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COMMITTEE OF PUBLIC ACCOUNTS debate -
Thursday, 6 May 2010

Chapter 7: Banking Stabilisation Measures

Mr. Kevin Cardiff (Secretary General, Department of Finance) called and examined.

We are dealing with the 2008 annual report of the Comptroller and Auditor General and Appropriation Accounts: Vote 1 — President's Establishment; Vote 6 — Office of the Minister for Finance; Vote 12 — Secret Service; chapter 1, Financial Outturn; chapter 2, Vote Management; chapter 4, Financial Commitments on Public Private Partnerships; chapter 6, European Union — Financial Transactions 2008; and chapter 7, Banking Stabilisation Measures.

I draw the attention of all to the fact that while members of the committee enjoy absolute privilege the same privilege does not apply to witnesses appearing before the committee which cannot guarantee any level of privilege to witnesses appearing before it. I remind members of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House, or an official by name or in such a way as to make him or her identifiable. Members are reminded also of the provisions within Standing Order 158 that the committee shall refrain from inquiring into the merits of a policy or policies of the Government or of a Minister, or the merits of the objectives of such policy or policies.

I welcome Mr. Kevin Cardiff, Secretary General, Department of Finance, and ask him to introduce his officials.

Mr. Kevin Cardiff

I am accompanied by Mr. Ciarán Connolly, Mr. Donal McNally, Ms Ann Nolan, Mr. Patrick Brennan and Mr. Michael McGrath who, between them, represent the various divisions of the Department. I hope that between us we will have a sufficient level of expertise to answer most of the members' questions. In addition, we have enough paper with us to keep us talking for weeks. We shall do whatever works for the committee and if members wish us to return another day that is fine. We will do our very best to deal with the issues they wish to raise.

The Chairman was kind enough——

I congratulate Mr. Cardiff on his recent appointment. It is his first time before this committee, at a time of unprecendented problems within the economy. It is only fair to acknowledge that he and his Department have worked long and hard to grapple with the financial, banking and economic crises that have hit the State in the past two years.

I wish Mr. Cardiff's predecessor, Mr. David Doyle, the very best in his retirement.

Mr. Cardiff's Department comes before the committee to discuss the accounts of 2008 and we wish to explore whether it has been effective in the discharge of its financial responsibilities. The country has endured a property crash and has a banking system which is on life support. I hope the Department will answer the questions put to it on the emergency banking measures and the performance before and during this crisis.

At a time of huge economic turmoil the Department has been central to economic planning and decision making. The country cannot afford to repeat the mistakes of the past. The culture of financial complacency must be replaced by a culture of robust accounting and transparent decision making. The era of crony capitalism in the private sector must end, as must the era of poor value for money in the public sector. Departments must be responsive to best practice and the Department of Finance must lead the reform of the public sector.

Now, more than ever, we need transformative leadership in order that this crisis does not break us but makes us stronger. That is the challenge to all our public servants in these dark and difficult financial times. It is in that context that we are having this meeting. I ask Mr. Buckley to introduce the annual report. The full text of chapters 1, 2, 4, 6 and 7 can be found in the annual report of the Comptroller and Auditor General or on the website of the Comptroller and Auditor General at www.audgen.gov.ie.

Mr. John Buckley

There are three Votes and five chapters of my annual report which fall for review. I will confine my comments to chapter 7, which deals with banking stabilisation. A financial crisis developed in autumn 2008 as Irish banks found it increasingly difficult to source funding following the collapse of loan and bond markets and a dramatic increase in the cost of unsecured overnight interbank borrowing. As well as finding it difficult to source finance, banks also had difficulty on the asset side of their balance sheets in the form of distressed assets due to property over supply and the demand for property under construction evaporating in the constrained credit conditions. The chapter outlines the various measures being taken by a range of agencies with the common aim of dealing with the banking crisis and restoring stability to the Irish financial sector.

By the time my report was finalised almost one year ago the State had already expended a total of €10 billion on recapitalisation of the two main commercial banks and on the rescue of Anglo Irish Bank, and a further €1 billion was soon to be spent. It had taken on considerable commitments under a September 2008 banking guarantee, covering bank liabilities totalling €265 billion by June 2009. The State deposit guarantee scheme was extended. Lending to credit institutions by the Central Bank and euro system had grown and while in the first half of 2008 the level of lending had been stable at around €40 billion, it grew rapidly to a peak of €130 billion in June 2009, when interbank lending had almost ceased. After June 2009, the level of lending progressively declined, reducing to some €80 billion at the end of March 2010 as interbank and wholesale financing markets normalised somewhat.

The first major response to concerns about bank liquidity and solvency was the extension of the existing deposit guarantee scheme. The key changes effected were an increase in the level of deposits protected from the existing €20,000 to €100,000 per depositor per institution; the dropping of the 10% depositor risk requirement; and the extension of the scheme to the credit unions, some of which had participated in the League of Credit Unions' non-statutory scheme. An Act to give effect to that extension was subsequently passed in June 2009. Credit institutions covered by the scheme are required to hold deposits with the Central Bank in deposit protection accounts. The amounts held on deposit fluctuated over time, but at end of 2009 the amount held was €608 million.

The bank liabilities guarantee scheme was very broad in terms of the forms of liability covered. It covered retail, corporate and interbank deposits as well as a range of debt instruments. Deposits already covered by the deposit guarantee scheme were excluded. The liabilities guarantee scheme stipulated that the covered institutions would pay compensation in recognition of the impact the scheme would have on the cost of Government borrowing. The NTMA undertook an exercise to estimate that impact and, based on the results of the exercise, the amount to be collected from the covered institutions was based on the assumption that debt costs were 0.15% to 0.3% higher as a result of the State's contingent liability under the scheme. It was determined that a sum of approximately €1 billion should be collected over the life of the scheme, that is, to the end of September 2010. By 8 March 2010, a total of €718 million had been collected by way of premia for the guarantee cover.

An eligible liabilities guarantee scheme became operational on 9 December 2009. Under the scheme, a State guarantee can be provided for deposits over the deposit protection threshold value of €100,000 and debt securities with maturities of up to five years. The liabilities must be created between 9 December 2009 and 29 September 2010 in order to qualify and subordinated debt is not eligible for cover. The scheme is being managed on the Minister's behalf by the NTMA. Fees are also payable under this scheme in respect of the liabilities covered, and €90 million in this regard was received in the first quarter of 2010.

Other initiatives aimed at banking sector stabilisation involved the recapitalisation of a number of credit institutions; the nationalisation of Anglo Irish Bank and, more recently, of Irish Nationwide Building Society; the establishment of NAMA to acquire developer-related loans; and the reforming of the Central Bank and Financial Regulator. Developments in these areas will be examined in a further report chapter in my forthcoming annual report.

Overall, the management of the banking crisis called for actions on the part of a number of institutions. Information exchange was facilitated by a domestic standing group which had existed since 2006. The forum, which brings together representatives of the Central Bank, Financial Regulator and the Department, is designed to facilitate information exchanges relevant to financial stability and develop a framework aimed at managing a potential systemic crisis. Membership of the domestic standing group comprises the economic assistant director general of the Central Bank, the prudential director of the Financial Regulator and an assistant secretary from the Department of Finance. Chairmanship is rotated among the three authorities on an annual basis.

Mr. Kevin Cardiff

I thank the committee for giving me the opportunity to make what I hope will be a short opening statement. A number of issues were raised at this forum last year, and where we promised to provide notes and so on we have done so. As the committee knows, this is my first time to come before it as Accounting Officer. I am not sure whether I have the best or worst job in the Civil Service, but it is a great honour. As it is my first time, I hope the committee will permit me to speak on the broad issues, as the Chairman suggested, before we discuss specifics.

As the committee knows, developments during 2008 marked a very negative turning point in Ireland's economic performance, which had its precursors in previous years, and in the stability of and outlook for our banking and financial system. International and domestic factors combined to create some of the most difficult conditions the State has ever had to face, which required a speedy and definitive response on all fronts, including civil servants, financial institutions, Government and the Oireachtas, to seek to restore a competitive economy and to stabilise the public finances. Thankfully, we and other forecasting bodies anticipate that we will be pulling out of economic recession shortly — there are certainly some helpful signs in that regard. I will return to that point towards the end of my presentation.

The role of the Department in all of this is to advise the Minister and Government on economic, financial and fiscal issues, and to implement Government policy. In other words, in terms of where we fit in the structure we work for the Minister and the Government in delivering on their policy priorities in these areas. We give frank advice to the best of our ability. From time to time, we get things wrong; that is very clear. We also get things right; but our advice is given honestly and directly, without fear or favour.

The Department prides itself on being able to react quickly to events and tries to be ahead of the curve. In the case of banking, it had to readjust its organisational structures, methods and skill base very quickly in an area in which the detailed expertise traditionally resided elsewhere.

In regard to banking issues, economic and fiscal issues, pay talks and all the various crisis management functions that have arisen, staff in the Department have worked very hard and unstintingly in an unprecedented situation. Genuinely, they have given their all to avert an even worse outcome than that which has unfolded. We will hold a discussion about the quality of advice and the Department and so forth but I wish to be clear that I have not encountered one moment, even during the work-to-rule, when I did not receive a great deal of support and co-operation from Department staff in trying to deliver what the Government, the Minister and the country required of us. Appropriately, we had to seek the advice and assistance of other bodies, including the NTMA, for which we were very grateful. The Department and these bodies also retained various advisers throughout the crisis period.

As a Department, our overall aim is the Government's aim and, I believe, that of all parties in the Oireachtas, that is, to create a stable, growing, employment-sustaining economy. These words almost sound hollow since we have been in the situation in which we have found ourselves during the past year or two. Nevertheless, they still underpin our policy advice, thrust and the aims of restoring fiscal stability, safeguarding the financial system, regaining national competitiveness and improving the efficiency and effectiveness of public services.

The Chairman used the word "transformative" and this is the challenge. I do not know if we are there yet but it is certainly the challenge. To these ends, the Department has focussed its energies on implementing the Government's medium-term strategy, designed to allow Ireland to resume economic growth as soon as possible and to achieve the Stability and Growth Pact target of a deficit below 3% of GDP by the end of 2014. Our tax system should seek to be as fair as possible and remains targeted on supporting competitiveness and maintaining employment, notwithstanding that tax rates have increased for our citizens. We have concentrated our effort in expenditure control on value-for-money and overall cost effectiveness of both current and capital expenditure. We sought to achieve these aims through the major expenditure control exercises in 2009, the comprehensive analysis of the Special Group on Public Service Numbers and Expenditure Programmes, the policy development work on public service pensions reform and the comprehensive review of capital expenditure initiated in 2009. All of these initiatives support the Government's budgetary consolidation strategy and prepare the ground for future economic growth. They also provide the basis for considerable debate, such as the debate at this committee. Perhaps we have not been as good as we should have been in pointing out the sheer volume of data and information we have made available, including approximately 3,000 pages on our website on the Special Group on Public Service Numbers and Expenditure Programmes. We must do more to facilitate this in a better way and to ensure people have it in a more accessible form than we have provided to date.

We have consistently sought to drive efficiency and effectiveness throughout the public service through the implementation of the Government's transformation agenda and the ongoing management of the industrial relations situation. In particular, this means the development of a range of initiatives on redeployment, decentralisation, e-government, shared services, State agencies, performance management and maintaining control of public service numbers and the pay and pensions bill.

In the financial services area, the overarching objectives since the crisis began were to stabilise the financial system, to facilitate the availability of credit in the economy and to protect the interests of taxpayers. Throughout 2008 and 2009, the Department advised the Government on policies to protect the economy and the financial system. We know that availability of credit, the continuity of payments systems and the security of deposits for savers and investors are essential for economic development. To ensure these outcomes, the Government has had to help the banks to stabilise their funding, improve the quality of their balance sheets and rebuild their capital. An appeal mechanism has been set up to allow for an independent appeal where credit is refused. Perhaps someone would do me the favour of asking me a quick question on this matter at some stage in the discussion and I can provide an update. In addition, the two main banks are currently preparing lending plans to support business and households in the next two years. We have reorganised our work and re-oriented our focus to achieve these objectives. It will take time, patience and effort. As we have seen, the international economy and financial system is still fragile and needs to be monitored. We must all seek to understand the dynamics of what has happened in the past two years, the mistakes we have made in the past five to seven years, the things we should have done better and the things we need to improve upon, but also the things we did well. We must seek to discover the causes and precursors of the crisis. However, we must also ensure that the work on rebuilding continues. We cannot rest on our oars and that message must be understood by all of us, especially the Department, nor can we rest on our oars in respect of fiscal matters, the financial system or the reform of the public services.

I will refer briefly to some of the more specific issues on the agenda. The financial outturn for 2008 shows that total Exchequer expenditure was €55.25 billion, of which some €49.25 billion relates to Voted expenditure. The Vote group allocations set out in the Revised Estimates for public services in 2008 amounted to €49 billion. Therefore, the outturn of €49.3 billion represents a relatively small overspend. Other expenditure of €6 billion brought total expenditure for the year up in excess of €55 billion which compared to receipts of €43 billion, resulting in a budget deficit of €13 billion. It is important to note that debt to GDP ratios, general government balances and so forth always refer to the Government deficit as a proportion of national income. They do not refer to the Government deficit as a proportion of Government income. That figure is also important and somewhat more worrying. When one examines that figure, one sees the reasons for the need for a fairly robust response to the crisis fiscally. In July 2008, the Minister for Finance announced a range of efficiency and savings measures designed to reduce public expenditure by €440 million in 2008 and €1 billion in 2009. As a result, the majority of Vote groups demonstrated savings against their initial 2008 allocation.

On Vote management, I welcome the conclusions of the Comptroller and Auditor General in chapter 2. The emphasis on control of public spending must continue and active containment of public expenditure remains a priority. The difficult but effective action taken in this regard so far has reflected to Ireland's credit on international markets and is providing Ireland with some breathing space. Current events show that markets are real and forceful influencing factors in considering our fiscal position. They simply cannot be ignored. I do not suggest anyone at this committee is saying as much but simply make it as a general comment.

I will not detain the committee long on individual votes. I refer to Vote 1 — President's Establishment. Traditionally, the Accounting Officer from the Department of Finance notes that while he does not run the Office of the President, for perfectly appropriate constitutional reasons, he is nonetheless the Accounting Officer for the Vote. The staff of the President's Establishment do not report to me and I do not authorise individual expenditures but I hope I can answer individual questions the committee may have or refer any questions to the office. The committee may wish to note that Department of Finance internal audit staff carry out internal audits in the President's office.

I refer to Vote 6 — Office of the Minister for Finance. There was a net outturn of €87 million in 2008 compared to an Estimate of €97 million, leaving a surplus of €10 million to be surrendered. The drivers of this saving included a 20% saving on the non-pay administrative budget.

I refer to Vote 12 — Secret Service. The sum expended in 2008 was €700,000, on which the Comptroller and Auditor General has signed off. Given the way this Vote operates, I do not have details for the committee. In fact, I had hoped to be brought into a secret room where someone would hand over a set of keys and a lot of secrets but, unfortunately, that does not happen.

I refer to chapter 4, financial commitments under public private partnerships, PPPs. This is a good and useful overview of where we are in respect of the programme. It will be a very useful tool for the Department in improving the openness and transparency of these long-term commitments. The role of my Department is to facilitate the PPP process centrally by developing the general policy framework and providing central guidance to Departments and other State authorities. The principal issue is in finding ongoing viable sources of private funding for such projects and to keep up a pipeline of projects. It is also very important to monitor the ongoing commitments to projects such that we understand not only what we have done this year but what we have committed to in future years. These can build up over time.

As regards EU funding, chapter 6 sets out details of the contributions to and the receipts from the EU budget in 2008. Ireland is projected to be a net recipient of funds until 2013.

The Comptroller and Auditor General's report sets out an overview of the main measures implemented for the banking stabilisation process, for which I thank the Comptroller and Auditor General. I will not repeat those measures now but will briefly update the committee on the measures taken since.

Since June 2009, the National Asset Management Agency Act has been passed by the Houses of the Oireachtas, NAMA has been established, EU approval has been received, although it keeps an oversight role, and the first tranche of loans have been transferred from the banks except for Anglo Irish Bank where the process will be completed by next weekend. The process will help cleanse the banks' balance sheets of the land and development loans and ensure losses are recognised up-front. It will also help to cleanse the banks of some of their biggest exposures and, therefore, make them less vulnerable to shocks.

The Financial Regulator carried out an exercise on the capital needs of the banks in the aftermath of the NAMA process and the results were announced on 30 March. The Minister also indicated the actions the institutions and the Government were going to take to meet the new capital requirements. I will not repeat the full list here but will say that, since then, Bank of Ireland has announced successfully raising capital of €1.7 billion from the private sector and a further €1.7 billion from the conversion of State preference shares. No new State money has been put in. AIB Bank is currently putting various assets up for sale and, having done that, it will presumably attempt a private sector response.

The Department also developed proposals to reform the structures for financial regulation through the creation of a single, fully integrated Central Bank Bill amalgamating the powers and functions of the financial regulatory authority. The first Bill dealing with these proposals is before the Dáil. A second Bill will follow and then a consolidation Bill to bring all the disparate strands together.

We are still forecasting a gross domestic product contraction of 1.3% this year, although we may revise that in June. That forecast is a combination of the recessionary picture continuing for the first part of this year and an upturn in the second part. We expect a change in the direction of the economy, with a bottoming out by mid-year and positive growth resuming in the second half. Most economic commentators now broadly share this perspective. Some are more optimistic and there is mounting evidence that the economic risks are towards the upside. Recent data and a range of indicators support this perspective, although international events continue to complicate the picture. Consumer sentiment is also strengthening, which is a positive for growth. Industrial production data and other leading business indicators are also showing signs of positive improvement, although not every sector is as positive.

