Oireachtas Joint and Select Committees

Wednesday, 29 July 2015

Committee of Inquiry into the Banking Crisis

Nexus Phase

EBS - Mr. Alan Merriman

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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We are back in public session. Is that agreed? Agreed. Can I ask members and those in the public Gallery to ensure that their mobile devices are switched off. We begin today's hearings with Mr. Alan Merriman, who is former finance director at EBS. In doing so I would like to welcome everyone to the public hearing of the Joint Committee of Inquiry into the Banking Crisis. Today, much of the focus of the inquiry is on EBS. At this morning's session we will hear from Mr. Alan Merriman, former director of finance at EBS. And Alan Merriman joined EBS in July 2005 where he was finance director until March 2009. Previously he worked with PricewaterhouseCoopers, where he was a partner. Mr. Merriman is now the chief executive at Elkstone Private. Mr. Merriman you are very welcome before the committee this morning.

Mr. Alan Merriman:

Thank you Chairman.

Photo of Ciarán LynchCiarán 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 are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. I 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. 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, will be relied upon in questioning and will form part of the evidence of the inquiry. So if I can now ask the clerk to administer the oath to Mr. Merriman please.

The following witness was sworn in by the Clerk to the Committee:

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Before Mr. Merriman makes his opening remarks, just to remind members once more that in certain engagements with financial institutions, some documentation may regard or contain personal names or financial data and in regard to protection of sensitive commercial information, members just need to be mindful of their questioning this morning in that regard. So with that said, if I can invite Mr. Merriman to make his opening remarks please.

Mr. Alan Merriman:

Thank you, Chairman. I very much appreciate the opportunity of being here today. Rather than repeating my witness statement verbatim, in the interest of time I plan to give a brief introduction to my responsibilities and time with EBS, explain why I believe EBS was more of a casualty rather than a cause of this crisis and briefly comment on a number of very select topics which I guess would be of particular interest to the committee.

I joined EBS in the summer of 2005 as finance director. Prior to this I had been with PwC for a little over 17 years.

I was on the audit and advisory team of the firm and I was the partner responsible for leading the firm's banking, audit and advisory practice. I was privileged to have practically all the Irish banks amongst my client base, including the Central Bank of Ireland and Bank of Ireland. I was very happy in PwC. Nevertheless, having been courted by EBS, I was eventually convinced to leave, attracted by the opportunity of testing myself in industry and by the wider challenge of ongoing professionalisation of the society and, of course, championing mutuality.

I ultimately ended up spending only a little over three and a half years with EBS and yet this very short period crossed both the tail-end of a long boom period that this country had enjoyed and the beginnings of what I would describe as two devastating crashes: the first being the global liquidity crisis which triggered the second, being our own catastrophic banking and property market crash. During the short, three and a half year period, I served under and diligently worked alongside, in very challenging circumstances, three different chief executives. I was given a wider role than might be considered the norm for a traditional finance director and, broadly speaking, this role might be best characterised as, in effect, being more like that of a COO, a chief operating officer. For instance, finance, treasury, commercial lending, operations, IT, internal audit, investor relations and risk, amongst others, all came under my areas of responsibility. I would emphasise that each of these important areas had their own head of finance, head of function - all well very well qualified and experienced in their subject matter fields and clearly responsible for the day-to-day runnings of their functions and/or departments. I had a very loyal, hard-working and talented team and strong support throughout this period from both our head office and the network, which I was, and continue to be, very grateful for.

As you may know, I stepped down - and reluctantly so - in early 2009. This was voluntary, in that I agreed that, as a mutual, it was important to show accountability to our members and other stakeholders for what had transpired in EBS and, in addition to the chairman resigning, I was the obvious choice at executive level to accompany him at that time. Similar to others, I would have preferred to have stayed and helped but we felt that, on balance, the right thing was that I should exit along with the chairman.

Let me emphasise that EBS was different. I think it's a very, very important point to acknowledge. It was a member-owned, non-profit organisation. It was the last remaining true building society in Ireland. It was established for teachers, was strongly supported amongst the public sector - guards and nurses, amongst others - and its people, whether at branch level or at head office, root and branch had a DNA and a culture of being community based and member focused. It was not focused on profit. It was about people, it was about trying to serve members better through superior service, real trust and competitive pricing compared to the banks, and to be relevant. It was a very democratic organisation, with a diverse board and true member representation. It was an alternative to the commercially-driven banks. It had a good culture and spirit, but neither was it perfect. The fact pattern, whether it was well understood or not, EBS was fighting for survival and relevance, not only in 2009 or 2010 but also back in 2005 and, indeed, before that. Had it not competed in the market, EBS, as Ireland's last true building society, would have ended up gone like the 20 other building societies that this country once had.

Running down the balance sheet realistically was not an alternative, so EBS continued doing what the board collectively thought best to preserve mutuality. This meant defending its natural mortgage market share and growing its non-member businesses to aid the member business. This strategy of running both a member and a non-member business in parallel had been successfully deployed by others in the UK and various international studies have shown that having a mutual is good for the market as a whole. However, as we all know now, regardless, the society was lost.

Let me comment on some specific matters that I think would be of particular interest to the committee. Risk appetite: I want to bring some clarity on this topic and, in particular, commercial property and development lending by EBS. Quite a number of commentators have questioned why a building society would be in those markets at all.

Firstly, just to emphasise that my understanding is that the building society legislation was explicitly changed to allow for this. The Oireachtas must have felt it appropriate and justified and it was against this backdrop that EBS first entered commercial lending in 1991, and not, I might emphasise, 2005. And I note that as part of its then approved board strategy, EBS embarked on development lending as a sub-strategy of commercial lending business in 2001 and, again, I would emphasise, not in 2005. The commercial business was circa €1.5 billion and the development lending book was circa €100 million by the time I joined in July 2005. From the information I've been able to glean in preparation for today, the development lending book, which was built up to circa €500 million by the end of 2008, gave rise to about €300 million of crystalised losses. For clarity of understanding, I'd like to highlight that whilst undoubtedly the development finance losses were shocking and a very severe blow to EBS, they did not bring about its demise. Rather, the facts clearly show that given the magnitude of the total capital ultimately needed for EBS, which was a multiple of this number, clearly a multitude of factors - which evolved over a very considerable length of time - lead to its business model failure and not just development and/or commercial lending. And I'll be happy to elaborate on this in questioning.

Whilst of little comfort, I would also note that risk management and best practices always evolve. And whilst EBS made mistakes - and, for example, the controls we put in place such as the 3% cap on development finance, were inadequate - by late 2007 and early 2008 we were actually ahead of the curve and this is evident by firstly two clear facts: we were the first to exit these businesses; and, secondly, our loan-loss provisioning at the end of 2008 was more realistic than the banks'. During my time with EBS, capital funding and liquidity were always key agenda items for the EBS board and the risk committees. There was good MIS and intelligence continuously available and there was definitely a sophistication and a depth in the society management team of these critical areas. For a small financial institution, we had the benefit of both a head of treasury and a head of capital markets, both with deep treasury experience, who, alongside risk, finance and strategy personnel, also had a strong appreciation of these important pillars of banking. Actions were taken continuously by the board of management to mitigate these risks, including widening and lengthening our funding programmes, improving our collateral position markedly over this period, investing in the infrastructure necessary to establish our covered bond bank - which, amongst other things, brought further emergency liquidity protection - and raising of PIBS, permanent interest-bearing shares, to improve capital ratios and lost absorption, etc. However, in truth, these were remedies which created breathing space for the status quoto be maintained, rather than being sufficiently, materially corrective. Consequently, when the crisis did arrive, EBS was, whilst relatively better placed than others, still poorly positioned to withstand the overwhelming stresses it brought.

In wrapping up, let me say a couple of things. Many hard-working people and families all over Ireland, through no fault of their own, were just trying to get on with normal life and do the right thing. They continue to suffer today from this global financial crisis. In truth, for them, certainly in the wrong place at the wrong time. This, in my view, arose in particular because of how, in Ireland, the property and banking market was allowed evolve here. And hindsight clearly shows us that Ireland's comparably greater systemic vulnerability in this disaster evolved unchecked by those who ought to have been able to genuinely make a difference or at least provide some meaningful shelter. EBS is not without fault but the hard truth, if you want my considered insight, is that successive Governments and the authorities, local and European, have much to answer for and more so than EBS. EBS was different - it was very much more of a casualty of this one-in-100-year crash than a cause. As the only real building society we had left, it fought a good fight. Yes, it failed but not for the want of trying. It was definitely not a root cause of this crisis locally, never mind internationally. Of course it made mistakes and we had failings and these are regretted. But EBS was essentially a small fish in a big pond in an even bigger world, where we were takers and not makers of how banking funding worked.

Within that system, EBS was trying to make a positive difference. It didn't give up on mutuality. Maybe that was a mistake; maybe it wasn't. I hope this somewhat panoramic and very personal perspective is of help, Chairman, and I'm happy to take questions.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Merriman, for your opening comments this morning and if I can invite Senator Marc MacSharry, please, to begin questioning. Senator, you've 25 minutes.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Thanks very much, Chair, and thanks, Mr. Merriman, for coming into us and for your account there. Can you tell me what was your assessment of the liquidity and the solvency of the society on the night of the guarantee in September 2008?

Mr. Alan Merriman:

I think at that particular point, I mean, clearly the market was under strain, EBS was having its challenges, but its own liquidity position was relatively well-positioned as a home lender with a very substantial residential book. We had a lot of collateral available to secure funding. And on the solvency side, well, clearly again, there were stresses and strains, the capital ratios were very strong at that particular point. So we were more concerned about the market as a whole as distinct to our own individual position at that point.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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What was the dependency on wholesale funding at that time?

Mr. Alan Merriman:

Well, broadly speaking, the society's funding came ... approximately one third came from the member base, which we'd describe as retail funding. Together with corporate deposits, about 50% of the entire balance sheet was supported by what would be referred to as customer deposits. So both retail members and corporates. The other 50%, broadly speaking, would have come from what one would loosely describe as the wholesale markets. That would have been a mix and a variety of different funding, both short-term and long-term.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Your society was covered as part of the bank guarantee but you didn't appear to be involved in any way in the final discussions with Government or the regulator. Can you tell us what input, if any, your society and you did in any of the discussions that took place at that time?

Mr. Alan Merriman:

I, personally, had no involvement. I think the society practically had no involvement either. And I think that really reflects back to my opening comments to your first question, that at that point in time we weren't seen to be a major factor one way or the other.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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And how did that manifest itself? Did you just get a call and say, "Look, we're doing this and you're in", or, "Do you want to be in?" or-----

Mr. Alan Merriman:

Yes, basically. I mean, quite literally got a phone call to say the guarantee had happened and, clearly, it was market-wide and, yes, that's exactly how it happened.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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And who rang who?

Mr. Alan Merriman:

I ... my recollection is I certainly got a call from Kevin Cardiff confirming that this had happened, and it was as simple as that.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Was that early in the morning or 3 o'clock in the morning or-----

Mr. Alan Merriman:

I can't remember. I genuinely can't remember.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Okay. We note that you wanted a five-year guarantee put in place. Can you outline your rationale and understanding with regard to that stance and did you make any recommendation externally and was there any response?

Mr. Alan Merriman:

Again, I don't recollect, myself, in terms of making any personal representations etc., etc. I know Fergus Murphy was here last week and he confirmed that five years is a particular idea he floated. I think the wider context would be that at that point in time, five years from, you know, a Fergus Murphy perspective was seen as being more prudent and more in sync with some other markets and would allow for a greater period of stability. And, as we've all seen, unfortunately, it's taken quite some time for this market to adjust.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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And would he ... who did he make this case to?

Mr. Alan Merriman:

I don't know.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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You don't ... would it have been Kevin Cardiff or-----

Mr. Alan Merriman:

I don't know.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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-----was there any dialogue? You're not aware of any dialogue at all?

Mr. Alan Merriman:

Not directly.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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To the Central Bank or-----

Mr. Alan Merriman:

No.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Nobody. Okay. Was it your first to hear of it last week when you heard Mr.-----

Mr. Alan Merriman:

Pardon?

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Was it the first time you heard it when Mr. Murphy was-----

Mr. Alan Merriman:

No, I mean, look, clearly there was, you know, ongoing discussions on a continuous basis about what was happening in the marketplace. I, personally, would have attended quite a lot of meetings down in the Central Bank and the regulator discussing what was happening in the markets, discussing the strains, sharing intelligence, etc., etc. So, clearly, this was all done very much in a context and, clearly, there was sense in the markets - all the treasury departments would be very well interconnected - that there was a real strain. So was it a shock when we heard what had happened and the proposed solution? No, it wasn't a shock, but it wasn't something that we were party to in any central way.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Can you tell us about the ... you said you had multiple meetings, kind of, down in the Central Bank with the regulator and others to discuss strains and other issues to do with the market. Was there ... what was the frequency of these meetings? Was there a standard, kind of, weekly meeting, monthly meeting?

Mr. Alan Merriman:

No, I'd say I ... my recollection of them is that they were ad hoc. They did, clearly, pick up in frequency. They were at the very highest of levels, so personally I would have been meeting with John Hurley and with Pat Neary and with Tony Grimes. And they would have been sharing with us their perspective on what was happening in the market and they would have been clearly, you know, looking for our intelligence in terms of - from the flows we were seeing - what was going on in EBS and our read of the markets at that point in time.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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So before there was any strains or any issues that are identifiable, with the benefit of hindsight, could you tell us that ... when would you say the situation changed? That ad hocbecame to be frequent or that the circumstances were demanding, that there was-----

Mr. Alan Merriman:

Again, I won't have great recall but it would be most definitely in the second half of 2008 would be my guess from all I know.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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And were those meetings at your request or was-----

Mr. Alan Merriman:

No, they would have been ... the vast majority would have been at the Central Bank's request.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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We're getting some phone interference there now.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Sorry. And was it ... was it typical that the regulator and the Central Bank wouldn't ... even before the crisis when there would be other, kind of, meetings scheduled once a year or whenever that may be, was it normal that the regulator and the Central Bank team of Hurley and Grimes would meet you together?

Mr. Alan Merriman:

No, absolutely not. I mean, this was extraordinary times and we were meeting very much in that context and that was absolutely understood at that point in time. These were not routine meetings, these were meetings in the context of, you know, what was happening in the marketplace, real concern in the Central Bank, real concern across individual banks in terms of what was happening and how this was going to be worked through. So these were extraordinary times.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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I'm just trying to get a picture of what was routine and what wouldn't have been routine. So let's go back to the routine meetings pre-crisis.

Mr. Alan Merriman:

Well-----

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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How would they ... what way would they manifest themselves? Would it be-----

Mr. Alan Merriman:

Well, it would depend on the perspective. I mean, I never met - and I was the finance director - I never would have met with John Hurley until this time.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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And would you have met with Tony Grimes and Pat Neary?

Mr. Alan Merriman:

Would have met them in different contexts. So, EBS would have been quite good at what I'd call being proactive and sharing with the regulator our strategy. So there definitely would have been, I would guess, at least annual meetings, where we would've updated on, you know, "Here's how the performance was this year. Here's where we've made progress. Here's what the strategy is. Here's what our challenges are." So those type of meetings certainly did happen in normal times as well as in stressed times. Discussions with a Pat Neary or a Con Horan would have happened on, I don't know, maybe on a twice-yearly basis there might be meetings where, again, at a strategic level, observations would be exchanged, etc.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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But certainly not the top brass that you say ... Mr. Hurley and everybody was there together in the one-----

Mr. Alan Merriman:

As I said it was extraordinary times and it was very much in that context.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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And these meetings started in and around, to the best of your recollection, the second half of 2008?

Mr. Alan Merriman:

Yes. And I could be ... I mean, the record might show that it was earlier but that's my recollection.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Oh, yes, we're only looking for your recollection. That's fine. And did you have a sense that they were acting together?

Mr. Alan Merriman:

Yes.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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And they were on the same page, to your mind?

Mr. Alan Merriman:

Broadly. I mean, they were meeting together, they were hearing us out together, they were sharing their input to us together. I'd no reason to believe otherwise.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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At any of these meetings that you were involved with, was it ever, kind of, thrown out there by Mr. Hurley or Mr. Grimes or others that "Look, you know, we're thinking out loud here. What do you think? Do we need a guarantee, do we not need a guarantee?", was there any sense of any of that?

Mr. Alan Merriman:

My recollection is ... guarantee wasn't discussed. That's my recollection. My recollection was that the meetings were more about what I would call the ebbs and flows of liquidity in the market, concerns around how this was going to be resolved, concerns about ECB. And it did clearly progress to EBS's position itself and what solutions there might be for EBS from a more M and A-type perspective.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Okay. And just as a result of these ongoing meetings that were going on over that six-month period, can you identify any specific tangibles that either ... that the Central Bank and regulator, acting together, prescribed for you to take, suggested you should take or that they suggested they themselves to try and mitigate against the difficulties of tightening liquidity positions?

Mr. Alan Merriman:

Well, look, it was ... again, I would, my recollection is; nothing was prescribed. They were clearly very interested in what we were doing ourselves to resolve strains and, and find ... additional means of getting collateral and access to funding, so there was intense interest in that. And when it came to the latter stages and what was going to happen to EBS and the realisation that EBS was very unlikely to be able to stay stand-alone, we would have been, I'd say, encouraged is the word I would use, to go and talk to particular banks about EBS potentially becoming part of those banks.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Yes. So, really it was just a marking, a market kind of reporting set of meetings that was going on, as opposed to-----

Mr. Alan Merriman:

Yes, I ... I, you know, I would probably use it as, you know, loosely intelligence exchange. It was, you know, the Central Bank, I think would have articulated it as being ... it was helpful to them to hear from those at the coalface what we were seeing and what our experiences were in terms of what was happening in the market, to reconcile that to, I guess, what was their more overarching perspective.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Was there any sense that, that ... or any discussion around that, that the liquidity difficulties could become solvency difficulties or anything like that?

Mr. Alan Merriman:

No.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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So, very much then, just if I was summarising and you can correct me if I'm wrong, that the ... they used you, in your own words, as an ... as an intelligence-gathering exercise and weren't prescribing or suggesting actions that should be taken in order to ease your liquidity difficulties?

Mr. Alan Merriman:

No, look, I think that's unfair. I think it was clear ... clearly intelligence-gathering. I think they clearly were very interested in what we were doing on the ground to remedy what was, you know, a very serious situation. I ... they weren't prescribing particular actions that we should be taking but I think it would be unfair to categorise it as simply intelligence-gathering.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Okay. No. It's just ... and that's fine. What I just want to see is, you know, did the ... did the Central Bank and the regulator have a proactive hand in saying, "Look, you need to try this, you need to do that, you need to do the other" or were they saying, "Thanks for that, thanks for coming in. We appreciate you giving us the information and steady as you go, you're doing a good job"?

Mr. Alan Merriman:

It ... it ... it was ... it was more the aggregate.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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It was more the?

Mr. Alan Merriman:

The aggregate. It was ... it was both-----

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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It was a little bit of both? But again ... so, just to ... just to ... sorry to be repetitive now, but, just to ask again, what kinds of actions were they recommending that you take?

Mr. Alan Merriman:

As I said, there were no explicit actions. There was no, "Alan, Fergus, go out and raise €500 million in the French commercial property market or in the French CP market."

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Okay. So, and again, I'm just going to finish on this, this train now in a second but, so ... you would be telling them perhaps, or would you, "We're getting some of our funding from X but it's getting more expensive, or it's more difficult to get anything from Y." Was that the kind of thing that was going on?

Mr. Alan Merriman:

Yes. It was ...we ... "Look, we have €200 million of local authority money from the UK maturing in two weeks' time, we're in daily interaction with those local authorities to ensure that we can retain those moneys or here's what we've got in terms of feedback, in terms of €50 million of the €200 million, is definitely going to be withdrawn. We're on our programme of our covered bank, we're four weeks away from having it fully implemented, at that stage that will accommodate another €2 billion of funding that can be tapped with the ECB, which we'll have by way of emergency cover." So it was very much that type of meeting.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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You spoke about the ... being encouraged towards the end to, to speak to other banks when it was clear that you weren't going, going to continue as stand-alone ... you, in your statement, said that you were a minority of one in ... in promoting, let's say, the ... the merger with AIB. When ... when was AIB first, you know, when did that merger option first develop?

Mr. Alan Merriman:

Okay, there are two different chapters here. So, what we've just been talking about was clearly at the, you know, early stages of what was then the crisis and the discussion with the Central Bank and the regulator were very much in that context where ... clear EBS was very unlikely to remain stand-alone and was going to need to end up in a bigger bank.

Mr. Alan Merriman:

In my witness statement, the reference to the AIB merger is at a much earlier point in time, it's December 2006-January 2007, and that was internal to the EBS board at that point in time.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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So, yes, thanks for that clarification. So ... did, did AIB make an approach or ... or-----

Mr. Alan Merriman:

Yes.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Okay. And-----

Mr. Alan Merriman:

So AIB, just to, you know, give you a very quick summary, AIB were very keen to merge, acquire EBS. Eugene Sheehy made the approach to Ted McGovern.

It was a very clear approach. The type of conditions they were prepared to sign up to were to make it more attractive to the EBS board to agree to that deal. And I, personally, at the time - despite having joined EBS for a number of reasons including believing in mutuality - I at that time had a personal view that I felt it was the better option for EBS at that point and would have advocated to both the chief executive and the chairman that we should proceed on that basis.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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And why did you feel that that was better? Was there-----

Mr. Alan Merriman:

Look, I'd been in EBS for about a year and a half at that stage. I could see many challenges. The society was always very well-intentioned, it had very good people, it was doing well in certain areas. But, big picture: it had a capital issue and it had a funding challenge. They weren't day-to-day challenges but it was pretty clear that in the longer term there was a sustainability question.

Mr. Alan Merriman:

So I felt that, given the pressures the society was under - particularly because of the mortgage market and the razor thin margins that were available at that point in time - that the ability for EBS to generate its own capital was very, very tight. And given what was going on in the market, that it was much more likely than not, that EBS wasn't going to be able to sustain itself, and therefore an exit at that point in time would be prudent and sensible.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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So was it your concern, in that sense, driven by a reducing market share?

Mr. Alan Merriman:

Not so much what I'd call a reducing market share but the substance of it was that because margins were so tight the society was generating very little capital, and without capital you can't lend out to your members. If you can't lend out to your members what are you in a member business for?

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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So there was obviously intense competition, there was other banks in, there was, you know, prices were going down, as you said margins were razor thin so, you know, was there a sense that other people were eating your lunch?

Mr. Alan Merriman:

I mean it was black and white, and black and white from two different contexts. Again, you will know well, but if I paint the broader scene, if we go back quite some time, if you wanted a mortgage in Ireland, building societies were the traditional place you would go to get a mortgage - the banks weren't interested. Times clearly changed. You had the Irish banks coming into the mortgage market and competing very aggressively and it became a core part of their business. And then, over and above that, you had the foreign banks came in ... encouraged to come into the market because at the time before their arrival there was a concern about oligopolies and cartels and pricing and competition. So the foreign banks came in and they were incredibly aggressive at two levels. You had certain banks like Danske Bank who targeted the refinance market, very low LTVs, but, effectively, practically no margin. And you had the likes of Ulster Bank who very aggressively went after the first-time buyer market. So EBS as a traditional building society, having in an environment where it was one of the few players in a normal mortgage market, now found itself in a market where both ends were being very aggressively competed for.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Did you feel at the time that you were ahead of the curve and that you could see the demise of the society that nobody else could?

Mr. Alan Merriman:

Look I wouldn't, you know ... banks, building societies, financial institutions, very complex - nobody has a monopoly on wisdom. I definitely had a concern about the long-term sustainability of the society from a capital perspective and a funding perspective. I had a concern later, mid '07, about market and house prices and so forth, but nowhere near to what ultimately transpired. But capital and funding at an earlier date, yes I had concerns.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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So, as the situation developed, did Eugene Sheehy's approach to Ted in December '06 you said, did the approach, you know, was it a kind of an Aer Lingus situation? Was the approach continuous for a year or-----

Mr. Alan Merriman:

No, no------

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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-----more, or was it a one-off turn down and that was it?

Mr. Alan Merriman:

-----it was pretty much a one-off. I mean, they came ... he came, he met with Ted, he sent a formal letter outlining what they were prepared to do. It was definitely discussed amongst the management team initially. It was discussed directly with the chairman of the time and as I said, I made clear to the management team and the chief executive and the chairman, that I personally - and it was a very unpopular position to take - that I really felt that EBS should be seriously engaging on this and looking to sell, for the reasons that I've explained.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Okay, and that would have meant demutualising, all that kind of stuff-----

Mr. Alan Merriman:

Yes, and clearly that would have been very much against the grain-----

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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An EGM to ... of the members to-----

Mr. Alan Merriman:

And change in legislation, so this was a very, very big deal. And again I go back to the board, the majority board, very strongly of the view that, "No, look, Alan, let's be clear, we're a mutual, we're here to preserve mutuality, we've a more optimistic view of this market and how we're going to do this than you, and no, look, we're sticking to what is our roots".

