Oireachtas Joint and Select Committees
Wednesday, 9 September 2015
Committee of Inquiry into the Banking Crisis
Nexus Phase
Ciarán Lynch (Cork South Central, Labour)
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As we have a quorum, the Committee of Inquiry into the Banking Crisis is now in public session. Is that agreed? Agreed. Can I ask members and those in the public Gallery to ensure that their mobile devices are switched off. We begin today's session 1 of our public hearings with Mr. Denis O'Connor and Mr. Aidan Walsh, partners, advisory services, PwC. In doing so, I would like to welcome everyone to the public hearing of the Joint Committee of Inquiry into the Banking Crisis, and at our first session this morning, we will hear from witnesses from PricewaterhouseCoopers.
Mr. Denis O'Connor and Mr. Aidan Walsh are partners in PwC. Both Mr. O'Connor and Mr. Walsh were key figures in the preparation of the PwC Atlas reports and reviews on Irish financial institutions for the IFSRA. Mr. O'Connor and Mr. Walsh, you're very welcome before the committee today.
Before hearing from the witnesses, I wish to advise the witnesses 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. 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 witnesses have been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee, will be relied upon in questioning and form part of the evidence of the inquiry. So with that said, if I can now ask the clerk to administer the oath to both Mr. O'Connor and Mr. Walsh, please.
Ciarán Lynch (Cork South Central, Labour)
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Now once again, Mr. O'Connor and Mr. Walsh, welcome this morning and if I can invite you, in whichever order you like, to make your opening remarks to the committee, please.
Mr. Denis O'Connor:
Thank you, Chairman, and members of the inquiry team. I am pleased to be here today with my colleague, Aidan Walsh. We were the partners leading the PwC work on Project Atlas from late September 2008 until January 2009. I was the main point of contact with IFSRA and the Department of Finance during our assignment. We have been requested to provide evidence in two key lines of inquiry - the role of advisers in analysing the crisis and, two, the effectiveness of reviews of the bank loan books and capital adequacy.
By way of background, PwC were retained by the IFSRA on 18 September 2008. Mr. Walsh and I met the Financial Regulator on that day. Mr. Neary explained to us that he needed urgent assistance to look at the liquidity position and the credit quality of a number of Irish banks. He explained that he would need us to carry out our work in a short period of time. Following our meeting, we exchanged a proposed scope of work and an engagement letter.
We commenced our work on Anglo Irish Bank on the following day, 19 September. Over the following number of days, our engagement was extended to include Irish Life and Permanent and Irish Nationwide Building Society. The original focus of our work was mainly on liquidity, as some of the banks were losing significant amounts of deposits and running out of money. We attended part of a meeting at the NTMA on 28 September, where we discussed the findings of our work over the previous eight or nine days. This work was focused mainly on liquidity and the level of provisions that existed in the banks' management accounts at the end of August 2008. Following on that ... following on from that, we issued an e-mail summarising the information shared at that meeting.
Apart from two e-mails discussing the deposit outflows on 29 September and the deposit inflows on 30 September, we had no other meetings or contact with IFSRA, the Department of Finance or the NTMA from 28 September until 6 October. On that date, we met the Financial Regulator in his office to discuss the work we had performed on the top 20 borrowers within each bank. We had not been involved in any discussions around the guarantee or any alternative options being discussed at that time. Our reports on Atlas 1 were discussed for the first time on the second week of October.
Following a meeting with the regulator on 8 October 2008, the Atlas 1 exercise was extended to cover all six banks and to increase the sample of the top 20 loans to the top 50 loans and the top 25 land and development loans. This Atlas 2 was a significant exercise and involved placing a large team from PwC in each bank for approximately five weeks, with us reporting to the regulator on 17 November, approximately six weeks after the guarantee had been announced.
Our work involved us reviewing lots of loan files and interviewing senior management in each of the banks, with particular emphasis on lending and credit areas. The scope of our work did not include reviews of smaller developers or any element of actual mortgage lending. Our reports highlighted the very large exposures that the banks had to a small number of developers and the very high level of asset concentration in property. The top ten borrowers had loans of €17.7 billion with the six guaranteed banks and that was before any additional borrowings they had in Ulster Bank or Bank of Scotland Ireland.
The Atlas 2 reports also included, for illustrative purposes, a number of scenarios shown to impact on tier 1 capital of write-downs in various asset categories. Following discussions on the findings of Atlas 2, the regulator requested that we undertake more work on the top 75 land and development loans. We referred to this as Atlas 3. We were to engage a property valuer to assist us with this work and JLL were engaged in mid-November 2008. They were asked to focus on problem commercial real estate loans and to carry out a review of the bank's valuation of the underlying properties based on an actual medium-term view of potential future value. JLL reported their findings on 17 December 2008.
We have submitted statements to the inquiry team dealing with the nature and scope of the work we were asked to carry out. As the committee is aware, we are restricted by Central Bank legislation as to what we can say about certain confidential information that we received during our work. Subject to these constraints, I look forward to being as forthcoming as possible in answering any questions you may have. I will now hand you over to my colleague, Aidan Walsh.
Ciarán Lynch (Cork South Central, Labour)
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Thank you, Mr. O'Connor. Mr. Walsh.
Mr. Aidan Walsh:
Thank you, Chairman and members of the committee. I am pleased to be here today with my colleague, Mr. Denis O'Connor. As he has stated, we have been requested to provide evidence to the committee on two lines of inquiry - the role of advisers in analysing the crisis and the effectiveness of reviews of bank loan books and capital adequacy.
I also attended the meeting with Mr. Neary, the Financial Regulator, on 18 September which Denis has referred to in his opening statement. This meeting took place following the collapse of Lehman Brothers the previous weekend and the severe constraints that were being experienced on an international basis in the interbank and wholesale money markets. As Denis has stated, following our meeting we agreed a specific scope of work and engagement letter. We deployed separate teams to each bank. In the first week of our work we focused, as agreed, on the movements in deposits into and out of the banks and in compiling information on the top 20 borrowers by jurisdiction in which the banks operated. Management at the banks were co-operative and shared management and accounting information with us. It was clear that the liquidity positions were deteriorating on a weekly and daily basis and interbank and corporate deposits were not being rolled over and where they were, the deposit periods were reducing significantly.
We both attended part of a meeting at the National Treasury Management Agency on Sunday, 28 September. There were participants from IFSRA, the Central Bank, the Department of Finance, the NTMA and from Merrill Lynch, who were the financial advisers to the Government. We did not have a draft report prepared for that meeting. We shared information we had collected on the rapidly declining liquidity and the substantial cash deficits that were forecast by the banks to arise in the very near term. We also shared information on a summary of the loan books at the three banks, the value of loans that were reported as impaired and the value of loan provisions that were booked. We had not done any substantive work on credit quality at this stage, just nine days into a complex assignment. Our next meeting, to discuss draft reports with the Financial Regulator and his staff, was on Monday, 6 October, a week after the bank guarantee had been announced.
As Denis has stated, we were instructed on 8 October to commence work on what was known as Atlas 2. The results of our Atlas 2 work was reported to the Financial Regulator and the Department of Finance in mid-November 2008, roughly six weeks after the bank guarantee had been announced. The primary focus of this report was, as agreed, on the top lending positions. It also included the results of stress tests that had been run by each of the banks on their capital adequacy ratios, and based on their own assessments of the probable emergence of future loan losses. In addition, PwC included two additional scenarios based on higher levels of future loan losses, called scenario 1 and scenario 2. The assumptions for these scenarios were developed in conjunction with officials from IFSRA, the Central Bank, Department of Finance and NTMA. As is clearly stated in the report, these scenarios were for illustrative purposes only, to show the sensitivity of the banks to future losses in these two scenarios. Our work was not intended to be a comprehensive assessment of the most likely outcome for future losses. It is also important to note that within the timescale that we were working to, Atlas 2 did not include any third-party evaluation of property values, nor did it include a review of the security documentation supporting the loans.
Work on Atlas 3 then followed. JLL's work was carried out independently of our loan reviews. JLL were given details of the properties comprising the collateral for the loans, but the loan details were not shared with JLL. The property values were tested based on a long-term outlook for property values, which was formulated by JLL. The collateral values were not marked to estimated current market value at the time of the review, as there were no ... as there was no liquidity in the market and the market could not absorb a wholesale transfer of property. The results of the JLL work were consistent with the indicative future losses calculated under scenarios 1 and 2 as part of the Atlas 2 analysis. Mr. O'Connor and I shared responsibility for the work which PwC carried out for IFSRA in the period from 18 September 2008 to early January on the assignments that we have code-named "Atlas". I too am subject to statutory obligations which prevent me from discussing confidential information which we obtained as part of our engagement on the Atlas reports. However, I also aim to be as forthcoming as possible and of as much assistance as I can be to the committee in relation to the two themes which we have been asked to address. Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Walsh, and we'll get questioning under way, and in doing so, if I can invite Senator Sean Barrett. Senator, you've 25 minutes.
Sean Barrett (Independent)
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Thank you very much, Chairman, and welcome to Mr. O'Connor and Mr. Walsh. I echo the Chairman's earlier welcome to you. In your statement, you state that PwC's role in many of these meetings was to obtain, analyse and summarise information from the banks. What was the response to PwC on liquidity, loan exposure and provision of assessments to ... from the other participants on the 28 September meeting?
Mr. Denis O'Connor:
Okay, I will start this. On liquidity, the bulk of our work at that stage was done on liquidity. As you probably are aware, the ... as deposits were up for maturity on the banks, they were ... they were not being rolled over, so a number of Irish banks had significant liquidity issues, particularly coming up at the end of September, which was the quarter end or half-year end in some of the cases. So the information that we had compiled over the previous number of days from the banks' records emphasised to the regulator - and they were participants in the meeting - that this was a big issue and a contingency plan would have to be put in place ASAP. We were looking at a good few ... into €8 billion or €10 billion outflows in a number of days, and that was happening at the end ... in three days' time.
Sean Barrett (Independent)
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And how did they react, Mr. O'Connor, when you informed them of your opinion?
Sean Barrett (Independent)
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Because you only had - what nine days, wasn't it - to come up with all that information? I think you said the first meeting was on 19 September and you ... and you reported back to them on the-----
Sean Barrett (Independent)
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-----on the 28th.
Sean Barrett (Independent)
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And, I mean, we would've had in earlier evidence concerns about the St. Patrick’s Day massacre and, you know, knowledge about the CFD purchases and so on, so I’m really trying to find, you know, did they need you to confirm what they already knew or were they surprised when you submitted your report?
Mr. Denis O'Connor:
I don't think they were surprised, but it was confirmation of what they knew and it was also looking at the outlook for the next number of days which was emphasising that the ... as deposits were up for, up for renewal, if they were not rolled over at that stage - there were no corporate deposits more or less being rolled over - what they had been told by the banks was going to happen.
Sean Barrett (Independent)
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Was there a sense of urgency?
Sean Barrett (Independent)
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They were really worried by that state.
Sean Barrett (Independent)
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And, were there views expressed by IFSRA that you can recall from those meetings?
Mr. Denis O'Connor:
Everybody, everybody was offering their views at the time around the table but the main issue was concern. Northern Rock episode had happened over the last number of weeks, there were people queuing on the streets to take out their money from deposits, that was what the Government, or the Department, wanted to avoid at all costs, so they had to put in place some plan that would give confidence to the whole system.
Sean Barrett (Independent)
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Yes. The Department of Finance, what contribution did they make to those meetings?
Ciarán Lynch (Cork South Central, Labour)
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Which was what?
Ciarán Lynch (Cork South Central, Labour)
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Okay, right so.
Sean Barrett (Independent)
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The NTMA had concerns about putting any of the pension funds on deposit in Anglo. Was ... did they feel vindicated or did they say anything to that effect?
Sean Barrett (Independent)
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Yes, but what was their contribution because they seem, within the public sector, it was seen as somewhat further away, I suppose, than some of the other bodies that you were meeting with.
Sean Barrett (Independent)
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And the Taoiseach's Department, were they represented on that ... on that group that you reported to?
Sean Barrett (Independent)
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So, because of the seriousness it was decided to, to extend the exercise to all the six banks, was that the ... that was the decision on that day was it?
Sean Barrett (Independent)
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So there was an interval between the ... at the end of Atlas 1 and the beginning of Atlas 2.
Sean Barrett (Independent)
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I see, but there was the meeting on 28 September where all the other-----
Sean Barrett (Independent)
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And were you involved in any of the discussions about the Government guarantee?
Sean Barrett (Independent)
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Did they ask you for your input, given all the up-to-date information you’d provided, or guidance, on the form of the guarantee?
Sean Barrett (Independent)
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Thank you. Now, in your statement you also say that you made comments and observation about possible asset write-downs and scenarios:
[T]hese were for indicative purposes only. And we did not seek to "mark to market" property assets in the present economic environment (where the market for property assets is largely illiquid); in that context it is difficult to forecast the outturn of any immediate short term assets, sales or asset developments.
Did that detract from the exercise? You knew that they were heavily concentrated, as you reported, in a small number of borrowers and you knew they were heavily concentrated in property, so were we leaving out too much by not investigating what, what was going to happen in property and in, in preparing the scenarios?
Mr. Aidan Walsh:
I think the focus of our work was actually to get a lot of detail behind the top 20 connections so in any one connection, there could be hundreds of loans and hundreds of properties providing collateral for that individual loan. So, the focus of our work was very much on commercial property loans and development property loans and getting as much detail behind those and helping to aggregate information in relation to connections and connections could ... loans could be out in a range of different names, different special purpose company names, individuals' names, partners' names. And we sought to bring together all the loans that related to a controlling individual within either that company or partnership or individual name.
Sean Barrett (Independent)
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But if you describe how the two scenarios that you added to the information you collected, how were they put together?
Mr. Denis O'Connor:
At one of the meetings in the Department of Finance, there was a discussion on the assumptions the banks had made themselves. The banks ... originally they had two assumptions on what could happen going forward and it was felt that maybe those assumptions were not hard enough. So, there was a discussion among all the parties at a meeting in the Department of Finance, "Maybe we will do two extra assumptions or scenarios." And based on that discussion, where everybody chipped in, scenario 1 and scenario 2, as outlined in page 98 of our report, were compiled. The main discussions were around land and-----
Mr. Denis O'Connor:
Land particularly, either zoned or unzoned. And the discussion there was for unplanned land, we would write down 45% over three years - 15% in year 1, year 2 and year 3 - and for land with planning, it was written down by 10% per annum over three years. They were things were added on. The amounts involved were not as large.
Sean Barrett (Independent)
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Chairman, could we refer to Vol. 1, the PwC core documents, on page 5, please? It will come up on your screen, gentlemen.
Sean Barrett (Independent)
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It's in your own green book as well. Looking at those, would it be fair to say that - on page 5 - that the institutions estimated a loss of ... it's not totalled but it starts with AIB thought it would be €2 billion and so on. That comes to €5.157 billion if I added up correctly. Then scenario 1 thought it would be €8.6 billion and scenario 2 thought it would be €10.3 billion. The concerns would be that while you had brought very important information to those meetings, this is way short of the eventual reality of the €64 billion. So, where did the scenarios come from given that they were so far short of what happened? And could I add to that? When the former Taoiseach, Mr. Cowen, was giving evidence - I don't know if you saw his presentation - he said on paragraph 25, the PwC analysis was "hopelessly optimistic" and certainly did not envisage the crisis to develop in the way that it subsequently did. So, those were scenarios within the banks. They still had no idea that we were headed towards the €64 billion and the inquiry we're conducting today.
Mr. Denis O'Connor:
-----and you've added them up there for €8 billion and €10 billion. That's for a year. The scenarios were for year 1, year 2 and year 3 so if you multiply scenario 2 by three years, it's over €30 billion. And the other material bit of evidence that you need - this was done before the capital ratios in the banks increased from 4% to 10%, which is a significant increase, and also this was one year in advance of actually NAMA happening where the loans were written down to market. So, our work was done before NAMA, before tier 1 capital ratios increased from 4% to 10%. And also, there were a number of other issues like the amount of equity in the loans, which we had assumed was equity, wasn't really equity. It was actually borrowed from a different bank or a different part of the same bank. And the banks themselves were relying on personal guarantees of the borrowers and those personal guarantees proved not to have any value.
Mr. Aidan Walsh:
Just, I would like to add to that, is that these scenarios were done in October 2008, which was around the time of the budget for the following year. And that budget was framed against assumptions that GDP would decline by 1% in 2009 and unemployment might rise to 7%. That was consistent with the outlook from the third quarter report from the Central Bank of the same time. The outturn for 2009 was that GDP declined by something ... 7% and unemployment rose to 15%. So the, the economic outlook in official documentation at the time was far more benign than the recession that evolved in Ireland over the subsequent two years.
Sean Barrett (Independent)
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But you were starting to look into, I suppose what I might call this can of worms and you found-----
Ciarán Lynch (Cork South Central, Labour)
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Mind now Deputy, or Senator.
Sean Barrett (Independent)
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-----the ... a dilemma in the banks that they were unaware Chairman, I suppose, of just how deep these things were and you were discovering things like, on page 6 of the document, the top 22 exposures were ... 53% of them were in Anglo and 32% in AIB - a huge concentration in borrowers, a huge concentration in property. And you mentioned the optimistic view, but there were also people like Professor Niamh Brennan and Jim O'Leary, Morgan Kelly, notably, pointing out there had been 40 property bubbles which he studied in his ESRI article. Was none of this intruding into the conversations of the people whom you were dealing with, like the banks themselves, the Department of Finance, the NTMA perhaps and IFSRA? Did they not realise what was coming down the track?
Sean Barrett (Independent)
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So they actually believed that kind of banking was sustainable, with heavy concentration on property, heavy concentration on a small number of borrowers, high loan to deposits and high loan to value.
Sean Barrett (Independent)
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How do ... do accountants just record that or is there a wider need for the auditor to say "We really ... I would have doubts as well that this model of banking can continue as in the past"?
Mr. Denis O'Connor:
Well, to start, our team was not an audit team. We were totally independent from the auditors, so we didn't ... we weren't auditing the books. Like, our job, going back to basics, was more or less to go in and analyse what was in the loan books, be it concentrational risk or the number of individual borrowers, and assemble that information over the six banks and give it to the Financial Regulator. And that for him was new information, particularly over the six banks. And for all of us, the element of surprise when we saw ten borrowers more or less owing €18 billion was very significant, to everybody concerned at those meetings.
Sean Barrett (Independent)
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Would an auditor, say in a draper's shop down the country, would he just look at the books or would he say, "By the way, you have got a lot of 1952 suits at the back. I don't think you are ever going to sell those for anything remotely like what you paid." Do you do much of the latter? Would that form part of a typical audit?
Mr. Denis O'Connor:
As part of our work it was and we looked at loan-to-value ratios, we looked at the concentrational risk, we looked at what ... whether there was planning in the areas or not or whether there was two or three shopping centres in the one small patch of ground coming up. That was all looked at and that was factored into our assessment of the risk on those top 22 borrowers, whether it was high risk, lower risk or moderate risk. And that was all part of our discussion and our debate over those four or five weeks in October-November.
Sean Barrett (Independent)
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And I note, from the auditor's website, that your collective bodies ... there's a lot of advice to the Minister, Michael Noonan, who will be in here tomorrow, on what he should put in the budget. Now does that contrast with auditing of banks in Ireland and elsewhere, which didn't see a bank crisis coming down the line? Is there a traditional view of auditing that just adds up the numbers and says "That's what they are" or one that provides the wider economic advice like you were just talking about there - there are other shopping centres, you know, a lot of the stock isn't going to sell? Which, where does the balance lie in that?
Mr. Denis O'Connor:
Well, the audit is a statutory responsibility which is totally geared to the audit opinion. Our work was a factual report on the loans, on the concentration and on the risks. Our work finished up in a document of hundreds of pages. The auditor's work finished up in a two-page opinion, so they're totally different aspects of ... two different jobs completely.
Sean Barrett (Independent)
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And how did the recipients of your report on October 6 ... well, they'd since had the guarantee ... wasn't that it? But did they realise that huge changes would have to take place in the Department of Finance, the Financial Regulator, Central Bank and so on because you-----
Sean Barrett (Independent)
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----brought this right to the fore?
Sean Barrett (Independent)
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When you were choosing the scenarios, even just to model it, did anybody say "Let's go to a 50% reduction in property"?
Sean Barrett (Independent)
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Well, how did the 45% so badly prepare the Government for the eventual bill that came in? You know, you were talking about-----
Ciarán Lynch (Cork South Central, Labour)
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You're leading now, Senator. Back to yourself, Mr. O'Connor.
Sean Barrett (Independent)
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When you went to Atlas 3, that was having property people on board ... wasn't that right? Were they too optimistic about how property values would ... would fare in Ireland?
Sean Barrett (Independent)
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When you were looking at things like sectoral concentration and borrower concentration and so on, when you were looking at the banks, did you come across bank records which were short of what you would regard as optimal?
Mr. Denis O'Connor:
-----and from branch to branch. But it is fair to say that if a plc was looking for a €100 million loan or €200 million loan, you'd have a lot of files and due diligence being carried out. Where developers were looking for that type of money, the quality of information available to the bank was not as strong or not as good.
Sean Barrett (Independent)
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Because that was a NAMA complaint ... was ... when they ... why did NAMA have a 61% discount on one of the banks? Because they found record-keeping was poor. Was that something which a normal audit might be expected to discern in banks, whether their record keeping was good?
Mr. Denis O'Connor:
I think what NAMA found out was some of the security in place was not as expected. An auditor would not normally go into that level of detail on ... checking security.
Sean Barrett (Independent)
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Should there have been closer contact between the auditors and the regulators?
Sean Barrett (Independent)
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The lessons of this crisis for reforming the relationships between the auditors and the clients. Could you give us some views on those?
Sean Barrett (Independent)
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Does auditing and the relationship with the clients ... does auditing itself need to be reformed? Have we learnt lessons from what happened us in the years up to 2008?
Mr. Aidan Walsh:
Could I just say that neither Mr. O'Connor nor I are current practising auditors. Our colleagues gave evidence to the committee a number of months back to discuss audits particularly in the financial ... regulated financial environment. I don't have views in relation to what the auditor's role and how it gets regulated and I don't have views in relation to how that should evolve.
Sean Barrett (Independent)
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Thank you for that. Thank you Chair.
Ciarán Lynch (Cork South Central, Labour)
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Can I just wrap up one item there with you? Senator Barrett was dealing with some issues around 28 September and so forth and Mr. O'Connor and Mr. Walsh, you are both invited to respond relative to any information you might have on the following: was PwC involved in any discussions about the Government guarantee?
Ciarán Lynch (Cork South Central, Labour)
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Prior or post?
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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That was the earliest there?
Ciarán Lynch (Cork South Central, Labour)
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In or around.
Ciarán Lynch (Cork South Central, Labour)
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Okay, so, in or about-----
Ciarán Lynch (Cork South Central, Labour)
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Was that the only meeting that the guarantee was discussed or did you have others?
Ciarán Lynch (Cork South Central, Labour)
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Who would have been at those meetings?
Ciarán Lynch (Cork South Central, Labour)
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Would the Minister of Finance have been at-----
Ciarán Lynch (Cork South Central, Labour)
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The Taoiseach was at one-----
Ciarán Lynch (Cork South Central, Labour)
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-----and the Minister of Finance was at most of them, if not all, yes?
Ciarán Lynch (Cork South Central, Labour)
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Okay. So how many meetings in between, let's say it was the 24th approximately, up to the eve of the guarantee? By your recall, how many meetings were there that discussed the guarantee?
Ciarán Lynch (Cork South Central, Labour)
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How long did the meetings last in terms of discussing the guarantee?
Ciarán Lynch (Cork South Central, Labour)
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Hours?
Ciarán Lynch (Cork South Central, Labour)
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Okay. So the guarantee would have been discussed for-----
Ciarán Lynch (Cork South Central, Labour)
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So, how placed into the agenda of those meetings was the guarantee?
Ciarán Lynch (Cork South Central, Labour)
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Were you there to just provide information or were you there in a passive position or in a more engaged position in that regard?
Ciarán Lynch (Cork South Central, Labour)
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Providing information, okay. And what were the questions from Government in regard to information sought from you in regard to the guarantee and other matters?
Ciarán Lynch (Cork South Central, Labour)
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Okay. And what was the strategic options discussed?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Nationalisation of what?
Ciarán Lynch (Cork South Central, Labour)
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Which bank?
Ciarán Lynch (Cork South Central, Labour)
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Anglo. So there was discussion-----
Ciarán Lynch (Cork South Central, Labour)
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But the option of discussing Anglo, was it the ... sorry, the option of nationalising Anglo, can you confirm or not whether it was discussed?
Ciarán Lynch (Cork South Central, Labour)
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By whom?
Ciarán Lynch (Cork South Central, Labour)
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The whole meeting. Was the Taoiseach at that meeting?
Ciarán Lynch (Cork South Central, Labour)
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Okay. And was at any time the option of how prepared the Government were or the Department of Finance in terms of the nationalisation of Anglo, preparation of legislation, anything like that?
Ciarán Lynch (Cork South Central, Labour)
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Mr. Walsh, have you anything to add to that?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you very much. Deputy O'Donnell.
Kieran O'Donnell (Limerick City, Fine Gael)
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Welcome, Mr. O'Connor and Mr. Walsh. How many engagements in total have the PwC complete for the Financial Regulator, the Central Bank, financial institutions, the Government agencies, between '08 and up to '13, and I suppose, up to date?
How many engagements has PwC been involved in in relation to the banks, either on behalf of the Financial Regulator, the Government, the Central Bank, the National Treasury Management ... any Government institution or the banks themselves between ... since the guarantee, since just before the guarantee up to the current date?
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, specifically, your department, what's your remit? Are ye corporate services-----
Mr. Aidan Walsh:
Corporate services. Could I just say, we prepared today to come and discuss issues around our work for ... services we provided in the period September 2008 to January 2009 on the three Atlas reports. We've a very significant financial services practice across the firm and I ... we don't have detail in relation to the full range of assignments that the firm might have carried out-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes.
Kieran O'Donnell (Limerick City, Fine Gael)
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But, specifically, we'll say on ... we'll say, the ... take just the Project Atlas programme, right - what would have been the type of teams, the size of teams you would have had involved?
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes.
Kieran O'Donnell (Limerick City, Fine Gael)
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And at partner level, manager level, what would they break down at?
Kieran O'Donnell (Limerick City, Fine Gael)
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And the type of fees that you would've earned for Project Atlas, we'll say, for those three ... what was the total fees that ye earned for Project Atlas?
Kieran O'Donnell (Limerick City, Fine Gael)
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€1.6 million?
Kieran O'Donnell (Limerick City, Fine Gael)
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-----50,000, so in total, your total there would be-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Sorry.
Kieran O'Donnell (Limerick City, Fine Gael)
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€2.4 million. And that was the total fees for the overall Project Atlas, for all the work on Project Atlas.
Kieran O'Donnell (Limerick City, Fine Gael)
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For PwC work. And the ... the ... going back on the Project Atlas itself, right, you ... in your witness statement, Mr. O'Connor, you said that ... that, "The PwC scenarios [analysed were] based on a number of assumptions and other than [Irish Nationwide they], had not been reviewed by [the] management in the Institutions." Why were Irish Nationwide provided with a copy of the assumptions and not the other financial institutions? And what type of response did ye get from Irish Nationwide and what was your view on the scenario analysis? Do you believe it was aggressive enough, given subsequent PCARs reviews of the banks?
Kieran O'Donnell (Limerick City, Fine Gael)
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And this was in Project Atlas 2.
Kieran O'Donnell (Limerick City, Fine Gael)
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And three.
Kieran O'Donnell (Limerick City, Fine Gael)
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Just two.
Kieran O'Donnell (Limerick City, Fine Gael)
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And the only difference between two and three-----
Kieran O'Donnell (Limerick City, Fine Gael)
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With JLL, to come up with valuations. So, we'll say, Atlas 1 was a desktop general overview just dealing purely with Anglo and Irish Nationwide. Am I correct?
Kieran O'Donnell (Limerick City, Fine Gael)
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And ILP.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay. Atlas 2 was where, effectively, you brought in all the financial institutions - all six - and you looked at two stress case scenarios in there that you wouldn't have had looked at in Atlas 1. So were in ... and this is ... we're dealing with Atlas 2. And Atlas 3, you brought in Jones Lang-----
Kieran O'Donnell (Limerick City, Fine Gael)
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-----to look at valuations.
Kieran O'Donnell (Limerick City, Fine Gael)
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Fine. So, really, the substantive work was done in Atlas 2.
Kieran O'Donnell (Limerick City, Fine Gael)
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So, if we go into Atlas 2, tell me why Irish Nationwide were given sight of the assumptions and their views and the others weren't?
Mr. Denis O'Connor:
No, there's a slight misunderstanding there. All the ... all the banks got the assumptions to run the scenarios but they were down at more junior level - at operative level. Because Nationwide was so all-centralised, the people who got the assumptions were the management as well and they queried them and said they were just unrealistic, over the top, total mad, whereas the people in the other banks just actually ran the models for us.
Kieran O'Donnell (Limerick City, Fine Gael)
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The people in the other banks ran the models.
Kieran O'Donnell (Limerick City, Fine Gael)
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Where did it end up with Irish Nationwide? Where did-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Ye overruled them.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay. And can I . . . we'll say . . . the fact right that . . . and I'm reading from the summary report, Chairman, that was given on ... which was published on 20 February '09, and you state in ... in the summary, you state: "Under the PwC [it's page 37] highest stress scenario, Anglo’s core equity and tier 1 ratios are projected to exceed regulatory minima (Tier 1 – 4%) at 30 September 2010 after taking account of operating profits and stressed impairments." Now you said these took place on 17 November 2008. The two questions I suppose I want to ask: how do you reflect on that now with the fact that Anglo has cost the taxpayer over €30 billion that they’ll never see a red cent for? And, secondly, that when you reported on 17 November on Project Atlas 2 to the regulator, the Taoiseach of the day, Mr. Brian Cowen, came out two days later and he said:
The report confirms that all institutions reviewed are in excess of regulatory requirements as of 30 September 2008 [ the date the guarantee scheme was announced by Government] The PwC report demonstrates, under a number of stress scenarios, that capital levels in the covered institutions will remain above regulatory levels in the period to 2011. The Government's guarantee scheme has been successful.
The Government and the Taoiseach of the day relied on your report-----
Ciarán Lynch (Cork South Central, Labour)
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This is turning into a speech. I need the question, Deputy. You've gone on quite a bit.
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, can you comment on the fact that the Taoiseach of the day, two days after you gave him the Project Atlas report, made specific reference to your report in terms of stress case scenarios for loans as a basis underpinning the Government guarantee two months earlier?
Ciarán Lynch (Cork South Central, Labour)
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The question is made. Now I need time for a response. Mr. O’Connor and Mr. Walsh.
Kieran O'Donnell (Limerick City, Fine Gael)
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And what about the fact that the taxpayer has ended up forking out €30 billion for Anglo Irish Bank on the-----
Ciarán Lynch (Cork South Central, Labour)
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That’s a fact. Can I get a question from you?
Kieran O'Donnell (Limerick City, Fine Gael)
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No, well, then can I ask you can you comment on the fact that you have stated in your report that under your highest stress case scenario on 17 November, Anglo would cover its tier 1 capital requirements and wouldn’t require taxpayers’ money but, in fact, it ended up €30 billion?
Kieran O'Donnell (Limerick City, Fine Gael)
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But you also said-----
Ciarán Lynch (Cork South Central, Labour)
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Deputy, I don’t want to be too intrusive now but I have to allow the witness the same amount of time at least to yourself that you have taken for questioning. Mr. O’Connor.
Mr. Denis O'Connor:
Tier 1 ratio before 10% is a big difference and this is all before NAMA came in where there was an asset write-down of 60-odd% in Anglo’s banks, which we hadn’t foreseen.
Kieran O'Donnell (Limerick City, Fine Gael)
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Can you explain ... you made reference earlier to Senator Barrett that the capital that was in ... I don’t know if you were speaking specifically about Anglo or the other banks, that what was being reported as equity wasn’t actually equity, that here was an element of loans from other banks and subsidiaries. Can you expand on that?
Kieran O'Donnell (Limerick City, Fine Gael)
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Explain that because that’s – oh, you were talking about the equity on the loans.
Kieran O'Donnell (Limerick City, Fine Gael)
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So effectively ... and when you looked at it further were there situations whereby there was nearly 100% gearing across the board on all loans?
Mr. Aidan Walsh:
I wouldn’t say across the board on all loans. This was very much a loan-to-loan situation and there were marked differences between individual borrowers and individual loans in terms of loan-to-values and how the equity portion was funded. I think one of the issues we found was that while money might have been borrowed from the commercial bank, you might find a situation where the related private bank had lent money to fund the equity portion of that loan. Or a different bank had funded the equity portion of that loan.
Kieran O'Donnell (Limerick City, Fine Gael)
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Can I go back on this ... the ... looking at the stress scenarios on the loans in Project Atlas 2? What ... give me the basis of the assumptions in the worst-case stress scenario in Atlas 2? What was your worst case? What were your assumptions?
Kieran O'Donnell (Limerick City, Fine Gael)
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That would mean the value of the property would fall 15-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Explain for a layman. What do you mean by saying that the 15 basis points for mortgages?
Kieran O'Donnell (Limerick City, Fine Gael)
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But did ye build into your scenarios in terms of projected fall in the value of property?
Kieran O'Donnell (Limerick City, Fine Gael)
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But in terms-----
Kieran O'Donnell (Limerick City, Fine Gael)
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But, in layman's terms, in terms of looking at your stress case scenarios and potential losses, and in the worst-case stress scenario, what did ye project property would fall by, commercial property?
Kieran O'Donnell (Limerick City, Fine Gael)
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But you did a worst-case scenario.
Kieran O'Donnell (Limerick City, Fine Gael)
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But it's the highest stress. What will then ... in the highest stress scenario, what did you provide for that in terms of fall in the price of property? Commercial land.
Kieran O'Donnell (Limerick City, Fine Gael)
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And that was land. What about property itself?
Kieran O'Donnell (Limerick City, Fine Gael)
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So, 4%. And do you believe that was adequate, considering the fall in property-----
Ciarán Lynch (Cork South Central, Labour)
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Mind now, ask the question, don't give a judgment.
Kieran O'Donnell (Limerick City, Fine Gael)
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No-----
Ciarán Lynch (Cork South Central, Labour)
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Was it sufficient, Mr. Walsh?
Mr. Aidan Walsh:
In hindsight - and here we are seven years on - no, that level wasn't sufficient. It was significantly higher than was being projected by the banks themselves at the time and I'd emphasise, again, that it was done as a time when the Government's own forecasts for the national budget was a 1% decline in GDP and a 7% rate of unemployment-----
Kieran O'Donnell (Limerick City, Fine Gael)
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But, Mr. Walsh-----
Kieran O'Donnell (Limerick City, Fine Gael)
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But, Mr. Walsh, ye took a 45% expected reduction in development land without planning. Over what period of time was that for, did ye think?
Kieran O'Donnell (Limerick City, Fine Gael)
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And you took it ... for land with planning, you took 30% over three years. But then, in terms of commercial property itself, you took 4%, much of that which might have been unlet, maybe partially built; 4% would appear to be ... would you not feel it's a very small figure?
Kieran O'Donnell (Limerick City, Fine Gael)
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But, looking at it, even at that moment in time, where liquidity had dried up, the banks themselves were doing no further lending, surely 4%, right ... and I would assume the majority of the commercial loans, if you group all corporate commercial loans together, the majority of those would have been in the commercial area, correct? We'll say, the majority.
Kieran O'Donnell (Limerick City, Fine Gael)
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So, exponentially, the loss provision that you would have been calculating, the fact that you were only taking 4% on the commercial loan book, would give an artificially low projected loss. Is that fair comment?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay, so you accept that. Can I ask, Mr. O'Connor, you were at various meetings on the ... there's a note, Chairman, on ... it's ... I'm going to a previous volume, but I'd say Mr. O'Connor would be familiar with it.
Ciarán Lynch (Cork South Central, Labour)
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First of all, ask the question is he familiar with it, and then we'll talk about it.
Kieran O'Donnell (Limerick City, Fine Gael)
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Are you familiar with it? It's a note, a minute of a meeting of a meeting of ... 'twas either the 25th or the 28th, at which you were present at the meeting. They have you down as "Dan O'Connor", but I presume it's Denis O'Connor.
Kieran O'Donnell (Limerick City, Fine Gael)
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Same man, right. Are you Dan or Denis?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay, we'll call you Denis.
Ciarán Lynch (Cork South Central, Labour)
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We're meeting you all over again.
Kieran O'Donnell (Limerick City, Fine Gael)
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Chairman, it makes reference ... are you familiar with the note?
Kieran O'Donnell (Limerick City, Fine Gael)
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Can I just make reference to it and ask you ... the Taoiseach was present and the Minister for Finance was present at that meeting. Was that meeting on 25 or 28 September?
Kieran O'Donnell (Limerick City, Fine Gael)
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The 25th, right. Now, at that meeting, it makes reference, "[David] Doyle noted [the]Government would need a good idea of the potential loss exposures within Anglo and INBS - on some assumptions INBS could be 2bn after capital and Anglo could be 8½" billion. Were ye asked to do any further work on Anglo and Irish Nationwide on the foot of those comments by David Doyle?
Kieran O'Donnell (Limerick City, Fine Gael)
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Were you asked for your comments, to give your opinion on the night, or your observation as to whether Anglo and Irish Nationwide were solvent at that time?
Kieran O'Donnell (Limerick City, Fine Gael)
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Did it come up for discussion at that time?
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes.
Kieran O'Donnell (Limerick City, Fine Gael)
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Do you believe, yourself, that Anglo and Irish Nationwide with solvent on the night of the guarantee?
Ciarán Lynch (Cork South Central, Labour)
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Are you able to answer the question?
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, I'd say Mr. O'Connor is a highly qualified man. I'd say-----
Ciarán Lynch (Cork South Central, Labour)
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Let the witness determine his own credit-----
Kieran O'Donnell (Limerick City, Fine Gael)
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With due respect, Chairman, right, Mr. O'Connor was the only third-party person that would have looked at the balance sheets of the banks and their loans in the nine days up to - well, not quite nine, but certainly up to six or seven days up to that date-----
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Mr. Denis O'Connor:
On 30 September, after the guarantee ... You can define solvency by two ways. Can a company pay its bills when they fall due? Does its assets exceed its liabilities? After the guarantee, it could pay its bills as they fell due and, at that point in time - we cannot recognise any future losses at a balance sheet date - so its assets exceeded its liabilities.
Kieran O'Donnell (Limerick City, Fine Gael)
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Prior to the guarantee being put in place, was Anglo and Irish Nationwide solvent?
Kieran O'Donnell (Limerick City, Fine Gael)
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Sure that's why I'm asking the question.
Mr. Denis O'Connor:
Well, the information we prepared for the 28 September meeting of the NTMA would have indicated that the deposits were not rolling over or expected to roll over on 30 September and future weeks, which would have left the banks in a very difficult position where we recommended to them a contingency plan had to be put in place.
Kieran O'Donnell (Limerick City, Fine Gael)
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And what contingency plan did you recommend be put in place?
Kieran O'Donnell (Limerick City, Fine Gael)
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So, technically, prior to the night of the guarantee, technically, was Anglo and Irish Nationwide Building Society - I suppose, Anglo in particular - was it insolvent?
Kieran O'Donnell (Limerick City, Fine Gael)
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And if you'd been asked on that meeting of 25 September whether Anglo or Irish Nationwide were solvent, what response would you have given?
Kieran O'Donnell (Limerick City, Fine Gael)
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So therefore, technically, prior to the guarantee it wasn't solvent, they were insolvent.
Kieran O'Donnell (Limerick City, Fine Gael)
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Can I just go back to the ... by the end of 2013, €64 billion in the six financial institutions, can you comment on the capital adequacy of the Irish financial institutions, risk over-concentration in property and land and development, arrears identification, interest roll-up? And, in your PwC report, you stated that - this is core document Project Atlas 1, Vol. 1:
The latest available capital information for the Banks shows current core Tier 1 ... ranging from 5.9% [in Anglo] to 8.6% [in Irish Nationwide] ... at 30 September before any stress testing or scenario analysis ... The table [below left] sets out the Banks' estimated capital ratios and risk weight[ings] as at the 30 September.
The table on the right sets out State investment. So, I suppose, the question is, how do we get from a point with Project Atlas 2 ... Project Atlas 1 ... that you were saying that the banks had ... would have sufficient core tier 1 to absorb any losses? Take ... and I am factoring into that the lower core tier 2 that's required - I think, it was at 4%; it went to 10% in future time periods. Even with that situation, how do we get to a point where €64 billion went into the six covered financial institutions?
Mr. Denis O'Connor:
On page 81, the page you have up there in front of me, what we ... all we highlighted there was the bank's management accounts position at the end of August or September for each of the banks. That's what the accounts were actually ... were saying. We hadn't done any work at that stage.
Kieran O'Donnell (Limerick City, Fine Gael)
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No work. And did you at all, when you had initially looked at the ... in Project Atlas 1, you reported on that on was it 27 September, am I correct?
Kieran O'Donnell (Limerick City, Fine Gael)
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Second week of October. Did you advise the Financial Regulator and the Government that there was a need for more in-depth review of the loans of the banks?
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes, but you still relied on management for Atlas 2. I mean, you relied, we'll say, on the ... did ye do any, I suppose, drilling down that, we'll say ... the fact that, subsequently, we'll say, there was results done by the Financial Regulator back in 2011 ... 2010-11, where it showed that the banks needs €24 billion. The question I'm asking is: being the professionals that you are, did you advise the Financial Regulator that the type of work that was done was insufficient?
Mr. Aidan Walsh:
We did a very significant amount of work in Atlas 2 in drilling down into the top 50 loans by jurisdiction and the top 25 development loans - sorry, connections - which would have been into hundreds of loans and hundreds of properties, and we identified loans and connections that we regarded as higher risk, medium risk or lower risk. We had a lot of specific comments in relation to individual developers and collateral.
Just to your point in relation to the Financial Regulator's work in 2011, in my view, the world had changed fundamentally between 2008 and 2011. NAMA had been instituted, the properties were being transferred over so they were now being marked down at mark-to-market basis, the capital adequacy ratios had increased from 4% to 10%, unemployment had gone to 15%, mortgage books were starting to experience significant stress and default rates, and, by 2011, we were very close to the very bottom of the property cycle.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay, Mr. Walsh.
Ciarán Lynch (Cork South Central, Labour)
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Deputy O'Donnell, I will let you back in again in the wrap-up.
Kieran O'Donnell (Limerick City, Fine Gael)
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Is it fair comment that the 4% potential reduction ... fall in the value of commercial property that you sought from '08 to 2011 in Project Atlas 2 grossly understated the fall in property ... commercial property as it happened over that three-year period, and if you had put in any ... what level of fall in ... in property prices would have given rise to a situation where you would not have been able to make the statement that the tier 1 ... the core tier 1 levels in the banks were sufficient to cover any impairment losses?
Ciarán Lynch (Cork South Central, Labour)
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All right. I will bring you back in at the end, Deputy, and to wrap up, Mr. Walsh.
Kieran O'Donnell (Limerick City, Fine Gael)
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I suppose, the question I'm asking-----
Ciarán Lynch (Cork South Central, Labour)
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I am sorry now, Deputy. I will bring you back in the wrap-up again.
Kieran O'Donnell (Limerick City, Fine Gael)
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It is a very simple question, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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You can come back to it. It doesn't matter how simple the question is. The witness must respond to the earlier question.
Kieran O'Donnell (Limerick City, Fine Gael)
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No, but, Chairman, I just want ... It's very simple. The 4 ... what level, if it had been 6%, 10%, ... at what level would all the banks have breached their core tier 1 requirements and you would have stated that the banks needed capital?
Ciarán Lynch (Cork South Central, Labour)
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Mr. Walsh, and without interruption, and then I am moving on. Mr. Walsh?
Kieran O'Donnell (Limerick City, Fine Gael)
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At 4%?
Kieran O'Donnell (Limerick City, Fine Gael)
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So ... but you didn't say that.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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We will come back to it in the wrap-up, Deputy. I'm going to be more tightly disciplined with time today, now.
I just want to deal with a couple of matters before I bring in the ... the leads have completed but before I move on to the other questioners, could one or both of you, Mr. Walsh and Mr. O'Connor, explain as to why the Government announced on December '08 that it intended to inject €1.5 billion into Anglo?
Ciarán Lynch (Cork South Central, Labour)
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Could either of you explain as to why the Government announced in December '08 that it intended to inject €1.5 billion into Anglo?
Ciarán Lynch (Cork South Central, Labour)
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Okay. So there was no analysis or services, to your knowledge, that PwC gave that informed the Government to come out with that announcement.
Ciarán Lynch (Cork South Central, Labour)
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Okay. As we know, that never transpired that the ... Anglo was nationalised practically within a month of that announcement actually happening so there wasn't any injectment of cash; it was a nationalisation "prospacy". But you're unaware as to what informed the Government making that announcement. Is that your testimony?
Ciarán Lynch (Cork South Central, Labour)
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Okay. All right, fair enough.
I just want to deal with some matters regarding to loan selection samples, the decision criteria and concentration risk for a moment before I bring in the next witness. The two relevant documents to this, you would be familiar with. There's your own statement, Mr. O'Connor, and there's the Project Atlas 2, Vol. 1 - the working draft of that. And in that, it says:
The top 22 exposures across the six institutions we have received total €25.5 billion, of which €13.7 billion [that's 53%] is in Anglo and €8.1 billion [that's 32%] is in AIB. The top ten exposures are each in excess of €1 billion, accounting for €7.5 billion [that's 17%] of the top 22 exposures.
It then goes on to say:
78.2% of Anglo's book is lent to property companies, 5.5% for personal investments and 6.3% to hotels. 42.2% of Bank of Ireland's book is in home mortgages. It appears that concentration limits may be exceeded in a number of cases [as the figures would have indicated as I've read out].
In your management discussions, what was the background and rationale for the major lending positions and the level of loan provisions from this examination?
Ciarán Lynch (Cork South Central, Labour)
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I said, in your management discussions, what was the background and the rationale for the major lending positions and the level of loan provisions in this regard?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Was it evidential based or was it, kind of, "Well, I know you and you're grand, I will give you a few bob", or was it that "We have a long-standing history with this guy and he always brings in the bacon?" What was the rationale underpinning it?
Mr. Aidan Walsh:
The provisions at the time were based on loans that had gone into default. There were no expected future losses for loans that had not gone into default booked and that was in accordance with the accounting standards at the time. So the provisions was based on default ... loans in default rather than an economic view or judgment in relation to what might transpire over time.
Ciarán Lynch (Cork South Central, Labour)
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In that regard, was there a view that loan loss provisions were not sufficient for relevant loans?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Could you give us an example of that robustness?
Ciarán Lynch (Cork South Central, Labour)
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And were you challenging that position with the bank? And could you, maybe, give us an example of that discourse as to how that went back and forth?
Ciarán Lynch (Cork South Central, Labour)
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Okay. When NAMA came before the committee, they gave an example of the lending model that was in place, and I'm just putting this out to see would ... did it kind ... was this related to the context of those conversations. Whereas where Mr. Daly says - he gives an example of the loan modelling - a developer would come in, they would borrow to develop a particular site.
The equity in that would increase because there was, kind of, very vast property inflation at the time. So when that was complete, in fact, the value of the property would be probably in excess of the original loan and there would be a significant degree of equity. The developer would then go for another loan and the securitisation and the deposit would be based upon the equity in the earlier ... there was no cash transaction-----
Ciarán Lynch (Cork South Central, Labour)
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-----there was just this equity. Is that the type of discussions that you had in regard to ... well, how the loans were securitised and supported? Was it in that area or somewhere else?
Mr. Denis O'Connor:
That'd be part of discussions. What Mr. Daly would have described is accurate; that would have happened. The one thing we were surprised at, as I said earlier on, was that if a plc was to go in for ... looking for a loan for €100 million, there'd be a huge amount of work, due diligence, everything else-----
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Okay. And what would happen? Maybe that's something to the conclusion that we might come to in regard to how loans are dealt with in the future. And so just continuing that line of questioning, did PwC suggest that the greater loan book granularity should be pursued to view another 50 loans or was this at the suggestion of the ... of IFSRA or another party, given the outcome of the top 20 loan reviews?
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
The regulator said that you-----
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
-----needed to-----
Ciarán Lynch (Cork South Central, Labour)
Link to this: Individually | In context | Oireachtas source
-----drill down further-----
Ciarán Lynch (Cork South Central, Labour)
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-----in that regard. And was that done?
Ciarán Lynch (Cork South Central, Labour)
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And what ... did it reflect something different or something new or much the same?
Ciarán Lynch (Cork South Central, Labour)
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Very consistent.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Moving on then to ... I just want to deal with the matter of ... were you aware ... and this comes back to your own statement again, Mr. O'Connor. Were you aware of summary information from PwC reports was likely to be discussed by Government officials from the Central Bank, the Financial Regulator, the Department of Finance, etc., at meetings taking place on 29 September 2008?
Ciarán Lynch (Cork South Central, Labour)
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Was that a surprise to you?
