We are back in public session. Is that agreed? Agreed. Can I ask members and those in the public Gallery to ensure that their mobile devices are switched off. We begin today's hearings with Mr. Alan Merriman, who is former finance director at EBS. In doing so I would like to welcome everyone to the public hearing of the Joint Committee of Inquiry into the Banking Crisis. Today, much of the focus of the inquiry is on EBS. At this morning's session we will hear from Mr. Alan Merriman, former director of finance at EBS. And Alan Merriman joined EBS in July 2005 where he was finance director until March 2009. Previously he worked with PricewaterhouseCoopers, where he was a partner. Mr. Merriman is now the chief executive at Elkstone Private. Mr. Merriman you are very welcome before the committee this morning.
Nexus Phase
EBS - Mr. Alan Merriman
Mr. Alan Merriman
Thank you Chairman.
Before hearing from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings. Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right. Members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.
The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee, will be relied upon in questioning and will form part of the evidence of the inquiry. So if I can now ask the clerk to administer the oath to Mr. Merriman please.
Before Mr. Merriman makes his opening remarks, just to remind members once more that in certain engagements with financial institutions, some documentation may regard or contain personal names or financial data and in regard to protection of sensitive commercial information, members just need to be mindful of their questioning this morning in that regard. So with that said, if I can invite Mr. Merriman to make his opening remarks please.
Mr. Alan Merriman
Thank you, Chairman. I very much appreciate the opportunity of being here today. Rather than repeating my witness statement verbatim, in the interest of time I plan to give a brief introduction to my responsibilities and time with EBS, explain why I believe EBS was more of a casualty rather than a cause of this crisis and briefly comment on a number of very select topics which I guess would be of particular interest to the committee.
I joined EBS in the summer of 2005 as finance director. Prior to this I had been with PwC for a little over 17 years.
I was on the audit and advisory team of the firm and I was the partner responsible for leading the firm's banking, audit and advisory practice. I was privileged to have practically all the Irish banks amongst my client base, including the Central Bank of Ireland and Bank of Ireland. I was very happy in PwC. Nevertheless, having been courted by EBS, I was eventually convinced to leave, attracted by the opportunity of testing myself in industry and by the wider challenge of ongoing professionalisation of the society and, of course, championing mutuality.
I ultimately ended up spending only a little over three and a half years with EBS and yet this very short period crossed both the tail-end of a long boom period that this country had enjoyed and the beginnings of what I would describe as two devastating crashes: the first being the global liquidity crisis which triggered the second, being our own catastrophic banking and property market crash. During the short, three and a half year period, I served under and diligently worked alongside, in very challenging circumstances, three different chief executives. I was given a wider role than might be considered the norm for a traditional finance director and, broadly speaking, this role might be best characterised as, in effect, being more like that of a COO, a chief operating officer. For instance, finance, treasury, commercial lending, operations, IT, internal audit, investor relations and risk, amongst others, all came under my areas of responsibility. I would emphasise that each of these important areas had their own head of finance, head of function - all well very well qualified and experienced in their subject matter fields and clearly responsible for the day-to-day runnings of their functions and/or departments. I had a very loyal, hard-working and talented team and strong support throughout this period from both our head office and the network, which I was, and continue to be, very grateful for.
As you may know, I stepped down - and reluctantly so - in early 2009. This was voluntary, in that I agreed that, as a mutual, it was important to show accountability to our members and other stakeholders for what had transpired in EBS and, in addition to the chairman resigning, I was the obvious choice at executive level to accompany him at that time. Similar to others, I would have preferred to have stayed and helped but we felt that, on balance, the right thing was that I should exit along with the chairman.
Let me emphasise that EBS was different. I think it's a very, very important point to acknowledge. It was a member-owned, non-profit organisation. It was the last remaining true building society in Ireland. It was established for teachers, was strongly supported amongst the public sector - guards and nurses, amongst others - and its people, whether at branch level or at head office, root and branch had a DNA and a culture of being community based and member focused. It was not focused on profit. It was about people, it was about trying to serve members better through superior service, real trust and competitive pricing compared to the banks, and to be relevant. It was a very democratic organisation, with a diverse board and true member representation. It was an alternative to the commercially-driven banks. It had a good culture and spirit, but neither was it perfect. The fact pattern, whether it was well understood or not, EBS was fighting for survival and relevance, not only in 2009 or 2010 but also back in 2005 and, indeed, before that. Had it not competed in the market, EBS, as Ireland's last true building society, would have ended up gone like the 20 other building societies that this country once had.
Running down the balance sheet realistically was not an alternative, so EBS continued doing what the board collectively thought best to preserve mutuality. This meant defending its natural mortgage market share and growing its non-member businesses to aid the member business. This strategy of running both a member and a non-member business in parallel had been successfully deployed by others in the UK and various international studies have shown that having a mutual is good for the market as a whole. However, as we all know now, regardless, the society was lost.
Let me comment on some specific matters that I think would be of particular interest to the committee. Risk appetite: I want to bring some clarity on this topic and, in particular, commercial property and development lending by EBS. Quite a number of commentators have questioned why a building society would be in those markets at all.
Firstly, just to emphasise that my understanding is that the building society legislation was explicitly changed to allow for this. The Oireachtas must have felt it appropriate and justified and it was against this backdrop that EBS first entered commercial lending in 1991, and not, I might emphasise, 2005. And I note that as part of its then approved board strategy, EBS embarked on development lending as a sub-strategy of commercial lending business in 2001 and, again, I would emphasise, not in 2005. The commercial business was circa €1.5 billion and the development lending book was circa €100 million by the time I joined in July 2005. From the information I've been able to glean in preparation for today, the development lending book, which was built up to circa €500 million by the end of 2008, gave rise to about €300 million of crystalised losses. For clarity of understanding, I'd like to highlight that whilst undoubtedly the development finance losses were shocking and a very severe blow to EBS, they did not bring about its demise. Rather, the facts clearly show that given the magnitude of the total capital ultimately needed for EBS, which was a multiple of this number, clearly a multitude of factors - which evolved over a very considerable length of time - lead to its business model failure and not just development and/or commercial lending. And I'll be happy to elaborate on this in questioning.
Whilst of little comfort, I would also note that risk management and best practices always evolve. And whilst EBS made mistakes - and, for example, the controls we put in place such as the 3% cap on development finance, were inadequate - by late 2007 and early 2008 we were actually ahead of the curve and this is evident by firstly two clear facts: we were the first to exit these businesses; and, secondly, our loan-loss provisioning at the end of 2008 was more realistic than the banks'. During my time with EBS, capital funding and liquidity were always key agenda items for the EBS board and the risk committees. There was good MIS and intelligence continuously available and there was definitely a sophistication and a depth in the society management team of these critical areas. For a small financial institution, we had the benefit of both a head of treasury and a head of capital markets, both with deep treasury experience, who, alongside risk, finance and strategy personnel, also had a strong appreciation of these important pillars of banking. Actions were taken continuously by the board of management to mitigate these risks, including widening and lengthening our funding programmes, improving our collateral position markedly over this period, investing in the infrastructure necessary to establish our covered bond bank - which, amongst other things, brought further emergency liquidity protection - and raising of PIBS, permanent interest-bearing shares, to improve capital ratios and lost absorption, etc. However, in truth, these were remedies which created breathing space for the status quo to be maintained, rather than being sufficiently, materially corrective. Consequently, when the crisis did arrive, EBS was, whilst relatively better placed than others, still poorly positioned to withstand the overwhelming stresses it brought.
In wrapping up, let me say a couple of things. Many hard-working people and families all over Ireland, through no fault of their own, were just trying to get on with normal life and do the right thing. They continue to suffer today from this global financial crisis. In truth, for them, certainly in the wrong place at the wrong time. This, in my view, arose in particular because of how, in Ireland, the property and banking market was allowed evolve here. And hindsight clearly shows us that Ireland's comparably greater systemic vulnerability in this disaster evolved unchecked by those who ought to have been able to genuinely make a difference or at least provide some meaningful shelter. EBS is not without fault but the hard truth, if you want my considered insight, is that successive Governments and the authorities, local and European, have much to answer for and more so than EBS. EBS was different - it was very much more of a casualty of this one-in-100-year crash than a cause. As the only real building society we had left, it fought a good fight. Yes, it failed but not for the want of trying. It was definitely not a root cause of this crisis locally, never mind internationally. Of course it made mistakes and we had failings and these are regretted. But EBS was essentially a small fish in a big pond in an even bigger world, where we were takers and not makers of how banking funding worked.
Within that system, EBS was trying to make a positive difference. It didn't give up on mutuality. Maybe that was a mistake; maybe it wasn't. I hope this somewhat panoramic and very personal perspective is of help, Chairman, and I'm happy to take questions.
Thank you very much, Mr. Merriman, for your opening comments this morning and if I can invite Senator Marc MacSharry, please, to begin questioning. Senator, you've 25 minutes.
Thanks very much, Chair, and thanks, Mr. Merriman, for coming into us and for your account there. Can you tell me what was your assessment of the liquidity and the solvency of the society on the night of the guarantee in September 2008?
Mr. Alan Merriman
I think at that particular point, I mean, clearly the market was under strain, EBS was having its challenges, but its own liquidity position was relatively well-positioned as a home lender with a very substantial residential book. We had a lot of collateral available to secure funding. And on the solvency side, well, clearly again, there were stresses and strains, the capital ratios were very strong at that particular point. So we were more concerned about the market as a whole as distinct to our own individual position at that point.
What was the dependency on wholesale funding at that time?
Mr. Alan Merriman
Well, broadly speaking, the society's funding came ... approximately one third came from the member base, which we'd describe as retail funding. Together with corporate deposits, about 50% of the entire balance sheet was supported by what would be referred to as customer deposits. So both retail members and corporates. The other 50%, broadly speaking, would have come from what one would loosely describe as the wholesale markets. That would have been a mix and a variety of different funding, both short-term and long-term.
Your society was covered as part of the bank guarantee but you didn't appear to be involved in any way in the final discussions with Government or the regulator. Can you tell us what input, if any, your society and you did in any of the discussions that took place at that time?
Mr. Alan Merriman
I, personally, had no involvement. I think the society practically had no involvement either. And I think that really reflects back to my opening comments to your first question, that at that point in time we weren't seen to be a major factor one way or the other.
And how did that manifest itself? Did you just get a call and say, "Look, we're doing this and you're in", or, "Do you want to be in?" or-----
Mr. Alan Merriman
Yes, basically. I mean, quite literally got a phone call to say the guarantee had happened and, clearly, it was market-wide and, yes, that's exactly how it happened.
And who rang who?
Mr. Alan Merriman
I ... my recollection is I certainly got a call from Kevin Cardiff confirming that this had happened, and it was as simple as that.
Was that early in the morning or 3 o'clock in the morning or-----
Mr. Alan Merriman
I can't remember. I genuinely can't remember.
Okay. We note that you wanted a five-year guarantee put in place. Can you outline your rationale and understanding with regard to that stance and did you make any recommendation externally and was there any response?
Mr. Alan Merriman
Again, I don't recollect, myself, in terms of making any personal representations etc., etc. I know Fergus Murphy was here last week and he confirmed that five years is a particular idea he floated. I think the wider context would be that at that point in time, five years from, you know, a Fergus Murphy perspective was seen as being more prudent and more in sync with some other markets and would allow for a greater period of stability. And, as we've all seen, unfortunately, it's taken quite some time for this market to adjust.
And would he ... who did he make this case to?
Mr. Alan Merriman
I don't know.
You don't ... would it have been Kevin Cardiff or-----
Mr. Alan Merriman
I don't know.
-----was there any dialogue? You're not aware of any dialogue at all?
Mr. Alan Merriman
Not directly.
To the Central Bank or-----
Mr. Alan Merriman
No.
Nobody. Okay. Was it your first to hear of it last week when you heard Mr.-----
Mr. Alan Merriman
Pardon?
Was it the first time you heard it when Mr. Murphy was-----
Mr. Alan Merriman
No, I mean, look, clearly there was, you know, ongoing discussions on a continuous basis about what was happening in the marketplace. I, personally, would have attended quite a lot of meetings down in the Central Bank and the regulator discussing what was happening in the markets, discussing the strains, sharing intelligence, etc., etc. So, clearly, this was all done very much in a context and, clearly, there was sense in the markets - all the treasury departments would be very well interconnected - that there was a real strain. So was it a shock when we heard what had happened and the proposed solution? No, it wasn't a shock, but it wasn't something that we were party to in any central way.
Can you tell us about the ... you said you had multiple meetings, kind of, down in the Central Bank with the regulator and others to discuss strains and other issues to do with the market. Was there ... what was the frequency of these meetings? Was there a standard, kind of, weekly meeting, monthly meeting?
Mr. Alan Merriman
No, I'd say I ... my recollection of them is that they were ad hoc. They did, clearly, pick up in frequency. They were at the very highest of levels, so personally I would have been meeting with John Hurley and with Pat Neary and with Tony Grimes. And they would have been sharing with us their perspective on what was happening in the market and they would have been clearly, you know, looking for our intelligence in terms of - from the flows we were seeing - what was going on in EBS and our read of the markets at that point in time.
So before there was any strains or any issues that are identifiable, with the benefit of hindsight, could you tell us that ... when would you say the situation changed? That ad hoc became to be frequent or that the circumstances were demanding, that there was-----
Mr. Alan Merriman
Again, I won't have great recall but it would be most definitely in the second half of 2008 would be my guess from all I know.
And were those meetings at your request or was-----
Mr. Alan Merriman
No, they would have been ... the vast majority would have been at the Central Bank's request.
We're getting some phone interference there now.
Sorry. And was it ... was it typical that the regulator and the Central Bank wouldn't ... even before the crisis when there would be other, kind of, meetings scheduled once a year or whenever that may be, was it normal that the regulator and the Central Bank team of Hurley and Grimes would meet you together?
Mr. Alan Merriman
No, absolutely not. I mean, this was extraordinary times and we were meeting very much in that context and that was absolutely understood at that point in time. These were not routine meetings, these were meetings in the context of, you know, what was happening in the marketplace, real concern in the Central Bank, real concern across individual banks in terms of what was happening and how this was going to be worked through. So these were extraordinary times.
I'm just trying to get a picture of what was routine and what wouldn't have been routine. So let's go back to the routine meetings pre-crisis.
Mr. Alan Merriman
Well-----
How would they ... what way would they manifest themselves? Would it be-----
Mr. Alan Merriman
Well, it would depend on the perspective. I mean, I never met - and I was the finance director - I never would have met with John Hurley until this time.
And would you have met with Tony Grimes and Pat Neary?
Mr. Alan Merriman
Would have met them in different contexts. So, EBS would have been quite good at what I'd call being proactive and sharing with the regulator our strategy. So there definitely would have been, I would guess, at least annual meetings, where we would've updated on, you know, "Here's how the performance was this year. Here's where we've made progress. Here's what the strategy is. Here's what our challenges are." So those type of meetings certainly did happen in normal times as well as in stressed times. Discussions with a Pat Neary or a Con Horan would have happened on, I don't know, maybe on a twice-yearly basis there might be meetings where, again, at a strategic level, observations would be exchanged, etc.
But certainly not the top brass that you say ... Mr. Hurley and everybody was there together in the one-----
Mr. Alan Merriman
As I said it was extraordinary times and it was very much in that context.
And these meetings started in and around, to the best of your recollection, the second half of 2008?
Mr. Alan Merriman
Yes. And I could be ... I mean, the record might show that it was earlier but that's my recollection.
Oh, yes, we're only looking for your recollection. That's fine. And did you have a sense that they were acting together?
Mr. Alan Merriman
Yes.
And they were on the same page, to your mind?
Mr. Alan Merriman
Broadly. I mean, they were meeting together, they were hearing us out together, they were sharing their input to us together. I'd no reason to believe otherwise.
At any of these meetings that you were involved with, was it ever, kind of, thrown out there by Mr. Hurley or Mr. Grimes or others that "Look, you know, we're thinking out loud here. What do you think? Do we need a guarantee, do we not need a guarantee?", was there any sense of any of that?
Mr. Alan Merriman
My recollection is ... guarantee wasn't discussed. That's my recollection. My recollection was that the meetings were more about what I would call the ebbs and flows of liquidity in the market, concerns around how this was going to be resolved, concerns about ECB. And it did clearly progress to EBS's position itself and what solutions there might be for EBS from a more M and A-type perspective.
Okay. And just as a result of these ongoing meetings that were going on over that six-month period, can you identify any specific tangibles that either ... that the Central Bank and regulator, acting together, prescribed for you to take, suggested you should take or that they suggested they themselves to try and mitigate against the difficulties of tightening liquidity positions?
Mr. Alan Merriman
Well, look, it was ... again, I would, my recollection is; nothing was prescribed. They were clearly very interested in what we were doing ourselves to resolve strains and, and find ... additional means of getting collateral and access to funding, so there was intense interest in that. And when it came to the latter stages and what was going to happen to EBS and the realisation that EBS was very unlikely to be able to stay stand-alone, we would have been, I'd say, encouraged is the word I would use, to go and talk to particular banks about EBS potentially becoming part of those banks.
Yes. So, really it was just a marking, a market kind of reporting set of meetings that was going on, as opposed to-----
Mr. Alan Merriman
Yes, I ... I, you know, I would probably use it as, you know, loosely intelligence exchange. It was, you know, the Central Bank, I think would have articulated it as being ... it was helpful to them to hear from those at the coalface what we were seeing and what our experiences were in terms of what was happening in the market, to reconcile that to, I guess, what was their more overarching perspective.
Was there any sense that, that ... or any discussion around that, that the liquidity difficulties could become solvency difficulties or anything like that?
Mr. Alan Merriman
No.
So, very much then, just if I was summarising and you can correct me if I'm wrong, that the ... they used you, in your own words, as an ... as an intelligence-gathering exercise and weren't prescribing or suggesting actions that should be taken in order to ease your liquidity difficulties?
Mr. Alan Merriman
No, look, I think that's unfair. I think it was clear ... clearly intelligence-gathering. I think they clearly were very interested in what we were doing on the ground to remedy what was, you know, a very serious situation. I ... they weren't prescribing particular actions that we should be taking but I think it would be unfair to categorise it as simply intelligence-gathering.
Okay. No. It's just ... and that's fine. What I just want to see is, you know, did the ... did the Central Bank and the regulator have a proactive hand in saying, "Look, you need to try this, you need to do that, you need to do the other" or were they saying, "Thanks for that, thanks for coming in. We appreciate you giving us the information and steady as you go, you're doing a good job"?
Mr. Alan Merriman
It ... it ... it was ... it was more the aggregate.
It was more the?
Mr. Alan Merriman
The aggregate. It was ... it was both-----
It was a little bit of both? But again ... so, just to ... just to ... sorry to be repetitive now, but, just to ask again, what kinds of actions were they recommending that you take?
Mr. Alan Merriman
As I said, there were no explicit actions. There was no, "Alan, Fergus, go out and raise €500 million in the French commercial property market or in the French CP market."
Okay. So, and again, I'm just going to finish on this, this train now in a second but, so ... you would be telling them perhaps, or would you, "We're getting some of our funding from X but it's getting more expensive, or it's more difficult to get anything from Y." Was that the kind of thing that was going on?
Mr. Alan Merriman
Yes. It was ...we ... "Look, we have €200 million of local authority money from the UK maturing in two weeks' time, we're in daily interaction with those local authorities to ensure that we can retain those moneys or here's what we've got in terms of feedback, in terms of €50 million of the €200 million, is definitely going to be withdrawn. We're on our programme of our covered bank, we're four weeks away from having it fully implemented, at that stage that will accommodate another €2 billion of funding that can be tapped with the ECB, which we'll have by way of emergency cover." So it was very much that type of meeting.
You spoke about the ... being encouraged towards the end to, to speak to other banks when it was clear that you weren't going, going to continue as stand-alone ... you, in your statement, said that you were a minority of one in ... in promoting, let's say, the ... the merger with AIB. When ... when was AIB first, you know, when did that merger option first develop?
Mr. Alan Merriman
Okay, there are two different chapters here. So, what we've just been talking about was clearly at the, you know, early stages of what was then the crisis and the discussion with the Central Bank and the regulator were very much in that context where ... clear EBS was very unlikely to remain stand-alone and was going to need to end up in a bigger bank.
Mr. Alan Merriman
In my witness statement, the reference to the AIB merger is at a much earlier point in time, it's December 2006-January 2007, and that was internal to the EBS board at that point in time.
So, yes, thanks for that clarification. So ... did, did AIB make an approach or ... or-----
Mr. Alan Merriman
Yes.
Okay. And-----
Mr. Alan Merriman
So AIB, just to, you know, give you a very quick summary, AIB were very keen to merge, acquire EBS. Eugene Sheehy made the approach to Ted McGovern.
It was a very clear approach. The type of conditions they were prepared to sign up to were to make it more attractive to the EBS board to agree to that deal. And I, personally, at the time - despite having joined EBS for a number of reasons including believing in mutuality - I at that time had a personal view that I felt it was the better option for EBS at that point and would have advocated to both the chief executive and the chairman that we should proceed on that basis.
And why did you feel that that was better? Was there-----
Mr. Alan Merriman
Look, I'd been in EBS for about a year and a half at that stage. I could see many challenges. The society was always very well-intentioned, it had very good people, it was doing well in certain areas. But, big picture: it had a capital issue and it had a funding challenge. They weren't day-to-day challenges but it was pretty clear that in the longer term there was a sustainability question.
So-----
Mr. Alan Merriman
So I felt that, given the pressures the society was under - particularly because of the mortgage market and the razor thin margins that were available at that point in time - that the ability for EBS to generate its own capital was very, very tight. And given what was going on in the market, that it was much more likely than not, that EBS wasn't going to be able to sustain itself, and therefore an exit at that point in time would be prudent and sensible.
So was it your concern, in that sense, driven by a reducing market share?
Mr. Alan Merriman
Not so much what I'd call a reducing market share but the substance of it was that because margins were so tight the society was generating very little capital, and without capital you can't lend out to your members. If you can't lend out to your members what are you in a member business for?
So there was obviously intense competition, there was other banks in, there was, you know, prices were going down, as you said margins were razor thin so, you know, was there a sense that other people were eating your lunch?
Mr. Alan Merriman
I mean it was black and white, and black and white from two different contexts. Again, you will know well, but if I paint the broader scene, if we go back quite some time, if you wanted a mortgage in Ireland, building societies were the traditional place you would go to get a mortgage - the banks weren't interested. Times clearly changed. You had the Irish banks coming into the mortgage market and competing very aggressively and it became a core part of their business. And then, over and above that, you had the foreign banks came in ... encouraged to come into the market because at the time before their arrival there was a concern about oligopolies and cartels and pricing and competition. So the foreign banks came in and they were incredibly aggressive at two levels. You had certain banks like Danske Bank who targeted the refinance market, very low LTVs, but, effectively, practically no margin. And you had the likes of Ulster Bank who very aggressively went after the first-time buyer market. So EBS as a traditional building society, having in an environment where it was one of the few players in a normal mortgage market, now found itself in a market where both ends were being very aggressively competed for.
Did you feel at the time that you were ahead of the curve and that you could see the demise of the society that nobody else could?