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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In terms of the retail end of the banking, had you have much involvement in that, in terms of sales, product, product target development, and things like that?

Mr. Alan Merriman:

No, not at a granular level. Clearly, I was on the board, clearly, I'm the finance director, so I, I clearly have a good overview, but not at a granular level.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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A lot of the senior management and board executives from the other institutions have been in, and we've been asking them about that, about, you know, to what extent were staff, and I suppose, as you said, the granular level, the manager, the branch level, to what extent were they driven by targets, and, I suppose, demands from above, to sell more and lend more. Do you feel ... all of them said, "No," by the way; all of them said, "Not at all; we expect people to come to work and do their job and there's no targets at all". I'm sure we all have views on that. But can I get your view on that? Were there targets? Was there a competitive environment where staff were expected to cross-sell their products, to take every opportunity and to drive things on?

Mr. Alan Merriman:

Well, look, let me answer it in two ways. Let me give you just what I might call a very layman explanation within EBS. EBS had a branch network. Within that network it was made up of both what I'd call branches where the management was employees of EBS, and I had tied branch agents where, effectively, the branch manager was running his own business as an entrepreneur. That was a relatively unique model to EBS in the Irish market. If you're a TBA and you're running your own branch, you don't need head office to be giving you additional incentives.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Okay. But, I mean, was that the culture? I mean, were-----

Mr. Alan Merriman:

The culture of any normal SME businessman, businesswoman, if they're running their business, they want to make it as efficient and as lean and as profitable, within reason, and that's how those TBAs managed their businesses. They managed it in a context. The controls were there. All credit underwriting was centralised. No branch manager, no person at the front, could write a loan. It had to be underwritten at head office level. But did a branch manager have an incentive to develop business, to do business development? Absolutely.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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And then they, in turn, would motivate the front-line staff.

Mr. Alan Merriman:

As any normal business would do.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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You said there "to be profitable within reason". Can you ever recall an incident where at board it would have been said, "Well, look we have enough profit there now"?

Mr. Alan Merriman:

No, and, again, I'll very clearly explain that. EBS, as I said, while it wasn't profit-orientated, EBS needed capital. Without capital, you can't have a building society, you can't have a bank. So EBS had to generate capital. Where does capital come for ... come from? Well, for a building society, it can only come from retained profits, broadly speaking. So, you know, this is somewhat of a contradiction, focus not on profit, but without profit, you can't have capital, and without capital, you can't have lending. So EBS wouldn't have had a scenario where it had enough capital, where I'm sharing with you, as a finance director, that as early as 2006, 2007, my view, well-known around the board, and ... sorry, not just my own personal view, treasury, strategy, finance people would have had the same view ... we didn't have enough capital, we wanted to be improving our capital.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Final question there, Senator.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Thanks. Just to take advantage of your career before EBS, if possible, and we've had much discussion here about the international accountancy standards, in particular, is it IAS 39?

Mr. Alan Merriman:

Yes.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Given your expertise in auditing, and, specifically on the banking side of that, with the benefit of hindsight, was this standard inadequate to the point where it just subverted the ability of financial institutions to plan for the future?

Mr. Alan Merriman:

No, it's a complete red herring and let me explain. And I think Dargan Fitzgerald from E and Y put it very well. I'll actually read out what he said and then I'll-----

Mr. Alan Merriman:

-----elaborate on it. He said:

I don't think the financial reporting of the losses was linked to the presence of the underlying causes of the crisis [He's clearly absolutely right]. The losses reported, whether in any particular period, are a consequence of the factors that caused the crisis, they didn't cause the crisis and I think that's a very important point.

So let me just put it very simply. IAS 39 was about how much loan loss provision you could recognise on your balance sheet or in your profit and loss account. It is has no impact on, "Do you have a bad loan or do you not have a bad loan?" The bad loans were written. They were there regardless of what the accounting standard would say. If management in any bank or any building society felt that the loan loss provisions under IAS were shy or weren't appropriate, it was open to management to share that through voluntary disclosure or other data. So, tables giving statistics on loan defaults, tables giving insights about future expected losses, they were all open to banks, regulators, everybody, to try and get that type of information. IAS is a red herring.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Merriman. Thanks, Senator.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Very good, thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you, Senator. Deputy Murphy. Twenty-five minutes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman and thank you, Mr. Merriman. You're very welcome. Just to pick up on that point ... just very briefly. I mean, the accounting standards didn't cause the crisis but did they hide the crisis?

Mr. Alan Merriman:

No.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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No.

Mr. Alan Merriman:

Absolutely not and let's think about it. How did they hide the crisis?

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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In terms of not being able to look to the future and the potential losses-----

Mr. Alan Merriman:

Sorry ... any ... let me be clear. We can all look to the future. This accounting standard over here that says, "You must do it this way, you must do that way in your books", that doesn't stop me as a manager being able to say, "Okay, I understand the accounting standard but this is the reality of what I'm dealing with, Mr. Regulator, or this is the reality of what I'm dealing with, Mr. Rating Agency, or this is the reality I'm dealing with, so I'm going to roll up my sleeves and hire a whole load of people who are going to help with credit recovery." The accounting standards are a complete red herring. Yes, they were unhelpful and, yes, there might have been a lag before the losses came through, and yes, that might have helped banks think they'd a better capital position than maybe they had. But it's a red herring-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. Thank you.

Mr. Alan Merriman:

-----an inadequate accounting standard but not really any material impact on what's come about.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, and the fact that the Spanish banks decided to allow for cross-cyclical provisioning in their own system-----

Mr. Alan Merriman:

I think that's very sensible and I've made that point in my witness statement about, you know, there were lots of other avenues. The regulator could have come along, just by way of example, and said, "Do you know what? We understand the accounting standard. We don't like it", and they didn't like it and I think that, to be fair to them, they made that very clear back then, never mind since. But they could have come along and said, "Despite the accounting standard, what we're going to do is we're going to require you, the Irish banks, to have an additional capital buffer", and force us to take capital in that, as you say, in that, kind of, anti-cycle perspective.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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But you had a battle with the board about what you were reporting, didn't you, at one point?

Mr. Alan Merriman:

Yes and again that ... again to make the distinction from what was that battle about. That battle and battle is harsh ... it was a very tricky time. The facts kept on changing; the crisis kept on getting deeper, so we were struggling with what is the right number to put in the accounts and that was back to accounting. You had to come up with the number to put in the accounts.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Yes. But just you go on about it in length from pages 6 to 7 in your opening statement about ... and you specifically say that you didn't come under any ... or the only time you ever came under any real pressure or challenge on accounts in 2009, when reporting on the 2008 results-----

Mr. Alan Merriman:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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-----and there was no difference of opinion between yourself and E and Y with your provisioning but the Central Bank and the regulator did have a problem, though, "that the provisioning might cause wider difficulties for the other banks and we were cautioned at the highest of levels to be very sure that what we provided was really needed". So there's a difference of interpretation there in terms of the presentation of the numbers?

Mr. Alan Merriman:

No, I think they're two different matters and, again, let me explain my understanding of what was going on with the regulator and with the Central Bank. So, EBS come down and we share ... we're going to have our accounts, these are our provisioning levels and we're sharing with the market, not only these provisioning levels, but we're sharing with the market our expectations that there's going to be greater loan losses to come. We can't put them in our accounts but we're telling the market that we believe the loan losses will be higher-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Yes. On that point, other banks weren't doing that at the time.

Mr. Alan Merriman:

I can't speak for other banks.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay.

Mr. Alan Merriman:

But we were being very appropriate in sharing, not only what we were providing, but letting everybody know we expected bigger losses to come that we couldn't provide for. The Central Bank, as I interpret it, their perspective .... and remember, I was only having to deal with EBS. The Central Bank has a much wider responsibility. So there's the Central Bank say, "Okay, here's little EBS coming along" and they're saying, "God, look, all these problems in development finance. Shit, what's the market going to read into that? Will they read across from that into the other banks? The other banks haven't being telling us that they got this extent of a problem. This could actually be another escalation in the Irish crisis. Now, Alan, and I'm just being clear, Alan, just be very sure you need those provisions because this could cause wider difficulty." That's the context.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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But do you think that was unhelpful interference by them?

Mr. Alan Merriman:

No, I don't think it was unhelpful-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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You were trying to more prudent and more honest, is that correct?

Mr. Alan Merriman:

Look, I would choose different words. I had a responsibility as the finance director to call it as I saw it within the rules. I had a responsibility to our members and our stakeholders to give as a true an account as I could of what we understood at that point in time. The Central Bank has a different remit. It has a much wider responsibility and part of their responsibility was making sure that we were taking due and proper care. So I would put it in that context. But I answered the question you asked of me in coming here about the integrity of the accounts and I'm just being very clear. We had debate at board levels, we had uncertainty at board level about what was the right number from a provision perspective but I never came under pressure from the board around the integrity of the accounts.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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And just to clarify, you were able to call it as you saw it?

Mr. Alan Merriman:

Absolutely, and we did.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. Thank you.

Mr. Alan Merriman:

And, as I explained, the reality is that in due course the provisions that were needed were far greater than we even thought at that point in time.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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I just want to back to the time, just prior to your arrival with the society, and if we can go the evidence book at Vol. 1, page 95, and it's a board meeting in 2002 and I just want to ... this is where they discuss at length for the whole board meeting commercial property and also the risks around development finance and the moves that the board's making at the time.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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What period is that, Deputy?

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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It's 2002.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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2002.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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So just to clarify ... when did the EBS see it as strategically important or appropriate for them to enter the commercial lending market? You say 1991?

Mr. Alan Merriman:

My understanding is they entered it in 1991-1992.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, and here, in 2002, we see them talking about making a play into development finance in a particular way. If you see it in front of you on the screen.

Mr. Alan Merriman:

Yes, okay, yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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So what I want to understand is-----

Mr. Alan Merriman:

I mean, before my time but yes, I see it.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Yes, but when you arrived in 2005, was this now settled policy for the society?

Mr. Alan Merriman:

Absolutely, and again, just to give ... I might have some numbers here but just to give a context. Look, I can't find it. Broadly speaking, I think, by 2002 the commercial lending book was in the order of €800 million; by 2005 it was €1.5 billion; development finance lending was clearly, for us, done around this point in time, you can see it from the records here yourself. So, this was a clearly an embedded strategy within EBS, well before I arrived.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Yes. So, there it outlines two approaches for development finance. Go for broke or the toe in the water.

Mr. Alan Merriman:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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And the toe-in-water approach is the favoured one. So when you arrived in 2005, would you still describe its involvement with development finance as toe in the water as it moved on from there?

Mr. Alan Merriman:

No, I think, you know ... and, I mean, they're very colourful phrases that are being used. I would say that, you know, in terms of moving from 2001, 2002 to 2005, they had clearly gone from what I'd call "zero" to where they had a book in the order of €100 million. So, I don't think I could describe the book of €100 million, even in the context of an EBS as being "a toe in the water".

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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One hundred million in 2005 and then, I think you said, €500 million in 2008.

Mr. Alan Merriman:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay.

Mr. Alan Merriman:

Back end of 2008.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Right. Just if we move on then to pages ... to the last page of that board report, page 97. I just want to look at the last paragraph, if I may ... let's see if it's on your screen. It's the last page of the ... so it's page 97.

Mr. Alan Merriman:

Yes. Sorry, I'm just unclear. The 2005 strategic delivery process-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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No, no, it's sorry it's not up on the screen yet. It's ... I'll just get some more time as well, Chair, as a result. Thanks. I'm going to ... it's going to come up. I'm going to-----

Mr. Alan Merriman:

Okay.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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-----read out the paragraph I'm interested in:

It was suggested that, with a view to widening the base of Commercial Property customers, a greater level of business networking would be needed in the future; in this respect, Brian Healy will contact individual Board members to establish whether they have contacts who may be a source of additional business.

So, tell me a bit about that. What does that mean and was that practice still going on when you appeared in 2005 in the society and did you see it as appropriate for the society to be using its board members in that way?

Mr. Alan Merriman:

What, what's the date of that?

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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This is the same board meeting in 2002.

Mr. Alan Merriman:

All right, okay. No, look, I'm not ... I'm not ... well, let me answer the question in two ways. One, I'm not explicitly aware of the board being used by commercial lending in what I might call a develop ... in a business development capacity. So I'm not familiar with that. But to answer your earlier question, do I see it as appropriate? Look, I think in, you know, what is the duty of a director? The duty of a director is, you know, a multitude of things but clearly it's for ... to act in the benefit of the society, of the company. So using a non-executive or any other director as a means as an introduction, I think is acceptable.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. You think it was acceptable for the society to make that proactive approach to people to offer them commercial terms-----

Mr. Alan Merriman:

No, no, again, let's be careful with wordings. I think it's appropriate for a non-executive or a director to make an introduction to a potential customer, whether it's a retail customer or whether it's a commercial customer. That is very different from saying do I think it's appropriate to go to somebody and say, "I've a bag of money here do you want to take it away and do something with it?" They are two very, very different things-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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And you see a distinction between the two?

Mr. Alan Merriman:

Of course I do.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. And when you arrived in 2005, were those types of conversations happening-----

Mr. Alan Merriman:

No.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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-----still on the board? No. Okay, thanks. Well if we can move on in the same evidence booklet please to page ... it's pages 99 through to 100, 101 and this is the commercial business plan from September 2005. You were in the society at this point in time?

Mr. Alan Merriman:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Were you responsible for developing or preparing this paper?

Mr. Alan Merriman:

I'll need to see the paper.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Yes. 99 is the first page of the report and then it goes into detail and 100 and 101 from there on. That's the first ... yes, sorry, the first page is here just in front of you.

Mr. Alan Merriman:

Okay so-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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And then it continues on.

Mr. Alan Merriman:

-----again just for ... so, if I'm looking at ... is this the right one in front of me now?

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Yes, yes.

Mr. Alan Merriman:

Yes, so, you know, again, it's an important distinction, I think, in terms of your question. This plan would have been developed and prepared by the then head of commercial lending. So it wouldn't have been my plan if I can put it that way but clearly, as the person ultimately responsible for commercial lending and being a board director, clearly I would have been party to approving this plan and was comfortable with it at that time.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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You were comfortable with the plan.

Mr. Alan Merriman:

I was.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. I mean it notes that commercial is an area that has more than tripled in scale to about €1.6 billion of the loan book. But the problem as it outlines in 2005 is that the lenders are lower risk, meaning good asset quality but low margins so the desire then is to go for higher-risk businesses. Now when Fergus Murphy was before us, he said on page 61 that ... of the transcript, that "the society entered into [the] marketplace [late and] at times [it] tended to do business ... with secondary ... developers and ... investors" in secondary locations and that the society wasn't "getting the better business, maybe none of the business was good".

Mr. Alan Merriman:

You know, look, I ... and I think Fergus said this himself that, you know, because we were exiting the commercial business shortly after he joined, he wouldn't have had what I might call as granular an understanding of the commercial business as perhaps Brian Healy would have had or, indeed, myself. I mean I'll be very clear that ... and let me explain. First of all, the low risk versus high risk. The commercial business EBS had at that point in time wasn't generating a sufficiently attractive return for the risk that was there. And what I mean by that is that if you have a limited amount of funding to allocate, if you are going to allocate it to a non-member business, so it's not going to your members - you are taking it away from your members to give it somewhere else - you have to ensure you are getting an adequate return. So that was the motivation for looking to move the needle on the risk curve. Fergus's comment, I would say to you very clearly: commercial was built up from 1991. I would say that if you look at the analysis when it was done on the development of ... the development of finance book of €500 million, 70% of that business was done to established developers and builders. So I am clearly and again, just bear in mind the context here ... the total book is €500 million. So, the maximum loan we might have had, and, again, I am not going to remember the exact numbers, but broadly speaking, I think, it would have been €50 million. If you could lend at most €50 million to a single relationship, EBS wasn't going to be in a position that it was going to be banking the Glass Bottle site or Ballsbridge. So clearly, by definition, we were lending our money out in the areas that could accommodate that type of lending.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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So was Fergus Murphy wrong then, in that they ... none of the business was good? They weren't getting the better business, none of the business was good?

Mr. Alan Merriman:

No, look, I think, you know, the way I'd articulate and it's the fairest way I can possibly do it is that, yes, EBS was later into development finance than others. Yes, it was competing in a very, very tough market place. Yes, it was having to establish and build relationships. Therefore, you wouldn't ordinarily expect to have the business that would be the best business - for obvious reasons. Developers themselves want to build relationships, they want to have the confidence that somebody is going to be able to bank them etc., etc. However, having said all of that, so it was a tough environment for EBS to build up that business but it was mandated to do it. It was a strategy to do it. Now, best way of being objective in terms of answering your question, let's talk about the discounts that were applied to the books across all the banks that went into NAMA and the subsequent deleveraging that was done. Fergus himself explained that the EBS discount was, I think, 57%. Big picture, that's within the goalposts of the other banks. So objectively, it wasn't any ... it wasn't much worse than others-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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As worse-----

Mr. Alan Merriman:

Well, it wasn't 61% or 62% or 63%. But, equally, in EBS's case, the other banks only transferred loans that were greater than €5 million. There was a special case for EBS. The entire books were transferred. So you are not comparing apples with apples. And if you look at the €2.5 billion that Fergus himself testified about; where he talked about that they had to deleverage €2.5 billion and it ended up with a write-off of, I think he said, €500 million. The aggregate discount of those two taken together is less than 30%. So I would say that objectively, the facts demonstrate that the EBS business wasn't any worse than what was being done in the market.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. Let's just look at this strategy paper because there's four alternatives for going forward as they presented. You've got "Hold", "Lean and Mean", "Step Up" and "Rocket". So which strategy did you support?

Mr. Alan Merriman:

Again, I don't have it on screen.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Sorry, it's page 101 of Vol. 1. It's also in your first booklet, the first green booklet, Vol. 1. It might be handier.

Mr. Alan Merriman:

What page?

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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101.

Mr. Alan Merriman:

The "Step Up" strategy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Yes, is that the one that you supported as well? I mean, was there unanimous support for "Step Up" or were there different points of view?

Mr. Alan Merriman:

I don't recollect the contrary view and you know, certainly I was comfortable with the "Step Up" strategy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. The "Step Up" strategy allows for it to evolve into any of the other alternatives as circumstances allow. Did it?

Mr. Alan Merriman:

It did and well, sorry, no it didn't to be more accurate. Clearly, and I think ...look, you draw out an important point that even then there was a recognition of let's see how this progresses. Let's see what is the obvious ... this was a interim step, let's put it that way. The strategy did change but the strategy was the exit strategy rather than a protracting strategy or a further acceleration. It was an exit strategy in due course.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Exit strategy. And when did that change to an exit strategy? After-----

Mr. Alan Merriman:

I think you have ... I'm sorry, I know you have statistics that shows actually the second half of 2007, the advances being lent out in commercial and in development were tapered down and we exited completely in the first half of 2008.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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2008, first half.

Mr. Alan Merriman:

So second half of '07 and the first half of '08.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Can I move on, if I may, to ... it's page 110 in Vol. 1 and it's a board meeting in February 2009. Your candidacy for re-election to the board is evaluated and the minutes state that you "would not be invited to stand for election as director for a second term" in the interest of the society. Can you just expand on that for us, please?

Mr. Alan Merriman:

Yes, look, I think the ... again, the broader perspective or context here is that we were just about to report our results. It was the first year that EBS was going to be reporting losses. Clearly, it was very evident that the development finance book in particular was causing significant damage. We had an AGM that was coming up in April and there was a very strong view amongst the board that as a mutual it was absolutely appropriate that we should be showing accountability.

The chairman was going to resign and we felt that it wasn't fair, if I can put it that way, that solely a non-executive would bear responsibility. We didn't think it made sense for wider board changes. We thought the chairman going was a clear indication of and acknowledgement of the mistakes that were made. But we also felt that an executive should go as well. This led up to that but this is more of a nuance because this is solely dealing with the board. And Bank of Ireland adopted the same approach. Their executive directors were not put up for re-election to their board but they stayed in their current positions.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Was it a voluntary departure then?

Mr. Alan Merriman:

Yes, no, it was ... and I made this clear in my opening statement again today, I personally would have preferred to stay. You've heard Richie Boucher from Bank of Ireland talk about that's what he wanted to do and he was allowed do that. There's a natural desire to stay when one is in trouble and sort things out. But the wider context - and I was part of the board and I very much agreed with this - we were a mutual, mistakes had been made, we wanted to be different, we believed we were different and we wanted to demonstrate that. So it was absolutely part of the EBS to show accountability. And I was definitely the right person to go at executive level.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, but just to come back to what's in your opening statement and some of your earlier conversation about this constant battle, maybe, that you were having with the board over the future direction of the society and the risks it was facing. And there seemed to be disagreement there.

Mr. Alan Merriman:

No, again, look, I, you know-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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I mean, does that play into this decision?

Mr. Alan Merriman:

Battle is ... "battle" is the wrong word.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Battle ... okay, I beg your pardon.

Mr. Alan Merriman:

I was very clear that I had my concerns about the long-term sustainability - for the reasons I shared earlier - of capital and funding.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay.

Mr. Alan Merriman:

That was ... that was '06-'07. The board came up with a very considered view. It went through the detailed analysis and it came up with a very considered view, "No, we're not selling out, we want to stay mutual, we're going to make it work. Management, we want you to make this work. You've a mandate to go and make it work." So we put ... we'd had that debate. I wasn't the bad loser. I accepted the board's decision. And what the strategy then was about was trying to preserve mutuality as best we could. So there weren't battles going on in the boardroom in '08.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay.

Mr. Alan Merriman:

What was going on in the boardroom in '08 was making sure that the society was doing all the prudent things it needed to be doing to best ... to best protect the society at that point in time.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. I just want to look at two other areas then, if I may, in the time I have left. One is this reliance on wholesale funding. Because in 1998 100% of funding for the society came from retail deposits. In 2001 it's down to 70%. By 2008 it's 47%. Was this shift intentional? Did the board see it as a risk at the time? Did they understand the potential risks at the time?

Mr. Alan Merriman:

Look, I think the start of it clearly was that wholesale funding became available to the market here. You know, EU, euro would have all been part, would have been a catalyst for that. Why did the society start seeking wholesale funding? Because it needed it to support the lending it was doing to its members. And then it just gradually grew over time. I think that's evident from all the papers and from the history. It grew over the course of time, bit by bit by bit. Was the board conscious of the risks around wholesale? It was conscious that there was a dependency on wholesaling ... on wholesale funding. It was very conscious of the need to diversify it. But it probably didn't anticipate - and I think this is true right across our own market, but globally - that a liquidity crisis of the type that came was as possible as it clearly was.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Mm-hmm. But do you feel that-----

Mr. Alan Merriman:

So the disappearance of a securitisation market overnight would be a very clear example of that. The interbank market disappearing pretty much overnight would be a very clear example of that. Did the board have a view ... did it really understand those possibilities and did it really believe those could happen? They would have seen that as being more doomsday than being in the probable.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. I have to move on, I'm afraid, because I am limited on time. Just the last thing I want to look at is Haven, the broker market business that EBS went into, which was a significant change for the society. Do you think the board had a sufficient understanding of what it was getting into? And how important was this move to the society, given that the CEO of Haven was also not invited to be re-elected to the board in 2008?

Mr. Alan Merriman:

Well, again, the Haven CEO wasn't invited to be re-elected because, at that point in time, the Haven business was going to be exited.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Yes.

Mr. Alan Merriman:

So that was that context.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Very shortly after it had been established.

Mr. Alan Merriman:

Yes, but, again, you have to look at before and after. So it was established at a time when there wasn't a funding crisis and it was exited when the funding crisis was front and centre.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay.

Mr. Alan Merriman:

The board would have done intense work around the merit of going into the broker market. The broker market typically in a European context is circa 50% of the market, so it's a very important part of the mortgage market, and it was done, again, in the interests of the long-term sustainability of the society. Broker markets bring more risks-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Yes.

Mr. Alan Merriman:

-----but they were understood.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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And you supported the move, then-----

Mr. Alan Merriman:

I did.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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-----with Haven? I mean, it was-----

Mr. Alan Merriman:

It was also part of the deleveraging strategy in terms of getting ... it was an answer to some of the funding challenges because there was going to be a JV at that point in time.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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I wanted to ask you about that actually ... with Britannia Building Society.

Mr. Alan Merriman:

Correct.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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That failed. Why did that fail?

Mr. Alan Merriman:

Again, it failed ... it failed for a variety of reasons but essentially it was because ... and, again ... look, it goes back to wholesale funding. When problems became evident in the Irish market, you know, if you're sitting in the UK in your building society in the UK or your local authority in the UK, you're going to very reluctant to engage in the Irish market.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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So why did EBS continue with it then? Why not take the warning signal from the failure and pull out-----

Mr. Alan Merriman:

Because ... excuse me.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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-----instead of going ahead 100% on the-----

Mr. Alan Merriman:

Well, because ... for two things: business was already up and running, so the book that was there at that point in time was going to go into the JV vehicle, so it wasn't a case of deciding not to proceed, it was already in progress; and then we've answered your question - we did exit it.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Yes, I mean, there was a potential sale at one point, €5 billion, but that-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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One last question now, Deputy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Thank you. But that didn't go ahead; why not?

