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Can I just ask about those 11, are they 60%, 70% of the alterations, 80% or would they-----
Michael D'Arcy (Fine Gael)
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Are other actions.
Mr. Fergus Murphy:
There would be a lot of other actions and there would be a story behind them all. But you're giving the flavour for, I'd like to think, action-oriented, hitting the ground running, changing the business model, bringing it to a more conservative risk-mitigated, command-and-control, frankly, and contain-and-control environment, which again, unfortunately, was the way the role eventuated.
Michael D'Arcy (Fine Gael)
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Could I ask, Mr. Murphy, in terms of push back - it's a term that we've become used to here - was there push back from your board, or were you specifically hired to ensure that these actions could be put in place?
Michael D'Arcy (Fine Gael)
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And your chairman was?
Mr. Fergus Murphy:
Mr. Mark Moran.
He asked me to come into the organisation and to look at it from the perspective of somebody coming from outside of Irish banking, coming from outside of Irish retail banking, and also from the perspective of somebody actually coming back from abroad. So, he gave me a very strong mandate to look at the totality of the organisation and decide what was the best way forward. They had had problems in 2007, in terms of cohesion of strategy and of board, and my role was to come in with outside experience and to try to pull it all together again into the most cohesive strategy and team that was possible.
Michael D'Arcy (Fine Gael)
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Can I ask you in terms of one individual within an organisation or financial institution, can one individual have that much authority to do an about face in terms of the direction that an institution had previously been going in?
Mr. Fergus Murphy:
I think, Senator, you set the tone from the top. You can't do it yourself, clearly. You need lots of very good people working with you who are completely committed to the to the vision and to the mission, who are up for the change and who are performing and clearly I relied on lots of very good people who I have to say, and it would be wrong if I didn't say, brought an awful lot of discretionary effort to bear through the crisis in working through it as best they could to fulfil the objectives of the society. That's what you would expect, that's what they're paid for, but I do feel I should say that. So, I'm setting the tone from the top, I'm setting the new strategy, I'm relaying the risk appetite - what we're willing to do in the future, what we're not willing to do. I'm making those big changes in terms of direction, and those levers. The execution then clearly of the activities in a granular way through the society - it's not as big as a Bank of Ireland or AIB but it's still a large organisation - is taking place through the teams and through the executive team and the senior management and I think, though, I was able to bring a perspective to bear, which clearly shows a significant change in direction from almost hitting the ground, and I would feel good about that and I would feel that was what my role was about.
Michael D'Arcy (Fine Gael)
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Mr. Murphy, on page six, half way down your opening statement you say on the third bullet pointon the second number of bullet points:
Pursued strategy of managing down commercial book: To aid this process, I employed a number of commercial property lending professionals, closed regional lending offices and improved controls by consolidating operations into a more centralised operation.
Could you just expand upon that, and I want to give you a little bit of background? Mr. Dan McLaughlin, former, or senior, economist with Bank of Ireland, stated clearly that it was the CRE sector that crashed the banks and had the impact that it did upon the Irish economy. Could you just outline what had happened prior to, or how the operation worked prior to you centralising the operation?
Michael D'Arcy (Fine Gael)
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Sorry just be.... how much was in commercial lending prior to that? Did the EBS start from zero?
Mr. Fergus Murphy:
They started from zero and they would have built a portfolio of commercial real estate and land and development finance to the level of €1.7 billion through the period from '01 through to '07. The society felt that they were under a lot of pressure and that their backs were to the wall in terms of the ability of the organisation to sustain itself, were they still relevant. There was huge compound growth, to our earlier conversation in relation to Irish banking. You also had one of the other building societies, the only other building society, probably a bit of a beta stock on what the banks were doing in terms of growth.
Michael D'Arcy (Fine Gael)
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Not an alpha stock?
Mr. Fergus Murphy:
Therefore, the society which was trying to stick to its heritage, which was that of lending money sensibly to people, to members, particularly who are at the beginning of getting on the property life ... of their property life cycle, the property ladder. But they felt that they weren't building enough capital, they weren't making enough revenue to sustain themselves. They weren't able to fund themselves as cheaply as the banks. They weren't accessing the markets as easily and, therefore, they felt they needed new profit pools to subsidise, I think is the word, the underlying business that I just spoke about, which was virtuous and, you know, had a multi-decade successful pattern for them. So by entering into commercial property, they believed this would give them fresh revenues that they could use to build their underlying business. The business ... in fairness to the society, there were limits, there were controls, there was risk management - it turned out it wasn't adequate. But the society kept, to my recall, the commercial property balance sheet to 15% of the total balance sheet and they kept the land and development balance sheet to 3% of the overall balance sheet. But between the two, they still became €1.7 billion of business that unfortunately because the society entered into this marketplace later than the other players with smaller scale ... unfortunately, they at times tended to do business in secondary and tertiary locations, with secondary and tertiary developers and commercial property investors, so they weren't probably getting the better business, maybe none of the business was good, I don't know, but they weren't getting the better business. So that meant that when ... the discussion we were having earlier on again ... when the Grim Reaper came around and when the global and international and local situation became cliff-like, that portfolio started to perform very, very poorly.
Michael D'Arcy (Fine Gael)
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But can I ask in terms of ... you say it was ... you consolidate operations into more centralised operation.
Michael D'Arcy (Fine Gael)
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Were there loans being approved regionally, or smaller amounts being made available to less senior directors? Can I ... I suppose what I'm trying to scope is ... it's quite simple to understand what a centralised operation is, perhaps in one venue with a number of individuals, but where did you come from to get to there?
Mr. Fergus Murphy:
Okay. So there ... Senator, there were a number of regional offices where commercial property would have been lent from. Now, again, in fairness to the society, before my time they ... underwriting would have been centralised and the approval of property would have been a centralised function, centralised credit committee, etc. However, there would have been origination in relationship management teams regionally. So the point I'm making there is that I'm closing down those regional teams, okay. That was done in March 2008 and then in June or early July 2008, I'm closing down commercial property completely in terms of saying, "We're not doing any more". Therefore, the commercial property origination in relationship management teams clearly weren't needed regionally anymore and the one that was there in Dublin, which covered Dublin and surrounding counties, etc. and some of the larger ticket business, almost overnight became an asset recovery unit and an asset management unit because the focus again was control, was minimised risk, was "How do we get our money back?" and that meant a bespoke strategy from each large commercial property transaction and that's what I'm talking to in that, Senator.
Ciarán Lynch (Cork South Central, Labour)
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One supplementary and I will bring you back in again.
Michael D'Arcy (Fine Gael)
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To be clear, Mr. Murphy, you said there was no chief risk officer. How could €1.7 billion worth of a loan book have been increased form zero without a chief risk officer?
Michael D'Arcy (Fine Gael)
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No, I understand that, but most institutions would-----
Ciarán Lynch (Cork South Central, Labour)
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Allow the witness to respond.
Mr. Fergus Murphy:
No, absolutely, I ... there was a head of credit and the risk officer reported into the finance director which, from a governance point of view, is not ... today would not be an acceptable scenario, okay, and that's why I changed that. So there wasn't an independent CRO, chief risk officer, but there was a credit department, there was a head of credit, there was an approval process with authorities, there was a group credit committee etc. So, in fairness, deals were going through a process. It was a flawed process but it was ... they were going through a process. I appointed an independent CRO, which means that person now is on the leadership team, or the executive committee, of the institution. They hadn't been before that. There was a head of credit reporting through the finance director. By having an independent CRO at the leadership team of the bank, who's reporting into me, but also probably more importantly, reporting into the board risk committee chair, a non-executive director. You now have risk at the centre of the organisation in terms of strategy implementation, tactics, tone from the top - you have a much more transparent organisational structure and the ability to manage things in a more effective way.
One of the findings from the crisis I think that all the reports would talk to is the fact that risk, at times, didn't have that voice, wasn't at the centre of the organisation in terms of culture and behaviours and clearly, one of the things I was looking to do was to commence that.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much Senator, I will bring you back in the wrap-up. Senator D'Arcy was also talking to you earlier with regard to liquidity and solvency issues and if I could just get this rounded off before I bring in Senator Barrett, I may ask you Mr. Murphy: did the EBS have any discussions with any other bank, Central Bank or Department of Finance in relation to liquidity issues or solvency of any particular bank in the weeks and days before the night of the guarantee and what was your ... what is your assessment of the liquidity and solvency of the society on the night of the guarantee in September 2008?
Ciarán Lynch (Cork South Central, Labour)
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Sure.
Mr. Fergus Murphy:
Obviously there was noise in ... in the system and, and there were rumours but there were no discussions between I, or us and the Central Bank in relation to that. In terms of the society itself, on the night of the guarantee or during that period, as mentioned briefly earlier on to the Senator, we had lost some international customer deposits, corporate deposits as they call them, non-bank financial institution deposits, but our local, retail and corporate deposits were stable. And therefore, although I was, you know, acutely aware of what was going on in the marketplace and we had significant concerns for the future in terms of what could happen next, at that point in time EBS was doing okay.
Ciarán Lynch (Cork South Central, Labour)
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Okay thank you. Senator Barrett.
Sean Barrett (Independent)
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Thank you Chairman and welcome Mr. Murphy.
Sean Barrett (Independent)
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Are you the sole chief executive in Irish banks to survive the cull of bosses after the State guarantee?
Sean Barrett (Independent)
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I think Senator Ross, as he was, I think gives you that title in any case.
Sean Barrett (Independent)
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And on the night of the guarantee you were in Donegal or coming back, is that correct?
Sean Barrett (Independent)
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And did your company have any role in the bank guarantee?
Sean Barrett (Independent)
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Maybe that's why you've survived. Sorry I shouldn't keep making ... you say "By the time I joined EBS-----
Mr. Fergus Murphy:
Senator could I say, I think this "surviving", I think probably one survived because one hadn't been in the country or managing a bank during the period, as Professor Honohan has said of '03 -'07, when the crisis prevention years were there and when the bubble blew up, I think that's probably why one survived.
Sean Barrett (Independent)
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You've expressed concern to Senator D'Arcy about the speed of the growth in credit. Do you have any idea what - indeed of 25% and 30% per annum in the lead-in to our troubles - do you have any idea what should be the correct rate of growth of credit in our kind of economy?
Mr. Fergus Murphy:
Senator I think that ... that's a very good question and if I look at the organisation I came from I ... I would say ... as in, sorry, a Dutch organisation that I worked for, I would say 10% is a ... a good number. Now, that is a very, very general comment I am making because clearly it depends on the economy at a point in time, it depends on the cyclicality of the economy. But you have asked the question in the context of our economy which is an enterprise economy, a foreign direct investment economy. It is an export-led economy. In general I would say that the maximum growth for a bank's balance sheet should be 10% in that scenario but more likely it should probably match GDP.
Sean Barrett (Independent)
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Thank you. Now, you say in your statement, on page 11, "By the time I joined EBS [and that's January 2008] the damage had been done and could not be corrected in the short term." Could you describe that damaged bank that you've joined?
Mr. Fergus Murphy:
Senator the, the ... number of things there, assets and liabilities, so on the liabilities side of the balance sheet EBS, like other institutions, had become too dependent on wholesale and international funding. Again, just as I summarised quickly earlier on, in 1998 100% of the liability base of EBS was retail deposits. Retail deposits, typically, will stay with an organisation unless there's a significant issue with the organisation. That lack of stability in the liability base was a fundamental issue and that is similar to every other institution in Ireland and many abroad and it talks to the discussion we were having on ... having earlier on with Senator D'Arcy in terms of what was happening internationally. On the asset side of the balance sheet, again EBS had built that €1.7 billion of land and development and commercial property financing, which was too much for an organisation its size. It also had a commercial buy-to-let portfolio of about €500 million or so on top of that. It had entered into the tracker mortgage marketplace, in fairness not to the extent of some other institutions, it had a buy-to-let business and profile. And so therefore the riskiness and the growth of the asset side of the balance sheet and the riskiness of it in the context of its components, was not suitable to a building society which should, at its very heart and ethos, be very conservative, prudential, given the fact that a building society, for example, can't raise capital in the same way as a bank can in the international markets and also the heritage and ethos and ownership. Being owned by members, you have a very special responsibility to stewardship the organisation in a conservative way.
Sean Barrett (Independent)
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Were there oversight problems? And I refer you to core document Vol. 2, on page 127, the task force Medusa, was, was that part of your correction when you took over?
Mr. Fergus Murphy:
In fairness Senator, that activity was commencing or had commenced on my commencement with the organisation and this was a very granular root and cause review of the problems that had emerged with a number of fraudulent or potentially fraudulent scenarios involving various solicitors. To my recall there was 34 priorities or improvements suggested in this report so that it couldn't happen again in the society, in the context of improving internal controls and that's what that is referring to. The, the Medusa report and project is probably ... it probably reflects an organisation that is growing too quickly, that isn't able to keep up with the growth in terms of its internal controls and approach. And in that regard, it's probably useful in an illustrative ... in terms of the overall story one is telling.
Sean Barrett (Independent)
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And in the same volume, there's a very long letter from Yvonne Madden, the Financial Regulator, from pages 37 onwards, which shows, shall we say, a wide range of administrative reforms needed. Just looking at pages 43 to 45, you see items like "no evidence" of what the borrowers did, "not clear" what the purpose, "no evidence", "not clear", "not legible", "not legible". It looks like you inherited a pretty dysfunctional organisation going through that. "Not certified", "not clear", "not reviewed", "not legible", "not independently certified", it just goes on and on through those pages. How did you try to deal with the problems that Ms Madden had drawn to your attention there?
Mr. Fergus Murphy:
Senator, again this would be illustrative of, yes, the environment that one was dealing with. So in summary, how, how one tried to deal with it was, first of all the tone from the top; getting everyone to understand what the new regime was about, what our risk appetite was about; ensuring that we built an independent risk function, with a reporting line directly into me and into the chair of the board audit ... board risk committee; getting the right person into that role as CRO - and we got an excellent person into that role who did great work in the subsequent years as we worked through the crisis; bringing some expertise into the organisation by bringing new people in who were experts in, for example, commercial property or in risk management; ensuring that the board's training and induction was stronger through thematic learning and education; increasing the frequency of meetings and making sure that the meetings that you were having and the forums that you were putting in place were more granular and allowed for a risk approach in terms of working through this crisis. In terms of managing risk, the biggest risks first.
And just becoming much more prioritised, and much more accurate about what the organisation was doing.
Sean Barrett (Independent)
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That letter is dated to you on 3 March 2008, and I make it there are 65 recommendations. So was the era of light-touch regulations over? And you were doing reform but you were also ... I think the regulator had certainly been into the business and gone through it with a fine comb at that stage.
Mr. Fergus Murphy:
Yes, I think that the era of regulation was changing. I think the regulation around Europe and around the world was becoming more risk-based, which is something that is welcome, rather than principles-based. And, again, Senator, I would agree with you that a letter like this starts to show that evolution from a principles-based regulation to a risk-based regulation approach.
Sean Barrett (Independent)
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How do you analyse 100% mortgages?
Mr. Fergus Murphy:
In EBS ... again, in fairness to them, before my time, EBS had mortgage indemnity insurance in place. That means that, with an international insurance company, EBS was insuring its book, so that the first loss on the book up to a particular attachment point, and I'll explain that in a moment, is taken by the insurance company. So, for example, if the attachment point is 85% LTV, loan-to-value, then the first 15% loss is for the account of the insurance company. In principle, that was the approach by the society. And that was an effort by the society to protect its capital and to protect its members. When EBS was talking about 100% mortgages, in the same way as other banks were, they, at least, were apportioning this insurance, or they had this insurance against those mortgages. But in terms of looking at 100% mortgages, No. 1, I wouldn't agree with them, and I did away with them, and in the second half of 2008 LTVs, loan-to-values, and debt service coverage ratios, called DSCRs, and NDIs, net disposable income ratios, were all commenced and started to be moved down. And during my tenure there were nine formal changes to the credit policy of the organisation, which reflects the credit appetite, and each of those nine formal changes brought the credit appetite more conservative, and tightened the appetite. Interestingly, Senator, if I might say, during the period before I joined, for the six years before I joined, there were 13 changes to the credit appetite, or to the credit policy, and they were all increasing the credit appetite and loosening standards. In terms of 100% LTV mortgages, given that I don't agree with them, but given that they were in place, the most important point in evaluating them is the affordability of the customer in relation to the loan they're drawing down.
Sean Barrett (Independent)
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What was Haven Mortgages? Was that a company you had to shut down?
Mr. Fergus Murphy:
Haven Mortgages was incorporated, if I recall, in either November of December 2007, just before I started, and Haven Mortgages was a subsidiary of EBS and that subsidiary ... the objective of that subsidiary was to do all of the intermediary, or broker business, for the organisation. The broker market in Ireland was growing, it was becoming a larger part of the total market, it was an important channel for the Irish banks and building societies. In the UK, for example, which we often follow in these trends, over 50% of the mortgage market was being originated from brokers. In EBS, they hadn't been involved in the broker marketplace because they wanted to work directly with members, customers who become members on putting a deposit in place with the organisation. Because they were losing market share, they decided they had to get into the broker market in a more aggressive way, and through a different brand and through a different subsidiary, they felt they could do that, and at the same time, protect the underlying member business in the EBS society itself.
Sean Barrett (Independent)
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Irish Nationwide wanted to take over EBS in November 2008. How did you respond to that?
Mr. Fergus Murphy:
I responded by entering into discussions with their chairman and their CEO, and doing some mutual basic due diligence of each other's portfolios. My sense on that was that, other things being equal, ceteris paribus, which ultimately they weren't, it would be good if the country could maintain a mutual in the financial services domain. In that regard, I would have clearly seen EBS as being the leader of that potential mutual, or arrangement. It became fairly clear very quickly in those generic discussions, that the balance sheet of INBS was not in a state that one could recommend to one's board or one's members that there would be a co-joining of the two societies.
Sean Barrett (Independent)
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Was that subject to commercial confidentiality, or did you, for instance, feel like informing the Government that ... what you'd found when you looked at Irish Nationwide-----
Mr. Fergus Murphy:
I think we were co-travelling, Senator, in that regard, in that the Department or the NTMA, depending on which it was at the time - I'm sorry, my memory - would have been understanding the developments, and I think they would have known more about the INBS balance sheet, actually, than myself.
Sean Barrett (Independent)
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Is there a difficulty in regulating this sector if a bank, or the old building societies, lends both to the developer and then, subsequently, to the people who buy those houses, or is that a practice which you'd have opinions on?
Mr. Fergus Murphy:
I think it's possible for both to happen, you know. I think in a marketplace or in a bank, for example, if you're lending to property developers, if you've got a commercial property unit, first of all, it needs to be staffed with really good people who understand property very, very well and have a long tradition and experience in property. Lending to a property development company, I'd rather call it than a property developer, because I think in most societies and economies you're lending to a company ... we had a property-developer culture rather than a property-development company culture, maybe, but if you're lending to a property development company, it's a very different kind of lend to the more granular lending to a borrower who's buying a house and their mortgage might be €200,000, €300,000, €400,000. And so, I think, in a bank, these activities would be very segregated. There would be no real connection between the two, and I think you actually can do both responsibly.
Sean Barrett (Independent)
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How do you address the problem of short-term borrowing for long-term lending in the housing market, in general?
Ciarán Lynch (Cork South Central, Labour)
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I'm sorry to see you going back so far, we'll stick with the periods already. That's maybe bit outside our terms of our reference, but we'll go there - go on.
Ciarán Lynch (Cork South Central, Labour)
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The Medici.
Mr. Fergus Murphy:
So banking has been about the disintermediation, and the intermediation, even, between borrowers and savers. And so banks legitimately run some of that intermediation; sometimes they call it "curve risk". It needs to be managed very, very carefully in terms of interest rate risk, and in terms of, even more importantly, funding and liquidity risk. And that's why ... or one of the main reasons why the Irish banks and banks elsewhere came to the situation they came, because they didn't, and they couldn't, manage their funding and their liquidity.
So it needs to be managed, Senator, in a very conservative way. There needs to be very strict limits around, maximum tenors and maturities. There needs to be strict discipline and rules around the make-up of the liability base, the components of it, making sure that the organisation has a good mix of liabilities, and that the duration of the liabilities of the organisation matches, inasmuch as it can, the asset duration. It's not possible to match them directly and typically, assets will have a longer duration than liabilities. But if an organisation has proper rules around their asset liability, management and their committee, you can manage that intermediation in the marketplace sensibly. Unfortunately, what happened in Irish banking was that, clearly, it wasn't managed sensibly at that point in time.
Sean Barrett (Independent)
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In your international context, what did the Canadians do that we might have emulated with some benefit to ourselves?
Mr. Fergus Murphy:
First thing that they have is that they traditionally, over a multi-decade period, would have lower loan-to-values in their mortgage lending - No. 1. No. 2, they didn't allow themselves the concentration risk issues that emerged in Irish banking, particularly around property, and property lending. No. 3, they didn't allow their banks to grow by, as the Chairman mentioned, up to 30% per annum, over a multi-year basis. No. 4, they would have had stronger regulation, and regulation that would have been a little bit more proactive.
I refer there again to macro-prudential regulation. No. 5, in their marketplace and I'm not sure if this is a stronger point I'm going to make, but they would have had mortgage indemnity insurance on their mortgage books, more as a normal scenario, whereas in EBS it was ... we were a bit of an outlier having that. There are probably five things and, I mean, sixth maybe, Senator, but you'd know this better than I, their economy didn't grow as fast as ours did in the ten years before the crisis. You know, we grew so fast, we grew too quickly.
Sean Barrett (Independent)
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Well, that's most interesting and useful, thanks. Now, you're a 10% growth person-----
Sean Barrett (Independent)
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Or lower. Now, the oversight such as all those points that Ms Yvonne Madden and you were working on in relation to internal procedures. Do you think that we've got a better oversight of credit within the financial sector now than we had in the lead-in to the crisis?
Mr. Fergus Murphy:
In terms of the granularity of risk management, in terms of the culture around risk management, again risk being at the centre of the discussion for all strategic and tactical issues, the organisational structure, the reporting, the identification of risk, the measurement of risk, the conversations around risk, the accountability and responsibility around risk, I think we are now at good practice level.
Sean Barrett (Independent)
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And you mentioned in response to Senator D'Arcy on wholesale funding, you've gone from 26% retail, 74% wholesale. What are you at today?
Mr. Fergus Murphy:
In terms of the combined AIB-EBS balance sheet, about 60% of the balance sheet now comes from retail deposits, current accounts and consumer corporate deposits, about 20% comes from wholesale funding, approximately 10% comes from capital and 10% from other resources. So, the focus, Senator, is very much on retail deposits.
Sean Barrett (Independent)
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Your first posting was in the ACC. Was that right ... in your early career, that's where you joined banking?
Mr. Fergus Murphy:
It wasn't, Senator. I joined banking in the subsidiary in Ireland of Credit Bank, known at the time as Irish Intercontinental Bank ... Credit Bank, the Belgian bank and, in fact, I had a short tenure in ACC Bank, when I came back to Ireland from Asia in the middle of 2007. ACC Bank was a Rabobank subsidiary, 100% owned by Rabobank. In fact, I had bought ACC Bank for Rabo or I had led the acquisition of ACC Bank for Rabobank in 2001 before I headed off to Asia and so I came back to Ireland as CEO of ACC Bank and the strategy was to build a, what we called, second home market for Rabobank in Europe in Ireland, because we had Rabobank Ireland in the IFSC, which was a fine wholesale financial markets corporate banking structured finance business. I used to be CEO of that in the past. We had ACC Bank, which I had just come in to be CEO of, which is a business bank. We had ... Rabo did have a 38% ownership in a company in the Netherlands called Eureko and Eureko own Friends First or did own Friends First in Ireland, the insurance company. And the idea was to bring all these things together and, also publicly known, attempt to buy EBS, which I, ultimately, became CEO of, because EBS being a mutual is a very similar model to the Rabobank co-operative model in the Netherlands. And try to create an organisation for Rabo in Ireland that would have a mortgage business, a savings business, a corporate banking business, a treasury business and an insurance business and a business banking business and become a real player in Irish financial services at that time. That was the mission I came back to in 2007 from Asia.
Sean Barrett (Independent)
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What I was trying to get at there is that if you get a banking system that's obsessed with property, do you need sectoral banks for agriculture and industry side by side?
Mr. Fergus Murphy:
I think the ACC Bank and the ICC bank were virtuous and did an awful lot of very good work in the Irish economy over a number of decades. At this stage in the development of our economy and financial services, I don't think you specifically need that kind of a specialist institution. If I look at AIB, for example, and if I look at other banks in the Irish market ... if I look at Rabobank where I came from, they would have very strong sectoral expertise in the sectors they choose to work in. So, for example, Rabobank would be the largest food and agri-bank in the world and they would work from farm gate to food plate with some of the smallest farmers and some of the largest food companies in the world. Similarly, I think, in Ireland AIB and, indeed, Bank of Ireland, would have a very strong focus on agri. They'd have a very strong focus on other sectors like ICT, biotechnology, health care, hotels, restaurants, leisure, etc. So, at this stage, Senator, I don't think we'd probably need that specialism and it was probably more appropriate in the formative years of the Irish economy back in the '50s and the '60s.
Sean Barrett (Independent)
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We've had evidence, finally, that house prices in Ireland have gone from 2.5 times incomes to as high as 12. Has sectoral concentration on property caused part or all of that massive house price increase?
Sean Barrett (Independent)
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Since about 1990, I think, would be ... yes, the figures for that, yes.
Mr. Fergus Murphy:
So ... well, yes, again as you know very well, the percentage of our GDP that was happening on the back of property development, property investment, became out of sync with global and European norms. And that is again - and I'm sorry to repeat myself and clearly, you're hearing this probably every day and you know it - you know, one of the biggest fundamental pillars upon which the Irish economy crashed and so, you know, your property industry again, similar to your banking industry, should macro speaking be growing similar to your GDP and given the multiple times over GDP property was growing at over a long period in Ireland, you know, it was a huge input factor to our crash and it's a huge lesson for us to learn.
Sean Barrett (Independent)
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Thank you very much. Thank you, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you very much and I think you've addressed the ... just one outstanding issue but I just want to get one aspect of it. In regard to the Financial Regulator and the Central Bank having been concerned with regard to the level of growth of credit and the oversight of such credit, what was your view of this and what steps did you help the EBS to take to offset these concerns?
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Mr. Fergus Murphy:
In the marketplace? Yes. So, for example, in the 2002-2007 period, the residential book in EBS would have grown by 17.4% per annum, not quite the 30 per cents we were talking about earlier on but 17.4% per annum. From 2008-2011, during my tenure in EBS, the residential mortgage book grew by 2% per annum. So you've a substantive change in approach in tone from the top, in risk culture, risk containment and I think that one stat ... I could give many but maybe, Chairman, that one stat might hopefully illustrate the changes that I was looking to direct in terms of growth of balance sheet.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you. And in regard to the regulator, what was your understanding of the regulator's observation of that growth of credit at that time?
Ciarán Lynch (Cork South Central, Labour)
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In regard to your observations of the regulator and the significant growth of credit, what was your observations of the regulator's office at that time?
Mr. Fergus Murphy:
Thank you, Chairman. I don't recall the regulator discussing the macro-prudential point which is what you're talking about there, the actual growth year-on-year. The discussions were many and would have been illustrated probably quite well by the discussion I was having with Senator Barrett around that 3 March 2008 Financial Regulator letter around many small items, but important ones, regarding commercial property and our fitness in terms of the way the operating environment was executing property transactions in the building society. I don't recall but I may be wrong, I don't recall any specific conversations with them around annual growth.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you. Senator Marc McSharry.
Marc MacSharry (Fianna Fail)
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Thanks very much. Thanks, Mr. Murphy, and welcome. In 2003, Project Nova was instigated, which would have fundamentally changed the business model of EBS, linking it to the larger Rabobank Group and a possible three-way platform of EBS, ACC Bank and Friends First. Was this an indication that the original mutual model of EBS was no longer valid?
Mr. Fergus Murphy:
I think that it was an indication that the mutual model in EBS was under significant pressure. I think it would have been too early, Senator, to say that it was not valid but, as I mentioned earlier on, it certainly was challenged.
And so, EBS were looking at options in terms of was there another way to preserve the mutual or mutual-like environment and code and heritage and, at the same time, get access to a bigger balance sheet and a more powerful engine, if I may choose that term, which would be coming in from the Rabobank, you know, global, big, Dutch bank which you know is in the top 20 banks in the world.
Marc MacSharry (Fianna Fail)
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And was that driven by survival or pursuit of market share?
Mr. Fergus Murphy:
I would ... of course, obviously it's many years before I joined the organisation but my sense of it is that it was driven by survival. More by survival than market share but, Senator, they actually become a similar discussion because it's about relevance. I think the most important point would be about relevance - "Can we ... we can probably survive but can we be relevant? Can we still be a 10% or 15% provider of finance into this market? Can we be relevant in the towns and villages of Ireland?"
Marc MacSharry (Fianna Fail)
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And just ... I'm conscious about people watching at home and a mutual being owned by all of the people who have money in their accounts there-----
Marc MacSharry (Fianna Fail)
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-----isn't that-----
Marc MacSharry (Fianna Fail)
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That's the model. So, presumably, to maintain a market share in a market where everyone else getting their money from the wholesale market and borrowing short to lend long at low rates and lending out at higher rates, is it the case that a mutual just might not be at the races because there isn't enough members of the mutual to keep ... keep the wheel turning?
Marc MacSharry (Fianna Fail)
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And is it-----
Mr. Fergus Murphy:
And so, the point I'm making is that it is possible still for mutuals to survive and for that corporate governance and legal form to thrive. In Europe, the first cousin of mutuality would be the co-operative banks and if I take my old alma mater, Rabobank, it's, I would say, thriving around the world and particularly thriving in the Netherlands. It's just, unfortunately, that our mutuals took wrong decisions. Clearly, if you can run a mutual in the UK, you can run one in Ireland in terms of the proximity, culturally, Anglo-Saxon economies, etc., etc.