The Government's underlying finances are on target, as evidenced by yesterday's Exchequer returns. They are in profile but in a year in which we expect a change in direction, we must watch this closely. The expectation among international forecasting bodies is that the global economy will improve modestly this year. While there are some concerns over the pace of change, our major trading partners are projected to return to growth this year. This will generate demands for our exports, which have held up well overall, and provide increased support for economic activity in this country. The challenge is to embed this upward trend and to strengthen our ability to take maximum advantage of it.

Can we publish that statement?

Mr. Kevin Cardiff

Yes.

I welcome Mr. Cardiff to the committee. The Committee of Public Accounts will be talking about the banking and financial situation when we are long gone. This conversation will be a staple of the Committee of Public Accounts diet for many years to come. Before we move into that, the biggest set piece for the Department of Finance each year is the annual budget statement. On 5 December 2007, what was the projected budget deficit for 2008?

Mr. Kevin Cardiff

We projected the deficit would be marginal. Having had positive years we said there would be a marginal deficit in 2008.

In 2007 we had a deficit of €1.6 billion. That was not predicted on budget day either. The projection was not that severe. Mr. Cardiff detailed the outturn but I want to see the prediction on budget day.

Mr. Kevin Cardiff

We predicted 0.9% of GDP.

What is that in money terms?

Mr. Kevin Cardiff

About €1.5 billion.

The projected budget deficit on budget day 2008 was €1.5 billion and we ended up with €13 billion.

Mr. Kevin Cardiff

Yes.

How does Mr. Cardiff rate that outcome versus his projection?

Mr. Kevin Cardiff

The forecasting outcome? It was dreadful.

Dreadful. Fine. I am pleased Mr. Cardiff says that because it was way off the mark as events transpired. People could see the slowdown in 2006 and that it was apparent in 2007 that we had a deficit of €1.6 billion. Given the forecasting was dreadful for 2008, what kind of bonuses were paid to staff who dealt with that type of issue during 2008?

Mr. Kevin Cardiff

We had at the time a performance bonus system for the assistant secretary general grade, immediately below the division heads. Most, but not all, assistant secretaries would apply and all got some level of payment. I do not have any details with me on what individuals got but the committee can take it they all got amounts of a bonus reflecting two things: performance and effort in that period. The Deputy can take it that for 2008, an awful lot of effort was required.

Deputy secretaries do not qualify for the bonus.

Mr. Kevin Cardiff

In the Department of Finance the second secretary would be the division head or the secretary general in charge of PSMD, Mr. Connolly.

I do not need names. I am interested in grades.

Mr. Kevin Cardiff

Secretaries General and second secretaries do not have a bonus scheme. Assistant secretaries did have a bonus scheme.

What is the grade below that?

Mr. Kevin Cardiff

Principal officer.

How many people applied for a bonus in 2008 and how many received one for performance?

Mr. Kevin Cardiff

About nine.

They all would have got most of the bonus.

Mr. Kevin Cardiff

They all got a bonus.

What was the maximum bonus available? How high up the bonus scheme did most of them qualify? I know it was a busy year, I do not dispute that.

Mr. Kevin Cardiff

There was a range. I am checking when we abolished the bonus scheme. We paid bonuses in 2008 for 2007 but we did not pay any bonuses in respect of 2008.

They would have been due for payment in 2009 but that did not happen.

Mr. Kevin Cardiff

To be perfectly honest, that was for industrial relations reasons. It was not about the individual performance scheme of officers. That bonus scheme was rescinded across the Civil Service. Had there been a bonus scheme, I would have had to have considered whether the required effort was made and whether the performance of individual officers was appropriate. I would have had to have decided whether officers did particularly well or badly at forecasting compared with other forecasting agencies. It would not have been a simple matter.

I draw members' attention to the fact there is a vote in the Chamber. The practice until now has been that we continue our meeting during the voting process. Are members happy with that arrangement in view of the fact they are now at a distinct disadvantage when their voting records are published? Some of us are continually absent from the Chamber on a Thursday, which is reflected in our voting records.

As we are elected to do a job, we should do it. I have always operated on the basis of: "to thine own self be true, And it must follow, as the night the day, Thou canst not then be false to any man". We should not be deflected from doing our job by ill-informed lightweight analysis and criticism from people who do not seem to know what they are talking about. I do not know anyone who takes a blind bit of notice of it. We should get on with doing our job.

The Whip's office should ask the Government Chief Whip and the major party whips to note such things in some way. It is the same with foreign travel. When we travel abroad, we check in and check out. Something should be shown, because it is grossly unfair when the media presents someone as absent for 90% of the time when they are only absent for 45%. There is a discrepancy between the parties, so correction is needed to be fair and equal to all sides, whether the issue affects one party or two parties. It is not fair that the Chairman and I sit alongside each other in Cork North-Central and Cork East, yet my record could be viewed as 90% while his record is viewed as 85% or 75% because he is doing a job in this forum. There is a need for fairness in the media presentation and they should not be selective.

The consensus, therefore, is that we continue.

We should continue the arrangement by which two Government and two Opposition Deputies — four people — should remain in the meeting. As there may be votes in Private Members' time later, the four of us who stay here will be recorded, in somebody's eyes, as doing no work in Dáil Éireann today, even though we are working hard in this committee.

To be fair and equal, we should take that into account.

We will talk to the Whips about it.

It is horrific to see that stuff in the newspapers every day. It might say, for example, the Chairman is only present for 40% of the time. I do not know if that is correct, but it is because he is doing a job in this forum and therefore misses the votes every Thursday. To be fair to our side of the House, proper mention must be made of that and there must be protection.

Okay. It is agreed that we continue.

I will move on to a few other topics covered in the report.

Mr. Kevin Cardiff

Before we move on, if the Deputy does not mind, I said — I stand by it — that the forecasting outcome was dreadful. However, so was everyone else's. I hope the banking inquiry, or at least we as a system, will consider these things. There is a question over whether forecasters will ever get major turns correct. There will always be people who are lucky in their outcomes or insightful and who might be able to say that a turn is coming. The Budget Statement that contained the forecast also outlined a series of six or seven risks to the economy. Every one of those happened, but no one could have said at the beginning of that year that any one of them would necessarily come to pass.

Economic forecasts are just that: there is no perfection about them. We do not do particularly worse or better than any other forecasting group. We are effectively discussing the performance of individuals, but if we begin to expect superhuman miracles of individuals, we will not get them to do the job. It will be done in a very cautious and self-protective way.

The forecasting outcome was very poor. The economic turnaround was much greater than we had predicted, and both the turnaround and the prediction have had consequences. I am not trying to hide from that, but I wanted to put it in context.

In 2007, we had a budget deficit of €1.6 billion. Heading into 2008, we were predicting a budget deficit of €1.5 billion. Everybody knew the situation was deteriorating. None of us would ever have expected a deficit of €12 million, but we did not expect there to be no deterioration in 2008 from 2007. Mr. Cardiff is telling us the 2008 budget deficit prediction was €1.5 billion compared with €1.6 billion in 2007, but in doing so he is basically stating that no deterioration was expected.

Mr. Kevin Cardiff

I am sure Deputy Fleming was saying that at the time, but it was not generally said. The Department of Finance GDP projection for that year was €3 billion, as was the Central Bank projection. The Economic and Social Research Institute projected €2.25 billion to €2.5 billion. The European Commission predicted €3.5 billion. The IMF in April 2008, which was a couple of months on, predicted almost €3 billion. The OECD projection in November 2007 was almost €3 billion. There was no clear picture at the time. There was a sense that there was potential for change and that there were risks. However, none of the forecasters I listed made the central case for the type of change we are talking about to have happened in 2008.

It certainly bears analysis and thought. If forecasts cannot predict turnarounds on the scale that they have actually happened, we need a system that deals not only with turnarounds but also with risks. We need to change the system to be more risk conscious rather than just being conscious of the central case.

I will move on to an issue that I was not going to get into just yet. As a result of the deteriorating situation in 2008, we brought forward the budget for 2009 to 7 October 2008, or some time around then. A week prior to that, the Department had to deal with the bank guarantee system. In the run-up from the end of August through September until early October, the Department's normal officials would have been geared towards the early budget that was scheduled owing to the deteriorating situation. Is it possible that the Department was not conscious at that stage of the banking difficulties that were evolving around it? Did it know it was facing a disaster on two fronts during September?

Mr. Kevin Cardiff

Even then, the scale of the disaster was not evident. In fact, work had been carried out on banking matters during the summer into September, up to the night of the guarantee and thereafter. I can give the committee a timeline if it would be useful. We should forget the summer period, or rather we should not forget it but I do not want to take too long over the matter.

It is helpful for everyone.

It is especially helpful for everyone because it is an important issue.

Mr. Kevin Cardiff

In 2007 there was a lot of dislocation in markets from the sub-prime crisis. Public understanding of the banking crisis and bank failure began in 2007 with the failure of some US and German banks. I think Sachsen LB was one. That was tied in to a special investment vehicle — SIV — structure in Ireland. IKB Deutsche Industriebank was another German bank. I forget the names of the US banks that failed that year. In August 2007 Northern Rock failed. That was a psychologically shocking incident in which, for the first time, people in this country were concerned about the security of their deposits, albeit that they were deposits with a UK institution. There was much concentration in Ireland on the extent to which Irish banks were exposed to the sub-prime crisis. Thankfully, that exposure was negligible in terms of the domestically focused institutions.

At the start of the following year it was clear that liquidity conditions were getting tighter and that this was driven by the sub-prime crisis. In a sense, perhaps the sub-prime crisis was also camouflaging more local effects. Throughout 2008 there was a gradual but steady constricting of the availability of funds on markets for Irish and other European banks. Bank of England figures on the UK interbank market show a fairly steady decline in the level of activity in interbank funding and so forth over that period. While in the course of the first half of 2008 we did not have a crisis and there was not an understanding of a major crisis, there was certainly a sense that there had been a fairly heavy knock-on in terms of bank liquidity from the United States. Deputies might recall that there were, for example, small bond issues by Irish banks in that period and the newspapers would have been saying that this was a significant achievement to get a bond issue in current tight circumstances. It started at longer term and got shorter. If the longer term money was more difficult to get, that meant the exposure of individual banks was increasingly to short-term money; therefore, their liquidity was available but it rolled over more quickly. That process continued through and into the summer.

Deputies will also remember that St. Patrick's Day in 2008 was a big day in the stock markets. Bear Stearns had failed and triggered a fairly significant turnaround in how the markets were seeing bank stocks which implied that markets were starting to see this tightness as being a more long-term issue. In August and September that tightening got considerably more difficult. A fairly significant marker for us was when the Reuters news agency published a story on discussions about insolvency for Irish Nationwide Building Society. It suggested Irish Nationwide Building Society was in some form of liquidation talks or insolvency talks. It was not true at the time and was corrected almost immediately, but it created a sense of concern for us in that it left us with the possibility that customers would be unhappy to leave their money in that or other institutions. There was that and the continuing tightening of liquidity for banks, especially the shortening of liquidity and the fact that instead of being able to get one-month or three-month money, one could get only one-week or two-week money. That led us to a much more intensive preparation phase and accelerating work that was already taking place through that month.

In that period, for example, the Financial Regulator would have sent advisers into Irish Nationwide Building Society. We brought Merrill Lynch on board. The National Treasury Management Agency's engagement with us, which had been continuous, became more active. It would not have been evident to the public partly because the budget provided some distraction, but the banking staff in the Department of Finance would have worked every single day from the first week of September until the end of October or November. In the sense of it being out in the public domain that a big thing happened on a single night, a huge thing did happen on a single night but it was not that there had been no discussion or forewarning.

Towards the end of the month a few things happened. The US crisis was deepening and the talks which temporarily failed on the night of the guarantee were a major issue. The talk in the markets about what the UK and other governments might do or what concerns they may have had was increasing considerably. The discussions here were intensifying.

We had a period when the Irish media, in doing their job of informing the public, seemed to frighten the public during the middle of September. Events were frightening. It is not that the media were wrong but certainly the public was becoming more concerned and this was helped by much media comment. That, in turn, led the Government, more than a week before the bank guarantee, to look at the bank deposit guarantee, which was up to a €100,000 basic limit. That was a big event in itself and was useful because it stabilised deposits at the retail end and made it much less likely that there would be an obvious run on deposits. There was still a steady and increasing drain on liquidity, deposits, interbank money and so forth at the invisible end, for example, in the wholesale markets and the larger investors.

By the time the night of the guarantee came, there had been quite a history of tightening. What changed that day, or a few days previously, was that after the Lehman Brothers collapse, the US markets and other funding markets and some traditional sources of funds did not just tighten; they almost stopped dead. The Federal Reserve bank data can show some of these effects. It was not a case of being able to get one-week money instead of one-month money, rather that certain depositors, commercial paper investors and so forth simply were not in the market. That was in large part because the Lehman Brothers event psychologically and in money terms showed people that one can lose money on a basic cash deposit. That had not happened in previous years and had not happened in any of the other US banking issues that had arisen. The market got very risk averse. That meant we were not just dealing with a situation where one or two banks might have difficulties but where the availability of funds for the entire Irish market was drying up.

What we knew less well but is evident in retrospect was that the market for liquidity and interbank funds in many other countries was also extraordinarily tight. The retrospective comment on what was happening in the UK a week or two later mirrors closely the discussions we had on guarantee night. By the time the night of the guarantee arose, a number of institutions regarded the funding position as dire, that is, dangerous, and the market situation internationally had reached a point where it was not going to reverse itself or improve in the short term, and there was no expectation that the international market would improve in the short term. That is the background, but even that is very much a summary. It was not the case that a switch was flicked suddenly on 29 September 2008. There was a real intensification of what was happening immediately post the Lehman Brothers collapse and in the day or two prior to that. There had been a build up through that time and, thankfully, some preparatory work had been done. The fact that the Government was able to produce a guarantee Bill and have it passed by the Dáil and the Seanad in very quick time was a tribute to the parties that took the matter very seriously but it was also in part because a good deal of that kind of legislative drafting had been going on under the surface for weeks and even months previously.

The only question I will ask about that particular night is in terms of advice. We all know what the Government decided was a policy matter to introduce the bank guarantee scheme. That policy matter is not for Mr. Cardiff to address but in terms of the advice given by officialdom, some people said we should have had wholescale nationalisation of all the banks. We now know that would have been unnecessary. Other people might have said that we should have let one or two of them go to the wall. Can Mr. Cardiff tell us the range of options he gave the Government? We know the Government made a political decision in the end. That is not Mr. Cardiff's call but he has already indicated that there was preliminary legislation for a guarantee in draft. Obviously, Mr. Cardiff had a menu of three, four or five different options on the table for whichever way the Minister chose to go.

Mr. Kevin Cardiff

The legislation in draft of one sort or another dealt with many different issues. We had a couple of Bills ready but the provisions in that could be used as a sort of operational menu for the kind of actions that could be taken but the legislation in draft would have allowed for nationalisation of a bank, nationalisation of a building society, liquidity support arrangements for banks or building societies, guarantees for individual banks or building societies, NTMA support and so on. It was a range of measures, the kind of measures that turned up in the guarantee legislation. The Deputy will recall that the guarantee legislation did not just provide for guarantees. It provided for the availability of a range of supports. In a sense, the guarantee legislation, the Credit Institutions (Financial Support) Act, contained most of the measures but not the nationalisation piece. That also was ready. In terms of advice, the Government had a range of advisers available to it that night and in the previous days and weeks. The Deputy can take it that all those options were being discussed and brought forward.

In terms of the Government's decision that evening, in truth, all the options were discussed by all the people who were present. We were giving people the range of options. The other advisory bodies in the room were doing the same. I am not supposed to comment on the merits of policy or get into a discussion about policy but it was clear that there was not a small solution available. The scale of the difficulties could not be addressed by way of a small solution. There was not a way to do something incremental on this issue, and that sense of the scale of the issues was fairly clear. It was common advice that any response had to be significant and definitive.

I want to change the topic and deal with another section in the report, namely, public private partnerships. I have some questions on——

Before we move on from that, Mr. Cardiff spoke at length about the banking crisis but there was more to the economic crisis than the banking crisis. There was the property bubble. In that context, when did Mr. Cardiff's Department become aware that we were at breaking point?

Mr. Kevin Cardiff

In terms of the property market, we would have seen the first big downturns in the course of 2008.

Did Mr. Cardiff read the Fitch report of 2006? Did anyone read the Fitch report?

Mr. Kevin Cardiff

Yes. It was read in the context of many other reports that were available.

(Interruptions).

Mr. Kevin Cardiff

In retrospect, it is somewhat prophetic.

The plane was going to crash, was it not?

Mr. Kevin Cardiff

No. I do not think one could say that, in fairness. We would certainly say there was a set of risks in regard to the property market. Others were also looking at the property market. There was not——

When did the people in the Department first accept that there was a property bubble?

Mr. Kevin Cardiff

We could see early on that there was the risk of an asset bubble, including property prices going up. There were risks dealt with in the course of the 2008 budget that we talked about. By the summer of 2007 we were saying that the easing in house prices, which was becoming apparent, was accelerating but the phrasing we might have been using would be more orderly developments in the future, in other words, there would be a significant turn around in property prices, but we were not at any stage saying until 2008 that a property crash was about to happen.

When did the Department get the OECD report on overheating of the market?

Mr. Kevin Cardiff

I am told that one was in 2008. We just outlined for the committee the sorts of economic indicators the OECD and others were providing for 2008. They were all saying that the economy was still in a growth phase at that stage. I have just been told that a 2006 OECD report stated that prices may have become over valued and that a disorderly correction of house prices would pose risks but as I said, at the end of 2007 it was still seeing a growth phase.

What did the Department do as a result of the 2006 report from the OECD?