Mr. Alan Merriman:

I told you. Because, basically, Britannia had no interest in proceeding given the difficulties that emerged in the market.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Thank you, thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Mr. Merriman, if I can maybe just deal with one brief matter with regard to the guarantee and I then want to move on to some other matters with you. Was there any discussions at any time with any other bank, the Central Bank, the Department of Finance in relation to the - excuse me - in relation to liquidity issues or solvency of any particular bank in the weeks before the night of the guarantee?

Mr. Alan Merriman:

I can't remember explicitly. I'm sure, you know, the head of treasury would have been having discussions with all his counterparties amongst the Irish banks. I'm sure the chief executive was discussing the same with other chief executives.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes.

Mr. Alan Merriman:

I know in those meetings that I personally was at in the Central Bank there were discussions about the market generally in terms of what was happening and concerns around institutions but I've no direct intelligence to be able to share.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. And there was nothing out there in the ether, by your recollection, in that regard?

Mr. Alan Merriman:

Not ... not to my understanding.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. If I can maybe just move then to the period subsequently after the guarantee, Mr. Merriman. And in November 2008 the treasury department looked for an increase in the lending lines to the other covered banks in order to invest in their unsecured debt and to have them reciprocate the same. This is the, kind of, green jersey thing. And on the screen there in the first two chapters, what we have there, this is an e-mail to the board from Mr. Gerry Murray, 17 November 2008 "Subject: Proposal to Increase Credit Limits [to] Irish Bank[s]". And the first two paragraphs kind of give a summary of the situation:

On September 30th, 2008 the Irish Government announced that it would guarantee Irish Banks / Building Societies until September 2010 under the Credit Institutions (Financial Support) Scheme 2008 (the "Scheme") [as it's known]. Subsequently, Moody's and [Standard and Poor] announced that they would rate any debt issued under the Scheme and maturing prior to September 2010 as AAA-backed.

That's top of the range, isn't it? It doesn't come any higher than that, yes?

Mr. Alan Merriman:

I see it there, yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, okay:

These events will result in Irish Banks attempting to access the market for senior unsecured debt. Integral to the success of the debt offering [...] is support from the domestic market. i.e. the banks will need to purchase significant quantities of each others bonds.

So this is ... this is a direction that Irish banks will start borrowing money from one another after the guarantee and securing bonds or borrowing bonds and everything else ... "Consequently, EBS Building Society will need to purchase debt issued by the [...] Irish institutions in order to get sufficient support to successfully issue a benchmark transaction of [its] own." So the suggestion there ... you start buying from other banks, that allows other banks to start buying from you. I'm correct there, yes?

Mr. Alan Merriman:

Yes, absolutely.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Right, in ... to what extent, in your opinion, did the board consider it was appropriate in this regard to pull on what was described as the "green jersey" and invest in such assets?

Mr. Alan Merriman:

A hundred per cent, I would say.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. All right. The-----

Mr. Alan Merriman:

So, you know, absolutely, you know, appropriately and accurately articulated by yourself. Very clear.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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As a-----

Mr. Alan Merriman:

And that was absolutely the intention.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. As a suggestion that this was Irish institutions operating in a bubble ... if I can put this premise to you, that this was Irish institutions operating in a bubble, in a domestic market, ultimately just washing one another's laundry?

Mr. Alan Merriman:

No again, look, let me make again a very clear distinction. This is now post the Government guarantee-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Indeed.

Mr. Alan Merriman:

-----coming in.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay.

Mr. Alan Merriman:

It's in the crisis and it's trying to accommodate a normalisation of the market.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Can I just bring up there, a slide here, okay? The next document coming up, Mr. Merriman, relates to its EBS Building Society minutes of the board meeting held on 17 November 2008. So, it's the minute relating to the same date of the earlier transaction. And if I can just bring you to the second column to the right and just take you down some of the language here:

Fidelma Clarke outlined the basis of two proposals in relation to Treasury limits and programmes arising from the implementation of the Government Guarantee Scheme. Papers had been circulated prior to the meeting.

And then talks about the counterparty limits of the institutions that EBS now would engage with as part of this cross transactions:

The Board resolved to

(a) increase the counterparty credit limits for AIB, Anglo, Bank of Ireland, IL&P and INBS to €200m, with the quantum increase above credit limits exclusively available for issuance covered under the terms and period of the government guarantee scheme.

I just want to refer to two institutions there. We have it on record here that the NTMA had such concerns with regard to Irish Nationwide ... INBS, that they wouldn't put a brass farthing into them and wouldn't do so for years. And at Anglo Irish Bank, that the NTMA had similar concerns about and wouldn't ... would only put money in there when they actually received direction from the Minister for Finance in writing to do so. Had you any concerns with putting money into INBS or Anglo?

Mr. Alan Merriman:

Okay. So, again, if I'm very precise on dates, this board minute is clearly, clearly in the context of the Government guarantee regime and therefore the reality is that while we're lending to those institutions, it's covered by the sovereign. And as an Irish building society operating in a stressed Irish banking context, it would have been very questionable had EBS not been supportive of this programme at that point in time. In other words, not being prepared to take risk on our own sovereign when our own sovereign was supporting the Irish banks and supporting EBS directly. So I think the context is very clear.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I understand the context of it but there is also what would be, kind of, maybe real-time information at the time that people in the business would be aware of. Were you aware that the NTMA had reservations with regard to these two institutions and would not ... and had serious concerns with putting any of their own assets into these institutions?

Mr. Alan Merriman:

This would be more ... I'd no direct involvement-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Well, you ... no, I'm asking you were you aware-----

Mr. Alan Merriman:

No, and I'm answering your question.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----that the NTMA had reservations about these?

Mr. Alan Merriman:

I had ... I had a ... I would have had a sense, I would have had an understanding at the time, that the NTMA were being reluctant to put moneys into the Irish banks. I'm not saying specifically those two-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes.

Mr. Alan Merriman:

-----just generally the Irish banks, that there was a reluctance. Now, did I understand that from the head of treasury or where did I pick it up? But no I would have had that understanding at that time that the NTMA were being encouraged but were being slow to support. Now, that was probably prior to the guarantee.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Sure. And so this is after the guarantee and you're now looking to be buying bonds from other banks and all the rest of it as a kind of means of a cross supporting one another.

Mr. Alan Merriman:

Which is normal. Normal in a normal market-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, I understand that.

Mr. Alan Merriman:

-----and clearly normal in a stressed market.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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But we're not in a normal market here now one month after the State has actually guaranteed financial institutions.

Mr. Alan Merriman:

So it's easier in this context.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Was there any discussion in your institution with regard to the Nationwide or with regard to Anglo of how safe or unsound or how wise or unwise it would be for the EBS to be buying bonds from any of these two institutions?

Mr. Alan Merriman:

At this point or earlier?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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At any time.

Mr. Alan Merriman:

Well, certainly at this point the discussion was there in relation to all the banks, and the context was the guarantee allowed one lift the limits and be comfortable with them. Prior to that I would have no recollection of any direct concern being raised about those two institutions from a lending perspective. But again I would emphasise that the lending would have been short term. These programmes are short-term programmes and we would have taken the comfort ... and again, look, you know, I say this in the context of what's happened, you know, all senior ... this was senior debt. All senior debt was clearly going to be stood over and was stood over.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And just on the broader level of those two institutions, I just want to know, at board level was there concern with any transactions that your institution might engage with with those two institutions?

Mr. Alan Merriman:

No. And again I just go back to the transactions were senior debt.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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At that time?

Mr. Alan Merriman:

At that time.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Thank you. Senator Susan O'Keeffe.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Thanks, Chair. Mr. Merriman, can I just clarify there when you said about the NTMA and you had a sense of it not putting anything on deposit with the banks from 2007? Was that knowledge not publicly available? You were saying you had a sense of it. Would they not have indicated that in their own figures?

Mr. Alan Merriman:

Well, look, it's ... no, it's well, no, I mean-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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It was private?

Mr. Alan Merriman:

I'm very sure it was private. They wouldn't be disclosing by counterparty where their money was being placed.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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And you were not aware of it through other people?

Mr. Alan Merriman:

Not especially. I'm guessing, and it's a guess, so, therefore, I'm ... you know, I don't want to-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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No, well we don't want guessing. Thank you. In Vol. 1, page 130, and again I know this was from the 2004 strategic review, it says ... it talked about, "Profits grow on average by 13% p.a. [per annum] from 2002 to 2004 and by 25% p.a. [per annum] thereafter." And I'm just wondering what you thought of that kind of forecast for growth at that time for the EBS?

Mr. Alan Merriman:

The historic one of 13% or the forward one of 25%?

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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No, the forward one. Was it an ambitious target at that time do you think?

Mr. Alan Merriman:

I think it was and I think it was understood as being ambitious.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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So, why have it there as part of the strategic review?

Mr. Alan Merriman:

Well, because it ... well again, as you rightly say it was before my time. But clearly that was their plan and that was their ambition and-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Well you came in just a year later so are you aware or can you recall whether that plan had changed by then or whether that was still, if you like, your ... the stated plan of the EBS when you joined?

Mr. Alan Merriman:

No, I think it was rebalanced because when I came in in 2005 I think the profits for that year were closer to ... I think the net profits were closer to 55 [million euro]. So clearly it was quite some distance away from the 85 [million euro] that's on this page that you're sharing with me.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Okay. In Vol. 2 of the core documents, Mr. Merriman, page 139, is a list of the top ten bonus payments in 2001-2008 and you received a bonus in 2007 of €309,000 that was the highest for that year. In 2008 you received a bonus of €220,000. Given what was happening at that time in terms of the stress in the financial markets and so on, was it appropriate or not to take a bonus of €220,000 do you think?

Mr. Alan Merriman:

Well, let me answer. First of all, I think the dates here are maybe out of sync by a year, I think.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Well, I can't be ... yes.

Mr. Alan Merriman:

That, that-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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I'm sorry I don't know that.

Mr. Alan Merriman:

No, that's all right, but that ... I'm just, just clarifying it here. So, I think they're out of sync by a year. I think they're cash payments made in those years for the prior years, I think.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Yes, it does say that, for the previous year. But, again, you would have known in 2008 what was going on in the world around you and I'm asking-----

Mr. Alan Merriman:

Sure and I've-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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-----whether it was appropriate to take the bonus for the previous year in 2008?

Mr. Alan Merriman:

Okay, so again, to try and clarify it for you, so it's I think it's the '07 bonus you're asking me about which I took in 2008.

Mr. Alan Merriman:

At the time that was taken it was probably early '08 and I'd also put it in the context of, as I explained in my opening statement, I was recruited, courted into EBS, I clearly had been a partner in PwC. I was on a very good package. I was leaving a very, very secure job. In making the move to EBS I would have been very minded to have some protection about my income at that point in time. I had obligations, I had loans and therefore it was important that I had visibility over what type of income I would have. And I would have needed that money at that point in time to cover my own obligations.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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And so part of the courting of coming to the EBS would have been appropriate bonuses and-----

Mr. Alan Merriman:

As as is natural for any move in any employment.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Okay. On page 3 of Vol. 1 there is a note from Cathal Magee, who was a non-executive director of EBS. This is 30 March 2006 - it's quite a long document, but in paragraph 2 he says:

It is my first experience of being corporately "bullied" as a Director because of positions I have articulated. However, it has reinforced in me an understanding of and a commitment to the need to implement the Corporate Governance Standards set out in the Combined Code in the [EBS] Building Society.

And then he goes on to talk about the society "slowly and painfully emerging from a legacy Building Society governance culture". What was Mr. Magee talking about there being "corporately bullied" to use his term?

Mr. Alan Merriman:

My understanding is that Cathal, amongst a number of non-executives, had been raising their concerns around a number of issues for quite some time in relation to, you know, various agenda items around the board. And he wasn't satisfied that they were being dealt with to his satisfaction. And it's in that context I believe that he's made that statement.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Yes. I mean, he would have been ... he was a man with a strong track record in other organisations wasn't he? So he was a very senior manager.

Mr. Alan Merriman:

Very experienced, very senior, very commercial.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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He was very commercial. So how did the EBS take his observations at that point in terms of his approach or his attitude? I mean, he was clearly appointed, he didn't wander in and become a member, he was appointed.

Mr. Alan Merriman:

Yes. I think we have to be careful about, you know, when we talk about what did EBS do, what do we really mean by that so-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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But what was the response at that time to his observations?

Mr. Alan Merriman:

No, no, let me be clear, I am just trying to help so, this was clearly at board level. So this was about relations around the board, so all non-executives and a number of executives. So how would those executives dealing ... between each other in relation to these matters, that's what Cathal is drawing out. So look, maybe to help I would say to you there is a very clear distinction between corporate governance and structures and systems on one hand and on the other hand, conduct of individuals around the board table. You can have very strong corporate governance, you can have good systems, good processes - as E and Y attested here that EBS had in their opinion - and, separately, you can have conduct and conduct can be different. It is personality driven, etc., etc. So the conduct around the board amongst certain individuals was considered to be not appropriate and that's what Cathal is drawing out here.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Okay. In Vol. 3 of the core documents on page 59 is the statement, the witness statement of Ms Ethna Tinney. She talks here about ... on page 59 at the bottom of paragraph 1, and she is talking about the appropriateness of property relating lending strategies and risk appetite, and she says "There was a sort of feeding-frenzy as the banks clambered over one another to get a piece of the action, especially as new foreign banks had entered the market as competitors." At the beginning of that paragraph she says "Lending large sums to developers was new to the society." and she said "The senior management in EBS, as in most of the lending institutions, were taken in by Ireland's so-called developers and also by their professional and other advisors." Mr. Murphy said in evidence last week "there was a ... reasonable chance of the organisation making it through, had they not been involved in all of that" and by "all of that", he meant commercial property and land and development. So what was going on? I mean, Ms Tinney's observation is that this was new to the society and it was a kind of a frenzy as banks clambered over each other and she goes on to discuss how the senior management were asked to review credit applications and so on, and I'll come to that, but I wonder what your first observation is of that?

Mr. Alan Merriman:

Okay, so let me deal with Ms Tinney's observations first and then with Mr. Murphy's. In relation to Ethna's - and I understand she is here later this morning and, therefore, you can ask her directly - but I am guessing that ... she started with EBS I think in the year 2000, so five years prior to my own joining the society. So I would suggest that perhaps she is talking about the step up into development finance in 2001 ... was new at that point in time and that was recently after her joining the society. And, you know, as I said, the development finance book in EBS started in 2001 and was stepped up to €500 million by the end of 2008 so that is an eight-year period. In relation to Mr. Murphy's comment-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Sorry, in fairness, Mr. Merriman, you will have read this because you were given the document. She does go on in the next paragraph to say:

In the period from December 2006 to April 2007 I was inundated via email by proposals from EBS senior management on behalf of "developers" for quantities of cash in the tens of millions which appeared to be asset-backed and also to contain personal guarantees. [So, typically] as a member of the credit committee, your approval or lack of it had to be sent ... by email to EBS by close of business the same day or the next day. The rationale was that if EBS did not facilitate the "developer" another bank would and we would simply be losing out on the business.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I need you to ask the question so that he gets time to respond.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Yes. So I am just saying, I mean, that is Ms Tinney's observation of what was happening. You were also a member of the board, I am asking do you share that view of what happened in EBS at that time?

Mr. Alan Merriman:

Again, I need to be very clear in terms of what question I am addressing. So, I have explained that Ethna joined, I believe in 2000, she can confirm that later, development finance started in 2001, that explains why she said it was new to society. In terms of the specific question that you are asking me, my recollection is that Ethna moved on to the board advances committee, which is the committee of the board that approves loans beyond a certain size. I am guessing that was perhaps in this time period December 2006 to April 2007 and that's the committee amongst the board members that gets individual loan documents to approve if the society wishes to do it. So that would have been new to Ethna at that point, not new to the society but new to Ethna at that particular point in time. And in terms of her being inundated, look, that's a subjective comment.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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No, I am not asking about the inundated-----

Mr. Alan Merriman:

In my view the frequency and the number would not have been of that magnitude.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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No, I am not asking about the inundated, she is saying that she was asked on each occasion:

the approval or lack of it had to be sent ... by email to EBS by close of business ... the next day. The rationale was that if EBS did not facilitate the "developer" another bank would and we would simply be losing out ... the business.

I am asking you the question was: is she correct in her observation that there was a rush, if you like, to facilitate the developer, otherwise you would be losing out on business?

Mr. Alan Merriman:

No, there wasn't a rush. There was a requirement for the business to be able to get board approval within a 24-hour period.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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In a 24-hour period. So that is correct?

Mr. Alan Merriman:

That is correct but, again, just so there are no misunderstandings, the board approval is the ultimate approval. It is the end of a long process of working through a loan application. It is the ultimate safeguard. It is beyond a certain €10 million level. We are not going to allow the executive to give this loan out without a further check coming from the board of non-executive directors as an additional precaution. And in doing that, the society understands if it is going to compete in this market, it needs to be able to provide the type of service that is expected. So therefore, we need to give a 24-hour period. Those members who sat on that committee fully understood that requirement and the need for them to be able to be available to give the consideration that would be needed within that timeframe and they would have got very detailed documents to help them support their agreeing or not agreeing to make those individual loans.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Senator D'Arcy.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Mr. Merriman you are welcome. Could you bring up book 1, page 125 to 128 please? Mr. Merriman, was consideration given to the fact that during the period of substantial growth, '04 to '08, that other banks in the Irish market were seeing double-digit growth? And was it possible that all banks could achieve the same level of double-digit growth within the jurisdiction? Could every bank be having those levels of growth and would the market not be destabilised by that quantity of growth?

Mr. Alan Merriman:

No, and, again, I was interested in seeing some of the commentary from earlier sessions about growth and what is good growth and what is bad growth and is 10% okay or is 15% bad or should it only be 5% and tie it to GDP. My simple answer to your question would be, you know, of course you can have high-teen growth or mid-twenty growth across the market and all participants can enjoy that if the market itself is growing in sync with that. If the market is not growing and people are trying to get 5%, 10%, 15% growth, there is going to be winners and losers. But if the market as a whole is growing then that can be accommodated and it is very driven by where you are in the cycle and what is going on in the market at that point in time.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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In evidence from other witnesses from the banking sector, Mr. Merriman, the demographics that ... coming towards the late '70s, that the children born at that stage would be requiring finance for properties and the like, going to the mid-noughties. It would suggest or would it suggest that the level of lending was carefully planned and that each institution had an objective to achieve its market share? Can I ask the question: was that a risky strategy by all of the banks, all of the financial institutions?

Mr. Alan Merriman:

No, but look, I, again, if I understand the question correctly, you know, each market participant has to make up its own mind in terms of what is appropriate with business and what it can accommodate but all market participants have to do it by reference to what is going on in the market. And as I have testified in my witness statement - and I think many people have testified here - the very, very broad consensus was that the market was going to continue to be growing, albeit slowing, and that the demographics and the economics of the country as a whole were going to be supported.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Mr. Merriman, Mr. Fergus Murphy gave evidence last week that when he joined the financial institution, the EBS, that there was a change of strategy. Was that change of strategy driven by one individual?

Mr. Alan Merriman:

No. I mean, I think Fergus himself said that, you know, clearly, as a new chief executive, he was better placed because he had, I think, no baggage and no association with the past. I think he very clearly articulated, and I think it's true, tone is very much set at the top and, therefore, has a cascading-down impact. But I also think - and this is probably the most important point - the circumstances were very different, so the strategy and the changes were being driven by what was happening in the market and our read of the market at that point in time. And as I've clearly articulated and explained earlier, EBS as a whole in the management team, at a much earlier point, had concerns and was already beginning to address the strategy and change things accordingly. Fergus's arrival certainly helped in that regard and it did accelerate because it was a new chief executive, and that helped, but it certainly ... enabled by him, but not exclusive to him.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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You joined in early 2005; is that correct?

Mr. Alan Merriman:

July 2005.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Oh, mid-July, okay. In evidence previously presented by others, a lot of people have said that there was a period - late '05, early '06 - that it was a point of no return; the extent of the downturn was going to be substantially more than if some actions had been taken prior to that. Did you notice, or did you have any knowledge prior to joining EBS, that potentially there was a fall coming?

Mr. Alan Merriman:

No. I mean, I would say - and again I say it in my witness statement - July 2005 for me, leaving PwC, going to EBS, what was the market like right then? Well, it was full employment, as we all understand what we mean by full employment. The economy was booming. House completions were going up. We had a lot of immigration into the country because of the job flow here. PwC were literally scouring the world, trying to find people to come into this market, to service the business and the business that we had at that point in time. It was a very, very strong economy and the immediate outlook in 2005 continued to be good. I would articulate that it was late '06-early '07 before there were strong indicators that there could be trouble ahead and, again, I'll be very clear that, even post the crisis, in late 2009 and 2010, many commentators believed that the worst was over and the truth was things got substantially worse in 2010 and 2011.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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In your opening statement you ... or previously you discussed that 50% of the funding for EBS came from wholesale funding and, prior to that, in the late '90s, it was all backed by deposits. At what stage did EBS move from ... when did EBS achieve 50% wholesale funding, are you aware?

Mr. Alan Merriman:

Look, I can't recollect, but it, clearly, grew over the course of time. I'm not sure ... I did see that; I heard that; that 1999, it was all non-wholesale. As a matter of fact, I'm not sure, I think ... I'd be interested in knowing, but, clearly, it grew substantially and, to answer your earlier question in this context, I would say ... you know, if you have a ... let me use very simple numbers ... if you have a €20 billion balance sheet and €10 billion of it is funded by wholesale funding, that is not something you deal with or change overnight. You've a €20 billion balance sheet of assets; €10 billion of it is coming from wholesale markets; it takes many, many, many years to try and change that needle.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Mr. Merriman, have you seen the witness statement from Fidelma Clarke? Have you read that?

Mr. Alan Merriman:

I have.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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You have. Page 5, Ms Clarke says, "The traditionally conservative approach to lending in EBS unravelled in the period ['00 to '07]." Were you aware that there was an unravelling of the conservative approach by EBS?

Mr. Alan Merriman:

Sorry, I'd just like to find the-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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It's page 5.

Mr. Alan Merriman:

I've different page numbers on mine.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Oh, sorry, okay.

Mr. Alan Merriman:

Her statement starts on page 41 in my book.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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It's, "Effectiveness of banks' credit strategy and risk management."

Mr. Alan Merriman:

Yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And it's the last paragraph, first line. Oh sorry-----

Mr. Alan Merriman:

No.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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-----first paragraph ... last paragraph, first line.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It's page 45 in the core booklet.

Mr. Alan Merriman:

Page 45.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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I'll read the line to you, "The traditionally conservative approach to lending in EBS unravelled in the period ['00 to '07]." You came in mid-'05. Did you ... were you aware-----

Mr. Alan Merriman:

Sorry, she said '00 to '07, is it?

Mr. Alan Merriman:

Okay, so over that seven-year period.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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You ... were you aware that that had happened?

Mr. Alan Merriman:

I was very conscious, as I think, generally, anybody in the market would be. So, five of those seven years were before my time-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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I'm well aware.

Mr. Alan Merriman:

----- the latter two, clearly, I was there. No, I'd be very conscious, and I know Fergus Murphy explained it as well, that maybe over the prior six-year period, there'd been 13 credit policy changes. They were clearly all ... "accommodative" would be the word. And I think the market, as a whole, totally understood that. Why did those changes happening? I'll give you a very simple example. We go back to what I call traditional building society lending. People would get 20-year mortgages. Well, 20-year mortgages became 25-year mortgages. Then they became 30-year mortgages. Then they became-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It's on the monitor there now, Senator, as well, just to assist you.

Mr. Alan Merriman:

Then they became 35-year mortgages. Why was that done? It was done, in part, because demand; people wanted to be able to access greater funding so they could get their houses. And it was accommodated because there was a rationale too, "Well, if you're 20 years of age, why shouldn't you be able to borrow for 35 years?" It clearly ended up, at a macro level, being bad because all it did was inflate house prices etc., etc., but they're the type of changes that were accommodated during that period.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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But what I'm asking you: were you satisfied with the change? And did you have any impact when you entered, when you joined the organisation, for those changes to continue changing? Did you do anything to try and revert back to the more conservative method of lending?

Mr. Alan Merriman:

No. And I say "No" in the context of late 2005 and 2006 and early 2007. Late 2007 and 2008, yes, lots of credit changes were made and they were done in a different context. They were done to dampen down-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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I suppose where I'm coming from is-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Last question now, Senator.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Yes. Where I'm coming from, Mr. Merriman, was you were coming in at a very high level, with substantial experience behind you, and you had seen the market growth and I'm asking did you request any changes to the conservative ... or to revert back to conservative lending approach?

