Simon Carswell: Inside Ireland’s, and probably the world’s, worst bank

In Blog by Ian Fraser0 Comments

September 24th, 2012

I’m half way through Simon Carswell’s Anglo Republic: Inside the bank that broke Ireland, and it’s a gripping read. In the book Carswell, finance correspondent of the Irish Times, describes how, from small beginnings, Anglo Irish Bank became a highly leveraged bet on the future of Ireland’s increasingly unsustainable property market, became a poster child of European banker profligacy and excess, and nearly brought down the entire Irish economy.

The bank, led by chief executives Sean FitzPatrick and David Drumm, lent so readily to Ireland’s bubble-era clique of underwhelming property tycoons that it inspired a herd mentality and a dangerous groupthink across the Irish banking and commercial property space. This culminated with a form of ‘tulip-mania’ with the Jurys Inns auction of June 7th 2007.  Even after the commercial property market had peaked, the Irish tycoon Derek Quinlan shelled out £1.166bn for the 20-strong chain of budget hotels, almost all of which was stumped up virtually instantaneously by the ever obliging Anglo.

Carswell’s sources have provided him (and by extension the reader) with an inside seat at many of the meetings and events that led to Anglo’s phantom success and ultimate demise.

I particularly liked the quotes about the bank’s former CEO Sean FitzPatrick on page 38, which read:-

“FitzPatrick was arrogant,” says another former director of the bank. “He wanted  semi-yes-men around him. He didn’t mind having arguments but he always wanted to win. If he didn’t win the  argument, he would think very badly of you. Sean FitzPatrick felt that it was Sean FitzPatrick plc and not Anglo Irish Bank plc  — he felt that it was his bank, that he should call the shots to the board and the  management … He didn’t want a board at all.”

“He had an ego that liked to be lauded,’ says a former executive. “As the bank attracted more attention, the ego inflated. I think there was a lot of venerating at the altar within the bank.”

There are interesting parallels with the Royal Bank of Fred.

Anglo Irish Bank saw its buccaneering attitude to loan approval, which short-circuited normal credit and risk management practices, as its biggest strength; but it was in fact its biggest weakness.

Carswell describes how the bank’s insane recklessness rubbed off on other lenders operating in Ireland, including Edinburgh-based Royal Bank of Scotland (which owned First Active and Ulster Bank in Ireland) and HBOS (parent of Bank of Scotland-Ireland). To avoid losing market share, profits and credibility with their shareholders, it seems these and other rival banks including Allied Irish Banks, Bank of Ireland, Irish Nationwide, Irish Life & Permanent and Educational Building Society thought they too must become equally blind to risk.

Given that Anglo Irish’s loan book was turning from toxic to radioactive by September 2008,  the Fianna Fáil government of Brian Cowen was extremely unwise to offer a two-year, 100% guarantee to all the bank’s depositors and bondholders, alongside those of five other Irish banks. To some, the move seemed like a canny way of preventing the Irish economy from collapsing. With the benefit of hindsight, however, covering total liabilities of €440bn, the move was far too generous to the banks, and turned out to be economic suicide.

Two years later, the actual cost of the guarantee, which was renewed by the Irish government in September 2010, had soared to 32% of Irish GDP. The markets lost faith in Ireland’s ability to service its debt, and the government was forced by the European Central Bank to accept an €85bn bailout from the EU and  IMF.

FitzPatrick was declared bankrupt in July 2010 and now faces prosecution. On 24th July 2012 he was arrested by Gardaí at Dublin airport as part of an investigation into a share support operation at Anglo Irish Bank. He was charged with 16 offences relating to his role in advising on and lending €450m to a golden circle of investors — the “Maple 10” (who are named towards the bottom of this transcript) and members of Sean Quinn’s family — to prop up the Anglo Irish share price.

Carswell’s book is the story of a how a small Irish lender inflated a property bubble of epic proportions before becoming one of the biggest financial basket-cases in Europe. As Carswell says: “This is the story of how a small Dublin bank became too big to fail and too rotten to save — and how it dragged an entire country to the brink of bankruptcy.”

During a presentation in Dublin City Library on March 29th, 2012, Carswell provided some figures about Irish property market, which explain first the size of the bubble that the country’s government and regulators helped to inflate, and the subsequent collapse. He said:

“This is a slide from the Department of Finance.  House prices are down about 60 per cent and commercial property down 70-80 per cent but the development land, which is much riskier for the bank, is down about 90 per cent and in many cases, particularly outside the city, it has reverted back to agricultural values.”

“And when you think about it that Anglo had 80 per cent of its loan book in property, more than 20 per cent, a fifth, more than a fifth of their book was in this high-risk land and development so if you think about the bank at the peak of the market, €73 billion in loans in 2008, it just had €4 billion set aside to cover potential losses which isn’t enough.

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