Mr. Alan Merriman
Look I wouldn't, you know ... banks, building societies, financial institutions, very complex - nobody has a monopoly on wisdom. I definitely had a concern about the long-term sustainability of the society from a capital perspective and a funding perspective. I had a concern later, mid '07, about market and house prices and so forth, but nowhere near to what ultimately transpired. But capital and funding at an earlier date, yes I had concerns.
So, as the situation developed, did Eugene Sheehy's approach to Ted in December '06 you said, did the approach, you know, was it a kind of an Aer Lingus situation? Was the approach continuous for a year or-----
Mr. Alan Merriman
No, no------
-----more, or was it a one-off turn down and that was it?
Mr. Alan Merriman
-----it was pretty much a one-off. I mean, they came ... he came, he met with Ted, he sent a formal letter outlining what they were prepared to do. It was definitely discussed amongst the management team initially. It was discussed directly with the chairman of the time and as I said, I made clear to the management team and the chief executive and the chairman, that I personally - and it was a very unpopular position to take - that I really felt that EBS should be seriously engaging on this and looking to sell, for the reasons that I've explained.
Okay, and that would have meant demutualising, all that kind of stuff-----
Mr. Alan Merriman
Yes, and clearly that would have been very much against the grain-----
An EGM to ... of the members to-----
Mr. Alan Merriman
And change in legislation, so this was a very, very big deal. And again I go back to the board, the majority board, very strongly of the view that, "No, look, Alan, let's be clear, we're a mutual, we're here to preserve mutuality, we've a more optimistic view of this market and how we're going to do this than you, and no, look, we're sticking to what is our roots".
In terms of the retail end of the banking, had you have much involvement in that, in terms of sales, product, product target development, and things like that?
Mr. Alan Merriman
No, not at a granular level. Clearly, I was on the board, clearly, I'm the finance director, so I, I clearly have a good overview, but not at a granular level.
A lot of the senior management and board executives from the other institutions have been in, and we've been asking them about that, about, you know, to what extent were staff, and I suppose, as you said, the granular level, the manager, the branch level, to what extent were they driven by targets, and, I suppose, demands from above, to sell more and lend more. Do you feel ... all of them said, "No," by the way; all of them said, "Not at all; we expect people to come to work and do their job and there's no targets at all". I'm sure we all have views on that. But can I get your view on that? Were there targets? Was there a competitive environment where staff were expected to cross-sell their products, to take every opportunity and to drive things on?
Mr. Alan Merriman
Well, look, let me answer it in two ways. Let me give you just what I might call a very layman explanation within EBS. EBS had a branch network. Within that network it was made up of both what I'd call branches where the management was employees of EBS, and I had tied branch agents where, effectively, the branch manager was running his own business as an entrepreneur. That was a relatively unique model to EBS in the Irish market. If you're a TBA and you're running your own branch, you don't need head office to be giving you additional incentives.
Okay. But, I mean, was that the culture? I mean, were-----
Mr. Alan Merriman
The culture of any normal SME businessman, businesswoman, if they're running their business, they want to make it as efficient and as lean and as profitable, within reason, and that's how those TBAs managed their businesses. They managed it in a context. The controls were there. All credit underwriting was centralised. No branch manager, no person at the front, could write a loan. It had to be underwritten at head office level. But did a branch manager have an incentive to develop business, to do business development? Absolutely.
And then they, in turn, would motivate the front-line staff.
Mr. Alan Merriman
As any normal business would do.
You said there "to be profitable within reason". Can you ever recall an incident where at board it would have been said, "Well, look we have enough profit there now"?
Mr. Alan Merriman
No, and, again, I'll very clearly explain that. EBS, as I said, while it wasn't profit-orientated, EBS needed capital. Without capital, you can't have a building society, you can't have a bank. So EBS had to generate capital. Where does capital come for ... come from? Well, for a building society, it can only come from retained profits, broadly speaking. So, you know, this is somewhat of a contradiction, focus not on profit, but without profit, you can't have capital, and without capital, you can't have lending. So EBS wouldn't have had a scenario where it had enough capital, where I'm sharing with you, as a finance director, that as early as 2006, 2007, my view, well-known around the board, and ... sorry, not just my own personal view, treasury, strategy, finance people would have had the same view ... we didn't have enough capital, we wanted to be improving our capital.
Final question there, Senator.
Thanks. Just to take advantage of your career before EBS, if possible, and we've had much discussion here about the international accountancy standards, in particular, is it IAS 39?
Mr. Alan Merriman
Yes.
Given your expertise in auditing, and, specifically on the banking side of that, with the benefit of hindsight, was this standard inadequate to the point where it just subverted the ability of financial institutions to plan for the future?
Mr. Alan Merriman
No, it's a complete red herring and let me explain. And I think Dargan Fitzgerald from E and Y put it very well. I'll actually read out what he said and then I'll-----
Okay.
Mr. Alan Merriman
-----elaborate on it. He said:
I don't think the financial reporting of the losses was linked to the presence of the underlying causes of the crisis [He's clearly absolutely right]. The losses reported, whether in any particular period, are a consequence of the factors that caused the crisis, they didn't cause the crisis and I think that's a very important point.
So let me just put it very simply. IAS 39 was about how much loan loss provision you could recognise on your balance sheet or in your profit and loss account. It is has no impact on, "Do you have a bad loan or do you not have a bad loan?" The bad loans were written. They were there regardless of what the accounting standard would say. If management in any bank or any building society felt that the loan loss provisions under IAS were shy or weren't appropriate, it was open to management to share that through voluntary disclosure or other data. So, tables giving statistics on loan defaults, tables giving insights about future expected losses, they were all open to banks, regulators, everybody, to try and get that type of information. IAS is a red herring.
Thank you very much, Mr. Merriman. Thanks, Senator.
Very good, thank you.
Thank you, Senator. Deputy Murphy. Twenty-five minutes.
Thank you, Chairman and thank you, Mr. Merriman. You're very welcome. Just to pick up on that point ... just very briefly. I mean, the accounting standards didn't cause the crisis but did they hide the crisis?
Mr. Alan Merriman
No.
Mr. Alan Merriman
Absolutely not and let's think about it. How did they hide the crisis?
In terms of not being able to look to the future and the potential losses-----
Mr. Alan Merriman
Sorry ... any ... let me be clear. We can all look to the future. This accounting standard over here that says, "You must do it this way, you must do that way in your books", that doesn't stop me as a manager being able to say, "Okay, I understand the accounting standard but this is the reality of what I'm dealing with, Mr. Regulator, or this is the reality of what I'm dealing with, Mr. Rating Agency, or this is the reality I'm dealing with, so I'm going to roll up my sleeves and hire a whole load of people who are going to help with credit recovery." The accounting standards are a complete red herring. Yes, they were unhelpful and, yes, there might have been a lag before the losses came through, and yes, that might have helped banks think they'd a better capital position than maybe they had. But it's a red herring-----
Okay. Thank you.
Mr. Alan Merriman
-----an inadequate accounting standard but not really any material impact on what's come about.
Okay, and the fact that the Spanish banks decided to allow for cross-cyclical provisioning in their own system-----
Mr. Alan Merriman
I think that's very sensible and I've made that point in my witness statement about, you know, there were lots of other avenues. The regulator could have come along, just by way of example, and said, "Do you know what? We understand the accounting standard. We don't like it", and they didn't like it and I think that, to be fair to them, they made that very clear back then, never mind since. But they could have come along and said, "Despite the accounting standard, what we're going to do is we're going to require you, the Irish banks, to have an additional capital buffer", and force us to take capital in that, as you say, in that, kind of, anti-cycle perspective.
But you had a battle with the board about what you were reporting, didn't you, at one point?
Mr. Alan Merriman
Yes and again that ... again to make the distinction from what was that battle about. That battle and battle is harsh ... it was a very tricky time. The facts kept on changing; the crisis kept on getting deeper, so we were struggling with what is the right number to put in the accounts and that was back to accounting. You had to come up with the number to put in the accounts.
Yes. But just you go on about it in length from pages 6 to 7 in your opening statement about ... and you specifically say that you didn't come under any ... or the only time you ever came under any real pressure or challenge on accounts in 2009, when reporting on the 2008 results-----
Mr. Alan Merriman
Yes.
-----and there was no difference of opinion between yourself and E and Y with your provisioning but the Central Bank and the regulator did have a problem, though, "that the provisioning might cause wider difficulties for the other banks and we were cautioned at the highest of levels to be very sure that what we provided was really needed". So there's a difference of interpretation there in terms of the presentation of the numbers?
Mr. Alan Merriman
No, I think they're two different matters and, again, let me explain my understanding of what was going on with the regulator and with the Central Bank. So, EBS come down and we share ... we're going to have our accounts, these are our provisioning levels and we're sharing with the market, not only these provisioning levels, but we're sharing with the market our expectations that there's going to be greater loan losses to come. We can't put them in our accounts but we're telling the market that we believe the loan losses will be higher-----
Yes. On that point, other banks weren't doing that at the time.
Mr. Alan Merriman
I can't speak for other banks.
Okay.
Mr. Alan Merriman
But we were being very appropriate in sharing, not only what we were providing, but letting everybody know we expected bigger losses to come that we couldn't provide for. The Central Bank, as I interpret it, their perspective .... and remember, I was only having to deal with EBS. The Central Bank has a much wider responsibility. So there's the Central Bank say, "Okay, here's little EBS coming along" and they're saying, "God, look, all these problems in development finance. Shit, what's the market going to read into that? Will they read across from that into the other banks? The other banks haven't being telling us that they got this extent of a problem. This could actually be another escalation in the Irish crisis. Now, Alan, and I'm just being clear, Alan, just be very sure you need those provisions because this could cause wider difficulty." That's the context.
But do you think that was unhelpful interference by them?
Mr. Alan Merriman
No, I don't think it was unhelpful-----
You were trying to more prudent and more honest, is that correct?
Mr. Alan Merriman
Look, I would choose different words. I had a responsibility as the finance director to call it as I saw it within the rules. I had a responsibility to our members and our stakeholders to give as a true an account as I could of what we understood at that point in time. The Central Bank has a different remit. It has a much wider responsibility and part of their responsibility was making sure that we were taking due and proper care. So I would put it in that context. But I answered the question you asked of me in coming here about the integrity of the accounts and I'm just being very clear. We had debate at board levels, we had uncertainty at board level about what was the right number from a provision perspective but I never came under pressure from the board around the integrity of the accounts.
And just to clarify, you were able to call it as you saw it?
Mr. Alan Merriman
Absolutely, and we did.
Okay. Thank you.
Mr. Alan Merriman
And, as I explained, the reality is that in due course the provisions that were needed were far greater than we even thought at that point in time.
I just want to back to the time, just prior to your arrival with the society, and if we can go the evidence book at Vol. 1, page 95, and it's a board meeting in 2002 and I just want to ... this is where they discuss at length for the whole board meeting commercial property and also the risks around development finance and the moves that the board's making at the time.
What period is that, Deputy?
It's 2002.
2002.
So just to clarify ... when did the EBS see it as strategically important or appropriate for them to enter the commercial lending market? You say 1991?
Mr. Alan Merriman
My understanding is they entered it in 1991-1992.
Okay, and here, in 2002, we see them talking about making a play into development finance in a particular way. If you see it in front of you on the screen.
Mr. Alan Merriman
Yes, okay, yes.
So what I want to understand is-----
Mr. Alan Merriman
I mean, before my time but yes, I see it.
Yes, but when you arrived in 2005, was this now settled policy for the society?
Mr. Alan Merriman
Absolutely, and again, just to give ... I might have some numbers here but just to give a context. Look, I can't find it. Broadly speaking, I think, by 2002 the commercial lending book was in the order of €800 million; by 2005 it was €1.5 billion; development finance lending was clearly, for us, done around this point in time, you can see it from the records here yourself. So, this was a clearly an embedded strategy within EBS, well before I arrived.
Yes. So, there it outlines two approaches for development finance. Go for broke or the toe in the water.
Mr. Alan Merriman
Yes.
And the toe-in-water approach is the favoured one. So when you arrived in 2005, would you still describe its involvement with development finance as toe in the water as it moved on from there?
Mr. Alan Merriman
No, I think, you know ... and, I mean, they're very colourful phrases that are being used. I would say that, you know, in terms of moving from 2001, 2002 to 2005, they had clearly gone from what I'd call "zero" to where they had a book in the order of €100 million. So, I don't think I could describe the book of €100 million, even in the context of an EBS as being "a toe in the water".
One hundred million in 2005 and then, I think you said, €500 million in 2008.
Mr. Alan Merriman
Yes.
Okay.
Mr. Alan Merriman
Back end of 2008.
Right. Just if we move on then to pages ... to the last page of that board report, page 97. I just want to look at the last paragraph, if I may ... let's see if it's on your screen. It's the last page of the ... so it's page 97.
Mr. Alan Merriman
Yes. Sorry, I'm just unclear. The 2005 strategic delivery process-----
No, no, it's sorry it's not up on the screen yet. It's ... I'll just get some more time as well, Chair, as a result. Thanks. I'm going to ... it's going to come up. I'm going to-----
Mr. Alan Merriman
Okay.
-----read out the paragraph I'm interested in:
It was suggested that, with a view to widening the base of Commercial Property customers, a greater level of business networking would be needed in the future; in this respect, Brian Healy will contact individual Board members to establish whether they have contacts who may be a source of additional business.
So, tell me a bit about that. What does that mean and was that practice still going on when you appeared in 2005 in the society and did you see it as appropriate for the society to be using its board members in that way?
Mr. Alan Merriman
What, what's the date of that?
This is the same board meeting in 2002.
Mr. Alan Merriman
All right, okay. No, look, I'm not ... I'm not ... well, let me answer the question in two ways. One, I'm not explicitly aware of the board being used by commercial lending in what I might call a develop ... in a business development capacity. So I'm not familiar with that. But to answer your earlier question, do I see it as appropriate? Look, I think in, you know, what is the duty of a director? The duty of a director is, you know, a multitude of things but clearly it's for ... to act in the benefit of the society, of the company. So using a non-executive or any other director as a means as an introduction, I think is acceptable.
Okay. You think it was acceptable for the society to make that proactive approach to people to offer them commercial terms-----
Mr. Alan Merriman
No, no, again, let's be careful with wordings. I think it's appropriate for a non-executive or a director to make an introduction to a potential customer, whether it's a retail customer or whether it's a commercial customer. That is very different from saying do I think it's appropriate to go to somebody and say, "I've a bag of money here do you want to take it away and do something with it?" They are two very, very different things-----
And you see a distinction between the two?
Mr. Alan Merriman
Of course I do.
Okay. And when you arrived in 2005, were those types of conversations happening-----
Mr. Alan Merriman
No.
-----still on the board? No. Okay, thanks. Well if we can move on in the same evidence booklet please to page ... it's pages 99 through to 100, 101 and this is the commercial business plan from September 2005. You were in the society at this point in time?
Mr. Alan Merriman
Yes.
Were you responsible for developing or preparing this paper?
Mr. Alan Merriman
I'll need to see the paper.
Yes. 99 is the first page of the report and then it goes into detail and 100 and 101 from there on. That's the first ... yes, sorry, the first page is here just in front of you.
Mr. Alan Merriman
Okay so-----
And then it continues on.
Mr. Alan Merriman
-----again just for ... so, if I'm looking at ... is this the right one in front of me now?
Yes, yes.
Mr. Alan Merriman
Yes, so, you know, again, it's an important distinction, I think, in terms of your question. This plan would have been developed and prepared by the then head of commercial lending. So it wouldn't have been my plan if I can put it that way but clearly, as the person ultimately responsible for commercial lending and being a board director, clearly I would have been party to approving this plan and was comfortable with it at that time.
You were comfortable with the plan.
Mr. Alan Merriman
I was.
Okay. I mean it notes that commercial is an area that has more than tripled in scale to about €1.6 billion of the loan book. But the problem as it outlines in 2005 is that the lenders are lower risk, meaning good asset quality but low margins so the desire then is to go for higher-risk businesses. Now when Fergus Murphy was before us, he said on page 61 that ... of the transcript, that "the society entered into [the] marketplace [late and] at times [it] tended to do business ... with secondary ... developers and ... investors" in secondary locations and that the society wasn't "getting the better business, maybe none of the business was good".
Mr. Alan Merriman
You know, look, I ... and I think Fergus said this himself that, you know, because we were exiting the commercial business shortly after he joined, he wouldn't have had what I might call as granular an understanding of the commercial business as perhaps Brian Healy would have had or, indeed, myself. I mean I'll be very clear that ... and let me explain. First of all, the low risk versus high risk. The commercial business EBS had at that point in time wasn't generating a sufficiently attractive return for the risk that was there. And what I mean by that is that if you have a limited amount of funding to allocate, if you are going to allocate it to a non-member business, so it's not going to your members - you are taking it away from your members to give it somewhere else - you have to ensure you are getting an adequate return. So that was the motivation for looking to move the needle on the risk curve. Fergus's comment, I would say to you very clearly: commercial was built up from 1991. I would say that if you look at the analysis when it was done on the development of ... the development of finance book of €500 million, 70% of that business was done to established developers and builders. So I am clearly and again, just bear in mind the context here ... the total book is €500 million. So, the maximum loan we might have had, and, again, I am not going to remember the exact numbers, but broadly speaking, I think, it would have been €50 million. If you could lend at most €50 million to a single relationship, EBS wasn't going to be in a position that it was going to be banking the Glass Bottle site or Ballsbridge. So clearly, by definition, we were lending our money out in the areas that could accommodate that type of lending.
So was Fergus Murphy wrong then, in that they ... none of the business was good? They weren't getting the better business, none of the business was good?
Mr. Alan Merriman
No, look, I think, you know, the way I'd articulate and it's the fairest way I can possibly do it is that, yes, EBS was later into development finance than others. Yes, it was competing in a very, very tough market place. Yes, it was having to establish and build relationships. Therefore, you wouldn't ordinarily expect to have the business that would be the best business - for obvious reasons. Developers themselves want to build relationships, they want to have the confidence that somebody is going to be able to bank them etc., etc. However, having said all of that, so it was a tough environment for EBS to build up that business but it was mandated to do it. It was a strategy to do it. Now, best way of being objective in terms of answering your question, let's talk about the discounts that were applied to the books across all the banks that went into NAMA and the subsequent deleveraging that was done. Fergus himself explained that the EBS discount was, I think, 57%. Big picture, that's within the goalposts of the other banks. So objectively, it wasn't any ... it wasn't much worse than others-----
As worse-----
Mr. Alan Merriman
Well, it wasn't 61% or 62% or 63%. But, equally, in EBS's case, the other banks only transferred loans that were greater than €5 million. There was a special case for EBS. The entire books were transferred. So you are not comparing apples with apples. And if you look at the €2.5 billion that Fergus himself testified about; where he talked about that they had to deleverage €2.5 billion and it ended up with a write-off of, I think he said, €500 million. The aggregate discount of those two taken together is less than 30%. So I would say that objectively, the facts demonstrate that the EBS business wasn't any worse than what was being done in the market.
Okay. Let's just look at this strategy paper because there's four alternatives for going forward as they presented. You've got "Hold", "Lean and Mean", "Step Up" and "Rocket". So which strategy did you support?
Mr. Alan Merriman
Again, I don't have it on screen.
Sorry, it's page 101 of Vol. 1. It's also in your first booklet, the first green booklet, Vol. 1. It might be handier.
Mr. Alan Merriman
What page?
101.
Mr. Alan Merriman
The "Step Up" strategy.
Yes, is that the one that you supported as well? I mean, was there unanimous support for "Step Up" or were there different points of view?
Mr. Alan Merriman
I don't recollect the contrary view and you know, certainly I was comfortable with the "Step Up" strategy.
Okay. The "Step Up" strategy allows for it to evolve into any of the other alternatives as circumstances allow. Did it?
Mr. Alan Merriman
It did and well, sorry, no it didn't to be more accurate. Clearly, and I think ...look, you draw out an important point that even then there was a recognition of let's see how this progresses. Let's see what is the obvious ... this was a interim step, let's put it that way. The strategy did change but the strategy was the exit strategy rather than a protracting strategy or a further acceleration. It was an exit strategy in due course.
Exit strategy. And when did that change to an exit strategy? After-----
Mr. Alan Merriman
I think you have ... I'm sorry, I know you have statistics that shows actually the second half of 2007, the advances being lent out in commercial and in development were tapered down and we exited completely in the first half of 2008.
2008, first half.
Mr. Alan Merriman
So second half of '07 and the first half of '08.
Can I move on, if I may, to ... it's page 110 in Vol. 1 and it's a board meeting in February 2009. Your candidacy for re-election to the board is evaluated and the minutes state that you "would not be invited to stand for election as director for a second term" in the interest of the society. Can you just expand on that for us, please?
Mr. Alan Merriman
Yes, look, I think the ... again, the broader perspective or context here is that we were just about to report our results. It was the first year that EBS was going to be reporting losses. Clearly, it was very evident that the development finance book in particular was causing significant damage. We had an AGM that was coming up in April and there was a very strong view amongst the board that as a mutual it was absolutely appropriate that we should be showing accountability.
The chairman was going to resign and we felt that it wasn't fair, if I can put it that way, that solely a non-executive would bear responsibility. We didn't think it made sense for wider board changes. We thought the chairman going was a clear indication of and acknowledgement of the mistakes that were made. But we also felt that an executive should go as well. This led up to that but this is more of a nuance because this is solely dealing with the board. And Bank of Ireland adopted the same approach. Their executive directors were not put up for re-election to their board but they stayed in their current positions.
Was it a voluntary departure then?
Mr. Alan Merriman
Yes, no, it was ... and I made this clear in my opening statement again today, I personally would have preferred to stay. You've heard Richie Boucher from Bank of Ireland talk about that's what he wanted to do and he was allowed do that. There's a natural desire to stay when one is in trouble and sort things out. But the wider context - and I was part of the board and I very much agreed with this - we were a mutual, mistakes had been made, we wanted to be different, we believed we were different and we wanted to demonstrate that. So it was absolutely part of the EBS to show accountability. And I was definitely the right person to go at executive level.
Okay, but just to come back to what's in your opening statement and some of your earlier conversation about this constant battle, maybe, that you were having with the board over the future direction of the society and the risks it was facing. And there seemed to be disagreement there.
Mr. Alan Merriman
No, again, look, I, you know-----
I mean, does that play into this decision?
Mr. Alan Merriman
Battle is ... "battle" is the wrong word.
Battle ... okay, I beg your pardon.
Mr. Alan Merriman
I was very clear that I had my concerns about the long-term sustainability - for the reasons I shared earlier - of capital and funding.
Okay.
Mr. Alan Merriman
That was ... that was '06-'07. The board came up with a very considered view. It went through the detailed analysis and it came up with a very considered view, "No, we're not selling out, we want to stay mutual, we're going to make it work. Management, we want you to make this work. You've a mandate to go and make it work." So we put ... we'd had that debate. I wasn't the bad loser. I accepted the board's decision. And what the strategy then was about was trying to preserve mutuality as best we could. So there weren't battles going on in the boardroom in '08.
Okay.
Mr. Alan Merriman
What was going on in the boardroom in '08 was making sure that the society was doing all the prudent things it needed to be doing to best ... to best protect the society at that point in time.