Marc MacSharry (Fianna Fail)
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So let's say Nationwide in England - because you have mentioned them as an example - is it fair to say that while they maintain, you know, a successful business or whatever it is, that their market share, you know, when compared to others that aren't mutual, has dropped?
Mr. Fergus Murphy:
They were struggling for a while but ... in fact, I'm not obviously an expert on them but my understanding is that they are doing very well again in that it's been a "back to basics". Some of the hype in banking, clearly is gone. Some of the players are no longer in the UK, either, that were there. So Halifax, Bank of Scotland, etc., being mopped up by Lloyds Bank, RBS's challenges. So the Nationwide has seen, I think, a strong resurgence in its activity, in its membership and in its volumes and is probably stronger now in 2015 than it was in 2005.
Marc MacSharry (Fianna Fail)
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Naturally this ... some of these issues, as you've said, predate your appointment to EBS. But, given your experience in banking ... a lifetime or a career in banking at different levels, if EBS, for whatever reason, had decided to maintain their mutual structure and to lend out money in line with those ... the resources of the members determined, would they be still tipping along there or would they have crashed?
Mr. Fergus Murphy:
I believe the best comparison there again is the Nationwide in the UK and I would, therefore, suggest - I mean it is hypothetical, but I would suggest - that they would probably still be tipping away and that they would be relevant in Ireland and that they ... the organisation would be as it was - a mutual. Now, I should say, in fairness, that the EBS brand is a very important part of AIB. That the EBS, as a company - as a subsidiary in AIB - is doing well. It was profitable in 2014 and, you know, the future looks strong for it in the context of the business it's doing and the position it has still in Ireland as a community financial services provider.
Marc MacSharry (Fianna Fail)
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Just again - with your experience in banking these are, kind of, general questions - would the decision of say what was Irish Permanent Building Society to mutualise have influenced, to your mind, the direction that EBS and, indeed, others were seeking to go and the Irish financial services market?
Mr. Fergus Murphy:
Yes. In fairness, Senator, I think that the EBS culture and the board that I joined ... the base case was they wanted to preserve mutuality and I think that was a virtuous objective and I think there was strong alignment in the board in relation to that. Again, they knew that they had a lot of problems. Again, they knew that the markets were beginning to turn. They had looked to see could they do this composite deal with Rabobank where, again, you're marrying the continental European member-based organisation called a co-operative with the Irish or UK member-based organisation being a mutual. And that, therefore, they wanted to conserve a mutual, excuse me, or a mutual-like organisation in Ireland and that's where the genesis of the discussions with Rabobank in 2003 were coming from. I should say for full ... for full transparency, I would have been leading those discussions from the Rabobank side at that time.
Marc MacSharry (Fianna Fail)
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Do managers in the EBS branch network have sales targets?
Mr. Fergus Murphy:
The planning that would have been done in EBS - before my time and during my time - would have been top-down in terms of "We believe we should have 15%, let's say, 10%, whatever, of the mortgage market; we believe that based on the fact that the economy is going to do A, B and C next year - growth will be whatever". And those targets ... that group target then would have been, you know, the plan. Targets within the branches wouldn't have been articulated in a precise way. Clearly, collectively you have to make your plan but there wouldn't have been tags on people's foreheads, managers in branches, etc., "This is what you have to make. This is the volume you would have to do". Now, that's in the branches, which were owned by EBS. 80% of the EBS network is or was tied to broker agents. These are local entrepreneurs who are in the local community and they are, again, tied, as the description suggests, to EBS in terms of their activity. They are paid on a commission basis for the business they do. That is their employment. That is their modus operandi. Now, they do not have any credit approval authority. All credit, during ... in the past years and now, all credit is approved centrally. So, although they are paid on their commission basis, they cannot do business. It has to be approved centrally.
Marc MacSharry (Fianna Fail)
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I understand. And I noticed all mutuals at different times had these tied agent brokers, okay. Is it fair to say that, really, everybody was moving away from that model - really back to the '90s - of the broker tied agent of-----
Marc MacSharry (Fianna Fail)
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But going back to the '90s, were they not beginning to kind of close off ... yes, brokers could be out there and come to you with proposals but, you know, the Joe Bloggs auctioneer-undertaker-filling station who was also Irish Nationwide or EBS or whatever ... that really from the 90s that was ... they were all moving away from that or, certainly, EBS too or-----
Marc MacSharry (Fianna Fail)
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I just want to get to that ... I appreciate they want to make money so they want to lend more but, as you said, they weren't underwriting, so, in real terms ... weren't specifically there to dictate what growth or not-----
Marc MacSharry (Fianna Fail)
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-----they were making but-----
Marc MacSharry (Fianna Fail)
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But in terms of ... so, just to put it another way, is there no targets for the sales staff within the branch network of EBS? Because there was ... where I'm coming from with this is, all of your colleagues have effectively denied that there was no performance-related targets for the management in all the branch networks all over the country and this is just a bit curious to some of us here and I just want to know had EBS the same model where people turned up for work, go in there and do the job to the best of your ability but, you know, nobody has a sheet of paper that says the Stillorgan branch needs to lend ... we have expectations in the line of X amount of money on mortgages, or Y amount of money on credit cards, or, you know, whatever the products are, and I just ... because ... there's kind of ... there's the board level of view on this and the management, they're coming in here and talking to us on it. And then there's the anecdotal one, that really the shoe was rarely taken off the throat, in the context of targeting staff.
Ciarán Lynch (Cork South Central, Labour)
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Senator. Mr. Murphy?
Mr. Fergus Murphy:
I think, Senator, that in the branches in EBS, during my time, there would have been soft targets for the branches. In other words, you know, they ... it wasn't their number one - what they call KPI, key performance indicator. But you ... the organisation would divvy up its expected market share based on the analysis it does on the economy, etc. Now, and then you would say, well, we, you know, we should be doing X of that in Limerick, and we should be doing X of that in Leinster, we should be doing Y of that in Connacht based on the demographics, based on the marketplace, based on economic activity. So, to my strong recall, there wouldn't have been strong explicit requirements on a particular branch or a particular individual in a branch to, "You must deliver €15 million," let's say, "in mortgages this year if you want to be eligible for a bonus," or some kind of variable remuneration, etc. But there would have been a top-down expectation, "We're going to do X per cent on X volume in Limerick or in Leinster." So I am sure there would have been discussions between regional managers and branch managers on a constant basis in terms of what volumes were they doing, were they holding market share, were they winning market share, what the bank or the building society up and down the road was doing, across the road, etc., and, you know, were we fit for purpose in terms of our origination and relationship management. But I don't believe there were ... and I think if we weren't, if a branch was not performing, I think there would have ... there probably would have been discussions in terms of the performance of the branch, because at the end of the day, it is a retail financial services outlet. But I don't think, Senator, there were hard criterion around volumes.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you, Senator.
Ciarán Lynch (Cork South Central, Labour)
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Deputy Kieran O'Donnell.
Kieran O'Donnell (Limerick City, Fine Gael)
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I welcome, Mr. Murphy. Chairman, can I direct the witness to Vol. 2, two pages, both interrelated, page 157, which effectively is the minutes of a board meeting on 1 April 2011 with EBS, very much around the whole area of merging with AIB? And interrelated with that, I want to refer to page 139, which is EBS top ten bonus payments 2010 through 2008. Chairman, am I at liberty to mention the particular individuals that are mentioned on the schedule on page 139?
Ciarán Lynch (Cork South Central, Labour)
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Just a moment there now, let me see.
Kieran O'Donnell (Limerick City, Fine Gael)
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Are they public?
Ciarán Lynch (Cork South Central, Labour)
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No, I don't think they are. I ... if you can just address it generally, Deputy, there for a minute and I'll come in and I'll give you a clear direction in a moment. Okay?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay. Were ... and specifically what I'm referring to is page 157, at the very top of the page, Mr. Murphy, where, "Chairman highlighted that, from a risk perspective, it may be necessary to seek binding commitments from certain critical EBS staff by offering them retention bonuses, etc." So were retention bonuses paid-----
Ciarán Lynch (Cork South Central, Labour)
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I might just assist you there, Deputy, and I'll stop the clock to do so. I've an indication of where you're going in this. I think where we were with this with other institutions that were in, the names were actually redacted, so to be consistent, I would just ... in that manner, I would advise that you take the-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Even though they're in the body of the-----
Ciarán Lynch (Cork South Central, Labour)
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Yes, but to be consistent with other testimony.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay, that's fine.
Ciarán Lynch (Cork South Central, Labour)
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You can through the years and the sums, just-----
Kieran O'Donnell (Limerick City, Fine Gael)
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That's fine.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Kieran O'Donnell (Limerick City, Fine Gael)
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Were retention bonuses paid to EBS staff as part of this process? EBS ... did you personally receive one?
Mr. Fergus Murphy:
Deputy, no, I can absolutely confirm that, number one, I didn't receive a retention bonus, and just for full clarity, I wouldn't have received, nor would I have expected to receive, any bonus during any part of my tenure in EBS, and I can confirm I didn't. I think that's a general comment made in a board meeting, and I can confirm to you that no other individual in the organisation would have received or did receive a retention bonus then or at any other point in time during my tenure.
Kieran O'Donnell (Limerick City, Fine Gael)
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And so can I take it that from 2008 on, no member of staff, either from the CEO down, has received a bonus payment in EBS?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay. Can I refer you to page 139, and just looking at the ... just generally - it's not the total there - but I notice between '01 and '08 that the level of bonuses paid, the top ten bonuses, there was €8,000 paid in 2001, that went over the years to €11,000 in '02, €235,000 in '03, it went to nearly €1.5 million in 2004, went down to half a million, €521,000 in '05, just short of €900,000 in '06, went to €1.5 million in '07, and down to €464,000 in 2008. In fact, I know one individual would have received nearly €450,000 of a bonus. How did that culture, within EBS, arise?
Mr. Fergus Murphy:
I think that financial markets, Deputy, and financial institutions became bloated, and I think that EBS, as a small independent, would have been, in fairness to them, looking at the marketplace, they would have been ensuring that there was a third party consultant working with them in terms of benchmarking their people and their remuneration. However, the results coming from those benchmarking would have told them that the market was moving on, that variable remuneration was an "important part" of the scorecard with your employee, your senior employee, and so it would have evolved, I would imagine, organically, rather than overnight, and you end up where you are in relation to that particular page.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay. Can I ask you on page 6 of your statement you make reference to that in 2005, EBS went from a situation where they were not in the land and development lending to over a two-year period to go really from zero to €1.7 billion. And the question I want to ask you is: if EBS had not gone into the land and development lending, would EBS have required a bailout from the taxpayer? Would EBS be a stand-alone prudential building society today?
Mr. Fergus Murphy:
I think it's a very, very good question, Deputy. If we look at the €2.375 billion that was required for EBS in terms of the Government and taxpayer, significant of the moneys are around the land and development and commercial property area. So, for example, specifically €425 million was required with regard to the assets transferred to NAMA, and they would have all have been land and development and commercial property. There was a-----
Kieran O'Donnell (Limerick City, Fine Gael)
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At the time that NAMA arose, what was the level of what I would regard as development loans in EBS at that time?
Kieran O'Donnell (Limerick City, Fine Gael)
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Of what?
Kieran O'Donnell (Limerick City, Fine Gael)
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So the €1.7 billion you speak about-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Was total of the two, but some of that would have ended up ... so there would have been €1.7 billion of loans available for transfer to NAMA.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay.
Kieran O'Donnell (Limerick City, Fine Gael)
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So we're up at nearly a million.
Kieran O'Donnell (Limerick City, Fine Gael)
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A billion.
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes.
Kieran O'Donnell (Limerick City, Fine Gael)
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I suppose the question I have-----
Mr. Fergus Murphy:
-----you're getting a large number, so, therefore, had there not been commercial property and land and development strategy emanating, originating from 2001 onward, we have more than ... we have probably, if my maths are right there, about 60% straight away of the required financing capital injection into the company dealt with.
Kieran O'Donnell (Limerick City, Fine Gael)
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You would not have been going into NAMA?
Kieran O'Donnell (Limerick City, Fine Gael)
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As an organisation. So in your view was the ... two quick questions. Number one; why did EBS enter the market when clearly it was a profitable company, profitable business prior to that? And why did it go in after the land and development business? Did it have the requisite expertise? You spoke already about risk assessment. And do you believe at the time, for the organisation, that it was a ... I suppose a ... bordering on a reckless move as a mutual society?
Mr. Fergus Murphy:
Right. There's no one word I could describe, Deputy, to ... or adjective or whatever, in terms of, of what it was. I think it's a conflux of various errors and issues and happenstances and poor strategy. So, I wouldn't describe it in ... with any one word. But, again, how did they get into it? They got into it because they felt they were losing relevance and that they had to create new profit pools, revenue pools, that would sustain their capital base and allow them to continue to have market share, particularly in the residential mortgage marketplace, which, in fairness, is a virtuous multi-decade, first-time buyers, second-time buyers, etc.
Kieran O'Donnell (Limerick City, Fine Gael)
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So, I suppose, I have one more question now, I should ask, would EBS be stand-alone today if it hadn't gone into the development side in 2005?
Mr. Fergus Murphy:
I will try and give you the best answer I can there. Obviously it's hypothetical in that we can't read the future. But, given the structure of the recapitalisation of EBS and the requirements that were, as we've just gone through fairly specifically, that were specifically related or can be correlated very closely to commercial property in land and development, it would ... it would seem to me that there was a very reasonable chance of the organisation making it through, had they not been involved in all of that.
Kieran O'Donnell (Limerick City, Fine Gael)
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Can I refer you to Vol. 2, page 161, and, Chairman, it's, it's EBS board presentation 26 September - "Government intervention anticipated and unavoidable". And I want to read just one, one paragraph, "Government intervention anticipated and unavoidable; potential scale of intervention is likely to be considerable and could change the Irish banking landscape here fundamentally." That's a note from the minute of a meeting of 26 September 2008 which I expect, Mr. Murphy, you attended?
Kieran O'Donnell (Limerick City, Fine Gael)
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And, can you just give me the basis for that statement because that statement was made, basically, three days before the guarantee was put in place?
Kieran O'Donnell (Limerick City, Fine Gael)
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Anglo and Irish Nationwide.
Kieran O'Donnell (Limerick City, Fine Gael)
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And how long would it have been in the public ether that those two organisations were in ... were in trouble?
Mr. Fergus Murphy:
Personally, from my point of view, I would say March-April 2008, I would have started to get informal updates, get a sense, in terms of my own perspective, that the growth of the decade before that, particularly ... particularly these two organisations, was strange. I wouldn't have been conclusive in my own view in terms of what was going to happen next. I wish I had a crystal ball. But, that there were ... it was ... it wasn't ... it didn't seem very conventional and that these two organisations, in particular, seemed to be outliers.
Kieran O'Donnell (Limerick City, Fine Gael)
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And, two quick questions. Did you regard either institution as to be systemic to the Irish banking system and did you, as CEO of EBS, in any way approach the Central Bank, Financial Regulator, Department of Finance, Government sources to express your concerns? And, did you see in any way that they could impact on EBS, your own institution, in terms of, of its activities?
Ciarán Lynch (Cork South Central, Labour)
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Thank you, Deputy. Mr. Murphy?
Mr. Fergus Murphy:
Sure. In terms of their, their importance ... their systemic importance, first of all, Deputy, as I mentioned earlier on, I didn't believe EBS had the same systemic importance as, for example, AIB or Bank of Ireland, and would have approached my business with the stakeholders in that regard, which I think was the appropriate and right thing to do. So, similarly, you know, given that I didn't think EBS was systemically important, I also wouldn't have thought that Anglo Irish Bank or INBS were systemic to the system, in the same way that I wouldn't have thought EBS was, because, you have a smaller market share, you were a smaller organisation, you are not a payments bank, a transition payments bank, you're not running ATMs per se, you're not doing basic banking, you don't have current accounts. So, based on that kind of approach, I wouldn't have seen them as systemic.
Kieran O'Donnell (Limerick City, Fine Gael)
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And you wouldn't have seen any-----
Ciarán Lynch (Cork South Central, Labour)
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Final question there, Deputy.
Kieran O'Donnell (Limerick City, Fine Gael)
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You wouldn't have seen any reason why either of those institutions couldn't have been nationalised on the night of the guarantee?
Mr. Fergus Murphy:
I wasn't competent and still probably wouldn't be competent to say what should have happened to them. I think that's a very long discussion, Deputy, that, that we could have. It's very difficult for me to say exactly what should have happened to them in the environment we were in.
Ciarán Lynch (Cork South Central, Labour)
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All right ... and I don't want you speculating because you'll be put on record on speculation as opposed to actual factual basis. Deputy Doherty, please.
Pearse Doherty (Donegal South West, Sinn Fein)
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Go raibh maith agat agus fáilte. Can I ask you to comment on the proposed merger with Irish Life and Permanent, the reasons behind it and also the reason why this proposed merger didn't go through? You, you'll see it on ... page-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes, 167 to 172 on core Vol. 2.
Mr. Fergus Murphy:
Yes, thank you, Deputy. The ... there were two efforts made to see whether or not Irish Life and Permanent and EBS, and then latterly, when Irish Life and Permanent and PTSB had decoupled, whether PTSB and EBS could merge with each other. This was the, the first effort when, obviously, Irish Life and Permanent was, was one unit. The, the thesis there and the objective there was to see was there a position where we could, again, in Ireland, have a, a third force by aggregating ... merging bank three and bank four, so to speak, and then having a viable organisation that would be not that dissimilar to an AIB or Bank of Ireland. So, that, that was the piece at the time, and we would have gone through work to, to validate that at the time.
Pearse Doherty (Donegal South West, Sinn Fein)
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And, why didn't it ... why didn't it happen and what period of time are we talking about?
Pearse Doherty (Donegal South West, Sinn Fein)
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It's not on the book.
Mr. Fergus Murphy:
It's not, is it not? I, I think that's ... was late 2009, Deputy, and going into early 2010. My memory on why it didn't happen is that I think one of the ... I think the initial PCAR came along, in early 2010, and the quantum of capital that was required into the institutions took over as the focus, rather than a merger of, of institutions.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. And, would you not ... did you not have an indication of what was coming down the line in terms of PCAR or were you still thinking that it would be a lot smaller than what PCAR discovered?
Mr. Fergus Murphy:
No, I think we would have had a fairly good line of sight on it. But, for example, PCAR ... one of the interesting things about capital in an organisation, in a bank, is, if you say the capital ratio should be 4% and then you can turn around the next day and say it should be 8%, so one of the ... one of the things that PCAR did correctly and rightly was it increased the capital requirements by two, of an institution. So, it's actually very hard to predict that, 'cause you could ... you could say, it could be some other number too. And, subsequently, Deputy, the ... the levels went from 8% to 10.5% etc., so it's very hard, at any point in time, to predict what an exercise might eventuate.
Pearse Doherty (Donegal South West, Sinn Fein)
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Can you tell me how it was possible for a building society to issue commercial property loans? What was the legislative framework that underpins this type of lending that EBS partook in?
Mr. Fergus Murphy:
So, in terms of the, again, the origination and genesis of that going back to 2001, because it was a property loan, my recall is that the ... the legal format and framework of the society enabled a property loan. And, because it was property, it was within their ... it was within their mandate.
Pearse Doherty (Donegal South West, Sinn Fein)
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So, the hotels, which basically ... you could buy a hotel under the type of ... or, you could fund the purchase of a hotel under the legislation in 2001?
Mr. Fergus Murphy:
Yes, because the underlying loan was to a property. I think that would have been the key piece. But, I'm just going back now in memory, as obviously, as you know, three or four months into my tenure I was closing it down. So I was more interested in how we don't lend to any property or hotels or anything, rather than how to do it. But, because it was a property loan, I think that's how it qualified.
Pearse Doherty (Donegal South West, Sinn Fein)
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And, you say when, in 2010, €836 million of property loans originating in just two years, between 2005 and 2007, were transferred to NAMA at an average discount of circa 60%, the resulting capital loss on these loans was very damaging. What was the nature of the €836 million worth of loans that were transferred to NAMA? Was it land, hotels, was it residential housing, what type of loans were they?
Mr. Fergus Murphy:
The ... sorry, the lion's share, Deputy, I think, off the top of my head maybe €540 million, €550 million - I stand to be corrected - would have been land and development. So, it would have been non-developed activities that could have been a field somewhere. It could have had zoning. It could have had planning. It may not have. But, the lion's share would have been that kind of business plus some of the larger commercial property.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. And this land, was that for housing or was it for commercial?
Mr. Fergus Murphy:
It could have been both for residential development or for commercial development. In many occasions it probably would have been for residential development, given the location, because often the locations were secondary and tertiary locations, in that it was unlikely to have a commercial activity in those areas.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. And you were mentioning to ... on previous question, the question about ... and we've had evidence to suggest by some witnesses that it was commercial lending that broke the banks. In relation to that statement, do you believe that that is true for EBS or not true?
Mr. Fergus Murphy:
I think that, to my conversation a few moments ago with the Deputy, I think it is a very large bearing to the EBS story. I can't say it's 100% of it, but it has a ... it's a dominating factor in the context of EBS being ... what happened to EBS. Another important point there, for example, so ... because I can't say it's 100%, is the liquidity and the funding of the balance sheet. There are a number of dynamics all coming together at the one time. One could argue that one item is 30% and something else is 60%, but those two points would be the dominating factors and I would believe that the commercial property piece is the most dominant.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. In relation to the portion of land that was transferred to NAMA, what was the haircut on that type of ... on that product?
Pearse Doherty (Donegal South West, Sinn Fein)
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Could have been up, okay. Can I ask you, what would have been the effect of a political guarantee on EBS as opposed to a legal guarantee, in your view, in relation to access to liquidity?
Pearse Doherty (Donegal South West, Sinn Fein)
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A statement of intent by Government, what many other European governments did?
Mr. Fergus Murphy:
Yes. I ... generically, again, hypothetical, hard to know, but I believe that the system in Ireland was ... it was more acute. The problems were more acute. We're a small economy. You're not going to be able to do, potentially, what the Germans or the UK or the US can do in terms of protecting their systems. You probably have to be more transparent and you're probably not going to get the benefit of the doubt from the markets given the size of the economy etc. So, probably you have to be more explicit.
Pearse Doherty (Donegal South West, Sinn Fein)
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What ... how long did the guarantee's effects last? We've heard from again witnesses that they had ... they had disappeared by the end of that year, by December, I think, from a former Taoiseach, or a Minister. Sorry, I'm not sure which one may have said it. But how long did the liquidity ... did the guarantee provide the type of access to liquidity that the banks needed?
Mr. Fergus Murphy:
The original CIFS legislation coming in in September 2009, definitely gave a shot in the arm to the financial institutions and to EBS, at that point in time, but as I mentioned earlier on, we weren't in a grave state. I was concerned, we weren't in a grave position in September 2008, but there were inflows of deposits in the three to maybe four to five months after that. So the deposit base grew on the back of the guarantee. Thereafter, in 2009, things continued to get worse for the economy and for the banks, for the sovereign, and one would have started to see an outflow of deposits again as the connective ... as the connection to the sovereign became more apparent to international investors and the sovereign itself started to weaken.
Pearse Doherty (Donegal South West, Sinn Fein)
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So, after about four to five months, your view was that depositors or lenders that would place money with your bank and other banks, began to question the solvency of the State and being able to stand over the guarantee that was given?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. In Vol. 1 page 49, if you'd just refer to that page, it's an inspection by the regulator into certain aspects of EBS's loan book in 2007, and we know that similar inspections took place across the banking system in January to March 2008. How much knowledge would the Financial Regulator's office have in relation to the loan book of EBS? And would the office have been aware of EBS's exposure to commercial land and development property loans? Would the office have been aware of the funding model of EBS at the time?
Mr. Fergus Murphy:
Yes. Deputy, I think the answer to all of those is yes. I mean, there were very deep relationships between the regulator and all the financial institutions, including EBS, and by the nature of a letter like this and the earlier letter that I was discussing with Senator Barrett, one can, I think, readily see that there is a strong depth of understanding and a strong depth of investigation in relation to each institution, given the nature of the letters coming through in terms of detailed challenge, and again, appropriately put, in relation to policies, procedures and how the institution can improve itself.
Pearse Doherty (Donegal South West, Sinn Fein)
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So, like there's stuff in this ... in this review, for example, that no proof of addresses for individuals in terms of mortgages that had been handed out. One individual, two jobs, there was a handwritten P60 and payslip for a second job; "no tax was being deducted from [the] employment", and it "would question the sustainability of the second employment".
There's also other findings, which say that there's ... you aren't stress testing, or you weren't ... the bank wasn't stress testing appropriately but also that the bank details for the last three months, bank account details were not being requested in relation to mortgages at all, so - apart from buy to let - so, is this just something that happened in the previous couple of months before the Financial Regulator did their inspection or was this going on ongoing with an EBS for years prior to that?
Mr. Fergus Murphy:
I think it's illustrative of what was happening in financial services in Ireland, not just in Ireland, but particularly in Ireland, during a multi-year period, including 2007, Deputy, as to that letter, 29 June 2007. The system wasn't able to keep ... catch up, keep up with the volume. The ... putting it bluntly, it was a, kind of, "stack 'em high, sell them cheap" approach in Irish banking. Because of all of the liquidity that was there in the world, as we spoke earlier on about, and because so much of it was available to Ireland and to Irish financial institutions, for example, the focus was on profit before tax, rather than on return on equity. And so that meant institutions were typically building the balance sheet ... again I'm repeating, I'm sorry ... to the 30% per annum comments made earlier on, and if you keep doing it, it'll keep being virtuous. But then the music stopped. And so the organisation and the operating environment in the organisation, and the control environment in the organisation, and the banking operations, and the things that need to take place, like validating income or making a payment or ensuring affordability, were struggling, creaking at the edges to keep up with the origination machine that was being fuelled by the easy liquidity.
Pearse Doherty (Donegal South West, Sinn Fein)
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But can I just, finally on this here, like, if you go to page 52, on the top of that page, it's item 4, "The Society's Credit Policy does not require bank statements to be obtained and reviewed in assessing affordability other than in the case of applications relying on surplus rent roll to support Homeloans or [buy to let]." Now, to me, that is just ... like, this is a bank issuing a loan, who's saying to the customer who's getting this money from the bank, "We don't actually need to see any of your bank statements." Like, is this ... was this just creaking at the edge where they decided to change the credit policy to say, "Well that's too much hassle asking them for the bank statements", or was this the policy of EBS forever, since it was established, and the Financial Regulator's only finding this out in 2007 during this review?
Mr. Fergus Murphy:
I would say, Deputy, to try and be helpful there, that one, I would imagine it wasn't the policy of the society for generations and decades before that, and that they would have had a reputation for being a conservative and prudential and good lender. I would imagine, and I don't have the detail here, that the wording here, "The Society's Credit Policy does not require bank statements", it may be ... and please do bear with me if I'm incorrect in this ... that the Regulator has evidenced where bank statements weren't seen or required or were on file and that the credit policy isn't explicit enough about calling out the requirement for bank statements. If I was betting on this, I would imagine that is the nature of this point 4, on page 54, rather than we ... we, as an organisation, EBS, at the time, as an organisation, has a blanket, you know, disinterest in receiving bank statements from applicants. However ... so, you know, devil in the detail, however, I think substantively a letter like this with so much in it, in terms of things that need improvement or could be done better, does reflect on, I think, probably your concerns, Deputy, but also the comments I'm making in terms of the system wasn't able to keep up with the origination that was taking place on the back of a property economy.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. I'll now move to wrapping things up. Senator D'Arcy, three minutes.
Michael D'Arcy (Fine Gael)
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Mr. Murphy, Senator Barrett stated you were one of the few who survived the cull and now that you're one of the most senior people in AIB. Are you - and when I say "you" I'm speaking about executive bankers - are you overpaid in this country?
Mr. Fergus Murphy:
I don't believe so, Senator, but my view will, you know, be a small one there, in that these things need to be benchmarked properly, locally, sector-wise and regionally. So, I believe that there is strong benchmarking that takes place in terms of what is the right amount of remuneration for a person doing a particular job. And so, you know, clearly, I have no influence on my own remuneration and I believe that, with the general improvements that have been made, which we referred to earlier on, in terms of risk governance and how the banks are running ... being run, and what the tone from the top is, I would feel confident that people in the future will get paid transparently, whatever that is, and that it will be properly benchmarked and organised suitably so that the best interests of the society, of the customers and of the bank is maintained.
Michael D'Arcy (Fine Gael)
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And who should the two pillar banks be benchmarked against?
Michael D'Arcy (Fine Gael)
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There's only two of you.
Mr. Fergus Murphy:
It's ... you know, I think one should benchmark against other institutions in Ireland, or companies in Ireland in other sectors. And one should benchmark against like-sized banks in other jurisdictions that are probably OECD zone A, western European, or whatever. I think there's probably plenty of exemplars or comparators there for us to use. Now, this is not an area of expertise of mine and I don't, you know, manage this part of the business but I would imagine that would be a reasonable approach.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Senator Barrett?
Sean Barrett (Independent)
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Thank you, Chairman, and thanks again, Mr. Murphy. What criteria should be used in choosing board members for the Central Bank?
Mr. Fergus Murphy:
I think, Senator, that it's very important to understand the sector. So, you must ... and it's probably a challenge, or a valid criticism of banking in Ireland at a point in time that, possibly, there were directors on banks who didn't have a strong financial background. But I think you need a certain quotient, or a quorum, or a percentage of your board that have a very strong financial background, be it in insurance or be it in banking, because it is a different business to lots of other businesses. If I could for a moment, you know ... if you sell a banking product to a customer, ironically and usually, that product stays on the bank's balance sheet for five, ten, 15 or 20 years. If I sell cheese, or if I sell shoes, or if I sell whatever, once I sell it, it's gone. Now, if it wasn't a good piece of cheese, the customer will come back and say to me, "It wasn't very good" and they may not buy anymore cheese from me again. But it's very different. You sell something to somebody but it stays on your balance sheet, so that's a different industry with a different rigour around it. It's actually quite a complex industry and, therefore, I believe having financial services background and experience would be very, very important.
