Chapter 6 — Banking Stabilisation Measures

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

Before commencing, I remind members and witnesses to turn off their mobile telephones, if possible.

We are considering the 2008 and 2009 annual reports of the Comptroller and Auditor General, chapter 7 — bank stabilisation measures 2008, resumed. As members know, we did not note that particular chapter at our last session. We are also considering chapter 6 of the 2009 report — banking stabilisation measures.

Before commencing, I advise witnesses that they are protected by absolute privilege in respect of the evidence they are to give this committee. If they are directed by the committee to cease giving evidence regarding a particular matter and they continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise nor make charges against a Member of either House, a person outside the Houses, nor an official by name or in such a way as to make him or her identifiable. Members are reminded of the provisions within Standing Order 158 that the committee shall also refrain from inquiring into the merits of a policy or policies of the Government or a Minister of the Government or the merits of the objectives of such policies.

I welcome Mr. Kevin Cardiff, Secretary General of the Department of Finance. Will he introduce his officials?

Mr. Kevin Cardiff

With me from the Department are Ms Ann Nolan, Mr. Kevin Nolan and Mr. William Beausang.

They are welcome. I ask Mr. Buckley to introduce the proceedings.

Mr. John Buckley

The crisis that emerged in global financial markets in 2008 exposed major structural weaknesses in the Irish banking sector. Heavy reliance by Irish banks on short-term borrowing, combined with over-concentration and excessive lending in the property and development sector, resulted in a domestic banking crisis that destabilised the Irish banking sector to a considerable degree.

When stability issues arise in the banking sector, governments and central banks acting in their role as guardians of the public interest need to intervene in order to protect the financial system and at the same time try to avoid major negative repercussions for the economy. The initial responses to the banking crisis here, as elsewhere, focused on containment of the problem, primarily through liquidity support and guarantees for bank liabilities. Since then, policy responses have focused more on attempts to resolve the underlying systemic and solvency problems. This has involved a range of measures to restructure banks and encourage bank lending, including the purchase of impaired loans, ongoing guarantees of banking liabilities and substantial injections of capital. Measures have also been taken to address the failures in the regulation and oversight of the financial sector that contributed to the severity of the impact in Ireland of the global financial crisis.

The array of measures has been generally co-ordinated by the Department of Finance. Since the measures implemented have involved action across a range of agencies, the financial transactions and commitments entered into are or will be accounted for in a variety of ways and will impact on the accounts of the Central Bank and Financial Regulator, the National Treasury Management Agency, NTMA, the National Pensions Reserve Fund, NPRF, and, latterly, the National Asset Management Agency, NAMA. The chapter being discussed today has been compiled to present an overview of the main measures implemented, and of the financial impacts to date, including financial commitments and contingent liabilities.

Inevitably, stabilisation developments have continued since the summer of 2010, which was the time we completed this report. The key events since then include the lapsing of the original bank guarantee, which had a fixed two year life, ending at the end of September 2010; the extension of the eligible liabilities guarantee scheme, which is available to cover certain new liabilities of banks entered into before the end of this year; and the publication by the Minister for Finance of an estimate of the expected eventual cost to the State of recapitalising the banks.

The first major response to concerns about bank liquidity and solvency was the extension of the existing deposit guarantee scheme, including an increase in the level of deposits protected from the existing maximum of €20,000 to €100,000 per depositor per institution. This is a permanent change in the level of cover. Credit institutions covered by the scheme are required to hold deposits with the Central Bank in what are called "deposit protection accounts", although at the time of the report, credit unions had not been required to contribute in this way. The amounts held on deposit fluctuate over time. At the end of 2009, the amount held in the account was €608 million.

The September 2008 bank liabilities guarantee scheme was broad in terms of the forms of liability covered. It extended to retail, corporate and interbank deposits as well as a range of debt instruments. Deposits already covered by the deposit guarantee scheme were excluded. The scheme stipulated that the covered institutions would pay compensation in recognition of the impact the guarantee had on the cost of Government borrowing. At the outset, 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 would be between 0.15% and 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 end July 2010, a total of €730 million had been collected by way of premia for the guarantee cover. With the lapse of the guarantee at the end of September 2010, that funding now falls to be paid to the Exchequer.

The eligible liabilities guarantee scheme was designed as an alternative but more restricted guarantee scheme, which became operational from 9 December 2009. Under that scheme, State guarantees may be entered into until the end of December 2010 for new deposits and eligible debt securities with maturities of up to five years. The scheme is being managed on the Minister's behalf by the NTMA. Fees payable under this scheme in respect of the liabilities covered accrue to the Exchequer. A total of €296 million was received for the first half of 2010.

In parallel with the guarantees, the Central Bank has provided substantial funding to support the liquidity of the banking sector, through its participation in eurosystem monetary policy operations. This support has been in the form of low interest advances to credit institutions based in Ireland. All of the advances are secured by forms of collateral approved by the eurosystem. Having peaked at around €130 billion in June 2009, the level of lending by the Central Bank to credit institutions has since reduced significantly. It stood at around €94 billion at the end of August 2010. The Central Bank has reported that just over 65% of its lending at March 2010 was to banks with a significant retail presence in Ireland. The balance was taken up by IFSC credit institutions.

In terms of measures aimed at restructuring the banks, very significant costs have been incurred by the State. Taking into account commitments announced by the Minister for Finance at the end of September 2010, the expected overall cost of recapitalisation will be some €46 billion. This comprises the following: some €11.73 billion already incurred by way of investments in shares; €22.73 billion committed through the provision of promissory notes; and projected future assistance to the banks totalling some €12.8 billion.

The final outturn is contingent on the outcome of a number of future and somewhat uncertain events. These include: the extent of loan write-downs at Anglo Irish Bank, and in particular, the outcome of its transfers of assets to NAMA; the amounts realised on AlB's asset sales and from disposal of the business of the EBS; and the outcome of negotiations with subordinated debt holders.

I thank Mr. Buckley and invite Mr. Kevin Cardiff to make his opening statement.

Mr. Kevin Cardiff

I thank the committee for providing me with the opportunity to make this opening statement.

Chapter 6 of the Comptroller and Auditor General's 2009 report sets out an overview of the main measures implemented by the Government as part of its banking stabilisation strategy during 2008 and 2009 and the first half of 2010. In fact, it is probably the best summary document of all that has gone on. Rather than go through all of those measures again it may be more useful if I were to draw out some of the major themes and then provide some update on the principal developments since the Comptroller and Auditor General's report was compiled.

Given the very difficult situation of our banking system since 2008, banking system intervention has taken a number of forms, and has dealt with several separate but related issues. Basically, these all revolve around three basic facts, which are that to be viable a bank must have capital as a buffer against losses; it must have liquidity to provide the cash flow for its operations; and it must be able to retain the confidence of the market to be able to sustain its capital and liquidity positions.

Liquidity, which is a bank's cash flow requirement, was the target of the banking guarantees. Three key interventions took place in this regard. The first, in September 2008, was the extension of the retail level deposit guarantee scheme to deposits of up to €100,000. The second was the broad guarantee given at the end of September 2008, and translated into law in the following days through the credit institutions financial support scheme, to which we refer as the CIFS guarantee scheme. The third was the more differentiated eligible liabilities guarantee, ELG, scheme, which provides in effect an extension of the broader CIFS blanket guarantee and has replaced it. It also allows for the possibility of guarantees for longer dated securities. It is framed to be more flexible and to allow for the eventual phasing out of the guarantees.

The second key theme of the interventions dealt with capital and loss buffers. Most of the domestic banking system has required capital support from the Government, and discussions on this started towards the end of 2008. Since then, capital has been provided in different forms by State agencies to Bank of Ireland and AIB, first in the form of preference shares and more recently by taking a direct equity stake, particularly in Bank of Ireland. State capital assistance has also been required by EBS, and in very large amounts by Anglo Irish Bank and Irish Nationwide.

Naturally, the process of judging the capital requirements of the banks has been difficult because over the period market values for loans and their underlying securities have been falling and difficult to estimate. However, a major step was taken earlier this year when the Financial Regulator's first prudential capital assessment review, PCAR, exercise was carried out, identifying in considerable detail the level of capital required by institutions having regard to various stress tests, as well as the estimates at the time of likely losses on transfer to NAMA, and again more recently with the statement of the Minister for Finance on 30 September 2010.

The NAMA process, which kicked off in April of last year and was the subject of very significant debate in the Oireachtas, has been another key element. This process has helped to reduce bank risk, by taking more difficult loan portfolios off their books. It also forces the early recognition of loan losses to ensure the level of losses in these more difficult portfolios is driven out into a more transparent form. At the same time, it provides institutions with assets in a form which can be used to access liquidity. This loan loss recognition is a challenge because it means the banks have to absorb losses on their balance sheets and on their profit and loss sooner rather than later. This, in turn, has capital implications. The detailed information provided to the markets in the Minister's September statement is designed to demonstrate that the Government's strategy for ensuring the resolution of our banking problems is transparent and sound. We are recognising these enormous banking sector costs in this year's deficit, which is projected to spike at 32% in general Government balance terms. While the projected Government deficit of 32% of GDP includes once-off capital support of almost 20% of GDP, it is important to recognise that were it not for this spike we would broadly meet our budget targets for this year.

A greater level of certainty regarding the final NAMA discounts for each of the participating institutions has provided the detailed basis for concluding our assessment of the capital needs of the banking sector. An assessment by NAMA of the loan-by-loan valuations carried out in respect of the transfer of approximately €27 billion of land and development and related loans into NAMA, together with the comprehensive and detailed information now available to it on the remaining loan books, has allowed the agency to refine its estimates of the discounts on the remaining loans to a high degree of accuracy. These final estimates have in turn allowed the Central Bank to update its assessments of the capital position of all of the institutions participating in NAMA following the prudential capital assessment review earlier in the year and the EU-wide Committee of European Banking Supervisors stress testing exercise carried out in July.

The Government agreed a number of steps to provide certainty about the impact of NAMA transfers, including that all remaining NAMA transfers should be completed in one single tranche for each of the participating institutions and that the accelerated transfer of eligible loans would be completed by mid-October in respect of Anglo Irish Bank. In addition, the Government decided that where the total exposure of a debtor is below a €20 million threshold in Allied Irish Banks and Bank of Ireland, that debtor's loans will not now be transferred to NAMA. This is largely because the sheer volume of small loans would make the process more difficult to administer. The previous threshold had been set at €5 million. These changes will allow NAMA to operate to the highest level of efficiency and effectiveness in the management of its loan portfolio.

The Central Bank has carried out a detailed analysis of potential losses in Anglo Irish Bank in the coming years. Its examination has drawn on comprehensive information and analysis of the bank's non-NAMA loan book carried out both by the bank and its advisers and independent consultants in preparing its restructuring plan for the European Commission. Information has also been made available by NAMA from a review of the assets securing the loans in the bank's remaining NAMA tranches. This review has enabled NAMA to advise the Central Bank of the expected discount of 67% on the remaining €19 billion of the bank's loans that are due to be transferred. The Central Bank has therefore established as definitively as possible the level of capital required by the new structure, that is, an additional €6.4 billion in total capital. This additional capital requirement brings the projected total gross cost of the restructuring of Anglo Irish Bank to €29.3 billion. The capital will be provided by increasing the promissory note issued by the State and by appropriate burden sharing exclusively by holders of Anglo Irish Bank subordinated debt instruments.

The severe stress testing carried out by the Central Bank, including a 70% discount on the remainder of the bank's NAMA loans, has concluded that the stress case level of losses could potentially be €5 billion higher than the expected €29.3 billion. However, as a stress case, this indicates the upper boundary of the level of losses and does not represent the Central Bank's expectation of the likely outcome. The Government will capitalise the new structure to the expected requirement of €29.3 billion through the promissory note structure which extends the cost and the funding burden over a period in excess of a decade. The authorities will also press ahead with restructuring with a view to achieving the split of the bank early in 2011.

The Minister's statement also clarified the position regarding the Government's policy for achieving burden-sharing by holders of subordinated debt and the very different situation of senior debt obligations. As these matters can easily be misunderstood or misrepresented internationally, the committee will understand if I do not say much on this topic.

The commission of investigation into the banking sector has commenced its examination of matters relating to corporate governance and risk management in each of the banks covered by the Government's guarantee up to the date of the decision to nationalise Anglo Irish Bank on 15 January 2009. It is led by Mr. Peter Nyberg, former director general for financial services at the Finnish Ministry of Finance. A review of macro-economic policy lessons set out in the Regling and Watson report will be carried out by the Joint Committee on Finance and the Public Service following motions in each of the Houses of the Oireachtas. The committee has been asked to report back to the Houses not later than 4 November 2010. Obviously, I cannot answer for its work. The Department is providing some facilities to the Nyberg commission but it has no involvement in its investigations.

A review of the Department of Finance is being conducted by an independent review group of experts from Canada, Ireland and the Netherlands. This review group is evaluating the systems structures and processes used by the Department over the past ten years. It is working diligently and is expected to report later this year.

I would like to refer briefly to some matters the committee wanted me to address arising from our discussions in July. Included among these was the question of records of communications between the Department and the Office of the Attorney General in regard to the bank guarantee. As I stated in my recent letter to the committee, I am advised it is well established that communications between the Office of the Attorney General and Departments are privileged from disclosure. My letter set out in some detail the grounds on which the Office of the Attorney General considers these documents to be subject to legal professional privilege but in seeking to be as helpful as I possibly can, I enclosed with my letter a table describing the Department's letters and e-mails in as much detail as I felt able to provide so that the committee can have an insight into the work carried out between the Department and the Office of the Attorney General.

I indicated previously that I have been in contact with professional advisers who performed work for Irish institutions or authorities in the run-up to the introduction of the bank guarantee to seek their consent for release of material produced by them. Having obtained the necessary consent, I have sent the committee a number of documents. I hope that my statement has contributed to a useful discussion.

May we publish Mr. Cardiff's statement?

Mr. Kevin Cardiff

Yes, of course.

He stated that all the transfers to NAMA would be completed by the middle of October. It is now 20 October. What is the current position?

