Oireachtas Joint and Select Committees

Thursday, 3 September 2015

Committee of Inquiry into the Banking Crisis

Nexus Phase

Anglo Irish Bank - Mr. Peter Fitzgerald

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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As we have a quorum, the Committee of Inquiry into the Banking Crisis is now in public session and can I ask members and those in the public Gallery to ensure that their mobile devices are switched off.

We begin today's session 1, public hearing with Mr. Peter Fitzgerald, former director of corporate and retail treasury, Anglo Irish Bank, and in doing so, I would like to welcome everyone to the public hearings of the Joint Committee of Inquiry into the Banking Crisis. This morning, the focus of the inquiry is on Anglo Irish Bank. At our first session, we will hear from Mr. Peter Fitzgerald, former director of corporate and retail treasury at Anglo Irish Bank. Mr. Peter Fitzgerald joined Anglo Irish Bank in 1998. While working in the treasury division, he developed a retail savings franchise in Ireland and the UK. He was director of corporate and retail treasury from 2006 to 2008 and Mr. Fitzgerald now works as an adviser to startup and SME companies in Ireland in the areas of strategic planning, corporate communications and business development. Mr. Fitzgerald, you are very welcome before the inquiry this morning.

Before hearing from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You're 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. 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 form part of the evidence of the inquiry. If I can now ask the clerk to administer the oath to Mr. Fitzgerald, 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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Once again, I welcome before the committee this morning Mr. Fitzgerald and if I can invite you to make your opening remarks to the committee, please.

Mr. Peter Fitzgerald:

Thank you Chairman and members of the committee. Firstly, I would like to say that I welcome this opportunity to share my experience in the roles I held in Anglo Irish Bank and IBRC with the members of the joint committee. I look forward to answering, as best I can and to the extent possible, any questions you have in relation to my performance in those roles and wider matters relating to the bank both pre and post its nationalisation.

To enable best usage of the time allocated to this session, I have narrowed the focus of my opening statement to deal with what I believe are the key areas of my testimony. By way of background, I have worked in financial services for a substantive part of my career to date, beginning in corporate treasury roles in First Active and KBC, followed then by a variety of roles within Anglo Irish Bank and, latterly, IBRC. These roles in Anglo were performed over a 15-year period from 1998 to 2013. From 1998 up to managing the sale of the credit ... under the Credit Institutions (Stabilisation) Act of the bank's deposits and NAMA bonds to Allied Irish Banks plc in February 2011, my main role was to raise customer deposits in order to fund the bank's balance sheet growth. I performed that role as a corporate deposit manager up to 2001, as head of retail banking from 2001 to 2006, as director of corporate and retail treasury from 2006 to 2008 and as head of retail banking again from 2008 to 2011. During this period, I reported to the head of corporate deposits, head of treasury, director of treasury, the managing director of Ireland and the head of operations in the bank, respectively.

I was appointed to the senior executive board or the SEB for a 12-month period from in and around the middle of 2006 to 2007. This was a management level below the main board of the bank. I also served on a number of management committees and subsidiary company boards at various times. I did not, however, serve as an executive director or member of the board of Anglo Irish Bank or any of its sub-committees.

Following the appointment of Mike Aynsley as the new CEO in late 2009, I became a member of the new leadership team of the bank and worked in a number of significant post-nationalisation restructuring projects. Finally, in early 2011, I was appointed as head of corporate treasury, or corporate affairs and communications, a role I held until my departure from IBRC in February 2013. For the purpose of clarity, my responsibilities in all of the roles previously mentioned did not extend to lending to customers or involvement in the credit, risk, audit or compliance functions of the bank.

The primary role of the group treasury role of Anglo was to fund the bank's lending growth. Both wholesale and customer funding were sourced for this purpose. By 2008, a significant portion of the bank's balance sheet was funded with customer deposits from two main categories, namely, retail deposit customers and corporate deposit customers. These deposits were the lifeblood of the bank and the business proposition was interest rate and customer service driven. The marginal returns offered for surplus cash on deposit made it worthwhile for customers to switch banking relationships for this aspect of their business alone. The corporate deposit customer profile ranged from SMEs to large corporate and institutional clients across practically every business sector. Retail customers were predominantly older savers with lump sums to invest.

The centres for sourcing corporate deposits in Anglo Irish Bank grew from a small network of branches in Ireland and offshore in the '70s to a large group treasury centre in Dublin in the '80s, followed by an ... additional branches in the UK and another large treasury centre in London in the '90s. From 2000 onwards, further centres in Austria, Dusseldorf, Jersey and Boston were used to source corporate deposits in line with asset growth. As a result of this planned expansion, deposits from corporate customers in Anglo grew year-on-year to €32 billion in 2008, accounting for 36% of the total funding position of the bank. The strategic intent to broaden its funding base to include deposits from retail customers was established in 2001 in line with the introduction of the SSIA, or special savings incentive scheme, in Ireland. Once established, the retail savings function in Ireland became successful very quickly and attracted significant positive media coverage and commentary due to the perceived lack of competitive offerings for savers in Ireland at that time.

Following this success, a strategic decision was then taken in 2004 to launch a retail savings proposition in the United Kingdom. While the UK savings market was, at the time, one of the most competitive in Europe, it was agreed to proceed and, following a test-and-learn period in early 2005, the bank began to enjoy considerable success with UK savers and growth was driven using high interest rates advertised in best-buy tables, in online and offline media and other comparator and aggregator sites such as moneysupermarket.com.

The remaining retail funding site of the bank was the Isle of Man. This had been in operation for many years and attracted a limited but consistent level of savings from onshore and offshore high net worth savers. While successful among its local peers in this space, the Isle of Man operation would always remain the smallest retail saving centre operated by the bank up to nationalisation. As a result of this planned expansion from early 2001 to its peak in 2008, the volume of retail savings from those three markets alone grew to circa€19 billion of funds entrusted. Close to 50% of these funds had come from the UK market over a relatively short period of time, with the balance coming from Ireland and the Isle of Man. Total deposits from retail customers in 2008 accounted for 22% of the overall funding position of the bank. At its peak, therefore, Anglo Irish Bank had a total portfolio of €51 billion of deposits, which accounted for 58% of the total funding sources of the bank. Given the strong growth of the UK retail funding franchise, a full launch plan was developed and under consideration to enter the German savings market in 2009. This was with a view to reducing the growing geographic concentration and significantly expanding the bank's future potential funding sources. This plan, however, was never implemented following the nationalisation of the bank.

The fast-growing concentration of UK-sourced retail funding was influenced by the increase in the Irish deposit protection scheme in Ireland and the subsequent introduction of the Government guarantee, as I have detailed in my witness statement. The collapse of Northern Rock was the first event that weakened customer confidence in the security of their savings with Anglo Irish Bank. The bank took thousands of calls per day from concerned customers who either wanted to withdraw funds or seek assurances that their deposits were safe.

While the UK retail centre of the bank was the main focus of calls from UK customers, Irish savers became equally nervous when queues formed outside the Northern Rock office in Dublin.

The collapse of Anglo's share price on 17 March was the second event to weaken customer confidence in the security of their savings. The seriousness of this event was greatly inflated by the fact that the Anglo share price, alone among Irish banks, was being targeted by sellers and fell by circa15% on that day. The outflows were significant and the bank ran a very real risk of not being able to handle the volume of inbound calls from concerned customers. It also introduced the first real risk of the bank’s branches in Dublin, Waterford, Cork, Limerick and Galway not being able to deal with the volume of customers calling to close their accounts.

The collapse of Lehman Brothers on 15 September 2008 was the third and final event that shook the confidence of customers in the safety of their savings. It is my view that the bank experienced a full-blown run on customer deposits from that period up to 29 September 2008. As the primary channel for both corporate and retail customers dealing with the bank, however, was via the telephone, this run never fully manifested itself in the public domain. In Ireland in particular however, the word on the street was that Anglo was in serious trouble. It was an incredibly stressful time for retail deposit customers in particular, many of whom still had all of their savings with the bank. While having survived two material events of this nature, the events of September brought a new level of uncertainty for the staff and management of the bank and, with the share price now below 30 cent, I believe most of the senior staff honestly feared the bank might not recover.

Up to the start of the crisis in August 2007, Anglo Irish Bank was lauded on the stock market for its spectacular balance sheet growth and highly profitable business model. This and Anglo’s commentary from a multitude of market analysts and other commentators led to Anglo being put forward as an example to its competitors and peers. In terms of the bank’s chosen credit strategy therefore, as a predominantly property-based lender in the Irish, UK and North American markets, it was difficult to foresee that everybody internally and externally could be wrong. The bank’s loan default rates had remained very low for the previous decade and there remained a huge appetite for commercial property projects, in particular among investors and developers in the bank’s chosen markets. Existing clients of the bank who had experience and track record in that sector were on hand to meet the demand and the clients’ stated credit policy was to back and work with these types of clients where the property had strong tenants, where cashflows could be identified and secured and where personal guarantees were available as additional security.

Anglo was three monoline banking divisions in one financial institution, namely, lending, treasury and wealth management. While all were successful in rapidly growing and diversifying their markets for their individual activities, each sold what could be broadly viewed as a single financial product into a highly targeted customer base, i.e., loans to borrowers in the real estate sector, deposits to interest-rate sensitive corporate and retail customers and predominantly real estate investment products often geared to high net worth individual clients. While the global liquidity crisis affected nearly every bank worldwide to some degree in 2007 and 2008, the underlying structure of the bank, together with the pace at which it had grown in that structure, compounded the stress of that crisis in a much higher degree to other banks who had lower concentration of lending exposures, more diversified funding sources and fee income from a wider universal offering to a diverse and longer-established customer base.

While Anglo Irish Bank had ceased development lending to new clients and had no direct exposure to private mortgage lending, the monoline exposure to a highly mobile customer deposit base in particular hit Anglo hard and fast in late 2008, as the perceived liquidity issue quickly became an actual one for the bank. Further complications arose for the bank out of the difficulty in reducing or stopping lending as the crisis worsened. This was in part down to the contractual commitments to borrowers and also the risk that without further lending, some development projects would cease and result in immediate and significant loan default. All of this took place in the face of unforeseen and therefore unanticipated risks, which included a total market dislocation and a practically simultaneous failure of each individual source of funding open to the bank over a period of less than 12 months.

I sincerely hope that my testimony today will be of benefit to the inquiry in fulfilling its mandate.

I would like to say that I fully accept responsibility for my roles as both corporate and director . . . corporate . . . as director of corporate and retail treasury and head of retail banking of Anglo Irish Bank for any part that I may have played in its failure and the consequences it had on the Irish State. It is genuinely something that I will always regret.

Finally, I would like to highlight that at the time of writing and submitting my witness statement to this inquiry, I do not hold any documents or other memoranda such as minutes of meetings from my time in the bank and, therefore, its contents are solely based on my recollection of events at the time. Thank you, Chairman and members of the committee.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Fitzgerald, I just want to clarify one matter there before I bring in the questioners this morning. Could you clarify to the committee as to whether or not you were a member of the assets and liquidity committee and whether you were a member of the supervisory board of the Austrian subsidiary?

Mr. Peter Fitzgerald:

Sorry, I was a member of both, yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. Senator Michael D'Arcy. Senator, you have 20 minutes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Thank you Chairman, just for a point of information for people who may - Mr. Fitzgerald, you are very welcome - people who may be tuning in this morning, I think it is appropriate to raise that Mr. Fitzgerald is Mr. Fitzgerald of the Anglo tapes and that they are not-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I am not going to go into that-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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I just want to-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Sorry, Senator, let me make this very clear-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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They are not on the agenda to be discussed today.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Let me make this very clear from the outgo: this committee would be subject to a very serious court injunction if we were to go into that space. So that conversation is ending-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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We are not discussing them is what I am saying.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It's ending right now. It's ending right now.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Thank you, Chairman. Mr. Fitzgerald, after the guarantee was announced, did Anglo use its enhanced credit status to attract deposits from non-guaranteed banks, either in Ireland or the UK?

Mr. Peter Fitzgerald:

I have said in my witness statement that I am confident it didn’t, in that from my perspective, and, obviously, I had both a retail deposit team of some note in a couple of jurisdictions, and corporate treasury salespeople ... clear instructions were issued and, I believe, were followed, that that was completely inappropriate.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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How many staff worked under you at that stage, both between Dublin and the UK?

Mr. Peter Fitzgerald:

I would have had about 300 staff in total between retail saving centres and corporate treasury and we also had an outsourced call centre in the UK which may have had up to 150 people working in it.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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So you'd hundreds of people working and you’re satisfied that at no stage-----

Mr. Peter Fitzgerald:

I'm completely satisfied.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Were you ever instructed either explicitly or implicitly to use the guarantee as a method of attracting deposits?

Mr. Peter Fitzgerald:

No.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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You weren’t?

Mr. Peter Fitzgerald:

No.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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While potentially morally wrong to do so, was it considered?

Mr. Peter Fitzgerald:

No, it wasn’t, no.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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It was never discussed?

Mr. Peter Fitzgerald:

It was never discussed. In fact, it was discussed on the basis that there was clear instruction to staff not to use it.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And who gave those instructions?

Mr. Peter Fitzgerald:

Well, I would've to my staff and my . . . the people working for me onwards down to their staff.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And was that a matter of a decision that you made or was it discussed with you by senior other executives within Anglo Irish Bank?

Mr. Peter Fitzgerald:

I don’t think we had a formal discussion about whether we would or would not use it. I just think the instructions were really clear at the time of the guarantee that it should not be used.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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But who instigated the policy of not using it? Was it yourself or was it other senior executives?

Mr. Peter Fitzgerald:

I can’t recall who instigated a particular policy in that regard. I just know that from my perspective and with my team, when the guarantee came out, we explicitly instructed our staff that it should not be used as a means to market us as an Irish savings institution and the benefit of the guarantee that that brought with security of savings.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And did you have that conversation with other executives?

Mr. Peter Fitzgerald:

I would have, yes.

Mr. Peter Fitzgerald:

Yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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You did. And everybody was agreeable with that, was it?

Mr. Peter Fitzgerald:

Yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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During your time on the board as a senior executive in '06-'07, did you ever express any concerns to other members regarding the bank’s increased concentration of risks, assets in the commercial property sector?

Mr. Peter Fitzgerald:

I don’t believe I did. It wasn’t my area of responsibility in the bank, so I actually had no operational responsibility for lending and while there were frequent presentations of the business to the board, etc., there was a wide agenda at the senior executive board and I don’t believe that I would have expressed concern about development exposures or other lending exposures because it wasn’t my area.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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You were an experienced banker, Mr. Fitzgerald. Should you have considered those matters or raised them at the board level?

Mr. Peter Fitzgerald:

Well, the senior executive board was made up of both executive directors, of which I believe there were four and - sorry, five - and non-executive ... or, sorry, executive directors and business or function heads. So I would have been a divisional director in the bank along with three other members of the senior executive board. Any communication with the board would have come from those meetings to the main board, because the executive directors were obviously members of those board ... of that board. I mean, certainly, there was a conversation back in 2006 and, just for clarity, I sat on the senior executive board for less than a year. From the records I've received, I think it was eight meetings that I would have attended as a member of the senior executive board, and I do recall that development lending, for instance, was discussed, because the bank was ... recognised that it was over-exposed to development lending, in particular, and had a policy from 2006 of not lending any more development finance to new customers. But, outside of that, the lending aspect of the business, as I described in my opening statement, just wasn't part of my functional responsibility, so I can't add any further insight into that, I'm afraid.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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I suppose where I'm coming from, Mr. Fitzgerald, is you had a large number of staff underneath you. Your job was to get ... to look after the retail deposits-----

Mr. Peter Fitzgerald:

And corporate deposits.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And the corporate deposits. And did you ... a term that is being used is "silos". Were you siloed? Did you only consider that and never offer other opinions to other executives within the bank?

Mr. Peter Fitzgerald:

I think the nature of Anglo Irish Bank was, both culturally and divisionally, quite siloed in that, as I mentioned in my opening statement, it really was three monoline activities between treasury, between lending and between wealth management. They did come together through the senior executive board. I think the concerns that would have been raised around funding was not in relation to the risk in terms of the credit risk but in relation to our ability to fund that prudently. And you will see in the minutes of the ALCO meetings and also in board presentations, the presentations made by the business from the treasury perspective in terms of the quantum of funding that we had to raise in order to adequately fund that lending growth, so... sorry, to your point, and just to be helpful, the discussions, I think, at senior executive board from my perspective and others in the treasury side would have been around the need to be able to fund that appropriately. I would not have expressed a view, because it wasn't my area, on credit risk, because it wasn't my area of expertise.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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You were aware of the extent to which Anglo Irish Bank was a monoline bank.

Mr. Peter Fitzgerald:

We were indeed, yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Were you aware that the figures that we've had presented to us was ... were, upon analysis, prior to the guarantee ... 82% of Anglo Irish Bank was made up of commercial real estate lending, 17% corporate, much of which was attached to the commercial real estate, and 1% residential. Were you aware of that?

Mr. Peter Fitzgerald:

I was, yes. And that was the chosen strategy of the bank on the lending side. So, yes, I was, yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And were you satisfied at that stage that it was ... you used the term "prudent" ... that that was a prudent banking model?

Mr. Peter Fitzgerald:

The bank-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Not now, but back then.

Mr. Peter Fitzgerald:

Yes. Back then, the chosen business model operated by the bank was one that was deemed a success, was lauded as a success in terms of its ... the value that it created in terms of its rising share price. The rating agencies, the market commentators, media commentators all put Anglo Irish Bank forward - and it's a point I've raised in my opening statement as well - as the business model for comparison and best practice against its peers and its competitors.

So it was very focused in three core markets. It had a sectoral approach, which in hindsight now was very, very monoline. It met its funding targets to achieve that lending year-on-year and when the crisis hit, that commentary changed and-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Sorry, at what stage did the crisis hit do you... in your view?

Mr. Peter Fitzgerald:

In my view, it was probably in 2006 when the bank was, I suppose, actively looking at not just its ... I suppose the fact that it was a monoline in the main real estate lender but the fact that it had a very high exposure to development finance in particular, which was the highest risk element of it.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Would you consider yourself somebody who is well-informed about what the market was saying about your institution - Anglo Irish Bank?

Mr. Peter Fitzgerald:

I would have, yes, because it was talked about at senior executive levels. We would have been very conscious about what was being said about us both by equity investors and capital investors.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And in terms-----

Mr. Peter Fitzgerald:

Sorry, just to your point ... so at a time that I sat on the senior executive board from 2006 to 2007, almost up to that point, the bank was still deemed by many externally and internally as operating a very successful business model. Its cost-income ratio was very, very low.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Did RBS not have a market note in relation to Anglo Irish Bank being monoline and that it was not systemic to the Irish sector? Were you aware of that market note?

Mr. Peter Fitzgerald:

Sorry, yes. There was ... obviously, there were-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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That was in 2007.

Mr. Peter Fitzgerald:

Yes. So there were people that had that view but it was an individual view. It wasn't necessarily a wide view at that time and I make mention in my witness statement that the bank then brought in three investment banks in, and I'm not 100% sure of the timing of this, it was either in late 2006 or early 2007. I believe it was on the instigation of the head of capital markets at the time basically on how our balance sheet was being structured to fund future growth. I believe those investment banks were BNP, Barclays and Merrill Lynch. They came in. We gave them substantial information in advance. They did a due diligence process and they presented to executive directors and the wide member ... and a wide grouping of the management team and I believe I highlight in the witness statement that they reaffirmed that we should be slowing growth in terms of our lending books, that our funding bases, while they had proved successful to date, were quite thin, and what I meant by that, is we were wholesale and customer and then the customer itself was just in a couple of markets.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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If I could move on, Mr. Fitzgerald, did you consider at any point during 2008 that the bank was insolvent?

Mr. Peter Fitzgerald:

I didn't. I didn't.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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On the night of the guarantee, did you believe the bank was insolvent?

Mr. Peter Fitzgerald:

I didn't, no.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Did you believe there was billions required by the State at that stage or tens of billions required by the State to underwrite the bank?

Mr. Peter Fitzgerald:

No, I didn't, no.

Mr. Peter Fitzgerald:

No and I didn't and I didn't for, I suppose, a very simple reason from my perspective in that my role was on the other side of the balance sheet. I didn't have-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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You said earlier that you were a person who was well-informed.

Mr. Peter Fitzgerald:

Yes, no, true but I wouldn't have had any insight into the fact that property values were as over-inflated as they were, not just in Ireland but in other markets.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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But you must have been well-informed that the corporate deposits were possibly likely to ... I think the term used "flight to quality", that was your term.

Mr. Peter Fitzgerald:

Yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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That that was likely to happen based upon the monoline status of the bank.

Mr. Peter Fitzgerald:

No, what I'm talking about here is ... I think ... I would regard that as liquidity as opposed to solvency.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Liquidity runs directly into solvency depending on the extent of the crisis.

Mr. Peter Fitzgerald:

Well no, I believe the solvency issue genuinely came post the guarantee.

And I'd agree with a lot of market commentators that that is the case in terms of the deterioration in the asset values that applied in the bank at the time. The liquidity issue was one that was short-term ability to meet our obligations, not in terms of the-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Were you aware of Professor Morgan Kelly's interview on "Prime Time" immediately after the ... I think it was within ... I think it was 30 September, in relation to ... his theory was that the asset values were so poor that the guarantee was a mistake? Did you see that interview on "Prime Time" with Professor Morgan Kelly?

Mr. Peter Fitzgerald:

I didn't see that interview, no.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Are you aware of it?

Mr. Peter Fitzgerald:

I am, yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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His assertion was that the liquidity wasn't available through Irish banks because of the quality of their loan book.

Mr. Peter Fitzgerald:

Okay.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And do you think that's a fair comment?

Mr. Peter Fitzgerald:

In hindsight, yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And, which caused which? Was the liquidity crisis caused due to the standard of the loan book or was it, as you say, the crisis came after the guarantee?

Mr. Peter Fitzgerald:

I think the roots of the crisis that led to a liquidity crisis were based on solvency as opposed to liquidity. I don't think that manifested itself in terms of asset values in Ireland or the UK until ... in fact, right out into 2009 and 2010. I think when confidence in, for example, in Northern Rock was lost it was around, predominantly, their lending business but it manifested itself in a loss of confidence in the savings and so, therefore, the liquidity that the bank had built up in terms of its savings and wholesale funding ran, which perpetrated a further crisis whereby they weren't able to meet their liabilities.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Sorry, Mr. Fitzgerald, but the question I asked you was which caused the bank to crash. Was it ... the theory that Professor Morgan Kelly put forward was that the standard of the loan book was so poor that that caused the liquidity crisis within Anglo and other Irish banks.

Mr. Peter Fitzgerald:

I don't think that was evident to-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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I'm not asking you what was evident. I'm asking you which caused it, in your opinion.

Mr. Peter Fitzgerald:

In my opinion, it was a liquidity issue that caused the bank to crash, in that we simply couldn't meet our short-term obligations.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Not the standard of the loan book, as put forward by Professor Kelly?

Mr. Peter Fitzgerald:

Ultimately, I think that proved to be correct but in the months leading up to the guarantee, I don't think that that was evident to the bank. I think it was a short term liquidity-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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But which was correct? I'm not talking about the months prior to the guarantee, what was evidenced. Which was the case, with hindsight, Mr. Fitzgerald?

Mr. Peter Fitzgerald:

With the benefit of hindsight, it was the asset values in the bank.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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The standard of the loan book?

Mr. Peter Fitzgerald:

The standard of the loan book, I would suggest, yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Mr. Fitzgerald, Project Atlas - conducted by PwC - I think some of it had started prior to the guarantee and subsequently concluded the field work prior to Christmas 2008. The report was presented to the Minister in early 2009, the Minister for Finance, Mr. Lenihan. I think it was February 2009 it was presented. Were you aware of that?

Mr. Peter Fitzgerald:

I had no involvement in the preparation of Project Atlas.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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You had no involvement. In terms of the The New York Timesheadline in 2010 ... you were still with Anglo Irish Bank at that stage?

Mr. Peter Fitzgerald:

I was, yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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The headline that, "[Could] one bank bring down a country?" Did you think that was a fair headline?

Mr. Peter Fitzgerald:

I guess, in hindsight, it was, given the fact that we required the greatest bailout of any bank in Ireland, ultimately.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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It was a bit more than that; it was the equivalent of half of the national debt-----

Mr. Peter Fitzgerald:

Yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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-----at that stage. The NAMA figures subsequently ... that were transferred - with a discount of almost 60%, I think it was 59% - were you surprised at the level of discount?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Final question now, Senator, and then I'm moving on.

Mr. Peter Fitzgerald:

Yes. I can't honestly offer an opinion on that because I wasn't involved in the NAMA transfer process or the valuation of our loans at that time. Post-nationalisation, I was still head of retail banking, working with treasury, and so I wasn't involved in the valuation process.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Thank you, Senator. I'll bring you back in later. Deputy McGrath.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Thank you very much, Chair. Good morning, Mr. Fitzgerald. Can I just start by asking you to clarify your own position? Because from the biog and from your own witness statement, you were head of retail deposits from 2001 to the summer of 2006-----

Mr. Peter Fitzgerald:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----and then you joined the senior executive board and you became director of corporate and retail treasury and about a year later you came off the senior executive board and you went back to being head of retail deposits. Is that correct?

Mr. Peter Fitzgerald:

That's correct, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes. So what led to you coming off the senior executive board after just a year and were you promoted and then demoted or what was the situation there, moving to director of corporate and retail treasury and then head of retail deposit, or was it the same job? Just clarify.

Mr. Peter Fitzgerald:

No, it was a promotion. The advancement to the senior executive board was me taking two portfolios - one was a retail deposit portfolio and the other was a corporate treasury business, which I had been involved in previously.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. Peter Fitzgerald:

So maybe if I would just go through it. When I joined the bank, I raised corporate deposits for the bank. It was decided, for a variety of reasons, that we needed to get into the retail business in 2001. I was asked to leave that and set up a retail savings franchise for the bank, which I did.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. Peter Fitzgerald:

Following that success, David Drumm was appointing some new people onto the senior executive board, asked me to join that and brought me back in under the total customer funding unit.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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In June '06.

Mr. Peter Fitzgerald:

Exactly, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Summer of '06. Yes.

Mr. Peter Fitzgerald:

He then, about a year later, removed myself and three other individuals from that, so it had gone from a committee of about nine-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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The senior executive board.

Mr. Peter Fitzgerald:

Senior executive board.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. Peter Fitzgerald:

He removed four to bring it back down to executive director level only. So, as I mentioned earlier on, it was made up of executive directors and heads of function. His reason to me was that he wanted to just rationalise it in terms of its structure and that was it. I was a director at the time so it wasn't a demotion in terms of grade but obviously it would have been important to me to be on the senior executive board, so-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Were you a function head as head of retail deposit?

Mr. Peter Fitzgerald:

Yes, I was a function head, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay.

Mr. Peter Fitzgerald:

So I always reported in to an executive director in the bank.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay.

Mr. Peter Fitzgerald:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And that executive director was on-----

Mr. Peter Fitzgerald:

Was on the senior executive board.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----the senior executive board then and not you. You were no longer on it from-----

Mr. Peter Fitzgerald:

Yes, exactly.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----the autumn of 2008.

Mr. Peter Fitzgerald:

Exactly. So we just went back to our function, but not sitting on the senior executive board of the bank.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. In September 2008, Anglo's loan-to-deposit ratio was 160% up from 125% in September '07. So, as head of corporate and retail treasury during the period '06 towards '08, were you concerned at any time during that period that the growth in customer deposits was not sufficient to fund the growth in the bank's loan book. In other words, there was clearly a growing dependence on wholesale funding as opposed to the bank's deposit base. Was that an issue that concerned you and were you raising that with your superiors?

Mr. Peter Fitzgerald:

Yes, it was an issue. And if you go back to late 2007, early 2008, it was obvious to us that the markets that we were funding both corporate and retail deposits from were too thin. So if you take a retail deposit business, for example, we were operating out of Ireland, which is quite a small market in European terms, the Isle of Man, which is very small, and the UK had at this stage over three years produced 50% of our retail deposit funding. So we knew that we needed to diversify.

And hence I worked on a plan with my team for a retail expansion into Germany, which was actually pretty much launch-ready shortly after the nationalisation of the bank. And we presented that to Donal O'Connor at the time. And obviously the bank had been nationalised so it didn't go any further. But there was certainly a strategic intent, to your point Deputy, that we were stretching our existing markets for too much funding and we needed to get into at least one or more ... to European markets on the retail side. And the other strategic development was we had got approval in the United States to raise deposits from a limited number of jurisdictions in North America, which again would have opened up much further funding capability. So in the ... I think one of the messages from the 2008 results was that the aim of the bank, predominantly through the customer deposit side, was to be 100% loan-to-deposit ratio by 2011.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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To be less dependent on wholesale funding.

Mr. Peter Fitzgerald:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. You were a member, as you indicated to the Chairman, of the supervisory board of Anglo Irish Bank Austria. The sale of this bank in December 2008 reduced Anglo's deposit base by around €600 million at a time when the bank's overall liquidity position was coming under pressure, so can you explain why did Anglo agree to sell this subsidiary at this juncture despite the resulting loss in deposits which the bank was needing?

Mr. Peter Fitzgerald:

Yes. Okay, well, maybe just one minute of background: the sale of the Austrian private bank followed on from a strategy of the bank to divest of private banking businesses outside of Ireland and the UK, so there was a trust business in the Isle of Man which was sold in 2006, I think, a private bank in Geneva that was sold around the same time, a fledgling private banking operation in Dubai, which we closed very early on, and I was asked to lead the sale of the private bank in Austria following on from that. That sale process started before the crisis. To your point, we did pause halfway through that process as liquidity issues were hitting the bank to determine if we sell this bank we are also selling, I think, it was either €575 million or €600 million in deposits, so it was considered. I had a discussion with the CEO and the finance director about it. We decided to proceed for three reasons. One was we had ... we were now fully engaged in a sale process and, obviously, stopping the sale of a private bank in particular is quite difficult in that you've got counterparties now actively doing due diligence etc., so we felt that pulling the sale would not just reduce the value significantly then but also any further time that we were to put it on the market. That's number one. Number two, our view was that the deposits at the time were a very small percentage of our overall customer funding business, so if you think about it we may have probably had about €45 billion, I can't remember the number, of total customer deposits then and this was €600 million. I think the third was I don't think we genuinely believed that the liquidity stress that the bank was under would actually result in its total collapse. We believed that we would get through it.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Did you support the decision, agree with it at the time?

Mr. Peter Fitzgerald:

I did.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Did Anglo provide some vendor financing as such, €24 million to the buyer as part of the sale agreement?

Mr. Peter Fitzgerald:

It did, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes. And what was the rationale behind that?

Mr. Peter Fitzgerald:

I am not ... totally au faitwith that, and the reason being was that it was done at the finance division in the bank level rather than myself.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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In your witness statement you take us through the key events leading up to the autumn of 2008, and you refer to the Northern Rock issue in the autumn of 2007, then the so-called St. Patrick's Day massacre where the share price of Anglo took a hammering, and then you come to the collapse of Lehman Brothers on 15 September 2008, and you say at the end of that paragraph on page 6 that "While having survived two material events [the previous two, Northern Rock and the St. Patrick's Day share collapse], the events of September brought a new level of uncertainty for the staff and management of the Bank and with the share price now below 30c, I believe most of the senior staff honestly felt the Bank would not recover."

So, can you elaborate on that? Who were you talking about there? And on what are you basing that assertion that senior people in the bank felt the bank would not recover? And what does "not recover" mean?

Mr. Peter Fitzgerald:

Okay. Yes, well, to put that in perspective, really, I suppose, what I was observing in my statement was the stress that the bank had been under for such an extended period at that stage. I think it was predominantly around the fact that we had no answers to the constant outflow of customer and wholesale deposits at that stage in that every day was just a fight to try and reassure customers, to try and retell our story, to try and outline that we had no mortgage lending, and all of the other types of answers we would have been giving to the marketplace.

I also think that when the share price went to the point that it did, it probably made equity raising very, very difficult for the bank. And so, without specific, you know, sitting down and saying, "Oh, this has to be the end", I think what I was describing really was just a sense in the bank that, you know, we were in serious trouble here.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Sure, but, I mean, the sense comes from what people were saying and what you were hearing and what was being discussed.

Mr. Peter Fitzgerald:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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What I'm asking you is do you believe that the people who were running Anglo Irish Bank in the second half of September 2008, before the guarantee, felt the game was up, that the bank really had no long-term future?

Mr. Peter Fitzgerald:

I think that's ... yes, I think that's a fair assessment.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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That they knew the bank would not survive?

Mr. Peter Fitzgerald:

I think the bank ... I think we felt that the bank had very, very serious issues and that it-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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But were existential issues.

Mr. Peter Fitzgerald:

Yes. Genuinely I'm trying to be as helpful as I can here but it is my view.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes, and what are you basing that view on?

Mr. Peter Fitzgerald:

I'm basing that view on conversations where we had no answers at that time and an incredibly stressful environment where we had been trying as many things as we possibly could to try and restore confidence in the bank.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And do you believe that those grave concerns about the survival of the bank pre-guarantee in September 2008 were shared with the authorities?

Mr. Peter Fitzgerald:

I had no involvement with the authorities but I had a sense that they were. I had a sense that there was lots of conversations externally as to how we might rectify the situation for the bank but I wasn't a party to them. I wasn't at that level ... I cannot explain to you ... at executive ... the level of board level, so I don't know.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Can I just ask you about the area that you had responsibility for? And when I look at the annual report for Anglo at September 2008, which was the year end, the amount of customer deposits was €51.5 billion, of which retail deposits were €19 billion and non-retail deposits were over €32 billion. So, this is the very end of September 2008. Can you define "retail deposits" first, Mr. Fitzgerald? What are retail deposits?

Mr. Peter Fitzgerald:

Sure, yes. Retail deposits are deposits from individual customers.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Persons, individuals?

Mr. Peter Fitzgerald:

Yes, persons. There may have been, but it's a tiny, tiny percentage of, you know, sole traders, kind of, owner-managers, where they might have used their ... but, we're talking less than ... we're talking hundreds of thousands of euros and very few of them in that it did actually fit into the definition of "retail", but, in the main, it was either individual or joint savings accounts.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay, and that €19 billion of retail deposits, how much of that would have been in Ireland? This is the group figure now. The bank was €14.7 billion, the group, €19 billion, broadly speaking.

Mr. Peter Fitzgerald:

Well, yes, working backwards, €10 billion of it came from the UK in euro equivalent. There was probably €4 billion from the Isle of Man and the balance from Ireland, so, €6 billion to €7 billion, I would suggest, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. And then non-retail deposits of €32 billion. What are non-retail deposits?

Mr. Peter Fitzgerald:

Non-retail deposits are anything from an incorporated entity.

It could have been from a-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay.

Mr. Peter Fitzgerald:

-----a small business with €100,000 on deposit up to a financial ... or a fund manager in the UK who gave us €600 million-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay.

Mr. Peter Fitzgerald:

-----on deposit here.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And how much volatility was there in the overall level of deposits that the bank was holding? Would some of those non-retail deposits be overnight deposits which were flowing in and out? Can you give us the sense of the level of movement?

Mr. Peter Fitzgerald:

Sure. Well, the retail business, you could take it that 50% of it was in one-year fixed deposit accounts.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay.

Mr. Peter Fitzgerald:

The bank only sold two types of deposit accounts. You either had on-demand or it was a one-year fixed. It didn't get any more complicated than that.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay.

Mr. Peter Fitzgerald:

And, so 50% of the retail deposits, being the €19 billion, was basically at risk of moving at a phone call's notice; 50% of that would have required notice for whenever the maturity was coming up to say, "I'd like to have it repaid".

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. Were you in charge of non-retail deposits as well?

Mr. Peter Fitzgerald:

I was, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Even when you were - your title was head of retail deposits - you were in charge of non-retail deposits?

Mr. Peter Fitzgerald:

No, I was in charge of retail deposits ... in around 2000, I think, it was either July or August 2008, my role changed again, where David Drumm asked me to ... basically because the retail business was proving, I suppose, the future, going back to my earlier piece where if we could have 100% of loan-to-deposit ratio, a huge portion of that would be from retail.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay.

Mr. Peter Fitzgerald:

He asked me to concentrate on the retail business and actually move it across into something that's much more operational, as in-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay.

Mr. Peter Fitzgerald:

-----go in under the head of operations for the bank. Now, that said, that was a conversation before the year-end. I would have still been quite active in the corporate deposit area-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay.

Mr. Peter Fitzgerald:

-----right up to the end.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Just to clarify, on top of the €51 billion of retail and non-retail, then there were interbank deposits of €20 billion. That wouldn't have fallen under your area.

Mr. Peter Fitzgerald:

No.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Was that under treasury?

Mr. Peter Fitzgerald:

Yes, it was treasury, but on the capital market side-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay.

Mr. Peter Fitzgerald:

-----and liquidities.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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So, talk me through the scenario where at the end of September 2008. If Anglo had collapsed or had been allowed to collapse, how would this have worked itself out? You had €51.5 billion of customer deposits. How much cash should you have on hand? If the bank collapsed, how would it have played out?

Mr. Peter Fitzgerald:

I don't know if I can answer that with any level of qualification.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Your opinion is all I'm asking.

Mr. Peter Fitzgerald:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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You know, you were in charge of all the deposits.

Mr. Peter Fitzgerald:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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If the bank didn't open its doors in early October 2008, how would it have played out?

Mr. Peter Fitzgerald:

As in if there was no back-stop funding facility available for the bank?

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes, if the bank collapsed.

Mr. Peter Fitzgerald:

Liquidation. Yes, liquidation, I presume, where the retail deposit customers would have been covered. If you remember, back on 20 September-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. Peter Fitzgerald:

-----deposit protection increased to €100,000.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. Peter Fitzgerald:

So two things happened then. Now, it was only within a week of the Government guarantee, so-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
Link to this: Individually | In context | Oireachtas source

So the State would have had to pick up the-----

Mr. Peter Fitzgerald:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And that-----

Mr. Peter Fitzgerald:

And there was-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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That figure ... that sum would have run into several billion, which the State would have had to pay.

Mr. Peter Fitzgerald:

If the fund was sufficient enough to pay. So, obviously, the deposit protection fund is a fund-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. Peter Fitzgerald:

-----which the Minister guarantees to top up-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes. And it wasn't sufficient at the time but, yes.

Mr. Peter Fitzgerald:

Yes. So, I can only assume liquidation, where retail deposit customers would have been covered up to the deposit protection scheme ... would have been at risk thereafter. Corporate deposit customers would have been totally at risk, based on the proceeds of a liquidation. Sorry, is that satisfactory?

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes, I'm just trying-----

Mr. Peter Fitzgerald:

I'm trying to be as helpful as I can.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----to tease out that scenario. You were in charge of the whole deposit area. There were over €51 billion of deposits that you had direct responsibility for. You have conceded that Anglo was facing an existential crisis. The State intervened, as we know; we know what happened since. We don't know the other scenario, which never played itself out.

Mr. Peter Fitzgerald:

True.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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So I think it's important just to ask that question. Finally, from the period, March 2008 until the end of September 2008, the liquidity situation was changing very quickly.

Mr. Peter Fitzgerald:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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What level of concern did you have over that period of time about the liquidity position of the bank?

Mr. Peter Fitzgerald:

Well, through the ALCO committee on which I sat, the bank had internal liquidity ratios, and also then it had regulatory liquidity ratios. So I won't go into the regulatory liquidity ratio now in terms of detail but it basically meant that from a regulatory point of view ... and I think this came in in the middle of ... or the start of 2007, the bank had to hold an amount of liquidity that was able to meet any outflows within 30 days with inflows in 30 days. The bank ... and we then set more stringent internal liquidity ratios, and it's evident in the minutes of the ALCO meetings that the bank actually held its line in terms of liquidity ... regulatory liquidity until ... practically up to the collapse of Lehman's. So, while liquidity was incredibly volatile, yes, the bank was liquid, yes? So it had a lot of liquidity; in fact, we were lenders into the market for quite a period of time. And the liquidity ratios as set by the Central Bank or the Financial Regulator were actually only breached almost September time, when liquidity stress became the most severe. But, obviously, from March right through, we were concerned daily about larger customers pulling credit lines that they had for the bank, ongoing retail worries where people weren't renewing their savings accounts when they hit a one-year maturity, as I described earlier. But, from a liquidity point of view, we were sound until Lehman's, in effect.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay, thank you.

Mr. Peter Fitzgerald:

And then it was very swift.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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If I may stay with that for a moment with Mr. Fitzgerald, in that, in December 2007, the group ALCO - or asset and liability committee - and the ALCO liquidity committee approved a stress testing and scenario analysis. I'll just bring it up on the screen there, just an example of it. This relates, I think, it's to you ... it's one of the core documents, Vol. 2, 37 to 59. I think it's two or three pages into that document. And the title of it is, "Stress testing: a scenario analysis - funding, liquidity, risk policy". This details a number of stress scenarios against the bank's liquidity and how they would be tested. Were you involved in developing or writing this policy?

Mr. Peter Fitzgerald:

I wasn't. It was presented, I've seen, and approved by the ALCO, by the liquidity ... by, it was ... this was put together by group risk and by the group trading and liquidity management function of the bank. And it was then presented into ALCO ... sorry, asset and liability committee-----

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

Mr. Peter Fitzgerald:

-----and approved by them, and then on to the board ... risk and compliance of the main board.

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

Mr. Peter Fitzgerald:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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The policy does not include an extreme doomsday scenario similar to that which occurred post the collapse of Lehman Brothers. Can you explain why that wasn't the case in this instance?

Mr. Peter Fitzgerald:

I just don't think it was envisaged. I mean, when I was looking at this in terms of my preparations for today, one of the things that struck me was that while the bank had, I suppose, adequately put forward a variety of different stresses that may occur to affect its liquidity and funding, practically all of them occurred throughout certainly the latter half of 2008, either to some degree and then, finally, all degree, yes? So, if you look here at the ... and this was done, I suppose, at a time when the outlook was more benign but we are regarding the probability of a neutral stress as being most likely then, and then very low probabilities attaching to even an Irish-specific market event.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And that is December 2007.

Mr. Peter Fitzgerald:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Just about nine months later, the bank doesn't go beyond the point of rescue; it actually gets rescued-----

Mr. Peter Fitzgerald:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----in September 2008 and in January 2009, the bank is nationalised. In the period leading up to the guarantee, were you aware of any discussions that might have been taking place in Anglo that the bank was seeking to be guaranteed or may be guaranteed?

Mr. Peter Fitzgerald:

Not at all. I learned of the guarantee in ... on the morning itself, on the way into work.

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

Mr. Peter Fitzgerald:

So, I had no insight into that.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Were you surprised that your bank was guaranteed, or were you not?

Mr. Peter Fitzgerald:

I was relieved, but I wasn't surprised, no.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And why were you not surprised?

Mr. Peter Fitzgerald:

I didn't think at the time that there were choices being made as to who was being guaranteed or otherwise. I thought it was a general blanket guarantee to sort a systemic issue. It's only in hindsight that I learned that there was a debate as to whether the bank should be included together with the INBS or not.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And from hindsight what is your understanding of the rationale as to why Anglo Irish Bank was guaranteed?

Mr. Peter Fitzgerald:

From hindsight my understanding?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, as and from now.

Mr. Peter Fitzgerald:

That it was systemic.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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That it was systemic.

Mr. Peter Fitzgerald:

Yes, systemically important.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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The bank was subsequently nationalised in January '09 and this committee has heard evidence in regard to ... that even nationalisation of Anglo was considered on the night of the guarantee. When did you first become aware of any consideration that your bank might be nationalised?

Mr. Peter Fitzgerald:

The ... I became aware from a phone call on the evening of its nationalisation, in other words about two hours beforehand.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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There was ... and was there any discussion or debate or consideration in the ether, to the best of your knowledge, through any period prior to that, either prior to the guarantee or prior to the nationalisation itself, that Anglo was going to be nationalised?

Mr. Peter Fitzgerald:

Not that I was aware of or a party to. As I said, I think it was announced ... it might have been announced on the national broadcaster in the 9 o'clock news.

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

Mr. Peter Fitzgerald:

I remember I found out about it through a phone call from a senior executive at 7 o'clock that evening.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, and no other indication to your knowledge?

Mr. Peter Fitzgerald:

None.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Thank you. Deputy Kieran O'Donnell.

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

In September 2008, Anglo's - and I'm referencing Vol. 2, page 33, its board's presentation and strategic options - and in September '08 Anglo's loan-to-deposit ratio was 160%. That's up from 125% in September 2007. That's roughly a year. Did you regard Anglo's increasing dependence on wholesale funding as a risk to the bank and would you've ever raised these concerns with other members of the senior management team?

Mr. Peter Fitzgerald:

Thanks, Deputy. Yes, I think I might have dealt with that earlier on where-----

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

Mr. Peter Fitzgerald:

Certainly it was a concern to the bank. It was discussed at ALCO. It would have been discussed with the senior executive in terms of, I suppose, the stretch that we were putting on the funding to cover that amount of lending. But, equally, we were funding sufficiently at the time and the long-term aim was that we have 100% loan-to-deposit ratio with further initiatives. So, if you look back, we had already moved funding from very, very small and humble beginnings - '80s, '90s, 2000. Probably what surprised us was the success of the business in the UK market which was tentative to start off with - very competitive market - and therefore we were looking at at least one new European market in the following 12 months to try and redress that. But, it was a concern and it was discussed.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And would you have been aware of the level of ECB funding that Anglo would have been looking to source, we'll say, as its deposits base was drying up?