Mr. Kevin Cardiff

We built those risks into our own thinking and our advice to Ministers and Government but the Chairman must remember that it was difficult to call the size of the downturn in the property market. There was not an indication of a crash. There was an indication of a turn around. If we recall that time, there was the discussion about the soft landing or the possibility of that. There was the discussion about whether soft landings happen. There was the discussion about the length of time economic growth as a whole would continue. Into 2008 we and others were projecting that economic growth, in general, would continue and would be less supportive of property prices but would not be such as to precipitate a crash in property prices in that year.

Mr. Cardiff would not agree with people who say that the Department sleep-walked us into this crisis.

Mr. Kevin Cardiff

No. I would not agree with that. The Chairman can imagine that anybody who has had responsibilities through this period or has responsibilities now is anxious that we never find ourselves in this position again. All of us, including Deputies, I am sure, are trying to think back to what we did or did not do or what we should or should not have done over that period.

Why would Mr. Cardiff think Ireland would be different from Finland, Sweden or Japan?

Please let Deputy Fleming finish.

Mr. Cardiff might answer on that point. Why were the Irish unique in terms of property bubbles? Why were the alarms bells not ringing madly by 2006?

Mr. Kevin Cardiff

There were certainly by 2006 indications of a turnaround in the property market, but there were still signs of a significant level of growth during that period. Retrospective certainty about the direction and scale of the house price crash simply was not available at the time. People were generally saying the same things as the Department in its publications, that there were risks in the property market and that these risks would probably lead to price declines and so forth. However, they were not signalling the crash as much as we might like to say now. As I said in response to Deputy Fleming, perhaps one of the lessons is that all of us, the Department and others, need to be more aware not just of our central case projections but also of the risks surrounding the projections or of better national risk management. That is the lesson we will try to learn. However, in terms of the signals at the time, while there were indicators of difficulty or risks in the property market which were built into our thinking and advice to Ministers and so forth, there was no unanimity. In fact, the majority of commentators were saying more or less the same as the Department. Clearly, in retrospect, that was very wrong.

I wish to make another brief point.

No, I am returning to Deputy Fleming and the issue of public private partnerships. However, I ask Mr. Cardiff and his officials to think about who was monitoring activities in the property market and the banks during the period 2003 to 2008.

There is a useful chapter on public private partnerships in the Comptroller and Auditor General's report. On page 26 there is a report on a number of National Roads Authority motorway projects. Some of them — I am not sure how many from the chart — involve concession contracts, under which toll road income goes towards the cost of the project. The figures quoted in the document are the payments to be made to the PPP company during the 30 year lifespan of the project. Is the Department able to give the committee the figure for gross construction costs, less the projected income, which will give the net payment made to the PPP company? Many motorways are being opened and according to the reports I have seen recently, the cost per kilometre is an average of €10 million. In the case of some projects, however, the figures are only a fraction of this because it is only a net figure. Can Mr. Cardiff give us the gross cost to the taxpayer of these projects? What is the cost of building a project, rather than the net amount after tolls are paid to the PPP?

Mr. Kevin Cardiff

We will happily send the Deputy a note on each of them.

I am happy with that.

Mr. Kevin Cardiff

The important point the Comptroller and Auditor General's report highlights concerns the extent to which there is a pre-commitment. Obviously, without PPPs, we would still have a roads programme and still be putting money into roads each year and so forth. It is not that it is changing the national budget, but these are pre-commitments, which is probably one of the important differences. Not only do PPPs have the potential to do things less expensively and more efficiently, but they also constitute national commitments to pay; therefore, they restrain one's budgets a little in future years.

Can Mr. Cardiff give us some details of PPP projects that were well advanced, where the preferred tenderer was in place, but which are not now proceeding? Where will the cost fall? I have in mind some of the decentralisation projects that are substantially well advanced in that they have gone through the planning and tender stages but are not now proceeding and have officially been put on the long finger for a few years. Obviously, millions in costs will have been incurred by the preferred bidders in some of these projects but they will not now get the job. Does Mr. Cardiff have a list of projects in that category and the costs that may fall to be met by the Exchequer? Who will carry these costs? I have seen nothing on them anywhere.

Mr. Kevin Cardiff

I have a set of contractually committed projects but that is not what the Deputy is seeking.

No, I am asking about the ones that have reached preferred bidder stage. I have in mind some of the decentralisation projects for which land has been acquired, planning permission has been granted, the tender process has been completed and the preferred bidder is identified. It is at the position to which Mr. Cardiff referred when he said the finance originally to be available to the PPP company was not available at the same advantageous rate, from the taxpayer's point of view; therefore, it is probably not advantageous to proceed with it on the basis of the long-term financing arrangements, from some of which we have pulled out.

Mr. Kevin Cardiff

The basic question is, in effect, the extent to which we make payments to bidders.

Mr. Kevin Cardiff

That is restricted, but we will check for the Deputy. We are not aware of how big is the pre-commitment in terms of Exchequer money that would have to pass to bidders.

I presume there must be some arrangement if they have spent millions bringing a project to this point, having completed the detailed design and specification work and been identified as the preferred bidder but the contract has not finally been signed. Perhaps it happened with some of the social housing projects also. I am aware it happened in the case of decentralisation projects.

Mr. Kevin Cardiff

I will certainly check for the Deputy.

I have a final question on PPPs. On page 27 of the Comptroller and Auditor General's report the figures quoted give the costs for the various waste water improvement systems for several towns and cities, but they do not include the payments from the local authorities. Can a mechanism be put in place in order that we can receive these costs? We are not getting the full picture in the report, only a report on the capital contribution from the Department of the Environment, Heritage and Local Government. I have heard from various parts of the country that the ongoing contractual arrangements for dealing with these on an annual basis are being met by the local authorities and that the costs of the design-build-operate system for the next 30 years are way higher than the local authorities had originally anticipated. Is there some way to find out the annual ongoing costs to the local authorities of each of these contracts in order that we can see the total picture of the cost to the taxpayer, be it through central or local government? The report does not give the full picture.

Mr. Kevin Cardiff

We will put it together for the Deputy. These things are carried out on the basis of tenders and the costs and so forth are pre-committed. It is not that a purchasing authority would not know at the time it signs on the dotted line what the costs would be.

If the costs are that easily achievable——

Mr. Kevin Cardiff

That is not what I am saying. Obviously, there will be variable costs and so forth, but we will certainly put together what we can for the Deputy.

Some of them would have been based on various population projections over a period of 30 years which might or might not now happen. I am worried that local authorities will be paying for a waste water treatment plant based on a population prediction that might never come to pass. The successful tenderer would have bid on the basis of a major increase in population and been given the job, but we might be paying for a service that might not be required in the near future. Does Mr. Cardiff understand my point?

Mr. Kevin Cardiff

Absolutely. That has always been an issue. Universities plan on the basis of the number of students they expect to have, while local authorities plan on the basis of the expected size of population and so forth. If these projections turn out to be incorrect, they will obviously be over or under-committed. We will do what we can to get the figure for the Deputy. Our colleagues in the Department of the Environment, Heritage and Local Government will probably be better able to access them.

I understood the NDFA, an agency of the Department of Finance, had provided the advice on the financial aspects of these projects.

Mr. Kevin Cardiff

Yes, it advises on many of them.

Is the information not available through the NDFA?

Mr. Kevin Cardiff

I am not passing the buck. I am saying I will get the Deputy as much information as I can.

From whatever source.

Mr. Kevin Cardiff

In other words, I am not asking the Deputy to source the information. I am saying I will source it.

I will have more questions later but I will let others in.

Arising from Deputy Fleming's question on public private partnerships, in the case of the Dublin waste water treatment plant public private partnership, how did the State end up bearing the cost of dealing with the odour? Perhaps Mr. Cardiff will come back to that later as it would delay the meeting now.

In case some of my comments might be regarded as somewhat critical and as Mr. Cardiff referred to the effort and performance of the staff of the Department, having spent a couple of years as Minister of State in the Department of Finance, I am in no doubt about the effort which, during the times of crisis, was quite superlative. Our concern is really about the performance. It is, essentially, whether the Department has been, is and will be fit for purpose.

From that point of view, I return to the fact that the property bubble, which underlies many of our problems, was not in any way foreseen. In the banking sector, one bank was chasing another following profits, lending long and borrowing short, mostly on property. The State was spending big, mostly on the public service, based on quite unsustainable revenue predictions because such predictions were so related to income from property development.

Returning to the issue of the warning signals evident, I recollect The Economist four or five years ago talking about the property dangers in Ireland — I presume that was Mr. Dan O’Brien — and the fact that one year there were up to 90,000 housing units built, a larger number than were built in the United Kingdom. Did anybody take any notice of the inevitable consequences of that kind of madness?

Mr. Kevin Cardiff

The answer is yes. In doing projections for economic growth and economic performance over the 2008 and 2009 periods, we would have building into those projections significant fall-offs in house completions. Certainly, for the 2008 budget, we had a big reduction built into the numbers.

In earlier years did it cross the mind of anybody in the Department that this just could not last and the consequential impact of that on the public finances and the banking sector?

Mr. Kevin Cardiff

If the Deputy goes back over the figures, for example, he will notice we were criticised for it at the time but we always under projected the yield from property taxes and the like. In any given year we were saying it did not look sustainable and then the following year, people here would say our forecasts were wildly wrong because we underestimated the yield from property. Other people, not thankfully mostly here, would tell us then we should spend it.

Was anybody doing medium-term projections?

Mr. Kevin Cardiff

We were certainly doing medium-term projections and, obviously, for the budget projections we always go a few years out. The tax figures show we were assuming lower property market growth than turned out for the earlier years. For the 2008-09 period, for example, we were assuming much higher house completions than turned out, and we clearly got that wrong. We were not ignoring the property bubble. We were not suggesting that current levels of property developments were sustainable. We were not out of line with what other people were saying at the time.

I suppose the question is whether there was some sort of unawareness of property as an issue. Honestly, I can tell the Deputy there was not an unawareness of property as a significant issue. Looking back on it, there was, I think, not just in the Department of Finance but more generally, probably a less active approach to the risks involved than we might have had and there was probably not a sufficient lining up, I suppose, of the property market risks, the financial market risks and all the rest.

Having said that, that was in the context of an expectation of a property market that was more depressed, not in fact of a property market that turned around and depreciated to the extent it did. I imagine that when we get to look at it again, the difference between the two was, at least in large part, determined by the scale of the international shock that happened at the same time as our own property bubble burst, and that was not anticipated.

I suppose the sense I am trying to get across is the experience of this — certainly the lesson I have learned — is that troubles do not come alone because one prompts another, and the scale of the international shock and the scale of the national shock did not just happen together but they interacted with each other to make things considerably worse. It is almost that one should start to expect that if one has a problem, other problems arise or are triggered by that one problem.

It is a long time ago since Shakespeare wrote:

When sorrows come, they come not single spies

But in battalions.

Mr. Kevin Cardiff

We have had our battalions.

I am not pretending now to have 20/20 vision about what happened in the past. How fit or well qualified was and is the Department to deal with the considerable complexities of modern finance? I emphasise I raise no question whatever about the effort of staff in the Department as I was a witness to it over a number of years. How many of the Department's staff are qualified to deal with risk assessment and can deal with, have a full understanding of, and an ability to advise on, the complexities of modern banking including all of these modern instruments such as CFDs and credit default swaps with which we all are becoming more familiar? Did I read somewhere that in the Department there are only a couple of staff with doctorates in economics?

Mr. Kevin Cardiff

One of my colleagues is giving me lists of qualifications of staff in the Department which I can read out. It is a highly educated bunch, with a wide range of relevant skills and qualifications. Getting to more of the specifics, the fact of holding a particular degree in a particular discipline does not necessarily qualify you for the range of things that can arise. It is a more specific expertise, I think, the Deputy is talking about.

Yes. I am suggesting that perhaps, despite the embargo, there should be an assessment as to whether the Department is sufficiently resourced from the point of view of staff with the kind of qualifications——

Mr. Kevin Cardiff

Is the Deputy asking whether we are fit for purpose right now?

Exactly. If the Department was a private corporation and was obliged to deal with expenditure of €50 billion annually, would greater expertise be available to it than is currently the case?

Mr. Kevin Cardiff

I do not believe the Department of Finance currently has sufficient expertise to deal with the issues at hand.

That is my basic point.

Mr. Kevin Cardiff

We have not ignored that fact. It is not possible to know, three years in advance, for example, what will be the nature of a particular crisis with which one will be obliged to deal. It is necessary, therefore, to be open to the advice one receives and also to find that advice. We have obtained the advice of the NTMA, which is sophisticated in the context of banking and financial matters, Merrill Lynch and, more recently, Rothschild, which has considerable expertise in this area. We also obtained the advice of the regulator of the Central Bank and so on. Small numbers of skilled individuals have been employed by the Department to help it negotiate this difficult period.

We do not assume we have an in-house capacity to deal with every crisis. However, we have a definite willingness to reach out for the advice we require. During the crisis-management period, the link with the NTMA significantly strengthened our hand. The NTMA is a resource that is available to the Minister in the same way that the Department is available to him. We were able to work closely with and obtain the advice of the NTMA.

Even if advice is obtained from outside, is it not the case that the Department requires in-house experts that will be able to assess such advice? I say this bearing in mind the fact that the performance of some of the investment banks leaves much to be desired. I am reminded of Michael Lewis's book, Liar’s Poker, in which he stated that the first entity to be looked after by an investment bank is that investment bank itself. Mr. Lewis has written a new book on the subject, which was mentioned in the most recent edition of The Economist. Complete reliance on advice provided by outsiders is not adequate.

Mr. Kevin Cardiff

We all have a few books in us. The Deputy is correct. However, I point out that those at the NTMA are not outsiders.

Mr. Kevin Cardiff

They are direct agents of the Minister in the same way as officials of the Department. That is what really strengthened our position. Even so, their offices are located separately from ours. We have employed a professional banking analyst and a banking accountant. We have an in-house legal adviser who has been working on the banking legislation, etc. The mere fact that we reached out for these resources suggests we felt it important to have them on hand.

The Department needs to increase its level of specialist skills. We do not need dozens of people with PhDs; we need a select few who will be available as a resource to the Department. There is no doubt that the generalist nature of our service can be a weakness. Within approximately one month, I was obliged to take six or eight people who were dealing with financial crisis planning and turn them into a financial crisis management team. The creation of such a team necessitated the involvement of an additional 20 or 30 people. One cannot do that with specialists in the same way one could with a generalist service. The fact that I had flexible, well educated general staff available allowed me to complete that particular piece of the puzzle. At the same time, however, we required specialist advice from company lawyers, banking analysts, investment banking houses, etc. Even if the Department had more in-house banking experts available to it, the services of the external experts would still have been required. I do not disagree with the Deputy in respect of this matter. That is highlighted by the fact that we have brought in a banking analyst, a banking accountant, etc.

Is it fair to state that if such expertise had been available to the Department three or four years ago, the warning signs might have been heeded to a greater extent?

Mr. Kevin Cardiff

I do not think that would have been the case.

Would the advice provided have been different if such expertise had been available and would this have led to some of the worst of the difficulties being avoided?

Mr. Kevin Cardiff

No, I honestly do not believe so. The people who got things most wrong in recent years were specialist bankers. It was not the case that there was a group of people who understood that everything was about to crash. There is no doubt that certain individuals had greater foresight than others.

One matter to which the Deputy referred and in respect of which he piqued my interest is the notion of appointing a risk officer. Such an individual would operate in a different way to a banking analyst. Perhaps there is something to the Deputy's suggestion and I will give it some consideration.

The Deputy touched upon a matter to which I referred earlier and to which I stated I would return. Who within the Department was specifically responsible for dealing with the banking and property sectors?

Mr. Kevin Cardiff

One division would have dealt with the economy, while another would have dealt with tax and financial services. A division head and an assistant secretary would have dealt with the economic matters and the same would have been the case in respect of banking matters. Small teams would have worked under these individuals.

Did any of these people identify the danger signals?

Mr. Kevin Cardiff

I have stated a number of times that there were signals and that we were probably in line with the consensus with regard to where the economy was going. The danger signals on the banking side began to become clear during the sub-prime crisis in 2007 and in 2008 when the position regarding liquidity began to become quite tight. Most of the banking decisions and the overall economic decisions of individuals, organisations and so forth that have mattered in respect of this issue were taken in previous years when there was no sense of an impending crisis.

What was the position in respect of the property market? What was the response within the section tasked with dealing specifically with the property sector to the OECD report that was published in 2006?

Mr. Kevin Cardiff

I do not believe we have a section that deals specifically with the property sector. We have a group of people which deals with the economy in general, which includes the property sector. Those people were dealing with that in the context of their overall assessment of the economy, which was more or less in line with the broad consensus. It was different in some areas but it was building into expectations a downturn in the property market, but not of the scale that happened. As already indicated, that was visible in the tax projections relating to property over the years. It was also visible in other areas.

When the OECD report was provided to the Department, did any section prepare a memorandum to advise the Secretary General and the Minister for Finance of the information outlined in that report? If such a memorandum was prepared, would it be possible for a copy to be sent to the committee?

Mr. Kevin Cardiff

I do not know to what specific document the Chairman is referring.

I am referring to any memorandum which might have been prepared in respect of the OECD report of 2006.

Mr. Kevin Cardiff

I do not know if a specific document was prepared in the Department in respect of that report. However, a set of projections and an assessment of the direction in which the economy was moving were provided to the Government each year. These were provided mid-year and——

Is it possible to obtain copies of those documents?

Mr. Kevin Cardiff

The Chairman is tempting me to enter the field of policy.

Was Mr. Cardiff of the view that a form of Ponzi scheme was operating at that time in respect of stamp duty?

Mr. Kevin Cardiff

Frankly, the Deputy's question is almost insulting. We have been working extremely hard. If we had been running a Ponzi scheme, we would, like anyone else involved in such a scheme, have withdrawn our money and done a runner.

That is what some of the people involved did.

Mr. Kevin Cardiff

That is neither fair nor accurate.

No one ended up like Mr. Bernie Madoff.