Ms Ann Nolan

The Minister referred to the transfers from Anglo Irish Bank. Mr. Cardiff stated that the transfers from that bank would be completed by the middle of October. In practice, we hope to introduce regulations for the accelerated transfer either today or tomorrow but they have to be cleared with the Attorney General's office. The transfer will take place this or next weekend or else over the intervening week. They will be done in one tranche but it will take a few days to complete the transfer. We expect them to be transferred in the next fortnight, however.

When does Ms Nolan expect to publish the report of the Comptroller and Auditor General which was sent to the Department in early October?

Ms Ann Nolan

That will be a matter for the Minister. It is due to go before the Government at the end of next week. I cannot guarantee it will be taken then because the Government has a lot of items on its agenda at present.

That will clear up certain other matters that have arisen. I thank Mr. Cardiff for the documentation he sent us arising from our last meeting. However, two specific documents were not included in the correspondence we received. One was a memo from the meeting on 29 September between the Taoiseach, the Minister for Finance, the Attorney General, senior officials at the Departments of Finance and the Taoiseach, the chairman and chief executive of the Irish Financial Services Regulatory Authority and the director general of the Central Bank. The other was a record of a meeting between the Taoiseach, the Minister, the Attorney General, senior departmental officials, the chairman and chief executive of the Financial Regulator, a legal adviser, the Governor and director general of the Central Bank, the governor and chief executive of Bank of Ireland and the chairman and chief executive of the AIB. Are those memos available and can the committee view them?

Mr. Kevin Cardiff

They are not available. We believe they are covered by the rules covering Cabinet confidentiality and the Information Commissioner has considered the same document and ruled on it. The Department does not have a formal memo of that night; it has informal notes that were taken. The Government decisions taken on the night would have been a matter for the Secretary General of the Government to document.

My information is that the Information Commissioner approved the release of those documents.

Mr. Kevin Cardiff

I do not believe so.

I was glad to see that when records of the domestic standing group meetings were sought again, additional informal notes were found. Why have they not been provided to us?

Mr. Kevin Cardiff

That came to light just a few days ago and I want to check them to see what they contain before I pass them on. There is not much there that would surprise. I also want to be clear on what was a domestic standing group meeting and what was not. There was a series of domestic standing group meetings but there are regular meetings between the Central Bank, the Department and the Financial Regulator all the time. Some of those would not have been designated as domestic standing group meetings but would none the less have been held under the same general set of protocols. I will double-check that they are being described accurately when the notes are provided.

That is critical information as the group was clearly central in the lead-up to the issue.

Mr. Kevin Cardiff

Some meetings were definitely domestic standing group meetings and were expressed as such. The committee has the formal meeting notes and what I have are just notes jotted down.

We have some formal meeting notes.

Mr. Kevin Cardiff

The committee has them.

There seem to be many meetings with no record. We requested those in July and it is unfortunate they are unavailable for this meeting.

Mr. Kevin Cardiff

I will try to get them to the Deputy very quickly.

Deputy Rabbitte will ask the first questions. This sitting is taking place against a background where the State has committed to putting €29.3 billion into Anglo Irish Bank. Its former chief executive owes €8 million to the State and is availing of the less demanding bankruptcy laws in the United States to avoid, as far as possible, dealing with his affairs in this country. I would describe him as a fugitive from accountability.

It is right that the authorities are pursuing the issue of extradition but it appears Mr. Drumm is still running rings around the State as he did when the State had to give a guarantee to his bank and others. The papers already released to the committee show the level of bad loans on the books of the banks was concealed from the Department and also from PricewaterhouseCoopers, as people like Mr. Drumm were at least in a state of denial about how they led their institutions to a state of insolvency.

The reckless carry-on of Mr. Fingleton will cost the State approximately €5.4 billion. The letter we received from him by way of Mr. Cardiff is another example of how people expected the State to help them while deliberately trying to mislead. He has still not repaid the €1 million bonus he received before exiting from Irish Nationwide and to all our constituents, whom we represent and who are bracing for cutbacks, this has all the hallmarks of one law for the rich and another for the poor. I noted previously that I have certain sympathies for the officials in the Department of Finance who must grapple with the issues and have had many sleepless nights. The events relating to the banks is the stuff of nightmares, with the taxpayer picking up the tab while people like Mr. Drumm and Mr. Fingleton are effectively laughing at us and playing ducks and drakes with the institutions of the State. It is against such a background that we are meeting today, with many questions having been asked on the previous occasion. We will deal with some responses received by way of correspondence from the past two weeks.

There is a vote in the House.

As I stated earlier, there is a pairing arrangement for me and Deputies Rabbitte, Kenneally and Fleming.

I thank Mr. Cardiff for being present. I will take his statement today along with the letter from 13 October. I will clarify the first point regarding checking to whom Anglo Irish Bank made the presentation on 18 September of that year. What is Mr. Cardiff's point in that case? Is it that there is no record of the presentation?

Mr. Kevin Cardiff

The committee has the presentation we received. There is no record of a meeting on that day. There was much going on so the document may have come in separately or was presented at a meeting. We cannot identify exactly who gave us the document and when it happened.

As Mr. Cardiff said, we have the presentation, grossly misleading as it is. Mr. Cardiff is saying there is no record in the Department of whom it was presented to.

Mr. Kevin Cardiff

Yes. There is no record in the Department of people from Anglo Irish Bank being in on that day.

Did we establish on the last day if there was a request from Anglo Irish Bank to make a presentation to the Department?

Mr. Kevin Cardiff

We did not establish that. We surmised a bit and perhaps I surmised too much. Most of the meetings with Anglo Irish Bank over a period of months would have been handled by myself, Ms Nolan, Mr. Beausang or some such combination. There was also one higher level meeting the Secretary General attended.

I appreciate it was a time of considerable tumult. I am trying to get a grip on what the Department was saying about the banks at the time. Were minds made up about Anglo Irish Bank and was the Department not especially interested in recording what was said? Did the bank have no credibility at that stage?

Mr. Kevin Cardiff

No, it does not mean that. We met officials from the banks on a number of occasions up to November and December. The credibility of the bank eroded considerably over that time and there were suggestions that seriously lacked credibility over the course of the month. There would have been a little worry about the ongoing credibility of Anglo Irish Bank. For example, the suggestion was made that it would take over Irish Nationwide only just before the bank guarantee when it ran out of money itself. Anglo Irish Bank had suggested that it would be the ideal candidate for taking over another institution. In that sense one would have been quite wary about grand plans if one could not see the reality attached to them.

It boggles the mind in retrospect.

Mr. Kevin Cardiff

With regard to that plan, the idea of taking over another institution was to prove the bank's machismo in the market and therefore add confidence. It may have been in order that the bank could look more sound than it was.

Mr. Cardiff mentioned Irish Nationwide and we have a letter from Mr. Fingleton dated 19 September 2008, some ten days before the crash. He states: "The society's immediate problem is a liquidity issue and not a seriously impaired mortgage book problem." He goes on to make a number of additional points, assuring the Department that "we ... can continue to operate as a very profitable and viable financial institution." What was the Department's response?

Mr. Kevin Cardiff

As the Deputy can see from other documents we gave him, the regulator had arranged for Goldman Sachs to try to get behind the Irish Nationwide Building Society position to see what the realities were. However, such an evaluation nonetheless relies on representations from management and exploring management's views. Two things are clear about Irish Nationwide Building Society: first, there was at least some level of loss in the book, or there was likely to be; and, second, the institution had had a liquidity problem or drain resulting from a lack of support among the general public and was, therefore, a damaged institution. One would not have relied very much on Mr Fingleton's letter; one would have waited for the analysis from Goldman Sachs and others, as well as the regulator.

What did Goldman Sachs mean when it stated the loan book of Irish Nationwide Building Society was bespoke and specific?

Mr. Kevin Cardiff

It meant that there was not a large number of loans that would be regarded as standard. Each loan was different. There were complicated structuring arrangements in loans which differed considerably from one to the other. Some had profit-sharing arrangements, as well as interest rate payments due. Therefore, the word "bespoke" meant that the loans were far from standard in some ways. They even started to drift into a sort of hybrid between loans and equity arrangements.

Was none of this ever picked up by the regulator?

Mr. Kevin Cardiff

It was never reported to us in a specific way, although it would not necessarily have been, since it was for the regulator to chase these things. I think it was clear to the regulator that the management structure at Irish Nationwide Building Society needed attention. It had insisted on new succession arrangements, for example.

Could it be argued that it had needed attention for the previous 15 years and no one had ever intervened to cause this to happen?

Mr. Kevin Cardiff

The intervention was clearly inadequate — that much is clear in retrospect. I do not want to speak for the regulator, but there were some interventions with regard to the management structure and the succession which were intended to relieve the situation where so much seemed to rely on one or two individuals. As the Deputy probably knows, a new senior executive went into Irish Nationwide Building Society, stayed for a while and then moved on. I do not know this for a fact, but I presume that was part of its response to the regulator's pressure to broaden the management structure. That occurred in 2006.

It looks as though Irish Nationwide Building Society won.

I will return to Mr. Cardiff's statement. The impact of this dereliction of duty, particularly in the two organisations about which we have been talking and on which the authorities seemed to have very little information at the time, is what Mr. Cardiff calls a spike in the national accounts adding an amount equivalent to 20% of GDP to the deficit this year? It is a nightmarish figure. He stated this was a once-off cost, but that is not entirely the case. We will have to pay interest each year for a number of years on the promissory notes. Is that correct?

Mr. Kevin Cardiff

Absolutely. It is a once-off cost, but we must borrow, in effect, to pay the cost and, therefore, will be paying interest for some years to come. It was as if the State had gone out and bought a tract of land for that amount of money. The cost is borne by the taxpayer in the same way as other borrowings would be over time. I did not mean to suggest it was not a real cost or that it would not have repercussions for the future but that in accounting terms we have one big spike and a reducing pattern thereafter.

Can we put a figure on the per annum cost and the number of years at this stage?

Mr. Kevin Cardiff

The per annum cost of, say, €30 billion at 5% to 6% would be €1,500 million.

A total of €1.5 billion.

Mr. Kevin Cardiff

Yes.

For how many years?

Mr. Kevin Cardiff

Until Ireland starts to have surpluses, that interest must be paid. If we pay back the principal but are still borrowing, our net debt will not change; therefore, the figure of €1.5 billion will extend into the future. On that particular loan, we will be paying back the principal over time; therefore, the figure of €1.5 billion——

That will add €1.5 billion to the deficit each year for the next, say, ten years.

Mr. Kevin Cardiff

For the specific loan, the amount will reduce during the years, but we must remember that since we are borrowing for other purposes, paying back the principal will require us to borrow more for something else. It is best to think in terms of two treatments. There is the general Government debt balance treatment, that is, the EUROSTAT treatment, as part of which one takes the principal amount up front as a cost to the Exchequer, to which the interest is added over time. In that mix, it is almost indefinite. With regard to cash payments, because we have deferred the cash amount, we will pay a fixed amount of around €3 billion each year until the debt is paid off. Because we are paying back not only the principal but also the interest that will accrue over time, like on any loan, it will take longer than it would otherwise; in other words, if we pay 10% each year, the loan will not be paid back after ten years because we will have accrued interest. Thus, we are talking about a period of 14 or 15 years.

Must the interest element be included in the national accounts each year?

Mr. Kevin Cardiff

In terms of presentation to the financial markets and so on, it would be nice if we could wave it away, but we must be clear on this. As far as the taxpayer is concerned, it is real money and, whatever about the accounting treatment applied, we should not hide it from ourselves. Applying the standard accounting treatment for general Government debt balance and EUROSTAT purposes, we treat the principal up front and interest accrues each year. The Exchequer borrowing requirement treatment is slightly different: it follows the cash. We will have to borrow money each year for several years to pay the amount.

What is the statutory authority for this fresh injection of capital? Is it financial support under the credit institutions financial support scheme?

Mr. Kevin Cardiff

It is.

It is authorised by the CIFS scheme——

Mr. Kevin Cardiff

Yes.

——even though it is by way of promissory note and so on.

The second major point in Mr. Cardiff's letter concerns his explanation of the reason we cannot be provided with the legal advices exchanged. Speaking only for myself, I am minded to accept this. I understand the reasons that might be appropriate.

Mr. Kevin Cardiff

I was a bit less minded. I looked into it quite closely. It is an issue of balance between transparency and the importance of maintaining those relationships confidential and making sure no legal liabilities will be imposed on the State accidentally, and so forth. We treated the committee's request seriously and by setting out what was going on in the various documents we tried to give an indication. Most were fairly technical not——

I have a "but" to that. Will the documents be made available to the committee of investigation?

Mr. Kevin Cardiff

We are putting the documents together almost as we speak and are seeking advice on whether to do that. So far we have not handed over anything that is legally privileged but I am minded to do as much as we possibly can to help the commission.

Referring to the table provided by Mr. Cardiff in terms of the exchanges of requests from his Department to the Attorney General for advices, it is interesting that on 29 April 2008 Mr. Cardiff wrote to the Attorney General with a view to taking advices on taking into public ownership a distressed credit institution. A consultation note accompanied the letter, entitled "Preparation of a draft nationalisation Bill for a financial institution". What motivated that at that time? Was it the share price crash in March, or Northern Rock?

Mr. Kevin Cardiff

It was two or three different things. In Ireland and in Europe more generally since 2007 or even 2006, there was more of an impetus towards contingency planning on financial market matters. There was always a fear in all countries that if one were seen to be panic driven into that expectation somebody would think there was a specific problem one was dealing with. That this was happening throughout Europe made that process a little easier and so, from 2006 — 2007 there was greater awareness of the need for contingency planning. In 2007, for example, there was an EU-wide crisis scenario simulation where a fictional European bank was going bust and there was a simulation as to how people would react to that, and so forth. That was already in people's minds. The Northern Rock experience was salutary and showed the importance of having something in regarding these matters

When that was in the mind of the Department and all of that was going on at the time, is it not a wonder that the Department did not cause the Governor or the regulator to send someone into the banks to drill an archaeological bore hole to find out what was really going on? If Mr. Cardiff was concerned enough to draft a Bill and ask the Attorney General for advice why did someone not go into the banks and do the kind of stress test that would establish whether we had a reason to construct such legislation?