Mr. Peter Fitzgerald:

Yes, to be honest, again there was three divisions in treasury and that wasn't one of mine.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And how big of a factor was ... when the contracts for difference issue arose with Mr. Quinn, were you aware of that? When did you become first aware of the contracts for difference issue between Anglo Irish Bank and Mr. Quinn?

Mr. Peter Fitzgerald:

Can I seek the direction of the Chairman on that? Is that-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I just need your attention there. I was just taking a note-----

Mr. Peter Fitzgerald:

I'm sorry, just in terms-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What I was asking really, Chairman, was I am really trying to-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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What's the question?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Really, what was the impact of the contracts for difference in terms of Mr. Fitzgerald's capacity to source deposits for Anglo? The question, I suppose, I was asking was, the contracts for difference in terms of Mr. Quinn and Anglo, what impact did that have on Mr. Fitzgerald's role as securing deposits for Anglo?

Mr. Peter Fitzgerald:

In terms of, I suppose, the ... any legal action, just any legal action relating to Mr. Quinn, that position, its effect on the bank, and knowledge of that in the bank, I've just ... I have concern ... I have concern voicing something today that might be prejudicial in six months' time.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I would err on the safest side, on the side of safety. The issue of Mr. Quinn's involvement with Anglo Irish Bank has been discussed at this committee before-----

Mr. Peter Fitzgerald:

Okay.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----so if your concern is in regard to just entering that into the debate at this committee, I wouldn't consider that a concern. But if you have material information that is related to a potential or pending matter that's under consideration by the DPP, I would ask you to take a more cautious approach.

Mr. Peter Fitzgerald:

No, no, I understand, and thank you, Chairman. So, if your question is in relation to how it affected my role-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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In accessing deposits for Anglo.

Mr. Peter Fitzgerald:

I am advised that we should seek a short adjournment, if that's okay.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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That is more than accommodating. What I propose is, if you need to speak to your own legal team there, I'll certainly accommodate that. I presume that you just need maybe about five minutes, Mr. Fitzgerald. If you need longer than that, just come back to me.

Mr. Peter Fitzgerald:

That's fine. I just want to get clarity as to where I can go with this.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Just adjourn, and I'll just put the meeting into a very short suspension for a couple of minutes. Okay?

Mr. Peter Fitzgerald:

Okay. Thank you, Chairman.

Sitting suspended at 10.17 a.m. and resumed at 10.35 a.m.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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All right. I propose we go back into public session so. And if maybe Deputy O'Donnell could just maybe resummarise the question again, and then I'll go back to Mr. Fitzgerald.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Thank you, Chairman. Mr. Fitzpatrick, just to recap the question I asked-----

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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His name is Fitzgerald.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Mr. Fitzgerald. What did I say?

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Fitzpatrick.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Fitzpatrick.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Fitzgerald. To recap on the question, what I'd like to know is when did you first become aware of rumours that the Quinn contracts for difference with Anglo Irish Bank shares was happening. And did that have an impact on your role in terms of your capacity to raise deposits for Anglo Irish Bank?

Mr. Peter Fitzgerald:

Okay. I was aware of Mr. Quinn's reported stake in the bank.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

When did you first become aware?

(Interruptions).

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Yes, when did you first hear the rumours?

Mr. Peter Fitzgerald:

I cannot recall when.

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

Mr. Peter Fitzgerald:

Roughly the start of 2008, maybe.

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

Mr. Peter Fitzgerald:

Yes. And in terms of the second part of your question, the rumours that were in the marketplace - and I think are already talked about in the public domain - about the reasons for the short-selling of the Anglo Irish Bank share price really only affected the business that I ran in the bank on 17 March.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

17 March.

Mr. Peter Fitzgerald:

Exactly.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

When the share-----

Mr. Peter Fitzgerald:

Exactly.

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

Mr. Peter Fitzgerald:

So what was the impact of that? So-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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17 March is when the share price-----

Mr. Peter Fitzgerald:

Apologies, yes ... 17 March ... the Patrick's Day-----

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

Mr. Peter Fitzgerald:

-----massacre, as it was named afterwards. So the share price of the bank fell substantially - I think at the end of the day it was close to 15% or more - and that caused obviously considerable stress among savers. It precipitated a short run on the bank ... and what I would describe as "run" is thousands of calls over the course of a number of days.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

That was in the week after the 17th.

Mr. Peter Fitzgerald:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Patrick's Day '08.

Mr. Peter Fitzgerald:

Yes, so the day after for approximately four days. And it went broadly unabated to the extent that it was-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And were these both corporate and retail deposits?

Mr. Peter Fitzgerald:

Both corporate and retail deposits, yes. There was then an announcement by the Financial Regulator of an investigation into short-selling. I'm not sure whether it was just of bank stocks or in the Irish marketplace. I believe that was on a Friday. And when that announcement was made, the share price rose, withdrawals abated and eventually stopped. So it was a real spike impact, to answer your question.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay, and in your presentation - and following on from Deputy McGrath - you said this was about the post-Lehman's 15 September 2008 collapse. And your last sentence is "I believe most of the senior staff honestly [felt] the bank [would] not recover." And then you said there was no answer at that time, when you spoke earlier. What do you mean by that, that there was no answer?

Mr. Peter Fitzgerald:

I personally believe that the bank felt it needed external assistance.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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When you say "external assistance", what form?

Mr. Peter Fitzgerald:

Well, I genuinely believe the bank didn't feel it could survive on its own.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And are you talking about liquidity or capital investment?

Mr. Peter Fitzgerald:

I'm talking about ... well, liquidity at the time.

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

Mr. Peter Fitzgerald:

As I mentioned previously, I don't believe the bank believed that it was requiring capital investment at the time. And so that was my sense, that the bank felt we won’t be able to survive as an independent entity as Anglo Irish Bank.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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From what time would you have felt that was the view in the bank? From what period?

Mr. Peter Fitzgerald:

I think very late in September, very late in September.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And was that emanating from the top down in the bank?

Mr. Peter Fitzgerald:

I didn’t have a huge interaction with the chairman or members of the board at the time but certainly among my peers-----

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

Mr. Peter Fitzgerald:

No I don't think I got that directly from the CEO but certainly among the divisional heads in the bank and especially in treasury where we were seeing the greatest impact of the outflows and as I mentioned earlier on every day was more difficult than the next, certainly post the collapse of Lehman's.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And what was generally the atmosphere like in Anglo say in that month of September? What was it like amongst the staff? Was it crisis management, was it chaos, was it chaotic? What was it like to be head of a division dealing with staff, dealing with customers? Did you feel the end was nigh, what was generally the ... describe to me the atmosphere?

Mr. Peter Fitzgerald:

I think very difficult obviously, very worrying obviously. The bank had built up very, very strong, I mean one of the ... one of the great cultural things about Anglo was its relationships with customers, and I think that’s well documented. So, you know, we didn’t have an online banking system, you know, customers dealt with us by phone, yes. The fear with customers was palpable despite deposit protection, despite maybe having removed some of their savings, they were very, very worried that the bank was not going to survive and that their deposits would be lost. I think it’s very, very true to say that. The stress on the staff was dealing with that, trying to reassure them as best as possible that we were doing everything we could and I think generally then among staff themselves, having been through the bones of nine months of almost constant stress - and certainly from my perspective I would have managed three runs on our savings business in particular-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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From the St. Patrick’s Day massacre?

Mr. Peter Fitzgerald:

Well from Northern Rock, thousands of calls, Patrick’s Day massacre, thousands of calls, in around September, thousands of calls. I mean, an anecdote is, you know, we were moving customers that called to our savings branches which we had a number of, well predominantly in Dublin, off the street and into meeting rooms in the back of the building to avoid precipitating a crisis by people seeing a queue outside the bank on Stephen’s Green.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So there was a real worry-----

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

Last question please Deputy.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Sorry yes, so there was a real worry in Anglo-----

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

Last question.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Sorry, was there a concern in Anglo that you would see people queuing in the streets to take out their deposits?

Mr. Peter Fitzgerald:

Oh very much.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Can I just very ... just one-----

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

I need discipline now from everyone.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I will be very quick. There was a dinner with Mr. Cowen, the then Minister for Finance, on 24 April in Stephen’s Green. Were you present at that dinner?

Mr. Peter Fitzgerald:

I wasn't.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
Link to this: Individually | In context | Oireachtas source

Okay, thank you.

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

Senator Susan O’Keeffe, ten minutes Senator.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Thanks Chair. Mr. Fitzgerald, why in your opinion, despite the fact that the bank appears to have undertaken regular stress testing on its liquidity position, did the bank not react sooner and more robustly to the liquidity crisis as September unfolded?

Mr. Peter Fitzgerald:

I believe, sorry, as I said earlier on, I believe from my experience - and I was on the customer funding side as opposed to the interbank or wholesale market side where it was predominantly managing the liquidity of the bank – but I do believe that every option was being explored to deal with that.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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And by "every option" can you give us some indication of what you mean by "every option"?

Mr. Peter Fitzgerald:

Well I can't, it’s a highly specialist area so I ... it would be wrong of me to try and inform you of that.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Would you say that the bank had its own emergency plan to deal with the crisis or were you making plans as the crisis changed?

Mr. Peter Fitzgerald:

I certainly think the latter is true. I think we would have always had overflow arrangements, as I mentioned earlier on we had outsourced call centres, we had plans for escalation of calls, both for good reasons and bad. In other words, if we had a market leading product we’d get more calls, if we had a negative environment we’d get more calls. Unfortunately from 2007 on it was predominantly the latter. So we had, I think, sound operational plans in place to deal with high volumes and stress and what I mean by that, just referring to the earlier piece, of just being able to control the environment as best we could with staff working late, etc. I don’t think we had a plan to deal with every aspect of our funding sources drying up over that sustained period but also then in a very, very stressed way from the collapse of Lehman’s, which really was a turning point, as I mentioned, in terms of breaching our regulatory liquidity requirements and just the sheer volume of outflows every day.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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As you said, you could see that sheer volume of outflow and it was, as you said in your statement, effectively a sustained run on the bank albeit not a public run in the way that we might understand. In what way was that run being made known to the Department of Finance, to the Central Bank to the Financial Regulator? How was that ... how was the severity of the crisis transmitted to those people?

Mr. Peter Fitzgerald:

Yes, I understand-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
Link to this: Individually | In context | Oireachtas source

If indeed it was.

Mr. Peter Fitzgerald:

Yes, true. The only piece that I am aware of, because I wasn’t - and I mentioned in my statement earlier on - I wasn’t party to conversations with the regulator, the Department of Finance or Central Bank. So, from my perspective I know that our risk function would have sent a daily, if not twice daily, report generated from the bank’s systems of our liquidity position to the Financial Regulator. It was on their behest and going right back to early in the crisis, so it was now a formal part of our day.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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So sorry, when you say "early in the crisis" do you mean January ’08 or September ’07?

Mr. Peter Fitzgerald:

No it might have been slightly, I can’t remember, I mean, first or second quarter of 2008.

Mr. Peter Fitzgerald:

We started this ... three o’clock, I remember it’s three o’clock, either call or -----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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But as it turned into a sustained run there, after Lehman’s, did you do anything or were you asked to do anything different as that accelerated before your eyes?

Mr. Peter Fitzgerald:

For me it was managing what was in front of us at the time on the treasury side. At levels more senior than me I assume, and I don’t know, that there was pretty significant engagement with the Financial Regulator, but as I said I wasn’t party to it so I don’t know.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Okay, you say in your own statement on page 6, you talk about, you know, finding in hindsight the sort of problems that Nyberg showed – "That credit risk management structures [in the Bank] were, in practice, deficient [and there was] ineffective overview of Group credit decisions", and so on. And you say, “Look that wasn’t part of my detail, but I know about them now.” But on your side of banking are you saying that while there were problems on the other parts of the bank, there weren’t similar kinds of problems, deficiencies, lack of governance-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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There is phone interference there Senator, somewhere in proximity to you.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Sorry, you know, what were the problems on your side or were there any?

Mr. Peter Fitzgerald:

Well if you think about what the treasury business was doing, it was basically taking money, predominantly from counterparties as opposed to lending it, so the risk was on their side as opposed to ours, yes?

Mr. Peter Fitzgerald:

So while we had credit risk around interest rate management and around volatility of currency and lots of things that you’d expect on a treasury operation, it was a very, very different business. It was a very transactional business as opposed to committing bank funds based on longer-term lending decisions.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Sure I appreciate the difference but what I’m asking you is whether or not your side of the bank was clean and pure while there were other activities going on in the other parts that-----

Mr. Peter Fitzgerald:

Yes, I understand what you are saying. I’m just trying to think in relation to our own business. I don’t recall significant governance issues on the liability side of Anglo’s business as opposed to ... as compared to those that have transpired on the asset side. And that’s ... I’m being as helpful as I can but I don’t think-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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In those last few weeks of September were you aware that, if you like, Anglo was now trying to find a partner, trying to find somebody to save the business, talking to other banks, talking to anybody who would talk to Anglo? Was that known among you generally?

Mr. Peter Fitzgerald:

It wasn't known and certainly I’m aware now that the chairman and chief executive at the time would have contacted AIB, Bank of Ireland, etc. That was news to me on hearing about it post event.

What I did know was their reasonably strenuous interactions, and perhaps at board level as well, with the Financial Regulator and perhaps the Central Bank about the funding position of the bank and the deteriorating funding position of the bank. So, anecdotally, I would have heard that in the corridors of the bank but in terms of trying to partner the bank or, you know, sell the bank or merge the bank with another entity, I hadn't insight into that.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Senator D'Arcy raised the matter of, you know, "Can one bank bring down a nation?", the headline of 2010 in The New York Times. Would it have been your view or anybody ... well, would it have been your view much earlier than that that, in fact, the bank had brought down a nation or could bring down a nation?

Mr. Peter Fitzgerald:

No, it wouldn't, no.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Not even ... not even, sort of, after 2008-2009 when it was nationalised.

Mr. Peter Fitzgerald:

No, because I don't think the extent of the losses that ultimately came about on those transfers across to NAMA, which I think were €21 billion ... until they came to light, with fresh eyes on the risks that the bank had undertaken and the credit assessment of the recoverability of the loans that had been made over the previous five-ten years, I wouldn't have had any foresight that that level of loss could have been perpetrated by the bank on the lending side of its activities - genuinely.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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The public would say, having looked across the years, that, you know, bankers had a good time, bankers were paid well, they were incentivised, they had good salaries, they had good pensions and they got away lightly given what had happened. Is that true? Was that true for you?

Mr. Peter Fitzgerald:

Personally?

Mr. Peter Fitzgerald:

I genuinely believe that when I worked with Anglo Irish Bank in the area that I did, that we built a business that was successful, albeit it turned out to be flawed in terms of the thinness of the funding basis that we were building to support the lending. I know that on that side of the business, we certainly worked hard and had some successes. When we look back, I think we had a responsibility and accountability obviously for what happened - most certainly. I don't know whether I could honestly give a view for bankers whether everybody got off lightly or otherwise. Everybody has had to deal with it in their own particular way, I think, in terms of the changed banking environment now.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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And finally, Mr. Fitzgerald, do you think that the contracts for difference situation in fact was the piece that brought the bank down?

Mr. Peter Fitzgerald:

I ... unfortunately, I'm going to have look for direction on that. It ... I've been legally advised that I shouldn't cover that area.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I think if you go into that space, there are prejudgments that could be in that.

Mr. Peter Fitzgerald:

I definitely think I would be putting myself and the committee at risk.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I would concur with your position. Senator O'Keeffe's time is up anyway, which is just convenient. Deputy Joe Higgins, please.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Mr. Fitzgerald, in page 3 of your written opening statement, you say:

[T]he size of deposits taken from individual customers however grew significantly from 2005 onwards [where] some 'institutional' clients had over €1 billion placed on overnight deposit with the Bank. This concentration level meant the deposits in the Bank became increasingly more volatile and, while every effort was made by the treasury teams to attract deposits from a wider range of small customers, the growth in deposits and other funding sources required to fund the huge volume of lending growth during the period from 2005 onwards made that task almost impossible.

And you finish by saying, on this point, that "This was to lead to significant problems for the Bank in 2008." Can I ask you did you ever express this concern to any member of senior management as it became clearer to you the type of problems that were emerging?

Mr. Peter Fitzgerald:

Okay. Well, if I could for a moment, I just want to put that ... put a little bit of context around my statement there because the ... I'm sorry, without going on too much of a tangent but when I worked in First Active Building Society very early on in my banking career, savers would come in and they would lodge regular savings or small deposits with the bank ... with the building society through a multitude of branches which would then result in mortgages for 20 and 25 years being issued.

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

Mr. Peter Fitzgerald:

Yes. There was no treasury function-corporate deposit-taking function of note in the building society at that time and it was a stable business. The context of my point there was that, while we operated in treasury and started off life very early on taking hundreds of thousands of euros from deposits ... in deposits from customers, the loan growth and the general market environment meant that customers had ... corporate customers, in particular, had a lot more money. I used the billion euro overnight deposit as just an example. There may have been one or two in those but for me-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes, but essentially you could sum it up by saying you became quite dependent on large corporate-----

Mr. Peter Fitzgerald:

Yes, and it increased the volatility for sure.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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-----deposits, yes.

Mr. Peter Fitzgerald:

And we did discuss that. We were aware of the risk of that.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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And who did you discuss it with?

Mr. Peter Fitzgerald:

We would have discussed it at the ALCO committee of the bank, which would have gone to the board risk and compliance committee. We would have had customer concentration lists in terms of the largest customers.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes, and would the top management have been ... above your level, have been aware of this?

Mr. Peter Fitzgerald:

They would have indeed. Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Were any plans, at any stage say from 2005 on, put in place to mitigate the impact?

Mr. Peter Fitzgerald:

Yes. So, as I've mentioned, we had opened from ... in the 2000s we had opened new centres to try and get more customers, to try and get more granular deposits.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay, that was to try and spread the-----

Mr. Peter Fitzgerald:

Exactly, yes.

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

Mr. Peter Fitzgerald:

And, just to finish, I think while those plans were in place, the liquidity crisis of 2008, from a timing perspective, just caught up with a lot of those plans.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Right, I'll just move on because of time, Mr. Fitzgerald. On page 10 and 11 of your statement, you say:

Merrill Lynch, BNP and Barclays Capital Markets were separately retained in 2007 to conduct a detailed due diligence of the Bank's balance sheet. The resulting findings highlighted, among other matters, the Banks high concentration to property and development lending, the thin nature of its funding base and the possible need to raise more equity as a capital buffer for possible future [use].

Did each of those entities make a report, a formal report, to you?

Mr. Peter Fitzgerald:

They developed their findings and report ... and made them in a report to the bank, yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Each had a written report to the bank.

Mr. Peter Fitzgerald:

Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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And where did these reports go? Who ... were they discussed?

Mr. Peter Fitzgerald:

Oh yes. So, each of the counterparties mentioned presented, over perhaps a half day, to the executive directors of the bank and a selection of the management team. Then the report was obviously left at the end of that and it was discussed. I don't know if those reports were then brought by the executive directors up to the board.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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You don't know if they were presented to the board.

Mr. Peter Fitzgerald:

I don't know, no.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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You would expect that they would, would you?

Mr. Peter Fitzgerald:

I would expect that those findings certainly would have been passed on to the board, yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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They haven't ... those three reports, Chair, haven't appeared in our evidence book. I mean, it seems to me that they are very material. The resulting findings, according to Mr. Fitzgerald, are quite stark, you know, again highlighting the concentration to property and development lending, the thin nature of the funding and the need to raise more equity. So, could we, at this stage, for further consideration, request that these come from IBRC?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I'll have that noted today, Deputy.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes, thank you. Okay. On page 11 again, Mr. Fitzgerald, you say, and I quote:

[T]he bank found it extremely difficult to reduce or stop lending as the crisis worsened. This in part was down to contractual commitments to borrowers and also the risk that, without further lending, some development projects would cease and result in significant immediate loan default.

And then you say that in the first part of 2008 a, by any standards massive, €6.5 billion was lent out.

This is a ... is this a very, very kind of a stark situation, Mr. Fitzgerald, that you are locked into something as if it is out of your control, despite the fact that everything should be saying that you should be cutting back on lending? I mean, a picture that came to my mind, would it be too dramatic to describe Anglo as let's say a "legal prescription drug supplier" with a highly addicted client who shouldn't ... who should be weaned off the stuff but you are terrified of the effects of cold turkey, economic arrest, cardiac arrest or something like this? Is ... does this paint, does this in your mind paint a very stark picture in retrospect?

Mr. Peter Fitzgerald:

I don't think your analogy is offside at all, in that I know that we obviously had - and if we just break it down, I suppose, when you are trying to curtail lending to a client base that have a multitude of projects that are on-running, etc. - then you basically have, as I mentioned earlier on and just, I suppose in context as well, I wasn't on the lending side ... I was just aware of the funding implications, yes, of the continued lending in 2008.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Can I ask you, Mr. Fitzgerald, then, just to ... did that situation arise largely from the methods of Anglo? Large loans, for example, for speculative land development and then to justify this you had to fund the developers who were speculating with a construction of some kind to go on it.

Mr. Peter Fitzgerald:

That-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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It was an inevitable consequence of this method of work.

Mr. Peter Fitzgerald:

I don't, I couldn't give you an informed answer on that because I wasn't on the lending side of the business. I suppose the highest level-view that I could give you on it was that lending to try and stop the lending machine in Anglo, yes, from the start of 2008 or maybe the last quarter of 2007, involved careful choosing of which projects that could be backed, I believe, which projects would need to be not backed any further. And I suppose the point and the reason I put it in my statement was that stopping lending outright when a crisis hits - and it may well have been a factor for all of banks, all of the banks that were hit by the crisis - proved very difficult for Anglo and I don't think your analogy is wrong either.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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And Mr. Fitzgerald, was this partly what left us, for example, with a multitude of ghost estates? That the initial lending had been made to buy but then the crisis came and no more-----

Mr. Peter Fitzgerald:

I think that is very possible, yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes. But did it not occur to you, Mr. Fitzgerald, an experienced financial person who keeps an eye on world affairs, that booms like this inevitably slump and crash, so it's a musical chair but at some stage the music will stop?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You must give way now, Deputy.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Would that not have occurred to you in the course of the 2000s?

Mr. Peter Fitzgerald:

Yes. To be honest, Deputy, I had no experience of that other than a growth environment for the bank. I believed the model that we operated was sound until it was evident that it wasn't.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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My very last question, Mr. Fitzgerald for the time, I beg your pardon, is this. Again, to say, to quote you, "[A]s I understand it, a substantial portion of the [total] new net lending figure of €6.5 billion in 2008 was lent in the first half of 2008 when funding the existing balance sheet was becoming increasingly more difficult". Mr. Fitzgerald, was that reckless trading to dole out €6.8 billion at a time when you had difficulty funding the existing commitments?

Mr. Peter Fitzgerald:

The only comment I would make on that, I think, is that what I was looking to do was describe the challenge of maintaining and growing funding, together with curtailing, as best as possible, the amount of lending. If that was the net result that was probably the best the bank could have done at the time. I would also add that it was our view that the credit crisis would abate and that it would resolve. If you look at the results, the presentation of the bank in 2008, it was for, you know, dislocation in the markets to last for another 12 months, maybe 18 months, and then we would regain traction. So it was about slowing, curtailing growth so that we could recover and move on. I think there was never a view in the bank that, quite obviously, that we wouldn't see it to the end of the year.

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

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. I'd like to move towards wrapping up and in doing so I invite Senator D'Arcy in please. Senator D'Arcy, three minutes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Mr. Fitzgerald, what was your salary and bonuses at the peak during the boom?

Mr. Peter Fitzgerald:

Can I ask direction on that, Chairman?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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That's a matter that has been raised with a number of other witnesses that have been before the committee, Mr. Fitzgerald. It is your prerogative whether you wish to answer that or not.

Mr. Peter Fitzgerald:

I'd prefer not to answer that question, if that is okay.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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Mr. Fitzgerald, in terms of your role in retail and non-retail deposits, can I ask in terms of anti-money laundering legislation, was that high on your list of issues to be dealt with and did you have any interaction with the Financial Regulator in that matter?

Mr. Peter Fitzgerald:

It was very high on the agenda. We were inspected on it regularly, externally as well as internally, but I didn't have interaction with the Financial Regulator - it would have been through the group compliance function of the bank.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And Mr. Fitzgerald, to finish, did you read the Simon Carswell book?

Mr. Peter Fitzgerald:

I did, yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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In your view, did it paint an accurate picture of life within Anglo Irish Bank?

Mr. Peter Fitzgerald:

I think it did.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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And just to finish on a specific issue, in relation of page 148 and I am discussing the St. Patrick's Day massacre, in relation to Merrion Capital and a broker and adviser, Mr. Ken Costello, who was, I use the term "focused upon" by Anglo Irish Bank. Are you aware of what I am discussing?

Mr. Peter Fitzgerald:

I am from the book, yes.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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From the book. Were you aware that that occurred?

Mr. Peter Fitzgerald:

I wasn't at the time, no.

Photo of Michael D'ArcyMichael D'Arcy (Fine Gael)
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You weren't. You had no knowledge of that matter.

Mr. Peter Fitzgerald:

No.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thanks very much, Mr. Fitzgerald. I just want to wrap up with a couple of questions myself with you and then we will bring matters to a conclusion. Mr. Fitzgerald, do you believe that it was appropriate that you, as a member of senior management having a team of over 300 people reporting to you, were focused solely on one area of business and that you appear to have operated in a type of isolation from the rest of the bank? Would that be a fair assessment?

Mr. Peter Fitzgerald:

I think it is a reasonable assessment, yes. I think it is the way the bank operated in that it was very segregated in terms of its divisions - lending, treasury and wealth management - and within those lenders had geographic locations and individual portfolios, and in treasury it was the same.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And in that regard, do you believe that you had an obligation to concern yourself with the wider business strategy of the bank?

Mr. Peter Fitzgerald:

For the period of time I was on the senior executive board which was, as I have mentioned, probably less than a year I did input into that strategy but aside of that it wasn't part of my role.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Do you feel it should have been?

Mr. Peter Fitzgerald:

In hindsight, I think the board of the bank regularly took budget presentations from the bank - and when I say "regularly" it was on an annual basis. If they had concerns they would make an agenda item for your business function to come up and the debate at those board meetings was always robust but in hindsight, yes, we probably could have benefited from being less segregated.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And in your opinion what was the fundamental failing of the management structure of the bank?

Mr. Peter Fitzgerald:

My personal view is that one of the deficits in the structure was that we didn't have a director of treasury represented on the main board of the bank as an executive director. We did have non-executive directors with banking and treasury experience but, if you think about it, for a considerable period before and during the crisis we did not have a director of treasury at an executive level.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Mr. Fitzgerald, I'd like to return to maybe the period of in and around 2008 and maybe first ask you as to where do you think that Anglo eventually ran out of road and was beyond the point of no return?

Mr. Peter Fitzgerald:

I think it was ... certainly, in my mind, it was post the collapse of Lehman's, because-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Which was in what period?

Mr. Peter Fitzgerald:

It was 15 September onwards.

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

Mr. Peter Fitzgerald:

It's when it became most stressed.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Of 2008?

Mr. Peter Fitzgerald:

In 2008, yes, excuse me.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Prior to that? The road looked okay, yes?

Mr. Peter Fitzgerald:

No, I think the bank .... and I mentioned in my statement .... the bank found itself defending its position and defending its business model from probably the last quarter of 2007 onwards.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So there was a growing awareness of evolving issues in the bank at that time, yes, okay?

Mr. Peter Fitzgerald:

They were predominantly equity issues, where the share price started to fall and we were vigorously defending, I suppose, the business model of the bank at that stage.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So in that environment of growing awareness and evolving issues, did you have any discussion with any board members, senior management or, indeed, any officials at any level in Anglo Irish Bank on the need to get access to what might be called "the political air" or to get issues facing Anglo into the political air? And, if so, was there any mechanism by which this would actually happen in Anglo?

Mr. Peter Fitzgerald:

It wasn't a conversation that I had with anyone in the bank.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And would you be familiar that if such a conduit was to be taken, who would be the conduit?

Mr. Peter Fitzgerald:

I would've assumed it would've been the chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Who was who?

Mr. Peter Fitzgerald:

I would've assumed it would've been the chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Which was who?

Mr. Peter Fitzgerald:

Seán FitzPatrick.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Seán FitzPatrick. Okay, with that said, there's just one final issue I want to raise with you, Mr. Fitzgerald, this morning. And that is in regard to just the general perception of Anglo Irish Bank and its senior management and so forth, and to ask you if ... there's been a lot written over the last number of years, a lot spoken about Anglo and its senior team. Mr. Fitzgerald, as a senior executive in Anglo Irish Bank, what are your views on the public perceptions that were put forward?

Mr. Peter Fitzgerald:

Given everything that's gone on with Anglo Irish Bank in terms of its activities, both from a business perspective and also in terms of alleged issues of corporate governance, I fully understand that the actions of the bank can never be forgiven or forgotten. And I would never look to defend them, either in a forum like this or outside of it, and from that perspective, I'd leave it at that.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So with that said, I just would like to invite you, Mr. Fitzgerald, if you so wish, if there are any closing comments or remarks that you'd like to make, to give you an opportunity to do so and then I'll bring matters to an end.

Mr. Peter Fitzgerald:

I've no further comments to add and I just want to thank the Chairman of the committee for your time today.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you. Thank you also for your participation today and your engagement with the inquiry. Mr. Fitzgerald, you're now formally excused and I propose that we take a recess for 15 minutes after which we will move on to our next session. Is that agreed? Agreed.

Sitting suspended at 11.13 a.m. and resumed at 11.38 a.m.

Anglo Irish Bank - Mr. Gary McGann

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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We will resume in public session. Is that agreed? Okay, and we now commence with the second session of today of public hearings with Mr. Gary McGann, former non-executive director at Anglo Irish Bank. 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? This morning, the focus of the inquiry is on Anglo Irish Bank. At this session, we will hear from Mr. Gary McGann, former non-executive director at Anglo. Mr. Gary McGann was a non-executive director of Anglo from 2004 to 2009. He is the former group chief executive officer of the Smurfit Kappa Group. Previously, he was group CEO of Aer Lingus and CEO of Gilbeys of Ireland. Currently, he is chairman of Aon Ireland and Paddy Power plc. Mr. McGann, you are very welcome before the committee today.

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 terms of the ... in respect of the 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 this 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 this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee, will be relied upon in questioning and form part of the evidence of the inquiry. So with that said, if I can now ask the clerk to administer the oath to Mr. McGann, 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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Thank you for being here this morning. If I can invite you to make your opening remarks, please.

Mr. Gary McGann:

Thanks, Chairman. As you're aware I've provided the inquiry with a written statement setting out my views on the topics which you've asked me to cover. I don't propose to go through my statement this morning but I'm here to answer any questions you may wish to raise with me. I think, as you're aware, there are a number of topics which, due to legal proceedings I've been advised that I can't address and therefore you'll appreciate that I may have to temper or constrain my responses in that regard, but other than that, Chairman, I'm happy to support and help the inquiry, so I'm happy to take questions.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, thank you. In that regard if I can invite our first questioner this morning, and that's Deputy Kieran O'Donnell. Deputy, you have 20 minutes.

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

Mr. Gary McGann:

Thank you.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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This is, Chairman, Vol. 1, page 35 to 48, a document. It's a memo to a board dated 30 January '07. In early 2007 you raised a number of concerns which are summarised and addressed in the memo to the board by Mr. McAteer and Mr. Moran, dated 30 January. Can you please tell the committee why you had these concerns and were they addressed to your satisfaction? That's Vol. 1, page 35. Yes. And if I could direct you as well that, on page 37 of that document, the heading is, "Banks and High Growth [not] always a happy marriage" and it says:

"High growth banks seldom die of old age!" (Mohammad Rhostom, Portfolio Manager, Brown Brother Harriman, referring to our growth).

You might, I suppose, put it in that context.

Mr. Gary McGann:

Well thanks, Deputy. The particular document referred to, I can't remember it in detail, but having reviewed it I can certainly remember the context. On this board and indeed on any board that I've served, having spent a lot of my life in plc world, I'm very conscious of how businesses interact with the equity investment markets and my advice and views to any boards I've been on are basically contained in the principle that shareholder value, which is ultimately what plcs are required to deliver in the context of a number of other things, is only delivered on a sustainable basis if it's based on a business that has a sound business model, has achieved credibility over time by virtue of its delivery against that model and has a management team which in themselves have got credibility in the market. And my request of the team at all times was to ensure that in articulating the business, the model and the reporting of results, etc., that those factors would be borne in mind, and the manner in which that that would be reflected in terms of outcomes would be that long-term value type holders would invest in the business. So that was the context of my, the issues I would have raised with the team. As I said, I would have raised it with teams in other companies as well.

Your reference to the comment on banks with high growth-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Seldom die of old age.

Mr. Gary McGann:

Yes, and I've seen a number of references to this. I have to say, I'm not minded, I certainly don't recollect too many of them being brought to our attention at the time, but obviously high growth has challenges attached to it, but the concept of growth, even in the banking business, subject to proper governance and proper capital adequacy ratios etc., is of itself not wrong. The issue is to be aware of the challenges and risks associated with it.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Do you believe now Mr. McGann that the Anglo model was a flawed model?

Mr. Gary McGann:

I'm not sure I would go so far as to say that the model in its, kind of, in totality, was flawed. It certainly was a model that had challenges. I think businesses in general - and I'm mindful that banks need particular attention - but businesses in general that have a narrow product range have inherent risk. Ironically, in the business I've run for 13 years as CEO and 17 years as an executive in the world of packaging, which is very far removed from banking, I accept, but we have a very narrow product range and the equity markets love it, because it's high-concentration expertise in a narrow area, deep and meaningful engagement. The debt markets don't like it because obviously of the higher risk attached to it. The way we dealt with it in my current business is we widened the geographic spread so that we actually got the portfolio effect of geography in terms of the de-risking of it. In the Anglo case, again, the product range or the product area was narrow but there were significant moves afoot to widen the application of that both in terms of product and in terms of geography. And it was evolving over time but not quickly enough.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Do you believe that the ... and I want to direct you to page 17, Vol. 1 in the same context, it's the Nyberg report, and it said, it's speaking specifically about Anglo ... he speaks about that "there is little evidence that board directors at the time were active in challenging the bank's approach or its pace of lending growth". How do you react to Mr. Nyberg's comments in that regard? And also it makes reference to the fact that the former CEO, Mr. FitzPatrick, was appointed to the new chair of the board in contravention of generally accepted governance principles at the time. Now you're a, I suppose, an experienced and seasoned holder of ... on boards, both as chair and as a member of the board. So how do you react to Mr. Nyberg's direct criticism of the board of Anglo in terms of its, the way it operated?

Mr. Gary McGann:

Can you just help me? Which page, again?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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It's page 17, Vol. 1. It's the first paragraph, 2.5.6 and 2.5.7.

Mr. Gary McGann:

Okay, thank you. I acknowledge what Dr. Nyberg has said. Dr. Nyberg reviewed Anglo, I think in 2011, maybe 2012 and, indeed, I met with Dr. Nyberg. And, certainly, the conclusions he has arrived at obviously have the benefit of a holistic look at the bank in the context of what transpired. And obviously he has the benefit of hindsight. And I'm not suggesting that it's the only basis on which he has concluded but, certainly-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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With due respect, Mr. McGann, in the limited time, you were a member of the board that appointed the former CEO as chair of the same board, which really was in complete contravention of good corporate practice. How do you stand over that?

Mr. Gary McGann:

Well, I need to first of all correct you on one point. I was only joining the board as that appointment was made.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But were you a member of the board that appointed that-----

Mr. Gary McGann:

I can't recollect whether it was actually done before I arrived or done just after I arrived, but the die was certainly cast. In the ... in the other aspect of your point, as you know, in terms of governance and the various committees and people who've opined on corporate governance, and there's been quite a number of them over the years now, there is a fundamental principle still of comply or explain. And the comply or explain principle applies to this day in terms of independence, non-independence, etc. The ... as I ... as it was explained to me, and as I understood it subsequently in terms of that appointment, there are a number of factors attaching to it. One, the man had enormous knowledge and experience of the bank and arguably was the most expert person in terms of the type of bank that Anglo was. Two, the appointment of the new CEO was from one step below the director who reports to the existing CEO, given that it was going to be an internal appointment. And there was consideration of external candidates and it was decided against, and there are obviously views on that.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Did you approve Mr. FitzPatrick's appointment as chair?

Mr. Gary McGann:

I ... in all honesty, Deputy, it was a done deal. But, but I understood it and, and-----

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

Mr. Gary McGann:

Yes, I did.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And can you go on ... the direct criticism of Mr. Nyberg where he said that there is "little evidence that [the] directors at [this] time were active in challenging the bank's approach or its pace of lending growth", which was incredible over that period in which you would have been director of Anglo.

Mr. Gary McGann:

Well, as the structure in Anglo was that the board were responsible for policy and strategy and governance, within the context of that, lending and risk was delegated, as is the right of a board, to the risk and compliance committee.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But in quick time, did ye challenge the bank's approach of the management and the CEO in terms of the direction they were taking Anglo Irish Bank in terms of the massive growth in commercial lending?

Mr. Gary McGann:

I think the context is important, Deputy. The context is very simple. The business was very successful. The environment was very strong. The profitability and the replenishment of the capital base was stronger than any bank in Ireland. Depositors and investors and rating agencies, etc., were all very, very happy. And, quite frankly, in the circumstances, the obvious, in hindsight, nature of the challenge, particularly in the context of a systemic downturn, wasn't apparent. So, challenging something with the benefit of the hindsight is very clear. The challenge at the time was to ensure that we were in reasonably good shape and there was no evidence brought to board that we weren't.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Can I move on to the contracts for difference? You were reported in Anglo Republic, the book, where you brought to a head the contracts for difference in September 2007. Did you believe it to be a critical problem for the bank and what did you see as the consequences? Were the non-exec directors kept informed? Did ye ... did the non-exec directors seek independent legal advice? How critical of an issue was it in terms of the future of the bank?

Mr. Gary McGann:

Well, I think, the ... the starting point was ... and to this day I find it hard to believe that in any business, most particularly a bank, that a position can be built without the investors and the market knowing that the position is being built. So I find that just unbelievable.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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When did you first become aware of the contracts for difference?

Mr. Gary McGann:

I can't be precise but my sense was ... sorry, my absolute clarity was from the media ... whenever the media started the rumouring and we started questioning it because, as you know, there was no definitive evidence of the holding. And to this day, in fact, there was no definitive evidence of the holding because that holding, as I understand it-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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How do you believe it affected the bank? What was the impact it had on the bank?

Mr. Gary McGann:

I think, ultimately, the impact it had on the bank was concern about the ... the ... the impact was very, very clear ultimately, from about March onwards, and that was that the invest ... the depositing public, both in terms of retail and corporates, were quite concerned-----

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

Mr. Gary McGann:

-----predominantly because the share price was in decline.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Was it a catalyst that brought about the demise of Anglo?

Mr. Gary McGann:

I wouldn't say ... I wouldn't go so far as to say it was a catalyst but certainly it was a strong contributor.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Can I move on?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You would be as well not to be so directive.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Can I move on?

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

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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The bonuses. I direct you to Vol. 2, page 77 to 95, and Vol. 2, page 97 to 99 - the Nyberg report. So can I ... and what I really want, I suppose, to ask is did you consider the level ... you were on the remuneration committee, is that correct, Mr. McGann?

Mr. Gary McGann:

I joined the remuneration committee in mid-2007.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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2007. Do you feel the level of bonuses awarded to senior executives to be justified in approach during the period? In the period from, we'll say, the years you were there, in '07 and, we'll say, '08 ... in '07, the CEO at the time - and it is in the accounts - received €3.274 million of a salary. He got a basic salary of €956,000 and he had a bonus of ... of €2 million. Do you believe it was justified?

Mr. Gary McGann:

Well, I think it is important to understand the context of remuneration. I mean, the remuneration arrangements in any business, particularly plcs, are based on best practice in the marketplace as advised by the various people who are expert in this area and Anglo Irish Bank's structure was no different fundamentally than anybody else's. There are obviously three elements to it - there is salary, there is short-term bonus and there is long-term incentive schemes. And the basis of each of those is against market practices, the quality and the size of the business and the performance of the business. But it's important, Deputy, that you understand the context.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But it's also ... it was the highest salary of any of the banks.

Mr. Gary McGann:

It was the highest-performing-----

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

Mr. Gary McGann:

It was the highest-performing bank for the last 25 or ... 25-odd years. That's well recognised.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So you believe that his salary of €3.3 million in '07 and €2 million in '08, with a basic salary of €1.15 million ... you believe that was justified.

Mr. Gary McGann:

What I am saying is I'm telling you the circumstances in which it was paid, which is the normal type of circumstances in any business in any industry - which is, short-term salary based on market competition, bonuses based on targets to be achieved and long-term incentives based on sustainable profitability.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Do you think it was justified?

Mr. Gary McGann:

I think if the numbers that Anglo Irish Bank delivered were the basis for it, then, against the structure of the remuneration, yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Mr. McGann, can I take you to ... there was a golf outing with the ... with Brian Cowen - he was Taoiseach at the time - on 28 July in Druids Glen. Were you present at that?

Mr. Gary McGann:

I was.

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

Mr. Gary McGann:

Sorry, to be clear, Deputy, I was present at a meeting before it and dinner after it. I was not present on the-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Can you walk us through the day? What time did you arrive to Druids Glen at?

Mr. Gary McGann:

Well, the meeting ... I'm trying to remember, the meeting before the game of golf was morning time, around nine, half-nine maybe.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Who booked the room?

Mr. Gary McGann:

I'm ... I'm not sure who did the bookings or-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Who paid for the room?

Mr. Gary McGann:

I don't know. I didn't.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What did ye discuss at the meeting?

Mr. Gary McGann:

The meeting was requested ... well, I was asked to attend the meeting by Fintan Drury in the context of a general discussion around the economy. There was some sense that there was beginning to be a slowdown. The ... Mr. Cowen was due to come in as Taoiseach. It was coming close to holiday time. A discussion ... a general discussion - not in any way a kitchen cabinet, for want of a better word - was requested. I was asked to attend on the basis of our domestic and international business and give a perspective on the issues that I saw.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Ye had a meeting in a meeting room in the hotel.

Mr. Gary McGann:

No, we had a meeting room off-site.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Off-site. Where was that?

Mr. Gary McGann:

It is not particularly relevant, Deputy. I'd prefer not to.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Well, I think, just for the sake of clarity, it would be ... it might bring a bit of-----

Mr. Gary McGann:

Well, it was in a private home.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Of whom?

Mr. Gary McGann:

Mr. Drury.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And did ye ... at that meeting, what did ye discuss? Did ye discuss banking?

Mr. Gary McGann:

No.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Why didn't ye discuss banking?

Mr. Gary McGann:

Because it wasn't-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I mean, banking is-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You are barraging the minute you ask a question. Mr. McGann to answer.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Sorry. Why didn't ye discuss banking considering it's such a large element of the Irish economy?

Mr. Gary McGann:

Because it wasn't on the agenda.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So what was on the agenda?

Mr. Gary McGann:

General economic developments and what the likely challenges would be and what the possible actions might ... might mitigate those negative developments.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And do you think it's credible, Mr. McGann, from the public looking in that - that was two days after Mr. Quinn would have written to Anglo about the contracts for difference, you had the share price falling in Anglo the previous March, tightening of credit within the banking system, the banking system being such a, I suppose, key driver of the Irish economy - that banking wasn't discussed?

Mr. Gary McGann:

Deputy, as I said, banking wasn't discussed.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And was it said it was off the agenda?

Mr. Gary McGann:

I am not sure I recall it, kind of, being excluded but ... I think, in the circumstances, it certainly didn't arise.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And did ye follow up? What time did that meeting conclude?

Mr. Gary McGann:

I think it was a couple of hours, Deputy.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And did ye meet up thereafter?

Mr. Gary McGann:

Met for dinner that night in Druids Glen.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And what did ye discuss at dinner?

Mr. Gary McGann:

General social conversations. The dinner was public; it was in the restaurant. It was, I think ... I can't remember ... I think, in fact, Mr. Cowen's driver was invited in because he had been around all day.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So, throughout that entire period, how long would you have spent in Mr. Cowen's company?

Mr. Gary McGann:

Maybe four, four and a half hours.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So throughout four and a half hours, there was no mention ... amongst, we'll say, yourself, Mr. Cowen, Mr. FitzPatrick, Mr. Drury and Mr. Gray, there was no mention of any nature regarding banking of any description.

Mr. Gary McGann:

To my recollection, no.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And can I ... and Mr. McGann, do you accept that people would find that difficult to accept and understand in the context of the time?

Mr. Gary McGann:

Well, I-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And in the context, Mr. McGann, that you were a board member of Anglo. We'd the chair of Anglo in - Mr. FitzPatrick.

We had the former member in, Alan Gray, former member, Fintan Drury, both in Anglo - Mr. Alan Gray, a member of the Central Bank and the Financial Regulator. Do you think ordinary people looking in would feel that it defies logic and credibility that you didn't discuss banking? And if you didn't, surely you should have discussed banking.