Mr. Alan Merriman:

From a credit policy perspective, there was no credit policy that I was uncomfortable with from a loan-to-value or from an income perspective, in terms of interest cover and things like that. From a process perspective, from a talent perspective, from a control perspective, I brought in numerous changes to strengthen the processes and the governance and so forth, but from a credit perspective, if a credit policy was approved at EBS board level, I personally would have been satisfied that it was supported and it was appropriate at that point in time.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Thank you. Thank you, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. Deputy John Paul Phelan.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you, Chairman. Good morning, Mr. Merriman.

Mr. Alan Merriman:

Morning.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Firstly, I want to reference a document that Senator D'Arcy just spoke about earlier, Vol. 1, page 126, minutes of a board meeting, 22 July 2005. The heading at the top is, "Section 3: Key Business Drivers Behind the Plan" and, specifically, the fourth point there, which is as follows, "Tracker mortgages will account for an increasing proportion of business - rising from 5% today to 60% by 2008. [And] This will push mortgage margins down"; somewhat prophetic, maybe.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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There's some phone interference coming by you there, Senator. Obviously-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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It isn't my one anyway.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I appreciate that, but sometimes proximity can cause it so, if it is, I'd ask the member to deal with it, please; not to have it interfering with your questioning.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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In relation to that, were you yourself aware of the risks that, you know, the tracker mortgage rate could pose for the institution? And, actually, as a board member, was it ever discussed really in-depth at board level in the EBS?

Mr. Alan Merriman:

It was discussed. I was aware and I always ... and, again, I think it's fascinating. It hasn't come up, to the best of my knowledge, in your discussions, I was always fascinated with the fact that the tracker mortgage was priced cheaper than the standard variable rate. It made no logical sense to me, from any perspective.

In other words, you know, by a customer having a guarantee that their rate was going to be tied to the ECB, when, in fact, they should have been paying more-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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They should have been paying the premium. Yes, okay.

Mr. Alan Merriman:

So I just thought it was madness------

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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And did you raise that? Did you-----

Mr. Alan Merriman:

I did raise it. But ... and, again ... no, look, you know, EBS got lots of things of wrong, it got lots of things right as well. The whole area of pricing of mortgages ... if you look at our book as an ... in aggregate, proportionally, compared to the other banks, we had very, very little by way of tracker mortgages. We had a lot of people in fixed rate and we had them in fixed rate because we felt that was the prudent thing to do. Typically, around five-year ... it affected stress testing as well but it gave them certainty. A bit like my own arrival into EBS and my own package, having visibility about what your expenses would be ... very, very helpful in terms of assessing credit. So we steered people more towards fixed rate and the standard variable rate for those reasons.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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But you're saying there was a discussion but perhaps not as in-depth as there-----

Mr. Alan Merriman:

It would have been understood but-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes.

Mr. Alan Merriman:

-----it was a feature of the market. EBS was not going to change the market.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, okay. I want to reference your opening statement. I think it's the seventh page but it's numbered as No. 9. The first paragraph ... the bottom of the first paragraph where you say, and I quote, "All understood the necessity for EBS to expand it's business and improve profitability. I would go as far to say we were encouraged to expand and become more commercial." In fact, at the start of that statement you'd referenced the regulator and Fitch and Moody's and a number of other bodies. Who was encouraging you? Because you seem to be indicating there that it's an external encouragement rather than an internal encouragement.

Mr. Alan Merriman:

Yes, well, look, I ... you know, clearly there's a lot of interested parties with a building society. So obvious candidates being the rating agencies, obvious candidates being the people who are lending you money, obvious candidates being the ... the regulator. So, you know, in sharing our strategies and sharing our business plans with all those parties, what was the reaction? What feedback were we getting? I'm being very clear, nobody - and I will say nobody - ever said, "Do you know what? Ted, Alan, Mark, Fergus, we really think that's not very clever.' In fact, I'm saying the opposite. I'm saying, "Do you know what guys? That makes very good sense. Yes, that doesn't give us a problem from a rating perspective and our particular A rating. Yes, we see the sense of you diversifying away from your mortgage book. Yes, we can see that the margins are under strain and, yes, of course it makes sense that you would diversify your business and have your non-member business. Yes, it makes sense to have a member business and a non-member business because we can see how it's circular." That's what I'm trying to explain.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, that's fair enough. I want refer to core document 2 ... Vol. 2, sorry, page 37, which is a letter from the Financial Regulator to Mr. Murphy, managing director, on 3 March 2008. It should be up on the screen, I'd say, momentarily. It says "Copy to Emer, Brian, Fidelma, Alan [who, I presume, is yourself] [and] Grant." It's a result of an inspection process. There's an interesting comment on the third paragraph where it says "The Financial Regulator's inspection process is a high level review and does not constitute a detailed examination or audit.", which, perhaps, may well have been the case. I want to specifically reference page number 43 ... it's a review of a number of files - loans, effectively - and issues that have been spotted by the regulator and a number of comments by them on those issues. The last comment at the bottom of page 43, should be up in a second. Is it? You have it anyway, yes?

Mr. Alan Merriman:

I do, yes.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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"Overall indebtedness was assessed on the basis of an uncertified Net Worth Statement. The inspectors would question whether reliance should be placed on such a statement." Over the page, page 44, second box, point No. 3, "The purpose of the €4m loan changed after approval - it is not clear to inspectors how the €3m funds advanced will be utilised (€1m being used to acquire US Property)." Next box down, "No evidence of income - (client will not provide it)." Point No. 3, "Salary details were estimated by EBS." Point No. 5, "No valuation of property being acquired. This property was used as security along with existing properties secured by EBS." And again, on the bottom of page 45, last ... the very last point, "Reliance placed on uncertified Net Worth Statements." This was in 2008 ... early 2008 ... March 2008, I presume referencing the previous year. How can you explain those discrepancies ... that this admittedly high-level review rather than an in depth analysis by the regulator, which they've said in their opening letter that these were identified? How did they happen?

Mr. Alan Merriman:

Okay. Well, let me ... let me deal with two or three things there. First of all, and I'm ... I want to be very clear ... very plain language - "The Financial Regulator's inspection process is a high level review and does not constitute a detailed examination or audit." That's insurance language, contingency language, you can clearly see from the nature of the findings that they're very forensic and a very detailed review had been undertaken.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.

Mr. Alan Merriman:

That's my view.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.

Mr. Alan Merriman:

Secondly, I'd say ... and I've had the benefit of it, I'm not sure if it's in the document that was shared with you by AIB and EBS, but I have seen the detailed response to all these queries that went back to the regulator, and it deals with every single point and explains them. And that was clearly done to the satisfaction of the regulator because there was no subsequent correspondence on the matter. The third thing I'd say is - and I think it's an important point in terms of giving you some personal insights - when we talk about the regulator, and in this case we're talking about the Financial Regulator here, there's many different components of the regulator. So there's the Pat Neary level, there's the head of the banking division level, there's teams that might do a thematic review of "know your customer", or there's an inspector who's doing a very detailed review, regardless of the wording, of the loan files. So my broad insight to you would be ... look, I can completely understand that somebody reads this cold and they go "Jesus, what's going on here?" Completely get that. What I will say to you, candidly, is that unfortunately the practice amongst the regulator was they'd come in and they would do these reviews, they wouldn't engage properly in terms of getting clarity while on site and then they would then send very detailed questions to have clarification. But, much more importantly, I'd be standing back and I'd be saying "Okay, look, this level of inspection was going on but where were the dots being joined up so that, at a higher level, the regulator would be coming in saying "Do you know what? I get it, that there's a passport where the photograph isn't legible. And that's not great. But do you know what? I don't need to talk about that. What I want to talk about is your development finance. And what I want to talk about is that you've got 33% of your book is funded only by retail deposits.".'' That's what was needed in terms of macro-regulatory intervention. That's where the regulator needed to be. When we talk about 100% mortgages, it's not about on an individual case whether an institution was doing it or not or why it was doing it-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes. I don't think anyone ... I'm not here to disagree, I don't particularly disagree with anything that you said, but my-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Last question, Deputy.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----my point still remains. I mean, this investigation by the regulator which was, as you said, kind of, standard practice, highlighted a number of fairly startling and-----

Mr. Alan Merriman:

But like-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----omissions by the EBS.

Mr. Alan Merriman:

But ... well, again, and I ... you know, look, I'm not trying to disguise or change the ... this was clearly, you know, a letter that was not well received in terms of the level of findings and it was taken very seriously in EBS. But, again, I just want to try and deal with what I might call prioritisation and what was going on. And, again, just be very stark: all of these findings, as extensive as they are, not one of them is rated a high priority. And even the ones that are there are rated a medium priority. So even these findings weren't leading to the regulator saying "Look, here's a problem and it needs to be dealt with right now."

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you very much. I'm moving to wrap things up. First up is Senator MacSharry. Senator.

Photo of Marc MacSharryMarc MacSharry (Fianna Fail)
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Nothing further.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you. Deputy Murphy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman. And, Mr. Merriman, just to clarify, from the board minute meetings in March 2007, the regulator expressed concern that you were responsible for both the commercial business and the risk function. Why did ... why did the regulator express that concern and what was the reaction from the board then?

Mr. Alan Merriman:

Okay. And I think this deserves a full response. First of all, when I joined EBS, it wasn't intended that risk would be under my remit. At that point in time, there was a director who had that responsibility at board level. They resigned shortly after my arrival and after, you know, consideration, the chief executive and the board asked whether I would take on the responsibility of risk along with my other responsibilities. So that's how it evolved, and that was pre-cleared with the regulator at that point. So we had an explicit discussion with the regulator.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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That was 2005 at that point? Or it was-----

Mr. Alan Merriman:

That was late 2005.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Late 2005.

Mr. Alan Merriman:

And we had an explicit discussion with the regulator. We would have written to them. They would have written back to us confirming their acceptance of the appropriateness at that time of my taking on that responsibility. Now, I just want to be very clear because, you know, there's this observation by others that EBS didn't have a chief risk officer and it didn't have a chief risk officer on a stand-alone basis reporting to the board or the chief executive. And in somehow or some way, that has contributed, in a meaningful way, to what transpired. Now, again, let me deal with the facts. Yes, it didn't have a stand-alone chief risk officer, but it had a head of risk, and you'll be meeting them later today. And that head of risk reported to me but they also had visibility at board level and they had their arms completely around risk but in an EBS context. So what I'm trying to say is that the question of there being a layer between the head of risk and the chief executive or a layer between the head of risk and the board, in my view, was unhelpful in terms of a post mortem, because, clearly, it would have been better to have a single individual at board level solely responsible for risk, but I actually don't think it made a meaningful difference. And, again, just to give that some objective analysis, two things I'd say - look at all the other banks who did happen to have a stand-alone chief risk officer reporting to the board, and I don't think they ended up in a different position. And, ultimately, I'd say - and I think again it's a corporate governance matter - ultimately, the chief risk officer of any organisation is not the head of risk, is not the head of finance; it's the chief executive and the board collectively.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Can I just ask-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Final question, Deputy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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-----what changed then in 2007? Why did the Financial Regulator change his opinion?

Mr. Alan Merriman:

Because ... and, look, it's inevitable, it's life. Best practices change. There were some documents out of Europe that were now saying ... and if you go back to the late '90s, the role and the job of a chief risk officer didn't exist at all.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It's Galway races week, lads. I'm sorry about that; that's where that came from. Time is up. I don't know where that came from, Deputy. I'm going to wrap things up. Something that struck me this morning when you were talking, Mr. Merriman, and as you go along the journey, you sometimes forget the obvious, and that the EBS was set up to assist teachers to buy homes and that's the start of the journey of the EBS's establishment. That was its raison d'être, that was its client base, and it grew out of that. I'm correct in that regard? And at the very end of the story, the affordability for the teacher to be able to buy a home was possibly gone beyond their affordability, certainly as a teacher.

Mr. Alan Merriman:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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At any stage during that journey, did you say to yourself, or was it discussed in the bank, the purpose of the establishment to which we serve, which was to allow a particular, sort of, income group ... and they become the classical, sort of, teacher and guard, in terms of looking at affordability-----

Mr. Alan Merriman:

Sure.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----it's ... we're now moving from 20 years out to 35 years to give these people mortgages, the ratios of their incomes with regard to the loans that were given to them are now out of kilter severalfold and other matters relating to that. Was that ever, ever discussed?

Mr. Alan Merriman:

I wouldn't say in that explicit way but, in the round, and it was something EBS did continuously, it did have extensive member forums. It had a lot of engagement with members, it did a lot of surveys, and the feedback was still very strong that the members wanted EBS to preserve. They wanted EBS to continue and the client ... you know, the satisfaction surveys and all that ... and, ultimately, at the end of the day, EBS was still able to provide mortgages to its members at competitive rates during those times. So EBS evolved but it still was serving members. It still was fulfilling a need.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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But the affordability in that competition became difficult and more difficult than when-----

Mr. Alan Merriman:

It came ... it's the point I made earlier about-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So for the purchase-----

Mr. Alan Merriman:

-----you know, change credit policy, go from 20 years to 25 years. Yes, it helps at that particular point in time but the reality is it's just pushing up prices for everybody.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay.

Mr. Alan Merriman:

But, again, that's not an EBS making.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I'm going to bring matters to an end.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Could I invoke just one clarification?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You can, indeed. Quickly, before we go.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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You made reference that-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Just a clarification not a question now.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Yes. It was on IAS 39, Chairman-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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-----and Mr. Merriman said it was a red herring, and the question I want to ask-----

Mr. Alan Merriman:

Big picture.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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-----was EBS ever asked by the Financial Regulator or the Central Bank to increase the provisions on loan losses?

Mr. Alan Merriman:

No.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Were you surprised with that?

Mr. Alan Merriman:

No.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Did you-----

Mr. Alan Merriman:

They'd no reason in the context of we had auditors, they clearly knew we were very robust in our approaches. So they'd no reason to ask us to increase provision.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But did they have the power to ask you?

Mr. Alan Merriman:

They'd the power to engage with us.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Did they have the power to ask you to increase the provisions?

Mr. Alan Merriman:

I think they could have asked us. But - and I'll be very clear on this - we couldn't have complied if it was outside of the accounting standard.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So, therefore, how do you regard it as a red herring then?

Mr. Alan Merriman:

Because I'm very clear the provisions are simply an accounting number. They're nothing to do with the underlying losses that are true and economic.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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All right, Deputy-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Just for the final point, just in-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Final point.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Yes. If you say it's a red herring, who then would make the decision to show in the notes to the accounts, the published accounts, that additional losses should have been ... additional provisions should have been provided for the losses?

Mr. Alan Merriman:

No. What was provided in the accounts was not we should be providing additional provisions. What was shown and disclosed in the accounts was these are the provisions that we have provided under the accounting standards and, by the way ... loose line ... by the way, we fully anticipate there's going to be higher loan losses in the coming periods.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Why wasn't that done?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Sorry-----

Mr. Alan Merriman:

Sorry, that was done. That was done.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----Deputy, I take the point of clarification, now that's it, it's done, okay.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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That's fine.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Mr. Merriman, I want to bring matters to an end. Is there anything you'd like to say by ... in addition or by closing remark or anything else?

Mr. Alan Merriman:

No. Thank you, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, with that said, I would now like to thank Mr. Merriman for his participation with the inquiry this morning and for his engagement with it. The witness is now formally excused. I propose we break for 15 minutes and return just after noon. Is that agreed? Agreed. Thank you.

Sitting suspended at 11.47 a.m. and resumed at 12.16 p.m.

EBS - Ms Ethna Tinney

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. So I now bring the committee back into public session is that agreed? And we move on to session two of today's hearings with Ms Ethna Tinney, former independent non-executive director of the EBS. 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. Today we continue our hearings with Ms Ethna Tinney, former independent non-executive director EBS. Ms Tinney was appointed non-executive director in December 2000. She was a member of the board audit and compliance committee from 2001 to 2005, she was transferred to the board credit committee in mid-2005. In 2007 she was voted off the board by members of the EBS at the AGM. In 2008 she was voted back on the board by the members and was a member of the board risk committee until May 2011. Ms Tinney, you are very welcome before the committee.

Ms Ethna Tinney:

Thank you.

Photo of Ciarán LynchCiarán 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 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 and I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings. Members of the public are reminded that photography is prohibited in the committee room and to assist the smooth running of the inquiry we will display certain documents 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 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 can now ask the clerk to administer the affirmation to Ms Tinney please.

The following witness was sworn in by the Clerk to the Committee:

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So, once again, Ms Tinney, welcome before the committee this afternoon and if I can invite you to make your opening remarks please.

Ms Ethna Tinney:

Further to the direction of the Joint Committee of Inquiry into the Banking Crisis to make a statement in writing on the following lines of inquiry relating to my role as non-executive director of the EBS Building Society, referred to below as EBS, I say as follows. To quality of the business model setting process, there was no such process as the business model had been set prior to my joining the board. In 1985, when I wanted to buy a house, the rules of EBS were clear. Ninety percent of the purchase price was the maximum you could borrow and two and a half times your salary. If you had a spouse or overtime, half of what each of these brought in annually could be added. Documentation had to be produced to verify applications. All Irish banks had similar rules. By the time I joined the board of the society 15 years later, in December 2000, those rules had been abandoned, not just by EBS but by most, if not all, lending institutions. Mortgage applicants’ declared incomes were sometimes well in excess of reality and up to six times the applicant salary was approved.

This happened gradually as the price of houses went out of the financial reach of most people, had the old rules still applied. I paid up to 14% per annum on the mortgage I held from 1985 to 1996 but, in the new euro scenario, interest rates had plunged which seemed to even out the risk. The risk of jobs being lost was not factored in, largely due to the country’s booming economy.

The induction to my new role as an EBS non-executive director was pleasant. The staff were delightful and the managers who explained their processes to me, equally so. However, I was uneasy when I was introduced to the idea of securitisation. In simple terms this is a way of packaging up mortgages into an asset and selling them on to a new layer of investors, who agree to pay a percentage of the nominal value of the loans in return for an agreed interest so that their money can be lent on again for new mortgages. It is ingenious in its way, as it is a system that seems to offer limitless working capital for a lending institution. But there is nothing to stop the new investors selling on their asset at a profit, and so on ad infinitum. Viewed that way, it has the look of a pyramid scheme and all depends on the original mortgages continuing to be serviced and becoming more expensive for the mortgagees. I could not get the image out of my head of a shark eating its own entrails. As time went by I became ever more doubtful of the fundamental banking concept of loans as assets and indeed of debts in any business as assets. The only asset that reassures me is something I can control and I cannot control the repayment of debt owed to me.

To adequacy of board oversight over internal controls, managed and monitored: unfortunately, this proved inadequate, which became apparent when the board of EBS was finally advised that an employee in the treasury department had illicitly engaged in proprietary trading strictly against the rules of the society. Strangely, this same employee had been previously present with his manager at a board meeting when non-executive directors had probed the possibility of just such an illicit trade being made. The board was reassured at the time by the executive directors that such a thing could not happen because of so-called “back-room controls”. These evidently failed and EBS sustained a significant loss. Similar scenarios unfold in other banks all over the world from time to time. But far more damaging was the decision by the board to sell the headquarters in Westmoreland Street owned by the society in order to transfer to a rented premises in Burlington Road. Over time it became apparent that this was a catastrophe and the full board did not have oversight of the implications of the decision.

To appropriateness of property-related lending strategies and risk appetite: lending large sums to developers was new to the society. The senior management in EBS, as in most of the lending institutions, were taken in by Ireland’s so-called developers and also by their professional and other advisers. So were the members of the board, including me. The belief that there were substantial profits to be made for the society from these developments led us to emulate our peers, although we had been cautious about joining the bandwagon. There was a sort of feeding frenzy as the banks clambered over one another to get a piece of the action, especially as new foreign banks had entered the market as competitors.

To appropriateness of credit policies, delegated authorities and exception management: and here there is an anomaly, Chairman, which I just want to clarify. In your opening introduction, you correctly said that it was actually in mid-2005 that I was put on the credit committee. My memory was faulty there and this affects what I have to say. I was actually taken off the BAC in mid-2005 and put on to the credit committee instead.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, I'll have that corrected. Thank you very much Ms Tinney.

Ms Ethna Tinney:

In the period from mid-2005 to April 2007, I was inundated via e-mail by proposals from EBS senior management on behalf of developers for quantities of cash in the tens of millions which appeared to be asset-backed and also to contain personal guarantees. Typically, as a member of the credit committee, your approval or lack of it had to be sent also by e-mail to EBS by close of business the same day or the next day. The rationale was that if EBS did not facilitate the developer, another bank would and we would simply be losing out on the business. All these proposals seemed fail-safe. It did occur to me many times that the EBS credit committee should be meeting about each of these large proposals but my colleagues on the committee seemed happy to do the business this way, and as I had clashed with the majority of the board over several matters at this stage I had no appetite for further confrontation.

To adequacy of the incentive and remuneration arrangements to promote sound risk governance: the bonus system in banks is crazy. You get a bonus for lending money out. There is no incentive to get it back in. Such a system encourages greed and recklessness. It is no wonder that banks go bust from time to time.

To appropriateness of the bank guarantee decision: probably until the last syllable of recorded time, this will be argued by politicians, economists and journalists. My personal view as a citizen of the Republic of Ireland, perhaps to some extent influenced by hindsight, is that it was indefensible for the Government in September 2008 to in effect yield the sovereignty of this country in order to shore up a banking system that is entirely of and for itself and will never change. I do accept, however, that many grave problems would have arisen if one or more banks had failed and that the full extent of the bad debts were not known at the time.

To analysis and consideration of the response to contrarian views: I incorporate below in italics a letter I insisted on sending to the members of EBS in advance of the annual general meeting in 2007, 29 March that year:

Dear Member,

Your EBS 2006 Summary Statement contains on the Notice of Annual General Meeting the following words:

“Ethna Tinney retires in accordance with the Society’s Rules and offers herself for re-election. (Members should be aware that the Society’s Board of Directors does not support Ms Tinney’s re-election as a Director)”

There are three reasons why the Board does not support my re-election.

In the years 2003 and 2004 the Board was intent on pursuing a deal with a foreign bank. This deal was characterised by the executive as a bold transformational play. I saw it as selling the family silver without giving the money to the family - you, the members. I opposed the deal from first to last. Ultimately the deal collapsed, but not before millions of euro of your money had been spent pursuing it.

In 2005 the Society advertised for new non-executive directors. I was a member of the Nominations Committee. Ten candidates were shortlisted through an external recruitment process. All ten were vetoed without any reference to me. I objected in the strongest possible terms. Last December I was removed from the Nominations Committee.

In 2006 the Board fractured over corporate governance. Three members, including me, became unhappy about aspects of senior executive remuneration and the payment of a multi-million euro sum into the Senior Manager’s Pension Fund without reference to the Board.

Am I right or wrong to oppose matters which appear to me to be against the interests of you, the members? If you believe that independent judgement exercised without fear or favour is a good thing on your Board then come to the AGM on April 16th or send your proxy to arrive not later than April 9th at EBS Building Burlington Road Dublin 4 and re-elect me.

This letter does not mention that I had repeatedly raised concerns about the size of mortgages we were lending to people. Nor does it detail my explosive response at a meeting in early 2007 to a proposal by the executive to get involved in sub-prime lending. A non-executive director colleague told me in front of the board that my response was “intemperate”, although the sub-prime industry in the US was already beginning to implode. Contrarian views were not tolerated on the board of the society.

To appropriateness of the relationships between Government, the Oireachtas, the banking sector and the property sector: I have never had a relationship with any member of the Government nor the Oireachtas nor the property sector. I do not golf, do not visit tents at racecourses and am not invited to dinners. But my sense, as a citizen of Ireland and as a director of EBS for nine years, is that there is a deeply unhealthy relationship between all four.

In conclusion, I wish to emphasise that this witness statement refers specifically to my time as a non-executive director on the board of EBS in the period December 2000 to April 2007 when I was removed from it. By the time I was re-elected onto it in 2008 there had been many changes to its composition and a new chief executive officer had been appointed. Sadly, it emerged during the next three years that EBS was irrecoverable. I retired from the board at the end of my third three-year term in May 2011.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Ms Tinney. We'll get questioning under way, and in doing so, I now invite Deputy Joe Higgins. Deputy, you have 25 minutes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Thank you, Ms Tinney, and your conciseness I will try to emulate. You were on the board from 2000, 2007, 2008-2011. Could you just very briefly, if you would please, recap the origins and the founding ethos of what became the EBS, formerly the Educational Building Society?

Ms Ethna Tinney:

Well, I wouldn't have been that familiar with it, to be honest with you, Deputy, because the way it happened was that there was a public advertisement which I saw in The Irish Timesin September 2000 inviting members of the EBS to apply for the position of non-executive director. And when I decided to do that, I was not particularly concerned with the founding ethos of EBS. I had had my mortgage with them from '85 to '96 so, therefore, I was familiar with how they liked to do things but I didn't delve into the history of EBS, to be honest with you.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay. But it was set up in its ... set up as an assistance to teachers and some other public sector companies.

Ms Ethna Tinney:

I was aware of that and I think it was actually set up by a teacher.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes.