Okay. I just want to look at two other areas then, if I may, in the time I have left. One is this reliance on wholesale funding. Because in 1998 100% of funding for the society came from retail deposits. In 2001 it's down to 70%. By 2008 it's 47%. Was this shift intentional? Did the board see it as a risk at the time? Did they understand the potential risks at the time?
Mr. Alan Merriman
Look, I think the start of it clearly was that wholesale funding became available to the market here. You know, EU, euro would have all been part, would have been a catalyst for that. Why did the society start seeking wholesale funding? Because it needed it to support the lending it was doing to its members. And then it just gradually grew over time. I think that's evident from all the papers and from the history. It grew over the course of time, bit by bit by bit. Was the board conscious of the risks around wholesale? It was conscious that there was a dependency on wholesaling ... on wholesale funding. It was very conscious of the need to diversify it. But it probably didn't anticipate - and I think this is true right across our own market, but globally - that a liquidity crisis of the type that came was as possible as it clearly was.
Mm-hmm. But do you feel that-----
Mr. Alan Merriman
So the disappearance of a securitisation market overnight would be a very clear example of that. The interbank market disappearing pretty much overnight would be a very clear example of that. Did the board have a view ... did it really understand those possibilities and did it really believe those could happen? They would have seen that as being more doomsday than being in the probable.
Okay. I have to move on, I'm afraid, because I am limited on time. Just the last thing I want to look at is Haven, the broker market business that EBS went into, which was a significant change for the society. Do you think the board had a sufficient understanding of what it was getting into? And how important was this move to the society, given that the CEO of Haven was also not invited to be re-elected to the board in 2008?
Mr. Alan Merriman
Well, again, the Haven CEO wasn't invited to be re-elected because, at that point in time, the Haven business was going to be exited.
Yes.
Mr. Alan Merriman
So that was that context.
Very shortly after it had been established.
Mr. Alan Merriman
Yes, but, again, you have to look at before and after. So it was established at a time when there wasn't a funding crisis and it was exited when the funding crisis was front and centre.
Okay.
Mr. Alan Merriman
The board would have done intense work around the merit of going into the broker market. The broker market typically in a European context is circa 50% of the market, so it's a very important part of the mortgage market, and it was done, again, in the interests of the long-term sustainability of the society. Broker markets bring more risks-----
Yes.
Mr. Alan Merriman
-----but they were understood.
And you supported the move, then-----
Mr. Alan Merriman
I did.
-----with Haven? I mean, it was-----
Mr. Alan Merriman
It was also part of the deleveraging strategy in terms of getting ... it was an answer to some of the funding challenges because there was going to be a JV at that point in time.
I wanted to ask you about that actually ... with Britannia Building Society.
Mr. Alan Merriman
Correct.
That failed. Why did that fail?
Mr. Alan Merriman
Again, it failed ... it failed for a variety of reasons but essentially it was because ... and, again ... look, it goes back to wholesale funding. When problems became evident in the Irish market, you know, if you're sitting in the UK in your building society in the UK or your local authority in the UK, you're going to very reluctant to engage in the Irish market.
So why did EBS continue with it then? Why not take the warning signal from the failure and pull out-----
Mr. Alan Merriman
Because ... excuse me.
-----instead of going ahead 100% on the-----
Mr. Alan Merriman
Well, because ... for two things: business was already up and running, so the book that was there at that point in time was going to go into the JV vehicle, so it wasn't a case of deciding not to proceed, it was already in progress; and then we've answered your question - we did exit it.
Yes, I mean, there was a potential sale at one point, €5 billion, but that-----
One last question now, Deputy.
Thank you. But that didn't go ahead; why not?
Mr. Alan Merriman
I told you. Because, basically, Britannia had no interest in proceeding given the difficulties that emerged in the market.
Okay.
Thank you very much.
Thank you, thank you.
Mr. Merriman, if I can maybe just deal with one brief matter with regard to the guarantee and I then want to move on to some other matters with you. Was there any discussions at any time with any other bank, the Central Bank, the Department of Finance in relation to the - excuse me - in relation to liquidity issues or solvency of any particular bank in the weeks before the night of the guarantee?
Mr. Alan Merriman
I can't remember explicitly. I'm sure, you know, the head of treasury would have been having discussions with all his counterparties amongst the Irish banks. I'm sure the chief executive was discussing the same with other chief executives.
Yes.
Mr. Alan Merriman
I know in those meetings that I personally was at in the Central Bank there were discussions about the market generally in terms of what was happening and concerns around institutions but I've no direct intelligence to be able to share.
Okay. And there was nothing out there in the ether, by your recollection, in that regard?
Mr. Alan Merriman
Not ... not to my understanding.
Okay. If I can maybe just move then to the period subsequently after the guarantee, Mr. Merriman. And in November 2008 the treasury department looked for an increase in the lending lines to the other covered banks in order to invest in their unsecured debt and to have them reciprocate the same. This is the, kind of, green jersey thing. And on the screen there in the first two chapters, what we have there, this is an e-mail to the board from Mr. Gerry Murray, 17 November 2008 "Subject: Proposal to Increase Credit Limits [to] Irish Bank[s]". And the first two paragraphs kind of give a summary of the situation:
On September 30th, 2008 the Irish Government announced that it would guarantee Irish Banks / Building Societies until September 2010 under the Credit Institutions (Financial Support) Scheme 2008 (the "Scheme") [as it's known]. Subsequently, Moody's and [Standard and Poor] announced that they would rate any debt issued under the Scheme and maturing prior to September 2010 as AAA-backed.
That's top of the range, isn't it? It doesn't come any higher than that, yes?
Mr. Alan Merriman
I see it there, yes.
Yes, okay:
These events will result in Irish Banks attempting to access the market for senior unsecured debt. Integral to the success of the debt offering [...] is support from the domestic market. i.e. the banks will need to purchase significant quantities of each others bonds.
So this is ... this is a direction that Irish banks will start borrowing money from one another after the guarantee and securing bonds or borrowing bonds and everything else ... "Consequently, EBS Building Society will need to purchase debt issued by the [...] Irish institutions in order to get sufficient support to successfully issue a benchmark transaction of [its] own." So the suggestion there ... you start buying from other banks, that allows other banks to start buying from you. I'm correct there, yes?
Mr. Alan Merriman
Yes, absolutely.
Okay. Right, in ... to what extent, in your opinion, did the board consider it was appropriate in this regard to pull on what was described as the "green jersey" and invest in such assets?
Mr. Alan Merriman
A hundred per cent, I would say.
Okay. All right. The-----
Mr. Alan Merriman
So, you know, absolutely, you know, appropriately and accurately articulated by yourself. Very clear.
As a-----
Mr. Alan Merriman
And that was absolutely the intention.
Okay. As a suggestion that this was Irish institutions operating in a bubble ... if I can put this premise to you, that this was Irish institutions operating in a bubble, in a domestic market, ultimately just washing one another's laundry?
Mr. Alan Merriman
No again, look, let me make again a very clear distinction. This is now post the Government guarantee-----
Indeed.
Mr. Alan Merriman
-----coming in.
Okay.
Mr. Alan Merriman
It's in the crisis and it's trying to accommodate a normalisation of the market.
Okay. Can I just bring up there, a slide here, okay? The next document coming up, Mr. Merriman, relates to its EBS Building Society minutes of the board meeting held on 17 November 2008. So, it's the minute relating to the same date of the earlier transaction. And if I can just bring you to the second column to the right and just take you down some of the language here:
Fidelma Clarke outlined the basis of two proposals in relation to Treasury limits and programmes arising from the implementation of the Government Guarantee Scheme. Papers had been circulated prior to the meeting.
And then talks about the counterparty limits of the institutions that EBS now would engage with as part of this cross transactions:
The Board resolved to
(a) increase the counterparty credit limits for AIB, Anglo, Bank of Ireland, IL&P and INBS to €200m, with the quantum increase above credit limits exclusively available for issuance covered under the terms and period of the government guarantee scheme.
I just want to refer to two institutions there. We have it on record here that the NTMA had such concerns with regard to Irish Nationwide ... INBS, that they wouldn't put a brass farthing into them and wouldn't do so for years. And at Anglo Irish Bank, that the NTMA had similar concerns about and wouldn't ... would only put money in there when they actually received direction from the Minister for Finance in writing to do so. Had you any concerns with putting money into INBS or Anglo?
Mr. Alan Merriman
Okay. So, again, if I'm very precise on dates, this board minute is clearly, clearly in the context of the Government guarantee regime and therefore the reality is that while we're lending to those institutions, it's covered by the sovereign. And as an Irish building society operating in a stressed Irish banking context, it would have been very questionable had EBS not been supportive of this programme at that point in time. In other words, not being prepared to take risk on our own sovereign when our own sovereign was supporting the Irish banks and supporting EBS directly. So I think the context is very clear.
I understand the context of it but there is also what would be, kind of, maybe real-time information at the time that people in the business would be aware of. Were you aware that the NTMA had reservations with regard to these two institutions and would not ... and had serious concerns with putting any of their own assets into these institutions?
Mr. Alan Merriman
This would be more ... I'd no direct involvement-----
Well, you ... no, I'm asking you were you aware-----
Mr. Alan Merriman
No, and I'm answering your question.
-----that the NTMA had reservations about these?
Mr. Alan Merriman
I had ... I had a ... I would have had a sense, I would have had an understanding at the time, that the NTMA were being reluctant to put moneys into the Irish banks. I'm not saying specifically those two-----
Yes.
Mr. Alan Merriman
-----just generally the Irish banks, that there was a reluctance. Now, did I understand that from the head of treasury or where did I pick it up? But no I would have had that understanding at that time that the NTMA were being encouraged but were being slow to support. Now, that was probably prior to the guarantee.
Sure. And so this is after the guarantee and you're now looking to be buying bonds from other banks and all the rest of it as a kind of means of a cross supporting one another.
Mr. Alan Merriman
Which is normal. Normal in a normal market-----
Yes, I understand that.
Mr. Alan Merriman
-----and clearly normal in a stressed market.
But we're not in a normal market here now one month after the State has actually guaranteed financial institutions.
Mr. Alan Merriman
So it's easier in this context.
Was there any discussion in your institution with regard to the Nationwide or with regard to Anglo of how safe or unsound or how wise or unwise it would be for the EBS to be buying bonds from any of these two institutions?
Mr. Alan Merriman
At this point or earlier?
At any time.
Mr. Alan Merriman
Well, certainly at this point the discussion was there in relation to all the banks, and the context was the guarantee allowed one lift the limits and be comfortable with them. Prior to that I would have no recollection of any direct concern being raised about those two institutions from a lending perspective. But again I would emphasise that the lending would have been short term. These programmes are short-term programmes and we would have taken the comfort ... and again, look, you know, I say this in the context of what's happened, you know, all senior ... this was senior debt. All senior debt was clearly going to be stood over and was stood over.
And just on the broader level of those two institutions, I just want to know, at board level was there concern with any transactions that your institution might engage with with those two institutions?
Mr. Alan Merriman
No. And again I just go back to the transactions were senior debt.
At that time?
Mr. Alan Merriman
At that time.
Okay. Thank you. Senator Susan O'Keeffe.
Thanks, Chair. Mr. Merriman, can I just clarify there when you said about the NTMA and you had a sense of it not putting anything on deposit with the banks from 2007? Was that knowledge not publicly available? You were saying you had a sense of it. Would they not have indicated that in their own figures?
Mr. Alan Merriman
Well, look, it's ... no, it's well, no, I mean-----
It was private?
Mr. Alan Merriman
I'm very sure it was private. They wouldn't be disclosing by counterparty where their money was being placed.
And you were not aware of it through other people?
Mr. Alan Merriman
Not especially. I'm guessing, and it's a guess, so, therefore, I'm ... you know, I don't want to-----
No, well we don't want guessing. Thank you. In Vol. 1, page 130, and again I know this was from the 2004 strategic review, it says ... it talked about, "Profits grow on average by 13% p.a. [per annum] from 2002 to 2004 and by 25% p.a. [per annum] thereafter." And I'm just wondering what you thought of that kind of forecast for growth at that time for the EBS?
Mr. Alan Merriman
The historic one of 13% or the forward one of 25%?
No, the forward one. Was it an ambitious target at that time do you think?
Mr. Alan Merriman
I think it was and I think it was understood as being ambitious.
So, why have it there as part of the strategic review?
Mr. Alan Merriman
Well, because it ... well again, as you rightly say it was before my time. But clearly that was their plan and that was their ambition and-----
Well you came in just a year later so are you aware or can you recall whether that plan had changed by then or whether that was still, if you like, your ... the stated plan of the EBS when you joined?
Mr. Alan Merriman
No, I think it was rebalanced because when I came in in 2005 I think the profits for that year were closer to ... I think the net profits were closer to 55 [million euro]. So clearly it was quite some distance away from the 85 [million euro] that's on this page that you're sharing with me.
Okay. In Vol. 2 of the core documents, Mr. Merriman, page 139, is a list of the top ten bonus payments in 2001-2008 and you received a bonus in 2007 of €309,000 that was the highest for that year. In 2008 you received a bonus of €220,000. Given what was happening at that time in terms of the stress in the financial markets and so on, was it appropriate or not to take a bonus of €220,000 do you think?
Mr. Alan Merriman
Well, let me answer. First of all, I think the dates here are maybe out of sync by a year, I think.
Well, I can't be ... yes.
Mr. Alan Merriman
That, that-----
I'm sorry I don't know that.
Mr. Alan Merriman
No, that's all right, but that ... I'm just, just clarifying it here. So, I think they're out of sync by a year. I think they're cash payments made in those years for the prior years, I think.
Yes, it does say that, for the previous year. But, again, you would have known in 2008 what was going on in the world around you and I'm asking-----
Mr. Alan Merriman
Sure and I've-----
-----whether it was appropriate to take the bonus for the previous year in 2008?
Mr. Alan Merriman
Okay, so again, to try and clarify it for you, so it's I think it's the '07 bonus you're asking me about which I took in 2008.
Correct.
Mr. Alan Merriman
At the time that was taken it was probably early '08 and I'd also put it in the context of, as I explained in my opening statement, I was recruited, courted into EBS, I clearly had been a partner in PwC. I was on a very good package. I was leaving a very, very secure job. In making the move to EBS I would have been very minded to have some protection about my income at that point in time. I had obligations, I had loans and therefore it was important that I had visibility over what type of income I would have. And I would have needed that money at that point in time to cover my own obligations.
And so part of the courting of coming to the EBS would have been appropriate bonuses and-----
Mr. Alan Merriman
As as is natural for any move in any employment.
Okay. On page 3 of Vol. 1 there is a note from Cathal Magee, who was a non-executive director of EBS. This is 30 March 2006 - it's quite a long document, but in paragraph 2 he says:
It is my first experience of being corporately "bullied" as a Director because of positions I have articulated. However, it has reinforced in me an understanding of and a commitment to the need to implement the Corporate Governance Standards set out in the Combined Code in the [EBS] Building Society.
And then he goes on to talk about the society "slowly and painfully emerging from a legacy Building Society governance culture". What was Mr. Magee talking about there being "corporately bullied" to use his term?
Mr. Alan Merriman
My understanding is that Cathal, amongst a number of non-executives, had been raising their concerns around a number of issues for quite some time in relation to, you know, various agenda items around the board. And he wasn't satisfied that they were being dealt with to his satisfaction. And it's in that context I believe that he's made that statement.
Yes. I mean, he would have been ... he was a man with a strong track record in other organisations wasn't he? So he was a very senior manager.
Mr. Alan Merriman
Very experienced, very senior, very commercial.
He was very commercial. So how did the EBS take his observations at that point in terms of his approach or his attitude? I mean, he was clearly appointed, he didn't wander in and become a member, he was appointed.
Mr. Alan Merriman
Yes. I think we have to be careful about, you know, when we talk about what did EBS do, what do we really mean by that so-----
But what was the response at that time to his observations?
Mr. Alan Merriman
No, no, let me be clear, I am just trying to help so, this was clearly at board level. So this was about relations around the board, so all non-executives and a number of executives. So how would those executives dealing ... between each other in relation to these matters, that's what Cathal is drawing out. So look, maybe to help I would say to you there is a very clear distinction between corporate governance and structures and systems on one hand and on the other hand, conduct of individuals around the board table. You can have very strong corporate governance, you can have good systems, good processes - as E and Y attested here that EBS had in their opinion - and, separately, you can have conduct and conduct can be different. It is personality driven, etc., etc. So the conduct around the board amongst certain individuals was considered to be not appropriate and that's what Cathal is drawing out here.
Okay. In Vol. 3 of the core documents on page 59 is the statement, the witness statement of Ms Ethna Tinney. She talks here about ... on page 59 at the bottom of paragraph 1, and she is talking about the appropriateness of property relating lending strategies and risk appetite, and she says "There was a sort of feeding-frenzy as the banks clambered over one another to get a piece of the action, especially as new foreign banks had entered the market as competitors." At the beginning of that paragraph she says "Lending large sums to developers was new to the society." and she said "The senior management in EBS, as in most of the lending institutions, were taken in by Ireland's so-called developers and also by their professional and other advisors." Mr. Murphy said in evidence last week "there was a ... reasonable chance of the organisation making it through, had they not been involved in all of that" and by "all of that", he meant commercial property and land and development. So what was going on? I mean, Ms Tinney's observation is that this was new to the society and it was a kind of a frenzy as banks clambered over each other and she goes on to discuss how the senior management were asked to review credit applications and so on, and I'll come to that, but I wonder what your first observation is of that?
Mr. Alan Merriman
Okay, so let me deal with Ms Tinney's observations first and then with Mr. Murphy's. In relation to Ethna's - and I understand she is here later this morning and, therefore, you can ask her directly - but I am guessing that ... she started with EBS I think in the year 2000, so five years prior to my own joining the society. So I would suggest that perhaps she is talking about the step up into development finance in 2001 ... was new at that point in time and that was recently after her joining the society. And, you know, as I said, the development finance book in EBS started in 2001 and was stepped up to €500 million by the end of 2008 so that is an eight-year period. In relation to Mr. Murphy's comment-----
Sorry, in fairness, Mr. Merriman, you will have read this because you were given the document. She does go on in the next paragraph to say:
In the period from December 2006 to April 2007 I was inundated via email by proposals from EBS senior management on behalf of "developers" for quantities of cash in the tens of millions which appeared to be asset-backed and also to contain personal guarantees. [So, typically] as a member of the credit committee, your approval or lack of it had to be sent ... by email to EBS by close of business the same day or the next day. The rationale was that if EBS did not facilitate the "developer" another bank would and we would simply be losing out on the business.
I need you to ask the question so that he gets time to respond.
Yes. So I am just saying, I mean, that is Ms Tinney's observation of what was happening. You were also a member of the board, I am asking do you share that view of what happened in EBS at that time?
Mr. Alan Merriman
Again, I need to be very clear in terms of what question I am addressing. So, I have explained that Ethna joined, I believe in 2000, she can confirm that later, development finance started in 2001, that explains why she said it was new to society. In terms of the specific question that you are asking me, my recollection is that Ethna moved on to the board advances committee, which is the committee of the board that approves loans beyond a certain size. I am guessing that was perhaps in this time period December 2006 to April 2007 and that's the committee amongst the board members that gets individual loan documents to approve if the society wishes to do it. So that would have been new to Ethna at that point, not new to the society but new to Ethna at that particular point in time. And in terms of her being inundated, look, that's a subjective comment.
No, I am not asking about the inundated-----
Mr. Alan Merriman
In my view the frequency and the number would not have been of that magnitude.
No, I am not asking about the inundated, she is saying that she was asked on each occasion:
the approval or lack of it had to be sent ... by email to EBS by close of business ... the next day. The rationale was that if EBS did not facilitate the "developer" another bank would and we would simply be losing out ... the business.
I am asking you the question was: is she correct in her observation that there was a rush, if you like, to facilitate the developer, otherwise you would be losing out on business?
Mr. Alan Merriman
No, there wasn't a rush. There was a requirement for the business to be able to get board approval within a 24-hour period.
In a 24-hour period. So that is correct?
Mr. Alan Merriman
That is correct but, again, just so there are no misunderstandings, the board approval is the ultimate approval. It is the end of a long process of working through a loan application. It is the ultimate safeguard. It is beyond a certain €10 million level. We are not going to allow the executive to give this loan out without a further check coming from the board of non-executive directors as an additional precaution. And in doing that, the society understands if it is going to compete in this market, it needs to be able to provide the type of service that is expected. So therefore, we need to give a 24-hour period. Those members who sat on that committee fully understood that requirement and the need for them to be able to be available to give the consideration that would be needed within that timeframe and they would have got very detailed documents to help them support their agreeing or not agreeing to make those individual loans.
Thank you.
Senator D'Arcy.
Mr. Merriman you are welcome. Could you bring up book 1, page 125 to 128 please? Mr. Merriman, was consideration given to the fact that during the period of substantial growth, '04 to '08, that other banks in the Irish market were seeing double-digit growth? And was it possible that all banks could achieve the same level of double-digit growth within the jurisdiction? Could every bank be having those levels of growth and would the market not be destabilised by that quantity of growth?
Mr. Alan Merriman
No, and, again, I was interested in seeing some of the commentary from earlier sessions about growth and what is good growth and what is bad growth and is 10% okay or is 15% bad or should it only be 5% and tie it to GDP. My simple answer to your question would be, you know, of course you can have high-teen growth or mid-twenty growth across the market and all participants can enjoy that if the market itself is growing in sync with that. If the market is not growing and people are trying to get 5%, 10%, 15% growth, there is going to be winners and losers. But if the market as a whole is growing then that can be accommodated and it is very driven by where you are in the cycle and what is going on in the market at that point in time.
In evidence from other witnesses from the banking sector, Mr. Merriman, the demographics that ... coming towards the late '70s, that the children born at that stage would be requiring finance for properties and the like, going to the mid-noughties. It would suggest or would it suggest that the level of lending was carefully planned and that each institution had an objective to achieve its market share? Can I ask the question: was that a risky strategy by all of the banks, all of the financial institutions?
Mr. Alan Merriman
No, but look, I, again, if I understand the question correctly, you know, each market participant has to make up its own mind in terms of what is appropriate with business and what it can accommodate but all market participants have to do it by reference to what is going on in the market. And as I have testified in my witness statement - and I think many people have testified here - the very, very broad consensus was that the market was going to continue to be growing, albeit slowing, and that the demographics and the economics of the country as a whole were going to be supported.
Mr. Merriman, Mr. Fergus Murphy gave evidence last week that when he joined the financial institution, the EBS, that there was a change of strategy. Was that change of strategy driven by one individual?
Mr. Alan Merriman
No. I mean, I think Fergus himself said that, you know, clearly, as a new chief executive, he was better placed because he had, I think, no baggage and no association with the past. I think he very clearly articulated, and I think it's true, tone is very much set at the top and, therefore, has a cascading-down impact. But I also think - and this is probably the most important point - the circumstances were very different, so the strategy and the changes were being driven by what was happening in the market and our read of the market at that point in time. And as I've clearly articulated and explained earlier, EBS as a whole in the management team, at a much earlier point, had concerns and was already beginning to address the strategy and change things accordingly. Fergus's arrival certainly helped in that regard and it did accelerate because it was a new chief executive, and that helped, but it certainly ... enabled by him, but not exclusive to him.
You joined in early 2005; is that correct?
Mr. Alan Merriman
July 2005.