Mr. Kevin Cardiff

We knew that there were growing liquidity pressures around the world. That was one thing we knew. We knew the US sub-prime issues had happened in 2007 and that the Northern Rock thing had happened. In that sense we had ample reason to respond in this way. In addition, we knew and understood that the Central Bank structure, including the Financial Regulator had teams whose job it was to keep track of the institutions. In the course of the previous year it had been doing stress tests or had been ordering stress tests done in institutions. At that stage we did not have any suggestion from them that there was an immediate need to do a more detailed review. If the Deputy is asking in retrospect whether it would have been a very good thing if we, or somebody, had insisted on a very detailed review of the institutions it might well have been. However, at that point it might not have thrown up the kind of concerns the Deputy is talking about because at that point the property values underpinning that part of the banking system had not started to fall off very strongly.

In April 2008?

Mr. Kevin Cardiff

The biggest of the indices, which lag a bit, had their first really strong fall in the second or third quarter of 2008. The next big fall was in the fourth quarter. Even the bank managements would not have known the extent of the property crash at that point.

When the Department looked for advice on the preparation of a draft nationalisation Bill it was that kind of general consideration. It was not a particular institution that prompted the request.

Mr. Kevin Cardiff

No. We had in mind that theoretically it could be either a bank or a building society so we had to bear in mind that legislation might have to be flexible about what legal form the entity to be nationalised or addressed would take. However, at that point there was no particular candidate in mind. That said, one would always in one's mind start with the smaller and work up.

It is striking that from the 29 April right through, and the papers seen by the committee at the last meeting — I believe it was July — tend to bear this out, there was no trigger for whenever the Department might make such an intervention. It was preparing this legislation behind the scenes, monitoring the situation and so on but there never was a trigger for when the Department might cause it to be implemented.

Mr. Kevin Cardiff

The approximate cause or worry was bank liquidity. One would have expected, if there was to be a trigger, that was where it would come from.

In the PricewaterhouseCooper documents that the Department of Finance attached, am I reading the note regarding Sunday, 28 September correctly? That was the day before the crash. According to that summary by PwC, there was not really any serious problem in the three institutions concerned, Anglo Irish Bank, Irish Nationwide Building Society and Irish Life and Permanent. The impaired loans, according to PwC, came to 0.4 of 1% in Anglo Irish Bank and 0.6% across the three institutions. How in the name of heaven could PwC come up with figures like that?

Mr. Kevin Cardiff

Impairment is a technical assessment. If one has many loans that are not due to pay interest because the terms of the loan are such that one will complete a development and only pay interest or re-finance at that point, then one would not necessarily impair them or have those as impaired loans on one's book. If, at this point, one's property values were still close to their peak and one did not account for a substantial reduction in property values——

Yes, but I ask Mr. Cardiff to look at the note. If I read it correctly, Anglo Irish Bank states it was likely to make a profit before tax of €1.1 billion for 2009. Will Mr. Cardiff look at the note? If I read it correctly, Anglo stated it was likely to make a profit before tax of €1.1 billion for 2009. Impaired loans were put at 0.4%. Of the €71 billion loan book there was only concern with about 3.2%. That was the day before the crash. That was scarcely projecting an overall worst case scenario of a €5 billion shortfall and we know now that this is €50 billion. How much did we pay to PwC, PricewaterhouseCoopers, for that advice?

Mr. Kevin Cardiff

It is probably in the Comptroller and Auditor General's report. I do not know the number off the top of my head but, in fairness to them, they were sent in on short notice and they made clear that this was a technical exercise. They did not suggest that they were making promises as to how these loans would perform over time. I am unsure whether the Deputy can suggest they did not do a proper job in the time they had. As the Deputy is aware, they carried out more extensive work in the months afterwards.

The fact is the institution believed it was in reasonable shape at that point. It had not accounted for very large shifts in property values, nor in technical accounting terms could it have. It could have prepared for but not accounted for it. Even some months later Anglo was discussing provisions, which it regarded as generous, in terms of hundreds of millions rather than billions of euro.

Mr. Cardiff referred to the work they did afterwards. However, the damage was done afterwards, is that not so? I refer to the different State agencies involved. There is a figure of €1.58 million. Mr. Cardiff has the figures in his table and we have them in the Comptroller and Auditor General's report. The agencies involved included the NTMA, the Department of Finance, the National Pensions Reserve Fund and the Central Bank. PricewaterhouseCoopers earned figures of €4.95 million and €1.58 million. These are figures the Department is bringing up to date. To the reasonably well informed taxpayer on the street these seem astronomical but the advice we received left a great deal to be desired. It seems they simply took the word of the management, which informed them there was a liquidity problem, nothing more fundamental than that, and that there was no solvency problem. This was reported to the Department on the eve of the crash. It seems very difficult to credit.

Mr. Kevin Cardiff

In fairness to them, it was the start of a process at that stage and it was not represented as being anything other than that. It was not represented as a prediction and I am unsure whether it would be fair to suggest that they were doing less than they should have based on this document.

We are cutting everyone's standard of living in the country. We have paid out €34 million for advice. Arthur Cox has been the main beneficiary as well as PwC and others. Did we get value for money? Let us consider one case, that of Merrill Lynch. How much did we pay to Merrill Lynch?

Mr. Kevin Cardiff

I believe it was €7 million.

Was that for the work done before 29 September?

Mr. Kevin Cardiff

No, that was for the work done between then and when that contract ended, which was in mid-2009.

When did we sign them up?

Mr. Kevin Cardiff

We signed them up in the third week of October 2008.

How much did we pay them?

Mr. Kevin Cardiff

We paid €7 million.

We did not take their advice and we have never established who advised the blanket guarantee. We know that Merrill Lynch did not and it appears the Department did not either. Who did it?

Mr. Kevin Cardiff

The blanket guarantee was one of a range of options available to the Government that evening. It was an option set out in Merrill Lynch documents and others as having some down-sides but also some clear advantages.

Is there anything we can do about the cost of advice? Should some of it be borne by the institutions?

Mr. Kevin Cardiff

Some of it is borne by the institutions. Advice on the guarantee schemes and so forth is charged directly to them. The Exchequer or the State institution concerned has tended to bear the cost on policy advice. Some of it has been charged back. For example, some legal advice on the capitalisations was charged to the institutions.

Is there anything we can do about the extraordinary fees? Do these institutions believe they can name any figure they wish? For example, let us consider the extraordinary amount of money going to Arthur Cox. Does the Department or the various organisations affected have itemised invoices for the legal advice from Arthur Cox?

Mr. Kevin Cardiff

I cannot speak for all agencies that have used Arthur Cox but the Department receives itemised invoices. I check them and occasionally I query them. I presume it is the same for the others.

Can we get copies of them?

Mr. Kevin Cardiff

Yes. I am sure we can.

What moneys are they charging us per day?

Mr. Kevin Cardiff

I do not know off the top of my head. They are standard partner rates. We have reduced them by 10% and we are in discussion with them about further reductions.

Will Mr. Cardiff outline the credit union situation?

Will that be your last question, Deputy Rabbitte? You can come in again later.

Thank you. What is the situation in terms of the credit unions? Have they been taken under the umbrella? What is the position in terms of the guarantee?

Mr. Kevin Cardiff

The credit unions are covered by the deposit guarantee scheme, which covers their customers up to €100,000.

That is the only protection?

Mr. Kevin Cardiff

They are not supposed to have many large customers given the rules that apply to credit unions and their scale.

Do we know that we have no great cause for concern?

Mr. Kevin Cardiff

In regard to the credit union movement as a whole, there are approximately 400 institutions concerned, with varying levels of financial strength. The regulator, the Central Bank, is doing a detailed review of more than 130 of these. No doubt it is paying consultants to do so, to refer back to the Deputy's previous point. However, that is taking place now. It is building a detailed picture of many of those institutions.

It is being looked at.

Mr. Kevin Cardiff

Yes, there is an active programme. Matthew Elderfield appeared before another committee some two weeks ago and gave an update on that matter. I can forward the details to the Deputy.

I thank Mr. Cardiff.

Arising from Deputy Rabbitte's questions about fees, will the Department give us copies of the itemised invoices received from all the advisers, including Merrill Lynch, Arthur Cox and Goldman Sachs? Will the Department flesh out this matter? If I got a plumber to do something in my house, I would receive an itemised bill containing so many hours of labour and so on. Were any of these bills questioned by the Department with regard to the number of personnel involved and the number of hours worked?

Mr. Kevin Cardiff

I believe some of them were, yes. If there was a reason for a dispute they would be disputed. Short of having someone sit in the firm concerned watching everybody's movements, one could not claim to know exactly what was happening. We do not have reason to doubt——

In regard to Arthur Cox, how many people were involved in the business?

Mr. Kevin Cardiff

It depended on the issue. It must be remembered that it has not just worked for the Department, it has also worked in NAMA. Different State agencies are using different parts of Arthur Cox. I do not know the numbers but it would vary from week to week depending on what work was going on.

After the initial urgency in September 2008, what procurement practices were followed to ensure the Department was getting value for money? Was any comparative study done with other companies?

Mr. Kevin Cardiff

The legal advice was procured quickly and without using the usual processes during the emergency. We have retained the same the firm because of the importance of continuity and so forth. The firm has also done other work for State agencies but that has happened after a full normal procurement process. Merrill Lynch was taken on in a similar manner on an urgent basis. There was a re-tender for its work later in the process which moved on and the work was then given to Rothschild. When there was additional work which Rothschild might have done it was re-tendered. As it happens, it got it but it was by no means a foregone conclusion. Work done in NAMA by HSBC on property values and property valuation methods was all tendered for. The work done in the NTMA and NAMA by Arthur Cox was tendered for. Apart from the contracts which were initiated at the outset, all contracts have been properly tendered for.

Can Mr. Cardiff look us in the eye today and say that he and the taxpayer were not fleeced by some of the demands which came in by way of invoices? We cannot pass judgment until we see the type of information contained in the invoices regarding the number of personnel and professional hours worked on these projects.

Mr. Kevin Cardiff

I can look the Chairman in the eye and say a couple of things if he wants absolute honesty. In terms of value for money, the place that one can most easily see it, because it is more concrete, is in the legal work rather than in the other advisory work. I can tell the Chairman honestly that the money spent was well worth it in the sense that the risks we would have taken on board by not having sound legal support could have cost us an awful lot more than the cost of getting the support in the first place.

Our assessment of the quality of work from the firm concerned — it happens to be the firm that has the business and is not a reflection on the quality of anybody else's work — particularly from senior partners has been very good. Our assessment of that is also confirmed by the assessment of the Office of the Attorney General. I do not consider that it has been bad value for money, in terms of what having the legal support has provided for the State. The only question is whether we could have got the same support at a cheaper rate. That is an open question but I am not sure we could have in the circumstances.

In terms of the non-legal advisers, such as banking advisers, some of the work can be very concrete and when they are doing very concrete work it is easy to see the value they add because it is the kind of work that is so specialist in terms of personnel no Government I know of would do without it. There is a more general advisory role which is very difficult to put a value on.

The point is, as Deputy Rabbitte said, some of the advice was not taken.

Mr. Kevin Cardiff

I would not categorise it in that way. Advice given contains pros and cons and helps one to form one's choices and assess what is the best way to go, even if the final finely balanced judgment is not exactly the one that the adviser suggested. I do not think that undermines the value of it.

I thank the Chairman. I welcome Mr. Cardiff and his colleagues. I want to continue the current line of questioning. Most of the questions on this area have been asked. Mr. Cardiff indicated that, by and large, in most cases where the Department has time all of this work is sent out to tender. Is that correct?

Mr. Kevin Cardiff

With the one exception that I mentioned where we felt it was important to maintain continuity.

Other than that, in normal circumstances if the Department was not up against the wire normally work is tendered for.

On the question of continuity, Mr. Cardiff referred to Arthur Cox and mentioned the advice it gives to other State agencies. Does that mean from now to perpetuity Arthur Cox will be the advisers to the Department of Finance, everybody else and State agencies and nobody else will have a chance to get a look in because of the continuity to which Mr. Cardiff referred? There may be better advice somewhere else.

Mr. Kevin Cardiff

No, it does not mean that at all. We review the position from time to time and, as I said, some of the work it got was explicitly on a tendering basis and the tenderers are re-tendered from time to time, as I understand it.

Would the Department tender on an annual basis or whatever for legal advice and put it out into the market?

Mr. Kevin Cardiff

We will not continue indefinitely with Arthur Cox without doing a proper tendering process.

We have asked Mr. Cardiff to supply itemised invoices of the advice the Department received. If one looks at the report of the Comptroller and Auditor General, it only covers about €10 million of €34 million in advice given. Perhaps the committee could write to the NTMA, the Central Bank and the Financial Regulator as well and ask them if they would provide itemised invoices for the legal advice they received. It would give us an overall picture of the situation.

Mr. Cardiff sent a letter to the secretariat which is dated 20 October. In it he said, "NAMA has reviewed the quality of loans still to transfer from AIB and estimated the discount to be applied to the remaining €13.5 billion of loans at 60%". Does the figure of €13.5 billion take into account the new €20 million threshold which has been introduced? Heretofore, any loans above €5 million were put into NAMA but that threshold has been changed to €20 million. Is that reflected in this figure?

Mr. Kevin Cardiff

Yes.

Deputy Rabbitte spoke about the letter of 29 April regarding taking public ownership of a distressed credit institution. Did that refer to a particular distressed institution at the time?

Mr. Kevin Cardiff

No.

In his letter of 13 October Mr Cardiff stated, "The Department began examining the legislative framework and scoping out the policy options available for maintaining financial stability in late 2007 and sought the advice of the Office of the Attorney General in November and December 2007". That letter is a number of months prior to the April letter. It suggests alarm bells were going off somewhere, that was the reason for this being done, but no action appears to have been taken.