Ms Ethna Tinney:

Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes, okay. Thank you. Why, as a mutual building society, did EBS see it as strategically appropriate to enter the commercial lending market do you think?

Ms Ethna Tinney:

If I was to be very blunt about it, I would say that there was a lot of testosterone rolling around in senior management and on the board at the time. And there was a sense that we were getting left behind as a lending institution, particularly with a view to INBS, which was the Irish Nationwide Building Society which was referenced quite frequently at board meetings by management. There was a sense that we were becoming a minnow as INBS expanded its lending and started to post profits that were up to five times the profits we were posting. And I think it wasn't so much strategic but a competitive urge, a wish to compete and I'm not sure that there was ... I don't recall any heart searching about why we would move from being what you might call, an old-fashioned small building society/bank, into trying to compete with ... in a more voracious arena of-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay, so there would have been-----

Ms Ethna Tinney:

-----development lending.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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-----there would have been a high consciousness among management, it's a question, that other banks in the Irish market were seeking double-digit growth. And, for example, in evidence here the chairman of Allied Irish Banks referenced Anglo Irish Bank as being constantly put up to them as a model to be followed, putting pressure on them, he felt. Would that be a similar situation?

Ms Ethna Tinney:

It was exactly the same thing. AIB was looking over its shoulder at Anglo and EBS was looking over its shoulder at INBS.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay. And was there much time in your period on the board allocated to the strategy in relation to commercial property? Was there much discussion on what that strategy should be and how it should be evolved?

Ms Ethna Tinney:

No. I think one of the things that I found most difficult about being a non-executive member of the board of EBS was that the way board meetings were run, was that you were sent a package, usually at very short notice ... it could be that thick ... on various topics that were going to be discussed at the board meeting. These would contain a lot of power presentations printed out that management were going to then take the board through during the meeting. So what would ensue was that you would have read these papers and yet the relevant manager would spend maybe an hour and a quarter actually taking you through all the frames again. And the net result of this was that if you had two or three presentations like that, the board meeting was over. So I began to realise that we were not talking to each other in the absence of management about the thrust of where these proposals were going. These proposals were managerial proposals-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay.

Ms Ethna Tinney:

Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay, now the-----

Ms Ethna Tinney:

The strategy was overlooked, I think. Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes. The commercial property loans grew from €460 million in 2001 to €1.7 billion in 2007 and €2.3 billion in 2008 - a 500% increase which by any standards is quite acute. I'm puzzled as to how that tallies against the board minutes of 31 May 2002 when the strategic plans said it would be a question of putting ... well, I'll quote the "Toe in the Water" and "The Toe in the Water approach is the favoured one".

Ms Ethna Tinney:

Can you just reference the page? I know what you're talking about and I have a comment to make on it.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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It's simply that ... the page is 95 in your book-----

Ms Ethna Tinney:

In Vol.1, is it?

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes.

Ms Ethna Tinney:

Yes. Okay.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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You don't really need to go there, Ms Tinney, in the sense that I'm just saying the reference is "The Toe in the Water approach is the favoured one", according to these minutes. I'm saying does that tally with that rapid increase in growth that I outlined?

Ms Ethna Tinney:

No, it does not. And the comment I want to make about that is that it's also, if you like, a management strategy, not necessarily a board strategy, to induce agreement from board members to go down a certain path by seducing them, by making it seem that it's actually not a very large move to make. That's why expressions like the "toe in the water"-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay.

Ms Ethna Tinney:

-----is used.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes. If we come forward then and this is starting at page 99 in Vol.1, Ms Tinney, and this is the EBS commercial business plan from 2005-2008-----

Ms Ethna Tinney:

Yes, I have it.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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-----and if you go to page 101-----

Ms Ethna Tinney:

I see it.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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-----it would seem that, perhaps, things have ... went forward from the "toe in the water" when, in the "Step Up" strategy, page 101, bottom right-hand side, favours "Grow high margin business in development finance ... Low emphasis on growing current business lines which have low ROC [return on capital]." This would seem, would it, to have formalised a move from the "toe in the water" to something more considerable in terms of large-scale commercial lending?

Ms Ethna Tinney:

It certainly did and it struck me so much that I highlighted it because looking back on my experience, as I have described it to you, of the interaction between management and the board itself, what I imagine is that what management really wanted was the "Rocket Strategy".

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Was?

Ms Ethna Tinney:

Was the "Rocket Strategy".

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes, okay.

Ms Ethna Tinney:

They weren't prepared to say that. So once again, it was a way of, you know, "Let's get started on this road." Well, we were well down the road at this stage.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay.

Ms Ethna Tinney:

And once the ball is rolling, it's very, very hard to stop it.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes and the strategy outlined, Ms Tinney, for the growth projected in commercial lending in 2005 was to be 25%; 2006, 29%; and the profit levels equally that were laid out were to be of a similar order - 25%, 2005-2008, in the updated strategy for 2004-2008. They seem to be high levels of profits in a mature market. Were you able to intervene at the board or do you remember challenging any of these growth figures as being, perhaps, too high, too ambitious?

Ms Ethna Tinney:

No, because my sense at this stage on the board ... certainly by 2005 but even earlier on, was that I was beginning to be regarded as a troublemaker, as a naysayer, as a maverick. There were other people on the board who had a much deeper understanding of the financials, in the sense that they were part of the financial industry, okay? And, therefore, yes, of course, you know, I would look at these figures and it didn't happen just in, say, 2005 for three years. Every year, we would be presented by the chief executive with the most seductive, is the word I would use again, seductive suggestions about profitability and growth.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay.

Ms Ethna Tinney:

And the general attitude of the board was "This is amazing, let's go for this."

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay. And in going for it apparently, Ms Tinney, in the EBS and developers as you outline it ... for example, in page 5 of your statement. And you speak about being inundated with proposals from EBS management on behalf of developers for quantities of cash in tens of millions and so forth being given very little time to process or absorb or to make a decision.

Ms Ethna Tinney:

Yes, absolutely.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Now, in ... Mr. Merriman this morning said in evidence that this was just a last stage of a lengthy approval process and that board members would have received relevant and suitable advice to help them with their decision. Was that the case as you found it?

Ms Ethna Tinney:

Not at all. I would be working for RTE in Lyric FM down in Limerick and my heart would fail me when, yet again, there would be an e-mail from EBS, carefully tabulated, setting out a proposal. It might run to 17 or 18 pages. But in terms of any assistance in dealing with it, there was absolutely none and also, as I say in my statement, you know, it occurred to me many times - the credit committee should be talking about this. We shouldn't be just asked in 24 hours, "Send back your approval or not". You know-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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So am I-----

Ms Ethna Tinney:

-----looking back on it, it was crazy.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Am I right here, Ms Tinney, that decisions then to give serious amounts of money to developers were not taken after a discussion on a board meeting, but were done by the ... done by board members via e-mail? Is that-----

Ms Ethna Tinney:

Yes. That is what I am saying.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Is that the case?

Ms Ethna Tinney:

Yes, yes, by the committee that was delegated which was the board ... to give it its full title - the board credit approval committee, BCAC.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Why was it a 24-hour period do you know?

Ms Ethna Tinney:

I have no idea except that the rationale was that ... there's an example of this here actually from Alan Merriman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Can you cite the page and I'll bring it up for you?

Ms Ethna Tinney:

If I can find it-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes.

Ms Ethna Tinney:

I will find it. I think it's at the front of ... where he actually says, "It would be appreciated if we could get back within 24 hours".

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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We can take that-----

Ms Ethna Tinney:

We'll find it.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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We can take that-----

Ms Ethna Tinney:

We'll find it, yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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We can take that, Ms Tinney-----

Ms Ethna Tinney:

And the rationale was, sorry, Deputy, was that if we didn't comply with the requirement of this developer to let him or her know - and they were nearly all hims, but they weren't all. Sometimes there would be married pairs or consortiums-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes-----

Ms Ethna Tinney:

-----that, you know, basically they would say, "Well, you can keep your money because we are going to get that somewhere else."

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay, do you recall ever for asking for more time yourself? Did you complain about this process?

Ms Ethna Tinney:

I think I said in my statement that "I was weary at this stage".

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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From other issues-----

Ms Ethna Tinney:

From other issues, exactly, of being contrarian yet again-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay. Okay, we will just move on. You say in your statement you ''were uneasy when introduced to securitisation''-----

Ms Ethna Tinney:

Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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-----which is the parcelling up of bundles of mortgages and selling them on to other organisations or funds of various kinds and, as we know, that was a huge part of the United States subprime mortgage scene. But was that the case with the EBS?

Ms Ethna Tinney:

Oh, absolutely. There is ... in the documentation it states that up to 1999 or '98 100% of our funding came from retail deposits -100%. Now, securitisation started in 1999 with the EBS and when I arrived a year later, it was in full flow, just like everything else that's, you know, thing. So, basically by, I think it's 2005, it's in Alan Merriman's statement, 75% of our funding was coming from what they like to call "wholesale funding" and only 25% from retail deposits. So, I mean, that is a colossal change, an absolute, you know, a colossal change and the problem about it was was that this absolutely fuelled what happened with the housing boom and the prices of houses because there was unlimited funds available to the banks to lend out you know. You package your mortgages, you sell that as an asset, you know, you get money in, you make more mortgages, you package them and so on.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes.

Ms Ethna Tinney:

It goes on and on.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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And were those packages of mortgages and what we are talking about here is human beings living in homes that-----

Ms Ethna Tinney:

Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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-----they were paying mortgages for.

Ms Ethna Tinney:

Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Were they actually sold off lock, stock and barrel?

Ms Ethna Tinney:

Yes. That's the way securitisation worked because-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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And was there any reference to the mortgage holders?

Ms Ethna Tinney:

In the early days, I do recall that when we would have presentations made to us by treasury when they were going out on what they called, "roadshows" - they were called,"roadshows" - and that query that you've just asked did come up. And I'm thinking about, say, 2001, 2002 when this really started to rock and roll that the ... we were assured by treasury that anybody whose mortgage was in the pool - they were called, "Emerald", in EBS so Emerald 3, Emerald 4, Emerald 5 - would be notified that this is what was going to happen to their mortgage and if they had an objection, to object.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Right.

Ms Ethna Tinney:

And then that disappeared off the horizon and we never heard any more about it ... about the mortgage holders.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay, so-----

Ms Ethna Tinney:

-----The mortgagees being, yes-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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-----a possibility is it, would be that you could have ordinary home owners bought their home in good faith with EBS-----

Ms Ethna Tinney:

That's-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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-----were paying their mortgage, sold off, perhaps, to what is sometimes is referred to as "vulture funds", have had their conditions reduced or interest rates increased, is that a possibility in relation to what happened?

Ms Ethna Tinney:

It didn't really work like that because, excuse me, it wasn't that the vulture fund could target a particular mortgage, kind of - what would you call it? - a pool of mortgages. But it would affect the decision that EBS would make about the variable rates that it was going to impose because the relationship between let's say, the vulture funds - they weren't all vulture funds - that would invest in these things was not directly with the mortgage holders. As far as the mortgage holders were concerned, their relationship was still with EBS.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay.

Ms Ethna Tinney:

But it explains why the frustration of the mortgagees when they could see lending rates going down and this was not being reflected in what they were being expected to pay.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay.

Ms Ethna Tinney:

Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Thank you. Just moving on to a different item, Ms Tinney. You said it was a damaging and a catastrophic decision, I am paraphrasing-----

Ms Ethna Tinney:

Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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-----to sell the EBS headquarters in Westmoreland Street, that the implications were not seen. Why was it damaging, catastrophic and what were the implications?

Ms Ethna Tinney:

Because we couldn't afford it and it was very, very simple. It was another thing that I found-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Sorry, we couldn't ... you-----

Ms Ethna Tinney:

Yes, I'll explain. We owned Westmoreland Street, okay? We had owned it for years and years and years and not only was it our headquarters, but it was our most important branch because of the footfall, the number of people who would use it and all that kind of thing. It was a real asset for EBS. Now the rationale for selling it, which didn't happen by the way, for years. It lay empty for years. That was one of the things that we hadn't thought through as a board was that we were now doing the very opposite of what EBS had been set up in the first place to do. We were selling our home to move into rented accommodation. The rented accommodation was a very, very fancy building in Burlington Road, which never had a branch, okay? Although it was mooted to open a branch in the early stages. Again, one of the seductive processes of getting the board to agree to this 25-year lease, by the way 25-year lease on this building, state-of-the-art building. We were involved with the builder. I am not going to say who it is because I-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes.

Ms Ethna Tinney:

-----I feel that that would not be right. We were involved in that we were lending the money to build the building but we were also going to become the tenant. So it was wheels within wheels and a deal within a deal and an awful lot of the implications of this didn't become apparent. I also recall a long-standing difficulty where the board had said, ''We don't need all this accommodation. We don't need it all'', and in order to seduce us - I keep using that word, but it was a seductive technique - to agree to it, we were told that the 4th floor would be leased out and we would make so much money, you know, on the leasing of that, subleasing, to some other tenant. That never happened and I doubt that management ever intended that to happen, yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Ms Tinney, you refer to the bonus culture. Some would call it as being crazy. Did you ... again, were you in conflict with the board or with elements of the board of management in regard to that in EBS?

Ms Ethna Tinney:

No, I think my thinking on it clarified over time, to be honest with you.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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And just finally, Ms Tinney, then, you refer to the relationship between the bankers and developers as a "feeding frenzy". You refer to securitisation as "shark eating its entrails". And you refer to "greed and recklessness" in the banking system. And then you also say, in relation to the bank guarantee, "in effect yield the sovereignty of this country in order to shore up a banking system that is entirely of and for itself and will never change." What do you mean by a" banking system that is entirely of and for itself"?

Ms Ethna Tinney:

What I mean by that is that, as we sit here in this committee of inquiry, the banks are finding new ways of shoring up their profitability with other derivatives, like securitisation, like a covered-bond bank. They're not changing. They're ... the banks have absolutely, in my view, and maybe, Chairman, you can stop me if I'm going too far, the banks-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Oh I will, but drive on.

Ms Ethna Tinney:

-----have absolutely ... absolutely no sense of guilt about what they have done. And if left unchecked, they are going to do it all over again. And the housing boom, by the way, has already started.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Finally, Ms Tinney, what would your view then be on a publicly-owned, democratically-run banking or financial system, as opposed to the present model?

Ms Ethna Tinney:

Well, look, I think, you know, we remember ACC, we remember ICC when they were State-owned, you know. I think they worked very well. In many, many countries there have been State-owned and co-operative-type banks. I think that they work better. I do ... I really do think ... I think that the bank ... private banking system is unbridled capitalism and, to that extent, because ... and because it's become so enormous and because the waves go out around it with more and more financial institutions trying to take little nibbles - and that's what I mean about the shark eating its own entrails - so that the end products are that much more expensive for those of us who have to pay for it, that this is actually leading to the situation that we all know of, you know, inequality stretching, stretching, stretching. And also to a size of the financial services industry that's unprecedented and wholly unproductive, except for passing money around between itself. You know, it's frightening.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Some people have ... or the financial market system, say, within Europe, the austerity agendas, etc., has led some commentators to say that it's a kind of an economic dictatorship. Would you have a view on that?

Ms Ethna Tinney:

I would agree with that.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Maybe a bit leading, Deputy. Maybe.

Ms Ethna Tinney:

A bit.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Anyway.

(Interruptions).

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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But I can see you going out to dinner on this one. Deputy Higgins to conclude please.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Chair, if there are any pro-marketeers among the members, they can challenge that. I'm concluding, thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Drive on, Deputy Higgins, drive on.

Ms Ethna Tinney:

He's finished. Are you finished?

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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I'm finished.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thanks very much. Deputy Kieran O'Donnell.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Thank you, Deputy Higgins. Welcome, Ms. Tinney. Haven, the broker ... and I'm referring, Chairman, to book 1, page 113 to 122, and I also want to refer to page 75 as well, Chairman. So, firstly, page 113, which is a briefing document on the broker market entry, 21 January 2005, and the ... page 75 relates to a review on the Haven set-up costs, which Ms. Tinney probably would be familiar with. It would ... this statement is ... would be during a period in which you were not on the board but you probably were familiar with the background to it.

Ms Ethna Tinney:

To the setting up of Haven, are you talking about?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Yes, yes.

Ms Ethna Tinney:

Yes, absolutely, yes. Well, it was already moved before I was removed, yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Yes, so ... so Haven-----

Ms Ethna Tinney:

So, what page are we on? Sorry ... sorry, Deputy.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I'm on ... well, really, I suppose, what I want to get clarification on is page 116 initially.

Ms Ethna Tinney:

116.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So it speaks about "ABC Mortgages".

Ms Ethna Tinney:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Is that different from Haven or is that more of the same?

Ms Ethna Tinney:

Yes, ABC became ... morphed into Haven, yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Fine. The broker market business of EBS was a significant change for it, and did the board, in your view, have sufficient understanding of what it was getting into? And what was your view of the impact of this business on EBS later on?

Ms Ethna Tinney:

Well, I think in this sense the board was not, if you like, maybe so led up a garden path because it did become clear, for whatever reason, during the early 2000s that brokers were becoming a very large part of the way mortgage business was done. I think people were just so busy. I think that that was a driver of that, you know. Very often young people, they would both be working, you know, and had they endeavoured to get a home they nearly, you know, always were. And, therefore, it was much easier to go to a broker who would facilitate getting your mortgage, take a lot of the paperwork off the hands of the applicants-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Do you remember the deliberations at the board level on the set up of what became Haven?

Ms Ethna Tinney:

I ... all I recall is we were told that if we didn't do this, you know, we would be again losing out, because, you know, 34% of the business was now being done through brokers, so-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Was there any due diligence done at board level? Like, did ye discuss it in-----

Ms Ethna Tinney:

No, no.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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-----what were the pros and cons or-----

Ms Ethna Tinney:

No.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So it was just assumed it was going ahead.

Ms Ethna Tinney:

The board seemed to be in ... very collegiate, you know, perhaps apart from myself and one or two others, you know.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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How did you feel about them going into the broker market?

Ms Ethna Tinney:

Well, it seemed to make sense, to be honest.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay. And going to page 75 in that regard, it said that there were ... in '07 they were supposed to ... EBS and Britannia Building Society were to do a joint venture. Do you remember the circumstances around that? Britannia, they actually backed out of that joint venture in November.

Ms Ethna Tinney:

I remember it very well because when I referred in my document, my statement, to my intemperate so-called outburst, it was about setting up a sub-prime business with Britannia. And-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So Haven was going into that area as well?

Ms Ethna Tinney:

Yes. Oh yes, without a doubt.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So you had established a broker business and then it was going into the sub-prime as well subsequently?

Ms Ethna Tinney:

The ... no. The two ... again, it was, you know, one thing morphed into another. I think Haven was the sub-prime, yes-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay.

Ms Ethna Tinney:

-----in its actuality.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So you might just elaborate on your intemperate outburst that day at the board meeting on Haven ... on the sub-prime.

Ms Ethna Tinney:

Okay. Well, what particularly frustrated me was that I had ... this is maybe going a bit far, Chairman, I have to refer to you here because in this case I have to refer to individuals.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Could you just take it in an aggregate form for the moment and if I need you to be specified. I can take a more specified-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Can she indicate, Chairman, in terms of positions rather than individuals?

Ms Ethna Tinney:

Yes, that would-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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In general aggregate terms, senior managers and so forth, like. Okay.

Ms Ethna Tinney:

Yes, yes. Well, I need to reference the then chief executive officer.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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When was this?

Ms Ethna Tinney:

This was at a board meeting in January 2007.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Fine.

Ms Ethna Tinney:

Okay. And I had noted over a number of years that what tended to happen was that when proposals were made - and we've discussed some of them - to change the strategy of what the society was doing, they were always presented, not by the chief executive officer, but by one of his senior managers. And I felt that this was not right. Because I felt that this ... if this was what the chief executive officer ... chief executive, CEO, we'll just say CEO ... if this was what he wanted, he should come forward and say so clearly. So, once again, when this suggestion was put by one of the senior managers at the board meeting ... and I always remember what that person said, "There's money to be made in sub-prime." And that's when I exploded. And I said, "And there's an awful lot of money to be lost [right] in sub-prime." And then I turned to the CEO and I said, "And if this goes up in flames, it's you who I am going to blame and not your senior manager who's proposed this."

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And what subsequently happened about the sub-prime proposal? Did it proceed in EBS?

Ms Ethna Tinney:

Oh yes. It became part of what Haven was all about.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And do you believe ... what was the reason, in your view, that you were not supported-----

Ms Ethna Tinney:

Not listened to.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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-----by the board to being reappointed in March '07? What was the real reason?

Ms Ethna Tinney:

We'll ... we'll get to that in a moment. But why did I get no support-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Yes.

Ms Ethna Tinney:

-----when I had my outburst?

I think because the enormity of what was being proposed was not realised by the other board members. Maybe they weren't watching what was happening in America, you know? Maybe they weren't. I don't know. I can't speak for them.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So there was no dissenting voice bar your own?

Ms Ethna Tinney:

Absolutely not.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay. And can you follow on from that? What do you believe was the real reason that the nominating committee, or the board, did not support your reappointment to the board a couple of months later, in March '07?

Ms Ethna Tinney:

I think the real reason was that I had really got under their skin and that they were fed up with me.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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You were a nuisance.

Ms Ethna Tinney:

I was a nuisance, precisely. And, "Let's get rid of her".

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And, did you have any support on the board?

Ms Ethna Tinney:

I did, one person.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And that person, did that person ... what way did they articulate that support?

Ms Ethna Tinney:

It was in a ... it was actually minuted, so I was pleased to see it. What I ... what happened was - and I've tried to find this document but I can't - that, it was indicated to me that my re-election ... not so much that my re-election wouldn't be supported, but just, "Would you please stand down?". I was required by the chairman to stand down, and I said I wouldn't. And because I had the right, as a sitting director, to nominate myself, I didn't have to get any support. And, at that stage, I think either the chairman suggested to me or I suggested to him, I said, "Can I put my case to the board? I would like to do that". And that happened shortly afterwards, so it was during January.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So, this was after that ... your intemperate outburst on the subprime lending.

Ms Ethna Tinney:

Yes. It would ... yes, it was just after that that I was informed that I was, maybe, surplus to requirements. So, I asked if I could address the board. And, naturally, I put a lot of effort into the address that I made, which was about ten minutes or 15 minutes, to try to explain my position, my contrarian position, if you like, on various items. I was listened to attentively but everybody's eyes were down, which is ... you know, I knew what was going to happen. And then I was asked to leave the room so that they ... the board could discuss it. And it was ... and I went home. And, minutes are a very interesting thing about ... on boards, but we won't get sidetracked or we could talk about that forever. But it was minuted, and it turned out that one member of the board had voted that my election should be supported, or my nomination should be supported. Just one, yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And do you put it down to an accumulation or do you put it down to your defiance in terms of the bank's proceeding into the subprime market?

Ms Ethna Tinney:

No, it was an accumulation. Oh, it, it really ... it started back with the Rabo thing. It started back in 2003 and 2004 when I objected, absolutely, to the idea that EBS would be enveloped by Rabobank without the members getting anything from it.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay.

Ms Ethna Tinney:

And, that, you know ... and I objected over a two-year period to that. And, again, without, really, any backup from anybody, because I was the only person who resented it. And I resented it purely because there was never any member proposition, let alone that the members weren't going to be given any money, but that there was no proposition ever tabled for them. So, you know, we were just talking about money and what would happen between Rabo and EBS.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And, Ms Tinney, would you have articulated, at board level, that, we'll say, areas like the rapid increase in the land and development as distinct from commercial lending from '05 on, and their entering into sub-prime market, did you believe that to be reckless, or not, on behalf of the, the bank ... the board of the EBS? Would you have articulated that at board level? Would others have articulated that?

Ms Ethna Tinney:

I think that my short answer to that is yes, because I think the general sense was shared, you know. I was clear about it, but the general sense was shared by several members of the board that this was all happening too fast. There were far ... it was far too much changing, far too quickly, and we can see that in the reality that, you know, the loan book grew from €5 billion in 2002, well, just under €6 billion, to just under €16 billion.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But ... and, when did you ... when was the rapid escalation? Was that from '05 on?

Ms Ethna Tinney:

I'd say '02 to '07, but it went its steepest curve from '05 to '07, and so I do feel implicated in that, as a member of the credit approval committee, you know, during that period, you know, yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And, can I direct you in that regard, Ms Tinney, to page 143, 144 and 147, Vol. 1?

Ms Ethna Tinney:

Sorry, we're starting at 143?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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At 143, yes.

Ms Ethna Tinney:

143.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And these are, Chairman, these are two of the e-mails you, you refer to, from Alan Merriman to other members of the credit committee.

Ms Ethna Tinney:

Exactly.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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The first was, effectively, that you had to come back by noon, which, that came at, that was the 26th, and you've to ... at 8.39 a.m. and it should be back my noon the following day. And this was a commercial loan, development loan, that went from an increase from €34 million to nearly €89 million for one individual. The second one was, on page 147, you were required ... this was a memo that came at just about 14.37, just after 2.30 p.m. on 12 April 2006, and you were required to have that back by "early afternoon tomorrow".