However, I think it's also very important to have people on the board of the Central Bank, or any other bank, that can bring a wide perspective outside of banking because one of the challenges and one of the, again, valid criticisms of banking is that we became so insular and so micro around the importance of banking that one could have forgotten what was actually happening in the real economy. And so having people with strong economic background and people with strong governance background and some people with expertise from sectors outside of banking would be the right mix. But the concentration should be on financial services expertise.
Sean Barrett (Independent)
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Thank you. And the final one: how did auditors of Irish banks miss so much?
Mr. Fergus Murphy:
I think the auditors were working within their prescribed mandates with regard to accounting standards and I think that we could have a long discussion on accounting standards and how they have evolved and the changes that are taking place now in them to, for example, try to predict more accurately the state and the likely projection of a bank's balance sheet. So, for example, going from incurred loss to expected loss, which IFRS 9 will do in the coming years. But I suppose the auditors and the accountants were working within the strictures that they were in, in terms of the accounting regulations that they had to follow. So, I think that would have probably, Senator, been a large part of it.
Sean Barrett (Independent)
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Thank you, and thanks, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. I just wish to wrap up with you, Mr. Murphy, please. And maybe a lot of discussion this afternoon was with regard to the past and the, sort of, corrections that were required and so forth. A part of the work of this inquiry is also to look to the future in terms of making recommendations so we don't revisit the errors of the past and the difficulties that come with them and maybe if I could draw you into making some final comments in that regard and if you might particularly talk about measures that would result in behavioural change in financial institutions. Earlier testimony here has, kind of, brought two issues to the fore: the separation of banks and bankers as being two different entities, and the concept, or the discussion earlier, that something like €140 billion has been paid in fines by financial institutions post-crisis, which would indicate that there is still behavioural aspects that are of concern.
Mr. Fergus Murphy:
Chairman, I think that is a very good point and I think that, again, taking a step back, banks got way ahead of themselves. They became extremely arrogant as a global sector and there's been, again, many lessons learned and many things have gone wrong, locally and internationally - fines of billions of euros being paid by banks around the world for misconduct of various types. They do say - it's a little trite - you know, that culture eats strategy for breakfast. I think it's true though, and if you build the bank around the right behaviours, which takes time, if you inculcate those behaviours steadily and consistently in the organisation, if the leadership of the organisation, starting at the board, are role models and are looking to do the right thing, if they call out good behaviours and they call out bad behaviours consistently - and that is the central mission for the board and for the management - I do believe we can continue to bring financial services, globally and locally, back into a more respectable space. It's going to take multiple years and efforts and attempts, but that's the mission that we are all on now. So, in that context, setting the required standards, having a meritocratic environment where people are performance managed in a fair but tough way; ensuring that conduct risk is at the very centre of the discussions again that take place around the top table. Again, it's easier to have those discussions when you've an independent CRO reporting both in to the board and in to the chief executive, conduct risk being the ... ensuring that the bank is doing the right thing by the customer; that they're making every effort to sell them the right kind of product at the right time; that the customer's eligible for that product; and that the customer can afford that product etc., etc.
That concept of conduct risk wasn't there ten years ago. It's a new phenomenon and if we build our bank based on conduct risk and based on having those transparent behaviours, we can bring it back to a good space. There are some countries in the world, like Canada, which we mentioned earlier on, like Australia, like Singapore, where I lived and worked for a number of years, where banking has a better reputation. I'm not saying that it has the very best reputation but a much better reputation than it has here, for example, in Ireland, and understandably after what has happened in Ireland, but I do believe, and I am confident, that with the right culture and the development of that culture, we can bring banking back to be a sustainable, responsible part of the economy, where people who work in banks - decent people, I mean, you know, there are a lot of ... thousands of decent people who work in banks - aren't embarrassed to get into the back of a taxi and say, when the taxi driver asks them, "Where do you work?" they're afraid that ... they don't want to say they work in a bank. We've got to get over that. And culture-----
Ciarán Lynch (Cork South Central, Labour)
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You share that with a few professions, I'd say, Mr. Murphy, and maybe you're in proximity to a few of them at the moment.
Mr. Fergus Murphy:
And culture is at the centre of that. And the culture of an organisation, nine tenths of it is under the waterline. It's like an iceberg: one tenth is over the waterline. So you have to work on that culture very, very hard and for many years because a culture grows over a 40-year period and, you know, it's subtle, whereas a strategy, you can see. It's in a paper, you can measure it, it's in a spreadsheet. So, our task now is to build that culture and it's early days but I would like to say, and I believe it is the case, that in AIB - and I'm sure it's the same in the other institutions - we can see the culture changing, we can see that we are there for the customer.
It's not about the bank; it's not about the banker; it's not about the bankers bonus; it's about doing and fulfilling for the customer. And if we do that, we've a chance of respectability for banking again.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you very much, Mr. Murphy. With that, I'm going to bring matters to a close. I just propose that we just take a very, very short private session after this just to work out the, kind of, sequencing for something to eat and all the rest of it. I've just been on to the canteen services here and I'll just give information to members about that as well. So with that said, I propose that we suspend just a few moments so we can excuse Mr. Murphy, and on doing so, thank you for your participation and for your engagement with the inquiry. And to now formally excuse you. Thank you very much, Mr. Murphy.
Ciarán Lynch (Cork South Central, Labour)
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I now propose that we return to public session is that agreed? Agreed. 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 devices are switched off? At our next session we will hear from Mr. Sean Mulryan, founder of Ballymore Group. This is one of several sessions in which the inquiry will focus on the relationships between property development companies and our principal financial institutions.
Sean Mulryan is an Irish property developer and the founder and chairman of the Ballymore Group, a Dublin-based international property development company. Since its foundation in 1982, Ballymore grew into one of Ireland's largest home builders. Ballymore also sought opportunities outside Ireland and is now established as one of the top developers in London. Mr. Mulryan you are very welcome before the committee this evening. I'd also give our apologies for the running a ... delay in schedule this afternoon and for any inconvenience that caused. I'd like to offer you the committee's sympathy in that regards.
Before hearing from the witness, I 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. 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 screens to your left and right and members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.
The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis and you have been ... submitted a witness statement. This is before the committee and will be relied upon in questioning and form part of the evidence of the inquiry. So with that said, if I can now ask the clerk to administer the oath to Mr. Mulryan please.
Ciarán Lynch (Cork South Central, Labour)
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Thank you for coming before the committee this afternoon, Mr. Mulryan, and if I can invite you to make your opening remarks please.
Mr. Sean Mulryan:
Thank you, Chairman, and members of the inquiry. I am happy to answer any questions or provide clarification on my written statement, already provided. Based on this statement, I would like to take up the opportunity to highlight a couple of points. I want to give you a brief background of myself and my company, Ballymore, and I want to give my view on the nature of the residential property development market in Ireland during the period 2001 to 2008 and subsequently, the collapse of the housing market in Ireland.
I founded Ballymore Properties over 30 years ago. I grew up in County Roscommon and began my working life as an AnCO trainee, becoming a bricklayer stonemason. I served my time in Galway and came to work in Dublin. I worked on some of the largest projects in the city and gained valuable experience in all aspects of design and construction. Aged 25, I saw an opportunity to build once-off residential homes in Leinster and established my business. My first ever house was in Ballymore Eustace and hence the name Ballymore Homes.
I began designing and building individual homes to individuals' specifications. The business took off and grew as the economy picked up in the late '80s. In the early '90s, Ballymore was one of the biggest developers of houses in Ireland. In 1991, we realised we needed to spread our risk and be less dependent on the Irish market and looked to expand into London. By the year 2006, our business model had become significantly concentrated on the London market. That year, when nearly 90,000 homes were built in Ireland, Ballymore accounted for less than one quarter of 1%, or roughly 225 new-build homes in Ireland that year.
This shift in business continued, and today Ballymore is one of London's biggest privately-owned property development companies. The problem for Ballymore was the fact that approximately 90% of our borrowings was with Irish banks.
I would like to give you an outline of the business that we are in. In my experience, property development is a complex business and requires considerable skills and experience: skills in buying the right property in the right place at the right price, knowing what would work on a site, and then designing a scheme that is capable of meeting future market needs. Then there's the process of planning permission, a long-term process which would often prolong negotiations, reworking of plans and dealing with objections. After that, there is the marketing and sales process, followed by the construction, completions, after-sales service and, in the case of Ballymore, we also manage the majority of our own estates once completed.
Property development is a capital-intensive business. The business model that worked for us was based on a tried and tested approach that combined the developer working closely with a lender, a commercial bank. This model worked. It combined the skills and experience of the developer with the capital provider, provided by the lender. Developers in Ireland relied almost entirely on commercial banks for the business model to work. The banking collapse meant the business model collapsed too.
Let me take a quick look back at the events leading up to 2008. Back in early to mid-1980s, falling income and high interest rates pushed house prices down. This changed between 1987 and 1995. Rising income and job creation drove economic growth in Ireland and rising demand pushed prices up by 5% per annum. Virtually all price growth from 2001 to 2007 was driven by a relaxing of credit conditions. 555,000 units were built between 1996 and 2006. In the peak of the boom, Ireland's housing construction market grew from around 4 to 6% of GNP in the 1990s to a massive 15% of GNP at the peak of the boom in 2006 and 2007. As a direct consequence of cheap credit and a massive level of borrowings, large numbers of unskilled and inexperienced people in Ireland became property developers.
The rate of house building in the mid-2000s was just simply unsustainable. Ballymore, in line with its view of the market, was not very active in Irish land acquisitions at that time. Our research showed that by 2006, the Irish market was building over 30,000 houses per annum more than was required for housing needs. Construction accounted for 24% of GNP, or 30% of GDP. Over a quarter of all economic activities in 2006 was construction. Employment in construction went from 182,000 in 2002 to 281,000 in 2007. That represented 13.4% of total employment compared to the UK and EU average of 8.2%.
Despite the fact that most economists were optimistically predicting continuous growth, we knew the market was over-supplied. We had grave concerns for the outlooks of '07 and '08. The Irish housing market was in real trouble and this was obvious even before the international banking collapse and the knock-on on the impact of the Irish lenders.
When the global banking crisis happened, the commercial banks were not able to participate in the business model. Once the business model collapsed, values collapsed and a consequence of that was the collapse of very many businesses, the loss of thousands and thousands of jobs and ultimately, the collapse of the market.
The property development market is a long-play business. The long-term nature of the business means property developers require the foresight, the patience and, of course, the capital to be able to deal with the ups and downs and the recurring nature of the market. The international banking crisis meant that the traditional model based on bank finance for property development was no longer an option and property development companies internationally had to look for new ways of funding new projects.
Ballymore Properties was fortunate to have an established and well-run business with a long, strong asset base, especially in London. We were unfortunate to have had so much of our borrowings with the Irish banks. So while we knew we were in a good position to withstand the crisis, what Ballymore needed was time and a mechanism to get through the period between the collapse and the recovery. NAMA provided the means for Ballymore to do that. Ballymore entered the NAMA process with a very detailed plan. The tight business plan provided a base for the company to operate while new financial arrangements could be put in place. Ballymore has worked with NAMA, co-operated fully and has worked our way through what needed to be done. While it was a most painful and costly process for Ballymore, our strong asset base, especially in London, has allowed us sustain the core business, begin raising equity and finance from new international joint venture partners and to regroup, ensuring the future viability of the business and accelerate our exit from the NAMA system.
In conclusion, Chairman, I would like to summarise my points as follows: the collapse of the Irish banks, following the global financial crisis, had a devastating impact on Ballymore Properties. Despite the fact that 85% of our assets were outside Ireland, 90% of our borrowings were with Irish banks. As the Ballymore business model relied on capital from the commercial banks, the business couldn't operate, once capital dried up. As Ballymore had substantial assets in London, where the downturn was short-lived and property prices recovered quickly, Ballymore was well positioned to recover. The company needed the time to restructure its financial relationship and needed time for the market to recover. Ballymore entered the NAMA process with a strong and tight business plan. The business had been working its way through this and is looking forward to paying its debt related to the Irish banks' borrowing very, very soon and returning to a normal market model.
Thank you and I'll take some questions now.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Mulryan, for your opening statement and if we can now proceed on to questioners and, in doing so, can I invite Deputy Michael McGrath to open up this session. Deputy, you've 25 minutes.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you very much, Chair. You're very welcome, Mr. Mulryan. Can I start by taking you to page 6 and 7 of your witness statement where you refer to a number of dates that Ballymore would have been involved in for high-profile sites, namely, the Irish Glass Bottle site and the Jurys and Burlington hotel sites? And you state that Ballymore was unsuccessful in each case and you were surprised to learn that your bids were as much as 35% off the pace. Can you elaborate on that? Is that a reflection of the over-valuation that was placed on those sites by, ultimately, the successful bidders in this case? And why would there be such a difference on the valuation put on sites like that by different bidders in the process?
Mr. Sean Mulryan:
Well, I suppose, we used to ... we were comparing Dublin land prices to London land prices at the same time because we're very active in London. So we had a direct comparison but we bid for many sites and we were a long way off. The one you mentioned, the Glass Bottle site ... well, we were invited to joint venture with the DDDA on the Glass Bottle site and they would have come to London and looked at our operation and would have liked what they saw and would have asked us to join ... would we be their partners in that particular site and we were very happy to do so. So we started the process of doing the due diligence and doing our appraisals on that particular one. And our deal with the docklands authorities was 25% that they were taking into equity and we'd be taking 75%.
Now, on that particular site, we spent a lot of time on that but we couldn't get past €140 million so we talked to the team and the DDDA and we put our first appraisal through at that cost and the asking price was much higher, way, way higher, so we agreed to do another two weeks' due diligence and on that particular, we just pushed it a little bit more but we were a long way off what the asking price and the anticipation was. So six weeks before the ... the bids, we withdrew and to give them a chance to go and negotiate with other people.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, and that was pushing up the price?
Mr. Sean Mulryan:
Everybody wanted trophy sites and there was a lot of madness in the system and when I used to compare what you could buy in London, in London docklands to Dublin docklands, it was five times cheaper per site to buy in London at the same time and London was equally as strong a market. There was no VAT on housing there so it just ... when you start to make direct comparisons, you could see that-----
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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And what was driving that desire for trophy sites, as you put it, which may not have been commercially viable at all at the levels that were being paid? Is that something that you would have experienced in the UK, for example, to the same extent-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----when you were bidding for sites-----
Michael McGrath (Cork South Central, Fianna Fail)
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Okay-----
Mr. Sean Mulryan:
-----and it's much easier to operate and you don't have the same kind of ... I don't know what the word is but it's just ... you just own land ... land, at the moment, is very high in London but at that particular time, it was much easier to operate and there weren't as many developers after ... after the land in London.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, okay. Mr. Mulryan, can I take you to page 11 of your witness statement - which is 013 on the system here - and it just gives an overview of Ballymore's borrowings at the end of September 2008 or an estimate thereof, because of the management accounts that you had at that time, and it shows total indebtedness of ... of just under €2.4 billion, of which Anglo Irish Bank accounted for 50%, pretty much. Can you explain the background as to how Ballymore became so dependent on one bank, Anglo Irish Bank, as the source of funding for the projects that you were involved in?
Mr. Sean Mulryan:
Well, we had a long relationship with Anglo Irish going back ... going back 20 years. So it had been a very successful relationship and that ... that's probably how it developed. There was a serious trust there and they liked doing business with us and, in hindsight, we shouldn't have done that because we should have spread into international banks. But the Irish banks were ... we were working very well with them and long, long, successful period of time. We had no issues over that 20 years, so it was probably ... that's what did it really. We weren't getting any special treatment from them but just everything was working and we just kept the model moving along. So there was-----
Michael McGrath (Cork South Central, Fianna Fail)
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And was their process of loan approval similar to the other banks in your experience or did you find it easier to get approval in principle if you had to make a quick decision on investing in a project? Were there any differentiating features between Anglo's approach and the other banks in Ireland that you would have dealt with?
Michael McGrath (Cork South Central, Fianna Fail)
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Or was it just a relationship you built up?
Michael McGrath (Cork South Central, Fianna Fail)
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You did.
Mr. Sean Mulryan:
-----with the banks and if anything, Anglo were very diligent. I could give an example of one particular loan which they ... it was difficult to get them to finance a major project in London and we agreed that to get it over the line, we would sell to 50% of the product at 20% deposits to underpin the project and we went through the usual due diligence.
We signed the approval, subject to selling 50% of the properties at 20% deposits but they sent a director - a senior director - of the company to ... to Hong Kong and spent three days in the sales centre standing over the sales ... standing over the sales, watching sales and what we were discounting to get our target of 50% sales. So very, very ... at that particular time, serious due diligence. And serious hands-on, in the early days.
Michael McGrath (Cork South Central, Fianna Fail)
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And typically, how long would it have taken to get approval in principle for funding for a project that you were looking to promote? Even verbal ... a verbal assurance that, yes, funding will be forthcoming? Are we talking days, weeks?
Michael McGrath (Cork South Central, Fianna Fail)
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How long? Never?
Michael McGrath (Cork South Central, Fianna Fail)
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Before you'd have any indication from the bank?
Michael McGrath (Cork South Central, Fianna Fail)
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Yes.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes, well, what I'm asking is the yes or no part, after you make the approach to the bank; how quickly would you establish whether there was a strong likelihood that that bank was going to finance a project?
Mr. Sean Mulryan:
Well, it certainly wouldn't be instantly or two or three days, that's for sure. So, I would say you ... probably we would get the answer of, yes, they're interested - two weeks - and then six weeks to get all the ... all the work done to get it to the stage to go to credit committee.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. By my calculations, Mr. Mulryan, of the €2.4 billion, give or take, that Ballymore owed in September 2008, almost €2 billion of that was owed to banks that ended up in NAMA the following year. You close your witness statement by saying, "In the case of Ballymore and NAMA's effectiveness, history will show that NAMA was effective in ensuring that monies borrowed were repaid." So do you wish to reveal to the inquiry how much of that near €2 billion owed to NAMA will Ballymore have repaid?
Michael McGrath (Cork South Central, Fianna Fail)
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100%?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. The issue of the fact that 90% of the moneys owed were owed to Irish banks - and you address that as a weakness as such, in ... or a mistake in terms of the model that you pursued - how is it that ... given that you were so successful in the London market in particular, and one would imagine the large UK banks would be knocking on your door and wanting to get involved in providing funding for these developments, how is it that you reverted in almost every case to the Irish banks, who ended up funding 90% of your developments, the vast majority of which were actually abroad?
Mr. Sean Mulryan:
Well, that's the way the process started and it was more loyalty than anything else because when I went into London in 1991, London was very, very ... it was going through an extraordinary recession at the time. And, at that stage, you know, Anglo supporting me there from day one, where another bank ... none of the English banks, because I'd no track record there. So it was more loyalty than anything else, I would say, that we stayed with them. It was a mistake not to have spread it into the bigger international banks.
Michael McGrath (Cork South Central, Fianna Fail)
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And did you have such opportunity to spread that business?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Again, in September 2008 Ballymore owed Irish Nationwide €288 million. Can you just elaborate on how you would have built up such business with a building society which traditionally was there to help people on modest incomes to purchase a house? Can you elaborate on how you developed such strong business links with Nationwide?
Mr. Sean Mulryan:
Well, it was '92 when we done our first joint venture with Nationwide - 700 houses in Lucan. And that model started from where Nationwide would be a partner.
So, Nationwide would put up all the money, charge an interest rate of about 2.5% over the Libor and - which would be normal banking - and then, for taking ... putting up all of the capital, they would take 50% of the profits. And that model was extraordinarily successful for them and then we moved forward. So, we done the 700 houses in Lucan, then we moved to London. They done, continuously, projects ... on the same basis, the same model, and right through into the 2000s. We done many, many projects on that model and from Nationwide's point of view, it was hugely successful. They not alone got their interest rate, they made a lot of profit, and, even, right up to right now, with the ... the loans being transferred to, to NAMA, there isn't one Nationwide joint venture that hasn't made a profit on the par debt, over the par debt, in that 20, 21, 22.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. So, when, when we hear from NAMA, as we have heard in this committee, and other committees of the House have heard from NAMA, about poor loan documentation - not specific now to Nationwide, but generally, in the, the loans they came across from the participating institutions - poor loan documentation, cross-collateralisation, security not being properly pinned down legally, you, you present a different picture of your experience with the banks in Ireland, that the process you submitted appears to have been quite, quite thorough and comprehensive.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, on the issue of the amount of equity in, in projects, you, you address that issue on, on page 16 of your witness statement, and you say, "Ballymore ... utilised a range of funding structures, from 100% equity funded, to 100% debt funded (when available) to a loan to value range of anywhere from 60% to 90%, with 80% being typically available during the period." Were 100% debt-funded projects always a feature of, of the banking system, in your experience of dealing with them over the last couple of decades?
Michael McGrath (Cork South Central, Fianna Fail)
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And they took 50% of-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----the profits.
Michael McGrath (Cork South Central, Fianna Fail)
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And was that the first of its kind in the Irish banking system that you're aware of?
Michael McGrath (Cork South Central, Fianna Fail)
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'92.
Michael McGrath (Cork South Central, Fianna Fail)
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And did they persist with that model in-----?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. And, for the other banks you say that 80% would have been typically available during the period, 80% debt finance for a project. Was that the Ballymore experience?
Michael McGrath (Cork South Central, Fianna Fail)
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70%, 80%. And where equity would have been put in by Ballymore, would that have been in the form of cash or would it have been unrealised equity gains from other developments, for example? This was a point that NAMA made, again, to the inquiry.
Mr. Sean Mulryan:
Well, it varied depending on, on the size of the development, you know, it varied. On a lot of developments we put in cash, and when we didn't, when the cash wasn't available and there was equity, we done some cross-guarantees from other developments. For instance, we would normally put in, as late as 2007, one of the banks ... one of the big loans was about €185 million, in Battersea, and we put in €65 million cash in 2007, and then the bank put in the remainder, which was approximately €120 million, €125 million. So that ... so that was ... that's what we did on that particular one as late as 2007.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Were personal guarantees a feature of your borrowings?
Mr. Sean Mulryan:
They were up to 1990 and then I had no personal guarantees from 1990 forward. But, then when the crisis ... when we, we had the crisis in, in 2008, I signed a personal guarantee, just, late 2008, just to, to get the working capital for the business and to keep the business going. So, I went back into personal guarantees after 15 years.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, and prior to that it had been 1990 was the-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----the last one that you did? And in the intervening 18 years or so, is it that the banks weren't requesting personal guarantees from you, or that you were resisting attempts by the banks to secure personal guarantees?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. You say in your statement that interest roll-up facilities were frequently offered by the financial institutions between, say, 2001 and 2008, and that Ballymore would always have requested interest roll-up facilities over the term of the loan. So can you explain that feature of a loan arrangement? And where would it be most suitable that during the, let's say, the development phase, the construction phase, before a rent roll income starts coming in, or before you get any sale proceeds from selling completed units, can you explain how that would work in practice?
Mr. Sean Mulryan:
Well, it's the only way the model works if ... and you put in your equity, it's not like investment property, whereas the income will pay the interest. There is no income until you start completing your products, completing your apartments into your income, and that's when the interest roll-up starts to ... you start to pay your interest, at the end of the project. And that's a model that's done worldwide in property development, and even today, across the world and in Asia, it's the exact same model.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. The evidence that we have heard, as an inquiry, is that that interest income, while not being actually received while it's being rolled up, was being recorded as income by the banks and the loans were deemed to be fully performing because they were acting in accordance with the loan agreement because no repayments were due. And, of course, when the crash came then, the full extent of the picture subsequently emerged, and that's why, I think, there is some focus on the issue of interest roll-ups as a feature of these loan agreements. But you're saying they were common practice-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----and that the model wouldn't------
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. How many companies were there in the Ballymore Group? Because you indicate that ... if I'm reading your statement correctly, that there was a separate corporate entity for every project.
Michael McGrath (Cork South Central, Fianna Fail)
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For each development. So at any point in time, how many companies would you have had------
Michael McGrath (Cork South Central, Fianna Fail)
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Over 20.
Michael McGrath (Cork South Central, Fianna Fail)
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And they would all have had the same parent company? They would all be sitting within the Ballymore Group?
Michael McGrath (Cork South Central, Fianna Fail)
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Can I take you to the issue of political donations, Mr. Mulryan, which is dealt with on page 18 of your statement? And it's 020 on the system. So it shows donations to public reps, or parties, from the 2001 to 2008 and, by my calculations, the amounts add up to about €128,000 over eight years. And there's a breakdown by party, and it show Fianna Fáil receiving 55.5% of donations. Can you explain why Fianna Fáil received so many donations? Was it because of any leaning you might have had yourself politically, because the party was in power, or to strengthen the Oireachtas? Can you just------
Michael McGrath (Cork South Central, Fianna Fail)
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-----rationalise that?
Mr. Sean Mulryan:
It's ... I would say they're the biggest party, probably, and probably they had a bigger campaign on fund-raising. I would imagine that it has ended up 55-19, but there would be no particular reason that we would be concentrating on that, because it's over seven or eight years, and different outings and different functions. So, it's cross-party and it's all documented.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. And your group also supported Fine Gael, PDs, Labour, but to a much lesser extent, and-----
Michael McGrath (Cork South Central, Fianna Fail)
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Sure.
Michael McGrath (Cork South Central, Fianna Fail)
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And why would you support political parties, or public representatives?
Michael McGrath (Cork South Central, Fianna Fail)
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And did you ever feel that you gained influence for your business by supporting politicians or parties financially in this way?
Michael McGrath (Cork South Central, Fianna Fail)
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Why would you say that?
Mr. Sean Mulryan:
I don't think it does ... I don't think a politician ... when you're selling homes and your business is ... is working and selling homes and working a business, I think sometimes it can be more negative than positive to be associated, because of the media and because of perception. So, I think it's negative.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Can I ask, Mr. Mulryan, in the pre-crisis period, did you or others in Ballymore believe at any time that a property bubble was in the making? Did you at any point see what was coming and start pulling back from investing in the Irish housing market, for example?
Mr. Sean Mulryan:
We were very negative in Ireland for a long period of ... from 2002 to 2007 because we felt that land prices were getting very expensive. We knew in the UK that there's 60 million people and they had ... equally the population in the UK was growing at the same rate per head of capita as the Irish and whereas the UK was 250,000 houses a year and they were getting about 180 ... Ireland with 4.5 million people, producing 90,000 houses a year, you didn't need to have too much ... you didn't need really to get into a lot of details to know there was something wrong. So, we started to do our own research and we did it every year, more hands on. We all ... how we knew that there was 30,000 houses being built in 2006 that wasn't necessary, just from our own research. So, we were ... we saw oversupply very early and that's why we didn't really engage seriously. 80% of our business at that time, in our land acquisition, was London. We done a certain amount in Ireland over that period just to keep our team going. We had a very good team for 20 years and we always wanted to have a certain activity in Ireland to keep our people employed, so we bought some land, but not a lot, to keep it ticking over. But we were negative very early on-----
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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And did you believe there would be a soft landing; that the property reductions would be 10%-20%, as opposed to 50%-60%?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. On the issue of the valuation process that banks would have undertaken, this is an issue the Central Bank looked at after the crisis and they said credit institutions were often negligent and imprudent in the manner in which they requested property valuations, so my question is, did you observe any difference in the rigour applied to valuations sought by Irish banks as opposed to non-Irish banks, and I know you dealt principally with Irish banks?
Michael McGrath (Cork South Central, Fianna Fail)
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The valuation process by ... by banks, yes.
Michael McGrath (Cork South Central, Fianna Fail)
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The valuation, valuing security and-----
Michael McGrath (Cork South Central, Fianna Fail)
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Yes.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Finally, Mr. Mulryan, overall now, when you reflect on what happened, do you believe that Ballymore Properties was a victim of the banking crisis or a contributor to the banking crisis?
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you. Thank you, Chair.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Senator Susan O'Keeffe.
Susan O'Keeffe (Labour)
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Thanks, Chair. Mr. Mulryan, if I can just go back a moment to the joint venture arrangement you had with INBS, was that vehicle called Clearstorm-----
Susan O'Keeffe (Labour)
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-----or were there several vehicles?
Susan O'Keeffe (Labour)
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Okay. And would-----
Susan O'Keeffe (Labour)
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What ... how does it change the relationship between someone like you and a financial institution if, instead of their lending to you for your project over there, they're actually right ... part of the project and have a share in the profit?
How does that change the relationship, do you think, if, indeed, it does?
Susan O'Keeffe (Labour)
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How ... when that relationship started, had that been your experience up until then that financial institutions were in a position to be in joint ventures, if you like, or were they very much more the other model of, "Here's the money and come back when you can pay it back."?
Mr. Sean Mulryan:
No. That model was huge in the UK for 30, 40 years and in New York and in all the big places. Around the world, that model has been the way major projects has been ... has been funded on that basis ... is the 50-50 split of the profits and the institutions putting up all the finance.
Susan O'Keeffe (Labour)
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Could it be argued that the financial institutions become speculators of a kind, do you think?
Susan O'Keeffe (Labour)
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Is that what financial institutions ... is that what we understand them to do, to take risks?
Mr. Sean Mulryan:
Well ... I can't ... I mean, their business model is their business and they take risks. No matter who you lend to, I'm sure there's a certain element of risk. So for ... I mean, they're taking more risk for a bigger reward. I think that's their ... that's what those people do. And it's still ... it wasn't first ... Ireland wasn't the first to have done ... or Nationwide ... I mean, that's been in ... that's the ... for a huge number of the private developers in London, that's the way they've been funded for 35 years.
Susan O'Keeffe (Labour)
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If you look at what we're doing here ... is discussing the banking crisis and the financial crisis and it wasn't just here it was in other countries, do you think its at all the case that those banking institutions, financial institutions, that came into that risk arena have contributed, along with yourselves, to the banking crisis that we found ourselves in?