Mr. Kevin Cardiff

There were alarm bells, the US financial system was in turmoil and a relatively large British institution had been taken into public ownership by then. It was not that there was specific information about Irish institutions other than that in common with the trend in other countries. Other than that there was a generalised liquidity pressure that was increasing over time.

If the Department had acted more vigorously at that stage, would it have been better informed on that night in September 2008 rather than being bounced into a situation?

Mr. Kevin Cardiff

The better the information we would have had on the night, the better things would have been, yes.

I am not saying the decision would have been different.

Mr. Kevin Cardiff

Neither am I but in retrospect it would have been good if a full and detailed inspection had been carried out on each of the institutions. Much of this depended on property values and at that point there was a sense of a turn in the property market but there had not been an immediate reflection of that in prices. Activity was dropping off and prices were starting to fall but not off a cliff at that stage. I do not know what a full inspection at that point would have shown, although it might have shown some of the governance issues that came to light later, in Anglo Irish Bank for example.

Would it not have been incumbent on the Department to investigate it anyway? It might have shown it up. It might not but it might have.

Mr. Kevin Cardiff

As I said, we understood that inspection teams in the Office of the Financial Regulator were keeping track of these institutions.

It appears now that was not the case.

Mr. Kevin Cardiff

There were teams and they were doing work but in retrospect it has not proved to be effective enough. In retrospect, had the Department leaned on the regulator to do more, it would have been a good thing. I will not pretend we had some great wisdom that we did not use because it was the regulator's job, not our job. If we had known better at the time, we might have done a better job, that is of course true.

Is it then the case that basically, the Department depended on the regulator and did not pursue it further than that, assuming that the duties were being properly carried out?

Mr. Kevin Cardiff

We did to a large extent depend on the regulator and we assumed to a large extent that the work was being done correctly.

Which in hindsight it was not.

Mr. Kevin Cardiff

In hindsight, of course I wish we had thought different about matters.

We also wish that was the case. In that letter of 13 October, there was mention of legally privileged documents. I accept that you have tried to be helpful in this regard but if an FOI request was submitted for those documents, would they be released?

Mr. Kevin Cardiff

For the purposes of deciding what documents we could give the committee, there was some judgmental work or there would be thousands of documents for the committee. The committee was kind enough to let us make those judgments. There was also a question of what we could release in the public interest. We would have taken a much broader view of the public interest in dealing with the committee than with an FOI request. If anything, we have gone beyond the FOI definition.

As a committee we have found that information we have sought, not necessarily from the Department of Finance, has been redacted. We subsequently found out that some people could get more information than we had got by submitting an FOI request. That is why I am asking.

Mr. Kevin Cardiff

It is a good question. The FOI decision making process is widely distributed, it is not decided by a Secretary General or a Minister, it is decided by individual decision makers in public bodies. That makes for speedier decisions, not that they are very speedy, but because they are more distributed they may be less consistent. The Act has a disadvantage in that it provides a benchmark for people dealing with committees as to what they can release. It has made the committee process more open than it was in years past, although perhaps I am being naive.

The Government decided if the exposure was below a total threshold of €20 million in AIB Bank and Bank of Ireland, the debtor's loans will not now be transferred to NAMA. Does that apply to Anglo Irish Bank as well?

Mr. Kevin Cardiff

No.

Ms Ann Nolan

The €5 million threshold never applied to Anglo Irish Bank, we always intended to bring all of those loans on board. Anglo Irish Bank has far fewer loans in that category because it tended to make big loans to big developers whereas Bank of Ireland and AIB might have a lot of customers who might have a lot of other business with them but had bought a small piece of development land for under €5 million somewhere, a field next to their house perhaps, which would count as development land under legal terms. Often these were doctors or solicitors. Bank of Ireland is far more likely to recover that money from those people than NAMA so we always had the €5 million threshold. However, when we looked at trying to transfer the total number of number of loans, the administrative problems it would cause and the difficulties NAMA would have in collecting those loans, we agreed with the banks that they would stay on the banks' books.

Turning to the preference shares that the NPRF purchased in AIB and Bank of Ireland, are we getting a return on them at the moment?

Mr. Kevin Cardiff

Where we did not get cash payments, we got payments in equity. There was an EU dictat that coupons should not be paid in firms receiving State aid and where they did they were not required to be paid, which applied not just to the State holdings but to other preference shareholders in these institutions. That put us on a bit of a hook because it meant we were expecting cash that we were not going to get so instead we took payment in kind in AIB. In Bank of Ireland the situation was altered by the equity raised there so we have fewer preference shares now. We converted some into equity and warrants were bought back from us so there was a return on that. One way or another, we are seeking a return on those preference shares.

They revert to ordinary shares basically.

Mr. Kevin Cardiff

In Bank of Ireland half of them were converted but in AIB we have not got to that yet. It is completing other capital raising operations first.

There was an interest rate of 7% on one and 8% on the other, is that right?

Mr. Kevin Cardiff

Yes.

Ms Ann Nolan

There were two payment dates to date. There was a payment date in Bank of Ireland and on that date we got our initial shares and there was a payment date in AIB and we got 16% of the shares in the bank. There will not be another payment date on either the outstanding preference shares for Bank of Ireland or for AIB preference shares until 2011. In the case of Bank of Ireland we will get a payment. It has lifted the capital stopper that the EU had applied so we expect to get cash this time. We will get a cash payment of 8% up to the date we converted and 10.25% for the period thereafter. We will get that payment on the total amount up to the date we converted them and on the balance amount at 10.25%. That payment date is in February or March — I am not absolutely certain.

Next February or March.

Ms Ann Nolan

Next February or March. The AIB one is still outstanding because——

Can we stay with Bank of Ireland for a moment. We have not received any cash from them as yet.

Ms Ann Nolan

We did receive cash from it but that was not a payment. We got back €500 million in cash from it.

Was it part of an interest payment?

Ms Ann Nolan

It was not part of an interest payment; it was a payment in lieu of the warrants. When we converted our preference shares we then had warrants and preference shares. The warrants are in danger of becoming less valuable after the preference shares have been converted into shares. Also they were anxious that they would not be able to attract outside investors if there was a danger that later we would be able to convert our warrants and have a majority shareholder. It was in their interest to buy back the warrants. They bought back the warrants and we charged them fees and various other things at that time. That was in cash and was paid back to the National Pensions Reserve Fund.

So half of that original amount is still in preference shares.

Ms Ann Nolan

Yes.

So we will get 8% up to the point of transfer and then 10.25%. Does that money that will come in February or March go in as part of our Exchequer returns as income?

Ms Ann Nolan

It will come in as income to the National Pensions Reserve Fund because it holds shares and it is the shareholder. It will be income to the National Pensions Reserve Fund.

None of that is on our books.

Ms Ann Nolan

It is on our books and will count as a GGB in looking at our deficit and so on.

What is the position within AIB?

Ms Ann Nolan

We have said that we will underwrite an open offer which will happen between now and Christmas. Some of that underwriting will be done for cash out of the National Pensions Reserve Fund and some will be done for conversion of preference shares. The final details have not been decided on by Government and obviously I cannot say what they will be. We are still in discussion with the various legal advisers, the bank, and the Government.

What percentage of Bank of Ireland do we own if it is State-owned?

Ms Ann Nolan

I understand it is 36%.

Based on market capitalisation what is that worth in real terms?

Ms Ann Nolan

I do not know but I can find out and let the Deputy know.

Perhaps Ms Nolan would let us know. Similarly, what percentage of AIB do we own at present?

Ms Ann Nolan

About 16% — I could be 1% or 2% out.

What will it go to?

Ms Ann Nolan

That is unclear. I really cannot tell the Deputy because I do not know yet. It is likely to be very high.

Will Ms Nolan give the committee a ballpark figure?

Ms Ann Nolan

I cannot because we are going to put these open offers out.

Mr. Kevin Cardiff

If we were to give a figure now or indicate a decision that has not yet been taken, that would be a notifiable event for AIB. It would have to make market statements and so forth so we should not speculate. What the Government has said is in the public domain and it is dangerous to go beyond that. We are planning for a contingency. The contingency is likely but not certain.

In regard to what we will get next year from AIB and Bank of Ireland, where are those figures in absolute terms?

Ms Ann Nolan

As I said earlier I cannot give the figures for AIB because we are in negotiations at present. There is no point in me telling the committee something that is not correct. For Bank of Ireland it is 10.25% of €1.7 billion, but I do not have a calculator.

Some €175 million. Is that a loss on what was expected or is it a gain?

Ms Ann Nolan

It is a gain on what we expected on those shares because originally we were going to get 8%. We put up the interest rates as part of the deal since we were facilitating a deal for them. It is a gain in that sense but, of course, it is less than originally intended because we converted the rest, the other half, into equity. We do not expect there will be a return on that equity next year given the bank's business plans and so on.

So you got approximately €180 million from Bank of Ireland and you do not know yet what you are getting from——

Ms Ann Nolan

That is true.

I thank Ms Nolan.

Up to the end of July you were to have €1.026 billion in payments from the institutions in respect of the guarantee. Has that been accounted for in the figures as yet?

Mr. Kevin Cardiff

In cash terms we have taken in nearly €800 million, under the first guarantee, the CIFS scheme, and €550 million under the eligible liabilities guarantee. That comes in cash into the Central Bank. We have not received it in the Exchequer yet but it would count towards our general government balance.

It has not been accounted for in the Exchequer yet.

Mr. Kevin Cardiff

Not yet.

What is due in that?

Mr. Kevin Cardiff

We will get that towards the end of the year.

Towards the end of the year. That will improve the position a little.

Mr. Kevin Cardiff

It is built into the figures already. It is not an unexpected bonus yet.

Based on the advice of the——

Mr. Kevin Cardiff

There is one hidden thing in that. The scale of the crisis around Europe has meant that the European Central Bank's overall seigniorage income has grown and, therefore, we will probably get a few extra hundred million euro from our share of that through the Central Bank. It is a small consolation but it is there.

Based on advice from the NTMA, the Government debt increased by between 0.15% and 0.3% as a result of the first guarantee, the CIFS scheme. Has that figure been revised in respect of the new guarantee on 30 September?

Mr. Kevin Cardiff

Under the CIFS scheme, it was reviewed once and was not changed at the time. In regard to the new guarantee the process is different and it is much more focused on European rules than the initial guarantee. We charge pretty much according to what they have agreed. There is a charge for short-term moneys, short-term deposits and a separate calculation for long-term money and those charges increase over time. If the Chairman wishes I can supply a note. From 1 July, the fee structure for long-term moneys is 106 to 135 basis points; in other words, if they raise €1 billion they have to give us €10 million; for short-term, greater than 90 days, they have to give us 0.7 of 1% and for the short-term, less than 90 days, it ranges from 1% to 1.5% between now and December. We can give the committee the fee structure.

In regard to the ELG scheme will the banks continue to pay for cover over the period they benefit from it or are the payments once off?

Mr. Kevin Cardiff

For so long as there is a guarantee there will be a payment.

That is just in relation to the ELG. Is there any payment in respect of the €100,000 deposit guarantee?

Mr. Kevin Cardiff

There is not a payment as such but there is a requirement to put a relatively small amount of bank deposits aside in an account held in the Central Bank to act as a fund. It is slightly pre-funded in that sense.

I am back to the question that Deputy Rabbitte asked earlier. Do the credit unions have to pay into that as well?

Mr. Kevin Cardiff

They have not paid into that so far because they have been brought into the scheme relatively recently but it would have been dangerous and maybe unfair to leave the credit unions out of the €100,000 guarantee when it was introduced. The credit union movement is the subject of a significant review at present and I imagine that as part of that review we will have to consider how to deal with its compensation arrangements.

Arising from Deputy Kenneally's question about information made available under the Freedom of Information Act and information for ourselves, we have expressed concerns in the past about the limitations on our powers because of the Data Protection Act and the Freedom of Information Act. Specifically in regard to reports being done by the Department, you carried out an investigation into the payments to Mr. Fingleton. Reading from press reports, that report was not made available to a newspaper under the Freedom of Information Act for particular reasons. Can Mr. Cardiff make it available to us for us to see exactly what is the scale of the issue there?

Mr. Kevin Cardiff

I will do exactly as I have done with every other document, I will look at it and see if I can give it to the committee and I will try to be helpful.

In regard to the letter we got from Mr. Cardiff regarding Mr. Fingleton did he not consider up to now whether the committee should have got that document?

Mr. Kevin Cardiff

Sorry, I missed that question.

Did it ever cross Mr. Cardiff's mind that the committee should have been provided with that document because it is basically part of our considerations?

Mr. Kevin Cardiff

Is that the report on Mr. Fingleton's payments?

That is right.

Mr. Kevin Cardiff

I am just trying to recall it, that was——

It is related to the letter from Mr. Fingleton to Mr. David Doyle on 19 September 2008 and all of the events after that.

Mr. Kevin Cardiff

I have tried very hard to fulfil as many of the committee's requests as I can. I had not thought about that one which had not yet been requested but we will look into it now.

As I said earlier, it is of great public concern that Mr. Fingleton is seen as an untouchable. A departmental report was done by you into his payouts and that document has not been provided to us.

Mr. Kevin Cardiff

There may be some misunderstanding. I do not know of any departmental report that was done into his payouts but the board of the institution did a report.

It was carried out by the public interest representatives, Adrian Kearns and Rory O'Farrell.

Mr. Kevin Cardiff

We are talking about the same one.

We are talking about the same thing.

Mr. Kevin Cardiff

I understand which one the Chairman is talking about.

Who are these people?

Mr. Kevin Cardiff

They are directors of Irish Nationwide.

Who do they represent as directors?

Mr. Kevin Cardiff

As directors, they served the institution but they were appointed by the Minister for Finance.

Who directed that the investigation be carried out?

Mr. Kevin Cardiff

I believe the Minister asked them to carry it out; I do not know that he was in a position to direct it to do so.

Could we formally get that report? Mr. Cardiff might forward it to us.