Ciarán Lynch (Cork South Central, Labour)
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Okay. When ... in the information that you had been providing, did you know that it might be used in that regard or had you any indication that these discussions would, kind of, find themselves falling into this sort of environment?
Ciarán Lynch (Cork South Central, Labour)
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If you-----
Ciarán Lynch (Cork South Central, Labour)
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Yes. If you knew that information and data and analysis that you were providing to Government and other services had that stop on its journey - and I do want to take on board the speed and all the rest of it - would that have informed how you would have presented your information or would you have considered that you would have, kind of, maybe reshaped it or focused on other areas if you knew it was going to lend itself to a discussion like that?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Other than the option of nationalisation, which we discover ... discussed earlier, was ... what were then other strategic options available to the Government before 30 September 2008?
Mr. Denis O'Connor:
I can't remember. There was a part guarantee, full guarantee, nationalisation, issue new shares, ordinary shares, preference shares, that type of ... wide-ranging discussions that Merrill Lynch primarily were bringing to the table at that stage, mainly how you get more capital and more liquidity and equity into the banks.
Ciarán Lynch (Cork South Central, Labour)
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Okay. All right. And just on ... coming back to your own statement there, Mr. Walsh, in which you say: "Following the granting of the Government Guarantee on 30 September 2008, our preliminary work on collateral that could be provided to the Central Bank in support of ELA was not pursued." In that regard, could you tell the committee why were PwC requested to draw up a list of loans that would be used as collateral?
Ciarán Lynch (Cork South Central, Labour)
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Which bank was that?
Ciarán Lynch (Cork South Central, Labour)
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Which bank was that?
Ciarán Lynch (Cork South Central, Labour)
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Anglo, okay, yes.
Ciarán Lynch (Cork South Central, Labour)
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Okay. And in your discussions with the Financial Regulator, did you ever express material concerns about additional liquidity and quality of the supporting collateral?
Mr. Aidan Walsh:
We had very factual discussions in relation to the loans that were being put forward as possible collateral, the nature of the loans, the nature of the collateral supporting those loans, the work that could be done to ensure that they hadn't been secured elsewhere and to ensure that the security for those loans was in place properly.
Ciarán Lynch (Cork South Central, Labour)
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And-----
Ciarán Lynch (Cork South Central, Labour)
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And, as that process progressed, it would then go on to the next stage, and in that regard, did the Central Bank and/or the Financial Regulator advise why the work on loans suitable for emergency liquidity assistance, ELA, were not pursued?
Ciarán Lynch (Cork South Central, Labour)
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Okay. The reason why I'm asking you is to, kind of ... to expand upon why that wasn't pursued is that the Government subsequently gave a guarantee which was a contingent commitment.
Ciarán Lynch (Cork South Central, Labour)
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This is the State standing behind its banks and it's not a funding instrument.
Ciarán Lynch (Cork South Central, Labour)
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There's no cash transfer. As we heard comments at the time, this was not going to cost ... it'll be the cheapest and all the rest of it. So why were you looking at ELA? And how can you square that off to us that you were in the area of looking at ELA and ELA then never ended up as an option?
Ciarán Lynch (Cork South Central, Labour)
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Because of the guarantee or because of-----
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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And maybe you could distinguish what the difference would be, for the committee, the State standing behind the bank created a certainty that created liquidity. If ELA had come in, what would have been different there in terms of cost to the State and other factors?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Would the State have been exposed through the ELA in the same way?
Ciarán Lynch (Cork South Central, Labour)
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Okay. You wouldn't be able to give us, to the best of your ability, an analysis of the different exposures from ... one from the guarantee and one from seeking the ELA.
Ciarán Lynch (Cork South Central, Labour)
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Maybe just to arrive to the fundamental of it - and this is my very last question - by the State giving the guarantee, who ends up with the responsibility of the debt?
Ciarán Lynch (Cork South Central, Labour)
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Okay. By the bank being afforded the ELA, who ends up with the responsibility of any liability on the ELA?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you. Deputy Michael McGrath.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you very much, Chair. You're very welcome, Mr. O'Connor and Mr. Walsh. Can I just take you back to the first engagement that you had with the regulator in September 2008? Can you advise the committee when PwC was first approached and by who? And what reason were you given for being contacted at the time?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. So the meeting happened the following day following the initial contact. Was there any procurement process involved for the appointment of PwC?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. And can you comment if you were requested for any input into the scope and specification of the engagement or was this provided to you by the Financial Regulator at the time?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure, and were there a number of drafts of the letter of engagement between the regulator and your firm?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay and I think you said that the overall fees for the three Project Atlas reports was €2.4 million. The Minister has previously put a figure of €3.8 million on the record in the Dáil. Is that accounted for by fees to Jones Lang LaSalle? Or can you account for that?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, so the €2.4 million you quoted is excluding VAT.
Michael McGrath (Cork South Central, Fianna Fail)
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And can you comment on what other fees PwC earned during the banking crisis by way of due diligence on AIB, Bank of Ireland, during the various recapitalisation programmes that took place in the subsequent couple of years? Do you have the overall picture?
Mr. Denis O'Connor:
I don't have the overall ... like, I don't have the overall picture here. You're correct, we did due diligence for the pension funds on AIB and Bank of Ireland as part of the preference share investment. We did work on Anglo for the Department of Finance in '09. We did work on INBS and EBS as part of a proposed merger of the building societies that didn't happen in '09 or '10-----
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. Can I ask you, Mr. O'Connor, just to clarify a comment you made to Deputy O'Donnell on the issue of whether Anglo was solvent on the night of the guarantee? And I think you used the measure of whether it was able to meet its obligations as they fell due, as opposed to the measure of whether its liabilities exceeded the true value of its assets. Can you just clarify your statement that Anglo, in your view, was insolvent at the end of September 2008?
Mr. Denis O'Connor:
Well, the Anglo projections they had produced themselves for management would have indicated that it couldn't pay its bills as they fell due without some contingency plan or plan on 30 September. The assets exceeded liabilities because you can't book any future losses at that point in time.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes. So you were using a liquidity measure of solvency, as such-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----in arriving at that conclusion.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Can I just ask that page 5 of the core booklets would again be put up? And, so this is Project Atlas No. 2. And just so that we're all understanding these figures correctly, the box on the top left, looking at the impairment basis points. So, for residential mortgages scenario 1, 15 there is actually 0.15%.
Michael McGrath (Cork South Central, Fianna Fail)
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So, similarly, development land without planning permission is 10% in scenario 1 and 15% in scenario 2.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes. Just so we're getting our zeros correct. And this was the assumption for scenario 1 and scenario 2 for one year.
Michael McGrath (Cork South Central, Fianna Fail)
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And it was clear in the report that the overall assessment was based on a repeat of that for three successive years.
Michael McGrath (Cork South Central, Fianna Fail)
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That was clear in the documentation because it's not clear in the extracts we have here.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes, okay. So the projection for development land without planning permission was, under scenario 1, that it would fall by 10% in 2009 and 15% in 2009 under scenario 2. Is that correct?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay and that that would repeat for three years, so a total fall, in development land without planning of 30% or 45%. And on the area that Deputy O'Donnell zoned in on - commercial/corporate, so scenario 1, a 1.5% drop in commercial property values in 2009, and scenario 2, a 1.25% drop in 2009.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Yes, these are impairments of the loan balance.
Michael McGrath (Cork South Central, Fianna Fail)
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So, bringing you to either 4.5% or 3.75% of full provisions. So, I think in your discussion there, you are accepting that overall, given what happened subsequently, those impairment levels - which were not intended to be a forecast, and that is clear in your document - ended up hopelessly underestimating the true extent of the impairment in that area.
Mr. Aidan Walsh:
That is correct but also the economic environment was significantly worse than people involved in this work, or involved in working with us, anticipated at that time. And I'll go back to the 7% fall in GDP and the 15% unemployment rate that transpired through 2009-2010, compared to what the Government's own forecasts and the Central Bank forecasts were-----
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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When did the tier 1 capital requirement go from 4% to 10%?
Michael McGrath (Cork South Central, Fianna Fail)
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Because you've referred to it a number of times.
Michael McGrath (Cork South Central, Fianna Fail)
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2010, so it wasn't in any way relevant at the time when-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----when these reports were being compiled? And when did PwC conclude that additional capital would have to be put into Anglo Irish Bank?
Mr. Denis O'Connor:
We didn't conclude ... we didn't conclude on that. Anglo ... the board of management liaised with the Department of Finance, the regulator. PwC were not involved in those discussions. After our Atlas 1, 2 and 3 reports on Anglo we didn't do much more work on that until some specific assignments on the business plan, etc., back in 2009, I think.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, but even under the most adverse assumptions that you made, your analysis was projecting at that time that Anglo would not need any additional capital in order to meet the minimum capital requirements.
Michael McGrath (Cork South Central, Fianna Fail)
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Through 2009 and 2010.
Michael McGrath (Cork South Central, Fianna Fail)
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Well then, just go to that excerpt on page 37, which isn't on the system, of the summary document which has been published - that under PwC highest stress scenario, and it was core equity and tier 1 ratios are projected to exceed regulatory minima 4% at 30th of September 2010, after taking account of operating profits and stressed impairments. So, under the highest stress scenario, you were projecting that Anglo would not need any additional capital and would still be in excess of the minimum capital requirements two years forward, using the assumptions that you were working under. Is that correct?
Michael McGrath (Cork South Central, Fianna Fail)
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And you make it clear that you were sticking with the four of the five assumptions that management had made in their assessments, they're in the previous page of that document. And assumption one is, Anglo will continue to generate core operating profits in line with existing profit levels, despite the current downturn. So your projections were based on that assumption, that Anglo would continue to be profitable going forward into 2009 and throughout 2010. You accepted that management assumption.
Ciarán Lynch (Cork South Central, Labour)
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Finish up now, Deputy.
Michael McGrath (Cork South Central, Fianna Fail)
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Thanks, Chair. Finally, one of the reasons that you cited earlier for the true picture ending much worse was around the issue of loan security, security not being properly tied down, cross collateralisation, personal guarantees not being worth a whole lot when the bank tried to pursue them. But when did you first identify any concerns in that area, because even going back to the letter of engagement for Atlas 1, point No. 9 in appendix A, you were to select a sample of the customer loan balances at the end of August '08 on the large exposures, and review the loan files, discuss the contents of these files with members of management. And then subsequently, in October, letter of engagement for Atlas 2, you were required to again review the loan balances at the end of September '08 for the top 20 this time-----
Ciarán Lynch (Cork South Central, Labour)
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A question, Deputy.
Michael McGrath (Cork South Central, Fianna Fail)
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-----and review the loan files, and discuss the contents of these files and supporting documentation with members of management. So your engagement did require you to look at the underlying documentation in respect of the loans extended to the major borrowers. So did you identify any concerns about the underlying security, cross collateralisation and securities not being legally tied down?
Mr. Denis O'Connor:
Correct. We looked at the loan files but security is not kept on loan files. Security is a separate issue completely and we did not look at security under any files. That was part of the legal process that happened and that really wasn't identified until NAMA came into being and they transferred the loans from the banks to NAMA. And as part of the legal due diligence it was found that the security assumption was totally flawed.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. So Project Atlas 1, 2 and 3 did not identify or examine any issues in relation to the underlying security underpinning the loans given to the largest borrowers of Anglo.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you, Deputy. Senator Susan O'Keeffe. Senator, ten minutes.
Susan O'Keeffe (Labour)
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Thank you, Chair. Gentlemen, good morning. Is it ... is it the case that your analysis was based on management accounts of the relevant banks and that it didn't involve any independent verification procedures?
Susan O'Keeffe (Labour)
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And what ... and if so, why?
Susan O'Keeffe (Labour)
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And could the management accounts and the half-year management accounts have been requested directly by the Financial Regulator to ascertain the information? Could the office have gone directly there and said, "Just give us those"?
Susan O'Keeffe (Labour)
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Okay. So when you ... you had ten days effectively between that meeting on 18 September to the bigger meeting, then, of 28 September that you spoke about. Am I correct in understanding that that was your last contact with officials prior to the guarantee - was on the 28th?
Susan O'Keeffe (Labour)
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Yes. So did anybody pick up the phone, did anybody talk to any of you between the evening of the 28th and the evening of the 29th? No.
Susan O'Keeffe (Labour)
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And so, why was there, if you like ... 'cause that was a Monday, wasn't it?
Susan O'Keeffe (Labour)
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Why do you think ... why was there a pause? Were you expecting that when you left the meeting on the 28th? Were you expecting that there'd be a silence or what were you expecting to happen at that point?
Mr. Aidan Walsh:
I don't think we had any defined expectations? We went back to trying to collect information in the three banks that we were working on. I ... I have to say we weren't aware of the pace at which the discussions in relation to how to implement the contingent plans were developing. I think we were both surprised when we heard news on the morning of Tuesday the 30th in relation to the ... the guarantee being announced.
Susan O'Keeffe (Labour)
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On page 85 of Brendan McDonagh's evidence, which you may or may not have seen, but he talks anyway about the meeting on 28 September and he says, you know, there were a range of options - and you've said that yourselves - "But in any of the meetings that [we'd] had up to that point, all the discussion seemed to be pointing that it was inevitable that we were going to nationalise Irish Nationwide and Anglo Irish Bank". Now, I appreciate that you weren't called in as advisers at that level but you were at some of those meetings that Mr. McDonagh was also at. Did you take that impression away?
Susan O'Keeffe (Labour)
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No, no, no. He doesn't say that either. He says it was "pointing that it was inevitable that we were going to nationalise". So that was his ... that was the opinion that he took away and I am asking whether you would share that opinion at that point or not.
Susan O'Keeffe (Labour)
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No, again, Mr. O'Connor-----
Susan O'Keeffe (Labour)
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Okay. So, in terms of the, if you like, the gap between the 28th and the 6th of October, as the week unfolded and you saw the guarantee and all of that, are you saying that there was then no contact at all between you guys - your team - and the Financial Regulator and everybody else that you'd been dealing with?
Susan O'Keeffe (Labour)
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So, on the morning of the guarantee, you'd heard it on the news, you didn't go in and go "Okay. We need to meet them, we need to talk to them, we need to give-----". No?
Susan O'Keeffe (Labour)
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Why do you think that was?
Mr. Denis O'Connor:
Our work was independent of that. At that stage, we had moved on to the underlying loans and the ... the liquidity issue had gone now. The guarantee was in place so that the banks were liquid again, they had deposits, they could open their doors the following morning. So, now we were going on to looking at the loan books - the top 20 loans in each bank - and because we are dealing with the banks themselves, we actually were not dealing with the Department or the regulator or anybody else.
Susan O'Keeffe (Labour)
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At what point did it crystalise for you that there was such a concentration of lending among such a small group of lenders? What ... when was that ... at least that you knew of it, even if you didn't know the entire detail of it? Can you recall when you knew that?
Mr. Denis O'Connor:
Probably in the second or third week of our work. When we went from bank to bank, like, you had borrower A in one bank who had X amount, then you went through the same borrower A was ... another couple of hundred million in the next bank. When you put them all together, it became evident very, very quickly that the top ten borrowers had huge amounts of money out there.
Susan O'Keeffe (Labour)
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So in the first ten days it was evident, even if all the detail of it wasn't evident.
Susan O'Keeffe (Labour)
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And so at what point did you share that information, that at the very least there was this high level of concentration among a small number and, therefore - there's a vulnerability attached, I take it, if you have a small number with a big loan - so where, at what meeting did you say "Guys, this is what we're finding. We haven't got all the detail yet."?
Susan O'Keeffe (Labour)
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Early October. Not before the guarantee, even though it was clear in the first ten days.
Susan O'Keeffe (Labour)
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Okay. So nothing was known about the individuals and their concentrations prior to the guarantee.
Susan O'Keeffe (Labour)
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According to you, I mean.
Susan O'Keeffe (Labour)
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Okay. Now, Mr. McDonagh talked about when he ... he had asked in relation to Goldman Sachs and in relation to INBS, he said, you know, there were 33 questions, he referred to at his evidence here, that I want to know the answers to and he had e-mailed them to the Department of Finance. He said they were terribly basic questions. He described them as commonsense questions in his evidence and I am just wondering whether or not that, sort of, lack of evidence ... that lack of detail was apparent to you also in the work that you were doing. He was saying that he was surprised by the lack of information available.
Susan O'Keeffe (Labour)
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In the regulator. Those basic questions could not be answered by the regulator about INBS.
Susan O'Keeffe (Labour)
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Okay. Mr. McDonagh also suggested at one point that he would like to share the Goldman Sachs information with PwC to get their view. Did that happen do you recall?
Susan O'Keeffe (Labour)
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Everything was shared.
Susan O'Keeffe (Labour)
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Okay, and did anything coming from there change your view in any way?
Susan O'Keeffe (Labour)
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In the information that you gave to ... in that ... one of those e-mails that you referred to - on 28 September - you say that "We have not had the opportunity to discuss the comments with management of the three institutions." I'm not clear, reading from the summary report and reading from the e-mail ... at what point did you talk to management about what you were saying and what they were saying, as opposed to just looking at information that they were giving you?
Susan O'Keeffe (Labour)
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Why was that? Was that because-----
Susan O'Keeffe (Labour)
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-----they wouldn't meet you or because there wasn't time?
Susan O'Keeffe (Labour)
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And do ... should it ... I mean, by the time you were going into that meeting on the 28th, should you not have had that opportunity to talk to senior management before you went into that meeting?
Mr. Denis O'Connor:
I don't think it was relevant at that stage because the information we were getting on liquidity was a matter of fact. We could get it off the guys in the treasury department ... how much money was coming and going on those days and what was forecast to go over the next number of days. There wasn't any judgment on it, where you would have discussions with senior management. It was quite easy to identify the amount of big loans that were up for maturity and whether they would roll over or not.
Susan O'Keeffe (Labour)
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Was there at all a sense that you were trying to keep Anglo going to the next weekend at that point. So, this would have been the Sunday - at that meeting - and you would've had meetings in those few days. Was there a sense at all that that's what you were trying to achieve?
Ciarán Lynch (Cork South Central, Labour)
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Allow an answer now, Senator. I'll allow a response and I'll allow you back in again once more.
Susan O'Keeffe (Labour)
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There's been a lot of discussion about, you know, trying to keep Anglo going to the next weekend and; nobody wanting to intervene or do anything during the week.
Mr. Denis O'Connor:
Well I'm not sure about that. The Anglo crisis point was Tuesday. It was end of year for them - 30 September - and I said earlier on, lots of deposits were up for maturity on that day. Depositors from other parts of the world really couldn't distinguish. It's hard to believe but they couldn't between AIB and Anglo Irish Bank and the contagion effect if one bank was to go would knocked everything else over at the same time. So it was key that all confidence was kept in the market and that whatever was to happen was to happen in an organised manner in the next number of days and we had only one attempt to sort this out.
Ciarán Lynch (Cork South Central, Labour)
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A brief supplementary now - a supplementary and then we're moving on, Senator.
Susan O'Keeffe (Labour)
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So sorry, when you say the depositors wouldn't be able to distinguish between Anglo and AIB, why?
Mr. Denis O'Connor:
Because they're both ... one is Anglo Irish Bank, one is Allied Irish Bank. If you're somewhere over in ... wherever you are and you're putting money on deposit, they don't go into that level of detail. They're investing really in Ireland at that rate of going and our understanding and our discussions with management and with other people was that one bank going in Ireland would have a contagion effect and all the banks would be in the same boat and the amount of discussion that would go on to distinguish one from the other will not happen. They will just put it into a more secure bank in a different country.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Can I just clarify one thing on that? The deposit exposure in Anglo, I understand both are AIB in one way or another and I can understand from a distance there can be confusion, but the personal deposit exposure between the two institutions ... were they similar?
Ciarán Lynch (Cork South Central, Labour)
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And the investor depositors, as they would be in financial institutions ... like we know the loan portfolios and all the rest of it but in terms of confusion on the international market, did people who would be depositing wouldn't be depositing in Anglo Irish ... Allied Irish Bank or sorry in Anglo Bank? Am I right there, no?
Ciarán Lynch (Cork South Central, Labour)
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There might be confusion but the people were actually voting with their feet and put the money in. There was no confusion with them when you look at the profile of the two banks.
Ciarán Lynch (Cork South Central, Labour)
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Alright - Senator Marc MacSharry.
Marc MacSharry (Fianna Fail)
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Thanks very much and thanks gentlemen for being here. Can I ask you can you advise to the extent of discussions you had with management of the financial institutions regarding the collating of arrears, information on non-performing loans and interest roll up at certain-----
Ciarán Lynch (Cork South Central, Labour)
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Phone interference - will people please turn off their phones please if they're near the Deputy because we'd have two more days of this? So I'm sorry now for interrupting you Senator but if there's a phone in proximity to you, I want it turned off please because it's interrupted you.
Marc MacSharry (Fianna Fail)
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Understood. Where did I lose you there gentlemen?
Ciarán Lynch (Cork South Central, Labour)
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Sorry, I'm just going to stop proceedings for a moment until the phones are switched off there. Mr. O'Connor, just hold on a minute and I'll stop the clock.
Ciarán Lynch (Cork South Central, Labour)
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Okay, is it good? Okay, we'll resume so please.
Ciarán Lynch (Cork South Central, Labour)
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Sorry, I'm just going to suspend for just 30 seconds before the phones are switched off there-----
Marc MacSharry (Fianna Fail)
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Do, yes, for security.
Ciarán Lynch (Cork South Central, Labour)
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Will people in proximity to Senator MacSharry please turn off their phones and then we'll resume? We've a lot of complaints in the public last week about this and I'm not going to go through the last week with the same level of complaint coming in in broadcasting and all the rest of it. So, back to yourself, Senator MacSharry.
Marc MacSharry (Fianna Fail)
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Will I finish the question? I was saying that there's the arrears issue, non-performing loans obviously, and the level of interest roll-up on certain facilities and the percentage representation of interest roll-up on the overall book.
Marc MacSharry (Fianna Fail)
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Was all management in the various institutions forthcoming? Were they happy to see you and three bags full, whatever you needed or were they obstructive andlaissez-faireabout the pace at which they sought to help you?
Mr. Aidan Walsh:
No, they definitely weren't laissez-faire. They were organised and structured to meet us, to share information, to make sure that they understand what our questions were, to make sure that they made loan officials available to us, to make sure that we got access to the loan files we asked to see. Just to go back to your earlier question, one of the things that surprised us a little bit was they didn't have separate analysis of loans that were just interest-only or interest roll-up, that they struggled to identify the value of interest roll-up in their P&L accounts.
Marc MacSharry (Fianna Fail)
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Okay. Did you seek to understand the material ... the number of material loans by clients that were restructured in advance, say, in the period up to 2008?
Mr. Aidan Walsh:
Again, yes ... the information didn't facilitate that. Loans got rolled over. Loans got renewed. The practice at the time was when a loan matured, unless there was something desperate going on, it tended to get rolled over and they weren't regarded as restructured loans. They were just regarded as a loan in the normal course. There was no separate segregation of restructured loans in the analysis that we saw from any of the banks.
Marc MacSharry (Fianna Fail)
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So there was no analysis done then of, for want of a better expression, the deterioration of loan quality?
Mr. Aidan Walsh:
There was analysis of deterioration of loan quality. A lot of very statistical information in respect of mortgage books and smaller commercial loans in terms of the development from compliant to maybe missing a payment or missing several payments. There wasn't that same statistical analysis for the larger lenders. They were dealt with on a case-by-case basis.
Marc MacSharry (Fianna Fail)
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Okay. In all your engagements and you mentioned various meetings where all these agencies were in the room and so on - the Minister for Finance was at most, the Taoiseach was at one - who chaired those meetings?
Marc MacSharry (Fianna Fail)
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Did the Minister speak much or listen?
Marc MacSharry (Fianna Fail)
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Okay. Did the Taoiseach make any interjections at the meeting he attended?
Marc MacSharry (Fianna Fail)
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He just listened. Okay. Was there any agenda being pushed by the chair or by the politicians that were present at various meetings?
Marc MacSharry (Fianna Fail)
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Okay. Was it a sense that look, "We're all in here to try and come up with", as you in your own words, "we're going to have one chance at this, let's get it right", and that there ... was there an openness around that so there was no agendas from any quarter, was there?
Marc MacSharry (Fianna Fail)
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Okay. Was there any indication that the view of the room or the consensus in the room was being passed by a higher authority, say, in the ECB or the EU Commission or ... was that discussed or mentioned at any stage by anybody?
Marc MacSharry (Fianna Fail)
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Yes, like, what system? I mean, in terms of "Let's guarantee, let's not guarantee, let's have a partial guarantee, let's issue more shares", I mean, what's the system that you have to go through for the ECB?
Marc MacSharry (Fianna Fail)
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Well that's more the Commission that the ECB, isn't it, in terms of state aid?
Marc MacSharry (Fianna Fail)
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To get it through, that's ... I understand that from a state aid perspective and that would be the Commission but was there any view that apart from the state aid aspect, that ... was there any ... "God, you know, the ECB won't wear that" or, you know, a suggestion that maybe the ECB had particular expectations and particular views about how these ... about the outcome of what was going on in your room when you were all doing your best to come up with the best way?
Marc MacSharry (Fianna Fail)
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Okay. You said to Deputy McGrath earlier on that there was no examination ... that it wouldn't typically be expected of auditors or it wouldn't be kind of best practice to go into the kind of cross-collateralisation of individual loans and to assess that, for example, the equity that you thought that was there and now it wasn't there because, you know, that just isn't the done thing in terms of auditing. Would you say or would it be reasonable to say that, in hindsight, the best practice of real time, you know, is flawed and that perhaps-----
Marc MacSharry (Fianna Fail)
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No, but it ... just ... I think that maybe you should, and I think the Chairman alluded to this, would you say that some of the recommendations to be considered by this inquiry should be that, look, really, you know, auditing is ... one of the lessons of this whole process is auditing of the focus of organisations like yourself that operate to the highest standards of the day need to change and be more penetrative in their examinations of issues such as this?
Mr. Aidan Walsh:
Can I just deal with the problem of the equity not being there? Part of that problem existed because there wasn't visibility across different banks and we had a very privileged position at the time in terms of getting an oversight across those six banks, but we actually didn't have any visibility into two other significant banks in the system at the time. So even the work we did didn't give us full visibility of what might have been going on with those top 20, 25 borrowers. We didn't see into the Scottish banks.
Marc MacSharry (Fianna Fail)
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And would you say that there's a need then in legislation to put an onus on financial institutions or individuals to declare such things in the future?
Marc MacSharry (Fianna Fail)
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Okay. Thank you very much.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Senator. I'm going to move to wrap up, three minutes each. Senator Barrett.
Sean Barrett (Independent)
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Thank you, Chairman, and thanks to again to our visitors. On page 5, the losses and the scenarios - that's in our core volume - you mentioned you'd gone as high as 45%. Was 50% or a higher number considered?
Sean Barrett (Independent)
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And in those discussions, who would've been pushing for higher numbers and who for lower numbers, say, between the Central Bank and the Financial Regulator and the NTMA and the Department of Finance?
Sean Barrett (Independent)
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So nobody had more input into those ranges than anybody else at the meeting, that you can recall.
Sean Barrett (Independent)
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Could I just have one other quote in the written submissions to us by Professor Niamh Brennan. She says at 7.13, "Accounting is highly judgemental". I'll just give you the quote if I may:
Many observers of the banking crisis will wonder how bank financial reporting turned out to be so wrong. The problem with almost all accounting information is that, while it has the appearance of precision and accuracy, it is the product of extensive subjective judgements. Most non-accountants do not understand the extent to which accounting is a matter of judgement. Bank financial statements were, with the benefit of hindsight, flawed. The judgements behind the accounting numbers were too optimistic. Specifically, receivables from customers were overstated because they did not reflect people’s inability to repay their borrowings which subsequently came to light.
How would you react to Professor Brennan's submission to us?
Mr. Denis O'Connor:
Well, the main point is that the auditor looks backwards. He can only make a provision if a condition exists at the balance sheet date. Sorry, the company can make a provision if the condition exists on the balance sheet date, the auditor will report on that. If a company had provided for losses that were going to happen in two or three years' time the auditor would not allow that to go through. So that is the issue more than anything else.
Sean Barrett (Independent)
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You say in your own-----
Ciarán Lynch (Cork South Central, Labour)
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Final question now, Senator.
Sean Barrett (Independent)
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-----submission on page 8, I think it's about the third last paragraph, that "Changes have been made since but, nonetheless, [those] were the prevailing rules and notwithstanding one's view of their fitness for purpose, they were required to be applied." Is that what has us investigating the €64 billion, do you think, relentless applying of rules which we now see were flawed?
Sean Barrett (Independent)
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I think that was Mr. O'Connor's, but never mind, yes, thank you.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you.
Sean Barrett (Independent)
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Thank you very much.
Ciarán Lynch (Cork South Central, Labour)
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Deputy O'Donnell, three minutes to wrap up and then we'll conclude.
Kieran O'Donnell (Limerick City, Fine Gael)
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Can I refer back to Vol. 1, page 5, and can I direct Mr. O'Connor and Mr. Walsh to scenario analysis, scenario 1 and scenario 2. Am I correct in saying that ... is scenario 2 the higher case scenario? Is scenario 1 or 2 the worst-case scenario? I know they don't want to use the worst-case but just-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Scenario 2. The commercial corporate, you've ... speaking ... you've looked for a 1.5% reduction per annum in scenario 1 and a 1.25% in scenario 2. Why are you taking a lower reduction in scenario 2 rather than scenario 1 for the corporate?
Kieran O'Donnell (Limerick City, Fine Gael)
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Sorry?
Kieran O'Donnell (Limerick City, Fine Gael)
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But you put a 4% reduction over three years, which is only about 1.25% per annum, more or less, there or thereabouts, and the commercial corporate made up the bulk of the majority of the loans. So how could you do a scenario 2 look at ... that you have a smaller reduction in the value of commercial property, rather than scenario 1, when scenario 2 was supposed to be the more worse-case scenario? What's the logic of that?
Kieran O'Donnell (Limerick City, Fine Gael)
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But corporate commercial lending was the majority of the lending; particularly certainly in the Anglo case it was the majority-----
Ciarán Lynch (Cork South Central, Labour)
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A question please.
Kieran O'Donnell (Limerick City, Fine Gael)
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The question I suppose I want to ask is that commercial property was falling in price from, really 2007 into 2008, well above the 4%, and the two questions I have are the logic for using 4% against a backdrop of real time where the fall in commercial property was higher, and secondly, if you had taken a realistic figure would the banks, and would Anglo Irish Bank, have required capital?
Mr. Denis O'Connor:
I will start to answer and you can come in. The ... as I said, the group of people around the table agreed that these would be the two options we would use. All these assets were income-generating assets at this point in time. They all had tenants in them. They were all generating income. There was no reason for to provide for them in-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes, but, Mr. O'Connor, the viewpoint would have been that scenario 2 was a worst-case scenario when, in fact, in terms of commercial property you've actually gone for a lower reduction in the value ... fall in the value of commercial properties in scenario 2 rather than scenario 1. It, kind of, doesn't appear to be logical in terms of analysis ... a base of analysis.
Ciarán Lynch (Cork South Central, Labour)
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Finish now, Deputy. This is your last question.
Kieran O'Donnell (Limerick City, Fine Gael)
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Is it logical on the basis? It's a critical point, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Yes I know, but you need to ask the question properly. That's why it's critical. Ask the question and we'll wrap up.
Kieran O'Donnell (Limerick City, Fine Gael)
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The question really I suppose I want to ask is: you used a figure of 4% for a fall over a three year period when the fall over that period was of the order of over 60%. Property was already falling well above 4% alone in 2008, and when you looked at a worst-case scenario you actually increased the value of commercial property rather than reduced it, so the logic why-----
Ciarán Lynch (Cork South Central, Labour)
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A question please, Deputy-----
Kieran O'Donnell (Limerick City, Fine Gael)
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What was the reason for that?
Ciarán Lynch (Cork South Central, Labour)
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-----because I'm wrapping up. Mr. Walsh, Mr. O'Connor, please.
Mr. Aidan Walsh:
Can I just point out at the bottom of that page 5, the bottom right-hand comment shows the make-up of the variance between scenario 1 and scenario 2, and it says that:
The move from PwC Scenario 1 to Scenario 2 is driven by impairment increases of €907 million on development land without planning ... and [€1.6 million ... billion] in relation to development land. This is offset by reductions of €446 million from commercial / corporate and €7.5 million ... unsecured consumer lending.
So the reader could see from that analysis that's written into the report what the impact of those individual changes were, and in the context of the exposures, I take from that that the impact of development land with and without planning permission far outweighed any movement on provisioning on commercial and corporate lending.
Kieran O'Donnell (Limerick City, Fine Gael)
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But the final question, if-----
Ciarán Lynch (Cork South Central, Labour)
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Deputy, you're out of time.
Kieran O'Donnell (Limerick City, Fine Gael)
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Yes, but sure, Chairman, it's-----
Ciarán Lynch (Cork South Central, Labour)
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Hang on a second please Deputy-----
Kieran O'Donnell (Limerick City, Fine Gael)
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-----the critical question in this-----
Ciarán Lynch (Cork South Central, Labour)
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Don't interrupt me please, Deputy. I'm going to run this tightly today. People will have specific time to prioritise their questions. It's not that, "I have another question"; it's not "Columbo", where you've just one more question before I go out the door. You ask your question in the time you're allocated. Deputy, I'm going to give you a bit of time, but from here on out, that's the way it's going to be.
Kieran O'Donnell (Limerick City, Fine Gael)
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Chairman, it's a very straightforward question, and the question is: ye are a world-renowned accountancy firm and professional advisers. Ye went for a 4% reduction on average in commercial property over a three-year period between '08 and 2011, when commercial property went down in reality by 60 ... over 60%. When you looked at the worst-case scenario, scenario 2 rather than scenario 1, you actually reduced the reduction in valuation from 1.5% per annum to 1.25% per annum.
And looking back now, in hindsight, were those figures grossly understated?
Kieran O'Donnell (Limerick City, Fine Gael)
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Agreed with by whom, Mr. O'Connor?
Ciarán Lynch (Cork South Central, Labour)
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Sorry, Deputy, I'm moving on. I'm closing things up.
Kieran O'Donnell (Limerick City, Fine Gael)
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Sorry, just let Mr. O'Connor finish.
Ciarán Lynch (Cork South Central, Labour)
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No, please, no. No. You have been afforded more time than any other member-----
Kieran O'Donnell (Limerick City, Fine Gael)
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No, but I'd like to hear the answer, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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-----on the committee today in regards to this engagement. Mr. O'Connor, Mr. Walsh, do you have anything further you'd like to add to that question? The question has been made, I'm not re-entering the question again.
Ciarán Lynch (Cork South Central, Labour)
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Mr. O'Connor, do you have anything you'd like to add to it?
Ciarán Lynch (Cork South Central, Labour)
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Okay. I just want to return to two items and then I'm going to wrap up. Were there any ... and it comes back to your own evidence earlier today, Mr. O'Connor, in regard to the solvency of Anglo circaSeptember '08 and were there any discussions on solvency/insolvency in your meetings at that time?
Ciarán Lynch (Cork South Central, Labour)
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Okay. You've no recollection of any solvency being discussed.
Ciarán Lynch (Cork South Central, Labour)
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Okay. And would you have any views on whether the Irish State should have been engaged in the protection of insolvent banks?
Ciarán Lynch (Cork South Central, Labour)
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Okay. All right. I'm going to wrap things up. Mr. O'Connor, Mr. Walsh, in thanking you to be here today I'd like to invite you, if you have anything you want to say by closing remarks, additional comments and so forth.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Mr. Walsh?
Ciarán Lynch (Cork South Central, Labour)
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Okay. With that said, I now propose that we conclude this session. In doing so, I'd like to thank Mr. Walsh and Mr. O'Connor again for their participation and engagement with the inquiry. Both witnesses are now formally excused and the meeting will suspend until 12 noon. Is that agreed? Agreed.
Ciarán Lynch (Cork South Central, Labour)
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Okay, with that said, we'll commence with session two, is that agreed? Agreed ... with our public hearing with Mr. Alan Ahearne, former special adviser to the late Minister for Finance, Brian Lenihan, TD. The Committee of Inquiry into the Banking Crisis is now resuming in public session. Can I ask members and those in the public Gallery to ensure that their mobile devices are switched off? We continue our hearings today with Mr. Alan Ahearne, former special adviser to the late Minister for Finance, Brian Lenihan, TD. Alan Ahearne is a professor and head of economics at the National University of Ireland, Galway. He was a special adviser to the late Minister for Finance, Brian Lenihan, from March 2009 to March 2011. He advised the Minister on economic, budgetary and financial policy in responding to the economic and financial crisis and played an advisory role in relation to the national recovery plan and the creation of NAMA.
Mr. Ahearne, you are very welcome before the committee today.
Ciarán Lynch (Cork South Central, Labour)
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Before hearing from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you're directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you're entitled thereafter only to 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. 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 and I will now ask the clerk to administer the oath to Mr. Ahearne.
Ciarán Lynch (Cork South Central, Labour)
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Once again, Mr. Ahearne, I welcome you before the committee this afternoon and if I can ask you to make your opening remarks to the committee, please.
Professor Alan Ahearne:
Thank you, Mr. Chairman. As you mentioned, Mr. Chairman, I served as special adviser to the late Minister for Finance, Brian Lenihan, from March 2009 to March 2011. In this role, I advised the Minister on economic, budgetary and financial policy in responding to the economic and financial crisis. Among other things, I played an advisory role in relation to three budgets during the period, the national recovery plan, the creation of the National Asset Management Agency, NAMA, and other measures to address the financial crisis. The three budgets during this period involved €15 billion of fiscal adjustments at an annual rate. These adjustments were aimed at reducing the Government's huge structural deficit, thereby restoring order to the public finances. Reducing the structural deficit, by definition, required discretionary measures as the structural deficit would not decline due to a cyclical recovery.
In dealing with the consequences of the bursting of the bubble for the Irish banking system, the Minister's focus was on stable ... on restoring financial stability by restructuring, recapitalising and deleveraging the banking sector. The Minister regarded the two main banks, AIB and Bank of Ireland, as core retail banks that would play important roles in Ireland's economic future. The banks required capital to remain in operation. The banks' capital positions were being eroded by loan losses and, therefore, the banks required recapitalisation. The Minister wanted to minimise the burden on the State of ensuring that AIB and Bank of Ireland were properly capitalised. For that reason, he afforded the banks the opportunity to raise private capital through, for example, rights issues involving shareholders. Ultimately, Bank of Ireland was successful in finding private sector solutions.
In the case of Anglo, the priority was to deleverage and de-risk the bank without damaging the rest of the banking system. The Minister had an open mind as to whether a small good bank could be carved out of Anglo, as proposed by the bank's management. Anglo had been included in the blanket bank guarantee and, therefore, the Government had to recapitalise Anglo to avoid a call by creditors on the guarantee. Moreover, Anglo required injections of capital to retain its banking licence and thereby maintain access to Central Bank funding.
In relation to the cost to the State of recapitalising the banks, the upfront costs were large by international standards. The Minister was confident that the State would recoup some of these outlays and wanted to spread the cost of the crisis over as long a period of time as possible. It's worth noting that although the cost of recapitalising Anglo and INBS added markedly to measured Government debt - about €35 billion - the way in which Anglo was recapitalised meant that the burden of servicing this debt is relatively low because the debt is largely held within the State sector, is long-term and can currently be financed in the market at a very low rate.
On the issue of right-sizing the banks, NAMA was established by the Government to help deleverage and de-risk the Irish banking ... the Irish banks. Asset management companies like NAMA have been used in many countries over recent decades during financial crisis to facilitate bank restructuring and to manage and dispose of troubled assets. Regarding the overall effectiveness of NAMA, in my testimony before this committee on 4 March last, I noted the assessment of NAMA in an independent study of the agency. On page 2, the study states, "First, the establishment of the bad asset agency, NAMA, serves as an international example of [the] successful management of bad assets." On page 24, the study states:
The establishment of NAMA was instrumental in the successful management of the Irish banking crisis. It allowed the banks to recognise fully the losses on these loans, and thus removed an important source of uncertainty for the banks. Next, the government set only overall targets for NAMA in [the] resolution of the bad assets. The relative freedom in running down the bad loan portfolio allowed NAMA to realise a relative good price for its assets disposals.
Also on the same page, the study draws a key policy lesson for other countries:
Ireland followed international best practice by setting up NAMA, [an] asset management agency to run down the bad assets of the Irish banks. Releasing bad assets from bank balance sheets is instrumental in the path [of the] recovery.
I share the study's view that the establishment of NAMA played a critical role in restoring financial stability in Ireland. I would note, however, that an asset management agency is not and cannot be expected to be a magic bullet to solve a banking crisis. No single policy measure on its own can do that. NAMA has been part of a set of policies that, together, have helped to restore order to the Irish banking system and contributed to the recovery in the Irish economy.
Notwithstanding the efforts to restore international investor confidence in Ireland and its banks, during the second half of 2010 the cost to the State of borrowing on international markets rose to unsustainable levels. Around the same time, funding in debt markets for the Irish banks dried up and the banks experienced large outflows of deposits, especially corporate deposits. These outflows replaced by borrowings from the euro system. The ECB and the Central Bank of Ireland provided invaluable liquidity assistance to the Irish banking system during the crisis. I believe, however, that the ECB in 2010-2011 underestimated the systemic nature of the crisis in the euro area. The ECB was overly anxious in the latter part of 2010 to reduce the amount of emergency loans that the euro system had extended to the Irish banking system. There are also question marks about the ECB’s communications with markets about individual member states. With no access to markets at affordable rates, the Irish Government was forced to borrow from the official sector. The EU-IMF-ECB programme of assistance provided the State with funds that were needed to finance the budget deficit and provide a functioning banking system.
Finally, Mr. Chairman, the large gains in international competitiveness recorded by the Irish economies ... Irish economy over the 2009-2010 period went a long way to creating conditions in the economy for key sectors of our economy to grow, gain market share and expand employment. Without these gains in competitiveness, the Irish economy would not be registering the fast growth rates that we see today. Thank you, Mr. Chairman. That concludes my prepared remarks.
Ciarán Lynch (Cork South Central, Labour)
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Excellent. Thank you very much, Mr. Ahearne, and if I can now invite Deputy McGrath to open the questions, please. Deputy, you've 25 minutes.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes. Thank you, Chair. Mr. Ahearne, you're very welcome this afternoon. Can I start by referring to your reference on page 4 of your witness statement that the late Minister Brian Lenihan had decided in autumn 2010 to wind down Anglo? So can I ask, what advice, if any, did you give to the Minister at that time to support the decision because, in parallel with that, the then management of the bank were actively lobbying to have a good bank-bad bank split and to try to carve out a new business from what remained of Anglo? So what was your advice at the time?
Professor Alan Ahearne:
I guess for ... for all the time that I served in the role as adviser, I was sceptical that a good bank could be carved out of ... out of Anglo. I felt that its ... its business model - which was large exposure or large lending to commercial property - that that would no longer be ... be viable. The management had talked about a new sort of a small business bank but I was sceptical about that. I think the Minister was open-minded on it. I never recall him being enthusiastic about this proposal. The proposal to carve out a small bank came from the management. The Minister felt that ... the argument was put to him that this carved-out small new business bank ... it might be worth something and therefore it might save the State a few billion in terms of the net costs of the banking system. So that obviously got his attention. He was aware that ... that we were going to need more competition in the banking system, so the idea of another bank being there was somewhat helpful. So any interactions I had with him, he was open-minded on it, but I never remember him being convinced one way or the other. So he wanted to give it ... this proposal a shot. It was being sent over to the European Commission for approval and back. I was seeing all these ... this documentation and I think what happened, as we got into September ... August and September, is that the European Commission had gone very cold on this plan and the Minister felt that it just ... just wasn't going to work.
Michael McGrath (Cork South Central, Fianna Fail)
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And in your view, what would have been the consequences of going for the other option of trying to carve out a good bank from Anglo? And what would've been the ... the operational factors in that decision?
Professor Alan Ahearne:
Well, the bank would've needed some capital but, again, if you thought that there was some value to be ... to come out of it, then there was an argument for giving you the capital ... the couple of billion of capital. I guess the issue was the reputational damage to this bank - whether it would ... it had a ... it would've had a franchise at all. The management felt that it could, that they could get something new out of it.
They’d even come up with a new name, "An Banc Nua", but I just didn’t see ... it would be the old Anglo, and I couldn’t see how it could play a role. Also, banking is about expertise and lending experiences. The expertise that they would have had would largely have been in lending to commercial ... in often the case, highly speculative properties so I just didn’t see how this would ... how this would fly.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. And when the decision was announced then in early September 2010 to separate it into a funding bank as such and a recovery bank, what was the anticipated timeline for the overall wind down of Anglo was it going to 2020 at that stage, was that the plan?
Professor Alan Ahearne:
I think, I mean, we would have been in and out by ... but I think it was certainly over a long period of time, it was eight to ten years. The problem with ... it had a large amount of assets, loans. It’s ... if you try to sell loans, deleverage very quickly, you have to take big haircuts on those loans, if you can find a buyer at all. And if you’re taking big haircuts you’re adding to the losses so the Minister was conscious that in deleveraging, particularly in an environment with very little appetite for Irish assets, you would have to be very careful and do it over a long period of time.
Michael McGrath (Cork South Central, Fianna Fail)
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So a short-term liquidation was not considered as a viable option at that time?
Professor Alan Ahearne:
No, that would have been viewed as too costly in the environment at the time. The point of having the funding back was, while Anglo did have ... did have some funds, it had some deposits, it did have ... it was able to raise funds ... and the Irish banking system as a whole needed funding, private funding. So the plan was to try ... how can you keep funding in the system, that funding that they had access to, without having a bank that can lend, and that was the argument for that particular split.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, if I can take you to November 2010 and the negotiations with the troika for the bailout. Ann Nolan of the Department of Finance stated in her witness statement to this committee that IMF officials were strongly in favour of burning any unguaranteed and unsecured bonds in Anglo. This was opposed by the EU and ECB officials. In the event, she said the matter was considered at a more senior level in the IMF, and you have said this as well, as a result of US Treasury veto the IMF came down against any such action. Can you elaborate on what happened at that time and was it a live issue being considered in the build up to and during the negotiations ... the burning of the unsecured senior bondholders in Anglo?
Professor Alan Ahearne:
It was a live issue. I mean, I had many conversations with the Minister during the summer of 2010 on the issue of senior bonds, particularly in Anglo because ... now there was no intention of doing anything while the guarantee was in place but the guarantee was going to run out in end-September. And then some bonds in Anglo and some of the other banks would there ... were therefore going to be exposed, they would no longer be guaranteed. So we talked about what could be done with those banks and whether there was room, scope for bail-in or burning those bonds as people say.
I mean, initially I think the Minister wasn’t particularly enthusiastic, he saw lots of problems with that and there were problems, market problems, legal problems, and he saw all those. But as time went on during the summer he sort of came to the position, came around to the position that in principle this would be a good idea. I mean, at one stage I remember, maybe in August or September, he even came up with some numbers. He was talking about senior unguaranteed bonds after the guarantee had gone, those bondholders taking a haircut as he put it of 50%. I mean, I remember a conversation when he begun with the line “The bondholders are going to have to take a haircut.” He had numbers – 50% for the Anglo, he had smaller haircuts for AIB, 20% or something like that, and then with Bank of Ireland at one stage he mentioned maybe 5% then he said, “Then it’s probably not worth doing it.” So we’d exclude that bank. So the focus was really on Anglo. INBS didn’t have many bonds but that was probably thrown in there as well.
I went to the Washington DC with him, because you mention the IMF, in early October and I met with a couple of IMF officials, I think one of whom you’re meeting tomorrow. And they brought up ... we had some discussion with the Irish and they brought up, they said “Is the Minister aware that there’s about €4 billion of Anglo bonds that are now unguaranteed, senior non-guaranteed?” I said he is aware of that and he was aware of that. They said “It’s a lot of money”, and I said “He’s aware of that.” So it was clear from the short discussion I had with them at that stage that they had spotted this and they had these concerns.
Michael McGrath (Cork South Central, Fianna Fail)
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That was October, is it?
Professor Alan Ahearne:
That was in early October of 2010 that they were in their line of sight. It was also in the Minister’s line of sight. I use the word, mistakenly, “in principle” because it wasn’t that he gave an order at some stage, you know, on 30 September after the guarantee “Okay, let’s burn them.” It wasn’t that but he, in principle, if the opportunity arose, if it could be done, he did want a haircut of these bonds. He was very concerned about the market reaction, how that would spill over into the sovereign debt market. He was getting strong advice from the NTMA that announcing that there was going to be a burning of senior bonds would have a very negative effect on the sovereign’s access and it would push up interest rates for the Irish Government. He wanted to avoid that, but of course that argument became moot when we got into a situation where Ireland was going to borrow from the official sector and that’s why that opened up that opportunity.
Michael McGrath (Cork South Central, Fianna Fail)
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So what happened then during the negotiations themselves? The IMF on the ground here in Dublin during the negotiations was still supportive. Why did it not happen?