Ms Ethna Tinney:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So, the first one, were these a regular occurrence?

Ms Ethna Tinney:

They were too regular as far as I was concerned. I found them quite frightening.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So, how often would you get them? The first one was on 25 January '06.

Ms Ethna Tinney:

Yes, and then 12 April '06.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Correct. So, 25 January '06, I mean, is ... it's a loan exposure to one individual going up by about 160%, over ... the total amount was €55 million. So, how often would these e-mails have come to you?

Ms Ethna Tinney:

If I gave you my best guess, I would say, in the period from mid-2005 to when I left in April 2007, this would have happened maybe 30 times. Now, the loans wouldn't all have been of that size or magnitude. But-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Was that the biggest?

Ms Ethna Tinney:

But, those ones that you're talking about, they really frightened me.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And was that the largest that would have come through?

Ms Ethna Tinney:

I can't remember, Kieran, to be absolutely honest with you. It's a long time ago, you know?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay, but ... and did other people on the credit committee have reservations about the way this was happening, in terms of e-mails coming out and so forth?

Ms Ethna Tinney:

I don't know, because we never talked about it.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And were you-----

Ms Ethna Tinney:

You see, I thought of it as divide and conquer, that ... the way it was done. And, you see, it's very interesting, because I want to answer your question, but when the whole idea of setting up a board credit approval committee was mooted by Joe Ryan back in April 2003 - and I wasn't one of the first members on it - you know, he does say that ... he talks about the-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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No, I saw that; I've seen all that.

Ms Ethna Tinney:

-----the discomfort, you know, for the members, you know, in not being able to discuss it.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Well, I just want to know the procedure. Did the credit committee meet to approve loans?

Ms Ethna Tinney:

I only remember one meeting in my entire six ... 18 months.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So, all the loans were basically approved by way of e-mail?

Ms Ethna Tinney:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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If you didn't respond to the e-mail, if you didn't respond-----

Ms Ethna Tinney:

Yes. I never didn't respond.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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You always did?

Ms Ethna Tinney:

I always responded, yes. One way or the other.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And were they always in the affirmative?

Ms Ethna Tinney:

Not always, no, but they were generally in the affirmative, because the way they were presented looked, as I said in my statement, fail-safe - 65% of the value of the land, whatever, people who were mega, mega owners, household name developers.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Do you believe that you had the requisite financial, technical knowledge to be on a credit review committee of a large financial institution like EBS?

Ms Ethna Tinney:

No.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So, why did you take the position?

Ms Ethna Tinney:

Because I didn't realise, when I took it on. I had done well on the BACC, which is rather different, you know.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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The which? On-----

Ms Ethna Tinney:

The board audit and compliance committee.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay.

Ms Ethna Tinney:

I had been on that for five years with ... not the chairman of the society, we had a different chairman.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What did ye do in that first committee, the audit committee?

Ms Ethna Tinney:

Oh, we ... a tremendous amount of forensic, kind of, looking at accounts, internal accounts, internal audits, and so on.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Did you have the technical knowledge for that post?

Ms Ethna Tinney:

Yes, I felt I did. Because, if I didn't ... if I felt I didn't understand what was going on, I always felt free to ask questions. Some of the BACC, you know, meetings, went on for up to six hours.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And do you believe that the board itself had the requisite composite technical knowledge to take on management in terms of proposals that were put to the board?

Ms Ethna Tinney:

I think that it's hard to say, because the outcome was a disaster. So, whether it came from a lack of knowledge and experience of how banks work within themselves.

Let's just say in that first board there weren't any bankers. There were members ... a partner of KPMG, that sort of thing, people were very experienced in the financial sector, but we did not on that first board have any bankers so that's quite interesting.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Your institution showed an increased reliance on wholesale funding from 2005 to finance the growth in loan portfolio. Were you aware of these issues? Did you regard it as a fundamental risk and how confident were you in the society's ability to meet its funding strategy in 2008? Were you aware of the fact that the wholesale funding went from effectively nearly over 70% of the ... sorry the deposits went from over 70% of the funding requirements of the banks to, by the time of the guarantee, to 24% of the requirements? Wholesale funding went from up to over 70% of the funding requirements of the banks from being around-----

Ms Ethna Tinney:

Sorry, I did mention this earlier on but I did it the other way round, that's right. Oh yes, I was very conscious of that-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Did you bring it up at board level?

Ms Ethna Tinney:

-----and I was very nervous of it. Yes, when the securitisation proposals would come in, which was the fundamental wholesale apart from corporate deposits that we engaged in at that time. They morphed then. They were abandoned by the time I came back. But the covered bond bank is no different really. So, yes, I was always nervous of it. I said in my statement I was nervous of it from day 1, yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What was your assessment of liquidity and solvency of the society on the night of the guarantee, on that fateful night on the 30 September 2008?

Ms Ethna Tinney:

My opinion of the liquidity or solvency?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Both - of EBS.

Ms Ethna Tinney:

All I can say is that at this stage we all knew we were heading for the rocks so I wasn't hiving down to try and find out what-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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When you say you all knew you were heading for the rocks, did the board know?

Ms Ethna Tinney:

I think the board did know but we didn't admit it to ourselves.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Did you discuss it at the board in terms of-----

Ms Ethna Tinney:

There was a tremendous amount of anxiety at this stage. By the time I came back in April 2008 it was a very different scenario. We had a different board and there was an ex-banker on it. It was a very different board so there would have been a lot of discussion about what state are we actually in. In fact, we talked about little else a lot of the time and the whole retrenchment had already started that Fergus talks about.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Did it come up at the board meetings that there would be a need for a Government State guarantee for the banks?

Ms Ethna Tinney:

No.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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At all?

Ms Ethna Tinney:

No, no, no. Whatever way the accounts were being put together and presented - no, we never thought that would happen or it would have to happen.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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You make reference to on the final page of your statement, you said, "But my sense, as a citizen of Ireland and as a director of EBS for nine years, is that there is a deeply unhealthy relationship between all four." And you are talking about Government, the Oireachtas, the banking sector and the property sector. Can you explain what you mean by that?

Ms Ethna Tinney:

What I mean is the testimony that was given by our ex-Taoiseach, Brian Cowen, of attending dinners with Anglo, and multiply that out by a factor. That is what I mean. That is unhealthy.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Was there similar type meetings with EBS?

Ms Ethna Tinney:

I was never invited to one. That's all I can say.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But do you know that such meetings took place?

Ms Ethna Tinney:

No, I don't.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Are you expressing an opinion without back-up evidence to the effect that it happened?

Ms Ethna Tinney:

Back-up evidence you can see in a situation where there is clear camaraderie between a banker in your own bank and a Minister who happens to be there for some reason like that. I tell you, I intuit it, Deputy. But I am not going to start saying what I saw, who with whom or whatever. But sometimes you see photographs in the papers, where you see one of your own senior managers out golfing with actually your leader An Taoiseach. That did happen. I saw a picture of our CEO golfing with Deputy Kenny and at the time I just thought, "Oh-oh". It was on the front page of the Sunday Independent.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Do you know what the circumstances were of that?

Ms Ethna Tinney:

I have no idea. I just thought the optics were terrible.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Do you believe that in your going forward what should be the structure in terms of corporate governance vis-à-visfinancial institutions in dealing with the institutions of the State and politicians and Central Bank and various others, the Oireachtas and so forth? What is in your view the type of protocol that should be in place?

Ms Ethna Tinney:

The protocol can only come from within the individuals who work in these various things. That is what I meant by saying the banks are of and for themselves. Can I put it like this - and this is the last colourful thing I will give you - it always seemed to me that the management in the bank and the non-executive directors were like cats and dogs. The managers were the cats and the unfortunate non-executive directors were the dogs. Natural enemies but the cats always outsmarted the dogs. You can look at that paradigm for anything whether it's a regulator, a politician, a banker. The fact of the matter is if people want to misbehave there is no way you can stop them - no way - and that is what worries me about the current scenario. The only way you can change what is happening is if there is a change of sentiment and that's why I said earlier on in answer to Deputy Higgins that, yes, I really do have a difficulty with the capitalist system and I have a difficulty with our political system because it depends on ... well, you say funding, yes? So I can't say that I have a methodology for saving the world but I think we all need to think about what is happening, that's all I can say.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Thank you. Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. Can I just deal with a few questions myself, Ms Tinney?

Ms Ethna Tinney:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I will just bring the document up on the board there - it's the board meeting re AIB/EBS merger and liquidity issues and discussed matters as well. In April 2011, Ms Tinney, when the Government decided to sell your society to AIB for €1, did you agree with this move and did you or the board put any alternative suggestions to the authorities?

Ms Ethna Tinney:

We did because the society had been up for sale since the end of 2010 and there was quite shock and horror when we were suddenly directed through the Department of Finance that we were going to be enveloped by AIB, yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Was there a sense of inevitability or could this have been an alternative approach, or maybe a clever idea could be put on the table or was it not being looked at?

Ms Ethna Tinney:

My memory was that the board was shocked that the hard work that had been done to represent ourselves to various interested buyers, and there were about three apart from AIB, that we actually weren't asked to in any way participate. We were simply told that this is what is going to happen.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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As part of that process, Ms Tinney, were retention bonuses paid to EBS staff as part of it?

Ms Ethna Tinney:

I have no idea.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You have no idea. Okay. Did you receive one?

Ms Ethna Tinney:

No.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you very much. I want to return to some questioning there that I had with Mr. Merriman this morning if you don't mind and if you were not privy to those meetings that's fine. I don't want you to be giving an opinion from a distance but if you have intimate knowledge of this information, it would be of assistance. So if I can just look at the first document - EBS's treasury proposal to increase limits for Irish banks. It's a November 2008 e-mail - it will come up on the screen there - and I am just wondering if you are familiar with this document?

Ms Ethna Tinney:

Is that in one of the volumes?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes.

Ms Ethna Tinney:

Is it Vol. 3, because that's where Alan Merriman's main statement is.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It should be on your screen now in one second. It is an e-mail to the board from Mr. Gerry Murray, it is the 17 November 2008 and it is a proposal to increase credit limits for Irish banks. This is post-guarantee, about a month or so after the guarantee, a month and a half.

Ms Ethna Tinney:

So it is late 2008.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It is in front of you there. There is a summary of it and maybe if I can just go to the second paragraph, it says:

These events will result in Irish Banks attempting to access the market for senior unsecured debt. Integral to the success of the debt offerings is support from the domestic market, i.e. [that] banks will need to purchase significant quantities of each others bonds. Consequently, [the] EBS Building Society will need to purchase debt issued by the other Irish institutions in order to get sufficient support to successfully issue-----

Ms Ethna Tinney:

I've lost ... sorry.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Have you got it? It's in book Vol. 2, page 107 if you're struggling with your monitor.

Ms Ethna Tinney:

Yes, Vol. 2, 107.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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107.

Ms Ethna Tinney:

All right.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. You're better at the books, it would seem, Ms Tinney, than the screen. That's good.

Ms Ethna Tinney:

I'm a bit short-sighted.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I suffer from that myself.

Ms Ethna Tinney:

I'm good with screens and technology but I'm short-sighted. So, this is from Gerry Murray, yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes. Are you familiar with that? Were you ... was that e-mail or correspondence brought to your attention, was it?

Ms Ethna Tinney:

I'm sure it would have been.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes.

Ms Ethna Tinney:

Proposal ... the subject: "Proposal to Increase Credit Limits for Irish [Banks]." I can't assume it ... you know, I don't recall it, but, you know, the documentation stretched to tens of thousands of pages.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I'm sure it does.

Ms Ethna Tinney:

Yes. So is there any particular thing that I can-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, I just want to move on to another document there that's ... that I discussed with Mr. Merriman as well this morning. This will come up now in a moment. Basically, just to familiarise yourself with this, this was post the guarantee, it was where different Irish institutions would purchase bonds and short-term money off one another, create activity in the Irish market and there was ... and so on and so forth. But, in the next document here, yes, if I can move ... this one. Sorry, just this page here, page 105. It's the referenced document earlier. It's page 105 in your booklet, Ms Tinney.

Ms Ethna Tinney:

All right. I have it.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. And this is the one here; here you go, yes. In that correspondence, if you look at the top of the page, it says:

Fidelma Clarke outlined the basis of two proposals in relation to Treasury limits and programmes arising from the implementation of the Government Guarantee Scheme. Papers had been circulated prior to the meeting.

And it talks about the counterparty limits then. These are the institutions that EBS would be engaging with and there would be about €200 million put into, kind of, operation as a result. To any institutions listed there, amongst AIB and Bank of Ireland, or Irish Life and Permanent, the Irish Nationwide Building Society and Anglo, was there any concern at board level with regard to Irish Nationwide, to your mind, or Anglo, with regard to the EBS actually engaging with them?

Ms Ethna Tinney:

I'm actually surprised at this because, by 2008 and long before, early in 2008 ... wasn't it 2008 that the Anglo share collapsed, Patrick's Day?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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St. Patrick's Day.

Ms Ethna Tinney:

Right. And ever since that, we would have been extremely leery of them and we also had developed a view, in more recent years ... I talked about, you know, INBS being held up as a model for us, you know?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes.

Ms Ethna Tinney:

But, in more recent years, we had again developed a view that what INBS was doing was possibly dangerous, which, of course, turned out to be absolutely the truth. So, I'm amazed, is all I can say, to see that we were, you know-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay.

Ms Ethna Tinney:

-----putting any funds at risk in either of these institutions at all, at all, at all. Or maybe it was a question of them putting in funds in to us, which would have been a different thing.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. And on a related matter, prior to this, the NTMA were quite ... we have it here from testimony from NTMA witnesses - Mr. Somers, in particular - that they were not putting any money into Irish Nationwide Building Society whatsoever and they were not going to put money into Anglo unless there was a ministerial direction and order-----

Ms Ethna Tinney:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----signed by a Minister to do so, which ... and that was way back in 2007 those concerns were there.

Ms Ethna Tinney:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Were you familiar or was the board familiar, with that the NTMA had concerns with regard to these institutions?

Ms Ethna Tinney:

If they were published, yes, because I read with great and avid interest, even when I was off the board, what was going on.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Sure.

Ms Ethna Tinney:

So, I would have noticed anything like that, yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Okay, and just while we're, kind of, at an observational level, in this period was there ... can you recall ... I'm not generalising, but specific concerns with regard to any co-operative business that you might be doing with those two institutions, Irish Nationwide Building Society and Anglo?

Ms Ethna Tinney:

Just-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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During that period-----

Ms Ethna Tinney:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

-----of the post-guarantee period-----

Ms Ethna Tinney:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----was there ... and the kind of matters I'm relating to now, would ... can you recall specific instances at board level where it was expressed that there would be concerns in regard to doing cross-transactions with either Irish Nationwide or Anglo?

Ms Ethna Tinney:

I can't recall them but, as I say, you know, I'm amazed that we would still have been talking to them, yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, just finally, on the issue of - just one final thing - was any ... this is an entirely different, related matter, so just to allow you to get your head into that space. Was any consideration given to the fact that, during this period - this is the review plan from 2004 to 2008 now, this is - that a ... that other banks in the Irish market were also seeking double-digit growth? In your own documentation, it was shown that the bank was going to have double-digit growth in its plan for that period and was it possible that all the banks could achieve their target growth? In summary, what I'm asking, Ms Tinney, it's ... everybody had a plan to win the cup.

Ms Ethna Tinney:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Only one team can actually win the cup but the policy seemed to be that everybody was going to win the cup at that time. Was there any concerns that, if everybody was to meet their target, and if EBS was to meet their target, was that actually achievable and what would the outcome of it actually be, if everybody was to grow so exponentially over a very short period of time?

Ms Ethna Tinney:

I think the surprising answer to that is there was not and I think that that is one of the biggest surprises, at a macro level, that our board - and we had lots of bright people on it, you know - did not say, "Hey", you know, "how big is this market?" I think that there was a collective belief that the market would just keep on growing.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you very much. Senator Sean Barrett.

Photo of Sean BarrettSean Barrett (Independent)
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Thank you, Chairman, and welcome to Ms Tinney. On page 47 in Vol. 1, there is the ... their attempt to assess you-----

Ms Ethna Tinney:

Oh yes, oh yes.

Photo of Sean BarrettSean Barrett (Independent)
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-----as a member of the board. What on earth was that process? Can you enlighten us?

Ms Ethna Tinney:

I'm just about to tell you.

Ms Ethna Tinney:

Because, in fact, this is the one thing that I do want to tell you. If you look at page 45 and page 47, they're actually identical, aren't they? They're a reproduction of nominations committee meetings that were held first on 24 January and then on Thursday, 8 February when they had decided to, you know, whatever, get rid of me. And the verbiage is this: "Ethna's performance as a Director has been formally independently adjudged to be well below average in the two formal board evaluations to date." Now, will you go back to page 43? And this adverts to January 2004, three years before. And if you look at the re-election of Ethna Tinney, you will see these words: "Brian Joyce, chairman of the Board, reported on the outcome of his discussion with Ethna Tinney following receipt of the individual director evaluation (based on the evaluation forms completed by the other 10 directors and collated by Jim Bruce)." So, the change in the verbiage is so significant, even though the two processes were exactly the same. In other words, in 2004, the minutes are accurate. Our evaluation consisted of being given a page and we had to fill in boxes, from one to five, of how we rated our colleagues under certain headings - attendance; punctuality; collegiality; business knowledge; you name it, it was in there - and of course the gas thing was, since you couldn't mark yourself, it was apparent long before it was collated by Jim Bruce, for anybody who wanted to study this information, who was writing what about whom.

The other corollary was that since it was done, to that extent, anomaly, you know, anybody could write any figure they liked about anybody else. Now, I can accept that, provided you tell the truth, but fast-forward to 2007, to be well ... to be adjudged formally, independently adjudged to be well below average, that is simply a lie.

Photo of Sean BarrettSean Barrett (Independent)
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They didn't have a management guru of some type?

Ms Ethna Tinney:

No, no. No, we all marked each other. It was sent off to Jim Bruce and the results came back.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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All right, Deputy-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

-----be measured now.

Photo of Sean BarrettSean Barrett (Independent)
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Thank you. Now, could I go to Vol. 2, page 139, the bonuses that were paid. Were they passed by the board?

Ms Ethna Tinney:

These extraordinary bonuses. So it's ... we're not in Vol. 1-----

Photo of Sean BarrettSean Barrett (Independent)
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I think its Vol. 2, page 139.

Ms Ethna Tinney:

Vol. 2, 139. Oh yes, I had a look at them in retrospect, you know. What I found ... no, no, these are quite familiar. They would certainly have been passed by the board or by the remuneration committee as a board and then presented to the board. The board didn't generally argue with the remuneration committee, but they are familiar. I think what's odd about them is the variability of them, in a sense. You know, why one year for Ted McGovern €448,000 of a bonus and then the next year €120,000 of a bonus? It's interesting, particularly since the business was grown exponentially as we've just discussed. So ... but yes, these are familiar.

Photo of Sean BarrettSean Barrett (Independent)
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Well, they were paid based on the previous year's performance. Was there any discussion in 2008 not to pay them because you had gone into the red at that stage, in 2008?

Ms Ethna Tinney:

Well, Ted McGovern had gone by 2008.

Photo of Sean BarrettSean Barrett (Independent)
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I see. Well, no, other people, though, were paid. There was €464,000 in bonuses paid in 2008 in a year in which the society had gone into the red.

Ms Ethna Tinney:

In ... and are you talking about the chief executive, Ted McGovern - 2004, €448,000?

Photo of Sean BarrettSean Barrett (Independent)
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Yes ... no, the other people like Mr. Merriman and Ms Finann and Mr. Keenan, I think, and Johnson and Healy. That there was still ... the Merriman one was the biggest, but it still came to €464,000 being paid in bonuses-----

Ms Ethna Tinney:

In which? Sorry, Senator-----

Photo of Sean BarrettSean Barrett (Independent)
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By a society which was loss making at ... in that year.

Ms Ethna Tinney:

In which year now are we talking about?

Photo of Sean BarrettSean Barrett (Independent)
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They were paid in 2008.

Ms Ethna Tinney:

Paid in 2008, yes, indeed. Yes, indeed. Right, okay. Yes, yes.

Photo of Sean BarrettSean Barrett (Independent)
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Was there any discussion about holding them back, as the society had gone into the red?

Ms Ethna Tinney:

No.

Photo of Sean BarrettSean Barrett (Independent)
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And, the go for broke strategy that you described to Deputy Higgins, was there a certain irony intended given what happened the society? Obviously, it was very successful but I mean, what was the go for broke strategy?

Ms Ethna Tinney:

The go for broke strategy was to try and emulate Irish Nationwide Building Society and turn in profits of €250 million per annum - paper profits, of course; they weren't true profits.

Photo of Sean BarrettSean Barrett (Independent)
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And a certain sense of irony, presumably, in the title of the strategy?

Ms Ethna Tinney:

Well, that's just my way of putting things.

Photo of Sean BarrettSean Barrett (Independent)
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Yes. Well, I think they used that term also.

Ms Ethna Tinney:

Do they actually? Yes.

Photo of Sean BarrettSean Barrett (Independent)
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Yes. The auditors: did they express any disquiet at the way the society was going over the years in which you were director?

Ms Ethna Tinney:

No, and that was a big surprise.

Photo of Sean BarrettSean Barrett (Independent)
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Was there ever any meetings of the non-executive directors held in the absence of management?

Ms Ethna Tinney:

Yes, there were. That was not that unusual, yes.

Photo of Sean BarrettSean Barrett (Independent)
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Because in your presentation you were hinting there was a very strong managerial dominance of the board. When the board escaped from that, could you tell us about those meetings?

Ms Ethna Tinney:

Generally, those meetings occurred within a board meeting. So the actual length of time that the non-executives had together was limited. I would also make the point that, although the executive directors withdrew, the chairman remained. So in terms of a conversation that could become uncomfortable, let's say, in terms of making a genuine, kind of, investigation between the non-execs into what they felt was going on and whether it was excessive or whatever, was impeded by the chairman.

Photo of Sean BarrettSean Barrett (Independent)
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Is there a way around that? Should there be a troika?

Ms Ethna Tinney:

I thinks it's a very interesting question because it has always struck me that - and this is not just EBS; it happens all the time in firms, in businesses, not just banks - that one of the things that a chief executive will try to do is to establish a very close relationship with his chairman, or her chairman, and the purpose of that is to control the board. And, therefore, I do think it's a fundamental weakness in business that there is this intimacy between a chairman and a chief executive. And you can see very clearly from the documents in Vol. 1 about you know, the arguments between Ron Bolger, Cathal McGee and Brian Joyce, that Brian expresses his belief that there is no other way of working than, you know, close liaison with the chief executive officer. But it does weaken the ability of non-executives to influence the board.

Photo of Sean BarrettSean Barrett (Independent)
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And the conduct of the meeting where ... the AGM, where you're running for election and the other board members, I presume, employed a PR company against you. I think that was ... was that December 2007? The ... Q4 PR were used to assemble information against you. Could you describe that as an event for the committee, please?

Ms Ethna Tinney:

What I think, Senator, your inquiring, is about the period between when I refused to walk, fold up my tent and the actual AGM in April 2007, and articles start appearing in the papers and goodness knows what. In a way, that process ... it passed me by, in a way, it just made me more determined to fight back and try and get into the public arena my point of view, which I managed to do, mainly thanks to one individual. And it didn't bother me, Senator; you know, I expected this.

Photo of Sean BarrettSean Barrett (Independent)
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Now ... the ... was there a sign in February 2009 - and this is book 1, pages 109-111 - of even at that late stage the board realising that things were going astray; that there seemed to be a wish at board to distance itself from the commercial exposures and non-member business?

Ms Ethna Tinney:

Absolutely. Yes.

Photo of Sean BarrettSean Barrett (Independent)
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Yes. But ... and, could you tell us about that? Because that was trying to get back to its roots almost in the society and I suppose the corollary is: was it too little too late at that stage?

Ms Ethna Tinney:

Absolutely. Yes. So from having gone in to full blast mode, go for broke mode, it was suddenly whack on the reverse engines. And to that extent, and I didn't actually agree with this, both the CEO of Haven, Tony Moroney, and our chief, our chief finance officer, Alan Merriman, were dispensed with. Yes.

Photo of Sean BarrettSean Barrett (Independent)
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And you didn't agree with that?

Ms Ethna Tinney:

I did not agree with it, no.

Photo of Sean BarrettSean Barrett (Independent)
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Could you tell us why?

Ms Ethna Tinney:

I ... as far as the second named is concerned, I felt he was very bright, I felt that he knew the innards of the society extremely well, and I felt we needed his abilities.

Photo of Sean BarrettSean Barrett (Independent)
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Finally, the 2007 offer from AIB - can you remember what price they put on that?

Ms Ethna Tinney:

I don't, and ... but what I do remember-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Your last question, Senator, please.