I want to focus briefly on the tendering process. When the tenders were submitted, what price was the final bill for each of the companies involved versus the tenders? Were they the same or substantially more, or what was the position? I ask Mr. Cardiff that because he mentioned that some of the work was specialist and he was talking particularly about the non-legal work. We do not know who proposed the scheme that was finally adopted. Deputy Rabbitte asked that question and we have not received an answer to it. It is something that people have wanted to know since the beginning. If the work is so specialised, as Mr. Cardiff described it, who were those with the greater expertise among the people making the final decision to ignore what was suggested in reports like those from Merrill Lynch? If the work was so specialised, who were the other person or persons who were most specialist who could decide not to take that advice into consideration?

The only other question I want to ask at this point is whether Mr. Cardiff was conscious at the time of the guarantee of just how limited his knowledge of the bank's books was when we see the huge the difference that is there? Was he aware on the night that the decision was being taken that his knowledge was so limited or was he fairly happy with the information that had been provided, which we now see was so vastly wrong, to put it bluntly? Was he conscious of the gamble that was there?

Mr. Kevin Cardiff

On the question of the tenders, most tenders were distributed around the State agencies; most of them were either in the Financial Regulator or in the broader NTMA family. Therefore, I do not have those numbers for the Deputy. I can make inquiries and get back to the committee.

On the reasons for the decision, from what the Chairman said at the start, I believe I am not supposed to comment on that except that, as I said before, the issues were very complex and there were considerable pros and cons for all the possible outcomes.

Was there other specialist knowledge that was relied upon, perhaps later than that?

Mr. Kevin Cardiff

The Government had available to it, or the Taoiseach and the Minister had available to them on the night, the expertise of the Central Bank, the Financial Regulator, the Department of Finance, the National Treasury Management Agency, the Attorney General and the Department of the Taoiseach but it was not really the key player. There was a range of advice available to the Government and it was for Ministries then to make that decision.

In terms of other companies that advised along the way, how may of the ones listed — I cannot find the piece of paper on which they are listed — were advising some of the institutions covered by the guarantee?

Mr. Kevin Cardiff

I would guess, at some stage or other, most of them because they all have very wide advisory practices that have quite long tentacles. Before we took on Merrill Lynch we had had on board another firm for a couple of days, such a short time that we did not pay them at all, which the committee will be glad to hear. It turned out that its conflicts were too direct and that became evident very early on. They all have potential conflicts of interest; they all have Chinese wall rules and all the rest of it to prevent that from getting out of hand. We have not come across instances where we felt compromised.

Deputy Edward O'Keeffe took the Chair.

How did the Department satisfy itself of that?

Mr. Kevin Cardiff

One can only satisfy oneself of that by watching the behaviours and by keeping track of them. The alternative is not to use the big advisory firms either in national terms or international terms, and that also has some downsides. The smaller firms can give one very good advice but they tend not to have reach. An example of what I mean is that one could have a small team that is very good on a particular set of issues but if one asks it about something that goes beyond its normal range, it cannot get access to the expertise as easily as the bigger ones, the Merrill Lynchs of this world. One can almost ask such firms anything and someone in their system will have an expertise on any financial question, whereas smaller teams do less well. One finds oneself constrained if one tries to have total purity. It is also a problem in relation to any issue of staffing, any issue of board memberships, of either institutions in the financial sector or of the State institutions dealing with the financial sector. It is very hard to find a large cadre of candidates who are both very expert and available in Ireland and have not had very close dealings with some of the institutions that are here. It is very helpful, but one ends up ruling out most people straightaway and dealing with those who have, perhaps, been retired from the fray for a year or two and who, therefore, have had a little time to release themselves from previous conflicts and so forth. It is a constant concern both with regard to the institutions and finding personnel to deal with these things.

My other question was about how conscious Mr. Cardiff was at the time of the guarantee.

Mr. Kevin Cardiff

It was a very new world for all of us; therefore, we were all conscious of the uncertainties.

Did Mr. Cardiff have any notion of their scale?

Mr. Kevin Cardiff

I do not know that a notion of the sheer scale of the fall was even possible. The Deputy will recall that in the couple of months immediately after the guarantee PricewaterhouseCoopers continued the work it had started in the days before it but had much more time to engage in a much more intensive investigation of the institutions. However, even at that stage the scale of the eventual losses was not clear. It is possible that it just was not possible at that stage to say what the scale of the eventual losses would be. Yes, we can all be concerned about the level of information available, but there is a question, even if things were different, of how much could reasonably or possibly have been available. The fact that the detailed work done immediately before and after the guarantee did not show up the level of losses in the institutions suggests perhaps that job was not as easily done as it might appear in retrospect.

Was Mr. Cardiff aware at the time of how scant the appraisal had been and that it was all they could do? When they gave him the figures, did they make him aware that this had been very much a cursory look at things?

Mr. Kevin Cardiff

There was certainly a clear awareness that much hinged on the extent to which there would be property market valuation falls in the coming months and years.

I welcome Mr. Cardiff and his officials. The public is almost punch drunk with talk about the banking crisis. I hope to simplify it in lay person's English. When talking about capital support, we use terms such as "preference shares", "warrants", "ordinary shares", "promissory notes" and so forth, but most members of the public do not know one from the other. They know what money is but not what these items are. One of the difficulties in tackling such a major crisis is that if people are to buy into something, they must understand it. Perhaps if I went through the institutions, Mr. Cardiff might tell me what has been paid into them, in cash injections, to date. We will deal with promissory notes and future commitments separately. How much has been paid into Anglo Irish Bank, AIB, Bank of Ireland, Irish Nationwide Building Society, the EBS and Irish Life & Permanent to date and by which State agency? Mr. Cardiff has mentioned that the National Pensions Reserve Fund does some of it and I presume the Department does some too. We have been talking about this issue at length and it is the subject of discussion at several Oireachtas committees. How much money has been paid into each institution?

Mr. Kevin Cardiff

We can circulate a note on it afterwards.

Mr. Kevin Cardiff

For AIB, it is €3.5 billion in preference shares——

No, can Mr. Cardiff state how much money has been paid into it?

Mr. Kevin Cardiff

It is real money.

I presume it has been paid not by way of warrant or promissory notes.

Mr. Kevin Cardiff

That was cash. We have not received any cash back from AIB in respect of that amount. In the case of Bank of Ireland, it was €1.8 billion in preference shares. We put in €3.5 billion in cash or preference shares, some of which has now converted into equity.

Is that ordinary shares?

Mr. Kevin Cardiff

It is converted from preference shares into ordinary shares. In the case of Anglo Irish Bank, it was €4 billion in cash and then one gets into promissory notes.

We will deal with that matter separately.

Mr. Kevin Cardiff

With regard to Bank of Ireland, we have also got money back — €500 million.

Therefore, there has been a net cash outlay by the State of €3 billion to date.

Mr. Kevin Cardiff

That is correct in cash terms.

What about Irish Nationwide Building Society, the EBS and Irish Life & Permanent?

Mr. Kevin Cardiff

We have not given any cash to Irish Life & Permanent. Irish Nationwide Building Society and the EBS received €100 million each in cash. The rest is in promissory notes. In some of these cases the NTMA or the NPRF has made ordinary investments through deposits, but the Deputy is asking about capital.

Almost €12 billion in cash has gone into them to date.

Mr. Kevin Cardiff

Yes.

From where does the €50 billion come by way of promissory notes? I realise the largest part is to Anglo Irish Bank. In layman's English, is a promissory note a commitment by the Government to give approximately €3 billion per annum for the next ten years? Is it like an overdraft facility? The Government will only give €3 billion per annum. There is a facility to provide €30 billion, but we are only drawing down €3 billion of that amount per annum.

Mr. Kevin Cardiff

It is exactly like that. It is as if we took out a loan which we must pay back over time.

My understanding is that we have not taken out a loan but have the facility to provide the money. Has the Exchequer drawn down the €30 billion?

Mr. Kevin Cardiff

No.

We have negotiated a facility that will allow us to draw down €3 billion.

Mr. Kevin Cardiff

The institution already has the cash. It is like we wrote an IOU.

It has actually received the cash. From whom did it receive it? Was it the European Central Bank?

Mr. Kevin Cardiff

Yes, in effect.

I realise it has received it indirectly. Are we giving a commitment to repay that amount? It has actually received the cash.

Ms Ann Nolan

No, it has not received the cash. It has been made a promise.

I am anxious to keep this very basic because people do not understand.

Mr. Kevin Cardiff

I am trying to keep it simple. We have taken out a loan. It is circular. In effect, we have taken out a loan in order to provide Anglo Irish Bank with capital.

In effect, it has received an extra €26 billion. The cost in respect of Anglo Irish Bank is €29.4 billion and Mr. Cardiff has accounted for €4 billion. How much of the remaining €25.4 billion will be provided by promissory note?

Mr. Kevin Cardiff

Some €19 billion in promissory notes has already been issued and it is projected a further €6.5 billion will be required. That is where the gap is.

Who will pay the interest on that €19 billion?

Mr. Kevin Cardiff

It is as if we have taken out a loan of €19 billion.

Is it the Exchequer?

Mr. Kevin Cardiff

Yes.

Deputy Bernard Allen took the Chair.

When one adds the €19 billion drawn down to date to the €11 billion in cash that has been put into the institutions, it gives a total of €30 billion put into the institutions so far. How much more has been committed?

Mr. Kevin Cardiff

It is actually a little more because we have not yet dealt with the promissory notes for the other institutions. They involve another €3 billion.

That gives a total of €33 billion. What is the expected overall cost? It is already at approximately €40 billion when one adds to the €33 billion the additional €6 billion in promissory notes yet to be put into Anglo Irish Bank.

Mr. Kevin Cardiff

That can be added, as well as a projected future capital injection for AIB which is as yet undetermined, but potentially could be over €3 billion. The projected figure for Irish Nationwide Building Society is €2.7 billion, bringing the total to €46 billion.

Let us say we, as a nation, are borrowing at a rate of 5%.

Mr. Kevin Cardiff

It could be more, but 5% would not be a bad number.

The cost to Joe and Josephine Soap would be €2.5 billion per annum in interest, on top of the €46 billion.

Mr. Kevin Cardiff

I am told some of it was put in as cash from the NPRF, on which there is a projected return; as such, some of it could probably be taken out.

It is €40 billion in any case.

Mr. Kevin Cardiff

We are paying a lot of money in interest.

We will be paying €2.5 billion per annum in interest. In the next ten years this will amount to €25 billion in interest, on top of the €40 billion figure we have come up with today. I accept we will be paying back the money for a period way beyond ten years. It is safe to say the banking crisis will cost us over a ten year period €60 billion to €70 billion when one factors in the cost of financing and so on.

Mr. Kevin Cardiff

I do not know if that is the best way to look at it. There will be an expectation of returns from AIB and Bank of Ireland which will be offset against the sum mentioned. We will also have to take off some of the guarantee moneys received and whatever other small positive returns are received. A person purchasing a car for €10,000 must, if he or she does not have the money, finance that cost. The Deputy is lumping everything together. This has the potential to cause confusion.

If we had €40 billion in cash in the National Pensions Reserve Fund, we would not have to borrow it.

Mr. Kevin Cardiff

We would be in a more comfortable position.

How much of the €40 billion for which we can easily account was injected in 2009? What was the timing? I understand a particular amount was injected in 2008. Also, EUROSTAT stated our investments of €3.5 billion in AIB and Bank of Ireland and €4 billion in Anglo Irish Bank had to be recorded as part of the deficit for the previous year. I recall a discussion on the matter. How much was injected in 2008?

Mr. Kevin Cardiff

There was no injection in 2008, although there were announcements in that regard.

How much was injected in 2009?

Mr. Kevin Cardiff

In 2009 €3.5 billion was injected into Allied Irish Bank and Bank of Ireland and €4 billion into Anglo Irish Bank.

That accounts for €11 billion to €12 billion of the sum of €40 billion. Mr. Cardiff said in his opening statement to the committee: "We are recognising the enormous banking sector costs in our deficit this year, which is projected at 32%. While the projected Government deficit of 32% of GDP includes a once-off capital support of almost 20% of GDP it is important to recognise that if this had not happened we would be broadly in line...". That relates to 2010. Given that we put in a lot in 2009, it is not right to describe what we are doing this year as a once-off. We had a once-off payment in 2009. We are now having another in 2010.

Mr. Kevin Cardiff

There might be need for a third.

It is certainly not a once-off if is happening every year.

Mr. Kevin Cardiff

It is a once-off in this sense. It is important to state clearly — I do not know if the international markets are watching — that the general Government debt balance treatment, the EUROSTAT treatment, is separate and applied according to its own accounting rules. In it there is what one as an accountant might call an exceptional item driving the figure for 2010. That did not feature in the method of accounting in 2009 because preference shares are regarded as a financial investment rather than a pay-out. The €4 billion given to Anglo Irish Bank was not regarded as a loss until later. There is a difference in accounting treatment that tends to focus matters in 2010 for that purpose. Not all of the money put into institutions is reckoned for general Government debt balance purposes.

If the banking crisis is to cost us €40 billion to €50 billion and our GDP is of the order of €150 billion, that accounts for a 30% proportion of GDP, not 20% as quoted by Mr. Cardiff. The figure of €40 billion we have come up with amounts to 30% of GDP. I do not see these figures in the presentation. Perhaps Mr. Cardiff might explain the reason he keeps telling us the figure is about 20% when, in fact, it is 30% overall.

Mr. Kevin Cardiff

We have been up-front about the costs involved and have not tried to hide them. There is a particular presentation used internationally. Therefore, one must stick with that methodology which is driving the 20% figure. To be clear, we are not trying to hide any figures from anyone.

It is not like buying a car for €10,000 and getting a loan to finance it. In the case of a promissory note, at least, in respect of Anglo Irish Bank and Irish Nationwide Building Society, it is a gift. We will not receive anything in return.

Mr. Kevin Cardiff

It is worse than a gift; it is a loss.

It is a donation.