Professor Alan Ahearne:
I mean, the Minister was pushing for, I think right up until – get my dates right – certainly the week of say 22 November – there was still a lot of work being done by the Minister and I think by officials on how we could do this. A lot of it was legal work because there were big legal issues involved. Later that week, or maybe the weekend, I was speaking with the Minister and he said there’d been a conference call, I think ... I understood it was a G7 conference call, but it may not have been, but it obviously involved sort of people at that level, and that it had been decided that the burning of bondholders had been vetoed. ECB was against it. That was relayed to me. The European Commission sided with the ECB and as the Minister put it, although the IMF staff themselves individually, and from earlier on had viewed this as a good idea, the organisation, at the executive level, took a decision not to do it and, therefore, ultimately the troika’s position on this was that there’d be no programme would be available if this route was taken.
Michael McGrath (Cork South Central, Fianna Fail)
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And did it come down to that net point in the end that if Ireland had insisted on burning senior unguaranteed bondholders there would not have been a programme, there would not have been financial assistance?
Professor Alan Ahearne:
Yes, I mean, it was ... particularly the ECB’s approach was quite strident so there would not have been a programme. And, indeed, I mean, the ECB could have done many other things if Ireland had decided to burn senior bondholders of a bank. They could have said, “This bank is now insolvent, you’re burning the bonds therefore we’re not going to lend to it anymore.” So they could have said the collateral ... this bank is no longer eligible for euro system financing, in which case all the financing would had to have fallen on the State. So there was ... at ... if the troika were against it and the ECB were against it there was no option.
It’s also the case, at least we’re focusing on the Anglo, the amount of money involved was about €4 billion, from €3.5 billion or €4 billion. Brian Lenihan had in his mind 50% discount so you might say €1.5 billion to €2 billion. It’s a lot of money but you’ve got to balance that against the consequences. The ECB and the European Commission had their arguments and they put them out and there was a recent European Commission paper looking at, assessing the programme – I have it here – and they list eight or nine reasons why they believe at the time Ireland should not have burned the bondholders, and they still think Ireland shouldn’t. They said it was in Ireland’s best interest not to. So they’re making those arguments but the Irish side had a different perspective on it.
Michael McGrath (Cork South Central, Fianna Fail)
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And at that time was it only the remaining Anglo bonds that were on the table in, let’s say, November 2010, and by coming out of the guarantee at the end of September there was total of about €19.5 billion that were unsecured and were now unguaranteed and Anglo as you say was about €4 billion to €4.5 billion? So throughout October and into November was it distilled down to the question of Anglo bonds or were the other ones not considered?
Michael McGrath (Cork South Central, Fianna Fail)
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Yes.
Professor Alan Ahearne:
But I think when the push came to the shove, I mean, as I described earlier, Bank of Ireland for example, the Minister was very reluctant to discount bonds in there. And I think in ex postrightly so because actually when you look at it the bank was able to raise private capital and recapitalise itself through subordinated debt. It’s not at all clear that senior bondholders in that particular institution should have been discounted. It’s certainly not the ... it’s certainly the case that they should not have been ... the losses from Anglo should not have been put onto senior creditors in Bank of Ireland.
So I think at one stage they may have had closure and given those sort of more general numbers, but I think in the heel of the hunt it came down to Anglo and INBS, which was much smaller, because those were banks that were going to be wound up and they were in a very ... a different position then. They weren't going to be issuing bonds in the future. It was easier to distinguish them from any other bank in Europe so ultimately it came down to them.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. As you know, Mr. Ahearne, about €15.5 billion in total of losses were imposed on junior bondholders - subordinated bondholders. Much of this was done through liability management exercises where debt holders were asked to voluntarily sell their debt back to the banks at reduced price. Was that seen as being an entirely different issue to the senior bondholders at that time?
Professor Alan Ahearne:
It was. I mean, I remember being in conversations - during the summer I think it was or maybe early autumn - in the Attorney General's office with several senior counsel. I am not a lawyer but just listening to the conversation, it was clear that it was much easier to put losses, legally, on subordinated bondholders than on senior bondholders. Subordinated debt, as I understood the conversation, is explicitly subordinated. So after all capital has been wiped out, you can then go to the subordinated debt and put losses on them. But senior bonds are not subordinated to deposits, for example. So, in a liquidation if you liquidated a hotel, you cannot treat the bill that is owed ... money owed to the launderette different from the money that is owed to the meat supplier. They are senior creditors. Unsecured senior creditors all treated equally and that was the position of the senior bonds. They were pari passuor equal in the eyes of the law to depositors ... much more difficult game. Now, maybe it can be done but it was clearly a much more complicated operation.
Michael McGrath (Cork South Central, Fianna Fail)
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The promissory note structure that was put in place back in 2010, can you explain the logic behind that structure at the time - an overall commitment of over €30 billion, over €3 billion to be paid every year for ten years or so? Can you explain why that structure was put in place and what, in your view, were the advantages of doing it that way from the State's point of view?
Professor Alan Ahearne:
I mean, assuming that money ... the bank had to be recapitalised, otherwise the guarantee would have been called in and the bank would have lost access to ECB funding. The issue is how do you put a large amount of money in, let's say, €30 billion. One way to do it is to put cash in. I mean that was done through ... AIB and Bank of Ireland were recapitalised with cash from the National Pensions Reserve Fund. There wasn't enough cash. So, the Minister could, in theory, have asked the NTMA to go out and borrow cash, issued Government debt and whatever interest rate prevailed at the time - ten-year money might have been 5% or 6% - borrow that money and put the cash in. A much, much cheaper way of doing it was to, rather than put cash in, to give the bank, Anglo, Government debt and that, whether it was regular Government debt or promissory note, it is all IOUs. Because, that way, Anglo could then go to the Irish Central Bank, present that piece of paper and borrow money on the back of it. That meant essentially that ... so the debt was not being issued into the market. The interest rate that was being paid on the promissory note was being paid to Anglo but Anglo was part of the Irish State as just an internal transaction. Anglo was paying interest to the Irish Central Bank on its borrowings but the Irish Central Bank is part of the State. All this stuff is simply internal. The cost to the Irish State of that recapitalisation was, if you go through it and get down into the weeds, the cost was the cost of funds to the Irish Central Bank borrowing from the Eurosystem and that was extremely low - it is currently zero. So the point was, this allowed Ireland to recapitalise this bank but the burden, the annual burden - the interest rate which is what really matters - was going to be extremely low. And that was the advantage of the promissory note system.
Michael McGrath (Cork South Central, Fianna Fail)
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But the State would still have to come up with the cash of €3 billion every year - every March.
Professor Alan Ahearne:
So the difficulty with it was ... I mean, people ... when the promissory note was restructured, a lot of people said, "The expensive, high-interest promissory note is being restructured." Well, that's a misunderstanding. The interest rate of the promissory note was irrelevant. The interest rate was being paid to Anglo. It's just one arm of the State to the other. The promissory note was an extremely cheap way of financing it. The problem with it, it was going away, it was going to be replaced every year by €3 billion of money borrowed in the market. So it wasn't that this was an expensive ... it was a really cheap arrangement but in seven or eight years' time it was gone. So, the trick was how could you keep that cheap arrangement in place for as long as possible and that's what the promissory note deal did. The Irish Central Bank currently owns these bonds. The interest paid goes to the Irish Central Bank. Look at the profits the Irish Central Bank is turning over to the Irish State. That's all internal. So this was a very cheap way of financing it.
€30 billion is a huge number but if I told you that you were going to finance €30 billion over 100 years at a zero interest rate, then it's irrelevant, it's for free. So the point is, when you're talking about national debt like that, you have to look at ... it's not just the amount, it's the maturity and the interest cost. And so the key to the way Anglo was being done was to get the cheapest possible finance and you can't get any cheaper than the ECB. It created issues because the ECB then, particularly as the amount increased in the autumn of 2010, were worried that this was monetary financing, essentially that the Irish Government was borrowing at a very cheap interest rate but it was happening through the banking system.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. How did Minister Lenihan react to the letter from Jean-Claude Trichet of 19 November 2010, which really left nothing to the imagination that emergency liquidity assistance would only be maintained if the Irish State applied for a bailout?
Professor Alan Ahearne:
I mean, I think it put in writing what had been said already. It wasn't that this was a complete shock. Maybe it was a surprise but what was a surprise was why this was put in writing. But that message that the ECB wanted Ireland in a programme, that the ECB was desperately unhappy with the amount of money it was lending, it wanted its money back, it wanted Anglo, which is the money we're talking about - the €40 billion that had been lent in ELA - it wanted the Government to pay that back by borrowing from somebody, either from the markets or from the troika. So it wanted Ireland to replace extremely cheap money through the promissory note arrangement with expensive money and Brian Lenihan said, "That's completely ridiculous. This is ... How is this going to solve our problem?" I don't remember talking ... explicitly asking him how he reacted to that but it put very starkly the ECB's view on Ireland at the time.
Michael McGrath (Cork South Central, Fianna Fail)
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In the article you contributed to the book on Brian Lenihan: In Calm and Crisis, on page 25, you mention that Mr. Lenihan discovered that senior people at the ECB were briefing market sources that the ECB was considering the withdrawal of financial support to Irish banks. So again, this would have been in November 2010. Can you elaborate on that? What was he hearing? What was he referring to there and what impact did this briefing have, which Governor Honohan has acknowledged, when he came before the committee here, did happen?
Professor Alan Ahearne:
So in August, I guess, and certainly in September and October, there was a huge amount of international investors or potential investors visited Ireland. These were people involved in pension funds and insurance companies who would be buying ... you would like to be buying Irish Government bonds, who may have done so in the past, potential ... people who would potentially lend to the Irish Government. Now, I met a lot of these people - they were very interested in the Irish economy and developments and stuff like that - and quite a lot of them brought up the point that the ECB appears to be hostile to this lending that it's doing - the ELA that's growing. And I remember somebody, one of them, saying to me - and again this somebody I'm trying to convince that they should lend to the Irish Government at reasonable interest rates - they said, "What are you going to do when the ECB pulls the funding from your banks?" They were talking about the Anglo stuff, in other words, forcing the Irish Government to go to the market to raise €40 billion, which it couldn't possibly do. And I said, "That's not going to happen." And he said, "Well, excuse me, I was in Frankfurt [I think that's what he said] yesterday and I met ECB officials and they told me that's what they are considering, so how do you answer that?" Now some of this was in the papers in the sense that ... I mean, they had, in early October, began to tighten up on liquidity. They had loosened things during the global financial crisis and they had begun to tighten things up - that was public. But it was clear that potential investors, whoever they were talking to, were being told that they want ... they're not happy with this and they're considering doing something about it, which would force the Irish Government on to the market to raise €40 billion.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Can I raise the issue of NAMA, Mr. Ahearne? And you have addressed it in your witness statement and you are strongly supportive of the NAMA project. But can I put a counter-argument to you, that the NAMA project crystallised immediately losses of €42 billion on the books of the banks, which triggered a massive round of recapitalisation? Subsequently, NAMA sold on the assets at market prices, which were at the lower end of the market, predominantly to US private equity funds or so-called vulture funds, who are now flipping those assets and selling them on for gains. Would it have not have been better to let the banks work their way through the assets at that time?
Professor Alan Ahearne:
I mean, crystallisation ... one person's crystallisation is another person's facing up to reality. And what they ... what NAMA forced and the sales forced the banks, the bankers and everybody else to do was face up to the reality of what had happened. I guess if ... let me make a couple of points. One is that the banks would have needed capital to cover those losses in any event, because there was stress tests being done - stress tests done, various PCAR rounds - and, ultimately, there was the comprehensive assessment, which is the stress test done by the ECB. And even if the loans had stayed on the banks - the books of the banks - they ... those stress tests would have seen potential losses in those and, therefore, the banks would have been required to have capital. So, it's not that the removal of the loans caused the banks to need capital, the fact that there was huge losses on those loans, irrespective of whether they stayed on the books or not, meant that the banks needed huge capital in order to cover those losses, in order to-----
Ciarán Lynch (Cork South Central, Labour)
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Final question, Deputy.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes, but it meant that those losses had to be fully recognised at the bottom of the market.
Michael McGrath (Cork South Central, Fianna Fail)
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So, okay, the losses were there vis-à-vis the actual value of the assets.
Michael McGrath (Cork South Central, Fianna Fail)
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But if they had been allowed to work them out over time, as opposed to NAMA doing it, then the outcome may have been different.
Professor Alan Ahearne:
Well, look at the aggregate numbers. I mean, if NAMA was about to make or expected to make a profit of €20 billion, or surplus - it's not a profit-making institution - a surplus of €20 billion, then you might have an argument there. You might say, "Well, they clearly underpaid these banks for these assets. Look at the huge profits or surplus they are about to make." And, by the way, most of the arguments at the time were not that the fears, concerns that NAMA was going to underpay, but they would overpay. But my understanding - and you've had NAMA in front of you - is that they more or less expected to break even or that they would make a small surplus. That would suggest to me that they more or less got the pricing right, that the value they paid was the value of the loans and, therefore, what happened is that the banks simply were forced to face up to what was reality.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Deputy, I will bring you back in again. The next questioner is Deputy Eoghan Murphy. Deputy, 25 minutes.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chair, and thank you, Mr. Ahearne. You are welcome back to the committee. I just want to stay with NAMA, if I may, because in your opening statement you suggested it was unfortunate that the details of the final tranche of loans, the transfer to NAMA was not available prior to the PCAR figures being announced, but you also said that the "subsequent upward adjustment made in September 2010 contributed to the weakening of investor confidence in Ireland around this time". So, are you saying that the NAMA process contributed to our need for a national bailout?
Professor Alan Ahearne:
No ... I mean, the way you put it there is far too stark. Ideally, the loans would have moved in one go and there would have been a price given and, therefore, the Central Bank, in doing its PCARs in the March of 2010, would have seen that price. And, therefore, a line could have been drawn over how much capital the banks needed for those particular assets. Now, the banks needed more capital for different assets, but at least for those.
The reality is, of course, that there was so many loans and, most importantly, the European Commission had set down rules by how these were ... how these would be priced and transferred, and they involved loan-by-loan transfers and due diligence and so that made for a slower process. So ... now, there were advantages to that in that doing that loan by loan allowed ... meant that the pricing was much more accurate and it allowed the State, through NAMA, to see the full picture. You could imagine in theory where a random sample ... a large random sample of loans is taken, they're priced and then all of the loans transfer at that price. That would be faster, but, of course, it would be more risky because you are only taking a random sample.
Eoghan Murphy (Dublin South East, Fine Gael)
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Was it weighed up in designing the process, this potential for the damage of drip-feeding information into the market about what was transferring across from the banks?
Professor Alan Ahearne:
I mean ... I think the most important thing was that the EU Commission rules were out before NAMA was even announced, so they were following that. So, there was no issue of could we ... can it be done in a different way.
Eoghan Murphy (Dublin South East, Fine Gael)
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And the inability to get political consensus. I mean, to what extent did that delay the process and to what extent was that frustrating the efforts of the Minister and the Department?
Professor Alan Ahearne:
I mean, I don't think it delayed things. NAMA was announced in April. From scratch, things were ... the legislation was written. I think it was announced. There was draft legislation put into the public domain in June or July and then legislation introduced. There was a Bill in September and it was up and running by later that year. So, given the size of the operation, given the size of the problem, that was fairly speedy. I think it took a lot of the Minister's attention and energy, the debate about it but ... look, this was a big ... this was a big policy decision and so, I think he understood that there was going to be a serious debate about it.
Eoghan Murphy (Dublin South East, Fine Gael)
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In the chapter you contributed on the book on Brian Lenihan, you wrote that Minister Lenihan learned that one of the banks, AIB, was covertly briefing against NAMA. At what level was this happening and what did those briefings involve? And were you aware of other banks doing this?
Professor Alan Ahearne:
That was reported back to him, that some stuff was appearing in papers ... I can't ... what it were, but some stories about NAMA's going to bankrupt the country and this sort of stuff. I think he had a ... the press office had done some work to see where this had come from and he was informed that they believed, or somebody believed, that it had come from AIB, presumably from senior people there.
Eoghan Murphy (Dublin South East, Fine Gael)
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Was it the view of the Minister or the Department that the banks were actively trying to delay NAMA or interfere with its establishment?
Professor Alan Ahearne:
That ... I think the view was that particular bank, which had big problems at that stage - much of it was still under the carpet - that that particular bank would prefer not to face up to the reality that they had made huge loans - speculative property loans - and there was going to be huge losses on it. So, I think he recognised that, yes, there was going to be opposition from certain bankers to the facing up of reality, but he was determined that people were going to face reality. He knew full well - I mean, I had discussed this with him - that the international evidence was that if you try to hide it, the costs don't go away, particularly the cost to ... the public cost, the cost to public finances or ... and to the citizens. They accumulate over time. It doesn't get any better, it gets worse and you have to face up to the problem, and he was determined to do that.
Eoghan Murphy (Dublin South East, Fine Gael)
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Did this opposition from certain bankers or banks ... did it interfere with or slow down the NAMA process?
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you. You also write about, in your opening statement, about Professor Schoenmaker and the successes of NAMA. And you wrote about the relative freedom that the agency had to manage the assets. But, what about the lack of flexibility regarding the bond repayment schedules that were entered into on behalf of NAMA? Did this result in a rush to sell prime assets to meet these early repayment targets?
Professor Alan Ahearne:
I mean, with an asset management company, there is always a tension between avoiding fire sales, but also avoiding hoarding. You want the asset management company ... you don't want them dumping all these assets onto the market at one stage, at one time, because there won't be enough liquidity there. If you are in a crisis and they have to sell them at very cheap rates, then they make huge losses. At the same time, you don't want them ... you don't want the asset management to be around in 20 years' time hoarding these. And that was the experience of the RTC, the Resolution Trust Corporation, in the United States. If I remember rightly, after a few years, Congress passed a law, kind of, forcing them to sell a bit more because it was felt that they weren't selling enough, that they were beginning to hoard. So, that's always a tension. It looks - and there are different reports that look at NAMA - it looks to me from the outside that that they probably got that about right. They were selling assets, but they tended to be foreign assets, often in the UK.
They were getting reasonable prices for those and therefore they were beginning, they were, they were paying off their senior debt. They held the Irish assets through 2011-12 but then there was a remarkable increase in the appetite for Irish assets over the last few years and they've sold into that. So by, by luck or by design, they seem to have, have got their timing about right.
Eoghan Murphy (Dublin South East, Fine Gael)
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So you wouldn't think there's an argument for trying to restructure the repayment schedule, given what we now know in terms of the rising value of assets? You know, because we talk about the initial costs of the bailout and then the potential for NAMA to reduce some of that cost direct through its work-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----by selling assets maybe too early and not holding on to them long enough, the ability to reduce that cost further is restricted.
Professor Alan Ahearne:
I mean, that's a judgment, that's an operational issue and a judge ... and a strategic issue for their board to judge when is the best time. I'm sure people have come in in the last few years and offered to buy the whole lot off them at a certain price, but the board have to make a decision about whether that's the best price or whether they could do better.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, and then just the understanding in the Department as to the purpose of NAMA when it came to the actual developers, the people who had the loans, and what they were pursuing, because I'm just wondering did the targets change or was NAMA always meant to only be pursuing for the costs that they paid, or were they meant to be pursuing for the full costs the banks paid when it came to the developers?
Professor Alan Ahearne:
I mean, when a debt transferred, that full amount of debt was owed to NAMA, and there was no sense in which NAMA was instructed to write off large portions of it, or just to chase the selling price value. No, there is still, the full amount was owed. Now, everybody knew that NAMA was not going to get back the full amount or anything near it. It was expected that what they would get back would be about the amount of money they had paid. After all, that is why they valued it that way. So, if they could get the full ... I mean I think €72 billion transferred for €30 billion, something like that. That was something like the numbers. If they could get the 100% back, the €72 billion, then we wouldn't have this inquiry because therefore there wasn't a bubble, all assets were valued properly. It was clear that there was a bubble, that assets were not valued, were not at the height of the bubble fairly valued, so there were going to be huge losses.
So that was, but, I mean, for example if there was a developer who had bought a field, and had a loan and the collateral on that was, I don't know, the field plus a bit of a pension fund, and that pension fund rose in value for some reason, and that pension fund would then be part of the collateral behind it, so that NAMA could go after that pension fund as well as the field if they ... so there was no sense of okay, "You've transferred this loan. It was originally €100 billion. It's transferred as €100 million and is now €5 million, therefore you only owe us €5 million." That was never the intention, and I don't, from what I know I don't think that has been the practice.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, thank you. Just to move on then if I may, when you entered the Department, and what the sense was in the Department of the need for a bailout. When did that start to come into your view, as an adviser to the Minister, because we have from other evidence that it occurred to some people in the Department around the time of the guarantee, that something like that might be needed down the line, some sort of a cross-stream credit line at least? And we also have a conversation between Governor Honohan and Minister Lenihan in April 2010 where Governor Honohan says it to the Minister that we're next in line for a bailout after Greece and the Minister said "No, it would be Portugal". So at what point in the Department are you thinking "We might be in trouble here on the sovereign side"?
Professor Alan Ahearne:
When I went in initially there was no discussion of the IMF, but when I went in initially our bond yields had, I think, moved above 5.5% and were heading towards 6%. There was huge outflows from the banking system. So, the risk that the country might not be able to fund itself, that was, that was a possibility. Now, I had no discussion with the Minister about that, but it was possible. The Minister, I know, did meet somebody from ... a retired IMF official, who gave him a sort of briefing about what a programme might look like if Ireland ever needed it and I think that briefing was sent, was e-mailed to me as well.
Eoghan Murphy (Dublin South East, Fine Gael)
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When was that?
Eoghan Murphy (Dublin South East, Fine Gael)
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April 2009.
Eoghan Murphy (Dublin South East, Fine Gael)
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And he met with, was it a retired IMF official?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, and that was, do you know how that was initiated, that meeting? Was it-----
Eoghan Murphy (Dublin South East, Fine Gael)
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But the outcome of that meeting was-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Professor Alan Ahearne:
It was just somebody who was retired, and decided to fill the Minister in on, you know, what a programme might look like. I knew what a programme looked like. I had followed countries that had been in programmes. As bond yields fell, things stabilised, that idea of turning to the, of needing official assistance just went off-----
Eoghan Murphy (Dublin South East, Fine Gael)
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When that meeting happened in April '09, a document came to you. Was that what you said, that there was a document?
Eoghan Murphy (Dublin South East, Fine Gael)
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Was that document, was there any action taken as a result of that document? Do you know did it go to Department of Finance officials?
Eoghan Murphy (Dublin South East, Fine Gael)
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So it wasn't necessarily sketching out an Irish-specific programme.
Eoghan Murphy (Dublin South East, Fine Gael)
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So did the Minister inform you of Governor Honohan's opinion in April 2010, that we'd be next for bailout after Greece?
Eoghan Murphy (Dublin South East, Fine Gael)
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No, okay. Were you aware that the IMF had suggested to Governor Honohan around that time, in May it was, a precautionary line of credit for the country?
Eoghan Murphy (Dublin South East, Fine Gael)
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This was in May 2010.
Eoghan Murphy (Dublin South East, Fine Gael)
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No, you weren't included in those conversations. Okay. In relation to the bank funding cliff that was approaching in September 2010, did the Minister and the Department, were they, were they sufficiently aware of the seriousness of that situation?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Professor Alan Ahearne:
We all had the numbers. They saw what was maturing. The ... I guess the view in, after the banking announcement in, at the end of March 2010, and in the weeks that followed, the Irish banks were actually able to, their funding had stabilised and they were actually bringing in, I think there was inflows of about half a million, excuse me, half a billion a week into the Irish banking system, where there had been outflows for the previous, in 2009, of a billion a week. So that at least had stabilised. The Irish banks were able to issue bonds. I think Bank of Ireland was able to issue some serious bonds, senior bonds. So the hope was that if things continued to stabilise that the banks would be able to raise private funding. It was clear they wouldn't raise enough private funding to get over the cliff, and therefore the Eurosystem, the ECB and the Irish Central Bank would have to help out temporarily, but if they had, in the months that then followed, they would continue to issue bonds and raise funds, and they would've been able to repay that. So the hope was that things would remain stable, and things would continue to improve, well they were improving marginally, but if they continued to do so, the banks would be able to get over that cliff.
Eoghan Murphy (Dublin South East, Fine Gael)
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And was there frustration in the Department on what was perhaps a delay on the part of the ECB, in terms of engaging on this issue, because Governor Honohan told us that he had to write to the ECB twice to bring it to their attention in the summer of 2010?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Just staying with the ECB, in your opening statement you talk about them misjudging the systemic nature of the crisis, and you also talk about question marks about the ECB's communications with markets about individual member states. Could you just elaborate on, when you talk about that second point, about the ECB's communications with markets about individual member states, is that the discussion that you had with Deputy McGrath earlier, that those kind of conversations that you were having?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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And, just then in relation to that, when it came down to the conversation about burden-sharing with bondholders, could it, could it have been a unilateral action on the part of the country? Is it not something that you don't announce, or you don't negotiate on, you do it, and then try and deal with it then? Was that at all part of the kind of calculations that the Department was making or looking into?
Professor Alan Ahearne:
There was no scope for burden-sharing while the guarantee was in place, so this was forward-looking. I mean, I discussed this with a senior civil servant maybe from May onwards about the Anglo bonds, could they be discounted. At the time the plan with Anglo was to split it into a good bank-bad bank, and that raises the issue of what goes into the bad bank, what creditors, what funding goes in. You put the subordinated debt in of course, and that would expose it then, but you, in theory, could put the senior bonds in. Now you are splitting the depositors and senior bonds then so that had all those legal issues but at least that was, in principle, we discussed that.
Eoghan Murphy (Dublin South East, Fine Gael)
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Just when that window opened up - end of guarantee before the bailout negotiations - and the IMF are talking to you about a figure of €4 billion and Mr. Lenihan is thinking maybe 50% of that, was anyone saying let's just do this, rather than wait to be told that we can't?
Professor Alan Ahearne:
I think the Minister certainly considered it, but as September went on, and our interest rates on, facing the State, on sovereign bond markets increased, then he became worried about the knock-on effects to the sovereign.
And the advice, clearly, from the NTMA was "Don't do this because it will push up your yields even more and you'll lose access to the markets and if you are pushing up the Irish interest rates as a heavier cost to the State and, therefore, any gain you are going to get you are going to lose". I mean, I was ... I remember he did an interview in New York in early October, maybe about 10 or 11 October, with, I think, the Financial Times, and I was sitting beside him and he said to them ... they asked him about the Anglo bonds and he said "Well, I'm not going to coercively discount them but the bank could do a liability management exercise and raise some capital that way, burn 'em that way. That's a voluntary ...". In fact, most of the subordinated debt that Deputy McGrath spoke of was done that way, done through voluntary ... a voluntary way. Not long after, I remember somebody from the NTMA - a senior official from the NTMA - showing me their BlackBerry and saying "Look at this, I'm getting e-mails from ... here's a headline, I think, from the Financial Timesor from somebody, something like Ireland going to default". It was that sort of tone to it - "Look at this, I'm getting e-mails from the people we sell bonds to asking me is Ireland about to default". And I said, "Well, he didn't ... the Minister didn't mention anything about sovereign bonds, he was talking about bank bonds", and the reply I got was "It doesn't matter, look at the headline, this is creating problems". And the Minister said ... I remember the Minister saying afterwards "Okay, I realise I'm talking about burning senior debt and you're [the NTMA are] trying to issue senior deb". So, they're different debts but very difficult to do in an environment where the sovereign market is stressed.
Eoghan Murphy (Dublin South East, Fine Gael)
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And, just staying on that issue, just one last question. Do you recall any conversation between Kevin Cardiff and the ECB when - we're later into November now, this is negotiations and discussions - and the ECB had its own legal advice on whether it was constitutional for Ireland to impose burden-sharing and Mr. Cardiff retorted that, you know, we could have a referendum if we needed to. Were you there for that conversation, do you recall it?
Professor Alan Ahearne:
He ... Kevin either said to me or else I read it in a memo. I thought that was somewhat later but Kevin's dates might be better than mine but I do remember that ... I think, reading it at the time in a memo that the ECB had said "We have got ... ", "Actually, this would be unconstitutional and we have got our own lawyers". And maybe - I'm not sure if it was written or whether Kevin said it to me afterwards but "This is the answer I gave them: "I'm sure if we put this to a referendum the Irish people would vote to burn Anglo bonds."."
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Just finally, going back to October and I think it was in your travelling over to New York you wrote in a chapter with ... for the book on Mr. Brian Lenihan about a discussion you had with him about the euro and about possibly exiting the euro. We know from other evidence that there was a unit doing work on potential contingencies should we find ourselves outside of the euro or should a decision we take bring us outside. But was that discussion a serious discussion or was it just a chat that people have, you know?
Professor Alan Ahearne:
I think Brian Lenihan's style was that he liked to consider all options. I mean, he wasn't willing just to ... if an official said, you can't do A, he'd want to know why can't you do it "Well, there's problems - X,Y and Z problems", "Well, is there a way around the X, Y and Z?". So, he was very open-minded and he wanted to satisfy himself that whatever route he was doing that that was the right route and that everything else had been considered. So, was it serious? It was never ... he didn't, sort of, again, order a big ... a plan to go ahead. It wasn't that but he wanted to kick the tyres of that particular out-of-the-box alternative route, as he did with many other things. And so I thought it was just a good way of doing policy making. He thought everything through, even things that were, sort of, real left field.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And you would characterise that as being real left field in terms of a possible option.
Eoghan Murphy (Dublin South East, Fine Gael)
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Did you give him any advice on it or was it-----
Professor Alan Ahearne:
I mean, I wouldn't have been in favour of it either. So we just discussed a lot of the, sort of, economic issues to do with it "If you had your own currency would you peg it to sterling or would you become part of the dollar zone?", it was all that sort of stuff. It was just very broad discussion of alternatives.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, thank you. The final section we are looking at, if I may, is the national recovery plan because you were involved in drafting that document, is that correct?
Eoghan Murphy (Dublin South East, Fine Gael)
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Something else I wanted to ask you about was ... because, again, in that chapter you submitted ... or in that book you submitted a chapter for, you talk about this visit from Olli Rehn in November 2010 and that the Minister had a bespoke plan for Ireland at the beginning of November and he wanted to discuss that plan with the French Finance Minister and with the German Finance Minister but a call from Olli Rehn in the Commission prior to this meeting of Ministers confirmed that the bespoke plan was not going to work. So, was this the national recovery plan, this bespoke plan, or was it a separate thing?
Professor Alan Ahearne:
No. So what he wanted ... I mean, Ireland was under pressure in sovereign ... in the markets. The national recovery plan would have been part of it, so what he wanted to do was get the national recovery plan out, publish it. He wanted the ECB to say that ... because the banks were separately under stress on their funding, he wanted the ECB to say publicly that they stood behind the Irish banks and provide liquidity. By the way, the ECB were never asked to give capital to the Irish banks. It's not that they were asked to pay for a single cent, they were being asked to give funding but they were repaid all the funding. But he wanted them to say that they would stand behind him. And then he was willing to enter some sort of precautionary programme and what he had in mind is they could ... I mean, he said they could do quarterly surveillance if they wanted but the Irish State had enough ... the sovereign had enough money to keep going to the middle of 2011. So he said "Look, let's use that money. If the markets haven't improved, we can run down that money. We've just given ourselves time, given everybody time [the Irish State] given the Europeans time." Because they were in turmoil over what was going on - this was, remember, the start of the EU area crisis - maybe get some money to keep the State going until the end of 2011 and at that stage if Ireland still did not have access to the markets, they had pulled out at this stage, then we'd go for a full-blown programme, but he wanted some time.
Eoghan Murphy (Dublin South East, Fine Gael)
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Right. And the national recovery plan was a part of that bespoke plan and he wanted to talk to the French and German Finance Ministers about it but Olli Rehn intervened. Was he asked to intervene or on what authority was he working?
Professor Alan Ahearne:
No, Olli Rehn had been in Dublin on ... early that week - so on maybe the 8th or the 9th - and he discussed this with Olli Rehn. He met him first privately then he came into the room with several officials and I was there. And Olli Rehn said "This is certainly worth pursuing". That was the point I was making, this precautionary plan. Later that week ... you know, so it looked at this stage there was going to be some time to develop this, to get the national recovery plan out and talk to the various ... to the two Finance Ministers. Later that week - the phone call that I am talking about is from Seoul - there was a G20 meeting. Now, I was in the United States ... I flew to the United States, to New York, later that week so I was in the US but I called back, I think, on the Friday. There was a ... Reuters or one of the news agencies had a story that said Ireland applying for the ... is going to apply for a programme. So I called back and said "What's this all about?" and I was told at that stage that a call had come in, I think, the night before, sorry, or at some stage around then, from Olli Rehn to Brian Lenihan and he had said - in the conversation as it was related to me - "Hi Brian. It's midnight in Seoul. Things have changed." And what he meant was ... "Things have changed.", is that on the Monday or Tuesday, there was this potential to explore a precautionary programme but by the time we got to later that week there was no time to do that.
Eoghan Murphy (Dublin South East, Fine Gael)
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Because of what had happened in Seoul, because of the-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Was Olli Rehn sent off as an emissary on behalf of the Government? Was he asked or tasked with, you know, sussing this out on behalf of the State or was he just picking up, you know, what was the view at Seoul and that's why he communicated that back?
Professor Alan Ahearne:
I mean, he would have been asked to accept the national recovery plan - which eventually they did - and the fiscal projections and all and then so he would have agreed to that but ... that was fine. What he was relaying back is obviously there had been some sort of meeting in Seoul where they had decided that this couldn't wait, that Ireland needed to go into a programme right away.
Eoghan Murphy (Dublin South East, Fine Gael)
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Just to clarify, sorry.
Ciarán Lynch (Cork South Central, Labour)
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A supplementary on it and then I'll move on.
Eoghan Murphy (Dublin South East, Fine Gael)
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So Olli Rehn had a discussion with partners in Seoul on the bespoke plan that Brian Lenihan had come up with and communicated to him in Dublin and they made a decision on it, or not.
Professor Alan Ahearne:
I mean, I don't know what happened in Seoul. No, I'm not necessarily saying that. He may not have brought that to ... he may not have brought that. Brian Lenihan didn't send him out to discuss this. Brian Lenihan himself was going to discuss it with the German and French Finance Ministers.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you.
Ciarán Lynch (Cork South Central, Labour)
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I'll bring you back in again to wrap up, Deputy Murphy. If I can just deal with a few matters myself with you, Mr. Ahearne. In your statement, you say that the merger of Anglo and INBS and the transfer of deposits was a reasonable approach agreed with the troika. Then you, kind of, go on to say, "Ironically, I had identified as an option the transfer of deposits from Anglo to AIB in a newspaper article I wrote in January 2009." Maybe if I could just tease out some aspects of that with you please, Mr. Ahearne, in that do you think the troika was a material motivating factor in the merger of Anglo and INBS and the resultant deposit transfers?
Professor Alan Ahearne:
It was something that they wanted to do. I mentioned that it made sense in ... I mean, there weren't huge benefits to it. In fact, the benefits were probably quite small, but they wanted to do it. One benefit was that it did put the two banks that were being wound down together and, in a way, created a separation between them and the other banks. I thought that was probably helpful. And there was a transfer of deposits then from Anglo to AIB. The country needed the deposits, it needed the funding, but the funding really needed to be in the banks, the core banks that were going to continue, not in banks that were going to be wound down. So that made sense to me.
Ciarán Lynch (Cork South Central, Labour)
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And maybe if you can outline what you would've seen as the potential benefits of your suggested option in 2009 of transferring the Anglo deposits to AIB?
Professor Alan Ahearne:
It was just that .... even then, in 2009, writing that, I obviously ... I didn't see a future for Anglo and, therefore, Anglo was ... my thinking on it was it was just going to eventually disappear. You had to do something with the bank's assets and liabilities. I think I wrote in that article about moving the assets to an asset management company. Well, that was done through NAMA, and then you've got to move its liabilities somewhere. So it made sense to move it to another bank.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Could I maybe invite you also to comment upon the suggestion by the Governor of the Central Bank, Patrick Honohan, that the merger of the EBS and AIB and INBS and Anglo was largely "cosmetic", would have been the words he would've used. In your opinion, was there any real value to be obtained from these mergers?
Professor Alan Ahearne:
On the EBS, I mean, it probably would have though it was a very small institution and depositors may well have become very worried about it post the programme. Is this institution going to last at all? And so that would've created worries for depositors which were unnecessary. So folding it into AIB and, therefore, depositors had AIB behind it, at least did provide some assurances to depositors. I don't think there were any big costs to it but ... and no huge benefits, but I think there was a benefit for stability or deposit stability reasons, having a bigger bank like AIB behind those deposits.
Ciarán Lynch (Cork South Central, Labour)
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Maybe if I can just move on to Anglo specifically in terms of its long-term future in that regard? You recall in your statement that the Minister decided in autumn 2010 to wind down Anglo. Maybe if I could ask you what advice, if any, did you give the Minister to support the decision to wind down Anglo?
Professor Alan Ahearne:
I mean, I discussed it with him many times. So he would've known my opinion about it. But, as I said, he was ... he would take advice from lots of different people and he was open-minded on it. So he was giving the management an opportunity to make their case that you could get a good bank out of it and that would be positive for the Irish economy.
Ciarán Lynch (Cork South Central, Labour)
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So that was one operational consideration that you, kind of, had this good bank-bad bank sort of thing. What other operational factors were considered at the time?
Ciarán Lynch (Cork South Central, Labour)
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Right.
Ciarán Lynch (Cork South Central, Labour)
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So what would have been the consequences to the State in two regards? One, winding it down quickly - as you just kind of said, there were some concerns there, maybe you could tell us more? And what were the concerns in terms of actually keeping it going as a going concern?
Professor Alan Ahearne:
I mean, in terms of immediately winding it down, there would've been no gain in terms of ... because it was under the guarantee, the creditors were all guaranteed, so it was no benefit to ... no reduction in the costs to the State. It still had to put the capital in. It was important that Anglo had a banking licence and was able to get funds from the ECB, because those were otherwise funds that the Irish State would have to do to wind ... to gradually wind this bank down.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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And was-----
Ciarán Lynch (Cork South Central, Labour)
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At any time was it discussed that, look, we're ... the situation with Anglo is this is where it was, this is where it is now and this is where it needs to go and that, ultimately, where it needs to go is a wind-down, a liquidation or some removal of it from the financial landscape?
Professor Alan Ahearne:
That was always ... that was always, I wouldn't say the preferred option, but it was always under very serious consideration that eventually this just wouldn't be here, it'd be wound down. It was all about timing. The management came up with this idea, well maybe we can save you a few bob and we can create a bit of value. So the Minister said, "Okay, well, look, just put together that proposal". But, as I said, he was open-minded on it.
Ciarán Lynch (Cork South Central, Labour)
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And in that regard, it's the final question specifically on Anglo. In the way that the promissory note was structured, did it enable or help or assist or hinder the ultimate liquidation of the company?
Ciarán Lynch (Cork South Central, Labour)
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But inevitably-----
Ciarán Lynch (Cork South Central, Labour)
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But inevitably if you're going to liquidate something, and we'd know from earlier testimony you ... that there's very particular structures for liquidation and, in this regard, there would be emergency legislation that'd been prepared over a period of time.
Ciarán Lynch (Cork South Central, Labour)
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So you would hit that junction point. So the question I'm asking you specifically is the way the promissory note was structured, was it assisting or hindering to that process?
Professor Alan Ahearne:
It was neutral on it ... once the decision was made to liquidate it, the Central Bank claimed the promissory note. So that was just normal Central Bank operations. The Central Bank could've held the promissory note. They decided with the Government that it was everybody's advantage to convert the promissory note into a regular Government bond, but it could've held the promissory note.
Ciarán Lynch (Cork South Central, Labour)
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Okay. I just want to wrap up with a couple of matters there and to say you were in a similar kind of area with Deputy Murphy a few moments ago. I'll maybe just put the question to you. I know you came in in 2009. You came in after the banking guarantee had actually been put in place but you were dealing with the legacy issue of it in your capacity as an adviser. So maybe if I could start by putting the question to you, did the structure and design of the banking guarantee along with its period of duration - which was two years, the way that it was actually set up - have any bearing on the Irish State entering a bailout programme two years and two months later, after it had been put in place?
Professor Alan Ahearne:
Well, it certainly limited options while it was in place for two years. I mentioned ... because all creditors were guaranteed. Of course, it's not at all clear that if there had been a different guarantee or low guarantee that the Irish State would have put banks into liquidation anyway and put losses onto senior creditors, depositors and bondholders. So the answer to that question, just to have it clear, I think, one has to have a clear idea of what the counterfactual is, and it's not clear to me that in the counterfactual-----
Ciarán Lynch (Cork South Central, Labour)
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Well, the fact is that a guarantee was put in place.
Ciarán Lynch (Cork South Central, Labour)
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So there's no counterfactual of there being no guarantee.
Ciarán Lynch (Cork South Central, Labour)
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There's a guarantee in place.
Ciarán Lynch (Cork South Central, Labour)
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So is it inevitable or not inevitable that you're entering a bailout programme by the particular design and structure of which the guarantee was put in place?
Ciarán Lynch (Cork South Central, Labour)
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What ... what was it-----
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Professor Alan Ahearne:
Let's say the ECB announced ... we know that it announced in July ... summer of 2012 ... a new programme, outright monetary transactions, OMT. We know it subsequently did a quantitative easing. By announcing the OMT, it reduced the yields on Italian and Spanish bonds, which had gone up to 7%, up to where Irish bonds had been in the autumn. It reduced them ... it kept those two countries in the markets. In other words, it prevented them going into a programme. Now, the programme ... there wouldn't have been a programme because there wasn't enough money for them, but the point I'm trying to make is, if the ECB - and this is a thought experiment - if the ECB had announced in the summer of 2010 OMT, would the Irish State have required a programme. And the answer is, in my view, clearly "No".
Ciarán Lynch (Cork South Central, Labour)
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All right. But what we do know is ... you're advising us that the ECB didn't capitalise the banks, that the funding, in effect, was a form of quasi funding capital. But is it the case that, in reality, without that funding, the banks were dead, illiquid and insolvent?
Ciarán Lynch (Cork South Central, Labour)
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So in that regard, were the banks that were covered by the guarantee still solvent and therefore qualifying for ECB-ELA funding at the time of Minister Lenihan’s last letter to Mr. Trichet?
Ciarán Lynch (Cork South Central, Labour)
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The ECB have a very specific interpretation and that was laid out in Mr. Trichet’s correspondence repetitively back to Mr. Lenihan.
Ciarán Lynch (Cork South Central, Labour)
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But there were then questions, and your theory, if I understand it right, is that because the State is standing behind the banks, which it was in 2008, and the State is solvent, the banks are de factosolvent.
Ciarán Lynch (Cork South Central, Labour)
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By November 2009 - or, sorry, November 2010 - there is a serious question with regard to the State’s solvency, so there is a serious question de factowith regard to the banks’ solvency. So in terms of the position of where the ECB are coming at that time, are there now concerns that are genuinely placed inside in the ECB with regard to the structure of ELA funding, with regard to the solvency of Irish banks, through the de factoquestions of solvency with the Irish State?
Ciarán Lynch (Cork South Central, Labour)
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Were they not implying that in the correspondence? You were saying there was a lot of implication that was stated in Mr. Trichet’s letter, but that was really what the real implication of those discussions was.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Mr. Cardiff, when he was before this inquiry here, in his witness statement, commented upon Jean-Claude Trichet’s letter in response to one of 19 November 2010 to the late Minister for Finance, and he says: "In many ways this letter was entirely superfluous, since it was already clear by the time of the letter that the Government was going to opt into a [bailout] programme." Would you concur with the statement that Mr. Cardiff said?
Ciarán Lynch (Cork South Central, Labour)
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Okay. So was Ireland bounced into a bailout programme or was it inevitable?
Ciarán Lynch (Cork South Central, Labour)
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Was it inevitable? According ... by Mr. Cardiff’s testimony, he is saying - I repeat - “In many ways the letter was entirely superfluous, since it was already clear by the time of the letter that the Government was going to opt into a programme.”
Professor Alan Ahearne:
I don't think there was anything the Irish side could have done to reduce our yields in the market and therefore to get back into the market. There were lots of things that could be done in Europe. I have given the example of OMT. Lots of things that eventually did occur, so-----
Ciarán Lynch (Cork South Central, Labour)
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But they are all programmes by their nature.
Professor Alan Ahearne:
-----it wasn’t inevitable in the sense that was there ... there was nobody in the world who could do anything about it. The European authorities could have done something about it but they had set up - as Brian Lenihan explained at the time - they had set up a fund, and their answer was, “Look, we’ve set up this fund to provide financial assistance. You need financial assistance. Go to this fund.”
Ciarán Lynch (Cork South Central, Labour)
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But if ... just to test the proposition - the proposition being that Ireland was bounced into a programme and if we weren’t bounced into that programme we wouldn’t have required a programme - is that an accurate proposition? Was Ireland ultimately going to go into a bailout programme one way or the other?
Professor Alan Ahearne:
If you look at what happened to the yields ... Let’s say the ECB had announced - they didn’t have the programme, but they announced that they would stand behind the Irish banks and that somehow stemmed deposit outflows from the Irish banks. The Irish Government’s plan was to get ... would have then ... wouldn’t have entered a programme. It would have issued the national recovery plan. We would have gone into 2011, but the yields on Irish Government debt were continuing to rise. They didn’t stop rising until we got to the summer of 2011. At that stage the Irish State would have been well out of cash.
Ciarán Lynch (Cork South Central, Labour)
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Were you aware, or did you witness the engagement the inquiry had with Mr. Trichet in Kilmainham?
Ciarán Lynch (Cork South Central, Labour)
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Okay. You are familiar with much of the content of it. When this proposition was being tested against Mr. Trichet - and one of the purposes of engagement with Mr. Trichet was that we would have ... that that engagement would be evidence that could we test with other witnesses, so this afternoon is an opportunity to test it with another witness - Mr. Trichet says: "As you know" - he’s talking about the whole ELA funding - "As you know, we could also have continued on our side after having gone from 100% of GDP to 200% - this is Irish GDP - and why not 300% of GDP? Then what would be the commission of inquiry [referring to this inquiry] be asking for? You would say, 'Were you totally crazy, at the ECB, to continue, when we were going into the wall at 100 miles per hour, to continue providing liquidity and liquidity and liquidity?' " So the question I put to you, Mr. Ahearne: is Mr. Trichet right? If this action hadn’t actually happened and his correspondence of November hadn’t kind of named the situation, and, as we see from Mr. Cardiff’s testimony, that we were going into a bailout programme anyway - if we had just delayed and stayed on the never-never with the ELA, would the bailout have been bigger for Ireland?
Ciarán Lynch (Cork South Central, Labour)
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The position, according to Mr. Cardiff, would have been ... according to Mr. Cardiff when he was before ... he said, “The stronger the position you have the better your negotiation situation is.” By running out of cash, does your negotiation position get weaker or stronger?
Ciarán Lynch (Cork South Central, Labour)
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I just want to stay with the proposition that we have in front of us. If Ireland had delayed its entry into a bailout programme, would the cost have been larger and would our negotiation hand have been weaker?
Ciarán Lynch (Cork South Central, Labour)
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You don’t think it would have made a difference.
I have another proposition here; it is a proposal for a very short five-minute comfort break. I am going to do that. However, while we are suspending, I just want to advise the witness that he is still under oath. You can refer to any legal advice and support you have here and we will resume in five minutes.
Ciarán Lynch (Cork South Central, Labour)
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We will resume in public session and, in doing so, continue on. And if I can invite Deputy O'Donnell, please. Deputy, you have ten minutes.
Kieran O'Donnell (Limerick City, Fine Gael)
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Thanks, Chairman. Welcome, Mr. Ahearne. On your appointment to the position of special adviser to the late Brian Lenihan in March '09, were you satisfied that the Minister and his officials were in possession of the management information that was necessary to make informed decisions such as the initial injection of capital of €4 billion into Anglo in May 2009? Was there recognition at that time by the Minister and officials that the data available to them was not as accurate as it could have been? And maybe you could put that in the context that we had PwC in before us this morning and Project Atlas ... one of the assumptions they took was that commercial property would only fall by 4% in value between '08 and 2011, when, in fact, property fell by over 60% during that time period. And, they were ... PwC were subsequently involved in doing work for the Department in around May '09, at which time you would have been in situ, where they agreed with that €4 billion that the new management in Anglo suggested was needed in terms of recapitalisation of Anglo.
Kieran O'Donnell (Limerick City, Fine Gael)
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So, when you joined on 18 March '09, what figure did the Minister for Finance believe was needed to be invested in Anglo?
Kieran O'Donnell (Limerick City, Fine Gael)
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When you say a few months later, precisely?
Kieran O'Donnell (Limerick City, Fine Gael)
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€5 billion and €10 billion?
Kieran O'Donnell (Limerick City, Fine Gael)
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For ... net overall?
Kieran O'Donnell (Limerick City, Fine Gael)
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And, did you feel at the time ... what was the basis for that view held by the Minister at the time?