Mr. Kevin Cardiff

There is no doubt that the Department of Finance, other parts of the Government and State system and other economic agents made mistakes and did not see things that they now, in retrospect, would like to have seen, but the notion of a deliberate, almost traitorous, suggestion we were trying to run something——

Last year our constituents had to find €4 billion to pay Anglo Irish Bank. That was shredded money.

Mr. Kevin Cardiff

I do not disagree with the Deputy.

They are suffering, as is the Civil Service. People are in dire straits.

Mr. Kevin Cardiff

That is exactly right.

It all comes back to the fact that the Department did not seem to be watching the shop between 2002 and 2008. That is the problem we face.

Mr. Kevin Cardiff

There is a lot of analysis to be done. I am not trying to dodge our share of the responsibility, but the Deputy suggested we had an almost deliberate scheme to try to boost the property market for tax revenue purposes. That is not the case. The Deputy is right that there is a lot of analysis to be done and that there are huge lessons to be learned. He talked about people in his constituency. Departmental officials have cousins and friends who are also suffering.

I asked a question arising from Deputy O'Keeffe's line of questioning. Will Mr. Cardiff provide for the committee the available memoranda relating to the 2006 OECD report?

Mr. Kevin Cardiff

I will certainly go back and check——

I dissociate myself from the suggestion that the Department was doing anything other than its best. My concern is whether it should have done better and whether it should be been better resourced. I do not want to tempt Mr. Cardiff into a long monologue in response to a few recent articles by Mr. Eddie Molloy which were savage in their analysis of the Department. He wrote, "As the corporate finance function of the public service, the department has presided over a situation where there is a chronic shortage of economics and financial accounting expertise throughout the whole public service, including in Finance". He also suggested the Department was, in its annual output statements, assessing itself and giving itself good marks and considers there is a need for an external examination of its performance from the point of view of suggesting ways by which this hugely important Department would be more fit for purpose in the future. Would that be a reasonable approach to adopt?

Mr. Kevin Cardiff

Funnily enough, the Deputy might expect to me to say otherwise, but I am not in wild disagreement with a lot of what was suggested in the second article. To the best of my knowledge, I have never met the gentlemen concerned, even though he made some comments about me.

Mr. Kevin Cardiff

I do not think I have met him.

I would not mind meeting him.

Mr. Kevin Cardiff

There were elements of his analysis that seemed to refer to a place I simply did not recognise, but there are elements with which I do not disagree. Others are saying other things about the Department with which I do not disagree. They all seem to fall around the area of skills and skill mix, on the one hand, and interaction with the political system, on the other. As regards interaction with the political system, perhaps it would be better if the committee had that discussion on its own. Some of the suggestions of the gentleman concerned and those of others that any time we disagree with the Minister we should issue public documents to say we have disagreed with him or her would change the nature of the system in ways about which the Oireachtas and Ministers should think. That is a separate matter.

I do not want to drag Mr. Cardiff into anything political, but we were fed a dose of silly comments such as that the fundamentals were sound made by the then Taoiseach when clearly they were not. Then we were told by the Taoiseach who had previously been Minister for Finance that he was relying on the best advice available which had, presumably, been received from departmental officials. That leads to a question which does not bring politics into the matter. Was the Department in a position to give the best advice?

Mr. Kevin Cardiff

We certainly were not in a position to give good enough advice because the evidence is that the system changed in ways that we did not predict. I do not know whether anyone was in a position to give good enough advice. I doubt it, but the Deputy can take it that this matter has preoccupied us. This has been the most frightening economic experience the country has had and we want to do our bit to correct it, just like everybody else.

I refer to the bank guarantee. Is it correct that Ireland was the only state in the western world to give a blanket guarantee? Was serious consideration given to not covering lower tier 2 debt — subordinated bonds? Why did we go that far?

Mr. Kevin Cardiff

The decisions were made by Ministers. Without commenting on their merits, perhaps the way to do it is to describe in general the issues surrounding them. Our guarantee was probably the broadest. It certainly was in legal terms, but there were various guarantees given that had not been formalised in the way ours had been, for example. I know this because I was reading the transcript of last year's Committee of Public Accounts hearing. I think I said last year that Mr. Sarkozy, Ms Merkel, the Austrian Prime Minister and various others had made solemn declarations to the public in their countries that nobody would lose any money in their banks. In other words, it was said almost in that form: "I give a solemn promise to the people of France [or wherever it was] that they will not lose a single euro on a bank deposit in France." These legally soft but nonetheless solemn and morally binding guarantees were given all over Europe. There was an ECOFIN declaration on behalf of all finance Ministers that systemically important banks would be supported in order that no important financial institution would be let go. However, in legal terms, our guarantee was the broadest.

On the subordinated bonds, that was one of the issues discussed in the context of the guarantee. It must be remembered that at the time we did not have information that the scale of the losses in the banks would be such as to make this an issue. In other words, in each bank there is a capital buffer, above which there are subordinated bonds, above which there is senior debt. Therefore, before a subordinated bondholder could lose money, one would have to get through the capital buffer, including restraining instruments, hybrid instruments and so forth. One would have to go through all of one's equity capital and undated long-term risk capital, subordinated bonds, hybrid instruments and so forth before one would get to the dated subordinated category. One of the issues that would have arisen in people's minds was whether, in the context of a broad guarantee, refusing to cover dated subordinated bonds would undermine the depth and breadth of the guarantee and its impact on the market but also whether that, in itself, might be a signal that there was a concern about the level of the capital buffer in the institutions. Since at that stage there was not a belief the capital buffers would be fully eroded, that would have been considered less important. There was some consideration given to this, but, in terms of the decision made, it concerned, first, a small piece of the overall guarantee.

Second, it was not expected that the capital buffers and the dated subordinated debt would be burned through. That was the set of issues we considered in the round. We also had regard to whether other authorities had refused, when banks had been in trouble in the past, to address or guarantee the dated subordinated bonds. We would not have wanted to set a precedent. However, we were doing something that was unprecedented in Ireland and, in recent years, in Europe. That was just one of the issues we had to consider.

I have a host of other questions, but colleagues want to contribute. I will ask one more on the banks. Does Mr. Cardiff have at this stage a ball-park figure for what it will cost to stabilise and support things? That includes the buildings and that other festering sore, the Irish Nationwide Building Society.

Mr. Kevin Cardiff

The Minister's statement on 30 March contained the most up-to-date information. I have a copy, but I will not read through it. The object of the co-ordinated set of statements around 30 March was to be as upfront as possible about the scale of the issues involved which were enormous and to make it clear to the market that the scale of the Government guarantee and the issues that had been dealt with were in a frightening but manageable place. There are no final figures, but the general breadth of the issue was outlined in the statement. If the committee wishes, I can read it.

Deputy Jim O'Keeffe mentioned the festering sore of the Irish Nationwide Building Society. The amount of capital that has gone into that is approximately €2.7 billion.

Has the Department got its €1 million back yet?

Mr. Kevin Cardiff

No.

My comment arises from a question from Deputy Jim O'Keeffe. On the night the decision was made on the bank guarantee scheme, was the Department aware of the transfer of €7 billion from Irish Life & Permanent to Anglo Irish Bank?

Mr. Kevin Cardiff

No.

Was there any contact, directly or indirectly, through intermediaries with Anglo Irish Bank? Can the committee see copies of the advice given to Ministers by the Department before the decision was made on that night?

Mr. Kevin Cardiff

The transfer had not happened at that stage; it happened at the end of September. The decision of the bank guarantee was made on 29 September. The Department would have become aware of it later in October, at which time we brought it to the attention of the Financial Regulator.

For what it is worth, the sequence of events, as I recall it, was that people such as the Financial Regulator were looking through reports from PricewaterhouseCoopers. The reports arrived in the Department and the NTMA more or less simultaneously. I received a telephone call from the NTMA asking if I had seen the figure of €7 billion, as it looked a little strange, and if I had mentioned it to the Financial Regulator. I was on page 60 of the relevant report and turned to page 118 or whatever it was. I asked the NTMA why it had thought the figure was strange, as it was presented in unemotive terms. On that day, or within a day or two, I telephoned the Office of the Financial Regulator to ask if it had seen the figure on page 118 and whether it was interested. The Financial Regulator took it up from there. The bulk of the transaction happened, as I recall it, although I am open to correction, on the day we gave the guarantee rather than on the day before.

Would the Department's advice have been different if it had been aware of it?

Mr. Kevin Cardiff

Our advice would probably not have been different, given the overall scale of the issues with which we were dealing, but had we been aware of the transfer, we would have advised on the reputational issue to which it might give rise.

Is it in order for the committee to see copies of the Department's advice?

Mr. Kevin Cardiff

The committee is in the hands of Ministers on that matter, but as I understand it, the Taoiseach has said the preparatory documents for that evening will be made available to the banking inquiries as they want them.

Can we see them?

Mr. Kevin Cardiff

I would have thought they were regarded as part of the Government preparatory documentation to which the Taoiseach referred.

As they are departmental documents given to a Minister, I think we are entitled to see them in order that we can make a judgment.

Mr. Kevin Cardiff

The simplest way for us to deal with that request is to follow the set of procedures outlined in the Freedom of Information Act 1997.

We would like to see them. We make a formal request to receive all documents related to the advice given.

Mr. Kevin Cardiff

I appreciate that. I will take the request and do what I can with it.

Thank you.

Are we cutting across, or duplicating, the work of the other inquiries?

We have a responsibility to see to it that——

I just wanted to make the point. They will report to another committee of the Houses; it is not right for two committees to carry out parallel and duplicate work.

We have a statutory job to do.

I accept that, but is it right that we duplicate and carry out work done in parallel by another committee? I am just asking the question; I am not against it. The information should come out, but if it is being prepared for another committee, will that committee discuss it in the afternoon after we have discussed it in the morning? From an Oireachtas point of view, should work be duplicated?

From an Oireachtas point of view, the Committee of Public Accounts is mentioned in the Constitution. The Chairman has every right to request all documentation relating to the guarantee and the matters that he specifically raised regarding Irish Life & Permanent. It is his duty to get the documents for the committee and it is the Department's duty to give them to us.

We have formally asked for them and expect to see them.

I welcome the representatives of the Department of Finance. I congratulate Mr. Cardiff on his appointment and wish him well. He is playing a good game — he is answering questions — but it is a difficult time.

The 1930s, following the events of 1929, were a difficult period in the financial history of the world. What happened then is similar to what has happened in the past year and a half, the events of which were not foreseen.

What work has the Department done with Goldman Sachs? Is that organisation involved in advising the Department in any way? It is in the news regarding rogue investments in derivatives. I read the financial newspapers in which Merrill Lynch was also mentioned as an adviser to the Department on merchant banking.

Mr. Kevin Cardiff

Goldman Sachs is not advising the Department of Finance. To the best of my recollection and to be as comprehensive as I can, it was, for a short time in September 2008, advising the Financial Regulator on the Irish Nationwide Building Society.

Is that Goldman Sachs?

Mr. Kevin Cardiff

Yes.

What is the position on Merrill Lynch?

Mr. Kevin Cardiff

Merrill Lynch is not advising the Department.

Is the Secretary General satisfied that the organisation is above board and that it does not have any tales or problems attached?

Mr. Kevin Cardiff

It is a large global institution.

Mr. Kevin Cardiff

Therefore, the answer is no.

Is the Secretary General aware that many people were making unregulated investments? Will the Department make policy to ensure it will not happen again? Accountants' offices and various others were advising people to make unregulated investments. As a politician, a number of the people concerned come to me, as they are in dire trouble with the investments made. There was no regulation of that kind of investment, but hundreds of thousands of euro were involved. Many people were advised to make back to back investments and to borrow money back to back on up to 100% of their assets. Most areas are regulated, but this area was not. I understand this issue had been raised by some of those in the regulatory area. Perhaps it was the financial services ombudsman, Mr. Joe Meade, who mentioned it three or four years ago, but it was not taken into account. It is an acute problem now. I could provide a list of names of people who are in grave difficulty due to unregulated investments in places like Croatia, Budapest and in many other areas throughout the world, including China and India. Many of them are trying hopelessly to retrieve their investment. Is the Department producing a policy on this so that every investment will be reported? These people should be under some scrutiny. I do not believe in strong regulation, but in regulation. We should not over regulate, but we need some terms of reference in this area.

We will have the Financial Regulator here next week.

That is on a different issue.

This needs legislation and a policy decision.

Mr. Kevin Cardiff

It appears from what Deputy O'Keeffe has said that some of his constituents have issues that could be raised with either the financial ombudsman or the regulator.

There is no protection for them there.

Mr. Kevin Cardiff

It depends on the nature of the investment. The extent to which there are unregulated investment opportunities for individuals has narrowed hugely over the years. A big step forward in that regard was taken in 1995 when basically anything that moved in the context of financial investments fell into the regulatory sphere, including areas where one's accountant was one's adviser. Even if the accountant was providing the advice in the course of his accounting business, it could fall into the regulatory system of the accounting bodies. However, if the Deputy is clear the areas in question are unregulated, it would appear they fall under the property sphere.

They are investments. The only fall back is in the accountancy area. If something irregular was found the accountant could be knocked off the register, but that is not much good for my constituents.

Mr. Kevin Cardiff

The Deputy asked about regulation. If financial instruments are in question, the people dealing in them are required to be regulated by either their accountancy body or, more likely, the Financial Regulator. In other words, they are investment intermediaries and are required to be regulated where financial instruments are involved.

Goldman Sachs comes to mind in this regard. It was involved in this kind of area. There is a need for some kind of legal protection.

Mr. Kevin Cardiff

The Deputy and I or the Deputy and the regulator need to discuss this after this meeting. If the Deputy can provide the details of the situations, I will try to tell him whether there is an avenue for his constituents to follow.

Two years ago, we were building 90,000 houses a year for our population of just over 4 million people at a time when the need for housing here was approximately 40,000 units. This led to a crisis in the building sector and the economy. What was the Department, which is the watchdog, doing about policy in this regard? What was it doing about helping, assisting and advising us to slow down? Building development in the commercial and other areas has created a major problem. Mr. Cardiff mentioned the NAMA Bill had been passed by the Oireachtas. I supported NAMA at the time, but we thought the haircut would be in the region of 30% and were led to believe that would be the cut-off point. However, we have seen since that it may increase to 50%, which will mean substantially more capital from the Government and the Department of Finance is required to finance our banks. This seems more likely with each day that passes. It was implied also when the Bill was presented to the Houses that NAMA would be successful and would make money available to the private sector to refund the economy and that it had the full support of the European Union. However, it is obvious that we will have a problem in the near future.

Mr. Cardiff mentioned the success of the Bank of Ireland launch in his opening statement. It was a success by the skin of its teeth on the day, but the day after, the whole world fell into crisis in the financial area. The Bank of Ireland will have to go to the private sector shortly quoting €1.58, whereas on the day the shares were €1.80. If the Bank of Ireland does not get that funding on the day, will there be a problem? In other words, if the issue is not written off by the existing shareholder and the private sector on the day it is floated, sometime in June, will there be an issue?

Mr. Kevin Cardiff

It was fairly clear early on that the NAMA haircuts would be determined following a fairly extensive bottom-up or detailed investigation of each asset before transfer. Deputies and the Government were rightly anxious to ensure that would be the case. Europe too insisted that would the case. There was never any controversy in that regard. If there was controversy, it was more about whether people believed that was how it would be done. The bottom-up estimates show there was a bigger loss in the books than expected. Some of that is due to the nature of the property market and the fact that it sunk even further in the interim, but more of it is due to the way in which banks dealt with those assets and whether they had properly secured their assets and whether there were cross assets, etc. The figures are coming out lower. I was rather reassured by that because I would hate to think we were going to pay too much for assets.

The Deputy is correct that this means there is a bigger capital hit in the banks and, therefore, a bigger capital requirement for the Government and the private sector to deal with. However, he is right only in the sense that this is brought to the fore by the NAMA process and is dealt with by Government capitalisation. The alternative would be that the loans would not be properly valued and either the State would take a hit later through the returns on NAMA's performance or, if the assets were within the banks, the banks would realise those losses later and would find they were undercapitalised. If there are losses, it is best to know about them.

How much research was done? Were any feasibility or due diligence studies done by the Department before NAMA was even drafted?

Mr. Kevin Cardiff

Towards the end of 2008, the Financial Regulator sent PricewaterhouseCoopers into all of the guaranteed institutions to review their property books. That same investigation brought to light the issue of the €7 billion. There were a series of reviews and documentation of the property books within those institutions.

Is that information available in the public arena?

Mr. Kevin Cardiff

The Minister published a summary of the PwC process at the beginning of 2009.

Did PricewaterhouseCoopers investigate all of the institutions?

Mr. Kevin Cardiff

I am not sure if it investigated Irish Life & Permanent, because it did not have a big property book. However, I think it investigated the others.

Who conducted the investigation into Anglo Irish Bank?

Mr. Kevin Cardiff

PricewaterhouseCoopers did it.

What did it come up with?

Mr. Kevin Cardiff

It showed there were considerable issues with regard to the scale of the property book, but not of the scale we have seen since.

Did it show the monetary value of the book?

Mr. Kevin Cardiff

It gave an estimation, but not of the scale that has come to light since.

Therefore, it did not do a proper investigation or due diligence. In other words, it did not conduct a forensic audit or investigation into what was happening in that bank. That bank was being talked about at this committee and around other tables for the past three years. I sat on the finance committee and my colleagues on all sides of the House were asking questions about it. Deputy Fleming was Chairman of that committee at the time. That bank was let go to rack and ruin and it destroyed the whole economy. When Northern Rock got into difficulties——

Mr. Kevin Cardiff

I do not wish to interrupt the Deputy's flow. On Bank of Ireland, if people do not take up the shares, the issue is underwritten; therefore, Bank of Ireland will still get its private sector capital and the underwriters will have to manage their position then. Obviously, it would be better for the overall tone of the market for Irish banks that these assets would be immediately purchased by the private sector. That would be much better.