Mention was made of the Central Bank and the general Government balance debt. The Central Bank annual report issued in the past few days states that at the end of 2009 the general Government balance debt was €105 billion. Is that the Department of Finance's figure because it is not the one it has been quoting as being the debt on 1 January 2010? I presume the Department and the Central Bank liaise on these matters. If the Central Bank states the general Government balance debt on 1 January was €105 billion and if we are putting in of the order of €30 billion this year for the banks and €20 billion in respect of the Government deficit, the general Government balance debt, according to the Central Bank, will be a minimum of €155 billion at the end of December. Does Mr. Cardiff agree with these figures, a big chunk of which is accounted for by the banks?

Mr. Kevin Cardiff

A big chunk of the debt is accounted for by the financial institutions. I accept the general Government balance debt will be €105 billion. The question that arises is how much of the banking amounts, in international accounting terms, is added to our debt and how much will be treated in other ways. Most, but not all, is added to the debt.

Obviously, the amount given to Anglo Irish Bank is added to our debt because it is essentially a write-off of its losses.

Mr. Kevin Cardiff

It is.

The same applies to the figure of €20 billion. Am I correct in saying the total Government debt at the end of the year will be, according to the Central Bank's figures, a minimum of €150 billion?

Mr. Kevin Cardiff

We will be producing a plan in three or four weeks in which all of this will be outlined. It is of that order but I do not want to say exactly what it will be.

Mr. Cardiff may not wish to comment on what I am about to say, but I am going to say it anyway. If the State borrows at a rate of 5% per annum next year, the interest charges for 2011 will be €7.5 billion. I cannot see the matter in any other way. If we have a national debt of €150 billion on 1 January next year, we will certainly be paying a rate of 5% in respect of it. I am just trying to obtain a sense of the scale of what is involved. The figure of €7 billion is massive. I cannot understand how the final amount will not be €7 billion but I can understand why Mr. Cardiff does not want to state whether it will be. Does he understand from where I have obtained that figure?

Mr. Kevin Cardiff

Yes. The Deputy's orders of scale are about right, whatever about the actual numbers. We will provide to the committee a note in which the actual numbers will be set out. There is nothing secret about them. To be clear, however, some things that are recognised for EUROSTAT, CSO and national accounts purposes may not be recognised for other purposes andvice versa. There can be differences of accounting treatment. The number is big. There are some offsets but these are much smaller than the numbers involved.

So we are heading into 2011 with an opening debt of €150 billion and, in light of next year's deficit, this will increase. Have we nearly reached the point where we might be obliged to seek support from the European stabilisation fund?

Mr. Kevin Cardiff

Even if I thought we had reached that point, I would not say so because it would not be my job to do that. We are not having that discussion. Honestly and truthfully, we are engaged in a discussion in respect of how we, as a nation, should deal with our national fiscal position. The European stabilisation fund and similar mechanisms merely lend money. They do not change the basics.

Correct. I understand that. What interest rates are charged by those responsible for the fund?

Mr. Kevin Cardiff

I do not know——

What rate did they impose in respect of Greece?

Mr. Kevin Cardiff

——but I presume they would be charging 5%, 6% or 7%.

So it would not be the end of the world if we were obliged to borrow from this fund. If the rate were reasonable, it would be no different than borrowing from someone else.

Mr. Kevin Cardiff

As citizens, we each have to have our own views on that. However, I am the Secretary General of the Department of Finance and I do not speculate on such matters.

That is fine. The €150 billion to which I refer has been borrowed from many people. Who are the bondholders and debt holders? Will Mr. Cardiff provide the names of the various companies involved? These bondholders and debt holders are mentioned every day. I have never suggested that we should default but I would love to know the identity of the institutions involved. Will Mr. Cardiff provide a general description as to their identity? To most people, they appear to be an anonymous group of entities located somewhere in cyberspace. There is no getting away from the fact that we are very much beholden to those to whom I refer.

Mr. Kevin Cardiff

The sort of entities which lend to Irish banks and to Ireland as a country include banks in other countries and in Ireland. Most of our national debt is held abroad. Others include pension funds. Without saying that it is investing in any particular way, PIMCO, a massive US fund, is one example in this regard. Central banks from all over the world lend to us, as do countries which have cash to invest. In other words——

Mr. Kevin Cardiff

I do not know about them. One could, for example, invent a country and state that the "Morovia national debt agency" has loaned €500 million to the Central Bank and may have a couple of hundred million with Anglo Irish Bank as a State-guaranteed entity. This agency would have a bit of our debt and a bit of this and a bit of that. The "Morovia pension fund" might have a few hundred million invested in Irish banks or elsewhere here. The authorities in this fictional country of Morovia would not lend to Irish banks or purchase Irish debt because half of the population there is of Irish descent. Rather, they would do so because they see a particular return and because they want to spread their own risk. They would not want their investments to be just in Ireland or Sweden or wherever. They would want their position to be spread. The entities involved are usually firms which accumulate money into one big fund to be better placed to manage it and spread the risk around the world.

I accept that funds are involved. However, would some of the world's wealthiest individuals, as well as insurance companies——

Mr. Kevin Cardiff

Yes.

——and banks, be involved? If one consulted the Fortune 500, would one find listed some of those who hold Irish Government bonds?

Mr. Kevin Cardiff

There could be some of them involved, usually by means of some vehicle or other. In other words, Joe Bloggs, multimillionaire, might have Joe Bloggs Enterprises Limited as his fund. Often it would not only be Joe Bloggs's money that would be at issue. Money put up by a number of other individuals would also be involved. Overall it is usually a big money management fund that is involved.

Insurance companies, pension funds——

Mr. Kevin Cardiff

Insurance companies, banks and pension funds.

My final point relates to a matter to which Deputy Enright referred. The Irish people, through various agencies listed on the chart provided by the Comptroller and Auditor General, pays large sums of money to Goldman Sachs, Merrill Lynch and Rothschilds. Would many of those to whom Mr. Cardiff refers be clients of the three companies to which I refer, which provide advice to the Government on whether we should default on bondholders, subordinated bondholders or whatever? Goldman Sachs, Merrill Lynch and Rothschilds have investment arms which operate in a certain way.

Mr. Cardiff stated that there are Chinese walls. What is the position when representatives of these companies advise the Department of Finance? Mr. Cardiff stated that it is obvious, in some cases, to identify who has a conflict of interests. These companies might deal with us on a once-off basis but they deal with their permanent clients much more regularly. In such circumstances, they would never have wanted to give advice to us that would have been in any way detrimental to the clients to which I refer. It must be inevitable that conflicts of interest arise.

Mr. Kevin Cardiff

It is not so much the individual conflicts. What must be taken into account to a far greater degree is their cast of mind. If these guys spend a great deal of time selling equities or investments from one place to another, they might not, for example, be as aggressive or assertive in respect of pricing in some cases. In addition, they might have a different view on what constitutes a good deal. That is just built into their culture. I can think of one example where — without discussing the detail — the NTMA insisted on a pricing adjustment that was contrary to an adviser's line. By doing so it probably saved the State hundreds of millions.

Figure 28 in the Comptroller and Auditor General's report shows that, to 31 July 2010, the consultancy fees charged to the Department, the NTMA, the National Pensions Reserve Fund, the Central Bank and the Financial Regulator were of the order of €33.76 million. If he does not have the relevant information with him, can Mr. Cardiff forward to the committee the equivalent consultancy fees paid by AIB, in which the State will soon have a majority shareholding, Anglo Irish Bank, which it completely owns, and Irish Nationwide? Those fees constitute part of the debts of these three institutions and it will ultimately fall to the State to pay those debts when the latter entities come into its ownership. I would like the costs incurred by the institutions to which I refer being added to the €33.76 million that has already been provided directly to the State agencies. Ultimately, the cost in this regard will fall to the taxpayer. If Mr. Cardiff has in his possession the information I require, that is well and good. If not, perhaps he might forward it to us.

Mr. Kevin Cardiff

I should clarify that I am not sure whether we paid Goldman Sachs. I think that company might have been commissioned by the Financial Regulator but that the cost might have been charged back to the institution concerned. As to the Deputy's basic question, I do not know if I can obtain the figures involved. I am aware of what he is seeking and I will try to do what I can to obtain it.

How much of the money we have borrowed on the bond market was put up by hedge funds?

Mr. Kevin Cardiff

I do not know.

Can Mr. Cardiff name a hedge fund from which we have borrowed?

Mr. Kevin Cardiff

No.

That information must be available in the public arena.

Mr. Kevin Cardiff

I am not sure it is. Hedge funds are a growing and important part of the financial system, so I am sure they have considerable investments in Ireland.

They take a very high risk and usually get a high interest return on their investment.

Mr. Kevin Cardiff

They do that in a couple of different ways. Sometimes they do it by looking for high direct returns from particular investments. If they were buying an ice cream factory in Dublin, for example,

Mr. Kevin Cardiff

HB is gone, but if they were to buy an ice cream factory in Dublin, they would look for a very high level of equity return. It would be a risky investment for them, but they would look for a high return on it. The other way they generate high returns is through leverage. They might, for example, invest in investments that have relatively low returns, but they in turn will have borrowed significantly. I, for example might put €10 into a hedge fund, but they would borrow €90 against my €10 and put it into a relatively low risk investment. A small movement in price on a low risk investment makes a big difference, not to the €100, but to my €10. These are two different ways they can look for a high return. Hedge funds invest in government bonds, but they also invest in movements in government bonds. Some of the funds are interested in the investment itself and others are interested in playing the movement, one against another.

Hedge funds are high risk. At one time here we borrowed money at approximately 3% interest and it went to 5% or more. To me, that implies people are taking a high risk. Hedge funds are in that business. It is obvious, therefore, that there must be some hedge fund money in the bonds the Government has borrowed. I do not understand why Mr. Cardiff cannot disclose the name of the hedge funds involved, because those hedge funds are in the public arena. What is the secrecy about?

Mr. Kevin Cardiff

I do not have a register with me of exactly who owns every Irish bond.

The Government is borrowing in the foreign market and hedge funds operate mainly in the foreign market.

Mr. Kevin Cardiff

There are nominee accounts and the names on the holdings change from day to day. There is a secondary market. We sell bonds to the primary market dealers in Irish Government bonds, but they sell them on to other people.

We are high risk now on the world market and Ireland is seen as at risk. I would think we will be exploited because of the publicity we get abroad in the international press and because it is the hedge funds that are active in funding us. We are paying much more on the market because the hedge funds can take a risk on the return they will get on their investment.

Mr. Kevin Cardiff

It is not just hedge funds that are investing in Ireland. Many sound, ordinary funds are happy to invest in Ireland because they believe there is a return to be had. I understand the point the Deputy is making, but my NTMA colleagues are more expert at dealing with the question than me. I will ask them to help me and provide a note for the Deputy.

All right. The auditing club in Ireland is very small. We have four major auditing groups and they are all involved in different banks. It is strange that they have been re-employed in investigating the different banking institutions, since they had failed in their auditing of the banks leaving us where we are. This issue has been raised in the Dáil . However, the Department went on to re-employ companies like PricewaterhouseCoopers, Ernst and Young and Deloitte & Touche to investigate the banks. We have seen what has happened to such companies across the world over the past ten years. Arthur Andersen was a big company, but it is now wound up. Why was there not a greater investigative process into the auditors or accountants that were being employed to investigate the banks?

Mr. Kevin Cardiff

I suppose it is for the very reason the Deputy mentioned, that there is a relatively small number of auditing companies that can produce the scale of resource required for the job. I do not pretend the situation is ideal, but that is the fact.

How does the Department propose to overcome the problem?

Mr. Kevin Cardiff

Is the Deputy suggesting or asking whether there is a Government plan?

It is a club of four. The international press is now carrying the story and saying there must be a break up of those major firms into smaller operation units, like the banking system. The situation is ongoing. How does the Department plan to overcome the problem in the future so that we do not have the auditing firm that audits Bank of Ireland going into Allied Irish Bank and so on with the same thinking and wearing the same hat?

Mr. Kevin Cardiff

There has been progress in this area in recent years. Not so many years ago we did not have the Insurance Accounting and Systems Association, IASA, for example, to provide some oversight of the auditing and accounting profession. Corporate governance rules have changed ——

Mr. Kevin Cardiff

They keep changing anyway. Corporate governance rules have changed so that there is now a requirement to change auditors more frequently. The impositions in the context of what is expected of auditors in terms of what they are required to report and so forth have increased over time. However, I am sure the Deputy is right that there is more to be done on that.

What does the Department propose to do in the future in any investigation in the accountancy area? Does it propose to look outside the country or within the country? This question will arise again, probably in a few week's time.

Mr. Kevin Cardiff

The European Commission is looking at the overall rules governing auditors and at whether through European legislation it should direct different structures in that area. The commission of inquiry, led by Peter Nyberg, will also look at what auditors did or did not do as part of its investigations.

How much knowledge do Standard & Poor's, Fitch and other rating agencies have and how do they form their opinions? Do they talk to the Department or do they work in the dark? How do they form an opinion that the country is at risk? They have been making very adverse comments on our economy and the state of the nation.

Mr. Kevin Cardiff

They form their own views and carry out their own research

Research, if they can or pull it out of the dark.

Mr. Kevin Cardiff

They do detailed research through all the public data sources and talk to institutions and the country concerned. The NTMA co-ordinates for Ireland on the credit rating and we and it spend a great deal of time trying to explain and talk the rating agencies through the situation. Where we think they do not see the positives, we spend time trying to explain those to them.

Has the Department talked to them?

Mr. Kevin Cardiff

Yes, regularly.

They do not accept its view. It looks to me as if the State will have 94% ownership of AIB and we will then own three public systems in the banking area — AIB, Anglo Irish Bank and NAMA property. NAMA qualifies as a bank, only to put that name on it. A few months ago, we were told that the capital requirement for AIB would be €7.6 billion, but it is now a public property and requires €9.4 billion. It planned to go to the market to get money to relieve the situation. Its shares are now quoted at approximately 40 cent on the public market, but it plans a rights issue at 50 cent. Nobody on earth would take up the rights at 50 cent when one could buy them on the market at 40 cent. Will there be a further capital requirement therefore? There will be a shortfall based on those sums.

We went from a situation where we had no regulation to one where we have serious regulation. Why was regulation not phased in over a period of years?. This would have been more friendly and helpful. What is the Department's role in the context of the Central Bank and the Financial Regulator?