Kieran O'Donnell (Limerick City, Fine Gael)
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And you, obviously, would have come in and reviewed reports and Project Atlas and so forth. And were you ... what was your view on the reports that had been provided to the Minister to that point?
Kieran O'Donnell (Limerick City, Fine Gael)
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What did you think the banks would be-----
Professor Alan Ahearne:
I didn't have a number. Ultimately, it would depend on ... the amount of recapitalisation that was going to have to be done by the State depended on lots of different things. It depended on, one, on how much private capital the banks could attract. There was always, right from day one, I think, some confidence that the Bank of Ireland would be able to attract private capital, and therefore, save the State having to inject the money. There was more scepticism about whether AIB would by then, so it was seen as a more troubled bank than Bank of Ireland.
Kieran O'Donnell (Limerick City, Fine Gael)
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Did you believe-----
Professor Alan Ahearne:
But ... So that was one of the factors, how much private capital. The other was how much capital ratios the Central Bank would set and, ultimately, the decision about how much capital the banks needed was a decision for the Financial Regulator and the Central Bank. I remember being in a meeting at some stage where there was a bit of a discussion - the Central Bank and the Governor and the Financial Regulator were there - a bit of a discussion about what's a good capital ratio for banking and the regulator abruptly stopped it and he said, "Excuse me, there's only one person who can set capital ratios, and that's me", which he was correct. It was not a political decision or a decision for a Minister or a Department.
Kieran O'Donnell (Limerick City, Fine Gael)
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When was this, Mr. Ahearne, roughly?
Kieran O'Donnell (Limerick City, Fine Gael)
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When in 2009?
Kieran O'Donnell (Limerick City, Fine Gael)
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And-----
Professor Alan Ahearne:
So, the point was that, yes, there was going to be more capital put into the banks. How much? That was a question for the Central Bank. It was going to do its stress test and its PCARs, and it was going to report the number ... up to the Minister to decide whether he puts the money in or not, the overall strategy, but the quantum of money that was required of capital to meet capital requirements, all that was to be determined by the Central Bank.
Kieran O'Donnell (Limerick City, Fine Gael)
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And did you believe, when you took up your position in special adviser to Minister Lenihan in March 2009, that the information at his disposal, the PwC reports, information from the Financial Regulator, NTMA, everyone else, all other various advisers, did you believe he had sufficient and accurate information?
Professor Alan Ahearne:
I realise that, I mean, the, sort of, accurate information you're talking about takes time to gather. The NAMA process, for example, was going to gather very accurate information - time-consuming, but they were going to drill down and, on a loan-by-loan basis get the, sort of, information that, ultimately, you needed. So, the Government ... I think at that stage it was very difficult for them to have a complete picture. How could they have? You're dealing with aggregates. This is what the, sort of, reports were dealing with. If you really want to get into the, sort of, assessment that NAMA did, and that, let's say, eventually, the ECB did in its comprehensive assessment and stress test, then you have to go into incredible detail, one-by-one, and that just takes a lot of time.
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, were you surprised that, six months after the guarantee when you joined with Minister Lenihan, that the Department of Finance or the Minister hadn't a full handle on the state of the balance sheets of the banks?
Professor Alan Ahearne:
I don't say I was surprised. I had ... in the previous time I was in front of the committee, I had said that I had met the Minister in, maybe, August of 2008 and had suggested to him that he should try and get as full a picture ... as good a picture as he could possibly get in the thinking about policy for banks but, again, you know, this is a ... to do the, sort of, exercise that NAMA did, for example, just takes a lot of time.
Kieran O'Donnell (Limerick City, Fine Gael)
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Can I just ... one quick question. Do you believe that if Anglo Irish Bank had been nationalised or had been ... ELA funding had been put in place on the night of the guarantee and you had gone to the ECB and gone to the European Commission, that you would have been able to burn bondholders and save the Irish taxpayer money?
Professor Alan Ahearne:
There's nothing that happened subsequently that would suggest that that would have been a possibility. The ECB was stridently against the burning of bondholders in ... once the guarantee had expired. The whole approach, from what I can see, and I wasn't there in September '08, ... but from what I can see, the whole approach from the ECB, and from Europe in general, was no more Lehman Brothers, no defaults so-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Well, do you believe that Anglo Irish Bank was solvent on the night of the guarantee?
Kieran O'Donnell (Limerick City, Fine Gael)
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In your professional judgment,-----
Kieran O'Donnell (Limerick City, Fine Gael)
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In your professional judgment as an economist, was Anglo Irish Bank solvent on the night of the guarantee?
Professor Alan Ahearne:
If you think ... so ... but if the solvency includes, sort of, forward looking, so what losses? It's not the losses as actually recognised today under what I think are imperfect accountancy rules but - you could step back from that, which is in a regulatory or an accounting approach to solvency, and say that, as an economist, this is what is going to happen in the property market and here's the real story with these loans, that there's really not much collateral and stuff like that. If you knew ... if you add on what subsequently happened and the losses, then it was ... it is clearly completely burst on the night, but that is not what the data would have shown on that night.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay. Can I take you to the bailout? You've stated earlier to the Chairman that it's your view that if the current bond buying programme that's in place under Mario Draghi and the ECB was in place, Ireland would not have ended up in a bailout programme. Is that correct?
Professor Alan Ahearne:
Again, it's somewhat speculative but, I think, if they had introduced OMT earlier, that would have calmed sovereign bond markets and Irish spreads would have fallen ... Irish yields would have fallen in the same way that German and in the same way that the Spanish and Italians' did in 2012.
Kieran O'Donnell (Limerick City, Fine Gael)
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And how would we ... if we hadn't gone into the bailout programme, how would we have ended up funding the investments that were required in the banks subsequently?
Kieran O'Donnell (Limerick City, Fine Gael)
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And do you believe the markets would have tolerated that?
Professor Alan Ahearne:
Well, that's just the point. This is ... if you have a backstop, a lender of last resort who is doing what they're doing now under ... it's now under quantitative easing where they're buying and they've driven Irish bond yields to 1.5%. But even under the OMT, which ... actually, there was no bonds bought under OMT - it was just an announcement - but that did reduce the yields. And if your yields are low enough, then when you have access you, obviously, have people who are willing to lend, then you can borrow from them and you can do the plans. I mean, ... if ... and, again, we are talking counterfactuals, which are extremely difficult. In that counterfactual, it wouldn't have made an iota of difference, I think, to the fiscal adjustments that were made. Ireland would still have had to do its fiscal adjustments. The fiscal adjustments that were done weren't done because we entered a programme; they were done because we had a very large budget deficit. Under a scenario where we could borrow from the markets, the borrowing would have been financed by the financial markets as the Government did the fiscal consolidation it did. It turns out that that money came from the official sector, but it's still the budget that had to be narrowed. It didn't make any difference to that. It may well not made a whole lot of difference on the ... what was done in the banking front. So, there was work needed to be done. The issue was who was going to finance it. Ideally, it would be financed by the markets. If the markets aren't going to finance it, then it had to be financed officially.
Kieran O'Donnell (Limerick City, Fine Gael)
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And who do you believe vetoed at the G7 meeting? Who vetoed the burning of the €4 billion in unsecured bondholders in Anglo?
Kieran O'Donnell (Limerick City, Fine Gael)
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And, I suppose, the very final point. Do you think anything different could have been done in terms of dealing with the banking crisis and the guarantee that would have saved the Irish taxpayer the at least €64 billion gross that has gone into the bank and, more particularly, the €30 billion of funds that are gone into Anglo Irish Bank that they will never see a red cent of again?
Professor Alan Ahearne:
Stuff could have been done while the bank ... while the property market bubble was inflating, yes, so if you're talking about ... if you're ... but once we got to where we were in, let's say, 2008, I think there wasn't a whole lot could be done on the Irish side. There was a lot of work to be done in restructuring the banks and fixing the public finances, but if you're talking about, sort of, avoiding the pain of the bursting of the bubble, then not a whole that could be done on the Irish side.
If we had the, sort of, European mechanisms - the banking union, quantitative easing - and if they had been in place in 2008, that would have made, I think, the deleveraging and the deflating of the Irish economy, and the recovery, easier, but that's not an issue for the ... I mean, that would ... that's not something that the Irish authorities had control of.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Deputy Pearse Doherty.
Pearse Doherty (Donegal South West, Sinn Fein)
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Go raibh maith agat agus fáilte ar ais chuig on choiste. Can I ask you, Mr. Ahearne ... or Dr. Ahearne, you mention in your statement, "Asset management companies like NAMA have been used in many countries ... to facilitate bank restructuring and to manage and dispose of troubled assets." Can you comment on the different structures and mechanism used in other countries and, in particular, outline their respective success in addressing their own particular issues as briefly as you can?
Professor Alan Ahearne:
I mean, there are many different types of asset management companies. They're publicly-owned. Some of them are privately owned. Sometimes there's an asset management company per bank; I think, the Swedes did it that way. Sometimes its an overall stay-alone asset management company, like NAMA or, I think, the Spanish have a very similar asset management company. So there's different variants of it.
Pearse Doherty (Donegal South West, Sinn Fein)
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Did anyone copy NAMA?
Pearse Doherty (Donegal South West, Sinn Fein)
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And successful outcomes or unsuccessful outcomes in those areas?
Pearse Doherty (Donegal South West, Sinn Fein)
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But in terms of the-----
Pearse Doherty (Donegal South West, Sinn Fein)
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But in terms of ... obviously, NAMA wasn't set up for the purpose of the economy. Obviously, it would have an effect on the economy. It was set up in terms of the banks ... in terms of getting the bad assets off the banks so do you have an analysis of how successful the NAMA ... the copying of NAMA in Slovenia and Spain ... how it worked out in relation to its stated purposes as opposed to the wider economy?
Professor Alan Ahearne:
I mean, ultimately, you're trying to fix a banking system for economic reasons. This is all about the welfare of the citizens so you're not stabilising your banking system or setting up an asset management company for the benefit of developers or borrowers or bankers. That was a ... NAMA ... the Government was accused of that when it was being set up. It was false then and it's clearly false. There aren't many developers going around saying that they benefitted greatly from NAMA-----
Pearse Doherty (Donegal South West, Sinn Fein)
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No, that's not the point.
Pearse Doherty (Donegal South West, Sinn Fein)
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That's not the point, Mr. Ahearne. The point is in relation to the establishment of NAMA to bring bad assets off the loan books of the banks. For example, it didn't really help Anglo Irish Bank or Irish Nationwide. Those two banks went bust. What I'm saying is you make the point that NAMA was replicated in two other European member states. With the stated purpose that it was set up for, was it successful or not?
Pearse Doherty (Donegal South West, Sinn Fein)
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The economy could have recovered in those countries or could begin to recover for other reasons, but the banks could have still been left as some of our banks were that were not able to be ... that didn't recover.
Professor Alan Ahearne:
As I say, I'm not an expert in the Spanish or Slovenian economy. I know in the Irish case that NAMA did achieve its objectives. It deleveraged and de-risked the banking system, and that was crucial. You can imagine-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. We heard-----
Professor Alan Ahearne:
Sorry, Deputy. You can imagine newspaper reports coming out about depositors, let's say, with AIB ... every day news coming out of the property market continuing to fall in 2009 and '10.
If AIB had held onto those assets, people would say, "Is this additional decline or is bankruptcy of this borrower, does that mean that this bank is now bust and I have to withdraw my ... and I should withdraw my deposits?" One of the advantages was, you took the high-risk loans and you put them into an institution that did not need to raise deposits, and that cleaned up ... helped to clean up the bank's balance sheets.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. We heard in testimony from various witnesses on the issues of NAMA and their belief that NAMA crystallised losses at the wrong point in the property cycle. For example, we also heard from Mr. Fingleton last week and he gave examples of three loans that he would be familiar with which were haircutted by NAMA which he believe will ... has already accrued close to half a billion euro of profit to NAMA. We also heard from developer Michael O'Flynn, where he gave evidence to this committee on 23 July and he said:
By paying low prices for assets and by taking good loans as well as bad, it was always likely that [an] entity would generate a profit. However, this profit has been achieved at the cost of an earlier recovery in the banking system and serious damage to some developers, who had loans acquired and who had lost an opportunity to work out those loans. It also ignore[d] the huge hidden cost of fees which [were] not included on NAMA’s balance sheets but, instead, added to the account of the borrower.
Firstly, what's your assessment of the assertion by Mr. Fingleton that NAMA was a factor in the losses experienced by those banks ... by his bank?
Professor Alan Ahearne:
The losses were there because the loans went bad and so if somebody lent €100 million to a borrower to buy a field to build houses in the middle of nowhere and it turned out those houses were not built and that field is now worth €10,000 because there's cattle and sheep on it, then there's a massive loss but that loss isn't ... NAMA didn't create that loss, the transfer didn't create that loss, the money-----
Pearse Doherty (Donegal South West, Sinn Fein)
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But does the-----
Pearse Doherty (Donegal South West, Sinn Fein)
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But does the transfer ... the example that was given, which we haven't seen as a committee, but the example that was given in terms of the haircuts that were provided on three particular loan cases, NAMA actually generated a profit of close to half a billion euro on them. So, therefore, it was because of the crystallisation, in Mr. Fingleton's view, of the losses at that time on the books of Irish Nationwide that resulted in half a billion euro of additional capital being required for that bank through the taxpayers.
Professor Alan Ahearne:
I don't have the detail of individual notes either but I can look at the aggregate. It looks like NAMA is going to recover in or about, say ballpark, as the money it paid. That sounds to me ... doesn't sound to me, therefore, that they completely underpaid the banks.
Pearse Doherty (Donegal South West, Sinn Fein)
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Well, Mr. Ahearne, we've also heard, and I think it was Deputy McGrath who talked about what's been referred to as vulture funds and private equity funds which are flipping loans, and we have much of this in the media which ... where they're making massive profits because not only did NAMA crystallise the losses at a point in time of the property cycle but it also ... it also sold on the properties as a result of the troika programme to redeem its bonds. So, therefore, even ... if it was allowed to, as a bank would, to work those loans over a longer period of time, it would have gained the benefit. So to say that they're only going to make €1 billion, for example, you also have to look at how many billions the private equity funds have made in flipping the properties.
Professor Alan Ahearne:
I mean, if somebody wants to make the case that a bank, AIB, that it's clear that the ... if the ... those ... they would have worked out those loans much better. You look at the way they have dealt with the mortgage arrears and if somebody wants to stand up and say, "It's clear that these bankers are actually really good at working out problem loans," then by all means go ahead and make that case.
Pearse Doherty (Donegal South West, Sinn Fein)
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That's not-----
Pearse Doherty (Donegal South West, Sinn Fein)
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That's not the case that's being put to you, Mr. Ahearne, with all due respect. The case is that NAMA's structure meant that they had to sell on these loans. They had to sell on these assets within a certain period of time and that was being done at a time when the property prices were either at rock bottom or just starting to recover, whereas if the structure of NAMA were allowed to hold on to the loans for a longer period of time, then you would actually receive greater amounts of money and be able to pay back the taxpayer a lot more.
Professor Alan Ahearne:
I mean, NAMA, I think was allowed ten years and, in fact, the legislation said it could go on longer if it needed to.
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes.
Professor Alan Ahearne:
But this goes back to the earlier comment that there is always this tension about hoarding versus trying to sell off the assets and avoiding fire sales. There's always controversies in the war with the RTC as well about people making money buying at the bottom, but that's an operational issue, strategic issue for the asset management company. They sometimes feel that by getting a few assets out there that begins to get some transactions and that gets things going. That's a strategic, a strategic decision.
Pearse Doherty (Donegal South West, Sinn Fein)
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My time is limited on this here but I would probably ... if we get a chance maybe somebody would pick it up. I don't think it would be fair to lay that on the door of the asset management agency because there was very strong criteria laid down as to the amount of deleveraging that NAMA would have to do as a result of the programme that Mr. Lenihan agreed with the troika. But can I ask you in relation to the book that's been referenced,In Calm and Crisis, and we talked about burning bondholders, on page 111, Mr. Ray MacSharry, who writes in the book along with yourself said:
One morning I got a call at about quarter-past eight and it was Brian. He told me ... he was able to burn the bondholders and he was very happy because the European Central Bank ... Jean-Claude Trichet had told him he could do it.
Did Minister Lenihan tell you that Jean-Claude Trichet had phoned him and told him to go ahead-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----and burn the bondholders?
Pearse Doherty (Donegal South West, Sinn Fein)
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Do you believe that Jean-Claude Trichet phoned him and told him that he could burn the bondholders?
Pearse Doherty (Donegal South West, Sinn Fein)
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Well, from ... you've had numerous conversations with Brian Lenihan. You've recounted some of them to the committee here today.
Pearse Doherty (Donegal South West, Sinn Fein)
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Is this conversation that Jean-Claude Trichet phoned Brian Lenihan and told him he could burn the bondholders and then rescinded that, said that he ... when he looked at it, because it was, I think, French and Germans that were going to get burnt that he could no longer do it. Would that be something that you believe that Brian Lenihan would keep from you, as his adviser?
Pearse Doherty (Donegal South West, Sinn Fein)
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Why do you find it surprising?
Professor Alan Ahearne:
Just, given the ECB's view, which was made very clear in November, but I think they were so strident ... it was ... it seemed so contrary to their approach, and their approach was no default, that it just seems surprising that there would have been some enthusiasm from the ECB over it. There was no senior bonds burnt in euro area banks.
Pearse Doherty (Donegal South West, Sinn Fein)
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No, I understand that. I accept that Mr. Trichet-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Just finally ... just one-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. One last question is, in relation to the Credit Institutions (Financial Support) Scheme, which the banks that were guaranteed signed up to and gave effect to the guarantee, there is ... one of the paragraphs there allows for the Minister to amend the terms and condition and also to discontinue the guarantee for any financial institution if it weren't keeping with the objectives of the scheme, which is that it is in the public interest. So, therefore, the scheme allowed for the cessation of the guarantee to any individual institution at any time. It's in article 8 of the scheme. Was this ever considered? Because you've made numerous comments about you couldn't burn bondholders until the guarantee extinguished in 2010, but the scheme actually allowed for the Minister to do that at any point. It had to be at six-month intervals that the review would have to take place. Was that ever considered? Did you look at this scheme in relation to that purpose? Was there ever a view offered that we should maybe look at this area in terms of discontinuing it for the likes of Anglo Irish Bank?
Pearse Doherty (Donegal South West, Sinn Fein)
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No.
Pearse Doherty (Donegal South West, Sinn Fein)
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No.
Pearse Doherty (Donegal South West, Sinn Fein)
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No.
Pearse Doherty (Donegal South West, Sinn Fein)
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But the Minister ... just to clarify there, it's article 8, which says:
The Minister may review and vary the terms and conditions of this Scheme from time to time ... no later than six-month intervals, to ensure that it is achieving [its] purposes [under] the Act ... At such ... review, the Minister shall consider, inter alia, the continued requirement for the provision of financial support under this Scheme with regard to the objectives of this Scheme and section 2(1) of the Act ... The results of [the] review shall be provided to the European Commission.
But it's the Minister had the ability to review whether the likes of Anglo Irish Bank should continue to provide ... to be guaranteed under the scheme.
Professor Alan Ahearne:
Well, the advice I heard, and the officials said this from early on, was the Minister should say nothing even publicly about discounting guaranteed bonds, and that was true right up until ... until the day the guarantee finished. I'm not even ... I'm not even talking about in the future. So if you look at statements through the summer of 2010, the Minister didn't say, "Well, we're now considering what we'll do after the guarantee." The legal advice was "Say nothing." That, that in itself, talking about discounting guaranteed bonds or even talking about discounting bonds after they came out of the guarantee while the guarantee was in place, that that may well trigger a call on the guarantee-----
Pearse Doherty (Donegal South West, Sinn Fein)
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That wasn't the question.
Pearse Doherty (Donegal South West, Sinn Fein)
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It wasn't the question.
Ciarán Lynch (Cork South Central, Labour)
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I ... the question is ... and I need to move this on because we have more witnesses coming today-----
Ciarán Lynch (Cork South Central, Labour)
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The question is that the legislation was structured in a particular way. This has been discussed with other witnesses that have been here before us. The legislation had provision for re-examination on a six-month basis. The question is not with regard to bond values. Was that provision - if I understand the question correctly - was that provision ever discussed or looked at in terms of being activated?
Ciarán Lynch (Cork South Central, Labour)
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Because you spoke about all these other options that were out there, so in the context that there might have been other options, was that provision ever looked at?
Professor Alan Ahearne:
I would say that I had a discussion with Brian Lenihan, sort of an out-of-the-box discussion, about rescinding the guarantee on Anglo. So we did discuss that for a while. I think at that stage there was several billion of bonds, but those bonds were not going to mature - these are the €4 billion ... were not going to mature until 2011 in any event. It was mostly deposits, and so that rescinding, which would have had all these various negative effects to do with essentially what would have been perceived as a default - as a default on the sovereign promise, but it's still a default - it would have had all those negative effects, and you would have - if you wanted to save money, ultimately you would have ended up discount ... discounting the positives. So we had that discussion and he ... he didn't pursue-----
Ciarán Lynch (Cork South Central, Labour)
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Senator-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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I need to move on, Deputy. Senator Michael D'Arcy.
Michael D'Arcy (Fine Gael)
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Mr. Ahearne, you're welcome.
Michael D'Arcy (Fine Gael)
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Can I just slip back into the NAMA mode following Deputy Doherty? The amount of moneys that were transferred across was €74 billion. That was the full amount. The discounted amount was ... moneys paid ... was €32 billion. A discount of €42 billion was the quantum in its ... in actual figures. How much of the €42 billion would the State get back that was discounted?
Professor Alan Ahearne:
I think NAMA are projecting at the moment that they'll ... some small surplus, maybe a billion or so. So the answer is ... maybe a billion or so.
Michael D'Arcy (Fine Gael)
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A billion of the 42.
Michael D'Arcy (Fine Gael)
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Would it be fair, then, to say, according to the NAMA numbers, that there'll be a loss of €41 billion in the entire figure, on the 74?
Michael D'Arcy (Fine Gael)
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Yeah. So the conversation about NAMA making a €1 billion loss ... can I ask you your view on that? Is it a €1 million - sorry, a €1 billion profit, or is it a €41 billion loss?
Michael D'Arcy (Fine Gael)
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Which is the fairest? Is it NAMA making a €1 billion profit or the banks losing €41 billion?
Michael D'Arcy (Fine Gael)
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Well, I'm asking you-----
Michael D'Arcy (Fine Gael)
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I'm asking you which is yours.
Michael D'Arcy (Fine Gael)
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Well, I'm asking you to select one, please.
Ciarán Lynch (Cork South Central, Labour)
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The witness can ... you can get to choose the question, but the witness gets to choose the answer.
Michael D'Arcy (Fine Gael)
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I'll give you another go at it.
Ciarán Lynch (Cork South Central, Labour)
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No.
Ciarán Lynch (Cork South Central, Labour)
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Move on, Senator, please.
Ciarán Lynch (Cork South Central, Labour)
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The witness was asked.
Michael D'Arcy (Fine Gael)
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Okay. Mr. Ahearne, on 7 September 2007, Professor Morgan Kelly stated in an article in The Irish Timesthat his view was the exposure to the commercial real estate sector posed a grave threat to the banks' solvency. Why do you think, as a professor of economics, he got such a little ... such a small hearing?
Professor Alan Ahearne:
I ... I don't ... he ... there weren't many voices. Part of it ... there were a lot more voices on the soft landing - the economy would be okay, the property market will be okay. They probably drowned out any voices that were giving warnings like that. I think I said last time in front of this committee that ... that a huge amount of people were benefiting from the bubble, and therefore I know people didn't want to hear that. It's also ... I mean, the ... presumably politicians, the political system, would ... in hearing something like that would have turned to, say, the Financial Regulator, the Central Bank or officials and got their opinion on it, and I think the consensus opinion was that whatever's happening is manageable.
Michael D'Arcy (Fine Gael)
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If I could slip back a little bit before your time, before you started with Mr. Lenihan ... Minister Lenihan. In the book that's been quoted to you in relation to Minister Lenihan, in Governor Honohan's article, Governor Honohan said the Minister told him he was overruled on the night of the guarantee. Did Minister Lenihan ever tell you that ... make that statement to you?
Michael D'Arcy (Fine Gael)
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Okay. We'll fast forward a little bit, then. In previous evidence, it's been stated that the ECB was briefing against the Republic of Ireland prior to the State taking the national bailout. Were you aware of people briefing against the State?
Professor Alan Ahearne:
-----that they were saying that they were hearing worrying things from ECB ... ECB or officials on ... someone like that. So I was ... I was aware of that. I mean, there were other briefing ... I don't know where it came from. For example, I mentioned earlier that there was a ... newswire report on the Friday, the 12th - I guess - of November 2010 saying that Ireland was going into a bailout. So there issues about where that came from and who briefed there. I don't ... I don't know.
Michael D'Arcy (Fine Gael)
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Okay. You say on page 5 of your opening statement, the third bullet point down - this is the market participants who you'd spoken with - and they had made the point to you that investors were expressing concern. Who were the market participants who expressed that concern to you?
Professor Alan Ahearne:
They were ... I don't ... I don't remember their names or what institutions they came from. They were people who came from pension funds. They were inter ... people from abroad, who were with some sort of financial institutions, perhaps pension funds or insurance companies. But they were obviously people who were in the market, potentially, for Irish bonds, and the people who bought Irish bonds.
Michael D'Arcy (Fine Gael)
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Mr. Ahearne, could you enlighten the committee in relation to your opinion and the Minister's opinion following the intervention by Governor Honohan on the "Morning Ireland" programme announcing that there was a likely bailout about to occur?
Professor Alan Ahearne:
In my opinion ... I heard it on the radio. I ... I called, I think, maybe someone in the press - the press office - and I said, "Was that expected or was that planned? What's the story here?". So it was a big surprise to me. I didn't speak to the Minister immediately after that - it would probably be a good bit later that day - and I didn't discuss it with him. He had moved on. My understanding is, from all the people who spoke to him very quickly, is that he was ... he was annoyed about it, but it was ... by the time I spoke to him, it was a fact of life and we had moved on.
Michael D'Arcy (Fine Gael)
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Mr. Ahearne, you joined the Minister's staff in March 2009.
Michael D'Arcy (Fine Gael)
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We had representatives from PwC here this morning and Project Atlas was discussed, and there were three separate versions - Project Atlas 1, 2 and 3. The final version was presented to the Minister in early 2009. I think it was February, shortly before you had started. Around that same period Mr. Peter Bacon was conducting research, and Mr. Peter Bacon was the first person to state that the cost to the State would now be tens of billions. Were you party to any conversation with the Minister in relation to how PwC could say that the banks were solid and solvent, and at practically the same time - a matter of a few weeks later - Mr. Peter Bacon was making his assertions that the cost to the State would now be tens of billions?
Professor Alan Ahearne:
No, I didn't. I mean, I discussed with the Minister, Peter Bacon, the NAMA plan ... quite a lot of them. I did discuss it with Peter Bacon himself. I spent a lot less time on the PwC plan. I mean, I would have maybe been given copies of it, or summaries of it, but I'd say that ...
I think by the time I got in there, we ... we had moved on and the name of the game was to try to separate the assets into NAMA.
Michael D'Arcy (Fine Gael)
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Could I just-----
Ciarán Lynch (Cork South Central, Labour)
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Senator, I need to be moving you to wrapping up as well, okay? Thank you.
Michael D'Arcy (Fine Gael)
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Yes. I just want to finish this point. PwC were paid millions of euros and they had access to all the banks. Mr. Peter Bacon had no access to the banks' information and you're telling me that you ignored or paid less attention to the PwC report and you followed Mr. Bacon, is that correct?
Michael D'Arcy (Fine Gael)
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No, I understand.
Michael D'Arcy (Fine Gael)
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But there were two reports.
Michael D'Arcy (Fine Gael)
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But, Mr. Ahearne, what I'm saying is that PwC had access to all the banks, all their loan books, all the information-----
Michael D'Arcy (Fine Gael)
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-----and you set that aside and you went with Mr. Bacon's. Is that what you're saying?
Professor Alan Ahearne:
The most ... when I went in, the most immediate ... there was a budget - a supplementary budget - and then the next phase for the banks was the creation of NAMA and the separation of assets. So, that's what I was working on.
Ciarán Lynch (Cork South Central, Labour)
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Just to bed this down - because I need to deal with one other issue and just to be very, very clear as well just in case people might have a misinterpretation - Ministers and politicians are responsible for making decisions; officials advise and advisers advise as well. So, I ... the issue here is you're not responsible for a decision that is made by a politician. Let's be very, very clear about that. But, in regard to the advice that Senator D'Arcy is referring to, did you fall on one side of the advice over the other; Mr. Bacon's or the PwC position?
Ciarán Lynch (Cork South Central, Labour)
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Okay. All right, okay.
Ciarán Lynch (Cork South Central, Labour)
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I need you to wrap up, Senator, quickly please.
Michael D'Arcy (Fine Gael)
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Yes. Just ... on 9 April 2009, Mr. Paul Carty, the chairman of the NPRF, wrote to the Minister in relation to the due diligence exercise on AIB, ultimately citing AIB would need additional capital of up to €1.6 billion in 2010-'11 over the already injected €3.5 billion. Do you recall why the Minister proceeded with the injection of €3.5 billion only having been informed that additional capital would be required?
Ciarán Lynch (Cork South Central, Labour)
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You're not overly familiar with that process, no?
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Michael D'Arcy (Fine Gael)
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And can you explain the eventual injection of €19.8 billion into AIB and how that total was reached?
Professor Alan Ahearne:
It would've been reached because the Central Bank determined a certain capital ratio eventually. That was determined with the troika and that's the amount of money they needed to bring their capital up to that given the amount of losses they were experiencing and were expected to experience.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you. I'm going to wrap up. Deputy McGrath, please.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you very much, Chair. Mr. Ahearne, I'd just like to quote an extract from Ajai Chopra's witness statement which will be put into evidence and to ask you a question and I know you haven't ... you haven't seen it before. He said:
It is understandable that there is a strong sense in Ireland that burden sharing between Irish taxpayers and bank creditors has been unfair. In late 2010, remaining unguaranteed and unsecured senior bondholder exposure was about €16 billion, somewhat above the magnitude of envisaged fiscal adjustment over the next four years. [The] comparison made the issue very visible. [He said] Even if spillover risks dominated, the question remains - why should Irish taxpayers have to bear a disproportionate burden to address wider euro area concerns?
So, do you believe that Irish taxpayers did bear a disproportionate burden to address wider euro area concerns arising from the banking crisis?
Professor Alan Ahearne:
I think Ireland should have been allowed to discount senior bank bonds, in particular the Anglo bonds. I think the Europeans have given their reasons why they didn't think that was in the Irish interest or in their interest and I think a big part of the reason was they felt there would be contagion to ... elsewhere in the euro area. So, that does mean that Ireland ends up having a higher cost for systemic ... in order to save ... for systemic reasons. That said, you know, Ireland ... there were various things done that saved Ireland a lot of money. For example, the reductions in the interest rates in the summer of 2011. So, although there was stuff taken away on one hand, there was a break given on the other hand and how all those things ... how they all net off is a difficult ... difficult calculation.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. And, finally, to what extent, Mr. Ahearne, was the failure to get to the bottom of the black hole in the Irish banks over the course of 2010, when there were various statements about the likely overall bill ... is it the case that the markets eventually lost confidence in our ability to get to the bottom of that black hole and lost patience in that? How significant a role did that play in Ireland ending up in the programme?
Professor Alan Ahearne:
I wouldn't overstate it. The main reason we ended up in the programme was because of the scale of the losses combined with the huge budget deficit and everything that was going on in Europe with the euro area crisis. So, there was a big combination of factors. It would have been better ... and it was ... if a number could have been produced and we didn't have to revise up the numbers during the course of 2010 as you explained it. There's no doubt about that. So, I think the revisions would have hurt investor confidence some and part of the programme was to bring in BlackRock to do this very detailed analysis. That was ... turned out to be a very good thing to do. It helped in confidence. So, I think it would be better if we could have got to the bottom of it earlier but in terms of would it have ... would that would have meant that we could have retained market access, I very much doubt it.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes. Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Deputy Murphy.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chair, and thank you, Mr. Ahearne, again. I just want to return to where we left off with the national recovery plan just to finish up a couple of questions on it. Could you just outline the relationship between that plan and the bailout that we entered into - in terms of it being a blueprint for it - when you were made aware that this was actually going to become a blueprint for what would be our bailout and then the parties that became involved or if parties became involved subsequently once you'd begun your work or the different people had begun their work once the bailout became ... came into view, please?
Professor Alan Ahearne:
I mean, I think as we went through the autumn and bond yields were rising and market access was becoming more and more difficult, then it was ... it was clear that this national recovery plan initially had been put forward as something to present to the markets to say "Look, you should lend to us because we have a plan here", but it was clear that if we were to enter a programme - and the probability that we would enter a programme was rising - that it could, therefore, serve as a blueprint. I mean, Brian Lenihan had said that he thought it would be ... the Irish public would find it difficult to accept the huge amount of budgetary adjustment that was still to come - and it was obvious that it was still to come - to correct the public finances if it appeared to be imposed from outside and, therefore, he thought it was important that if there were to be more adjustments - and there were going to be - that they would be seen to have been part of a plan made ... written in Dublin. So, that was a big part of the reason that there was a big push to get the national recovery plan done and, therefore ... before the troika plan was announced.
Eoghan Murphy (Dublin South East, Fine Gael)
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But was that a presentational issue or was this actually our plan and to what extent then was that plan amended when we entered the bailout negotiations?
Professor Alan Ahearne:
I don't think there was any amendment. I mean this was ... the national recovery plan was written in Dublin. I ... there was some comments ... when Olli Rehn came in early October ... excuse me, in early November, he must have had some details because he ... there was a little bit of discussion there about the national recovery plan. I mean, he just had some suggestions about if you're going to do a VAT increase, you shouldn't do it right away, you should do it in the future so people can ... will, anticipating the VAT increase, bring forward their expenditures. Just some issues like that. But the plan was written in Dublin and it was more than presentation. It was ... the Irish Government felt - Brian Lenihan felt - that they were doing the right things, they had been doing fiscal consolidation, that they were on the right path and they wanted to go down that path and they knew they had more information about - economically and politically - about the Irish economy than ... than outsiders did.
Eoghan Murphy (Dublin South East, Fine Gael)
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Can you just finally comment on your role in evaluating the amount of money that was going to be needed as part of the bailout and the different breakdowns and what you were advising versus what was ultimately secured?
Professor Alan Ahearne:
I didn't advise on the particular breakdown. I mean, the quantum of money needed was, sort of, mechanically produced. Certainly, for the public finances, it was a case of crunching the numbers and seeing what sort of money would be borrowed and what maturity ... what money was maturing. On the banking part, the number was extremely large. I remember that - €35 billion. It seemed very unlikely that we required €35 billion but the troika had insisted on that. They ... I mean, they wanted large amounts of capital put into the bank. I think the ECB wanted large amounts of capital because the bank would then have cash and they could repay the ECB. Ultimately, the ECB's ... my perspective on it's approach to this in the weeks leading up to the entering the programme was that they wanted their cash back and they wanted restructuring of the Irish banking system in a way that the Irish banks would repay quickly the amount of money that had been borrowed and the ECB would, therefore, reduce their exposure.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, thank you and just finally if I may then, Chair, just in relation to your time in the Department working for Minister Lenihan and the actions that he took over that period, is there anything that's been left out from the public record or you think misinterpreted or misrepresented from your time working with the Minister in terms of the actions that he took and why he took them?
Professor Alan Ahearne:
I had mentioned in my statement about the fiscal consolidation. I mean, at the ... when ... I remember in 2009, there was a lot of arguments about ... the Government surely should be putting money into the economy not taking it out. I think that was a misunderstanding of the nature of the deficit. As I mentioned in the statement, it was a structural deficit. I mean ... and I said a few times in the statement if the work that was done over that period had not been done, the Irish economy would not be growing at 5% this year. I think that's ... to me, that's absolutely clear and, therefore, in his work, he set the groundwork for the recovery that would follow.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Ahearne. I'm going to bring matters to a conclusion. Mr. Ahearne, this is your second time before the committee and I'd like just to acknowledge that you were here in the Context Phase as well. Given that and standard practice for all the witnesses when we come to a conclusion, is there anything else you'd like to say by closing comments or final remarks or any additional information?
Professor Alan Ahearne:
The initial date I'd been given was very awkward for me and I asked for a new date and I just thank you, Mr. Chairman, and the members of the committee for facilitating that. This is a very important committee and I know that you're winding down or winding up this part of the phase. I just want to say that the report that comes out will be extremely important so I very much look forward to reading it.
Ciarán Lynch (Cork South Central, Labour)
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Okay. I thank you. With that said, once again, to thank you, Mr. Ahearne, for his participation today and in the earlier process in the inquiry as well. With that said, I now wish to formally excuse the witness and propose that we return at 3.10 p.m. is that agreed? Agreed. So the witness is now excused and we're formally suspended until then, thank you.
Ciarán Lynch (Cork South Central, Labour)
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I now propose that we return back into public session for our third session of today. Is that agreed? Agreed. Okay. As we can now commence our public hearings with Mr. Alan Gray, former board member of Central Bank of Ireland, the Committee of Inquiry into the Banking Crisis is now resuming in public session. Can I ask members and those in the public Gallery to ensure that their mobile devices are switched off?
Our first hearing of this afternoon is with Mr. Alan Gray, former non-executive director, Central Bank of Ireland. Alan Gray has worked as an economist for over 30 years in Ireland, Europe and in Canada. He was a non-executive director of CBFSAI, that is, the Central Bank, from December 2006 to September 2008 and was ... and recently he has been appointed by the Government as director of the IDA. He is a managing partner of Indecon International Economic Consultants. Mr. Gray, you're very welcome before the committee this afternoon.
Ciarán Lynch (Cork South Central, Labour)
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Before hearing from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you're directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you're entitled thereafter only to 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. In addition, there are particular obligations of professional secrecy on officers of the Central Bank in respect of confidential information they have come across in the course of their duties. This stems from European and Irish law, including section 33AK of the Central Bank Act 1942. The banking inquiry also has obligations of professional secrecy in terms of some of the information which has been provided to it by the Central Bank. These obligations are being taken into account by the committee and will affect the questions asked and the answers which can lawfully be given in today's proceedings. In particular, it'll mean that some information can be dealt with in a summary or aggregate basis only, such that institutions or individuals will not be identifiable.
Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on your 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. With that said, if I can now ask the clerk to administer the affirmation to Mr. Gray, please.
Ciarán Lynch (Cork South Central, Labour)
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So, once again, Mr. Gray, I thank you for your attendance here today and if I can invite you to make your opening remarks to the committee, please.
Ciarán Lynch (Cork South Central, Labour)
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Can you lean closer to the microphone there, Mr. Gray, if you don't mind?
Ciarán Lynch (Cork South Central, Labour)
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Or maybe just turn it a small bit towards you. Perfect. Good man, thank you.
Mr. Alan Gray:
Thank you. Chairman and members of the inquiry, as an independent economist, I believe that major mistakes were made resulting in the economic, fiscal and banking collapse. To help understand what happened and why, I have submitted new evidence which I hope will help the inquiry.
I am head of economic research with an independent Irish economic practice. I joined the board of the Central Bank in 2007 as a non-executive director. I am on the Government's labour market council and I'm a director of the IDA and chairman of London Economics.
My work as a professional economist has given me the opportunity, since the 1980s, to offer impartial advice to consecutive Labour, Fine Gael and Fianna Fáil Governments and to governments internationally. When I provide any informal advice to Irish Governments or serve on State boards, I request that I do not receive fees or expenses, a practice which is not unusual for economists.
My statement and supporting material comprises extensive notes and documentation I prepared at the time. I ask the inquiry to excuse any references to publications that I have written. These are not to give these publications particular significance but to confirm views I've held at key periods. As well as the banking crisis, I have provided evidence on a number of matters of public interest, including the meeting on unemployment with An Taoiseach on the morning of 28 July 2008 - I should say with the then Taoiseach - and the continuation of the discussion over dinner at Druids Glen. These show that I expressed concerns on the economy at the meeting and I suggested actions to prevent an even more rapid decline. I have provided the 11 pages of detail notes I circulated at the discussion and I would be happy for the inquiry to release those notes and all of the approximate 80 pages of evidence I have submitted.
I turn to the causes of the crisis. Before addressing the significant Irish mistakes, I would like to briefly note the design flaws in the single currency and the impact of the bankruptcy of Lehman's. In considering why there was a crisis in Europe, the Nobel Prize winning economist, Professor Krugman, concluded:
The truth is that the story is mostly monetary. By introducing a single currency without the institutions needed to make that currency work, Europe effectively reinvented the defects [...] that played a major role in causing [...] the Great Depression.
The design flaws in the single currency were particularly significant for Ireland due to our dependence on trade and the declining competitiveness. In a publication I edited prior to Ireland joining the euro, one of my academic collaborators, Professor Jeffrey Sachs, then at Harvard University, concluded that, "This is surely a big risk for a small country that is dependent on export-led growth - perhaps even too big a risk."
One concern I hold is that the required European institutions and policy instruments may not yet be in place, and complacency exists about this inadequacy. The ideologically driven US decision on 15 September 2008 to let Lehman Brothers go bankrupt resulted in an international banking crisis of a scale not seen since the 1930s. The combined impact of the Lehman collapse and design flaws in the single currency had horrendous implications for Europe. The larger lending countries and international agencies tend to downplay these two factors and shift most of the blame onto peripheral countries.
Central Bank directors are understandably reluctant to criticise the international institutions, particularly given their extensive funding support for Ireland. However, I believe the decision of these institutions to prevent Ireland from burning the bondholders and requiring Irish taxpayers to then bear the cost was morally indefensible. This forced a small state to socialise losses and impose the burden on ordinary working people, while private sector gains were protected.
Reference to the design flaws in the euro and the Lehman's collapse is not to deny the scale of the Irish mistakes. An unpredictable and once-in-a-century external crisis was made much worse by a gross over-dependence on the construction sector and by a failure of bankers, policy makers and regulators to adequately respond to the risks. In my view, the key Irish mistakes were mistakes in lending decision by banks, the failure in the regulation of banks, the impact of Irish macroeconomic policy and intervention in the property sector.
The lending decisions made by individual banks provided loans to developers and others which turned into bad debts. I believe this was the fundamental driver of what happened in Irish banks. There was also a failure of bank regulation and deficiencies in stress testing and macro-prudential policy. Detailed stress tests were undertaken but failed to anticipate the scale of the impending crisis or the level of increased capital needed. In the aftermath of the guarantee, I felt the banks were still in denial of the necessary capital requirements. Writing to the Department of Finance and the Central Bank to provide a contrary, external perspective, I said the banks' own assessment has indicated that they may have sufficient capital to meet regulatory requirements after dealing with anticipated bad debts and that PwC reports suggest that, under certain scenarios, this may be the case. My letter states that I do not accept this and concluded that action on capitalisation is needed and as soon as possible.
In addition to deficiencies in the interpretation of stress testing, there was insufficient regulation of banks and inadequate capital requirements, particularly in the period from 2000 to 2007. Accurate information was not obtained on major borrowers dependent on property and I raised this at board meetings. More intensive involvement in the approval of directors of banks would also have been appropriate. At my very first board meeting in 2007, a new policy was outlined to dampen the growth in the property sector. This new measure required the banks to increase to 150% the capital requirement for lending to speculative property. It was suggested that speculative lending could then only happen after 50% of the property value had been pre-sold. Not surprisingly, as an economist I was very supportive of this revised action as I felt it was beginning to respond to the risks. However, I accept this proved far too little and far to late to address the scale of the crisis which emerged.
Regulatory weaknesses did not cause the crisis but they did not do their job and did not prevent the crisis. This weakness was not due to the absence of supervisory powers and these cannot be used as an excuse for the misjudgments about endogenous risks and the failure to discover practices in the banks. Once developments in individual banks became clearer and more information was available to the board, I concluded that radical changes were essential to the system of financial regulation. I wrote to the Central Bank and Financial Regulator and to the Department of Finance, and I quote, "It has been my opinion for some time that radical changes are needed to the system of financial regulation in Ireland" and I went on to say that "I believe a fundamentally changed basis for regulation of financial institutions is required". As you know from the letter I have submitted in evidence, I suggested major changes at the time, including: increases in the minimum requirements for capital; new controls on lending practices; changes in the incentive structures; greater levels of inspection of financial institutions; new requirements for approval processes for directors and senior management; greater levels of public disclosure and transparency; changes in the relationship between external auditors and the Central Bank; and measures to facilitate and protect internal whistleblowers.
Irish macroeconomic and fiscal policy also played a part in the period post-2000 and there was an over dependence on stamp duty and VAT from property and there was too rapid growth in public expenditure. This was based on a belief that economic growth would continue, together with a consensus on the desirability for increased public expenditure. Concerns on macroeconomic policy were a recurring theme for myself and for other economists in Ireland years prior to the crisis. In a publication to honour Dr. T.K. Whitaker's 80 years, I indicated - and I'll quote - "while the lessons of previous policy errors are well known, there are potential dangers ... particularly if public expenditure programmes are planned on an assumption of continued rapid growth."
I emphasised the difficulty of adjusting public expenditure programmes which could result in the emergence of a large deficit and an expansion of public debt if there was an economic downturn.
Interventions in the property sector also fuelled the fire of property prices. In 1997, I argued that policy should, by appropriate planning and zoning decisions, ease the shortage of land for residential housing. Restrictive zoning meant windfall gains to property speculators, increased housing costs and opened up opportunities for corruption. The escalation in property prices was further fuelled by the build-up of tax incentives. My views on this were informed by an investigation of property tax incentives which I and other economists completed for the Department of Finance in 2005. My views at that time indicated that while the incentives were supported by a range of vested interests, including investors, property developers and banks dependent on property, my report concluded:
There is absolutely no case for further government incentives. Continuing to approve new projects would contribute to oversupply and represent a clear waste of scarce public resources.
I strongly recommended the abolition of the vast range of property incentives.
On crisis management, in the period since I joined the board of the Central Bank in 2007, there were detailed plans by the Central Bank to deal with the liquidity position and a domestic standing group was established jointly with the Department of Finance to examine risks and responses. The focus was on liquidity risks and this intensified over time. On 16 September 2008, a note to directors of the Financial Regulator pointed out that term funding was effectively closed. It stated that post-Lehman's, public concern was increasing and the tone of media comment was systemic rather than institution-specific. Investors were cutting lines to Irish banks and requesting breaks in the terms of deposits. In addition to two institutions which were being very closely monitored, one of the other major institutions advised that, "If markets do not improve, they risk breaking liquidity ratios in a matter of weeks." This signalled to me the danger of a full scale run on the Irish banking sector.
While liquidity risks were monitored, there was much less understanding of solvency and this was a major mistake. This may have been due to the belief that solvency and liquidity were separate. The week of the bank guarantee, leading to the guarantee decision, resulted in Irish citizens paying a very high and unjust cost for the banking crisis. The guarantee was not thought up on the night of 29 September but arose from extensive analysis by the Department of Finance, Central Bank and regulator, with the teams of external advisers. I first heard of the guarantee as the main option being considered in an emergency joint Central Bank-IFSRA board meeting which was called on 25 September but this option must have been developed earlier. As is evident from the official board minutes which I have supplied you with, the Governor and the Central Bank and the Department of Finance indicated that a guarantee of the liabilities of the six financial institutions was being considered. There was no suggestion at that time of any option to guarantee some banks but to nationalise others. The Central Bank board was never asked for a view on that revised option. The minutes of the Central Bank board meeting on 25 September show: "The Governor and the Chairman of the Authority briefed the meeting on the ongoing discussions with the banks and the Department of Finance regarding the liquidity position of the Irish banks and policy options to be considered if the position continued to deteriorate". It indicated that the Minister for Finance ... the then Minister for Finance had convened a meeting on Wednesday, 24 September, attended by the Central Bank, the Financial Regulator, the NTMA and the Department of Finance and, I assume, by their advisers.
The Government had also met with the Minister ... the Governor of the Central Bank had also met with the Minister for Finance and the Taoiseach. The outcome of this meetings ... of these meetings was that the Government wanted policy options for the future of the financial sector to be developed and refined, as a matter of urgency, over the weekend for consideration by the Cabinet at the start of the following week. Following a detailed discussion on the liquidity pressure on all the banks in what was referred to as ... unprecedented international credit crunch, it was suggested that if the liquidity situation did not improve, the issue for the authorities would be how to address the whole financial system.
The minutes highlight what was seen as the key policy option. The minutes explicitly noted that a key policy option for the weekend was whether or not the Government should issue a formal guarantee for the liabilities of the six domestically-owned credit institutions. If a decision was to be made in this regard, the Government would require the formal advice of the Central Bank and the Financial Regulator on the necessity of such a measure and its impact. On hearing this proposal, I raised the following questions at the board. Would it be illegal under state aid rules? I suggested I expected it would be challenged. How could one minimise any exposure to the State? Would financial markets and the public view this as a credible guarantee? Had all alternative options been fully exhausted? And was there any hope of ECB-wide action before consideration was given to such a radical decision? I knew the Government ... the Governor of the bank had been very actively exploring ECB action for some time. And how would any guarantee interact with the necessary restructuring action on individual institutions in order to ensure viability? I clearly remember the representative from the Department of Finance and the Governor and some other directors also expressed strong views on that latter issue.