Mr. Sean Mulryan:
I mean, Nationwide's experience with Ballymore is there was never a loss on any project in 22 years. Okay, so they made money consistently but that didn't happen on a lot of other situations with Nationwide. And I ... I can't speak for that but, you know, its all about who you put your ... you back, right. If you back people in the business that cares about it and has a lot of experience and really, really knows what their doing - like, there were many, many really good developers in Ireland - and then if you start doing the same with people who do not know their business, who aren't developers - but perceived to be, with no experience - and you apply the same model, you're going to have a problem. And that's what happened.
Susan O'Keeffe (Labour)
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And that's what happened?
Susan O'Keeffe (Labour)
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In the ... you listed there 11 banks with whom you did business - or 11 financial institutions - of which INBS was one. Would you have had similar joint ventures with all or some of the others-----
Susan O'Keeffe (Labour)
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-----or was it just them?
Susan O'Keeffe (Labour)
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And why then, given what you said, that these, if you like, joint ventures were available in lots of other countries the UK and the US, you've said, why then why the other institutions not engaging in this? Why was it just INBS, do you recall?
Susan O'Keeffe (Labour)
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Okay. Did you ever ask any other financial institution to engage in that kind of-----
Mr. Sean Mulryan:
I did actually. A site in Prague, in Wenceslas Square, that we acquired about ten years ago, Anglo, for the first time, done a similar model to the Nationwide model and the only one ever was done on that particular ... on that particular site. And they put up all the money and they took one third of the profits, but that was the only one I've ever done with Anglo and that. So they were ... at that stage, that was a first.
Susan O'Keeffe (Labour)
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Is it fair to say that you also did ... you had other arrangements with other property developers, as and when it was required, if you were interested in a particular development, you might ... you might get into a deal with some other developer? Is that fair enough?
Susan O'Keeffe (Labour)
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No, no. Not all the time-----
Susan O'Keeffe (Labour)
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Okay. And what would the purpose of that had been, when you did that?
Susan O'Keeffe (Labour)
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Okay. Did you have an Isle of Man business part to your whole business structure and, if so, why would you have had that?
Susan O'Keeffe (Labour)
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Is it tax efficient?
Susan O'Keeffe (Labour)
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On page 19 of your own statement, you talk about lobbying and you discuss that you always sought to communicate or engage with the public, elected representatives and so on. You say:
This consultation process was an open and transparent activity where each interest group lobbied for its own point of view. In many cases, Ballymore's point of view was taken on board.
So are ... can you recall, Mr. Mulryan, a particular instance of where your lobbying for something might have paid off?
Mr. Sean Mulryan:
Well, we always ... when we're doing major projects, we always make presentations to all the appropriate bodies from ... in the boroughs or in the local authority areas that we are ... so we present our ... our vision for the area and ... I don't know whether you call it lobbying but we ... and we engaged with the local ... the local residents as well, always do that. So that's part of our process always.
Susan O'Keeffe (Labour)
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And you're not able to recall a particular instance, for example, where you ... because you say that in many cases your point of view was taken on board. You can't give ... are you able to give us an instance of where that might have been successful?
Susan O'Keeffe (Labour)
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Deputy McGrath did raise with you the matter of relationships with banks and so on and you talked a bit about roll-up interest and so on. Were there other incentives that banks offered as time went by? Did you notice lower interest rate margins, interest holiday periods, or not?
Mr. Sean Mulryan:
No, no. I never saw it ... there was never really a major difference in the interest between any of the banks, that I would have seen anyway. It varied ... okay, on charges, the interest rate you can negotiate, but some of them with upfront charges, yes, can be high. You negotiate ... it's a matter of negotiation.
Susan O'Keeffe (Labour)
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And you would, of course, have negotiated.
Susan O'Keeffe (Labour)
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No, but, I beg your pardon-----
Susan O'Keeffe (Labour)
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-----I meant your company, yes. When Mr. Quinlan was here before us, on page 51 of his evidence, he talked about how he discovered that, in fact, it was the German banks who were making the loans to him. He said he hadn't realised that the Irish banks were, in fact, selling the loans. So he discovered that ... he said:
[W]e were paying the Irish bank 1.5% but her bank were only charging 0.5%. So the Irish bank were pocketing the 1% ... and our clients were losing out ...
And he said he then switched. So was that something that you were aware of at all, because you talked about how you kept most of your business in the Irish banks and perhaps it might have been wiser to have spread your business around?
Susan O'Keeffe (Labour)
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Yes. So were you aware of this selling of loans?
Susan O'Keeffe (Labour)
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No. Okay. And why ... so I think you said it was ... was it just that it became the way you did business, that you kept your business here and your ... your banking business here-----
Susan O'Keeffe (Labour)
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-----that you didn't ... that you didn't seek to go outside? Okay. When Mr. ... bear with me, when Mr. McCreevy was here, the former Minister for Finance, he said:
I personally am not close to any of the builders. I know lots of builders [I] know lots of tradesmen ... I know lots of accountants, I know lots of punters, I know lots of other kinds of people. I know lots of politicians, or I used to in any event.
How would you describe your relationship, if any, with Mr. McCreevy?
Susan O'Keeffe (Labour)
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And would he have been someone you might have invited to your home or to various events that you were hosting?
Susan O'Keeffe (Labour)
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Absolutely. In relation to Mr. Ahern, of course, the former Taoiseach, he said he ... "I don't believe that I, personally, had much interaction with property developers". Again, I'm wondering what your relationship with Mr. Ahern might, might ... might be or have been.
Susan O'Keeffe (Labour)
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Would you have been able, Mr. Mulryan, to ring them up if you wanted to ask them something? Because, you know, some people don't know politicians on that level and some people do.
Susan O'Keeffe (Labour)
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Okay. I know that, obviously, what your business now, we're not really discussing but I ... but you have recently been in China with Mr. Ahern, isn't that right? Well, relatively recently, I'm sorry. In the last number of years.
Mr. Sean Mulryan:
That's about four years ago when they were on a commission, a trade commission in Anhui in China and, at the same time, I was in China. It was the time of NAMA and I was trying to raise funds to exit NAMA at that period. So I got a meeting with the chairman of CIC of China and his team to put a proposal to raise our funds to exit NAMA very early. And at that time as well we had been approached the Chinese in London. And the ambassador ... they were doing a new city in Anhui, and they were seeing what was being done in Europe - and they would like us to do the master planning, and help them with a European designed city. So I met Mr. Ahern there and he joined me at that promotion but we didn't go ahead with that because we had to commit to our four years with NAMA or five years with NAMA so we agreed with NAMA to withdraw from the Chinese venture and concentrate on London and working our debt through and take on no new projects. But I was disappointed with the ... it was a huge opportunity in Anhui in China but we decided to withdraw from that and-----
Susan O'Keeffe (Labour)
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Did you know, or have any relationship with, Mr. Brian Cowen, again the former Taoiseach and former Minister for Finance?
Susan O'Keeffe (Labour)
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And so again, obviously, you'd invite him to various events?
Susan O'Keeffe (Labour)
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So, obviously, the reason I'm asking, Mr. Mulryan, is that a lot has been written about developers and politicians and their relationship and, you know, many people in the country don't have a relationship with politicians at all and they wonder how it happens that developers become close and, of course, I think it's fair to say you were also in the Galway tent. Is that right?
Susan O'Keeffe (Labour)
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Yes. So would you have had a similar relationship with politicians across all the parties or was it just these politicians that we've spoken of?
Susan O'Keeffe (Labour)
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Would you invite as many of them to your ... in the same way as the three that we've discussed?
Susan O'Keeffe (Labour)
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Do you believe that that allowed you any advantage, that relationship that you had with them, or not?
Susan O'Keeffe (Labour)
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Did you ever calculate, Mr. Mulryan, how much the various tax breaks and incentives ... did you ever make a calculation as to how much they might have benefited you, or did they benefit you?
Susan O'Keeffe (Labour)
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Urban renewal schemes and-----
Susan O'Keeffe (Labour)
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Well, that's, I mean-----
Susan O'Keeffe (Labour)
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Okay. Just to be clear again, in relation to the donations that you gave to various political parties - and thank you for listing them in your response - they were ... just to make sure, they were contributions made by your business, by Ballymore, is that correct?
Susan O'Keeffe (Labour)
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Is that correct? Would you ... did you ever, as Mr. Mulryan, make donations yourself personally?
Susan O'Keeffe (Labour)
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Okay. When you were dealing with Irish banks, again, in that, you know, the sort of ... I suppose, now 1999 say up to 2005 and so on, did you get any impression from them that they were in the pursuit of market share, or did you find that they behaved as they had always done, or was there any change apparent in the way they behaved, either with you or perhaps with other developers or builders or builders or property people that you might have known? Was it a subject of discussion among you?
Susan O'Keeffe (Labour)
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How was that clear Mr. Mulryan? How did you know that?
Susan O'Keeffe (Labour)
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Can you recall at any point when you said in your head "It's gone to another stage"? Was there a moment, it may not have been a defining moment but-----
Mr. Sean Mulryan:
-----and associates, when they became property developers and they were never property, they were only ... they were in different businesses and they were in the Civil Service, and they became property developers, and I knew them well and they used to come to me for advice, and they didn't ... I gave them advice but when they come back to me, "I changed my mind, I bought that site" and 100% finance available, okay. So, that was 2004 or 2005 and that was on a pretty large scale. Anybody could get money to buy a site and hope you got planning and sell it, or go building houses, or buy 20 apartments and hope it all worked out and get 100% finance. So that was the defining moment.
Susan O'Keeffe (Labour)
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So, to put it in the vernacular, it sort of became a free for all, where everybody thought they might make money too.
Susan O'Keeffe (Labour)
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And then ... and so ... at that point did that change your view of what you were doing in Ireland?
Mr. Sean Mulryan:
No, I was always a little bit worried it was overheating ... it was very, it was ... we were overproducing homes and any time that you're building and overproducing, oversupplying the market to the extent we were, you were going to end up with an extraordinary problem down the road.
Susan O'Keeffe (Labour)
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Did you ever share those thoughts about the overheating market ... if you like, the people now getting into property that perhaps shouldn't, did you ever share that indeed with any of your colleagues, friends or, indeed, with any of the politicians that we've discussed?
Susan O'Keeffe (Labour)
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Right, and did you ever get a response to that?
Susan O'Keeffe (Labour)
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You were as described as the kind of person who likes to go through the snag list and, again, I'm quoting so it may be ... is that a reasonable thing to say?
Susan O'Keeffe (Labour)
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You were described as the kind of person who himself likes to go through the snag list.
Susan O'Keeffe (Labour)
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No. But I think that point that this article was making was that you're a careful man, I think was the point they were making. That you like to pay attention to detail. The reason I was asking was I just wondered how if in the end, if that were the case, how did it come to pass that you ended with so much debt? If, or was it that-----
Mr. Sean Mulryan:
Well, I would say on my product and on business, that is the case. On the product ... delivering good product, making sure it's a very high standard and design, marketing ... everything to do with the product, absolutely hands-on. How did it get to ... probably on the financial side, you'd have to say, we would do it differently the next time.
Susan O'Keeffe (Labour)
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And if you were to define the key difference, because I'm sure that, I mean, might take quite a long time, but is there a key difference that you would do differently the next time?
Susan O'Keeffe (Labour)
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What was Peter Bacon's role in Ballymore?
Mr. Sean Mulryan:
Well, from '91 or from 2001, Peter used to do the ... different areas where we wanted to do business, like London and Europe, he would do all the economic studies for me and the demographics and the supply and the demand, government policies, before we'd decide to invest, and he done that for years. And in 2005, whereas we were very active in London, I needed to strengthen my team so I done a three-year contract with him to go to London, operate as executive chairman to strengthen up my team and hire some new people. And the contract finished in 2007.
Susan O'Keeffe (Labour)
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Deputy McGrath asked you whether you thought that you were a victim of what had happened and you said you thought that you were. Do you understand why people, members of the public, might not share that view and might say otherwise, might say that you contributed, along with others, to the state that we find ourselves in and that ... and that ... if you like, you are I trust still doing business, you've said that you're going to be repaying your debt to NAMA and so on and that you know, you have paid ... you have paid no price?
Susan O'Keeffe (Labour)
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But do you believe you made any contribution to the crisis that we have come through?
Susan O'Keeffe (Labour)
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But the paying back of the debt takes a period of time, where, you know ... beyond, whereas the broader members of the public found themselves out of work, you know, and all the other dilemmas that we've seen, people emigrating and so on. For them that was an immediate outcome and they would say, well for you, that wasn't the case - you didn't ... you didn't lose your job, lose your home, lose your-----
Mr. Sean Mulryan:
Well, that's not ... not true. I mean, all my executives took a 25% and 30% reduction in their wages, rolled up their sleeves for seven years and sacrificed everything in time and to get through this and get our mountain of debt taken down and paid back which was huge, €2.2 billion. So that's what we did, so everybody ... we all sacrificed our lives and we spent ... no social lives, no holidays, we just worked around the clock for the last seven years.
Susan O'Keeffe (Labour)
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Finally, if I just might ask you one question that ... it was actually mentioned in one of the books, Breakfast with Anglo, which you may or may not have seen, and in it he just mentions - Simon Kelly - he just talks about, I suspect you didn't do this because you've said ... that ... people ... some people separated-----
Ciarán Lynch (Cork South Central, Labour)
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Have you seen this, Mr. Mulryan, have you?
Ciarán Lynch (Cork South Central, Labour)
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Just we need to allow flexibility for that.
Susan O'Keeffe (Labour)
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Sorry, and if you don't know it's fine-----
Ciarán Lynch (Cork South Central, Labour)
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In that regard, Mr. Mulryan, just to advise you, if you are unfamiliar with it and you don't feel comfortable answering because it's unpresented material you can refrain from replying.
Susan O'Keeffe (Labour)
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Absolutely, it's a practice rather than a ... it's the idea of separating the property asset from the tax allowance and selling it on. But I suspect that, because of what you said before, you didn't do that much business in that area?
Susan O'Keeffe (Labour)
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No, so thank you. That's fine. Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Can I deal with a couple of matters with you there, Mr. Mulryan, before we move on to the other questioners, with your permission? Mr. Mulryan, from your perspective, do you regard the valuation methodology applied in the pre-crisis period as having been sufficiently robust and representative? And maybe you could give us your views as to whether there were deficiencies or not in the process at that time.
Ciarán Lynch (Cork South Central, Labour)
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In the lending process, or not, at that time?
Ciarán Lynch (Cork South Central, Labour)
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In your own experience, yes.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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What do you mean by 70-30?
Ciarán Lynch (Cork South Central, Labour)
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Okay. And there has been some suggestions that, in some instances, there was potential for no equity whatsoever.
So let's say a person creates one development, with the level of property inflation that was taking place at the time, the initial loan on that would be well exceeded by the new valuation on it, creating a position of equity in which another loan could then be drawn upon the basis of that equity, and that would become a very compounded situation, whereby several developments in different stages of completion, operation, construction, so forth, could be in place without there actually having ever been, in 70-30 terms, any down-payment of cash, but the percentages was met through equity. Would you be familiar with a lending practice like that?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Would there have been ... would you have been familiar with loans that would have been issued on the basis that was no material cash deposit?
Ciarán Lynch (Cork South Central, Labour)
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Other than equity.
Ciarán Lynch (Cork South Central, Labour)
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And would there have been instances where that equity could have been used as cross-securitisation-----
Ciarán Lynch (Cork South Central, Labour)
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-----and that would have been to different financial institutions.
Ciarán Lynch (Cork South Central, Labour)
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Okay, so development X, equity would be used for one loan or a number of loans with one institution, but they wouldn't be with a number of institutions.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Do you have a view on whether the valuation process in the pre-crisis period influenced lending practices in the Irish banks?
Ciarán Lynch (Cork South Central, Labour)
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Yes, yes.
Ciarán Lynch (Cork South Central, Labour)
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In your construction field, Mr. Mulryan, did you develop retail or commercial units?
Ciarán Lynch (Cork South Central, Labour)
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Okay. And on the basis of, let's say, retail lending, that you'd go to a financial institution for ... to acquire funding to get one going, was the issue of upward-only rent reviews and how that would actually impact with regard to how the lending model would be dealt with? So you're going to build a shopping centre, it'll have 20 shopping units, the entry rent is going to be the set rent, and because of only upward-only rent reviews, it can only go up from there, there was an assurance that the rent that would immediately come in at current market values would never be dipped below. Was that ever discussed with regard to your retail financing?
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. If I can maybe just bring you back to your statement, Mr. Mulryan, and I'll just bring it up on the screen there, I think it's page 19 of 20 there. And you share with the committee your comments in regard to NAMA. I think it's just coming up there, yes. It's just that lower part of the page. If I can just take the two paragraphs of that, there, Mr. Mulryan. It says:
The establishment of NAMA in the budget 2009 was done at a time of great panic. However, the uncertainty was prolonged. It took nine months for the legislation to be enacted and a further four months for Ballymore’s loans to be transferred into NAMA. This was a very difficult period for Ballymore, especially as most of its activity was in the UK, particularly London, and the market there had little understanding of what was happening with the banking crisis in Ireland.
The reputational damage that Ballymore endured during this period was compounded by the fact that NAMA took over everything related to Ballymore - all loans, not just the poorer performing loans but the good loans and unencumbered assets as well.
Can I ask you maybe to elaborate on the effects of this time lag, and how it impacted upon your business?
Mr. Sean Mulryan:
Well, it meant ... but I mean, I understand why. But it meant that the business didn't operate for probably 12 months; it was just absolutely stopped. And from the point of view of some of our projects in London that we would have a lot of our sales sold with 20% deposit, we had to stop whilst all that was happening. But then I understand the difficulty of handing over such an enormous amount to a new entity, and they had to get their heads around it. It was obvious that this had to happen and it was going to take time for it to bed in. So, even though that's what happened, I can understand why it happened.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you very much. I just propose we take a five-minute break, if that's okay, thank you very much, and we'll resume in five minutes.
Ciarán Lynch (Cork South Central, Labour)
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I'm proposing that we go back into public session and, as we move on today, I just want to clarify one matter that Senator O'Keeffe raised with you, Mr. Mulryan, and then I'll invite Deputy Eoghan Murphy in. Mr. Mulryan, it's just a follow up to a question, it's more of a point of clarification than anything else. You said ... as to which Department Ballymore would have sent their views with regards to overheating to, was that the Department of Finance, or where was it?
Ciarán Lynch (Cork South Central, Labour)
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Okay. All right. Would these reports have been written by Mr. Bacon or by another individual in Ballymore?
Ciarán Lynch (Cork South Central, Labour)
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Okay, and they were the corporate view of the company going to the Department anyway, so.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you. Deputy Eoghan Murphy.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman, and thank you, Mr. Mulryan. A lot of the areas I wanted to discuss have already been raised by other members of the committee, so if I go over old ground, just let me know and I'll move on. On page 5 of your written statement you talked about, in paragraph 4, "Whether stated in the Loan Agreement or not, the financial institution generally required a high level meeting which senior management attended [and it would happen] on an annual basis, to review the past year [to look at] the progress on [the] financed assets, general business discussion about the wider economy and real estate sector and Ballymore’s future intentions". So, these annual meetings which were in the loan agreement, or not, would this be, kind of, a half-day meeting?
Would it be a lunch meeting? Can you just tell me a bit about those kinds of meetings?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And at these meetings, would the banks, as they talked about Ballymore's future intentions, would they be pitching you for business? Would they be suggesting extra credit facilities or a particular site?
Mr. Sean Mulryan:
Not really, no, not really. It'd be my experience of the banks they would be looking at the overall ... their overall commitment to Ballymore and how we're performing, and looking at the overall, even though everything would be ring-fenced, the individual bank would be looking at their loan book and how are we going. And many times at those meetings they would have told us that, you know, they weren't going to have any more exposure to Ballymore.
Eoghan Murphy (Dublin South East, Fine Gael)
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They were going to have no more-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Sorry, more or no more exposure?
Eoghan Murphy (Dublin South East, Fine Gael)
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No more.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. So on none of those occasions, none of the banks that you did business with-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----came to you or suggested to you that they had something to offer that you weren't looking for?
Eoghan Murphy (Dublin South East, Fine Gael)
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And in those discussions, did you ever get a chance to express your own concerns about what might be happening in the property market in Ireland or the types of lending that banks were pursuing, given that, as you said earlier, it was your business to know what was going on?
Mr. Sean Mulryan:
Well, I think that ... through that period all our ... I wouldn't have very much discussions with the bank on the Irish operation. We were buying a lot of land in London through that period, so my meetings would be ... would be ... with those banks would be in London, and we'd be talking about, about the operation over there, because that was, at that stage, in the 2001 to 2008, that's where we were putting our funds and that's where we were acquiring land and that's where all the focus was.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Moving on with the page, to the next page of your statement, you talked about, under section 5, in sub-paragraph 3, "Rapid increased supply of bank lending to these potential property developers", these are the new developers that came on line. Did you notice a change in your relationship with the bank? Did you notice a change in the culture in the bank?
Eoghan Murphy (Dublin South East, Fine Gael)
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What was that change?
Eoghan Murphy (Dublin South East, Fine Gael)
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Well, with some banks. What was the change that you noticed?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And-----
Eoghan Murphy (Dublin South East, Fine Gael)
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But did you ever express concern to the banks then about these 1,000 new property developers and the fact that they were chasing the business, and any concerns you might have had as to their suitability for ... as borrowers?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And was it easier for you to get credit or financing or loans at the time as a result of any change that you noticed in the banks at the time, whether to old or new lenders?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And would you have been aware of anyone that you dealt with in the banks making commission off the lending that they were giving to your company? No? Okay. And then, just on page 7 of your opening statement, you talk about the pitches you made for certain sites.
Eoghan Murphy (Dublin South East, Fine Gael)
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The bids. You learned that one was 35% off the pace at the time. So, in one way, I suppose, that reflects what you thought the value was of the land, but at the same time you still made the bid. Can I ask why?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. But Jurys and Burlington?
Eoghan Murphy (Dublin South East, Fine Gael)
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So, the bank approached you over the Burlington site?
Eoghan Murphy (Dublin South East, Fine Gael)
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But, sorry, just a moment ago I thought you told me that the banks never approached you?
Eoghan Murphy (Dublin South East, Fine Gael)
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I don't understand the distinction.
Eoghan Murphy (Dublin South East, Fine Gael)
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This is a private bank or private-----
Eoghan Murphy (Dublin South East, Fine Gael)
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But part of the bank?
Eoghan Murphy (Dublin South East, Fine Gael)
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I mean, can we not deduce from that that it is the bank then approaching you-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----to go into a deal?
Eoghan Murphy (Dublin South East, Fine Gael)
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It is?
Eoghan Murphy (Dublin South East, Fine Gael)
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So, in relation to my earlier question when I asked you if any of the banks ever approached you about new lending, or about, you know, investing in a particular site-----
Eoghan Murphy (Dublin South East, Fine Gael)
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----the answer to that question would be?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And this suggestion was put to you by the private banking in-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----in one of the banks?
Eoghan Murphy (Dublin South East, Fine Gael)
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And to just ... to go back to the earlier line of questioning then, did this happen often?
Eoghan Murphy (Dublin South East, Fine Gael)
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That was the only time it happened?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. You knew at the time that the market was overheated and that there was too much debt in the real estate sector, but you still went and bid?
Eoghan Murphy (Dublin South East, Fine Gael)
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Why?
Mr. Sean Mulryan:
Oh we ... I suppose, in hindsight, we shouldn't have done that but we felt that we were ... we ... on that particular ... we had very little in Ireland and we are ... we have an Irish operation and we like to keep a certain activity here. And, I suppose, this particular one attracted us because the private banking was putting up the money and we weren't taking any financial risk.
Eoghan Murphy (Dublin South East, Fine Gael)
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You weren't taking any financial risk?
Eoghan Murphy (Dublin South East, Fine Gael)
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So, how did that work?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. So it was an easy call then for you to make, if there's no risk involved-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----only an upside?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, so, if there's no risk involved, why not up the asking price? There's no risk to you, so you've nothing to lose and, if you bid a higher price, you could potentially gain?
Eoghan Murphy (Dublin South East, Fine Gael)
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So why not ... why bid low? Why not bid high?
Eoghan Murphy (Dublin South East, Fine Gael)
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I don't understand.
Eoghan Murphy (Dublin South East, Fine Gael)
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Yes
Eoghan Murphy (Dublin South East, Fine Gael)
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Yes.
Eoghan Murphy (Dublin South East, Fine Gael)
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Yes.
Eoghan Murphy (Dublin South East, Fine Gael)
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But I thought you said there was no risk to making the investment on your part?
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.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. So, given the overheating that you were aware of in the market, and there's too much debt as well in the real estate sector, and it was the first time an approach like this had been made to you-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----did that concern you at the time?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And just on page 7 as well, in your statement, you say:
Ballymore sought to manage its multi-bank borrowing by: (1) Availing of credit from various providers so as to mitigate any level of dependence or overreliance on a specific source ...
Were you successful in this?
Eoghan Murphy (Dublin South East, Fine Gael)
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Were you successful in availing of credit from various providers so as to mitigate any level of dependence or over-reliance on a specific source?
Mr. Sean Mulryan:
Probably not, when we see where we have ... with NAMA, it obviously ... obviously not.
Eoghan Murphy (Dublin South East, Fine Gael)
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Yes. I mean, just because, looking at page 11 in the table that you provided, and it's very helpful. I mean, the majority of your lending is with one institution, Anglo Irish Bank. So how did it come to be that the ... I suppose the policy of Ballymore was to spread its risks across banks in terms of its borrowing, but then it ended up with having 50% of its borrowing from one Irish institution?
Eoghan Murphy (Dublin South East, Fine Gael)
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How did that happen? I mean, was there a breakdown inside Ballymore in terms of your internal lending strategies, your risk procedures?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. You also said that you sought to manage your multi-bank borrowing by - point 2 - "Presenting opportunities to several providers seeking the most competitive commercial terms." If we again look at the table on page 11, it would appear that Anglo Irish-----
Ciarán Lynch (Cork South Central, Labour)
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Be mindful of the sensitivity of the commercial information, like ... that-----
Eoghan Murphy (Dublin South East, Fine Gael)
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I'm just using information that's been provided, Chair.
Ciarán Lynch (Cork South Central, Labour)
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Sure.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thanks.
Ciarán Lynch (Cork South Central, Labour)
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I just need to, kind of, put that in the space, Deputy.
Eoghan Murphy (Dublin South East, Fine Gael)
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Again, on page 11, Anglo Irish Bank seem to have always secured the most commercial ... competitive commercial terms for you.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. But can I ask just then, as a final question, would you ever ... have ever borrowed from Anglo, even if it wasn't on the most competitive ... or most competitively commercial terms available?
Eoghan Murphy (Dublin South East, Fine Gael)
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You probably would. Why?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And just my final question then, would you ever have sought to borrow from an Irish bank, been refused and gone to its subsidiary in the UK to borrow or vice versa?
Eoghan Murphy (Dublin South East, Fine Gael)
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No. Okay. Thank you.
Ciarán Lynch (Cork South Central, Labour)
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I don't know if-----
Eoghan Murphy (Dublin South East, Fine Gael)
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It's the answer to the question. It's fine, Chair.
Ciarán Lynch (Cork South Central, Labour)
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Okay. All right, thank you very much. Okay. Deputy Joe Higgins.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Mulryan, I'd like to explore with you, under one of the one of the terms of reference of the banking inquiry, 3(b)(ii), "relationships between State authorities, political parties, elected representatives, supervisory authorities, banking institutions and the property sector". Now, in your introduction, Mr. Mulryan, you say the land bank is the key to future business planning. And you say you have to have land in the pipeline and then you say, "this land must be developed in stages from completing the site assembly required, securing a feasible planning permission through to the marketing and eventual sales of homes". And, in relation to that, I wonder if you could give us a picture of how that's achieved and, perhaps, particularly in relation to ... in the 1990s you began to assemble what were known as the Charleslands near Greystones in County Wicklow. So was it a land bank of about 200 acres?
Joe Higgins (Dublin West, Socialist Party)
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Yes. And one of the most prominent auctioneers locally, Dooley solicitors ... or auctioneers, brought the land to you, your partner was another developer, Mr. Sean Dunne, and then you set about see ... getting planning permission. Okay. And in 2002 you got planning permission, register reference No. 14910, and 015318, and one of those permissions was for up to 1,500 homes. And what was going to go on the rest of the land?
Joe Higgins (Dublin West, Socialist Party)
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Okay. And you say in your statement "securing a feasible planning permission", but that site was landlocked and you needed Wicklow County Council to give permission to build roads through a 20-acre site that was owned by it, which was earmarked for social housing. So how did you go about unlocking that problem?
Joe Higgins (Dublin West, Socialist Party)
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Yes, but you needed a material contravention of the development plan for the county council-owned lands. I'm just wondering how a developer in that position deals with the council, how do you approach that issue ... to secure a material contravention, which is crucial.
Ciarán Lynch (Cork South Central, Labour)
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I just need you to be mindful, Deputy, of the overview that the relationship ... the business model and the banking crisis. I'd just be careful of commercial sensitivity here, okay? Continue.
Joe Higgins (Dublin West, Socialist Party)
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Yes. I'm ... speaking under a particular terms of reference-----
Ciarán Lynch (Cork South Central, Labour)
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I'm letting you continue on just ... are you moving on? I just want to let you know that-----
Joe Higgins (Dublin West, Socialist Party)
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-----it's relation to leverage, as well-----
Ciarán Lynch (Cork South Central, Labour)
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-----that guarded advice, Deputy.
Joe Higgins (Dublin West, Socialist Party)
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There was a vote for material contravention to secure roads in that land on 12 May and it was defeated. And then on 17 July ... can I refer to a public document, Mr. Mulryan? You're aware of this document.
Ciarán Lynch (Cork South Central, Labour)
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It has been provided to the witness, has it?
Joe Higgins (Dublin West, Socialist Party)
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Yes. This is an agreement dated 17 July and it's ... it's between you and Wicklow County Council. You're aware of this-----
Ciarán Lynch (Cork South Central, Labour)
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Mr. Mulryan, are you familiar with the document that has been provided to you?
Joe Higgins (Dublin West, Socialist Party)
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This is a public document in the planning section of Wicklow County Council, an agreement between Brambleglen Limited and Ballymore Contracting Limited, Sean Mulryan and Sean Dunne and Wicklow County Council, signed 17 July.