Oh, mid-July, okay. In evidence previously presented by others, a lot of people have said that there was a period - late '05, early '06 - that it was a point of no return; the extent of the downturn was going to be substantially more than if some actions had been taken prior to that. Did you notice, or did you have any knowledge prior to joining EBS, that potentially there was a fall coming?
Mr. Alan Merriman
No. I mean, I would say - and again I say it in my witness statement - July 2005 for me, leaving PwC, going to EBS, what was the market like right then? Well, it was full employment, as we all understand what we mean by full employment. The economy was booming. House completions were going up. We had a lot of immigration into the country because of the job flow here. PwC were literally scouring the world, trying to find people to come into this market, to service the business and the business that we had at that point in time. It was a very, very strong economy and the immediate outlook in 2005 continued to be good. I would articulate that it was late '06-early '07 before there were strong indicators that there could be trouble ahead and, again, I'll be very clear that, even post the crisis, in late 2009 and 2010, many commentators believed that the worst was over and the truth was things got substantially worse in 2010 and 2011.
In your opening statement you ... or previously you discussed that 50% of the funding for EBS came from wholesale funding and, prior to that, in the late '90s, it was all backed by deposits. At what stage did EBS move from ... when did EBS achieve 50% wholesale funding, are you aware?
Mr. Alan Merriman
Look, I can't recollect, but it, clearly, grew over the course of time. I'm not sure ... I did see that; I heard that; that 1999, it was all non-wholesale. As a matter of fact, I'm not sure, I think ... I'd be interested in knowing, but, clearly, it grew substantially and, to answer your earlier question in this context, I would say ... you know, if you have a ... let me use very simple numbers ... if you have a €20 billion balance sheet and €10 billion of it is funded by wholesale funding, that is not something you deal with or change overnight. You've a €20 billion balance sheet of assets; €10 billion of it is coming from wholesale markets; it takes many, many, many years to try and change that needle.
Mr. Merriman, have you seen the witness statement from Fidelma Clarke? Have you read that?
Mr. Alan Merriman
I have.
You have. Page 5, Ms Clarke says, "The traditionally conservative approach to lending in EBS unravelled in the period ['00 to '07]." Were you aware that there was an unravelling of the conservative approach by EBS?
Mr. Alan Merriman
Sorry, I'd just like to find the-----
It's page 5.
Mr. Alan Merriman
I've different page numbers on mine.
Oh, sorry, okay.
Mr. Alan Merriman
Her statement starts on page 41 in my book.
It's, "Effectiveness of banks' credit strategy and risk management."
Mr. Alan Merriman
Yes.
And it's the last paragraph, first line. Oh sorry-----
Mr. Alan Merriman
No.
-----first paragraph ... last paragraph, first line.
It's page 45 in the core booklet.
Is it?
Mr. Alan Merriman
Page 45.
I'll read the line to you, "The traditionally conservative approach to lending in EBS unravelled in the period ['00 to '07]." You came in mid-'05. Did you ... were you aware-----
Mr. Alan Merriman
Sorry, she said '00 to '07, is it?
Correct.
Mr. Alan Merriman
Okay, so over that seven-year period.
You ... were you aware that that had happened?
Mr. Alan Merriman
I was very conscious, as I think, generally, anybody in the market would be. So, five of those seven years were before my time-----
I'm well aware.
Mr. Alan Merriman
----- the latter two, clearly, I was there. No, I'd be very conscious, and I know Fergus Murphy explained it as well, that maybe over the prior six-year period, there'd been 13 credit policy changes. They were clearly all ... "accommodative" would be the word. And I think the market, as a whole, totally understood that. Why did those changes happening? I'll give you a very simple example. We go back to what I call traditional building society lending. People would get 20-year mortgages. Well, 20-year mortgages became 25-year mortgages. Then they became 30-year mortgages. Then they became-----
It's on the monitor there now, Senator, as well, just to assist you.
Mr. Alan Merriman
Then they became 35-year mortgages. Why was that done? It was done, in part, because demand; people wanted to be able to access greater funding so they could get their houses. And it was accommodated because there was a rationale too, "Well, if you're 20 years of age, why shouldn't you be able to borrow for 35 years?" It clearly ended up, at a macro level, being bad because all it did was inflate house prices etc., etc., but they're the type of changes that were accommodated during that period.
But what I'm asking you: were you satisfied with the change? And did you have any impact when you entered, when you joined the organisation, for those changes to continue changing? Did you do anything to try and revert back to the more conservative method of lending?
Mr. Alan Merriman
No. And I say "No" in the context of late 2005 and 2006 and early 2007. Late 2007 and 2008, yes, lots of credit changes were made and they were done in a different context. They were done to dampen down-----
I suppose where I'm coming from is-----
Last question now, Senator.
Yes. Where I'm coming from, Mr. Merriman, was you were coming in at a very high level, with substantial experience behind you, and you had seen the market growth and I'm asking did you request any changes to the conservative ... or to revert back to conservative lending approach?
Mr. Alan Merriman
From a credit policy perspective, there was no credit policy that I was uncomfortable with from a loan-to-value or from an income perspective, in terms of interest cover and things like that. From a process perspective, from a talent perspective, from a control perspective, I brought in numerous changes to strengthen the processes and the governance and so forth, but from a credit perspective, if a credit policy was approved at EBS board level, I personally would have been satisfied that it was supported and it was appropriate at that point in time.
Thank you. Thank you, Chairman.
Thank you very much. Deputy John Paul Phelan.
Thank you, Chairman. Good morning, Mr. Merriman.
Mr. Alan Merriman
Morning.
Firstly, I want to reference a document that Senator D'Arcy just spoke about earlier, Vol. 1, page 126, minutes of a board meeting, 22 July 2005. The heading at the top is, "Section 3: Key Business Drivers Behind the Plan" and, specifically, the fourth point there, which is as follows, "Tracker mortgages will account for an increasing proportion of business - rising from 5% today to 60% by 2008. [And] This will push mortgage margins down"; somewhat prophetic, maybe.
There's some phone interference coming by you there, Senator. Obviously-----
It isn't my one anyway.
I appreciate that, but sometimes proximity can cause it so, if it is, I'd ask the member to deal with it, please; not to have it interfering with your questioning.
In relation to that, were you yourself aware of the risks that, you know, the tracker mortgage rate could pose for the institution? And, actually, as a board member, was it ever discussed really in-depth at board level in the EBS?
Mr. Alan Merriman
It was discussed. I was aware and I always ... and, again, I think it's fascinating. It hasn't come up, to the best of my knowledge, in your discussions, I was always fascinated with the fact that the tracker mortgage was priced cheaper than the standard variable rate. It made no logical sense to me, from any perspective.
In other words, you know, by a customer having a guarantee that their rate was going to be tied to the ECB, when, in fact, they should have been paying more-----
They should have been paying the premium. Yes, okay.
Mr. Alan Merriman
So I just thought it was madness------
And did you raise that? Did you-----
Mr. Alan Merriman
I did raise it. But ... and, again ... no, look, you know, EBS got lots of things of wrong, it got lots of things right as well. The whole area of pricing of mortgages ... if you look at our book as an ... in aggregate, proportionally, compared to the other banks, we had very, very little by way of tracker mortgages. We had a lot of people in fixed rate and we had them in fixed rate because we felt that was the prudent thing to do. Typically, around five-year ... it affected stress testing as well but it gave them certainty. A bit like my own arrival into EBS and my own package, having visibility about what your expenses would be ... very, very helpful in terms of assessing credit. So we steered people more towards fixed rate and the standard variable rate for those reasons.
But you're saying there was a discussion but perhaps not as in-depth as there-----
Mr. Alan Merriman
It would have been understood but-----
Mr. Alan Merriman
-----it was a feature of the market. EBS was not going to change the market.
Okay, okay. I want to reference your opening statement. I think it's the seventh page but it's numbered as No. 9. The first paragraph ... the bottom of the first paragraph where you say, and I quote, "All understood the necessity for EBS to expand it's business and improve profitability. I would go as far to say we were encouraged to expand and become more commercial." In fact, at the start of that statement you'd referenced the regulator and Fitch and Moody's and a number of other bodies. Who was encouraging you? Because you seem to be indicating there that it's an external encouragement rather than an internal encouragement.
Mr. Alan Merriman
Yes, well, look, I ... you know, clearly there's a lot of interested parties with a building society. So obvious candidates being the rating agencies, obvious candidates being the people who are lending you money, obvious candidates being the ... the regulator. So, you know, in sharing our strategies and sharing our business plans with all those parties, what was the reaction? What feedback were we getting? I'm being very clear, nobody - and I will say nobody - ever said, "Do you know what? Ted, Alan, Mark, Fergus, we really think that's not very clever.' In fact, I'm saying the opposite. I'm saying, "Do you know what guys? That makes very good sense. Yes, that doesn't give us a problem from a rating perspective and our particular A rating. Yes, we see the sense of you diversifying away from your mortgage book. Yes, we can see that the margins are under strain and, yes, of course it makes sense that you would diversify your business and have your non-member business. Yes, it makes sense to have a member business and a non-member business because we can see how it's circular." That's what I'm trying to explain.
Okay, that's fair enough. I want refer to core document 2 ... Vol. 2, sorry, page 37, which is a letter from the Financial Regulator to Mr. Murphy, managing director, on 3 March 2008. It should be up on the screen, I'd say, momentarily. It says "Copy to Emer, Brian, Fidelma, Alan [who, I presume, is yourself] [and] Grant." It's a result of an inspection process. There's an interesting comment on the third paragraph where it says "The Financial Regulator's inspection process is a high level review and does not constitute a detailed examination or audit.", which, perhaps, may well have been the case. I want to specifically reference page number 43 ... it's a review of a number of files - loans, effectively - and issues that have been spotted by the regulator and a number of comments by them on those issues. The last comment at the bottom of page 43, should be up in a second. Is it? You have it anyway, yes?
Mr. Alan Merriman
I do, yes.
"Overall indebtedness was assessed on the basis of an uncertified Net Worth Statement. The inspectors would question whether reliance should be placed on such a statement." Over the page, page 44, second box, point No. 3, "The purpose of the €4m loan changed after approval - it is not clear to inspectors how the €3m funds advanced will be utilised (€1m being used to acquire US Property)." Next box down, "No evidence of income - (client will not provide it)." Point No. 3, "Salary details were estimated by EBS." Point No. 5, "No valuation of property being acquired. This property was used as security along with existing properties secured by EBS." And again, on the bottom of page 45, last ... the very last point, "Reliance placed on uncertified Net Worth Statements." This was in 2008 ... early 2008 ... March 2008, I presume referencing the previous year. How can you explain those discrepancies ... that this admittedly high-level review rather than an in depth analysis by the regulator, which they've said in their opening letter that these were identified? How did they happen?
Mr. Alan Merriman
Okay. Well, let me ... let me deal with two or three things there. First of all, and I'm ... I want to be very clear ... very plain language - "The Financial Regulator's inspection process is a high level review and does not constitute a detailed examination or audit." That's insurance language, contingency language, you can clearly see from the nature of the findings that they're very forensic and a very detailed review had been undertaken.
Okay.
Mr. Alan Merriman
That's my view.
Okay.
Mr. Alan Merriman
Secondly, I'd say ... and I've had the benefit of it, I'm not sure if it's in the document that was shared with you by AIB and EBS, but I have seen the detailed response to all these queries that went back to the regulator, and it deals with every single point and explains them. And that was clearly done to the satisfaction of the regulator because there was no subsequent correspondence on the matter. The third thing I'd say is - and I think it's an important point in terms of giving you some personal insights - when we talk about the regulator, and in this case we're talking about the Financial Regulator here, there's many different components of the regulator. So there's the Pat Neary level, there's the head of the banking division level, there's teams that might do a thematic review of "know your customer", or there's an inspector who's doing a very detailed review, regardless of the wording, of the loan files. So my broad insight to you would be ... look, I can completely understand that somebody reads this cold and they go "Jesus, what's going on here?" Completely get that. What I will say to you, candidly, is that unfortunately the practice amongst the regulator was they'd come in and they would do these reviews, they wouldn't engage properly in terms of getting clarity while on site and then they would then send very detailed questions to have clarification. But, much more importantly, I'd be standing back and I'd be saying "Okay, look, this level of inspection was going on but where were the dots being joined up so that, at a higher level, the regulator would be coming in saying "Do you know what? I get it, that there's a passport where the photograph isn't legible. And that's not great. But do you know what? I don't need to talk about that. What I want to talk about is your development finance. And what I want to talk about is that you've got 33% of your book is funded only by retail deposits.".'' That's what was needed in terms of macro-regulatory intervention. That's where the regulator needed to be. When we talk about 100% mortgages, it's not about on an individual case whether an institution was doing it or not or why it was doing it-----
Yes. I don't think anyone ... I'm not here to disagree, I don't particularly disagree with anything that you said, but my-----
Last question, Deputy.
-----my point still remains. I mean, this investigation by the regulator which was, as you said, kind of, standard practice, highlighted a number of fairly startling and-----
Mr. Alan Merriman
But like-----
-----omissions by the EBS.
Mr. Alan Merriman
But ... well, again, and I ... you know, look, I'm not trying to disguise or change the ... this was clearly, you know, a letter that was not well received in terms of the level of findings and it was taken very seriously in EBS. But, again, I just want to try and deal with what I might call prioritisation and what was going on. And, again, just be very stark: all of these findings, as extensive as they are, not one of them is rated a high priority. And even the ones that are there are rated a medium priority. So even these findings weren't leading to the regulator saying "Look, here's a problem and it needs to be dealt with right now."
Okay.
Okay, thank you very much. I'm moving to wrap things up. First up is Senator MacSharry. Senator.
Nothing further.
Okay, thank you. Deputy Murphy.
Thank you, Chairman. And, Mr. Merriman, just to clarify, from the board minute meetings in March 2007, the regulator expressed concern that you were responsible for both the commercial business and the risk function. Why did ... why did the regulator express that concern and what was the reaction from the board then?
Mr. Alan Merriman
Okay. And I think this deserves a full response. First of all, when I joined EBS, it wasn't intended that risk would be under my remit. At that point in time, there was a director who had that responsibility at board level. They resigned shortly after my arrival and after, you know, consideration, the chief executive and the board asked whether I would take on the responsibility of risk along with my other responsibilities. So that's how it evolved, and that was pre-cleared with the regulator at that point. So we had an explicit discussion with the regulator.
That was 2005 at that point? Or it was-----
Mr. Alan Merriman
That was late 2005.
Late 2005.
Mr. Alan Merriman
And we had an explicit discussion with the regulator. We would have written to them. They would have written back to us confirming their acceptance of the appropriateness at that time of my taking on that responsibility. Now, I just want to be very clear because, you know, there's this observation by others that EBS didn't have a chief risk officer and it didn't have a chief risk officer on a stand-alone basis reporting to the board or the chief executive. And in somehow or some way, that has contributed, in a meaningful way, to what transpired. Now, again, let me deal with the facts. Yes, it didn't have a stand-alone chief risk officer, but it had a head of risk, and you'll be meeting them later today. And that head of risk reported to me but they also had visibility at board level and they had their arms completely around risk but in an EBS context. So what I'm trying to say is that the question of there being a layer between the head of risk and the chief executive or a layer between the head of risk and the board, in my view, was unhelpful in terms of a post mortem, because, clearly, it would have been better to have a single individual at board level solely responsible for risk, but I actually don't think it made a meaningful difference. And, again, just to give that some objective analysis, two things I'd say - look at all the other banks who did happen to have a stand-alone chief risk officer reporting to the board, and I don't think they ended up in a different position. And, ultimately, I'd say - and I think again it's a corporate governance matter - ultimately, the chief risk officer of any organisation is not the head of risk, is not the head of finance; it's the chief executive and the board collectively.
Can I just ask-----
Final question, Deputy.
-----what changed then in 2007? Why did the Financial Regulator change his opinion?
Mr. Alan Merriman
Because ... and, look, it's inevitable, it's life. Best practices change. There were some documents out of Europe that were now saying ... and if you go back to the late '90s, the role and the job of a chief risk officer didn't exist at all.
It's Galway races week, lads. I'm sorry about that; that's where that came from. Time is up. I don't know where that came from, Deputy. I'm going to wrap things up. Something that struck me this morning when you were talking, Mr. Merriman, and as you go along the journey, you sometimes forget the obvious, and that the EBS was set up to assist teachers to buy homes and that's the start of the journey of the EBS's establishment. That was its raison d'être, that was its client base, and it grew out of that. I'm correct in that regard? And at the very end of the story, the affordability for the teacher to be able to buy a home was possibly gone beyond their affordability, certainly as a teacher.
Mr. Alan Merriman
Yes.
At any stage during that journey, did you say to yourself, or was it discussed in the bank, the purpose of the establishment to which we serve, which was to allow a particular, sort of, income group ... and they become the classical, sort of, teacher and guard, in terms of looking at affordability-----
Mr. Alan Merriman
Sure.
-----it's ... we're now moving from 20 years out to 35 years to give these people mortgages, the ratios of their incomes with regard to the loans that were given to them are now out of kilter severalfold and other matters relating to that. Was that ever, ever discussed?
Mr. Alan Merriman
I wouldn't say in that explicit way but, in the round, and it was something EBS did continuously, it did have extensive member forums. It had a lot of engagement with members, it did a lot of surveys, and the feedback was still very strong that the members wanted EBS to preserve. They wanted EBS to continue and the client ... you know, the satisfaction surveys and all that ... and, ultimately, at the end of the day, EBS was still able to provide mortgages to its members at competitive rates during those times. So EBS evolved but it still was serving members. It still was fulfilling a need.
But the affordability in that competition became difficult and more difficult than when-----
Mr. Alan Merriman
It came ... it's the point I made earlier about-----
So for the purchase-----
Mr. Alan Merriman
-----you know, change credit policy, go from 20 years to 25 years. Yes, it helps at that particular point in time but the reality is it's just pushing up prices for everybody.
Okay.
Mr. Alan Merriman
But, again, that's not an EBS making.
I'm going to bring matters to an end.
Chairman.
Yes.
Could I invoke just one clarification?
You can, indeed. Quickly, before we go.
You made reference that-----
Just a clarification not a question now.
Yes. It was on IAS 39, Chairman-----
Yes.
-----and Mr. Merriman said it was a red herring, and the question I want to ask-----
Mr. Alan Merriman
Big picture.
-----was EBS ever asked by the Financial Regulator or the Central Bank to increase the provisions on loan losses?
Mr. Alan Merriman
No.
Were you surprised with that?
Mr. Alan Merriman
No.
Did you-----
Mr. Alan Merriman
They'd no reason in the context of we had auditors, they clearly knew we were very robust in our approaches. So they'd no reason to ask us to increase provision.
But did they have the power to ask you?
Mr. Alan Merriman
They'd the power to engage with us.
Did they have the power to ask you to increase the provisions?
Mr. Alan Merriman
I think they could have asked us. But - and I'll be very clear on this - we couldn't have complied if it was outside of the accounting standard.
So, therefore, how do you regard it as a red herring then?
Mr. Alan Merriman
Because I'm very clear the provisions are simply an accounting number. They're nothing to do with the underlying losses that are true and economic.
All right, Deputy-----
Just for the final point, just in-----
Final point.
Yes. If you say it's a red herring, who then would make the decision to show in the notes to the accounts, the published accounts, that additional losses should have been ... additional provisions should have been provided for the losses?
Mr. Alan Merriman
No. What was provided in the accounts was not we should be providing additional provisions. What was shown and disclosed in the accounts was these are the provisions that we have provided under the accounting standards and, by the way ... loose line ... by the way, we fully anticipate there's going to be higher loan losses in the coming periods.
Why wasn't that done?
Sorry-----
Mr. Alan Merriman
Sorry, that was done. That was done.
-----Deputy, I take the point of clarification, now that's it, it's done, okay.
That's fine.
Mr. Merriman, I want to bring matters to an end. Is there anything you'd like to say by ... in addition or by closing remark or anything else?
Mr. Alan Merriman
No. Thank you, Chairman.
Okay, with that said, I would now like to thank Mr. Merriman for his participation with the inquiry this morning and for his engagement with it. The witness is now formally excused. I propose we break for 15 minutes and return just after noon. Is that agreed? Agreed. Thank you.
EBS - Ms Ethna Tinney
Thank you very much. So I now bring the committee back into public session is that agreed? And we move on to session two of today's hearings with Ms Ethna Tinney, former independent non-executive director of the EBS. The Committee of Inquiry into the Banking Crisis is now resuming in public session and can I ask members and those in the public Gallery to ensure that their mobile devices are switched off. Today we continue our hearings with Ms Ethna Tinney, former independent non-executive director EBS. Ms Tinney was appointed non-executive director in December 2000. She was a member of the board audit and compliance committee from 2001 to 2005, she was transferred to the board credit committee in mid-2005. In 2007 she was voted off the board by members of the EBS at the AGM. In 2008 she was voted back on the board by the members and was a member of the board risk committee until May 2011. Ms Tinney, you are very welcome before the committee.
Ms Ethna Tinney
Thank you.
Before hearing from the witness I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given and I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings. Members of the public are reminded that photography is prohibited in the committee room and to assist the smooth running of the inquiry we will display certain documents on the screens here in the committee room. For those sitting in the Gallery these documents will be displayed on the screens to your left and right. Members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.
The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee and will be relied upon in questioning and form part of the evidence of the inquiry. So with that said, if I can now ask the clerk to administer the affirmation to Ms Tinney please.
So, once again, Ms Tinney, welcome before the committee this afternoon and if I can invite you to make your opening remarks please.
Ms Ethna Tinney
Further to the direction of the Joint Committee of Inquiry into the Banking Crisis to make a statement in writing on the following lines of inquiry relating to my role as non-executive director of the EBS Building Society, referred to below as EBS, I say as follows. To quality of the business model setting process, there was no such process as the business model had been set prior to my joining the board. In 1985, when I wanted to buy a house, the rules of EBS were clear. Ninety percent of the purchase price was the maximum you could borrow and two and a half times your salary. If you had a spouse or overtime, half of what each of these brought in annually could be added. Documentation had to be produced to verify applications. All Irish banks had similar rules. By the time I joined the board of the society 15 years later, in December 2000, those rules had been abandoned, not just by EBS but by most, if not all, lending institutions. Mortgage applicants’ declared incomes were sometimes well in excess of reality and up to six times the applicant salary was approved.
This happened gradually as the price of houses went out of the financial reach of most people, had the old rules still applied. I paid up to 14% per annum on the mortgage I held from 1985 to 1996 but, in the new euro scenario, interest rates had plunged which seemed to even out the risk. The risk of jobs being lost was not factored in, largely due to the country’s booming economy.
The induction to my new role as an EBS non-executive director was pleasant. The staff were delightful and the managers who explained their processes to me, equally so. However, I was uneasy when I was introduced to the idea of securitisation. In simple terms this is a way of packaging up mortgages into an asset and selling them on to a new layer of investors, who agree to pay a percentage of the nominal value of the loans in return for an agreed interest so that their money can be lent on again for new mortgages. It is ingenious in its way, as it is a system that seems to offer limitless working capital for a lending institution. But there is nothing to stop the new investors selling on their asset at a profit, and so on ad infinitum. Viewed that way, it has the look of a pyramid scheme and all depends on the original mortgages continuing to be serviced and becoming more expensive for the mortgagees. I could not get the image out of my head of a shark eating its own entrails. As time went by I became ever more doubtful of the fundamental banking concept of loans as assets and indeed of debts in any business as assets. The only asset that reassures me is something I can control and I cannot control the repayment of debt owed to me.