I made suggestions to attempt to protect the taxpayer and reduce the risk to the State if such a policy was subsequently decided - firstly, by ensuring any guarantee was for as short a time period as necessary and I argued against any long-term guarantee. I indicated if the State felt obliged to give a guarantee, we should get out of these obligations as quickly as possible. I suggested that in the event of any guarantee, the banks should be forced to pay in full for this and the payment levels should reflect the value to the banks and the risk to the State. Some of these points which I and the other directors made were reflected in the formal, signed-off, agreed minutes of the meeting, and I quote:
In discussing the option of a Government Guarantee, the meeting noted that the market would have to be convinced of the credibility of the Guarantee. There was also a likelihood of a legal challenge on competition grounds if it was confined to the domestic credit institutions. The meeting agreed that the issue of an explicit Government Guarantee supported by a willingness to supply additional funding, if necessary, warranted detailed consideration. In this context, however, it would be necessary to identify a viable long-term strategy for the industry and [to] pursue this objective vigorously.
I had the distinct impression at the meeting that a guarantee of all banks was the favoured option and probably the only option in serious consideration which was explained to the board. I felt strongly at that stage that all available options should be examined, rather than simply the guarantee option, and I decided that evening to write to the Department of Finance, the regulator and the Governor of the Central Bank. As is evident from my correspondence of 25 September 2008, which I have provided to the committee, I outlined my view on the principles which should be followed: (i) State exposure to be minimised where possible; (ii) the knock-on impact of any decision should be taken into account and the minimisation of contagion; the cost of any assistance to be paid for fully by the sector, even if this means over time; and wider economic implications should be factored in. The best option was, in my view, a European-wide, EC-wide ... ECB-wide action. My opinion was there was a reluctance by the ECB to recognise the scale of the problem or to take necessary responsibility for their role, but I felt pursuing that action was desirable.
On the option of a guarantee of all six financial institutions, as proposed by the Department of Finance and the Central Bank, I was ... felt there was a need to consider different formulations if this was the chosen option. I also raised explicitly my concern over whether it would postpone necessary restructuring of Irish banks. I had concerns over whether a guarantee would be effective in preventing a bank run and what would be the market reaction. This was still a major concern to me in the days and weeks after the guarantee was announced. I also suggested the payment terms could be structured in a way which would neutralise the competitive impacts, i.e. some banks should pay proportionally more. My suggestion implied much higher costs for institutions such as Irish Nationwide and Anglo. I highlighted the need to take action to reduce Exchequer exposure and to restructure the sector. In my written advice on 25 September 2008 to the Governor of the Central Bank and to the Department of Finance, I outlined three other issues which I felt needed to be addressed as well as the immediate issue of liquidity, namely, a response to individual banks with liquidity issues, actions to reduce risk and potential exposure and plans to restructure the sector. The options for action in relation to individual banks which I proposed on 25 September 2008 included management changes, restrictions on loan ... on loans and a restructuring plan, including managing-down of loans.
Over the next few days, it was very clear the crisis was getting much worse and I felt a bank run was now a real possibility. There was a sense of incredible panic in world financial markets and policy makers were in uncharted waters. I had come to the view that Ireland could face the total collapse of the banking system and the ECB was taking the attitude that we were on our own. By the time we had reached 29 September, I knew from the previous board meeting of the Thursday - of the 25th - that the Government ... that the Governor had indicated he'd previously been against the guarantee but then ... by then felt things had changed. The decision of the US Congress to reject the bailout plan ... their bailout plan - which was an extraordinary decision - meant there was now ... while there was up to then a chance that liquidity pressures would ease, things had now fundamentally changed. My view is that given this development, the guarantee was the sensible option, but of the terrible options available. However, I always understood that a response to the liquidity crisis would at best only buy time to address the underlying problems and to deal with the issues in individual banks. As soon as the guarantee was introduced, my focus was on how to minimise the exposure to the taxpayer and I wrote, on 20 October 2008, to the Governor of the Central Bank and to the Department of Finance stressing that "the day we give a time limited guarantee is the day we need to plan for exiting".
In conclusion, I would like to very briefly suggest a number of issues for possible consideration by the committee that may help to avoid another crisis, namely: supply issues in the housing market, unless addressed, could result in the re-emergence of rapidly increasing property prices and rental prices and even greater levels of homelessness; Governments might usefully consider using any unexpected windfall gains in Exchequer return to repay national debt, rather than fund tax reductions or increased expenditures; the Central Bank should base its policy in regulation on an assumption that any regulated institution could fail and, if it is of systematic importance, will be bailed out, and regulation should reflect that; there is ... a renewal in bank governance and personnel should be a requirement; changes in the nature of auditing of banks are required; and banks need to incentivise long-term gains, rather than spurious short-termism. Thank you, Chairman and members of the inquiry.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Gray, for your opening statement, and to get questions under way, I'll invite Deputy John Paul Phelan. Deputy, you have 15 minutes.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you, Chairman. Good afternoon, Mr. Gray ... and I’d ask you to be as brief as you can in your answers - I’ve a lot of questions to cover. Firstly, I put it to you that you are arguably, in terms of this inquiry at least, the most important economic adviser to Government who is largely unknown by the general public. And according to the testimony of Mr. Cowen and, indeed, some others, you were the last person outside of Government Buildings on that night to speak with him on the night of the guarantee. Firstly, I just wanted to ask you are you ... were you expecting a call on the evening in question and were you aware of the significance of the advices you were giving ... given?
Mr. Alan Gray:
So I wasn’t expecting a call in the sense there was no pre-arrangement to have a call but I wasn’t in any way surprised. I have given independent economic advice to governments for about 30 years and it’s known, I think by most governments, that because of the international nature of my work that I might have perspectives that other people don’t have. That is not to say, Deputy, those views are right but they are often somewhat different from other views and they are always independent and are never influenced by vested interests. And governments, I ... in my experience find it very hard to find independent economists who can give independent advice and are willing to do so.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, I just ... I'm not trying to cut you short but I want to get through this as much as I can.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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In your opening statement ... I want to rewind to before the night of the guarantee, in your opening statement in the notes in references section, you remark that you "have not fallen into the foolish and arrogant trap of suggesting that I have never made mistakes". Mr. Gray, I just wanted to ask you do you believe ... and you referenced the meeting yourself, that it was a mistake for you to meet with the former chairman of Anglo Irish Bank and Mr. Drury and Mr. McGann and the former Taoiseach in and around Druids Glen in July of 2008?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, but I-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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That’s ... and I'll turn to the unemployment question a little bit later. First of all, who organised the meeting, in your recollection?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Was Mr. Drury somebody that you would've been familiar with? Did you have regular contact or irregular contact with him?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Both Mr. Drury and Mr. McGann last week stated that you were the one responsible for drawing up the agenda for the meeting. Is that correct?
Mr. Alan Gray:
So I think there may be some semantics here that are, sort of, important to be clear on. Nobody asked me to prepare an agenda for the meeting. I was invited, on behalf of the Taoiseach, to attend the meeting to outline any views I had on unemployment and on the ... what was happening in the economy - which is something that many governments have done at different periods - and I put in a lot of effort in advance of the meeting, including talking to some international economists about their perspectives and ideas, and I turned up at the meeting with my detailed notes. So-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Was there a formal agenda?
Mr. Alan Gray:
There was not. I did not have an agenda but it was the case, and this may be a version of semantics which might suggest that was an agenda, I turned up at the meeting and I was at ... there was a general discussion about whether people had ideas and I said "Taoiseach, I have detailed ideas in a number or areas and I have copies of my notes and would it be appropriate to share those?" And so it did actually become the agenda for the discussion but it wasn’t a ... I didn’t see it as an agenda, I saw it as an outline of my views on what was happening, the adequacy or inadequacy of the Government’s response to that and what should be done.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I want to put a quotation to you from Mr. Drury’s evidence to the inquiry in response to a question from Senator O’Keeffe concerning whether unemployment was on the agenda or had been discussed. He said, "The rise in unemployment was something that, you know, we would all have been conscious of, nobody needed to raise it." Now, that is a direct contradiction of your witness statement where you refer to the Druids Glen meeting, on page 2 of your statement, as the "dinner on unemployment", and you've referenced that in your comments. I just, again, ask you to square that particular dichotomy, if you can.
Ciarán Lynch (Cork South Central, Labour)
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You need to clarify it to the best of your ability, Mr. Gray.
Mr. Alan Gray:
Thank you, Chairman. But what I can be very certain of is I was invited to talk about unemployment and what was happening in the Irish economy and that is what I talked about and the detailed evidence notes, which were prepared at the time, and which I circulated ... or any reading of that shows that was the subject matter.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, that’s fair enough. So your view is that, contrary to what Mr. Drury said, that unemployment was discussed at this particular-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Was banking discussed?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Banking in general?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Can I put it to you that it seems extraordinary that a group of people who all had involvement in banking - whether central banking, commercial banking - the Taoiseach, who was on the precipice of a banking crisis ... that you would gather and have a discussion on the economy and no reference would be made? I’m putting that as a layman on the street might feel.
Mr. Alan Gray:
Well, I was asked to talk about the unemployment and the economy and to share my views on it. I was not asked to attend a meeting to discuss banking, and if I was asked, Deputy, to attend a meeting with those participants on banking, I would not have attended. I would've felt that was a matter for the executives in the Central Bank.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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You state on page 8 of your written statement, and I want to quote you directly, that you raised at board meetings the accuracy of information "from [...] banks [and] elsewhere on the position of major borrowers dependent on property". I want you to outline, if you can - because I haven’t been able to find them - any board meetings where you brought that subject up, the dates where they happened, and if you have maybe some of the ... some of those details that you can present to the inquiry.
Mr. Alan Gray:
Of course, because it was something that was of particular concern to me, having previously - in 2005 - undertaken the investigation of what was happening in the property sector and the way the tax incentives were fuelling property prices. I was also very aware, as an economist, of the scale of growth in commercial lending that had occurred over the period from 2000 to 2007 and I don’t have ... I didn’t have time, Deputy, before this attendance to look at every reference but I do have some references that I would like to bring to your attention. At the regulator board meeting in, I think, mid-2007 - and you have, I understand, a copy of the board meetings - I did indicate that I felt it was necessary to examine in more detail the top property exposure in the banks. I suggested that there would be merits in examining the holding company accounts of the banks and ... sorry, the holding company accounts of the property developers or major borrowers, and to review whether information provided by the borrowers to different banks varied.
Were they telling the same story to each of the banks? And what was the credit assessment of those property developers by individual banks and was there any difference? Because it was known to people on the Central Bank and the regulator board that they shared the same clients.
I'd also point out that in December 2007, the banking supervisory division, following on from that point I made, conducted a series of inspection of the banks to look at the commercial property lending. And in January 2008, the IFSRA board were informed of a number of issues that were raised. I'd also like to encourage you to look at the board minutes for the regulator meeting in May 2008 when I again raised this at the IFSRA board and requested more investigation of the risk exposure of the banks to major property developers.
Just finally, and I won't ... I know you've lots of questions and I'm happy to answer them all. In June 2008, I asked of what progress had been made on this and I was informed at the board of the regulator that arrangements were being made to interview the heads of lending in the main banks in order to examine in more detail the principal exposure to property developers. And they were notes I had kept at the time but if I had time to forensically go through all of the-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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That's fair enough.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Was Anglo one of the banks that you were concerned about?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Did you, when you were invited to attend the meeting in Druids Glen - this is the last question I'm going to ask about this particular matter-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----not feel it appropriate to maybe raise your concerns ... that you were meeting with people, all, bar the Taoiseach, who were directly related to Anglo Irish Bank, that perhaps those concerns should be raised with the Taoiseach in advance and even potentially with them in their attendance at the meeting?
Mr. Alan Gray:
I certainly would not have considered my role, as one of nine non-executive members on the board, to be meeting an individual - representatives from an individual banks - and raising issues. I felt the appropriate channel to do that was at the board meeting and I have given you a number of references where I had done that. And I would also point out that, when invited to that meeting, I knew Fintan Drury was a friend of the Taoiseach and a communications adviser and I saw him in that context. I knew Mr. FitzPatrick was, indeed, chairman of Anglo Irish Bank and that would have been known to everyone. But I saw Mr. McGann as somebody who ran a major manufacturing company rather than an Anglo bank executive director.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Can I ask you, ... now I have only a minute left and I want to cover a couple more areas. At annex 9 of your statement, you state: "No one from Anglo has ever asked me to take action on their behalf or to make representations on their behalf." What then, Mr. Gray, were the former chairman and chief executive of Anglo coming to meet you about on the night of the guarantee?
Mr. Alan Gray:
So, I think when they came to me on the day of the guarantee - and I think it was that day - they ... I did not invite them to come, they came. I believed they understood that the bank would not open the next day because that was the information that was available to the Financial Regulator and I think was widely known in the market. And I think they were very keen to try and find any option or any channel to, you know, have their views aired. They came and they ... Mr. Drumm had a presentation with him. I told him I had a very busy day and, you know, was there ... I'd prefer he would just tell me what was the purpose of the meeting. And he went through a number of points in his presentation. He didn't leave it with me. I told him these were issues that they should talk directly to the Central Bank on, and to the Financial Regulator, and that was what happened.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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You're under affirmation, I think, instead of oath. I just want to put the quote to you again. You stated-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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You stated: "No one from Anglo has ever asked [and this is page 9 of your own, the annex, or annex 9, sorry]-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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"[N]o one from Anglo has ever asked me to take action on their behalf or to make representations on their behalf." What was the discussion about on the night in question, unless they were asking you to take some action on their behalf or to make a representation?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I'm not saying, by the way, that you were-----
Ciarán Lynch (Cork South Central, Labour)
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Without interruption now, Deputy.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I'm not saying that you made a representation on their behalf-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----but you stated in your own opening statement that you weren't even asked.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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But what was the discussion about then?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Finally-----
Ciarán Lynch (Cork South Central, Labour)
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If I can just deal with it. If one assumes, Mr. Gray, that all behaviour is purposeful and needs driven - I sometimes question that theory but that's what psychologists would believe - what was the purpose of Anglo coming to meet with you and what was the need that they were expressing?
Ciarán Lynch (Cork South Central, Labour)
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Okay. That's what the presenting issue was. What was the presenting ask?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Right, thank you. Conclude please, Deputy Phelan.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I just ... My final question then is in relation to the actual phone call which I touched on at the start. The options that were discussed ... I just want you to briefly outline them. Mr. Cowen, in his testimony to the inquiry said - and I want to quote him directly - he said:
I phoned him and asked him what he thought of a guarantee option being used. Mr. Gray emphasised that providing a guarantee would, obviously, give an advantage to those institutions to whom the guarantee would apply vis-à-viscompetitors, since they would have the backing of the Irish Government.
In your statement to The Irish Timeson 14 January 2011, written on your behalf by a legal firm I understand, provided to the inquiry-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Sorry, it's been presented to the inquiry ... I misunderstood it if that's ... I wasn't trying to mislead myself. You state that you were asked to "obtain your views as a director of the Central Bank on the likely market reaction". The question - really, there's two parts - what were the options discussed? And which is, in your recollection, the correct recollection of events of that phone call? Did Mr. Cowen ask you what you thought of the guarantee option being used or did he ask you the much narrower question about what the likely market reaction to that option would be?
Mr. Alan Gray:
Okay, Deputy, if I can deal with the two questions. First of all, the option that the Taoiseach asked my view on was the very same option that was raised at the Central Bank board meeting the previous Thursday, which was an option to give a guarantee to the six financial institutions. And he asked me what did I think of it and what would be the market reaction. I don't see a difference in that-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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One is a broader question. The market reaction is a-----
Ciarán Lynch (Cork South Central, Labour)
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Deputy, I will bring you back in the wrap-up.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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The market reaction could be encapsulated in the broader term but I mean, what I'm saying is your initial statement or that statement in The Irish Timesspecifically said, "likely market reaction". That is a very narrow thing.
Mr. Alan Gray:
Well, I think, Deputy, to be, you know ... in terms of fair procedure, the statement went on to explain the issues that I was ... dealt with in that discussion, which, if you took a very narrow interpretation of just market reaction, then it wouldn't have raised issues that I raised, which was that the bank should be forced to pay a fee for it and that it should be time-limited because the longer you give a guarantee, the bigger risk to the State.
And so, I don't see any difference. I wrote that statement, not with any legal assistance or any legal advice. And I had a significant dilemma in writing that statement because I have always operated as a very professional economist, operating with commercial confidentiality. When that issue became a matter of national public debate, I was extremely ill at the time and I wasn't quite sure how to respond. Other people didn't make any statements and I still don't know to this day did I made the right call in trying to balance professional confidentiality and in terms of having public disclosure, but I made that decision.
And it ... I have had discussions with the current Taoiseach and previous Taoiseachs and previous Ministers and I would never dream of making a public statement about them. Even this morning before I came to this inquiry, I was asked advice from very senior people in the Prime Minister's office of another eurozone country. But I don't go issuing public statements about contents of discussions I have, because it is the epitome to independent professional conduct. But I made that decision and I don't know whether it was the right one or not.
Ciarán Lynch (Cork South Central, Labour)
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I am just going to bring in Senator Barrett. I just need to clarify this so we don't ... we avoid repetition and kind of visiting the same area over and over this afternoon, Mr. Gray. Just clarify this. On the day of the guarantee, two officials from Anglo called to see you, yes?
Ciarán Lynch (Cork South Central, Labour)
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The two officials were?
Ciarán Lynch (Cork South Central, Labour)
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Okay, so the chief executive officer and the chairperson of Anglo.
Ciarán Lynch (Cork South Central, Labour)
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They called to see you and they tell you about their problems. Yes?
Ciarán Lynch (Cork South Central, Labour)
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And they did not ask for any action and they did not ask for any advice. They just called to tell you their problems.
Ciarán Lynch (Cork South Central, Labour)
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I know that ... that they told you their problems.
Ciarán Lynch (Cork South Central, Labour)
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I just want ... but at no time ... there was no request for any action and there was no request for any advice.
Ciarán Lynch (Cork South Central, Labour)
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Okay. So, other than them calling to tell you about their problems, was there any other purpose or content or any related matter that you are not telling us now?
Ciarán Lynch (Cork South Central, Labour)
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I am not speculating; I am just dealing with facts.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Senator Barrett.
Sean Barrett (Independent)
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Thank you, Chairman, and welcome to Mr. Gray. You're saying that you don't take a fee from the Central Bank and you provide your economic advice free. I mean, how does that work in the sense that ... does your company lose every time you're spending a day or two at the Central Bank? Is that the consequence, yes?
Mr. Alan Gray:
It would, Senator, that would be the consequence. And I think, Senator, you, probably more than most, would know that there has been a long tradition, since the 1950s or '60s, in economists being willing to give their time and views on important issues free to governments, where they're just asked for their opinions.
Sean Barrett (Independent)
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Okay, thanks. Now, on the Central Bank, you joined in January 2007 and the crisis happened in September 2008. So, you had about 20 months. Could you describe your experience? Did you see it building up or did it all happen at the very end in a crisis situation, or could you see it building over that 20-month period?
Mr. Alan Gray:
Senator, so I certainly did not know that the particular crisis that we've all had to been faced with would occur and I don't believe anyone else anticipated that scale of crisis, and I have outlined why I think that crisis happened, by a combination of both Irish and international mistakes. But I was very aware of the risks in the banking sector and the risks in the Irish economy and I raised those risks on many occasions. In terms of Deputy Phelan's questions, I outlined some of the risks I raised and looked for action to get more information on the commercial property lending side and I also raised issues in relation to the stress testing of banks and a whole range of other issues, some of which are in the detailed evidence I've supplied.
Sean Barrett (Independent)
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Were you the only contrarian on the board expressing those kinds of sentiments?
Sean Barrett (Independent)
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And what did people challenge the conventional wisdom about?
Mr. Alan Gray:
So, I think it was very much a question of looking for the executives to examine in more detail the key risks that were in the banking sector. And they related to examining in terms of what was likely to happen in the commercial, buy-to-let market, in the property sector. It was very much in terms of looking at and encouraging an investigation of what would happen during a property crash, because all booms end in either a slow down of property prices or, in a significant number, in terms of a property crash. So, I think there was a very wide range of risks identified and research done, but they came to the wrong judgment on what actually happened.
Sean Barrett (Independent)
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Why did they come to the wrong judgment?
Mr. Alan Gray:
I think there was a combination of factors. I think undue comfort was taken from the fact that the previous decline in Irish property prices, which happened a number of previous ... a number of years previous, had not caused any difficulties for the banking sector. I think the second reason was they felt from their detailed international research, which they presented in terms of the draft stability reports, that the probability was that if there was a property crash, it would be a property crash that would decline over time rather than the scale of immediate crash that happened following the Lehman Brothers. And also Senator, I think because they believed that the magnitude of that property price decline would be less than actually transpired.
Sean Barrett (Independent)
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Was this a discussion or did they actually give you data on sectoral concentration, on loan-to-value, on loan-to-deposits, on the amount of borrowing from the Central Bank itself, from the ECB? Did you get numbers to back up your fears?
Mr. Alan Gray:
Yes, Senator. They weren't my figures, but in terms of the level of evidence given to the board, I felt that there was a good granularity on those numbers and estimates and, if we've time, I would like to talk a little bit about the stress testing that was undertaken, the research that was done for it and why it actually failed to anticipate the scale of crisis which emerged.
Sean Barrett (Independent)
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So, an impression that the Central Bank and the regulator weren't aware of what was going to happen in September 2008, you would say that's wrong, that they were, they had the data, they were presenting it at the board and the board members were analysing it.
Mr. Alan Gray:
They certainly - and I wouldn't like to give any misunderstanding of this - they had no idea of the scale of the crisis which subsequently emerged, but they did examine a wide ... they certainly knew that the property exposure of individual institutions ... they didn't have sufficient information on what exactly was the position with individual property borrowers, and that was something that I raised at a number of board meetings.
But they did know about the exposures and they did know about the necessity to identify the key risks.
Sean Barrett (Independent)
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Did the directors discuss ... some, two of the biggest banks were lending about 7% of their book to agriculture and industry combined, and about 80% to property. Did anybody raise fears around the bank, the Central Bank board table, about that kind of a banking system?
Mr. Alan Gray:
They did, Senator. I think from the time I joined, really, a few things were happening. First of all, that incredible mountain of build-up of lending to the property sector really was just hitting its peak. And I cannot comment on any analysis that happened prior to 2007 when the real risks were built into the sector, but there was a detailed discussion on the risks which were very evident then, Senator, and that was a part of the board discussions.
Sean Barrett (Independent)
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Were there concerns about houses moving from two and a half times average income to up to 12 times average income, or The Economistinternational data on house prices showing that Ireland was way ahead of pretty well anywhere else that The Economistwas collecting the data?
Sean Barrett (Independent)
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You mention on page 6 of your presentation your concerns about the design faults in the euro. Did the Central Bank have any fall-back position to deal with massive flows of capital into the Irish banking system?
Sean Barrett (Independent)
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Did you bring the work of Jeffrey Sachs, your author, to the board to warn them about that?
Sean Barrett (Independent)
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Did the bank have any contact with the ECB about the dangers to our economy from the design faults in the euro?
Mr. Alan Gray:
It was certainly the case that we were informed by the Governor that there was intensive interaction with the ECB about the liquidity position in the Irish banks, which was related to that factor. And indeed that was part of the reason for the domestic standing group being established as a tripartite group between the Department of Finance, the regulator and the Central Bank.
Sean Barrett (Independent)
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Yet in the documents you sent us there seems - I'll put the proposition to you, that there is a remarkable lack of urgency, you know, as this problem built up. You know, measures to have thoughts about further measures, sort of, kind of thing. The imminence of the crisis doesn't seem to have led to any policy response.
Sean Barrett (Independent)
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You were a strong opponent of the tax incentives for property and your study, in fact, quantified some of the measures which hadn't elsewhere been quantified. Could you tell us why you were so strongly against tax-based property investments?
Mr. Alan Gray:
I think that they are one of the biggest Irish mistakes that happened within our own control. I think that there were a number of issues in relation to property-based tax incentives. One was that they meant that funding was being directed into, effectively, a unproductive part of the economy rather than supporting the internationally-traded sectors and this was of concern to me, not just as the crisis emerged but much earlier. I think it was in the early to mid-1990s, in a book that I wrote that, Senator, you may be aware of because one of your colleagues, Professor McAleese, was one of the contributors. But in my chapter on that book I pointed out, back then, back in I'm not sure if it was 1992 or 1995, that no new taxation measures should be introduced for any activity in the non-traded sectors of the economy. And I pointed out that views ... viewed in isolation many of the tax incentives for certain property and other investment might appear defendable in order to achieve a specific local or other objective, but viewed against the background of the need to encourage tradeable activities, such activities cannot in general be justified. And I purposely went on to say that there should be no further extension to the timescale for them, and I pointed out that whenever a date is set for the cessation of investment-related property tax incentives, strong vested interest groups will emerge to seek an extension of such deadlines. The case will be argued that investments were in the planning stage and it would be inequitable to have the cut-off date. I said, alternatively it could be argued the level invested had not taken place and the timescale should be extended, but I said-----
Sean Barrett (Independent)
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Okay, thank you. If I may-----
Ciarán Lynch (Cork South Central, Labour)
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In general, just a point, I need you to return to me with the line of questioning and what's outstanding maybe in your wrap-up, Senator, but I need you to focus up on concluding your line of questioning there. We've only got a couple of minutes left.
Sean Barrett (Independent)
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Yes. Your memo to Kevin Cardiff on 25 September 2008 outlining the five options to deal with specific issues faced by the individual domestic banks ... did you get a response to that?
Sean Barrett (Independent)
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And that was an altruistic gesture. Mr. Cardiff didn't ask you for it or commission you to do it.
Mr. Alan Gray:
No, this was the only - I gave that as a member of the Central Bank board, who earlier that day was told that the Government were looking for urgent actions to deal with the escalating liquidity crisis and that the Government would be seeking the views of the Central Bank board. I outlined my views at the board meeting but I wanted to make sure that there was full understanding, because in a board of nine people you can only have - a bit like this committee - you know, conversations can get a bit shortened even though it might be worthwhile to continue. And I went home that evening. I dropped everything I was planning to do and I wrote that detailed memo. Nobody had requested it, other than they had pointed out that this was likely to be the option and I felt it was important to encourage consideration of other options.
Sean Barrett (Independent)
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Finally, you sent in about 4,500 words, estimated, on the employment and unemployment problem. Did you get a response to that from the people who attended that particular meeting?
Ciarán Lynch (Cork South Central, Labour)
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I just want to deal with-----
Sean Barrett (Independent)
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It happens to economists. I'm very sorry-----
Ciarán Lynch (Cork South Central, Labour)
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-----the disagreement that Senator Barrett was touching upon. Just to clarify, the advice requested, was the advice requested by the Department of Finance or by Mr. Cardiff?
Ciarán Lynch (Cork South Central, Labour)
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Who informed you of that?
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Right.
Ciarán Lynch (Cork South Central, Labour)
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Okay, but you then fed in a document afterwards-----
Ciarán Lynch (Cork South Central, Labour)
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Were they expecting it or did you just come and write, and say, "Look, I'm going to bang it into the guys there tomorrow", or what?
Ciarán Lynch (Cork South Central, Labour)
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Were they expecting it?
Ciarán Lynch (Cork South Central, Labour)
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Okay, that's fine, so you ... this is something you done under your own volition?
Ciarán Lynch (Cork South Central, Labour)
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So, in this regard, this is a voluntary action, but, at any time, was there a consultancy agreement between Indecon and the Department of Finance?
Mr. Alan Gray:
There was no consultancy agreement between Indecon and the Department of Finance on any issues concerning financial services or anything related to this. As I pointed out, on occasion we would win assignments on a competitive basis like our property-based tax incentive review but this was nothing to do with ... nobody was paying me to do this but as a director of the Central Bank I felt a responsibility to give my views.
Ciarán Lynch (Cork South Central, Labour)
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Well, I just want to stay with this particular. Was there any reason why liquidation was not considered on the most stressed banks prior to any guarantee being issued to ... for the other viable banks?
Mr. Alan Gray:
Chairman, that was not one of the options. I mean the options that were presented at the Central Bank board meeting ... there was only two options given. One was to provide a full guarantee on all the banks and, secondly, to give a bond to all the banks which would have effectively the same thing.
Ciarán Lynch (Cork South Central, Labour)
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I know on that day you are moving very much to a pinch point where a decision has to be made but at any time in the lead up to that - I am not even talking about this afternoon, that afternoon - was there any reason why liquidation was not considered on the most stressed banks?
Ciarán Lynch (Cork South Central, Labour)
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And this brings me on to the next issue because there is a question there as to whether Anglo is systemic or not and so forth and that it was a point of debate. So was liquidation rather than the nationalisation mentioned in your memo to Kevin Cardiff dated 25 September 2008 not a more favourable option for the Exchequer?
Mr. Alan Gray:
It would have been much more favourable for the Exchequer but much more damaging for the economy. I know of no expert economist in this area that thinks in the middle of coming into a bank run that a sensible option would be to liquidate a bank and we do have one example of that, Chairman, namely, in Lehman Brothers and we know the impact of it.
Ciarán Lynch (Cork South Central, Labour)
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To say I am grateful to allow me the discipline of getting through some of this stuff here with you, Mr. Gray. Just finally on that, was a political guarantee rather than a full blanket guarantee considered as an option by you or the board members and, if not, why not?
Mr. Alan Gray:
It wasn't considered by the board members but it certainly was considered by myself. And on the second page of the detailed document that I put in, I put a potential option would be that there would be a Government or ministerial statement indicating a State guarantee would be provided if required or an intention to provide such a guarantee but with no immediate commitment or legislation. And I gave my assessment of that would be that that would be in danger of being seen as too weak and it would probably be better not to have any such statement. And that if in the scale of the crisis we were facing, any systematic wide initiatives must be seen as sufficient otherwise it would fail. And I think the idea that in the scale of the crisis that people were facing that a general political statement from the Government would've prevented a bank run, I think would not be a credible option.
Ciarán Lynch (Cork South Central, Labour)
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So it needed a full paper guarantee not just a political statement.
Ciarán Lynch (Cork South Central, Labour)
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Just for the moment, we can deal with the specific regulatory matters as I, kind of, go deeper into the question but just for now, I just want to deal with the processory aspects of it. In your witness statement you advise, "I felt so strongly on this that I wrote to the Central Bank Governor-Financial Regulator and to the Department of Finance and suggested radical reform of financial regulation." Now I just don't want to get the details for the moment but would you consider it normal practice for a board director to write to the Central Bank Governor and the Financial Regulator expressing concerns? Would that be normal practice in the main?
Mr. Alan Gray:
I think in terms of the strength of my views and in terms of my understanding of the scale of changes needed, it was an appropriate action. It wouldn't be a normal action, Chairman, in a normal situation if there was not major problems and the reason that I sent it to the Department of Finance and to the Central Bank and not just raised it at Financial Regulator board meetings was it would require Government action and legislative changes as well as simply a matter within the remit of the board.
Ciarán Lynch (Cork South Central, Labour)
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A more holistic solution, I suppose, for want of a better word.
Ciarán Lynch (Cork South Central, Labour)
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Were you aware of any other directors looking or doing otherwise, that would have been, that would have taken kind of similar actions?
Mr. Alan Gray:
I am not aware but I would not necessarily be aware. I did not send those letters to all the directors. I didn't go to board meetings and say, "I've taken the time to look at what I think would be the issues in a guarantee", and urge action and things. And maybe others did but I have no knowledge of that.
Ciarán Lynch (Cork South Central, Labour)
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Can you maybe just advise the committee as to what was the reception, the reply you received, to this written note?
Mr. Alan Gray:
So, I think on ... I think I've submitted five letters I have sent into the Secretary General, the second secretary, the chairman of the Financial Regulator and the Governor, concerning either the guarantee, the issue of capitalisation or the regulation and on all occasions I would have had a verbal acknowledgement and a, "Thank you", for them but they would not have discussed with me what responses they were proposing to take and, Chairman, nor would I have necessarily expected them to.
Ciarán Lynch (Cork South Central, Labour)
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Okay. I am just going to bring in Deputy O'Donnell in a moment but I just want to afford you to give the fullest explanation in this. When Anglo called to see you ... Mr. FitzPatrick and Mr. Drumm, where did they see you, your office, your house?
Ciarán Lynch (Cork South Central, Labour)
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To your office, okay. Who advised them to go to you? Did they say a person said we need to go and see you?
Ciarán Lynch (Cork South Central, Labour)
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Okay. How did they find you? Did they have your-----
Ciarán Lynch (Cork South Central, Labour)
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Were you expecting them?
Ciarán Lynch (Cork South Central, Labour)
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They didn't phone ahead?
Ciarán Lynch (Cork South Central, Labour)
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Okay. And they didn't ring or have your number? They just literally showed up on the door. What time of the day was it?
Ciarán Lynch (Cork South Central, Labour)
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After lunch?
Ciarán Lynch (Cork South Central, Labour)
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And later that evening you had a discussion with Mr. Cowen -----
Ciarán Lynch (Cork South Central, Labour)
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-----about ... he stepped out of the room to ring you and he expressed to this committee the importance that he would take and weigh upon your advice. Did the engagement with Anglo that afternoon inform any of the discussion with Mr. Cowen later that evening?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Deputy Kieran O'Donnell.
Kieran O'Donnell (Limerick City, Fine Gael)
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Thanks, Chairman. Welcome, Mr. Gray. Mr. Gray, can I go to Vol. 1, page 65 to 66, its core document, it's the letter of 20 October that you wrote to Mr. Kevin Cardiff? You might just summarise what were the main points you wanted to raise. It is about an exit strategy from the bank guarantee, the reasons why you wrote the letter so early in the guarantee period. How was the letter received? What action was taken on foot of it? You sent a similar letter to the financial stability committee in the Central Bank and what action was taken on foot of this?
Kieran O'Donnell (Limerick City, Fine Gael)
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It's in Vol. 1, page 65.
Ciarán Lynch (Cork South Central, Labour)
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The transcript in front of you might be more helpful for you.
Mr. Alan Gray:
Thank you very much, Deputy, and I'm very aware of the letter, as you can imagine, but I just wanted to have it in front of me in terms of answering you. So, in terms of when ... why did I write that letter and what was the nature of it and what was the content, I was aware at that stage that there was a very widespread perception both in Ireland and internationally that the guarantee had worked in terms of stemming the outflow of funds to the banks.
But I was very much aware - and these were the same points I was making in my letter of the 25th, before that decision was made - I was very much aware that there was significant risks for the exposure for the Exchequer.
Kieran O'Donnell (Limerick City, Fine Gael)
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And in that context, Mr. Gray, would you have advised Mr. Cowen, the then Taoiseach, in your telephone conversation that you believed the guarantee should only be for a year?
Mr. Alan Gray:
I did not give a precise timeframe but I said it should be as short as possible, and I had in mind the fact that it was probably about exactly a year previously when Northern Rock went bust that the UK Government - and, I think, very wisely - did not say, "We'll give a guarantee for five years." They said, "This is a temporary guarantee to deal with an exceptional period of financial turbulence."
Kieran O'Donnell (Limerick City, Fine Gael)
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In the limited time I have, can you just summarise the key points you were making and what action was taken on foot of the letter of 20 October?
Mr. Alan Gray:
Thank you, Deputy. So I said ... the key points I was making is that I knew that there were ... everyone was very involved in implementing the guarantee but I felt that we ... policy makers needed to focus on the effective risk management for the guarantee and the exit strategy. And I made that statement that the day we give a limited guarantee is the day we need to-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Was there action taken on foot of your letter, Mr. Gray?
Kieran O'Donnell (Limerick City, Fine Gael)
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I have very limited time now, Mr. Gray.
Mr. Alan Gray:
I understand but I'm trying to, in the most effective way possible, give an answer to this. That was only highlighting a risk but in terms of what action was taken, I outlined what I felt was the action that was needed. And I said that that risk management strategy must have, really, changes in the regulatory process, including effective monitoring, assessment, quantification and control of risk. And I outlined a number of strategies that could be done to achieve that, actions to increase the capitalisation of the Irish-----
Kieran O'Donnell (Limerick City, Fine Gael)
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And did you get a response to the letter, Mr. Gray?
Kieran O'Donnell (Limerick City, Fine Gael)
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Can I move on? You made reference in your document - annex 7 in Mr. Gray's statement - it relates to the meeting in Druids Glen, and you gave, effectively, your agenda. And I just had a quick look at the agenda, Mr. Gray. It's about 64 items in the agenda.
Kieran O'Donnell (Limerick City, Fine Gael)
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I think about eight of them relates in some way ... could be related to creditor banking. The first two ... the notes in blue underneath the main headings, when did you write those notes?
Kieran O'Donnell (Limerick City, Fine Gael)
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When did you write the notes?
Kieran O'Donnell (Limerick City, Fine Gael)
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So you wrote them post-Lehman's?
Kieran O'Donnell (Limerick City, Fine Gael)
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And the first one speaks about that Ireland faces its most difficult economic challenge in over two decades and the scale of the challenge shall not be underestimated, and you speak about Lehman Brothers in that context. No. 2, you say, "Ireland has been hit by four main international developments, namely: global credit crunch"... was the No. 1 item you put in there. So, the question I suppose I want to ask, in that context, Mr. Gray: do you think it's credible to say that banking was not discussed?
Mr. Alan Gray:
I certainly do. I mean, I was talking there about the international economic environment, and what I had indicated is that Ireland had been hit by four main international developments - the global credit crunch, the unprecedented increase in energy prices, the decline in investor and consumer sentiments and rising European interest rates-----
Kieran O'Donnell (Limerick City, Fine Gael)
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But you were in the room. Did the meeting take place at Mr. Drury's private home?
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay. What time did the meeting start at in the morning?
Kieran O'Donnell (Limerick City, Fine Gael)
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Are we saying 8 o'clock, 9 o'clock?
Kieran O'Donnell (Limerick City, Fine Gael)
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About 10 o'clock.
Kieran O'Donnell (Limerick City, Fine Gael)
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And you were in the room ... like, were you aware of who would be attending that meeting prior?
Kieran O'Donnell (Limerick City, Fine Gael)
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You were invited by Mr. Drury?
Kieran O'Donnell (Limerick City, Fine Gael)
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So you-----
Kieran O'Donnell (Limerick City, Fine Gael)
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So you would've been aware at that stage that you had two current directors and the chair of the board of Anglo, you had one former director, Mr. Drury. Did you not think, in your role as a member of the Central Bank, at that particular moment in time, that it would be unwise to attend such a meeting?
Kieran O'Donnell (Limerick City, Fine Gael)
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Why not?
Mr. Alan Gray:
I didn't, Deputy, for a number of reasons. I was ... if I had been asked to attend a meeting on banking or Anglo Irish, I certainly would. But I was asked to attend a meeting where the chairman of Anglo Irish Bank was there and the chief executive of Smurfit Kappa - I wasn't even aware that he was a director of Anglo Irish Bank - and Mr. Fintan Drury, who was a friend and adviser to the Taoiseach on communication issues. I have been invited by many different Ministers and Taoiseachs to attend meetings, and I don't have a say... I don't control who the other attendees are but I did not see any difficulty with this.
Kieran O'Donnell (Limerick City, Fine Gael)
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And the final ... in this statement, in this annex 7, you give - on section 3, "Suggestions re Process and Indicative Timelines" - you go down through ... that, really, over the month of August, the Minister for Finance and the Government should do an action plan. Was any of this acted upon?
Kieran O'Donnell (Limerick City, Fine Gael)
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No action?
Kieran O'Donnell (Limerick City, Fine Gael)
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But they were all ... I mean, I accept they were to implement the particular items you had discussed in this agenda. On reflection, Mr. Gray, why did you say earlier that it was a mistake for you to attend that meeting?
Ciarán Lynch (Cork South Central, Labour)
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But at the time of the meeting ... I'm only interested in the content of the ... and the context of then. Events subsequently unfold and all the rest of it; I'm not looking for that filter or that measure to be put in it.
Ciarán Lynch (Cork South Central, Labour)
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Deputy O'Donnell is referring to the context of the meeting.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay, thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Deputy O'Donnell. The next questioner is Deputy Eoghan Murphy. Deputy.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman. Thank you, Mr. Gray, and you're very welcome. Mr. Gray, I'd like to focus on your time as a member of the board of the Central Bank, if I may. You resigned from the board when exactly?
Mr. Alan Gray:
So, I've seen some media statements suggesting that I was appointed in December 2006 and that I was on the board to 2009. I'm not quite sure the source of that information. It certainly isn't information I've given the inquiry, and I don't believe it's factually correct. Or actually it says I was there till 2008 ... September 2008. I joined ... I got my first letter appointing me, having agreed to join, when I came back from my break at Christmas. I got it in January and I attended my first board meeting at the end of January 2007. I remained on the board until the new Central Bank Commission was appointed. I was on the board that oversaw the appointment of Professor Honohan as the new Governor; I was on the board of the regulator that saw the appointment of Matthew Elderfield as the new regulator; and I was on the board that started to implement a very different form of financial regulation, very much in line, Deputy, with what I had earlier written to Finance and the Central Bank.
Eoghan Murphy (Dublin South East, Fine Gael)
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So you continued on past the guarantee and into ... easily into ’09.
Eoghan Murphy (Dublin South East, Fine Gael)
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I just wanted to clarify that because it wasn’t clear. You provided in your written statement your views on stress testing.
Eoghan Murphy (Dublin South East, Fine Gael)
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I wanted to know if you wanted to add to those because you do talk about one of the reasons why our own stress testing here in Ireland didn’t identify the problems. Without repeating yourself, is there anything you want to add to what you submitted in your written documentation?
Mr. Alan Gray:
Thank you, Deputy. I think that I did have some further thoughts on stress testing, yes. Just in preparing for this session, Deputy, I went back through more detailed notes I had and I can’t quite remember whether I put this in my statement but the very first presentation on financial stability and stress testing that was made to the central board ... bank board when I was a member was at the end of March 2007, and I and a number of other directors asked for further work to be undertaken on five areas: the exposure to the decline in the price of building land; the consequences of the continuation of recent trends in credit; the effect of changes in interest rate on affordability and debt levels; analysis of the levels of provisioning and what would be the impact of a collapse in property prices. At a subsequent meeting of the Central Bank board, I and other directors asked for further work to be completed on three areas: commercial property; the buy-to-let market and the emergence of sub-priming.
Eoghan Murphy (Dublin South East, Fine Gael)
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Mr. Gray, can I just interrupt you for a second?
Eoghan Murphy (Dublin South East, Fine Gael)
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Because I want to ask what that implies. Does that imply that when you came onto the board you felt that the stress testing being undertaken wasn’t good enough?
Eoghan Murphy (Dublin South East, Fine Gael)
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So, those were additional factors that you wanted to be undertaken.
Mr. Alan Gray:
Exactly. Yes. And they did do additional fact research, including an examination of the details of a range of property price collapses. I have submitted that in part of my evidence to the commission and it has been deemed as not appropriate for me to put into my evidence because of section 33AK but I am happy to talk in a more general way about that if that would be helpful.
Eoghan Murphy (Dublin South East, Fine Gael)
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One of my colleagues might be able to come back to that. There were a couple of other things around that I wanted to ask. The other question was in relation to you or your company ever being employed or contracted to do additional work for any of the individual banks on their own stress testing or any measures like that.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. So you had no independent knowledge of the banking system separately from your position on the Central Bank board.
Mr. Alan Gray:
Well, I had some knowledge of the banking system internationally from our work for the European Commission and we have done work for the financial services conduct authority in the UK and for other clients but I had no information from any Irish banks other than the information which was available to the regulator and the Central Bank.
Eoghan Murphy (Dublin South East, Fine Gael)
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If I could move on to the meeting of 25 September 2008-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----and a note you provided in to Kevin Cardiff. It’s page 34, Vol. 1. One of the initial points you put down is the danger of a system-wide response being seen to be too weak, “Any system wide initiative ... must be seen as sufficient so ... there is not ongoing initiatives launched.” Is that in effect you saying that anything that is done needs to do the job and do it in one go, if you like, because we heard something similar from Mr. Hurley when he was before the committee? So I’m wondering if when he put that view into the room on the night of the guarantee it was because of the conversation that the Central Bank would have had, but because of that view that you held in particular.
Mr. Alan Gray:
I can't interpret why Mr. Hurley made any comments but I can certainly account for my view on that, Deputy, which was there ... in every banking crisis there is a real danger of piecemeal action which subsequently leads to more and more piecemeal action and actually causes a much greater problem.
Eoghan Murphy (Dublin South East, Fine Gael)
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That is the sufficiency that you were talking about.
Eoghan Murphy (Dublin South East, Fine Gael)
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A final question, if I may, because I’m close on time, is, when Mr. McDonagh was before us from the NTMA, in the inquiry, and he was talking about the night of the guarantee but also the preparations leading up to it and what he understood and the view of the NTMA and he said in page 91 of the transcript, it says, this is Mr. McDonagh: "I think it was about 1 o'clock, I think it was about 1 o'clock in the morning when Kevin came out of the room and says ... said 'The Government has made a decision to ... do a blanket guarantee', and I was flabbergasted because all the work had been about preparing for [nationalisation, excuse me,] nationalising an institution." So, can you ask how the NTMA might have had that view right up until the moment of the guarantee, whereas the view of the Central Bank from the 25th was it’s going to be a guarantee?
Eoghan Murphy (Dublin South East, Fine Gael)
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You mentioned the NTMA was in a meeting on the 24th, the day before that.
Mr. Alan Gray:
And we were informed that the NTMA were at a meeting the previous day with the Central Bank, the regulator, the then Minister for Finance and their teams of advisers and the outcome from that meeting was the proposal that was being put for consideration to the Central Bank board, and I wasn’t at those meetings that Mr. McDonagh was at on the 24th but I am outlining what we were told as Central Bank directors the next day and what the formal signed-off minutes by everyone shows was the case.
Eoghan Murphy (Dublin South East, Fine Gael)
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But is it possible that someone attending the meeting on the 25th being informed of what was discussed on the 24th might have misinterpreted this in some way to come to the conclusion that Mr. McDonagh had come to that-----
Eoghan Murphy (Dublin South East, Fine Gael)
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It is possible.
Eoghan Murphy (Dublin South East, Fine Gael)
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How is that possible if the meeting is so clearly recorded and that’s your clear understanding that the guarantee was the option being discussed-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----that someone would be able to say then or come to a view from that that all the work had been about preparing for nationalising an institution? How can you take that from-----
Eoghan Murphy (Dublin South East, Fine Gael)
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But you think it’s possible that someone could do that?
Eoghan Murphy (Dublin South East, Fine Gael)
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Can you think why perhaps they might decide to give, or could they or would they, give a view to the Central Bank but be doing other work that they wouldn’t inform you of, that might be equally as valid an option?
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Deputy Higgins.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Gray, your private consultancy company is called Indecon, correct?
Joe Higgins (Dublin West, Socialist Party)
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When was that founded?
Joe Higgins (Dublin West, Socialist Party)
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Okay. And you have done over the years, over the decades, work for the Irish Government and the Department of Finance.
Joe Higgins (Dublin West, Socialist Party)
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Would you ... how would you describe your company’s relationship with Government officials and the Department of Finance in this State, and if you would differentiate between that relationship before your time of appointment to the board of the Central Bank and the regulator, during your time, and then since you resigned?
Mr. Alan Gray:
Thank you, Deputy. I think the relationship of the Indecon research economists with the central ... with the Department of Finance or with the Taoiseach’s Department, or any other Government Department, would be seen very much as an independent view on issues and I often say to some of my economists that if someone is looking for a view rubber-stamped they will certainly not ask Indecon for our view.
I have heard, Deputy, about lots of major consultancy and, you know, advisory and research work being given to different practices for particular reasons, but not through public tender, but that has never occurred in Indecon's case.
Joe Higgins (Dublin West, Socialist Party)
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And did you also give advice or represent in some capacity, major banks?
Mr. Alan Gray:
Our research practice has done work in the financial services sector, including for banks. Most of the work in financial services we've been undertaking internationally have been for regulators, such as the UK Financial Conduct Authority, and we did a very major study that you might be aware of for the European Commission on how to protect consumers in financial difficulty. And I'd like to just particularly answer the question about banks. The only bank that we have ever done any research project work for was Bank of Ireland. It was never in relation to any issue that was related to regulation or related to any issues before the Central Bank.
Joe Higgins (Dublin West, Socialist Party)
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So do you feel there was ever a conflict of interest between your company's advising Bank of Ireland, say, and your role on the Central Bank?
Mr. Alan Gray:
Deputy, if I ... if we were advising them on Central Bank issues, I would have felt there was a conflict of interest, but that has never been the case. And as soon as I was appointed to the board of the Central Bank, in January 2007, I wrote to the Standards in Public Office Commission, described the type of work we had done for Bank of Ireland and asked did they consider there could be any material conflict of interest. And I got a formal response from the Standards in Public Office Commission on 9 February 2007, which said there is no basis to conclude that there could be material influence in the performance-----
Joe Higgins (Dublin West, Socialist Party)
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That's clear enough, Mr. Gray. I'll move on for time reasons.