Photo of Sean BarrettSean Barrett (Independent)
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That is my last one, thank you, Chairman.

Ms Ethna Tinney:

Yes, I can't remember the figure-----

Ms Ethna Tinney:

But I remember thinking it was inadequate.

Photo of Sean BarrettSean Barrett (Independent)
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Yes. But it was greater than €1, which was what they eventually got it for.

Ms Ethna Tinney:

But maybe at the time I thought we were worth more.

Photo of Sean BarrettSean Barrett (Independent)
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Yes, thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source

Okay, thank you very much. Deputy Pearse Doherty. Deputy, ten minutes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Go raibh maith agat a Chathaoirligh, agus fáilte chuig an coiste. If we look at the board minutes of July 2005, which is on book 1, page 126. The question that arises from them for me is: were you away of the extent of the tracker mortgage interest rate risk? And, in EBS, was that ever discussed at board level? This is where the minutes show that the increase on tracker mortgages would account for an increase in proportion of business rising from 5%-----

Ms Ethna Tinney:

Five per cent to 60%.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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-----in July 2005 up to 60% three years later in 2008.

Ms Ethna Tinney:

My sense is that in 2005 there was still a tremendous, sort of, feelgood that everything was going to be the best of all things possible. And the volumes of tracker mortgages that, therefore, that we were attracting blinded us to the dangers of what would happen in terms of depressing the margin and so on and the final outcome, which meant that once again, we can't afford the tracker mortgages - well, not me, because I'm not involved anymore.

But the standard variable rate is now actually shoring up the trackers, which is most unfair on the people on the standard variable rate. No, it is surprising that it didn't strike any of the good brains on the board that this was actually dangerous.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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But the minutes of the meeting in 2005 go on to say, "This will push mortgage margins down." by increasing your tracker business from 5% to 60% of mortgages. Given that it's-----

Ms Ethna Tinney:

So that-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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-----acknowledged at that time, what was the discussion? Is that-----

Ms Ethna Tinney:

The push was to, "Let's go to the brokers. Let's establish a brokerage. Let's establish, maybe, sub-prime." You know, it all fed into the idea of volume, volume, volume - never mind the quality, feel the width.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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But was there any discussion on risks in relation to this? There's an acknowledgement here - on the minutes - of risk but was there any discussion at board level of the risk? Was it just, "Let's increase by [I don't know how many] hundred per cent ... or from 5% to 6% over three years and this will push margins down"? Was there a ... from your recollection, did anybody say, "Well, what does that mean for our institution if we rely on 60% of tracker mortgages?" Was there-----

Ms Ethna Tinney:

I'd need to just read that page carefully because, you know, I mentioned the whole thing about minutes before-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes.

Ms Ethna Tinney:

-----and one of the things I learnt over the years that I was on the board ... I was surprised sometimes when there would be a robust conversation about, say, something like this, that it's not referred to in the minutes. And I learnt, late in the day, that if you want something minuted specifically, you have to request it. If you do not ... supposing I say, "Well, I, Ethna Tinney, do not agree with this tracker thing"-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes.

Ms Ethna Tinney:

-----I have to say, "I want that minuted."

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes.

Ms Ethna Tinney:

Whereas if I don't say that, there's no mention of the fact that not all the members were in agreement. Whatever the decision was is what's minuted. And, clearly, the decision was to go along the lines of the inputs presentation.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Like, it appears to me that it's a ... quite an important decision to increase your proportion of business on trackers from 5% to 60% in a period of 36 months. In your view, can you recall whether you expressed a view? And I'm not just concerned in relation to your own personal view. Could you give us an insight, if any, as to what the board ... did they just note it and move on or was there ... do you think that there was a discussion? If you can't recall, obviously we'll just ... we can move on.

Ms Ethna Tinney:

Yes. I don't have a recollection, I really don't, but what I can say was there was nobody jumping up and down-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay.

Ms Ethna Tinney:

-----because I would have remembered that.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Ms Tinney, you say in your statement on page 1, you say, "Mortgage applicants' declared incomes were sometimes well in excess of reality".

Ms Ethna Tinney:

Yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Can you explain to the committee ... what do you mean by this?

Ms Ethna Tinney:

What I mean was that the prudential regulations that had applied when, say, I wanted a mortgage, and the kind of documentation that I would have to provide was no longer required, so, therefore, just as in the example that the Chairman brought up earlier on about ... about ... or, no, somebody else - it was during Mr. Merriman's testimony - about the Financial Regulator in ... one of his inspectors finding out that there wasn't basic documentation at all for, you know ... and this started to happen on a wholesale basis, not just with EBS but with the other banks. So, in other words, "You say your income is 48 grand, that's okay. Yes, we'll accept ... show us a P60 or a ... [more likely] just a slip of your ... of your ... of your income but we'll take it on faith that you're actually earning this extra money that you say that you are." Yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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But was it known to EBS that the declared incomes at the time were well in ... as you say, well in excess of reality?

Ms Ethna Tinney:

Yes, it was. And the reason that we did it ... not that anybody would have ever verbalised that, but the reasons that we did it was that if ... if we actually said, "Look, show me your money", that the person wouldn't qualify for a mortgage for whatever house he or she wanted to buy and that, therefore, you know, our business would be, once again, eroded. In other words, because of the fuel that was burning, the house boom and the bubble, as it turned out to be, there was acquiescence all round. There was collusion, if you like. Yes, unspoken collusion that we wanted to assist people to have homes. So we're not going to ask too many hard questions.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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And when the same institution is now looking for recoupment of arrears or repossession of the homes-----

Ms Ethna Tinney:

Yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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-----or voluntary surrender-----

Ms Ethna Tinney:

Yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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-----by somebody who may have provided documentation that, as you say, the institution was aware that it was in excess of reality, how do you feel about that?

Ms Ethna Tinney:

Well, I feel that it's all wrong. I feel that what's happening is all wrong and I feel that the balance of blame rests with the bankers, including myself, rather than the people who looked for mortgages.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. You say in your statement in relation to developer loans, on page 5, and I quote, you say:

The rationale was that if EBS did not facilitate the "developer" another bank would and we [simply] would ... be losing out [of] business. All these proposals seemed fail-safe.

Ms Ethna Tinney:

Yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Can you explain to the committee, were developer loans granted because they were seen as fail-safe? Was it because of competition from other banks or was there another reason or was it a combination of both factors?

Ms Ethna Tinney:

Oh, I'd say that ... I would say that the ... in general, my sense would have been that there was ... the proposals were believed in and that's why I use the expression, "taken in by", right? That's important. I say ... I believe that we were all taken in by these so-called developers, you know. And they had quite different agendas from what we thought they had, you know. So I think it was-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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What do you mean by that? Just if you can ... what was the ... the agenda, I presume, is that they wanted money.

Ms Ethna Tinney:

To put it very, very bluntly, that they perhaps didn't have ... particularly as the bubble grew to bursting point and these clever people were always ahead of the posse, that they had no intention of applying the funds to what they stated in their application, right, okay?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay.

Ms Ethna Tinney:

And I'm going to say no more than that. But in terms of the staff of EBS, I have no doubt that everything they did was done in good faith. It was ... the problem was there was just far too much pressure - do business, do business, do business.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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And that was coming from?

Ms Ethna Tinney:

Senior management all the way down. It's always ... the buck stops always with the boss.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. What was the guiding reason with regard to your own role in the credit committee? What were the factors that led you to decide to green light some of these developer loan applications?

Ms Ethna Tinney:

Because they were always presented so well. They all made sense. I think Alan refers to that in his document, that, you know, it seemed perfectly okay in that ... in that exponential growth to accept proposals that were based on land values that were, you know ... that the money we were giving were ... was 60% of what the valuers were saying it was worth. But then, I think that we possibly were naive about the relationship between the developers, the builders and the valuers and the various other advisers, because everybody stood to gain if we said, "Yes", and handed over the money, yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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You mention in your statement in relation to these ... these loans as well that-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Be wrapping up this now, Deputy.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes, just two questions on this here ... that the developers backed up their claim with a personal guarantee.

Ms Ethna Tinney:

Yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Can you explain to the committee, and to anybody that may be watching, what is a personal guarantee and what was the type of documentation that a developer would provide EBS in terms of a guarantee? And one final wee supplementary, because the Chair will cut me off, you also mention that you - through e-mail - rejected some of the loan applications. Can you inform the committee was there ... was there ever or were there many of the loan applications rejected by the committee, not just by individual members?

Ms Ethna Tinney:

No. It was never alluded to and my sense would have been that 99% of them were acquiesced to. To your earlier question about, you know, when is a personal guarantee not a personal guarantee? Well, look, I ask you this question: how come all these bankrupt developers are rolling in money? They all gave personal guarantees, not just to us but to other banks. The banks didn't get money back, but they still have loads and loads of money. Now, riddle me that. I don't understand it. I never saw the legal documentation on which these proposals were founded. What I do know is that because the answers had to be made so fast was that ... I have absolutely no doubt that the proper lien was not perfected on many of these agreements.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay, thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you, Ms Tinney. Deputy Michael McGrath.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Thank you very much, Chair. Ms Tinney, good afternoon. Can I, first of all, take you to Vol. 2, page 105, please, and it relates to the board deciding to increase the counterparty credit limits for the other Irish banks to €200 million? So this was in November of 2008.

Ms Ethna Tinney:

Sorry, could you just give me the page number again?

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Sure, yes. Page 105-----

Ms Ethna Tinney:

105.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----of Vol. 2.

Ms Ethna Tinney:

Is this the one we discussed before?

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes. And there's some more information on the following pages, 107-111. So essentially this was a decision by the board to increase the lending lines to the other covered banks and it's in the aftermath of the Government decision on the bank guarantee. And it seems to be to facilitate lending to each other, as such, you could buy bonds back and forth. So to what extent in your opinion did the board consider at this time that it was appropriate to, in a sense, pull on the green jersey and invest in such assets from other banks? What was the thinking behind it?

Ms Ethna Tinney:

Well, that clarifies why I was struggling with the Chairman about how these things were getting written at all. Obviously, the fact that the Government had decided to guarantee every smidgen of money that was in all the banks gave us the courage, you know, to do this, to change our view of what was safe.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. Can I take you to, just on page 2 of your statement so on the system - it's 004, if that could be opened? It's under the heading of the "Adequacy of board oversight over internal controls, managed and monitored". And you refer to an instance where an employee in the treasury department of EBS had illicitly engaged in proprietary trading, strictly against the rules of the society. And at the end of that paragraph you refer to EBS sustaining a significant loss. Can you recall what the loss was from that event?

Ms Ethna Tinney:

€1.2 million. Yes, it was €1.2 million.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay, and can you just explain what happened? What do you mean by "illicitly engaged in proprietary trading"? Can you just tell us what that is?

Ms Ethna Tinney:

Well, under the rules of building society it is not permitted to trade your own money, or rather your depositors' money. In other words, you can't take a gamble. You can't decide you're going to take a gamble on currency or anything else or stocks and shares. And this particular individual did that. Now, as I said in my statement, it was supposed to be impossible because of the checks that went on. But it wasn't impossible and he did it. And he was a very smart guy and he wasn't doing it for himself. So it's hard to understand why he actually took the risk. Now, two of his colleagues knew what he had done but he managed to hide it for two years. And eventually they couldn't stick the notion that this was going on any more. He persuaded them that if he was given time, his position would come right and all would be well. So after two years they told his boss and that's how it came out. And one of the interesting things is, as well, that our auditors never spotted the hole in treasury.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And did it go to board level then?

Ms Ethna Tinney:

Oh, well, of course, there was consternation. There was absolute consternation.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. And the loss to the society was €1.2 million?

Ms Ethna Tinney:

Yes, it was either €2.1 million or €1.2 million but I believe it was €1.2 million.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And what were the repercussions from that episode? What happened?

Ms Ethna Tinney:

Nothing.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Nothing?

Ms Ethna Tinney:

Nothing.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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€1.2 million lost by-----

Ms Ethna Tinney:

Yes. Let's just say-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----illicit trading against the rules of the society and nothing happened?

Ms Ethna Tinney:

No. Exactly. I'm sure there must have been discussion in treasury about how they could tighten up the controls so this would not happen again and about where was the hole in the controls that permitted this to happen, when we had that boardroom discussion precisely about, you know, could this happen? And this individual standing there smiling.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And was the individual sanctioned?

Ms Ethna Tinney:

No.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And how was that acceptable to the board?

Ms Ethna Tinney:

Well, I queried it very strongly, as you can imagine since I still remember it, and I was told by the CEO it was better for the reputation of the society if he was ... if it was all brushed under the carpet.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. And just to clarify the nature of what happened, it was trading, essentially, the deposit book or part of the deposit book was traded on, on some financial instruments?

Ms Ethna Tinney:

The funds of the society, exactly, yes. I don't even know-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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You don't know the detail?

Ms Ethna Tinney:

We weren't told precisely what he did, we were just told-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. And was it a breach of regulatory rules as well as a breach of the building society rules?

Ms Ethna Tinney:

Probably not. I mean, banks engage in all kinds of gambling, you know, within the law. But it is strictly prohibited, for obvious reasons, in building societies.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay, and are you saying that ... prohibited by internal rules? Or was it ever enshrined in regulations?

Ms Ethna Tinney:

By building society legislations, actually legislation, yes, going back a long time.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Well then surely it was a matter that must have been reported to the regulatory authorities. If it was a breach of legislation then the Central Bank and regulator would have been responsible for dealing with that, surely.

Ms Ethna Tinney:

Well, I can't tell you because all I can tell you is that nothing happened. Except, much later in the day, you know - when this individual was still working for us - and it was proposed that he would be given a position of trust over something. And this was when the new board had, you know, arrived, it would have been about 2009 maybe. And I specifically said, "No", and told the board the story about what had happened and that was accepted.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. Chairman I think we might examine the board minutes as a committee around that time to see how the issue was being addressed. We'll deal with that separately. Ms. Tinney, you wrote to the members of the society directly in March 2007. That was a time when the board was trying to remove you, as such. Was that the first time that you wrote directly to the members?

Ms Ethna Tinney:

Of course.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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It was.

Ms Ethna Tinney:

There's 420,000 of them so it was a very expensive exercise really, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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So how did you do it? It was by post?

Ms Ethna Tinney:

Oh, EBS had to do it, I just ... Yes, they did it by post. Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And they paid for it?

Ms Ethna Tinney:

Well, I forced them to.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Right. And, okay, given that, you know, that was such a-----

Ms Ethna Tinney:

Sorry, could I just say-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Please.

Ms Ethna Tinney:

Could I just say what was going on in the media gave me leverage and the stuff that I was queried about, about Q4, what was going on, gave me leverage to force the board to do this because otherwise, I was going to look for satisfaction some other way. Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. So you raised three specific issues in your letter to the members about the 2003-04 efforts to pursue a deal with Rabobank, that's who you were referring to-----

Ms Ethna Tinney:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----the issue of nominating non-executive directors and the transfer of funds into senior managers' pension fund. So those were the three issues that you raised. But you didn't raise any issues or concerns about the strategy, the commercial strategy of the building society at the time and the rapidly growing loan book in terms of commercial property, the land and development book. You didn't raise any issues about that or the issue of the growing dependence on wholesale funding, for example, as opposed to deposits. So can you just elaborate on that, given that you were undertaking a major exercise writing to all the members directly? If you had these grave concerns about the direction of the society and its strategy, why didn't you take that opportunity to set those out to the members directly?

Ms Ethna Tinney:

Because I think I felt, at the time, I spent a lot of time thinking about what I would say to them. If you want to gain people's attention, you've got to tell them a story. If I had written in vague terms about my anxieties about funding, about the size of mortgages and all that kind of thing, I didn't think I'd gain any traction whatsoever. What I wanted to say was, "This is what I've done and this is what's happened to me as a result. Therefore, all is not well in EBS". And that's why I chose to do it anecdotally, rather than as a dissertation on the state of EBS.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And do you regret now not bringing to the attention of members your views, your concerns, about the strategy of the building society?

Ms Ethna Tinney:

No, I don't, not in the slightest. Because the outcome would have been worse for me. Yes. Most of the members wouldn't have even noticed, to be honest, if they got a weird letter from a member of the board saying, "I'm worried about EBS."

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. And generally, like, was your dissent noted? You spoke earlier on about the need to have, you know, dissent formally recorded in the minutes. Like, did you dissent on board strategy, for example? I mean, for example, we have the commercial business plan 2005-08 which does ... asked the question of the board, do you agree with ramping up the risk appetite. I mean, did you agree with the strategy that was ultimately adopted?

Ms Ethna Tinney:

My overall sense, and I've said this already, was that everything was moving too fast in a direction that was completely at odds with what, A, we were established to do and, B, that we had the competence to do. In terms of trying to stop this juggernaut, quite honestly, it was beyond me.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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But sure what was the point in being on the board then? You know, if it was a fait accompliand you couldn't influence the direction?

Ms Ethna Tinney:

But I was trying. I was trying all the time, what more could I do?

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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So did you dissent, for example, on that commercial strategy?

Ms Ethna Tinney:

I don't remember specifically. I'm not going to claim I did this, that or the other. What I can tell you that will just make it apparent to you what the situation was, was that, you know, it came to a stage where most of the members of the board wouldn't actually talk to me.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. Very finally, you spoke about the credit committee. You were on that from mid-2005 to April '07?

Ms Ethna Tinney:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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So almost two years. And did you say earlier on that your recollection is it met once in about 18 months?

Ms Ethna Tinney:

Yes. Once where I attended. Only once where I attended. There might have been other meetings that I didn't attend or wasn't informed about ... wasn't informed about because ... because of, as we have discussed, the rapidity of which these decisions had to be made and because I was living down in Limerick, you know. There could have been meetings and-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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But sure surely you couldn't have a situation were a member of the committee wasn't even told the committee was meeting.

Ms Ethna Tinney:

I'm not saying that there was; I'm just saying that I don't know. But I only recall one meeting.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. So were there other meetings that you were notified of - but ... but you didn't attend - of the credit committee?

Ms Ethna Tinney:

No, absolutely not.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. So you were informed of one credit committee meeting in a period of 22 months-----

Ms Ethna Tinney:

Yes, that's my recollection.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----at a time when the society was lending millions of euro-----

Ms Ethna Tinney:

Yes, tens and tens and tens of millions of euro.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----in commercial property land development? Absolutely. Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you, Deputy McGrath. I'm going to move please to a wrap-up. Do you have anything else to offer, Deputy Higgins?

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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No further questions, thank you. Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. With that said, I'm going to bring matters to a conclusion. Ms Tinney, I can invite you to make any closing remarks if you wish. The ... in doing so with Mr. Merriman earlier this morning, I just, kind of, revisited the sort of journey of the EBS where it started out as an institution that could help a particular type of civil servant buy a house and ended up in maybe a different space at the end of its journey. Do you've anything that you'd like to say by final ... matters of closing remarks?

Ms Ethna Tinney:

No. I'll say that my whole experience with EBS, taken in toto, was in some ways very bruising but it was certainly very educational. And I don't regret a minute of it.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you, Ms Tinney. With that said, I'd like to thank you for your participation today with the committee and for your engagement with the inquiry. You're now formally excused. Just to say to members, if there's any other matters relating to what we discussed in private business this evening, I probably might take before we come back before the next public session. But I don't have enough data as such yet, okay. So, with that said, I now propose that we suspend for one hour and return at 3 p.m. Is that agreed? Okay.

Sitting suspended at 2.03 p.m. and resumed at 3.18 p.m.

Oireachtas - Ms Mary Harney and Mr. John Gormley

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I now call the committee back into public session. Is that agreed? Agreed. And we'll continue our hearings today, our session 3, which is public hearing with Ms Mary Harney, former Tánaiste and leader of the Progressive Democrats, and Mr. John Gormley, former Government Minister and leader of the Green Party. 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. This afternoon, we continue our hearings with senior members of the Government who had key roles in the run-up to the crisis period. At this afternoon's session, we will hear from Ms Mary Harney, former Tánaiste and leader of Progressive Democrats, and Mr. John Gormley, former Environment Minister and leader of the Green Party. Mary Harney was a member of the Dáil from 1991, sorry 1981, to 2011. She held several senior posts in government and was Tánaiste from June 1997 to September 2006. She was leader of Progressive Democrats between 1993 and 2006, and again from 2007 to 2008. John Gormley was a member of the Dáil from June 1997 to February 2011, and was Minister for the Environment during that time. He was leader of the Green Party from July 2007 to May 2011. Ms Harney and Mr. Gormley, you're very welcome before the committee this afternoon.

Ms Mary Harney:

Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Before hearing from the witnesses, 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 do so, you are entitled thereafter to only 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 with 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 witnesses have been directed to attend this meeting of the Joint Committee of the Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee, will be relied upon in evidence and 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. Gormley and Ms Harney, please.

The following witnesses were sworn in by the Clerk to the Committee:

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Once again, thank you, Mr. Gormley and Ms Harney, and if I can invite you to make your own opening statements. Mr. Gormley, if I could ask you to commence.

Mr. John Gormley:

Chairman, committee members, I would like to thank you for giving me the opportunity to address the banking inquiry committee on these important issues. I hope that your valuable work will add to the store of knowledge on this subject contained in the Regling and Nyberg reports and that lessons can be learned. Chairman, I became leader of the Green Party in 2007 following the resignation of Trevor Sargent. While we were the only party that based our 2007 election manifesto on a forecast of reduced growth, I don't think anybody in the party could have predicted that our term in government would coincide with the worst economic crisis that this country has ever had to endure. The Green Party did not create the housing bubble but, in government, we had a duty to extricate our country from the crisis. This involved making the most difficult political decisions that any small party in this State has ever had to make. It is a fact that two thirds of what is known euphemistically as the "fiscal adjustment", which led to the recovery, was made by the Green Party in government. The Green Party TDs and Senators voted for these cutbacks and tax increases, convinced that this was the correct course of action, while also knowing that it would lead inevitably to electoral annihilation. I’m proud of the dignified way that the Greens conducted themselves during this time of adversity. I’m also proud of the fact that the Green Party insisted that every one of those austerity budgets was progressive. In other words, each budget hit the wealthier members of our community proportionately harder than the less well-off. This has been confirmed by subsequent studies of the various budgets by the ESRI. This is not to imply that the cutbacks were painless; they were not. Large sections of the Irish people suffered hugely because of the austerity measures and I regret that we were forced to make these decisions. I believe our economic and financial problems were caused by a combination of factors, which include banking deregulation and poor oversight of the financial institutions, a property bubble fuelled by reckless lending practices and irresponsible land rezoning, huge increases in public spending, over-reliance on property and construction-related taxation, alongside inappropriate reductions in some taxes. The globalisation of banking and interbank lending also led to a global domino effect.

I’d like now to concentrate on one of the above subjects and one which is close to my own heart: the role of poor planning in our economic crisis. Some of the inquiry members may be aware of the report published in July 2010 by NUI Maynooth titled, A Haunted Landscape: Housing and Ghost Estates in Post-Celtic Tiger Ireland. It is a report that deserves the full attention of this committee. Let me quote from the executive summary:

Government has two principle levers through which it can ... regulate property development. The first is through fiscal policy with respect to regulating access to credit and determining taxation rates. The second is through planning policy and the zoning of land and the granting of planning permissions. Explanations of the Irish property bubble have focused almost exclusively on the former, and the role of the banks, tax incentive schemes, and the failures of financial regulators. To date, the role of the planning system in creating the property bubble has [not been] considered.

The fact is, Chairman, that corrupt and irresponsible zoning practices did play a significant role in our economic crisis. The above report asked that a commission of inquiry would look specifically at this matter. That may not happen but you have the opportunity to examine it as part of your own inquiry. During the so-called boom years, the Green Party representatives on local councils and in the Dáil tried at every turn to highlight the problems of poor planning. On entering Government, we resolved to introduce a more evidence-based and sustainable planning system. As Minister, I enacted new planning legislation and intervened at local level in a number of cases of poor planning practice. I also initiated a number of reviews of local planning following complaints and allegations by members of the public. The Green Party also insisted on a windfall tax on the unearned benefit to landowners of rezoning land. All of these measures were designed to counteract the poor practices which had led to the crisis and I am convinced that had they been in place earlier, the property bubble would not have inflated to such an extent and the severity of the economic crisis would have been much reduced.

On the question of banking, the Green Party was to the fore in directly criticising the lending practices of the banks. Our then Finance spokesperson, Dan Boyle, recalls in a book he published on our time in government, a meeting with the Irish Banking Federation in 2006. He attended this meeting, along with the current leader of the party, Eamon Ryan and I'd like to quote directly:

We brought up the question of the efficacy and economic sanity of issuing 110% mortgages, and the general lack of sustainability that seemed to exist in [the] property market; a market the banks seemed intent on inflating further. The response to our concerns was both arrogant and condescending. We didn’t understand banking, we were told, besides which the market would correct itself in a relatively painless manner.