To adequacy of board oversight over internal controls, managed and monitored: unfortunately, this proved inadequate, which became apparent when the board of EBS was finally advised that an employee in the treasury department had illicitly engaged in proprietary trading strictly against the rules of the society. Strangely, this same employee had been previously present with his manager at a board meeting when non-executive directors had probed the possibility of just such an illicit trade being made. The board was reassured at the time by the executive directors that such a thing could not happen because of so-called “back-room controls”. These evidently failed and EBS sustained a significant loss. Similar scenarios unfold in other banks all over the world from time to time. But far more damaging was the decision by the board to sell the headquarters in Westmoreland Street owned by the society in order to transfer to a rented premises in Burlington Road. Over time it became apparent that this was a catastrophe and the full board did not have oversight of the implications of the decision.
To appropriateness of property-related lending strategies and risk appetite: lending large sums to developers was new to the society. The senior management in EBS, as in most of the lending institutions, were taken in by Ireland’s so-called developers and also by their professional and other advisers. So were the members of the board, including me. The belief that there were substantial profits to be made for the society from these developments led us to emulate our peers, although we had been cautious about joining the bandwagon. There was a sort of feeding frenzy as the banks clambered over one another to get a piece of the action, especially as new foreign banks had entered the market as competitors.
To appropriateness of credit policies, delegated authorities and exception management: and here there is an anomaly, Chairman, which I just want to clarify. In your opening introduction, you correctly said that it was actually in mid-2005 that I was put on the credit committee. My memory was faulty there and this affects what I have to say. I was actually taken off the BAC in mid-2005 and put on to the credit committee instead.
Okay, I'll have that corrected. Thank you very much Ms Tinney.
Ms Ethna Tinney
In the period from mid-2005 to April 2007, I was inundated via e-mail by proposals from EBS senior management on behalf of developers for quantities of cash in the tens of millions which appeared to be asset-backed and also to contain personal guarantees. Typically, as a member of the credit committee, your approval or lack of it had to be sent also by e-mail to EBS by close of business the same day or the next day. The rationale was that if EBS did not facilitate the developer, another bank would and we would simply be losing out on the business. All these proposals seemed fail-safe. It did occur to me many times that the EBS credit committee should be meeting about each of these large proposals but my colleagues on the committee seemed happy to do the business this way, and as I had clashed with the majority of the board over several matters at this stage I had no appetite for further confrontation.
To adequacy of the incentive and remuneration arrangements to promote sound risk governance: the bonus system in banks is crazy. You get a bonus for lending money out. There is no incentive to get it back in. Such a system encourages greed and recklessness. It is no wonder that banks go bust from time to time.
To appropriateness of the bank guarantee decision: probably until the last syllable of recorded time, this will be argued by politicians, economists and journalists. My personal view as a citizen of the Republic of Ireland, perhaps to some extent influenced by hindsight, is that it was indefensible for the Government in September 2008 to in effect yield the sovereignty of this country in order to shore up a banking system that is entirely of and for itself and will never change. I do accept, however, that many grave problems would have arisen if one or more banks had failed and that the full extent of the bad debts were not known at the time.
To analysis and consideration of the response to contrarian views: I incorporate below in italics a letter I insisted on sending to the members of EBS in advance of the annual general meeting in 2007, 29 March that year:
Dear Member,
Your EBS 2006 Summary Statement contains on the Notice of Annual General Meeting the following words:
“Ethna Tinney retires in accordance with the Society’s Rules and offers herself for re-election. (Members should be aware that the Society’s Board of Directors does not support Ms Tinney’s re-election as a Director)”
There are three reasons why the Board does not support my re-election.
In the years 2003 and 2004 the Board was intent on pursuing a deal with a foreign bank. This deal was characterised by the executive as a bold transformational play. I saw it as selling the family silver without giving the money to the family - you, the members. I opposed the deal from first to last. Ultimately the deal collapsed, but not before millions of euro of your money had been spent pursuing it.
In 2005 the Society advertised for new non-executive directors. I was a member of the Nominations Committee. Ten candidates were shortlisted through an external recruitment process. All ten were vetoed without any reference to me. I objected in the strongest possible terms. Last December I was removed from the Nominations Committee.
In 2006 the Board fractured over corporate governance. Three members, including me, became unhappy about aspects of senior executive remuneration and the payment of a multi-million euro sum into the Senior Manager’s Pension Fund without reference to the Board.
Am I right or wrong to oppose matters which appear to me to be against the interests of you, the members? If you believe that independent judgement exercised without fear or favour is a good thing on your Board then come to the AGM on April 16th or send your proxy to arrive not later than April 9th at EBS Building Burlington Road Dublin 4 and re-elect me.
This letter does not mention that I had repeatedly raised concerns about the size of mortgages we were lending to people. Nor does it detail my explosive response at a meeting in early 2007 to a proposal by the executive to get involved in sub-prime lending. A non-executive director colleague told me in front of the board that my response was “intemperate”, although the sub-prime industry in the US was already beginning to implode. Contrarian views were not tolerated on the board of the society.
To appropriateness of the relationships between Government, the Oireachtas, the banking sector and the property sector: I have never had a relationship with any member of the Government nor the Oireachtas nor the property sector. I do not golf, do not visit tents at racecourses and am not invited to dinners. But my sense, as a citizen of Ireland and as a director of EBS for nine years, is that there is a deeply unhealthy relationship between all four.
In conclusion, I wish to emphasise that this witness statement refers specifically to my time as a non-executive director on the board of EBS in the period December 2000 to April 2007 when I was removed from it. By the time I was re-elected onto it in 2008 there had been many changes to its composition and a new chief executive officer had been appointed. Sadly, it emerged during the next three years that EBS was irrecoverable. I retired from the board at the end of my third three-year term in May 2011.
Thank you very much, Ms Tinney. We'll get questioning under way, and in doing so, I now invite Deputy Joe Higgins. Deputy, you have 25 minutes.
Thank you, Ms Tinney, and your conciseness I will try to emulate. You were on the board from 2000, 2007, 2008-2011. Could you just very briefly, if you would please, recap the origins and the founding ethos of what became the EBS, formerly the Educational Building Society?
Ms Ethna Tinney
Well, I wouldn't have been that familiar with it, to be honest with you, Deputy, because the way it happened was that there was a public advertisement which I saw in The Irish Times in September 2000 inviting members of the EBS to apply for the position of non-executive director. And when I decided to do that, I was not particularly concerned with the founding ethos of EBS. I had had my mortgage with them from '85 to '96 so, therefore, I was familiar with how they liked to do things but I didn't delve into the history of EBS, to be honest with you.
Okay. But it was set up in its ... set up as an assistance to teachers and some other public sector companies.
Ms Ethna Tinney
I was aware of that and I think it was actually set up by a teacher.
Yes.
Ms Ethna Tinney
Yes.
Yes, okay. Thank you. Why, as a mutual building society, did EBS see it as strategically appropriate to enter the commercial lending market do you think?
Ms Ethna Tinney
If I was to be very blunt about it, I would say that there was a lot of testosterone rolling around in senior management and on the board at the time. And there was a sense that we were getting left behind as a lending institution, particularly with a view to INBS, which was the Irish Nationwide Building Society which was referenced quite frequently at board meetings by management. There was a sense that we were becoming a minnow as INBS expanded its lending and started to post profits that were up to five times the profits we were posting. And I think it wasn't so much strategic but a competitive urge, a wish to compete and I'm not sure that there was ... I don't recall any heart searching about why we would move from being what you might call, an old-fashioned small building society/bank, into trying to compete with ... in a more voracious arena of-----
Okay, so there would have been-----
Ms Ethna Tinney
-----development lending.
-----there would have been a high consciousness among management, it's a question, that other banks in the Irish market were seeking double-digit growth. And, for example, in evidence here the chairman of Allied Irish Banks referenced Anglo Irish Bank as being constantly put up to them as a model to be followed, putting pressure on them, he felt. Would that be a similar situation?
Ms Ethna Tinney
It was exactly the same thing. AIB was looking over its shoulder at Anglo and EBS was looking over its shoulder at INBS.
Okay. And was there much time in your period on the board allocated to the strategy in relation to commercial property? Was there much discussion on what that strategy should be and how it should be evolved?
Ms Ethna Tinney
No. I think one of the things that I found most difficult about being a non-executive member of the board of EBS was that the way board meetings were run, was that you were sent a package, usually at very short notice ... it could be that thick ... on various topics that were going to be discussed at the board meeting. These would contain a lot of power presentations printed out that management were going to then take the board through during the meeting. So what would ensue was that you would have read these papers and yet the relevant manager would spend maybe an hour and a quarter actually taking you through all the frames again. And the net result of this was that if you had two or three presentations like that, the board meeting was over. So I began to realise that we were not talking to each other in the absence of management about the thrust of where these proposals were going. These proposals were managerial proposals-----
Okay.
Ms Ethna Tinney
Yes.
Okay, now the-----
Ms Ethna Tinney
The strategy was overlooked, I think. Yes.
Yes. The commercial property loans grew from €460 million in 2001 to €1.7 billion in 2007 and €2.3 billion in 2008 - a 500% increase which by any standards is quite acute. I'm puzzled as to how that tallies against the board minutes of 31 May 2002 when the strategic plans said it would be a question of putting ... well, I'll quote the "Toe in the Water" and "The Toe in the Water approach is the favoured one".
Ms Ethna Tinney
Can you just reference the page? I know what you're talking about and I have a comment to make on it.
It's simply that ... the page is 95 in your book-----
Ms Ethna Tinney
In Vol.1, is it?
Yes.
Ms Ethna Tinney
Yes. Okay.
You don't really need to go there, Ms Tinney, in the sense that I'm just saying the reference is "The Toe in the Water approach is the favoured one", according to these minutes. I'm saying does that tally with that rapid increase in growth that I outlined?
Ms Ethna Tinney
No, it does not. And the comment I want to make about that is that it's also, if you like, a management strategy, not necessarily a board strategy, to induce agreement from board members to go down a certain path by seducing them, by making it seem that it's actually not a very large move to make. That's why expressions like the "toe in the water"-----
Okay.
Ms Ethna Tinney
-----is used.
Yes. If we come forward then and this is starting at page 99 in Vol.1, Ms Tinney, and this is the EBS commercial business plan from 2005-2008-----
Ms Ethna Tinney
Yes, I have it.
-----and if you go to page 101-----
Ms Ethna Tinney
I see it.
-----it would seem that, perhaps, things have ... went forward from the "toe in the water" when, in the "Step Up" strategy, page 101, bottom right-hand side, favours "Grow high margin business in development finance ... Low emphasis on growing current business lines which have low ROC [return on capital]." This would seem, would it, to have formalised a move from the "toe in the water" to something more considerable in terms of large-scale commercial lending?
Ms Ethna Tinney
It certainly did and it struck me so much that I highlighted it because looking back on my experience, as I have described it to you, of the interaction between management and the board itself, what I imagine is that what management really wanted was the "Rocket Strategy".
Was?
Ms Ethna Tinney
Was the "Rocket Strategy".
Yes, okay.
Ms Ethna Tinney
They weren't prepared to say that. So once again, it was a way of, you know, "Let's get started on this road." Well, we were well down the road at this stage.
Okay.
Ms Ethna Tinney
And once the ball is rolling, it's very, very hard to stop it.
Yes and the strategy outlined, Ms Tinney, for the growth projected in commercial lending in 2005 was to be 25%; 2006, 29%; and the profit levels equally that were laid out were to be of a similar order - 25%, 2005-2008, in the updated strategy for 2004-2008. They seem to be high levels of profits in a mature market. Were you able to intervene at the board or do you remember challenging any of these growth figures as being, perhaps, too high, too ambitious?
Ms Ethna Tinney
No, because my sense at this stage on the board ... certainly by 2005 but even earlier on, was that I was beginning to be regarded as a troublemaker, as a naysayer, as a maverick. There were other people on the board who had a much deeper understanding of the financials, in the sense that they were part of the financial industry, okay? And, therefore, yes, of course, you know, I would look at these figures and it didn't happen just in, say, 2005 for three years. Every year, we would be presented by the chief executive with the most seductive, is the word I would use again, seductive suggestions about profitability and growth.
Okay.
Ms Ethna Tinney
And the general attitude of the board was "This is amazing, let's go for this."
Okay. And in going for it apparently, Ms Tinney, in the EBS and developers as you outline it ... for example, in page 5 of your statement. And you speak about being inundated with proposals from EBS management on behalf of developers for quantities of cash in tens of millions and so forth being given very little time to process or absorb or to make a decision.
Ms Ethna Tinney
Yes, absolutely.
Now, in ... Mr. Merriman this morning said in evidence that this was just a last stage of a lengthy approval process and that board members would have received relevant and suitable advice to help them with their decision. Was that the case as you found it?
Ms Ethna Tinney
Not at all. I would be working for RTE in Lyric FM down in Limerick and my heart would fail me when, yet again, there would be an e-mail from EBS, carefully tabulated, setting out a proposal. It might run to 17 or 18 pages. But in terms of any assistance in dealing with it, there was absolutely none and also, as I say in my statement, you know, it occurred to me many times - the credit committee should be talking about this. We shouldn't be just asked in 24 hours, "Send back your approval or not". You know-----
So am I-----
Ms Ethna Tinney
-----looking back on it, it was crazy.
Am I right here, Ms Tinney, that decisions then to give serious amounts of money to developers were not taken after a discussion on a board meeting, but were done by the ... done by board members via e-mail? Is that-----
Ms Ethna Tinney
Yes. That is what I am saying.
Is that the case?
Ms Ethna Tinney
Yes, yes, by the committee that was delegated which was the board ... to give it its full title - the board credit approval committee, BCAC.
Why was it a 24-hour period do you know?
Ms Ethna Tinney
I have no idea except that the rationale was that ... there's an example of this here actually from Alan Merriman.
Can you cite the page and I'll bring it up for you?
Ms Ethna Tinney
If I can find it-----
Yes.
Ms Ethna Tinney
I will find it. I think it's at the front of ... where he actually says, "It would be appreciated if we could get back within 24 hours".
We can take that-----
Ms Ethna Tinney
We'll find it.
We can take that-----
Ms Ethna Tinney
We'll find it, yes.
We can take that, Ms Tinney-----
Ms Ethna Tinney
And the rationale was, sorry, Deputy, was that if we didn't comply with the requirement of this developer to let him or her know - and they were nearly all hims, but they weren't all. Sometimes there would be married pairs or consortiums-----
Yes-----
Ms Ethna Tinney
-----that, you know, basically they would say, "Well, you can keep your money because we are going to get that somewhere else."
Okay, do you recall ever for asking for more time yourself? Did you complain about this process?
Ms Ethna Tinney
I think I said in my statement that "I was weary at this stage".
From other issues-----
Ms Ethna Tinney
From other issues, exactly, of being contrarian yet again-----
Okay. Okay, we will just move on. You say in your statement you ''were uneasy when introduced to securitisation''-----
Ms Ethna Tinney
Yes.
-----which is the parcelling up of bundles of mortgages and selling them on to other organisations or funds of various kinds and, as we know, that was a huge part of the United States subprime mortgage scene. But was that the case with the EBS?
Ms Ethna Tinney
Oh, absolutely. There is ... in the documentation it states that up to 1999 or '98 100% of our funding came from retail deposits -100%. Now, securitisation started in 1999 with the EBS and when I arrived a year later, it was in full flow, just like everything else that's, you know, thing. So, basically by, I think it's 2005, it's in Alan Merriman's statement, 75% of our funding was coming from what they like to call "wholesale funding" and only 25% from retail deposits. So, I mean, that is a colossal change, an absolute, you know, a colossal change and the problem about it was was that this absolutely fuelled what happened with the housing boom and the prices of houses because there was unlimited funds available to the banks to lend out you know. You package your mortgages, you sell that as an asset, you know, you get money in, you make more mortgages, you package them and so on.
Yes.
Ms Ethna Tinney
It goes on and on.
And were those packages of mortgages and what we are talking about here is human beings living in homes that-----
Ms Ethna Tinney
Yes.
-----they were paying mortgages for.
Ms Ethna Tinney
Yes.
Were they actually sold off lock, stock and barrel?
Ms Ethna Tinney
Yes. That's the way securitisation worked because-----
And was there any reference to the mortgage holders?
Ms Ethna Tinney
In the early days, I do recall that when we would have presentations made to us by treasury when they were going out on what they called, "roadshows" - they were called,"roadshows" - and that query that you've just asked did come up. And I'm thinking about, say, 2001, 2002 when this really started to rock and roll that the ... we were assured by treasury that anybody whose mortgage was in the pool - they were called, "Emerald", in EBS so Emerald 3, Emerald 4, Emerald 5 - would be notified that this is what was going to happen to their mortgage and if they had an objection, to object.
Right.
Ms Ethna Tinney
And then that disappeared off the horizon and we never heard any more about it ... about the mortgage holders.
Okay, so-----
Ms Ethna Tinney
-----The mortgagees being, yes-----
-----a possibility is it, would be that you could have ordinary home owners bought their home in good faith with EBS-----
Ms Ethna Tinney
That's-----
-----were paying their mortgage, sold off, perhaps, to what is sometimes is referred to as "vulture funds", have had their conditions reduced or interest rates increased, is that a possibility in relation to what happened?
Ms Ethna Tinney
It didn't really work like that because, excuse me, it wasn't that the vulture fund could target a particular mortgage, kind of - what would you call it? - a pool of mortgages. But it would affect the decision that EBS would make about the variable rates that it was going to impose because the relationship between let's say, the vulture funds - they weren't all vulture funds - that would invest in these things was not directly with the mortgage holders. As far as the mortgage holders were concerned, their relationship was still with EBS.
Okay.
Ms Ethna Tinney
But it explains why the frustration of the mortgagees when they could see lending rates going down and this was not being reflected in what they were being expected to pay.
Okay.
Ms Ethna Tinney
Yes.
Thank you. Just moving on to a different item, Ms Tinney. You said it was a damaging and a catastrophic decision, I am paraphrasing-----
Ms Ethna Tinney
Yes.
-----to sell the EBS headquarters in Westmoreland Street, that the implications were not seen. Why was it damaging, catastrophic and what were the implications?
Ms Ethna Tinney
Because we couldn't afford it and it was very, very simple. It was another thing that I found-----
Sorry, we couldn't ... you-----
Ms Ethna Tinney
Yes, I'll explain. We owned Westmoreland Street, okay? We had owned it for years and years and years and not only was it our headquarters, but it was our most important branch because of the footfall, the number of people who would use it and all that kind of thing. It was a real asset for EBS. Now the rationale for selling it, which didn't happen by the way, for years. It lay empty for years. That was one of the things that we hadn't thought through as a board was that we were now doing the very opposite of what EBS had been set up in the first place to do. We were selling our home to move into rented accommodation. The rented accommodation was a very, very fancy building in Burlington Road, which never had a branch, okay? Although it was mooted to open a branch in the early stages. Again, one of the seductive processes of getting the board to agree to this 25-year lease, by the way 25-year lease on this building, state-of-the-art building. We were involved with the builder. I am not going to say who it is because I-----
Yes.
Ms Ethna Tinney
-----I feel that that would not be right. We were involved in that we were lending the money to build the building but we were also going to become the tenant. So it was wheels within wheels and a deal within a deal and an awful lot of the implications of this didn't become apparent. I also recall a long-standing difficulty where the board had said, ''We don't need all this accommodation. We don't need it all'', and in order to seduce us - I keep using that word, but it was a seductive technique - to agree to it, we were told that the 4th floor would be leased out and we would make so much money, you know, on the leasing of that, subleasing, to some other tenant. That never happened and I doubt that management ever intended that to happen, yes.
Ms Tinney, you refer to the bonus culture. Some would call it as being crazy. Did you ... again, were you in conflict with the board or with elements of the board of management in regard to that in EBS?
Ms Ethna Tinney
No, I think my thinking on it clarified over time, to be honest with you.
And just finally, Ms Tinney, then, you refer to the relationship between the bankers and developers as a "feeding frenzy". You refer to securitisation as "shark eating its entrails". And you refer to "greed and recklessness" in the banking system. And then you also say, in relation to the bank guarantee, "in effect yield the sovereignty of this country in order to shore up a banking system that is entirely of and for itself and will never change." What do you mean by a" banking system that is entirely of and for itself"?
Ms Ethna Tinney
What I mean by that is that, as we sit here in this committee of inquiry, the banks are finding new ways of shoring up their profitability with other derivatives, like securitisation, like a covered-bond bank. They're not changing. They're ... the banks have absolutely, in my view, and maybe, Chairman, you can stop me if I'm going too far, the banks-----
Oh I will, but drive on.
Ms Ethna Tinney
-----have absolutely ... absolutely no sense of guilt about what they have done. And if left unchecked, they are going to do it all over again. And the housing boom, by the way, has already started.
Finally, Ms Tinney, what would your view then be on a publicly-owned, democratically-run banking or financial system, as opposed to the present model?
Ms Ethna Tinney
Well, look, I think, you know, we remember ACC, we remember ICC when they were State-owned, you know. I think they worked very well. In many, many countries there have been State-owned and co-operative-type banks. I think that they work better. I do ... I really do think ... I think that the bank ... private banking system is unbridled capitalism and, to that extent, because ... and because it's become so enormous and because the waves go out around it with more and more financial institutions trying to take little nibbles - and that's what I mean about the shark eating its own entrails - so that the end products are that much more expensive for those of us who have to pay for it, that this is actually leading to the situation that we all know of, you know, inequality stretching, stretching, stretching. And also to a size of the financial services industry that's unprecedented and wholly unproductive, except for passing money around between itself. You know, it's frightening.
Some people have ... or the financial market system, say, within Europe, the austerity agendas, etc., has led some commentators to say that it's a kind of an economic dictatorship. Would you have a view on that?
Ms Ethna Tinney
I would agree with that.
Maybe a bit leading, Deputy. Maybe.
Ms Ethna Tinney
A bit.
Anyway.
But I can see you going out to dinner on this one. Deputy Higgins to conclude please.
Chair, if there are any pro-marketeers among the members, they can challenge that. I'm concluding, thank you.
Drive on, Deputy Higgins, drive on.
Ms Ethna Tinney
He's finished. Are you finished?
I'm finished.
Thanks very much. Deputy Kieran O'Donnell.
Thank you, Deputy Higgins. Welcome, Ms. Tinney. Haven, the broker ... and I'm referring, Chairman, to book 1, page 113 to 122, and I also want to refer to page 75 as well, Chairman. So, firstly, page 113, which is a briefing document on the broker market entry, 21 January 2005, and the ... page 75 relates to a review on the Haven set-up costs, which Ms. Tinney probably would be familiar with. It would ... this statement is ... would be during a period in which you were not on the board but you probably were familiar with the background to it.
Ms Ethna Tinney
To the setting up of Haven, are you talking about?
Yes, yes.
Ms Ethna Tinney
Yes, absolutely, yes. Well, it was already moved before I was removed, yes.