Joe Higgins (Dublin West, Socialist Party)
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You say in your opening statement, page 4, written one:
However, [this is in relation to the bank bailout etc.] I believe their decision to subsequently force Ireland to avoid imposing losses on bond holders andrequiring Irish taxpayers to then bear the cost was morally indefensible. It was one of the worst examples of a small state being forced to socialise losses (i.e. for the taxpayers to pay the costs) while the private sector gains were protected.
And you also said under the paragraph, "Week of Bank Guarantee", page 16:
The Bank Guarantee decision resulted in Irish citizens having to pay a very high and unjust cost for the banking crisis. Providing a linkage between the sovereign and the liabilities of the financial institutions proved to be a very costly decision.
Mr. Gray, is this by way of recanting from your support and advocacy for a bank guarantee? Because, obviously, the bank guarantee was the origin of why the sovereign and the taxpayer were eventually saddled with this massive debt.
Mr. Alan Gray:
So, there is no recanting, Deputy, and I'd like to deal with the key elements in what I'm saying. I could understand that the ECB, for international financial stability reasons, might require and make a decision that bondholders shouldn't be burnt at any particular time because of the impact on world financial markets. What I feel is that would be an extremely unjust decision if that was a decision that was made but when combined with the requirement that to meet that worldwide international stability objective one member state would have to pay the cost, was morally indefensible, and I don't make those comments lightly. The guarantee ... that is about burning the bondholders. The guarantee issue is ... the guarantee was an unjust decision but was, in my view, the sensible decision, even though it was unjust, given the terrible options that were available.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Gray, you also said on page 9, "Regulatory systems did not cause the crisis, but did not prevent the practices which led to the crisis." Most fundamentally, what caused the crisis, in your view?
Mr. Alan Gray:
I think I outlined, Chairman - or not Chairman, sorry, Deputy - a number of key factors. I think there was two major international factors that were of critical importance. One was, with the enthusiasm for having a euro, people ignored the design faults in the euro and did not put in place the institutions necessary to make that work, and my view is that that is still the case, unfortunately.
Joe Higgins (Dublin West, Socialist Party)
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Yes.
Joe Higgins (Dublin West, Socialist Party)
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Okay.
Joe Higgins (Dublin West, Socialist Party)
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Yes.
Joe Higgins (Dublin West, Socialist Party)
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Okay, and on that point - and this is my last point because I'm out of time, Mr. Gray - more fundamentally still, is it appropriate that in a democratic society private financial institutions, which hold enormous power over society, are able to profiteer and speculate at will, and blow up such a massive bubble that then creates, when it crashes, such havoc? Would you not say that that's a more fundamental reason that they have that right or not and the greed for super profits?
Joe Higgins (Dublin West, Socialist Party)
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But isn't that fundamental to how the capitalist financial markets operate?
Mr. Alan Gray:
Well, I think that a bank that is prudently managed, properly regulated in an economy with appropriate macroeconomic policies, without inappropriate intervention in the property sector, would not cause a crisis. So, I don't think it's the fact that they're commercial organisations that are the problem. The problem is the mistakes made within the banks and the failure of the regulatory system to stop them making those mistakes, and the fact that that fuel which ... this crisis is all really about what happened in property and was fuelled by inappropriate tax incentives.
Ciarán Lynch (Cork South Central, Labour)
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I am going to invite Senator O'Keeffe, and I'm going to propose just a five-minute comfort break after that. Senator O'Keeffe.
Susan O'Keeffe (Labour)
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Thank you, Chair. Mr. Gray, did you give any advice to the Taoiseach or anybody else in the Government relating to the troika bailout, or the establishment and operation of NAMA, or the nationalisation of Anglo Irish Bank?
Susan O'Keeffe (Labour)
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No, that's fair enough so, Chair, you'll just amend the time. Thank you. Yes, please.
Mr. Alan Gray:
I did not give any advice in relation to nationalisation. I did not give any advice in relation to the bailout but I did point out in the evidence that I submitted that I and some other external economists were invited to a meeting in the Department of Finance, some time in October, to give our external assessment of what was likely to happen in the economy and what would that mean for public finances, and that was prior to the bailout. But I put that in for full disclosure in case people would be saying, "Well, that was actually related to the planning for the bailout," and it may well have been.
Susan O'Keeffe (Labour)
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Mr. Gray, you have, as I think one of my colleagues has asked you, you've done consultancy work for very many Government Departments over the years. That's correct. I think you also worked for the Department of Industry and Commerce at one stage.
Susan O'Keeffe (Labour)
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And you worked for the Central Bank as well when you were younger, I think.
Susan O'Keeffe (Labour)
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And just to check, forgive me, you said you did some consultancy work for the Bank of Ireland but not for any other banks. Is that correct?
Susan O'Keeffe (Labour)
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And did you do consultancy for the Quinn Group, or for Quinn Insurance or for any of the Quinn Group?
Susan O'Keeffe (Labour)
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No, okay. When you were appointed to the board of the Central Bank, you say in one of your annexes that you decided to talk to some of the heads of departments and the management team, I think, in the Central Bank.
Susan O'Keeffe (Labour)
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You took it upon yourself to talk to them. When you did that, did you speak to Mr. Frank Browne?
Mr. Alan Gray:
So what I was referring to was the heads of departments in the Financial Regulator board, not in the Central Bank board. And the reason I took that view was the Central Bank board was very much an advisory board that looked at general economic developments. As an independent economist, I would assume that if there had been any contrarian views - I am, despite what might appear in this session ... am an extremely informal individual and I would be known in the economics profession, and people would ... I assume, if anyone had any different views ... would have come to me. And economists, by their DNA, are hard to stop giving their views.
But on the regulator board, when I was appointed I thought, maybe because the Central Bank and the regulator was a sort of a hierarchical and a deferential type organisation, I thought it would be important to ensure that there were no views about problems or particular issues which were ... people didn't feel at liberty to express to the board, and I asked could I meet all the department managers on a confidential basis, one to one.
Susan O'Keeffe (Labour)
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Did you speak to Mr. Browne?
Susan O'Keeffe (Labour)
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That's fine, I am just checking. That's fine.
On the night of the guarantee when you got the phone call from Mr. Cowen, can you recall, Mr. Gray, what time it was when you got that call?
Susan O'Keeffe (Labour)
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Did Mr. Cowen indicate that there was any agreement or disagreement in relation to where the conversation was heading? Did he say that anyone was favouring one thing or the other, and that he was, if you like, caught in the middle and was not sure? Can you tell us about that?
Mr. Alan Gray:
Sure. He didn't, and he didn't tell me what the Government were likely to do. He asked my view. He said it was being considered to give a guarantee to the banks and what did I think was the market reaction, and did I have any views on them. It was the very same option that was raised at the Central Bank board meeting-----
Susan O'Keeffe (Labour)
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And was he ... was it a conference call or was it just you and him, or were you aware was anyone else listening to the conversation?
Susan O'Keeffe (Labour)
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And did he indicate that the Minister for Finance was favouring nationalisation?
Susan O'Keeffe (Labour)
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You met with the Minister for Finance, I think, on 7 September. Can you tell us what that meeting was for?
Mr. Alan Gray:
My best recollection of that meeting was that he asked could he meet me to give my views on what was happening in the economy and what was happening in the labour markets. And one of the issues I recall making to the Minister at the time was that it was very important that, in looking at policy responses, it wasn't confined just to a public finance response.
Susan O'Keeffe (Labour)
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So you didn't talk about banking and you didn't talk about the state of the banks, because it would have been coming back after the summer and things would have been starting to kick-off again, and the crisis would have been starting to make itself felt. So you're saying it was just about the economy and not about the banks.
Susan O'Keeffe (Labour)
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Going back to Druids Glen, if I may,-----
Ciarán Lynch (Cork South Central, Labour)
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Just wrap up, Senator, please.
Susan O'Keeffe (Labour)
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Thank you. You said that the Taoiseach had asked you to come because-----
Susan O'Keeffe (Labour)
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-----because, obviously, you knew the Taoiseach. And did he ask you by way of a phone call or an e-mail, and when he-----
Susan O'Keeffe (Labour)
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A phone call directly to you.
Susan O'Keeffe (Labour)
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And when it was ... when Mr. Drury explained to you that this meeting would take place in a private house, in his house,-----
Susan O'Keeffe (Labour)
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-----what was your opinion of that, because under normal circumstances I am sure you would meet the Taoiseach or a Minister in their own office, not in someone else's private house? So, how did it arise that you agreed to meet them in a private house?
Mr. Alan Gray:
I had no difficulty in the location of the meeting, Senator. I would have met respective Ministers of all parties in different locations. I remember, when I was a young economist, being invited by Dr. Garret FitzGerald when he was Taoiseach, to meet him in his house in Palmerston Road.
I was given the directions to the location of this off-site meeting. I'd never been to the house before. I've never been to the house since. It was a logistic issue, I understood, because it was a few minutes away from Druids Glen, and I had been informed that the ... some of the other parties were going to play golf subsequently which, as you know from my statement, I wasn't invited.
Susan O'Keeffe (Labour)
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You don't play golf.
Susan O'Keeffe (Labour)
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Finally, if I may, Chair,-----
Ciarán Lynch (Cork South Central, Labour)
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Quickly, quickly.
Susan O'Keeffe (Labour)
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-----when you put your outline ... your schedule and your agenda, it is clear that the schedule or the timeline that you gave for what you were proposing by way of a restoration of the economy, was stunningly tight. You know, you were talking about-----
Susan O'Keeffe (Labour)
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-----Government agreeing in two weeks. In fairness, you know a lot about the way government works and you know that most people take a holiday in August, and your timeline was, if I might suggest, very ambitious indeed. So it looks like a very ambitious project that, if you like, really didn't fit with the kind of meeting. It looks like something from another day or another time that would have required a huge big meeting with a lot of people, and not that kind of meeting. And I am just asking did you have another purpose when you wrote that document originally and did you then think, "Oh, I'll take that with me because it would be useful."
Mr. Alan Gray:
Certainly not, and the timescale was very ambitious. But one of my frustrations as an economist, not only in Ireland but in other European countries, is how slowly governments tend to move and I knew there was a looming crisis. I felt that the response to date by policymakers was inadequate and I pointed that out - it's printed in the document that I circulated.
Susan O'Keeffe (Labour)
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And how did that go down at the meeting when you said that?
Ciarán Lynch (Cork South Central, Labour)
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Now I need to break, Senator.
Susan O'Keeffe (Labour)
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Yes, I know. How did that go down when you made yourself ... your views clear?
Ciarán Lynch (Cork South Central, Labour)
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Thank you. It's just coming up to 5.30 p.m. I am just proposing a very short, five-minute break. In doing so, just before we do break, I just need to ... just let Mr. Gray know and inform him that once he begins giving evidence, he should not confer with any person other than his legal team in relation to his evidence on matters that are being discussed before the committee. With that in mind, I now suspend the meeting until 5.35 p.m. and remind the witness that he is still under oath until we resume. Is that agreed? Agreed.
Ciarán Lynch (Cork South Central, Labour)
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Okay, I'm going to propose we go straight back into public session. Is that agreed? I just want-----
Ciarán Lynch (Cork South Central, Labour)
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Yes, what?
Susan O'Keeffe (Labour)
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Could I have a point of clarification when you're ready?
Ciarán Lynch (Cork South Central, Labour)
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Quickly now, please.
Susan O'Keeffe (Labour)
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Yes, sorry. Mr. Gray, can I just clarify when you were on the phone to Mr. Cowen, was the subject of the Quinn Group, or the contracts for difference, or the dangers they were posing to Anglo, was that raised at all-----
Susan O'Keeffe (Labour)
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-----in the conversation? No. Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you.
Ciarán Lynch (Cork South Central, Labour)
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I just want to deal with one ... just one outstanding item, another question, and then I'll bring in Deputy Doherty. Mr. Gray, in your witness statement you advise:
In attempting to respond to the crisis, extensive use of external advisers was made by the Department of Finance. This included both international financial and legal advisors. Their advisory reports were not shared with the Central Bank non-executive directors and I have only briefly seen some of these subsequently when they have been publicly released.
Were you surprised that the advisory reports were not shared with the Central Bank non-executive directors?
Ciarán Lynch (Cork South Central, Labour)
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What was the rationale for the suppressing of information for non-executive directors, that there would be this, sort of, editing process? What would you understand this to be rationale?
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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And did this lack of confidential information, and some of the information on which you've said you've subsequently seen, impact upon the board's knowledge, its functionality or its performance?
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Deputy Doherty.
Pearse Doherty (Donegal South West, Sinn Fein)
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Go raibh maith agat agus fáilte. Can I ask you, Mr. Gray, in minutes you provided to the committee from the Central Bank board, and in your statement as well, we see that the issue of the six-bank guarantee was raised? And a copy of the same minutes that this committee has access to - the reference from the secretariat is core book, John Hurley, Vol. 3, it's on page 33 ... and we see that the Governor told the board, which you attended, of the need to get the two pillar banks on board with the idea of a six-bank guarantee ... and that the Governor went on to say that he would need to talk to the two banks "who to date have been negative on such a proposal". You go on to say in your statement, on page 17, that "there was no suggestion at any time of any option to guarantee some banks but nationalise others, yet we know from evidence from AIB and Bank of Ireland that this was their preferred option ... of those two banks. And, obviously, we know from the board minute that you were informed that AIB and Bank of Ireland were not on board with the six-bank guarantee option. So, what then was the discussion around the need to convince the two pillar banks of the necessity of a six-bank guarantee?
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes. You left that bit out from the minutes that you provided ... the bit that talked about the need for AIB and Bank of Ireland to get on board with this, and that they were opposed to this prior to this, to that point.
Pearse Doherty (Donegal South West, Sinn Fein)
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If we have John Hurley's book please, Vol. 3. Can we get that, JH, Vol. 3, page 33? It's the next page ... and there it is. So, the minutes ... you've provided these minutes, but the last ... the second last bullet point there wasn't provided, which is, "There was a need to talk to the two banks which to date have been negative on such a proposal." The two banks ... we've seen these bullet-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----minutes as well and this is a version for the public, but these two banks were, obviously, AIB and Bank of Ireland.
Pearse Doherty (Donegal South West, Sinn Fein)
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The question is, Mr. Gray-----
Pearse Doherty (Donegal South West, Sinn Fein)
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You were informed at this meeting that you refer to in your statements that AIB and Bank of Ireland were not in support of a six-bank guarantee-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----and that they would need to be got on board with such an option.
Pearse Doherty (Donegal South West, Sinn Fein)
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Well, the wording that we have, that's available to the public, is this third bullet point from the bottom is ... this is from the Governor ... "There would be a need to talk to the two banks which to date have been negative on such a proposal."
Pearse Doherty (Donegal South West, Sinn Fein)
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You don't include that part in the minute.
Pearse Doherty (Donegal South West, Sinn Fein)
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No.
Pearse Doherty (Donegal South West, Sinn Fein)
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You've included all of the other minute, but you've deleted ... or not deleted, sorry-----
Pearse Doherty (Donegal South West, Sinn Fein)
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You've-----
Pearse Doherty (Donegal South West, Sinn Fein)
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You've left out a paragraph which talks about the fact that AIB and Bank of Ireland were not supportive of this proposal to date and that there would've been a need for the Governor to-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----talk to them.
Mr. Alan Gray:
And apologies. The only reason I left that out of the board minutes was that I was proposing that all of the annexes that I had submitted would be publicly released, and because it referred to two specific institutions it was my interpretation under section 33AK that I might be breaching that to include it in my evidence. The legal advice to the commission is that I can't include any of that in my public evidence, so that was the only reason for that. My recollection of the minutes ... and not the minutes ... my recollection of the meeting was the Governor explained that there had been discussions with the banks prior to this issue coming before the board of the Central Bank. And he explained that the major banks had up to this date been against a guarantee but that, given the evolving liquidity position, that their view may have changed, and that the Governor and the Department of Finance were going to continue their discussions with the banks.
Pearse Doherty (Donegal South West, Sinn Fein)
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And is your information that the discussions in relation to this proposal was with how many banks and which banks?
Ciarán Lynch (Cork South Central, Labour)
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There is phone interference there now coming in, folks. Sorry, just one second now.
Pearse Doherty (Donegal South West, Sinn Fein)
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It's not me.
Pearse Doherty (Donegal South West, Sinn Fein)
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But, sorry, there was actually detail, just to-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----put that on the record, because we have the evidence. There was ... you were informed that discussions would need to take place with the AIB and Bank of Ireland, and you were informed that AIB and Bank of Ireland did not support a six-bank guarantee.
Pearse Doherty (Donegal South West, Sinn Fein)
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My question is to you: were you informed in relation to whether that issue, as you say, was discussed with the major banks?
Was Anglo Irish Bank one of the banks that this issue was discussed with prior to this meeting?
Pearse Doherty (Donegal South West, Sinn Fein)
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So, you know what happened with AIB and Bank of Ireland-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----that there was previous discussions about a six-bank guarantee-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----but not with Anglo Irish Bank or any other banks.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, can I ask you in relation to going back, unfortunately, to the issue on Druids Glen and you talk about your conflict in terms of the privacy that you've had and the confidentiality that you've kept in relation to clients or people that you've provided advice to and the fact that you felt that you needed to make a public statement to bring clarity to the public in this matter? Can I ask you in relation to the public statement that you include here to The Irish Timeswhere you say you were invited to attend an informal dinner with the Taoiseach in Druids Glen; "The purpose of the invitation was to provide independent ideas [and] stimulate economic growth and to reduce unemployment in Ireland"? Could people suggest that that was misleading in the way that you weren't invited to a dinner in Druids Glen to discuss unemployment and the economic growth in Ireland until you actually were invited to a private meeting in a private residence of a former director of Anglo Irish Bank and, when that meeting hadn't concluded, you were asked to attend a dinner?
Mr. Alan Gray:
So, I think it is very evident that I was invited to that dinner to provide a continuation of a discussion but I did not refer to the previous discussion. And the reason I didn't; I was trying to balance my approach which would not be to normally issue statements to the media about policy discussions with any governments and when this broke I, as I have mentioned, I was extremely ill and I was trying to make a decision of what to release to balance my normal confidentiality arrangements and to respect people's privacy but yet to put out in detail what the content of that interaction was about. I was aware that the house we were in was an ordinary family home. I did not know whether Mr. Drury had children or not and I felt I would be breaching a personal issue of normal privacy and I didn't think it mattered, the location of it.
Pearse Doherty (Donegal South West, Sinn Fein)
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I appreciate that and in relation to ... did you give any thought to the fact that you were making a public statement that this dinner and this discussion happened in an open forum in a hotel with a Garda driver present where, indeed, the substantial discussion happened in a private residence behind closed doors with no garda present and only the Taoiseach and three other connected senior persons with Anglo Irish Bank? Did you consider that that would be the type of detail maybe that the public would have been looking for at that time, instead of corroborating what had already been released through questions to the Taoiseach in the Dáil?
Mr. Alan Gray:
I think all of the other participants chose to make no statement. I felt it was important to make a statement to deal with what was the nature of this discussion and I made that decision realising that I would be breaching my normal approach to respecting people's privacy and confidentiality but I felt it was important to have that in the public domain.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay.
Mr. Alan Gray:
And I did not think there was any issue about it being, you know, behind closed doors. Most meetings that I would have with Government Ministers would be behind closed doors. You know, in general you don't have them out in open, but I didn't think there was any attempt to hide the fact a discussion was proceeding. If there was, you know, one would hardly choose a public golf course hotel to have an open discussion and dinner. It wasn't in a private room in the hotel, it was in the general just-----
Ciarán Lynch (Cork South Central, Labour)
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Okay, Deputy.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, can I finish on this point here just in relation to the notes that you provided in terms of the-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----not the agenda, but the document or the points of discussion that you brought to the meeting? These have obviously been ... this document has obviously been altered, as you've outlined to the committee, since that meeting. Can you provide the committee with the original documentation if you still have access to it and can I ask you the point in relation to a number of the measures? The number of the ... a number of issues that you were discussing with the chairperson of Anglo present and two of the directors was, for example, additional equity for investment in start-ups; measures for credit fund for home ownership; we have guarantee that mortgage interest tax breaks wouldn't be reduced when the Government would have to implement different austerity measures; social housing ... local housing ... social housing being sold back to the owners to invest in construction. Some of these matters - and it was touched on by one of the Deputies-----
Ciarán Lynch (Cork South Central, Labour)
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Last question now, Deputy.
Pearse Doherty (Donegal South West, Sinn Fein)
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-----it is very much about credit in the economy. How is it possible to have senior bankers in the room, somebody from the Central Bank and talking about measures that you believed would introduce credit for the ... in the economy ... for people to buy their own house - consideration of a home buying scheme was another measure that was on the agenda - yet no discussion in relation to banking? Like, was the chairperson of Anglo Irish Bank, you know ... this obviously, like these ... some of these measures - it's stated in it - that it would be in conjunction with the State and the financial institutions. How ... is this not banking that's being discussed?
Mr. Alan Gray:
So, a couple of points, Deputy. You suggested that the document was altered. It was not altered. I highlighted in blue my interpretation of what I was discussing under each of the headings. I can, of course, supply the commission with the original documentation but it is identical to the document that you have, which has all the points in black other than the ones in blue. The issues, if I can go on to the particular areas that you're raising, were not about banking. They were about trying to deal with what I felt was the escalating unemployment position and the issue of social housing I don't think had any relevance to the banking sector. It was something that I felt very strongly about and normally in a context like this, one would not disclose information like this, but I came from a family that was homeless at one stage and I ended up in local authority tower blocks in Ballymun and I know the importance of people not having a house and this was a policy issue which I felt would have a social benefit and which would help create employment. It was nothing to do with banking.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Deputy McGrath, please.
Pearse Doherty (Donegal South West, Sinn Fein)
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Sorry-----
Ciarán Lynch (Cork South Central, Labour)
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Sorry-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Sorry, Chair, but there was specific measures - because in fairness to Mr. Gray, you did answer the issue on social housing - but there are specific measures here where you proposed co-operation between the State and financial institutions, which I presume would be Anglo Irish Bank as well, with the chairperson of Anglo Irish Bank sitting there with two directors there, where there would be working relationships between State and financial institutions. Is that ... I'm wondering how could the conversation not evolve in relation to banking. It's just, you know, somebody put it to me that-----
Ciarán Lynch (Cork South Central, Labour)
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The proposition has been made. I'll let Mr. Gray respond to it.
Mr. Alan Gray:
Yes. So, it didn't and none of those issues would be relevant to Anglo Irish Bank. They weren't in the general residential mortgage market. When I was looking at consideration of a home-buy scheme, I was referring to a social initiative in the UK to have a similar scheme. I outlined similar schemes in New Zealand. These were not issues about banking.
I think any objective economist would look at these and say these are issues about an economist identifying the scale of the crisis which had not yet been interpreted.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Deputy McGrath, please.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you very much, Chair. Good afternoon, Mr. Gray. Just if I can take you to that letter of 25 September '08 addressed to Mr. Kevin Cardiff, and you have spoken about this at length so we should be able to get through these questions quite quickly. There weren't any terms of reference for that paper, I think you've confirmed that. It was your own initiative following the discussion that you had just attended at the Central Bank meeting. Can you outline the supporting evidence and analysis you placed the greatest emphasis on when preparing this or what documents did you have regard to or was it just from your own mind that you prepared this paper?
Mr. Alan Gray:
Thank you, Deputy. It wasn't from any specific documents that I prepared it to but it was based on my very rigorous interpretation of what was the scale and nature of the issues that were facing the banking sector from my role in the Central Bank. In my role as chairman of London Economics, we have experience in about 80 countries internationally.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes.
Mr. Alan Gray:
I've advised on countries as diverse as Cuba and Germany and all sorts of countries and I was aware of international experience in a number of these areas, and it was based on that analysis. I had indicated to the Department of Finance and to the Governor that I knew they had their own teams of advisers but I believed in sharing my inputs, for what they were worth, outlining the need to look at a wider range of options. I put the ECB option as the very first one because I felt that that would be the normal response. If this was in the US, the Federal Reserve would have been taking actions-----
Michael McGrath (Cork South Central, Fianna Fail)
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Sure.
Mr. Alan Gray:
-----rather than individual states. And the other issue I was very keen to highlight, based on my analysis, was this wasn't just a liquidity issue. There was four challenges facing ... and I was concerned that everyone might think there was one. There was: to improve liquidity in banking; to deal with issues in individual banks; to reduce the State exposure; and to restructure the sector.
Michael McGrath (Cork South Central, Fianna Fail)
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And that's all set out in the paper.
Michael McGrath (Cork South Central, Fianna Fail)
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And just to clarify, in preparing this paper on that evening, you didn't consult with anybody else?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, and the recipients were Mr. Hurley, Mr. Cardiff, to whom it was addressed, and the ... David ... is that David Doyle?
Michael McGrath (Cork South Central, Fianna Fail)
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So he was sent a copy as well.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure, and apart from the Central Bank authority meeting, which informed your decision to write this paper, did you have any direct discussions before writing this or, indeed, after this ... after writing it, with Mr. Doyle and Mr. Hurley about this paper?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay, and with the Minister for Finance, Mr. Lenihan, did you have any direct discussions with him around this time?
Michael McGrath (Cork South Central, Fianna Fail)
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No. And can I ask, Mr. Gray, at that time, were you the beneficial owner of any shares in the Irish banks or ... either directly or through investment portfolios that you might have had a share in?
Michael McGrath (Cork South Central, Fianna Fail)
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Sure, and that would ... no shares in Irish bank would extend to include any investment portfolios that you had?
Michael McGrath (Cork South Central, Fianna Fail)
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Were not invested in the Irish banks?
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you. Can I ask you: when did you first realise that additional capital would have to be injected into the banks?
Mr. Alan Gray:
I felt ... certainly in early October, I felt that there was a likelihood of the need for additional capital in the banks and in terms of my views on that ... it was based on emerging research that was coming from the PwC and other analysis that I knew that that might be a possibility. It was also a feature of probably every banking crisis that banks subsequently needed some additional capitalisation.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. But just to clarify this point because the ... you know, early October is only a few days after the end of September-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----and by 20 October, you were writing to Kevin Cardiff specifically addressing issues around the capitalisation of the banks and the possibility of additional capital being needed. That was followed up with a further letter on 19 November, which is in annex 6 ... 16 rather, which you provided to us. So, my question is, when you were preparing the paper on 25 September and, indeed, when you had the discussion with the Taoiseach on 29 September, was it anywhere in your mind at all that providing a guarantee for the banks would inevitably have to be backed up by injecting additional capital into those banks?
Michael McGrath (Cork South Central, Fianna Fail)
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But it isn't referenced, to my knowledge, in the paper - is it - of 25 September?
Mr. Alan Gray:
No. I felt there was ... on 25 September, I felt there were four issues that needed to be dealt with. The first one was the issue of liquidity ... that I felt that there was a restructuring and action in individual banks that would be required. And if one looks at the actions to reduce risk and potential Exchequer exposure in specific individual banks, which I outlined, I identified three options: one, management changes; one, restrictions on loans; and, thirdly, a managing down of the loans. And that is really an ... like, banks need capital depending on their scale and size and there's two ways of really addressing that - one is to put in more capital or one is to scale down the organisations. I also felt that in relation to banks, the best option, if it was feasible, would be to sell the banks or sell part of them to a institution that would have a wider capital base. And in my response to individual banks who had liquidity issues, the options that I had outlined was to seek a trade sale as a strong ... to a strong, credible institutional buyer and I pointed out that that was the best option and should be pursued but it was unlikely to be feasible in the current circumstances. So there was ways, in dealing with the potential issues that would need to be dealt with subsequently, that might have, you know, have involved responses other than the State putting in capital.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure, but the paper makes no reference at all to the possibility of the State having to put in capital.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure.
Michael McGrath (Cork South Central, Fianna Fail)
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But by 20 October, you were writing directly about the State injecting capital through the pension reserve fund or other sources in exchange for preference equity shares. That was one of the options you were specifically setting out.
Michael McGrath (Cork South Central, Fianna Fail)
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Yes.
Mr. Alan Gray:
And it was in January 2009 that I had come to the firm view that additional capital was required. The banks had been told to do very detailed stress testing and they came back and said that they didn't need additional capital to meet regulatory requirements and to deal with the levels of expected bad debts. And some PwC scenarios were suggesting the same issues and I just did not believe that was correct.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. Finally, do you now believe, looking back, that in your discussion with the Taoiseach on the night the guarantee was decided or a number of days previous when you did take the initiative to document some key points and key challenges that the State was facing, that you should have identified the likelihood, or the possibility at least, that the State would have to inject money into the banks by way of recapitalisation?
Michael McGrath (Cork South Central, Fianna Fail)
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I only ask it because, you know, less than a month later you wrote a specific paper on the capital requirements of the banks, which included the prospect of the State injecting capital and this was before the State had made any announcement that it was likely to have to inject capital into the banks. That came, I think, on 28 November ... was the first reference by the State. So you seemed to realise very, very quickly after advocating the possibility of a guarantee-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----that it would involve the State injecting money into the banks.
Mr. Alan Gray:
I think, first of all, I didn't advocate a guarantee. I was outlining the need to look at other options and to outline the risks in relation to a guarantee and I felt ECB action was a more appropriate action. But I have seen almost in every case whereby worldwide liquidity markets become into significant difficulties, the interaction between solvency and liquidity changes and that requires additional capital. The regulator was being asked to send in teams of accountants to come up with an assessment of whether capital was needed and I did not have certainty on that time of whether it would or not.
Michael McGrath (Cork South Central, Fianna Fail)
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You say you were not advocating a guarantee, but if you look at the paper of 25 September, under the heading, "A. Improved Liquidity in the Banking Sector", which was the burning issue of the time, you set out the options. One, the preference of an ECB intervention, which it became clear - if it hadn't been clear already - that that was not going to happen, and then under "Potential National Responses", there are five options. Four of them involve a guarantee, either a commitment to provide one or an actual guarantee. The only one not involving a guarantee is the banks setting up a liquidity war chest which, in your comment box, you say "probably not feasible this week".
Michael McGrath (Cork South Central, Fianna Fail)
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So if I was reading that, I would interpret it as advocating a guarantee.
Mr. Alan Gray:
I understand that, Deputy, if one interpreted that letter in isolation from knowing that earlier that day, we were informed that the main option being considered was a bank guarantee. I was responding to that proposition. And just for the record, I believed that the bank guarantee, which was a horrific and unjust decision on the Irish people, was the best option because of the restricted options that were available by the time we got to the night of the 29th.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Senator MacSharry.
Marc MacSharry (Fianna Fail)
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Thanks very much and thanks very much, Mr. Gray, for being here. Can I ask with regard to your letter of 25 September 2008 to Mr. Cardiff about the strategic options, what information was available to you relating to the liquidity or solvency of the Irish financial institutions prior to providing the advice to the Taoiseach?
Mr. Alan Gray:
So I think there was very ... so that was not advice to the Taoiseach, Deputy, that was advice to the Department of Finance and to the Central Bank and to the Financial Regulator in my role as a director of the Central Bank. So, just for clarity, it wasn't advice to the Taoiseach. But in terms of the information that I had access to, I had no access to any information other than what was available to all the members of the regulatory board and all the members of the Central Bank board, which was very detailed information on the solvency position.
Marc MacSharry (Fianna Fail)
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And do you believe that the level of management information available to the Central Bank and regulator was sufficiently robust to appropriately inform some of the most significant decisions ever made in the history of the State?
Marc MacSharry (Fianna Fail)
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What could have been done better at that time? I mean, you mentioned that liquidity and solvency was purely ... the difference was purely a matter of valuation on a given time. So, what is your view on what ought to have been done better in assessing the solvency at that time?
Marc MacSharry (Fianna Fail)
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But given the time available, presumably, was this possible do you feel?
Mr. Alan Gray:
No. I mean I ... the committee are probably very aware of the book on the fall of the Celtic tiger by Professor Antoin Murphy who ... I don't know whether he has given witness evidence here but I consider him to be the most insightful economist with expertise in this area. And I agree with assessment really that there has been undue attention on to the guarantee decision, which was probably the best option of the terrible options available but the horrific mistakes were made by many people prior to the guarantee and sometimes very significantly prior to and also post the guarantee.
Marc MacSharry (Fianna Fail)
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Yes, okay, just back to Druids Glen briefly. When you were going to the house for the private meeting, were you aware that there was onwards then to Druids Glen for dinner? Was that always part of the plan or?
Marc MacSharry (Fianna Fail)
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Okay, so golf intervened and you continued the discussion afterwards and you went elsewhere. You didn't play golf so you linked back up with them later on. Isn't that correct?
Marc MacSharry (Fianna Fail)
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So, you came back after the golf for that and for all the world, the meeting stopped at the house and it resumed at the public forum in the restaurant in Druids Glen.
Marc MacSharry (Fianna Fail)
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And the golfers could have talked about football, banking or God knows what for the 18 holes or nine holes or six holes or whatever. Would that be fair?
Marc MacSharry (Fianna Fail)
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Absolutely. We don't know in other words. So they didn't say to you, "Well, look we're going to consider this over our golf and we'll talk to you later on." There was none of that.
Marc MacSharry (Fianna Fail)
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Okay. Do you feel that, considering the credentials of everybody involved, notwithstanding your own view on it and what you've said, that somebody considering the attendees at this event might find it somewhat hard to believe that banking wasn't discussed? Would you think that's outlandish or do you think it's reasonable?
Marc MacSharry (Fianna Fail)
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Absolutely, and you've been clear on that and we've ... you've given your word on that and so on. But, again, in your experience of life, not least economics, could you appreciate that that's a point of view that somebody could quite reasonably have, looking in?
Marc MacSharry (Fianna Fail)
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Indeed, and then there's the concept of the balance of probability. You'll be familiar with that, I'm sure.
Marc MacSharry (Fianna Fail)
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Yes. So just two very final questions, Chairman. And it's back to your time on the Central Bank. Would you've be familiar with Tom O'Connell as chief economist in the Central Bank?
Marc MacSharry (Fianna Fail)
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He would have given evidence here that, despite his proximity to the bosses and the board and the 7th floor - indeed, he met personnel, he told us, regularly at the water fountain there - he had extreme difficulty in getting his message across to the board on the basis of what he called the political and property vested interests within that board. Is that your experience of having talked with him, bearing in mind your own view that economists aren't for hiding behind the door in terms of making their views known?
Mr. Alan Gray:
I was surprised to hear that evidence and I'm not sure what period he was referring to in the evidence, Deputy, whether it was a period when I was on the board or some period previously. But I never felt there was any restrictions on what people would say at the board and I ... being a non-party political person, I never noticed any politically ... party politically driven views -----
Marc MacSharry (Fianna Fail)
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Okay, and he did say that he regularly ... this is the second part of that question and I have one very final one, Chairman, if its okay. The ... he said he regularly presented to the board. Obviously, he was brought in to give presentations and so on.
Marc MacSharry (Fianna Fail)
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Would there be anything to prohibit, for example if he'd have said "Look, while I'm here, I have concerns about such a thing." Would that opportunity have ever been afforded to somebody like him?
Marc MacSharry (Fianna Fail)
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Okay. That's good, that answers that. You mentioned how, in part of your dual representation down on the board of the regulator, that you requested a specific private meeting with each of the individuals from each of the sections.
Marc MacSharry (Fianna Fail)
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Again, we had people who claimed to be dissenting voices from those sections that were in here. The evidence will show who they were. Did any of those people highlight to you, "Look", you know, I've had serious concerns here. I don't have enough staff", or ,"Nobody's listening", or, "There's a bubble building", or, "We're not doing anything on the macro-prudential regulatory side, we're ignoring that and focusing just on the consumer side", as some of the evidence seemed to depict? Was this not in private and the benefit that these "surprised people", as you put it-----
Marc MacSharry (Fianna Fail)
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-----were able to share that with you? Did that not ring alarm bells for you or did they just simply not share anything with you?
Mr. Alan Gray:
No such views were expressed to me, Deputy. I asked could I meet all of the divisional managers and I said I wanted to meet them one by one. It was suggested that maybe they should meet me with a group or something. I said, "No, I want to meet everyone one by one." And it was asked why did I think this was appropriate and would it not be best to deal with it in the board and I said I felt, as a new board member just coming in in 2007, I wanted to have the opportunity to meet the key people and hear one-to-one. And at no time ... I said to them, and again I said it ... in the context of what I find a slightly frightening public context in this, I might be a bit more formal than I normally am, but I said, "Look, I'm a non-executive director of this. If you have any views that you wish to express to me, give them to me in confidence because I want to understand what are the issues."
Marc MacSharry (Fianna Fail)
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And is it fair to say nobody did?
Marc MacSharry (Fianna Fail)
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Thanks very much.
Ciarán Lynch (Cork South Central, Labour)
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Senator Michael D'Arcy.
Michael D'Arcy (Fine Gael)
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Thank you, Chairman. Mr. Gray, you're welcome.
Michael D'Arcy (Fine Gael)
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Can I ask you, Mr. Gray, following the visit by two senior Anglo Irish execs to your office on the day of the guarantee, you subsequently spoke with An Taoiseach, Brian Cowen, did you tell him during that telephone conversations that both of those executives had attended your office during the day?
Mr. Alan Gray:
I did not and I did not refer that to anybody else. I did not give any great import to that. And the Taoiseach was asking my advice in the middle of a crisis situation and I felt if I was to refer to the fact that two executives had come to my office, that it might give an undue prominence or could be misunderstood in some way. And I did not mention it to the Taoiseach or anyone else. And I decided, when the issues of the Druids Glen discussion came public, to make a public announcement on that.
Michael D'Arcy (Fine Gael)
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And with the benefit now of hindsight, should you have told the Taoiseach?
Michael D'Arcy (Fine Gael)
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Okay. In the month of September, were you aware that the Central Bank were ... was pairing institutions or having conversations and some ... with one institution with another?
Marc MacSharry (Fianna Fail)
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Were they attempting to pair institutions?
Mr. Alan Gray:
Okay. Mr. Gray, you're an experienced individual as well as an experienced economist. If ... could I ask your view in relation to the ... the bank guarantee? When I say "in relation to the bank guarantee", was there any other likely option to be taken on the night of the bank guarantee itself, considering what's been said to us this morning by PwC, what you've said in relation to the minutes of 25 September and the conversations that were held up to the night of the guarantee? Was there any other likely option to be taken by those in that room on that occasion?
Michael D'Arcy (Fine Gael)
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That was all. Can I now ask the question that I've asked previously? It was known that the Anglo bonds were due on a particular date-----
Ciarán Lynch (Cork South Central, Labour)
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Yes, okay. Just be careful of prejudgment now, Senator.
Michael D'Arcy (Fine Gael)
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I shall be careful, Chairman, as always.
Ciarán Lynch (Cork South Central, Labour)
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No bother.
Michael D'Arcy (Fine Gael)
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Why wasn't something done on the weekend, rather than waiting for the following week to come?
Mr. Alan Gray:
Well, my understanding ... so I'd have no detailed knowledge of why something wasn't taken or not but it was very clear at that critical Central Bank emergency board meeting on the 25th that options had been considered, that the advisers were doing further work, that the Central Bank and regulator were being asked to refine and examine the options over that weekend, including ... and NTMA were at that meeting to give advice to the Government early the following week. So in terms of could anything else have been done, I am not privy to that Deputy.
Michael D'Arcy (Fine Gael)
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I'm trying not to make a judgment here now, Mr. Gray, but we've been told that if you were taking a bank down, you could only do it at a weekend. And, the weekend came and went.
Michael D'Arcy (Fine Gael)
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In terms of ... well, that's been the evidence that's been given by Governor Hurley - that if there was something to be done, it would be done at a weekend when you would have more time, more hours, rather than a number of ... a small number of hours during the week.
Mr. Alan Gray:
I suppose that depends on the amount of planning that was done in advance and there would be some evidence ... I am not sure whether Northern Rock, when the UK Government initially gave a guarantee and then subsequently nationalised it...whether they did it at a weekend or not, I wouldn't have thought it's impossible not to...but I defer to Governor Honohan's views.
Michael D'Arcy (Fine Gael)
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Okay, sure. Did you see former Governor Hurley's evidence where he used the term in relation to some of the powers available to the Central Bank as "theoretical"?
Michael D'Arcy (Fine Gael)
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No, if you haven't seen it, you know, I don't see the point. Can I ask, Mr. Gray, you entered the Central Bank in early '07?
Michael D'Arcy (Fine Gael)
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And the final FSR report was concluded and that final FSR report outlined the substantial increase in household debt. It was, clearly, itemised as an area of substantial concern.
Michael D'Arcy (Fine Gael)
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Why was it allowed go unchecked or was the matter raised at board level? This State went from one of the lowest household debt, 71% of GDP, going back to '97, to a predicted figure of 248% of GNP.
Michael D'Arcy (Fine Gael)
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And finally, Mr. Gray, in September '08, in your witness statement, you state, "In addition to two institutions which were being very closely monitored by the Regulator, one of the other institutions advised that “if markets do not improve they risked breaking liquidity ratios in a matter of weeks.”What actions did the Central Bank Financial Regulator take to support the two institutions?
Michael D'Arcy (Fine Gael)
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Were proposals by the Central Bank or the Financial Regulator or the financial institutions of the other financial institutions, were any proposals made to assist those two that were in immediate difficulty?
Michael D'Arcy (Fine Gael)
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Did you personally present any proposals to the Taoiseach to assist either of the two institutions?
Ciarán Lynch (Cork South Central, Labour)
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Excellent. Thank you very much. We are going to start moving towards wrapping things up. Deputy Phelan.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you, Chairman. Mr. Gray, just returning again to annex 9 of your statement where you said, "No one from Anglo had ever asked me to take action on their behalf or to make representations on their behalf." I want to put a quote to you from a book produced by Bruce Arnold and Jason O'Toole called The End of the Party, page 15, specifically, where it states:
When he was Finance Minister, Cowen appointed Gray as Director of the Central Bank and the Financial Services Authority of Ireland and also as a member of the Irish Financial Services Regulatory Authority (IFSRA)...
In late 2010, Indecon contacted the website forumpolitics.ie to ask them 'to point out that despite what's being posted here and alluded to, Indecon have never acted for Anglo Irish Bank in any capacity'.
Only days prior to the banks' bailout, Drumm says he and FitzPatrick met with Gray as a 'go-between' between Anglo and the Department of Finance. He says the intervention was needed because Finance 'wouldn't tell us what way they were thinking'.
According to Drumm, calls were made to Alan Gray. He was asked: 'What should be done? What are they thinking? Are we doing the right things? Are we doing the wrongthings?' There could be no direct communication with the Department of Finance.' At meetings there attended by Drumm and FitzPatrick, the officials would sit and listen and look. In the end no one was any the wiser. According to Mr. Drumm, 'They wouldn't tell them what to do. They wouldn't help us.'
I'm sure you're probably familiar with that particular quote; it's at variance with your own annex 9 statement that you didn't act on, you know, questions that were raised with you by Anglo. Can you answer it?
Mr. Alan Gray:
So, there's absolutely no truth in that statement. My evidence is the factual evidence on the position. I did consider taking legal libel action against the publishers and there was something in a newspaper that I subsequently .... more recently as a leaked version of Mr. Drumm's non-admissible statement was issued-----
Ciarán Lynch (Cork South Central, Labour)
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Careful. I won't draw into the content of Mr. Drumm's statement as that's still a matter that's under consideration with the DPP.
Mr. Alan Gray:
I understand, Chairman, and I won't refer to that but there was a similar allegation to that one in the book by a national newspaper where they actually didn't even state that this individual has alleged this. They stated I'd had made those contacts and representations and had presented proposals to the Taoiseach on this. And I have never sued any newspaper and I believe in open discourse and even though I probably would be a lot wealthier tonight if I did, I chose not to, but that doesn't mean there's any basis for those suggestions.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Final question.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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In your witness statement you advise regarding to the guarantee:
I first heard of this as the main option being considered at an Emergency Joint Central Bank meeting on 25 September but it must have been worked on much earlier. The Governor of the Central Bank and the Department of Finance briefed the Board and indicated that a guarantee of the liabilities of banks was being considered.
I have about...there's five parts to the question, brief answers if you can. Did the Governor and-or the Department of Finance advise how a guarantee solution came about?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, so the second part is outside of who was involved ... so outside of the discussions with the banks and the domestic standing group were there others involved in that?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Was the extent of the liability of the guarantee discussed or quantified?
Mr. Alan Gray:
So, they certainly quantified the amount of loans that are liabilities in the banks. I think it...just...I don't have as much energy as members of the committee but it was either €600 billion or €400 billion was quoted in the statement and that was the only assessment that was shared with the Central Bank.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Are you aware if discussions had already taken place either formally or informally with the ECB or other institutions about the suitability of a guarantee?
Mr. Alan Gray:
I understood from being on the board of the Central Bank that there had been extensive discussions with the ECB in the run-up to the guarantee position because once Lehman Brothers went bust and was allowed, very foolishly in my view, to be liquidated, it meant that interbank funding ended and a world financial crisis happened in 14 or 16 countries subsequently. And the ECB was very much aware of this. There was very regular contact by the Governor, which was reported back in a general sense to the board and I understood as it got near the date, maybe even daily telephone discussions.
But exactly what was discussed, or not, I'm not quite sure.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Briefly, then, what other strategic options were discussed at the meeting?
Mr. Alan Gray:
So the only other strategic option - which is in the board minutes that I shared but is under section 33AK - was to provide a bond to ... a State bond to provide credit to the banks, which would've been effectively a guarantee. When there was a discussion on that, they indicated that that would have a particular risk for Ireland's credit rating, and I did not get the impression that it was being seriously considered.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Senator Barrett.
Sean Barrett (Independent)
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Thank you, Chairman, and thanks again to Mr. Gray. Did the Central Bank have rules for board members in relation to contacts with the sector you were regulating?
Sean Barrett (Independent)
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Mr. Begg, when he was here, said there was no training at all for board members. Was that true in your time?
Mr. Alan Gray:
I believe that if any board members had've asked for training, it would have been provided. Prior to joining the board, at my own expense I took training in the Chartered Institute of Accountants about the roles and responsibility of directors because I was aware of the significance of the issues that the Central Bank would be dealing with.
Sean Barrett (Independent)
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And you told us earlier that Bank of Ireland was the only banking client?
Sean Barrett (Independent)
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Okay. And the Department of Finance and the Taoiseach's Department, were they clients of yours?
Mr. Alan Gray:
So in relation to the Department of Finance and the Taoiseach's Department, Indecon, as you know, which is the research practice I lead, is one of the largest groups of research economists in Ireland. Similar to the ESRI, we would tender for projects. We've never been awarded projects except by public tender from those organisations. My understanding is, and I haven't checked all the detailed records but, from memory, Senator, I don't think we did any work at all for the Department of Finance or for the Taoiseach's Department when I was on the board of the Central Bank.
Sean Barrett (Independent)
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So you didn't have a conflict of interest?
Sean Barrett (Independent)
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Just the last one then. When Mr. FitzPatrick and Mr. Drumm came to see you, were they trying to get you to assist in the sale of Anglo?
Sean Barrett (Independent)
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Okay. Thank you very much.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much and I'm just going to wrap up very briefly. In your witness statement, you advise that the guarantee was not thought on the night of the ... or, sorry, the guarantee was not thought up on the night of 29 September but arose from extensive analysis by the Department of Finance, Central Bank Governor, regulator and with the other involvement of teams of external advisers. By, kind of, implication or by just, kind of, the outline of that, it could appear that your comments on the guarantee would seem to imply a predetermined guarantee scenario was already evolving or developing or had developed. Would that have been the case, yes?
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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In terms of probability, to use that term, this was probable or not more than other things on the table?
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Mr. Alan Gray:
-----and, secondly, whether there would be any ECB-wide initiative. And in my note on that date, I did point out that what we had to be very careful of is that the ECB does not leave us on our own and then subsequently put in policy initiatives which could have benefited Ireland, and I believe that is actually what happened.
Ciarán Lynch (Cork South Central, Labour)
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And you covered that earlier this evening with us as well.
Ciarán Lynch (Cork South Central, Labour)
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You say that a liquidation of Anglo would've been much better for the Exchequer but much worse for the economy. In what way would the Irish economy have suffered from this and can you put any figure on it?
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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And, finally, I just want to come back to the call that Mr. Cowen, the Taoiseach, made to you that evening. He rings you - what's the content of that telephone call actually?
Ciarán Lynch (Cork South Central, Labour)
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Yes, what was the purpose? Mr. Cowen, obviously, has a reason for ringing you.
Ciarán Lynch (Cork South Central, Labour)
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He wants to discuss .... what's he ringing you about?
Ciarán Lynch (Cork South Central, Labour)
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I-----
Mr. Alan Gray:
No, but I just want to ... and he was in the process of trying to make a decision on this. The Central Bank board, of which I was a member, were told that the Government would be seeking their advice. And he rang me to indicate that the Government were considering ... he didn't say that they were going to do it, he said they were going to consider providing a bank guarantee and did I have any views on it and what did I think would be the market reaction.