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

Mr. Gary McGann:

Sorry, excuse me, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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No, you're in.

Mr. Gary McGann:

I think you've asked me about four questions and they sound like-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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All of them are credible.

Mr. Gary McGann:

-----all potentially contradictory.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Well, explain why they're contradictory.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Sorry, Deputy. You'll have to allow Mr. McGann to deal with the series of questions there.

Mr. Gary McGann:

All I can tell you, Deputy, we did not discuss banking to my recollection.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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You ... there was a previous dinner held by Anglo back on 24 April '08 with Mr. Cowen as guest. Did you discuss banking at that dinner for Mr. Cowen?

Mr. Gary McGann:

Not specifically, no.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Did you make a presentation?

Mr. Gary McGann:

I didn't, no. Sorry, I was ... we certainly had a round the table discussion from various people from various backgrounds as to what we were seeing in the market.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So what was discussed at that dinner, Mr. McGann?

Mr. Gary McGann:

That dinner was, to my recollection, more a social event than a business event, but certainly there was a round-table, as I said, tour of the table, in terms of what the economics-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So no discussion around either Anglo Irish Bank, even though it was-----

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

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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-----no discussion around Anglo Irish Bank, even though it was hosted by Anglo Irish Bank, or no discussion around banking?

Mr. Gary McGann:

No, but I think, Deputy, in both cases, I think it would have been inappropriate to actually have the incoming Taoiseach, the Minister for Finance, into a general meeting based on a social occasion and table issues that should be tabled in a business environment. So the answer is "No", there was no discussion.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. The next questioner is Deputy Joe Higgins. Deputy, 20 minutes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes, Mr. McGann, if I can refer to Vol. 1, page 68, of the core booklet.

Mr. Gary McGann:

Vol. 1?

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes, and this relates, Mr. McGann, to a letter from the Financial Regulator to the chief executive of Anglo Irish Bank, dated 27 June 2007. And in that, 30 issues are raised by the Financial Regulator with the chief executive, and what would be considered as quite significant issues, particularly perhaps the extent of lending for land development, etc., and another significant issue, the exception to group credit policy. Now, can I first of all ask you to reconcile that letter with what you say on page 5 of your written submission, "I have no recollection of the board having received any correspondence directly from the regulator's office and I was not aware that the management received any correspondence from the regulator outlining any material concern or dissatisfaction about how the bank was operating its business model, its risk profile or its lending practices." Were you aware of this letter, Mr. McGann, and the concerns it raised?

Mr. Gary McGann:

I certainly did not see this letter and, therefore, did not see the content of the letter, the concerns raised.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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And were the issues raised in this letter brought to the board by the chief executive?

Mr. Gary McGann:

Not to my recollection. I have no recollection of ever hearing of any of these issues.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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You are aware of the letter now, I take it.

Mr. Gary McGann:

Sorry, I have it in my pack.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Would you agree that some of the issues are of very high significance?

Mr. Gary McGann:

I certainly think in the context of how things evolved it would have been both helpful and informative if we were aware of them at the time.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Would you say, Mr. McGann, it should have been imperative that these issues were brought to the board?

Mr. Gary McGann:

I think some of the issues were certainly of a magnitude that should have been brought to the board, yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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And why weren't they, do you think?

Mr. Gary McGann:

That I do not know.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay. Now, I'd like to move on then to Vol. 1, page 57. This relates to exceptions to group lending policy, and we see there ... this concerns the month of July, but I'm going to leave July out of it actually, Mr. McGann, because the previous five months - February to June - are given, and this is commercial lending. The exceptions to the lending policy and limits in February '08 was 26%; March, 28%; April, 28%; May, 28%; and June, 28%. In your opinion, Mr. McGann, were these high levels of exceptions ... would you agree that there were high levels of exceptions to begin with?

Mr. Gary McGann:

Well, I think the principle of exceptions in the bank - and, as I understand it, not necessarily just in Anglo - that the policies were set tighter and that, therefore, there would be exceptions to the policy, and those exceptions were ... these exceptions, as I understand it, were not breaches. They were exceptions in the sense that they exceeded the policy and, therefore, required a higher order of review and/or sign-off-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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But would you say, Mr. McGann, that they might have been indicative of problems with the control environment inside Anglo, or whether the ... an independent credit control function was exerting itself sufficiently on the lending side, for example?

Mr. Gary McGann:

I don't think it necessarily follows that exceptions to the policy, given that the policy was, as I said, written tightly and, as I say, it's not necessarily just in Anglo ... that the exceptions would by their nature be, if you like, a breach or a piece of evidence that there was a problem. I think what they needed was obviously a higher order of sign-off. It doesn't ... for example, it doesn't follow that loans that were made as exceptions to policy were necessarily bad loans or, indeed, worse loans than loans that were within policy.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Well, can I take you ... us then, Mr. McGann, to Vol. 2, page 3? This is a report from NAMA. If I can take you to the bottom of that page:

Of the 1,731 cases reviewed at client level, the number found to have represented an exception to credit policy was 1,073 or 62% of clients. The aggregate value of the exceptions identified was €31.97 billion or 92% of the value of the Book which transferred to NAMA.

Mr. McGann, 92% of the total loans transferred to NAMA from Anglo were exceptions to credit policy. Would an ordinary onlooker be forgiven for thinking that this was a damning indictment of credit policy in Anglo?

Mr. Gary McGann:

In all honesty, Deputy, that's a number I hadn't seen before until I read this book, so I find it difficult to comment on it. It's a high number, that's for certain. Obviously, the time in which that number was calculated, I presume, is at the back end of the whole downturn.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Mr. McGann, these books would have been furnished to you weeks ago.

Mr. Gary McGann:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I would have assumed that you would have read over them during that period of time, so I would be assume that this would not have been the first time you would have seen this figure, when Deputy Higgins raised the question with you. So I will be expecting a broader answer to that question, than just, "This figure is kind of new to me".

Mr. Gary McGann:

No, no. It was new to me, Chairman, as I said, when I saw it in the book.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, okay, so you had time to think about it.

Mr. Gary McGann:

Oh no, absolutely.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So maybe you could respond to it a bit further.

Mr. Gary McGann:

No, no. I have read the book and read the book in great detail, I can assure you.

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

Mr. Gary McGann:

What I'm saying is I don't know how the number was calculated. I haven't got the access to the NAMA base on which they ... the number was calculated.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Joe, I just want to stay with this for a second. I've stopped the clock for you there. If you can continue on the figure there for a moment, so.

Mr. Gary McGann:

I've nothing further to say, Chairman.

It's a large figure. I don't know how it is calculated but I accept in the context in which we're discussing it, it's a very large figure.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Well, I must invite you to say more, Mr. McGann, because it doesn't matter when it was calculated. I take it that NAMA examined the loans and found that 92% of the value of the book which was transferred to NAMA - almost €32 billion - was money that was lent by way of exception to the official credit policy of Anglo Irish Bank and the point ... I would ask you again: do you find that shocking?

Mr. Gary McGann:

Deputy, I was not on the risk and compliance committee, which presides over the loans and so, therefore, the ... my ability to have these levels of detail at a main board level wasn't something that I can recollect-----

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Mr. McGann, with respect, I wasn't on the credit committee either but as a lay representative of ordinary people out there, when I read that, I was utterly shocked.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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That's a prejudgement now, Deputy, and the witness is here to testify, not the member.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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No, but I'm ... and I would say ... what I'm ... the point I'm making to you is that a layperson out there would see or would raise a question which I'm raising to you that this bespeaks ... or does it bespeak a credit policy that was ... that went out of control?

Mr. Gary McGann:

Well, I think the ... first of all, I totally accept and acknowledge 92% is a heck of a big number. Secondly, I think if I understand it correctly, this number was calculated at the end when values ... when all sorts of numbers and dynamics had gained a momentum that certainly nobody anticipated but at face value, I accept the point you're making, Deputy.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay, move on for time, Mr. McGann, and at a board meeting on 12 December 2008, it was reported that Mr. Drumm, chief executive, and Willie McAteer, had met with Mr. Hurley, then Governor of the Central Bank, and Mr. Grimes of the Central Bank at which a figure of €3 billion of new capital was acknowledged as being needed. So this was December 2008, a few months after the bank guarantee. On the night of the bank guarantee, were you aware that Anglo would require this quantum of additional capital in order to remain solvent and what would your assessment be of the bank's liquidity and solvency position at the time of the guarantee?

Mr. Gary McGann:

Certainly around the guarantee, I wouldn't have been aware of a number of €3 billion. I think the board were aware that there were certainly challenges in terms of how the bank's model would be sustained longer term. I think the speed at which developments occurred into the period towards the end of September and, indeed, thereafter was huge. The ... I think just to try and deal with it, at no point in time did we, as a board, believe we were dealing with a solvency issue. We most certainly believed we were dealing with a liquidity issue and that liquidity was not just an Anglo liquidity issue, albeit a significant one in Anglo, but was a much wider liquidity issue across a range of different businesses. So at the time of the guarantee, to specifically answer your question, €3 billion, no.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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And you ... do ... were you of the view that Anglo was solvent at the time of the guarantee?

Mr. Gary McGann:

Absolutely.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay. So if I move on then to Vol. 2, page 79, and Deputy O'Donnell has referred already to the bonuses and you as part of the remuneration committee would have been at a ... from a certain date, would have been responsible for part of ... and you described to the Deputy the level of bonus for the chief executive, for example, and, presumably, for the others as justified. How can ... how do you justify that justification, Mr. McGann? For example, as I left home this morning at 6, 6.30, the ... my local postmen and women were already an hour or two at their depots sorting mail-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I remind you, Deputy, between the difference between giving evidence and asking a question.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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-----and performing a very important social function. Would they be entitled or should they be entitled to a bonus of €2 million or €1 million? How do you justify-----

Mr. Gary McGann:

With the greatest of respect, Deputy Higgins, we're talking about apples and oranges here. The international banking world, the international plc world has norms and structures around how remuneration takes place. Whatever about the absolute amount, the methodology is straightforward. There's an annual salary based on a competitive marketplace that's normally advised and guided by experts in this area and REMCOs decide on the appropriate level or not. That number tends to be market-competitive - size of business, performance of the business. There's an annual bonus associated with short-term objectives which is pre-agreed and, for want of a better word, contracted with the management between the management and the REMCO and then there's long-term schemes to sustain long-term profitability rather than short-termism. And against that backdrop, in the period 2007, there was a contracted commitment between the REMCO at the beginning of '07 when I wasn't a member of REMCO - but it doesn't matter - and the numbers delivered and the payout took place. That's how it works.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Mr. McGann, if I could ask, with the great respect to yourself as well, no postman and woman cost the taxpayers of this country €32 billion, which the management of Anglo Irish Bank did. How can you justify those levels of bonus for activities that led to, by any standards, a catastrophe for the taxpayer and the social situation of many people in this country?

Mr. Gary McGann:

I think the correlation may be invidious in the sense of the pay at that particular point in time. I do accept that the remuneration system didn't have clawbacks for strategies that failed but the two need to be seen, I think, separate. I don't think you can make that straight correlation.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay. Mr. McGann, you are, I would say, by consent among your peers one of the leading capitalists of this generation with, you know, serious position in industry and so forth and you're an experienced person in business for a considerable amount of time. Bearing that in mind, can I ask you are you aware of the evidence of Professor William Black, a former US regulator, to this inquiry?

Mr. Gary McGann:

I have heard of it.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes, and I want to put to you some of Mr. Black's evidence. He says there is a recipe which banks follow "which produces the worst losses, is most likely to cause hyperinflated bubbles [...] to cause catastrophic individual losses and future crises" and the recipe he says is a bank that grows like crazy, make terrible-quality loans, employ extreme leverage while setting aside no meaningful loss reserves for the inevitable catastrophic losses. And he says three sure things that arise as a result if these ingredients are followed, there will be record profits; under modern executive compensation, the senior leadership will promptly be made wealthy; there will be catastrophic losses. My first question, Mr. McGann, is: would you say is that a fair summation of what happened within Anglo Irish Bank and its effect on the nation? And, secondly, Mr. Black has been saying this since the late '80s, early '90s. Again, given your experience, could you not have foreseen that booms always give way to busts?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Allow time for a reply now, Deputy Higgins. Mr. McGann?

Mr. Gary McGann:

You know, I'm ... as in most walks of life, Deputy, I think we can all find people who will posit a view that actually fits a particular theory. I don't buy the simplicity of that. Nobody, for example, planned for a systemic downturn, one-in-100-years event which, basically, brought about a lot of circumstances that nobody had anticipated.

Anglo Irish Bank's capital ratios were strong. Anglo Irish Bank was replenishing its shareholders' funds on an annual basis because of tight cost-to-income ratios, low dividend pay, or decent dividend payout ratios, etc., so I don't think it was all a one-way street. I accept that, in hindsight, there were aspects of the model that did not stand up to the test of this type of environment, for sure.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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But, Mr. McGann, with respect, how can you describe it as a one-in-100-year event? Professor Morgan Kelly of UCD published a study of, I think it's maybe two dozen countries over the previous, maybe, 30 years that had a property development-housing bubble, and each one, without exception, crashed. And you, I've no doubt, would have been familiar with the Scandinavian situation of the late '80s and the early '90s. What I'm saying to you is that as an experienced business person, were you not aware of this danger when you saw the exponential growth of lending, speculative development and so forth within the bank that you were a prominent member of its board?

Mr. Gary McGann:

Let me clarify that any of the events that I've read about, at no point ... to my point about one in 100 years, I don't think I can recollect in my lifetime - and, unfortunately, I'm around a long time - when we have seen bank of Wachovia, Washington Mutual, Freddie Mac, Fannie Mae, Depfa, Fortis, you name it, banks all over the place, going into difficulties, if not total demise. I have not seen, as a company that I ran in 33 different countries, the business affected in almost every one of those countries all at the same time. So, I am saying to you the one in 100 years is in the sense of the global nature of what happened and, therefore, geographic spread and de-risking across geographies didn't necessarily underpin models of businesses in other sectors. In Anglo's case, it didn't.

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

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Was it the case not that all those distinguished banks internationally that you mentioned were all at the same game, the same methods, as Anglo? You are aware of the debate about the financialisation of the international economy and the banks and speculative lending etc., came to have such a preponderance. So, was it surprising that those banks met a similar fate?

Mr. Gary McGann:

No, but I think, Deputy, all banks had elements of what Anglo were doing. Clearly, Anglo's was a narrower base with the wider geography to mitigate it. But I accept that there were elements of this in most banks but development and property and building is part of economics. It ... I mean, arguably, today, the price of housing in Dublin is going up because of lack of development.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay, thank you, Mr. McGann.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. If I could just, maybe, deal with two matters myself. I just operate with the books at the moment, with you, Mr. McGann, and it relates just to ... it's Vol. 1, page 58. It's an extract from Anglo's risk management report 2008 and in it, Anglo's monthly risk management report notes on the continuous basis that the bank is in excess of the Financial Regulator's single sector exposure limit. This should be 200% of own funds. This is concentration limits lent out, that a bank should be in one area and in another area they can ... to use a phrase you used earlier, apples and oranges. You don't put all your money in apples; you lend out to apples and oranges and other types of fruits. But in the July '08 report noted that the exposure was 587.88% of own funds. So, maybe if I could put the question to you Mr. McGann that as an independent, non-executive director, were you concerned at the level of exposure at any time and did you raise these concerns with management?

Mr. Gary McGann:

I'm not ... I can't recollect, Chairman, but my ... I do remember conversations around the sector concentration and, as you know, this was something that was returned regularly to the Financial Regulator.

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

Mr. Gary McGann:

But there was an argument that the categorisation could be thought about differently, for example, the categorisation was towards development investment, property investment, when in actual fact, Anglo's model, in the first principle, was around income stream. It was based on income stream lending with a collateral, with the, if you like, the underpin being the property, and then there was, obviously, collateralisation across other businesses and then personal guarantees. But the ... if you categorise it across the basic income streams, and the source of those income streams, you get a different categorisation.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Maybe, correct me if I'm wrong here, but, as I understand it, Anglo wasn't a high street bank. You wouldn't find it in your local town or village.

Mr. Gary McGann:

Correct.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It didn't have ATMs around the country and it may have had a mortgage book but its mortgage book wouldn't have been its main body of work.

Mr. Gary McGann:

Correct.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So, Anglo's ... and bearing in mind as well that construction in the country at that time accounted for 24% of the Irish economy, which was twice above the recommended norm. Construction should account to about 12%. It's at 6% at the moment. They're moving upwards again, which it needs to get back to a sustainable rate of 10% to 12%. But, at that time, the construction in the country was twice, 200%, of what it should've been. I mean it was ... that was a well-known figure around the place. You were highly concentrated into this area, and there were exposures being raised from it. So, I suppose, if I could return to the question and break down into two parts, were you concerned with the issue and were you bringing these concerns to management?

Mr. Gary McGann:

I think, Chairman, it's the other way round. I mean, the role of non-executives, obviously, is to govern the business in the context of general plc governance. The role of management is to bring the concerns or the information and the base for those concerns, to the board. I'm not sure it was articulated as clearly as you've done.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. And were you satisfied with any of the explanations that you-----

Mr. Gary McGann:

I certainly had an understanding of the nature of how the loans were being funded and, therefore, the categorisation of the sourcing of that fund.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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But with the ... NAMA's testimony to this inquiry in terms of how loans were actually being funded was, if I could give an example, a person would maybe, from the get-go, at the very, very first development, would maybe get a loan-to-value situation where they might have to come up with 10% or 20% or 30% of the cash. But, because we were in an escalating and hyper property inflated environment, that, by the time they moved to the next development, the value of the initial development had exceeded the loan-to-value and probably was in high positive equity, therefore that positive equity could be used as a deposit on the next development, which meant that there was no cash payment on the next loan. What was there was a securitisation on what we subsequently found out was an overvalued development. And this became compounded where a very small number of lenders with your institution found themselves getting massive cash loans, or getting massive loans, over a period of time, to accumulate more developments without ever spending a single cent in deposit terms. I mean, this is the type of concentrations we're talking about. And, when Anglo finally crashed, what we saw on its loan book was a very, very small number of people with huge debt exposure. Was that ever a consideration inside in the bank that there is something here that we need to be looking at?

Mr. Gary McGann:

It wasn't evident as clearly as you've articulated. It wasn't as evident as that.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And, as I articulated it, would you consider that an accurate articulation?

Mr. Gary McGann:

No, in hindsight, I think that's very clearly the case.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Moving on again just to another document, it's Vol. 2 of the court documents, which is page 27, transcript of public hearings dated the-----

Mr. Gary McGann:

Sorry, Chairman, could you repeat?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It's Vol. 2, page 27 and it's a transcript of public hearings that we had with Mr. Brendan McDonagh. And, NAMA, when they were before us, and in information that they provided, estimated that circa of around €9 billion of interest roll-up was included in loans transferred to it by five banks. €3 billion of it related to Anglo, and I'll just go to the testimony there. It was actually ... I think Deputy Higgins was speaking to Mr. McDonagh at the time, and Mr McDonagh says that:

I should add that that €9 billion [figure] was based on data which was given to the banks before NAMA came into existence, so it was based on information we got back in the summer of 2009. We estimated that [the] €9 billion was broken down as follows; AIB about just over €3 billion, Anglo Irish Bank €3 billion, Bank of Ireland €1.8 billion, INBS €1 billion and EBS €0.1 billion.

Could I ask you, were you aware of the level of interest roll-up in Anglo Irish Bank?

Mr. Gary McGann:

I wouldn't have been aware of the total number, but I would have been aware of the principle of ... of principal roll-up, yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. And was the figure included in board and senior management information dashboards on a regular basis?

Mr. Gary McGann:

No.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. And was this level of increased risk monitored within the bank?

Mr. Gary McGann:

Well, I think the concept of interest roll-up is inherent in some of the products that were basically being dealt in. Development lending obviously has a long lead time to income. So interest roll-up as part of that deal is not an unusual concept. And obviously the trade-off or the ... the ... underpinned to that needs to be, obviously, quality collateralisation and experienced developers and so on. But the principle of interest roll-up of itself is not necessarily a failure on the original loan but, rather, part of it.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, but if you ... coming back to my earlier articulation to which you agree with, where you have a significant, though small, number of investors, a number of which would be engaging in interest roll-up ... if you've interest roll-up over a broad field, the exposure is weighed out of one small field. But with such a narrow field of individuals, did the bank consider that in terms of risk?

Mr. Gary McGann:

Not specifically, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. And did the bank have adequate information systems to monitor this risk properly?

Mr. Gary McGann:

I think we need to distinguish between the information systems and the information that actually emanated to-----

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

Mr. Gary McGann:

-----to board.

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

Mr. Gary McGann:

And my understanding is the information systems were such that I think the information would have been available. Whether it was presented as clearly as that, I certainly don't have a recollection of it.

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

Photo of Sean BarrettSean Barrett (Independent)
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Thank you and welcome to Mr. McGann. The Nyberg report states that "There is little evidence that board members in Anglo [...] were active in challenging the [board's] approach or its pace of lending growth." How did you react when you read that?

Mr. Gary McGann:

Again, I think, Senator, the evaluation done was obviously somewhat in retrospect. I think there is no doubt about it that the board were aware of a certain amount of lending. There were initiatives taken to work on curtailing lending and to only lend new loans to well-established and existing customers where there was a long-standing relationship and confidence. I think the board would also be very conscious of the capital base of the board and the extent to which that capital base was reasonably robust and, obviously, in the context of profits, was replenished on an annual basis in a substantial way. So ... and I think the third issue is the extent of the downturn certainly wasn't anticipated, with the exception of some notable commentators - a small number - the general sense was we were heading for a soft landing rather than a crash of cataclysmic ... of a cataclysmic nature, so ... so the context, I think, was such that we wouldn't have necessarily had that view.

Photo of Sean BarrettSean Barrett (Independent)
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Could I refer to Vol. 2, Chairman? And on page 105 ... there was a board meeting of Anglo Irish Bank on 12 December 2008, which is a fairly critical time. Nine people were absent, only five present. That hardly communicates a board, at a critical time, performing up to scratch.

Mr. Gary McGann:

I don't recall, Senator, whether this was a scheduled board meeting or a board meeting called at short notice.

Mr. Gary McGann:

So, in all honesty, I can't comment.

Photo of Sean BarrettSean Barrett (Independent)
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You were there with Mr-----

Mr. Gary McGann:

I'm ... I'm-----

Photo of Sean BarrettSean Barrett (Independent)
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Sorry, I beg your pardon.

Mr. Gary McGann:

I'm delighted to see I was there, Senator.

Photo of Sean BarrettSean Barrett (Independent)
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Yes. You were there with Mr. McAteer and Mr. Drumm, Mr. Jacob and Mr. Whelan, but, you know, by conference call with Mr. FitzPatrick, Mr. Harwerth, Mr. O'Connor, Mr. Quilligan, Bradshaw, Ms Heraty, Sullivan, Dukes and ... and Daly. You know, you refer in your statement, you know, these were people of the highest calibre, but they weren't there at a crucial stage. I think the bank had to be nationalised pretty soon after.

Mr. Gary McGann:

I think, Senator ... I'm surmising, but I think, given the number absent and joining by conference call, it strikes me that this was probably a board meeting that was called at relatively short notice. This would not be the norm.

Photo of Sean BarrettSean Barrett (Independent)
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Could I refer to Vol. 3, page 3? The survey of the board members by Mrs. Hague - that the board members were asked to evaluate themselves, I think. Being accountable to the public, 11 thought ... of the directors thought they were excellent and two, acceptable. Compliance with regulatory requirements, ten thought they were excellent and three, acceptable. "Are there any areas of the board's work which cause you unease:" No, 11 directors; yes, two. And the two refer to the complexity of accounts and "Preparing for and managing the unexpected". Wasn't it a board which not only didn't attend on the other date I mention, didn't seem to be in touch with what was happening in the business at all, that it could have these questions?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Please ask the question now, Deputy ... or, Senator, without moving to your own conclusion, please.

Mr. Gary McGann:

I think there are a number of points that I could make, Senator. One, the concept of an external evaluation of the board at that time was quite-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I'm going to stop you for a second there.

Mr. Gary McGann:

Sorry.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I'm getting reports, there, of communications interference all morning from mobile phones. Even the public have actually been in contact with the communications unit here. So I have to insist ... I'll go into public ... or private session and the next time this actually happens but ... if I hear phone interference. It's of huge annoyance to people who are actually trying to avail ... and watch these hearings as they're taking place. It's of huge annoyance to them. So please, turn off your mobile phones.

Photo of Sean BarrettSean Barrett (Independent)
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My microphone is on currently. There's no device, Chairman, and Mr. McGann-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I understand that, Senator, but ... and I appreciate, but it can be in your vicinity ... it can be in the vicinity of a microphone even-----

Photo of Sean BarrettSean Barrett (Independent)
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Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----a person or two away and it'll still be picked up. Back to yourself, Mr. McGann, please.

Mr. Gary McGann:

I think the concept of third party evaluation of a board was somewhat ahead of its time. It's only latterly that many plcs are doing this. So, in that context at least, there was some degree of initiative by the board. As to whether the board was out of touch or not, I mean, this is a ... this is an evaluation done by an experienced third party with a lot of board evaluation experience. It was done quite objectively, as far as I'm concerned, in the sense that I had ... I can only testify as to my engagement with Ms Hague. And the board's evaluation ... if you go further into it, you'll see that there was quite a variety of different answers across a number of different areas, so it wasn't as if it was just tick the box and move on.

Photo of Sean BarrettSean Barrett (Independent)
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If I could refer, Chairman, to Vol. 1 at page 15, our parliamentary colleague, the Committee of Public Accounts, found:

Anglo had poor governance structures and procedures and risk controls during its period of high growth. Weaknesses in these areas were identified by auditors and regulators in 2003, 2006 and 2008.

So was that brought to the attention of the board in your time as the director?

Mr. Gary McGann:

Any feedback of any shape or form from auditors and evaluators is ... wherever it came to the board members would have gone to the board without a shadow of a doubt. I mean, the feedback that I can ... I can ... I can give you quotations of feedback from our external auditors and I can give you quotations of feedback from PwC and the independent evaluation of the committees in 2007, which is quite positive and quite progressive in terms of its evaluation.

Photo of Sean BarrettSean Barrett (Independent)
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Was some of the positivity generated by the way the bank dealt with dissident opinion in Ireland? For instance, Morgan Kelly was contacted by officials of the bank. Were you aware of that?

Mr. Gary McGann:

No, I wasn't, Senator, no.

Photo of Sean BarrettSean Barrett (Independent)
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And there's also evidence that the bank contacted stockbrokers who had unfavourable views of the Anglo performance with a view to getting those stockbrokers sacked. Were you aware of that?

Mr. Gary McGann:

No, I wasn't.

Photo of Sean BarrettSean Barrett (Independent)
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Yes. On pages 148 to 149, an official-----

Mr. Gary McGann:

Which volume, sorry?

Photo of Sean BarrettSean Barrett (Independent)
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Of Simon Carswell, Anglo Republic.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Are you familiar with the book, Mr. McGann, are you?

Mr. Gary McGann:

I'm aware of the book, Chairman; I haven't read it.

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

Photo of Sean BarrettSean Barrett (Independent)
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But it says that an official ... a senior official wanted a certain stockbroker fired, you know. So we have found this - that there was lots of dissident opinion, not just Morgan Kelly, Niamh Brennan and so on, Jim O'Leary-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Be mindful, now, of conclusion and judgment. Ask a question, Senator.

Photo of Sean BarrettSean Barrett (Independent)
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The consensus, I think, may have been manufactured. And having contrarian stockbrokers threatened, I think, may have artificially made the board overconfident. Would you accept that as a proposition? You can generate your own PR and it makes you feel good.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Do you have a comment or an observation on that, Mr. McGann?

Photo of Sean BarrettSean Barrett (Independent)
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Did you do that in your time as a director?

Mr. Gary McGann:

I ... certainly, I mean, I think the concept of engagement with analysts on their views on business is a standard proposition, but it generally is associated with convincing or trying to convince analysts of the areas that maybe they have misinterpreted. But the concept of ... putting them under pressure to change their views under threat I think is not something I'm aware of at all.

Photo of Sean BarrettSean Barrett (Independent)
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Thank you. 24 April 2008, in the second edition of the book, Anglo Republic, it says that a dinner took place in Heritage House with the Minister for Finance, Brian Cowen. Were you present?

Mr. Gary McGann:

I was, Senator.

Photo of Sean BarrettSean Barrett (Independent)
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And it says:

Gary McGann, Ned Sullivan, Anne Heraty and Drury, all non-executive directors, spoke. The new Taoiseach was told about the pressure in the property market as a result of the credit crunch and how the bank had funding problems because of the turmoil in the international financial markets, but that it wasn't a major issue.

Pat Whelan, Declan Quilligan and Tony Campbell also spoke. That's different, I think, from the other meeting, which was a general one about Ireland. This one seems to have been very strongly about the difficulties of the bank.

Mr. Gary McGann:

Well (a) Senator I haven't read the book but (b) certainly that's not my recall of the meeting and I don't know what the sources of Mr. Carswell has used for that.

Photo of Sean BarrettSean Barrett (Independent)
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What did you speak about?

Mr. Gary McGann:

I spoke about Smurfit Kappa's experience as a manufacturer in Ireland and what we were seeing in the basic industrial world, both in Ireland and internationally.

Photo of Sean BarrettSean Barrett (Independent)
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Was there a problem in your time as director with documentation in the bank? Again, that's ... Carswell finds that the documentation in regard to directors' loans, he said, was a mess and there's been------

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Directors' loans is-----

Photo of Sean BarrettSean Barrett (Independent)
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Sorry, there is also the NAMA evidence that one of the reasons-----

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

Photo of Sean BarrettSean Barrett (Independent)
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-----for the 61% discount was bad documentation in the loans that they transferred from Anglo to them.

Mr. Gary McGann:

I wasn't aware of wholesale difficulties with documentation. Internal audit from time to time did evaluations on the documentation process and wherever there were difficulties found, they were raised and dealt with and undertakings given to correct them and, indeed, in some instances where lawyers who would have been responsible on a panel to give legal undertakings and provide legal undertakings wherever they were repetitively failing to do that they were delisted. So that's the only knowledge I have, Senator, but I hadn't the sense that it was widespread and wholesale.

Photo of Sean BarrettSean Barrett (Independent)
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Thank you very much. Thank you, Chair.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Deputy Michael McGrath.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Thank you very much, Chair. Mr. McGann, you are very welcome. Can I just start by asking you about the length of your witness statement. It's only three and a half pages long. You were directed to give evidence on over a dozen lines of inquiry. It strikes me as very short.

Mr. Gary McGann:

Well, what I tried to do Deputy is give information that was clearly known to me and available to me. And wherever I wasn't able to comment in terms of my lack of knowledge or experience of the particular question, for example, relationships with Finance, Central Bank and so on, I wasn't really in a position to elaborate.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay.

Mr. Gary McGann:

I tried to give as much as I could without speculating.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Can I ask you to clarify what was in the board packs which were sent to members of the Anglo board in advance of each board meeting? Can you take us through the content of a board pack?

Mr. Gary McGann:

You're testing my memory now-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Well from the-----

Mr. Gary McGann:

-----but yes-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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What would it have contained? The minutes of the previous meeting-----

Mr. Gary McGann:

It would be, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----sub-committees-----

Mr. Gary McGann:

It would certainly have, obviously, agenda, minutes of the previous meeting. Wherever there were minutes of sub-committees to be circulated they were circulated, wherever there was a subject matter that was specific to that board meeting to be discussed, in many instances, not all, papers would be pre-circulated for consideration so that at least the non-execs would have read themselves into the subject matter.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes, but was it practice for the minutes of the sub-committee meetings to be circulated with each board pack?

Mr. Gary McGann:

To my recollection, we certainly ... can I be sure that we got them all the time? I can't be sure but ... but I think, in general, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And am I right in saying that the credit committee was not a committee of the board?

Mr. Gary McGann:

No, the credit committee was executive.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Sorry?

Mr. Gary McGann:

Sorry, credit committee were executives-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. Gary McGann:

-----and then they engaged through the group risk director with the risk and compliance committee.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay, so by extension would the board pack have contained the minutes of the risk and compliance committee minutes but not the credit committee minutes?

Mr. Gary McGann:

Certainly not the credit committee minutes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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But the risk and compliance committee-----

Mr. Gary McGann:

To my recollection I think they were-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. Can I just take you to Vol. 1 page 31, and this is a draft business plan summary from late 2008, November 2008, and it is for the five years 2009 to 2013. Whatever became of this document? Was it adopted by the board at the time as the business plan going forward?

Mr. Gary McGann:

I think, Deputy, I think events overtook it, in all honesty. This is, I think, November 2008.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. Gary McGann:

I believe events overtook it.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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It wasn't actually adopted. Can I just ask you to square a reference in this document on page 31, where it says notwithstanding the recessionary environment:

[W]e are confident that given the nature of our business model and appropriate pricing and management of risk, the Bank will continue to generate strong profits and capital. We believe that Anglo [Irish Bank] will be the most profitable and capital generative of all publicly quoted financial institutions in Ireland over the next five year period.

This was November 2008. We heard evidence this morning from Peter Fitzgerald that, in his view, after the Lehman collapse, so in the second half of September 2008, those in charge of running Anglo knew the game was up. What is your view?

Mr. Gary McGann:

I don't believe certainly ... certainly at board, and obviously with board's engagement with the executive directors, of which there were four, that certainly wasn't the concept. The environment was extremely challenging. Funding and liquidity was a serious issue. There was a strong view that that environment that prevailed, that created the funding challenges, couldn't sustain long term. I mean, we have to remember these were times when (a) banks wouldn't lend to banks; they'd lend to the central bank ... the European Central Bank rather than lend to one another, they had to go that circuitous route. These were times when, latterly, you had UBS and Deutsche Bank and Bank of New York basically charging people to mind their money by putting it on deposit. So we had very unusual and hard to believe long-term sustainable circumstances. So against that backdrop there was a belief that a recapitalised Anglo could have a future but it would need (a) stronger funding sources and (b) probably a broader funding footprint.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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When did you realise that Anglo's future as an independent financial institution without any intervention or State support was longer tenable?

Mr. Gary McGann:

I don't think there was a point in time. I mean, there is no doubt about it that all the banking system around the bank guarantee were struggling in terms of liquidity and therefore ... hence, I presume, the context for the guarantee. But at all points in time the board saw this as a funding liquidity challenge. We'd obviously issues around property valuation and the asset side of the balance sheet to be addressed, probably with capital raising but Anglo Irish Bank had a very strong track record in capital raising. In the first half of 2007 it had basically raised €500 million at a 2% discount, which even in today's standards is a hell of a fund ... or an equity raising. It had a tier 1 bond six times oversubscribed in the first half of 2007, so this was a rapidly, kind of, changing environment.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. Did you say earlier on in response to Deputy Higgins that correspondence from the Financial Regulator would not have been brought before the board as a matter of course?

Mr. Gary McGann:

I don't believe the board ever saw any correspondence from the regulator. I've no recollection.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Would never have been included with board packs.

Mr. Gary McGann:

No, as I say, in my time I have no recollection of ever seeing anything from the regulator and ... sorry-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Reports such as, for example, risk management reporting - it is on page 55 of Vol. 1 - would that have been included in information which the board would have been apprised of?

Mr. Gary McGann:

I don't believe so, Deputy, no.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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So where would this have sat in the structure?

Mr. Gary McGann:

The risk and compliance-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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The risk and compliance committee. You were the chairperson of the audit committee. Is that right, Mr. McGann?

Mr. Gary McGann:

I was, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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From what period?

Mr. Gary McGann:

From June or July 2007.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Sure. Can I take you to Vol. 2? And we'll start with page 63. Now, the initial report here predates your period, it relates to 2003, but I just want to highlight a couple of issues where at the bottom of page 63, "In 10 [...] of [the] 12 files [examined - this is on the issue of security underpinning loans] no letter from the bank's solicitor confirming that security was complete is evident".

And it goes through various examples where no solicitor's letter confirming security being present and then the explanations were the verbal confirmation in many cases had been received and the documentary evidence had been requested from the solicitor after the loan had been issued. Now, as I said, that was 2003. If you keep going to page 67, at the bottom of that - this is January 2007 - it references, "The previous audit report on Banking Ireland in 2005 highlighted cases whereby advances were made on the receipt of verbal rather than written confirmation from the Bank's solicitors." So, clearly the issues identified in 2003 continued in 2005. Now you were on the audit committee at that time. Do you recall these difficulties?

Mr. Gary McGann:

I was. I recall issues like this being raised in internal audit as part of the audit process and when they were, they were taken very seriously and they were raised at board and undertakings given by the ... first of all, as you know, the process here would be that management have the right to respond. They would, in most cases, agree that this was the case and agreed actions would be taken, including getting the documentation and an undertaking that this was not going to happen in future. I do recollect at one point basically this becoming a real issue where the chairman instructed the CEO to ensure that no lending would happen without the documentation being in place. So, as-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Was there sufficient follow-up? I mean, if you look at, say, page 68 and 69, which, again, is from January 2007, there are various examples there. Page 68, "We noted 5 (out of 34) cases where items of security specified on the approved credit were either not put in place or were amended without appropriate writtenapproval." Across the page, 69, at the top, "Confirmations of Security[...] items on 7 (out of 34) accounts were still outstanding." I mean this was crazy practice.

Mr. Gary McGann:

With respect, Deputy, I mean, in most businesses you will find aberrations around control processes. In this case, in many instances, these would have been ... they would have been strong verbal statements and the documentation eventually would have been brought to the product.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Hold on now, Mr. McGann. This was a situation where Anglo Irish Bank was lending out millions of euro to borrowers and was accepting verbal assurances that adequate security would be forthcoming.

Mr. Gary McGann:

From the legal profession. Verbal assurances from lawyers.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Was that acceptable to you?

Mr. Gary McGann:

No, it's not ideal at all but it happens. I'm not condoning it, but what I'm saying is obviously it-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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It happened a lot in Anglo Irish Bank.

Mr. Gary McGann:

Well, I think there's evidence of progress. Numbers are reducing, but, yes, it did.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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We have a report from 2003, which is before your period. We have a reference to a 2005 report, which isn't in the pack but, again, where verbal confirmation was being accepted. And, we have a report from January 2007 citing specific instances, again where written confirmation of security of many loans was not evident.

Mr. Gary McGann:

Correct. And that was ... a breach of rules is not acceptable: it is a fundamental principle, Deputy. But, what I'm saying to you is it does happen. When it did happen and internal audit raised it, we took it very seriously. We took it to the board and, as I said, the chairman instructed the CEO to-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Finally, Mr. McGann, a report, again in Vol. 1, starting at page 115 - Lending Ireland, Anglo Irish Bank Development Report, April 2007. Where would that report have sat in the structure of governance? Would that report have come to the board? It's quite high level; I would assume it went to board level.

Mr. Gary McGann:

I don't recall seeing it but it may well have done, Chairman. It is ... while high level in one sense, it's actually very, very detailed in another.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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It is, yes.

Mr. Gary McGann:

Instinct, I doubt it did. It would ... normally that would be the type of report that would go to the risk and compliance committee who, in turn, would give a summary and synopsis of it to the board.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. If you look at page 129, for example, where it looks at Galway client analysis, so these are loans, presumably, extended in that area. It goes through unzoned land, €84 million; zoned land, €392 million, without planning; zoned land, with planning, €236 million - that's the whole land area - development with no pre-sales, €342 million; development with pre-sales, €638 million; development with pre-lets, €48 million; total development exposure, €1.2 billion; land exposure, €700 million: in Galway alone. Do you have any comment on that?

Mr. Gary McGann:

Not really, Deputy. I mean-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Where does the buck stop ultimately, Mr. McGann, for the running of the company? Who's ultimately responsible?

Mr. Gary McGann:

The buck stops with the CEO and, ultimately, the board are responsible for the CEO's appointment.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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But, for the running of the company and its ultimate performance, is it the CEO or is it the board?

Mr. Gary McGann:

The CEO. Absolutely the CEO.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Not the board, for the overall governance and the running and operation of the company.

Mr. Gary McGann:

No, the board set policy, set strategy and appoint a CEO to implement and deliver on it.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And is the board responsible for the performance of the CEO and his team?

Mr. Gary McGann:

Oh, yes, I think ... absolutely. They appoint him. They have the right to appoint and the right to dis-appoint.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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So, ultimately, in the hierarchy the buck stops with the board.

Mr. Gary McGann:

Certainly in terms of the appointment of the executive to deliver on the strategy.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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"On the appointment of the executive to deliver on the strategy" but not for the overall implementation of the strategy.

Mr. Gary McGann:

No, I think that's an executive responsibility.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Not the board's?

Mr. Gary McGann:

To my knowledge ... certainly as I have operated on both sides of the equation - and I recently retired CEO after 30 years as CEO - I've always ... that's the context in which I've always viewed it.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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But you could argue by extension that the-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You are going to have to-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----responsibility of the board ends with the appointment of the CEO.

Mr. Gary McGann:

No, no. The appointment and the assurance that the CEO delivers on his objectives, which are the objectives set by the board.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I'm unclear, Chairman, but if you want to move on-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I can allow you a moment if you're just on the same line of questioning, if you need clarity on that. Once we don't open up another line of questioning, I will give you another moment, if you wish.

Mr. Gary McGann:

Deputy, I'm not trying to be Jesuitical.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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No, nor am I.

Mr. Gary McGann:

I am genuinely saying to you ... I'm saying to you, as a CEO - I've retired three days - as long as I've been a CEO, I've been very clear that the responsibility to deliver rests with me. I appoint a team, I deliver it with the team. In terms of how I do and who ... how it's evaluated, how I do, absolutely, that's the board and they have the right to maintain me, appoint me or get rid of me.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. Gary McGann:

If I'm not performing, I'm presuming get rid of me is the ultimate objective.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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The CEO reports to the board.

Mr. Gary McGann:

Absolutely.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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We'll round that off then, if we can, maybe. Is ... was there any concern at board level with regard to the CEO and how the company was being managed and the business model being pursued?

Mr. Gary McGann:

And I don't want, Chairman, to stray in the wrong direction here-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I understand, yes. I'm not talking in hindsight now but at that time.

Mr. Gary McGann:

No, Chairman, is the honest answer.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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There wasn't. Okay, thank you. Deputy Pearse Doherty.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Fáilte to Mr. McGann chuig an coiste. Can I ask you just to start off with: in your opinion was the decision to combine the role of finance director and the chief risk officer prudent or appropriate at the time when the loans were growing rapidly, in terms of the need to maintain an independent risk function at the time, allocation needed ... and the time allocation needed for both responsibilities, was it prudent and responsible to merge both functions?

Mr. Gary McGann:

I think the ... if I start with the consequence of it and work backwards, if I may, Deputy. I mean, I think, on the positive side, the person appointed was probably the most experienced banker in Anglo, after the chairman himself and, obviously, a qualified accountant, a man of long experience and a man very highly regarded in terms of his knowledge, integrity, etc. So, from the point of view of the role of risk, that was a plus. Under him, as finance director, there was a very strong team led by a very strong CFO who, in my experience, was actively involved in a lot of the areas that you would typically see a finance director in. In fact, the concept of a finance director, with a CFO reporting to the finance director, in my experience, is rather unusual. But, having said that, if you pull it all together and look in hindsight, clearly, I think the answer is it certainly wasn't, in hindsight.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay, it wasn't prudent or appropriate, in hindsight. And, when this was discussed, was it discussed in detail? Was there ... this is quite an important change, a big change, was there discussions or was it just a rubber-stamping situation by the board?

Mr. Gary McGann:

I'm not sure it was a rubber-stamping. I don't have a recollection of it being a big subject issue, quite honestly, Deputy.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Who proposed it?

Mr. Gary McGann:

I don't recollect but I ... sorry, the logic, without being able to tell you definitively ... but the logic would be that this would be the CEO who would propose this.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Mr. Walsh, on page 2 of your statement, you say the unique combination of the freeze in liquidity and interbank lending, coupled with the huge deposit withdrawals, was not anticipated; its scale and reach impacted globally across the wide range of industry and commerce and not just banking. Now, one could argue that this is one view of the international context. Evidence presented to this committee shows that from late 2007, Irish banks were seen as overexposed to the credit crunch, and from early 2008, Anglo Irish Bank was being cited as increasingly risky investment above others. The reasons given by the rating agencies at the time were its commercial property lending portfolio and its reliance on wholesale funding. So, can you inform the committee as to whether the downgrades from rating agencies were discussed at meetings that you attended at board?

Mr. Gary McGann:

They were certainly referred to but in many ways, the rating agencies' actions and elaborations were of a business model and business circumstances that had prevailed for many, many years, and indeed the people who continued to put money with the bank, the people who continued to invest with the bank were the same type of people who ... who had been supporters of the bank for many, many years previously. What had changed is obviously the circumstances and the potential confluence of a number of different issues, which is effectively what I was referring to in my, in my initial statement.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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So when agencies and those who advise investors were saying "sell, sell your shares in Anglo Irish Bank" as early as January 2008 because of the exposure, overexposure to commercial property and then seeing what was happening in the market and what was likely to happen in the future, how did the board respond to that?