Yes, so ... so Haven-----
Ms Ethna Tinney
So, what page are we on? Sorry ... sorry, Deputy.
I'm on ... well, really, I suppose, what I want to get clarification on is page 116 initially.
Ms Ethna Tinney
116.
So it speaks about "ABC Mortgages".
Ms Ethna Tinney
Yes.
Is that different from Haven or is that more of the same?
Ms Ethna Tinney
Yes, ABC became ... morphed into Haven, yes.
Fine. The broker market business of EBS was a significant change for it, and did the board, in your view, have sufficient understanding of what it was getting into? And what was your view of the impact of this business on EBS later on?
Ms Ethna Tinney
Well, I think in this sense the board was not, if you like, maybe so led up a garden path because it did become clear, for whatever reason, during the early 2000s that brokers were becoming a very large part of the way mortgage business was done. I think people were just so busy. I think that that was a driver of that, you know. Very often young people, they would both be working, you know, and had they endeavoured to get a home they nearly, you know, always were. And, therefore, it was much easier to go to a broker who would facilitate getting your mortgage, take a lot of the paperwork off the hands of the applicants-----
Do you remember the deliberations at the board level on the set up of what became Haven?
Ms Ethna Tinney
I ... all I recall is we were told that if we didn't do this, you know, we would be again losing out, because, you know, 34% of the business was now being done through brokers, so-----
Was there any due diligence done at board level? Like, did ye discuss it in-----
Ms Ethna Tinney
No, no.
-----what were the pros and cons or-----
Ms Ethna Tinney
No.
So it was just assumed it was going ahead.
Ms Ethna Tinney
The board seemed to be in ... very collegiate, you know, perhaps apart from myself and one or two others, you know.
How did you feel about them going into the broker market?
Ms Ethna Tinney
Well, it seemed to make sense, to be honest.
Okay. And going to page 75 in that regard, it said that there were ... in '07 they were supposed to ... EBS and Britannia Building Society were to do a joint venture. Do you remember the circumstances around that? Britannia, they actually backed out of that joint venture in November.
Ms Ethna Tinney
I remember it very well because when I referred in my document, my statement, to my intemperate so-called outburst, it was about setting up a sub-prime business with Britannia. And-----
So Haven was going into that area as well?
Ms Ethna Tinney
Yes. Oh yes, without a doubt.
So you had established a broker business and then it was going into the sub-prime as well subsequently?
Ms Ethna Tinney
The ... no. The two ... again, it was, you know, one thing morphed into another. I think Haven was the sub-prime, yes-----
Okay.
Ms Ethna Tinney
-----in its actuality.
So you might just elaborate on your intemperate outburst that day at the board meeting on Haven ... on the sub-prime.
Ms Ethna Tinney
Okay. Well, what particularly frustrated me was that I had ... this is maybe going a bit far, Chairman, I have to refer to you here because in this case I have to refer to individuals.
Could you just take it in an aggregate form for the moment and if I need you to be specified. I can take a more specified-----
Can she indicate, Chairman, in terms of positions rather than individuals?
Ms Ethna Tinney
Yes, that would-----
In general aggregate terms, senior managers and so forth, like. Okay.
Ms Ethna Tinney
Yes, yes. Well, I need to reference the then chief executive officer.
When was this?
Ms Ethna Tinney
This was at a board meeting in January 2007.
Fine.
Ms Ethna Tinney
Okay. And I had noted over a number of years that what tended to happen was that when proposals were made - and we've discussed some of them - to change the strategy of what the society was doing, they were always presented, not by the chief executive officer, but by one of his senior managers. And I felt that this was not right. Because I felt that this ... if this was what the chief executive officer ... chief executive, CEO, we'll just say CEO ... if this was what he wanted, he should come forward and say so clearly. So, once again, when this suggestion was put by one of the senior managers at the board meeting ... and I always remember what that person said, "There's money to be made in sub-prime." And that's when I exploded. And I said, "And there's an awful lot of money to be lost [right] in sub-prime." And then I turned to the CEO and I said, "And if this goes up in flames, it's you who I am going to blame and not your senior manager who's proposed this."
And what subsequently happened about the sub-prime proposal? Did it proceed in EBS?
Ms Ethna Tinney
Oh yes. It became part of what Haven was all about.
And do you believe ... what was the reason, in your view, that you were not supported-----
Ms Ethna Tinney
Not listened to.
-----by the board to being reappointed in March '07? What was the real reason?
Ms Ethna Tinney
We'll ... we'll get to that in a moment. But why did I get no support-----
Ms Ethna Tinney
-----when I had my outburst?
I think because the enormity of what was being proposed was not realised by the other board members. Maybe they weren't watching what was happening in America, you know? Maybe they weren't. I don't know. I can't speak for them.
So there was no dissenting voice bar your own?
Ms Ethna Tinney
Absolutely not.
Okay. And can you follow on from that? What do you believe was the real reason that the nominating committee, or the board, did not support your reappointment to the board a couple of months later, in March '07?
Ms Ethna Tinney
I think the real reason was that I had really got under their skin and that they were fed up with me.
You were a nuisance.
Ms Ethna Tinney
I was a nuisance, precisely. And, "Let's get rid of her".
And, did you have any support on the board?
Ms Ethna Tinney
I did, one person.
And that person, did that person ... what way did they articulate that support?
Ms Ethna Tinney
It was in a ... it was actually minuted, so I was pleased to see it. What I ... what happened was - and I've tried to find this document but I can't - that, it was indicated to me that my re-election ... not so much that my re-election wouldn't be supported, but just, "Would you please stand down?". I was required by the chairman to stand down, and I said I wouldn't. And because I had the right, as a sitting director, to nominate myself, I didn't have to get any support. And, at that stage, I think either the chairman suggested to me or I suggested to him, I said, "Can I put my case to the board? I would like to do that". And that happened shortly afterwards, so it was during January.
So, this was after that ... your intemperate outburst on the subprime lending.
Ms Ethna Tinney
Yes. It would ... yes, it was just after that that I was informed that I was, maybe, surplus to requirements. So, I asked if I could address the board. And, naturally, I put a lot of effort into the address that I made, which was about ten minutes or 15 minutes, to try to explain my position, my contrarian position, if you like, on various items. I was listened to attentively but everybody's eyes were down, which is ... you know, I knew what was going to happen. And then I was asked to leave the room so that they ... the board could discuss it. And it was ... and I went home. And, minutes are a very interesting thing about ... on boards, but we won't get sidetracked or we could talk about that forever. But it was minuted, and it turned out that one member of the board had voted that my election should be supported, or my nomination should be supported. Just one, yes.
And do you put it down to an accumulation or do you put it down to your defiance in terms of the bank's proceeding into the subprime market?
Ms Ethna Tinney
No, it was an accumulation. Oh, it, it really ... it started back with the Rabo thing. It started back in 2003 and 2004 when I objected, absolutely, to the idea that EBS would be enveloped by Rabobank without the members getting anything from it.
Okay.
Ms Ethna Tinney
And, that, you know ... and I objected over a two-year period to that. And, again, without, really, any backup from anybody, because I was the only person who resented it. And I resented it purely because there was never any member proposition, let alone that the members weren't going to be given any money, but that there was no proposition ever tabled for them. So, you know, we were just talking about money and what would happen between Rabo and EBS.
And, Ms Tinney, would you have articulated, at board level, that, we'll say, areas like the rapid increase in the land and development as distinct from commercial lending from '05 on, and their entering into sub-prime market, did you believe that to be reckless, or not, on behalf of the, the bank ... the board of the EBS? Would you have articulated that at board level? Would others have articulated that?
Ms Ethna Tinney
I think that my short answer to that is yes, because I think the general sense was shared, you know. I was clear about it, but the general sense was shared by several members of the board that this was all happening too fast. There were far ... it was far too much changing, far too quickly, and we can see that in the reality that, you know, the loan book grew from €5 billion in 2002, well, just under €6 billion, to just under €16 billion.
But ... and, when did you ... when was the rapid escalation? Was that from '05 on?
Ms Ethna Tinney
I'd say '02 to '07, but it went its steepest curve from '05 to '07, and so I do feel implicated in that, as a member of the credit approval committee, you know, during that period, you know, yes.
And, can I direct you in that regard, Ms Tinney, to page 143, 144 and 147, Vol. 1?
Ms Ethna Tinney
Sorry, we're starting at 143?
At 143, yes.
Ms Ethna Tinney
143.
And these are, Chairman, these are two of the e-mails you, you refer to, from Alan Merriman to other members of the credit committee.
Ms Ethna Tinney
Exactly.
The first was, effectively, that you had to come back by noon, which, that came at, that was the 26th, and you've to ... at 8.39 a.m. and it should be back my noon the following day. And this was a commercial loan, development loan, that went from an increase from €34 million to nearly €89 million for one individual. The second one was, on page 147, you were required ... this was a memo that came at just about 14.37, just after 2.30 p.m. on 12 April 2006, and you were required to have that back by "early afternoon tomorrow".
Ms Ethna Tinney
Yes.
So, the first one, were these a regular occurrence?
Ms Ethna Tinney
They were too regular as far as I was concerned. I found them quite frightening.
So, how often would you get them? The first one was on 25 January '06.
Ms Ethna Tinney
Yes, and then 12 April '06.
Correct. So, 25 January '06, I mean, is ... it's a loan exposure to one individual going up by about 160%, over ... the total amount was €55 million. So, how often would these e-mails have come to you?
Ms Ethna Tinney
If I gave you my best guess, I would say, in the period from mid-2005 to when I left in April 2007, this would have happened maybe 30 times. Now, the loans wouldn't all have been of that size or magnitude. But-----
Was that the biggest?
Ms Ethna Tinney
But, those ones that you're talking about, they really frightened me.
And was that the largest that would have come through?
Ms Ethna Tinney
I can't remember, Kieran, to be absolutely honest with you. It's a long time ago, you know?
Okay, but ... and did other people on the credit committee have reservations about the way this was happening, in terms of e-mails coming out and so forth?
Ms Ethna Tinney
I don't know, because we never talked about it.
And were you-----
Ms Ethna Tinney
You see, I thought of it as divide and conquer, that ... the way it was done. And, you see, it's very interesting, because I want to answer your question, but when the whole idea of setting up a board credit approval committee was mooted by Joe Ryan back in April 2003 - and I wasn't one of the first members on it - you know, he does say that ... he talks about the-----
No, I saw that; I've seen all that.
Ms Ethna Tinney
-----the discomfort, you know, for the members, you know, in not being able to discuss it.
Well, I just want to know the procedure. Did the credit committee meet to approve loans?
Ms Ethna Tinney
I only remember one meeting in my entire six ... 18 months.
So, all the loans were basically approved by way of e-mail?
Ms Ethna Tinney
Yes.
If you didn't respond to the e-mail, if you didn't respond-----
Ms Ethna Tinney
Yes. I never didn't respond.
You always did?
Ms Ethna Tinney
I always responded, yes. One way or the other.
And were they always in the affirmative?
Ms Ethna Tinney
Not always, no, but they were generally in the affirmative, because the way they were presented looked, as I said in my statement, fail-safe - 65% of the value of the land, whatever, people who were mega, mega owners, household name developers.
Do you believe that you had the requisite financial, technical knowledge to be on a credit review committee of a large financial institution like EBS?
Ms Ethna Tinney
No.
So, why did you take the position?
Ms Ethna Tinney
Because I didn't realise, when I took it on. I had done well on the BACC, which is rather different, you know.
The which? On-----
Ms Ethna Tinney
The board audit and compliance committee.
Okay.
Ms Ethna Tinney
I had been on that for five years with ... not the chairman of the society, we had a different chairman.
What did ye do in that first committee, the audit committee?
Ms Ethna Tinney
Oh, we ... a tremendous amount of forensic, kind of, looking at accounts, internal accounts, internal audits, and so on.
Did you have the technical knowledge for that post?
Ms Ethna Tinney
Yes, I felt I did. Because, if I didn't ... if I felt I didn't understand what was going on, I always felt free to ask questions. Some of the BACC, you know, meetings, went on for up to six hours.
And do you believe that the board itself had the requisite composite technical knowledge to take on management in terms of proposals that were put to the board?
Ms Ethna Tinney
I think that it's hard to say, because the outcome was a disaster. So, whether it came from a lack of knowledge and experience of how banks work within themselves.
Let's just say in that first board there weren't any bankers. There were members ... a partner of KPMG, that sort of thing, people were very experienced in the financial sector, but we did not on that first board have any bankers so that's quite interesting.
Your institution showed an increased reliance on wholesale funding from 2005 to finance the growth in loan portfolio. Were you aware of these issues? Did you regard it as a fundamental risk and how confident were you in the society's ability to meet its funding strategy in 2008? Were you aware of the fact that the wholesale funding went from effectively nearly over 70% of the ... sorry the deposits went from over 70% of the funding requirements of the banks to, by the time of the guarantee, to 24% of the requirements? Wholesale funding went from up to over 70% of the funding requirements of the banks from being around-----
Ms Ethna Tinney
Sorry, I did mention this earlier on but I did it the other way round, that's right. Oh yes, I was very conscious of that-----
Did you bring it up at board level?
Ms Ethna Tinney
-----and I was very nervous of it. Yes, when the securitisation proposals would come in, which was the fundamental wholesale apart from corporate deposits that we engaged in at that time. They morphed then. They were abandoned by the time I came back. But the covered bond bank is no different really. So, yes, I was always nervous of it. I said in my statement I was nervous of it from day 1, yes.
What was your assessment of liquidity and solvency of the society on the night of the guarantee, on that fateful night on the 30 September 2008?
Ms Ethna Tinney
My opinion of the liquidity or solvency?
Both - of EBS.
Ms Ethna Tinney
All I can say is that at this stage we all knew we were heading for the rocks so I wasn't hiving down to try and find out what-----
When you say you all knew you were heading for the rocks, did the board know?
Ms Ethna Tinney
I think the board did know but we didn't admit it to ourselves.
Did you discuss it at the board in terms of-----
Ms Ethna Tinney
There was a tremendous amount of anxiety at this stage. By the time I came back in April 2008 it was a very different scenario. We had a different board and there was an ex-banker on it. It was a very different board so there would have been a lot of discussion about what state are we actually in. In fact, we talked about little else a lot of the time and the whole retrenchment had already started that Fergus talks about.
Did it come up at the board meetings that there would be a need for a Government State guarantee for the banks?
Ms Ethna Tinney
No.
At all?
Ms Ethna Tinney
No, no, no. Whatever way the accounts were being put together and presented - no, we never thought that would happen or it would have to happen.
You make reference to on the final page of your statement, you said, "But my sense, as a citizen of Ireland and as a director of EBS for nine years, is that there is a deeply unhealthy relationship between all four." And you are talking about Government, the Oireachtas, the banking sector and the property sector. Can you explain what you mean by that?
Ms Ethna Tinney
What I mean is the testimony that was given by our ex-Taoiseach, Brian Cowen, of attending dinners with Anglo, and multiply that out by a factor. That is what I mean. That is unhealthy.
Was there similar type meetings with EBS?
Ms Ethna Tinney
I was never invited to one. That's all I can say.
But do you know that such meetings took place?
Ms Ethna Tinney
No, I don't.
Are you expressing an opinion without back-up evidence to the effect that it happened?
Ms Ethna Tinney
Back-up evidence you can see in a situation where there is clear camaraderie between a banker in your own bank and a Minister who happens to be there for some reason like that. I tell you, I intuit it, Deputy. But I am not going to start saying what I saw, who with whom or whatever. But sometimes you see photographs in the papers, where you see one of your own senior managers out golfing with actually your leader An Taoiseach. That did happen. I saw a picture of our CEO golfing with Deputy Kenny and at the time I just thought, "Oh-oh". It was on the front page of the Sunday Independent.
Do you know what the circumstances were of that?
Ms Ethna Tinney
I have no idea. I just thought the optics were terrible.
Do you believe that in your going forward what should be the structure in terms of corporate governance vis-à-vis financial institutions in dealing with the institutions of the State and politicians and Central Bank and various others, the Oireachtas and so forth? What is in your view the type of protocol that should be in place?
Ms Ethna Tinney
The protocol can only come from within the individuals who work in these various things. That is what I meant by saying the banks are of and for themselves. Can I put it like this - and this is the last colourful thing I will give you - it always seemed to me that the management in the bank and the non-executive directors were like cats and dogs. The managers were the cats and the unfortunate non-executive directors were the dogs. Natural enemies but the cats always outsmarted the dogs. You can look at that paradigm for anything whether it's a regulator, a politician, a banker. The fact of the matter is if people want to misbehave there is no way you can stop them - no way - and that is what worries me about the current scenario. The only way you can change what is happening is if there is a change of sentiment and that's why I said earlier on in answer to Deputy Higgins that, yes, I really do have a difficulty with the capitalist system and I have a difficulty with our political system because it depends on ... well, you say funding, yes? So I can't say that I have a methodology for saving the world but I think we all need to think about what is happening, that's all I can say.
Thank you. Chairman.
Thank you very much. Can I just deal with a few questions myself, Ms Tinney?
Ms Ethna Tinney
Yes.
I will just bring the document up on the board there - it's the board meeting re AIB/EBS merger and liquidity issues and discussed matters as well. In April 2011, Ms Tinney, when the Government decided to sell your society to AIB for €1, did you agree with this move and did you or the board put any alternative suggestions to the authorities?
Ms Ethna Tinney
We did because the society had been up for sale since the end of 2010 and there was quite shock and horror when we were suddenly directed through the Department of Finance that we were going to be enveloped by AIB, yes.
Was there a sense of inevitability or could this have been an alternative approach, or maybe a clever idea could be put on the table or was it not being looked at?
Ms Ethna Tinney
My memory was that the board was shocked that the hard work that had been done to represent ourselves to various interested buyers, and there were about three apart from AIB, that we actually weren't asked to in any way participate. We were simply told that this is what is going to happen.
As part of that process, Ms Tinney, were retention bonuses paid to EBS staff as part of it?
Ms Ethna Tinney
I have no idea.
You have no idea. Okay. Did you receive one?
Ms Ethna Tinney
No.
Okay, thank you very much. I want to return to some questioning there that I had with Mr. Merriman this morning if you don't mind and if you were not privy to those meetings that's fine. I don't want you to be giving an opinion from a distance but if you have intimate knowledge of this information, it would be of assistance. So if I can just look at the first document - EBS's treasury proposal to increase limits for Irish banks. It's a November 2008 e-mail - it will come up on the screen there - and I am just wondering if you are familiar with this document?
Ms Ethna Tinney
Is that in one of the volumes?
Yes.
Ms Ethna Tinney
Is it Vol. 3, because that's where Alan Merriman's main statement is.
It should be on your screen now in one second. It is an e-mail to the board from Mr. Gerry Murray, it is the 17 November 2008 and it is a proposal to increase credit limits for Irish banks. This is post-guarantee, about a month or so after the guarantee, a month and a half.
Ms Ethna Tinney
So it is late 2008.
It is in front of you there. There is a summary of it and maybe if I can just go to the second paragraph, it says:
These events will result in Irish Banks attempting to access the market for senior unsecured debt. Integral to the success of the debt offerings is support from the domestic market, i.e. [that] banks will need to purchase significant quantities of each others bonds. Consequently, [the] EBS Building Society will need to purchase debt issued by the other Irish institutions in order to get sufficient support to successfully issue-----
Ms Ethna Tinney
I've lost ... sorry.
Have you got it? It's in book Vol. 2, page 107 if you're struggling with your monitor.
Ms Ethna Tinney
Yes, Vol. 2, 107.
107.
Ms Ethna Tinney
All right.
Okay. You're better at the books, it would seem, Ms Tinney, than the screen. That's good.
Ms Ethna Tinney
I'm a bit short-sighted.
I suffer from that myself.
Ms Ethna Tinney
I'm good with screens and technology but I'm short-sighted. So, this is from Gerry Murray, yes.
Yes. Are you familiar with that? Were you ... was that e-mail or correspondence brought to your attention, was it?
Ms Ethna Tinney
I'm sure it would have been.
Yes.
Ms Ethna Tinney
Proposal ... the subject: "Proposal to Increase Credit Limits for Irish [Banks]." I can't assume it ... you know, I don't recall it, but, you know, the documentation stretched to tens of thousands of pages.
I'm sure it does.
Ms Ethna Tinney
Yes. So is there any particular thing that I can-----
Yes, I just want to move on to another document there that's ... that I discussed with Mr. Merriman as well this morning. This will come up now in a moment. Basically, just to familiarise yourself with this, this was post the guarantee, it was where different Irish institutions would purchase bonds and short-term money off one another, create activity in the Irish market and there was ... and so on and so forth. But, in the next document here, yes, if I can move ... this one. Sorry, just this page here, page 105. It's the referenced document earlier. It's page 105 in your booklet, Ms Tinney.
Ms Ethna Tinney
All right. I have it.
Okay. And this is the one here; here you go, yes. In that correspondence, if you look at the top of the page, it says:
Fidelma Clarke outlined the basis of two proposals in relation to Treasury limits and programmes arising from the implementation of the Government Guarantee Scheme. Papers had been circulated prior to the meeting.
And it talks about the counterparty limits then. These are the institutions that EBS would be engaging with and there would be about €200 million put into, kind of, operation as a result. To any institutions listed there, amongst AIB and Bank of Ireland, or Irish Life and Permanent, the Irish Nationwide Building Society and Anglo, was there any concern at board level with regard to Irish Nationwide, to your mind, or Anglo, with regard to the EBS actually engaging with them?
Ms Ethna Tinney
I'm actually surprised at this because, by 2008 and long before, early in 2008 ... wasn't it 2008 that the Anglo share collapsed, Patrick's Day?
St. Patrick's Day.
Ms Ethna Tinney
Right. And ever since that, we would have been extremely leery of them and we also had developed a view, in more recent years ... I talked about, you know, INBS being held up as a model for us, you know?
Yes.
Ms Ethna Tinney
But, in more recent years, we had again developed a view that what INBS was doing was possibly dangerous, which, of course, turned out to be absolutely the truth. So, I'm amazed, is all I can say, to see that we were, you know-----
Okay.
Ms Ethna Tinney
-----putting any funds at risk in either of these institutions at all, at all, at all. Or maybe it was a question of them putting in funds in to us, which would have been a different thing.
Okay. And on a related matter, prior to this, the NTMA were quite ... we have it here from testimony from NTMA witnesses - Mr. Somers, in particular - that they were not putting any money into Irish Nationwide Building Society whatsoever and they were not going to put money into Anglo unless there was a ministerial direction and order-----
Ms Ethna Tinney
Yes.
-----signed by a Minister to do so, which ... and that was way back in 2007 those concerns were there.
Ms Ethna Tinney
Yes.
Were you familiar or was the board familiar, with that the NTMA had concerns with regard to these institutions?
Ms Ethna Tinney
If they were published, yes, because I read with great and avid interest, even when I was off the board, what was going on.
Sure.
Ms Ethna Tinney
So, I would have noticed anything like that, yes.
Okay. Okay, and just while we're, kind of, at an observational level, in this period was there ... can you recall ... I'm not generalising, but specific concerns with regard to any co-operative business that you might be doing with those two institutions, Irish Nationwide Building Society and Anglo?
Ms Ethna Tinney
Just-----
During that period-----
Ms Ethna Tinney
Yes.
-----of the post-guarantee period-----
Ms Ethna Tinney
Yes.