Ciarán Lynch (Cork South Central, Labour)
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Okay. So, as you said earlier, the guarantee was in the ether in terms of probabilities or whatever. We'll see what the weight of that actually is but we know, or it has been presented here from testimony, that the issue of including or not including Anglo in the guarantee is a very significant discussion on the night. The Minister for Finance and the Taoiseach have different views on it and, in fact, the room seems to be split very much on this. And the issue of nationalising or not nationalising Anglo is, by the testimony so far, whether it was the biggest issue or not on the night, was certainly ... certainly a live issue inside in the room. Did the Taoiseach at any time discuss either the inclusion of Anglo in the guarantee or not or the nationalisation of Anglo or not?
Ciarán Lynch (Cork South Central, Labour)
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And what would it have been?
Mr. Alan Gray:
My view would've been that it would be a mistake unless we had undertaken the due diligence. Because it is a really important issue, Chairman, that I have seen in so many cases - the private sector comes to the state with a failed institution and wants them to nationalise it, and the cost is always with the taxpayer and-----
Ciarán Lynch (Cork South Central, Labour)
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And earlier that afternoon, the CEO and chief executive ... sorry, the chairperson and chief executive officer had called to you, told you about all their problems.
Ciarán Lynch (Cork South Central, Labour)
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You were cognisant of that. The Taoiseach's on the phone to you. There is a guarantee being put in place ... the extension of the guarantee. By your own volition, do you think you maybe should have had that discussion and told the Taoiseach that there ... you had a visit from these gentlemen that afternoon and, on the information that you had, this is the exposure the State would actually be taking?
Mr. Alan Gray:
Chairman, just to be clear, I never said I felt, even in retrospect, I should have told the Taoiseach. I felt then and I feel now it would've been a mistake to mention that to the Taoiseach because it could've been misinterpreted as suggesting that I had some, you know, issue and the Taoiseach might have asked me about what Anglo were talking about, and it wasn't relevant to what I was being asked by the Taoiseach.
Ciarán Lynch (Cork South Central, Labour)
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Okay. I'm going to wrap things up, Mr. Gray. I certainly appreciate, and the committee does, your co-operation this afternoon. We've, kind of, a long schedule today and we've a bit of an overrun. Is there anything you'd like to say? I know in your opening statement you gave some recommendations for the future, which the committee would always welcome to hear in terms of our report. Is there anything other than that that you'd like to further add this afternoon?
Mr. Alan Gray:
No, Chairman, just to thank members for their impartiality and their courtesy.
I was going to say, Chairman, when you were asking me that question, that I hope the committee will consider some of the gaps that currently exist, which are ... need to be addressed to potentially prevent another crisis. And I haven't had an opportunity at this session to outline the details of what I think would ... are those gaps in detail, other than the short ideas I have outlined. And if the committee would find it useful to have some subsequent written views from me on those, I would be willing to do that.
Ciarán Lynch (Cork South Central, Labour)
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Okay, by means of correspondence, that's always welcome. In terms of ideas, we never have enough ideas, as we know, without a formal legal process and all the rest of it, Mr. Gray, so thank you very much for that offer. With that said, I now propose that in thanking Mr. Gray for his participation and engagement with the inquiry, that we formally excuse him and doing so, that we will suspend until 7:15 p.m. Is that agreed? Agreed.
Ciarán Lynch (Cork South Central, Labour)
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The Committee of Inquiry into the Banking Crisis is now resuming in public session. Can I ask members and those in the public Gallery to ensure that their mobile devices are switched off? Our final hearing of this evening is with Mr. Tom Browne, former director of Anglo Irish Bank. Mr. Browne was a director of Anglo from 2004 to November 2007. He joined Anglo in 1990 and was a member of the Dublin lending division from 1990 to 2000. He retired from Anglo in November 2007 and stepped down from the board at the same time. Mr. Browne, you are very welcome before the committee this evening and thank you for your co-operation in being here.
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. I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of this inquiry which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings.
Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right. Members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.
The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have 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. Browne, please.
Ciarán Lynch (Cork South Central, Labour)
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Okay. So, welcome again, Mr. Browne and if I can invite you to make your opening remarks to the committee, please.
Mr. Tom Browne:
Thank you, Chairman. Good evening, ladies and gentlemen. I have been a career banker, starting with AIB in 1979 where I worked in various branch banking and head office departments. In 1990, I joined Anglo Irish Bank as lending manager in its Dublin branch. I was promoted to divisional head in 1997. In November 2000, I resigned from the bank to join the Devey Group as chief executive. The Devey Group was a Dublin-based health care, hospitality and property group with business operations in Ireland and Portugal. After approximately 11 months with the Devey Group, I was approached by the Anglo CEO, Seán FitzPatrick to rejoin the bank. I returned to the bank in February 2002 to establish a new division in the bank called the wealth management division. The wealth management division was an amalgam of various private banking operations in Dublin, London, Vienna, Geneva and the Isle of Man. In January 2004, I was appointed as an executive director to the board of the bank. In January 2005, I was appointed head of lending Ireland as part of significant management changes introduced by the newly appointed CEO, David Drumm. In April 2007, I advised Mr. Drumm and the chairman, Mr. FitzPatrick, of my intention to leave the bank with the announcement of my departure being made to the Stock Exchange on 4 September 2007 and set up a new business LeBruin, which is a corporate finance and debt advisory business now employing 20 people in Dublin, Galway and London. I welcome the opportunity to be of assistance to the inquiry.
Given that I left the bank at this time, I can only be of limited assistance on what happened in the last quarter of 2007 and through 2008 when the bank experienced growing pressures and issues, which culminated in the Government guarantee and, ultimately, the nationalisation and State bailout of the bank.
The inquiry has provided me with core documents. I have, however, not had any insight into the workings of the bank itself since I left in 2007. I will, again, however, do my best to be of assistance to you.
When I left the bank in 2007, I firmly believed that the credit approval process, the loan review process, the ongoing reviews of credit policies and the developing risk function within the bank were sufficiently robust to provide early indications of problems in the loan book to the executive team, the board and to the Financial Regulator. Over the ten years to 2005, Anglo Irish Bank had transformed from being a small player in the Irish marketplace to becoming a serious player in terms of market share in chosen segments in Ireland, with a growing business in the UK and an emerging business in the US. This performance in Ireland was driven by a number of factors: a very active, long-standing client base, many of whom had become the leading players in the property development and investment sectors; very strong customer loyalty across the core client base, which ensured a high level of repeat business for the bank; and an economic environment with low interest rates and wholesale bank funding at unprecedented levels. The success of Anglo over the ten-year period to 2005 was reflected not just in the growth of the loan book, but also in year-on-year increases in earnings and a strong market rating recognised by reputable international agencies such as Oliver Wyman who, in 2007, named the bank as the best performing bank in the world over the previous five years.
Due to this comparative success and to the prevailing economic conditions, competition in the mid-2000's began to significantly intensify. This competition came from existing universal banks in Ireland and from emerging foreign lenders in the market. For example, AIB bank established what they called win-back teams to target former clients who'd moved their business elsewhere, or existing clients who were multi-banked. Emerging players, such as Bank of Scotland Ireland, ACC Bank and Ulster Bank, all competed very aggressively to wrest market share from existing banks, including Anglo. All of this led to an avalanche of credit in the marketplace. The timing of the Savills launch could not have been worse. Asset values rocketed, signs were emerging of a property bubble and, while the general consensus was that the market would have a soft landing, the emerging evidence indicated a serious potential problem.
In early 2006, the Anglo board decided, on the basis of management advice, to change its lending policy reflecting the concerns we held about the acceleration in asset values and given the growing intensity of competition. A decision was taken that no new clients with development funding proposals would be entertained. The bank would exclusively deal with existing customers with a deal carrying an acceptable level of risk. This policy change became widely known in the marketplace and, indeed, some competitors played on this in their tactics to attract new development business. This policy change was Anglo's attempt to curtail activity in this sector of the market, which, clearly, had begun to overheat. On reflection, the motivation for this policy change was entirely correct; however, the policy itself was seriously flawed because it did not go far enough. We continued to support our bigger existing clients who continued to be active in the market, which led to very large exposures to a concentrated number of clients. The lending proposals at that time all met the acceptable levels of risk. These proposals were from long-term, proven operators, each with a depth of expertise and capability to deliver successful projects time and again.
Yet, with the benefit of hindsight, the failure to more forcibly implement the policy decision taken in early 2006 together with the shortcomings in the policy itself was a serious mistake. The consequences of this mistake became very clear when the property market in Ireland collapsed, resulting in very significant losses for the bank. The bank should not have defended its position with its biggest borrowers against the intensive competition in the market to the extent that it did. This defence led to unacceptable exposures concentrated on a relatively small number of customers, and no matter how professional and capable these customers were, the concentrated risk profile which resulted from this defence was to put the bank's loan book at an unacceptable risk.
Regarding the funding of the bank during this period, I did not experience that funding was under pressure prior to my departure from the bank. Through the early part of 2007, wholesale corporate and retail funding had held up well and the performance of the bank in attracting new funding was very good. There was no indication of stress. However, the pressure which emerged ultimately, post the Northern Rock issue, demonstrated that the funding base was not sufficiently wide, deep or stable to underpin the scale of the loan book. It also since emerged that at the time of my departure from the bank, Seán Quinn had a sizeable position in the bank through CFDs, contracts for difference. I was not made aware of this, although other board directors of the bank were. Although Seán Quinn's CFD position would go on to cause difficulties for the bank, it would not, however, be appropriate for me to make any further comment on this matter because of ongoing legal proceedings.
When I left Anglo, I genuinely believed that the bank was solvent and liquid. Indeed, a thought that a liquidity or solvency issue would emerge was alien to me. I did not see a threat to the long-term viability of the bank as I left the bank in 2007. I was a senior executive and an executive director of Anglo until 2007. Given what ultimately happened and the consequent impact on so many people, staff, customers, shareholders and the State, I deeply regret my own role in the building of the loan book to what became an unsustainable, overly concentrated scale. Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Browne, for your opening remarks.
Susan O'Keeffe (Labour)
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Could we have clarification as to when Mr. Browne, exactly, left the bank?
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Deputy Murphy.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman, and thank you, Mr. Browne. You're very welcome.
Eoghan Murphy (Dublin South East, Fine Gael)
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I'd like to begin with the performance of the board, if I may. There was a board review undertaken by external consultants in 2003 and this review noted that some directors felt that the board pack "fails to ignite debate on important issues". The report also notes that many directors expressed a "frustrating need for more debate on strategic issues". When we come to the Nyberg report in 2011, when speaking about Anglo, it says, "There is little evidence that board directors at the time were active in challenging the bank's approach or its pace of lending growth". And, again, many of these observations were also reflected in a board evaluation that was carried out in November-December 2007. Do you agree, or not, with these observations?
Eoghan Murphy (Dublin South East, Fine Gael)
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But, would that have been your impression of the board when you arrived?
Eoghan Murphy (Dublin South East, Fine Gael)
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"Fails to ignite debate on important issues ...many directors expressed a frustrating need for more debate on strategic issues."
Eoghan Murphy (Dublin South East, Fine Gael)
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But, do you think that the level of debate and challenge to management of the board was sufficient then from the non-executive directors?
Eoghan Murphy (Dublin South East, Fine Gael)
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So, when you came onto the board, though, was there any reference made back to this external consultants review from 2003 on the strategic management committee, was any discussion of how you might improve the board packs, improve debate at the board level?
Mr. Tom Browne:
Well, the board packs were being improved the whole time in terms of the level of information that was being given, so there was continuously upgrading of all the information on an ongoing basis from various aspects of the business. And, again, going back to my point, I never felt there was anything but a very transparent, open environment in terms of discussion around any issue relating to the activities of the bank during my period on the board.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. When Mike Aynsley was before us, he said that the committee structures was not as effective as they could have been, and he was aware that a board within a board existed. Can you comment on this in a general way, please?
Eoghan Murphy (Dublin South East, Fine Gael)
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Mike Aynsley talked about this idea of a board within a board existing at Anglo.
Mr. Tom Browne:
Again, you know, during my period of time on the board, I never got a sense that there was anything but a very transparent, open process around the board table, and I wouldn't have got a feel ... I wouldn't have got a sense that there was a, kind of, a board within a board during my period of time there.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. The Nyberg report also talked about Anglo having insufficient checks and balances - "Traditional risk evaluation procedures and risk mitigants were not implemented in practice", and that governance also "fell short of best practice". What do you say to that? Do you agree with that?
Mr. Tom Browne:
Again, if you go back to the risk function in terms of how the risk function evolved over the years as the bank grew, I would have felt the risk function was very much on top of its game in terms of actually, kind of, being on top of the loan book.
The bank was growing, you know, in three jurisdictions - Ireland, the UK and in America - and the risk function was staffed up by high-quality people, from within and new hires from other banks, so I would ... Deputy, I would have always felt that the risk function, in particular, was ... you know, it ... it was growing in tandem with the bank. You know, the management structure they put in in regard to watch lists where the ... you know, every manager had his watch-list case, which was actively managed by the managers ... I would have always felt the risk function was very much on top of their game in terms of management of the overriding risk in the bank.
Eoghan Murphy (Dublin South East, Fine Gael)
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So is Nyberg incorrect when he says that governance fell short of best practice in Anglo Irish Bank?
Eoghan Murphy (Dublin South East, Fine Gael)
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Have you read the Nyberg report?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Would you have a ... okay, if you haven't read it, I'll move on from that. If you could, just briefly describe to me the corporate culture of the bank during your period on the board.
Mr. Tom Browne:
The corporate culture of the bank was very much ... you know, it was a very inclusive bank. It was a, you know, ... it was a very from the, kind of, top-down in terms of, the bank was very much on the one-way street in terms of what it was doing. It was very focused in terms of what it actually ... it did. You know, the board was very aware of, actually, kind of ... the actual ... the issues around the ongoing activities of the bank, no matter what area of the bank, and any ... and there was always encouragement to actually ... to flag any issue of concern to the board early, and that was very much the mindset, you know, within ... across the board table, that if there was a concern, if there was an issue, bring it up earlier and make the board aware of it.
Eoghan Murphy (Dublin South East, Fine Gael)
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How often would the board have social occasions, a dinner, for example, where it would bring in someone from outside of the bank to engage with them, maybe make presentations in an informal way? We have heard here before about a dinner at Heritage House, at which the former Taoiseach attended. Those kinds of engagements ... were you party to any of those types of dinners with the bank engaging with people from outside of the bank?
Mr. Tom Browne:
Yes, like, you know, there would have been one or two occasions every year. Somebody from, you know, the industry expert or, you know, from financial markets would have been brought to a, you know, a luncheon or a dinner after a board meeting and would have given their view in terms of the relevant topic of expertise. So that was kind of ... that was something that happened on a regular enough basis.
Eoghan Murphy (Dublin South East, Fine Gael)
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The purpose of those occasions was to hear from the outside experts-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----to speak to the board.
Eoghan Murphy (Dublin South East, Fine Gael)
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Were you ever at a dinner or a luncheon where a politician attended?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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Was that a lunch or a dinner, do you remember?
Eoghan Murphy (Dublin South East, Fine Gael)
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And the purpose would have been to hear from the Financial Regulator about-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Moving on from that to your role as managing director for lending, Ireland, can you tell me a bit about the lending culture under your stewardship because Mike Aynsley also told the committee about a story that was related to him about an auction as a way of illustrating the culture and the lending practices in the bank prior to the crisis? This is what Mike Aynsley said to us, and he is talking about someone speaking to him about an auction:
And [the person] said, "I don't know how they found out about it but I was at an auction one morning and a fellow came up and he handed me an envelope, and it was an Anglo Irish Bank envelope, and I opened it up, and there was a cheque inside, which represented slightly more than what the deposit would be and it says ... a note attached saying, 'Just in case you need the deposit'.". So, you know, this is the mindset at the time. It was to go out there at all costs ...
Do you recognise that?
Mr. Tom Browne:
I would absolutely refute that story. That would never have happened, in my view. I'll give you another example of an auction that I attended. In early 2006, when the bank had brought its new policy in place, I attended an auction on a property, which was guiding somewhere in the region of €10 million, in terms of its guide price, and it sold for something in excess of €30-odd million at the time, and I remember coming back to the office and requesting my secretary to get all the lenders into the room because this was, kind a, further justification of the change of policy that we had just introduced, that the market had gone out of control. You know, people were way ... were paying way over the odds based on indicative pricing for assets, and that's the other side of the story where the bank was at in early 2006.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, well, let's look at this change in policy. In the core booklets, in Vol. 1, page 121, is a map of Ireland. It's from a presentation from lending Ireland of 30 April 2007. You've seen this report in the booklets.
Eoghan Murphy (Dublin South East, Fine Gael)
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Yes, so that would have been compiled and put together while you were-----
Eoghan Murphy (Dublin South East, Fine Gael)
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So you were involved in that.
Eoghan Murphy (Dublin South East, Fine Gael)
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There's a map here on page 121 and it is, "Total Drawn Land Balances - €5.29bn Loans by Location as at 30/04/07", and it is up on the monitor there in front of you - €2.7 billion in Dublin, a third of a billion in Meath, a quarter of a billion in Galway, a half a billion in Cork, and it is showing, for each county, the exposures. So was this map presented as a positive to the bank, to the board, to the directors? What was the purpose of this?
Mr. Tom Browne:
The purpose of this was to actually show the ... exactly where the exposures were in terms of land balance. Land was always, you know, the key issue of concern in terms of actually ... because if there was any correction in the market, your land values were the ones that were immediately going to be dramatically affected.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Mr. Tom Browne:
And there was three elements in terms of ... you know, you had your unzoned land, your zoned land and land with planning permission. Your real risk category was your unzoned land because, you know, that was the one that, kind of, if markets had continued to actually ... had deteriorated, the value in regard to that type of land would eliminate overnight. So this, the purpose of this presentation, was to show the exposure, kind of, on a geographical basis.
Eoghan Murphy (Dublin South East, Fine Gael)
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So what was the point or what was the goal of lending Ireland at this point in time in relation to these figures? To reduce them, to increase them, to-----
Eoghan Murphy (Dublin South East, Fine Gael)
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But if you changed the policy in 2006, why did ... and, again, your internal report shows this, that development lending in Ireland accounted for 30.5% of total lending and that it increased by 50% in the previous 12 months. This is in the report of April '07. If the policy changed in '06, how could lending in Ireland increase by 50% in the following 12 months?
Mr. Tom Browne:
As ... again, as I said in my opening statement, is that we continued to support some of our bigger clients who were still remaining very active and that was the mistake that we made, that we continue to support a lot of these bigger clients in terms of the projects that they brought to the bank, and I think that was the mistake, looking back, that we made.
Eoghan Murphy (Dublin South East, Fine Gael)
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But 50% is ... I mean, if you recognised something in 2006 and the policy is to try and pull back - I understand the caveat that you put in there - but then to see it still increase by 50% in a 12-month period.
Mr. Tom Browne:
Well, I think it is a reflection of the fact where asset values were going. You know, again, going back to my point about, you know, we had a very active, you know, client base, they were the biggest players in the market and, unfortunately, we continued to actually support those players when we should have actually probably curtailed the level of lending to the bigger players in the market.
Eoghan Murphy (Dublin South East, Fine Gael)
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So that was a mistake.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And just then to note that from September 2004 to September 2007 Irish lending grew by 284% - so that's €13 billion to almost €38 billion - and this was on loans advanced ... It was on loans advanced during this period that Anglo took its heaviest losses and you were MD of lending for most of this period, so what do you say to that?
Mr. Tom Browne:
Again, going back to the ... you know, again, the franchise ... you know, the franchise over those number of years was growing in terms of what ... it just wasn't property lending. We'd attempted to, kind of, broaden the base in terms of cashflow lending, M and A-type lending, corporate ... more corporate lending. So we'd broadened the base over those number of years. Again, going back to the point I made earlier on, we had a very active client base. We had a very high level of repeat business.
Eoghan Murphy (Dublin South East, Fine Gael)
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Sorry, how did you broaden the base? Excuse me.
Eoghan Murphy (Dublin South East, Fine Gael)
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Yes.
Eoghan Murphy (Dublin South East, Fine Gael)
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What kind ... what areas?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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And what was your view of 100% lending?
Eoghan Murphy (Dublin South East, Fine Gael)
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What was your view of 100% lending within the bank?
Eoghan Murphy (Dublin South East, Fine Gael)
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Could you intervene in a process, in a lending process, to make sure that a developer, a borrower, would get 100% financing?
Eoghan Murphy (Dublin South East, Fine Gael)
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So you're familiar with the Applewood development in Swords?
Eoghan Murphy (Dublin South East, Fine Gael)
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Yes.
Eoghan Murphy (Dublin South East, Fine Gael)
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Were you involved in securing that loan?
Ciarán Lynch (Cork South Central, Labour)
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Just speak in the general if you can there, Deputy, now, okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, yes.
Ciarán Lynch (Cork South Central, Labour)
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I'm just-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Just ... sorry-----
Ciarán Lynch (Cork South Central, Labour)
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Just to be general.
Eoghan Murphy (Dublin South East, Fine Gael)
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Yes.
Ciarán Lynch (Cork South Central, Labour)
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Mr. Browne.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And just in terms of the finance for that project or finance for projects at the time, in terms of 100% lending being done by the banks in terms of providing all of the money that was needed to secure the site, was that a practice in the bank?
Eoghan Murphy (Dublin South East, Fine Gael)
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A one-off situation?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And you were involved with that.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. So how can such a situation arise in the bank with such strict lending policies as you outlined in your written statement?
Eoghan Murphy (Dublin South East, Fine Gael)
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I'm not sure about the start of the project.
Mr. Tom Browne:
Yes, I think it could have been, you know. But, again, I think it was a very unique situation where the bank decided to actually ... because of the actual promoter that was involved there, we decided, you know, to take that position and get involved in that scheme at that time, but it was a very much a one-off type situation.
Eoghan Murphy (Dublin South East, Fine Gael)
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And that decision was made by the board of the bank?
Eoghan Murphy (Dublin South East, Fine Gael)
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By the credit committee, not by the board?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And what about the use of personal guarantees in the bank?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. But there was an internal inspection report ... or, sorry, an inspection report done by the Financial Regulator in 2007 and one of the issues it highlighted was that the bank didn't have a mechanism for formally monitoring the overall extent of the loan book subject to personal guarantees. Why didn't it?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. Every loan would have been-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----subject to personal guarantee?
Eoghan Murphy (Dublin South East, Fine Gael)
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Right.
Eoghan Murphy (Dublin South East, Fine Gael)
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I see. So you didn't need to have a mechanism because it applied to every single loan.
Eoghan Murphy (Dublin South East, Fine Gael)
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Was that a mistake?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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I'll give you another five minutes but I just want to pick up on this point, Mr. Browne. There were propositions that people who gave personal guarantees gave personal guarantees to many financial institutions and when NAMA was auditing its loan book, when it took it on board, that was certainly something that was visible in the NAMA. So, while you were taking personal guarantees, were you also examining to see if the person who was giving you a personal guarantee hadn't already given a personal guarantee to another institution?
Ciarán Lynch (Cork South Central, Labour)
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And did you discover or uncover situations where a personal guarantee was already in place with another institution and you did not issue a loan?
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Would you say that the examination of the exposure in personal guarantees in regard to cross-guaranteeing at a personal level was robust enough given where NAMA found themselves when they went and looked at the loan books?
Mr. Tom Browne:
Again, going back to my time there ... you know, to picture a moment in time in terms of where, you know, people's, kind of ... you know, the value of the personal guarantees, you know, back in 2005, 2006, 2007, you know, was significantly, you know, I suppose, greater than their debt obligations.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Okay, that's not the question I asked you, Mr. Browne. The question is: given what came out in the wash when the loans were transferred into NAMA, and the level of exposure on cross-exposure on personal guarantees, do you think that the ... that the risk analysis of personal guarantees was sufficient enough in Anglo?
Ciarán Lynch (Cork South Central, Labour)
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I'm not ... look, we know the paperwork transferred-----
Ciarán Lynch (Cork South Central, Labour)
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-----we know what the details of that show. Do you believe, given what NAMA then uncovered when they started looking at each of the books and the personal guarantees that were actually given, that Anglo's risk analysis of personal guarantees ... you say it was a ... it was one of your performing criteria, but when it was washed out and what was seen, was it ... do you now consider it to be robust enough or not?
Ciarán Lynch (Cork South Central, Labour)
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Okay. I don't want to be repeating myself, Mr. Browne, but that's not the question I'm asking you. I'm asking you now ... we know what happened afterwards. Do you consider it now ... you're going back to then-----
Ciarán Lynch (Cork South Central, Labour)
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-----and that you think that everything was fine then-----
Ciarán Lynch (Cork South Central, Labour)
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-----and maybe it's fine now even in that regard. That's what was the ... the visible to you then. Given what's visible to you now, do you consider that the risk analysis of personal guarantees was robust enough?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you. Deputy Murphy.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thanks, Chair. Mr. Browne, looking then ... continuing on this theme, and enforcement of security, NAMA reported that a downward adjustment of €477 million in aggregate was required to the value of the loans acquired from the participating institutions due to the difficulties with enforcement of security, and Anglo accounted for 57% of this total, €273 million. So can you explain why the discount applying to Anglo's loans in respect of difficulties with security was so high?
Mr. Tom Browne:
Again, you know, the process was that we would have engaged a solicitor, a firm of solicitors to put our security in place. That was always farmed out. We had a panel of ... two panels of solicitors, depending on the size of the deal. And a solicitor would be responsible for putting the security in place. So, you know, when you ... you know ... so on a case-by-case basis, there was individual legal firms appointed to make sure that the security was perfected. And it was the responsibility of the lending team and the banking administration team to ensure that the security was put in place. But, ultimately, the responsibility was actually ... was the role of the legal agent appointed by the bank in terms of perfection of security. And, again, you know, I don't ... it seems ... that when you say that figure, it seemed extraordinary high. You know, again it depends on, kind of, the individual aspects of each case. But it seems remarkably high to me, because again the process was very much, you farmed out your legal perfection work to an appointed panel of solicitors.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. So you don't think this is indicative of a lax approach to taking security-----
Eoghan Murphy (Dublin South East, Fine Gael)
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-----by Anglo?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Mr. Tom Browne:
-----to perfect it on behalf of the bank. So in that case then, you know, in ... based on your figures, there's a huge issue in regard to the quality of the work that was undertaken by those legal firms. So, you know, it was very much part and parcel of the actual process that the security was perfected by an appointed law firm acting on behalf of the bank. So that work then was, obviously, not done correctly by the individual law firm. And there should be, you know, there should be a ... you know, initial questions asked of those law firms in terms of why didn't they do their job properly.
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay. And just-----
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Finally.
Eoghan Murphy (Dublin South East, Fine Gael)
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Final question, sorry. And it's just in relation to discussions at the board in relation to why the NTMA wasn't placing deposits with the bank. What was your view ... I mean, we have a view from Brendan McDonagh from the NTMA that they were always sceptical about the business model of Anglo and that the bank couldn't get deposits from the NTMA. And then, eventually, it did and the NTMA didn't want to keep those deposits with the bank but it had to because of a direction from the Department of Finance. So did the board discuss this and what was the view of the board?
Mr. Tom Browne:
I don't remember it ever being discussed at the board while I was there. My answer to that would be, you know, over the years that I was there the bank had a tremendous track record in terms of its ... its actual liquidity and fundraising. It always used to amaze me when you looked at the list of corporate depositors, you know, you had international firms across Europe, you know, with €700 million, €800 million, €900 million on deposit. So the bank was very successful in terms of growing its deposit base under a number of strands over many many years but that issue, you know, in terms of the NTMA, I don't remember it ever being coming up at the board meeting.
Eoghan Murphy (Dublin South East, Fine Gael)
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Or outside of the board in your role as MD of lending Ireland.
Eoghan Murphy (Dublin South East, Fine Gael)
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On the strategic management committee?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, thank you. Thank you, Chair.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Deputy Doherty.
Pearse Doherty (Donegal South West, Sinn Fein)
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Can I just get clarification on the personal guarantees? You say that the bank always took personal guarantees from individuals. What was the situation when a developer ... when the loan was being applied in the name of the company, as opposed to the person?
Pearse Doherty (Donegal South West, Sinn Fein)
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So it's the same thing.
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes.
Pearse Doherty (Donegal South West, Sinn Fein)
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So, their house or whatever their assets, their personal assets-----
Pearse Doherty (Donegal South West, Sinn Fein)
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And you say that this happened on all occasions.
Pearse Doherty (Donegal South West, Sinn Fein)
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But you testified that in all loans that this was the case.
Pearse Doherty (Donegal South West, Sinn Fein)
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The reason I ask is, Michael O'Flynn has come before this inquiry, which ... where he had, I think, loans with a range of institutions, but 50% of them were with Anglo Irish Bank. And he has given evidence to say "I never issued personal guarantees to any lender in relation to the business".
Pearse Doherty (Donegal South West, Sinn Fein)
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So it wasn't every loan.
Pearse Doherty (Donegal South West, Sinn Fein)
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Every loan wasn't backed by a personal guarantee.
Pearse Doherty (Donegal South West, Sinn Fein)
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Of ... of, for example, not wanting to individualise it, but are you suggesting that this case where we know - well, where it has been given in evidence - that there was no personal guarantee ever given, you are suggesting that a personal guarantee would have been asked for, is that what you are saying?
Pearse Doherty (Donegal South West, Sinn Fein)
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What was the policy? Just explain. You're the head lender in Anglo Irish Bank.
Pearse Doherty (Donegal South West, Sinn Fein)
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Explain the policy because we're ... you told us there was personal guarantees in all loans, now there was not in all loans but they were always asked for, now you're not-----
Pearse Doherty (Donegal South West, Sinn Fein)
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So did you?
Pearse Doherty (Donegal South West, Sinn Fein)
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Did you look for it? Did you-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, so in relation to this loan for example, you would've requested of O'Flynn Group for a personal guarantee.
Pearse Doherty (Donegal South West, Sinn Fein)
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But you're just after telling us that they was ... they were looked for in all cases.
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes, and I asked you "And did you?" and you said "Yes".
Pearse Doherty (Donegal South West, Sinn Fein)
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So not in all cases.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Without changing the subject, I just want to round something off on this and we'll stop the clock a second. In just the general area of securitising loans, did you follow that up, this process, with law firms?
Ciarán Lynch (Cork South Central, Labour)
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Did you actually have a legal process for following-----
Ciarán Lynch (Cork South Central, Labour)
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-----up the securitisation?
Ciarán Lynch (Cork South Central, Labour)
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Okay, and maybe you could just explain to us in that regard when we had the transference into NAMA, the letters of undertaking that were required seemed to be a huge issue in terms of securitisation, the incompletion of legal work by banks and securitisation, and all the rest was a very, very ... was a legacy issue that NAMA had to deal with quite quickly to get its, kind of, deeds and portfolios sorted out. How did Anglo perform in that regard?
Ciarán Lynch (Cork South Central, Labour)
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No. I know well. I'm talking about the process when Anglo came in. How did they rate in compare to other institutions in having their legal undertakings completed when the portfolios were transferred into NAMA?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Deputy Murphy, sorry, Deputy Doherty.
Pearse Doherty (Donegal South West, Sinn Fein)
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Well, I was just going to go on to that issue in terms of security and the perfection of security. And Deputy Murphy rightly outlined the €477 million, I think it was, from NAMA, but NAMA confirmed that that for the institution - the individual banks - was in the region of €2 billion. That's how much loans that could not be perfected because of ... or could not ... had to be written off as a result of unperfected security, and the majority of them rested with your bank. We see on the core documents, Vol. 2, page 63 ... we see an example of 12 files that was carried out. And of ten of those files, no letter from the bank's solicitors confirming the security was complete is evident, that's, 83%. These are loans above €6 million. It talks about the credit policy where draw-down shouldn't happen unless it's authorised in writing by a manager before the perfection of security, but we see that the draw-downs were taking place. And I think in the situation the number of draw-downs up to the time of the review for the 12 selected loans was 67. So, again, we are seeing, like, loans of €149 million which were drawn down with no solicitor's letter on file. So, as a result of your credit policy, that would have had to be authorised by a manager. So, it's not solely the responsibility of the solicitors.
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes, and ultimately you as head of lending would it be?
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes.
Pearse Doherty (Donegal South West, Sinn Fein)
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What do you mean "cross jurisdictions"?
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes, these are Dublin... just see the top of the paper ... these are Dublin loans.
Pearse Doherty (Donegal South West, Sinn Fein)
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And you would have been told "No, it's not", and you still allowed for draw-downs, for example, of €149 million without any security being effected, £11 million sterling without security being effected, US $30 million, €23 million in another one, €18 million in another one, €14 million in another one, and so on. And that's only ten out of the 12 loans that were inspected, 83%.
Pearse Doherty (Donegal South West, Sinn Fein)
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Well, given the fact that we know that €2 billion from the financial institutions that went into NAMA of loans that were issued, had to be written off basically - the security wasn't perfected and the majority of them rested with your bank - do you not think that there was a serious issue here, which this audit was outlining to you?
Mr. Tom Browne:
Yes, and again, on the basis of this audit, right, action would have been taken to ensure that, you know, you got the letter on file from the solicitor. But, like, the reality of it is ... is that whilst you may not have the letter on file, right, the security, would have been in place, and it would have been signed off by the respective authorised signatures that the security was in place.
Pearse Doherty (Donegal South West, Sinn Fein)
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But can I put it to you that the reality that we're dealing with today is that, according to NAMA, €2 billion of loans issued by financial institutions, of which the majority of them rested ... originated from your institution, could not be pursued because the security was not perfected? So, it's not ... it doesn't seem to be the case that this was just a delay, that the letter was in the post or something that this ... these loans had to be written off. People who got this money were not pursued as a result of this type of ... managers authorising draw-downs of loans without perfection of security.
Pearse Doherty (Donegal South West, Sinn Fein)
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That's fair enough, but is the responsibility not with you, as head of lending, not to issue the money before the perfection of security is there?
Mr. Tom Browne:
And again, right, in regard to all ... you have to look behind all of these cases to see why, you know ... there's a reason behind why the loans were drawn down, right, without having the letter on file, right. And the follow up would have been, right, to actually, kind of, make sure that the security was put in place, and a letter in the file from the legal firm, you know, verifying the fact that the security had been put in place.
Pearse Doherty (Donegal South West, Sinn Fein)
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Do you believe that the security was put in place in all of these loans, despite what NAMA has told this committee?
Mr. Tom Browne:
Obviously, you know, on the basis of what NAMA saw after the event, right, there was loans of where the security wasn't fully perfected.
Pearse Doherty (Donegal South West, Sinn Fein)
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Do you take any responsibility for that as head of lending?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, and ... but you take responsibility up until that period. Is that what you're-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----telling me? Can I ask you ... it was mentioned in terms of the culture of lending within the bank and it was talked about in terms of the auction ... evidence that we've had ... you've mentioned that you haven't read the Nyberg report, but have you read Anglo Republic?
Pearse Doherty (Donegal South West, Sinn Fein)
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Book by Simon Carswell.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. The opening chapter of that there deals with the biggest transaction in the history of the Irish property bubble, a transaction that totalled €1.165 billion. It suggests that the property that was purchased was purchased at 2 o'clock in the morning. A manager from Anglo landed with a bank draft for the purchaser ... to the ... for the purpose of the purchase of that property. Is that an accurate reflection of what was going on in Anglo - that Anglo was on call at 12 o'clock at night, landed down to the office where this auction - so-called auction - was taking place and produced a bank draft at 2 o'clock in the morning to allow this developer to buy the biggest valued asset in the history of the Irish property bubble?
Pearse Doherty (Donegal South West, Sinn Fein)
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Well, it's in ... it's in the prologue of ... it's the opening chapter ... it's the opening words of Anglo Republic. It's the Jury Inn property and it was ... the question is in terms of the ... the ... the ... the culture-----
Pearse Doherty (Donegal South West, Sinn Fein)
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-----is this the type of activity that was going on in Anglo?
Mr. Tom Browne:
No. I think that is an unfair reflection, you know. You know, there was a very clear culture in the bank, right, of a loan process that went from ... you know, the team that actually originated the loan or the team who managed the exposure, they would actually look at the actual ... the individual loan. They would decide whether they felt that loan was worth bringing to actually what we used to call our mini-credit committee meetings. The mini-credit committee meeting was a meeting amongst the lenders like in a room like this. There could be 20, 30 people who would actually ... the loan would be presented, it would be debated amongst the actual ... the lenders. If the consensus view was that the loan was a good loan, it would go on to a main credit forum in terms of, actually, for final sign off where non-lenders and risk would have been the final arbitrators of the individual loans. In some situations, you know, there would have been forums - gathered quickly - of senior people to decide whether a loan was actually one that was worth doing in terms of acceptable levels of risk, but the vast majority of, actually, loans would have gone through a very formal process of approval. As I say, from the team up to the mini-credit situation to the main credit situation and being signed off at that level.
Pearse Doherty (Donegal South West, Sinn Fein)
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But did we have ... the question I am asking is, did we have - as is reflected in this book - at around 2 a.m., a senior lender from Anglo arrived at William Fry with a bank draft for €1.165 billion? Is that ... was there-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes, there was a process.
Mr. Tom Browne:
-----there would have been a huge ... for something like that, there would have been a massive amount of debate. It wasn't someone rocking up with a cheque for that level at 12 o'clock at night. There would have been a massive level of discussion and debate in regard to the merits, demerits of actually doing the deal. So, you know, that - the way it's portrayed - is actually kind of, you know, not the way it happens.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay, so, there would be an upper limit for-----
Mr. Tom Browne:
There would've been a huge amount of discussion around that. It wasn't somebody kind of, as you say, rocking up at 12 o'clock at night to William Fry's. There would have been a massive amount of discussion around an exposure such as that. And then, going back to my point, you know, there was a very formulaic approach from the ground up in terms of, actually, approval of loans. Every loan, you know, went up to credit committee every year for review and every loan was reviewed by risk - in the early days, four times a year, and in latter years, two times a year. And out of those review processes came what probably was the most important management tool, which was the actual watch list. The watch list was, you know, the individual loans on each portfolio that needed attention. The attention was decided by the risk people in terms of what action was ... was to be taken in regard to, you know, correcting the situation that they weren't happy with.
Pearse Doherty (Donegal South West, Sinn Fein)
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It all sounds absolutely fantastic and it sounds great, bar the small point that the bank cost the State €30 billion as a result of loans ... the loan ... the loans that were issued.
Pearse Doherty (Donegal South West, Sinn Fein)
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It sounds very robust and-----
Mr. Tom Browne:
No, but, and again, Deputy, from the point of view of ... actually, it was a very robust process, okay. You know, as I said earlier on, the mistake that was clearly made, right, in terms of, actually, the property development loans in particular, was that we did support, you know, probably our top 20 clients too robustly against intense competition and we got too big with those exposures. And I think they would have caused an awful lot of difficulty when the property market went into its nosedive.
Pearse Doherty (Donegal South West, Sinn Fein)
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We've seen ... there's figures in Vol. 1, on page 57, for 2008 but they reflect also a similar pattern in 2007 - and this is on page 57 of Vol. 1 - and it's the exceptions to group policy lending credit policy. We're seeing an average of about 25%. So, what of all your loans are exemptions ... exceptions to your own policy?
Pearse Doherty (Donegal South West, Sinn Fein)
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How do you stand over that as head of lending?
Mr. Tom Browne:
Yes, well, I think you have to look at the exceptions. Every exception has to be look ... looks ... looked at in terms of its materiality. An exception could be the following: if credit policy says that interest cover has to be 1.3 times, the lending manager brings a loan to credit committee and, say, the loan is €5 million and the interest cost is, say, at a rate of 5%, so that means the cost of funding that loan is €250,000. So, at 1.3 times, you need €325,000 of income to actually tick the box in terms of-----
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes.
Mr. Tom Browne:
-----in terms of interest cover. But if the loan comes up and it only has 1.2 times of income, so it's only got €300,000, it'll be shown up on the actual ... the actual credit application that this is an exception to credit committee. It'll be debated whether it'll, actually, should be done and in that situation it's decided, for a whole host of reasons, why the credit would be signed off.
Pearse Doherty (Donegal South West, Sinn Fein)
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What-----
Mr. Tom Browne:
If I go back to your picture ... your thing ... your page 57, if you look at that, right, okay, you know, where from February '08, 26% went to 42%, right, okay, if you look at, kind of, the comment underneath it - "The percentage increase in exceptions for July is primarily due to lenders applying a 20% discount to security values." Obviously, this is, you know, into 2008, you know, a year after I left the bank and obviously what the bank was doing at that stage, because asset values were under pressure, when the loans were going up for, actually, their annual review, the actual value of security was being written down to reflect the fact that the market was actually ... asset values were actually on a downward spiral. And that's where you've got the increase in that period of time. So, you have to look behind ... there was an individual story behind every exception. And exceptions, you know, on the basis of ... you have your lending policy, right, okay, but if it's an exception to credit policy, it's put up very clearly upfront, right, for a decision to be made whether you would actually want to approve the actual ... the credit, if it's outside policy. And that could be for a whole host of reasons. Like, it could be there's other security that ... cross-secured. There's ... the client could be a depositor of the bank. The client, you know, could be, you know, have another, kind of, relationship with the bank in terms of, actually, on the private banking side. So, there is a whole range of issues that could determine why you would actually, kind of, approve a loan-----
Ciarán Lynch (Cork South Central, Labour)
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A final question, Deputy.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. We've heard testimony from ... from others in the committee, including Professor Honohan, which talks about the damage was done, you know, in the period running up to 2006 ... that period ... that when you were going into 2008, it was too late. Can you explain to me - and that was ... obviously ... coincides with the period when you were head of lending of Anglo Irish Bank for the Irish division - can you explain to me how NAMA had to apply a 61% discount to loans that your bank and you, as head of lending, approved? How did you get it so wrong and ... when we compare it to other banks which had haircuts but not as high as 61% applied to them?
Mr. Tom Browne:
I think ... as I said in my opening statement, I think the big ... the biggest issue looking back at it now is that we got very big with a very small number of clients who were the most active in the market at that time. We defended our position too strongly with these people and our exposures went to levels that were unacceptable and as a result of that then, you know, the haircuts that the bank, you know, obviously were forced to take because they were very big exposures with clients reflected in the fact of what happened when NAMA came into being. And, you know, I've openly admitted it here tonight that we did actually defend ourselves too strongly with a small, select group of clients-----
Pearse Doherty (Donegal South West, Sinn Fein)
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What does that mean - defend yourselves? Does that mean continue to give them money when you shouldn't have given them money?
Mr. Tom Browne:
No, I think again looking back at every ... all the loans at time look on the basis of ... when you looked at them, they had acceptable risk but I think the biggest issue looking back there now is we didn't cap out our exposures with some of these bigger clients and say that's, you know, that's as much as we can do and without ... that's the mistake that was made in hindsight.
Ciarán Lynch (Cork South Central, Labour)
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I'll let you back in again, Deputy, as we wrap up. I just want to kind of come into an area myself which is probably a summary where Deputy Doherty is at so I won't drill back down to the detail. I'll just take it at top level with you, Mr. Browne, which is with regards to the bank's lending approach. What was your view of the lending policy procedures and prevailing culture? Was it the kind of ... was it the norm as reflected in the wider banking sector or was it a very aggressive one or was it passive? How would you reflect upon that now?
Mr. Tom Browne:
I think the ... as I said in my opening statement again, I think what the bank had developed over kind of the period '95 to 2005 was a very active client base, Chairman, where there was a very high level of repeat business from that client base. There was huge loyalty from that client base and we continued to support those clients probably too strongly into a period when the market was actually getting overheated.
Ciarán Lynch (Cork South Central, Labour)
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But in cultural terms, coming back to Deputy Doherty's earlier question that there was ... the level of exceptions, could it be put forward or not that the question was "yes, we do have an exception policy and there's a culture reflected in that and that's why we have 25%, in that we have a different view of what exceptions are hence we have such a high level and that's a cultural position in the bank"?
Ciarán Lynch (Cork South Central, Labour)
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But there is a kind of a ... but in every organisation whether you study it academically or exist in one, every organisation has a culture. This structure is ... this committee has a culture-----
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Mr. Tom Browne:
That's the word I would use, Chairman, and, you know, you actually, you took a view on each case, right, on its merits and if it was outside of exception, there was a, you know, there was a general sign-off of the credit based on a ... you know, as I said as a collective forum at credit committee to say "yes, we're happy with the risk".
Ciarán Lynch (Cork South Central, Labour)
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And coming on to the credit risk then and in your opinion, did you believe that the controls adopted by the bank were sufficiently robust?
Ciarán Lynch (Cork South Central, Labour)
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So were you voicing any concerns at that time?
Ciarán Lynch (Cork South Central, Labour)
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In terms of the credit risk controls? You weren't articulating any concerns at that time, no?
Ciarán Lynch (Cork South Central, Labour)
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All right. I'm going to ... I'm referring to three different documents but I'm just going to bring up two pages as examples of them. One is regard ... they're all in Vol. 1. One deals with risk appetite, the other one's minutes of risk and compliance meetings and the other one is an extract from the loan review summary. So in core book Vol. 1 there, I'm just bringing up on the screen ... I think it's page 97 if I can just have a look at it there ... page 97. If we just to go to the bottom of that page there, Mr. Browne, it says:
Residential development accounts for 67% of development overall. Exposure [of] zoned land without planning primarily related to the Bank's Top 10 customer relationships with whom the Bank has a long and satisfactory track record [and] It was noted that the exposure to the unzoned land was not significant.
And then I'll just go on to page 101 in the same book and we might just leave this one on the screen then afterwards. If you go to 101, and it's the second table down there where it gives a breakdown of the areas of the exposures, I'm assuming that sum on the left is €10 billion, is it ... €10 billion and €600 million ... on the left, yes ... is that €10 billion?
Ciarán Lynch (Cork South Central, Labour)
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Okay. All right, so the other ones then are €627 million unzoned land; €3,580 million on zoned land; just about one-and-a-half billion on zoned land with planning permission and over €600 million, €641 million in fact, with speculative development and then the development, what's the "w/c" there? What does that mean? Development?
Ciarán Lynch (Cork South Central, Labour)
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With working capital with pre-sales and pre-lets of €4,240 million. Right. Did you have any concerns over the extent of the bank's exposure to the development sector?
Ciarán Lynch (Cork South Central, Labour)
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Okay. So how did you raise those concerns? What actually happened because this is ... you say you raised it in 2006? This is 2007 and this is what the portfolio is showing.
Mr. Tom Browne:
Absolutely and again, it goes back to the point that, you know, a lot of, you know ... a significant amount of that exposure would have been to our top clients and again, it's ... again highlighting, you know, the mistake that was made ... that we didn't cap out with some of those bigger clients.
Ciarán Lynch (Cork South Central, Labour)
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Maybe you can just talk me through this so I can understand it. There is a risk analysis being done here in terms of exposure and what is happening is that property is being broken down into different sort of categories. Am I correct there, yes?
Mr. Tom Browne:
Absolutely and based on the risk element of the actual ... going from unzoned land across to development with pre-sales, your high-risk category is your unzoned land and then you move across in terms of the risk profile so your risk profile in terms of your development ... with pre-sales, pre-let, you believe you're actually kind of, you know, you're working out there ... in terms of actually, your pre-sales, pre-lets will repay your debt. The real issue here, when you look at kind of where the risk was, is around unzoned land and zoned land and again, the mistake that was made is that we continued to support people who were actually kind of acquiring, you know, that type of asset.
Ciarán Lynch (Cork South Central, Labour)
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But could I put it to you. Mr. Browne, that the real risk, as a counter-proposal just to challenge that statement if you don't mind, is that basically what we have here is a sectionised area of one single sector, which is property, albeit in different manifestations, and that Anglo were overly concentrated into the property market?
Mr. Tom Browne:
And that's why we endeavoured, you know, in the years from kind of, you know, '04, '05, '06, '07 onwards, to actually spread the actual ... the risk by moving into other areas like cashflow lending because it was recognised within the bank that we had an over-dependence on exposure to property, both development and investment.
Ciarán Lynch (Cork South Central, Labour)
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How long of a period of time did this difficulty take to create?
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Ciarán Lynch (Cork South Central, Labour)
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So this was a crisis that developed over a period of time?
Ciarán Lynch (Cork South Central, Labour)
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But this was a problem that had developed over a period of time.
Ciarán Lynch (Cork South Central, Labour)
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And was that problem developed through Anglo's lending practice?
Ciarán Lynch (Cork South Central, Labour)
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So would it ... would ... you repeated a number of times this evening that you departed in September 2007 or so but were the difficulties that came to unfold after post ... after 2007 already in the ether and already in play before 2007?
Ciarán Lynch (Cork South Central, Labour)
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Can we come back here? The risk is already in place, as you say, from 2006.
Ciarán Lynch (Cork South Central, Labour)
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Okay but ... if I can maybe use an analogy, and it is not like somebody getting off the Titanicin Cobh because what happened afterwards was completely different, but subsidence in a house takes place because there's a drainage problem not fixed and all of a sudden somebody has to come in and the underpinners and it costs a big load of money. So it's not that the wall fell down yesterday is what the problem was; it's that there was a problem not addressed over a long period of time and, hence, a major intervention. Was the problem in Anglo growing like a subsidence issue because there was a difficulty underpinning the structure, or was it that something happened later in 2007 that was unforeseen, and where did that come from?