Mr. Gary McGann:

There wasn't a sense that there was that level of difficulty in early 2008, Deputy. I mean, the reality of property collapse in Ireland is probably ... was only really crystalised in early 2009, when the last quarter of 2008's stats-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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But you were being downgraded in early 2008-----

Mr. Gary McGann:

Yes, but-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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-----as a result of overexposure in property. We had the Financial Timesarticle, for example, in around the "St. Patrick's Day massacre", talking about Anglo Irish Bank being in the same boat as some of the other banks that had gone bust and run into trouble. So this wasn't a secret kind of conversation that was happening between the numbers. There was openly people ... large institutions who were telling people to get out of Anglo Irish Bank, rating agencies were downgrading you, serious commentators in international financial press were saying "stay clear of Anglo Irish Bank". Did the board just say "we know better" or did you take a serious-----

Mr. Gary McGann:

No, no, but the board had a business and a business model that it needed to sustain. The board's focus at all time was how to ensure the viability of the business, how to sustain the business, how to protect the depositors' interests, how to ensure that the value for shareholders wasn't totally eroded.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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What strategies did the board put forward to address the downgrades that were happening at that time, in early 2008?

Mr. Gary McGann:

It wasn't open to the board to change the model, if you think about it. I mean, there was a business model that really had to be sustained, so the focus then was on where lending was made. There was obviously the challenge of curtailing or stopping the lending which would actually become a self-fulfilling prophecy in terms of the demise of the business. There was the whole area of having to ensure that we could source funding to sustain the business.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Mr. McGann, we have seen evidence at this committee and ... you know, in terms of where all the banks seen themselves post-2008. It was a presentation, I think, either to the Central Bank or to the Department, and Anglo Irish Bank stood out because they expected to lend more during that period. They believed they were going to be highly profitable and so on and so forth. We have heard evidence from Nationwide, for example, that they stopped all new lending in ... at end of 2007. Was it not the prudent and appropriate thing for the board to change the strategy at a time when agencies, international commentators that were reputable, were saying that your model is "broke" and people should run from your model and from your bank?

Mr. Gary McGann:

I don't think the board accepted that the model was broken, number one. I think, number two, in terms of the lending, there was a very definite focus on where lending was to be made into areas that the board and the management, most particularly in the risk and compliance committee, believed could deliver ... obviously not in the circumstances that ultimately prevailed but in a more benign downturn than we ultimately achieved.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Do you regret not recognising at that point in time that the model may have been broke?

Mr. Gary McGann:

I certainly regret being a party to the business that turned out the way it did.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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In relation to the St. Patrick's Day massacre, can you inform the committee as to whether this was discussed at board meetings and what were the issues raised by the drop of Anglo's share price?

Mr. Gary McGann:

The answer was "yes", it was discussed on a number of occasions and at that time, the big factor that was weighing on the minds of the board was the whole uncertainty that the CFDs or the increasing clarity of what the CFDs meant, and what the implications and challenge that was going to be for the business in terms of an overhang and the lack of confidence as to how it was going to play out, and therefore the fear factor. I mean, I happened to be running a business where the share price was in freefall. If I could take a quick segue just to give you a parallel in a totally different world, but it is very important that it was ... in Smurfit Kappa, we IPO'd in March 2007 with a €16.50 share price. By early 2008, mid-2008, our share price was €1, so the value of the business had gone from about €5 billion to €300 million. That was what was happening in a recession-proof business but because we weren't a bank, it actually didn't matter to the core model and the core business. In the case of the bank, once the share price started to come under pressure, obviously confidence in the bank in the context of retail depositors and even corporate depositors was the issue, and that was the key focus at the time.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Would you accept that while the St. Patrick's Day massacre was the most dramatic fall in share prices, that your bank was taking a bludgeoning for the previous number of months, right back as far back as 2007 in terms of share drops?

Mr. Gary McGann:

It was certainly being ... once the rumour machine started to run on, around, I think, September, October 2007.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Can I go back to the point you mentioned in terms of the, the Druids Glen outing? And you said that the meeting took place in Fintan Drury's house. Is that house in Druids Glen?

Mr. Gary McGann:

No.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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No? Where was that meeting?

Mr. Gary McGann:

It was, it was near Druids Glen. But I mean, it's a private house, I don't-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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No, well, you see, it's important because we have not been told that ... up until now, and the public hasn't been told that there was a private meeting in a residence, despite this being a matter of public discussion since 2011 at least. There has been never a suggestion that there was a meeting in a private house off Druids Glen.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Just to give a bit of assistance here, Deputy, I'm not looking for the postal code of the property but is it kind of-----

Mr. Gary McGann:

It's in the vicinity.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It's in the vicinity. So you're talking kilometres, miles or-----

Mr. Gary McGann:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Less than kilometres.

Mr. Gary McGann:

It's in Wicklow and Druids Glen is in Wicklow.

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

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. The agenda for the meeting ... can you furnish the agenda to the meeting to the committee?

Mr. Gary McGann:

I don't have it, Deputy. I didn't keep it.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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It was not saved on your computer.

Mr. Gary McGann:

I got a hard copy.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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We were told by Fintan Drury that you actually drew up the agenda for the meeting and brought the agenda to the committee.

Mr. Gary McGann:

No, when you talked to Fintan Drury ... that Alan Gray drew up the agenda-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Sorry, my apologies, my apologies. We will check that with Alan Gray when he comes in. You don't have ... you don't have a copy of the agenda.

Mr. Gary McGann:

No.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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And in relation to the meeting that took place, Alan Gray had made previous ... previous statements in relation to the meeting in terms of how he joined Mr. Cowen and Mr. FitzPatrick for dinner afterwards, and that has been the impression, the public impression up until now; that it was a golf outing and then dinner. Now we learn that there was actually a private meeting in a private residence which discussed issues around the economy but nothing to do with bankers or banks, despite the fact that we have directors or board members of Anglo Irish Bank, the CEO, members of the Central Bank there. Why, in your view, would the likes of Mr. Cowen, the former Taoiseach, address the Dáil-----

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

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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-----and made the point that you joined the Taoiseach after the golf outing, and it was held in public and it was not in any private corner? Why did you not challenge that and say ... and explain that actually there was a private meeting held behind closed doors, not even in Druids Glen complex, as we were all led to believe, but in somebody's private residence, that discussed these matters?

Mr. Gary McGann:

I had no sense that there was any such misinterpretation, Deputy, quite honestly. I thought Mr. Drury was very clear that there was a meeting because I think you queried him on the sequence of events as to whether they would have been better to have the golf first or the golf second. I can't remember the query but I think you queried the sequence of events.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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We did query the sequence of events. We asked Mr. Drury to ... I asked Mr. Drury, in particular, to correct me if I was wrong and I ... I suggested that he explain to this committee that there was a meeting beforehand either in the foyer or upstairs in a private room. We were not told that it was off-site in a different ... in a different residence. But Mr. Cowen in his evidence didn't provide any indication whatsoever that there was a private meeting beforehand off-site in relation to, and indeed his testimony to the Dáil-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Deputy, I'd ask you not to make a judgment on it but-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Well I'm not making a judgment-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----just to seek the record, Deputy.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I'm actually just ... for example, can I ... the reason I ask you to challenge this is ... the perception is that there was a social outing - this is from the Taoiseach in the Dáil:

We were joined that evening by Alan Gray, an economic consultant, Gary McGann, the chief executive of Smurfit Kappa, and my Garda driver, who also attended the lunch. These individuals came for dinner but only three of us were on the golf course. When Deputy Ó Caoláin came over, I went to the wedding breakfast as he suggested. The reason I said that was not to muddy the waters. There was no suggestion of meeting surreptitiously in a corner or a room.

But wasn't ... isn't it now the case that there was a meeting, privately, in a corner or in a room, not even in Druids Glen, that discussed all this matters and that you not only joined afterwards but you were actually there from half nine that morning discussing an agenda that none of us ... none of us have seen yet?

Mr. Gary McGann:

That is correct, there was. There was a meeting.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Deputy?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I'm going to move to wrapping things up. Deputy Kieran O'Donnell, you have three minutes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Thank you, Chairman. Just a point of clarification, Mr. McGann. I may have misinterpreted, but you did speak at the dinner for Mr. Cowen that Anglo gave on 24 April?

Mr. Gary McGann:

Yes, there was a kind of a round the table discussion. Yes, I did.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But you gave a presentation-----

Mr. Gary McGann:

No-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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-----on Smurfit Kappa, no?

Mr. Gary McGann:

I had no presentation ... I mean I gave a view of the world through the eyes of Smurfit Kappa, yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Can I just bring ... the issue around the contracts for difference for Seán Quinn. Did the board look for information from the CEO or was it a matter that the CEO brought the issue to the board?

Mr. Gary McGann:

I think - and I'm kind of working on memory and surmising, Deputy, here - but my sense is we all kind of arrived at the same information base via the media, and how the media got it in the first instance is ... is not clear to me. But it all started in the ... kind of, the general public environment. We obviously raised the question and, in fact, the discussion at board was that the chairman, I think the chairman and the CEO, if I remember correctly, were dispatched to meet ... but first-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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The board insisted on the chair and the CEO to go and meet Mr. Quinn.

Mr. Gary McGann:

I'm not so sure we had to insist, I think. I mean, it was agreed.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And did you deem it at the time that it ... that it was a serious threat to the bank?

Mr. Gary McGann:

I certainly deemed it to be a very unhealthy environment to be in. And I'm minded ... I'm old enough to remember that the late Tony Ryan, in fact, had a big chunk in Bank of Ireland at one stage and that was deemed - it was much less, it was around 10% - and that was deemed to be an unhealthy situation for an individual to have in a significant bank. So, yes, I did not think, in any sense, that this was a healthy situation.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Could it have brought down the bank if it went unchecked?

Mr. Gary McGann:

I, I'm not sure it was in that ... in hindsight, in the circumstances that prevailed, it certainly could have undermined it seriously, but that wasn't on our mind at the time if you remember, Deputy, because a systemic failure wasn't ... wasn't on the cards.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Can I refer finally, Chairman, to Vol. 2, page 109? It's a presentation that was made to the board by the then CEO, David Drumm, on 26 September, three days prior to the guarantee being put in place. I suppose I just ... were you present at that meeting, Mr. McGann?

Mr. Gary McGann:

I presume I was, Deputy. I just can't ... I didn't-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Really, I suppose, what I want to ask is that it's put in the report that immediate liquidity support from the Government is essential. That's on page 113. And we had Mr. FitzPatrick in here this morning, a former-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Mr. Fitzgerald. Different soldier, Deputy. You're all right.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Wishful thinking on my part, Chairman.

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

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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A personal view, Chairman, not a committee view.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Please move on.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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He stated that around that time, he said: "I believe most of the senior staff honestly [felt] the bank [would] not recover". He says there was no answers at the time. So-----

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

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What was the prevailing mood at that meeting? Was ... did the board feel at that meeting on 26 September that the game was up for Anglo, unless the Government stepped in to support it?

Mr. Gary McGann:

Sorry, what page?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Page 113, Vol. 2., and it's "1. Go it alone". It's the fourth point down - "Immediate liquidity support from Government is essential".

Mr. Gary McGann:

Thanks, Deputy. I heard earlier that Mr. Fitzgerald gave the testimony he did. I ... certainly that wasn't ... there was no way like that level of doomsday mentality. This is a very, very challenging ... let me not understate it. It was extremely fraught, very challenging, but it was totally liquidity based. The perception ... belief, rather than perception, was that the lack of liquidity couldn't sustain. It wasn't just Anglo. There was a ... it was absolutely choked in the broader system and ... so therefore a liquidity event was needed as a matter of urgency to, to obviously fund it.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Did you as a board direct the CEO and the chair to make contact with Government to get a liquidity support?

Mr. Gary McGann:

No, not to my recollection. I think that may well have been already under way but-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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But what I want to know ... this is only three days prior to the guarantee. And when I read this presentation, I don't feel the sense of alarm or a reflection of what the actual perilous position that Anglo was in.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Conclude now, Deputy.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So what was the prevailing mood?

Mr. Gary McGann:

The prevailing mood was there was a fundamental need to address what was looking like a very challenging situation, at least on a liquidity basis and, perhaps, longer term.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Were you told by the executive that if you didn't get a liquidity support stream in place that Anglo would go out of business a week later?

Mr. Gary McGann:

No.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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There was no feeling, no view, even though that was the case?

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

Mr. Gary McGann:

The answer's "No".

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

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Deputy Joe Higgins.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Mr. McGann, just to ... trying to get clarity on this ... in the pre-golf outing meeting in Mr. Drury's house, it was yourself, the Taoiseach, Mr. Cowen, Mr. Drury and anybody else?

Mr. Gary McGann:

Mr. FitzPatrick and Mr. Gray.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Mr. Seán FitzPatrick and?

Mr. Gary McGann:

Mr. Alan Gray.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Mr. Alan Gray. And Mr. FitzPatrick was the chairman of Anglo Irish Bank, you were a director or you were a member of the board-----

Mr. Gary McGann:

But I was invited by Fintan Drury as CEO of Smurfit Kappa Group.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes, but you were a member of the board of Anglo.

Mr. Gary McGann:

I was. I was.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Mr. Drury was a member of the board or had been a member of the-----

Mr. Gary McGann:

He may still have been, or about to go.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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-----board. And how does that meeting relate to the dinner that took place later? Because the impression that many of us have is that-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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A question, not conclusion.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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I mean, was it the same discussion that started earlier in the morning-----

Mr. Gary McGann:

At the dinner that night?

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

Mr. Gary McGann:

Yes, the dinner that night was a social ... like, "We're having dinner - join us". I mean, I was invited to go to a meeting to discuss the general economic environment that I saw in Smurfit Kappa. That was the morning meeting. There was a game of golf which ... I had to go back to work and I was invited, if I was available, for dinner.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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So your evidence is that the substantive discussion on economic issues of a general character took place at the morning meeting.

Mr. Gary McGann:

Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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And even with high-level representatives of Anglo Irish Bank and Anglo Irish Bank somewhat, or quite a bit, in the limelight, beckoning problems etc., its problems or issues related to it were not discussed.

Mr. Gary McGann:

It was clearly ... it was clearly positioned to me that that was not the purpose of the meeting.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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It was not the purpose of the meeting-----

Mr. Gary McGann:

Yes.

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

Mr. Gary McGann:

No, and therefore didn't occur.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay. Mr. McGann, you also attended an Anglo board dinner on 24 April 2008 at which the then Minister for Finance, Mr. Cowen, was a guest.

Mr. Gary McGann:

Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Was it common for Anglo to have dinners with senior political figures?

Mr. Gary McGann:

Common ... in my recollection, common as in regularly, no. To my knowledge, to my experience, no. I should caveat this by saying I travelled an awful lot. I was away, so anything that was outside the normal cycle of board meetings I wouldn't have been available anyway. So, I don't sense it was common. It happened from time to time over the years.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Did you attend other dinners of the board or substantially organised by Anglo, with senior political figures?

Mr. Gary McGann:

I can't recall that I did, Deputy.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Were you aware of any-----

Mr. Gary McGann:

I was aware that there were previous ones, certainly before my time, and maybe even during my time when I wasn't there.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Do you recall who the guests, the political-----

Mr. Gary McGann:

I don't, Deputy, I'd be speculating. I've heard names but I don't definitively know that.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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And finally, at those dinners, do you know if any representatives of the Central Bank or the Financial Regulator would have been in attendance?

Mr. Gary McGann:

I ... again I'm working on ... hearsay is maybe too strong a word, but I have a sense that there may have been a dinner once or twice with the Central Bank or with the regulator but I couldn't be more definitive.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you, Deputy. I am going to move things to wrapping up and in final conclusion I'll ask yourself, Mr. McGann, if you want to make anything by means of final comment or contribution and maybe just to, kind of, assist you into that area, you were speaking earlier, I think with both Deputy O'Donnell and Deputy Higgins, in regard to the bonus culture, or the bonus structure in Anglo Irish Bank. Could I ask you, in your opinion, if the structure of the bonus programme in Anglo helped or hindered the pursuit of a sustainable business model and strategy?

Mr. Gary McGann:

In theory, Chairman, it should have helped a sustainable business model because the weighting of the economics, if the business was successful and reflected in the marketplace, would be that the economics for the management would have been better from a sustainable, long-term programme rather than a short-term one. That's not to say that the short-term, obviously, as we've discussed already, wasn't attractive but the weighting was towards the longer term. Now, as you know, over time this is all evolved and, indeed, the argument is that it should be even more weighted long term and with claw backs.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So, that is in theory; in practice, did it help or hinder?

Mr. Gary McGann:

I think, in practice, it clearly didn't. I'm not sure that you can draw a direct line of correlation between the two but it's obviously not unrelated and the answer is, "No".

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, Mr. McGann, in terms of your own engagement here with the inquiry this morning and as Deputy Higgins referred to you as a very well-established capitalist. Coming from a very well-established socialist, I don't know how that balances itself out but do you, kind of, take the comment anyway? As one of Ireland's leading businessmen, do you feel that your business experience enabled to you to make a meaningful contribution to the governance of Anglo Irish Bank?

Mr. Gary McGann:

I certainly believe, Chairman, that I did the job I was meant to do to the best of my ability. I gave it as much effort as I could and the fact that it has ended up the way it did is a matter of serious regret to me, but I don't feel that I short-changed the business or the shareholders or the staff.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Did your general business experience translate into you having sufficient skills to carry out your role as a bank director during your time with Anglo?

Mr. Gary McGann:

Well, I think if the view is that only people who are experienced bankers should be bank directors then the answer is clearly, "No", but I don't hold that view, Chairman. I think a good mix of directors is always good.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And in that regard, do you consider your decision to join Anglo to have been a mistake or a good decision?

Mr. Gary McGann:

On a human level, Chairman, I'd be a happier man if I hadn't been there but given that I chose to accept the offer, I did my best.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And in your own regard, what was your personal responsibility for its ultimate failure?

Mr. Gary McGann:

I think being a member of the board of the bank that ended up the way it did, I obviously share the responsibility that everybody else did.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you, Mr. McGann. I'm going to bring matters to a close. Is there anything further that you would like to add by means of suggestions going into the future or any other comment that you would like to make, Mr. McGann?

Mr. Gary McGann:

Not really, Chairman. I think it's been very comprehensive and I thank you ... to you and the committee.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you. With that said, I'd like to thank you for your participation with the inquiry today and for your engagement with it. You're now formally excused. I propose that we suspend for just about an hour and to return at 2.30 p.m., if that's agreed. Is that agreed? Agreed.

Sitting suspended at 1.25 p.m. and resumed in private session at 2.37 p.m. The joint committee resumed in public session at 2.44 p.m.

Anglo Irish Bank - Mr. Matt Moran

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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We will resume in public session. Is that agreed? Agreed. We’ll now move on to session 3 of today’s public hearings with Mr. Matt Moran, former finance director, Anglo Irish Bank. 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 please switched off, particularly so given that there was complaints this morning with regard to interference. Today the focus of the inquiry is on Anglo Irish Bank. At this session we will hear from Mr. Matt Moran, former chief financial officer at Anglo Irish Bank. Mr. Matt Moran was chief financial officer at Anglo Irish Bank from 2004 to 2008 and finance director from 2009 until 2011. He is currently a partner in the corporate finance division of PwC Luxembourg. Mr. Moran, you are welcome before the committee this afternoon.

Mr. Matt Moran:

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 to their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You're directed that only evidence connected with the subject matter of these proceedings is to be given. I would also remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings.

Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right. And members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.

The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee, will be relied upon in questioning and form part of the evidence of the inquiry. So, with that said, if I can now ask the clerk to administer the oath to Mr. Moran 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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Once again, welcome, Mr. Moran, and if I can invite you to make your opening comments or remarks to the committee please.

Mr. Matt Moran:

Thank you, Chairman. Chairman, members of the committee, since the beginning of 2009 I have co-operated with all the various lines of inquiry and investigations by State and other bodies and I welcome the opportunity to come before you this afternoon. In addition to the detailed written submission which I furnished to the committee in early August 2015, I come here today before you to further assist the committee - as best I can - in the crucial work you are undertaking.

The failure of Anglo Irish Bank and the wider banking system in Ireland was a calamity for the Irish economy and for the many people associated with the banks, including staff, customers, investors and the Irish taxpayers. Whilst I never served as a member of the board of directors of the bank or as an executive director, I was within the next layers of management, both before its nationalisation and afterwards. Following nationalisation by the Minister for Finance in January 2009, the new Government-appointed board selected and appointed me as director of group finance. I will endeavour to give the committee as clear a picture as I can of the circumstances of which I have knowledge surrounding the failure of the bank.

I joined the bank in late 2002. Prior to that, on completion of my university studies, I spent some eight years as a financial consultant in London and New York, primarily in supporting small and medium-sized enterprises. I had no lending experience and my role in Anglo was not on the lending side. My brief was to support the group finance director, as required, and I carried out a variety of projects in this regard. My expertise was in corporate finance activities such as mergers and acquisitions, equity raising, financial analysis, as well as special financial assignments. Among the projects that I managed or had significant involvement in were: major share placings, raising almost €1 billion in new equity capital for the bank; liaison with international investment analysts that were conducting independent analysis on the business; assessing acquisition opportunities; and completing the disposal of the bank’s private banking business in Austria and also in Switzerland.

Within group finance, I was involved in restructuring management accounts reporting ... to enhance reporting standards, recruiting specialist accounting skills in each area of the Dublin-based finance team, overseeing the introduction of international financial reporting standards for the bank's accounts and in assisting the leadership of the treasury trading business to devise strategy and business plans.

In late 2004, I was given the title, chief financial officer, to assist my profile in representing the bank without any change of my role. My investor relations function meant externally I became more widely known as an executive of the bank. My work in these and other areas reflected well on the bank internationally and increased my standing internally. I also had responsibility for managing the group finance Dublin function. This function included the preparation of monthly management accounts, the preparation of regulatory returns on the direction of the group finance director, and liaising with the auditors on the conduct of the audit of the Irish operation of the bank and group consolidation. During this period, the quality of the bank's internal and regulatory reporting were greatly improved.

Events since the banking crisis have shown that the risk position of the bank and that of all other financial institutions in Ireland deteriorated to an event ... to an extent not foreseen at that time. The same happened across Europe and elsewhere. There are well-documented external and internal reasons for this. The external reasons have already been aired before the committee. I don't propose to dwell on these, except to underline that they made life impossible for many financial and regulatory institutions, with fault lines being exposed across a wide spectrum. There was little or no perception by forecasters or authorities of the severity of what lay ahead. In addition, the bank had a distinctive external pressure arising through the Quinn investment and leveraged contracts for difference that were held through a multitude of investment banking and other broker counterparties internationally.

There were also significant internal issues within the bank, some of which are indicated in the core documents circulated by the committee in recent weeks. These support the view outlined in my written submission to the committee that the lending function was excessively dominant in the bank and that the risk function controls were, ultimately, insufficient. This is best captured in the decision to consolidate the leadership of the risk and finance functions under the group finance director in 2007 and the management reorganisation of the same year. That reorganisation saw the senior executive board narrowed to just five people, including four lenders and one non-lender. It was apparent from these and other events that the value attached to independent views had diminished.

Group finance Dublin did not have responsibility for lending by the bank. Group finance Dublin did not have any responsibility in group risk management, which was the key control function in the conduct of the bank's lending business. At all times since the late 1990s, risk and finance teams were entirely segregated with distinct areas of responsibility. This continued to be the case even after the aforementioned change to leadership.

Management accounting and audit relied on the integrity of the data inputted by the lending divisions, regional operations and other departments in the bank. This data was adjusted to account for impairments and provisions set out in a monthly report prepared independently by the risk management department based on its detailed assessment of loan risk. As in almost all banking institutions, the interrogation and scrutiny of lending data and underlying risk was the responsibility of risk management. Inadequate controls in this area was one of the factors in the subsequent difficulties that faced the bank.

From the second half of 2007, throughout the year 2008 and into 2009 the bank was in constant spasms of crisis. Strenuous efforts were made to determine the extent of the bank's downside exposure to the ensuing financial turmoil, both within and outside of the bank. My role throughout this time was primarily looking at capital opportunities for the bank in international capital markets. The incessant downward spiral in each of the economies in which the bank lent money, but most particularly in Ireland, exacerbated the scale of losses in each half year. None of these reviews by multiple parties from within and outside of the bank identified the scale of the potential losses. In addition, none of them, from what is known to me, found defects in financial reporting in respect of lending impairment.

Internal audit within the bank, which reported directly to the board audit committee and the chief executive, would have conducted its own reviews on processes and procedures. The factors contributing to the failure of the bank were multifaceted and complex. There were many actions, decisions, events and circumstances surrounding this and all viewed through a different lens than the one we use today.

I would like to conclude by expressing my own sincere and deep regret for the great hardship that the failure of the bank and the wider banking system in general inflicted on so many. Chairman, notwithstanding the constraints placed upon me, which the committee is aware, and the fact that I have not had access to potentially relevant materials pertaining to the bank from 2002 through to 2008 and thereafter, I will now endeavour to answer any questions you and other members of the committee have and seek to help you in relation to your lines of inquiry.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Moran, for your opening statement and if I can invite Deputy Eoghan Murphy to commence questioning. Deputy, you have 20 minutes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman. Thank you, Mr. Moran. You're very welcome. I want to begin with the crisis period beginning in '07. At the beginning of '07, a stockbroker in Davy's begins advising against the purchase of Anglo shares because he believes them to be overvalued. What was your reaction when you heard that news?

Mr. Matt Moran:

I don't recollect, Deputy, the precise timing or who that stockbroker was but if you look back from 2005-06, the bank's stock had re-rated. So, it used to trade at a discount to the market and, in 2007, had risen to a premium to the market and with that change, with that increase in value over time, a number of brokers then, at that stage in 2007 or 2008, but especially in 2007, changed their recommendation from a "buy" or a "strong buy" to a "hold" or a "sell".

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Your reaction to stockbrokers who were claiming that the stock was overvalued by two thirds and were recommending a "hold" or a "sell". Do you remember any particular reaction yourself or in the bank?

Mr. Matt Moran:

In 2007, Deputy, and the stock being overvalued by two thirds, I don't have direct recollection of-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Have you read Simon Carswell's book on Anglo Irish Bank?

Mr. Matt Moran:

No, I have skimmed through it but I haven't read the book.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Well, do you mind if I quote a couple of things from that book to you?

Mr. Matt Moran:

Sure, certainly.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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There was a meeting of investors in Anglo's boardroom in September 2007 - something you did regularly, you brought people in - and a stockbroker from Davy's was there who had been advising against purchasing Anglo's shares because he felt that the falling property market and rising cost of borrowing would be a problem for the bank.

And it's alleged, or it's written in the book, that you escorted that person out of the meeting and had harsh words with them. Do you recollect that?

Mr. Matt Moran:

I do recollect the instance of the meeting and, if I stand back looking at the time, Davy's were stockbroker to the bank and that means their analysts covered the bank. All of their other stockbrokers were allowed to take their view in respect of the bank and they could express their own view if they wanted or as they saw fit.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Were you a shareholder in the bank?

Mr. Matt Moran:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Do you think that your position as a shareholder clouded your judgment in some way when it came to these types of issues?

Mr. Matt Moran:

I don't think so at all.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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You don't think so. Okay. So you don't accept the finding of the Nyberg report that this may have coloured the judgment of executives at a time of high growth for the bank.

Mr. Matt Moran:

I can only talk from my own perspective, Deputy, that shareholdings never coloured my view in respect of the bank. I had joined the bank, I had worked in the bank over a period of five years at the time and was long term in the bank for my future. That's how I saw the future of my career.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. So the financial investment that you also had, you don't feel that it conflicted your ability to have a more sound judgment or an objective judgment when it came to things like what shareholders were saying ... or stockbrokers - excuse me - were saying about the value of the bank and its condition.

Mr. Matt Moran:

I don't believe that at all, that it clouded view. Like, my shareholding has cost me very significantly and, well, my shareholding never clouded my view. What was important was to have open dialogue with investors and with brokers and, I think, that the bank engaged in fulsomely.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. We heard earlier from another witness that ... three key events, basically, in the crisis for Anglo and the first was the run on Northern Rock, which also happened in the same month as that meeting that you had with potential investors. Would you agree that the Northern Rock run was the first ... was the beginning of the crisis for Anglo?

Mr. Matt Moran:

No, Deputy, I would go a little bit earlier. I would go back to the time when a fund from a large French bank was ... it was noted into the market that they were no longer going to permit cash calls on the fund. And I think that was the start of the liquidity crisis or the first signal that became available in the market and that was around August-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Around August, okay.

Mr. Matt Moran:

-----and then subsequent to that we saw a number of banks, very large global banks, do deals in the market where they took relatively short-term funding at quite high cost.

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

Mr. Matt Moran:

I think the first public instance - you are right to refer to - is Northern Rock because, you know, a run on a bank in a neighbouring economy was clearly a huge issue for the Irish banking system and Europe in general.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. If we move forward then towards the end of the year ... and in December of '07 Anglo develops a policy document for ... "Stress Testing & Scenario Analysis Funding Liquidity Risk". It is in the evidence book, Vol. 2, page 37, which you would've seen. We don't have to go into the book actually - it's not that important - but it included details for stress parameters for six different scenarios and their impact on the banks' funding and liquidity positions. Was the Financial Regulator aware that you were doing that work internally at the time?

Mr. Matt Moran:

I don't know precisely if the regulator was aware but this followed the introduction of a new liquidity regime for the Irish banks that was introduced by the regulator and I'm not sure if this was communicated by risk to the regulator.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, and were you involved in this ... in this document at all, in putting it together?

Mr. Matt Moran:

I might have had limited involvement. I certainly would have seen the document. I don't think I was involved in putting it together or outlining the stress tests.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, I mean, would senior management at the bank at the time have been aware of the domestic standing group, which was the members of the Central Bank, regulator and the Department of Finance who were working on similar stress test scenarios - but for the banking system as a whole - at this same point in time?

Mr. Matt Moran:

I don't know if members of the board were or executives were. I wasn't, Deputy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. And then, so, in terms of any relationship between the work the bank was doing internally to test its own self and how it might get through or manage a crisis, there was no relationship between that work being done and the work being done by the Government, which at the time was modelling - in a simulation - the possibility of an Irish bank failing and what impact that might have on the rest of the system.

Mr. Matt Moran:

Unless indirectly, Deputy, through interactions with the regulator that this was communicated, I personally just wasn't aware of the domestic standing group that you mentioned.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. So, given that these ... that group risk had done this policy report and undertaken stress testing on a monthly basis, why ... in your opinion, why did the bank not react sooner then, when it came to the - and more robustly, I suppose - to the liquidity problem prior to September 2008? Why, when you are doing this at the end of 2007 and, as you say, the crisis has begun since August, why, when it comes to September, do you find yourself, having miscalculated the risk actually and the problems that you are going to face-----

Mr. Matt Moran:

Well, I think from the onset of the crisis, Deputy, in August-September, there was an enormous level of work undertaken in the bank to protect liquidity and it's a very difficult balancing act that a bank undertakes because any show or sign of weakness can cause, actually, the weakness to feed off itself and result in an issue. So the bank worked very significantly to manage liquidity in the period. There were a number of issues, I think, which are worth highlighting. Firstly, the bank was a monoline bank and businesses that are focused, niche players tend to do very well in strong economic environments. Businesses that are focused, niche players, on the other hand, tend to do less well when economies are hit. Now, I don't think anybody foresaw the scale of crisis that was going to come but that was a factor that the bank had to handle.

Secondly, the bank was single-A rated and, over time, it became de factonecessary to have a double-A rating to play in the markets. Thirdly, we had a very particular issue in respect of the CFD holding in the bank and that manifested itself and became known to me towards the end of 200. But I think the fact that that position was held by so many international counterparties, the market became aware of that and that undoubtedly, in my view, had an impact on liquidity within the bank.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Were you involved with any of the attempts to get the NTMA to place deposits with the bank?

Mr. Matt Moran:

No, I don't believe so.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, and did you have a view at the time as to why the NTMA was not placing money with Anglo?

Mr. Matt Moran:

I had little or no contact ever with the NTMA until after the crisis.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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But you weren't involved in discussions with senior management about what was happening with the NTMA or attempts to get deposits from them, or sources of funding.

Mr. Matt Moran:

I was aware, in the background, that there was an effort by the bank to seek funding from all sources. I didn't have any direct involvement with the NTMA.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. What do you know about the green jersey agenda that was undertaken in March '08 by the Financial Regulator and the Central Bank Governor?

Mr. Matt Moran:

I've heard that term used. I don't know if I can say anything more than that about it, Deputy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. Well, I mean, we've discussed it with the Governor and we've discussed it with the other banks as well ... that they did approach Anglo and the head of treasury, John Bowe, was tasked with this project between the banks. Is that correct?

Mr. Matt Moran:

Well, what I recollect, Deputy, is contact between the chief executive of the bank, David Drumm, and the Governor and I recollect David Drumm, post that meeting, giving an instruction to John Bowe to come up with a plan on how the banks help each other.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. And you were involved with that plan.

Mr. Matt Moran:

I wasn't involved in that plan but I recollect it being ... I recollect something of that nature being highlighted by the chief executive in an e-mail post his meeting.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, I'll move on from that then. In the same month, you were part of a delegation that travelled to the Middle East to look for new sources of funding for the bank.

Mr. Matt Moran:

That's correct.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. Can you tell me a bit about-----

Mr. Matt Moran:

New sources of capital rather than funding.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Capital. Can you tell me a bit about that?

Mr. Matt Moran:

So in March 2008, Morgan Stanley arranged a meeting with private equity providers or sovereign wealth funds in the region in order to source potential capital for the bank and, in particular, it related to the CFD investment.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, and did the regulator know that you were making that move in the Middle East?

Mr. Matt Moran:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, and was it successful?

Mr. Matt Moran:

Ultimately, it wasn't successful. So a number of banks from around the world had approached the region, but the banks that ended up raising capital were very much the global brands or internationally recognised players.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. At what point or were you involved at all in any conversations about a guarantee for the bank, either a political one or a legal one? We had in evidence from Kevin Cardiff that Seán FitzPatrick had raised a form of guarantee with John Hurley at the end of April 2008.

Mr. Matt Moran:

I had no involvement, Deputy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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You had no involvement in the discussion?

Mr. Matt Moran:

I wasn't aware of the guarantee until the morning it was announced.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. Coming to political contacts around the time of the guarantee, did you make any? Did you have any?

Mr. Matt Moran:

I had two in particular.

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

Mr. Matt Moran:

Actually, I think they've been aired before the committee. David Drumm asked me to make contact with the then Leader of the Opposition, Enda Kenny. I contacted Enda Kenny and arranged for him to meet with Willie McAteer and David Drumm, and he came to the office to meet with McAteer, Drumm and myself, together with Richard Bruton, and another person attended with them.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. What was the purpose of that meeting?

Mr. Matt Moran:

David Drumm gave the attendees a pack of information on the background to the bank and he took them through the business model of the bank and what the bank does.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, and that was the extent of it?

Mr. Matt Moran:

That was the extent of it.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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And you said there was a second contact?

Mr. Matt Moran:

The second contact was Beverley Cooper-Flynn, who at the time told me - both of these people are from Castlebar, where I'm from myself - and she told me at the time that she was involved in a grouping looking at issues around the crisis. And a key message she passed to me was that if the bank was going to raise capital in the future, that the only way that Government would look at capital was if the bank could raise private capital as well.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. I'm curious, these are the only two political contacts that you are aware of the bank making in the crisis period in September, is that correct?

Mr. Matt Moran:

They're the only contacts ... I think the question you asked me was what contacts did I have.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, I beg your pardon. But, I mean, were you wondering why you were having political contacts not with the Government but with the Opposition, for example?

Mr. Matt Moran:

The contact with the Opposition pertained to just the general noise in the markets that public representatives were making.

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

Mr. Matt Moran:

And I think in the past, from my knowledge, Anglo had little or no political contact. So in the end, it found itself in a position where it had to start from scratch to make some engagements, from what I knew.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. I'm limited for time so perhaps some of my colleagues can continue.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You have five minutes left, Deputy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chair. Moving back then before the crisis period, in terms of the interaction with the Financial Regulator, there was an inspection of commercial property lending activities at Anglo by the regulator in May 2007, which identified 30 separate issues which required to be addressed. And you would have seen it in the evidence book that's given to you. Were you made aware of that report when it was produced? It's on page 67 of Vol. 1.

Mr. Matt Moran:

Thank you, Deputy.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It's a Financial Regulator document, so it won't be displayed.

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

Mr. Matt Moran:

I have the document. Thank you, Deputy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Did you see that document when it was produced at the time with the list of 30 separate issues?

Mr. Matt Moran:

I don't recollect, Deputy. This was addressed to the chief executive. It was cc'd to the head of compliance and it related to lending matters.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, but we heard earlier in evidence that documents like these were not shown to the board - documentation from the Financial Regulator. Would you have been aware of that when you were in the bank?

Mr. Matt Moran:

I had no ... I would have no awareness of that. I never sat on the board. So I would just have no awareness whether it was or whether it was not shown.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. So when you got this document then in your evidence booklet, the fact that the regulator would have written to the bank in 2007 with 30 different issues related to commercial property lending was absolutely news to you, surprised by the details.

Mr. Matt Moran:

Yes, like, and I've read it subsequently, so I can comment in hindsight, or in retrospect. So, you know, I've seen the letter but it's all relating to lending matters, some suggestions, some areas of control weakness, some proposed changes. I don't know if there was a response, Deputy, to the letter-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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There was a response and I wanted to ask you actually about the response, but you weren't involved in formulating it.

Mr. Matt Moran:

I don't recollect, Deputy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. Just on issue 21, which is there, and it was in relation ... 21. (ii), which is on page 70, it talked about the maximum internal property development exposure target being 20% of the loan book. But at March 2007, that exposure accounted for 25% of the loan book, but the response from the bank was that it had no concern with this, that the borrowers were proven clients with large-scale projects in UK and Ireland. None of that's familiar to you in terms of being involved in it?

Mr. Matt Moran:

No, like, I assume that response was prepared to that point by risk or lending.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, and were you involved then with the Financial Regulator's five by five big developer exposure inspection of the five banks and the five biggest exposures that happened in December 2007?

Mr. Matt Moran:

I don't believe I was, Deputy. No.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Well, if you weren't involved then I'll move on. So coming back then to September 2008 and just before the guarantee, in fact, there's a presentation to the board entitled "Strategic Options" from David Drumm. He notes how the market sees Anglo as a monoline bank with a concentration risk in commercial property and he's proposing a merger with Irish Life and Permanent to create a more diversified business model. That's in Vol. 1, page 147, that report that he presented, the presentation that he gave. So were you aware of this at the time? Late September, you know, Anglo has the difficulties that it has, are you aware that this is being considered by management and the board?

Mr. Matt Moran:

I was aware, Deputy, that this and a multitude of other options were being considered from more or less the early part of 2008 right through to now. And I think you mentioned ILP, I think that was considered then and certainly at least at one stage earlier.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. But so, when the consideration came, I mean, what did that say to you as a senior person in the bank? Did it tell you ... did it say to you that the business had failed, that the approach that Anglo had taken in the market wasn't successful, that now it found itself in this position?

Mr. Matt Moran:

Well, Deputy, markets changed dramatically beyond recognition. Banks globally and in Europe were under siege. The Irish banks suffered significantly and if you were a smaller bank, that was further amplified in terms of the pressure you felt in the market. So throughout 2008 there were numerous areas of strategic work to raise capital for the bank, to secure the bank's position, to try and diversify the bank, which was obviously one of the potential benefits from ILP. I had some involvement with the bank's advisers, Morgan Stanley, looking at various options. There were options considered with Rabobank becoming an investor. There were options being considered with a larger bank taking over the bank. So I would say a multitude of options were considered, including doing a rights issue to bolster capital in the bank. But most banks that had tried to do that during 2008, unless they were a global branded player, seemed to damage themselves in the market. So the market read, if you went to raise capital you had an issue and, therefore, doubly punished you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You're out of time, Deputy. Do you want to put a supplementary?

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chair. At that point, and just immediately prior to the guarantee, did you believe that the bank was failing? And my second question is, I mean, was the bank beyond saving at that point?

Mr. Matt Moran:

I think the bank had a very significant liquidity issue that worsened throughout 2008 and became most acute post the Lehman and Washington Mutual collapse and the various transactions that happened around then and the failure for TARP to be implemented. So, the bank had a liquidity issue. I thought at that time that the issues we had seen and the deterioration in the economy wouldn’t be as bad so I really felt that liquidity, solving liquidity, would save the bank at that point in time.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. Senator Sean Barrett. Senator, 20 minutes.

Photo of Sean BarrettSean Barrett (Independent)
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Thank you very much, Chairman, and welcome to Mr. Moran.

Mr. Matt Moran:

Thank you, Senator.

Photo of Sean BarrettSean Barrett (Independent)
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I think in your evidence you were saying that the decision to combine the roles of the finance director and the chief risk officer, you felt, was wrong. I hope I picked that up correctly. Was that - in your presentation just now - was that a correct interpretation?

Mr. Matt Moran:

Correct, Senator, and I objected at the time that it was done to both the CEO and the group finance director at the time and to one other executive director.

Photo of Sean BarrettSean Barrett (Independent)
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And the reasons for your objections?

Mr. Matt Moran:

I just think it’s not right in a bank. Banks obviously are very different to other businesses but risk is a fundamental function of a bank and finance is a fundamental but different function to a bank.

Photo of Sean BarrettSean Barrett (Independent)
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Thank you. Nyberg, on page 101 of Vol. 2, Mr. Chairman, he shares some of Mr. Moran’s concerns here: “neither [the internal audit] nor the Audit Committee was in a position to challenge credit decisions per se, where the main problems [mainly] ultimately arose". So, would you agree with Nyberg on that point, that the internal audit was too weak?

Mr. Matt Moran:

Sorry, Senator, if I just may read-----

Photo of Sean BarrettSean Barrett (Independent)
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Page 101. I’m sure it will come up in time.

Mr. Matt Moran:

Yes, thank you. What I think it’s fair to say, Senator, is that the review of lending and lending risk rested with risk management rather than with internal audit. And I think that would be normally perceived as good practice, as long as you have internal audit that subsequently reviews that, so the lines of defence, you might have heard that terminology.

Photo of Sean BarrettSean Barrett (Independent)
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Did you ever feel at the time or since that - you were raising the money, that's all, you said that, lending wasn’t your province – did you ever feel like going to the lending people and say, you know, “This will come unstuck unless you guys get your act together. We’re out working our socks off raising the money, we’d like a little bit of tightening up on the lending side”, or were you in a silo?

Mr. Matt Moran:

I wrote a memo, which is in the book of evidence, to the board in early 2007, I think, January 2007, where I refer to – that note by the way is from me and Willie McAteer, well I’m the author of that note – I refer in that note to the need to moderate the market’s expectations from the banks, from a growth perspective.

Photo of Sean BarrettSean Barrett (Independent)
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When the terminology in the bank, monoline bank as you say, to us that means sectoral concentration, which is one of the areas, as you know, where the red lights go on, and were you aware that the regulator was concerned about concentrating in one sector and concentrating on a very small number of borrowers? Was that not a risky strategy?

Mr. Matt Moran:

The bank had a model that was to be very focused on the business it undertook and part of the management who had been with the bank for 15-20 years, part of its success and its mantra, was sticking to its strategy and to its focus and not seeking to diversify because diversification also brings with it other risk. The bank lent money to an individual, who in turn bought an asset and then had various cashflows below those assets and that was a source of diversification.

Photo of Sean BarrettSean Barrett (Independent)
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But the Davy economist whom you discussed with Deputy Murphy, he thought your shares were two-thirds overvalued and in fact the eventual discount from NAMA was 61%, so he wasn’t too far wrong. He was a good forecaster wasn’t he?

Mr. Matt Moran:

I don't know, with respect, if it is a Davy’s economist or if it’s a Davy’s broker that’s referred to.

Photo of Sean BarrettSean Barrett (Independent)
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His name is mentioned.

Mr. Matt Moran:

Yes. I don't think it’s an economist with ... and brokers have their own views as individuals relative to their clients and, you know, they are not broking for the bank, they are broking for their investor clients.

Photo of Sean BarrettSean Barrett (Independent)
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But you took grave exception to that, isn’t that correct, to that stockbroker?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Or did you?

Mr. Matt Moran:

I didn’t give a charred image.

Photo of Sean BarrettSean Barrett (Independent)
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Or a round of applause or whatever? Did you have any contact with him after he wrote that report?

Mr. Matt Moran:

I did.

Photo of Sean BarrettSean Barrett (Independent)
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And you disapproved, I presume, strongly, isn’t that right?

Mr. Matt Moran:

I met him for a coffee afterwards, Senator. What’s fundamental, and my point was very clear that, you know, if you have an issue share it with us, share it with the management of the bank. Don’t have that come back to us through another source.

Photo of Sean BarrettSean Barrett (Independent)
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And you had a similar cup of coffee with Morgan Kelly isn’t that right?

Mr. Matt Moran:

No, I had lunch with Morgan Kelly.

Photo of Sean BarrettSean Barrett (Independent)
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And you didn’t like his views either, is that right?

Mr. Matt Moran:

I had a very open lunch with Mr. Kelly and I found him very interesting and I found his views very interesting and of course he was ultimately proven to be very right.

Photo of Sean BarrettSean Barrett (Independent)
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Yes, it’s recorded that Kelly didn’t believe a word of what you told him. That’s on page 119.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Wait now, hold up, that is a judgment and Mr. Moran would be need to be asked as to his recollection of it or any reaction to that.