-----was there ... and the kind of matters I'm relating to now, would ... can you recall specific instances at board level where it was expressed that there would be concerns in regard to doing cross-transactions with either Irish Nationwide or Anglo?
Ms Ethna Tinney
I can't recall them but, as I say, you know, I'm amazed that we would still have been talking to them, yes.
Okay, just finally, on the issue of - just one final thing - was any ... this is an entirely different, related matter, so just to allow you to get your head into that space. Was any consideration given to the fact that, during this period - this is the review plan from 2004 to 2008 now, this is - that a ... that other banks in the Irish market were also seeking double-digit growth? In your own documentation, it was shown that the bank was going to have double-digit growth in its plan for that period and was it possible that all the banks could achieve their target growth? In summary, what I'm asking, Ms Tinney, it's ... everybody had a plan to win the cup.
Ms Ethna Tinney
Yes.
Only one team can actually win the cup but the policy seemed to be that everybody was going to win the cup at that time. Was there any concerns that, if everybody was to meet their target, and if EBS was to meet their target, was that actually achievable and what would the outcome of it actually be, if everybody was to grow so exponentially over a very short period of time?
Ms Ethna Tinney
I think the surprising answer to that is there was not and I think that that is one of the biggest surprises, at a macro level, that our board - and we had lots of bright people on it, you know - did not say, "Hey", you know, "how big is this market?" I think that there was a collective belief that the market would just keep on growing.
Okay, thank you very much. Senator Sean Barrett.
Thank you, Chairman, and welcome to Ms Tinney. On page 47 in Vol. 1, there is the ... their attempt to assess you-----
Ms Ethna Tinney
Oh yes, oh yes.
-----as a member of the board. What on earth was that process? Can you enlighten us?
Ms Ethna Tinney
I'm just about to tell you.
Good.
Ms Ethna Tinney
Because, in fact, this is the one thing that I do want to tell you. If you look at page 45 and page 47, they're actually identical, aren't they? They're a reproduction of nominations committee meetings that were held first on 24 January and then on Thursday, 8 February when they had decided to, you know, whatever, get rid of me. And the verbiage is this: "Ethna's performance as a Director has been formally independently adjudged to be well below average in the two formal board evaluations to date." Now, will you go back to page 43? And this adverts to January 2004, three years before. And if you look at the re-election of Ethna Tinney, you will see these words: "Brian Joyce, chairman of the Board, reported on the outcome of his discussion with Ethna Tinney following receipt of the individual director evaluation (based on the evaluation forms completed by the other 10 directors and collated by Jim Bruce)." So, the change in the verbiage is so significant, even though the two processes were exactly the same. In other words, in 2004, the minutes are accurate. Our evaluation consisted of being given a page and we had to fill in boxes, from one to five, of how we rated our colleagues under certain headings - attendance; punctuality; collegiality; business knowledge; you name it, it was in there - and of course the gas thing was, since you couldn't mark yourself, it was apparent long before it was collated by Jim Bruce, for anybody who wanted to study this information, who was writing what about whom.
The other corollary was that since it was done, to that extent, anomaly, you know, anybody could write any figure they liked about anybody else. Now, I can accept that, provided you tell the truth, but fast-forward to 2007, to be well ... to be adjudged formally, independently adjudged to be well below average, that is simply a lie.
They didn't have a management guru of some type?
Ms Ethna Tinney
No, no. No, we all marked each other. It was sent off to Jim Bruce and the results came back.
All right, Deputy-----
-----be measured now.
Thank you. Now, could I go to Vol. 2, page 139, the bonuses that were paid. Were they passed by the board?
Ms Ethna Tinney
These extraordinary bonuses. So it's ... we're not in Vol. 1-----
I think its Vol. 2, page 139.
Ms Ethna Tinney
Vol. 2, 139. Oh yes, I had a look at them in retrospect, you know. What I found ... no, no, these are quite familiar. They would certainly have been passed by the board or by the remuneration committee as a board and then presented to the board. The board didn't generally argue with the remuneration committee, but they are familiar. I think what's odd about them is the variability of them, in a sense. You know, why one year for Ted McGovern €448,000 of a bonus and then the next year €120,000 of a bonus? It's interesting, particularly since the business was grown exponentially as we've just discussed. So ... but yes, these are familiar.
Well, they were paid based on the previous year's performance. Was there any discussion in 2008 not to pay them because you had gone into the red at that stage, in 2008?
Ms Ethna Tinney
Well, Ted McGovern had gone by 2008.
I see. Well, no, other people, though, were paid. There was €464,000 in bonuses paid in 2008 in a year in which the society had gone into the red.
Ms Ethna Tinney
In ... and are you talking about the chief executive, Ted McGovern - 2004, €448,000?
Yes ... no, the other people like Mr. Merriman and Ms Finann and Mr. Keenan, I think, and Johnson and Healy. That there was still ... the Merriman one was the biggest, but it still came to €464,000 being paid in bonuses-----
Ms Ethna Tinney
In which? Sorry, Senator-----
By a society which was loss making at ... in that year.
Ms Ethna Tinney
In which year now are we talking about?
They were paid in 2008.
Ms Ethna Tinney
Paid in 2008, yes, indeed. Yes, indeed. Right, okay. Yes, yes.
Was there any discussion about holding them back, as the society had gone into the red?
Ms Ethna Tinney
No.
And, the go for broke strategy that you described to Deputy Higgins, was there a certain irony intended given what happened the society? Obviously, it was very successful but I mean, what was the go for broke strategy?
Ms Ethna Tinney
The go for broke strategy was to try and emulate Irish Nationwide Building Society and turn in profits of €250 million per annum - paper profits, of course; they weren't true profits.
And a certain sense of irony, presumably, in the title of the strategy?
Ms Ethna Tinney
Well, that's just my way of putting things.
Yes. Well, I think they used that term also.
Ms Ethna Tinney
Do they actually? Yes.
Yes. The auditors: did they express any disquiet at the way the society was going over the years in which you were director?
Ms Ethna Tinney
No, and that was a big surprise.
Was there ever any meetings of the non-executive directors held in the absence of management?
Ms Ethna Tinney
Yes, there were. That was not that unusual, yes.
Because in your presentation you were hinting there was a very strong managerial dominance of the board. When the board escaped from that, could you tell us about those meetings?
Ms Ethna Tinney
Generally, those meetings occurred within a board meeting. So the actual length of time that the non-executives had together was limited. I would also make the point that, although the executive directors withdrew, the chairman remained. So in terms of a conversation that could become uncomfortable, let's say, in terms of making a genuine, kind of, investigation between the non-execs into what they felt was going on and whether it was excessive or whatever, was impeded by the chairman.
Is there a way around that? Should there be a troika?
Ms Ethna Tinney
I thinks it's a very interesting question because it has always struck me that - and this is not just EBS; it happens all the time in firms, in businesses, not just banks - that one of the things that a chief executive will try to do is to establish a very close relationship with his chairman, or her chairman, and the purpose of that is to control the board. And, therefore, I do think it's a fundamental weakness in business that there is this intimacy between a chairman and a chief executive. And you can see very clearly from the documents in Vol. 1 about you know, the arguments between Ron Bolger, Cathal McGee and Brian Joyce, that Brian expresses his belief that there is no other way of working than, you know, close liaison with the chief executive officer. But it does weaken the ability of non-executives to influence the board.
And the conduct of the meeting where ... the AGM, where you're running for election and the other board members, I presume, employed a PR company against you. I think that was ... was that December 2007? The ... Q4 PR were used to assemble information against you. Could you describe that as an event for the committee, please?
Ms Ethna Tinney
What I think, Senator, your inquiring, is about the period between when I refused to walk, fold up my tent and the actual AGM in April 2007, and articles start appearing in the papers and goodness knows what. In a way, that process ... it passed me by, in a way, it just made me more determined to fight back and try and get into the public arena my point of view, which I managed to do, mainly thanks to one individual. And it didn't bother me, Senator; you know, I expected this.
Now ... the ... was there a sign in February 2009 - and this is book 1, pages 109-111 - of even at that late stage the board realising that things were going astray; that there seemed to be a wish at board to distance itself from the commercial exposures and non-member business?
Ms Ethna Tinney
Absolutely. Yes.
Yes. But ... and, could you tell us about that? Because that was trying to get back to its roots almost in the society and I suppose the corollary is: was it too little too late at that stage?
Ms Ethna Tinney
Absolutely. Yes. So from having gone in to full blast mode, go for broke mode, it was suddenly whack on the reverse engines. And to that extent, and I didn't actually agree with this, both the CEO of Haven, Tony Moroney, and our chief, our chief finance officer, Alan Merriman, were dispensed with. Yes.
And you didn't agree with that?
Ms Ethna Tinney
I did not agree with it, no.
Could you tell us why?
Ms Ethna Tinney
I ... as far as the second named is concerned, I felt he was very bright, I felt that he knew the innards of the society extremely well, and I felt we needed his abilities.
Finally, the 2007 offer from AIB - can you remember what price they put on that?
Ms Ethna Tinney
I don't, and ... but what I do remember-----
Your last question, Senator, please.
That is my last one, thank you, Chairman.
Ms Ethna Tinney
Yes, I can't remember the figure-----
Ms Ethna Tinney
But I remember thinking it was inadequate.
Yes. But it was greater than €1, which was what they eventually got it for.
Ms Ethna Tinney
But maybe at the time I thought we were worth more.
Yes, thank you.
Okay, thank you very much. Deputy Pearse Doherty. Deputy, ten minutes.
Go raibh maith agat a Chathaoirligh, agus fáilte chuig an coiste. If we look at the board minutes of July 2005, which is on book 1, page 126. The question that arises from them for me is: were you away of the extent of the tracker mortgage interest rate risk? And, in EBS, was that ever discussed at board level? This is where the minutes show that the increase on tracker mortgages would account for an increase in proportion of business rising from 5%-----
Ms Ethna Tinney
Five per cent to 60%.
-----in July 2005 up to 60% three years later in 2008.
Ms Ethna Tinney
My sense is that in 2005 there was still a tremendous, sort of, feelgood that everything was going to be the best of all things possible. And the volumes of tracker mortgages that, therefore, that we were attracting blinded us to the dangers of what would happen in terms of depressing the margin and so on and the final outcome, which meant that once again, we can't afford the tracker mortgages - well, not me, because I'm not involved anymore.
But the standard variable rate is now actually shoring up the trackers, which is most unfair on the people on the standard variable rate. No, it is surprising that it didn't strike any of the good brains on the board that this was actually dangerous.
But the minutes of the meeting in 2005 go on to say, "This will push mortgage margins down." by increasing your tracker business from 5% to 60% of mortgages. Given that it's-----
Ms Ethna Tinney
So that-----
-----acknowledged at that time, what was the discussion? Is that-----
Ms Ethna Tinney
The push was to, "Let's go to the brokers. Let's establish a brokerage. Let's establish, maybe, sub-prime." You know, it all fed into the idea of volume, volume, volume - never mind the quality, feel the width.
But was there any discussion on risks in relation to this? There's an acknowledgement here - on the minutes - of risk but was there any discussion at board level of the risk? Was it just, "Let's increase by [I don't know how many] hundred per cent ... or from 5% to 6% over three years and this will push margins down"? Was there a ... from your recollection, did anybody say, "Well, what does that mean for our institution if we rely on 60% of tracker mortgages?" Was there-----
Ms Ethna Tinney
I'd need to just read that page carefully because, you know, I mentioned the whole thing about minutes before-----
Ms Ethna Tinney
-----and one of the things I learnt over the years that I was on the board ... I was surprised sometimes when there would be a robust conversation about, say, something like this, that it's not referred to in the minutes. And I learnt, late in the day, that if you want something minuted specifically, you have to request it. If you do not ... supposing I say, "Well, I, Ethna Tinney, do not agree with this tracker thing"-----
Ms Ethna Tinney
-----I have to say, "I want that minuted."
Ms Ethna Tinney
Whereas if I don't say that, there's no mention of the fact that not all the members were in agreement. Whatever the decision was is what's minuted. And, clearly, the decision was to go along the lines of the inputs presentation.
Like, it appears to me that it's a ... quite an important decision to increase your proportion of business on trackers from 5% to 60% in a period of 36 months. In your view, can you recall whether you expressed a view? And I'm not just concerned in relation to your own personal view. Could you give us an insight, if any, as to what the board ... did they just note it and move on or was there ... do you think that there was a discussion? If you can't recall, obviously we'll just ... we can move on.
Ms Ethna Tinney
Yes. I don't have a recollection, I really don't, but what I can say was there was nobody jumping up and down-----
Okay.
Ms Ethna Tinney
-----because I would have remembered that.
Okay. Ms Tinney, you say in your statement on page 1, you say, "Mortgage applicants' declared incomes were sometimes well in excess of reality".
Ms Ethna Tinney
Yes.
Can you explain to the committee ... what do you mean by this?
Ms Ethna Tinney
What I mean was that the prudential regulations that had applied when, say, I wanted a mortgage, and the kind of documentation that I would have to provide was no longer required, so, therefore, just as in the example that the Chairman brought up earlier on about ... about ... or, no, somebody else - it was during Mr. Merriman's testimony - about the Financial Regulator in ... one of his inspectors finding out that there wasn't basic documentation at all for, you know ... and this started to happen on a wholesale basis, not just with EBS but with the other banks. So, in other words, "You say your income is 48 grand, that's okay. Yes, we'll accept ... show us a P60 or a ... [more likely] just a slip of your ... of your ... of your income but we'll take it on faith that you're actually earning this extra money that you say that you are." Yes.
But was it known to EBS that the declared incomes at the time were well in ... as you say, well in excess of reality?
Ms Ethna Tinney
Yes, it was. And the reason that we did it ... not that anybody would have ever verbalised that, but the reasons that we did it was that if ... if we actually said, "Look, show me your money", that the person wouldn't qualify for a mortgage for whatever house he or she wanted to buy and that, therefore, you know, our business would be, once again, eroded. In other words, because of the fuel that was burning, the house boom and the bubble, as it turned out to be, there was acquiescence all round. There was collusion, if you like. Yes, unspoken collusion that we wanted to assist people to have homes. So we're not going to ask too many hard questions.
And when the same institution is now looking for recoupment of arrears or repossession of the homes-----
Ms Ethna Tinney
Yes.
-----or voluntary surrender-----
Ms Ethna Tinney
Yes.
-----by somebody who may have provided documentation that, as you say, the institution was aware that it was in excess of reality, how do you feel about that?
Ms Ethna Tinney
Well, I feel that it's all wrong. I feel that what's happening is all wrong and I feel that the balance of blame rests with the bankers, including myself, rather than the people who looked for mortgages.
Okay. You say in your statement in relation to developer loans, on page 5, and I quote, you say:
The rationale was that if EBS did not facilitate the "developer" another bank would and we [simply] would ... be losing out [of] business. All these proposals seemed fail-safe.
Ms Ethna Tinney
Yes.
Can you explain to the committee, were developer loans granted because they were seen as fail-safe? Was it because of competition from other banks or was there another reason or was it a combination of both factors?
Ms Ethna Tinney
Oh, I'd say that ... I would say that the ... in general, my sense would have been that there was ... the proposals were believed in and that's why I use the expression, "taken in by", right? That's important. I say ... I believe that we were all taken in by these so-called developers, you know. And they had quite different agendas from what we thought they had, you know. So I think it was-----
What do you mean by that? Just if you can ... what was the ... the agenda, I presume, is that they wanted money.
Ms Ethna Tinney
To put it very, very bluntly, that they perhaps didn't have ... particularly as the bubble grew to bursting point and these clever people were always ahead of the posse, that they had no intention of applying the funds to what they stated in their application, right, okay?
Okay.
Ms Ethna Tinney
And I'm going to say no more than that. But in terms of the staff of EBS, I have no doubt that everything they did was done in good faith. It was ... the problem was there was just far too much pressure - do business, do business, do business.
And that was coming from?
Ms Ethna Tinney
Senior management all the way down. It's always ... the buck stops always with the boss.
Okay. What was the guiding reason with regard to your own role in the credit committee? What were the factors that led you to decide to green light some of these developer loan applications?
Ms Ethna Tinney
Because they were always presented so well. They all made sense. I think Alan refers to that in his document, that, you know, it seemed perfectly okay in that ... in that exponential growth to accept proposals that were based on land values that were, you know ... that the money we were giving were ... was 60% of what the valuers were saying it was worth. But then, I think that we possibly were naive about the relationship between the developers, the builders and the valuers and the various other advisers, because everybody stood to gain if we said, "Yes", and handed over the money, yes.
You mention in your statement in relation to these ... these loans as well that-----
Be wrapping up this now, Deputy.
Yes, just two questions on this here ... that the developers backed up their claim with a personal guarantee.
Ms Ethna Tinney
Yes.
Can you explain to the committee, and to anybody that may be watching, what is a personal guarantee and what was the type of documentation that a developer would provide EBS in terms of a guarantee? And one final wee supplementary, because the Chair will cut me off, you also mention that you - through e-mail - rejected some of the loan applications. Can you inform the committee was there ... was there ever or were there many of the loan applications rejected by the committee, not just by individual members?
Ms Ethna Tinney
No. It was never alluded to and my sense would have been that 99% of them were acquiesced to. To your earlier question about, you know, when is a personal guarantee not a personal guarantee? Well, look, I ask you this question: how come all these bankrupt developers are rolling in money? They all gave personal guarantees, not just to us but to other banks. The banks didn't get money back, but they still have loads and loads of money. Now, riddle me that. I don't understand it. I never saw the legal documentation on which these proposals were founded. What I do know is that because the answers had to be made so fast was that ... I have absolutely no doubt that the proper lien was not perfected on many of these agreements.
Okay, thank you.
Thank you, Ms Tinney. Deputy Michael McGrath.
Thank you very much, Chair. Ms Tinney, good afternoon. Can I, first of all, take you to Vol. 2, page 105, please, and it relates to the board deciding to increase the counterparty credit limits for the other Irish banks to €200 million? So this was in November of 2008.
Ms Ethna Tinney
Sorry, could you just give me the page number again?
Sure, yes. Page 105-----
Ms Ethna Tinney
105.
-----of Vol. 2.
Ms Ethna Tinney
Is this the one we discussed before?
Yes. And there's some more information on the following pages, 107-111. So essentially this was a decision by the board to increase the lending lines to the other covered banks and it's in the aftermath of the Government decision on the bank guarantee. And it seems to be to facilitate lending to each other, as such, you could buy bonds back and forth. So to what extent in your opinion did the board consider at this time that it was appropriate to, in a sense, pull on the green jersey and invest in such assets from other banks? What was the thinking behind it?
Ms Ethna Tinney
Well, that clarifies why I was struggling with the Chairman about how these things were getting written at all. Obviously, the fact that the Government had decided to guarantee every smidgen of money that was in all the banks gave us the courage, you know, to do this, to change our view of what was safe.
Okay. Can I take you to, just on page 2 of your statement so on the system - it's 004, if that could be opened? It's under the heading of the "Adequacy of board oversight over internal controls, managed and monitored". And you refer to an instance where an employee in the treasury department of EBS had illicitly engaged in proprietary trading, strictly against the rules of the society. And at the end of that paragraph you refer to EBS sustaining a significant loss. Can you recall what the loss was from that event?
Ms Ethna Tinney
€1.2 million. Yes, it was €1.2 million.
Okay, and can you just explain what happened? What do you mean by "illicitly engaged in proprietary trading"? Can you just tell us what that is?
Ms Ethna Tinney
Well, under the rules of building society it is not permitted to trade your own money, or rather your depositors' money. In other words, you can't take a gamble. You can't decide you're going to take a gamble on currency or anything else or stocks and shares. And this particular individual did that. Now, as I said in my statement, it was supposed to be impossible because of the checks that went on. But it wasn't impossible and he did it. And he was a very smart guy and he wasn't doing it for himself. So it's hard to understand why he actually took the risk. Now, two of his colleagues knew what he had done but he managed to hide it for two years. And eventually they couldn't stick the notion that this was going on any more. He persuaded them that if he was given time, his position would come right and all would be well. So after two years they told his boss and that's how it came out. And one of the interesting things is, as well, that our auditors never spotted the hole in treasury.
And did it go to board level then?
Ms Ethna Tinney
Oh, well, of course, there was consternation. There was absolute consternation.
Okay. And the loss to the society was €1.2 million?
Ms Ethna Tinney
Yes, it was either €2.1 million or €1.2 million but I believe it was €1.2 million.
And what were the repercussions from that episode? What happened?
Ms Ethna Tinney
Nothing.
Nothing?
Ms Ethna Tinney
Nothing.
€1.2 million lost by-----
Ms Ethna Tinney
Yes. Let's just say-----
-----illicit trading against the rules of the society and nothing happened?
Ms Ethna Tinney
No. Exactly. I'm sure there must have been discussion in treasury about how they could tighten up the controls so this would not happen again and about where was the hole in the controls that permitted this to happen, when we had that boardroom discussion precisely about, you know, could this happen? And this individual standing there smiling.
And was the individual sanctioned?
Ms Ethna Tinney
No.
And how was that acceptable to the board?
Ms Ethna Tinney
Well, I queried it very strongly, as you can imagine since I still remember it, and I was told by the CEO it was better for the reputation of the society if he was ... if it was all brushed under the carpet.
Okay. And just to clarify the nature of what happened, it was trading, essentially, the deposit book or part of the deposit book was traded on, on some financial instruments?
Ms Ethna Tinney
The funds of the society, exactly, yes. I don't even know-----
You don't know the detail?
Ms Ethna Tinney
We weren't told precisely what he did, we were just told-----
Okay. And was it a breach of regulatory rules as well as a breach of the building society rules?
Ms Ethna Tinney
Probably not. I mean, banks engage in all kinds of gambling, you know, within the law. But it is strictly prohibited, for obvious reasons, in building societies.
Okay, and are you saying that ... prohibited by internal rules? Or was it ever enshrined in regulations?
Ms Ethna Tinney
By building society legislations, actually legislation, yes, going back a long time.
Well then surely it was a matter that must have been reported to the regulatory authorities. If it was a breach of legislation then the Central Bank and regulator would have been responsible for dealing with that, surely.
Ms Ethna Tinney
Well, I can't tell you because all I can tell you is that nothing happened. Except, much later in the day, you know - when this individual was still working for us - and it was proposed that he would be given a position of trust over something. And this was when the new board had, you know, arrived, it would have been about 2009 maybe. And I specifically said, "No", and told the board the story about what had happened and that was accepted.
Okay. Chairman I think we might examine the board minutes as a committee around that time to see how the issue was being addressed. We'll deal with that separately. Ms. Tinney, you wrote to the members of the society directly in March 2007. That was a time when the board was trying to remove you, as such. Was that the first time that you wrote directly to the members?
Ms Ethna Tinney
Of course.
It was.
Ms Ethna Tinney
There's 420,000 of them so it was a very expensive exercise really, yes.
So how did you do it? It was by post?
Ms Ethna Tinney
Oh, EBS had to do it, I just ... Yes, they did it by post. Yes.
And they paid for it?
Ms Ethna Tinney
Well, I forced them to.
Right. And, okay, given that, you know, that was such a-----
Ms Ethna Tinney
Sorry, could I just say-----
Please.