Mr. Tom Browne:
No, I think, you know, the growth in the loan book had happened over a period of time. You would have been very comfortable, you know, up to 2006 in terms of where you were at in terms of the overall exposure, but from 2006 on, as the market definitely became softer, we tried to curtail our activity in regard to actually this element of the market and, unfortunately, we did continue to support some of the bigger clients who were the most active players and, as a result of that, the loan balances grew.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. Deputy Joe Higgins.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Browne, in that regard, is it the case that you gave extraordinary support to a handful of clients because from 2004 to 2005 customer lending went up by €10 billion in 2006, it went up €16 billion and in 2007, €17 billion? Now if that was in a period of restraint, how do you explain figures like this?
Joe Higgins (Dublin West, Socialist Party)
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The group.
Mr. Tom Browne:
Yes, but at that time, Deputy, you know, the group was expanding, you know, and had significant growth in the UK and in America at the same time. So the bank, you know, was not just growing in Ireland, it was growing across a geographical spread and it was felt at the time that that was a good strategy to adopt, that Ireland was a wealthy-----
Joe Higgins (Dublin West, Socialist Party)
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Do you accept that they are enormous figures?
Joe Higgins (Dublin West, Socialist Party)
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And, Mr. Browne, can I ask you ... you were director of lending Ireland, 2004-2007-----
Joe Higgins (Dublin West, Socialist Party)
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2005-2007. You were ... risk and compliance committee 2005-2007. Are you saying that you gave full financial information to the board on the lending situation and, indeed, other aspects that you were responsible for during your time with this responsibility? And did any board colleagues ever express concerns to you or to other directors about the quality of information provided to the board?
Mr. Tom Browne:
No, there was never any ... the board was given full transparency in regard to actually the loan book of all jurisdictions. The risk function would have reported to the board every time they did a loan review process. The top ten exposures would have been identified to the board on an ongoing basis. At no stage did I get a sense that the actual ... the board members were getting anything but a fully comprehensive overview of the loan book from any jurisdiction.
Joe Higgins (Dublin West, Socialist Party)
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Right, you say in your opening statement, written, Mr. Browne, "in relation to exception management where a loan was being put forward that was outside of credit policy, this was clearly highlighted in credit papers for discussion at the credit committee meeting as to why the credit should be approved if an exception to credit policy and your decision to be made in relation to same at the credit meeting...". Could I ask you to look at - sorry, I didn't give notice of this - page 3, in Vol. 2 of the IBRC book? You have it yourself there, Mr. Browne, Vol. 2, page 3, it is easily got. This relates to documents from IBRC liquidators in NAMA, exceptions to credit policy for Anglo loans, and the findings at the very bottom and the very bottom paragraph:
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 million or 92% of the value of the Book which transferred to NAMA.
Ciarán Lynch (Cork South Central, Labour)
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That is a typo. Actually it is a billion but it says a million on the page but it is actually a billion.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Browne, 92% of the book that was transferred to NAMA was by way of exception to credit policy but how do you explain ...
Mr. Tom Browne:
Deputy, if I take you back, I think the answer is in the book itself, right. If you go to book number, Vol. 1, page 57, I think it is ... if you again go back to that table where you see the level of exceptions in 2008 over a period of February '08 to July '08 has dramatically jumped from 26% to 42%, so ... and the reason for that is ... it states there in the document that, "The percentage increase in exceptions for July is primarily due to lenders applying a 20% discount to security values." Now I presume what happened thereafter is that as asset values continued to actually collapse over the period of time, '08 onwards, every time the actual credit was going up to renewal on an annual basis, it was being highlighted as an exception because the lenders were actually applying bigger and bigger discounts to the underlying security. So, when that report was done it reflects the fact that within the bank, from probably '08 onwards, they were actually discounting the underlying value of the security, hence it shows up as an exception. When I looked at that as well, the only rationale I could come up, in terms of why that figure is such ... it's based on that the bank was, obviously, applying more and more discounts to the underlying security.
Joe Higgins (Dublin West, Socialist Party)
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You are saying a retrospective ... retrospectively applied.
Mr. Tom Browne:
Yes, because every credit would go up to credit committee for an annual review, so a policy was, obviously, adopted in '08 after I had left the bank where they saw asset values were actually starting to actually decrease and, as a result of that ... because, you know, it says 20% discount, it could have been higher thereafter. So every time a credit went up, it would, obviously, be shown as an exception to actually credit ...
Joe Higgins (Dublin West, Socialist Party)
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Okay, I think we may want to get clarification on that from liquidators and NAMA but in any case, Mr. Browne, the fact that there was such a huge transfer of your loan book to NAMA at such a huge discount, does that imply that there was huge pressure on your employees to expand and expand lending way beyond safe limits?
Joe Higgins (Dublin West, Socialist Party)
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Okay.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Browne, you said you had read the Anglo Republicbook by Simon Carswell. He portrays a different picture based on interviews with former employees and you've probably seen it where he says ... I have not time to quote it all, but I will just quote, as follows from page 50 ... the credit committee meetings - "It was a cross between a Nuremberg rally and the half-time talk to an American football team,' says one ex-Anglo manager. 'There were between fifty and sixty people in the room ... The whole system was set up wrong. No one was going to dissent in that atmosphere." That suggests ... Do you agree with that?
Joe Higgins (Dublin West, Socialist Party)
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Okay. Can I ask you a final question then, Chairman, because my time, unfortunately, is up. It is this-----
Ciarán Lynch (Cork South Central, Labour)
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Take more time, if you wish there now.
Joe Higgins (Dublin West, Socialist Party)
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Mr. Browne, do you ... oh, yes, a second last question then. In the annual report for Anglo Irish Bank 2006 ... you were also involved in the human resources department, is that correct?
Joe Higgins (Dublin West, Socialist Party)
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Okay. Can I ask you what was the reason for Anglo Irish Bank's anti-trade union policy, and were you an originator or an enforcer of that?
Joe Higgins (Dublin West, Socialist Party)
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And what the rationale-----
Ciarán Lynch (Cork South Central, Labour)
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Try not to be leading now, Deputy, even though I am giving you more time.
Joe Higgins (Dublin West, Socialist Party)
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Sorry?
Ciarán Lynch (Cork South Central, Labour)
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I am giving you a bit more time but try not to be leading in the question.
Joe Higgins (Dublin West, Socialist Party)
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Yes. I'm not leading, Chairman, because in minutes of a board meeting where there was to be a merger proposed-----
Ciarán Lynch (Cork South Central, Labour)
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Yes.
Joe Higgins (Dublin West, Socialist Party)
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-----one of the downsides, according to the bank management, was the fact that the union would now come into the reckoning.
Ciarán Lynch (Cork South Central, Labour)
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A question.
Joe Higgins (Dublin West, Socialist Party)
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I am just asking ... non-union policy, let's say that, what was the reason for that?
Joe Higgins (Dublin West, Socialist Party)
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Right, finally then, Mr. Browne, you ... I think you did say you regretted the damage that has been done to the economy in relation to what happened in the banks. Did I hear you correctly in that regard?
Joe Higgins (Dublin West, Socialist Party)
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And do you accept that there have been rather serious and very bad consequences for ordinary people as a result of the bubble and the bust?
Joe Higgins (Dublin West, Socialist Party)
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Is there an irony then, Mr. Browne, that you now run a debt-restructuring company and involved with you are-----
Ciarán Lynch (Cork South Central, Labour)
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That is not on.
Joe Higgins (Dublin West, Socialist Party)
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-----some of the biggest debtors in NAMA?
Ciarán Lynch (Cork South Central, Labour)
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Sorry, Deputy, I'm moving on. Senator Sean Barrett, please.
Joe Higgins (Dublin West, Socialist Party)
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What's wrong with that?
Ciarán Lynch (Cork South Central, Labour)
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You're outside the terms of reference, timewise and everything else. There's also an implied statement with regard to an institution that has not been called before us and its operation.
Joe Higgins (Dublin West, Socialist Party)
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I was just asking Mr. Browne-----
Ciarán Lynch (Cork South Central, Labour)
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I know that and I'm moving on.
Joe Higgins (Dublin West, Socialist Party)
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-----if there's an irony in the fact that he's-----
Ciarán Lynch (Cork South Central, Labour)
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I know that and I love to give you as much time as I can, Deputy, but in this case I have to pull back. Senator Sean Barrett.
Sean Barrett (Independent)
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Thank you, Chairman. Thanks for coming in, Mr. Browne. The Anglo annual report for 2007 on page 3 shows that over the period 2002-7, profit before tax increased by 376%, earnings per share by 363% and total assets by 398%. Do you think that these levels of growth were prudent or sustainable in the context of the level of competition in the Irish lending markets during that period?
Sean Barrett (Independent)
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I'll give it to you again. I must have spoken too quickly. The Anglo annual report for 2007 shows that over the period 2002-7, profit before tax increased by 376%, earnings per share by 363% and total assets by 398%. And then the question was: 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 that period?
Mr. Tom Browne:
I think, Senator, what they reflect is again going back to the very active client base we had in a very active market where we enjoyed a very high level of repeat business over those five years. So they were a function of, you know, as I say the client base that had ... the bank had developed, probably over the previous ten, 15 years who were very active in the marketplace.
Sean Barrett (Independent)
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And then were those levels of growth ... do they imply that the pursuit of growth was affecting credit quality and lending standards?
Mr. Tom Browne:
Again, going back to the point about kind of, in terms of the process of lending in terms of actually ... every loan that came up for approval went from the team doing their due diligence to the mini-credit forum, who actually was the lenders themselves deciding whether the risk was acceptable. And then going on to main credits where group risk was the final arbitrator whether the risk was acceptable. So that process was the standard approach in terms of actually, kind of, the individual loans that were actually underwritten at the time.
Sean Barrett (Independent)
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In Vol. 1, page 37, Mr. McAteer and Mr. Moran sent a memo to the board in 2007 - "High growth banks seldom die of old age". They say, "A key balancing act for us is to impress upon the market that Anglo's growth is delivered in a measured and conservative manner, without loosening our credit standards." Isn't your evidence to Deputy Doherty and Deputy Higgins that there were 92% exceptions and Nyberg found that the audit committee ... neither the internal audit nor the audit committee was in a position to challenge credit decisions where the main problems ultimately arose? I mean, wasn't the model unsustainable?
Mr. Tom Browne:
Again, you know, I don't think ... it wasn't unsustainable in the context of where we were at at that moment of time. The exceptions, as I explained ... you have to look behind the reason behind the exception in every loan. You know, at the time in the marketplace when you were actually going out to investors, you were being quizzed on a continuous basis in regard to the sustainability of the model. And in every situation we were actually able to kind of explain why we felt the model was sustainable. And the growth in the bank really in the years was going to come from markets such as the UK and the USA.
Sean Barrett (Independent)
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But didn't Davy Stockbrokers and Merrion Stockbrokers in early 2007 and about a year later put the shares as overvalued by two thirds?
Sean Barrett (Independent)
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And a reflection that this model was unsustainable because it was based 88% on property, following a property boom which was ... when the bubble was bound to burst, wasn't it?
Sean Barrett (Independent)
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But did you ever get your lending share to industry even into double digits?
Sean Barrett (Independent)
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Did you ever get the share of the loan book in industry above 6%, 7%, 8% even? It was 88% property. You were a monoline bank.
Sean Barrett (Independent)
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And were you aware of the literature that, you know, fast growing banks as the quote that they gave at the board meeting-----
Sean Barrett (Independent)
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They do come to an end because it's-----
Sean Barrett (Independent)
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-----it's not solidly based.
Mr. Tom Browne:
And that's why again you were trying to actually kind of diversify the bank from both a geographical point of view and also from a sectoral point of view here in Ireland, because it was clearly identified that we needed to actually, kind of, reduce the over-dependency on lending to property.
Sean Barrett (Independent)
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So were you surprised, after you left Anglo, that it did collapse with 61%-----
Sean Barrett (Independent)
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-----discount-----
Sean Barrett (Independent)
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----- when it transferred to NAMA?
Mr. Tom Browne:
-----when I left the bank there was absolutely no sense at all that there was any stress on the system either from the credit point of view or from the funding point of view. So I was shocked when I left the bank in ... after I left it in 2007 because I had no ... as I said in my opening statement, it was alien to me that there was kind of a liquidity or a solvency issue coming up the track as I was leaving in 2007.
Sean Barrett (Independent)
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The St. Patrick's Day massacre, did that cause you to change your views?
Mr. Tom Browne:
Well, obviously the market was talking at that stage. I'd left the bank ... well and truly left the bank at stage. And obviously there was other issues going on in terms where ... the world financial markets were in crisis at the time and it was rebounding back on all the banks here in Ireland.
Sean Barrett (Independent)
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Did they react in the correct way from the bank's perspective to the CFD? Were they too slow to react? What would you have done if you had known earlier about the CFD purchases?
Ciarán Lynch (Cork South Central, Labour)
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I don't think you can either. Final question, Senator.
Sean Barrett (Independent)
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Sorry, I did not intend to-----
Ciarán Lynch (Cork South Central, Labour)
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That's all right.
Sean Barrett (Independent)
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----- cause difficulties; it was a genuine question. Thank you, Mr. Browne, and thank you, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. Deputy John Paul Phelan.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Thank you, Chairman. Good evening Mr. Browne. Firstly, I want to refer to the book that has been referred to by many others, Mr. Carswell's Anglo Republic. In it, it states that you were paid €3.75 million from Anglo when you resigned in November 2007 as a golden handshake or retirement package. Is that correct?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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How do you feel, yourself, now in light of what we've subsequently discovered with Anglo and its operations and the cost to the Exchequer about that sum?
Mr. Tom Browne:
I suppose every day I worked in Anglo I worked kind of to my best of my ability. I suppose I used my best judgment in any decisions I made or any decisions I influenced while I was there. When I left the bank in 2007 I felt I'd done a good job and I felt I left behind a bank that there was no undue stress when I was walking out the door. So all decisions I took when I was there and implemented, I took them all in good faith. You know, when I handed in ... when I told the chief executive and the chairman that I was leaving, it was the board's decision to actually decide whether I was entitled to, you know, a payment. I decided I was leaving. Whether I got one or not was irrespective. I was leaving, my race was run. And, you know, the board decided that they were going to actually recognise my efforts over the previous 15 or 16 years.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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That's fair enough. I was reading your ... part of your biography there, during your second term in Anglo, and it is remarkable reading because you seem to have held a lot of different, kind of, roles within the bank at the ... at the same or similar times. You were the head of ... managing director of lending for Ireland between 2004 and 2007, when lending went from €3 billion to €38 billion.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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€13 billion, sorry, to €38 billion. Do you think ... do you think, I suppose, basically, that was a sustainable level of increase for that four year ... for that four-year period?
Mr. Tom Browne:
It wasn't sustainable, it just happened, you know, in terms of, you know, you'd a very active client base in a very active market with a landscape that actually created those type of opportunities, and we had a client base that we continued to support and, as I said earlier on, we supported too strongly.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Again referring to the ... Mr. Carswell's book, it is noted in one point, or mentioned in one point, that you have been critical of senior management in Anglo. I'm instructed by legals not to get involved in that discussion and I-----
Ciarán Lynch (Cork South Central, Labour)
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We are not dealing in a legal framework, so it's not that you're instructed, you're obliged.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes, and I'm obeying the instruction. But I want to know, do you feel yourself that there was any of your conduct, or "any of your own conduct" is probably the wrong word, but any things that you did, particularly in your time as head of lending in Anglo, that contributed to the financial difficulties ultimately a year after you left and to the, you know, exposure of the taxpayer to billions of euro of ... that's lost?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes, you ... I was referring to the ... that you had been critical of senior management in Anglo.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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It's from Mr. Carswell's book-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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-----as well.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I can. Page ... it's the Kindle version, page 5911, where he said, and I'll quote it, the conduct of senior officials at Anglo had ultimately proved-----
Ciarán Lynch (Cork South Central, Labour)
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I think I need to be mindful of allegations there now.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Sorry this is not an alleg----- this is a published-----
Ciarán Lynch (Cork South Central, Labour)
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Yes, I know, there ... the ... as we mentioned before the meeting here, I would urge the Deputy to err on the cautious side rather than to create a risk. We're just about a day away from concluding public hearings. We haven't ended up in court yet and I'd like to see the closing line in the same manner.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, look it, really the point I suppose I'm trying to ask you, Mr. Browne, is do you feel ... you're saying that Anglo was grand when you left in 2007. You were head of lending for the preceding four years, if you like-----
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Well, okay, two and a half years. Do you feel that any of your actions in that time contributed to the downfall of the bank a year after you left?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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In your opinion was the decision to combine the roles of finance director and chief risk officer prudent or appropriate at the time when loans ... time when loans were growing so rapidly, in terms of the need to maintain an independent risk function at the time allocation needed, albeit that both responsibilities essentially were merged into one? Do you think it was a prudent decision?
Mr. Tom Browne:
And again, that was a decision which would have been taken after I departed. I don't think it was the right decision because I think given the growth of the bank at the time, I think it would have been a much better decision if there would have been an independent risk function completely dedicated to the risk activity.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay. Can I ask you did you see the evidence of Mr. Moran, Matt Moran, when he was in here last week?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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He stated, and I want to put a quote that he said ... gave to the inquiry. He said, with respect to Anglo, that "the lending function was excessively dominant"-----
Ciarán Lynch (Cork South Central, Labour)
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Deputy Phelan I will let you finish and I'll stop the clock now. I'm just getting reports that there is dreadful mobile phone interference coming in proximity to you there.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, well, I don't ... I don't have a mobile phone here. Where was I? "The lending function was excessively dominant in the bank and that the risk function controls were, ultimately, insufficient". What you make of that comment?
Mr. Tom Browne:
Well, the lending function was always, you know, the dominant function in terms of the bank and where it came from. I wouldn't accept that the risk function didn't have, you know, it's independence, staffed up by high-quality people who had the independence to be able to, kind of, decide whether the risk is acceptable or not, and I would've always seen the risk function as being more than capable of actually calling the ... the decision in regard to whether the deal made sense or not from a risk point of view.
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Finally, briefly, the FitzPatrick's tapes book by Tom Lyons and Brian Carey outlines that you had a meeting with the regulator, staff of the regulator, after the collapse of Northern Rock. Basically I want you to briefly to outline what was discussed at the meeting, and if you could, what types of issues the regulator was raising with you on behalf of Anglo, or do you remember ... do you remember that?
John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Okay, that's fair enough.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Moving on, next questioner is Deputy Kieran O'Donnell. Deputy.
Kieran O'Donnell (Limerick City, Fine Gael)
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Thanks, Chairman. Welcome, Mr. Browne.
Kieran O'Donnell (Limerick City, Fine Gael)
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NAMA estimated that there was €9 billion in interest roll-up in the loans transferred by the five banks to NAMA, and they said €3 billion of that related to Anglo. Now they ... I'm ... the document I'm referring to, Chairman, is Vol. 2 page 27. It was evidence given by Brendan McDonagh, who's the CEO of NAMA. I suppose the question really was were you aware of that level of interest roll-up in the Anglo loan book? Would those figures have been made aware to the board and senior management and dashboards on a regular basis ... management information dashboards? How was this level of risk ... increased risk monitored within the bank? And do you believe that the bank had adequate information systems to monitor this risk properly?
Kieran O'Donnell (Limerick City, Fine Gael)
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Can I ... can I just clarify one or two points, Mr. Browne? When in 2004 did you become managing director of lending in Ireland?
Kieran O'Donnell (Limerick City, Fine Gael)
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2005, and what date did you actually leave Anglo, because the ... what precise date did you leave Anglo?
Kieran O'Donnell (Limerick City, Fine Gael)
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Because I looked at the ... at the ... the annual accounts for 2007 for Anglo, and they state ... which are dated 27 November, they state that you were shortly leaving the board.
Kieran O'Donnell (Limerick City, Fine Gael)
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That was the end of November.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay, and the €3 billion roll-up-----
Kieran O'Donnell (Limerick City, Fine Gael)
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How would that have arisen?
Kieran O'Donnell (Limerick City, Fine Gael)
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Was it a common feature among development loans?
Kieran O'Donnell (Limerick City, Fine Gael)
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So, say if one of your existing clients rang you and said, "I've a land deal I want to invest in", and ... would you typically ... did you distinguish between with or without planning?
Mr. Tom Browne:
Yes, again going back to the report we had, you know, the various aspects of the land in terms of it's zoned, unzoned, planning, with working capital, so very much clearly it was identified in terms of what the risk category in regard to the land loans, and land was always, you know, the risk ... the high-risk capital.
Kieran O'Donnell (Limerick City, Fine Gael)
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So typically you'd have given interest roll-up on land. If that developer-----
Kieran O'Donnell (Limerick City, Fine Gael)
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And would you-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Would you allow interest roll right up to developing the site, building houses on the site?
Mr. Tom Browne:
Again you may, depending on the project, depending on the location of the project, depending on the actual developer that was behind it, depending on your view of, kind of, the actual, you know, the end ... the end product in terms of its salability. So again, so every loan like that was looked at in terms of, you know-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Did it not leave the bank very exposed to a downturn?
Kieran O'Donnell (Limerick City, Fine Gael)
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That was only for new lending. The existing clients you continued to lend to.
Kieran O'Donnell (Limerick City, Fine Gael)
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Why did you leave Anglo?
Kieran O'Donnell (Limerick City, Fine Gael)
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What do you mean by your race was run?
Kieran O'Donnell (Limerick City, Fine Gael)
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Would you accept, Mr. Browne, that during your period as managing director of lending in Ireland, that was the rapid escalation in property lending within Anglo?
Kieran O'Donnell (Limerick City, Fine Gael)
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But it happened under your watch.
Kieran O'Donnell (Limerick City, Fine Gael)
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Will you expand, then, in terms of your leaving ... the reasons you left? So, you said your race was run, you went for the top job in '04. Subsequently?
Kieran O'Donnell (Limerick City, Fine Gael)
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There wasn't in any way ... like it's circumstantial that you left a relatively short time before the Patrick's Day massacre in terms of share price in Anglo.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay.
Mr. Tom Browne:
I decided to go, in terms of ... I had informed the chief executive and the chairman in April of that year that I wanted to leave and I didn't see anything coming down the tracks, as I said in my opening statement. As far as I was concerned the bank was in rude good health in ... as I was leaving. And as I said earlier on in my statement, I never ... a liquidity or solvency event was alien to me in terms of my thinking as I was leaving.
Kieran O'Donnell (Limerick City, Fine Gael)
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Can I just refer, very briefly, to the Anglo Irish ... Anglo Republic... and you made reference in your opening statement that you were not made aware of the contracts for difference. You said "I was not made aware. Other directors were." I'd just refer to page 108 of it, where it's "Gary McGann, chief executive of paper and packaging group Smurfit ... and a non-executive director at Anglo, pushed the matter at a board meeting in early September." This refers to the contracts for difference. "By now the directors felt it was time to speak to [the] Quinn directly." Were you a member of the board at that time, Mr. Browne?
Kieran O'Donnell (Limerick City, Fine Gael)
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Do you remember that issue coming up at the board at that time?
Ciarán Lynch (Cork South Central, Labour)
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Well, I would ... I would encourage you to err on the side of caution, Mr. Browne, really, if-----
Kieran O'Donnell (Limerick City, Fine Gael)
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Was that from February onwards?
Ciarán Lynch (Cork South Central, Labour)
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Yes. Hold it there. Have you any other question that's not related to that?
Kieran O'Donnell (Limerick City, Fine Gael)
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Well no, it was that Mr. Browne said he wasn't made aware of it and I'm asking that ... was the board and were ye made aware of it?
Ciarán Lynch (Cork South Central, Labour)
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Yes, I know, we're not going to go there. Thank you.
Kieran O'Donnell (Limerick City, Fine Gael)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Thank you Mr. Browne. I'll now bring in Deputy McGrath.
Michael McGrath (Cork South Central, Fianna Fail)
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Thank you very much Chair. Good evening, Mr. Browne. Can I start by taking you to core booklet Vol. 1, page 67? So, this is an inspection of commercial property lending activities at Anglo by the Financial Regulator in May 2007. And in the-----
Ciarán Lynch (Cork South Central, Labour)
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That will have to be referenced off the book. I think it's -----
Michael McGrath (Cork South Central, Fianna Fail)
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That's fine, yes. Mr. Browne has it anyway. Page 67, Vol. 1. So, that particular inspection by the Financial Regulator identified 30 separate issues which it required to be addressed and which it listed in a report dated 27 June 2007. Varying degrees of seriousness, I think would be fair to say, Mr. Browne, but a number of quite important issues. So, can I ask, were you made aware of this report as a board member and was it discussed by the board?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay and would correspondence from the Financial Regulator typically have been brought before the board?
Mr. Tom Browne:
Yes, something like that would have been brought before the board. And again, going back to, kind of, what I said earlier on, Deputy, my view of the board, in terms the openness and transparency, it was very much ... if there was an issue that had to be discussed, it would be brought up forthright and put before the board in terms of any issues that needed to be discussed. So, something like that, I would have said to you, would've definitely have been brought up to the board-----
Michael McGrath (Cork South Central, Fianna Fail)
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Yes.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay and to your recollection that wasn't the only time that correspondence from the regulator would have been included-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----in the board pack and discussed.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Mr. Tom Browne:
The other point with that, Deputy, would've been that any time there was any interaction between the regulator and mainly through, I suppose, the finance director, that would've been ... in my view would've been brought to the attention of the board. Again, going back to the point that there was-----
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure and in respect of this particular correspondence, who was responsible for dealing with it and for ensuring that it was followed up on and the recommendations implemented?
Michael McGrath (Cork South Central, Fianna Fail)
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But it wasn't you?
Mr. Tom Browne:
Sorry, some of it could have been within my remit and some of it would have been, probably, through the risk function. I would've said the overall responsibility for dealing with it would probably have been at the foot of the risk people supported by the lending people in terms of relevant aspects of it.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. Can you recall specifically what action was taken-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----on foot of this?
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. Okay. Just an issue that was raised earlier on by Deputy Higgins ... just intrigued me. You were head of group HR for a time, is that right?
Michael McGrath (Cork South Central, Fianna Fail)
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January '05 until when?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay. How does the head of lending Ireland also become the head of human resources?
Michael McGrath (Cork South Central, Fianna Fail)
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Right.
Michael McGrath (Cork South Central, Fianna Fail)
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Was there a HR department?
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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Right
Michael McGrath (Cork South Central, Fianna Fail)
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And who reported to you in respect of HR issues?
Michael McGrath (Cork South Central, Fianna Fail)
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A different ... and what was his position? He was-----
Michael McGrath (Cork South Central, Fianna Fail)
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Right.
Michael McGrath (Cork South Central, Fianna Fail)
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Right.
Michael McGrath (Cork South Central, Fianna Fail)
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Okay.
Michael McGrath (Cork South Central, Fianna Fail)
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And on the other governance issue and sticking with the name Seán FitzPatrick, when he left as CEO and became chairperson of the board in 2005, you were on the board at the time. Was that a move that you supported? Was there a serious discussion on that as to whether it was the appropriate thing to do from a governance point of view - that the outgoing CEO would step straight in as chairman?
Michael McGrath (Cork South Central, Fianna Fail)
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Was that as a sub-committee of the board or was it not the board as a collective-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----would have discussed that?
Michael McGrath (Cork South Central, Fianna Fail)
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In what forum? How would that ... would they meet separately or-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----how would that work?
Michael McGrath (Cork South Central, Fianna Fail)
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Right, okay. Just on the issue of exceptions to credit policy, just looking at page 3 of Vol. 2, this issue was touched on earlier on, but the reference at the very bottom of it, which basically is a summary of the aggregate of exceptions to credit policy for the period 2001 to 2008 prepared by ... by the special liquidator, as such, found that 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, in volume terms, and then in value terms, the aggregate value of the exceptions identified was €31.97 billion or 92% of the value of the book which transferred to NAMA. So, I know you explained some element of that would have arisen after you left, but this was a representation of the 2001 to 2008 period. Does that match your experience in your role?
Mr. Tom Browne:
No. Again, there was exceptions and, as I explained earlier on, you know, when you look at exceptions you have to go behind the individual reasons for every exception. As we saw in one of the other exhibits, you know, probably in the latter years as asset values, security values, actually kind of diminished, the bank obviously was taking a very conservative approach in terms of writing down security values-----
Michael McGrath (Cork South Central, Fianna Fail)
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Right.
Michael McGrath (Cork South Central, Fianna Fail)
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If we look at, like, page 13 of the same booklet, there were some changes to the credit policy in July 2005. So when we talk about exceptions to credit policy, presumably we're talking about exceptions to these type of rules which were in place about maximum loan-to-value across-----
Michael McGrath (Cork South Central, Fianna Fail)
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-----the different type of lending.
Mr. Tom Browne:
Because, again, to give an example of that, you know, if the credit policy was no more than 75% loan-to-value and if through the process of approval, you know, a credit came up where it was 80% loan-to-value, it was highlighted at, you know, at the approval stage and a decision would've been taken based on the, you know, ... could be on any whole host of reasons why the loan would be approved on, you know, at an exceptional level. So, you know, somebody saying, "Well, the credit policy says 75% loan-to-value but the loan has come up at say 80% loan-to-value", so it's highlighted from the word "go" and a decision is made to approve that based on other, you know, circumstances. So it's clearly identified from the word "go" in terms of that approval. What the discussion around why you would approve it, you know, will depend on a whole range of reasons.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. But, I mean, a lot of your answers on this issue and on the issue of security seems to be the case-by-case analysis, but, I mean, I have to put it to you that the basis of making a decision on a case-by-case scenario doesn't seem to have regard to what the policy was. The policy seemed to be breached on a wholesale basis, looking at the figures that we have before us.
Mr. Tom Browne:
Yes. No, based on that figure, right, okay. But, you know, again, you know, if you look at that figure there which is, you know ... is you highlighted there ... you know, again it goes back to what's behind, you know, each of those loans, right. Why are they exceptions? If the bank has decided in 2008 to write down, you know, the underlying security by 20%, that, in itself, and you can see the figure there, it went from, what, 28% to 46% over the period of four or five months as a result of the bank deciding that, you know, let's kind of take a 20% haircut in the underlying value of the security, and that's why an awful lot of accounts will end up being exceptions in that situation.
Michael McGrath (Cork South Central, Fianna Fail)
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Sure. That's a snapshot in 2008, but we're looking at the aggregate position-----
Mr. Tom Browne:
Yes, you know, but the reality of it is, yes, I would say to you, go back to kind of, you know, the period '01, '02, '03, '04, '05. Yes, there would have been exceptions to credit policy. They would have been reported on a monthly basis, just like that report we saw there, okay, and there would have been, you know, a specific reason behind each of those exceptions, why it was an acceptable thing to do.
Michael McGrath (Cork South Central, Fianna Fail)
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The point I am making is the exceptions seemed to become the norm. If the policy had to be breached that often, then either you weren't following the right policy or it was being-----
Michael McGrath (Cork South Central, Fianna Fail)
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Policy was catching up with the practice - trying to.
Ciarán Lynch (Cork South Central, Labour)
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I just want to clarify one thing for you there, before you conclude, Deputy, because this might want to bring you back in again, okay. Is the ... if I could ... in your witness book, there, page 67, that's ... it's the letter to the Financial Regulator, 27 June 2007. It's in Vol. 1. It won't come up. It's just I want to get a clarification on it more than anything else. You ... were you a non-executive director, Mr. Browne, yes? Were you an executive or non-executive?
Ciarán Lynch (Cork South Central, Labour)
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Executive, okay. In ... and you haven't seen this document before, no?
Ciarán Lynch (Cork South Central, Labour)
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You're familiar with this document.
Ciarán Lynch (Cork South Central, Labour)
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All right. It's just to say that in his statement in evidence Mr. Gary McGann stated that as a non-executive director he'd never seen this letter. Could you clarify whether, in your opinion, that it would've gone to the non-executive directors?
Michael McGrath (Cork South Central, Fianna Fail)
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He said it was discussed at the board, a few months ago.
Michael McGrath (Cork South Central, Fianna Fail)
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It's different.
Ciarán Lynch (Cork South Central, Labour)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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And Mr. McGann would have been part of the correspondence list.
Ciarán Lynch (Cork South Central, Labour)
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I'm just trying to clarify that now, for sure.
Ciarán Lynch (Cork South Central, Labour)
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Are you concluded then, Deputy McGrath?
Michael McGrath (Cork South Central, Fianna Fail)
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Yes. Thank you.
Ciarán Lynch (Cork South Central, Labour)
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Okay. Senator O'Keeffe.
Susan O'Keeffe (Labour)
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Thanks, Chair. Mr. Browne, I know that you say you haven't read the Nyberg report but I'm just wondering ... they ... in the Nyberg it says that the ... it observes that the Financial Regulator raised concerns over the shortcomings in Anglo's risk function, but it isn't clear whether the risk committee or the board saw the letters relating to that. So, do you recall ever seeing that correspondence from the regulator relating to Anglo's risk function?
Susan O'Keeffe (Labour)
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Okay. So that means literally that - you don't remember.
Susan O'Keeffe (Labour)
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That's fine. That's fine. Broadly, what share of responsibility would you say that Anglo would shoulder for the banking crisis?
Susan O'Keeffe (Labour)
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Right. Significant. Is that - you're the man with the figures - is that more or less than 50%?
Susan O'Keeffe (Labour)
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Okay. I have to say I am wondering, in fact, why your own statement to this inquiry is so short, Mr. Browne. It's two and a half pages long. I think it's the shortest statement we've probably received. Was there a reason why your statement is literally that short?
Susan O'Keeffe (Labour)
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Okay. In the book, The FitzPatrick Tapes, and don't worry this is not contentious, it's an observation made by Seán FitzPatrick himself, and he was talking about how, after David Drumm had been appointed, he said well:
The bank was about lending. ... The lending guys were all about Lionel Messi. They were all strikers. They were the pop stars. They were the guys who were making the f-ing money. They didn't worry about how the money was got to give to them. As far as they were concerned they were the guys lending money and that was where it all was. That was where the culture was as well.
Now Mr. FitzPatrick, obviously - pretty much important guy in your bank. What do you think about his observation?
Susan O'Keeffe (Labour)
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Was it lending at all costs?
Mr. Tom Browne:
I don't think it was. I think there was a very clear process in terms of, actually, kind of, how the whole ... you know, the whole loan approval process went and how it evolved over the years. It was very thorough, it was very complete. You know, all the management tools around management of the loan book in terms of watch lists, everything like that, you know-----
Susan O'Keeffe (Labour)
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Although Mr. FitzPatrick does say they didn't worry about how the money was got to give to them. I mean, he's ... he's saying that himself about your own bank.
Mr. Tom Browne:
Well, I think what he ... I think what he's referring to there is that, you know, they didn't worry about, you know ... the treasury guys, you know, as on ... on the funding side, their responsibility was to be able to go out and develop new strands of funding to be able to fund the actual growth of the ... of the loan book. And the bank, you know, in the latter ... you know, in the latter years, you know, was kind of developing, you know, its operations in the UK and in America, so suddenly you had the three, kind of, areas of geographical growth in terms of the ... yes, the loan growth in the bank.
Susan O'Keeffe (Labour)
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You've said several times, Mr. Browne, that when you left the bank in September '07 that it was in - I think you used the expression - "rude health". Mr. Moran, when he gave evidence, on page 76, he was talking about how it had started. He said, "the start of the liquidity crisis or the first signal that became available in the market", that was August 2007, and then he goes on to talk about Northern Rock, which, clearly, you would be aware of. So is Mr. Moran wrong? I mean, lots of people have given evidence that, really, things started to get very tight August-September, really beginning to feel the tension by October-November, never mind then what happened when you had left. So, I'm just wondering, would you revise your view or do you-----
Susan O'Keeffe (Labour)
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So why then does the ... did the liquidity crisis start and then why was that of not ... no concern? Why do you not rate it as a concern?
Susan O'Keeffe (Labour)
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But what was that about then? What was the tightening ... why is he saying that and why have plenty of other people said it?
Mr. Tom Browne:
Well, I think ... I think ... I think the first people ... the first event that people, kind of, point to was Northern Rock in September 2007. That was the first, kind of, real public manifestation that there was problems starting to actually arise in the whole, you know, liquidity world. And it went from there.
Susan O'Keeffe (Labour)
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Although he says August, I think Northern Rock was September, but-----
Susan O'Keeffe (Labour)
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-----do you still maintain-----
Susan O'Keeffe (Labour)
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-----you didn't-----
Susan O'Keeffe (Labour)
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You said at the start that when you came back to Anglo ... when you'd been asked to come back by Mr. FitzPatrick, that I think you returned to manage the wealth management division. Is that correct?
Susan O'Keeffe (Labour)
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And so, tell us, was the wealth management division, was that high net worth individuals?
Mr. Tom Browne:
Basically at the time what it was was you had probably five satellite operations, all very much independent republics in terms of, you know, Vienna, Geneva, the Isle of Man, Dublin private banking, the assurance company, and they were all very much doing their own thing. The creation of the develop ... of the ... what I was asked to do was pull together, you know, a cohesive approach in terms of those businesses in terms of creating a strategy around them in terms of growing the business, and using, kind of, some of the attributes of, say, the fund management expertise in a place like Geneva and see could it be applied in places like Dublin or London or Vienna. So it was ... they were ... they were very much independent republics in their own right before that and the idea about creating the division was to actually pull it all together and put a, kind of, a strategy around the business.
Susan O'Keeffe (Labour)
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And, as I say, what did that involve though? Was it about high net worth individuals or-----
Mr. Tom Browne:
-----the profile of each individual location was completely different. You know, you go from, say, Geneva was probably high net worth individuals, to the Isle of Man, which was very much retail deposit. So each of the ... each of those operations had a very, very different clientele.
Susan O'Keeffe (Labour)
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And did it involve the creation of property syndicates?
Susan O'Keeffe (Labour)
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Right. And was that something you had a hand in?
Susan O'Keeffe (Labour)
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Or you were involved with rather?
Susan O'Keeffe (Labour)
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And what relationship was there then? What interface was there between that part of the business and the bank part of the business or was it utterly separate?
Mr. Tom Browne:
Yes, no, it was separate and then the ... you know, the private bank ... that would have been mainly done out of Ireland, where the private bank would have gone and sourced these investment opportunities, you know, and probably in the early days was predominantly probably in the UK. Then there was probably some European opportunities brought and then latterly there was some things in America brought ... brought into the private bank.
Susan O'Keeffe (Labour)
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What share of-----
Ciarán Lynch (Cork South Central, Labour)
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Okay, time to wrap up, Senator.
Susan O'Keeffe (Labour)
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What share of the profit of Anglo Irish Bank would have been contributed by that division?
Susan O'Keeffe (Labour)
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Small but comfortable.
Susan O'Keeffe (Labour)
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And, just to clarify, when you ... when you changed your job and became head of lending, Ireland, some ... that division stayed though. I take it somebody else took that job.
Susan O'Keeffe (Labour)
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So it didn't close down.
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much. I'm going to move to wrap things up inviting Deputy Murphy to conclude, please. Sorry, my apologies, Senator D'Arcy just indicated on one point.
Michael D'Arcy (Fine Gael)
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Yes, just very ... just two very small things, Mr. Browne.
Ciarán Lynch (Cork South Central, Labour)
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Turn off your phone first. There's some areas there that's-----
Michael D'Arcy (Fine Gael)
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I asked Mr. Peter Fitzgerald if he had read the book and he said he had and I asked him was it a genuine reflection-----
Ciarán Lynch (Cork South Central, Labour)
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Please. I'm going to hold for a second, Senator, because there's terrible phone distortion there, wherever it is coming from. Okay, continue again, please.
Michael D'Arcy (Fine Gael)
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I asked him was it a genuine reflection of the way business was transacted within Anglo Irish Bank. Can I ask your opinion on it, please?
Michael D'Arcy (Fine Gael)
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You don't think it is.
Michael D'Arcy (Fine Gael)
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Okay. And then, finally, Mr. Browne, your severance payment of €3.75 million. You left the institution; were they obliged to pay you a severance package?
Michael D'Arcy (Fine Gael)
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They weren't. And it was within their gift to do so.
Michael D'Arcy (Fine Gael)
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Was that very generous?
Michael D'Arcy (Fine Gael)
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And was it the norm for people leaving who decided to leave, where there was no legal obligation to pay anything?
Michael D'Arcy (Fine Gael)
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And what were they paid?
Ciarán Lynch (Cork South Central, Labour)
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Okay. Thank you very much. Deputy Murphy.
Eoghan Murphy (Dublin South East, Fine Gael)
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Thank you, Chairman, and thank you, Mr. Browne. Just to come back to this 2006 policy change. You decide you're going to stay with your proven clients, the big developers who've got large scale projects in Ireland and that's going to be the MO from 2006 on. And then total lending in Ireland doubles over this period of time. Were you placing too much trust in these special clients that you were sticking with from 2006? And I'm not asking you about trust in their business abilities, I'm asking about trust in their wealth, how much you perceived that they owned, their exposures in terms of their assets or what they were developing and too much trust in terms of how much they were telling you they were borrowing from others?
Mr. Tom Browne:
I think ... I think, you know, I think it's an interesting word, "trust", you know, we backed them because we believed their ... of ... we believed their ability to deliver on the projects. You know, there were people that we had, kind of ... we had developed a close relationship with over ten, 15, 20-year period, and we'd seen them perform and, I suppose, the view was that if there was going to be a soft landing, you know, the people that you wanted to be in the trenches with were people that had a track record of delivering performance. And the view would have been that these were the people to actually, kind of ... to support.
Eoghan Murphy (Dublin South East, Fine Gael)
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So your lending was based on belief rather than based on hard data or-----
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Mr. Tom Browne:
You know, were you happy with the risk, were you happy with the credit risk, were you happy with, kind of, the actual proposal in terms of its ... its work-out, its repayment proposal? And then ... and then the issue was: are these the type of people you want to actually, kind of, deal with?
Eoghan Murphy (Dublin South East, Fine Gael)
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Were you making assumptions of their own personal wealth in terms of personal guarantees? Were you making assumptions in terms of what they might be exposed to in terms of borrowing from other banks?
Eoghan Murphy (Dublin South East, Fine Gael)
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Was any of this being backed up with paperwork in terms of-----
Eoghan Murphy (Dublin South East, Fine Gael)
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But did you have full visibility?
Eoghan Murphy (Dublin South East, Fine Gael)
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Because there was an inspection done by the Financial Regulator at the end of 2007 and ... you had just left, but this relates to lending done under your period in charge. And there was a number of findings and one of the findings was that, "several show how much trust the banks were placing in the unverified assertions of their borrowers with regard to their personal wealth, and how inaccurate some of the information being used by the banks was."
It talked about management estimates of wealth, not estimates coming from the person who was selling but management sitting there, coming up with numbers but not having anything behind that other than their own impression of the borrower.
Mr. Tom Browne:
Going back to my own experience, like, you know, I remember having several meetings with some of the bigger clients. When you went through detail of their exposures and their actually ... and their net worth positions, you know ... and that would have been something that I would have done on a number of occasions with some of the bigger clients.
Eoghan Murphy (Dublin South East, Fine Gael)
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"The inspectors noted that the institutions have been unable to obtain a Net Worth Statement from [Mr. X], as he is unwilling to disclose such details in writing. In addition, the statements provided by [Mr. Y and Mr. Z] have not been certified by a third party". So, was this happening in Anglo?
Mr. Tom Browne:
Sorry, it could have happened, yes. I'm not saying it didn't happen but there would have been, kind of, you know, fairly detailed conversations around, you know, the bigger clients' exposure to other banks, the bigger clients' kind of, you know, net worth positions and verification of that information.
Eoghan Murphy (Dublin South East, Fine Gael)
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This inspection report found that the understanding of bank A's exposure to a developer ... another bank's exposure to the same developer was out by more than €1 billion. So I mean, how can you tell me that you had accurate understanding of their exposure to the banks and then you could be out by potentially €1 billion in this case?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, a level of trust. A big developer who you have now decided to back, you know, from 2006. Are you really going to interrogate them about their personal wealth or their exposure to other banks when they've been with the bank for so long? Would you really be able to have that relationship with them?
Eoghan Murphy (Dublin South East, Fine Gael)
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And you would just trust the figures?
Eoghan Murphy (Dublin South East, Fine Gael)
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And what about this idea of management estimates rather than figures coming from the borrower themselves?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay, then that contradicts what you just said about the vigorous approach you took to getting this information.
Eoghan Murphy (Dublin South East, Fine Gael)
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And they would have provided documentary evidence for that in every case?
Eoghan Murphy (Dublin South East, Fine Gael)
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Would you have gotten it?
Eoghan Murphy (Dublin South East, Fine Gael)
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Okay.
Ciarán Lynch (Cork South Central, Labour)
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Thank you. Deputy Doherty, please. Wrap up.
Pearse Doherty (Donegal South West, Sinn Fein)
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Page 15 of Vol. 1 details the Public Accounts report of July 2012 on the crisis in the domestic banking sector and it notes:
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. ... Management showed a lack of awareness of risk and focused their attention on business growth.
So, with that noted, Mr. Browne, how do you reconcile these comments with the positive statements on the governance structure of the bank contained in the corporate governance statements each year in the bank's annual reports?
Pearse Doherty (Donegal South West, Sinn Fein)
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The whole lot of it?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. I'll have to start from the start because ... Do you understand what's in the PAC report in terms of the poor governance structure, the fact that the auditors and regulators identified weaknesses in these areas in 2003, 2006 and 2008, that the management, which you're part of, showed a lack of awareness of risk and focused their attention on business growth? And I'm asking you how do you reconcile those comments of the PAC's report with the positive statements on the governance structure of the bank that was contained in the corporate governance statements each year in the bank's annual reports?
Pearse Doherty (Donegal South West, Sinn Fein)
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Yes, we know that because the auditors identified ... the PAC revealed that the auditors identified weaknesses in 2003, 2006 and 2008. How come ... the point here is how come the statements of corporate governance every year in the bank's annual reports was giving you a clean bill of health basically?
Mr. Tom Browne:
You know, it's actually, kind of, on the basis that they were made aware of those issues ... and they must have been made aware of, kind of, what action was being taken on the back of those reports ... they must have been happy that, kind of, whatever was being identified was being dealt with and they were happy to sign off on the basis of, kind of, their report. So they must have looked for satisfaction that something was being done in the context of the issues that had been raised.
Pearse Doherty (Donegal South West, Sinn Fein)
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Do you believe that the management showed a lack of awareness of risk and focused their attention on business growth?
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay.
Pearse Doherty (Donegal South West, Sinn Fein)
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Okay. I want to refer to another book - sorry, if you just bear with me - Matt Cooper, Who Really Runs Ireland?I'm not sure if you are familiar with the book or not.
Pearse Doherty (Donegal South West, Sinn Fein)
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Matt Cooper's book, Who Really Runs Ireland?It's a book that he published. You're referenced or you're mentioned in the book along with Tiernan O'Mahony, both of you leaving a number of years after not being appointed to the top position. He talks about Tiernan O'Mahony writing in The Irish Timesas far back as 2002, saying the big days of 40% per share profits are over and it'll be more likely to be 15% to 20%. But he mentions ... he says about you, and I will quote just for your benefit:
Browne stayed on for another three years before leaving with the same generous package as O'Mahony enjoyed. In that time, he tried to reduce the bank's exposure to the Irish property market. As far back as early 2005, he told me that it had become dangerously overheated and too dependent on tax breaks. There was limited value left for investors. However, while he had some success in reducing the bank's exposure, it continued to do new business in Irish property, both as a banker and as an investment organiser.
He goes on to talk about how Drumm wanted to prove himself FitzPatrick's equal, wanted to double the profits of the bank within five years, which he did within two. So, can I ask you is that a true reflection of your own position at that point in time in 2005? Were you trying to reduce the over-exposure to the Irish property market at that time in the bank and was there other pressures within the bank?
Mr. Tom Browne:
No, it is a true reflection. I remember the conversation. I suppose the first attempt to try to do that was the change of policy in 2006. I remember the board meeting well where it was debated long and hard in regard to the policy change and the policy change was adopted by the board. You know, there was several examples where I saw this market getting seriously overheated. The policy change was an attempt to actually curtail our activity. As I said earlier on, you know, we didn't do it ... we didn't impose that policy strong enough. You know, we continued to support, you know, the bigger clients when we shouldn't have - we should have kept out - and we failed in terms of the implementation of that policy. So, from that ... so, you know, the policy that was brought to the board was the attempt to try to curtail activity and that was reflective of that comment.
Ciarán Lynch (Cork South Central, Labour)
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Okay, thank you. With that said, I'm going to bring matters to a conclusion. Mr. Browne, is there anything you would like to add by manner of closing comments, further remarks or additional information?
Ciarán Lynch (Cork South Central, Labour)
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Thank you very much, Mr. Browne. With that said, I'd like to thank you for your participation this evening and your co-operation with the schedule today and your engagement with the inquiry. You're now formally excused and it is proposed that the meeting is adjourned until 9 a.m. tomorrow, Thursday, 10 September, when we will conclude our final day's hearings, our public hearings, of the inquiry. Is that agreed? Agreed.