Joe Higgins (Dublin West, Socialist Party)
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Okay?
Joe Higgins (Dublin West, Socialist Party)
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You know the agreement I'm talking about?
Joe Higgins (Dublin West, Socialist Party)
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But, Mr. Mulryan, it's ... present when the official seal of the council of county Wicklow was affixed is a nominated member-----
Ciarán Lynch (Cork South Central, Labour)
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You're moving beyond the terms of reference now, so I need you to kind of move to a question or to make clear why you want to travel with this please.
Joe Higgins (Dublin West, Socialist Party)
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Yes, the point is, Chairman, that there's a document signed here by Mr. Mulryan, by Mr. Dunne, by a member of the council, a nominated member, Councillor Vance, and the country manager, which secures the road easements that the developers needs from Wicklow County Council. The point is, that according to section 183 of the Local Government Act 2001, that is a reserved function of the elected members but it was never brought to the elected members.
Ciarán Lynch (Cork South Central, Labour)
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Okay, sorry, Deputy, you're ... we're drifting into ... sorry, Deputy-----
Mr. Sean Mulryan:
I think it's the county manager that you should be talking to. I have no idea. I think it's the county manager who is the boss, who runs the council, who ... who has ... I can't do a material contravention. It is the manager that has to do that and the authorities. I can't influence them.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Joe Higgins (Dublin West, Socialist Party)
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But you were not aware that the elected members were not notified of this?
Ciarán Lynch (Cork South Central, Labour)
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Sorry, sorry, Deputy ... Deputy, I'll have to ... I'll have to bring you back from that space, okay. I really do.
Joe Higgins (Dublin West, Socialist Party)
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In, in relating to this issue, Mr. Mulryan, and how developers and local authorities interact, auctioneer, Mr. Dooley, for example, says that a meeting in his office to discuss this road problem was held in April. There was a councillor present, himself, and Mr. Dunne.
Ciarán Lynch (Cork South Central, Labour)
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We're drifting outside the terms of reference now-----
Joe Higgins (Dublin West, Socialist Party)
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Would that be ... would that be a normal way of-----
Ciarán Lynch (Cork South Central, Labour)
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-----I have to give Mr. Mulryan a bit of space here, Deputy.
Joe Higgins (Dublin West, Socialist Party)
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-----discussing the problems?
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Ciarán Lynch (Cork South Central, Labour)
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No, I-----
Ciarán Lynch (Cork South Central, Labour)
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Yes. Okay, and I'd ... what you call it, I would have to concur with your opinion, Mr. Mulryan, and it's drifting outside the terms of reference and you're free not to respond to that if you so wish.
Joe Higgins (Dublin West, Socialist Party)
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But ... sorry, Mr. Chairman, I don't want to be difficult, but why is it outside the terms of reference? I'm exploring the relationship between ... as I indicated at the beginning, between the State authorities, the property sector and elected representatives.
Ciarán Lynch (Cork South Central, Labour)
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I ... if you wish I'll just go through the ... just legal advice now. If you wish, I can go into private session ... or, just private session to deal with this, if you wish, Deputy.
Joe Higgins (Dublin West, Socialist Party)
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No, but let me just-----
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Joe Higgins (Dublin West, Socialist Party)
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I want to move on-----
Ciarán Lynch (Cork South Central, Labour)
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Okay, please.
Joe Higgins (Dublin West, Socialist Party)
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-----fairly quickly. But one further thing, Mr. Mulryan, is that Mr. Dooley says a further meeting was held in March 2003, that that meeting discussed all the possibilities of the access road, etc., and outlined drawings of how it could be resolved, that he attended that meeting, that it was in Dobbins restaurant-----
Ciarán Lynch (Cork South Central, Labour)
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I need a question, Deputy, please.
Joe Higgins (Dublin West, Socialist Party)
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-----in March and that you and Mr. Dunne-----
Ciarán Lynch (Cork South Central, Labour)
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I need a question, Deputy, that's in the terms of reference.
Joe Higgins (Dublin West, Socialist Party)
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-----and the councillor attended. Do you remember that meeting?
Ciarán Lynch (Cork South Central, Labour)
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I need a question.
Ciarán Lynch (Cork South Central, Labour)
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Mr. Mulryan, I just need to advise you that we're drifting beyond the scope of the terms of reference here.
Ciarán Lynch (Cork South Central, Labour)
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I'm not going to choose this moment to tell somebody not to answer a question but the prerogative and the decision to answer, that rests entirely with yourself, if you wish to or wish not to.
Joe Higgins (Dublin West, Socialist Party)
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Yes.
Ciarán Lynch (Cork South Central, Labour)
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Please, Deputy, without interruptions.
Joe Higgins (Dublin West, Socialist Party)
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The point, Mr. Mulryan, is-----
Ciarán Lynch (Cork South Central, Labour)
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Deputy, without interruption.
Joe Higgins (Dublin West, Socialist Party)
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-----would it be normal for ... or would it be appropriate, for someone from a major-----
Ciarán Lynch (Cork South Central, Labour)
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Deputy, please, without interruption there. Mr. Mulryan has indicated his position on the question. I can go into private session and we can have a long legal discussion around this but I don't want to be interrupting your time.
Joe Higgins (Dublin West, Socialist Party)
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No. But just in terms of the interaction between the local authority and the developers, the banking sector, etc., would it be normal for developers, or appropriate to meet with a councillor-----
Ciarán Lynch (Cork South Central, Labour)
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It would assist you, Deputy, if you ask a question.
Joe Higgins (Dublin West, Socialist Party)
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-----to discuss details, and then the councillor brings their proposal into the local authority in the interest of the developer. Do you think that's appropriate, or was it normal?
Ciarán Lynch (Cork South Central, Labour)
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You're outside of terms of reference there.
Mr. Sean Mulryan:
It would be appropriate to work with the local authorities if there's major developments to be delivered. I mean, somebody has to deliver them and you must work and co-operate with the local authorities and the local communities and deliver the infrastructure. And you can't do that without dealing with the authorities and the bodies in the authorities and negotiating.
Ciarán Lynch (Cork South Central, Labour)
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Maybe if I can just reshape the question for you, which I think ... I'll stop the clock for you, Deputy ... every local municipal authority in the country, Mr. Mulryan, would, on a five-year cycle, put together development plans. And that development plan would, kind of, identify areas of zoning; this would be residential, this would commercial, this would be development and so forth. As part of your business practice, would you have engaged with authorities to see where the development plan was going and you would look at your own business model in conjunction ... in line with how a development plan might be evolving over the five-year cycle?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Deputy.
Joe Higgins (Dublin West, Socialist Party)
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Yes. Just to move on quickly then. Then, Mr. Mulryan, in that site or any site, by any developer, when these problems are resolved for the developer and the planning permission is achieved, the price of the land would increase exponentially, would that be correct?
Joe Higgins (Dublin West, Socialist Party)
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In the period of the bubble that this inquiry is trying to look into, would the price of a site like that increase manyfold?
Joe Higgins (Dublin West, Socialist Party)
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I understand that, Mr. Mulryan, but in the Ireland of 2002 and 2003, if a site like that was purchased for, let's say, €20 million or €25 million, planning permission for 1,500 houses was secured, planning issues were resolved, would the price of that land then increase exponentially?
Joe Higgins (Dublin West, Socialist Party)
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By ... could you put a factor on it?
Joe Higgins (Dublin West, Socialist Party)
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Any rough-----
Joe Higgins (Dublin West, Socialist Party)
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Okay. Well-----
Ciarán Lynch (Cork South Central, Labour)
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Wrap up so, please, Deputy.
Joe Higgins (Dublin West, Socialist Party)
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I'll just put ... to finish the line. Just, I don't know, and unless you want to tell me how much you paid and then when you sold the land on to other developers, how much you-----
Joe Higgins (Dublin West, Socialist Party)
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You couldn't. Well, let's say for the sake of argument that ... and this is just for the sake of trying to illustrate a point in relation to housing particularly, that it went from €20 million to €100 million. That would mean that the price of a site, of the 1,500 homes, would go from €13,000 to €66,000. Do you think, Mr. Mulryan, as a major developer, that it's just and right that young people would then be paying that for the rest of their lives for the profits of banks and developers to-----
Ciarán Lynch (Cork South Central, Labour)
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Deputy, I'm going to have to interject there. The question is made, Deputy, and the intent of it ... I'm not too sure if Mr. Mulryan wants to-----
Joe Higgins (Dublin West, Socialist Party)
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Okay. But-----
Ciarán Lynch (Cork South Central, Labour)
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Deputy, I'm going to have to close it there, I really am. Deputy Pearse Doherty.
Pearse Doherty (Donegal South West, Sinn Fein)
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Go raibh maith agat, agus failte romhat. Going back to, just, one of our terms of reference in relation to relationships between State authorities, political parties, elected representatives and supervisory authorities, the banking institution and the property sector. Can I ask you in relation to your ... going back to your relationship with Mr. Cowen, the former Taoiseach, it was reported back in 2011, it says, "the Mulryans, who are famous for throwing lavish parties where guests such as Anglo Irish Bank's Sean FitzPatrick would mingle with Fianna Fail's Charlie McCreevy and Brian Cowen." Is that an accurate statement or not?
Pearse Doherty (Donegal South West, Sinn Fein)
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Is that an accurate statement or not?
Pearse Doherty (Donegal South West, Sinn Fein)
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That some of the parties that you have thrown, and you've mentioned that the Taoiseach would have been guests at those, and Charlie McCreevy, but would they have also included ... senior people from the financial institutions including Seánie FitzPatrick?
Ciarán Lynch (Cork South Central, Labour)
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Can you just quote the source of that there please, Deputy?
Pearse Doherty (Donegal South West, Sinn Fein)
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The source is ... it's by a ... the investigator editor of, I think it's theMail on Sunday, it's Michael O'Farrell, posted on 30 October 2011.
Ciarán Lynch (Cork South Central, Labour)
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Are you familiar with that, Mr. Mulryan, are you?
Pearse Doherty (Donegal South West, Sinn Fein)
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Well, the question is, outside of the post, the question is very simple. Did you throw parties where the, the former Taoiseach, Brian Cowen, or did you have entertainment or did you host events where Brian Cowen and Seánie FitzPatrick would have been in each other's company?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, okay, and ... they, they would be events where other guests would be in a ... in attendance.
Pearse Doherty (Donegal South West, Sinn Fein)
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And the types of parties that you run, without intruding, and I'm only looking at the relationships in terms of the sectors that I outlined. When the former Taoiseach and former Finance Minister were in attendance, would there have been individuals from the financial institutions? Would it be the norm that, that there would be key people from financial institutions in attendance? Were they on the guest list?
Mr. Sean Mulryan:
There was never the norm, I would do one sporting event every year and I might have 100 people there; neighbours, people from the sporting sections and a few ... and on some occasions ... one or two occasions, Seán FitzPatrick was there and a few occasions other people were there. I don't know how, I don't know at which times I can tell you that they were all there, I can't tell you that.
Pearse Doherty (Donegal South West, Sinn Fein)
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Of course, I, I can understand ...I appreciate that. In relation to ... what Senator O'Keeffe was talking about in relation to the delegation to China, which I think was led by the former Taoiseach, Bertie Ahern, if that's correct. You were in attendance there when he met the governor of one of the provinces, is that correct?
Pearse Doherty (Donegal South West, Sinn Fein)
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Who else was in attendance at that meeting?
Ciarán Lynch (Cork South Central, Labour)
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Now, we're kind of moving to the edge of the terms of reference-----
Pearse Doherty (Donegal South West, Sinn Fein)
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No, no, the reason I'm asking ... the question I'm putting to you directly was, was Des Richardson the, the person who instigated the Galway tent, the major fund-raiser for Fianna Fáil, was he in attendance at that, at that meeting?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. Do, what ... can you outline to the committee your relationship with Fianna Fáil's main fund-raiser, or the person behind the Galway tent? As he called it this week, I think it was his baby.
Pearse Doherty (Donegal South West, Sinn Fein)
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I think he said it was his baby, this, this week, so can you outline the relationship, did you have a relationship either personal or business relationship-----
Pearse Doherty (Donegal South West, Sinn Fein)
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With Mr. Richardson.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, and in relation to just political donations, just to make this clear, I think it was asked earlier on but just to focus in on this; in terms of ... outside to the parties, did you provide political donations to individual TDs or Ministers and did you also include their chief fund-raisers in relation to that, to the parties?
Pearse Doherty (Donegal South West, Sinn Fein)
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No. And did you ever purchase property or were the beneficial owner of property from either Ministers, TDs or ... the chief fund-raiser, in the form of Mr. Richardson?
Pearse Doherty (Donegal South West, Sinn Fein)
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No. Okay, can I ask you in relation to the ... on page 11, in terms of the debts that you have shown from the institutions, which was based on your 31 March 2009 accounts, which show a total of, it'll come up on the screen, it's on page 11 of your statement ... €2.378 billion of debts to the financial institutions. Can you inform the committee whether that is debts solely to Ballymore Properties or did you have additional debts that were private, outside of the company? And also if you can ... did you have any other vehicles or companies that aren't included in relation to this?
Pearse Doherty (Donegal South West, Sinn Fein)
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But it's within the terms of reference, it's ... would this company ... this company would have had-----
Ciarán Lynch (Cork South Central, Labour)
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Mr. Mulryan is entitled to commercial sensitivity as well, Deputy, okay?
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. I appreciate that. Okay, but just to clarify, because there have been reports in the paper for ... and this is where I was concerned in relation to your exposure to Bank of Ireland, which seems very low here, but there has been reports that it was actually hundreds of millions in excess of that. But that would be in relation to other companies or other interests that you had?
Ciarán Lynch (Cork South Central, Labour)
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We're going into commercial sensitivity here now again, Deputy.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. Well, can I say in relation to your final ... to your statement at the end, in relation to "... history will show that NAMA was effective in ensuring that monies borrowed were repaid".
Is that only in relation to Ballymore that you're talking about?
Pearse Doherty (Donegal South West, Sinn Fein)
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No, you're talking about all entities?
Pearse Doherty (Donegal South West, Sinn Fein)
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And, can we just clarify that you're talking about the loans that were taken out from the financial institutions and not the money that was paid for those loans by NAMA?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. And in relation to NAMA, you'll be aware, or you may be aware, that NAMA, and this is from ... the public accounts committee received correspondence back in 2011 from Brendan McDonagh talking about the incentivisation mechanisms, and he talked at that point in 2011 that legally binding agreements had been entered into with nine debtors, under which the proposed incentives are in place. And he goes on to say, "Incentivisation mechanisms may sometimes be included; for example, profit above a target NAMA repayment level could be shared 90% to NAMA and 10% to the debtor."
Ciarán Lynch (Cork South Central, Labour)
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What document are you referring there to Deputy?
Pearse Doherty (Donegal South West, Sinn Fein)
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It's a document from the PAC but it's a public ... the question I'm putting to him is-----
Ciarán Lynch (Cork South Central, Labour)
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I know they might be public but the witness does need to have a familiarisation with things as well.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, are you familiar with the incentivisation proposal that NAMA has?
Mr. Sean Mulryan:
Look it, I have a legal agreement with NAMA and, in that legal agreement, I have a serious confidentiality-----
Ciarán Lynch (Cork South Central, Labour)
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And I don't want you to breach that, Mr. Mulryan-----
Ciarán Lynch (Cork South Central, Labour)
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-----and I'm not asking you to do so either.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, the reason I asked this question, without ... and I'm not asking you to breach your ... the confidential agreement - and nobody would expect you to do that - with NAMA, but your statement that everything will be paid back that you borrowed, the question that may arise is, if this incentivsation clause is within your contract, then you would actually receive 10% of that money that is owed to the banks?
Ciarán Lynch (Cork South Central, Labour)
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And in respect to the witness, that is a document that he has signed and a legal position that he has to maintain.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. On page 8 of your statement you contrast the professional business model of Ballymore with that of the 1,000 or so new entrants many of whom, you say, on page 22 of your statement, "had little or no experience in property development". How significant a part did these new entrants play in the creation of the property bubble, in your view?
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes.
Mr. Sean Mulryan:
Absolutely, I would say that was ... that that created enormously ... because let's face it, what is a property developer, you know what I mean? If it was 800 ... but in the whole of Ireland, I know most of the property developers and I'd say there's no more than 100. And so everybody became a property developer and I think that was a huge part of the problem. I'm not saying property developers ... you know, they make mistakes as well, but I think that contributed enormously. You had ordinary people calling themselves property developers, buying properties, not alone in Ireland, in Bulgaria, in Romania, all over the world and in Ireland and building big portfolios on 95%, 100% finance. I think that was a huge contribution to the problem.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, and from what you observed, what were the critical difference between the business model of these new entrants - whatever number they were - and your own company, Ballymore? And if you can refer to risk assessment in your response, I would appreciate that.
Mr. Sean Mulryan:
Well, I think ... what was the difference? The difference was that, I think, we had the experience in the business . We weren't ... we delivered for 30 years. Somebody starting day one, who has no experience, wouldn't have the capability or the track record to know how to deal with situations that happened.
Pearse Doherty (Donegal South West, Sinn Fein)
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Can I ask you a final question? Mr. Mulryan, if the Government didn't guarantee Anglo Irish Bank and didn't establish NAMA ... if Anglo Irish Bank folded, given the level of exposure that you had to Anglo Irish Bank, where would you be today?
Pearse Doherty (Donegal South West, Sinn Fein)
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You mention in your-----
Ciarán Lynch (Cork South Central, Labour)
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Leading, Deputy, now. I'll allow you with the question but don't lead, okay?
Pearse Doherty (Donegal South West, Sinn Fein)
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The reason I ask is, you mentioned in your statement that NAMA bought you time, bought your company time, and that was required. There are many people that are maybe watching this that didn't have a vehicle to buy time. Many people's houses have been repossessed and they've never had the opportunity that others may have had. But if that time wasn't bought for you or for your company, the question I'm asking you is, how important was that? Where would you have been? You had over €1 billion exposure to NAMA-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----your loans would obviously be in default and would be called upon-----
Ciarán Lynch (Cork South Central, Labour)
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Now, let Mr. Mulryan answer the question. You're putting-----
Ciarán Lynch (Cork South Central, Labour)
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And if he wishes to.
Mr. Sean Mulryan:
But there was alternatives to NAMA in a situation like that. We had a ... in London we had a tremendous London land bank, about 20,000 lots along the river, in London, bought really well. And there were many institutions in the world that, if I knocked on their door at that particular time, that would definitely have come with us and taken us out and would have done ... maybe we would have done much better than with NAMA. I am absolutely certain of that.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Deputy. I'm going to bring matters to a wrap-up. I'm want to deal with a couple of items with you ... and maybe if I can just take a different sort of aspect to the earlier question Deputy Doherty asked, Mr. Mulryan, when you said that ... or you were giving evidence that there was a lot of ... more people came into the construction business, people without a history in the area and the expertise and all that goes with that. Given that this inquiry is about going into the future as much about the past, do you have a view as to how the corporate structure of significant development companies that would have tens and hundreds of millions of euros in investments and that ... there is, kind of, a counter approach, and it's been said in some testimony here, that corporations ... or that operations of that size are usually corporations that have shareholders and stuff, it just wouldn't be a person by limited guarantee? Would you have a view on what type of ... sort of model would-----
Ciarán Lynch (Cork South Central, Labour)
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Sorry, in that the ... going back to your earlier response to Deputy Doherty, where you said there was thousands of people came into the property ... construction, people who had no background in building became developers overnight and so forth. In earlier testimony to this inquiry, there was discussion with regard to a different type of business model into the future that might be more sustainable and that might not create situations where one individual or a very tight team of people through a sort of conglomerate ... not a conglomerate but a cartel, coming together, or whatever ... would have such a level of exposure and indebtedness. So a company that would be borrowed ... or would be in construction that maybe would have €0.5 billion or maybe €2 billion worth of liabilities and assets would be ... would have a corporate structure with shareholders and that type of approach. Has that been something that you've given consideration to, given your experience over the last decade?
Ciarán Lynch (Cork South Central, Labour)
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Could you maybe elaborate upon that, please?
Ciarán Lynch (Cork South Central, Labour)
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Yes, the funding of a construction company, as opposed to one person being a limited company and ending up with a situation maybe they're €1 billion in debt or a very, very small company with that type of debt.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Mr. Sean Mulryan:
I had brought Dr. Michael Smurfit on the board of Ballymore ... wasn't totally comfortable with the level of debt and we were looking at new ways to deleverage and go forward. And our plan ... if we hadn't had the crash, we would probably have listed on the London and Singapore stock market, and we would have taken out a huge amount of the debt ... and reduced, obviously, my share in the company.
Ciarán Lynch (Cork South Central, Labour)
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Just to return to the past for a while, then, Mr. Mulryan, NAMA applied a discount of 5.25% to the long-term value of acquired properties to cover due diligence - this was on the macros level now - 0.25% and enforcement at 5%.
In your dealings with Irish banks, how would you rate the extent to which the banks sought robust legal documentation as part of the application process and was reliance on solicitors' undertakings, either commonplace or a rare situation, by your experience and observations?
Ciarán Lynch (Cork South Central, Labour)
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All right, okay. Just a final question there. On, I think it's page 6 of your statement ... and I can bring it up, if you wish, if you don't have it there in front of you. You can contrast ... sorry, actually I've the wrong there, sorry. Did you observe any differences in loan monitoring between your various lenders? For example, did all lenders undertake inspections of key milestones? Was it a kind of a one size fits all by all the different institutions? Was there a variance or sort of menu or different type of lend?
Ciarán Lynch (Cork South Central, Labour)
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Okay. And finally, is ... it's just something you picked ... that you commented on earlier and if I ... maybe I can just pick up on that once more and get some further clarification. You commented upon how banks had loosened their lending standards and if maybe if I can ask is ... did this have any relationship to why you diversified outside of Ireland and maybe if you could elaborate-----
Ciarán Lynch (Cork South Central, Labour)
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You commented earlier on how banks had loosened their lending standards and maybe if you could just talk a bit further to that and if you can say, if this was in any way related to you diversifying your business model outside of Ireland?
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Ciarán Lynch (Cork South Central, Labour)
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Or in general? You had done business over a period of time, so you would obviously been dealing with the financial institutions over a period. With the variation and the loosening of the model, did the Irish banking model have any relationship with you diversifying outside of Ireland?
Mr. Sean Mulryan:
I don't fully ... but anyway, I just go back to my experience with the banks over the period that I operated with them before the problems. We didn't see much change over that period of time of how they dealt with us. What's more, the numbers got bigger, there's no question about that. Like, the numbers were bigger as the business got bigger but it was the same model that worked consistently right through.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you. We'll move to wrapping things up so and if I can move to Deputy Michael McGrath, please.
Michael McGrath (Cork South Central, Fianna Fail)
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I've no more questions.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Senator O'Keeffe.
Susan O'Keeffe (Labour)
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Yes, thanks. I just have four questions, very briefly. Thank you, Mr. Mulryan. Mr. Bacon, we know is involved in the establishment of NAMA, and I'm not wishing to discuss NAMA, but did you have any opportunity to talk to Mr. Bacon about how NAMA might look or how an organisation like that might be set up?
Susan O'Keeffe (Labour)
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Okay. Were you paid a salary by NAMA while you were-----
Ciarán Lynch (Cork South Central, Labour)
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It's very confidential ... so.
Susan O'Keeffe (Labour)
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Sorry, I didn't realise. David Brophy was one of your directors, isn't he? Or one of your-----
Susan O'Keeffe (Labour)
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Yes. He was also a director of INBS, isn't that the case?
Susan O'Keeffe (Labour)
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How did that arise and can ... could that have contributed to any conflict of interests that one of your directors was-----
Ciarán Lynch (Cork South Central, Labour)
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Mr. Mulryan now might not be factual in that. I don't want you to be speculating. So, unless you can ... factual-----
Ciarán Lynch (Cork South Central, Labour)
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Okay, yes.
Mr. Sean Mulryan:
The Ballymore board identified the need for an operating person with a banking treasury and law background. Mr. Brophy joined the company as chief operating officer in August 2006. Mr. Brophy was recommended by Dr. Michael Smurfit from his experience as head of treasury at the Jefferson Smurfit Group. Mr. Brophy also sat on the board at the time he joined Ballymore, including a period on the board of Nationwide Building Society, which he joined in February 2006. This appointment required the approval of the Central Bank of Ireland. At no stage during the period, Mr. Brophy sat on the board of Ballymore and INBS, did any matter arising where he was in a position of conflict of interests. No lending from INBS occurred after the date of his joining the board of Ballymore and if discussions arose, Mr. Brophy always excused himself from any discussion.
Susan O'Keeffe (Labour)
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Thank you. And finally, figures that ... and I understand these were figures that were released, properly released by you in 2010, indicated that four directors of Ballymore would have been paid €2.9 million between them for 2010. I am just wondering how that fits with what you have been telling us earlier about how, you know, people worked very hard and sacrificed a lot. Again, to the public at large, €2.9 million between four directors would seem to be a lot of money.
Ciarán Lynch (Cork South Central, Labour)
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Just there-----
Ciarán Lynch (Cork South Central, Labour)
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They would, yes.
Ciarán Lynch (Cork South Central, Labour)
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Indeed-----
Ciarán Lynch (Cork South Central, Labour)
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Okay-----
Ciarán Lynch (Cork South Central, Labour)
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Okay, if we can get one-----
Ciarán Lynch (Cork South Central, Labour)
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Okay, if we can get one asked that can be answered, we'll end with that.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you very much. Okay, I'm going to wrap up with that. Mr. Mulryan, if there is anything further you would like to add by means of a closing statement or any comment, I will accommodate you if you wish.
Ciarán Lynch (Cork South Central, Labour)
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I'm unsure, to be honest with you. Okay, but I'll try to accommodate you. I'm not too sure if this is the appropriate forum for it but, look, you have been a co-operating witness as best as you can today, Mr. Mulryan and if you are not gong to breach any legislation right in front of my eyes, I'd like to give you a bit of leverage.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Joe Higgins (Dublin West, Socialist Party)
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Sorry, Chairman, sorry, Chairman-----
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Joe Higgins (Dublin West, Socialist Party)
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I think this is completely out of order, with respect.
Ciarán Lynch (Cork South Central, Labour)
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I'll suspend-----
Joe Higgins (Dublin West, Socialist Party)
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You stopped me from asking Mr. Mulryan questions that I believe were very pertinent to try to explore the whole bubble and-----
Ciarán Lynch (Cork South Central, Labour)
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Just, just-----
Joe Higgins (Dublin West, Socialist Party)
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-----crisis and role of developers and banks and now you are allowing the witness to read a statement in relation to-----
Ciarán Lynch (Cork South Central, Labour)
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I, I am hearing you, Deputy and I'm trying to operate-----
Joe Higgins (Dublin West, Socialist Party)
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-----an issue over in Europe?
Ciarán Lynch (Cork South Central, Labour)
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Okay, I don't know if we are getting into contracts now it might not be appropriate.
Joe Higgins (Dublin West, Socialist Party)
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Can we ask questions on it then?
Eoghan Murphy (Dublin South East, Fine Gael)
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Chairman, I mean, if its pertinent to the banking inquiry, as we have been progressing this-----
Ciarán Lynch (Cork South Central, Labour)
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Okay, if it's relevant, just to be clear here, where we are and I can accommodate everybody, the ... in regard to your own situation, Deputy Higgins, I'll give you as much accommodation and flexibility as I could, however, you were coming on the edge of what would be considered terms of reason or terms of reference and other part of it - Freudian slip there maybe - apologies, I think we are getting late in the day. But I would also like to, if possible, if you're ... I don't want to get into the situation where ... where a witness would knowingly stray off the terms of reference as well. So I just need a bit of ... a bit of fairness here, if I can and I'd ask you to proceed slowly. Every witness that comes in before this inquiry, since we have started, I have asked them at the end of it if they wished to make a closing comment and in this regard, I am doing the same with Mr. Mulryan. Deputy-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Just to clarify, Chair, I mean if you could clarify it through the witness. If this in relation to a particular commercial decision-----
Ciarán Lynch (Cork South Central, Labour)
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Yes, we can't-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----then we shouldn't be able to go into it. We weren't allowed to go into other commercial decisions-----
Ciarán Lynch (Cork South Central, Labour)
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Yes, exactly-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----with the witnesses-----
Ciarán Lynch (Cork South Central, Labour)
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And that would be the balance. If this relates to a commercial matter and a business relationship, we didn't pursue-----
Ciarán Lynch (Cork South Central, Labour)
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Sorry, Deputy-----
Michael McGrath (Cork South Central, Fianna Fail)
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Can I ask if the statement has been made with the consent of NAMA?
Ciarán Lynch (Cork South Central, Labour)
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Yes, that's-----
Ciarán Lynch (Cork South Central, Labour)
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Okay, what I-----
Joe Higgins (Dublin West, Socialist Party)
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What is the purpose of-----
Ciarán Lynch (Cork South Central, Labour)
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Usually by a closing statement, somebody is making closing remarks. Mr. Mulryan, we may end up in a situation, if you make this closing statement extending this session, because you may put questions out on this floor as well. A statement is one thing where somebody makes a closing remark ... it is somebody making ... putting further evidence in there, that must be tested.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you.
Michael McGrath (Cork South Central, Fianna Fail)
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Chairman, if it's a significant story, we should hear what the man has to say-----
Ciarán Lynch (Cork South Central, Labour)
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Okay-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----I believe-----
Ciarán Lynch (Cork South Central, Labour)
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Well, listen. If members wish ... if members wish ... just give me two seconds. What I am going to propose is that we adjourn for five or ten minutes, sufficient time to allow our legal people to see what Mr. Mulryan wishes to say and if wishes to say it with legal approval, we will go there. So I'm now proposing that we adjourn.
Joe Higgins (Dublin West, Socialist Party)
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It might be that the members can then ask questions in relation to the statement that is made?