Mr. Matt Moran:

Everyone is entitled to their views, Senator.

Photo of Sean BarrettSean Barrett (Independent)
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What about Mr. Murray Brown of the Financial Times, did you have an altercation with him as well?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Or not?

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Or lunch? Or coffee?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Please, just one second, now, hang on a second. It’s a bit more serious than this actually. I’ll ask you, Senator, to just go through the facts of the engagements. Our job is to hear the evidence being presented, to, at a later time, apply a value judgment if required, and to present the meetings and engagements in a more neutral tone, which allows Mr. Moran to inform the committee in a non-prejudicial basis as to actually what happened. Mr. Moran.

Photo of Sean BarrettSean Barrett (Independent)
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Could you tell us about your meeting with Mr. Murray Brown or your contacts with him?

Mr. Matt Moran:

I genuinely, Senator, cannot recollect that but I think you might be able to highlight it to me.

Photo of Sean BarrettSean Barrett (Independent)
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Yes, according to page 221 of the Anglo book by Simon Carswell:

Moran gave [Murray Brown] an earful, threatening legal actions against the [Financial Times] if [he] didn’t retract the article. Moran said that Anglo had been in no more difficulty than any other Irish bank.

I’m trying to build up that the industry seemed to operate in a consensus that they were right but they seem to have spent a lot of time dealing with contrarians in a fairly rough kind of manner. Were you under orders?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Could I maybe reframe that: the industry took any challenging view towards it seriously and decided to engage in it in a very serious manner?

Mr. Matt Moran:

Thank you, Chairman, I would agree with that. I think the context though, just to be helpful to the committee, is banks were under siege and Irish banks were under very significant siege at the time. International markets and players in markets can make a lot of money if share prices go up and others can make a lot of money if share prices go down. So there are always parties looking to seek value through the rise in a share price and others looking to seek value through the fall of a share price. At the time, clearly, markets were very sensitive. I don’t agree, by the way, with the version of events as written in that manner but of course all the banks at the time engaged with all the parties who were writing about the bank.

With a bank, it is very important, if you ... if issues happen in a bank - and remember at the time we had the regulator coming in because of rumours that were being spread by parties, potentially to play their own business or play their own book - it is very important that during that fragile time that some balance is given to that situation.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I've just one interjection there on that, just sorry. Was ... in terms of a strategy or a ploy, was Anglo engaged in a similar ploy? You said that you'd all these parties that were trying to increase their share fold or to make share ... share drop, to present a best image of themselves; big PR campaign; very challenging and aggressive position to anything that might challenge the corporate image of the company and so forth. Was Anglo engaged in such a strategy?

Mr. Matt Moran:

I don't think so, Chairman, in terms of, you know, an active strategy to-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And your engagement with these personalities, was that part of the strategy to ... by Anglo to challenge any dissenting or critical views of it that might be out there in the media or in the marketplace?

Mr. Matt Moran:

Well, Chairman, like, you had instances where e-mails were sent around saying, "Anglo has lost funding from X."

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

Mr. Matt Moran:

It was totally untrue, but they were happening time and time again with big names behind them and, you know, in the market at that time, people didn't wait for the right answer. They just reacted once they saw what was happening.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. My apologies. This can make up a bit of time there. Senator Barrett, back to yourself there.

Photo of Sean BarrettSean Barrett (Independent)
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Thanks, there. But, you see, if there were dissenting voices and they were treated in the way in which ... the describing of which is in Mr. Carswell's book, this one ended up costing €64 billion to taxpayers. I don't particularly mind if one company wants to entertain journalists, but this one was so serious. Do you think there was a moral hazard problem in Irish banking?

Mr. Matt Moran:

Could you explain, please, sorry, Senator?

Photo of Sean BarrettSean Barrett (Independent)
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Moral hazard is when people are exempted from the consequences of their actions. We had to bail out banks; we don't bail out bicycle shops and dry cleaners. So I'm not very worried what bicycle shops and dry cleaners say to stockbrokers. I'm very worried about what happened in this case, that the dissenting voices, there was an attempt made to, I think, to quell them. And we have to as public representatives inquire, you know, why there was such a herd mentality, as is in the Nyberg report, that led to €64 billion being imposed on the citizens of this country. Do you not think there should have been more free play of ideas?

Mr. Matt Moran:

I ... thank you, Senator. I understand your point. At that time, Senator, all I can say to you is the bank thought it was going to work through the crisis that it was beginning to face. And if messages are given to the market that are incorrect or inaccurate at the point in time, then that can have a very significant impact on the bank's funding and the bank's stability. And indeed many authorities from ... including our own here in Ireland and elsewhere took action to ensure that commentators were, you know, were safe in how they put things across. I think I heard it from another person, Mr. Cardiff, talking about, you know, if people knew at the time that they were looking at a rescue plan, that in itself, if it became public, would cause the issue. And I think that mentality, rightly or wrongly, existed with people in the banks.

Photo of Sean BarrettSean Barrett (Independent)
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Did people in Irish banking think they were too big to fail and they didn't have to address the basic problems but have these discussions with journalist and stockbrokers and commentators instead?

Mr. Matt Moran:

I can only talk from my own knowledge, Senator. I think it was the opposite. People in Ireland thought that the banks were too small and, therefore, would fail. Like, the issue that became clear later in the crisis was that if you didn't have size and diversity, that you would fail.

Photo of Sean BarrettSean Barrett (Independent)
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Can I just ask you on the NAMA estimate that there was €9 billion of interest rolled up in loans transferred to it by the five banks and €3 billion related to Anglo? Were you aware of the interest roll-up included in the Anglo loan book?

Mr. Matt Moran:

I was not aware of the scale until I saw the document from you, but I would have been aware that Anglo provided development lending. It was well known in the markets that it provided development lending and that it was normal for development lending to have interest roll up.

Photo of Sean BarrettSean Barrett (Independent)
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Was that figure included in the board and senior management information dashboard on a regular basis, the rolled-up interest?

Mr. Matt Moran:

I don't know, Senator.

Photo of Sean BarrettSean Barrett (Independent)
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Okay. And how was that level of increased risk monitored within the bank?

Mr. Matt Moran:

Risk had that function. Risk had a ... it was an independent function to lending charged with monitoring the risk in the bank, in charge of monitoring risk on a loan-by-loan basis, including any development lending and including any interest roll-up allowed.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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How familiar were you with those processes, Mr. Moran?

Mr. Matt Moran:

I never worked in risk, Chairman.

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

Photo of Sean BarrettSean Barrett (Independent)
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And the meeting of the board of 12 December 2008. Now that's been mentioned this morning, that about two thirds of the board members were absent. But at that board meeting it was reported that David Drumm and Willie McAteer had met with John Hurley and Tony Grimes at the Central Bank of Ireland and a figure of €3 billion of new capital was acknowledged as being needed. Were you aware that Anglo would require this quantum of additional capital in order to remain solvent?

Mr. Matt Moran:

No, I wasn't a member of the board at any time and I didn't attend that meeting and I'm not aware of that figure. What I can provide, Senator, as background is that the capital norms had changed, so Anglo had significant capital well above regulatory limits. But the market determined new limits and, as a result, banks everywhere in the world were seeking alternative sources of capital, and that public market avenues which were normal were very nervous and closed to such activities, and hence the reason to approach private equity providers and sovereign wealth providers.

Photo of Sean BarrettSean Barrett (Independent)
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What was your assessment of the bank's liquidity and insolvency position on the night of the guarantee?

Mr. Matt Moran:

Again, I had no knowledge of the guarantee or the night of the guarantee at the time. I was aware through the end of September that the bank was losing funding, especially post-Lehmans and WaMu collapse, and I was aware that the bank, you know, needed additional funding lines at that point in time.

Photo of Sean BarrettSean Barrett (Independent)
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Was the gravity of the Anglo position understood? I ask that because the Anglo balance sheet was 60% of Ireland's GDP. Lehman Brothers, which has been mentioned by several speakers, was only 7% of US GDP. I mean, this was Ireland heading towards a real crisis, as we saw. Was that appreciated in the bank and in the people with whom you associated?

Mr. Matt Moran:

Well the Irish banks had €400 billion of a balance sheet combined, which was a multiple of Irish GDP.

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

Mr. Matt Moran:

Four times. Thank you, Chairman. And, I think, when we look back today, that was an issue for Ireland and for the sector.

Photo of Sean BarrettSean Barrett (Independent)
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How do you feel in retrospect of having spent time working in Anglo Irish Bank?

Mr. Matt Moran:

I have huge regret, Senator, for being involved in the bank. I worked very hard in the bank. I stayed post the change of management. I continued to work, but the outcome, what the bank has cost, Senator, to Ireland, to the taxpayers, has been just enormous beyond belief.

Photo of Sean BarrettSean Barrett (Independent)
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Would you prefer it wasn't on your CV?

Mr. Matt Moran:

I think everyone, Senator, who worked in the bank would prefer that it wasn't on your CV, absolutely.

Photo of Sean BarrettSean Barrett (Independent)
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Thank you, Mr. Moran, and thank you, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Senator Barrett. Mr. Moran, if we might just stay with you for a moment, I just want to deal with one question and then I'll bring in the other questioners now that the leads have completed. Mr. Moran, in June 2008 Anglo prepared a financial projections for the 2008 to 2012 period. This is less than, what, four or five months before the guarantee and just about six months out from nationalisation, one of which was an "extreme stress case". Under this scenario, loan loss provisions were estimated at 1.2%. That's up on the screen there at the moment.

You see it there, I think it's the second last column on the page. And so loan loss provisions were estimated at 1.2% of the portfolio over the period of 2009 to 2012. It's in your document books there - if you just want to reference the book rather than look at the screen, it's in Vol. 2. I think it's page 33.

Mr. Matt Moran:

Vol. 2, page 33. Vol. 1 maybe?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Sorry. No, it's actually pages 17 to 23 of Vol. 2. That's where it is, sorry.

Mr. Matt Moran:

Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And the next document coming up on the screen is actually in Vol. 2, page 25. It's the Anglo annual report of 2009. And here what we actually see is that, in the event, the actual impairment charge at the end of 2009 amounted to 19.2% of the loan portfolio. So what was predicted was 1.2% and what actually happened was 19.2%. Did management get any external economic advice or input into the stress test scenario?

Mr. Matt Moran:

I'm not aware, Chairman, if external advice was taken. This was prepared in April-May 2008.

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

Mr. Matt Moran:

The purpose was ... if you see, there's a table at the back, on page 22, and that table would be typical of how a rating agency looks at the bank.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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That's correct.

Mr. Matt Moran:

And this was based on a set of assumptions at that time which looked at ... if you look, the extreme stress case has a loss level of close to €4 billion - €3.7 billion - which was, I think, 100 times the specific charge in '06 or '05. So it was, you know, a massive multiple and, at the time, whilst people felt, I believe, that the economy was worsening and the situation was worsening, people did not anticipate the scale of what happened. When, in 2009, the new board undertook a detailed ... or instructed the undertaking of a detailed bottom-up exercise with some external help, there were two very clear issues. Firstly, the last quarter of 2008 had worsened dramatically and then, in the first quarter 2009, it got further worse.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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There is a lot of figures and details there but I just want ... in terms of what were the top-line events that were actually happening around that time, Mr. Moran, is ... we have testimony here that there was discussions about the requirement to ... or the potential or the possibility of guaranteeing financial institutions in the State. There was preparations, at some stage or other of 2008, with regard to nationalisation legislation for financial institutions. And there's more than what might be considered a degree of flux actually in the market. So, in that regard, did management consider a doomsday scenario as part of this stress test exercise?

Mr. Matt Moran:

I think, Chairman, we had advisers - an investment bank from the UK, a global investment bank - who was advising the bank on multiple issues, including the raising of capital to bolster capital - including rights issues - takeover, be taken over, halo investors. And that was a consequence of the flux, as you say, in the market at the time. So there was intense involvement and, indeed, that was part of my life throughout that period, looking at how do you underscore or underpin the balance sheet given the way the economics were beginning to change.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, and, in that regard, did ... in terms of stress testing here, some of the kind of aspects of it, did the stress testing take into account correlations between types of property being financed - investment, development, speculative landbanks and so forth?

Mr. Matt Moran:

Well, input into this came from risk. So risk inputted this, clearly using historical experience and their experience as individuals.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And that brings me to my next question - individuals. One of the notable aspects of the Anglo loan book is the short number of individuals and the great exposures that were there. Was that ever taken into ... as part of the consideration under stress testing?

Mr. Matt Moran:

I don't know if risk undertook that stress testing, Chairman. I wouldn't have been involved personally, so I don't know if that was the case.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. You just said earlier - I think it was ... I'm not too sure whether it was to Senator Barrett - that you were not aware of the scale of the interest roll-up. As CFO, were you involved in producing the accounts for the bank?

Mr. Matt Moran:

I didn't produce the accounts but I did write the summary report, often, to the accounts.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So, in that regard, would this not have been a number that you would have seen when compiling the accounts?

Mr. Matt Moran:

Well, in a bank you have the lending operations, you have risk and you have-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I'll just come back to the question. Did you see the numbers when compiling the accounts?

Mr. Matt Moran:

I don't recollect, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. If ... so you haven't ... do you think that this should have been a number that was transparent in compiling the accounts? Should it have been there when you were looking at the accounts?

Mr. Matt Moran:

I would hope, Chairman, that it was in the risk report.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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But you don't think it should've been in the figures that were being presented to yourself, no?

Mr. Matt Moran:

Well, I would hope it's in the risk report, which would look at risk and roll-up and that assessment. But finance didn't have a role in respect of risk, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I just want to go with an issue that you responded to Deputy Murphy as well. You were asked specifically what political contacts you made and obviously you would have detail in regard to that. Are you aware of other political contacts that were made by the bank? Like, was there a meeting to say, "Well, Mr. Moran, you go and talk to such and such a person; such and such a person, you go and talk to such and such a person"?

Mr. Matt Moran:

No, Chairman, there wasn't a meeting like that. I am aware of the bank meeting and having Brian Cowen for dinner. I didn't attend. I wasn't on the board. I was aware of that. I don't think I'm aware of others except through ... subsequently learning through media.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And as a senior manager in the bank and in the growing flux that we are concerned ... and the growing awareness of the evolving issues of the bank, were Anglo ... because you've had ... can I just say, were they the only two times you ever had political engagements or political meetings of that nature? Outside of the ... they seem to relate specifically to the crisis period. Was there other meetings you had outside of the crisis period?

Mr. Matt Moran:

I was involved ... I visited the Department of Finance. So I had some other contacts but they were routine in nature or else I wasn't taken into the meeting once the meeting started.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And, just as an overall strategy, if there was access to ... to gain access to a political ear, as such, with issues relating to Anglo, who would be the person that would deal with that?

Mr. Matt Moran:

I think the chief executive or the chairman, Seán.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, and what would they do? Would they do it themselves or would they delegate somebody else to do it?

Mr. Matt Moran:

Well, there are two instances involving me in which they were delegated. I was specifically asked, Chairman. I don't know of others.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You don't know of any other situations where other people were delegated, no?

Mr. Matt Moran:

Unless you could help me ... I'm not aware, from my recollection, of other contact being made. Certainly, I wasn't directly involved, Chairman.

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

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Thank you very much, Chair. Mr. Moran, you're very welcome.

Mr. Matt Moran:

Thank you.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Can I start by asking you about Anglo Irish Bank's annual report for 2007, page 3, which shows that over the period '02 to '07, profit before tax increased by 376% and earnings per share by 363% and total assets by just under 400%. So can I ask you, do you think that these levels of growth were prudent or sustainable in the context of the level of competition in the Irish lending market during the period?

Mr. Matt Moran:

Well, Deputy, the growth referred to is clearly the growth in all markets, I believe.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. Matt Moran:

So what the bank had sought to do was to diversify by going into other markets, not just Ireland where it traditionally had lent. So some time in the '90s it established a UK division. Some time in the 2000s - in the noughties - it established a US division.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay.

Mr. Matt Moran:

I think it's clear, on hindsight, that this level of growth was excessive for the bank.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Was it sustainable?

Mr. Matt Moran:

I don't believe it was sustainable and, indeed, in my note to the board in January 2007 I specifically flagged that the bank needs to change from its high growth to a more moderate growth and prepare the market for that.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. And do you think that the pursuit of growth of that order inevitably impacted on credit quality and lending standards? There was such a drive for aggressive growth, did it have an impact, do you believe, on those issues - the quality of lending, in particular?

Mr. Matt Moran:

I didn't sit in many credit committees and I wasn't part of creditor lending so I didn't feel in the bank from where I sat that there was this, you know, drive for growth, as you call it. But the retrospect view is clear that - and from what I have seen in other documents and issues around certain controls - that credit appeared to weaken and controls around risk appeared to weaken.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. I am intrigued by your reference to the credit committee. On page 10 of your witness statement, you say "up to 200 staff members ... could serve on a credit committee", and in the appendix then you explain that when you add in the number of people who might dial in by video conference and those who would be attending directly who would be relevant, "some 30 to 60 people would attend each committee out of some 200 potential participants", and a credit committee meeting would have been held every other day perhaps.

Mr. Matt Moran:

Yes, or even daily. Like I remember, as context, when I joined the bank, being invited into credit committee to learn how the bank works so it was seen as a-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay.

Mr. Matt Moran:

-----as a learning ground and bringing lenders into credit committee was seen as a way to, in effect, teach them-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay.

Mr. Matt Moran:

-----so lenders were brought in. Now I know that is different to certain other banks, but lending was the heart of the bank; it did nothing else really. It didn't have other income generating activities of significance.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. You referred to a briefing which you organised involving Fine Gael - Enda Kenny, Richard Bruton plus one other - which involved Willie McAteer, Mr. Drumm and yourself. When did that take place?

Mr. Matt Moran:

You've got me. I'm afraid I don't know exactly when that was.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Well, Mr. Kenny was questioned by Deputy Doherty when he attended and all that he could say was, "I think it was 2008".

Mr. Matt Moran:

It was definitely 2008.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Pre-guarantee, post-guarantee? Look, I am not trying to catch you out. Mr. Kenny-----

Mr. Matt Moran:

I am sorry.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Mr. Kenny did give ... did refer to it in the Dáil previously-----

Mr. Matt Moran:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----and said it was a couple of weeks after the guarantee. Now when he came before this inquiry, he said it was some time in 2008 so, can you narrow it down for us is what I am asking.

Mr. Matt Moran:

I honestly can't. I don't have a diary from that period. You can see subsequent e-mails in November from me so I think that it is most likely correct. I have no reason to believe it is not.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. What e-mails are you referring to?

Mr. Matt Moran:

These e-mails in the public domain where I wrote to David Drumm following contact from Enda Kenny.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. So you are confirming that you are the author of those e-mails. So the reference is an article in theSunday Independentof 21 July 2013?

Mr. Matt Moran:

Correct.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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You are familiar with that-----

Mr. Matt Moran:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----by Tom Lyons and Daniel McConnell, where two e-mails in particular are referred to. The first e-mail would be 18 November 2008, from yourself to Mr. David Drumm, where you refer to an "Enda K": "Enda K called ...Said that today a lot of rumour circulating Leinster Hse concerning deal with BoI (Bank of Ireland) and ILP, (Irish Life and Permanent)." Did you send that e-mail?

Mr. Matt Moran:

I did, and "Enda K" refers to Enda Kenny.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Sure. And in that you were giving an account of a conversation you had personally with Mr. Kenny.

Mr. Matt Moran:

Correct. So there were lots of rumours at that time, as you know, and he informed me that these rumours also existed.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. When was that particular conversation? Was it the same day that you would have sent the e-mail or-----

Mr. Matt Moran:

I think my note is contemporaneous, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. And then the following day, 19 November, there is a further e-mail, from you to Mr. Drumm, where it says, "Enda says we are to be an 'offshoot' of" BoI." Were you the author of that e-mail to Mr. Drumm?

Mr. Matt Moran:

I was, correct.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And is that giving an account of a separate conversation with Mr. Kenny?

Mr. Matt Moran:

I believe so. I think my note is contemporaneous.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. Can you give us the background to that because, obviously, those are very sensitive issues that were being discussed by Mr. Kenny, as Leader of the Opposition, and you - information which may or may not have been accurate or I don't know the provenance or where he would have got the information. But can you give us the background to those conversations? So were there two conversations? Were there more conversations at that time between you and he?

Mr. Matt Moran:

I think, Senator, they are the only conversations because I sent notes immediately afterwards informing the leadership of the bank. They were, I think, referred to as noise about potential transactions or potential outcomes for the bank and, indeed, there was noise all the time from multiple parties at that time and he just informed me, "Listen, this is the noise that I've heard."

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. Mr. Kenny told this inquiry that he had no conversation of any substance with yourself.

Mr. Matt Moran:

I think that is fair to say.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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But he did have a conversation with you in which he informed you that Anglo was to be an offshoot of Bank of Ireland.

Mr. Matt Moran:

I think the context of the comment was, "Listen, there's noise around here that you're going to be bought by this one, bought by that one."

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And a second conversation in which he conveyed to you a rumour circulating around the corridors of power about a deal between Bank of Ireland and ILP?

Mr. Matt Moran:

Again-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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You would characterise that as not a conversation of any substance?

Mr. Matt Moran:

Well, at the time, Senator, there was ... there were rumours literally every hour, every day about what's going to happen the banks, who's going to own who, what international players are going to come in, what international players are going to leave, and, literally, rumours were ten a day.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Sure. Under questioning by Deputy Doherty, Mr. Kenny acknowledged at least one conversation, and said that there may have been two, and that the origin of it was that your brother contacted him to say that you wanted to speak with Mr. Kenny, that you wanted to say something to him. Is that the case?

Mr. Matt Moran:

That's correct. My-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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What did you have to say to him?

Mr. Matt Moran:

In Castlebar, my brother has a bar. It's just opposite Enda's constituency office. Clearly, it's a small town, as you know, and whilst I didn't know Enda well, my brother is closer to his age and knew him.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Sure, and Mr. Kenny acknowledged that he did make contact with you. So, pertaining to Anglo Irish Bank, what did you want to convey to him, if anything?

Mr. Matt Moran:

Well-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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He specifically referred to ... that the origin of the call was your brother said to Mr. Kenny that you wanted to convey something to him.

Mr. Matt Moran:

Well, maybe just to be very precise on that, I think it was that the CEO of the bank had asked to have an opportunity to meet Enda Kenny and I was a route for him to arrange that, and I've explained the meeting that took place.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. Mr. Chairman, I know we are not going anywhere near the whole criminal trial area, but just to ask Mr. Moran that what was said in court that you have immunity from the DPP, that that is accurate in relation to all matters pertaining to Anglo.

Mr. Matt Moran:

That is correct.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Thank you.

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 afternoon, Mr. Moran.

Mr. Matt Moran:

Good afternoon.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Firstly, I want to turn to Vol. 1.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Just for a moment here. Just on that matter, while you may have immunity, and that's been acknowledged and everything else-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Stop the clock, Chair.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, the clock is stopped. That should not be misconstrued or misinterpreted that Mr. Moran has the freedom to say whatever he actually wants inside here because there would be witnesses and people who may be facing some procedures that could be impacted by what Mr. Moran might actually comment upon. Would I be right in that regard?

Mr. Matt Moran:

That's correct, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So we are definitely correct in that regard.

Mr. Matt Moran:

Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So it is not licence for Mr. Moran to say whatever he wishes.

Mr. Matt Moran:

Absolutely not.

(Interruptions).

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Indeed, indeed. I just wanted to clarify that, Deputy McGrath. Back to yourself, John ... Deputy Phelan.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you. Don't start the clock for a few more minutes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You'll get immunity there.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Mr. Moran, good afternoon again. I wanted to ask in relation to Vol. 1, pages 29 to 32 or 33, I think. It's a document entitled "Draft Business Plan Summary - Five Years, 2009 - 2013", and it's dated November 2008. Firstly, would you have been involved in the compilation of that document and was it presented to the board? I presume it was presented to the board of the bank.

Mr. Matt Moran:

I don't know if it was presented to the board. I never sat on the board and I don't know if this was given to them. This, to the best of my recollection, Deputy, was prepared by the group head of compliance at the instruction of the chief executive.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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So, would you have had any input into it?

Mr. Matt Moran:

I think the finance team would have had input into it and I would have been involved, but it was run by the group head of compliance.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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There are a couple of quotes that I just want to put to you from it, in particular, one at the bottom of page 31, "Anglo Irish Bank Overview". It says, and bearing in mind this was November 2008, "We believe that Anglo Irish Bank will be the most profitable and capital generative of all publicly quoted financial institutions in Ireland over the five year period", the five-year period being 2009 to 2013, exclusive. In light of the fact that this was just a few months before nationalisation, a few months before the bank was making impairment provision of over €4 billion and ultimately cost many billions of euro to the State and the taxpayer, how can you rationalise for the general public how this statement was made or that conclusion was come to?

Mr. Matt Moran:

It's not my conclusion, Deputy, but I can understand fully why you can ask that question in the context of what ultimately happened. I think others have come before the committee and explained that 2008 and the first three quarters of 2008 were very different to what ultimately happened. The fourth quarter of 2008 saw a significant downturn but that materialised later, and in '09 and '10 the collapse in the economies, in particular in Ireland, but also elsewhere where the bank was - they were all correlated if you will - led the bank to have a much worse position than the assumptions that were used to create this view. So, fundamentally, risk did not believe that the bank would suffer this level of losses, and the other elements of the bank's model were positive contributors. For example, it had a cost-to-income ratio that was very low, so it meant that for revenue generated in a period, a significant element of that would convert to profit, so it had some buffers. Now, nationalisation, from what I understand, occurred for numerous reasons, rather than implying it just to be the level of loss, but I understand your question obviously.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I think nationalisation was, I think it would be fair to say, directly related to the level of loss, but I know the point you are making. I want to - well, I suppose - ask you also in relation to your own time working in Anglo firstly. When again, just remind me ... I was just trying to find the date that you started working in Anglo.

Mr. Matt Moran:

September 2002.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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You've worked in several different financial institutions at this stage. What was the overriding culture of Anglo Irish Bank? Was it very different than other institutions that you worked in or was it largely similar?

Mr. Matt Moran:

I lived outside of Ireland from 1990 until I came home to join the bank in 2002. From afar, Anglo was seen as a strongly performing business. The culture in the bank was one that was very customer-centric, very customer-focused. People were very hard-working. That was the attitude in the bank. So in those earlier years I was there, those characteristics were good and strong characteristics, I would say, of the culture in the bank. It was a smaller business so people knew each other. You know, it was relatively small at 2,000 people compared to the larger banks of 15,000 to 20,000 and beyond elsewhere in international scene. So that's some colour of what it was like.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes. Well, I don't want to rehash the statements or the references that have been made by the first two speakers, Senator Barrett and Deputy Murphy. You would have been portrayed in the media, in some of those books that were published and other articles, as being somewhat of an enforcer for the line. I suppose, to use a political phrase, one could equate you with a chief whip kind of role in terms of how you were portrayed at least in the media. Is that an accurate portrayal do you think? Outside of the three references that Senator Barrett made to those particular meetings that took place, were there other similar events, and did you see that as part of your function? Were you acting off your own bat or was that something that you were instructed to do?

Mr. Matt Moran:

I cannot comment on how others portray or how it is written. That is obviously for them to comment, rather than for me. I worked very hard in the bank. I had that ethic about me and I was seen as someone who could take on difficult issues and look to try and solve them. I can say no more than that. Others can comment and, you know, these were stressful times obviously in 2007 and 2008, but others can comment, not me.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Those instances, were they off your own bat or were you acting on-----

Mr. Matt Moran:

Well, for example, I met Professor Kelly at the request of the CEO of the bank.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, and were there other such similar discussions, robust discussions to use another political analogy?

Mr. Matt Moran:

Well, there's one that was frequently quoted in the media in respect of Merrill Lynch and, you know, media can have a view and have a colour that is somewhat different from reality, as we all know.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, well that's fair enough. Finally, I wish to ask you in relation to ... it is core document 2, pages 3 to 5. I'll get it myself, yes, "Exceptions to Credit Policy for Anglo Loans Transferred to NAMA". Information provided by the special liquidators on exceptions to credit policy for loans transferred to NAMA shows that the aggregate value of exceptions identified was almost €32 million or 92% of the value of the book which transferred to NAMA. Can you explain for the committee why the level of exceptions to credit policy was so high?

Mr. Matt Moran:

I obviously only saw this document when it was sent to me by the committee. I wasn't a lender. I wasn't in risk. I wasn't aware of that level or that headline. Clearly, on the face of it, it's very significant and it's very surprising. To give a more meaningful answer I think anyone who'd look at this would need to go down through and understand what was the nature of the exception. You know, without looking at it, it's hard to comment, but the size ultimately and the percentage is of itself just a very significant level.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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All right. Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Deputy. Now, Deputy Kieran O'Donnell. Deputy, ten minutes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Thanks, Chairman. Welcome, Mr. Moran. Can I direct you to Vol. 1, two presentations? One volume page 61, which is Anglo Irish's - sorry, the auditors of Anglo Irish, Ernst and Young's view on the controls in place. And then, subsequently, page 63, Project Legacy which PwC carried out and their review in terms of loan losses, and the disparity between both of those. Can you offer an explanation for the disparity and do you believe that PwC's comments in terms of Project Legacy are accurate and fair?

Mr. Matt Moran:

I can't comment, Deputy. I wasn't involved in the review of lending, the review of risk, the review of exceptions. It's very difficult for me to comment.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What was your role, Mr. Moran? You joined the bank in '02.

Mr. Matt Moran:

Correct.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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What exactly did you do?

Mr. Matt Moran:

I explained in my opening statement so I was involved in-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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No but ... distil it down. When you came in in '02, what were you appointed as?

Mr. Matt Moran:

As associate director.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Doing what?

Mr. Matt Moran:

A variety of different roles, Deputy. So a significant-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Who did you report to?

Mr. Matt Moran:

I reported to Willie McAteer, the group finance director.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So you were in a finance role?

Mr. Matt Moran:

Correct.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And subsequently, you were appointed CFO. Was that correct?

Mr. Matt Moran:

I was but it was no change to what I did or my role.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So you always reported to Willie McAteer?

Mr. Matt Moran:

Correct.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay. So your role was in the finance area?

Mr. Matt Moran:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Had you any specific area of responsibility under Mr. McAteer?

Mr. Matt Moran:

I took on a number of areas. One was investor relations. Two was looking at the Dublin finance function and upgrading that so I hired a lot of people into the business. I brought people in from across other banks. I brought people from international markets into the finance function of the bank.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So you reported directly to Willie McAteer? Did you in any way report to the CEO, David Drumm?

Mr. Matt Moran:

No, I never reported to the CEO, David Drumm.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Can I go to page 4 of your statement? It is in your role dealing with investor relations. You said:

Throughout 2008 the international crisis escalated. The inherent difficulties surrounding the entire banking industry, and specifically Anglo Irish Bank's position as a small player in the banking pool, was compounded by shareholder issues. By these I refer to Sean Quinn's [contracts for difference] investment in the Bank and [a] problem ... arising from its unravelling.

What was your involvement in the unravelling of the contracts for difference of the Seán Quinn investment?

Mr. Matt Moran:

I had relationships with investment banks. I had a relationship with the investment bank that was hired by the bank to look at strategy around placing the position or the underlying shares to the CFDs.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And who did you ... who were the investors ... who was the advisers you took on?

Mr. Matt Moran:

Morgan Stanley.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay. And you might just elaborate as to ... were you tasked with project managing this unravelling?

Mr. Matt Moran:

I worked with the group finance director who was the person responsible for shareholders in the bank and I worked-----

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

Mr. Matt Moran:

Correct, Deputy, and I worked with him to look at various options - 12, ten or 12 in total - around placing the underlying shares in discussions with the regulator at the time with international investors.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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When did you first become aware of the contracts for difference - with Seán Quinn's contracts?

Mr. Matt Moran:

In or around end of December '07- early January '08.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And how difficult did you find it to actually unravel? Just give me ... how complicated ... I suppose what I want to know really is how difficult it was and in your dealings with investors overall, what implications did it have for the bank itself in terms of operating, in terms of liquidity if the contracts for difference hadn't arisen - the Seán Quinn contracts for difference. Do you believe on the night of the guarantee that Anglo Irish would have had the liquidity problems it found itself in?

Mr. Matt Moran:

I'll answer it another way if I may? Back to your opening point, information about the CFD position was drip-fed to me so I became aware over time.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Drip-fed by whom?

Mr. Matt Moran:

By the group finance director, Willie McAteer, or the CEO, David Drumm.

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

Mr. Matt Moran:

What transpired was there were nine counterparties to the CFDs and CFD-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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You might explain that for the ordinary person when you say counterparties - the nine.

Mr. Matt Moran:

What happens in a contract for difference is that the person who has the economic interest never owns the underlying shares.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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They pay, effectively, a deposit or----

Mr. Matt Moran:

Correct.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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----- a small sum up-front.

Mr. Matt Moran:

Correct. So you have a bank and the bank agrees to have the position in respect of the underlying shares but the person who has the economic interest pays a margin. So, for example, if you wanted to buy €10 million worth, you could pay €2 million down but the bank would give you the equivalent position of €10 million.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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If the shares go up, you gain and if the shares go down, you cover the difference.

Mr. Matt Moran:

Absolutely.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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So there was nine-----

Mr. Matt Moran:

There were nine but very interesting-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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There was nine banks.

Mr. Matt Moran:

There were nine banks or brokers who then in turn would go to ... a broker would go to the bank if it didn't have the facility itself to create the contract for difference.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And how did you get to a point where you found out who these nine were?

Mr. Matt Moran:

It was provided to me by the group chief executive - by David Drumm.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Okay and how did he come up with it?

Mr. Matt Moran:

I would be speculating how he did.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I have to advise confidentiality here now as well, Mr. Moran - of customer confidentiality. Be mindful of that, please.

Mr. Matt Moran:

Yes. Thank you, Chairman. It was provided to me anyway by the group chief executive and one of the key issues with a CFD, which we learned, was you don't have any rights relating to the share. So the underlying bank can do what they want with respect to the share. They can take the shares. They can use them for some other reason. They can not buy the shares. But in effect what happened in late 2007 and early 2008 and right through 2008 that the market became very focused on share price as a proxy for risk and so you have what's called the VIX index or the fear index as it became known at the time, where that gyrated wildly and if share prices were moving up and down, whereas historically, funders would, I think, have very seldom looked at that, it now became a core area of focus for any depositor.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Specifically, the Seán Quinn contracts for difference - what impact did you believe did that have in terms of rumours in the markets, did it have on the share price and more particularly, what impact did it have on Anglo Irish to be able to attract, we'll say, deposits, to be able to attract with bonds investors?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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We've two minutes now, Deputy.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Did it have ... the root of my question is on the night of the guarantee, would Anglo Irish ... 30 September ... would Anglo Irish have had the liquidity problem if the Seán Quinn contracts for difference had not arisen?

Mr. Matt Moran:

It's very difficult to say and speculate whether it would have had or would not. I believe it was certainly ... if it didn't have it, it would've been a lot less of an issue.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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The liquidity would?

Mr. Matt Moran:

Absolutely because what had happened is the market was aware given the multitude of counterparties that ... and all the other counterparties would go behind the nine so it turns out it ... market knowledge was very significant, that there was a very significant holding from an investor.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Were these counterparties based in Ireland, England or Europe or America?

Mr. Matt Moran:

Typically Ireland and the UK.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Were they other banks?

Mr. Matt Moran:

Other banks, typically - five banks, six banks and three brokers to that extent.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And if you were a counterparty providing that access to funding for the person investing in a contract for difference, would you have been aware of what shares they were doing the contracts for difference with?

Mr. Matt Moran:

Absolutely. So then just to go back to your point because I think it is important to give the context, the counterparty held the risk if the ultimate investor didn't pay them. So the counterparty at any stage could say "I'm selling." Market players who wanted to bet on the share price going down could influence that in any way or if the share price did go down, it might have created a trigger for that CFD holder to automatically sell. If you sell, you push the share price down again and it feeds off itself.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And did you feel ... did Anglo Irish feel compelled to move immediately to close off control of the-----

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

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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I think it's a critical point, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You are just running out of time. That's all.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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No but it's a complicated area that has huge significance in terms of Anglo-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You don't have time to talk so ask the question please?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Well, I suppose the question I want to ask is did Anglo Irish feel compelled to move to take control of the contracts for difference, that the implications were so broad for the bank in terms of liquidity and share price that they had to move?

Mr. Matt Moran:

My understanding, Deputy, is that together with the regulator, because I wasn't directly involved in those discussions, that both the bank ... the CEO of the bank and the board of the bank and the regulator believed that this was a huge issue.

Remember, you know, if you want to acquire shares in a bank, if you go over a certain threshold, it being 10%, you must disclose and seek approval from the regulator. The CFD was worse in the sense that it gave all the downside risk without any control to the underlying person who held the economic risk.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Finally, did the Financial Regulator ... is it your view that they were fully informed of all aspects of the contracts for difference once it came to your ... once it came to Anglo's notice? And did they approve all the actions that ye took in terms of taking control of the contracts for difference?

Mr. Matt Moran:

I can only give you what's my understanding because I didn't have the contact myself, but my understanding was, yes.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Then the contact was through ... the contact to the Financial Regulator was through?

Mr. Matt Moran:

It was through the chief executive and the group finance director, I believe, and may have included other members of the board at certain points in time.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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And do you know who they were, the other members of the board?

Mr. Matt Moran:

I don't know, Deputy.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I will wrap things up and then I'll finish up myself, on this occasion. Deputy Murphy, please, three minutes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman, and thank you, Mr. Moran. Just one other area I want to look at very briefly, if I may, is the development lending and Anglo's exposure to it in 2008, because in March 2008, your bank's exposure to development lending was 15% of the loan book. By December, the exposure is at 23%, but this wasn't because you'd increased your lending; it was because you reclassified a section of loans. Is that correct?

Mr. Matt Moran:

I don't ... excuse me, I don't know the particular point. Is this in the-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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This is to do with a results announcement that you made to analysts from London and Dublin in December '08 in which 15% of the loan book had been said, in March, to be development lending exposure, but it is a reclassification that brings it to 23% at December '08, which is pretty significant, because it actually changed quite significantly the exposure the bank had at the time to speculative lending at a very crucial point in time for the bank. Do you remember that reclassification?

Mr. Matt Moran:

I do, Deputy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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You spoke about it at that meeting with analysts.

Mr. Matt Moran:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Do you remember why that reclassification took place?

Mr. Matt Moran:

I can't recollect. Sorry, I can't recollect why that reclassification took place.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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You can't. Okay. Thank you.

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

Photo of Sean BarrettSean Barrett (Independent)
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Thank you, Chairman. Thanks, Mr. Moran. On the CFDs and your discussion with Deputy O'Donnell, Mr. Carswell puts those arising in early 2007, but you weren't told until December. Was there a slowness to react to those purchases by Mr. Quinn?

Mr. Matt Moran:

I don't know, Senator. I know when, broadly, I became aware of it.

Photo of Sean BarrettSean Barrett (Independent)
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There's a suggestion from the Revenue Commissioners in 2006 there should be a stamp duty on CFDs. Would you think it was a good idea if this committee were to recommend that?

Mr. Matt Moran:

Stamp duties have pluses and minuses. If you want to attract liquidity into the Irish market, a stamp duty is a negative if other markets are not doing it.

Photo of Sean BarrettSean Barrett (Independent)
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But your overall experience with CFDs would not be particularly pleasurable I suppose, would it?

Mr. Matt Moran:

I think it's a very different point though, Senator. I don't think it's related.

Photo of Sean BarrettSean Barrett (Independent)
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Well, sometimes you tax activities which are felt to have social costs rather than benefits. Did you have any relationships with the NCB Stockbrokers - the robust discussions? Did you have some with them?

Mr. Matt Moran:

I definitely knew NCB Stockbrokers and, yes, we would have known them well as a bank.

Photo of Sean BarrettSean Barrett (Independent)
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It is reported that senior executive in Anglo sought to have a stockbroker sacked because he didn't like the views of Anglo that that stockbroker was publishing.

Mr. Matt Moran:

That's not me. That's all I can say to you.

Photo of Sean BarrettSean Barrett (Independent)
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Right. Did you have a similar robust conversation with Irish Life and Permanent, Mr. McCarthy, at any stage?

Mr. Matt Moran:

No, I don't believe I had a robust conversation with Mr. McCarthy.

Photo of Sean BarrettSean Barrett (Independent)
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Okay. Thank you very much.

Mr. Matt Moran:

Thank you very much. Thanks, Chair.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I just want to wrap up with a few matters there and just a couple of issues that were touched upon this afternoon maybe just so we can conclude with some further clarification upon them, Mr. Moran. I just want to return back to the interest roll-up figure again, €3 billion for Anglo, and your earlier testimony saying that you really didn't have an awareness on this until the core documents were provided to you here. However-----

Mr. Matt Moran:

Just to clarify, Chairman, I'm aware of interest roll-up in the bank. The exact level of €3 billion-----

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

Mr. Matt Moran:

-----I'm aware of through the documents provided to me.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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All right. In your opening statement, you do state, though, that the financial function ... or that a function of yours was responsibility for financial reporting and management accounting. Am I correct in that? That was in your opening statement, yes?

Mr. Matt Moran:

Correct, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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In simple terms, interest rates is the lifeblood of profitability within a bank. That's where the money gets made. Would I be correct in that regard?

Mr. Matt Moran:

The interest rates?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, the charging of interest. It's as old as time. This is how banks make money.

Mr. Matt Moran:

Absolutely. A differential between what you borrow the money at and what you lend it out is, ultimately, going to drive your profitability, yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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That's the oldest part of the banking model. Would I be correct there?

Mr. Matt Moran:

I wouldn't disagree with you, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. So, in that regard, how could you not have been aware of these numbers when interest margin is a key component of the bank's income?

Mr. Matt Moran:

Well, the key focus of finance was to record, to take the data from the systems in the bank, and there is a financial method and an allowable method to recognise interest income, and that's what the bank did. And then the bank had a separate function, which provided an opinion as to whether that income, whilst recognised, then should be written down or impaired or a loss recognised. And in a bank, obviously, compared to all other businesses, that's a very separate and distinct function.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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But you have all this money out. You're not getting any income from it.

Mr. Matt Moran:

Yes, but you've got to look at that, Chairman, with respect, on a loan-by-loan basis and risk, look at that and say-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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€3 billion of it is the accumulated sum. €3 billion. It's not loan-by-loan basis; there's €3 billion of interest roll-up out there. That's not a small figure now, Mr. Moran.

Mr. Matt Moran:

No, I agree with you, Chairman. That's a significant figure and that was across the loan book, I believe, in respect of development activities.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Maybe you could just maybe explain as to why the head of compliance was involved in compiling a business plan.

Mr. Matt Moran:

I think that was a request from the regulator, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, would that be normal practice in financial institutions for management and those to be involved in business generation, who are compliancy officers?

Mr. Matt Moran:

Well, I think ... it was a business plan, Chairman, that had all aspects of the bank involved in it.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Mr. Moran, as chief financial officer, would you have had detailed knowledge of the main elements of the account of the bank?

Mr. Matt Moran:

Of the-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Of the accounts of the bank.

Mr. Matt Moran:

I would have had ... yes, Chairman, I would have had knowledge of, you know, everything to do with the financial accounting system of the bank.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So, maybe you could explain to us, then, why you would not have been aware of the level of interest roll-up into the accounts. These figures would have been generated by risk and they would have been part of the overall interest income figure of the bank.

Mr. Matt Moran:

I think they would actually be generated by banking, not by risk, and so they would be generated by the banking system, which would record income and it would be properly recognised by us in finance. And then, if there was any potential delinquency to that income, it was a matter for risk.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I'm just trying to figure this out in layman's terms, in that if I was operating a household like this - I mean, €3 billion - the bailout of the bank and the overall bailout of all the sums, I mean, we've moved into billions so, sometimes, we kind of, unless the extra zeros aren't there we don't recognise it as a figure. But, as you were saying earlier in your testimony, in early 2008 we weren't into those gigantic sums and all those extra zero spaces and guarantees. So, is your testimony under oath this evening, Mr. Moran, that you really weren't cognisant of the import of that €3 billion in interest roll-up?

Mr. Matt Moran:

No, Chairman. Just to be very clear to you, I was fully aware that the bank was involved in providing interest roll-up facilities as part of its book. The bank had a significant element of development lending, for which interest roll-up was a natural feature. The quantum, and I say that very truthfully, the quantum of €3 billion, when I saw it, I was not aware of that level prior to receiving this document.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Mr. Moran, as a senior executive responsible for key functions such as financial reporting and investor relations, how important a role did you feel that you played in maintaining the image of Anglo as a solvent bank with a low risk profile?

Mr. Matt Moran:

As I said, Chairman, I was in the next layers of management below the board so I had a senior position and I-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Were you not important people, according to Senator Barrett there, in, kind of, presenting the retail window and the shop window of Anglo to make sure that everybody was seeing that you were in good shape?

Mr. Matt Moran:

No, I was agreeing with you, Chairman, that I had a senior role in the bank and, you know, I played a role where I worked extremely hard to ensure that the bank position was understood and in 2008, clearly that was one of huge challenge. And how others represent that-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I'll rephrase ... or, I won't rephrase the question, I'll give it back to you exactly, because the word "image" is the important part of the question here, and it's how important a role did you feel you played in maintaining the image of Anglo as a solvent bank with a low risk profile?