I do not see the private sector taking a share priced at €1.58 against €1.80 a week or ten days ago. It will probably be less unless there is a rebound in another way because of Greece and the monetary crisis in Europe.

When Northern Rock got into difficulties——

Mr. Kevin Cardiff

For what it is worth, we sold our warrants at €1.80. The Government warrants were priced at the higher price.

I congratulate the Secretary General on his advice.

Mr. Kevin Cardiff

It was not my advice but rather the NTMA, even though I would like to claim it.

I will give it to the Secretary General anyway. Northern Rock got into difficulties and it was a mortgage bank, similar to the likes of Anglo. When this happened in September 2007, was it not obvious that the amber lights were flashing and we should have been looking at what was happening in the banking system in this country? This was followed by Bear Stearns, one of the oldest merchant banks in America. There was no recognition taken here of what was happening in the world financial and banking sectors. We were well aware here and people in the streets knew that our banks were borrowing beyond their means from Germany and other places and would not have the capacity to repay that funding when things got difficult.

Mr. Kevin Cardiff

That is probably one of the issues the banking inquiry will examine, whether the regulatory system was sufficiently close to what was happening in the institutions. It would be nice, in retrospect, to have had a much better picture of the asset base of those institutions.

On the question of public ownership of the banking system, what would happen if the banks had to be taken into public ownership, if they had to be nationalised? I know this is the case with Anglo Irish Bank, but what about in the case of the other banks which would be in public ownership if they go beyond 50% or 60%? What would be the consequences for shareholders and investors in these banks?

Mr. Kevin Cardiff

We will refrain from referring to a specific bank. If bank X has a value of €3 billion and it is 100% State-owned and the Government capitalises it by another €3 billion, it is worth €6 billion. The Government's share is then 50%. If the Government were to put in another €3 billion, the Government share would be €9 billion which is 67%. The shareholders' initial piece is still worth €3 billion but it is a smaller proportion of a larger whole. The shareholders in that case are not being disadvantaged but rather they are being helped as the Government is helping to support their institution. That is one of the fallacies — not that I mean this is what the Deputy is saying — but sometimes people put about the fallacy that in some way the Government capital support is a disadvantage to an institution.

Such support only happens because an institution requires Government capital support. It is a real support to the institution and, indirectly, it helps to support shareholders. However, their share, as a percentage, declines but their actual value does not decline in terms of what their piece is worth, because the Government has come in. In market terms, it is probably more difficult to get private money into an institution which is 70% State-owned than if the institution is 30% State-owned. The reason is that the person who is putting the money in has to have a view not only of what his or her stake will be worth now but what it might be worth if there is a further State injection, whether their value will be diluted. They may decide that they do not like the way that State-owned institutions are typically run or they might take a view that the management incentives will not be sufficiently oriented towards the shareholders or that they have already got a sufficient overall exposure to the Irish State and that investment in bank X would be in addition to some other exposure to Ireland. For that reason, they may not want to invest. It can make the investment case more difficult if there is a significant majority or even a significant minority State piece. It could be suggested that the trick then is to ensure the maintenance of a minority State injection. The difficulty is that this can be achieved in a couple of ways. One of the ways is to underprice. In other words, one does not, in effect, hand the subsidy from the State over to the shareholder. The shareholder's piece is valued as being worth a lot more than the State's piece and this is obviously far from ideal.

Another option is to put the money in but not to take the control that goes with the money. For example, in the RBS case, the UK Government took a 75% controlling stake but its economic stake was much larger. While this deals with some of the issues which the private sector might have, it does not deal with the dilution issue and there would still be a significant State interest. Some of those market issues can be addressed but one cannot address all of them without getting to the point where State value is being handed to private shareholders. It is a quandary which has arisen in a number of countries. The Minister's public position is that — I do not mean to say he holds a different private position — if there are new injections it will be by way of equity.

The current situation in Europe is very fluid and very difficult, arising from the situation in Greece and probably Portugal and Spain. Will there be a cost to the Department of Finance in Ireland's contribution to help and assist the European Union? How will we get that kind of money to help our colleagues in Greece?

Mr. Kevin Cardiff

I am glad the Deputy referred to them as our colleagues in Greece. I know from where we were this time last year that when one is in trouble, every gombeen, gouger, low-life type in the world that has a few bob, seems to turn up at one's door offering help.

Mr. Kevin Cardiff

Perhaps not always, but supposedly offering help. There are scam artists. What Greece needs, frankly, is help from people it trusts. As the private market has not been able to deliver for Greece, the eurozone member states have come in to help. Importantly for Greece, this help is independent of the private market. The up-front cost for Ireland is an injection of moneys of up to €1.5 billion but it will be given a piece at a time, to help Greece meet its requirements. That Irish investment is based on our European Central Bank capital key, in other words, it is just a way of apportioning it around Europe. We will take our fair share and no more. This must be approved by the Oireachtas and legislation will be required.

Will this add to our national debt?

Mr. Kevin Cardiff

Yes.

Therefore, there is a liability on the State.

Mr. Kevin Cardiff

Whatever about the accounting treatment, this is real money that we are giving to our Greek fellow-eurozone members, which we fully expect to get back, but it is real money.

I understand. However, will it not add further weakness to our national debt and affect our image abroad? We are at approximately €80 billion now, which will increase.

Mr. Kevin Cardiff

It adds a touch.

Mr. Cardiff mentioned Royal Bank of Scotland. We can say that Lloyds and Barclays stayed independent in the United Kingdom. It is relevant from the point of view that they are now making profits for the British Government. I believe Royal Bank of Scotland was 84% nationalised following a bad investment it made in Holland. Lloyds was forced by the British Government to take over Bank of Scotland. They are both in a profit making situation being semi-nationalised and making considerable money for the British Government. Would Mr. Cardiff envisage our banks coming into that situation even though they are partially State owned where there would be further investment for the banks and rather than the capital pay back that there would be a current return from them in terms of the profitability? When would Mr. Cardiff envisage that happening?

Mr. Kevin Cardiff

Is the Deputy talking about Bank of Ireland and AIB?

Yes and possibly the Irish Nationwide Building Society.

Mr. Kevin Cardiff

It would be after 2012 before they could pay dividends for European Union reasons. I have a strong belief in the Irish economy. I believe it will recover from its current situation and do very well, possibly even better than some of the commentators would suggest, but I hope not through another boom and bust cycle. We hope we will know better than to let ourselves get into that. We expect a return on our equity investment in these institutions.

The economy depends on trade. If our cost of production is not right we are in difficulty. It is very hard to read in that crystal ball where the economy will go. Some 90% of what is produced on this island needs to be shipped abroad. With the world economy doing poorly and if our cost of production is not right, we will not get the kind of growth Mr. Cardiff mentions.

Arising from Deputy Edward O'Keeffe's questions, when did the Department become aware of the "bed and breakfast" loans between Irish Life & Permanent and Anglo Irish Bank, and the deals that were done with the golden circle? When did the Department become aware of the shenanigans within Anglo Irish Bank and Irish Life & Permanent?

Mr. Kevin Cardiff

Just working backwards——

I should have said Irish Nationwide Building Society and Irish Life & Permanent.

Mr. Kevin Cardiff

Does the Chairman mean the loans to Mr. FitzPatrick?

Mr. Kevin Cardiff

We would have known about them, I think, in the context of the due diligence work we did. If the Chairman remembers, there was a proposal to make a capital injection into Anglo Irish Bank, which was in January 2009, I think. That information about Anglo Irish Bank and therefore about Irish Nationwide Building Society emerged then.

As Deputy Edward O'Keeffe said, people were talking about Anglo Irish Bank for a long time before things reached a crisis point. Were there any communications between the Department and the Financial Regulator? Did anybody in the Department raise concerns or questions with the regulator?

Mr. Kevin Cardiff

There was a lot of discussion throughout 2008 and even in the beginning of 2007 about issues regarding the liquidity of the banking system in general, of which Anglo Irish Bank was part. Obviously the Central Bank of Ireland and the regulator were keeping a close eye on their liquidity and were reporting back to the Department as part of our discussions on the overall picture and so forth. By the golden circle, I do not know if the Chairman means the people who bought out the——

I mean the ten people.

Mr. Kevin Cardiff

I presume it is the issue of the scale of investments. I do not want to get into talking about individuals unless the Chairman wants me to. Certainly the fact that there were issues about a large shareholding in Anglo Irish Bank would have been known to the Central Bank of Ireland and the regulator earlier that year. The Department would have been aware that the Central Bank of Ireland and the regulator were concerned with and looking at that issue. It would have become aware sometime in July 2008 that people had purchased some of that stake. It would not, obviously, have been aware of the details of that purchase. The concern that the regulator and Central Bank of Ireland would have had was not to do with the Anglo Irish Bank shareholders or any concern about the particular level of share prices in Anglo Irish Bank; it was more about whether an Irish institution would be less stable if these kinds of issues were arising around it and therefore they would have been concerned about the stability of the institution. The fact of the Anglo Irish Bank share price falling considerably in the period around March 2008 would also have been of concern to them. This might have been seen as a contributing factor.

What decisions were made, if any, as a result of those concerns?

Mr. Kevin Cardiff

Those decisions would have been regulatory decisions. The concern was that this stake by a single individual or set of interests was destabilising. I presume the regulator was closely monitoring and discussing with the institution what its response was going to be.

When did Mr. Neary resign?

Mr. Kevin Cardiff

I believe it was January 2009.

Did his financial package follow the Department's guidelines? Did he get just his legal rights or was there an embellished or "golden handshake" element to it?

Mr. Kevin Cardiff

As I recall it, his package was in line with whatever the pension arrangements were in the institution, but they were not sanctioned or agreed by the Department to the best of my recollection. This would have been a decision of the regulatory authority's board.

Would the Department not need to give its approval?

Mr. Kevin Cardiff

No, we did not in the particular legislative circumstances of that case.

It had no role. In Mr. Cardiff's view did the package meet the Department guidelines?

Mr. Kevin Cardiff

This is a person I worked closely with and I do not want to personalise it at all. Whatever the Chairman thinks about his performance and all the rest, there are pros and cons, let us say, and there are things one could say in his support also. That is just to get out of the way the fact that I knew him well and therefore——

The question is a simple one about meeting the Department guidelines.

What Mr. Cardiff is saying is beside the point.

Mr. Kevin Cardiff

I know it is beside the point, but I wanted to say it just the same, if the Deputy does not mind. The factual position is that there were no guidelines that applied from the Department of Finance to the Financial Regulator. The Financial Regulator made his own decision. In terms of the guidelines that would apply to a civil servant in similar circumstances, it certainly has happened in the past that civil servants in similar circumstances got similar packages. From recollection there was a cash element, which I am not sure would have been within the norm, but I would have to double check.

What was the total cost of the package?

Mr. Kevin Cardiff

I do not know. We answered that in parliamentary questions.

I would like to get the information.

Mr. Kevin Cardiff

There is no problem with that.

The question is simply whether it complied with the Department of Finance guidelines.

Mr. Kevin Cardiff

It was not required to comply with the Department of Finance guidelines.

I know it was not, but did it comply?

Mr. Kevin Cardiff

Does Mr. Connolly know?

Mr. Ciarán Connolly

No.

Mr. Kevin Cardiff

I will read out the information I have.

Mr. Ciarán Connolly

The Department of Finance had no role in the matter and therefore we would not have had standards in regard to it.

There are Department of Finance guidelines relating to pension and gratuities.

Mr. Kevin Cardiff

I know that. I am not trying to be evasive. I do not know his exact personal circumstances and therefore I do not know the exact number but in terms of the Department of Finance guidelines an early pension payment in such circumstances——

What we are concerned about is that any deal that was done would be seen as a reward for serious failure. The simple question is about the cost of the deal that was done with him and, second, whether it complied with existing Department of Finance guidelines even though, as Mr. Cardiff indicated, it was not subject to Department of Finance guidelines.

Mr. Kevin Cardiff

He got his pension plus a payment of an additional €151,000 which was six months' remuneration, plus an additional two months' salary which was due to his being required for a period.

Was it similar to the deal received by Mr. Rody Molloy?

Mr. Kevin Cardiff

Similar.

Does Mr. Cardiff see it as a reward for failure? I do, and the public would view it as an award for serious failure.

Mr. Kevin Cardiff

The Deputy can form his own conclusions. I do not see it so much as a reward for failure as a payment which the authority wanted to make to allow for changes in the management structures at the top. The authority would have had to judge the value of it in its terms.

Could Mr. Cardiff provide us with the overall cost of the total package?

Mr. Kevin Cardiff

I can certainly provide the Deputy with whatever information we have which is already in the public domain.

The Central Bank Act 1942 was amended several times before we changed it in 2002. That was a severe Act on the banking institutions. Mr. Neary was appointed as regulator and he came before meetings of the Joint Oireachtas Committee on Finance and the Public Service. It is easy to criticise the man and give out about him. I am not here to defend anyone but if he was to do anything drastic in the banking area he would have killed the Celtic tiger and all parties in the House would have been after him then. He did not have the tools to do the job. If one is carpentering without a hammer one cannot drive a nail. It is as simple as that. Let us be straight about it.

Mr. Cardiff has not convinced me in regard to the 30% discount for NAMA and where I thought we would settle. We are now at 50%. Where will existing funding come from to fund businesspeople and provide extra capital for the banks? There is an issue in that regard. Is that organisation working in the dark? Mr. Cardiff replied to me about the PwC audit. That investigation was not carried out in great depth. If it was done forensically it would have been much tighter. I remain confused on the issue and do not know what to say to my constituents and the people.

I support the Cathaoirleach's call for information on the former Governor of the Central Bank, Mr. Hurley. It would be important for us to get information on the package he received also.

A political point was made. We are 12 good men and women and true from all parties on the Committee of Public Accounts. The changes in the Central Bank administration separating the regulator from the Central Bank was something to which I and my party were opposed and for which we are now paying a bitter price. That is a fundamental point.

That is a policy issue.

I accept that. We must receive information on Mr. Hurley's package also.

I welcome Mr. Cardiff and his colleagues. I was a little bit taken aback last night when I read Mr. Cardiff's opening statement. The comment on the first page is that the role of the Department is to advise the Minister and Government on economic, financial and fiscal issues and to implement Government policy. In other words, we work for the Minister and the Government. Surely the Department has a much broader remit than that. As Accounting Officer within the Department I presume Mr. Cardiff's job is to work for the public interest to ensure value for money, protect the public purse and provide advice in the public interest. I do not know if that is an ethos that underlines the approach taken by senior people within the Department of Finance.

Following on from that, in the past two weeks I tabled a parliamentary question to the Minister for Finance, to which I received a political answer rather than a factual answer, which very much seemed to tie in with the approach that the role of the Department is to work for the Minister and the Government. I would like to hear Mr. Cardiff's views on that matter.

Mr. Kevin Cardiff

I will give my views. The reason I put that in is because the suggestion is going about that we should almost stand entirely separate from the Minister; that there would be a Department of Finance here and a Minister there and the advice would almost be a formal interaction where the Department would send the Minister advice and the Minister would consider it and say whether he agreed or disagreed. He would send his position back and the Department would hold up a sign saying the Minister agreed or disagreed.

I am not suggesting that. In summing up the role of the Department Mr. Cardiff said that it works for the Minister and the Government.

Mr. Kevin Cardiff

How Deputy Shortall characterised the wider interest is something with which I do not agree. I am wholeheartedly behind it. Our role and function is all about serving the public interest and doing that to the best of our ability. It is not about serving party interests.

The role of Accounting Officer is different. He or she must account for what the Department has done and how it has used its funds and provided value for money. In terms of the policy role, we are part of the Executive arm and our line of reporting is through the Minister and the Government and to the Oireachtas in that sense.

In terms of the parliamentary question to the Department, it was brought to the attention of my office and I considered it. I agreed with Deputy Shortall that it was not the full answer and a revised letter providing a fuller answer was sent by me within, I hope, 24 hours. In the normal course of events the replies are made by the Minister who is personally responsible for almost every answer but given the sheer volume of parliamentary questions to be answered in written form the vast bulk of the replies are drafted by civil servants.

Who clears them if they are not cleared by the Minister?

Mr. Kevin Cardiff

In the normal course of events it is up to the Minister to decide how he wants the replies to be cleared. Each question would be seen by a senior official before it goes to the Minister. In that instance we could have done better.

I do not wish to dwell on that matter especially. I am just saying that it is very much in line with the point Mr. Cardiff made that it is his job to work for the Minister and the Government.

Mr. Kevin Cardiff

If a Minister took a different line on a parliamentary question to the Department it would be the Minister's answer. There could be hundreds of parliamentary questions awaiting written answers in any given month and therefore——

The initial reply was very much to protect the Minister and not to provide a factual answer. The Accounting Officer is attending today as Accounting Officer for the Department of Finance.

Mr. Kevin Cardiff

For the Department.

Mr. Cardiff was called here today to answer questions based on his role as Accounting Officer.

Mr. Kevin Cardiff

That is exactly right.

It is a little bit surprising that he describes his job as working for the Minister and the Government.

Mr. Kevin Cardiff

I will try to carry out my role in the spirit of the way in which I dealt with that question. If we have been insufficiently responsive or have not done the job we wanted to do, we will try to correct that immediately.

Okay. I am just saying it is extraordinary that Mr. Cardiff, as Accounting Officer responsible for the performance of the Department of Finance, the senior Department in Government, appears before us and describes his job as working for the Minister and the Government. The members of the committee regard the Accounting Officer as having a much wider remit. The description given does not fit Mr. Cardiff's role and I am concerned it is how he sees his role, given that he offered such a description in his opening statement.

Mr. Kevin Cardiff

The Deputy need not be concerned.

I am concerned that he said in his opening statement that his role was as I described.