Mr. Kevin Cardiff

On the latter question, ——

That is the simple one.

Mr. Kevin Cardiff

It is the simple one. The Central Bank and the Financial Regulator are now part of the same organisation. The internal differentiation between them has been removed and it is now just the Central Bank. They are independently charged by the Oireachtas to carry out their functions. The Secretary General of the Department of Finance is the only outsideex officio member of the board, which means that whatever about the Department, I have some responsibilities there.

The Deputy also asked why the regulation could not be introduced more gently, so to speak. I presume the Deputy is referring to capital and so forth. The answer is simple enough. It was not a case of doing what was most convenient for the institution over time but rather it was dealing with a banking system's problems. That banking system needs to present itself to the financial markets and ask for money and the banks could not do this with the capital levels they had. Even if the regulator had known and had not set capital standards for them, the market would have demanded capital standards from them.

Did someone get the sums wrong? It was public knowledge that they would sell off assets and then go for a rights issue. The rights issue would come in at 50 cent, which is what they say now so there would be a saving to the State. I know for definite that the State is taking up that shortfall which could come to another €2 million. This thing is only starting.

Mr. Kevin Cardiff

I do not think the Deputy has any basis for saying it is only starting.

I do not want to contradict the Secretary General or argue with him but would he buy the shares at 50 cent on a rights issue when he could buy them on the market at 49 cent?

Mr. Kevin Cardiff

No rights issue has been priced.

I read about it in the newspaper.

Ms Ann Nolan

It is priced in the normal way the day before the announcement. It was priced.

That is a technical answer. I am talking as a man in the street.

Mr. Kevin Cardiff

If we were back six months ago and the regulator had demanded an extra €3 billion of capital from AIB before it was clear the bank needed it, the Deputy might have said to me then that this was a case of overdoing it. The big change between March and the end of September with regard to the AIB capitalisation requirement was to do with the NAMA valuations.

I understand the Department and the Minister met the developers and the construction industry and he talked about a haircut of 28%. Is this correct? We are now nearly at zero.

Mr. Kevin Cardiff

I think we always said that the——

I understand the Department did not agree with the developers on the day so it had it all wrong and now we are where we are, so to speak.

Mr. Kevin Cardiff

I am not sure which meeting the Deputy is referring to. An estimate in April 2009 stated that——

Perhaps Mr. Cardiff was not the Secretary General at the time. A figure of 28% was mentioned at a meeting with developers and others and I think the Minister was present. The developers said the figure would be higher than that and the Department's officials did not agree. There is a conflict between what the Department knew through its research and the establishment of NAMA which has been a disaster for the banking institutions and for the economy as a whole. NAMA will be one of the greatest disasters in Irish financial history.

Mr. Kevin Cardiff

I fully understand the arguments for that point of view. Without commenting on the merits of policy, I could put forward a view which would be a counter-argument.

With regard to referring to policy matters, I must be lenient with Deputy O'Keeffe since he waited so long for his turn to speak.

I ask Mr. Cardiff to be more flexible in his answer.

Mr. Kevin Cardiff

I can happily discuss it with the Deputy at any stage outside the committee. I understand the perspective and I can explain it to him.

I welcome Mr. Cardiff and his colleagues. On behalf of the taxpayer I ask for some further information. It has been the view up to very recently that the cost of the bank bailout should be borne by the taxpayer alone and it has only been reluctantly accepted in recent times that there should be some sharing of that burden with subordinated debt holders. At this point we are in a position where, according to the Minister's recent statement, Anglo Irish Bank, Irish Nationwide Building Society and AIB are all insolvent and cannot survive without cash injections. Many taxpayers would ask why they should pay anything to subsidise the banks' debt holders. Many people would be of the view that the cash shortfall in those three banks should be made up by the debt holders. That would seem to be the logical view to take as these people have taken risks, they are holding the debt in the banks and why should they not share the burden. Given the view and the position that has been adopted in respect of placing this massive burden on Irish taxpayers, would Mr. Cardiff accept that the taxpayer has a right to basic information about that debt in those three institutions? This follows on from questions asked by Deputy Fleming earlier but I noted the nature of the replies were very generalised. At this point I think Irish taxpayers are entitled to basic information about the debt holders in those three institutions.

For example, is Mr. Cardiff in a position to tell the committee which institutions or individuals currently own the debt? If that information is not available to the Department, can it be supplied to the committee within the next week or so? Can Mr. Cardiff say when the debts were issued and can he provide the committee with a schedule of those debts? It is also important the committee is told the repayment terms and, in particular, whether the holders of subordinated debt were given a higher rate of return in view of the higher risk involved. Are the holders of senior debt being given a higher return than depositors? The other information to which taxpayers are entitled is to know what discounts are currently operating in the open market on these debts.

Mr. Kevin Cardiff

The Deputy's questions are reasonable ones. In answer to the first question about specific information, I will circulate a note to the committee. With regard to the date of the subordinated debt, we tend to look at their maturity date. We may have information with us but we can certainly provide a listing of when each of those bonds was taken out and at what interest rate. I expect to be able to provide this information by next Monday or Tuesday. We also can provide the Deputy with an indication of the market pricing for each of those debt instruments. This will differ according to the maturity but there is no difficulty in providing that information.

Is Mr. Cardiff confirming that the holders of senior debt are receiving a higher return than depositors?

Mr. Kevin Cardiff

That really depends on when they bought them. At the time those instruments were purchased, they would have been treated as low risk and at a market rate for the time. So they would not have been earning much more than big depositors, but it would be typically as follows. If one wanted a one-year deposit with, for example, Anglo Irish Bank or the Irish Nationwide Building Society, one would make a one-year deposit or one could buy some debt from them for what was one year of maturity. However, then they had medium-term note programmes so if one wanted to buy for three or four years, one would probably buy their notes. They would have been buying those debts on the assumption of a relatively low level of risk, which would not be too different from the level of risk the depositor assumed he or she was getting. However, the rates for bonds are clearly different from the rates for deposits and the rates for deposits can, themselves, vary a lot as between customers, so it is hard to just say that it would always be more than the depositor was getting, but certainly it would have been more than the small depositor was getting.

Are these not critical figures for assessing the situation? It is important that we know the level of risk that was taken by all debt holders. The level of risk is reflected in the kinds of returns they would expect to get. Given that it is a casino, how would Mr. Cardiff argue that taxpayers should pick up the tab when people went in knowingly taking on very high-risk debt? Why should they all not take a hit?

Mr. Kevin Cardiff

First, that is a policy question. Second, it is one that is very market sensitive. The Deputy can assume that anything I might say on that — or anything that she might say on that for that matter — would get reported around the world. As it is a policy matter, I will not comment on the merits of it.

With all due respect, the taxpayer will be required to carry an enormous debt and all it entails in terms of jobs losses, serious cutbacks in basic public services and severe austerity for the foreseeable future. Taxpayers have the right to know why they are being lumbered with this when the people who went in knowingly taking a serious risk in the market are not required to share it.

It is a serious question but it is a policy issue.

At the minimum taxpayers are entitled to the basic information I have requested. It is not possible to make any kind of judgment on it without knowing those figures. Is Mr. Cardiff saying he can provide all of that to us next week?

Mr. Kevin Cardiff

The bulk of what the Deputy is asking for can be provided by Monday.

We will hold off so.

There is a lack of transparency there.

In terms of the impact of this on Irish society over the next ten or 15 years, can Mr. Cardiff provide us with a schedule of how it will affect our annual budget every year for the next ten to 15 years? What will be the impact on cash flow each year in the budget? Does that schedule exist?

Mr. Kevin Cardiff

We can circulate that too. In terms of the general government balance, which is the one that is targeted mostly, we have dealt with most of the cost in 2010 and the impact therefore, going out, while it will drift down over time, will be of the order of €1.5 billion per annum. If one has a deficit of €20 billion, then it would be €18.5 billion without that €1.5 billion, so it makes a significant difference. It is not the bulk of the deficit, but it is a big contributor. If one wants to think about the actual requirement for us to borrow cash as a nation, that will arise each year over the next decade plus. Assuming we are paying, say, €30 billion in round terms, we will have to borrow around €3 billion a year and that goes out for about 13 or 14 years.

I ask Mr. Cardiff to clarify that. Is this entirely related to the bank guarantee?

Mr. Kevin Cardiff

The bank guarantee actually brings in money ironically, though it costs us a lot in other ways, but in cash terms it brings us in money.

I mean the entire bailout.

Mr. Kevin Cardiff

The promissory notes for Anglo Irish Bank, Irish Nationwide Building Society and EBS add up to about €30 billion. We will be paying that down over time — about €3 billion a year, there or thereabouts.

Is Mr. Cardiff saying that €3 billion will come off the top of the budget each year?

Mr. Kevin Cardiff

The budget targets are set in general government balance terms, but €3 billion will go onto our requirement to borrow. So the NTMA, instead of borrowing €20 billion or €30 billion in 2010, will say "Right, instead of that we will borrow €3 billion a year over the next decade and a half", or whatever it might be.

Is the schedule for 15 years?

Mr. Kevin Cardiff

It works out at about that. It is a bit like a loan, one pays it down but there is interest accruing so one has to pay both of those over time.

Will we be borrowing €3 billion every year for the next 15 years?

Mr. Kevin Cardiff

About 15 years, 14 or 15 years.

What other costs will be involved — the €1.5 billion?

Mr. Kevin Cardiff

That should not be added — those are separate numbers.

I ask Mr. Cardiff to clarify that.

Mr. Kevin Cardiff

In terms of our general government balance targets, there is about €1.5 billion, reducing over time, but starting out at about €1.5 billion, which is an addition to our general Government deficit, which we need as a country to reduce over time. Instead of borrowing directly on the market a large amount of money in 2010, we have given IOUs that allow us to make the actual cash borrowings over time. So, if one likes, our economic position is best mirrored in the general Government balance figures, but our cash requirement is best thought of as arising over a period of years.

Has the Department prepared a schedule outlining all debt arising as a result of the banking crisis?

Mr. Kevin Cardiff

We have schedules of that kind and we can certainly produce one in that form.

Can we also have that next Monday?

Monday is a public holiday.

Mr. Kevin Cardiff

We will be working.

No figure was mentioned for the cost of the advice from Goldman Sachs. Mr. Cardiff has indicated that the Irish Nationwide Building Society would have——

Mr. Kevin Cardiff

I imagine it would be charged back directly to it. I do not know, but I would imagine so.

Was Goldman Sachs working for anybody else?

Mr. Kevin Cardiff

It works for many people.

Did it work for any of the other banks or State agencies?

Mr. Kevin Cardiff

I understand that it had been doing a separate job in Irish Nationwide Building Society, preparing loans for securitisation. As it was already there and had a knowledge of the loan book for that purpose — or had started to get a knowledge of the loan book for that purpose — the regulator took it over and arranged that it would work for that institution with charges back to Irish Nationwide Building Society.

I know that Mr. Cardiff gave an undertaking to provide details of the additional consultancy costs from each of the financial institutions.

Mr. Kevin Cardiff

I said that I would not have the numbers necessarily but I said I would do whatever I can. I will certainly try to identify who works for whom.

Can Mr. Cardiff get the figures for us?

Mr. Kevin Cardiff

I said to Deputy Fleming that I understood what he wanted and I would try to get as much of it as I can.

The figure we have at the moment is €35 million for buying in advice for the State agencies. It is important that we also know the equivalent figure for the cost to the individual financial institutions of buying in advice. Does Mr. Cardiff have any handle on that?

Mr. Kevin Cardiff

I imagine they spend more on it than we do.

The figure is likely to be more than €35 million.

Mr. Kevin Cardiff

Yes. One must remember that in addition to the structural advice they receive, they issue debt and do corporate finance deals on a regular basis. It is bread and butter for them. I imagine that their total numbers are quite a bit bigger than the number mentioned by the Deputy.

I assume it is possible for Mr. Cardiff to get those figures for us.

Mr. Kevin Cardiff

I will certainly try.

Fine. We would appreciate it if they could be given to us as soon as possible. Where does the Department stand on the expensive advice received from consultants? On the role played by Merrill Lynch, how much was it paid for the advice it gave?

Mr. Kevin Cardiff

It was paid €7 million.

Did that happen immediately before the guarantee?

Mr. Kevin Cardiff

No. A newspaper has suggested that the company was paid €7 million for three days' work, or for two weeks' work. That is not the case. It was paid €7 million for its work over an extended period of nine months or a year.

Ms Ann Nolan

It was paid for a period of nine months between September 2008 and June 2009.

Fine. I refer specifically to a document that has been provided to this committee, which set out the various options available to the Department of Finance.

Mr. Kevin Cardiff

That was part of the work the company did for us. It continued to work for nine months after that.

When the Minister for Finance wrote toThe Irish Times during the summer, he claimed that Merrill Lynch supported the Government action. A number of people disagreed with that and said it was not an accurate assessment of the advice given by Merrill Lynch in the document. Has the Department considered the prospect of suing advisers on the basis of the poor quality of the advice that was provided to it?

Mr. Kevin Cardiff

No, we have not. One would imagine that institutional shareholders might want to think about that, but we have not.

Mr. Cardiff mentioned institutional shareholders, but is it not the case that we are all shareholders now? Surely there is a job to be done on behalf of the taxpayer.

Mr. Kevin Cardiff

To be honest, I do not think much value would be added by such an approach. The advice was, in general, honestly given and competently put together. It was provided in difficult circumstances and with plenty of caveats. I am not sure there is any pot of gold there.

Is it worth anything? What kind of value for money did we get for the more than €70 million that we spent?

Mr. Kevin Cardiff

I think the correct amount is €35 million.

Mr. Cardiff has already said that a further €35 million, at least, was paid by the institutions as well. We are talking about a bill of more than €70 million, for so-called expert advice, paid by the Irish taxpayer.

Mr. Kevin Cardiff

I think the expert advice was just that — it was not a guarantee. I do not think one would have a strong legal case if one sought to turn it into a guarantee. Perhaps I am wrong.