Ciarán Lynch (Cork South Central, Labour)
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What will happen here, Deputy Higgins, is our legal people and maybe Mr. Mulryan has legal people with him here today - I'm not too sure - but there will be an engagement with Mr. Mulryan, and before we go back into public session with Mr. Mulryan, our legal people will discuss with us as well as to the context and the flow of this. I'm sure everybody doesn't want five minutes of questioning with Mr. Mulryan at the end of this. There might be two or three issues that might need to be related, and on that basis, what I would do then is I would refer, if it's one question or so, to the Chair, and it's going to be more than that to revert back to the leads. Is that agreed? Agreed. I'm proposing for a very short break, five minutes this might only take. If it's required any longer, the legal people will inform us of same. Is that agreed? Agreed.
Ciarán Lynch (Cork South Central, Labour)
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So if I can just propose we go back into public session. Is that agreed? Agreed. Okay.
And this is to formally and in public session to conclude our session of today with Mr. Mulryan, and in doing so, to thank Mr. Mulryan for his participation today with ... and his engagement with the inquiry. And to now formally excuse the witness and to suspend the meeting, proposing to suspend it for 30 minutes. People just might want to get a cup of coffee or a sandwich or something like that, okay. We'll say 7.45 p.m., if possible, okay. Thank you.
Ciarán Lynch (Cork South Central, Labour)
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I now propose we return back to public session. Is that agreed? And in returning to public session, this is our fourth session of today, the Committee of Inquiry into the Banking Crisis is now resuming in public session. Can I ask members and those in the public Gallery to ensure that their mobile devices are switched off.
At our next session we will hear from Mr. Michael O'Flynn, founder, O'Flynn Construction Group. This is one of several sessions in which the inquiry will focus on relationships between property development companies and their principal financial institutions. Mr. Michael O'Flynn founded O'Flynn Construction in 1978. The O'Flynn Group operates a number of businesses in Ireland, the UK and mainland Europe. The group's activities cover property investment, development, construction and the provision of student accommodation. The group, as well as its personal borrowings, have now exited from NAMA. Mr. Flynn, you're very welcome before the committee this evening.
Before hearing from the witness, I 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 to 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 the 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 this 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 screens to your left and right. Members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.
The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have submitted a witness statement. This is before the committee, will be relied upon in questioning and form part of the evidence of the inquiry.
I now ask that the clerk will administer the oath to Mr. O'Flynn, please.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. O'Flynn, and, once again, thank you for your co-operation with the committee this evening and if I can invite you to make your opening remarks, please.
Mr. Michael O'Flynn:
Thank you, Chairman. Good evening all and thank you for the opportunity to address the committee. As you know from my submission, I have been in the property development and construction business for over 37 years. During this time, I worked through the recession of the 1980s and the currency crisis of 1992-1993. At all times, the O'Flynn companies paid every creditor and repaid all borrowings in full plus interest. Our business model was always soundly based. From 1978, the business grew, as did the mix of skills within the organisation, including development, planning, project management, asset management and construction, investment and finance. Development was the origin of the group and was always at the centre of our activities. The key focus for development was to take a total management approach from inception to completion, only building product where real demand existed.
As a group, our plan was to create a strong and valuable organisation which would be broadly based and diversified in so far as is practical in terms of locations, business and economic risk. At the peak in the mid-2000s, the O'Flynn Group employed over 1,000 people directly and indirectly. In the statement to the inquiry, NAMA CEO, Mr. Brendan McDonagh, and not Mr. Frank Daly, as mentioned in my submission to you, indicated a view that diversification reflected an absence of strategy amongst developers. I disagree. Rather, diversification is a recognised and appropriate risk management strategy operated by businesses of scale.
By the end of 2008, the group had fully evolved to a diversified model in terms of its asset type and geographic base. In addition to our development business in Ireland, our varied businesses extended across nine jurisdictions, encompassing commercial, retail, industrial and residential and included a very successful student accommodation business, senior living accommodation and investment properties.
My relationship with banks - I can only speak from my own experience with the banks, that experience runs contrary to some of the generalisations I have heard reported at this inquiry about easy lending which was relationship based and where the loan was up to 100% or more of the value of the asset in some cases. This was certainly not the case in relation to the O'Flynn Group. The cash balances of the O'Flynn Group were always strong and were applied in property acquisitions. Even the years 2006-2008, the average amount of our cash balance was €76 million. In our property acquisitions, a mix of our own cash and bank borrowings was generally applied, with the exception of joint venture arrangements where a lender sought a much higher return based on profit share. In such cases, funding was provided by the lender and time, skills and expertise were provided by us and profits were shared in an agreed proportion.
To be very clear, our borrowings were not speculative. They underpinned specific developments with a strong balance sheet and a credible and strong cash flows to support them. I never issued personal guarantees to any lender in relation to the business and the reason for this was our track record, but also the strength of our balance sheet and by extension, the level of equity which we were bringing to each project. In approving any loan application, the bank had to satisfy itself of the ability of the borrowing company to repay the loan and the security available. I have never provided any form of personal guarantee to a bank to secure an O'Flynn Group loan.
The O'Flynn Group way of operating was to identify a projects that made financial sense and then go about the financing, not the other way around. From time to time, O'Flynn Group companies are required to provide guarantees for the liabilities of other group companies and where we believed it was the right thing to do, those inter-company guarantees were provided.
The global financial crisis - access to finance is the lifeblood of developers in the way raw materials are to a manufacturer. When the global financial crisis hit, that supply was denied to us. Regardless of how strong a company's balance sheet is, if you and your principal customers are dependent on banks for access to cash, you will not be in a position to continue business in such circumstances. I am hugely appreciative and grateful to the State for providing liquidity to our business when the banks were in the extraordinary and unforeseen position of being unable to provide finance. It was the only time in my 37 years in business that I have ever seen a business environment like this and I hope I will not see it again in my time.
The role of NAMA - while the concept of NAMA was well-intentioned, I believe it was destined to realise a less than optimal return to the State.
NAMA was intended to save the Irish banking sector but in fact hastened its demise and along the way added to the burden on the Irish taxpayer. There were alternative and better options, and Lombard Street Research, a macroeconomic consultancy company based in London, outlined those options in a report which was submitted by the Construction Industry Federation to the Department of Finance, a copy of which I have provided to the inquiry.
I believe there are four reasons why NAMA has and continues to fail to maximise the return to the State. Firstly, the time that it took to create this new organisation, staff it, resource it, and deal with the European Commission on competition matters, decide on a valuation mechanism, value the loans on a loan-by-loan basis and ultimately transfer the loans, which was costly. The concept of NAMA was first mooted in April 2009 but it was April 2010 before NAMA was able to even commence the review of business plans of the first tranche of borrowers. It led to continued financial uncertainty over an extended period. Secondly, I firmly believe that from the outset NAMA lacked experience in many important areas but most notably in the area of asset management and development. This had very significant consequences in terms of early action to enhance the value of the assets under management. Thirdly, NAMA failed to distinguish between developers who knew what they were doing and had a track record in business but who were thrown into turmoil by the global financial crisis, and part-time developers or people who had gone into the development business without having any understanding of the fundamentals involved. While in NAMA, I presented a comprehensive, professionally assisted business plan designed to ensure that the O'Flynn Group could continue in its current form and that all debt could be repaid over time at par. We applied very significant resources to the preparation of our business plan, which extended to some 2,000 pages, and believed that it offered a realistic timeframe to allow the group to operate a successful recovery strategy, which in turn would result in full debt repayment over time. This plan was examined in detail on behalf of NAMA by FTI Consulting, a global business advisory group experienced in complex businesses, who conducted a comprehensive exercise with which we co-operated fully. Although our engagement with FTI was positive, our business plan was rejected by NAMA without explanation or any meaningful engagement whatsoever. Instead we were required to implement a business plan designed by NAMA personnel unfamiliar with our extensive and varied businesses across nine jurisdictions.
The NAMA plan did not accommodate full debt repayment. Although we had no part in designing it, we were required to implement it and yet remain responsible for the full amount of the loans. Despite attempts on my part, NAMA refused to engage with me to see how this plan could be achieved. To this day, I am bewildered as to why this was the case but the net effect is the taxpayer suffered a loss that could have been avoided in respect of the O'Flynn Group loans. To be clear, we did not get a loan write-down. NAMA took over the O'Flynn Group €1.8 billion loan book and sold to the Blackstone at a discount. However, we continue to owe Blackstone the full par value of the loans. The discount taken by NAMA on the sale of the loan has cost the taxpayer but could have been avoided, had NAMA been prepared to work with us and to take our business plan on board. We are fortunate that following the resolution of our dispute with Blackstone we still have a business, albeit a smaller one, on which we are building up again and contributing to the economic growth of the country. However, both the tax man and the O'Flynn Group would have benefited, had NAMA taken a more strategic approach to our business and assets. While I can only speak for my own business, I know there were other developers where NAMA has lost out, also because of their failure to identify and work with these people though an agreed business plan to maximise the return to the State.
Finally, there was an in ... there was an inability of NAMA to recognise the cyclical nature of the economic downturn, and take a longer-term view of asset realisation and maximisation of proceeds. We are all ... we are already seeing assets purchased from NAMA being sold on at significant profits. A combination of a failure to identify developers who knew their business and a lack of recognition of where Ireland and Europe were on the economic cycle has resulted in a significant loss for the State. Had NAMA picked developers who knew the business and had a track record, the State would have realised more proceeds and, in addition, some of the office and housing shortages we are now ... which are now emerging due to the lack of activity in recent years could have been avoided.
Much of the debate around NAMA has come to be dominated by its profitability as a measure of its success. This should not be the case. By paying low prices for assets and by taking good loans as well as bad, it was always likely that the entity would generate a profit. However, this profit has been achieved at the cost of an earlier recovery in the banking system and serious damage to some developers, who had loans acquired and who lost an opportunity to work out those loans.
It also ignores the huge hidden cost of fees which are not included on NAMA's balance sheets but, instead, added to the account of the borrower.
There are other failings that I think should be identified: the lack of any real oversight of NAMA in relation to the ... to the exercise of the extraordinary powers vested in it; the special Oireachtas committee to examine matters in relation to NAMA, as provided for in the NAMA Act, was never established; the refusal by NAMA to allow partial refinancing joint ventures or any other means of attracting outside equity; the so-called section 172 policy - section 172 precludes the sale of loans by NAMA to borrowers who are in default in respect of those loans; NAMA, however, operated a policy which, in fact, went far beyond what the legislation provided. Although our loans were not in default at the time they were sold, NAMA's process precluded any proper commercial discussions between us and, thus, prospective purchasers of our loans. It was irrational and, in my view, potentially unlawful that we were precluded from having such discussions with potential purchasers. I believe that the State should be allowed to get the best return from the sale of assets, irrespective of who the highest bidder is.
Most NAMA borrowers are prevented from speaking frankly of their personal experiences within NAMA, either because their loans are still controlled by NAMA or because they are subject to confidentiality arrangements. I've outlined in much greater detail in my submission my experiences of NAMA and a ... and the serious shortcomings of same. I should stress, however, that I have encountered some very decent, professional and fair-minded people who worked in NAMA. However, I have also had some very poor experiences. The only remedy a borrower can seek in NAMA is to seek judicial review of decisions made by NAMA. Not only does the expense of such application put it beyond the reach of most borrowers but any such application is certain to be regarded by NAMA as unco-operative and, therefore, in real terms, would be the end of that borrower in NAMA. To be very clear, I had no role or involvement or was not consulted on the transfer of my loans, or the loans of the O'Flynn Group, when the various financial institutions entered NAMA. I equally had no involvement in the price at which these loans were transferred, the haircut suffered by the banks and the cost to the Irish taxpayer as a result. In fact, at the time my loans were acquired, NAMA ... NAMA insisted that the borrowers did not even have the right to make representations in relation to the acquisition of their loans. The Supreme Court subsequently determined that NAMA was wrong in that regard.
Neither the acquisition of our loans from the banks nor the sale of them by NAMA had any impact on the amount we owed. At all times we remained liable for the full par debt. I've already repaid my personal loans in full, which I believe is a vindication of the fact that they never constituted a systemic risk and should not have been acquired by NAMA. The O'Flynn Group submitted a business plan which would have allowed full debt repayment but this was rejected and, instead, despite remaining liable for par debt, we were required to implement NAMA's alternative plan under which full repayment could never have been achieved. I was not permitted to be a party to the selection of the winning bid for my loans nor the price paid for those loans. It's important to know that we co-operate fully with all prospective bidders to maximise the return to the State and this has been acknowledged by NAMA. People talk about NAMA being a developer bailout but that is not my experience.
To be very clear, as I have said already, I am hugely appreciative to the State for stepping in to provide liquidity when the banks became unable to operate and I wanted to repay that. The taxpayer lost money, of that there is no doubt. However, I have a business that is now much smaller than it was before, resulting in a direct loss to the economy. The main winners in all of this have been the private equity companies who have the funding and are able to buy loans and assets at a time in the economic cycle where the value realised by the State was far from optimal. As the positive economic cycle has progressed, these assets and loans are now being realised at a significant profit.
The future: looking to the future, development always requires skill and judgment to be done well at a significant scale. It's always capital intensive and it is always a risky undertaking. It is essential that a professional developer sector is re-established to ensure that Ireland's future property needs are satisfied to meet the requirements of a modern, growing economy. Part of the re-establishment of a professional development model would have to entail less reliance on bank finance and a greater dependence on a different funding model, where the equity comes from professional investors. But as well as the development sector learning lessons from the crisis, there are also lessons to be learned in the area of zoning, planning and building regulations. We should not lose the opportunity to correct all the systemic issues which ... that contributed to the demise of the property sector in Ireland. The property ... the property market is cyclical. The O'Flynn Group and its various companies have been through a number of peaks and troughs but we have adapted to meet circumstances and to continue in business. It is easy in the current climate to forget the positive contribution made by the ... by the construction-property sector to the economy. A functioning property and construction sector, with properly-managed, experienced companies, is essential in every economy. Ireland is no exception. Thank you, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. O'Flynn. And if we can commence questioning, please, and in doing so if I can invite Deputy Kieran O'Donnell. Deputy, you've 25 minutes.
Kieran O'Donnell (Limerick City, Fine Gael)
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Welcome Mr. O'Flynn, at the late hour.
Kieran O'Donnell (Limerick City, Fine Gael)
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Mr. O'Flynn, based on your dealings with the Irish banks in the pre-crisis period, did you get the general impression that the ... maintaining and growing market share was the dominant driver in lending practices? And did you observe increasing competition between them for businesses with you and your company?
Mr. Michael O'Flynn:
Well, I would have to say that we had an approach to lending in that we had our own process to go through before we approached a bank. There is no doubt that there was competition by the banks for such lending. We had our own internal approach where we went through a process of appraisal and did all the advance work before we would even discuss a project with a bank or with banks. I think the competition was strong, of that there is no doubt.
Kieran O'Donnell (Limerick City, Fine Gael)
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And looking at appendix 2 in your ... in your ... page 7, you dealt with eight banks in the first pie chart and over 50% of loans for the O'Flynn Group were held with Anglo alone, from what I can see. And, can you explain why that level of debt was held with Anglo above the other banks? The ... AIB, you dealt with Bank of Ireland, AIB, Bank of Scotland, First Active, Lombard and a couple of other banks. But in the main, well over ... well, I can see from the pie ... over 50% was with Anglo.
Mr. Michael O'Flynn:
Yes, there's a simple explanation for that in that the bulk of the borrowing with Anglo was out of London. We had a long-established relationship with the London branch of Anglo, and the two businesses that we had in the UK and Europe were Victoria Hall, which is a student accommodation business, and Tiger Developments, which is mainly an investment property and business, would have traditionally banked with Anglo from the outset and we continued to be loyal to them in that regard.
Kieran O'Donnell (Limerick City, Fine Gael)
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And-----
Kieran O'Donnell (Limerick City, Fine Gael)
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So the Anglo loans were basically for UK investments?
Kieran O'Donnell (Limerick City, Fine Gael)
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UK and Europe, not Irish?
Kieran O'Donnell (Limerick City, Fine Gael)
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And did you find that the banks, did the banks come to you looking for loans? Did they hustle you for loans, in essence?
Kieran O'Donnell (Limerick City, Fine Gael)
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And the level of gearings that the banks were willing to accept, did you see a slippage in that up to 2008 over those years?
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, I suppose I'm referring to ... to page 19 of your appendices, and you give two graphs. You give the O'Flynn Group, the value-to-debt ratio at 30 September '08 and on the face of it, Mr. O'Flynn, it would seem that the debt gearing levels were very high.
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes.
Mr. Michael O'Flynn:
I mean, at the end of '08 we were well into the crisis at that stage, which started in '07. And even ... if you look at that, you're still talking about a difference of a few hundred million, I think, in equity, despite the downturn of '07 and '08. But if you go back to the earlier years, we would have been dealing with an equity ratio, excluding joint ventures now, of maybe 70%, 30%. Well, we had substantial equity on our balance sheet, in our company and, as I said in my opening statement, we had cash balances and we always applied equity to our ... to our projects.
Kieran O'Donnell (Limerick City, Fine Gael)
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You didn't find any one of the banks more aggressive than the other?
Kieran O'Donnell (Limerick City, Fine Gael)
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And what do you-----
Kieran O'Donnell (Limerick City, Fine Gael)
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And what would you regard as a sustainable debt-to-value ratio now?
Kieran O'Donnell (Limerick City, Fine Gael)
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Now. No, wait, both.
Mr. Michael O'Flynn:
Sorry. I always worked on the rule of ... the old rule was two thirds, one third and I think we all got into the 70:30, and sometimes, perhaps, pushed it over the 70%, but we were always talking about a third, 30%, you know, maybe it went down a bit. Now, I would say that's not enough. I mean, we ... the old rule was that 70:30 was a good position to be. It served us well for 37 years in terms ... or thirty-something years at that stage in terms of how we operated because I don't think anybody, anywhere saw the scale of the shock that we were asked to take. So, we worked on the basis of a model that had served us well for decades but,-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay.
Kieran O'Donnell (Limerick City, Fine Gael)
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And what would think should be the ... going forward, what would you feel is a sustainable level?
Kieran O'Donnell (Limerick City, Fine Gael)
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Based on your expertise in that area.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay. In the pre-crisis period, same period, did you or your management colleagues believe at any point that there was a property bubble was in the making, or did you generally rely on the soft landing theory?
Kieran O'Donnell (Limerick City, Fine Gael)
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When you say "price increases", are you saying in land?
Mr. Michael O'Flynn:
Well, I've heard previous reports of this inquiry. Land drives the price of houses more than anything else and the first rule of business was always to stay in business, but there was probably a time in the 2000s when we should all have packed our bags, really, because of the price escalation of land.
Kieran O'Donnell (Limerick City, Fine Gael)
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Now when-----
Kieran O'Donnell (Limerick City, Fine Gael)
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And when ... what would you think was the period that you should have all ... what date should you have all packed up your bags, in hindsight?
Mr. Michael O'Flynn:
Well, I think, in the mid-2000s, land was overheating and we began to ... it's important to remember that I've been through the '80s and the '90s in the UK and I've seen different difficulties, shall I say, in the property area. So, we were diversified in terms of geographic locations, but also in terms of development and investment and, like, we would have had €75 million rental income per annum; whilst we were in NAMA, for example, I think, somewhere totalling €260 million, €270 million was paid to NAMA. So we were ... we thought we had a good hedge because of the-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Rental roll.
Mr. Michael O'Flynn:
-----the rent roll, but, you know, against that, no one ever anticipated the scale of the collapse and, I suppose, prices ... when the average couple can't buy a house, you know, you know something is going wrong with your business model. But very little anyone could do about ... you know, do-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Did you pull back, did the O'Flynn Group pull back at any stage coming up to-----
Mr. Michael O'Flynn:
Well, we found ourselves losing out to a lot of sites, you know, which was a concern to us at the time, but I'm ... I must say, the whole planning situation is a huge concern of mine and has been for a long number of years. And it's not just today and I'm not looking back with hindsight when I talk about this, but I've a huge difficulty in that the price of land went absolutely out of all order but the lack of market marking ... matching up what was required to satisfy the market and what was being zoned-----
Kieran O'Donnell (Limerick City, Fine Gael)
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We'd-----
Kieran O'Donnell (Limerick City, Fine Gael)
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We'd Mr. Mulryan in earlier, you may have seen his testimony.
Kieran O'Donnell (Limerick City, Fine Gael)
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And he said that, from '05 on, he reckoned that there was 30,000 more houses being built than the market required. So, was there a case of whereby that supply was well in excess of demand-----
Kieran O'Donnell (Limerick City, Fine Gael)
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-----from '05 on?
Mr. Michael O'Flynn:
I think there are two points to that. One is that the overall numbers were out of line with what should have been built. But we built a lot of houses in a lot of places where houses weren't needed. We zoned a lot of land, you know, in a lot of places land was ... shouldn't have been zoned. We put a lot of infrastructure into land, into local authorities where ... to build houses in places where they shouldn't have built houses in the first place. I mean, I've always concentrated on the metropolitans, but I was really, really taken aback by some of the developments that got zoned, and got infrastructure and got planning. You know, you have to have zoning, you have to-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes.
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, then on a final point in this question, what could have been done, we'll say, in that '04-'05 period, that would have cooled the market?
Mr. Michael O'Flynn:
Well, first of all, I would have zoned more land. I would have matched up the zoning and the infrastructure to where houses were needed. Anybody like us, building houses since 1978, it was not in our interest to have house prices escalating to the extent they were, making super profits that we were putting back into the raw material, we were buying for new land. That is not a business model that can survive, okay? We thought we had a good hedge against it because of all the other activities and this ... We formed a group in 2006. We thought by forming the group we were doing exactly what should be done in case you had a downturn. We never ... maybe we all bought into the soft landing, somewhat, but no one could have anticipated a global crisis - the euro crisis. Because the-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Did you-----
Kieran O'Donnell (Limerick City, Fine Gael)
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So did you buy into the soft landing?
Mr. Michael O'Flynn:
I bought into the soft landing, by and large, because I never thought that the banking position could be as bad as it was. I always had equity. I knew that equity could be lost. Like, in a development, first of all, you have a balance sheet. But then in a development itself, you have a profit margin; that's the first thing that should go. And then you have equity in the company with ... but no one ever anticipated that the scale of the drop, which was no doubt connected, not to the oversupply, because there was very little oversupply, and I've been a long advocate of this. It was all down to the, you know, to the banking collapse and the establishment of NAMA. Because NAMA's establishment was meant to save the banking crisis. But sure, it expedited it.
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, okay, that leads into NAMA. Did the NAMA disposal of assets and loans from your company's portfolio happen at the most opportune time to achieve the best return for your business and, more particularly, for the taxpayer? And can you please distinguish between disposal regimes for Ireland and abroad in terms of the way NAMA dealt with it? You might just go through it and a couple of points I want to take up with you.
Kieran O'Donnell (Limerick City, Fine Gael)
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In simple terms right, do you believe - you've said it already, but just to articulate it - do you believe that the way the policy that ... the way NAMA went about disposing of your loans was in the best ... put O'Flynn Group in the best position and get the best return, the most opportune return to the Irish taxpayer?
Kieran O'Donnell (Limerick City, Fine Gael)
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But Mr. Flynn-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes.
Mr. Michael O'Flynn:
-----going back to that, Deputy, the first point is NAMA ... we've been into NAMA ... now I embraced the NAMA structure with reservations, and that's no secret to anyone, because I made a lot of comment at the time because it was my business and my livelihood and everything else. But I went into NAMA on the basis that this was going to be a work-out vehicle. That we were actually ... they were actually going to identify people they could work with and figure out a plan to get us out of this extraordinary position that ... perhaps, we contributed somewhat to it but I think it was a ... banking was the origin of the scale of it. And when I went into NAMA, I thought NAMA was going to be work-out vehicle and we were going to figure out plans on working that out. I spent enormous time, as did my senior staff, working on a business plan of some couple of thousand pages, because of the nature and scale of our business but NAMA had no interest in that business plan.
Kieran O'Donnell (Limerick City, Fine Gael)
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What did NAMA want you to do?
Kieran O'Donnell (Limerick City, Fine Gael)
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But you did-----
Mr. Michael O'Flynn:
I knew their plan. I could not repay the debt ever with the plan they had. I had a plan that by ... with a number of ... of inputs and a structure ... you know, a strategic plan, which was reviewed by FTI Consulting on behalf of NAMA, but I had a plan to repay my debt. They never engaged in that plan.
Kieran O'Donnell (Limerick City, Fine Gael)
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And would that ... would that have required NAMA to put an investment into your proposal?
Kieran O'Donnell (Limerick City, Fine Gael)
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But that's taxpayer's money.
Mr. Michael O'Flynn:
Sorry, the nature of business is: we owed money. Some of those businesses didn't actually need ... needed very little money. Remember, we ... we had a big ... you know, rental income. But the reality of the situation was, if you put companies on hold for one, two, three or four years you're not going to get a return from the businesses that are actually involved in that period and that's actually what happened. I mean, they definitely gave us ... allowed us do certain developments, as they saw it or certain pieces of development, as they saw it. But the overall plan that we produced to repay our debts was rejected. And that's ... that was a watershed moment for me-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes.
Mr. Michael O'Flynn:
-----because I had come up with a plan. I wanted to repay everything. I'm very grateful for what the taxpayer ... for the State and the taxpayer, what was done, but my plan was to repay the money, not be told "Here's a plan, which won't repay the money and, by the way, you're responsible for it."
Kieran O'Donnell (Limerick City, Fine Gael)
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If NAMA wasn't set up, what would have happened to the O'Flynn Group? Like, you were very exposed, particularly in Anglo and other banks. What would have happened to the O'Flynn Group?
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, before your loans went into NAMA, were they functioning loans?
Kieran O'Donnell (Limerick City, Fine Gael)
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Were you repaying?
Kieran O'Donnell (Limerick City, Fine Gael)
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Was there much interest roll-up on loans?
Mr. Michael O'Flynn:
Well, sorry, I ... it's important to understand, interest roll-up is part and parcel of development. Where I had interest roll-up it was being rolled up. To this day ... and I've borrowed recently for development, from one of the pillar banks, and I've offers from both of them for development, there's interest roll-up as well, because that's how those loans are done.
Kieran O'Donnell (Limerick City, Fine Gael)
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So your loans went into NAMA-----
Mr. Michael O'Flynn:
So there was interest roll-up on one hand. There was substantial interest being paid on the other loans on the other hand because of the rental income I had. Now, you must realise, for a year before NAMA became active, the banks were pretty inactive. So that was a period when a lot of loans went out of kilter and I can't, Chairman, give the exact details of every-----
Ciarán Lynch (Cork South Central, Labour)
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I appreciate that.
Mr. Michael O'Flynn:
-----but, by and large, I can tell you ... and I can come back if you wish, Chairman, I can tell you that we were doing what we were supposed to be doing. Now, we made decisions with banks not to continue developments that we had development finance for, because that was the prudent thing to do. We brought a lot of our developments to a convenient stop. There is no ghost estate attached to my portfolio anywhere. We put huge effort into finishing off roads, finishing off houses. People who had bought off us were actually not living in building sites. That was the effort we put in and we felt-----
Kieran O'Donnell (Limerick City, Fine Gael)
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And can I just-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Can I just ... point of clarification, your personal loans were taken into NAMA, right? In terms of security for those personal loans, would it have any way involved the O'Flynn Group in terms of shareholding in the O'Flynn Group or-----
Mr. Michael O'Flynn:
No, my personal loans, to this day is a bone of contention of mine. They should never have been in NAMA, because, because-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Were they in any way, security-wise or anything, tied into the O'Flynn Group?
Kieran O'Donnell (Limerick City, Fine Gael)
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At all.
Mr. Michael O'Flynn:
Yes. Like, as I said to you, I embraced NAMA. My only option at the time was take a judicial review. Yes, I took the best legal advice in this country and considered taking it. Not just looking with the benefit of hindsight and what NAMA turned out to be, I should have taken a judicial review against everything except the Irish land and development company, because I genuinely thought I was buying into a structure that actually was a work-out, was an asset management agency, as the name describes, but it was anything but that, Deputy, I can assure you.
Kieran O'Donnell (Limerick City, Fine Gael)
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And can I take it further? Do you have any idea of the level of discounts that were ... that was ... given on your loans when they went into NAMA? Have you any idea?
Kieran O'Donnell (Limerick City, Fine Gael)
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Well then, assuming when those loans were ... were initially mooted to be sold on to Blackstone ... I just ... you were reputed back in May 2014 as saying that ... that your ... that your ambition was to ... that the loans would come out of NAMA. Am I correct in that?
Mr. Michael O'Flynn:
You're absolutely correct. Once NAMA rejected my business plan ... and at that stage ... at that stage and during that process I had made a lot of important concessions to NAMA, serious financial concessions to NAMA.
Once they had rejected my business and presented a plan that was unworkable, I would not repay my loans. At that stage, Deputy, I wanted out. And I make no secret of that fact because, as far as I was concerned, I couldn't do what I set out to do and I wasn't interested in implementing a plan that I had no faith in and I didn't believe in.
Kieran O'Donnell (Limerick City, Fine Gael)
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And at the time, just, I suppose, for clarification, Mr. O'Flynn, would you have been on a salary from NAMA as ... were you one of the developers that would have been on a salary from NAMA during that period?
Mr. Michael O'Flynn:
Well, first of all, I wasn't on a salary from NAMA, I was on a salary from my company. All our expenses and all our costs were being paid by the company.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay. So your basic-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Your basic contention was you were a functioning company, repaying your loans and whatever. Can I just ask you on one particular point, you state in your ... page 1 of your document you say-----
Kieran O'Donnell (Limerick City, Fine Gael)
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This ... sorry, on your statement itself.
Kieran O'Donnell (Limerick City, Fine Gael)
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And you say, "neither the recession nor the banking crisis could fairly be said to have been 'caused' by developers." Can you expand on that? And in your view who ... it's the second last paragraph on page 1 and it says, "For present purposes, it suffices to record my personal view that neither the recession nor the banking crisis could fairly be said to have been 'caused' by developers." If not, who caused the crisis?