Mr. Kevin Cardiff

I gave the Deputy the context. I hope there will be no packages for me and that the Deputy will be having this discussion with me next year. She will have a year in which to monitor how I perform in my role. I do not believe there will be an issue.

I understand that Mr. Cardiff has considerable experience in the Department of Finance. From his statement and response to questions so far at this meeting, it is evident that one could sum up the response of the Department to the banking crisis and property collapse as, "mea culpa”. Given the scale of the calamity facing the country and the fact that future generations will be paying for the mistakes made, that kind of response is wholly inadequate. This committee and the public are entitled to more information on the precise role the Department played in recent years in overseeing the performance of the economy and providing adequate advice to the Government on developments in the economy in order to avoid the kind of catastrophic collapse that has affected the country. I would like Mr. Cardiff to be a bit more specific on the work the Department has been doing in recent years. I would like him to tell us about the early warning systems that are in place. What information was at the Department’s disposal on the overheating of the property market and the consequent collapse of the banking system?

What is the exact role of the Department of Finance in respect of the Central Bank and Financial Regulator? How is it represented on the board? Who has represented the Department in recent years on the board of the Central Bank and what reports were brought back to the Department from that body?

Mr. Kevin Cardiff

I shall answer the questions in reverse order. Legislatively, the Secretary General of the day is a member of the board of the Central Bank. That would have meant my predecessor, his predecessor and so forth were on the board. The Secretary General is not a member of the board of the Financial Regulator. In that sort of structure, the Secretary General would be privy to the discussions of the board of the Central Bank but not of the regulatory structure below it. Of late, and in preparation for the Government's intended changes to the board structure, the two boards have been meeting together. This is to allow for greater co-ordination.

I am talking about the period 2006 to 2008.

Mr. Kevin Cardiff

In that period, the Secretary General of the Department was on the Central Bank board but did not have a role on the board of the Financial Regulator.

How far back did Mr. Doyle go?

Mr. Kevin Cardiff

I think it was about 2006, prior to Mr. Considine.

What was the process involved? Mr. Doyle was privy to the discussions and debate on what was happening the banks and property market. What was the reporting mechanism and what was done with the information when he brought it back to the Department?

Mr. Kevin Cardiff

His role was sort of personal. In other words, no other official of the Department was a member of the board. He was present in a personal capacity and obviously he would have had to have been careful about sharing with the Department information he received confidentially from the board. He would have been able to bring back to the Department his sense of how economies and the Irish economy were developing. There would have been, at any given moment, a fair degree of cross-talking with the Department on both economic and financial matters. I do not believe the Department would ever, in regard to major matters, be particularly ignorant about the thinking of the Central Bank on the development of the economy in general. There would be a fair degree of talking on that matter.

There is a lot of contact. The Secretary General is not the only point of contact and there is a lot of contact below that position. The Secretary General is a board member and can share with the Department the general trend and tone of developments but would not be entitled to share every confidential piece of information. The latter would refer mostly to individual institutions rather than to matters concerning the general tone and tenor of the economy.

Were written reports provided?

Mr. Kevin Cardiff

From my experience, board members get papers. On the general economy, most of the papers the board members would get would be found, in some form or another, in the published documents of the Central Bank. The Central Bank publishes four reports per year. One is an annual report and one incorporates financial stability reports. There would have been a financial stability report for, say, 2007 that would have stated that while the risks to the economy or to financial stability had increased, banks and so forth appeared to be sufficiently resilient to deal with them or anything else that might arise. One would have talked about the potential downturn in the property market as one of the increasing risks.

Are the reports that would have been provided for board members of the Central Bank subject to freedom of information legislation?

Mr. Kevin Cardiff

The Central Bank does not come under freedom of information legislation.

I refer also to documents in the possession of the Secretary General of the Department of Finance.

Mr. Kevin Cardiff

No, because he receives them as a member of the board. I can give the Deputy a reference number.

The Comptroller and Auditor General, in his opening remarks, referred to the domestic standing group which I understand was set up in 2006. Its purpose was to provide a forum to exchange information relevant to financial stability and develop a framework aimed at managing potential systemic crises. Membership of this group comprised the Central Bank, the Financial Regulator and the Department of Finance. Can Mr. Cardiff tell us about that group? From reading the report of the Comptroller and Auditor General, one would imagine the group comprised the early warning system that was in place. Who was the Department's representative on the domestic standing group? What kinds of reports were sent to Mr. Cardiff on its meetings?

Mr. Kevin Cardiff

A typical meeting of the domestic standing group would have had an assistant secretary as the representative of the Department of Finance.

Who was that person?

Mr. Kevin Cardiff

It was probably Mr. Beausang.

Mr. Kevin Cardiff

Mr. Beausang would have been the person at most of the meetings. The group would also have comprised similarly senior people from the Financial Regulator. It mutated over time because, by the period 2008 to 2009, meetings between the Central Bank, the Department and the National Treasury Management Agency were super-domestic standing group meetings in the sense that they would very often have included more senior people or would have happened much more regularly than in other periods. Meetings were happening every day or even twice a day. They were under the general ambit of arrangements that had been made for the exchange of information between institutions. The domestic standing group, established in 2006, met more frequently in 2007. This was a response to both stresses in the domestic market and an EU requirement.

What records were kept of that group's meetings?

Mr. Kevin Cardiff

I will have to check for the Deputy. There were other minutes of meetings and so forth that took place.

Can they be made available to the committee?

Mr. Kevin Cardiff

They can be requested under freedom of information legislation.

I did not ask Mr. Cardiff that. I asked if they could be made available to the committee.

Mr. Kevin Cardiff

I will look into it.

The impetus for this was that there should be greater contingency planning for financial stability. The impetus was partly domestic and partly from EU level where there was an identification of the need for member states to strengthen their contingency planning arrangements. This was driven, in particular, on account of the risk of threat to the stability of cross-border institutions. It allowed a certain amount of work to be done about the exchange of information on individual institutions.

Was Mr. Beausang an assistant secretary?

Mr. Kevin Cardiff

Yes.

The main risk that was informing this work was the concern that an unexpected problem in a large single institution could trigger a systemic problem. In 2008, the focus became much more that the whole financial sector would become seriously stressed, which is what happened in practice.

In summer of 2008 the European Central Bank's regulators and Finance Ministers agreed a memorandum of understanding for cross-border financial stability planning.

Okay but I did not ask Mr. Cardiff about this.

Was Mr. Beausang the Department's representative on that committee from its inception?

Mr. Kevin Cardiff

I believe so.

Mr. Kevin Cardiff

The committee does not meet formally in the same way as it did because we were having so many other meetings. He still would be on the committee.

Did Mr. Beausang provide formal reports to the senior management team in the Department?

Mr. Kevin Cardiff

Yes, he certainly reported back to senior management and the Minister.

There was an early warning system in place then.

Mr. Kevin Cardiff

There was. it was important in 2007 and 2008, in particular, because it allowed us to prepare legislation for crisis management.

Before 2008, how did the Department respond to the information coming back from that group?

Mr. Kevin Cardiff

The Department was engaging in contingency planning during that time. For example, there was an EU-wide simulation exercise in how individual and collective member states would deal with a particular crisis.

Yes, but I am concerned about the domestic standing group and the information that was fed back to the Department about the domestic situation.

Mr. Kevin Cardiff

Yes, that is what I am trying to address.

For example, I presume the Department was receiving good intelligence on the overheating of the housing market.

Mr. Kevin Cardiff

No, I do not believe that was discussed. Mostly, what was discussed was how individual issues of stability in individual institutions might be dealt with. In the middle of 2007 and after, the focus of discussions became the liquidity of the financial system in general on how that was impacting or might impact on individual institutions.

I would assume what was happening in the housing market was a major issue for the group.

Mr. Kevin Cardiff

I honestly do not believe what was happening in the housing market, per se, was a major focus of discussion in that group. The main focus is what was happening to financial liquidity in the markets.

It is extraordinary that this group was not monitoring and reporting back on concerns about what was happening in the housing market. It was a key factor in all of this.

Mr. Kevin Cardiff

It was not the key focus because the group was established with the intent of dealing with financial institutions getting into difficulty.

It is extraordinary when one considers an OECD report in 2006 expressed concerns about an overheated housing market. Was this report and its impact on the banking sector and the wider economy ever discussed by the group?

Mr. Kevin Cardiff

I will check back to see if it was discussed by the group. The focus of this particular group was on the impact of financial institution events and how they would be managed. There was a European concern that issues in an individual institution could have a cross-border or Internal Market contagion factor.

The first question that comes to mind when an OECD report with concerns about the property market is released, is whether the banking institutions are exposed.

Mr. Kevin Cardiff

Yes. The financial stability and regulatory system were dealt with in the Central Bank structure through its financial stability reports. A financial stability report for 2007 noted the overall risks in the system had increased. A large part was driven by the sub-prime crisis but there were also risks from property and so forth. The report presented a picture that was, as it turned out, over optimistic about a set of institutions that might be subject to adverse movements in property and sub-prime but were sufficiently resilient to deal with them.

It is important we get information on what type of issues were discussed at these meetings, what reporting back systems were in place in the Department and what the reports contained. It stands to reason that anyone with any knowledge of the economy would have drawn attention to what was happening in the property market and the banks' overexposure.

Mr. Kevin Cardiff

I will send the committee a letter on this.

Was there correspondence from the Department of the Environment, Heritage and Local Government about its concerns about the property market between 2006 and 2008?

Mr. Kevin Cardiff

I do not believe there was much correspondence from the Department on this matter.

Mr. Donal McNally

There were a number of actions which we took during that period to cool down the market without precipitating a crash. If we could have engineered a soft landing, we would have. The Bacon report, which sought to cool the market, brought in a tax on second homes and got rid of investor reliefs.

Sorry, but those recommendations were ignored.

Mr. Donal McNally

No, they were implemented. The Deputy's party voted for them; therefore, they were not ignored.

I am asking about the tax relief for investment properties.

Mr. Donal McNally

There was a cut at the time.

There was, but it did not go as far as the Bacon report had recommended.

Mr. Donal McNally

I believe it did.

I thought he said that tax relief for investment property should be eliminated.

Mr. Donal McNally

To the best of my knowledge, that was done and the Bacon report was acted on. It was not welcomed by the people who thought the Department did not know anything about property. We also conducted an analysis in tandem with the Department of the Environment, Heritage and Local Government on the property tax reliefs and sought to phase those out over the period 2005 to 2008. We did so by reducing them from €100 to €50 to €25. If we had got rid of them in one go, it might have precipitated what we were trying to avoid.

We also gave strong advice to the Government in 2006 not to cut stamp duty despite the clamour from various areas because we saw that the market was cooling down and to cut stamp duty might just ignite matters. We tried to take a fairly modest view on capital gains tax and stamp duty receipts when others were saying we were going to get them and our forecasts were too much on the low side. We were trying to bring about a phased reduction. There was a realisation that houses could not continue to be built at the rate of 90,000 per year, and one could not keep getting CGT receipts for selling the same asset. The question was, however, when this would happen. What happened was certainly far more abrupt than was anticipated.

It was inevitable it was going to happen and that it was going to crash.

Mr. Donal McNally

If the natural demand level is 40,000 to 50,000, one cannot keep building 90,000 a year for a protracted period.

It went up for two or three years.

Mr. Donal McNally

It went up to 70,000 or 80,000. The general demographic analysis done by the ESRI suggested 60,000 to 65,000 a year. It had been at around 40,000 for a long time. Even we would have recognised that once a lot of houses are built, the scope for building more cannot be ongoing.

Are we using the bulldozer now?

At what point was the Government advised that serious action needed to be taken to cool down the property market?

Mr. Donal McNally

We would have done this in 2000-01 on foot of the Bacon study which was brought in to try to cool things down and also to rebalance the investment for the first-time buyer.

At what point was the mortgage interest relief reduced for investment property?

Mr. Donal McNally

It was cut at around the time of the Bacon report, in 2000-01.

The Department continued to allow tax relief, however, for investment properties.

Mr. Donal McNally

It may have been restored, but it was cut at the time.

It continues to this day, does it not?

Mr. Donal McNally

There is a cut in it now, for the moment. I believe it has been reduced by 25%.

That was not sufficient to cool down the market.

Mr. Kevin Cardiff

Some policy decisions were taken, but I am not sure whether we are entitled to go into that matter.

I would like the Secretary General to tell the committee whether those policy decisions were consistent with the advice the Department was providing. I am not asking about policy decisions, rather about the advice the Department provided.

Mr. Kevin Cardiff

I appreciate that, but in effect the Deputy is asking us to comment on the merits of policy being administered and——

No, I am asking the Secretary General about his stewardship within the Department and what advice he provided to cool down the housing market.

Mr. Kevin Cardiff

I believe the Deputy can see from the tenor of what has just been said that we had tried to be a cautious adviser at all stages throughout the process. However, when the crisis happened, we went from 90,000 houses per annum into a steep decline, and it is expected that 12,000 will be built this year.

That is not as a result of policy decisions or advice that was given but rather because the market collapsed. Why did it get to a point that the market was so over-heated?

Mr. Kevin Cardiff

The advice and expectation from ourselves and others would not have foreseen a switch from 90,000 to 12,000. Obviously, we would have been advising that in the round, 90,000 was too much and the level of natural demand, as estimated by the ESRI, was about 60,000. Therefore, there had to be a correction that would bring the figure into line with that natural demographic amount. The fact that this demographic was supported by outward migration and so forth meant it would be even less.

It was a pyramid scheme, really, was it not?

Mr. Kevin Cardiff

It certainly was unsustainable, but I do not believe anyone either in the Department of Finance or more generally said that 90,000 houses a year was sustainable, nor was that built into expectations.

There is no evidence available to me to suggest the Department of Finance was saying to Government this had to stop and had to be cooled down because the figure of 90,000 houses a year was not sustainable. Surely it was the responsibility of the Department of Finance, as the senior Department, to be urging that change in policy in order that we did not face the ultimate collapse that occurred.

Mr. Kevin Cardiff

I believe we were advising Ministers that the property market was unlikely to continue at its current level and was likely to turn down. However, it was not our advice and neither was it the belief of most other commentators that the turn down would be on the scale that arose. Built into our valuation figures for budgetary purposes and all the rest would have been, for example, a lesser expectation of returns from property because we did not believe the market could continue at the level it was at. Therefore, it would not have been wise in any given year to assume that level of ongoing activity.

Was it just a case of hoping it would be a soft landing rather than providing advice to ensure this would happen?

Mr. Kevin Cardiff

That is probably too simplistic.

If it is too simplistic, can the Secretary General inform the committee of what action he took and what advice he provided?

Mr. Kevin Cardiff

The expectation was that the overall economic situation was such that the property market would naturally reach limits that would bring it back more towards its normal level. In the event, this would have achieved something of a soft landing, but that did not happen. Had we envisaged a much harder landing, the advice would have been different, but we also had to advise that it was important not to continue to stoke the housing market and that careful and prudent taxation decisions had to be made to avoid this.

I would have thought that the role of the Department of Finance was to provide policy advice to ensure we did not have massive shocks such as the collapse of the housing market and that officials would have been working overtime to have policy decisions taken to ensure to the greatest possible extent that we would have a soft landing. Nothing I have heard would suggest the Department was doing that.

I shall leave it there in relation to the property market. I want to move on to the situation in the banks. In the lead-up to the St. Patrick's Day massacre, 17 March 2008, where the Anglo Irish Bank share price collapsed, what information did the Department have on what was happening within Anglo Irish Bank at that stage? Had it been forewarned of the prospect of the collapse we witnessed on St. Patrick's Day?

Mr. Kevin Cardiff

No, we had not.

Who was providing the Department with information on what was going on in Anglo Irish Bank?

Mr. Kevin Cardiff

Our only source of information on that would have been the Financial Regulator in the Central Bank.

The Secretary General is saying it was a complete surprise to the Department of Finance when the Anglo Irish Bank share price collapsed, given this was after what had happened in Bear Stearns. Was this a shock to the Secretary General?

Mr. Kevin Cardiff

It was neither a shock nor a complete surprise that this particular institution would be singled out by the market and would take a significant stock market hit. The overall trajectory of bank share prices was downwards. We were not aware of a specific reason on 17 March that Anglo Irish Bank would collapse more than others. There was an unease about the fact that a single individual or set of interests appeared to have a significant stake in Anglo Irish Bank and there was a suggestion at the time that speculators might try to target that interest. In other words, they might take a view on the ability of that interest to sustain its position and to increase the market pressure to see if that could be broken. However, there was no specific piece of information that led us to believe that there was a likely hit of that kind on that day.

Did the Department receive anything from the Financial Regulator that would indicate that this was a likely event?

Mr. Kevin Cardiff

Not to the best of my recollection. The event on that day was not so much the issue as the general trend in liquidity, the interest in bank stocks and so on. While things looked very dramatic on the day, it was a relatively mild forerunner when compared with what happened over the year.

What figures were available to the Department in September 2008 on the value of the guaranteed liabilities?

Mr. Kevin Cardiff

We had a picture of the value of the assets in the financial institutions that were being guaranteed.

What would the Department's estimate have been at that stage?

Mr. Kevin Cardiff

It was around €440 billion.

That was the figure that came out afterwards. Was Mr. Cardiff aware of the scale of the liabilities at that point when the guarantee was given?

Mr. Kevin Cardiff

We were aware of the balance sheets of the banks and, therefore, the scale of the liability if we were to guarantee them all. We were not aware of the scale of the losses within the institutions that emerged later. There was no figure available which pointed to the likely losses of any given institution at a given time.

The Department must have had some kind of estimate of what was involved.

Mr. Kevin Cardiff

We had an estimate of the scale of the guarantee and we had an assessment from the Financial Regulator and the Central Bank that the institutions were broadly solvent and that the guarantee would not be called upon, which, thankfully, it has not.

What way is the Department organised in respect of banking expertise? Does it have a banking unit? How was it in 2008?