Early in our term in government, I recall, at a pre-Cabinet meeting in the Taoiseach’s office at the time of the Northern Rock collapse, asking the Finance Minister, Brian Cowen, if our banks were sound. He told me that there was no problem with our banks and that they well capitalised. I had no hard evidence to suggest otherwise but a nagging doubt did persist. It was clear that the Lehman's collapse would have knock-on effects and I asked Minister Lenihan if there were contingency plans here. He told me that matters were in hand. I got the impression that Finance were working on a plan but I had no idea that they had been working on it for an extensive period of time, as indicated in the evidence of Kevin Cardiff.

I became aware that week from a comment made to me by Minister Lenihan that he had also been in contact with David McWilliams. I did not know the extent of that contact until David McWilliams published details in a subsequent book. I phoned David McWilliams on his mobile, while I was in Brussels on 26 September. We had a long and detailed conversation on what could and should be done on the banking crisis. In his evidence, David McWilliams seemed to indicate that we had no further contact on the matter. In fact, there was an important exchange of e-mails, which are included in the appendix, at the request of the Chairman. When I raised the possibility of nationalisation of the banks during our telephone conversation, he dismissed the idea out of hand. He did so again in his subsequent e-mail to me. I told him that I would raise the matter with the Taoiseach and the Minister at a pre-Cabinet meeting on the Sunday, that was 28 September. I met the Taoiseach and Minister Lenihan in the ante-room opposite the Cabinet room. I passed Mr. Lenihan the article written by David McWilliams and mentioned his proposals. There was a cursory acknowledgement of the points but neither of them indicated that there was to be a meeting with bankers the next day.

The first indication I had of such a meeting was when I got a phone call from Minister Lenihan at about two o'clock on the morning of the 30th. I had a brief conversation with Minister Lenihan. He explained to me the urgency of the situation. He said that this was an incorporeal Cabinet meeting but that I was welcome to come into Government Buildings, if I wished. I told him that it would not be necessary if we were going with the "David McWilliams option". He confirmed that that what was being proposed. As this had been the basis of our previous discussions, I was satisfied to give my consent to a Government decision to publish legislation to give effect to the guarantee. Early that morning, I e-mailed David McWilliams with the news. When he replied later on that day, he was particularly pleased that the markets had reacted so positively to the guarantee. Chairman, I would like it noted that I was grateful for David McWilliams's input. He did not know, nor did I, that we were dealing with an insolvency problem. Even on the day of 30 September, Minister Lenihan told us that the guarantee was the best way to deal with the liquidity problem.

Following the guarantee decision of September 2008, the Green Party maintained a close involvement in the Government banking and budget strategy. Responsibility for dealing with these matters in government was assumed by my colleague, Eamon Ryan. That part of my official statement is based on contemporaneous notes taken by Eamon Ryan and I believe it would be in the interest of the committee to interview him separately, as he had a more direct involvement in these matters.

Before concluding, Chairman, I'd like to draw your attention to three small corrections to my official statement. I already notified the inquiry team that I was attending a meeting of the European Environment Bureau on 26 September 2008 in Brussels and not a European Council meeting. Secondly, the sentence relating to the National Economic and Social Council should read as follows: "In answering their question as to whether we were more Northern or Southern European in our current circumstances, it was clear that the former was the case", and I emphasise "the former" there; I think it read "the latter". Also in the official statement, references made to the level of emergency liquidity coming from the European Central Bank and it states that it "had reached some €130 million". That should, of course, read "€130 billion". Finally, Chairman, I have noticed in preparing for this hearing that the record-keeping in the Oireachtas and the various Departments needs to be improved. I'm referring now to Ministers' diary records, phone and text and e-mail and visiting records. All of this, I believe, should be in digital format, searchable and readily available and, right now, it isn't. I'd like to thank the inquiry team and the staff for their unfailing courtesy and I'd like to wish you, Chairman, and the members of the committee every success in completing this important report.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Than you very much, Mr. Gormley, and if I can invite Ms Harney now to make her opening remarks please. Ms. Harney.

Ms Mary Harney:

Chairman, members of the committee, I'm very pleased to be here this afternoon to help you in the important task you've set for yourselves which is to hopefully provide valuable lessons for the future management of our economy. And your report will build on the analysis we've had already from Honohan, Regling-Watson, Peter Nyberg and so on. I have submitted a detailed statement to the committee in response to the lines of inquiry sought of me and I am assuming that that statement has been read so I, therefore, am not intending to read that statement this afternoon. But I just do want to highlight a small number of issues.

You have asked me to deal with the policies in the 28th, 29th and 30th Dáil. And, broadly, the macroeconomic policy was consistent - the strategic focus of the Government was to stimulate employment, to increase competitiveness so that we could reduce unemployment, and particularly long-term unemployment. I am particularly proud of the achievements during those Governments. We brought unemployment down from double digit to 4% or 5%, which was effectively full employment and, in particular, we made a very serious dent on what was long-term unemployment. In the mid-'90s to 2000, there was reference made to reclassifying the unemployed ... the long-term unemployed as unemployable. We proved that through activation policies that what could have been a long-term unemployment for ever, those people became employed and I am very proud of that. We introduced a national minimum wage, we reversed emigration with immigration, we significantly grew take home pay and we greatly advanced the national infrastructure, as manifested most particularly by the motorway ... motorways we see in the country today. But I'd like to highlight the investment we made in science, research and technology and now two thirds of the IDA jobs are very much dependant on the investments we made around 2000 in basic research in this country. Ireland is now third in the world in nanotechnology, fifth in material science, first in immunology and so on. These are major achievements for a country of our size. We also increased social spending on education, health and pensions, and particularly welfare payments. We had budget surpluses every year between 1988 ... 1998 and 2007, with the exception of one year. We reduced, as I said, the burden of taxes and we grew spending. We established a National Pensions Reserve Fund and 1% of GNP was put into that fund for a rainy day.

However, notwithstanding the successes that I am proud of, we made mistakes. We did not foresee the enormous explosion of credit with entry into the euro. Prior to entering into the euro, we put an extraordinary amount of effort into what I would call the "changeover process''. We were very focused on the rate with which we enter, on competitiveness issues, particularly vis-à-vis our nearest trading partner, the UK, and the effect on inflation. In hindsight, we should have put a process in place that would have allowed us to look at the risks and the potential and the benefits of low interest rates on this economy. I think if we had done that, it might have helped to arrest the more serious, negative effects of a low interest rate and cheap credit on the economy and we could have put mitigating measures in place.

Secondly, we were very trusting of the regulatory environment. We probably should have been more proactive in monitoring and reporting, particularly the Government but also, I think, the Oireachtas. We should have had regular assessment of the financial stability and that could have helped. We could have had more critical analysis of the financial stability report. And I think we placed undue confidence on the process and the procedure that we put in place. And whilst it's not the job of Government to micro-manage regulation, if it goes wrong, Government must accept the political consequences of that. And I believe we have to.

And, thirdly, I think we allowed public spending to grow too quickly on the back of what I would call ''transient taxes''. We had recurrent expenditure on the basis ... or recurring expenditure on the basis of transient taxes mainly from the unsustainable construction activity. It's understandable why these mistakes were made. The general commentary in the ... in the country was benign and that helps to explain some of the mistakes. Even the ESRI in their mid-term report, 2008-2015, forecast a growth rate of 4% and even in their worst-case scenario, the expectation was that the resilience and flexibility of the economy, with appropriate management, would see us return to reasonable growth in 2010. I mention that simply to say that well-respected and credible organisations - even with the best forecasters - can get it wrong. We need to learn lessons from that and the lesson is that we need to challenge the consensus. I think consensus is part of our gene as a nation. We didn't challenge the consensus and, in particular, the Government should have challenged the consensus and, therefore, we failed to pursue the hard remedies that might have avoided some of the pain that our citizens had to endure. For those mistakes, of course, I, as a member of the Government, have to share responsibility and I deeply regret all of those mistakes. I regret, in particular, that we did not dig deeper and ask harder questions.

I want to deal now with the issue of regulation and my role and relation to that. In 1997, when I became Minister for Enterprise, Trade and Employment, I had responsibility for the regulation of the insurance industry and credit unions. I was conscious that in 1985 an insurance company ICI almost brought a bank down, owing as they did I think it was £400 million at the time. I was anxious that the Department which didn't have the expertise - we had, effectively, half an actuary - to continue to regulate insurance. But I was also aware that banks were getting into pensions and life assurance and I believed that one ... eyes should look at an organisation and not separate regulators - one in the Department of Enterprise, Trade and Employment and the other in the Central Bank. The Government agreed to the establishment of a single Financial Regulator. And we subsequently put a process in place to look at how that Financial Regulator would be put in place, whether it would be greenfield option, whether it would be part of the Central Bank or whether it would be what became subsequently known as the "two-pillar approach". In the context of those discussions, it was pointed out that the Governor of the Central Bank would have to have the authority to issue binding instructions to the regulator. This was pointed out both through ECB intervention, through the Department of Finance and though the Central Bank itself. When the report came, I was happy to go along with that. We are, after all, a small country and there was no point establishing an organisation for the sake of it and we had to be mindful of the Governor's wider responsibilities as part of a single monetary union.

I was also conscious during that time that the role of the consumer was ignored in regulations. Banks were, quite honestly, in some cases ripping off consumers. There were hidden costs. They were helping consumers establish bogus non-resident accounts for the purpose of avoiding tax. There were many hidden charges and there was a lack of confidence in regulation, as we knew it, and even a State bank was involved in DIRT. I was involved, too, in a number of inquiries as Minister for Enterprise, Trade and Employment into banks - Guinness Mahon, Irish Intercontinental, National Irish Bank and so on. And the combination of all these things brought me to the conclusion that all was not well in the manner in which we regulated the financial services and that is why I was so proactive in seeking to ensure that we had a new regime. The mistake, I suppose, was after the new regimen was put in place, not being more proactive in ensuring that appropriate resources were devolved to the regulation of the financial institutions. And, in fact, it wasn't until this ... until the Honohan report, I think it was, that I realised that the big institutions only had two individuals responsible for their regulation. I think that was a serious error and the Government certainly wasn't aware of that. And I think it's a pity that we weren't aware of the lack of resources that were being applied to regulation.

Chairman, I end there for the purposes of time. I'm happy to take questions on my statement, or even things that aren't in my statement. But above all else can I say if there's any lesson I have learned from my time in government, as a result of what happened, it is that we need to be more questioning, particularly of consensus. And we did have a national consensus in relation to a soft landing in the property market that was not correct. And it is the responsibility of Government and maybe, secondly, the Oireachtas to be more questioning of consensus of that kind. And perhaps if we were, it may not have avoided all the problems, or any of them, but certainly I think it's a responsibility we all bear and as we go forward I think it's a lesson that we should learn. Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Ms Harney, and thank you also, Mr. Gormley, for your earlier statement. If I can now commence questioning, and if I can invite Deputy John Paul Phelan to begin. Deputy, you have 15 minutes.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you, Chairman. And good afternoon, Ms Harney and Mr. Gormley. I'd ask you to be as brief as you can, we only have 15 ... or I only have 15 minutes. Maybe to start with Ms Harney first in relation to the last point you made with regard to regulation. Outside of the issue of resources, which you referenced, you've detailed how you had a role in the establishment of the new regulatory system. With the benefit of hindsight, are there other structural changes that you would do differently now if you had that time back again?

Ms Mary Harney:

Well, can I ... sometimes I think we've become a bit obsessed with structures, and I think both Governor Honohan in his report, and I think Mr. Patterson, when he was before this committee, whilst they had issues with the structure, did say that the structure wasn't the reason why mistakes were made, and I would agree with that view. I think we can become a little bit obsessed with how things look, rather that what we do. I think if there's anything I would say reflecting back, and I don't intend for one moment to scapegoat anyone, because I think, collectively, we all failed, but I think it's more to do with the culture. The reason I was so keen to have a new regulatory environment was partly because of the cultural issues that I experienced. As I said, customers of banks were ... had hidden charges imposed on them. They were being helped set up bogus non-resident accounts to avoid tax. I knew in the Department of Enterprise, Trade and Employment that we certainly didn't have the resources to deal with a modern insurance industry and I was very worried that what had happened in '85 could happen again, and that's why we sought to move that into a different era. Many of the people on that committee recommended a greenfield site, and that had attractions to me initially. But I think, given the involvement of the ECB, given the fact that we were part of a monetary union and the particular responsibilities that fall on the Governor, and, as I said, what was more of concern to me was what they did rather than who did it.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Can I ask in relation to the greenfield site issue: it would have been covered, I suppose, in media speculation at the time, that some of the ... maybe Fianna Fáil members of the Government would have favoured retaining regulation more centrally within the Central Bank, whereas the Progressive Democrats members of Government might have been more identified with the greenfield site. Can you enlighten us maybe as to the discussions that led to the ultimate establishment of what we had?

Ms Mary Harney:

Well, to be fair, Deputy, it never broke down as between Fianna Fáil and the Progressive Democrats in relation to that matter. There were differences between, I suppose, the Department of Finance and the Central Bank on the one hand, and probably everybody else. But what concerned me was how we regulated rather than necessarily who did it.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.

Ms Mary Harney:

And I was mindful of the particular responsibilities of the Governor and also of resource implications. And this expertise is not easily found. It's a very complicated area. In my own Department at the time we only had the equivalent of half an actuary. So I was conscious of all of those issues. And what concerned me most was what the regulator did, rather than who actually did it.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, that's fair enough. Can I ask you then in relation to the discovery, and you mentioned the reports, and we've had evidence here from witnesses of two to three people who were directly regulating, on a micro level, different institutions. How did that situation ... how was it allowed to come about? How, in light of the fact that you said you had reservations, that you had only an effectively half an actuary in your Department regulating insurance and the credit unions, how come there wasn't more strict oversight of the actual prudential regulation of financial institutions?

Ms Mary Harney:

Well, certainly I wasn't aware, and I don't believe the wider Government was aware, of the resources that were being allocated. Maybe it's ... I mean, we're all talking here about eight years on and hindsight and looking back at mistakes and trying to reflect and agonise about are there things we should have seen and done differently. Certainly, if I was to say that having established a new regulatory environment, perhaps we should have looked for ongoing reports from that regulator.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.

Ms Mary Harney:

That didn't happen. Certainly in my part it didn't happen. I don't know whether it happened through the Department of Finance, but I was not aware of the poor level of resources that was being applied to the regulation of what is a very complex global industry.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. You referenced Mr. Patterson in your comments there as well. Did you see his evidence to the inquiry?

Ms Mary Harney:

I certainly watched him, yes.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I want to quote a quote which has got a lot of coverage maybe in subsequent questioning of other witnesses, from him, from his evidence on the day he was here. I'll quote him directly. He said, "None of the authority - the board - had any experience in regulation [regulating banks]." You would have had some input, I'm sure, into the nominees onto the board of the new regulatory authority. How come we could have appointed, or Government could have appointed, a board of people to regulate that had, between them, zero experience of regulation?

Ms Mary Harney:

Yes, I did have some involvement. In fact, I ... if memory serves me right, I think I did suggest to the Minister of Finance that Mr. Patterson would be an ideal person to be chairperson. I had come across him briefly in business and he impressed me. That skillset is not easily found, quite honestly. These ... other than retired regulators, I'm not certain who we could have put on that had regulatory experience. There was a former CEO of an insurance company, an economist, I think. In fairness we tried to get a balance-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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A romantic novelist, was there?

Ms Mary Harney:

Sorry?

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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A romantic novelist ended up on the board?

Ms Mary Harney:

Well, you know, consumers had to be represented too, and, in fact, the whole debate, and I've read ... I've taken the opportunity - in fairness, in the context of coming to this committee - to read the Dáil debate again, and the whole emphasis in the Dáil from Deputies of all parties was on consumer protection. So it was appropriate that consumers, and we're all consumers, should be represented on the board as well. I'm not certain. I respect what Mr. Patterson had to say. I think we would have had to go outside the country. We're sometimes not good at that.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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He said that he flagged it at the time with the Minister and there was no-----

Ms Mary Harney:

Well, it wasn't something I was aware of that he was concerned about, to be honest with you.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. But with the benefit of hindsight?

Ms Mary Harney:

Of course. Look-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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A lot of things-----

Ms Mary Harney:

-----with the benefit of hindsight, we appointed Mr. Elderfield and we paid him a salary substantially greater than what we were prepared to pay during those years. There's a lot of lessons we have learnt. And one lesson we must learn is that this expertise globally is in scarce supply. And, therefore, if you're going to acquire that expertise, whether it's in the form of executive staff ... and sometimes in Ireland we go for three instead of one with the expertise and the experience, we might go for three more junior people. I think what ... if there's any other lesson we should learn from the regulatory issues it is that we need the appropriate expertise, whether it's on the board of the regulator or whether it's particularly working at executive level in the regulatory office.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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There was another quote that I just want to put to you from Pat Rabbitte when he was here last week. He gave his summation of issues around regulation that led to the collapse, and he said ... he described it as a "classic case [here] of regulatory capture". What do you feel on that particular, yes, on that particular view?

Ms Mary Harney:

Well, one would have to say in hindsight, notwithstanding the changes we made, with the exception of the consumer issues, where I think the new regulator did have a very proactive, hands-on approach to the consumer issues, because prior to that the Central Bank, I think, referred issues around bank charges to the director of consumer affairs - it wasn't an area that they had an interest in - but notwithstanding the changes it's fair to say that I think the culture didn't change.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.

Ms Mary Harney:

And I would agree with Deputy Rabbitte in that respect. And maybe it is partly because we're a small country, but there was a lot of deference, perhaps, to the banks. In the first instance the failure of the banking system must rest with the bankers and the lenders. And then the auditors and the accountants. I think, to be fair, the regulator and the Central Bank come down third and fourth line of defence. They're not up there No. 1.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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You don't ... well, I understand, and I think the point you're saying is that boards of directors have responsibility and, you know, the structure of the bank to their own shareholders. But we've uncovered a lot of, I suppose, evidence from different sources of a very deferential relationship that existed between the banks and those who were supposed to be regulating them, not least details of social events that took place in or around the time of the guarantee.

Do you not favour, or do you favour, a more hands on - even with the benefit of hindsight - form of regulation and do you not feel that that actually was a crucially ... a crucial failing in what happened?

Ms Mary Harney:

Well, if you look at core document No. 40, which was sent to me, on page 87 there's a note there from the head of the banking unit, I think, in the Department of Finance, which quoted me as saying I wanted a more proactive regulatory environment. That is a fact; I did.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.

Ms Mary Harney:

I wouldn't get too hung up on the social events, Deputy, I'm more concerned about what people do. If they do their job, who they socialise with is not ... of no interest to me. But I do think we need a regulatory environment that's robust, that protects the consumer and protects the banking system. And I think we were all quite alarmed with what came out subsequently. Some reckless lending, which none of us, in our wildest dreams, could have imagined.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. I've two questions that I have to ask you before I get to Mr. Gormley. Hopefully I'll have a bit of time with him. At the bottom of page 3 of your statement that you presented to the inquiry you said, "I have commented on Government's lack of awareness of the growing risks in relation to Financial Stability in the lead-up to the crisis - an omission that one hopes is unlikely to be repeated given the huge focus on regulatory implementation since then." Briefly, do you feel that enough has been done to ensure that a repeat will not happen? Briefly, please?

Ms Mary Harney:

I hope so. I think their ... certainly the regulatory focus now is much more robust. There's no question about that. I think all of us, whether as Members of the Oireachtas or members of Government, will be far more questioning and will get behind the data that's supplied and use our critical faculties more. But if you're to ask me could we have another crisis, I can't put my hand on my heart and say, "No". But sitting where I sit now, I think we've done everything so far possible to avoid that, yes.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. This is my final question. On the website, still, of the Department of jobs and enterprise, as it is now, when I was preparing for this I found a speech, or a press release of a speech, that you gave in 2002, 12 September 2002, at an event ... a breakfast event in a hotel in the IFSC, and I want to put a quote from it to you:

15 years after it started, the IFSC is fully on the world financial map. I would like to see if we can give a renewed public-private push to bring [international] financial services to a new level in Ireland. Let's renew the energy and commitment on all sides that got us this far. The new financial regulator ... will help give a boost, as we already see in the Chairmanship in Brian Patterson. There is a lot more we can do together. So let's set our sights high.

I want to ask you, what did you mean in terms of a boost? And, secondly, we've had a few witnesses that have outlined the clash, if you like, between the two roles of the regulator, regulation and promotion, that existed under the legislation. And you seem to be indicating, if I'm not ... if I'm correct there, that the role of the regulator was almost equally important in terms of promotion.

Ms Mary Harney:

Well, in relation to the developmental role, that came secondary to stability, obviously. I think Mr. Honohan said that ... the Governor said that in his report, that it wasn't of the first order. Secondly, we established a global financial services sector here from zero and to have credibility in the global financial world you need good regulation. It's not about light regulation or no regulation; it's about strong, robust legislation. People are not going to put their funds and their money into a country where they're not confident of the regulation. So, what ... when I was talking I was talking about the new, strengthened regulatory environment. And in relation to the development of promotional role, the IDA had a strong role. As Minister for Enterprise, Trade and Employment I met with many financial services companies around the world, promoting the IFSC, and so too did the clearing house. So, I think the Central Bank's role would have been certainly down the line from that and it would, in any case, have been secondary-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Was there an inherent conflict, though, in those two roles?

Ms Mary Harney:

I know it's gone now and why it was there in the first place I'm not so certain. Perhaps there was a conflict. It's not the first piece of legislation that I am aware of where there might be this overarching clause that talks about the development role of whatever sector. But I think the Central Bank's first and primary responsibility was the stability, financial stability of the country and I don't think anybody can take from that.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. There's only a minute and 20 seconds left for Mr. Gormley, sorry about that-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----scold you now for your manners, Deputy Phelan.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----but thank you for your answers. Yes.

Ms Mary Harney:

It was not my wish to take all of Mr. Gormley's time, I assure you.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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No. I briefly want to refer Mr. Gormley to page 4 of your statement.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Quick question now, Deputy.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes.

Mr. John Gormley:

Page 4.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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It's the phone call from Minister Lenihan on the night of the guarantee when you were ... an invitation, at least, was extended to you to attend the Government Buildings. Why didn't you? And again, if you had that time all over again would you have ... would you act differently now?

Mr. John Gormley:

I'll answer the second part of your question first. No, I wouldn't. I have given evidence here to show you very clearly that I was across the issue. And I think it's fair to say that I was more across this issue than other members of the Cabinet, with the exception, of course, of the Minister for Finance and the Taoiseach himself. And I had discussed it with Minister Lenihan. I had, as I said, discussed it with David McWilliams. Now, Mary Harney has made an interesting point here when she talks about challenging the consensus. Well I did challenge the consensus by taking a contrarian view. David McWilliams, as you know, was right about the bust, absolutely. I wanted to get his views and Minister Lenihan had taken on board his views as well. Both of us, therefore, were on the same page and-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Did you have a detailed understanding, though, of what this McWilliams option which you referenced-----

Mr. John Gormley:

Well, if you read the David McWilliams e-mail, which I have supplied at the request of the Chairperson, he goes into quite a bit of detail. And that's why I put it to Mr. Lenihan and I said, "Are we going with the McWilliams option"? The David McWilliams option. And he said, "Yes". And that's why I was clear in my own mind that I could approve this. Now, also, bear in mind that this was an incorporeal meeting, where you're not present. I don't think it would have changed one thing by me being present. No other members of the Cabinet were present. It wouldn't have changed anything, and-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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But you were the only one like, as far as I'm aware, who was given the option on that night of-----

Mr. John Gormley:

I think he extended that courtesy to me because we had discussed it, and-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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But do you think that that one-page e-mail from-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You're using a bit of time now so, and I need you to wrap up.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I think that a one-page e-mail from Mr. McWilliams was fully ... full awareness, for you, I thought.

Mr. John Gormley:

Well, the ... I ... as far as I know, the only difference ... I think David McWilliams was saying that the bond holders should not be included in the guarantee. That's the one change. The day following, he ... I don't think he was too concerned about that particular issue because again I got another e-mail from him. So that was the only difference as far as I can see.

Other than that, we had gone through it ... by the way, you know, we did have a Cabinet meeting the next day and it was actually open to any member of the Cabinet to say to Mr. Lenihan, "I don't want an incorporeal meeting, I want a full Cabinet meeting on this." That option was also open to myself. I didn't feel it was necessary, nor did I feel, having discussed it at Cabinet the next day, that it was necessary.

But you have to remember this and bear this in mind at all stages, we were told that this was a liquidity problem. We were not told that it was a solvency problem. We couldn't have known that, nor could Minister Lenihan, and, therefore, we were working on that basis. And we were, effectively, misled by the banks on that issue and that's why we progressed and that's why we made that decision. But, likewise, I would put it to you as well, Deputy, that the Opposition parties were briefed as well. We had to vote on this issue. This wasn't a decision that was made in the middle of the night really, because the legislation had to be voted on in Dáil Éireann. And the Opposition parties were briefed. They were given the same information that we were given. I don't think the Department for Finance hid anything from the Opposition parties. And, again, you were probably given misleading information because, again, you were told that this was a liquidity problem. We now know it was a solvency problem but that's what we were going on at the time.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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