Mr. Matt Moran:

I think I, like many others, Chairman, played an important role in that regard. Nothing ... nothing more significant in my role but I played a role in that and many others did as well.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And in that regard, were your actions appropriate and did you carry out your duty to be open and transparent with the market in general as a publicly-quoted company?

Mr. Matt Moran:

I believe, you know, as has been shown in the ... sorry, I want to be careful about what I say because of other matters, but I believe as a finance function, and in my role, we prepared our accounts appropriately and disclosed to the market appropriately.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I'm ... I ... my question relates to my earlier question of you going out there and maintaining an image of Anglo as a solvent bank with a low risk profile. My question to you is, in that regard, were your actions appropriate and did you carry out your duty to be an ... open and transparent with the market in general as a publicly-quoted company?

Mr. Matt Moran:

I believe that we always acted in a transparent manner with the market and, you know, provided what information was required of us. In 2008, there was a lot of noise and a lot of information in the market and, you know, others might have their own views and I can't influence that, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. I still don't know if you've answered the question or not, so I'm going to give it to you once more. My question to you is that you played a role in maintaining an image of Anglo as a solvent bank with a low risk profile.

Mr. Matt Moran:

Chairman, I believe that to be the case. I believe that in 2008 that the bank was solvent. I never believed anything different, Chairman. I think what's being demonstrated in what's provided here is that there were issues in terms of risk, and that's very clear and I-----

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

Mr. Matt Moran:

That's been highlighted.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Just be mindful of what you say.

Photo of Sean BarrettSean Barrett (Independent)
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Thank you. No, just ... thank, you, Chairman. Well, the NTMA, we've had in evidence, formed a different view. How did you respond when you knew that the NTMA would not put money on deposit in Anglo anymore? They obviously felt the nation's pensions, etc,. were at risk.

Mr. Matt Moran:

I had no involvement with the NTMA.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Were you aware the NTMA were not putting money into you?

Mr. Matt Moran:

I don't have any direct knowledge of that, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You never knew that.

Mr. Matt Moran:

I heard elements in the bank that the NTMA had a low level of deposits but I don't have-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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The NTMA had to be instructed to put money into you at one stage because they were so resistant to doing so. You were not aware of that?

Mr. Matt Moran:

I ... I ... genuinely, Chairman, I didn't have any ... any activity with the NTMA. I was aware that the NTMA's deposits were low but I-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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The Government weren't ... instructed the NTMA at one stage to put money into Anglo and the NTMA in evidence here said that they ... they ... Mr. Somers said he had to go away and get legal advice and then informed that on the foot of a ministerial direction he would actually put money in there. That was ... you were never aware of those issues, no?

Mr. Matt Moran:

I don't have direct knowledge of them, Chairman.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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All right, thank you. I'm going to bring matters to conclusion, Mr. Moran. I'm to ... as with every witness, I'd like to allow you some space to maybe comment upon anything you'd like to further add. It could be ... it might even be some further detail, recommendations or any other comments that you'd like to make.

Mr. Matt Moran:

Thank you, Chairman. Just, in summary, I hugely regret the outcome of the bank and the impact it had and, you know, there are significant lessons to be learned from that, clearly. And thank you for your time here today.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Thank you. With that said, I'd like to thank Mr. Moran for his participation and for his engagement with the inquiry, to now formally excuse ... excuse you and to propose that we suspend until 16.50. Is that agreed?

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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16.15. Sorry, 6.15.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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16.50.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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16.50.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, thank you. Is that agreed? Agreed. Ten to five. Thank you.

Sitting suspended at 4.35 p.m. and resumed in public session at 5.04 p.m.

Irish Life and Permanent-Permanent TSB - Mr. David Went

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, so I now propose that we return back into public session. Is that agreed? Agreed. In doing so we will now commence session 3 of today, or 4 of today's hearings actually, with Mr. David Went, former group chief executive ILP-Permanent TSB. The Committee of Inquiry into the Banking Crisis now resuming in public session, can I ask members and those present in the public Gallery to ensure their mobile devices are switched off.

This afternoon, the focus of the inquiry is on Irish Life and Permanent and Permanent TSB. At this session we will hear from Mr. David Went, former group chief executive of ILP-Permanent TSB. Mr. David Went was appointed managing director of Irish Life Assurance plc Dublin in 1998 and group chief executive of Irish Life and Permanent plc in 2000. Mr. Went retired in May 2007. He spent most of his career with the NatWest group, where he was chief executive of the Ulster Bank group from 1988 to 1994 and chief executive of the Coutts group from 1994 to 1997. Mr. Went, you're very welcome before the committee this evening. Thank you.

Before hearing from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect to their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You're 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. Yet, 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 form part of the evidence of the inquiry. So with that said, if I can now ask the clerk to administer the affirmation to Mr. Went?

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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I welcome you before the committee this evening, Mr. Went, and if I can ask you to make your opening remarks, please?

Mr. David Went:

Thank you Chairman. Well, I've reviewed in detail the contents of the core books provided to me by the joint committee and while I hope to assist the committee in so far as possible, I would like it noted that much of the material provided to me in the core books relates to events which took place after my retirement from Permanent TSB, or from Irish Life and Permanent. I hope and expect to be in a position to answer any questions the committee may have from 1998 up to my retirement at May 2007; however, I may be unable to comment on matters that occurred after my retirement for obvious reasons.

I will now comment on the lines of inquiry that you asked me. First of all, the composition, skills and experience of the board members. The merger of Irish Life and Irish Permanent in April 1999 was effected by the purchase of Irish Life by Irish Permanent. Irish Permanent became the holding company for the new corporate group, as well as a licensed bank, and the merged board became not just the board of the bank but the group board of the enlarged entity. I became group chief executive of ILP in 2000. The bank chief executive became an executive director on the group board reporting directly to me. The initial ... it was recognised that the initial composition of the board would require adjustment over a two to three-year period and over the years to 2006, a non-executive nominations committee reviewed the composition, increasingly with external assistance, and directors were appointed with a wide range of skills and experience. There was always a majority of non-executive directors and my view is that we had a suitably skilled, inquisitive and challenging board, fully capable to supervise the business in a fully effective manner. Board evaluation of performance was carried out regularly with external assistance.

Quality of the business model setting: following a strategic review of the business on my appointment in 1998, the board concluded that the acquisition of a banking customer base was a strategic imperative. The merger with Irish Permanent plc followed and the opportunity arose to acquire the Trustee Savings Bank in 2001. It increased customer numbers, had a substantial deposit base and permitted ILP to become a real participant in the current account market, regarded as a core product for bank assurers. Strategic planning was carried out through a series of strategic plans, usually over three-year periods, covering a SWOT analysis review of the economic and competitive environment, potential acquisitions, costs, challenges, etc. And a detailed annual budget focused on the operational implementation of the agreed strategy. Discussion of both strategic plans and annual budgets considered the capital strength of the group and bank, with an overriding objective of maintaining at all times a buffer over minimum regulatory requirements.

The board was fully involved in the process and external expertise was used better to inform the process.

ILP developed a very clear “Ireland First” strategy aimed at becoming a leading provider of personal financial services in Ireland. By the end of 2006 it consisted - with the exception of a relatively small centralised mortgage provider, CHL, in the UK - primarily on the provision of Irish house mortgages, both owner-occupier and buy-to-let, together with a significant car finance business and a commercial lending business. We did not become involved in large development or speculative property lending nor lending on raw land, due to a combination of restrained risk appetite and skill deficits in respect of those types of lending. The strategy focused on lower-risk, widely-spread portfolios of lending in an attractive home market where we had operated successfully for many years. We did not anticipate the savage downturn and the damage it would do to the chosen business model, especially when combined with the complete breakdown of funding options.

Adequacy of board oversight over internal controls - board oversight over internal controls was comprehensive and some of the regular reports that the board received are listed in my witness statement, and I will not go into them further here. There was a very detailed chief executive’s report covering the performance of all business units of the group, together with the latest available financial information. All of these reports were the subject of detailed discussion at board.

The appropriateness of property-related lending strategies and risk appetite - as I've said earlier, the lending strategy was focused around house mortgages, both for residential purposes and investment, and this accounted for the bulk of the loan portfolio, 88%. In addition, about 5.5% of total lending was accounted for by commercial loans for the purchase of investment property, generally with the benefit of a long-term lease. The objective was to build up a portfolio primarily consisting of a substantial number of relatively low ticket or small ... smallish residential loans, giving a wide spread of borrowers and locations with conservative loan-to-value ratios - average 71% at inception in 2006. However, in the event, the extent of the decline in residential property prices did not protect the portfolio on the downside.

Appropriateness of credit policies, delegated authorities and exception management - credit policies were reviewed regularly and changes required approval of the board and were advised to the regulator. LTV ratios were reasonable, averaging 71% for residential home loans, although first-time buyer loan-to-values reached 87% in 2006 following the introduction of 100% mortgages in 2005. Borrowers were tested for repayment capacity, including a stressed 2% interest test. Similar policies were applied to residential investment property loans, with both LTV and rental cover ratios for interest payments. Commercial loans policies primarily consisted of loan-to-value ratios to a maximum of 75% to 80%. Instalment credit loans were automatically credit scored using industry standard scorecards with suitable controls over exception approvals. Delegated authorities were determined on a tiered basis depending on the experience of the holder. Larger loans would require reference to a central credit unit under the supervision of a very experienced retail lender. Loans in excess of this discretion were referred to a group credit committee consisting of a number of experienced lenders, including the chief risk officer, and chaired by the group finance director. Exceptions to policy were approved on a case-by-case basis, generally on a "next higher" basis. The board received monthly reports on all loans in excess of €6.35 million and, in relation to loans approved as exceptions to policy, within the delegated discretion system. Similar arrangements applied to our business in the UK - CHL.

The stress test required by the Central Bank in 2006 included a house price reduction of approximately 22% over two years, with a modest recovery in year three, together with increased unemployment rising to 9.7% over the three years of the test. Housing completions were assumed at 50,000 per annum throughout. While none of the scenarios modelled indicated serious threat to the solvency of the bank, it should be noted that the actual extent of the price declines and rise in unemployment subsequently vastly exceeded those set. However, the most significant defect in these tests lay in the absence of tests involving stress on the funding side. Perhaps this was because of the now proven to be unfounded belief in the strength and durability of the sources of funding available to banks in Ireland. There were no specific warning signs and, indeed, global capital markets had come through many periods of severe stress over the past 20 to 30 years and at this time had never appeared so accommodating to reasonably rated borrowers. However, the deterioration in sentiment towards Ireland and the Irish banks post-2006 demonstrated quite clearly that there is effectively only one counterparty in wholesale markets as Professor Nyberg perceptively remarked in his report of 2011. Failure to anticipate this truth, in common with many others, remains, in my view, the single biggest error that was committed in our business plans.

Analysis of risk concentration in the base, adverse economic scenarios and the impact on capital structures - as I said earlier, the overall portfolio was very widely spread and remained largely unchanged in terms of concentration in the years 2001 to 2006, which underlined the consistency of our strategy. I've previously referred to the results of the 2006 stress test, which appeared satisfactory in terms of a robust response to economic shocks which were considered severe at that time but clearly, with hindsight, absolutely inadequate to model the actual impacts of the recession of 2008-2010.

Adequacy of the incentive and remuneration arrangements to promote sound risk governance - all remuneration arrangements for senior executives, including myself, required the approval of the remuneration committee, consisting entirely of non-executive directors. In the case of the senior executives - myself and those reporting directly to me - the package consisted of a base salary, a bonus opportunity up to 60% of salary, access to group share options up to a maximum multiple of salary and membership of various group defined benefit pension schemes. I did not become a member of a defined benefit pension scheme as I joined Irish Life at age 51, with an anticipated retirement age of 60.

Overall remuneration terms were reviewed regularly with the advice of international remuneration consultants. While at this remove total reward is substantial, it was not excessive relative to that scene in the Irish market. However, it is clear that public perception of remuneration in financial services at this time is that it was excessive and it's clear that this perception is reality for financial services executives, including myself, and I fully accept that. Bonus payments for those reporting directly to me were based on individually designed objectives agreed with the remuneration committee, reviewed at the half year, and performance overall was agreed at year end, with bonuses based on that performance. Monthly business reviews were held with those executives. I do not believe that the remuneration arrangements led to a culture of excessive risk taking, given the checks and balances within the overall credit approval system, including the group credit committee structure and the treasury policy, which I think you heard about this morning.

Impact of shareholder or lending relationships in promoting independent challenge by the board - ILP was a publicly quoted company with a very widely spread investor base, including a substantial retail element. As such, we met regularly with institutional shareholders in Ireland and overseas. These meetings involved exchanges of views on company performance, strategy, etc. While on occasion our overall performance was regarded quite unfavourably in comparison to a number of our competitors, particularly in relation to our non-involvement in large-scale property lending or lending to the SME sector, we did not change our stance on this as we lacked both risk appetite and the skills to undertake that business. We reported the feedback to the board and considered whether we should modify strategy to take account of these views. But in general terms, we maintained over this period a very consistent approach to the business in strategic terms. Because of our business model, we did not have lending relationships with borrowers of the nature that, I think, are ... is implied in this line of inquiry.

Appropriateness of the regulatory regime - the regulatory regime has been characterised as principles-based and light-touch. However, I would characterise it more as unbalanced, with a substantial, relatively well-resourced and quite intrusive, self-confident consumer focus contrasting markedly with an under-resourced and tentative low key prudential activity. This seemed to be confirmed by the ex officiodirectorship of the consumer director of the regulator in contrast to the position of the prudential director.

This misallocation led to an inability of the supervisor to analyse in a meaningful way the substantial flow of information that banks provided. In addition, when on-site inspections took place - and that was rarely - there was substantial delay in furnishing reports and dealing with bank responses. Responses to the submission of requested information on particular topics were also very slow.

While there was contact between the regulator and ILP group at a variety of levels, my contact was mainly restricted to twice-yearly visits to the regulator and the prudential director to review half-yearly and annual accounts. While these meetings were businesslike and professional, they contrasted markedly with meetings I had experienced elsewhere with other regulators. Clearly, my interactions with the regulator or certainly ... I'm sorry ... Certainly, my interactions with the regulator bore no resemblance to the extremely thorough reviews with rating agencies.

The regulator appeared reluctant to use its power of moral suasion that I believed it possessed, preferring to take a very legalistic view of its power. I recall contacting the regulator regarding the introduction of 100% mortgages, which I regarded as an unnecessary and unwelcome development, but it was made clear to me that the regulator regarded itself as powerless to intervene. It's my view that the regulator failed to fulfil its prudential function. It is, obviously, primarily a failure on the part of management and boards of banks that was responsible for the crisis that emerged. However, as with all participants in the creation of the crisis, I'm sure that different decisions at different times by the regulator could have reduced the severity of events.

The nature and appropriateness of the relationship between the Central Bank, the Department of Finance and banking institutions: I have no direct knowledge of the relationship between the Central Bank and the Department of Finance and, therefore, I don't consider it appropriate for me to speculate. I can recall only a couple of occasions when I would personally have contacted the regulator on a matter of concern and only one semi-social event - an in-house lunch with my chairman at the offices of the regulator. We were members of the Irish Bankers Federation and we tended to prefer interactions on industry issues to be conducted by them. To the best of my knowledge, during this period I had no contact with the Minister for Finance, the Secretary General of the Department and other senior civil servants unless perhaps at industry gatherings - Institute of Bankers' functions, IBEC, etc.

Appropriateness of the relationships between Government, the Oireachtas, the banking sector and the property sector: The committee has heard evidence from a number of witnesses in respect of these matters. I have no direct experience of the nature or appropriateness of these relationships and, therefore, I do not believe I can usefully comment.

Conclusion: In preparing for this appearance, I have reviewed thoroughly the last accounts for which I was responsible - 31 December 2006 - together with the economic backdrop at the time in order to explain the subsequent outcomes which contributed to such negative outcomes for staff, customers, shareholders and, of course, the Irish State and its people, all of which I deeply regret. While bank margins had declined over the period due to a combination of a very competitive mortgage market, including the introduction from the UK of tracker mortgages, together with an increased use of wholesale funding to fund customer lending, bank profits had more than doubled to €202 million, while capital remained sound with a risk asset ratio at 10.4% comfortably meeting the objective of exceeding regulatory minima.

The two issues which I think best demonstrate the sharp contrast between the time of my leaving and subsequent events are the mortgage portfolio and liquidity on 31 December 2006. Mortgage quality, which was 88% of the book on December 2006: aside from apparently healthy LTV ratios, which I have illustrated in some detail in my witness statement, the arrears position was healthy. Since 2002, cases in arrears had halved, from 7.1% to 3.4% of the portfolio and case numbers had reduced despite the increase of mortgage accounts by approximately 20%. The strong consensus of economic commentary, domestically and internationally, was that despite the rapid expansion of both credit and house prices the economy was fundamentally sound – the soft landing scenario.

We now know that in the period 2008 to 2010 the economy, partly from events abroad, encountered its worst recession ever, vastly exceeding the levels for which the regulator had stress tested in 2006, and, clearly, this was in the nature of the fabled 400-year flood. The liquidity position on December 31 2006: at the end of 2006, the bank appeared to be well funded, with very easy access to a variety of apparently liquid capital market sources; long-term debt repayments were very widely spread; there was a relatively low use of securitisation; and there was a significant availability of secured repo and ECB eligible collateral together with approximately 35% customer deposits. Long-term debt, securitisation and customer deposits together provided 65% of funding. Moody's rating agency increased the financial ... the ratings strength of ILP to AAA in early 2007 while S and P maintained a rating of A+ at end 2007. Events subsequently proved this funding model absolutely inadequate. External events, together with negative views on Irish credit portfolios ensured that very rapidly all capital markets were closed to IL P with the disastrous effects that we now know. The error here was clearly failing to recognise Professor Nyberg’s point that in the capital markets there is only one counterparty and, hence, if one source closes to a borrower, all will close simultaneously.

In summary, Chairman, from my perspective Irish Life and Permanent was a sound and well-run business when I retired and I was shocked and disappointed at the impact of subsequent events. I deeply regret the consequences for the staff, customers, shareholders of Irish Life and Permanent and, of course, for the Irish people. I hope my statement will assist the committee in its task.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you, Mr. Went, and thank you for taking us through your opening statement. I now invite Deputy Pearse Doherty to commence questioning. Deputy, you have 20 minutes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Go raibh maith agat agus fáilte. Can you comment on the reasons why, in your opinion, the chairman indicated that he would be discussing with the executive directors "how the Board might add more value to [the] business operations"? This was noted in the board minutes of the meeting dated 20 April 2004. You can find it, I think, on page 4 of the-----

Mr. David Went:

No, I have the example-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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-----core Vol. 1.

Mr. David Went:

Well, there were two aspects of the ... This was ... We had had a review of the board performance and there were two aspects in relation to improvement in the board performance. One was that we ... I would bring forward proposals to progress specific actions identified by the nomination committee to further improve its effectiveness and this largely revolved around the non-executive directors wishing to have greater interaction with individual business units, to get to know the individual managements of the business units, meeting the management of those, getting to understand the business better and more intimately than perhaps they had in the past.

As far as the question you asked ... the specific question you asked, I think that was a feeling by the chairman that we had very high calibre people on the board, with a wide range of experience, and feeling that perhaps we were not making the most use of them, their experience, you know, their contacts that they might have, advice that they might like to give. That, I think, was the... was what's referred to.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Mr. Went, on 27 July 2005, you wrote a file note in relation to the conversation you had with Brian Patterson of IFSRA and Pat Neary in relation to the 100% mortgages. What was your view on the issuance of the 100% mortgages?

Mr. David Went:

Sorry, can you refer me ... just to-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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The file memo is to be found on page 70 of core 1-----

Mr. David Went:

Sorry, page what?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Page 71.

Mr. David Went:

71. I'm sorry. I'm familiar with the note but I just wanted to ...

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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The question is - what was your view to the issuance of 100% mortgages?

Mr. David Went:

At the ... When I first heard about it, I was, in the common parlance, I was fit to be tied. I found the ... I felt that this was a product that was not required. The maximum LTV ratio at that stage was 92% so I did not believe that going to 100% was something that there was a crying demand for that product in the marketplace. I also felt that this introduced into the Irish market an unattractive feature which was potentially competing on credit quality, which was ... rather than on price, service, you know, all ... a number of other things, but ... things that banks had competed on for years ... but, it had not generally been the practice in the Irish market for banks to compete on credit quality and, therefore, I felt that this was a very retrograde step.

I also felt that in general terms that it introduced for the first time into the Irish market, you know, a no-moral-hazard product for the mortgage customer, effectively. It had always been my view that, you know, the ... having ... customers having to demonstrate some form of saving over a period of time, having to demonstrate that they had a deposit for their house ... all of those things were good social things and good from the point of view of prudential situation.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Are you aware of any other bank or institution that held similar views to your own and did you have any conversations with them about this?

Mr. David Went:

No, I can't ... I ... I did not have conversations with them.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay.

Mr. David Went:

I did have the conversation with the regulator.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes, can you tell us what Brian Patterson's and Patrick Neary's views were on this issue when ... in your conversations with them?

Mr. David Went:

Well, may ... if I could deal first of all with my conversation with Pat Neary.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes.

Mr. David Went:

I think that's the ... I rang Pat and I told him ... I gave him the gist of what I've just said to you - that I thought this was a bad product, a bad idea and that in my view the regulator should seek to forbid the product. We went through a conversation about the fact that that the regulator was a principles-based regulator and therefore ... and played no part in the approval of specific products, all of those things. And I made the point to him that I thought he was taking ... I thought ... that I thought he was taking a rather legalistic view of his powers and in particular at that time I would've concluded that he did not seem to think that he could use the power of moral suasion that I believed a regulator has in relation to a regulated business. We had that discussion. I indicated to him that I thought that, for example, you know, the particular bank that had introduced this was a subsidiary of a major UK bank.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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First Active, is it?

Mr. David Went:

Yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes.

Mr. David Went:

I indicated to him that I thought that, you know, if he felt, you know, that this was a bad thing, and I ... I got the impression that Mr. Neary did, and I don't want ... I would never want to put words in this mouth, but I got the impression that he was not unduly enthusiastic about it, but felt his hands were tied. I indicated that I thought that ... well, you know ... there is a college of regulators dealing with banks, where regulators exchange information on matters of concern and that if he were to ring the Bank of England and say, "Look, one of your people in Ireland is doing something which we really don't like", I felt that that was something that could've had some impact.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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In your note with ... on your conversation with Brian Patterson at the Irish Times Trust board meeting-----

Mr. David Went:

No, it was the Irish Times meeting ... Irish Times Limited.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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The Irish Times board meeting, sorry, yes.

Mr. David Went:

That is right, yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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You say that the regulator had no legal powers to prohibit particular products; they do have general prudential powers, including the threat to impose ... including the threat of the imposition of incremental capital. You go on to say what IFSRA need to do was to have the courage of their convictions on any particular issue. What do you mean by that?

Mr. David Went:

Well, I'm ... it's self-evident what I mean by the general prudential powers.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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No, the powers are ... the courage of their convictions - what do you mean by that?

Mr. David Went:

Well, I got the impression that they were not enthusiastic about the introduction of the product but felt that they should ... could do nothing about it, and my-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Did you have the courage of your own convictions when it came to your own bank and deciding whether to introduce 100% loan-to-value mortgages?

Mr. David Went:

No, I had ... as I said in the ... as I think I indicated in the note ... you know, we were a bank that had for 100-plus years provided one in four mortgages, in particular to first-time buyers and this product was aimed particularly at first-time buyers. And, you know, it was ... first-time buyer mortgages would have been about a third of our residential mortgage business, roughly. And being realistic about it, if we could not provide a competitive product to potential first-time buyer customers, we would lose our business and that would be very serious for us in the long run.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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But even though you were fit to be tied, even though you thought this policy was a disaster, even though that this policy provided no risk to the customers and so on and so forth - even though you lectured the Financial Regulator with not having courage of their convictions - you went ahead and stuck your hand in the fire because First Active were ... had their hand in the fire.

Mr. David Went:

Yes, we concluded, having reviewed the options and having reviewed the risks that were inherent in this, we concluded that we had no option but to proceed.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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But other banks ... did all ... did ... other banks decided not to do this. Some institutions decided not to do this.

Mr. David Went:

Virtually all banks introduced some element - some form - of first-time buyer mortgage.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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But has ... is there an institution that didn't?

Mr. David Went:

I can't recall specifically.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Did Nationwide introduce a 100%-----

Mr. David Went:

No, but Nationwide ... Nationwide by that stage was not making any house loans.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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In 2005.

Mr. David Went:

They were not ... hardly making any house loans.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay.

Mr. David Went:

Nationwide at that stage was basically a commercial lender.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay.

Mr. David Went:

I don't want to comment on another institution-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I get that, okay.

Mr. David Went:

-----but Irish Nationwide at that stage was basically a commercial lender and from my experience was that there were very few people took out more house mortgages from ... with Irish Nationwide.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Do you regret the decision of not sticking to your convictions in relation to the 100% LTVs?

Mr. David Went:

Yes, I regret it, but I regret it in that ... but the problem is that I can't ... I could not at that ... I can't foresee ... I can't imagine what the outcome would have been. I believed at the time and we all ... our board believed at the time that taking everything in the round, it would've been a very serious damage to our institution.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes, okay. That's ... you've made that point very clear and thorough. What is your view on the facilities offered to borrowers such as interest-only repayment loans and increased loan-to-values ratios and what effect these had ... these facilities had on the property market at the time?

Mr. David Went:

Well, interest-only loans were almost ... virtually, they were for house purchase ... residential house purchase ... were virtually non-existent. I ... there may well have been some people who got them, but very very limited. Investment property loans ... residential investment property loans were different because the tax treatment of interest on investment property loans was such that there was a very significant benefit in having as much interest charged on the loan as possible. And obviously it increased the risk, but our experience was, and the experience up until 2006 in any event was that there were very low levels of arrears on residential investment property loans.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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The question I'm really having is ... not that ... you know, we know right across-----

Mr. David Went:

Sure.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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-----all the institutions there was a very low level of arrears.

Mr. David Went:

Sure.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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There was high employment and so on. The question is: what impact did it have on the property market? Do you accept now today with hindsight, for example 100% loan-to-value ratios and interest-only loans ... did you, do you believe that they helped create a property bubble which allowed prices to spiral - some would say - out of control?

Mr. David Went:

I am not sure. I am not sure that the first-time buyer mortgages had as big an impact as one ... as you might think, you know in terms of the impact on house prices. Certainly interest-only loans made it easier for people to acquire residential investment properties and clearly if there was a ready availability of credit that certainly could allow prices to increase.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Are you aware of any loans or terms offered to borrowers, which would be considered outside the normal commercial terms available at your institution, made during the period of your tenure and, if so, can you clarify the reasons why this happened?

Mr. David Went:

No, I am not.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Were there any issues with the registration of interests - with assets taken as securities - within Permanent TSB?

Mr. David Went:

Not to the best of my knowledge.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Was the process of security registration and of security valuation reviewed by the external auditors?

Mr. David Went:

Yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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It was. And what was their view?

Mr. David Went:

They raised no queries on it so I had to assume it was satisfactory.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Your institution showed an increased reliance on wholesale funding from 2005 to finance growth in the loan portfolio. Were you aware of the issues and did you regard this as a fundamental risk or not?

Mr. David Went:

Well, we were clearly aware of the issues because we reviewed on a monthly basis the make-up of our funding portfolio. However, we had concluded that for us the primary thing that we looked at was the extent to which customer deposits, long-term debt and securitisation funded our total loan book. And that was about two thirds of it was funded through that, and these were seen as relatively stable sources of funding, and that was ... that, therefore ... and that proportion had been relatively stable over a number of years.

Clearly wholesale funding was required to ... to finance growth and indeed, you know, looking back on it that was one of the, that was one of the key attractions that people saw in the introduction of the euro, as far as the Irish was concerned, because Ireland ... one of the problems that there had been in Ireland, why there had been such a wide divergence of interest rates between Irish rates and European rates, was that there was a relatively small pool of capital and once Ireland entered the euro, Irish banks, who had been somewhat constrained in terms of their access to, to funding, they were now ... they now had access to the second, or one of the two widest and deepest and most liquid markets in the world. So that was ... so that was seen as a very attractive proposition.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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KPMG were your auditors for the period 2002 to 2010, inclusive. In your opinion, could the retention of KPMG over the years affect the quality of their audit work and their independence in carrying out their duties?

Mr. David Went:

No, I don't think so. The audit partners ... the audit partner for the first five or six years of my period there retired and was replaced so there was a rotation of the audit partner and you know, we had no reason to doubt KPMG’s ability to audit our accounts.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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It was noted in the minute of the audit committee on 9 November 2006 that the committee was satisfied with the performance of the auditors. In hindsight would you agree with this view?

Mr. David Went:

Sorry, can you give me that ... can you give me that reference please?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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There is no reference to it, it’s just a note that-----

Mr. David Went:

Sorry what ... what-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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It was noted in the minute of the audit committee.

Mr. David Went:

Yes, which page is it please?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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It’s ... there is ... it’s not in the core books. It’s just a note, and if you take it that this is the case that there was-----

Mr. David Went:

Okay, it’s not in the core book?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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It’s not in the core book, no.

Mr. David Went:

Okay.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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It’s a minute in the ... of the audit committee of 9 November 2006, during your tenure, that the committee was satisfied with the performance of the auditors. In hindsight would you agree with this view?

Mr. David Went:

Yes I would. I mean I think you’ve heard from the ... all of the audit firms involved in the audit of all of the financial institutions and I believe that they have, you know, they have robustly defended the quality of their audits.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes. I am more interested in your view in-----

Mr. David Went:

I have no reason to doubt the quality of their audit. As I said, you know, when I look back on the position as of 31 December 2006, I, I had no reason to doubt the quality of the audit of that ... those accounts.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Can you recall any issue which may have warranted a qualified report which the auditors discussed with you but did not feature in the management letter, the final year-end report?

Mr. David Went:

It would have ... sorry, would you repeat the question?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Can you recall any issue which may have warranted a qualified report which the auditors discussed with you but did not feature in the management letter, which was the final year-end report?

Mr. David Went:

No, I cannot.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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No, you cannot. Are you aware of any key issues that should have been included in external audit but were not?

Mr. David Went:

That should have been included in the external audit?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes.

Mr. David Went:

No, I’m not.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Did the board fully understand the implications of the adoption of IAS 39 standard had on the financial statements of the bank?

Mr. David Went:

IAS 39 ... is that, sorry I’m ... I’m ... is that IFRS?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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It's you can’t book future losses.

Mr. David Went:

Sorry?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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The standard that doesn’t allow you to recognise-----

Mr. David Went:

Yes, sorry, this is when effectively the ... the general bad debt provision was prohibited.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes.

Mr. David Went:

I mean that ... the general bad debt provision was clearly a potential buffer to, to problems, but that’s what the accounting standards-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes, and the question is: I know that it was an accounting standard but did the board fully understand the implications of the adoption of IAS 39 standard had on the financial statements of the bank?

Mr. David Went:

To the extent that this removed a buffer? Is that your question?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Well to the extent that expected losses may not be recognised in the end of year accounts because of IAS 39 and that it could provide a comfort maybe for the board. Did they, did they ... was this explained, did they understand IAS 39?

Mr. David Went:

Well they knew that unlike previously, they were not ... we were not permitted to maintain a general reserve to cover future losses.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. To the extent that you or any other board members had concerns with the adoption of IAS 39, was any concerns raised with the regulator? Was there any concerns, did you have concerns with IAS 39 or any other board member that you know of and was it ... was those concerns, if they existed, raised with the regulator or the Central Bank?

Mr. David Went:

No, to the best of my knowledge not. I mean, you know that’s a matter ... that’s ... you know, this, this ... accounting standards are a matter ... are a matter like ... they’re a very long way away from, from me in Ireland I can tell you.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Do you feel that the amount provided for in the provision for bad debts was adequate and in hindsight do you feel that the amount provided should have been different?

Mr. David Went:

Under IAS 39?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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No, in the ... yes, well yes. Well under ... in your report, in ... the provisions that the bank made for bad debts.

Mr. David Went:

I believe that as at 31 December 2006 the provision for bad debts was properly stated.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay.

Mr. David Went:

Can I just make one point though that the ... there’s a very large concentration always on capital, in capital, and you know Walter Bagehot, many, 200 years or so ago, said, you know, a good bank needs no capital and no amount of capital will save a bad bank. So, to some extent, you know, the argument ... the argument about the sufficiency of capital is ... is a very relevant argument, however you know, liquidity is a much more significant issue in my view.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Mr. Went, finally can I ask you what role, if any, did you play in your institution in bringing it to a point where it needed to be rescued for the State, less than 18 months after you left your position? What decisions did you make that helped bring that about or do you completely absolve yourself from any decisions or directions that the bank took at your time that set it on this course?

Mr. David Went:

No, of course I don't absolve myself from those. And, you know, I’ve made the point that we, we made an error in relation to, with hindsight - and you know we would not have been, we would not have been in a small crowd in relation to that sort of hindsight - with hindsight, in relation to not fully recognising the point that Professor Nyberg makes on capital markets that once ... because that ultimately goes to the question of confidence and once confidence goes in an institution the institution is doomed, you know, in the long term. So we certainly made an error in not recognising that. And we also made an error in not recognising that there was a possibility of a 50% drop in house prices. You know we ... that was far ... that would far and away have exceeded any drop in house prices - instantaneous, almost instantaneous, drop in house prices - that anybody would have foreseen. So those, those were two errors that were made and I take responsibility for that.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. Deputy John Paul Phelan, 20 minutes Deputy.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you Chairman and good afternoon Mr. Went.

Mr. David Went:

Good afternoon.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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First of all I’d just like to ask you did you appreciate the level of risks, or do you feel that there was an appreciation of the level of risk that was attached to the level of growth within your institution that was being achieved at the time you were chief executive of the organisation?

Mr. David Went:

Could you repeat that?

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Was there an appreciation, either by yourself or at board level or at senior management level of the, the risks that were attached to the level of growth that was being achieved?

Mr. David Went:

Okay. I guess we always ... we were always conscious of the risk inherent because every banking business is a risk business. I suppose we, we focused on ... there were two aspects of risk in our business. One was the, the mortgage, you know, the mortgage portfolio and the extent to which there was a cushion in there through loan-to-value ratios and we believed that with an average loan-to-value ratio of 71% at inception, there was a substantial cushion there. And equally we ... on the liquidity side we believed, looking at the way in which we looked at it, you know the two thirds of our funding came from long-term debt, customer deposits which would presume to be sticky, and securitisation which actually matched the tenor of the assets - that's two thirds of that, leaving only one third to be covered through short-term facilities - we concluded that that risk was satisfactory.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. There was another risk which subsequently transpired, which was in relation to tracker mortgages.

Mr. David Went:

Yes.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Were you aware of the extent of the tracker mortgage interest at risk and was that ever discussed at board level or senior management level within the institution?

Mr. David Went:

I mean, the issue of tracker mortgages was discussed before we began to offer them. The problem with tracker mortgages is basis risk because, traditionally, mortgage products were lent on a ... on what you might call an "administered rate" basis, a standard variable rate basis. So, therefore, if interest rates went up on the deposit side, the bank had the discretion to raise the interest rates on the asset side, so there could be a pretty much immediate re-pricing of both asset and liability. However, in the UK, in particular, tracker mortgages had become a very significant feature of the market in the '80s - sorry, in the '90s - and these ... tracker mortgages are where you lend at a fixed margin over the official rate. So that introduces another rate ... another element of risk, which is basis risk, where if you, for example, are lending at 1% over the ECB rate and the ECB rate goes up by 0.25%, well, that reduces your margin to 75 basis points, so that's not a good thing.

So the ... and what ... how we analyse that risk would have been to look back over the period. I mean, we didn't have a very long period of euro rates, but we had a reasonably long period of Deutsche mark rates, which would have been a proxy for that. And when you look back over the previous 20 to 25 years, you would have seen periods where official rates diverged from market rates for periods of extreme stress. In 1987, Black Wednesday, when Gorbachev was ... or Yeltsin was kidnapped in Russia, like, there was a tremendous dislocation of markets. So individual deposits ... market deposit rates spiked and official rates didn't. But by and large, those periods were relatively short and if you had to sit and suffer, you know, a contraction of your margin over a period of time, it wasn't a bad thing.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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So I'm not trying to cut you short ... but there was a discussion but you didn't really take any action, is that right?

Mr. David Went:

No, there was a ... we would have been aware of the risk but ... and that would have been factored into our, you know, our overall review of our treasury policy, etc.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I want to ask you about another product that you entered into, or the institution entered into, in March of 2007, shortly before you left, with Merrill Lynch - the Springboard mortgages, they were termed, to cater for individuals who were experiencing difficulties in securing lending from banks by traditional methods. In ... with the benefit of hindsight, was that a good decision?

Mr. David Went:

Well, Springboard was regarded when we entered into it as a relatively small diversification that could open up, potentially, another market to us, which was analogous to the market we were in but was slightly different. And it's fair to say that there was considerable discussion of that particular proposition at the board. There had been some concerns in the US over sub-prime mortgages. There was a concern that this was, you know, was a sub-prime mortgage business. That wasn't the way in which it was conceived by Irish Life and Permanent. It was conceived by Irish Life and Permanent as being a, sort of, a non-standard mortgage, not very far ... potentially quite close to a standard mortgage but certainly not sub-prime.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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But there was an element of sub-prime, wasn't there?

Mr. David Went:

Oh, yes, I'm not disputing that. However, we always ... we took a very cautious approach to that. We decided that, you know, we did not have all the skills necessary to enter into that business, so we entered into a joint venture with Merrill Lynch, where the financial risk was 50:50 split.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Can I ask ... and I know you were gone, I think, at the stage, a year later, when Merrill Lynch looked to cease their involvement. Did that raise any alarm bells for you at the time? I know it was post your time as chief executive.

Mr. David Went:

Well, I ... being cynical, I'd say, "Phew, I'm glad I wasn't there then". But... no, it clearly ... a decision was made. I have no insight into that decision. But it was, I would repeat, it was a very, very small part of the Irish Life and Permanent or Permanent TSB business.

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

Mr. David Went:

And one of the things that it attempted to do, it was meeting a specific need where it was very difficult .... there were very black and white rules over mortgage lending for people who had, for example, a small Circuit Court judgment or something like that. So it ... you know, you could actually find yourself cut off for a very long period of time from being able to buy a house by a relatively small indiscretion.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. I just want to change now, if I can. You've spoken in answer to Deputy Doherty in relation to the 100% mortgage issue. You're critical in your statement about the regulator, particularly about the prudential, I suppose, side of the regulator. Did you at any time voice your concerns, either internally to the board of the bank, to the bankers' federation, which you mentioned in your statement, or, indeed, did you voice your concerns to the regulator, outside of that 100% mortgages issue, about lack of sufficient prudential regulation?

Mr. David Went:

Well, it's obvious that I voiced my concerns, you know, internally within the bank, because I copied the note that I did to all of the non-executive directors in relation to 100% mortgages.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Outside of that issue? The prudential, in general, I suppose, is what I'm asking-----

Mr. David Went:

No, I mean, I can't say that I did. But that ... I, you know ... that ... and I certainly didn't go along to the regulator and say, "Oh, listen, I think you're doing a very weak job". I mean, I ... that sounds to me like a very incredible scenario.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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And the bankers' federation?

Mr. David Went:

The bankers' federation?

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes, you mentioned them ... referenced them in-----

Mr. David Went:

No, I don't think that matter came up.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. So, really, your statement here ... outside of the 100% mortgage issue, is you looking back with hindsight and saying that prudential ... there was a lack of resources in the prudential end but you didn't, outside of the 100% mortgage area, raise any of those concerns?

Mr. David Went:

No, I wouldn't have considered that to be my role.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, well, I just wanted to clarify that. That's fair enough. I want to then turn to page 8 of your statement where you say----

Mr. David Went:

Page 8. Excuse me, just, can I just find page 8?

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes. Basically, the soft landing, which you referenced yourself. You spoke about the consensus that existed domestically and internationally. Was-----

Mr. David Went:

Which section is this, sorry? Excuse me.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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It's under the heading "A. Mortgage Quality", on page 8 of your long ... your original statement to the inquiry.

Mr. David Went:

Okay.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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There's a diagram in the middle and it's in the paragraph underneath: "[T]he strong consensus of economic commentary both domestically and internationally was that despite the rapid expansion of both credit and house prices, the economy was fundamentally sound", the "soft landing scenario" is how you termed it.

Mr. David Went:

Yes.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Were you and your institution doing any analysis of what the likely outturn for the Irish property market and, indeed, the economy was going to be?

Mr. David Went:

No, I think what we sought to do was to access as many sources of information on ... you know, informed information on the Irish economy and the Irish property market and to form a view as to whether or not, you know, what the consensus was and what ... and whether or not we-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Would it be fair to say then that you bought into the soft landing scenario - as an institution, not you yourself personally - but Permanent TSB and Irish Life were part of the consensus?

Mr. David Went:

I don't think its unfair to say that we agreed that the soft landing scenario was the most ... you know, the base case if you like.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Now I want to turn to an item that I found online - press release from Permanent TSB on 20 September 2002:

Permanent TSB launches country's first cheque book-based mortgage account. New facility breaks down the barriers between mortgage lending and other personal loans. Permanent TSB, the country's largest mortgage provider, has announced the launch of the first cheque book-based mortgage account in Ireland. The new facility, One Plan, would allow customers to use an ordinary cheque book to pay for items such as holidays, consumer goods, education fees and, of course, home improvements. Any funds used for such purposes will only attract mortgage rates of interest and no other form of borrowing provides such good value to customers as mortgage borrowing.

How do you feel about that particular product now or do you think that it was marketed, as it was marketed at the time ... I can tell you it was marketed at the time because I was offered one myself which I, thankfully, didn't take up. Do you think that that was prudential?

Mr. David Went:

Well, it wasn't ... I mean ... the one thing to remember about One Plan was that there was a very ... relatively low limit on the amount of funds that one could access through the One Plan product, in other words, the ... and, in fact, I think, that-----

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I have it here: "One Plan works by giving customers pre-approval to borrow up to 75% of the value of their homes". 75% wouldn't be characterised as a low loan.

Mr. David Went:

I'm sorry, I was talking about the incremental portion of the loan. I guess you have to ... I have to acknowledge that there's probably marketing hyperbole in there.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----guilty of that.

Mr. David Went:

Sorry-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Its not the first time we've seen that, Mr. Went.

Mr. David Went:

That's right.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Absolutely, Chair.

Mr. David Went:

However, the basic point ... the basic purpose of One Plan was to take a base level of mortgage loan and to allow the borrower a proportion over and above that within prudent LTV ratios. That was what the basic purpose was. So, for example, using the extension point you just made it was that, you know, you could take out a One Plan loan ... you're ... that would be ... you would have your core mortgage and then as you spent your money on the extension, you know, you could actually use ... you could actually pay for it yourself rather than having to come to the bank and ask for it.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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That's ... I don't think anybody would argue with that. I think-----

Mr. David Went:

That was the basic premise of it.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Well, the basic premise ... that was the last item listed. The first item was a holiday, the second was consumer goods. You know, there was a lot of things included there which, I think, people now looking back on would think were not suitable for that type of product, if you know what I mean, not ... whatever about extensions.

Mr. David Went:

As I said, I can't disagree that it was marketing hyperbole but, you know, as long as this was within an overall envelope of a reasonable loan-to-value ratio, I do not ... I don't think it is unnecessarily imprudent.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Again, I want to change to the issue of remuneration and, I think, on page 5 of your statement you said: "I do not believe that the remuneration arrangements led to a culture of excessive risk taking given the checks and balances with the overall credit approval system." So, were bonuses - I maybe misunderstood your statement - were bonuses paid on the basis of profits made through extra lending?

Mr. David Went:

No, the bonuses at this ... the bonuses that I'm referring to here were based on a combination of group profit, business unit profit and then a number ... a small number, four or five particular objectives. They might have been the implementation of a particular project, such as the restructuring of the branch network or something like that. There was no direct correlation between the payment of a bonus and an individual loan.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, but they would-----

Mr. David Went:

But there would have been targets-----

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

Mr. David Went:

There would have been targets that people would have ... that ... where achievement of those targets would have led to the payment of a bonus.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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They weren't linked to profitability in the sense that, you know, if a mortgage is sold, which is a 30-year mortgage, there was no sense of clawback on a bonus that it wouldn't be realised in full or it could be clawed back if the product or the loan proved, ultimately, to be profitable?

Mr. David Went:

No, but at this level there was a process ... I mean ... just, sorry, I'll go back. In terms of determining whether or not people were lending just for the sake of lending, there were a number of audit-type processes in relation to that. There was a credit quality process that was run by the credit group and they would go through and look at experience of individual lenders and if the experience of individual lenders were that arrears were coming up, that would be a bad thing. Equally, then, the internal audit function would have done separately, as part of their internal audit of a branch or wherever, they would have done a review of that. So, to the extent that lenders were lending just for the sake of lending, I don't believe that that would have been a serious problem, no.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Finally, your strategy as a group was to focus on the domestic Irish mortgage market which you were ... and, I don't know, perhaps, still are one of the, you know, the largest lender. Was there ever any effort during your time as chief executive to diversify? You mentioned, I think, in your statement again that you felt you didn't have the necessary skill set to be looking to SMEs and to, maybe, "the productive sector", as it might be termed. Was there ever any discussion at senior management and board level that, perhaps, that was something that Irish Life and Permanent TSB should be looking to do?