Mr. Kevin Cardiff

In 2008 we had a small group of people working on preparatory legislation with the Central Bank, the Financial Regulator and the NTMA.

What was the level of expertise within that group?

Mr. Kevin Cardiff

They were not banking experts. They were not trained in banking per se. They were very good general civil servants but general civil servants all the same. They had access to the information and expertise of the Financial Regulator, the Central Bank and the NTMA on particular issues. They had access to what was emerging from Europe on contingency planning and so on. They were developing legislation to prepare for a contingency.

After the guarantee in September 2008 and as more information emerged, we moved a considerable number of staff from other work into the banking area to cope with the guarantee legislation and its implications, and we moved to beef up the broader policy advice area. We relied for specialist advice on the NTMA and we brought in advice from Merrill Lynch and others. The Financial Regulator was buying in advice from accountants and we were using lawyers and so on. Therefore, there was a considerable increase in the resources available to deal with the crisis.

What expertise existed in the Department in respect of professional qualifications or experience in banking?

Mr. Kevin Cardiff

The departmental officials in the banking area were mostly general civil servants assigned to the work. They learned on the job and would have had the advice from the regulatory officials at meetings they had to attend. A large part of the work the unit was doing before the crisis was related to negotiating and transposing European legislation into Irish law. Owing to that work they were doing they were exposed considerably to the banking and financial system and the various issues that arose. However, there was a significant amount of relevant education in that group, but they were not trained bankers.

I am not trying to be wise after the event.

Mr. Kevin Cardiff

I realise that.

However, would Mr. Cardiff accept that it was a significant weakness not to have had any specialist expertise available among his staff, someone who really knew something about banking? If the Department had an oversight role on the Central Bank, the Financial Regulator and what was happening throughout the country in banking, surely there was a need for that expertise on an ongoing basis.

Mr. Kevin Cardiff

I appreciate the spirit in which the Deputy is asking the question. In retrospect, it would have been better had we been less reliant on other sources and more reliant on internal resources.

Does this not raise the whole question about modernisation within the Civil Service and the urgent need for reform? Who in the Department is responsible for public service reform?

Mr. Kevin Cardiff

I am responsible as secretary and Mr. Ciarán Connolly is also involved in that division. The Deputy is correct. All this ties directly into the issue of public sector reform because the issue of the balance of skills in the Civil Service is not just for the Department of Finance but for every Department. It is a considerable issue. We were discussing it earlier in the context of the Molloy articles and so on. I do not disagree with the diagnosis that we need a greater internal reliance on specialist skills. The generalist system has some real strengths that we should not throw out, including the fact that we can take a group of people from one place and move them to another place. They respond very well to that and they do good work. A core piece of specialist expertise is important within that, however, which is clearly one of the issues we have to confront.

It is a bit like draining the Shannon. Everyone talks about public service reform, yet we have seen very little action.

Mr. Kevin Cardiff

It is very frustrating for people working in the public service as well as for politicians.

The Department of Finance is responsible for public service reform. Can Mr. Cardiff provide any grounds for confidence that it is going to happen?

Mr. Kevin Cardiff

There is a great deal of work on it that should lead to real results. I will ask Mr. Connolly to discuss that matter shortly. We are working with the Department of the Taoiseach to transform the public service agenda, which is very important work. The weaknesses we have exhibited need to be addressed, as do the weaknesses exhibited beyond Departments. We are working towards this.

There is no great evidence of an appetite to do that or of anybody leading the charge. What is the situation in regard to people coming in from the outside? In addition to the need for better academic qualifications, there is the question of the need to bring in people who are the best and the brightest in the private sector. There is also the importance of having private sector experience and making that available to the public service. What is the situation in regard to people being recruited from outside?

Mr. Ciarán Connolly

As the Deputy will appreciate, the position on recruitment at certain levels is a matter for negotiation with the public service unions.

I know that. I asked what is the situation. Is there a percentage of promotional posts?

Mr. Ciarán Connolly

Yes, there is.

What is that percentage?

Mr. Ciarán Connolly

It is just over 20% for all grades up to principal officer. The ratio varies between grades because of the cascade effect if there are promotions at a higher level.

What about the situation above principal officer level?

Mr. Ciarán Connolly

The current practice, which has been in place for a couple of years, is that all competitions are open competitions.

Has the 20% figure been achieved?

Mr. Ciarán Connolly

It has. That is the proportion being filled by open competition.

Has that been achieved in each Department?

Mr. Ciarán Connolly

It is the proportion that has been put out to open competition. The Deputy must bear in mind that for open competitions, serving public servants are eligible to apply like everyone else. Not surprisingly, they tend to be quite successful in those competitions.

From that 20%, what percentage of people coming from the outside into the service were successful?

Mr. Ciarán Connolly

I do not regard the number who come from the outside as the measure of success.

I did not say that. I just asked for the figure.

Mr. Ciarán Connolly

I do not have that figure but we can get it for the Deputy.

Do we have any idea of the extent to which we are bringing outside expertise into the Civil Service?

Mr. Ciarán Connolly

It is significant enough, although I do not have a precise figure.

As Mr. Connolly is the person responsible for public service reform, it is important this figure would be available. Are we achieving any kind of target figure in terms of bringing outside expertise into the service?

Mr. Ciarán Connolly

Yes, we are. I do not have the figures in front of me.

Given that, how does Mr. Connolly know the position?

Mr. Ciarán Connolly

I have seen the figures previously, although I cannot remember them precisely.

Can Mr. Connolly make them available to members?

Mr. Ciarán Connolly

Yes. To add to that, a feature of the system is that within the open recruitment process, we try to target specific skills, for example, in regard to financial management, information technology and so forth, although we also have generalist open competitions as a subset of this.

We would appreciate it if Mr. Connolly would provide the figures. I request that the committee would be provided with a list of all the consultancies that have been employed in regard to both banking and the housing market in the past three or four years, with details of the cost of each consultancy.

Will that be provided?

Mr. Kevin Cardiff

Yes.

Mr. Molloy was referred to earlier and he was fairly harsh in his comments on the performance of the Department. I will not quote him fully as I do not want to rub salt into the wounds. Has a review been carried out within the Department on the issues that have been raised arising from the property bubble and the collapse of the banking system?

Mr. Kevin Cardiff

We carried out a capacity review in 2008 which was published in 2009 but it was almost immediately outdated by events. There has not been a further review. We will be undertaking one but I am sure we will also be subject to the close attention of any banking inquiry.

We cannot have gone through the experience we have gone through and not stopped to consider very carefully what it means for the institution in which we work, its skills, its broad expertise and its position within the overall system. That will be happening but, up to now, we have been running to keep up with the situation as it has unfolded. A review has not taken place as yet but it will happen.

Deputy Shortall's last question was on consultancies. No proper tendering was in place for the appointment of consultants. Arthur Cox, PricewaterhouseCoopers, Merrill Lynch and Jones Lang LaSalle were mentioned. The NTMA told the committee that Merrill Lynch was the only one which could advise because any other realistic candidate was ruled out. Did Arthur Cox send PricewaterhouseCoopers to work for any covered institution?

Mr. Kevin Cardiff

I have no doubt it did, and it would not be a surprise. If one considers the number of law firms around the system and the big four accountancy firms, I am sure they do and have done that. We have seen examples of it and it is obviously an issue we are careful about. We have seen no examples of situations where we think the access to the officials has been abused.

Is it open to all?

Mr. Kevin Cardiff

When we tender, the tenders are open to all. For example, the tender which brought in Rothschild as our advisers instead of Merrill Lynch was open to all. It was done by the NTMA rather than the Department but I imagine both domestic and foreign institutions applied for it. There were also tenders for work around the system in terms of due diligence work on institutions. Even where an Irish firm got that work, it would have been open to firms from abroad.

On the initial Arthur Cox contract, we wanted a particular expertise in Irish law because there is so much Irish law to be changed and adjusted in the context of the guarantee and so on. We did not play favourites, however. We chose a firm which we thought would be expert in that context. It was done in the context of the urgency of the situation. Where situations have been less urgent, there has been proper tendering.

How many checks does the Department do in regard to conflicts of interest?

Mr. Kevin Cardiff

Within the contract, there is an expectation they will declare conflicts of interest. We are very sensitive to this issue but there is no easy way. We are not sitting within Arthur Cox ensuring each individual lawyer does not talk to another individual lawyer who has done work for a bank.

Are there Chinese walls?

Mr. Kevin Cardiff

There are. In the end, we are dependent on the professional ethics of the people concerned. If we see any instances of concern, we would immediately react to them. It occurred in regard to one NTMA contract that a published report of an organisation which was doing work for us had figures that were strikingly similar to figures we had internally. The NTMA chased that a considerable distance to ensure it was just a coincidence and not an inappropriate sharing of information within the organisation. As it turned out, the coincidence arose because a person who was not privy to our data got his figures mixed up and these figures just happened to coincide with our figures.

What legal expertise is there within the Department?

Mr. Kevin Cardiff

Apart from a smattering of people who have their own legal qualifications, in the Department we have an in-house barrister, a resident lawyer, if one likes, who has been provided for us by the Office of the Attorney General. The person concerned was heavily engaged with the banking legislation, as well as the NAMA legislation as it progressed. We still rely a lot on the Office of the Attorney General, but having someone in-house, as Deputy Fleming noted, adds to the speed and quality of response.

Before calling Deputy Broughan, I have one further question on the effectiveness of the auditors. I refer specifically to the auditors for the Irish Nationwide Building Society and Anglo Irish Bank. Does Mr. Cardiff have any views on their effectiveness? In view of his experiences, does he have a view on the need to change the regulations pertaining to auditors?

Mr. Kevin Cardiff

The experience is that just because accounts are audited does not mean they are right. Auditors will tell us that there are limitations in their work in what they can and cannot do, yet we, the regulatory system and so forth rely a lot on them. When I use the word "we", I do not mean the Department but the public system, shareholders and so on. They all rely a lot on audit results. I do not wish to draw too many conclusions from that, except that the manner in which audits clearly are retrospective and based on accounting standards which provide for snapshot rather than prospective figures has complicated matters.

Does Mr. Cardiff think the fact that auditors had monitored the figures over a period of years and yet detected no irregularities means there was negligence or incompetence?

Mr. Kevin Cardiff

I do not have the privilege afforded to the Chairman.

I return to the six or seven year period to September 2008. Mr. Cardiff reprimanded me for my reference to a Ponzi scheme. A Ponzi scheme operates when a small group of insiders with information are selling a product and when a lot of outsiders finally are left, as was the case with the original Ponzi scheme, holding the baby. The bottom line for my constituency is that thousands of young couples, in particular, have been left holding the baby and are in negative equity, with massive loans of €300,000, €400,000 and so on, on housing units that may be worth between €150,000 and €200,000. People are in dire straits and there is palpable anger in that regard and regarding the cuts totalling €4 billion made last year which have hamstrung so many families. People expect the Committee of Public Accounts to try to determine how it went wrong and what happened to the overarching invigilating agency — the Department of Finance.

I refer to the Max Watson and Klaus Regling report, as well as that of Professor Patrick Honohan, on the failure of the financial regulation and management system. Have they yet interviewed the senior members of the Department in this regard? I understand the aforementioned reports will be made available in four or five months' time. Have the interviews taken place? Have they asked for documents and so on?

Mr. Kevin Cardiff

To be clear, as the Deputy is aware, we are providing within the Vote for the expenses of the Regling and Watson study, but we have no input in what they decide to do. As a matter of fact, they have had discussions at least with officials of the Department of Finance. I know this because I am one of the persons with whom there have been such discussions. Professor Honohan has also had discussions with people from the Department of Finance, including me. That work is ongoing. I believe we have given papers to both groups, as requested. The timeframe of four or five months surprises me, as I would have thought or hoped they would be made available within four or five weeks at this stage.

It was stated in a recent media report the Regling report would be published in approximately four months.

Mr. Kevin Cardiff

From the point of view of supporting them with their administration and so forth, my information suggests they are getting much closer than that. In terms of the support we are providing for them, it suggests they are aiming to produce their report more or less on time. I know for a fact that they are aiming to produce on time, which would mean towards the end of this month or not too much later than this. As the Government has set it out, that is the first part of the process, to be followed by a more detailed process. This looks like a scoping process, but it is their investigation and I have been very careful not to be seen or to be involved in setting their direction. Obviously, the Minister, since he commissioned the work, wrote to Messrs Regling and Watson with a terms of reference letter which is available on their website, namely, www.bankinginquiry.gov.ie; therefore, it is available if the Deputy wishes to see it. Alternatively, we can forward it to him.

The Secretary General spoke at length about the domestic standing group just as I was obliged to leave for a vote. Unfortunately, there have been a few votes this morning. There was also a financial legislation advisory forum, of which I understand the managing director of Arthur Cox, Mr. Pádraig Ó Riordáin, was chairperson from late 2007 until last year when it appears the group disappeared from the face of the earth. It was charged with bringing to an end light touch regulation or bringing forward more comprehensive legislation in respect of financial management. I note, for example, that the forum included something like nine members of the property industry who were involved in property law, interrelated developers and so on. Was this not a case of asking the poachers to manage the river at the high point of the period in question? Incidentally, was Mr. Cardiff a member of the committee?

Mr. Kevin Cardiff

No, formally I was not a member of the committee. I do not believe nine members of the property industry were members of it. I would be very surprised if that was the case. It was a mixture of officials, consumer and industry interests. The basic brief was not so much to rewrite policy as to rewrite the legislation to make it more modern and usable. Obviously, nothing it would have done would have been done without the policy consideration of——

Why was the committee effectively abandoned last year? I acknowledge the legislation that will be brought before the House this week or whenever——

Mr. Kevin Cardiff

For the very simple reason that we were much too busy with the financial crisis to continue to service it.

I believe there were 23 members of the committee, only six of whom were from the Department of Finance. At least nine members were from business interests.

Mr. Kevin Cardiff

Yes, they were from business interests but not——

Mr. Kevin Cardiff

No.

While I do not wish to stray into the area of policy, the Taoiseach who then was Minister for Finance seemed to want to have the imprimatur of the property industry on the ultimate financial regulation.

I revert to the OECD report of 2006 and the Fitch Ratings report, to which the Chairman and I have referred previously. Obviously, many people have mixed feelings about rating agencies such as Moody's, Standard & Poor's and so on. My party and I have been critical of all of them. I refer to a famous Fitch Ratings report from 2006. A few weeks ago I read something written by Kathleen Barrington that reminded us at length that the report clearly stated Ireland would crash in flames, it was going down the tubes, we should get the fire engines out and that Ireland was in deep trouble. The Fitch report was in mid-2006. The OECD report apparently states something similar. The bottom line regarding that report is that the Department would have written it after telling the OECD's economists that this was the way Ireland was.

We need Mr. Doyle and his predecessor to revert to the committee if we are to examine the period in question. I congratulate Mr. Cardiff on his appointment.

Mr. Kevin Cardiff

I thank the Deputy.

As Mr. Cardiff knows, it is our job to ask the questions the public is asking. It seems that Mr. Doyle, his predecessor and everyone else in charge of the Central Bank and the regulatory system in any way must revert to the committee.

Did two external reports not claim that Ireland was in deep trouble, it had a property bubble and, like Finland, Sweden and Japan, it would go down the tubes? Did they not say that action needed to be taken? We did nothing. Is this not an indictment of the Department of Finance's failure in carrying out its raison d’être as the senior Department? Unfortunately, we must conclude that it is not fit for purpose.

Mr. Kevin Cardiff

Being fit for purpose is a continuous pursuit and we will build on and learn from the crisis. I share the Deputy's concern about its impact on people. I will not argue back and forth about performance, as it is such an important issue.

Could the Secretary General provide the committee with any documents relating to the Fitch and OECD reports? Yesterday and this morning I sought the Department's management committee's documents. In my previous party spokesman incarnations, a number of Departments such as the old Department of Communications, Marine and Natural Resources, following an initiative by the then Minister, Deputy Dermot Ahern, and his successor, the Minister, Deputy Noel Dempsey, used to have management committee minutes. I could find none from the Department of Finance. Why can we not have them to examine at least as far back as 2002, as the Chairman and the committee want to do, to determine how the situation went disastrously wrong? Is there a management committee?

Mr. Kevin Cardiff

Yes.

But it does not publish its minutes.

Mr. Kevin Cardiff

It does not. As to the Fitch report, Deputy Broughan mentioned the credit raters. We must remember that Ireland had an AAA credit rating during the period in question, which was only reduced following the crisis and the issues mentioned by people started to impact on the economy and the national finances. The Fitch report notwithstanding, there was not the general sense of an economy in deep trouble suggested by Deputy Broughan. In fact, the general sense was of an economy with a generally positive outlook with certain specific risks and a likely downturn in the property market. However, the depth and severity of the downturn was not predicted.

Regarding the general thrust of the Deputy's questions on skills, abilities and the role of the Department, he called us overarching as if we had control of everything. We do not. The Oireachtas, policy and so on have set up structures that, for example, keep particular institutions at arm's length from us for good reasons. It is not the case that we run the property market, the regulatory system or the economy as a whole. The function we perform is narrower than that, but the Deputy is right to state we ought and seek to have a broad outlook so as to use our influence to provide the right policy and structural advice.

The public would see the Department a certain way. Recently I reflected on the first meeting of Dáil Éireann in the Mansion House when Michael Collins was the Minister for Finance. The first action he took was to raise a loan for the young Republic, which was then about to start the real struggle for independence. Through the years, people have held that office and Mr. Cardiff's to be central roles.

For the past year or two I have been fed up reading many economists who, having previously worked in banks, are now lecturing us from the pages of daily newspapers about what occurred, what must be done, etc. A small cadre of academics and other economists, such as Professor Morgan Kelly, Dr. David McWilliams and so on, were shouting from the rooftops as far back as 2004 and 2005. One of the simple points made by David McWilliams, perhaps in 2005, was that an artisan's cottage in Rialto was worth more than a chateau in the Dordogne or the Auvergne. One wondered whether it could really have been the case that a nice little house in Rialto was worth so much more than a chateau with land and so on in a beautiful part of France. Was something not fundamentally wrong with this situation? Professor Kelly stated likewise again and again.