Mr. Michael O'Flynn:
I have always said that there's no question there was too much borrowing. There was a lot of borrowing for projects that could not work and I had lots of experience of looking at projects that couldn't work. I don't believe that the banking crisis ... that this was caused by developers. I think we certainly, the borrowings in the property sector were an issue but the developers that I would speak of are not ... are the full-time, professional developers, who have been at it, in my case 37 years now and lots of others like me. But, unfortunately, every single person became a developer of some sort or other. Not every single ... lots of people became developers. And all of us got lumped in together. This is what happened also in NAMA. Everybody was ... they didn't separate the professional from the amateur, or from the people who got into the business, people who had no skills in the area, people who had no history of doing ... or, actually not able to work the assets, so to speak. So I don't think it's a ... we've taken a fair amount of criticism as a grouping and I'm speaking for the full-time professional developers. A lot of that has actually been caused by the way NAMA decided to demonise us at the outset, which is an extraordinary thing to do when you're taking over all the loans of all these people, to be overcritical of them. But I think the banking crisis ... it was a global crisis. It was a euro problem. And I think had the banks been able to withstand the shock that other countries could, I don't think we would be having this discussion that ... we certainly had some contribution, but we didn't cause it.
Kieran O'Donnell (Limerick City, Fine Gael)
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Do you believe it would have been a soft landing?
Mr. Michael O'Flynn:
I'm sorry, I believe we have other issues on the property area. I'm not saying we didn't make some ... I'm absolutely, you know, appreciative to the ... of the support and I'm absolutely acknowledging that were lots of issues in the property area. But to put us there front and centre as the cause, the developer community that I speak for, I don't think that's a fair reflection.
Kieran O'Donnell (Limerick City, Fine Gael)
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Can I just bring it to the present, and you've been quite outspoken in terms of how future planning for building of houses and commercial ... the provision of commercial property and very much, a lot of that has been directed at NAMA. What would you ... what's the blueprint that you would like to see in terms of the next five years, as to what you believe should happen in terms of provision of housing throughout Ireland and provision of commercial property?
Kieran O'Donnell (Limerick City, Fine Gael)
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And obviously, when you're giving that reply, integrate NAMA into your response.
Mr. Michael O'Flynn:
Well, the first thing one should try and figure out, what does the market need? We should only ever be supplying market needs. There was a lot of market needs that never existed that people were trying to supply. At this moment in time I'm extremely worried about the supply of houses and the supply of buildings for industry. I am worried because, whilst I've read the Government's 2020 programme, and it's quite good, it says a lot of things, I don't see much implementation attached to it.
I see a mismatch in terms of the funding for the industry. There's a serious funding problem out there for the industry. Everyone talks about we need all these houses, we need buildings, we need everything. But, to actually address the issues, someone needs to do something about it and I, I can see prices again being driven ... I think the ... I think the, the cost associated with building, the development charges, you know, we need proper regulations, and I'm all for that but some of the standards being applied by local authorities are just not necessary and are, are not what's needed in a recovering scenario. Having said that, I'm not against, the regulations are essential. I'm just talking about the extra cost being put. Development levies need to be looked at ... the whole planning area is taking for ever. We have to get real about planning in this country if we're talking about playing catch-up on what's needed in terms of housing and FDI. We're lucky that one of the pluses of the ... of that period is that we'd a lot of buildings where a lot of housing of jobs took place, but they're running out. We, we have the ... trying to fund speculative development, Deputy, is next to impossible, even in, even in this greater area in ... the greater Dublin area.
Kieran O'Donnell (Limerick City, Fine Gael)
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Why is that, finally?
Ciarán Lynch (Cork South Central, Labour)
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Final question, Deputy.
Kieran O'Donnell (Limerick City, Fine Gael)
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Just expand-----
Ciarán Lynch (Cork South Central, Labour)
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Final question.
Kieran O'Donnell (Limerick City, Fine Gael)
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Why is that, what funding model should be put in place and what can you do to ensure-----
Ciarán Lynch (Cork South Central, Labour)
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I'm only allowing one supplementary, Deputy. I'll bring you in in the wrap-up again then, okay? You're lead questioner, so you get back in.
Mr. Michael O'Flynn:
Because the banks have had such a difficult time with property, I can understand their reluctance to go near anything with, where there's ... more speculative nature than they need to. The reality of the situation is that you have to create buildings before you get tenants. Buildings aren't going ... people aren't going to come from, you know, faraway places in the world and wait two years. You have to have, I've known in places that we've developed in Cork, we've done a lot of work with the IDA over the years and they've done phenomenal work, but they needed buildings. They need buildings. I go back to the time when they used to ... advance factory rentals because otherwise we couldn't fund it. We're back to those days again but, to answer your question, we need to identify how many houses do we need and where do we need them. We need to put infrastructure where those houses, and you know I ... I've been involved with lots of meetings on behalf of Property Industry Ireland, even recently with various Departments ... in Dublin and recently with the Cork development forum. I'm really worried about the fact that there's scarce money to go around, we're not putting it where development is urgently needed to supply the housing numbers and the offices and factories that are needed. So you have to identify first: what's the market need, where is the need, you can't give some, a bit to everyone everywhere in the country and you have to supply it at a cost that works. Unfortunately, some of the costs associated with development today, the cost of funding is one of those costs. I think the development ... the banks are going as far as they can go. I think there's only a certain amount of equity around, a lot of the equity was easy to get for investment properties. It's more difficult for, for development ... I know that more than anybody else as, as well as anybody else knows that. So, I think we've challenges there in the cost of funding, we've challenges on the costs associated with planning, development levies and some of the regulations.
Ciarán Lynch (Cork South Central, Labour)
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We'll return to that again in a moment, Mr. O'Flynn, but I do need to move on. Senator Marc MacSharry.
Marc MacSharry (Fianna Fail)
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Thanks very much, and thanks, Mr, O'Flynn, for being here and sorry for delaying you so long this evening. From your statement that you've made political contributions to various parties, in your opinion was there any relationship between political contributions from the property sector and the regime of property-related tax incentives and reliefs, such as the urban renewal scheme in the pre-crisis period, and were such tax measures as common in other countries where you had business interests?
Mr. Michael O'Flynn:
Well, I made contributions to parties and there's no question about that and I've always supported various approaches for contributions. There was ... I never made a contribution to connect with and look for anything from any politician, ever. So, I don't see any connection there but to go to the, the key part of your question, I think tax incentives are very important for certain types of developments. I accept some of the tax incentives in this country probably went on longer than they should but I was involved in urban renewal, I would say urban renewal is still necessary in parts of our cities. I think we've, we have to have more people living in cities and we have to find ways of buffering the, the brownfield or, or, you know, the brownfield cost of building and the issues around that.
I mean there are large parts of our cities that are not viable, some of them were not viable in the boom years and that's the blunt reality. I've been involved in student accommodation schemes in ... back in the early '90s. Ireland led the way, we created a very big student accommodation business in the UK, in Germany and Spain. Ireland led the way with accommodation, with student accommodation because of tax allowances and it helped universities enormously and I read in the paper, I think today or yesterday, that one of the universities - I think our own man from Cork - was calling on further tax incentives. We have to provide accommodation if we're going to feed our universities and I think universities are very important. So the point I'm coming to is, there are some tax incentives which would be very necessary and very desirable today.
Marc MacSharry (Fianna Fail)
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Just so ... for absolute clarity, you wouldn't be aware of any demonstrablequid pro quofor contributions or donations?
Marc MacSharry (Fianna Fail)
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Okay and just a last question on this kind of stream, if you like. When contributions were made in ... by the firm or you personally or whatever, were they always solicited by way of, you know, fundraising activities by politicians or political parties, or, for example, at election time would you unilaterally decide "It's election time, I think I'll make contributions"?
Mr. Michael O'Flynn:
I think to answer your question, by and large, they were ... we were always approached to buy a table, buy this, buy a golf outing or something or other, and they were all public events which we openly supported and I don't ... I can't recall getting up in the morning deciding to contribute. But if I was approached for that, or for many other causes be they charity or otherwise, I was rarely found wanting.
Marc MacSharry (Fianna Fail)
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To the best of your knowledge, you wouldn't have kind of taken your own initiative and said, "Well there's an election coming up I think I'll ...".
Marc MacSharry (Fianna Fail)
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Okay, that's fine. From your perspective, do you regard the valuation methodology applied in the pre-crisis period as having been sufficiently robust and representative? And if not, what is your view in relation to any deficiencies in the valuation process in the pre-crisis period?
Mr. Michael O'Flynn:
Look ... the valuation is not an exact science, it is never meant to be. I think the valuations turned out to be so wrong, one would have to question how valuable they were. But I would also have to say that you have to have a valuation process in an industry like ours. I think the valuers, like ourselves, have learnt a lot from the crisis, I think, going forward. Values tend to be above the market when the market's going up and below the market when the market's going down. I think you won't see too many strong valuations from the experiences they, and all of us, have had in recent times. But to answer your question overall, I think valuations were too strong.
Marc MacSharry (Fianna Fail)
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And then in the crisis, well I say ... let's ... rather than the crisis, in the stronger growth period, say that's 2005-2006, into 2007, did standards drop in any way in terms of the approach by valuers, in terms of the robustness of loan to value? Or was there any sense that valuers were facilitating developers perhaps to get a better loan to value ratio from their perspective rather than the banks-----
Mr. Michael O'Flynn:
I can only speak of my own experiences and we always dealt with the main companies when it came to valuations and valuations were nearly always a requirement, a precondition in the bank borrowings. I have never experienced anything other than proper, professional approach and I dealt a lot in the UK as well and, I must say, the Irish-UK model would have been very similar.
Marc MacSharry (Fianna Fail)
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Yes, and would any valuer have ever, if you were putting together a project and maybe you had your own view, or your project team had their own view of a value, did the valuer ever say to you, "Sorry no, that won't work, that doesn't work, that doesn't stack up"?
Mr. Michael O'Flynn:
No, absolutely ... even ... if the valuer wouldn't always agree and that's fine too. But we had our own process for evaluating, you know, a project. And we never brought in valuers except as a banking requirement, because we would have had our own skills in the various offices that we have, because we don't operate at a distance from any of our projects.
Marc MacSharry (Fianna Fail)
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You said there that in nearly every instance a valuation was required. Can you outline a case or two, perhaps, where, in borrowing, a valuation was not required?
Mr. Michael O'Flynn:
Chairman, I have to check, but, by and large, it was a box that we always ticked. And, you must remember, if I was to go forward with a development, I would have to be sure of my sales prices and we would generally ask ... consult with external agents, and we would always work on the basis that you might be asked to value this. So there was no point in giving us a value unless it was going to, you know, follow through.
Marc MacSharry (Fianna Fail)
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I suppose ... it's not in any way to question your own good business model, it's rather to get a perspective because we've had other evidence that would suggest that, on occasion, financial institutions did not seek valuations. So, could I ask you, without being specific to any cases, are you aware of any loan for a development purpose that was extended, to you or anybody, without a valuation being insisted upon by the financial institution?
Mr. Michael O'Flynn:
I can't say that I am, to answer your question, but I've no doubt loans were extended where banks took a view of other security but ... and that I would be aware of, because I was often puzzled by the prices paid, so ... and puzzled by the prices paid, there's usually some reason why a bank can lend more than what's-----
Marc MacSharry (Fianna Fail)
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In your assessment, did NAMA save your business, or not? And are there features of NAMA's engagement with your company that you regard as particularly helpful and any as particularly unhelpful?
Mr. Michael O'Flynn:
Well, that's a big question. I've already outlined a lot in my statement ... and mentioned in my opening statement. I think the concept of NAMA might have worked had they embraced the industry and those who were capable of working through. I didn't think it was the right concept. I put into my statement ... I made a submission, I felt there should have been a bad bank in each bank. I think if NAMA was a ... overall credit-controlling structure, it might have had some chance but the kind of skills that NAMA ended up with ... for the kind of undertaking they had to carry out, it was just an impossible ask. They didn't have the skills to deal with companies of our scale or of the type of product we were dealing with. It became ... it wasn't an asset management company, it became a quasi-receivership vehicle.
Marc MacSharry (Fianna Fail)
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So just ... in the word, then, helpful or unhelpful?
Marc MacSharry (Fianna Fail)
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In your opening statement, sorry, in his opening statement, Mr. Daly's comments ... it's okay to make reference to previous evidence isn't it?
Ciarán Lynch (Cork South Central, Labour)
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Yes, once you're not getting into the business of-----
Marc MacSharry (Fianna Fail)
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Sorry, I am quoting from you, I'm just confusing myself slightly for a second. In your own opening statement, you said that "Mr. Daly's comments illustrate NAMA's lack of understanding of the development sector and I take exception to the generalised suggestion that diversification can only be explained as an unbridled and irresponsible "compulsion to purchase-----
Marc MacSharry (Fianna Fail)
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Was it, okay, sorry, Mr. McDonagh ... "compulsion to purchase more", you said. Can I ask, did NAMA have an expertise or skillset deficit, to your mind?
Mr. Michael O'Flynn:
Well, I think it had. I don't see how NAMA could ... like, the banks had an expertise in banking and financial ... albeit everybody had difficulties, but NAMA didn't have the asset management-type property experience that was necessary and it became very clear that the programme was to dispose of assets and there's been an extraordinary amount of assets that were sold at totally the wrong time. But on top of that, a lot of assets lie dormant. We weren't preparing planning permissions, we weren't working on preparing for the shortage that we now have today because nothing happened for a number of years.
So ... if the work was done in that period, which was all part of our plan and I'm sure the plans of others, well, then you would have a much more valuable portfolio today. But you've portfolios now being sold where pretty much nothing happened for a number of years. Like, the nature of our business wasn't a collection of assets, it was a business. You can't let a business ... you have to keep working a business and I am ... we have a sound business plan.
Marc MacSharry (Fianna Fail)
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Did you have a sense that ... you were mentioning earlier about you had gone with your business plan and so on and this was rejected ... did you have a sense that because you were the developer, because you were the business owner, that, in some way, because you were the maker of the suggestion or business plan that it was going to be wrong anyway?
Mr. Michael O'Flynn:
Well, we had it professionally assured by an outside company. So, we didn't just make it up ourselves in a room and say "NAMA must agree with us."
Marc MacSharry (Fianna Fail)
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So, it is your-----
Marc MacSharry (Fianna Fail)
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Yes. No, I appreciate that. So is it your assessment that it wasn't adequately assessed on the other side?
Marc MacSharry (Fianna Fail)
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Okay. Do you think-----
Mr. Michael O'Flynn:
There was another plan in play to dismantle the people in the industry and that plan ... I was told at a very early meeting by the senior executives, "We want disposals. We don't want plans. We don't want development. "We don't need any more development", I was told at one meeting by a very senior executive and I said, "But this is a business that I've been in for an awful long time and we will need development again." And I'm on public record of saying that for a number of years now. We had too much development in many places but we have ... we had a short ... we never oversupplying. We'd wrong product at times and I'm guilty of that, partly driven by planning considerations and partly driven by bad timing on our part. I'm the first to accept to that but, by an large, we shouldn't have stopped the development industry like we did. We shouldn't have panicked either, like we did. I'm sure Europe ... we'd have found a way with Europe if we had proper approach to a lot of companies who were capable of working out their product and supplying the needs of an economy that was in difficulty but had a careful plan to return to ... which it has done and which we wanted to tie into as an industry.
Marc MacSharry (Fianna Fail)
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In your opening statement, you said, and I'm quoting, "I firmly believe that, from the outset, the Board of NAMA lacked experience in many important areas but most notably [I just said there a second ago again] in the area of asset management and development ... NAMA had embarked upon a strategy of disposals which I believe ultimately cost the State dearly." Can you expand a little bit on this?
Marc MacSharry (Fianna Fail)
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Okay. Well, put it another way. Let's just say NAMA, as opposed to board or executives, I mean do you feel that ... I mean, would it be correct to say that they embarked on a strategy for disposals which ultimately cost the State dearly - as an entity as opposed to individuals or board or executives or-----
Mr. Michael O'Flynn:
There is no question, Senator. By anybody who understands the Irish property businesses and companies that there has been an incredible amount of money lost on the structure that was set up to save the banks but it did the opposite, to work out the industry which it never actually did and we now have shortages and rising prices, which is a concern to everyone, and very few structures capable of actually delivering product which is ... you know, to attract the new money that's needed for development, you need platforms, you need businesses because, you know, and I have recent experience of this. The first question that all of these equity providers who might look at development will ask is, "Who is the company? Do you have a structure? Is there someone to receive the money?" So, all of this happened under NAMA's watch. That's my answer.
Marc MacSharry (Fianna Fail)
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Did your experience in disposals that ... did NAMA, do you think, or not, look to the assets with the stronger or the greater equity to dispose of first or to move first so as to raise capital for their own works rather than - and you had mentioned earlier - looking at the longer-term picture of what was viable development?
Mr. Michael O'Flynn:
Well, some of the overseas assets that were sold quickly, and I resisted that, were extraordinary. We knew in the industry, those of us operating out of London ... there were very good examples in London. Some of the assets now that are maybe been brought to the market in Ireland are actually going to do well, but had they been sold back then like others were, you'd have had the same result. So it's extraordinary that we were in such a rush to sell good assets, a lot of them good income-producing assets, and, at the same time, hold the borrowers responsible for the outcome when the timing couldn't have been worse. I think in a banking situation ... and I have been through the banking issues in the past in terms of tough times be it in Ireland and in the UK and overseas. We worked through ... we paid all our money back. It didn't happen today or tomorrow but it was always the plan was you borrowed the money, you paid your money back and that's what companies like I wanted, like us wanted to do.
Marc MacSharry (Fianna Fail)
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I don't want to panic the legals on the next question so I'm only going to be questioning in a very general sense, okay. I'm going to quote for you and then I'm going to ask a question but in a very general sense. And you said in your opening statement:
NAMA was required to have full regard of the legal rights of those who were to be affected by those powers. Regrettably, in my experience, it did not always happen.
So not speaking specifically, but in a general sense, which legal rights of developers do you believe, in general, were affected by NAMA's operations?
Ciarán Lynch (Cork South Central, Labour)
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I'll assist you in answering the Senator's question. Is ... without finding yourself in a space of making an allegation that would be ... well, it might consider an abuse of privilege or something like that I would maybe, if you could speak in general terms as to what the approaches were. Once you don't make a statement. Okay, please.
Marc MacSharry (Fianna Fail)
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Yes, I've, kind of, my own notes done out so I can't tell you what page it's on, I'm afraid.
Marc MacSharry (Fianna Fail)
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It's on the screen, great.
Ciarán Lynch (Cork South Central, Labour)
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Highlight the section. It's hard to read there sometimes if it's at an angle. Yes, it's the ... item 4, the role of NAMA.
Marc MacSharry (Fianna Fail)
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My screen isn't operating so I can't help.
Ciarán Lynch (Cork South Central, Labour)
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You've got it.
Marc MacSharry (Fianna Fail)
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I couldn't tell you; it's not in front of me, unfortunately.
Marc MacSharry (Fianna Fail)
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Yes, it's the first paragraph I'm told, yes.
Mr. Michael O'Flynn:
There is no doubt in how NAMA operated, the extraordinary powers vested in it were used to make ... to get commercial solutions from borrowers who didn't have any access to the courts and who were not able to defend their positions. Now, it's one thing to give extraordinary powers; it's another thing for those powers to be used, not just in a legal sense, but in a commercial sense, and I think the property rights of companies and individuals was taken away by the fact that people had no choice. It was a case of if we didn't accept what was being suggested, another solution would be found for your borrowings. I think the rights of the individuals and I don't want to go into the technical side and I don't want to go into any of my own. But the rights of the individuals and companies were ignored in the application of their commercial power, not to mention their legal options.
Marc MacSharry (Fianna Fail)
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Okay. Chairman, you can guide me on this one. I'm going to quote again and then ask you a question, but if I'm veering offside, you can let me know because I am not sure. Again, in you opening statement you said:
The O’Flynn Group co-operated fully in all of its dealings with NAMA, but there was no consultation with the developer when the loans were acquired; a strong business plan was rejected without explanation; and there was a leakage of very sensitive information into the public domain.
What leakage of sensitive information was made into the public domain that you referenced in your opening statement? And do you believe the leaked was-----
Marc MacSharry (Fianna Fail)
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-----deliberate or accidental?
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Okay. We're all right.
Marc MacSharry (Fianna Fail)
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Is that all right?
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Marc MacSharry (Fianna Fail)
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Okay, that's all I wanted to know about that. Very finally, three minutes ahead of schedule: for the taxpayer, do you believe that in NAMA, the public have got value for money?
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. I'll just take a couple of questions myself there, Mr. O'Flynn, and it's been indicated to me that some members might want to have a very short break, a comfort break, at that time. Mr. O'Flynn, would you describe yourself as a developer or a builder or is there a difference?
Mr. Michael O'Flynn:
It's a good question, Chairman. It's a question I'm hearing more recently. We are builders and developers, in that I think to describe ourselves only as developers isn't doing justice to the amount of other skills that we have in terms of project management, construction and development management. And I think the origin of the business was building and developing. In the '80s, there was one profit. That was a combination of construction, project management and developer. Unfortunately in the years leading up to the crisis, everybody became a developer and all the other skills were hired in. I think we're going back to the model where unless you have the in-house structure and ability, I don't think the banks will want to know any more, and I don't think if the banks will be interested, you won't be able to borrow money.
Ciarán Lynch (Cork South Central, Labour)
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I want to focus on the building aspect in a moment. Were you a land speculator at any time?
Ciarán Lynch (Cork South Central, Labour)
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Okay. And did you speculate at any-----
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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On the building side of it, I want to move to the present, and then maybe work a bit backwards and we'll go back into NAMA and all the rest of it. In testimony recently with the former Taoiseach, Bertie Ahern, last week, one of the issues that he repeated over and over was to increase supply, increase supply, during the crisis years. However, we know that even with the increase in supply between 2002 and 2007, affordability was an issue for a lot of people and that people on the average wage saw the average price of a house go up severalfold, in some cases ten to twelvefold over a period of time. In terms of a construction building programme at this moment in time, where are we with affordability? Is it possible, to your mind, that we can build houses that are somewhat in or around maybe four to five times the average industrial wage and provide people with an average house at that cost?
Mr. Michael O'Flynn:
We are struggling to supply because the cost of building is higher than the sales price, so we ... and I think one of the problems of those years is that there was too much credit available to people to buy houses and there wasn't enough serviced and zoned land to supply where product was needed.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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But at affordable levels is the question I'm asking, Mr. O'Flynn? Is-----
Ciarán Lynch (Cork South Central, Labour)
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Maybe if I can ... maybe if I can reshape the question?
Ciarán Lynch (Cork South Central, Labour)
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There's a difference between returning to a sustainable construction programme, where it's 12% of the economy, as opposed to 24%, but there is a question as well that has to be put, that we, we ... recovery does not mean prices of back in the heady days of 2005, 2006 and 2007?
Mr. Michael O'Flynn:
Chairman, to answer your question, I think we've a cost-based problem, because we can't afford prices to go up too high. They need to recover more, a little bit more on the sales side, but I think on the costs side, on the VAT side, for example, I mean, there is ... on Part V, social and affordable housing, I was a big critic of not having the integration but having the costing loaded onto the private mortgage holder.
I think the whole ... there's up to 40% of a house, goes back to the Exchequer, in some form or other. To answer your question, I think we have a difficulty on the cost side, and, I think we need some more help on the sales side. But, it can't be all on the sales side, because, if your average couple - and we knew this was happening - if your average couple can't-----
Ciarán Lynch (Cork South Central, Labour)
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This brings me to my next question.
Ciarán Lynch (Cork South Central, Labour)
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Okay, and-----
Ciarán Lynch (Cork South Central, Labour)
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And by, by the mid-2000s that's exactly where we were, in that the typical Garda, nurse, or whatever, were not able to afford to buy your product, and-----
Ciarán Lynch (Cork South Central, Labour)
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Can you just hear me out a second?
Ciarán Lynch (Cork South Central, Labour)
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Thank you. The State, through Part V and other measures, as you mentioned, made interventions and, in the Cork region, that both you and I would be familiar with, we saw affordable housing which is social housing, which is subsidised to allow people to have the ambition realised to buy a home exceeding €200,000 and so forth. So, on the basis that there was an affordability issue, as you just mentioned, did you, at any time, spot that affordability issue in the 2000s, and at any time did you adapt or change your business model or talk to the banks about it?
Mr. Michael O'Flynn:
I certainly realised we were pricing ourselves out of business, for want of a better description. I probably expected prices to level off for a long time. We were fortunate in that we were able to build, project manage and develop, but others couldn't. I definitely would have said it many times to ... at meetings with Departments, which I often attend - I attended some in the last few weeks, discussing this very issue - and, certainly would have said it to the Government of the day as well, because, we were ... I would have regular interaction through the CIF, or, in recent times, more with PII, about the difficulties of having a business model that's sustainable, fundable, and that'll deliver a product.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Going back into the future, again, is there a Rubicon that gets passed, that when the average household couple earnings ... that the price of the average home that would be in their affordability range passes a ratio point that we have an unsustainable model again?
Ciarán Lynch (Cork South Central, Labour)
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In the new building market, now.
Ciarán Lynch (Cork South Central, Labour)
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All right. Mr. O'Flynn, there was a nine-month time lag from the announcement of NAMA to the enactment of the enabling legislation and a further few months before business loans began to be transferred from the banks. Now, you've spoken in general, but I just ... this specific aspect of it, did this time lag have any particular effects on your business, and, if so, please elaborate?
Mr. Michael O'Flynn:
It had enormous effect on our business in that the banks weren't able to operate, NAMA weren't fully in play, and we were left in a situation that we were between both, and, for a long period of that time, NAMA had to approve decisions that the banks were making. It was just ... it was ... it really did exacerbate a bad situation, and that's why I've always felt that, had a solution been found connected to the banks, you would have saved all that time, and you would have saved an industry that was in total meltdown.
Ciarán Lynch (Cork South Central, Labour)
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Mr. O'Flynn, related on the NAMA operation again, NAMA adopted five approaches for managing debtors. Basically, there was a menu of them there, about five approximately. One was full loan restructuring;, two was partial loan restructuring; three was disposals links to key milestones; four, agreed disposable programmes; and five, enforcement. Typically, one of these approaches was applied to a debtor; if not, maybe a menu of them. Were any of those five approaches taken with you, collectively, altogether, or one or two of them?
Ciarán Lynch (Cork South Central, Labour)
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Okay. And, in taking those approaches, would you have considered them fair, benign or adverse?
Mr. Michael O'Flynn:
Look, I didn't expect NAMA to be an easy place for anyone. I did expect it to be commercial. I did expect it to be more understanding of the nature of the businesses we were in, and I did expect it to want to engage with a strategic look forward. It didn't have that, and I don't think it ever sought that as its remit, to be fair to some of the board and people in NAMA.
Perhaps there was a disconnect there between the Government and NAMA.
Ciarán Lynch (Cork South Central, Labour)
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And on that broad range of, sort of, operations, because I ... with trying to comprehend the complexity of such a situation going in there ... and there are so many parties to it and so forth - banks, your own organisation, subsidiaries and so forth - and then debtors and creditors and everything else, was there any time during that period where NAMA gave assistance to any creditor issues that you may have had during your involvement with them?
Mr. Michael O'Flynn:
Any assistance NAMA gave us on creditors we provided security they didn't have-----
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Mr. Michael O'Flynn:
-----previously. And I said it in my earlier remarks to Deputy O'Donnell that we ... we weren't found wanting, even though we didn't have the various companies cross-secured. But, at that stage, I understood we were dealing with a different structure to what it turned out to be.
Ciarán Lynch (Cork South Central, Labour)
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I'll move on to the whole, sort of, exiting of NAMA in a moment but maybe if I can just get a picture. When was the last significant big project that you undertook where you borrowed significant sums prior to the whole business product going south?
Ciarán Lynch (Cork South Central, Labour)
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Pardon?
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Okay, and what was the cost of that development, about-----
Ciarán Lynch (Cork South Central, Labour)
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Okay. And had you ... were you commencing other developments in and around that time where you had sought funding as well?
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Mr. Michael O'Flynn:
We finished off houses that were under construction. We brought other houses to a convenient stop and we generally, what I would say, made sound commercial decisions as regards what to finish and what to leave, and we brought all our estates to a completion that any residents who bought were able to live and not feel they were living in a building site.
Ciarán Lynch (Cork South Central, Labour)
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I remember the Elysian when it was built and the one abiding memory I have of it, Mr. O'Flynn, is I think that a one-bedroom apartment in it was something like €385,000 and you could get a Porsche kitchen put in for about €100,000 on top of that. I think it might be cheaper to buy the car and you would have had a better investment in the long run, but you could get a ... at any time, did anybody say ... because, remember ... because I live in Cork, you could still get quite a good house in the suburbs of Cork for in around €350,000. You were selling one-bedroom apartments for the same price, if not more, with the super-duper kitchen to go with it. Did anybody say "this business model is a-----
Ciarán Lynch (Cork South Central, Labour)
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I don't think it did. Maybe I ... I could be incorrect there.
Ciarán Lynch (Cork South Central, Labour)
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It would be a one-seater Porsche if that was the case, Mr. O'Flynn.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Mr. Michael O'Flynn:
It's a building that any modern, growing city should want and should have. Unfortunately, the timing was terrible in that it probably took us a year to a year and a half to get planning, and it probably took us two and a half years to build. So when you press a button ... and we had a lot of equity put into the Elysian, when you press ... and put a lot of equity into finishing the Elysian, and I think we brought it to the right stage. Unfortunately, the reason it's spoken of so much, and I'm happy to bring it up as an example to answer you question, Chairman, is that NAMA refused to allow a fit out of the Elysian, and had that happened it would have been occupied immediately. We subsequently had some units fitted out but had all the units been fitted out day one, every apartment would have been occupied. It will recover in time. It will take some time, unfortunately, but it's ... it's a development that Cork can be proud of and that will always work in Cork. And remember, this was all appraised; we didn't just ... we were working off house prices of the day. We were working ... we had done our construction cost analysis. So you might say the prices seem crazy but I can tell you, we would not have started that without the appraisal being signed off by the bank - and it was one of the pillar banks - by the sales, by the construction. So we ticked all the boxes that we always ticked but we never expected the prices to fall to the extent they fell.