Will Mr. Cardiff consider the matter?

Mr. Kevin Cardiff

I have not considered it.

There is no point in paying large amounts of money to these people if they are not giving us value for money, or if their advice is not sound.

Mr. Kevin Cardiff

The advice provided by some of them, at least, has been very valuable.

I conclude by asking about Mr. Fingleton. It sticks in the craw of many people — it sickens them — that a man who caused so much damage and placed such a burden on Irish taxpayers has a pension pot worth €27 million. Has the Department received any legal advice about what might be done with regard to the pension pot and the bonus of €1 million that Mr. Fingleton received before he left Irish Nationwide?

I should mention that while the Deputy was missing — I appreciate that she was in the Chamber — we asked for a copy of the report of the two departmental representatives on the board, which was compiled following an investigation into payments to Mr. Fingleton.

My question is a little different. Has the Department received any legal advice about what can be done about the pension?

Mr. Kevin Cardiff

Any action with legal standing would probably have to be taken through the institution. As I recall it, when the institution examined the legal position, it did not feel it had a formal case. I understand it is anxiously awaiting the repayment of the €1 million sum mentioned by the Deputy.

I also asked about the pension of €27 million.

Mr. Kevin Cardiff

It is a huge number, is it not? I do not know whether it was invested, or where it was invested. Before all this trouble arose, it came out of an Irish Nationwide pension scheme and went into a private scheme. Therefore, it was never part of Irish Nationwide at a time when the State was involved in the ownership of that institution.

Has the Department received any legal advice about the possibility of recovering some of that money?

Mr. Kevin Cardiff

My recollection is that the report into the moneys that were received by Mr. Fingleton considered whether they were received correctly. I do not know whether legal advice was attached to that report, but I can check. I am aware that some consideration was given to the matter.

I thank Mr. Cardiff.

We expect to see that report.

I would like to ask Mr. Cardiff about an aspect of banking regulation that was mentioned by Deputy Ned O'Keeffe. Is he aware how difficult it is to open a bank account?

Mr. Kevin Cardiff

Yes.

A constituent of mine had difficulties opening a bank account for his son, who wanted to save his communion money. When he went to the bank to open an account, he was told he did not have the appropriate documentation for his child, which was fair enough. When he brought the child's passport into the bank, he was told that the child's PPS number was also needed. When he brought the passport and a document with the PPS number into the bank — this was his third attempt to open the account — he was told he also needed to provide two utility bills in his own name, as the parent of the child. There is a contrast between the regime that allowed Irish Life & Permanent to send €6 billion or €7 billion on a holiday to make the books look good and the current regime, which penalises the citizens of this country. Although regulation is necessary, some degree of common sense must prevail.

Mr. Kevin Cardiff

I will deal with that briefly. It sounds like the difficulty was caused by the institution's interpretation of the money laundering rules. Ireland has signed up to abide by these important international rules. Banks are supposed to use a certain amount of discretion in their exercise of the rules. Although the guidelines provide for certain requirements — one must look for X and Y — they may not apply in some circumstances. In a typical case, a bank will seek photo identification and a utility bill, but not everyone has a utility bill. The guidelines allow for discretion mechanisms to be used to deal with such issues. In the case mentioned by the Deputy, it sounds like the problem was not with the bank's policy or the regulations, but with the training of the staff in the branch in question. I would be happy to be proved wrong.

Perhaps I should mention that Mr. Cardiff is looking at the person in question.

Mr. Kevin Cardiff

I am looking at the person. Fine. Although the money laundering rules are deliberately onerous in the sense that they require banks to get clear proof of who each customer is, they are not supposed to be overly burdensome. It should not be impossible for a child to open a bank account just because he or she does not have a standard set of documentation. I can show the Deputy the guidelines and what the banks are supposed to be doing, but it does not sound to me like it corresponds to what happened.

Unfortunately, the pendulum is swinging too far. Interpretation is very strict and narrow and they say they have no discretion. That is what they have been told. I wanted to illustrate that point.

Paragraph 6.46 of chapter 6 of the report of the Comptroller and Auditor General refers to an anticipated value of eligible assets of €81 billion and 1,500 borrowers. That only 1,500 people were responsible for an eligible asset book valued at €81 billion is astonishing. Ten of the largest borrowers were transferred to NAMA initially. Reference was made to advice and the analysis of highly paid consultants on the non-NAMA moneys with the banks. I refer to loan values of less than €5 million. I was not aware that the AIB and Bank of Ireland debtors' amount had been increased to €20 million. My real concern is that, as a nation, having been affected to the extent we have in regard to the bond markets, even a little thing will tip us over the edge. The markets certainly do not have much trust in where we are financially. I am concerned that our estimate, according to the report of the Comptroller and Auditor General, was almost 20% out in respect of ten individuals. Although they were the ten largest borrowers, we were 20% out. As we moved down through the remaining 1,490 people, the haircut became larger. That is the way it should be because the assets simply did not stack up on analysis. I am very concerned that the figures for the loans of less than €20 million from AIB and Bank of Ireland and less than €5 million from the other institutions will not stack up either. It is stated they have been analysed, but, as we can see from the quality of the work done by the analysts and those who advise the Department and other institutions, the analysis seems to be appallingly poor. Is Mr. Cardiff satisfied that the numbers being circulated will stack up in the future? I know he can only give his opinion, but there is no grey area in this instance. If the figures are incorrect, it will tip us over the edge. It is crucial, therefore, that they are correct. This is an Oliver Cromwell moment, a warts and all moment, for the nation. The loan book for the institutions in question is substantial.

Mr. Kevin Cardiff

The best way to answer is to tell the Deputy a little about the process involved. The regulator will not just allow the institutions to state loans under €20 million are for them to value. In other words, the regulator will not judge the institutions' capital based on their own valuation. The regulator and the Central Bank should outline this themselves, but I understand the plan is that the regulator will insist that the sub-€20 million loans be haircut in the institutions' system to an amount extrapolated from the level of haircuts NAMA has discovered in the books in the course of its work. The Deputy is correct that these haircuts have been bigger than expected by a long shot. This is partly attributable to the fact that property values changed in the period between the initial estimates and the final date for the valuations. One would have expected them to move in some direction in any case.

The other thing that has happened is that items within the loans have turned out to be worse than they may have appeared from outside. It was always said consistently, thankfully, that the NAMA process would operate on a very detailed loan by loan basis. It is that very detailed work that is driving out these imperfections which have real value implications. One would not know from the face of it, or even from a very detailed look at an overall book, where the haircuts were. However, if one operates on a loan by loan basis, one finds imperfections in securities, cross-securities, personal guarantees that can only be used against one loan rather than three, and so forth. NAMA has been assertive in ensuring this is done correctly. Even where it was told it was wrong to be so pernickety, it has gone through the process as I have outlined. Perhaps we are all suffering from this now in that the banks need a little more capital, but in the longer term it will probably save us all some money.

Regarding the sub-€20 million loans, there will be an estimated value based on the work of NAMA, not just on that of the institutions.

I am concerned that NAMA is being advised by advisers——

Mr. Kevin Cardiff

I misunderstood the point.

——whose advice was poor, as we have seen on too many occasions. With regard to the loans worth under €20 million and under €5 million, the numbers are not accurate. When we re-enter the bond markets in 2011, those concerned will be waiting for more bad news. If it comes, there will be a price to be paid. I hope the advice at this stage is accurate because there have been too many occasions on which it was inaccurate.

Mr. Kevin Cardiff

I take the point. There is no such thing as an accurate forecast. Forecasts are always a little wrong in one way or another.

Mr. Kevin Cardiff

However, a fair degree of attention has been paid to trying to make this a fairly conclusive statement. As the Deputy saw, there were two numbers given for Anglo Irish Bank, a good case and a stress case. There is a certain allowance for the stress case. The Deputy should take it from me the number will not be exactly right, but it should be in the right order and about right. If it is produced carefully enough, the market should be able to take reassurance from it.

My view on NAMA——

We will be meeting its officials in the next few weeks.

It is crucial that I have the opportunity to put the point I am making to the Secretary General also. My view on NAMA was that it would not allow the market to find a starting position. A good example of this concerned the Fingleton apartments that were placed on the market about a week ago. According to reports, 40 or 50 are in the process of being sold. What are the Secretary General's views on the matter? We need to consider where we are going to go from here. At what stage within the entire NAMA process, during which advices will emerge from the Department, will NAMA allow properties to be placed on the market such that it will find its starting point? Without properties being placed on the market, there is no starting point. The number of property transfers is practically nil. In such circumstances, the excessive stock is not being allowed to be purchased. As long as this is the case, there will be nothing at the supply end. Without this happening, guys will be left unemployed. There is a domino effect and nothing happens. We are now in that position. I would like to hear Mr. Cardiff's views on how we can make something happen.

Mr. Kevin Cardiff

I will make it clear, because I believe that is how the Oireachtas wanted it, that the Department has absolutely no say in those commercial decisions.

I am aware of that.

Mr. Kevin Cardiff

My understanding is that it is anxious to get all the assets in and then to start managing them. That has already begun but then it is a question of managing the process proactively. I do not believe there is any intention to sit on assets, as it were, just for the sake of it. One of the sales has been in progress for relatively large sums of money, although not in Ireland yet or not for big numbers in any event. It would probably be better for the Deputy to put the question to NAMA, but my suspicion is that he will be somewhat reassured in the event to learn that it does not intend to keep the market starved and unable to find a base.

It is not directly relevant, but indirectly it is. In relation to the——

Mr. Kevin Cardiff

Before I address that, I believe my colleague might have a slightly fuller answer for the Deputy.

Ms Ann Nolan

The committee may be interested to know that as well as the Comptroller and Auditor General's report on NAMA, two other documents were received from NAMA — I do not have with me the exact titles — that are now with the Minister which he is hoping to bring to Government next week, and they will be laid before the Houses along with the quarterly report for the end of June. The second item is an annual report for the first year, that is, the year to June. It sets out the policies on the areas the Deputy referred to as determined by the board. I hope they will come to the Oireachtas either next week or the week after.

I thank Ms Nolan. I will finish up by asking a question about the former regulator and his office and the manner in which the chief internal auditor of AIB was treated when many years ago he raised the issue of overcharging by that bank. In hindsight, looking back on the files, did that whole issue not raise any alarm bells in the Department of Finance regarding the effectiveness or ineffectiveness of the regulator? I am talking about the manner in which that man was treated as a result of the report he submitted. I know the current Financial Regulator has issued a type of apology for the way that man was treated, but in hindsight did that not raise any alarm bells concerning the effectiveness of the regulator's office at the time?

Mr. Kevin Cardiff

There is nothing specific on it. It was not something, to the best of my recollection, that was being——

Was something not said to the Department concerning the way the banks operated? Surely there should have been a follow-up on that at least between the Department and the Financial Regulator on the issue.

Mr. Kevin Cardiff

I will look back and see if there are any papers on it but I do not recall any.

Could Mr. Cardiff supply the committee with the papers, if any, that went between the Department and Mr. Neary and his office at the time?

Mr. Kevin Cardiff

Of course.

That whole episode was disgraceful.

Mr. Kevin Cardiff

I do not know the detail, but I am aware that the current regulator gave his best view of the situation to the committee, and I accept that.

Ms Nolan has just said that NAMA's first annual report is expected.

Ms Ann Nolan

I was talking in respect of a second document as well that gives the policies.

Yes. Publication of that report is imminent. Given NAMA's size and importance, we should hold a special meeting immediately on that because our work schedule to next February is laid out.

We discussed this earlier in private session and——

I apologise. I did not know that.

We said we would find out today when the Comptroller and Auditor General's report would be published by the Government. We were told it would be within a matter of weeks. The other reports will be with Government at that stage, so we agreed that our work programme was sufficiently flexible to have a session on NAMA between now and Christmas, and the sooner the better.

Mr. Kevin Cardiff

I would appreciate it if we could go into private session.

I would prefer not to.

Mr. Kevin Cardiff

I did not know the procedure, but I was here for two hours in private session during the summer. I wanted to deal further with Deputy Shortall's point, but I can do it directly with the Deputy. That is the simplest way.

It raises all types of questions for us.

Mr. Kevin Cardiff

I do not wish to raise any questions for the committee at all. I did not realise there were any issues involved, and I apologise.

We can go into private session if the members agree.

The committee went into private session at 1.26 p.m. and resumed in public session at 1.27 p.m.

I call on the Comptroller and Auditor General to summarise.

Mr. John Buckley

I want to summarise where we are in our reporting cycle on banking issues. Obviously we produce the report on the Financial Regulator. We have catalogued over the last two years, 2008 and 2009, the bank stabilisation measures which we are dealing with today. The forthcoming report on NAMA will cover the asset acquisition process it is applying, the outturn on the first loan acquisition round and the arrangements for governing and resourcing the agency. The first accounts of NAMA will be for the year ending 31 December 2010, which has yet to elapse. Along with those first reports and the first audit of NAMA we intend to do a follow-up or second report on NAMA which will outline in as simple terms as possible the consolidated position of the agency and how the consideration and state aid has been calculated for all the loans acquired to date. We will look then at the property management arrangements as well as the arrangements for loan servicing. We will look also at the working out and enforcement process that has been put in place. In summary, I am signalling that we have a report that is fairly imminent, the content of which I have outlined, and we have a follow-up report that will be done in conjunction with the annual audit certification process.

I thank Mr. Buckley. Will we wait before agreeing?

A number of items have still to be clarified, so I believe we should hold off.

We have the 2008 report done, on which we can sign off, and we have the 2009 one here as well.

I believe we should leave the 2009 report open until we get the further information we need.

Can we deal with the 2008 report?

We will dispose of the 2008 report. Is that agreed? Agreed. We will hold the 2009 report open until Mr. Kevin Nolan comes back.

Mr. Kevin Cardiff

Chairman, can I request that the committee goes into private session for 30 seconds? It concerns something I cannot say in public but I want to be clear that I have not misled anyone.

We will go into private session.

The committee went into private session at 1.30 p.m. and adjourned at 1.35 p.m until 10 a.m. on Thursday, 28 October 2010.