Is it not a fact that the Department was consistently warned? Some people who were cheerleaders at the time are trying to set up a system of cuts and a vicious retrenchment of the economy. I have the same opinion of them now as I did then. A cadre of good economists warned us, but the Department did not take them seriously.

Mr. Kevin Cardiff

They comprised a part of the range of opinion in the system at the time, but the consensus of opinion did not lie in that direction and was certainly not that extreme.

In Professor Kelly's lectures he made a point when examining the Finnish, Swedish, Japanese and a few other markets, namely, the uncanniness of the phases property prices had gone through before crashing. He was able to quote chapter and verse regarding the phases of our market. Was no one in the Department listening to him, reading from www.economics.ie or so on?

Mr. Kevin Cardiff

I need to read www.economics.ie to see what we are doing.

Mr. Kevin Cardiff

Those types of influence are part of a broader system and a part of what we listen to, but one is also listening to the consensus among official forecasters and so forth, which did not present us with the kind of outlook referred to by the Deputy. It may be a lesson, namely, that we need to be open to a broader range of debate and people. For what it is worth, we have already started taking some small action in this regard. We are opening ourselves to a broader range of economic interests and entering into low key discussions with the people involved so as to avoid relying solely on a set of six or eight official economic forecasting bodies.

I will not argue too much about our performance, but the perception of the Department is not always accurate. The Department is not an enormous organisation that dominates the Civil Service and the public service by having its people intrusively engage with each of those bodies. It comprises a small group of people with sub-groups examining particular sectors. There is a spread. For example, one could have a staff of hundreds in the Department of Health and Children dealing with the entire expenditure on health. I am not saying it is inappropriate but there is a corresponding staff of approximately six or eight in the Department of Finance. There is a similarly small group in my Department dealing with the expenditure related to the Department of the Environment, Heritage and Local Government. However, for financial regulation issues there is a larger group. Most of these staff are engaged in dealing with the legislative demands of the European system and so forth. The actual work in respect of actual sectors, whether regulatory or expenditure sectors, is done by the relevant bodies. The Department's method of operation has been on this leveraged basis. It operates a small group of people within the Department while the actual work and responsibility resides elsewhere.

Does the Department have a member on the Basel Committee?

Mr. Kevin Cardiff

No.

Have we ever been represented on it?

Mr. Kevin Cardiff

No.

I wish to put one brief question on this matter.

We are running out of time.

I realise this is a vast territory.

Mr. Kevin Cardiff

The Basel Committee is more or less the G20 group, of which we are not large enough to be a part.

Does it ever consult us?

Mr. Kevin Cardiff

No, it does not consult us directly but it consults the European Commission. It is important to realise that the Basel rules are translated into European rules through European directives and at that point we have an input.

I refer to Bank of Ireland. As commentators have noted recently, it is the one covered institution which seems to be escaping with non-majority State control. My view has been that the two leading systemic banks should have been nationalised.

However, I refer to the current situation. Has the Department carried out a full cost benefit analysis of the most recent arrangements? Mr. Cardiff referred to Richie Boucher going to the market desperately trying to keep State involvement at 35% or 36%. However, the upshot of it is that, as taxpayers, we will forego approximately €100 million of the €280 million promised yearly payments. I understand we will receive a once-off €500 million allocation. We have cancelled the right to buy ordinary shares. At a funeral last week, someone asked me what happened to the €4 billion in Anglo Irish Bank and how it was spent. I realise this is separate territory but I wish to pursue a similar line. I have examined the figures as best I can but many distinguished commentators have stated the case as well. The bottom line is most of the public would like to believe, despite what some people have said about dead money and so on, that we will get back every penny the banks have received. We want our money back from those banks.

Let us start with Bank of Ireland. Was that a good deal for the public? I have no wish to stray into the political area but has the Department organised things in a particular way? Has the Department agreed to a refinancing or recapitalisation of Bank of Ireland in such a way that the primary objective is to keep it independent rather than to protect the interests of the taxpayer, in other words, such that we will lose possibly billions in returns from Bank of Ireland because we are giving it such a sweetheart deal to keep it independent? The Comptroller and Auditor General will report to the committee on the matter. Bank of Ireland is the one bank which seems to have kept its old ways. Before 1942, it was our central bank but it appears to have kept its old culture. It is still there hanging on, perhaps by the fingernails. Are we giving it a sweetheart deal, which is not in the interests of the public?

Mr. Kevin Cardiff

I did not make the decision, but it is fairly clear from the figures that it is not a sweetheart deal. First, we retain a 36.5% stake in the bank. We will continue to hold approximately half of the preference share injection that we made last year. That preference share injection was at an interest rate of 8%. I am sure the bank did not especially wish it but as part of the deal the bank has agreed to pay us 10.25% instead of 8%. Also as part of the deal our warrants in the Bank of Ireland are retired. In other words, the bank must buy them back from us and we take the full value of the market increase in Bank of Ireland shares. That is where the €500 million comes from; it amounts to €500 million plus the extra coupon. Very importantly, as part of the restructuring deal the Commission has agreed to lift the fatwa — I am sure there is a better word — or at least the prohibition that resulted from its European law and State aid considerations on the payment of coupons on this debt. In a sense, we have taken our €500 million and banked it. We have a better chance of getting coupons on the preference shares issued and we have upped the applicable interest rate on those preference shares. The other preference shares are converted into ordinary equity, from which we take the benefit of the full equity return, which, presumably, over time will be positive.

I refer to the prudential capital assessment review which the Central Bank prepared. It gives us figures for each of the banks and covered institutions. Did the Department of Finance do any cost benefit analysis on this deal?

Mr. Kevin Cardiff

In the current disposition of work between the Department and the NTMA, the NTMA leads the negotiations with us at each meeting. The NTMA and the Department have been advised by Rothschild. It has been our financial advisers on the structure of the deal to ensure we get the best deal possible. I presume I can stray this far into the policy field. It was not the policy intention at any stage that Bank of Ireland or any other bank would be kept out of public hands by whatever means necessary; in fact, the opposite was the case.

Did we not agree to the appointment of Richie Boucher, who was the head of commercial property in the bank? Anyway, that is a matter of policy.

We are restrained for logistical reasons. Let us limit the discussion to one or two more questions.

Mr. Kevin Cardiff

Let us remember the period we have come through and the situation we were in. All decisions, even the supposedly relatively minor decisions such as CEO appointments and so on, carried particular risks and dangers. For example, in the case of AIB it took quite some time to find a new chief executive. In the case of Bank of Ireland the exit of the previous chief executive probably took place more quickly and in a less orderly fashion but perhaps there could have been risks with not having a chief executive in place relatively quickly. I do not wish to go into the decision but in terms of the public interest in these matters, there were pros and cons. It is fine to say one does not want X or Y in particular positions but there are continuity and security issues in terms of the safety of the system and they feature in such discussions and decision making.

As part of the process of developing the Bank of Ireland deal, commercial advice was given by Rothschild. Through the NTMA it advised the Minister that this was an appropriately good commercial deal. Reference was made to spreading the risks. The deal leaves the Minister with three or four avenues of advantage, rather than only having a preference share investment. The European Commission could object to the coupon being paid or it could prevail upon us not to have it paid. He has a better chance that this coupon will be paid and at a higher rate. Instead of relying on getting the coupon rate he now has a piece of the equity and instead of holding on to the warrants and hoping his stake in Bank of Ireland will improve on the basis of it, he now has a distribution between the equity investment, which is about the same as it would have been had he taken the warrants into account and the cash in hand from the other thing. It does not have the look of a bad commercial deal. Obviously, the Government would not be involved in any of these deals; it does not have an interest in being involved in the banking system as an investment partner but for the fact that the banking system has been fragile. In a sense, the fact of having one of the larger banks in broadly private ownership and the other potentially in more complete public ownership is a spreading of risk.

I ask Deputy Broughan to be brief for logistical reasons as we must leave the room.

We could ask similar questions about Anglo Irish Bank and the EBS. Nobody got a chance to air the EBS issues, the covered institutions and the period up to September 2008.

I wish to ask about one topic. Mr. Cardiff stated that ECOFIN stated no systemic bank in the EU should fail.

Mr. Kevin Cardiff

I was going from recollection but I believe in October 2008 a statement along those lines was issued.

It was about systemic banks.

I wish to speak briefly about Anglo Irish Bank because it is now a fully nationalised State company owned by the taxpayer. Approximately half of Anglo Irish Bank will go to NAMA. Has Mr. Cardiff done any assessment on what the haircut will be on the loans not being transferred? This will come up for discussion. Does Mr. Cardiff have a view on it?

Given that NAMA will take over most of Anglo Irish Bank's loans, inevitably some of the loans left in the bank will not be good performing loans. Will Mr. Cardiff agree that at this stage, whatever about in the past, nobody could state that Anglo Irish Bank is a systemic bank to the economy or would fit into the category discussed by ECOFIN in October 2008?

Mr. Kevin Cardiff

It is certainly not a bank that is doing any significant new lending into the economy, if that is Deputy Fleming's definition, and it is not important in the economy in terms of the payment system because it is not party to that. Going back to 2008 and why it was systemic, it was because of the implications for the broader system if it were not protected.

Is Mr. Cardiff stating that it was not systemic in its own right but because it could cause collateral damage to the system?

Mr. Kevin Cardiff

That is what systemic means to me. Everyone will have his or her own definition of it. In the midst of the worst moments of my career, I was not worried about whether Anglo Irish Bank would lend the following year, I was worried about whether the whole system would come crashing down, with Anglo Irish Bank being the first but not the only one. In that sense it was systemic and now, a year and a half on, we own this institution.

It remains systemic in the sense that it has systemic implications if it were to fail, which will not happen, or not be managed through its difficulties. If the suggestion is that there is a view or widely held belief that it is being supported because of its likely contribution to credit in the future, the cost benefit analysis on that would not stack up. It is being supported because it has had to be supported to ensure the safety and stability of the Irish financial and economic situation.

We nationalised Anglo Irish Bank in January 2009, approximately 15 months ago. It is a fully State-owned organisation. I must put it to Mr. Cardiff straight that I see him as the most senior civil servant in Ireland as the Secretary General of the Department of Finance. I am sure he will agree that when the Revenue Commissioners are owed money by an Irish taxpayer they send in the sheriff and that if a person has fraudulently claimed money from the Department of Social Protection he or she is prosecuted and appears before the courts. We had reports of a woman not paying a television licence appearing before the courts. Will Mr. Cardiff explain why, given that the Irish taxpayer owns Anglo Irish Bank in its entirety, that we have not had Seán FitzPatrick in court to pay the €70 million he owes the taxpayer? Part of the reason we have to put further money into Anglo Irish Bank is that the debts owed to it are not being paid. If they are not paid, the taxpayer will have to put more money into it.

The people of Ireland cannot understand why ordinary people are sent to jail and the sheriff comes after them, but the same action is not taken against a big guy owing €70 million to a fully State-owned institution.

That is a policy matter.

Mr. Kevin Cardiff

Perhaps I will stretch myself.

Does the Secretary General understand from where we are coming? The people cannot get their heads around why Seán FitzPatrick can swan around the world and still owe the taxpayer €70 million. I do not care if I upset the man and I would like him to come before the committee to contradict me. We are letting him away with it. People are in arrears in their loans and mortgages and we have spoken about sub-prime lending. We have all met victims of this in our clinics——

I do not know what I am to spare Deputy Shortall. I will not spare Seán FitzPatrick. If Deputy Shortall wants me to, I will not. I want to know——

Free reign for years.

——why in the past 15 months the people responsible for collecting that debt have not sought to bring that man to court to pay it?

Mr. Kevin Cardiff

The simple answer is that the management of the bank is responsible for chasing that debt and in fairness to them, those in management are chasing it. To the best of my knowledge they are actively chasing that debt and will continue to do so.

The more complicated answer is that while that institution is being run at arm's length by its board there is a framework agreement between the Minister and the board as to how it will be run with regard to certain matters that have to be referred back to him. The board cannot give up on this kind of debt; its members are not entitled to step back from that and state they will not chase Seán FitzPatrick. The board would have to get the permission of the Minister for any such action. No one is giving up on those loans, to the best of my knowledge, and I would be as equally worried about it as Deputy Fleming. They are trying to maximise their return.

Is the Secretary General telling me that we will have a negotiation, scheme or arrangement whereby he will offer 50%, like what is being offered to NAMA, and walk away from the taxpayer owing us €35 million and that somebody might accept this?

Mr. Kevin Cardiff

No, I am not telling the Deputy that. I am telling him that as far as I am aware — I think I would know if it was otherwise — the debt is being actively and fully pursued. It will not be my decision to give up on it. I would have thought it would be unlikely.

Briefly, to correct the record on mortgage interest relief, it was reintroduced in 2001 contrary to the Bacon recommendations. There is no question but that it stoked the property market as well as costing us approximately €800 million a year in tax spending. There are questions about the role of the Department in allowing that policy to continue and the contribution it made to the housing bubble.

I am interested to know the view of the Department on the phenomenon of 100% mortgages and on the ratio of income to mortgage granted and what action it took in that regard.

Mr. Kevin Cardiff

We did not have much of an input; it was matter for the regulator and I do not believe we ever stated to the regulator that we had a particular objection to it, except that obviously when it was raised from time to time by Ministers, the regulator would have been asked whether he was happy with where things were in this regard.

The Department did not have a view on it.

Mr. Kevin Cardiff

We did not ever have a formal Department of Finance view on it.

Surely alarm bells should have been ringing if this practice was ongoing.

Mr. Kevin Cardiff

In retrospect, we should think of the role of regulators and Departments and how they interact.

That is fine, but there are senior people paid from the public purse whose job it is to oversee these issues. There is much public concern about the fact that the same senior people remain in the banks who are responsible for this. In many ways, the same could be said about the Central Bank, Financial Regulator and the Department of Finance. There are questions to be answered.

With the seven institutions covered by the bank guarantee scheme, how much has been paid back to date to the Exchequer?

Mr. Kevin Cardiff

They are required to pay for the benefit of the guarantee. They paid €750 million up to now and there is another amount due before the end of the year. It will be more than €1 billion by then.

What was the amount?

Mr. Kevin Cardiff

It will be more than €1 billion.

What is the current position on the duration of the scheme?

Mr. Kevin Cardiff

Currently, the scheme is formally open until the end of September. That is under review.

It can continue for up to five years.

Mr. Kevin Cardiff

There are currently two schemes operating under the general umbrella of the guarantee. The original was the credit institutions (financial support) scheme and the second is the eligible liabilities guarantee scheme which allows for a further guarantee to extend, at a greater cost, to loans or debt issued now but which banks will not be due to repay for up to five years. That process is not open ended and must come to a close.

It is possible that people are looking at us but there is nothing that any depositor, debtor, creditor or anybody else needs to do on foot of this. Any change in the scheme will be pre-announced with plenty of time to act. There is no need for anybody to be concerned.

I thank the witnesses. I will ask Mr. Buckley to make his final comments.

Mr. John Buckley

The purpose of the bank stabilisation chapter was to look at how the Department and the State was responding to the issues arising from the crisis. Banks clearly have vulnerabilities, specifically that they tend to borrow short and lend long. The borrowing can be from depositors or by way of short-term debt. That is a clear vulnerability. A relatively small reduction in the value of assets would have a disproportionate effect on capital. The responses were aimed at those issues, with NAMA on the capital side and the guarantee and deposit protection measures to encourage the retention of funds.

All we can do in the next few years is catalogue the steps being taken as bank resolution is ongoing. There is a long way to go and it is far too early to evaluate the impact and effect. On an interim basis we can say that there has not been any disorderly failures in the Irish system and retail depositors in the system have not lost any money. There has been an interim containment but in the long term we will have to revisit the issue and lessons will be learned, as the Secretary General repeatedly noted in his contribution. The evaluations will be for another day.

I thank Mr. Buckley. Is it agreed that the committee note Vote 1 — President's Establishment and Vote 6 — Office of the Minister for Finance?

I think we should hold Vote 6 and chapter 7.

Yes. Will we note the remainder?

Does that mean we are holding Vote 6 and chapters 6 and 7?

No. We are holding Vote 6 and chapter 7. Does the Deputy wish to hold chapter 6 also?

Yes. It deals with European Union financial transactions.

We will hold Vote 6 and chapters 6 and 7.

Every member has been present for the meeting and I thank our officials for staying for such a long time. It can be tough to prepare for these meetings. Most of us only got through four or five questions out of 40. For example, we did not get to address the many institutions which affect so many of our citizens and on which there is State expenditure. I mentioned the EBS and so on. Will it be possible to have representatives from the Department back before the committee?

Yes, that is the plan. We will be requesting that the reports on the inquiry into the banking sector be referred to this committee in order that we can do a full report for Dáil Éireann on the issue.

Irrespective of what others are doing, we are doing our report.

We are doing a report and we decided earlier in private session to ask that the reports on the banking inquiry be referred to this committee so we can finalise our report. The regulator is appearing before the committee next week and we hope to have all the information available to us, coupled with the material we asked the Secretary General to provide for us. When we have all this we can prepare a report and present it to Dáil Éireann. The issue has been a disaster for this country, its people and the economy.

I thank Mr. Cardiff and his colleagues for their attendance at this fairly long session. We are not finished but the information we have received to date, as well as the information we requested, will help us to conclude our report. Next week, on Thursday, 13 May, we will examine special report No. 72 from the Comptroller and Auditor General dealing with the Financial Regulator's response to the financial market crisis.

The witnesses withdrew.

The committee adjourned at 2.25 p.m. until 10 a.m. on Thursday, 13 May 2010.
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