Mr. David Went:

But can I ... I'll deal with that in two parts if you like. For the first period of my time with this group, we spent our time exiting substantial investments that we had overseas that were sub-scale, relatively unprofitable and we decided that we wished to allocate that capital to Ireland where there appeared to be much better economic opportunities and where we had a really substantial market position where we felt we could make better use of that capital. So, that's a general point. The second point you make about SME lending ... I came from a background of running a retail bank, Ulster Bank, and I was fully aware of the extent to which the branch manager and the overall process by which people progress in the bank and become branch managers ... the overall point ... the overall way in which that happens and I concluded and I persuaded my colleagues on the board that it was really too big a stretch for us to, if you like, reverse engineer an SME lending capability into our branch network because I just did not believe we had the skills to do that and I believed that those - and I still believe that - that those skills were actually special skills. You know, you started off by being a clerk to a lender and then you progressed your way up, you went into an advances department, you know, all of those sort of things. I just concluded that we could not reverse engineer those without excessive risk into our branch network and, in particular, I knew from having run Ulster Bank that the clearing banks, AIB, Bank of Ireland, Ulster Bank, National Irish Bank, actually were pretty good at doing that and we would have found it very difficult to compete in that market.

Photo of John Paul PhelanJohn Paul Phelan (Carlow-Kilkenny, Fine Gael)
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So you decided to focus on what you thought was your-----

Mr. David Went:

Yes, we decided essentially to be, you know, a mortgage lender, a plain vanilla mortgage lender.

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

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. I just want you ... maybe if you would clarify there, Mr. Went, just with regard to the general board composition. Did the board feel that the amount it provided for bad debts in 2006 was correct or understated and that the notes in the accounts gave the reader enough details about the potential risk involved with the commercial portfolio?

Mr. David Went:

Sorry, I misheard-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Did the board feel that the amount provided for in bad debts in 2006 was correct or understated and if the notes in the accounts gave the reader enough detail about the potential risk involved with the commercial portfolio? You were addressing this earlier?

Mr. David Went:

Well, I had-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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This would be with regard to Deputy Doherty on IAS 39.

Mr. David Went:

I can't, you know, I can't speak for the views of the board like particularly, but you know, the account ... we would not have signed off on the accounts if we had not believed that they provided a true and fair view of the state of the company at that time.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay. Deputy Eoghan Murphy, ten minutes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Thank you Chairman and thank you Mr. Went. You're very welcome. I want to look at the area, if I may, of the wholesale markets and wholesale funding and that strategy pursued by you when you were there. If we look at Vol. 1, page 106 of the evidence books, this is a-----

Mr. David Went:

Yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Vol. 1, page 106, if you look at point 8.1 on the funding model ... you'll see it, half way down:

The Group's lending book grew aggressively from €12.9bln in 2001 to €39.2bln in 2007. This growth was largely funded through the wholesale markets.

So, can you tell me a bit about that strategy and why you decided to pursue that?

Mr. David Went:

Well as I said, the basics ... the broad strategy of the group in terms of funding was to fund through customer deposits, which were about 35%, and then to fund through long-term debt and securitisation and, you know, between the three of those, it accounted for about 65% of the total funding and we considered that the remaining 35% in short-term funding, you know, short-term funding - a variety of sources, a very wide variety of sources - we considered that that was a reasonable amount to be funding on a short-term basis. So, that was the broad thrust of the strategy and I think you may have heard that this morning-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Yes, but was it intentional, though, that wholesale funding would increase as it did, aggressively, as it says here in the document but at the same time, funding sourcing from retail deposits would fall? I mean, were you intentionally changing the balance, changing the mix?

Mr. David Went:

No, not particularly but it reflected, a) the level of growth to fund customer requirements and b) a very, very competitive deposit market - retail deposit market - where it was very difficult ... it was, you know, there was a tremendous amount of competition in the retail deposit market.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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It's not indicative of you de-prioritising retail deposits.

Mr. David Went:

No.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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No, okay. In terms of the risk associated with that increased share from the wholesale market, were you aware of those risks? Were you ... is it something that would be in front of the board on a regular basis about this increase?

Mr. David Went:

Well, the board received, on a half-yearly basis, a review of funding policy and the extent of funding and all that sort of stuff and that was part of the discussion. But as I said earlier ... as I said in my opening statement, you know, the ... we viewed the opportunity to fund in a variety, a wide variety of wholesale markets, as a really attractive part of joining the euro. And, you know, when we look back ... and at the time, wholesale markets, I won't say ... they almost looked invincible. Now, with hindsight, they weren't and, in particular, I come back to this point that ... and I do acknowledge that this is a significant error ... that we did not recognise the risk that, if confidence left the Irish banking system, markets would all close, just like that.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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There is phone interference, Deputy, coming near you. It's somewhere from your proximity

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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It's is not me.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It is not always the person that's speaking; it's just people in proximity so I'd ask them really to deal with their phones. Sorry there now for disturbing you Deputy.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Sorry. Thank you. Just, staying on this page and just moving down in that paragraph to the sentence, ''The Group's position was highly precarious in 2008 due to its high level of short term funding and therefore its high loan to deposit ratio.'' Do you accept that? That that's why the group found itself in a precarious position in 2008?

Mr. David Went:

Well, I've already said that.

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

Mr. David Went:

I've already acknowledged that.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. And you accept ... do you accept that that happened because of this change in the mix of funding and this - what it says at the opening of the paragraph - "aggressive" move in the lending, to grow the lending book using the wholesale markets?

Mr. David Went:

With hindsight, yes.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. Thank you. Just then, related to that but slightly moving aside, is the stress testing that would have happened then, as you embark on this new strategy or you see the wholesale markets and the potential that they offer. What kind of testing were you doing against this new source of funding in case of a downturn, in case the markets were then closed to you - a particular market abroad or the Irish market here or whatever might happen?

Mr. David Went:

I'm not sure whether this morning you covered that with my colleague. There was a.... there were ... there was a ...if you just bear with me for a second ... if I can find his statement ... no, I'm finding it difficult to find it.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Who are you referring to, sorry?

Mr. David Went:

I am referring to Mr. Gantly's witness statement from this morning.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Mr. Gantly hasn't appeared yet.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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He hasn't appeared.

Mr. David Went:

Oh, he has not appeared. I'm sorry. I apologise.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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I was confused.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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We were all getting -----

Mr. David Went:

I believed, obviously, in the ... hold on. If I'm allowed ... am I allowed to refer to it?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, you can indeed. Mr. Gantly will be in here anyway.

Mr. David Went:

Okay. Before I respond specifically, this was not a deliberate strategy, you know, a switch from ... We did not deliberately say, "We don't want retail deposits anymore, we just want wholesale funding".

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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If it's not a deliberate strategy then does it happen by accident? Is that the implication?

Mr. David Went:

No, no. It happened because we had a funding plan ... we had to have a funding plan to meet anticipated growth.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, but the funding plan then was it a strategy, then, to-----

Mr. David Went:

Oh well, if you-----

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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I mean, it was deliberate. You made these decisions.

Mr. David Went:

I take that point, yes. Okay. Now, wait a second ... yes, there was a ... excuse me for reading from this, potentially ... We introduced this ... an updated liquidity policy in October 2003 and this was based on the Basel committee on banking supervisions paper, Sound Practices for Managing Liquidity in Banking Organisations, and there were three ... essentially this was looking at contingency funding and there were three specific examples. One was a moderate entity-specific crisis; in other words, this was a crisis just about us and you know, some money had gone astray or something like that. Under that ...an unexpected cashflow problem only likely to last a few days. It was presumed under this scenario that wholesale and retail deposits, short-term paper funding programmes would remain intact and that we'd sell off liquid assets to meet the thing. A severe entity-specific crisis which affected our ratings and this would have been where we would have suffered a major downgrade - two notches on long term and one on short term - and it was assumed there that unsecured sources would be severely affected. The scenario could take weeks to possibly three months to stabilise and it was anticipated that not only would we use our liquid assets, but we would use securitisation, you know, the eligible collateral to do that. And the final one, then, was an industry-wide crisis where there are liquidity problems in the banking system as a whole causing widespread disruption to markets. The best defence is described as maximising our ability to deal with stress under scenario two. Under that scenario, we also assumed that the regulatory authorities would be aggressive in providing support to the system, making Central Bank borrowing effectively the swing factor in ensuring the survival of the institution. We implemented ... we conducted those tests using the Basel requirements every month and they were submitted to ALCO, you know, to our asset liability committee, on a monthly basis. So, this was not something that we did not consider. We did consider it.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Sorry, when did that work begin? The working out-----

Mr. David Went:

It would have begun in 2003.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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In 2003. And it continued right on until you left?

Mr. David Went:

Right on.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay. I mean ... looking back, then, was it complex enough to deal with the actual funding mix that you had and the different types of investments and the different type of lending?

Mr. David Went:

To be honest, I find it difficult to answer that question because I'm not ... I wouldn't be sufficiently familiar with the absolute ... the complete methodology.

But I think that ... being truthful about it, I think that nothing would have been sufficient to deal with the actual outcome because the ... you know, the doors all just shut right away so I think nothing would have ... no amount of analysis, I believe, would have tested for that level of stress.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, thank you. And then just in terms of the loan-to-deposit ratio of the group, you found yourself in a more difficult position or a more precarious position than other entities in the system. I mean, how does that happen for the group?

Mr. David Went:

Well, obviously, it happened because, I suppose ... I wasn’t around at the time so I’m ... I’m speculating to some extent ... but, no, I'm speculating to some extent. Perhaps it was because people took a more negative view of the asset portfolio of Irish Life than they did of other people’s portfolios, that’s one aspect of it. So, therefore, depositors wanted to withdraw their money more than they might have done with other people. Equally, because we had a very wide sort ... we had a substantial reliance on ... we had a substantial amount of short-term funding, that all just stopped straight away. Commercial paper average duration was 40 days so once the commercial paper market was shut, like, you know, that was it. So that was what ... and I’m not sure that any analysis of this, any stress testing of this would actually have taken you to where it actually went to.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Okay, and just to clarify, sorry, you shared your stress tests-----

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

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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Did you share your stress tests results with the regulator? Was this work passed to them or was it something you kept in house?

Mr. David Went:

No, this was something that we were doing internally as part of our overall treasury policy and how we controlled out exposure to liquidity problems.

Photo of Eoghan MurphyEoghan Murphy (Dublin South East, Fine Gael)
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So you did say in your statement that you thought the regulator's ... was unbalanced in their approach to the banking sector.

Mr. David Went:

No, I said ... what I said was that the basic defect in the stress test of 2006 was there was absolutely no view taken of liquidity.

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

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Deputy Murphy. Senator Sean Barrett. Senator, ten minutes.

Photo of Sean BarrettSean Barrett (Independent)
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Thank you, Chairman, and welcome to Mr. Went. The ... PTSB were very active in the residential investment property market, called RIP in the era - and I think it may be a good Freudian slip. And, in terms of annual growth in this market, with a relaxing of terms and conditions, was the level of risk associated with this growth fully understood?

Mr. David Went:

Well, I believe so because each ... you know, to the extent that there were, you know, changes to credit policy, they were gone through at an executive level, they were reviewed with the board and, ultimately, the changes in credit policy would have been advised to the regulator. And I think you have somewhere in these papers some examples of changes in credit policy and I presume the reason for having them in here is to show the way in which the thought process, in terms of the changes, operated. And that's, you know ... so every time there was a change in credit policy, a logical process was gone through and the decision obviously at the end was that this was a ... you know, this was not an imprudent way to go.

Photo of Sean BarrettSean Barrett (Independent)
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But the results seem to indicate, as you were describing to Deputy Murphy, that in loan-to-deposits, loans-to-value and sectoral concentration, major policy decisions were made which ended in tears. You went the wrong way in all three of those.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Ask a question rather than make the judgment Senator.

Mr. David Went:

Repeat that, sorry.

Photo of Sean BarrettSean Barrett (Independent)
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That ... when you were describing to Deputy Murphy, you know, what was happening in terms of loans-to-deposits, loans-to-value and sectoral concentration, we were moving ... I would put the proposition - for "Yes" or "No" – we moved in the wrong direction, I'll put it to you, in relation to all of those and that’s why this committee is here ... this inquiry is here.

Mr. David Went:

Well, in terms of sectoral concentration, I don’t believe that, you know, we moved at all, you know, from the very beginning because that was our concentration was always on ... essentially on house mortgages. So I ... I don’t accept that.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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What about volume?

Mr. David Went:

Sorry?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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There is sectoral and then volume, which would be different. The volume of that that you would be doing, would you see that as being related or separate?

Mr. David Went:

Sure. Well, you know, when ... the volume we did was a factor of the volume available in the market and the volume that ... and our traditional and historical market share. Our market share over these five or six-year period ... this five or six-year period, would have ranged from at the bottom 20% up to around about 23% and that was below our historical average. So, you know, we weren’t doing anything out of the ordinary as far as ... as far as market share was concerned. It wasn’t as if we had come from, you know, making one house loan in 2000 to making 15 million house loans in 2006.

Photo of Sean BarrettSean Barrett (Independent)
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But on page 63 in the volume, January 2006 ... reporting on December, says it was up 93% on the previous December and then you go to page 89, November 2005, approvals 119% up. Now was that not bound to end? That was a bubble really - I’ll put that proposition to you.

Mr. David Went:

Well, I ... certainly, with hindsight, that was a bubble. But I repeat that we were doing what we had always done which was meeting, you know, roughly 25 ... 20% to 25% of the mortgage requirements of the Irish population. That’s what we had done for 100 years.

Photo of Sean BarrettSean Barrett (Independent)
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You said in your speech in October 2004 to the Institute of Bankers that Mr. Gordon circulated from Permanent TSB that:

Mr. Went [said] that he was increasingly concerned at the level of criticism being made about the banking sector in Ireland. He said, "My concern is that after a period of pretty relentless criticism, we’re coming closer to a tipping point where the cumulative effect could begin to influence the attitude of international institutions towards the sector."

Weren’t the problems the people at the dinner not the critics outside? Irish banking was brought to the present state by the people who ... at the Institute of Bankers dinner that you were addressing on that night.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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It was at a different dinner, Deputy ... just proposition, proposition, proposition.

Mr. David Went:

Sorry, I don’t recall that speech but I don’t know-----

Photo of Sean BarrettSean Barrett (Independent)
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I can give it to you if you want to remember it. I mean, wasn’t that ... something happened in Irish banking ... look to the wider one, and from your experience in Ulster Bank it was a ... you know, a conservative pillar of society and people like Colm McCarthy have raised this point and perhaps you might assist us. What happened to Irish banking? It was conservative, it lent wisely, although conservatively, the people in it were pillars of society and respected, they were valued members of society, they promoted thrift. Now we’ve got to a situation where Her Majesty withdrew a knighthood from a banker associated with the Ulster Bank and we can’t-----

Mr. David Went:

I am not associated with the Ulster Bank.

Photo of Sean BarrettSean Barrett (Independent)
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Yes. And we can’t find a jury, in the opinion of the Judiciary, which will give a banker a fair trial. Why is ... why has Irish banking, you know, incurred the €64 billion and why has it fallen so much? What might you have done, from your experience in Ulster Bank, to ... to bring it to the situation where we didn’t have these bubbles and crises?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you, Senator, you’re keeping me wide awake. Mr. Went.

Mr. David Went:

That's a very interesting philosophical comment. First of all, I'd have to say I’m heartsick by what happened to Ulster Bank. I left Ulster Bank in 1994. It was regarded, within the NatWest Group, as a very good performer, a very sound, solid business, very strong credit culture, very ethical organisation, etc. And I’m heartsick at what happened to it and it being driven into the ground. So, you know, I ... I just ... I mean ... I ... I’m not exactly sure what you’re trying to get at.

Photo of Sean BarrettSean Barrett (Independent)
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I am trying to get at that ... that banking is ... its changes in policies have brought this country to an impasse where we had to go to the IMF.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Can I give a summarisation of that to maybe try to assist you, Senator, in that we ... all these institutions, with maybe the exception of one, have been about since maybe God was in his short pants and they operated a business model for decades, if not centuries. And within two decades most of them, if not all of them, were wiped out. Would that be a fair reflection? What happened? What happened to ... in these institutions?

Mr. David Went:

I think that, you know, the best analysis I’ve seen of this is in Professor Nyberg’s report and I think that’s ... it's a ... for anybody who’s been involved in the banking business, it’s a very sobering analysis, it’s a very simple analysis.

The analysis is that there was a ... you know, the Irish economy was seen as all-powerful and people got caught up in it, if you like, and that's how it happened. And I think that Professor Nyberg's analysis is the correct analysis. There was, you know, a herd mentality, a groupthink, etc. I think that's the analysis of it, you know.

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

Photo of Sean BarrettSean Barrett (Independent)
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You said in that speech that you referred to, "There can be no place in banking or financial services for people with low standards of ethics."

Mr. David Went:

Ah, yes, I now remember.

Photo of Sean BarrettSean Barrett (Independent)
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Were you concerned at that time?

Mr. David Went:

I now remember.

Mr. David Went:

I now remember the speech.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Be very careful now.

Mr. David Went:

I now remember the speech. No, no. The speech ... from memory, there had been a number of incidents where banks maybe had fallen short of what you might regard as proper standards but, sort of extrapolating from that, there had been a considerable amount of public comment on the fact that all bankers were dishonest, you know, etc., etc., etc., and my view was that that was not the case. I mean, you know, you go back to the – and I won’t debate this philosophically too much – but you go back to the point you made about, you know, Ulster Bank being a very sound, solid bank and everything else. If you also go back to that time, the one consistent thread of political comment on banking was that banks weren’t actually sufficiently in tune with the requirements of their customers. They should do more to support their customers. I mean, you know, you can’t have it both ways.

Photo of Sean BarrettSean Barrett (Independent)
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Well, I mean, what would you ... do you think we should go back to the first way then, to have solvent banks which would have a standing-----

Mr. David Went:

Of course we-----

Photo of Sean BarrettSean Barrett (Independent)
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-----in society compared to what's happening now.

Mr. David Went:

Of course, we should have solvent banks but every developed economy requires, you know, a vibrant banking industry that meets the needs of its customers. But what it does ... but what it also requires is a banking industry that retains the confidence of its customers.

Photo of Sean BarrettSean Barrett (Independent)
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Why do you think auditors missed so much in auditing Irish banks?

Mr. David Went:

I think that ... I think we’re back to the issue of, you know, a consensus on likely outcomes because that’s what, you know, that’s the ... one of the big issues for an auditor is to, you know, the forward ... forward-looking estimates. So, I guess, the consensus on that. That, I would think ... and maybe every ... maybe they had the same, you know, they came ... they came to the same conclusions as everybody else did.

Photo of Sean BarrettSean Barrett (Independent)
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Thanks. My time’s up, Chairman. I just want to reassure Mr. Went, I like the banks the way they used to be. If you’ve any influence, please-----

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

Mr. David Went:

Well, I liked the banks the way they were.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I’m going to move promptly on. Deputy Higgins. Ten minutes, Deputy.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Mr. Went, just to continue the theme, since you mentioned philosophical, etc., could I ask you if you maybe might ... if the situation could be summed up as follows, that your group lending grew aggressively, according to a PTSB report which is in our documents, from €12.9 billion - "lending grew aggressively from €12.9bln in 2001 to €39.2bln in 2007" - and, in that same time, customer accounts grew from €9.5 billion to €13.6 billion? The point being made then that short-term funding became a huge need for your organisation. And is it the case that that happened, that you went beyond the bounds, because as ... a number of contributors here have given evidence of cut-throat competition between the banks for profit maximisation, and that blinded you to the dangers? Would that be true or-----

Mr. David Went:

Profit maximisation, in what respect?

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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In the banks. The witness from ... a senior witness from Allied Irish Banks, for example, gave evidence of being under severe pressure to emulate Anglo’s profits and some of its methods.

Mr. David Went:

But that, with respect now, was in relation to its lending activities, nothing to do with its funding model.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes, but the point is your lending grew exponentially-----

Mr. David Went:

Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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-----in a short period of time.

Mr. David Went:

Yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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I mean, as an experienced banker, would you not have been aware of what Mr. Honohan has said in some of his learned dissertations and Mr. Black, the former regulator in the United States, said that growth over 20% or 25% is a recipe for potential catastrophe later on?

Mr. David Went:

Well, as I said, I'm not sure of the connection between asset growth and funding, which I thought was what you were trying to ... what you were asking me ... the question you were asking me. I’m sorry, I’m not trying to be difficult but I just don’t follow the connection.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes, but, well, in general, that the financial institutions, in pursuit of profits and aware of the competition with their competitors, were growing their ... various elements of the business far too fast.

Mr. David Went:

All I can say is that for, as far as Permanent TSB was concerned, we stuck to what we had always done, which was providing house loans for people. That is what we had done in all of our previous manifestations for over 100 years. That was our primary business. We did not get involved ... you know, no matter how sexy or how exciting the spectre of development lending, you know, lending for raw land, anything like that, we did not do that. We stuck to what we knew and we stuck to what we knew and we stuck to it in a way in which we felt that ... you know, the average loan-to-value ratio of our entire mortgage portfolio was 71%, so that meant there was 29% of equity in the portfolio. That’s a very substantial amount of equity to start with.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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But, Mr. Went, did you ... and if I refer to Vol 1, page 37 to 42 or so, in sticking to that, did you not at the same time loosen up considerably the criteria and did you not loosen your credit standards in such a way that gave rise subsequently to serious problems? For example, in the buy-to-lets, in reducing ... or in one situation where, if a proposal for a buy-to-let essentially is not self-financing on a stand-alone basis, the applicant’s net disposable income is assessed to establish if the deal is affordable and you reduced the income for a single person to €40,000 and then other ... some other changes that you made at that time. I mean, wasn’t ... I agree with you, you didn’t go into the wild speculation that we have heard about in other areas of ... that left us with ghost estates, etc., but within the area that you were working in, did you not, kind of, emulate what was happening elsewhere in a different way?

Mr. David Went:

Well, I'd have to say, when you look at this ... if you look at these pages and you look through the way in which it was reviewed, you know, I ... we’ve carefully analysed what we thought was the incremental level of risk which we were taking on and we concluded, in all good faith, that that was a reasonable level of incremental risk to take on. And in terms of the growth in the portfolio, as I said, you know, we traditionally had provided 25% of mortgages to Irish people, and through this period our market share was somewhere between 20% and 25%. So we ended up doing no more than we had done over the previous 100 and odd years.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Okay. As an aspect of that, Mr. Went, can I ask you, in relation to the price of a home ... because you were experts in this field and evidence to this inquiry show that between 1996 and 2006 the price of an ordinary home increased each year for ten years by the equivalent of the average industrial wage.

And that's an astonishing, I think you will agree, perhaps, statistic.

Mr. David Went:

An astonishing statistic, yes.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Was it not clear to experienced banking and experts in home mortgages, particularly like yourselves, that that was creating a ... an appalling scenario, and did you not consider ... raising alarm bells all over the place to stop that type of exponential growth in the price of an ordinary home?

Mr. David Went:

Well, you know, there's nothing a bank ... there's nothing a mortgage lender can do to stop the increase in the price of a home; it's the market determines the price of a home.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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But, Mr. Went, with respect, if you all join inside the market in competing with each other and so forth, are you not part of the bubble blow up?

Mr. David Went:

The critical thing that, you know, we had to consider in terms of our lending policy in relation to house mortgages was how affordable were the repayments to the borrower. And when you combined, you know, when you looked at historical affordability criteria of borrowers, you know, over this period by and large despite ... despite house price increases affordability actually improved because tax rates went down, interest rates, you know, in the ... in 1987, a house mortgage cost 15% for a period of time. By the time you got to 1997 or 2005, you were talking about 5%, so the interest rate had gone down. So the overall level of affordability of monthly repayments was actually at a very high level.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Just one minute now, Deputy.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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I wish we'd more time to pursue that-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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I'll be picking that up when we wrap up; don't worry about that.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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-----because, Mr. Went, people with huge negative equity and 40-year mortgages, I think, would ... we could discuss that but because-----

Mr. David Went:

Could I just make the point about ... sorry, I just ... 40-year mortgages are a very emotive way of putting it. The average life of a mortgage in Ireland is about ... certainly for the previous 40 years, is about six or seven years. So, therefore, the actual ... the initial ... no, no ... the initial term of a mortgage is, sort of, irrelevant because people change houses. They move lenders, whatever. So roughly ... so the average life of a mortgage, and you can actually see that throughout the papers here, is about six or seven years. So the initial term of the mortgage is actually, sort of, irrelevant. It doesn't really matter that much because most people move houses. They get ... they decide they'd get a better rate from a lender or whatever, so, you know, 40-year mortgage ... it's very emotive I admit that, but it actually isn't that relevant in practice.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Again I wish we had more time. Just two very final points-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Finish now, Deputy, if you can, please.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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You know there ... many people feel we have a housing crisis now. We see evidence of it every day. The ... would you accept in any way that the buy-to-let policy of organisations such as yourself has created a part of that crisis with the foreclosing on people who can't afford, therefore, tenants being put out, etc.?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, we are moving out of terms of reference now so I need to get back to information that's relevant to Mr. Went.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Yes, well, just the effect of the policies of the bubble period being partly responsible for the housing crisis today.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Mr. Went might deal with that in his closing remarks, if he wishes to.

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

Mr. David Went:

I'd prefer not to but-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Well, if you wish to.

Mr. David Went:

No, I mean, I fail to see ... to be honest, I do not see how lending money to people to rent to other people is actually a contributory ... you know, is actually something that can ... seen as a real contributor to the housing crisis. I accept it may be due to the financial position of the owner of the house, but I don't actually see how creating more houses for rent can contribute to a housing crisis.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Mr. Went, to conclude, I'm to ask you this just very briefly.

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

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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A letter from Peter Fitzpatrick who was your finance director ... group finance director-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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This is Vol. 2, page 11.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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It's on page 11, and he's complaining about the Bank of Ireland saying to other bankers etc. in ... in ... towards the end of 2007 that the issue for all Irish banks was one of survival and that Bank of Ireland is creating massive negative sentiment. Do you have any comment in relation to that, what Mr. Fitzpatrick said?

Mr. David Went:

No, I've no idea, I mean I can't, you know, I left in May 2007 and I've no comment.

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

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And when you left in May 2007, do you believe that the institution was in good health at that time, Mr. Went?

Mr. David Went:

I said that when I ... in my initial remarks I believed it was a soundly financed and well-managed institution.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, Mr. Went, I'm going to wrap up and I'll then invite you to make any closing comments that you want. I just ... it just, kind of, following the discussion there that you were having with Deputy Higgins, and it was, kind of, in my mind anyway, I just want to bring up two slides on the screen. I don't know if you've seen them before. It's not ... I'm not going to be asking you questions, it's just, kind of, to give a bit of context as to what was being discussed. What we have here on the first screen is two tables, one showing the ratio of average new house price to the average industrial wage and it traces a period from 1996 to 2006, and what we see there is a very, very upward trajectory over the ten-year period. In the next slide below we see a ratio of average-----

Mr. David Went:

Second-hand prices.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----yes, and then we see an average of second-hand house prices to the average industrial wage and we also see a similar, sort of, reflection there. If I can just move on to the other slide, and what we have there is the residential house price annual, and we see it moving from 1992, the blue line being new house prices and the red line being second-hand house prices, both growing quite exponentially as well over that period. And in the slide below, we have the residential house price quarterly, and, once again, the blue line is new house prices and the red line is second-hand house prices and we see significant increases there of quarter-on-quarter, with the whole thing peaking in and around 2007, 2008, the latter part-----

Mr. David Went:

Sure.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----of the noughties. Now, in your earlier discussion then, and we're, kind of, because we're moving to conclusion, that I would be looking, say, from witnesses as well maybe to give insights that allow us to, kind of, move towards findings and conclusions ....listening to you to this afternoon there seems to be three things, kind of, on the table with regard to the mortgage environment. There's market share, there's competition and there's volume. So market share is not necessarily a fixed thing. If there is an increasing house buying market and you've 25% of the market that's more houses that are being sold and bought, and, likewise, shrinking, so just to say that you've maintained market share over a period of time doesn't reflect the volume that was actually going on.

Mr. David Went:

No, it doesn't. No, I accept that.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So you'd accept that?

Mr. David Went:

I absolutely accept that.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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That's grand. And also then there's the issue of competition that you referred to earlier where a competitor introduces a new product into the market that has, what was the term you used earlier ... that brought different types of concerns to the earlier type of concerns. One was about the, sort of, the design of the product and so forth. You were on about here the prudentialism of that product, so the competition, kind of, brings in-----

Mr. David Went:

Sure.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----this stuff as well. So, could I put it to you, Mr. Went, that, as a proposition and to get your thoughts on it, that during the 2000s right up to the property crash, as indicated on the slides that I showed, house prices were escalating at an unprecedented level year-on-year? Average industrial wage, as Deputy Higgins would also ... that the average house price was increasing by the average industrial wage year on year. And, in these circumstances, regular and even above regular income earners should have been priced out of the market earlier in the decade because the house prices were going up.

Mr. David Went:

Sure.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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They should have been priced out but they didn't become priced out because house purchasing continued right up to the peak of the crash later in the decade because the figures show us that there were even more houses being bought. It wasn't that the slide is going up in price; the consumption of houses is increasing also.

Mr. David Went:

Sure.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So, in any way, was this facilitated by the designing of mortgage products that seemed to have met the affordability criteria but, in actual effect, was camouflaging the price of the property or by extending the mortgage term? Like, so what we had here ... the design of the product was still meeting the affordability criteria but the price of the product was being camouflaged because of the product. As a proposition-----

Mr. David Went:

Well, to, I mean, yes, that's a-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Would you care to comment on that?

Mr. David Went:

No, I mean, I think that's probably true.

I mean, as ... you know, there was a tremendous demand for housing, you know, amongst the entire Irish community. You know, we're a nation that wants to own their own home, and as, whether it is a first-time buyer or a second-time buyer, as they reach, if you like, the peak of what they can get as a mortgage under existing terms, that's clearly a pinch point.

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

Mr. David Went:

And there were a number of ways ... factors that, in fact, led to probably, you know, the ability to borrow more than you would have been able to borrow two years ago. One would have been incomes rising. The other would have been interest rates lowering. The other would have been taxes being reduced. There would have been an extension of mortgage terms, you know, at the outset, because obviously if you ... despite the fact that your ... the average mortgage lasts for six or seven years, you know, if you price ... if you calculate something on the basis of 40 year repayments rather than 25 year repayments, that's a much lower amount of a monthly payment. So there's a whole series of things that can happen to make, you know, to give the ability to borrow more to a particular borrower.

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

Mr. David Went:

And that, in fact, it's all of the above that were in existence at ... during this time.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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But as the market is changing, the product is changing-----

Mr. David Went:

Sure.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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----- to purchase. Or, sorry, the mortgage. There are two of them products. The house is changing. And we also have the elongation of the loans, the lengthening of the loans, the mortgage terms, and interest-only, 100% and all the rest of it happening, making the affordability criteria to acquire the mortgage-----

Mr. David Went:

Yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----still accessible, even though the house price-----

Mr. David Went:

Absolutely right.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----is gone off the map.

Mr. David Went:

Absolutely right, yes. Yes.

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

Mr. David Went:

But is that a bad thing?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Well, this is the proposition I want to talk out with you now, okay. And further to that then, we had a ... in the residential market. Concurrently to that we have the buy-to-let market, where there is significant mortgage interest relief for the investor. And, as you said earlier, in fact, a high level of interest on the loan is advantageous to the buy-to-let owner because they get a relief on it. This is also adding to the inflation of property-----

Mr. David Went:

Sure.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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----- prices and so forth. So, in that regard, and, kind of, coming back to my earlier proposition to you that people should have been priced out of the market earlier, in summary, did financial institutions and your own elongate the bubble through the design of these products?

Mr. David Went:

That's probably a fair statement.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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So, the design of mortgage products actually suspended the crash. Is that right? Would you concur with that proposition, and that the crash could have come sooner and not have been so extreme if the mortgage products were not-----

Mr. David Went:

No.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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-----designed in the way they were to elongate it?

Mr. David Went:

I don't believe that the crash came because of the house mortgage market. I believe that the crash came because of the speculative development raw land market and because of external events. So, I don't believe that the house mortgage market was the proximate cause of the crash. It was one of the causes of the crash-----

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

Mr. David Went:

-----but or it was a part of the crash, but it was not the proximate cause of the crash.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Let me, sorry, let me just share for ... what's called a germane disclosure in counselling, a relevant experience that assists the client. An experience I had knocking on a door one day in Cork was to meet a couple. One was a public servant who was on a mid-income level and the other one was working in the pharmaceutical industry in Cork. Back in the day, one of them would have been able to afford a house on their own, and it was like an episode of Dan Paddy Andy. The bank manager told them that they needed to get married so they could get a mortgage. So it's like going to a matchmaker instead of going to your bank. Even with the combined incomes, they could no longer afford an entry price house and they were earning too much to qualify for affordable housing.

Mr. David Went:

Local authority. Yes, sure.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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You'd be familiar with the product at the time. Now, just the basic premise of product sales and capitalism or whatever: to buy a product, somebody ... for instance, like a car ... if I go out and buy a new car tomorrow, somebody needs to buy my second-hand car off me. And that maintains the market because there's entry into the market. By 2005 and 2006, because entry into the market is becoming harder for these couples who are above average earnings, was that not a sign that the market was eventually going to collapse? Forget about land speculation. If people can't afford to buy a home, the market will collapse anyway, just like the car market will collapse if I can't sell my car second hand.

Mr. David Went:

It's possible. You know, as I say, I think the ... I think it's quite instructive for me to look at the commentary on the Central Bank's latest introduction of limits on mortgages. You know, that seems to me to be a very prudent and reasonable response to, you know, what has happened in the past. And the general level of comment on that has been: what about the poor first-time buyer? You know, so, in other words, you know, we have to ... we can't have it both ways.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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And I agree with you, so this is the final part of it. Do we need a product that allows the first-time buyer to come into the market but a product that is actually prudentially safe to them over a long period of time, and was the product that was available in the 2000s not prudentially safe to first-time buyers?

Mr. David Went:

Possibly, but you know, when you ... if you talk to people who bought a house 35 years ago, they will tell you about queuing outside Irish Permanent's head office in O'Connell Street in order to get an application form for a mortgage that was issued like ... that were ... and mortgage forms were only given out once a month.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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There was a bank manager quite close to me, Mr. Went, in the same county, and he was known as Johnny Five Grand because that's all he'd give you. I'm not talking about those circumstances. I am talking about a mortgage product that is sustainable in the long term; not one that you have to get down in a deferential role to a banker or not one that you're given because of competition in the market.

Mr. David Went:

Well, you know, maybe there is. Maybe there is.

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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Can I raise the point, Mr. Went, that the home, which is a basic human necessity should not be the subject of profiteering and speculation-----

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

Photo of Joe HigginsJoe Higgins (Dublin West, Socialist Party)
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-----as it became during the bubble?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, I'm going to invite you, because I want to wrap things up, Mr. Went, by ... and I appreciate the time that you spent with us today, particularly your final engagement with myself. Is there anything further you would like to add by means of final comment or remark?

Mr. David Went:

No, I just want to repeat something that I said at the beginning because, from my perspective, Irish Life and Permanent was a sound, well-run business when I retired, and I've been shocked and disappointed at the impact of the subsequent events. And I do deeply regret the consequences for the staff, the customers, the shareholders and, obviously, for the Irish State. And I hope that my statements and my interaction here today will be useful to the committee. Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Went. With that said, I'd like to thank you for your engagement and participation with the inquiry this evening and to now formally excuse you and to propose that we suspend for 15 minutes and return at 15 minutes past 7 p.m.

Sitting suspended at 7 p.m. and resumed in public session at 7.20 p.m.

Irish Life and Permanent-Permanent TSB - Mr. David Gantly

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 move on now to session 5 of today's hearings with Mr. David Gantly, former head of group treasury at ILP-Permanent TSB. 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.

This evening we will focus ... the focus of the inquiry is on Irish Life and Permanent-Permanent TSB and at this session we will hear from Mr. David Gantly, former head of group treasury, Irish Life and Permanent-Permanent TSB. Mr. Gantly joined the then Irish Permanent Building Society in 1994 as chief dealer in their treasury department. He was appointed group treasurer of Irish Life and Permanent in 2000 and held the post until he left the group in early 2009. Mr. Gantly, you're very welcome before the committee this evening.

Mr. David Gantly:

Thank you very much.

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 must 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, and members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed. The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis and you have been 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 oath to Mr. Gantly 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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Thank you again, Mr. Gantly, and if I can invite you to make your opening comments to the committee please.

Mr. David Gantly:

Thank you, Mr. Chairman, for the introduction. Just ... I've a few brief comments just about five or six minutes, so at the outset-----

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Okay, that's grand.

Mr. David Gantly:

-----I'd like to say that I've endeavoured in my written responses to address the lines of inquiry as fully as I could but in some instances that I actually had ... did have to limit my, my responses. So I worked in Irish Life and Permanent as treasurer from 2000 to early '09, effectively the period covered, obviously, by this inquiry. And in that role I was responsible for all activities relating to treasury, counterparty credit exposures, market risk, funding and liquidity management. The treasury function itself was physically located in the IFSC and my direct reporting line was to the group finance director. I was a member of the senior management of the group at that time. I was not a member of the board nor was I a member of the bank executive. With regard to board-appointed committees, I was a member of the assets and liability committee; I was a member there since 1994. I was also a member of the group risk committee, which was set up in 2007, and the group CEO had set up a new strategy team in early to mid-'07 and I was not a member of that group.

So given my role and the lines of inquiry that I've been asked to address, I'd just like to make a few brief comments regarding liquidity in the banking system and to make some specific comments in relation to Irish Life and Permanent's liquidity and, indeed, funding strategies. So a fundamental function of the banking system is the provision of maturity transformation whereby banks fund longer-term assets with shorter-term liabilities. This provides longer-term liabilities to households and corporates, which facilitates long-term capital investment with obvious economic benefit and social benefit, indeed. The provision of maturity transformation creates liquidity risk for banks. So the regulatory liquidity standards that banks are required to adhere to seeks to mitigate that risk and, in addition, Irish Life and Permanent's funding strategy sought to further mitigate that particular liquidity risk. So Irish Life and Permanent's funding was broadly split into three thirds: long-term debt, customer accounts and short-term wholesale debt. We also held and managed a liquidity portfolio, which provided a substantial buffer against any adverse movement in our short-term wholesale liabilities. Irish Life and Permanent's balance sheet differed from the two main banks in that 85% of the assets comprised residential mortgages, which were highly liquid in normal market conditions. Irish Life and Permanent was also a bank assurer which was created post the merger of Irish Life, the country's largest life assurer, and Irish Permanent in 1999. The bank's credit rating and its ability to raise debt in capital markets benefitted from that particular group structure. Despite extremely difficult market conditions in 2008, Irish Life and Permanent raised over €3 billion of long-term debt through bilateral transactions. Residential mortgages on top of that could also be used as collateral for drawings with the ECB.

So by 2008, Irish Life and Permanent had a loan-to-deposit ratio of 275%, which was significantly higher than that of the other Irish banks. Irish Life and Permanent had, as I said, the backstop of being able to access ECB funding by using its less risky residential mortgages as collateral, a point which is acknowledged in the Nyberg report.

I would also say that, you know, a low loan-to-deposit ratio is not a panacea in itself. The Turner report, which was commissioned by the Chancellor of the Exchequer in the UK in October '08 and was published in March '09 ... and in that Lord Turner, the then chairperson of the FSA in the UK, was asked to review the causes of the crisis and to make recommendations on changes in regulation and supervisory approach to help create a more robust banking system. The report provides a very clear and in-depth analysis of the root causes of the crisis and provides a very clear template for suggested changes to make to the banking system to make it more robust. So, with regard to funding that particular report highlights the fact that Icelandic and Irish banks were active deposit takers in the UK market and these deposits, while they did reduce their loan-to-deposits ratios, as the crisis dragged on and deepened these deposits did not remain sticky and were ultimately not renewed, so-called "sticky deposits" obviously being less likely to be withdrawn in a crisis event.

So Mervyn King, the then Governor of the Bank of England, made the point that the crisis revealed faultlines in global regulation and supervision, pointing out that global banking institutions are global in life but national in death, a point that we clearly saw. So, Irish Life and Permanent's funding strategy was formulated with the intention of providing a sustainable, stable funding platform and this strategy was formulated against the conventional wisdom that a liquidity event would be very short-lived. The banking system is susceptible to liquidity events. I had first-hand experience of significant liquidity disruption in markets during the Russian debt crisis and the collapse of Long-Term Capital Management in 1998. Global markets also experienced a severe liquidity shock post the 11 September attacks and, in both those instances ,regulatory authorities acted very decisively to find a quick solution to the problems and that was actually achieved. So the recent crisis, which was clearly systemic, its impact unprecedented, the duration of the disruption in markets was not anticipated and, inevitably I think, the regulatory liquidity requirements which were in place were not sufficient to withstand that particular shock. So regulators, clearly, are revising capital and liquidity standards in order to strengthen the system and prevent a recurrence of recent events which, regretfully, have had such a devastating impact on Irish citizens.

Thank you, Mr. Chairman, and I am happy to take any questions.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much again Mr. Gantly. We will commence questioning; if I can invite Senator Susan O'Keeffe. Senator, 20 minutes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Thank you, Chair. Mr. Gantly, you say in your statement that you were ... treasury was physically separated, that you were in a different building in a completely separate place. Isn't that correct?

Mr. David Gantly:

That's right, as I say, the group structure as it is, bank assurance, the life company was located in Abbey Street, the bank in Stephen's Green and the treasury within the IFSC.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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And in a way does that reflect how it operated? Were you quite a, sort of, separate entity or did you feel very much linked to the activity of the bank as a whole?

Mr. David Gantly:

Okay, well, I suppose at the outset, while the term "group treasurer" was used, in reality the treasury function was aligned to the bank. The life company's business was quite independent so I suppose that is in the first case. I guess the ... my main interaction then with the bank per se... I mean, obviously, I had a direct reporting line to the finance director which I've said, I would have had obviously a lot of access with the CEO and other members of the bank, I suppose, but by physically not being there you clearly were removed so that had some impact, I think, yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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So coming up to the time of 2008 and the guarantee, how much were you aware of how things were changing and how more of an emergency it was becoming in those last weeks, or not?

Mr. David Gantly:

I would say "Absolutely". I suppose, the issue was a treasury problem, a global treasury problem, so I would say back in mid-'07, you know, there were actions happening in the markets, there were credit spreads were starting to widen, there were markets just starting not to function and things that I'd seen happen for 30 years - you know, normal functioning markets - just really started to implode in a way that I had never seen before.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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So this was new. What was happening in 2007 was a complete change from anything you'd see before.

Mr. David Gantly:

I think that, as I said, the examples I've given were very specific. This was for sure ... we had heard of systemic risk, it was kind of ... sounded like a nebulous enough thing, people didn't really know what it meant but this is what it was and I don't think anybody saw the scale of it or what was coming, yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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And so when you would talk to your colleagues and say, "I've never seen anything like this. This feels different, this is different" and that was in when - October, November 2007?

Mr. David Gantly:

Yes, from mid ... probably, yes, absolutely around the autumn through - I'd say that's fair, yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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One of the things that has always puzzled me personally is how, then, did it take until the end of September 2008 for it all, if you like, to come to a head, to blow up in a single night?

Mr. David Gantly:

Yes, I mean ... if ... I gave a presentation to the risk committee in November 2007 and there were senior members of the ... from the banking side there including the CEO, the group finance director and the ... it's part of the documents that you have and it's basically saying that we had ... I mean, our funding strategy in the short term was based about a geographic and product diversification and I show a list in that and I'm clearly saying that there is traditional avenues that we have used extensively, you know, forever, as it were, have suddenly started ... are drying up, essentially, so like the USC commercial paper market for instance, which is a very short-term borrowings, would be instigated by banks there - that was a €2 trillion market that within three months, four months just absolutely dried up so this was just ... we had never seen anything like this before.

I think, in answer to your question, I think there was a sense with ... that something was going to come over the hill to kind of rescue this, whereas, in fact, as I said for sure people thought liquidity crises were normally short term - that would have been my absolute opinion - so I think people thought that something ... I don't know what was in mind but that something was going to happen that was going to actually sort this out. And I suppose it dragged on ... "muddled on" would be as best I could describe it, and then you mention September '08 and, I suppose, the final kind of, in my opinion, cliff that really ... that the markets fell over then was the collapse of Lehman and that really was the straw that broke the camel's back, if I could, yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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So, as all that was going on, as you say, as you were muddling along hoping something might come over the hill and so on, were you aware whether, in general terms, the bank was having discussions with any other banks or with Central Bank or the Department of Finance in relation to those liquidity issues? I know you say you wouldn't have had direct contact with the Department of Finance yourself-----

Mr. David Gantly:

I didn't have, I-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Were you aware of what, sort of, if you like, official contacts were being had, either with other banks or with Government Departments?