Ciarán Lynch (Cork South Central, Labour)
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And-----
Ciarán Lynch (Cork South Central, Labour)
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Okay. This is my final statement, then I just propose we take a very short break. You say, on page 5 of your statement, that NAMA embarked on a strategy of asset disposals which you believe ultimately cost the State dearly. As assets disposals were - and still are - linked to the redemption of senior bonds, as agreed with the troika, in your opinion, what should NAMA have done differently?
Mr. Michael O'Flynn:
Well, they should certainly have not disposed of assets and they ... in the early days, which they did. They should have found a way of going back to Europe, going back to the State to ... once they understood the cyclical nature of our business and the likely recovery of that business. When the private equity companies come in here, in great numbers, I can assure you they know what's going to follow, and it has followed. So they should have found a way of doing what banks always did in this situation, they should have worked out the loans and worked out ... with the borrowers who were capable of doing that. And some of the properties that were sold in London and other parts of the globe by NAMA have turned out to be very expensive lessons for the Irish taxpayer.
Ciarán Lynch (Cork South Central, Labour)
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And just on that, on a general rule then - it's my final, final question - is ... was there ever any vast differences between your internal valuation and external valuations?
Ciarán Lynch (Cork South Central, Labour)
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Okay, well if ... a significant-----
Mr. Michael O'Flynn:
I don't consider 5% to be ... to be a big difference. There's a tolerance level in valuations. Of course, if we got valuations that didn't match our own anticipated prices, we wouldn't have gone ahead with a project but I would rarely have come across a situation that that happened.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. O'Flynn. I now propose that we break for just five minutes or so, for a comfort break. Just to let you know that you are still under oath. You can take advice from your own ... your own team, if you wish ... if you wish to do so and we'll return and you're still under oath. Just before we go into ... I just, very quickly, just on a housekeeping matter, I now propose we just go into private session. I just want to make an announcement.
Ciarán Lynch (Cork South Central, Labour)
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We continue our engagement of this evening with Mr. O'Flynn. It is just coming up for ten o'clock, so if I can ask Mr. ... or Senator Michael D'Arcy to recommence questioning. Senator, you have ten minutes please.
Michael D'Arcy (Fine Gael)
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Thank you, Chairman. Mr. O'Flynn, you are very welcome and you're good to stay.
Michael D'Arcy (Fine Gael)
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Banks were under increasing pressure due to the competition within the banks to offer incentives, such as non-recourse loans, interest-only roll-up, lower interest rate margins, interest holidays and the like. In your experience, were such practices common among Irish banks? And if they were, did the situation differ between Irish banks and banks, non-Irish banks, banks from outside of the jurisdiction?
Mr. Michael O'Flynn:
I think the practice was very similar on both sides of the Irish Sea, but I predominantly worked with the UK ... or with the Irish banks. I think, yes, there was competition. I think, unfortunately, a lot of lending seemed to have been based on personal guarantees, which seemed to have give comfort to the banks, albeit for maybe not the best reasons. And I think that ... I was ... I'm somewhat surprised by the level of competition that led to, maybe, personal guarantee style banking to the extent that it actually happened.
Michael D'Arcy (Fine Gael)
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And did the non-Irish banks in ... banks from other jurisdictions accept personal guarantees as sufficient collateral?
Michael D'Arcy (Fine Gael)
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As a business or a profile of a major construction development company grew, did you observe a relaxation in the lending criteria?
Mr. Michael O'Flynn:
I can't say I did. We had our own approach to lending, or to borrowing, and when we were borrowing, we set about a proposal that we had our own internal approach, our own process, and we went to the bank when we were pretty sure that we had a bankable proposition that made sense for us to go forward with. I can't say that I saw any big change in the approaches by banks, and I would have found them all to be pretty similar in that regard.
Michael D'Arcy (Fine Gael)
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You discussed NAMA earlier, Mr. O'Flynn, the €42 billion discount. Could you speak further in relation to that in terms of ... I'm not asking you about your own personal business; what I am asking is what is your understanding about how the State gets back, some, all of that €42 billion?
Mr. Michael O'Flynn:
Well, I would be surprised with some of the prices that were paid, if they don't make a profit, but you have to understand that there was an awful lot of money spent on professional fees. It became quite a business, the professional fee, not just the NAMA professional fees, but what was added on to the borrowers as well on ... in relation to maybe NAMA's professional advisers as well as the borrower's own professional advisers. And I'm not sure a lot of value was gained from that, because, perhaps, in some cases, the security was poor, and the businesses weren't sound propositions in the first place or they lacked a professionalism. But in a lot of cases - and I can speak from my own experience - there was nothing gained from the millions that was put into professional fees.
Michael D'Arcy (Fine Gael)
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Sorry, Mr. O'Flynn, Minister Lenihan told us very clearly during the NAMA debates, that the discount would stay with the borrower, would stay ... and that the banks ... while the money-to-par value that was transferred to NAMA ... that the borrower would still be on the hook for the discounted amount or loan.
Michael D'Arcy (Fine Gael)
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Sorry, the discounted amount that you didn't bring into NAMA, that was with the banks, is the money I'm discussing.
Mr. Michael O'Flynn:
The banks paid ... the banks were paid a discount by NAMA, but the borrower still owed the full amount, so the discount was ... in some cases, it was one arm of the State paying the other, and because of ... at that stage you had a nationalisation of one of the banks, or a number of the banks. So what was that about? I don't know.
Michael D'Arcy (Fine Gael)
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What I'm trying to explore is the discounted amount that wasn't transferred into NAMA that remain on the banks' balance sheets, that the developers are ... had borrowed ... the full value. Will the State see any of that money?
Michael D'Arcy (Fine Gael)
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Sorry, the loans were ... the full loans were €74 billion. NAMA were ... paid the six covered institutions €32 billion.
Michael D'Arcy (Fine Gael)
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There was a discounted amount of €42 billion.
Michael D'Arcy (Fine Gael)
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The money is lost to the banks.
Michael D'Arcy (Fine Gael)
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Yes, I'm aware but will the State get the money back is what I'm trying to ask?
Mr. Michael O'Flynn:
Well, unless NAMA makes a big profit and I can't see the structure that's there and the lack of activity to a lot of the businesses that were in and remember, it should make a big profit because good loans were taken as well as bad loans or challenging loans. And I would have expected them to make, you know, quite a profit. But you don't make profit in business unless you invest in business.
Michael D'Arcy (Fine Gael)
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True. Mr. O'Flynn, Mr. Dan McLaughlin, chief economist with Bank of Ireland ... I'm not sure if you saw any of his evidence?
Michael D'Arcy (Fine Gael)
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He stated very clearly that there was a commercial real estate sector that damaged the banking sector more than anywhere else and he itemised the ... Anglo Irish Bank as being the most expensive to the State, costing over €30 billion. And he also stated clearly that and the documents that we've had at our perusal stated that Anglo Irish Bank was 82% commercial real estate, 1% residential and 17% corporate, much of which was related back to commercial real estate sector ... a monoline bank. Could you offer me an opinion in relation to commercial real estate sector?
Mr. Michael O'Flynn:
I mean, Anglo was a property bank. That's what Anglo was. That was the model and unfortunately, there was a mismatch between what they were borrowing and lending because they didn't have the access, the funds. So that mismatch, it was ... none of us, none of us understood the position we were all finding ourselves in by borrowing money. And it was a raw material for our business but none of us understood the situation that they had a mismatch on their side and that came back to haunt us all because the banks, really, couldn't afford to lend the money they were lending.
Michael D'Arcy (Fine Gael)
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You stated previously, Mr. O'Flynn, that the international dynamics were the biggest factor. Is that ... would I be correct in assessing that?
Mr. Michael O'Flynn:
The global crisis had a big influence. I think the euro situation, that euro lending that when we went into the euro and the lending that happened as a consequence of that and the access to money by the banks. And that's how the banks grew because of the access overnight and the access to short-term money. I think that drove property prices and I think property contributed but I think the bigger macro issues were the root cause rather than we were the cause. We were a contributor but not the cause.
Michael D'Arcy (Fine Gael)
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Those macro influences were in other jurisdictions?
Michael D'Arcy (Fine Gael)
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Nowhere else had the same banking crisis ... same banking crash like ours. Did you explain that?
Mr. Michael O'Flynn:
I think England had quite an issue but they dealt with it quite differently by the insurance scheme they brought in. I think we, in setting up the NAMA structure, we hastened the demise of our banks and we also ... if you look through the NAMA ... the purpose of NAMA and go through each of the line items in NAMA and I'm happy to go through them, if you wish now.
Michael D'Arcy (Fine Gael)
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But, Mr. O'Flynn, sorry. Just to make ... the €64 billion was 1.5 times the national debt of the nation. The UK's banking crash wasn't 1.5 times ... the equivalent of the national debt of the UK.
Mr. Michael O'Flynn:
I'm not for a moment suggesting that amount of money should be lent to property. I absolutely ... it was far too much property for this State. But a lot of the property that was being lent on for outside the State and a lot of that didn't turn out to be as sound as one would have expected. But the reality of it is there was too much money lent in property. There wasn't enough regulation in that regard. And I've been speaking for our own structure and structures like ours - I think we were able to take a shock but the shock that came was just no ... no business can operate if the ... all the banks get into difficulty at the same time and all the customers are going to be affected at the same time. So, yes, I think there's no doubt that the banking ... the amount of lending, how a lot of the lending was done, the lack of regulation around it, I think all of those are big issues which I am sure this ... which I know this inquiry has a lot to assess. But I think that's the ... that's the root cause of the situation. That's my view. That's all I can give you is my view-----
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Deputy Joe Higgins. Deputy, ten minutes.
Joe Higgins (Dublin West, Socialist Party)
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Mr. O'Flynn, you say in your opening statement that generally in relation to your loans that there was quite strict vetting by the banks before a loan would be given. Is that correct?
Joe Higgins (Dublin West, Socialist Party)
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Yes, and you've seen on the other hand that NAMA and other witnesses here have said the opposite, not in relation to your business, which wasn't commented upon, but as a general comment. So have you any ... how can you square this situation that you ... you say were impeccably proper with regard to securities, etc.? But generally there seems to have been a laissez-faireattitude according to other witnesses.
Mr. Michael O'Flynn:
Yes, I ... like, Deputy, it's a fair question and I did say in my statement as well that there was a big difference between the approach of professional developers from part-time developers and I can't speak for how ... how poorly some governance was in loan applications. But the reality is that if the loan application ... the person making the application had a poor system it looked like it might have still got through and I can only speak for companies like ours who actually did our business in a certain way. And when our business transferred to NAMA, there was no outstanding security, no outstanding undertakings, no outstanding anything because we were as keen to make sure that our security was done properly. So, to answer your question, I think that there ... based on the evidence of people from NAMA and elsewhere, there were a lot of ... of less than proper legal and other diligence work done and people borrowed money.
Joe Higgins (Dublin West, Socialist Party)
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Mr. O'Flynn, there was evidence given also regarding to ... a reliance on solicitors' undertakings for loans. Were you aware of this?
Joe Higgins (Dublin West, Socialist Party)
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Mr. O'Flynn, one estimate would say that tax breaks for property development cost the Exchequer €2.78 billion between 2004 and 2008. Were such tax breaks important to your business and would your business and loans have been viable without such tax breaks?
Mr. Michael O'Flynn:
I think they would have been viable. In that period of time, I don't think we benefited from any tax breaks. We were ... we benefited from tax breaks in the earlier period. I'm not sure what specific tax breaks you are referring to when you give that figure to me. Can you enlighten me on the tax breaks for that period?
Joe Higgins (Dublin West, Socialist Party)
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Well, I think it refers to a whole range of-----
Mr. Michael O'Flynn:
A whole range. Well, I think a lot of the tax breaks, e.g., hotels and seaside villages and that, I think ... I could never understand them, first of all. And, secondly, I don't think they needed to be there for developments to happen and some of them might have been better off if they never happened.
Joe Higgins (Dublin West, Socialist Party)
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So would you say that it was then a needless subsidy from the taxpayer to developers and banks?
Mr. Michael O'Flynn:
I think it ... I think some tax breaks as I said, Deputy in my opening statement or in response to the first questioner, some tax breaks were necessary and they're desirable and they would be desirable today, but I think a lot of them were ... perhaps they were a good idea, but they should have been a finite period on them, and I think they went on far too long.
Joe Higgins (Dublin West, Socialist Party)
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Right. Just moving on then, Mr. O'Flynn, The Irish Timeson 19 May 2014 reported or said that loans worth about €1.8 billion by yourself and NAMA were sold to Blackstone for €1.1 billion. Would you say, now that you're out of NAMA, if that's-----
Joe Higgins (Dublin West, Socialist Party)
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Is that accurate?
Joe Higgins (Dublin West, Socialist Party)
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But do you know how many ... much loans went into NAMA, surely?
Mr. Michael O'Flynn:
Oh sorry, I'm aware of the loans that went into NAMA. And it ... sorry, went into Blackstone ... you mean were sold to Blackstone?
Joe Higgins (Dublin West, Socialist Party)
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Yes.
Joe Higgins (Dublin West, Socialist Party)
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And you've no knowledge of how much NAMA received from Blackstone?
Joe Higgins (Dublin West, Socialist Party)
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For those loans?
Joe Higgins (Dublin West, Socialist Party)
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You've no way of venturing an educated guess, have you?
Mr. Michael O'Flynn:
No, I've already explained to the inquiry that we set about to repay all our loans. Our business plan was rejected and I've never made a secret of the fact that I, given that our plan was rejected, I was quite keen to exit NAMA because I couldn't see any future in a structure that didn't allow me to apply my business and work my way out of all my loans.
Joe Higgins (Dublin West, Socialist Party)
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And, Mr. O'Flynn-----
Mr. Michael O'Flynn:
The result, the result from Blackstone ... the NAMA sale to Blackstone, I was outside the room, Deputy, I was never involved in it-----
Joe Higgins (Dublin West, Socialist Party)
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Yes.
Joe Higgins (Dublin West, Socialist Party)
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Yes. Let's say, for the sake of argument, that it was sold to Blackstone for a lesser amount, some hundreds of millions; who ... is somebody pursuing you for that difference?
Joe Higgins (Dublin West, Socialist Party)
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Okay.
Joe Higgins (Dublin West, Socialist Party)
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Well, could Blackstone pursue you, for example?
Mr. Michael O'Flynn:
Well, Blackstone ... I owed Blackstone the full debt, not any discount they might have received and the Blackstone situation is well known. We ended up in quite a dispute and as a result of that dispute we have a settlement, which is confidential, Chairman and I cannot go into that.
Ciarán Lynch (Cork South Central, Labour)
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We get that, and I don't want you to breach that either.
Joe Higgins (Dublin West, Socialist Party)
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Okay, and, Mr. O'Flynn, the examiner reported that you were able to buy back some of your loans or-----
Ciarán Lynch (Cork South Central, Labour)
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Is it the Irish Examineror the financial examiner? Just to be clear on that.
Joe Higgins (Dublin West, Socialist Party)
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Yes. Is that true?
Mr. Michael O'Flynn:
Just to explain ... sorry, just to explain, Deputy: in the settlement of our dispute, and I have to be very careful here, I am ... we are taking away a certain amount of assets and Blackstone are taking away the rest. The lion's share are going to Blackstone and the debt follows both. Okay? So I am finalising a structure with Blackstone, which takes away development assets for both Ireland and the UK.
Joe Higgins (Dublin West, Socialist Party)
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Yes, because of time I'll just move on, Mr. O'Flynn. Mr. O'Flynn, you said the developer is not to blame for the crash. Most people and many witnesses certainly to this inquiry would say that in many ways, developers and bankers were Siamese twins responsible for blowing up the bubble to excessive lending, speculation and so on that caused the crash?
Mr. Michael O'Flynn:
Well look, I can only be responsible for my own business, and I'm not saying that property lending hasn't contributed to the ... to the crash. Certainly as far as I'm concerned, developers like us who have always done our business for all the years, 30-plus years, didn't cause the crash that you refer to.
So, I can't speak for the world but I can tell you ... is that we alone, in how we did our business, wouldn't have caused any crash. Some of the property lending - and the scale, and the lack of regulation and some of the people it was lent to - perhaps contributed to the crash. But I'm not ... I don't think it's fair for, with due respect, for people to put the tag on us as the people ... or to describe us as Siamese twins with banks. I mean, banks can speak for themselves but I speak for my developer situation.
Joe Higgins (Dublin West, Socialist Party)
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Okay. Mr. O'Flynn, you asked a question in the course of answering ... or, here, tonight, and you posed, "How can we build houses that people can afford?" You're aware that a High Court judge, Kenny, had a report in '73-'74 ... that the price of building land should be controlled so that speculation was ruled out. And if you combine that with building homes at cost prices, people can afford that then. Is that ... wouldn't that be true? If the speculation and the profiteering was ripped out of the system then people could afford.
Mr. Michael O'Flynn:
Well, I, I'm aware of the Kenny report that never actually ... I think anything happened with it, as such, but-----
Joe Higgins (Dublin West, Socialist Party)
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It was never implemented.
Mr. Michael O'Flynn:
Never implemented, that's ... that's what I should have said. But, Deputy, to ... to answer your question, I'm not speaking for land speculation. Land speculation ... or spiralling land prices is bad for people in my business. It's ... we are people who build houses. We have built hundreds - 400 to 500 houses a year on the peak - we've been building houses since 1978. We employ lots of people directly to do that and hopefully we will be back building houses again. The problem, Deputy, is that we can't build houses unless we can build affordable houses. We don't have enough land zoned in the right places, we ... the ... we don't have enough infrastructure for that land. And, I could speak very much about Cork as a region. I mean, we have huge challenges to put an affordable model ... and I'm not in disagreement with you, I'm not speaking for any land speculators. Because I'm buying land to build houses to sell; the more I pay for the land the more that my business isn't going to work. So, I'm not-----
Joe Higgins (Dublin West, Socialist Party)
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Just, lastly-----
Joe Higgins (Dublin West, Socialist Party)
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Lastly, Mr. O'Flynn, because my time is up, we see now venture funds - what are called in some media circles "vulture capitalists" - buying up large tranches of apartments and homes here and becoming extensive landlords, making ... make people who exist in those developments feel very insecure, very uncomfortable. What kind of a legacy is that for developers and banks to leave to ordinary people?
Mr. Michael O'Flynn:
It's ... described as you have, it's not a good legacy at all but you have to ask yourself the question "How did this happen?" Why did we allow property fall below replacement cost? 'Cause that's what we did and that's what these people will do when they see property falling below replacement cost. And I've outlined already to this inquiry that the NAMA model caused property to fall below replacement cost 'cause they talked down their own product, they talked down their own ... their own borrowers. 'Cause, at the end of the day, other than properties that NAMA have taken ... enforced on, if the borrowers owned the property. So, we've allowed a situation where values kept dropping and that's what's created the opportunity for the external capital companies to come in. No, what you describe is not a good situation and I think it's a great shame the amount of money that has been wiped off property and off property companies, and the amount of money that property companies' individuals have suffered. Because we are described as ... as a bunch of people who ... who didn't behave well. I can assure you, Deputy, I behave well and my company and others like me have behaved well. What has happened is ... is terrible. It should never have happened. But I - like others like me - stayed around to try and find a way through and that's what I've been trying to do. And it's been a tough, tough time.
Ciarán Lynch (Cork South Central, Labour)
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Thank you, Deputy. Senator Sean Barrett.
Sean Barrett (Independent)
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Thank you very much, Chairman, and thanks for coming back again, Mr. O'Flynn. The Central Bank, in an assessment of the valuation process, commented that credit institutions were often negligent and imprudent in the manner in which they requested property valuations. Did you agree with that and ... and did you see any differences between the valuations sought by Irish banks and non-Irish banks?
Sean Barrett (Independent)
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And did you tell us earlier that even Anglo didn't engage in these attributed inefficiencies from the Central Bank, that you found Anglo inefficient?
Mr. Michael O'Flynn:
The Anglo ... and I've looked at them, because of my appearance here today ... I've looked recently at the Anglo facility agreements, where we borrowed extensively out of London. I can tell you they were as stringent as any other facility letters that we have, and I have provided a copy into the inquiry.
Sean Barrett (Independent)
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And you had, I think by some books, it's in a public source, I think it's Simon Carswell's book, you had a billion borrowed from Anglo?
Sean Barrett (Independent)
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But they went broke for about 30. So if they were efficient with you, there must have something else happening in the ... in that bank?
Mr. Michael O'Flynn:
Well, I ... all I can speak is from my own situation, we had a very, very substantial rent roll with them, and I would have said ... I would have ... with a bit of hindsight, Senator, I don't think any of my overseas properties should have come into NAMA.
Sean Barrett (Independent)
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In the circumstances of where all of the banks had gone broke, and the country was in a rescue from the IMF, was it impossible for somebody to, you know, just putting the devil's advocate ... surely it was impossible for people to come to you and say, "Listen, we'll try and separate the amateur developers but we'll try and keep you in business". I mean it just wasn't an option for Mr. Lenihan at the time, was it? You know, given that all that banks were gone, and the country was at the behest of Mr. Trichet.
Mr. Michael O'Flynn:
Well, I don't accept that. I think Mr. Lenihan had the option at the time of working it out, you know, through the banks. They were ... the UK model was ... they set up an insurance scheme to cushion the blow, because there was quite an impact on the UK as well. So my view is that what we ... the solution here made the problem bigger, and if you look at the recovery, it was meant to put money into the system. We're seven years on, or whatever number of years, and we still haven't got the money into the system. I mean, there's still a very, very tight functioning banking sector.
Sean Barrett (Independent)
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But we haven't made the adjustment, would that be the case made? That we saw houses in 1990 going from two and half times income to twelve times income. As you said earlier, you were pricing your product away from the average guard, teacher, nurse, and so on.
Sean Barrett (Independent)
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And will we ever see, you know, four and half, five times average incomes for house prices again, or will we all be working for banks and builders?
Mr. Michael O'Flynn:
Well, as I said earlier, I think the cost model has to be looked at a well. I mean with 13.5% VAT- there's zero VAT in the UK. We've a lot of ... the housing area and the construction area gave a false economy to the State for a long number of years. To go back to some of the questions that were asked, and the Chairman asked. We have to look at the cost side to make sure that your average guard and nurse can buy houses. And I, as house builder, want that to happen.
Sean Barrett (Independent)
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I mean, we have development levies in south Dublin, 60,000 per house. A levy of 352,000 per hectare within 1 km of the LUAS, so ... and I've another here that Ronan Lyons gave, that the average house price has risen by 10,000 a year to construct, between 2009-2014. There's a substantial increase of a third in construction at a time when ... of static incomes, in fact, falling incomes, falling house prices, driven by regulatory changes with increased minimum sizes accounting for 40% of the increase, greater energy efficiency accounting for further 40%, and cost relating the building control amendments accounting for 10%. So, there's too much high cost still in the system, isn't there?
Mr. Michael O'Flynn:
There's no question, and that's my comments earlier on Construction 2020. We've no prospect of delivery. There's no prospect of implementing that policy that the Government have put out there, unless somebody sits down and starts analysing both sides of the line here, because the cost, as you say, and some of those regulations I am in favour, not some of the local authority extra regulations that have been put on. But we ... the planning issue, like we've a serious planning problem in this country in terms of having planning applications processed at a reasonable time period because the longer it takes to get planning, the longer ... the more it costs at the end of the day.
Like, cost goes somewhere. They all go on to the end purchaser. And, to go back to Deputy Higgins' point, we have to build affordable houses and we have to look at all the factors, and I'm talking about not just the VAT and the development levies and the contributions, obviously, the Part V, the social, we have to look at them all. I mean, we've no social housing policy in this country to deliver housing and putting some of that, albeit integration is desirable, over on top of people who are saving for houses is wrong. And that's an issue that I said in my closing of my earlier statement, Chairman, I think the future and how we're going to solve, we must learn form the mistakes but we must also come up with a workable business model for development because the equity players, who are essential to the business going forward, will not invest unless it works. And the banks certainly won't invest. And we still haven't cracked that vital piece of mezzanine finance that's probably going to be necessary from here on. So, we had an unsophisticated model in this country when it came to development. It came back to cost us dearly, but we have to come up with a model that's going to work or we'll be here in two or three years' time still talking about the problems.
Sean Barrett (Independent)
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If you went to the Stock Exchange and re-formed your company, as you're seeking now, would there be long-term finance because isn't that one of the faults, we used short-term finance for the long-term asset of a house?
Sean Barrett (Independent)
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Would the Stock Exchange or pension funds ... what alternative could we do for finance?
Mr. Michael O'Flynn:
I think it has to be a lot more equity-based and that will ... certainly more public companies, more institutional investment. We don't have a tradition of institutional investment like you do in the UK. I mean, we can ... we've developed a lot of product in the UK. You've a variety of insurance and institutional investor that you don't have here in this country, so I agree with you, Senator. I think we need to look at setting up more structures. They don't have to be public, but they need to be quasi-public in terms of equity investment, because that's the key. But the equity people won't touch a cost-based model. It doesn't work. This cost-based model has serious flaws in it and I don't see any leadership to recover the industry except, "Leave it happen", and, if that happens, prices will go the wrong way again, Chairman, but the ordinary people won't be able to build houses, or buy houses, and you'll have more social housing requirement in time.
Sean Barrett (Independent)
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We'll bear that in mind when we consider the report. Thanks very much.
Sean Barrett (Independent)
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Yes, thanks, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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I'm going to start wrapping things up and I just ... some more overhanging stuff, just before close of business, but I'll work on the opening things up. Deputy O'Donnell, three minutes.
Kieran O'Donnell (Limerick City, Fine Gael)
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If Blackstone had succeeded in their court case with you, what would have been the implications for the O'Flynn Group? Can I ask?
Ciarán Lynch (Cork South Central, Labour)
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That's a legal process. It had an outcome and it would be wrong-----
Kieran O'Donnell (Limerick City, Fine Gael)
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It's concluded.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay, well, I won't pursue it.
Kieran O'Donnell (Limerick City, Fine Gael)
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That's fine.
Kieran O'Donnell (Limerick City, Fine Gael)
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There's an obvious question that I-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay.
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, then can I just ... do you believe that the developer/building sector took too much risk, we'll say, in the period from '05 onwards to '08? And did it involve groupthink amongst builder/developers, in hindsight?
Mr. Michael O'Flynn:
Yes, well, one of the risks that happened, and I think this will resonate with a number of the questioners today, is that we ... the "subject to planning" was always part and parcel when I went building first in the '70s and '80s. Unfortunately, the banks decided that "subject to planning" wasn't necessary anymore.
Kieran O'Donnell (Limerick City, Fine Gael)
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From what date?
Kieran O'Donnell (Limerick City, Fine Gael)
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From when?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay.
Kieran O'Donnell (Limerick City, Fine Gael)
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Builder, yes.
Kieran O'Donnell (Limerick City, Fine Gael)
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Previously wasn't there?
Mr. Michael O'Flynn:
Wasn't there previously. You could ... not alone were you subject to planning, but you were often phasing the development purchases. That happens a lot in the UK and I think the model is going to become a lot more sophisticated and refined. One of the challenges are you have to have platforms to receive money but those platforms have to have good governance, good management and will have to have a percentage equity that actually makes sure you don't end up in this situation ever again.
Kieran O'Donnell (Limerick City, Fine Gael)
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And the final question ... the final question then, Mr. O'Flynn is, have we reached an equal ... an equilibrium point, where the cost of building the family home, the three-bedroomed, semi-detached house is at the same ... at a level where builders like yourself will build those homes?
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes.
Kieran O'Donnell (Limerick City, Fine Gael)
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I suppose the question I'm really asking you-----
Mr. Michael O'Flynn:
There's also the restriction in the Central Bank lending, I think is unfortunate at the time it came. Because you have to have viability before you have restrictions. You ... if you're struggling with viability and you have restrictions, that's really difficult. And a house in one part of Ireland compared to a house in another part of Ireland. Like, you have to look at viability, the appraisal and different parts of the country. And I go back to ... it has to be ... it has to be affordable. And I think that it's a sophisticated ... it's a serious problem and it needs a very sophisticated solution. And I think there are ... were some announces by the Government that we left X number of houses built by NAMA and whoever. Look, it's not going to happen. So we need to face up to the fact that we've a problem, we're not dealing with it and we have to start dealing with it sooner or later - otherwise the problem gets bigger.
Kieran O'Donnell (Limerick City, Fine Gael)
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Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Deputy O'Donnell. Senator MacSharry.
Marc MacSharry (Fianna Fail)
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No further questions.
Ciarán Lynch (Cork South Central, Labour)
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I'm going to wrap things up. Mr. O'Flynn, just asking you since you've exited out of NAMA, or in the period exiting out of NAMA, and as you said earlier you see yourself as a builder, you were never a speculator but development is part of building. How many houses have you built since you exited NAMA?
Mr. Michael O'Flynn:
Well, since ... we've only exited NAMA a year ago, we're currently on site in Lucan in Dublin and we have a number of schemes, as soon as we finalise our exit, for the development land in Blackstone. We should be on site, I'd say, within three months on a number of Cork sites.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Is there anything you'd like to add by means of final comments? Just got me into trouble earlier, so please don't do it again.
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Mr. Michael O'Flynn:
------in terms of ... I really would like to see something done about the cost of funding and the constituents that make up a ... building a house, including the VAT and all the various charges. And perhaps look at ways of making it ... keeping it affordable. But re-establishing, you know, a model. Be that a special senior debt structure for development is found, I'm not really suggesting, but some way needs to be found to make development viable again. That's all.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. So with that, I'd like to bring this session to a conclusion. In the ... prior to suspending for maybe just about five minutes as we, when we go back into private session. I'd like to thank Mr. O'Flynn for his participation this evening with the inquiry and for his engagement with it. And to now formally excuse you. So I now propose that we suspend for five minutes and return in private session, is that agreed? Agreed.