Mr. David Gantly:

Okay. No, I was. I had one meeting with the Department of Finance which, I think, was post the guarantee so I wouldn't have a relationship there. I suppose, just within treasury itself, we would have had very direct contact with the regulators - both the Financial Regulator and the Central Bank - and that would be conducted on a, really, a weekly and daily basis so the ... our liquidity manager would have been in contact, regular daily contact with the Central Bank money desk and, in the first place, that would have been for the conduct of normal market transactions so this would be repurchase agreements which the ECB would do on a regular basis so in normal times that was a ... the normal repos that they undertook were conducted once a week for a two-week duration and then the LTROs, or long-term refinancing operations, would have been done every three months for a three-month term. Now obviously, as the crisis, you know, dragged on they extended the term of those long-term operations to three months to six, to 18 and eventually out to two years.

Going back to your question, I mean I would have been absolutely aware that ... I knew people ... I would have had a very close working relationship with the finance director who was my immediate boss and I would have been absolutely aware of ... that there was regular contact with the regulator and, indeed, I would have been at some of those meetings myself.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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I mean you, in Vol. 2, page 15, your e-mail to the Financial Regulator, dated 29 November, not surprisingly talked about the threats to liquidity and the fact that the interbank market is now effectively closed. Do you believe or do you think that the Financial Regulator, while you were giving information all the time and, as you say, you had a professional relationship and you were in touch, increasingly in touch, was the Financial Regulator's office slow to take control of the situation or did the Financial Regulator's office do a good job?

Mr. David Gantly:

I'd say that a lot of the information ... there was a lot of information being collected, that's for sure, and so just from an organisational perspective when we were asking for something that was a priority they got exactly what ... and we had very good systems which produced the information which was obviously critical in the first place.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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But you can have information. It is whether you act on it.

Mr. David Gantly:

Absolutely.

I think as ... certainly at meetings ... I was at a meeting I can recall in ... I guess it must have been somewhere around the summer to the autumn of 2008 with the CEO and the group finance director and there was certainly a sea change I think then that we were saying well, what was ... I was there to really say what was going on in the marketplace. I presented a picture and I think the regulator absolutely knew that the markets were in bad shape. So they were getting the information. I suppose the ... ultimately, the only real reaction, if you like, that I physically saw would have been the announcement of the guarantee because I can't recall that there were any other changes that would have happened. I mean at ECB level, it was being fed back and there was a longer-term repos were being provided so there was clearly an awareness that the system which normally ... the traditional, you know, method that banks would have used to fund was utterly drying up and that the lender ... ultimately, the lender of last resort was increasingly becoming the lender of first resort.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Do you think that perhaps the Financial Regulator and all the associated bodies also thought that someone would come over the hill ... in a way that they were hoping something would sort itself out? Did you get that impression or is that completely not fair?

Mr. David Gantly:

I think that would be ... I couldn't really answer for how they saw it but I do think there was a little bit of ... I suppose it was incredibly unusual. People have used the expression "one in a 100 year event". It was there so there was ... I think there was an element of people ... all of us being caught in the headlights to an extent.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Again, in Vol. 2, Mr. Gantly, on page 5, is the e-mail from Peter Fitzpatrick relating to the retail deposit guarantees and adding the voice to increasing the limit:

My view is anecdotal at this stage and based on reports on what people are [openly] talking about in the workplace. I think that an increase in the guarantee would go a long way to restoring retail confidence right across the [Irish] market.

Again, this is 17 September 2008. Is that an action that ... would it have made a difference if that action to guarantee ... to raise the limit were taken earlier? Would that have helped, do you think?

Mr. David Gantly:

In terms of the actual flows that we saw across our retail division, no because we didn't experience ... we saw ... in fact, we didn't see any, you know, really significant negative flow. It's-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Until post-Lehman's.

Mr. David Gantly:

So I'd say it hadn't a huge impact but it certainly helped. I mean, you might remember there was ... there were radio shows going on, it was a very ... it's easy to ... I mean, it's a long time ago looking back now number one.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Yes, this is post-Lehman's, of course, isn't it too?

Mr. David Gantly:

This was post-Lehman and really ... it's hard to describe. I mean I certainly know from my side ... you know when you're going in in the morning and you're saying "Right, what's our liquidity situation? What's going to happen next?" At that particular time, there was ... there were rumours of ... I suppose ... I'm not going to name banks but there were rumours of, you know, two or three German banks that were being ... there was speculation that they were in trouble ... a Belgian bank. It was just ... every day, you went in it was rumoured as to who was next kind of thing.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Again, in Vol. 2, on page 11, there's an e-mail again from Peter Fitzpatrick writing to the Financial Regulator and, specifically, he's talking here about ... and this is going back to 22 November 2007.

Mr. David Gantly:

Yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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He's talking about Bank of Ireland actively talking down the Irish story and:

[T]o quote Schroders in the UK, who met with BOI yesterday, the CEO said that "in quarter 1, the issue for all Irish banks was one of survival". Bit alarming for BOI, but to put us all in the same boat is creating massive negative sentiment. Of course, I'm getting-----

Mr. David Gantly:

Sorry, Senator, if I could just ask which part ... where are you in the text?

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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I beg your pardon - page 11, Vol. 2, the second paragraph of the e-mail.

Mr. David Gantly:

The second paragraph, okay, thank you.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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So, again, you know, it's quite ... it's a curious moment, I suppose, that your organisation was complaining to the Financial Regulator about the Bank of Ireland talking down the market and including you guys in it. Was that something that ever happened again or what ... do you remember this or do you have anything ... obviously, you've had the books prior to coming here?

Mr. David Gantly:

Absolutely. Well I think the reference to me in it is very specific in the first paragraph in terms of an engagement with the regulator.

Mr. David Gantly:

I think this is a private view of Mr. Fitzpatrick which he's representing so.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Okay. You're not aware of it?

Mr. David Gantly:

I may have seen this before ... the memo but certainly this wasn't ... I wouldn't have seen this as a house view.

Mr. David Gantly:

Or a view, or maybe more fairly, a view that I subscribed to.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Indeed, in that first paragraph, you are thanking the help that you've had from the regulator in helping to get the assets across the finishing line to be included in the tender and it's ... you're talking about €2 billion drawing from the ECB tender. Was that again an indicator of the trouble ... the difficulty that you were in or would that have been normal business?

Mr. David Gantly:

It would have been, I'd say, out of the ordinary. Not ... I'd... if we ... when we went back to... going back to 2007, which was in a sense where we started this, one of the responses that I initiated as I saw the markets starting to dry up ... we would have used securitisation, which, obviously, was an obvious tool for us to use given the nature of the balance sheet with 85% of the assets were residential mortgages. So in the normal course of events, you know, pre ... let's call it up to mid-07, I mean securitisation from the 90s on had become more sophisticated, wider investor base and we could use securitisation to fund longer term. And, typically, a securitisation would be funded for five years ... would be the duration and I know Mr. Went earlier referred to the weighted average life on mortgages being somewhere around six so we were actually, kind of, almost match-funding the assets.

So when the conventional sources of securitisation actually started to dry up, I was extremely nervous about what was going on in the marketplace. What we started to do was we identified with the help of our colleagues in the wider bank to ... we identified the pools of mortgages. If you want to do a securitisation, you'll say ... typically say €1 billion or €2 billion in that case in that instance. They have to satisfy certain criteria. You've got to have ... you've got to be able to ... because they're going to be put into a special investment vehicle and the cash flows have got to be very clear. There's a lot of criteria that it must kind of adhere to.

So back in '07, faced with the markets as I saw them, I put in place a plan to create pools of ... to have pools available for essentially what would have been deemed to be internal securitisations. So at the time then, the ECB in the normal course of events would, as I said earlier, would be engaged in repos in their normal market activity and would get more involved with, you know, as required I guess. And at the time, residential mortgages counted as tier 1 collateral for drawings with the ECB so this was a very valuable asset for us to have.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Okay. Are you aware of whether stress testing took into account the correlation between the different types of property being financed, in particular category of loans issued, for example, tracker mortgages, and the availability of appropriate funding or was that outside your-----

Mr. David Gantly:

Stress testing on sort of ... on the banking asset side was utterly removed from my remit so I would have had no input into that.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Okay. In looking at your statement, Mr. Gantly, where if you like do you see your ... I don't mean you personally but the contribution of if you like ... where did it go wrong for the bank? Because we can talk about the global impact and we can talk about Lehman's and all of those things absolutely nobody's pretending they didn't happen. But internally in the bank in that time that you were there, what do you think the bank did that contributed to the eventual cost to the taxpayer of some considerable amount of money - billions?

Mr. David Gantly:

You started the question when you asked about my input into it or are you talking about the wider, sorry-----

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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No, I am looking at your statement and I'm thinking I can't quite see in your statement where that is acknowledged if you like. What was it in the bank ... no, not you personally, Mr. Gantly-----

Mr. David Gantly:

Sorry, okay.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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---- the bank and, obviously, from where you were sat in the bank as opposed to ... because, you know, you were significant within the bank.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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The operational business model from an observation - what were the fault lines in it?

Mr. David Gantly:

Yes, sure. I think one of the documents that you'll have seen in the documents that were submitted to you would have shown that the strategy in the bank ... there was a strategy presentation in 2005 and the drive was towards ... it was faced with ... I think at the time the market share was somewhere in the bank was about 17% and I know, as David Went referred to earlier, the bank always saw itself as having a kind of 20%-25% market share was its kind of target. That's where it saw itself being and the response to that, you know, was to actually go for higher volume, lower margin and there was a migration then of existing customers to the tracker product, okay. So I think with the benefit of hindsight, I think that was not maybe the most perfect strategy to adopt but, as I say, that's with the benefit of hindsight.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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ILP was downgraded by Standard and Poor's in June 2008 and placed on a negative outlook, and then Moody's also put it on a negative outlook in July. Can you recall what was the reaction, if you like, among you and your colleagues after that happened? Was it what you expected or was it ... did it come out of the blue or was it fair or what did you think?

Mr. David Gantly:

You said, "in 2008".

Mr. David Gantly:

Yes. Well, in the first place, I would have engaged in discussions with the rating agencies, and I can't remember the exact timing. I think it was Moody's first and then Standard and Poor's, if I remember, but I can remember being in London, you know, at a presentation to the rating agencies and having a discussions afterwards. And, you know, I was asked what did I think and my view was that, you know, the presentation went as well as it could go, the case was very fairly presented but I thought that they would downgrade us. So, I think, somewhere in there too, I think, there is a statement, maybe about how rating agencies actually behave. So, you know, you could argue, you know, 12 months ago the Irish story was clearly becoming ... at the sovereign level was becoming clearly better but it takes the rating agencies ... they tend to be, I think, after the event. And ... but ... I suppose, it's not as important if you're ... if the curve is rising, but if you're in a crisis, it clearly adds, and adds significantly, to the problem. It has a disproportionate influence in a downgrade.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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When the Department of Finance was, if you like, trying to organise itself through September, it was looking at all the various institutions. It put you in the same category with Anglo Irish Bank and INBS, the three of you grouped together and, indeed, they referred to your position as "finding conditions very challenging". I mean, again, they would have been drawing that, obviously, from the information that was going through to the Financial Regulator and so on. But was that something that you were aware of, that the three institutions were bracketed in the same breath - they would be talked about together - or did it matter at all by then?

Mr. David Gantly:

Well, one, I wouldn't have been aware of it and I wouldn't have known what analysis that they were forming that on. I mean, clearly, if you're talking about business models, we're very different organisations. I mean, my sense ... and, again, you know, markets ... a huge part of markets is, kind of, confidence and rumour, but, like, post-Lehman, the talk globally was, you know ... I suppose, I was thinking ... you say to people ... everybody would say to you, like, "There's a big liquidity problem out there but we're fine", and that doesn't actually ... that doesn't stack up. So my sense at the time, and, I think, the regulator's actions on, I think, it was 20 September or post the meeting on 20 September when they increased the retail deposit from €20,000 to €100,000 ... I mean, clearly., that was reflective of the fact that there was ... there were liquidity issues but my understanding would have been that those liquidity issues were there for all of the banks.

I can only speak, obviously, to Irish Life and Permanent's position. We certainly experienced, you know, some run on ... "run" would be probably too strong. I mean, we had corporate customers who would have been non-Irish who would have rolled over their funds so they might place one-week money with you or they might place overnight money, but they could do that for 365 days a year. So that's, kind of, was the nature of the business. So we did see in the two weeks, say, up to the guarantee, we saw some of that money not being renewed, particularly, I would say to you, the overseas element to it, but it wasn't huge. But, I mean, obviously, the issue was ... and you're saying, "Well, if this continues." And, as I said, post-Lehman, it was just the heat really just seemed to get turned up. You felt something was just going to give, yes.

Photo of Susan O'KeeffeSusan O'Keeffe (Labour)
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Did you think the bank would go under at that point?

Mr. David Gantly:

I didn't think the bank was going to go under. I think that there was ... I mean, I know I had conversations with the finance director and said ... like, months prior to that, and said that I felt it was inevitable that people would breach the regulatory liquidity requirements. I mean, if I remember correctly, the week before the guarantee, I think, we were, like, ... we satisfied our regulatory requirements twofold, somewhere in that region, to the best of my knowledge, but I was absolutely aware that if the pace of what was happening was going to continue, it just felt that something was going to give.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Hold it at that now, Senator, thank you very much. Deputy Michael McGrath.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Thank you, Chair. Mr. Gantly, you are very welcome.

Mr. David Gantly:

Thank you.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Can I start by just going back to the issue of tracker mortgages? And I know you weren't on the banking side, as group treasurer, but in terms of interest rate risk, were you aware of the extent of the tracker mortgage interest rate risk and was this issue ever discussed at board level, to your knowledge? And I know you weren't on the board, but can you just discuss that?

Mr. David Gantly:

Okay. I can recall in the ... in some of the documentation, there is a reference at a board meeting to discussing basis risk between seven and 30 days' funding so basis risk was ... you know, therefore, was discussed. The principal area where it would have come up would have been at ALCO meetings, which I was a member of. And if ... when trackers were introduced, I suppose, if you went back to '99, obviously, and the creation of the euro in the financial markets, I mean, clearly, we had come from a situation where you had the Irish market with all its, kind of, vagaries and a lot more volatility. If you went back to the '80s, you know, just currency problems and you'd get 16% and 17% interest rates. So with the euro, it wasn't written in stone but, for sure, I was asked this question and it was something I tracked myself. The ECB ... there was ... broadly, it appeared that they were running with a policy where they were running about a five basis points, in other words, 0.05%, between the ECB rate and the one-month rate, and I certainly would have been asked that question and would have reflected that, and, equally, would have pointed out that our funding was ... tended to be over 30 days so you straightaway had basis risk between the ECB rate and the one-month. The tracker products were clearly priced off the ECB rate so there was risk there and it was ... and we pointed it out.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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When did the bank start rolling out tracker mortgages?

Mr. David Gantly:

To the best of my knowledge, I would have said somewhere like in late '04-'05.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I think '05 actually, yes. I think '05.

Mr. David Gantly:

I do know that ... I think 85% of tracker mortgages in Ireland, to the best of my knowledge, were written between 2004 and 2008.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. And can you just explain to the inquiry how a bank would fund, let's say, a bundle of mortgages - an individual mortgage, a bundle of mortgages? Where does that money come from?

Mr. David Gantly:

Okay. Well, if I went back one, I suppose, you're going to be generating, you know, assets from within the bank, right? So, typically, they are going to be writing ... If they write, say, for instance, just for argument's sake, €500 million of business in a month and that's going to be spread across, say, a standard variable product, tracker, five-year fixed, whatever, yes? So, in the first place, our systems, that was fed back down to treasury. So all of that ... the risk that that generated was transferred into treasury and, I suppose, structural asset and liability management was our ... one of our core, probably, you know, things that we did, in addition to, sort of, liquidity management. I'd say, they were the two prongs that were really critical. So ... sorry, I've just-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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The money, ultimately, is coming from-----

Mr. David Gantly:

Absolutely, sorry, excuse me.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----deposits, wholesale funding, you know, your funding mix.

Mr. David Gantly:

Okay, sorry.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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The point I am getting at is, like, from a bank's point of view, I could never understand the logic of a tracker mortgage because you were linking the price that you could, ultimately, charge the consumer to a lever that you had no control over. I mean, at the peak, what proportion of your funding, as a bank, was accounted for by ECB funding?

Mr. David Gantly:

Okay. I think-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I mean, a small percentage?

Mr. David Gantly:

I would have said ... I said up to, sort of, the guarantee, I think, about €12 billion would have come-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Percentage wise?

Mr. David Gantly:

-----from the ECB and that was ... the balance sheet at the end of 2008, to the best of my knowledge, was, I think, about €40.1 billion.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay.

Mr. David Gantly:

So, essentially-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Between a quarter and a third.

Mr. David Gantly:

About 25%, 30%. But in that scenario, essentially, what had happened was that all of the short-term funding had basically exited and, essentially, it was replaced by ECB drawings.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. So, in the years prior to that, the proportion of your funding-----

Mr. David Gantly:

I think the thirds that I mentioned-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----from the ECB would have been lower?

Mr. David Gantly:

Entirely.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Dramatically lower.

Mr. David Gantly:

It was there as a backstop. So I mentioned in the opening statement, I think, and in the written submission, that our funding strategy was centred around both the products and geographical spread in the one hand, but, equally, we spread the funding between ... like, three thirds, between long-term, customer deposits and short-term. So, if you like, then the crisis impacted, well, ultimately on them all, but the first place that it is going to hit you is going to be in your short-term debt.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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You see, I could understand the logic of a tracker from a bank's point of view if the cost of funds from the ECB was the full measure of the bank's cost of funds but, of course, it wasn't; it was only a small proportion of your funding mix and yet you tied the price that you could ultimately charge the consumer to what was only a small proportion of your funding mix, which ... What was the logic?

Mr. David Gantly:

Well, I think, the decision surrounding the introducing of trackers in terms of Irish Life and Permanent ...

I suppose it was ... as has been shown before, it is a very competitive marketplace, other people are there so it's ... I think there was a reaction to some extent to competitive pressures. It was also, I suppose, the ... a very stated objective of the group to be the No. 1 provider of retail financial services so I think there was an element of cross-sale seen in this, to be fair, as well. I did say that in that ... in a normal conditions that you had this roughly five basis points basis risk and if ... so, if you're writing a track with 100 basis points you're saying, "Well, actually it's 95 but we can live with that." And, the pricing would have reflected that.

If you looked at it in absolute terms, and in a crisis scenario where spreads, you know, just got blown out, I think, beyond where anybody thought they were going-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes, outside linking. Linking your price to the consumer was a small element of your funding mix.

Mr. David Gantly:

It was ... it's inherently dangerous. The optionality in the product was with the customer.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Sure.

Mr. David Gantly:

And from a treasury perspective to hand away the options wouldn't be ... is never a good idea.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. We'll move on. Can you comment on the reasons why Permanent TSB had an exposure to Icelandic banks of €92.4 million and what was the total amount written off on these exposures, if you know? And, that is referenced in the core booklets as well. Vol. 1, page 79, there's a letter which I'm sure you've read from Peter Fitzpatrick to Mary Burke in October '08. What's the background to that issue, that exposure?

Mr. David Gantly:

Well, as I said in the opening comments, we would have held a liquidity portfolio which was typically of very very high quality, didn't go below, sort of, single A. The bulk of it was triple A rated. It was sovereigns. But, as part of that portfolio we did have an exposure to Icelandic banks, I suppose, which back in 2006-2007 had been rated triple A. So that was ... I mean, the purchase of those was within the terms of the credit guidelines that we actually worked within treasury. And, essentially the crisis ... Iceland decided to default and, to the best of my knowledge, the full €92 million was written off.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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The full amount was lost, okay. In his statement to the committee Mr. Kevin Cardiff stated that ILP was set to run out of money by Thursday, 2 October 2008. You covered some of this earlier on. What was your assessment of your bank's liquidity and solvency position on the days leading up to the night of the guarantee and the night of the guarantee itself and, indeed, the subsequent days?

Mr. David Gantly:

Okay. Well these, Senator ... the liquidity issue was certainly getting more critical. My take was that our regulatory requirement was absolutely satisfied up until the guarantee. I'm not ... I don't know the full details behind, you know, what document he's referring to. Clearly, we would have had ... we would have been sending liquidity reports. They would have gone to the regulator, would show your inflows and outflows and your net position and there are going to be days where you've got bigger exposures than not. So, I'm ... I'd really need to see the document to comment there.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay, but did you need the guarantee?

Mr. David Gantly:

I'm sorry.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Did the bank need the guarantee?

Mr. David Gantly:

Well, at the time, I'm pretty sure that we had ... I mentioned earlier that we had collateralised ... created the internal securitisations as a backstop.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. David Gantly:

And, we had a pool of €20 billion coming from that which was available to us. And, to the best of my knowledge, at the time we had ... our drawings were somewhere in the region of €8 billion. So, I would've thought we had absolutely available collateral to ... available emergency collateral. I mean that might be the difference.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes. Okay.

Mr. David Gantly:

With regard to solvency, I mean, the bank had 9.2% capital ratio at the end of 2008. Again, as I said, we were part of the wider group. The solvency ratio in the life company was 1.6% and I think that effectively meant there was a bit of ... a surplus of about €700 million or €800 million capital within the life company. So, you know, solvency was ... I never saw as an issue.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. I'll come back to the solvency issue but just sticking with liquidity for a moment, as far as you were concerned as group treasurer there was adequate liquidity on hand for the bank in the immediate days leading up to the end of September.

Mr. David Gantly:

Yes, but as I said ... post ... I mean, this is a problem-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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This is post-Lehman's now.

Mr. David Gantly:

-----that's been happening since '07 and it's getting worse.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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So, short-term funding has stopped.

Mr. David Gantly:

Short term is drying but, equally, longer-term funding is getting harder. Don't forget all the longer-term funding that you would normally access that's starting to bite-in clearly as you move along the time axis.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And had you debts maturing in the weeks ... the days and weeks-----

Mr. David Gantly:

Absolutely. So, we would've had a long-term debt profile somewhere out the region of probably about ten years, typically, and we purposely set it up like that because one of ... obviously every year when you sit down with the funding you're looking at your new lending growth and you're looking at the refinancing of maturing debt. So, we looked to stagger the refinancing risk to try and mitigate that. But, as I said, as we moved into, sort of, late '08, you know, all of the markets were just ... were just ceasing so the problems were getting worse. So I'm not saying that there wasn't potentially ... looking into it post-Lehman you're looking down saying "Well if this doesn't stick well it's going to cause problems", absolutely.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. And while PTSB was covered by the guarantee and you weren't in any way involved in the final discussions, as you know, AIB and Bank of Ireland went to Government Buildings on the night in question. So, did the bank have any input in the days leading up to it about the possibility of a guarantee and whether it would wish to be included? It might have been at a more senior level to you possibly but-----

Mr. David Gantly:

I don't ... yes, I'm aware that, you know, that the CEO and chairperson were at meetings in Government Buildings. Frankly, if that's after the event I'm not ... I can't honestly say. We had no input into the guarantee would have been absolutely my take. I mean, I-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And you personally wouldn't have been aware in the 24-48 hours leading up to the decision-----

Mr. David Gantly:

That that was in the offing?

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----that something was about to be done.

Mr. David Gantly:

No.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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No.

Mr. David Gantly:

I got a phone call, I think, on the Tuesday morning from the CEO at about 4 o'clock saying that a blanket guarantee had been put in place.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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What was your reaction?

Mr. David Gantly:

I was surprised but not shocked I suppose would be the honest way to put it.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Did you feel it was the right decision----

Mr. David Gantly:

I think that's a-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----then?

Mr. David Gantly:

I suppose the ... my immediate reaction to it was ... the question that was put me, "Well what's this going to mean?" So, I mean ... and essentially what it meant was that, you know, we had gone from being a weak single A creditor you know to having triple A status, that funds were going flow in and ... which is exactly what happened. So that was my immediate reaction.

In terms of ... you know, I'm aware that there was a lot of discussion, there was a lot of advisers around before it. I was always a little bit surprised after the event that it seemed to ... that decisions appeared to have had to be made in a rush, but, frankly, I don't ... I hadn't access to it. I don't know enough about it. That's more of an opinion, I guess.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And what was the immediate impact of it on your operations and on the funding and liquidity side of the bank?

Mr. David Gantly:

Where we had started to see an issue with the non-rollover of, in particular, funds from the UK and Europe I suppose there was probably a day or two of ... things stabilised straight away and there was a day or two of people looking for full clarification as to what it meant. Some investors were quite happy to lend but, absolutely, there was a massive flow of funds. Going back too to the increase in the €100,000 on the-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. David Gantly:

That was specifically on the retail side.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. David Gantly:

But ... I mean, I was certainly ... the message was put to me like that ... and, as I understand it, it came from the regulator was, look, to put it out there that ... to, you know, corporate investors, that there is an implicit, sort of, guarantee here behind the Irish banks and I think that that was also clear.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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And, on the broadly blanket nature of the guarantee, did you believe that it was too broad? Had you any views at the time and what is your current view of the appropriateness of the bank guarantee?

Mr. David Gantly:

I guess ... the real cliff that I was looking at was in terms of liquidity so, therefore, my reaction at the time was, it's going to .... it sorts that problem. You know, I hadn't, I suppose considered it ... I don't think anybody ... I don't ... I think few had ... was to look at what the scale of the blanket guarantee meant in terms of its absolute size relative to Irish GDP. So, in terms of, you know ... equity bore the full cost. You know, subordinated debt that counted as capital for me I would have thought that that should have suffered the same fate.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. The State ultimately ended up injecting €4 billion into Irish Life and Permanent: €1.3 billion was recouped with the sale of Irish Life and a further €500 million or so in the recent restructuring. The net cost is still north of €2 billion, as I understand it.

Mr. David Gantly:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Given that Permanent TSB didn't go into the whole area of speculative property lending, land banks and development finance, how did it end up costing €4 billion?

Was it the collapse in property prices? Can you explain, from your point of view, and I know you were gone in early 2009-----

Mr. David Gantly:

February '09, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Property prices fell dramatically in '09 and '10 but, from where you were sitting, on your departure did you foresee that the cost could be so great of rescuing Irish Life and Permanent?

Mr. David Gantly:

I'd say absolutely not, Deputy, no. But I didn't sit down and ... and either, you know, to, sort of, deeply analyse it either, I'd have to say.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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But where could the losses have come from? Can you just rationalise it? You know-----

Mr. David Gantly:

Well, some ... okay, again, I was gone in February '09 but, I mean, clearly, as part of the whole PCAR, sort of, process, like, banks' capital requirements were increased substantially-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. David Gantly:

-----so they were going to need more capital so ... than hitherto. So that was ... they were ... in the marketplace, as it was then, that capital was only coming really from one place. I honestly don't have insight into the breakdown and analysis of the mortgage portfolio, to answer your question.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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So it would have been driven by loan impairments, additional provisioning-----

Mr. David Gantly:

Sorry, that's-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----stress testing-----

Mr. David Gantly:

Sorry, that's where it would have come from, yes. I beg your pardon, yes, that would be absolutely my take, but I don't know the mechanics of that.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Sure. And you said that 85% of the ... was it the group assets-----

Mr. David Gantly:

No.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----were accounted for by residential mortgages?

Mr. David Gantly:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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What were the other 15%, broadly-----

Mr. David Gantly:

Well, you'd the car finance-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----of the asset base?

Mr. David Gantly:

You had car finance division-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay.

Mr. David Gantly:

-----and then there was the joint venture with Springboard, with Merrill's. That would have been the bulk of it.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Okay. Can you just explain how the loan-to-deposit ratio reached a mouth-watering 275%? And, in the context of the fact that the funding mix ... if you look at the graph on Vol. 1, page 121, which looks at '06, '07, late '07, March '08, and the composition of the funding mix remains broadly stable, with long-term debt being, you know, 20-odd per cent; securitisation, 7%, 8%, 9%; deposits, 34%-32%; and then short-term funding. Was it just the explosion in credit, that while the composition of your funding remained broadly stable, your loan-to-deposit ratio was going through the roof-----

Mr. David Gantly:

Yes, absolutely.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----because the lending was-----

Mr. David Gantly:

Yes, absolutely. I mean, the strategy didn't change. I mean, the strategy that we had in 2000 was ... was ... as I said earlier, was that we would fund a third long-term, a third through customer deposits and a third short-term. So, that broadly stayed the same-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. David Gantly:

-----but obviously the quantum, as you rightly say, as you've described, it just ... it increased, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Why was it so out of step with the other financial institutions in terms of the loan-to-deposit ratio? It was way out on its own.

Mr. David Gantly:

I think some of the emphasis, maybe, on the ... at a group level was actually ... there was probably ... there could have been some cannibalisation of, sort of, retail deposits that went into life product. It's possibly part of it.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Would that have been a significant factor?

Mr. David Gantly:

I couldn't put a number on that. But I suppose, the point ... when you say "mouth-watering", I mean, we were always very upfront about where the ratio was, and I just ... I make the point in my opening statement that, like, ultimately, you know, there are Irish banks with much lower loan-to-deposit ratios, as there were-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Yes.

Mr. David Gantly:

-----global banks who had much lower loan-to-deposit ratios. And the reality of the situation is, you know, I'm pretty confident that they ended up in ... with bigger issues sooner than we did.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Sure.

Mr. David Gantly:

And I think, maybe to that point as well, that if you look at the ... the NFSR, the net stable funding ratio, which is one of the proposals that the regulators, kind of, are introducing, it's really aimed at ... at addressing that. So I don't think ... I don't think a, you know, low loan-to-deposit ratio in itself is such a-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Sure, it's just one measure but, in nominal terms, were the level of deposits broadly stable or were deposits rising over the period in question ... let's say, those key years '06- '07?

Mr. David Gantly:

Well, I mean, the-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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As I said, you have two elements to that measure - you've loans and you've deposits. Were the deposits ... in nominal terms, what was the pattern?

Mr. David Gantly:

It was ... sorry, that ratio was widening, yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I know that.

Mr. David Gantly:

So the loans were growing at a faster rate than the ... than the retail deposits.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Costs were growing but----

Mr. David Gantly:

Absolutely. But not at the same pace, yes. And, if you like ... so going back pre the crisis, well, I mean, securitisation - and we were, kind of, as I said, a unique balance sheet in that regard - was, you know, it was suddenly a very deep market and did we over-rely on that? With the benefit of hindsight, possibly.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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What was the main mistake that was made? Was it the over-reliance on wholesale funding?

Mr. David Gantly:

I ... faced with the challenges that we came across, the answer is, I suppose, is yes. Yes. But-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Where would you rank that then with ... alongside, say, credit decisions and the quality of lending?

Mr. David Gantly:

Well, I suppose ... yes, okay-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I know it was the confluence of a number of factors that-----

Mr. David Gantly:

Sure.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----crystallised the whole thing in the end but, in terms of the decisions that were made by ILP, the factors that were within your control, how would you rank-----

Mr. David Gantly:

I think a bank-----

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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-----the mistakes that were made?

Mr. David Gantly:

I think a bank can survive a liquidity crisis, but not a solvency crisis. So I think ... so if the solvency remains intact, I think you could come through the crisis. I mean, it's ... securitisation today is back on the market. I mean, what happened is that, you know, things were so bad that, you know, the baby gets thrown out with the bath water really, essentially. So, as I said, I think the bigger issue is clearly your solvency.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Thank you.

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

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Go raibh maith agat. Fáilte roimh tUasal Gantly. Can I ask you, and it was mentioned in relation to the e-mail to IFSRA on 22 November, it's on page 11-----

Mr. David Gantly:

Of Vol. 1 or 2? Sorry, Deputy.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes, it's Vol. 2. On 22 November, Peter Fitzpatrick stated, "To quote Schroders in the UK, who met with [Bank of Ireland] yesterday, the CEO said that "in quarter one the issue for all Irish banks was one of survival"." Can you expand on this comment that's made in this e-mail, that as early as to November 2007 they're suggesting that the Irish banks' survival is the key issue for the next three months? It's in the second paragraph.

Mr. David Gantly:

Yes, I've got the ... yes, yes. Clearly, the liquidity issue had raised its head. I mean ... I think, Deputy, really, I can't answer for Mr. Fitzpatrick's words. I-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Do you share the view that, at that point, there was an issue in terms of the Irish banks' survival?

Mr. David Gantly:

No.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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That it was that serious or it was getting that serious?

Mr. David Gantly:

No, I wouldn't have perceived that it was survival, absolutely not. I mean if I ... if I refer back to the document that I presented to the risk committee, I said that capital was going to be scarce, I said that the use of ECB benchmark for product was an issue, that credit spreads were going to widen. They were the sort of issues that were in my mind. But survival? No, no.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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The e-mail also talks about the fall in stock prices and at the end there, the second last paragraph, the two lines, says, "Another reason for the stock prices going off is another round of margin calls in the remaining [contract for difference] market. I am told that this is all done and dusted now and that a good number of previously wealthy folk have lost their shirts in [contract for differences]." Was this a view that was well established or is this a view that you held yourself? I know this isn't your e-mail but is this something that was known at this time ... in November, that previous wealthy folk had lost their shirts in contract for differences?

Mr. David Gantly:

No, I wouldn't recognise that. I mean, I would have been aware that there was a certain ... certainly an issue within banks, I'd say, that hedge funds were short-selling stock and people saw that as being ... I took more of a market view on it, that it was ... if ... it was a just a ... it was a function of markets and they were either ... they were right or they were wrong.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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We've heard about this short-selling and, you know, and it's in this e-mail as well. And we had the Government instigating ... or in ... the Central Bank instigating an inquiry in relation to Anglo. But isn't it not the case that the actual short-selling of stocks and the banks that they were short-selling - if they were short-selling - if they were spreading the rumours then to benefit from it, that they all went bust? Maybe there was ... was there ... could there have not been a grain of truth in the fact that they looked at the numbers of the banks, seen what was coming down the road and were saying, "This isn't good, folks", you know?

Mr. David Gantly:

But, as I said ... I didn't ...

I philosophically wouldn't have had a problem with the concept of hedge funds short-selling stocks, which, I think, a lot of bankers seemed to have. So I wouldn't have shared that and they absolutely ... I would agree with you, Deputy, their analysis-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Short-selling is a normal practice, although it was banned, but it was a normal practice and a legitimate practice. The issue here, and it is referred in the e-mail, is that people would have been involved in short-selling and would spread what would be viewed by some as malicious rumours in relation to events.

Mr. David Gantly:

Okay. I wasn't talking ... I was talking about them taking ... if somebody takes a view on the market-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Short, yes.

Mr. David Gantly:

-----and they have done their analysis and they see problems emerging and I think they were quicker and maybe that's because they were distant and, ultimately, they were right. I mean, I agree with you, yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. In terms of the pre-crash period, when did you begin to notice that something was up with the capital markets?

Mr. David Gantly:

The capital markets, you mean in funding, the whole shebang?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes.

Mr. David Gantly:

I would say mid ... I, kind of, put mid-2007 as being when I was starting to really get kind of jittery about what was going on.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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And what was the perception of Irish financial institutions during that period, 2007 going up to 2008? What were they saying to you? Like, you were on the end of the phone to them, you were meeting with them, they were telling you what they thought of the banks, what they thought of your bank.

Mr. David Gantly:

Speaking to whom, sorry?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Well, the markets, the funds.

Mr. David Gantly:

Yes, I would have spoken to people in other treasuries, obviously, and I think they would have shared - we would have shared the same concerns that this is behaving in a way we've never seen before, what's going to happen next, which was a pretty disconcerting place to be.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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But the lenders to your institution, what were they saying? What was the perception of the markets in relation to Irish financial institutions?

Mr. David Gantly:

The perception of the Irish, of the Irish-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Of the Irish banks.

Mr. David Gantly:

I'm sorry, I'm not quite sure, I'm not with you.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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The question is, what was the market perception at that time? So, you say that about mid-2007, you felt that something was up with the markets, obviously.

Mr. David Gantly:

Yes.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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What was the perception? What were people saying? What were traders saying to you, people that would normally lend to banks?

Mr. David Gantly:

Sorry, I beg your pardon, just that the normal functioning of markets that we'd experienced for the last 25, 30 years was broken, was fundamentally changing. And I suppose the concern was is this - there are issues - is this temporary or is this going to be the new ... is this the new reality?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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From your day-to-day dealings with the capital markets, was there any distinction being made between various financial institutions or various Irish financial institutions or were they all being treated as a block?

Mr. David Gantly:

Well, again, I mean, I can only tell you what my perception would have been of that. I don't know how external investors were viewing it but I ... but it would be my strong, sort of, suspicion that some banks were seen as being stronger than others, for sure.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. In the deals that you were making, you were carrying out, was there no conversations in relation to how they perceived your bank via Anglo, via Bank of Ireland, via AIB? You know, was there none of that conversation going on?

Mr. David Gantly:

Well, I mean the actual ... no, I wouldn't have actually said so, no, no. I mean I can't remember specifically that, you know, having conversations with people. I really can't say, can't answer that.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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One of the things, one of the issues we have come across in the banking inquiry is this quote about "No Dublin trades", with a suggestion basically that Ireland was being locked out of the capital markets, that this was a direction that was given. Did you ever come across any evidence of a blanket block on deals with Irish banks? Did you ever hear any sense of that "No Dublin trades" in the days running up the guarantee?

Mr. David Gantly:

A blanket block from international investors?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes.

Mr. David Gantly:

No, but I mean, obviously, if you went back to ... I can't remember when the famous PIGS acronym was generated. You know, Ireland was ... I have no doubt that Ireland, in some investors' eyes, was in that pool and, therefore, was not being viewed in, you know, in a great light.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. So you have, kind of, no specifics of any conversations whatsoever. Like, you know, I'm looking ... I'll go back to the e-mail that we were referring to there. Again, on page 11 - and we have this as documentary evidence - where it talks about, "One of our Canadian Holders said that she has been informed out of London that we [ILP] in Irish Life and Permanent are the next Northern Rock." That's just a snippet that we got in an e-mail of kind of conversations that go on in relation to the perceptions of the bank and so on and so forth. And this e-mail is actually very much about Bank of Ireland as well, even though it is coming from ... So, like, you weren't privy to any kind of conversations in relation to the perception of investors to the bank, whether they were looking at the Irish banks all as one or whether they thought maybe Irish Life and Permanent wasn't as ... in a worse state than other banks.

Mr. David Gantly:

Well, I didn't speak ... in the first place, there were people who were more active in that, sort of, area and this document actually refers to our hedge funds, right.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes.

Mr. David Gantly:

So I didn't speak with hedge funds.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Right.

Mr. David Gantly:

So, that's part of the answer.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay, but you're not aware of it. Obviously, you spoke to people who were speaking to hedge funds.

Mr. David Gantly:

Honestly, I mean, as I said, the best way I can probably answer the question, Deputy, is to say that if people were seeing us ... there was certainly a body of thought out there, and I certainly perceived that, you know, you had Portugal, Ireland, Greece and Spain were, you know, the ones that had the bigger problems. So, obviously, if you were being viewed in that division, you certainly weren't in the premiership so that-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes, but the key thing I'm trying to find from here, from your experience in treasury, is was Ireland Ireland? So that means every financial institution in Ireland or was there a different ... were people sophisticated enough to look and say, "Well, we actually think, hypothetically-speaking, that Anglo Irish Bank's model is one that we do not understand [to borrow a quote from the NTMA] so, therefore, we isolate them but in terms of AIB or Bank of Ireland we're more favourable to them." Or was it-----

Mr. David Gantly:

Sorry, I-----

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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-----just, in your understanding, was it just Ireland was, kind of, a no-go area for some.

Mr. David Gantly:

Okay, I don't think it was that Ireland was a no-go area. Specifically, I think that Anglo and Nationwide, people would have had more concerns. That, anecdotally, that's what I would have picked up. And then the flipside would have been that you would have had Bank of Ireland probably and AIB at the top of the tree, with ourselves somewhere in the middle.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Mr. Gantly, we heard evidence that the main reason-----

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

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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-----the main reason decided by rating agencies for downgrading Irish banks was because of the dominant business model shared by the main Irish banks, that is, commercial and residence property loans funded through large degrees through wholesale markets that were mired in a sustained credit crunch. Would you have come across this perception in your day-to-day dealings? Was this or was this not a general perception?

Mr. David Gantly:

A general perception by the agencies?

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes, by people that you dealt with externally.

Mr. David Gantly:

I think if ... I can recall - I think it was in 2007 - and the Moody's, in their report, cited the fact that our well-diversified funding model was actually, was seen as a positive.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Okay. Finally, can I ask you in relation to bondholders and the debate that has been going on and we have discussed this in the inquiry as well in relation to the burning of bondholders, what was the view, to the best of your knowledge, or were you aware of the view of people in the market as to whether, for example, subordinated bondholders should have been burned or whether senior bondholders should have burned that bought their bonds that were sold in the secondary market? Was there a perception out there that this would happen?

Mr. David Gantly:

I'd say ... my own view, and I think it would, and it certainly would have been shared, I think, by quite a few market participants that I would know, was that, as I said, equity bore the full cost. So, you know, accordingly, that subordinated debt, which counted as capital, should have been fully hit. I think straying into the senior side of it, I'm actually not sure.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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You are not sure on what?

Mr. David Gantly:

As to whether it should or shouldn't have been.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Yes.

Mr. David Gantly:

All I do know is that clearly the Government on the night had a big decision to make. They were clearly under a lot of pressures and I mean I don't ... to offer you a view as to what should or shouldn't have been, I would have had to see the whole picture.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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I think we can all agree with that.

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

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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Just to make the question a bit clearer, sorry, it's not about what should have happened on the night of the guarantee.

Mr. David Gantly:

Okay.

Photo of Pearse DohertyPearse Doherty (Donegal South West, Sinn Fein)
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The NTMA had prepared a document - it would have been after your departure - but prepared a document in relation to the burning of subordinated and senior unguaranteed bondholders at the time when we went into the troika bailout. The question I was asking you, because this debate was still ongoing in a public way, was there ever a concern or expectation raised by those in the markets, people that you would have spoken to, that this may happen, not that they may have supported it but that it may happen? Was there a view that this was a risk for them or-----

Mr. David Gantly:

It's not a conversation, frankly, I would have had.

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, Deputy Doherty.

Mr. David Gantly:

Thank you.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Mr. Gantly, by means of wrapping up this evening if maybe-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Chairman, can I ask a short question?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Yes, if the Deputy can be brief.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Yes, very brief. What is the difference in time period between the average wholesale funding term and the mortgage term? When you were going for wholesale funding, give me the difference in the time period? On average, how long was the wholesale funding?

Mr. David Gantly:

Long-term funding would be typically defined as over one year.

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

Mr. David Gantly:

Our debt profile-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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On average, what was the wholesale funding - for what term?

Mr. David Gantly:

I'd say four to five years.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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Typical. Right, go on.

Mr. David Gantly:

At the time if you went back to, as Mr. Went referred to earlier, the weighted average lives on a mortgage-----

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

Mr. David Gantly:

----- I think it was actually lower. At the peak of the market it was about five. Now this clearly has widened subsequently.

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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My final question is as follows. When did Irish Life and Permanent first begin to lose money on tracker mortgages in your experience? In what year?

Mr. David Gantly:

Oh, boy. To answer the question, clearly we have got a weighted average margin on the assets and we have got a weighted average margin on the liabilities. What I can say is that at the end of '08 our net interest margin was 105 basis points. That was down from 117. Obviously trackers are going to drag that down and the SVR is going to take that up. That is as much as I could offer, Deputy. I don't know within that. I suspect, I mean if you were to do the economics of it and you looked at the ... just in absolute terms, if you looked at where wholesale funding costs had gone to-----

Photo of Kieran O'DonnellKieran O'Donnell (Limerick City, Fine Gael)
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That is where I want to.

Mr. David Gantly:

By ... you know ... certainly I could stand over and say that by early '08, it wouldn't have been economic.

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

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Thank you very much. Mr. Gantly, just to wrap things up, if I can ask you in your role as treasurer of Permanent TSB, do you believe you performed your duties in the best interest of the company at all times?

Mr. David Gantly:

I absolutely do, yes.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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What, if anything, do you consider you could have done better during that period?

Mr. David Gantly:

I beg your pardon?

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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What, if anything, if at all, do you consider you could have maybe have done better?

Mr. David Gantly:

It's very difficult to come back with the benefit of eight years.

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

Mr. David Gantly:

Capital home loans was a unit that we had in the UK. There was certainly, I think there was a lot of interest for that at the time. It certainly crossed my mind that maybe it was a good thing to sell. Am I sorry I didn't, sort of, shout louder? Absolutely. Am I sorry that I didn't highlight even stronger in '07 as to what was going on in the markets? I probably am. But, frankly, I saw the issues arising. I don't think ... I'm not sure that I've met anybody who saw the scale of them.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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Is there anything you'd like to add by means of closing comment or further remarks, Mr. Gantly?

Mr. David Gantly:

No. In conclusion, I thank you very much. I'd like to thank your secretariat. They have been extremely good on the day and in the past. I genuinely hope that my contribution has been of some value to you and I wish you well in, obviously, the final production of your report.

Photo of Ciarán LynchCiarán Lynch (Cork South Central, Labour)
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With that said I would like to thank you, Mr. Gantly, for your participation here this evening, for your own co-operation in the late sitting this evening and for your engagement with the inquiry. I now formally excuse you. In doing so, I wish to say that the meeting is now adjourned until 2.30 p.m. on Tuesday, 8 September 2015. Is that agreed? Agreed.

Mr. David Gantly:

Thank you.

The joint committee adjourned at 8.33 p.m. until 2.30 p.m. on Tuesday, 8 September 2015.