Ms Ethna Tinney
Could I just say what was going on in the media gave me leverage and the stuff that I was queried about, about Q4, what was going on, gave me leverage to force the board to do this because otherwise, I was going to look for satisfaction some other way. Yes.
Okay. So you raised three specific issues in your letter to the members about the 2003-04 efforts to pursue a deal with Rabobank, that's who you were referring to-----
Ms Ethna Tinney
Yes.
-----the issue of nominating non-executive directors and the transfer of funds into senior managers' pension fund. So those were the three issues that you raised. But you didn't raise any issues or concerns about the strategy, the commercial strategy of the building society at the time and the rapidly growing loan book in terms of commercial property, the land and development book. You didn't raise any issues about that or the issue of the growing dependence on wholesale funding, for example, as opposed to deposits. So can you just elaborate on that, given that you were undertaking a major exercise writing to all the members directly? If you had these grave concerns about the direction of the society and its strategy, why didn't you take that opportunity to set those out to the members directly?
Ms Ethna Tinney
Because I think I felt, at the time, I spent a lot of time thinking about what I would say to them. If you want to gain people's attention, you've got to tell them a story. If I had written in vague terms about my anxieties about funding, about the size of mortgages and all that kind of thing, I didn't think I'd gain any traction whatsoever. What I wanted to say was, "This is what I've done and this is what's happened to me as a result. Therefore, all is not well in EBS". And that's why I chose to do it anecdotally, rather than as a dissertation on the state of EBS.
And do you regret now not bringing to the attention of members your views, your concerns, about the strategy of the building society?
Ms Ethna Tinney
No, I don't, not in the slightest. Because the outcome would have been worse for me. Yes. Most of the members wouldn't have even noticed, to be honest, if they got a weird letter from a member of the board saying, "I'm worried about EBS."
Okay. And generally, like, was your dissent noted? You spoke earlier on about the need to have, you know, dissent formally recorded in the minutes. Like, did you dissent on board strategy, for example? I mean, for example, we have the commercial business plan 2005-08 which does ... asked the question of the board, do you agree with ramping up the risk appetite. I mean, did you agree with the strategy that was ultimately adopted?
Ms Ethna Tinney
My overall sense, and I've said this already, was that everything was moving too fast in a direction that was completely at odds with what, A, we were established to do and, B, that we had the competence to do. In terms of trying to stop this juggernaut, quite honestly, it was beyond me.
But sure what was the point in being on the board then? You know, if it was a fait accompli and you couldn't influence the direction?
Ms Ethna Tinney
But I was trying. I was trying all the time, what more could I do?
So did you dissent, for example, on that commercial strategy?
Ms Ethna Tinney
I don't remember specifically. I'm not going to claim I did this, that or the other. What I can tell you that will just make it apparent to you what the situation was, was that, you know, it came to a stage where most of the members of the board wouldn't actually talk to me.
Okay. Very finally, you spoke about the credit committee. You were on that from mid-2005 to April '07?
Ms Ethna Tinney
Yes.
So almost two years. And did you say earlier on that your recollection is it met once in about 18 months?
Ms Ethna Tinney
Yes. Once where I attended. Only once where I attended. There might have been other meetings that I didn't attend or wasn't informed about ... wasn't informed about because ... because of, as we have discussed, the rapidity of which these decisions had to be made and because I was living down in Limerick, you know. There could have been meetings and-----
But sure surely you couldn't have a situation were a member of the committee wasn't even told the committee was meeting.
Ms Ethna Tinney
I'm not saying that there was; I'm just saying that I don't know. But I only recall one meeting.
Okay. So were there other meetings that you were notified of - but ... but you didn't attend - of the credit committee?
Ms Ethna Tinney
No, absolutely not.
Okay. So you were informed of one credit committee meeting in a period of 22 months-----
Ms Ethna Tinney
Yes, that's my recollection.
-----at a time when the society was lending millions of euro-----
Ms Ethna Tinney
Yes, tens and tens and tens of millions of euro.
-----in commercial property land development? Absolutely. Thank you.
Thank you, Deputy McGrath. I'm going to move please to a wrap-up. Do you have anything else to offer, Deputy Higgins?
No further questions, thank you. Thank you.
Okay. With that said, I'm going to bring matters to a conclusion. Ms Tinney, I can invite you to make any closing remarks if you wish. The ... in doing so with Mr. Merriman earlier this morning, I just, kind of, revisited the sort of journey of the EBS where it started out as an institution that could help a particular type of civil servant buy a house and ended up in maybe a different space at the end of its journey. Do you've anything that you'd like to say by final ... matters of closing remarks?
Ms Ethna Tinney
No. I'll say that my whole experience with EBS, taken in toto, was in some ways very bruising but it was certainly very educational. And I don't regret a minute of it.
Thank you, Ms Tinney. With that said, I'd like to thank you for your participation today with the committee and for your engagement with the inquiry. You're now formally excused. Just to say to members, if there's any other matters relating to what we discussed in private business this evening, I probably might take before we come back before the next public session. But I don't have enough data as such yet, okay. So, with that said, I now propose that we suspend for one hour and return at 3 p.m. Is that agreed? Okay.
Oireachtas - Ms Mary Harney and Mr. John Gormley
I now call the committee back into public session. Is that agreed? Agreed. And we'll continue our hearings today, our session 3, which is public hearing with Ms Mary Harney, former Tánaiste and leader of the Progressive Democrats, and Mr. John Gormley, former Government Minister and leader of the Green Party. The Committee of Inquiry into the Banking Crisis now resuming in public session and can I ask members and those in the public Gallery to ensure that their mobile devices are switched off. This afternoon, we continue our hearings with senior members of the Government who had key roles in the run-up to the crisis period. At this afternoon's session, we will hear from Ms Mary Harney, former Tánaiste and leader of Progressive Democrats, and Mr. John Gormley, former Environment Minister and leader of the Green Party. Mary Harney was a member of the Dáil from 1991, sorry 1981, to 2011. She held several senior posts in government and was Tánaiste from June 1997 to September 2006. She was leader of Progressive Democrats between 1993 and 2006, and again from 2007 to 2008. John Gormley was a member of the Dáil from June 1997 to February 2011, and was Minister for the Environment during that time. He was leader of the Green Party from July 2007 to May 2011. Ms Harney and Mr. Gormley, you're very welcome before the committee this afternoon.
Ms Mary Harney
Thank you.
Before hearing from the witnesses, I wish to advise the witness that, by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter to only qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings ongoing, and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings. Members of the public are reminded that photography is prohibited in the committee room. To assist with the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right. Members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.
The witnesses have been directed to attend this meeting of the Joint Committee of the Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee, will be relied upon in evidence and questioning and form part of the evidence of the inquiry. So with that said, if I can now ask the clerk to administer the oath to both Mr. Gormley and Ms Harney, please.
Once again, thank you, Mr. Gormley and Ms Harney, and if I can invite you to make your own opening statements. Mr. Gormley, if I could ask you to commence.
Mr. John Gormley
Chairman, committee members, I would like to thank you for giving me the opportunity to address the banking inquiry committee on these important issues. I hope that your valuable work will add to the store of knowledge on this subject contained in the Regling and Nyberg reports and that lessons can be learned. Chairman, I became leader of the Green Party in 2007 following the resignation of Trevor Sargent. While we were the only party that based our 2007 election manifesto on a forecast of reduced growth, I don't think anybody in the party could have predicted that our term in government would coincide with the worst economic crisis that this country has ever had to endure. The Green Party did not create the housing bubble but, in government, we had a duty to extricate our country from the crisis. This involved making the most difficult political decisions that any small party in this State has ever had to make. It is a fact that two thirds of what is known euphemistically as the "fiscal adjustment", which led to the recovery, was made by the Green Party in government. The Green Party TDs and Senators voted for these cutbacks and tax increases, convinced that this was the correct course of action, while also knowing that it would lead inevitably to electoral annihilation. I’m proud of the dignified way that the Greens conducted themselves during this time of adversity. I’m also proud of the fact that the Green Party insisted that every one of those austerity budgets was progressive. In other words, each budget hit the wealthier members of our community proportionately harder than the less well-off. This has been confirmed by subsequent studies of the various budgets by the ESRI. This is not to imply that the cutbacks were painless; they were not. Large sections of the Irish people suffered hugely because of the austerity measures and I regret that we were forced to make these decisions. I believe our economic and financial problems were caused by a combination of factors, which include banking deregulation and poor oversight of the financial institutions, a property bubble fuelled by reckless lending practices and irresponsible land rezoning, huge increases in public spending, over-reliance on property and construction-related taxation, alongside inappropriate reductions in some taxes. The globalisation of banking and interbank lending also led to a global domino effect.
I’d like now to concentrate on one of the above subjects and one which is close to my own heart: the role of poor planning in our economic crisis. Some of the inquiry members may be aware of the report published in July 2010 by NUI Maynooth titled, A Haunted Landscape: Housing and Ghost Estates in Post-Celtic Tiger Ireland. It is a report that deserves the full attention of this committee. Let me quote from the executive summary:
Government has two principle levers through which it can ... regulate property development. The first is through fiscal policy with respect to regulating access to credit and determining taxation rates. The second is through planning policy and the zoning of land and the granting of planning permissions. Explanations of the Irish property bubble have focused almost exclusively on the former, and the role of the banks, tax incentive schemes, and the failures of financial regulators. To date, the role of the planning system in creating the property bubble has [not been] considered.
The fact is, Chairman, that corrupt and irresponsible zoning practices did play a significant role in our economic crisis. The above report asked that a commission of inquiry would look specifically at this matter. That may not happen but you have the opportunity to examine it as part of your own inquiry. During the so-called boom years, the Green Party representatives on local councils and in the Dáil tried at every turn to highlight the problems of poor planning. On entering Government, we resolved to introduce a more evidence-based and sustainable planning system. As Minister, I enacted new planning legislation and intervened at local level in a number of cases of poor planning practice. I also initiated a number of reviews of local planning following complaints and allegations by members of the public. The Green Party also insisted on a windfall tax on the unearned benefit to landowners of rezoning land. All of these measures were designed to counteract the poor practices which had led to the crisis and I am convinced that had they been in place earlier, the property bubble would not have inflated to such an extent and the severity of the economic crisis would have been much reduced.
On the question of banking, the Green Party was to the fore in directly criticising the lending practices of the banks. Our then Finance spokesperson, Dan Boyle, recalls in a book he published on our time in government, a meeting with the Irish Banking Federation in 2006. He attended this meeting, along with the current leader of the party, Eamon Ryan and I'd like to quote directly:
We brought up the question of the efficacy and economic sanity of issuing 110% mortgages, and the general lack of sustainability that seemed to exist in [the] property market; a market the banks seemed intent on inflating further. The response to our concerns was both arrogant and condescending. We didn’t understand banking, we were told, besides which the market would correct itself in a relatively painless manner.
Early in our term in government, I recall, at a pre-Cabinet meeting in the Taoiseach’s office at the time of the Northern Rock collapse, asking the Finance Minister, Brian Cowen, if our banks were sound. He told me that there was no problem with our banks and that they well capitalised. I had no hard evidence to suggest otherwise but a nagging doubt did persist. It was clear that the Lehman's collapse would have knock-on effects and I asked Minister Lenihan if there were contingency plans here. He told me that matters were in hand. I got the impression that Finance were working on a plan but I had no idea that they had been working on it for an extensive period of time, as indicated in the evidence of Kevin Cardiff.
I became aware that week from a comment made to me by Minister Lenihan that he had also been in contact with David McWilliams. I did not know the extent of that contact until David McWilliams published details in a subsequent book. I phoned David McWilliams on his mobile, while I was in Brussels on 26 September. We had a long and detailed conversation on what could and should be done on the banking crisis. In his evidence, David McWilliams seemed to indicate that we had no further contact on the matter. In fact, there was an important exchange of e-mails, which are included in the appendix, at the request of the Chairman. When I raised the possibility of nationalisation of the banks during our telephone conversation, he dismissed the idea out of hand. He did so again in his subsequent e-mail to me. I told him that I would raise the matter with the Taoiseach and the Minister at a pre-Cabinet meeting on the Sunday, that was 28 September. I met the Taoiseach and Minister Lenihan in the ante-room opposite the Cabinet room. I passed Mr. Lenihan the article written by David McWilliams and mentioned his proposals. There was a cursory acknowledgement of the points but neither of them indicated that there was to be a meeting with bankers the next day.
The first indication I had of such a meeting was when I got a phone call from Minister Lenihan at about two o'clock on the morning of the 30th. I had a brief conversation with Minister Lenihan. He explained to me the urgency of the situation. He said that this was an incorporeal Cabinet meeting but that I was welcome to come into Government Buildings, if I wished. I told him that it would not be necessary if we were going with the "David McWilliams option". He confirmed that that what was being proposed. As this had been the basis of our previous discussions, I was satisfied to give my consent to a Government decision to publish legislation to give effect to the guarantee. Early that morning, I e-mailed David McWilliams with the news. When he replied later on that day, he was particularly pleased that the markets had reacted so positively to the guarantee. Chairman, I would like it noted that I was grateful for David McWilliams's input. He did not know, nor did I, that we were dealing with an insolvency problem. Even on the day of 30 September, Minister Lenihan told us that the guarantee was the best way to deal with the liquidity problem.
Following the guarantee decision of September 2008, the Green Party maintained a close involvement in the Government banking and budget strategy. Responsibility for dealing with these matters in government was assumed by my colleague, Eamon Ryan. That part of my official statement is based on contemporaneous notes taken by Eamon Ryan and I believe it would be in the interest of the committee to interview him separately, as he had a more direct involvement in these matters.
Before concluding, Chairman, I'd like to draw your attention to three small corrections to my official statement. I already notified the inquiry team that I was attending a meeting of the European Environment Bureau on 26 September 2008 in Brussels and not a European Council meeting. Secondly, the sentence relating to the National Economic and Social Council should read as follows: "In answering their question as to whether we were more Northern or Southern European in our current circumstances, it was clear that the former was the case", and I emphasise "the former" there; I think it read "the latter". Also in the official statement, references made to the level of emergency liquidity coming from the European Central Bank and it states that it "had reached some €130 million". That should, of course, read "€130 billion". Finally, Chairman, I have noticed in preparing for this hearing that the record-keeping in the Oireachtas and the various Departments needs to be improved. I'm referring now to Ministers' diary records, phone and text and e-mail and visiting records. All of this, I believe, should be in digital format, searchable and readily available and, right now, it isn't. I'd like to thank the inquiry team and the staff for their unfailing courtesy and I'd like to wish you, Chairman, and the members of the committee every success in completing this important report.
Than you very much, Mr. Gormley, and if I can invite Ms Harney now to make her opening remarks please. Ms. Harney.
Ms Mary Harney
Chairman, members of the committee, I'm very pleased to be here this afternoon to help you in the important task you've set for yourselves which is to hopefully provide valuable lessons for the future management of our economy. And your report will build on the analysis we've had already from Honohan, Regling-Watson, Peter Nyberg and so on. I have submitted a detailed statement to the committee in response to the lines of inquiry sought of me and I am assuming that that statement has been read so I, therefore, am not intending to read that statement this afternoon. But I just do want to highlight a small number of issues.
You have asked me to deal with the policies in the 28th, 29th and 30th Dáil. And, broadly, the macroeconomic policy was consistent - the strategic focus of the Government was to stimulate employment, to increase competitiveness so that we could reduce unemployment, and particularly long-term unemployment. I am particularly proud of the achievements during those Governments. We brought unemployment down from double digit to 4% or 5%, which was effectively full employment and, in particular, we made a very serious dent on what was long-term unemployment. In the mid-'90s to 2000, there was reference made to reclassifying the unemployed ... the long-term unemployed as unemployable. We proved that through activation policies that what could have been a long-term unemployment for ever, those people became employed and I am very proud of that. We introduced a national minimum wage, we reversed emigration with immigration, we significantly grew take home pay and we greatly advanced the national infrastructure, as manifested most particularly by the motorway ... motorways we see in the country today. But I'd like to highlight the investment we made in science, research and technology and now two thirds of the IDA jobs are very much dependant on the investments we made around 2000 in basic research in this country. Ireland is now third in the world in nanotechnology, fifth in material science, first in immunology and so on. These are major achievements for a country of our size. We also increased social spending on education, health and pensions, and particularly welfare payments. We had budget surpluses every year between 1988 ... 1998 and 2007, with the exception of one year. We reduced, as I said, the burden of taxes and we grew spending. We established a National Pensions Reserve Fund and 1% of GNP was put into that fund for a rainy day.
However, notwithstanding the successes that I am proud of, we made mistakes. We did not foresee the enormous explosion of credit with entry into the euro. Prior to entering into the euro, we put an extraordinary amount of effort into what I would call the "changeover process''. We were very focused on the rate with which we enter, on competitiveness issues, particularly vis-à-vis our nearest trading partner, the UK, and the effect on inflation. In hindsight, we should have put a process in place that would have allowed us to look at the risks and the potential and the benefits of low interest rates on this economy. I think if we had done that, it might have helped to arrest the more serious, negative effects of a low interest rate and cheap credit on the economy and we could have put mitigating measures in place.
Secondly, we were very trusting of the regulatory environment. We probably should have been more proactive in monitoring and reporting, particularly the Government but also, I think, the Oireachtas. We should have had regular assessment of the financial stability and that could have helped. We could have had more critical analysis of the financial stability report. And I think we placed undue confidence on the process and the procedure that we put in place. And whilst it's not the job of Government to micro-manage regulation, if it goes wrong, Government must accept the political consequences of that. And I believe we have to.
And, thirdly, I think we allowed public spending to grow too quickly on the back of what I would call ''transient taxes''. We had recurrent expenditure on the basis ... or recurring expenditure on the basis of transient taxes mainly from the unsustainable construction activity. It's understandable why these mistakes were made. The general commentary in the ... in the country was benign and that helps to explain some of the mistakes. Even the ESRI in their mid-term report, 2008-2015, forecast a growth rate of 4% and even in their worst-case scenario, the expectation was that the resilience and flexibility of the economy, with appropriate management, would see us return to reasonable growth in 2010. I mention that simply to say that well-respected and credible organisations - even with the best forecasters - can get it wrong. We need to learn lessons from that and the lesson is that we need to challenge the consensus. I think consensus is part of our gene as a nation. We didn't challenge the consensus and, in particular, the Government should have challenged the consensus and, therefore, we failed to pursue the hard remedies that might have avoided some of the pain that our citizens had to endure. For those mistakes, of course, I, as a member of the Government, have to share responsibility and I deeply regret all of those mistakes. I regret, in particular, that we did not dig deeper and ask harder questions.
I want to deal now with the issue of regulation and my role and relation to that. In 1997, when I became Minister for Enterprise, Trade and Employment, I had responsibility for the regulation of the insurance industry and credit unions. I was conscious that in 1985 an insurance company ICI almost brought a bank down, owing as they did I think it was £400 million at the time. I was anxious that the Department which didn't have the expertise - we had, effectively, half an actuary - to continue to regulate insurance. But I was also aware that banks were getting into pensions and life assurance and I believed that one ... eyes should look at an organisation and not separate regulators - one in the Department of Enterprise, Trade and Employment and the other in the Central Bank. The Government agreed to the establishment of a single Financial Regulator. And we subsequently put a process in place to look at how that Financial Regulator would be put in place, whether it would be greenfield option, whether it would be part of the Central Bank or whether it would be what became subsequently known as the "two-pillar approach". In the context of those discussions, it was pointed out that the Governor of the Central Bank would have to have the authority to issue binding instructions to the regulator. This was pointed out both through ECB intervention, through the Department of Finance and though the Central Bank itself. When the report came, I was happy to go along with that. We are, after all, a small country and there was no point establishing an organisation for the sake of it and we had to be mindful of the Governor's wider responsibilities as part of a single monetary union.
I was also conscious during that time that the role of the consumer was ignored in regulations. Banks were, quite honestly, in some cases ripping off consumers. There were hidden costs. They were helping consumers establish bogus non-resident accounts for the purpose of avoiding tax. There were many hidden charges and there was a lack of confidence in regulation, as we knew it, and even a State bank was involved in DIRT. I was involved, too, in a number of inquiries as Minister for Enterprise, Trade and Employment into banks - Guinness Mahon, Irish Intercontinental, National Irish Bank and so on. And the combination of all these things brought me to the conclusion that all was not well in the manner in which we regulated the financial services and that is why I was so proactive in seeking to ensure that we had a new regime. The mistake, I suppose, was after the new regimen was put in place, not being more proactive in ensuring that appropriate resources were devolved to the regulation of the financial institutions. And, in fact, it wasn't until this ... until the Honohan report, I think it was, that I realised that the big institutions only had two individuals responsible for their regulation. I think that was a serious error and the Government certainly wasn't aware of that. And I think it's a pity that we weren't aware of the lack of resources that were being applied to regulation.
Chairman, I end there for the purposes of time. I'm happy to take questions on my statement, or even things that aren't in my statement. But above all else can I say if there's any lesson I have learned from my time in government, as a result of what happened, it is that we need to be more questioning, particularly of consensus. And we did have a national consensus in relation to a soft landing in the property market that was not correct. And it is the responsibility of Government and maybe, secondly, the Oireachtas to be more questioning of consensus of that kind. And perhaps if we were, it may not have avoided all the problems, or any of them, but certainly I think it's a responsibility we all bear and as we go forward I think it's a lesson that we should learn. Thank you.
Thank you very much, Ms Harney, and thank you also, Mr. Gormley, for your earlier statement. If I can now commence questioning, and if I can invite Deputy John Paul Phelan to begin. Deputy, you have 15 minutes.
Thank you, Chairman. And good afternoon, Ms Harney and Mr. Gormley. I'd ask you to be as brief as you can, we only have 15 ... or I only have 15 minutes. Maybe to start with Ms Harney first in relation to the last point you made with regard to regulation. Outside of the issue of resources, which you referenced, you've detailed how you had a role in the establishment of the new regulatory system. With the benefit of hindsight, are there other structural changes that you would do differently now if you had that time back again?
Ms Mary Harney
Well, can I ... sometimes I think we've become a bit obsessed with structures, and I think both Governor Honohan in his report, and I think Mr. Patterson, when he was before this committee, whilst they had issues with the structure, did say that the structure wasn't the reason why mistakes were made, and I would agree with that view. I think we can become a little bit obsessed with how things look, rather that what we do. I think if there's anything I would say reflecting back, and I don't intend for one moment to scapegoat anyone, because I think, collectively, we all failed, but I think it's more to do with the culture. The reason I was so keen to have a new regulatory environment was partly because of the cultural issues that I experienced. As I said, customers of banks were ... had hidden charges imposed on them. They were being helped set up bogus non-resident accounts to avoid tax. I knew in the Department of Enterprise, Trade and Employment that we certainly didn't have the resources to deal with a modern insurance industry and I was very worried that what had happened in '85 could happen again, and that's why we sought to move that into a different era. Many of the people on that committee recommended a greenfield site, and that had attractions to me initially. But I think, given the involvement of the ECB, given the fact that we were part of a monetary union and the particular responsibilities that fall on the Governor, and, as I said, what was more of concern to me was what they did rather than who did it.
Okay. Can I ask in relation to the greenfield site issue: it would have been covered, I suppose, in media speculation at the time, that some of the ... maybe Fianna Fáil members of the Government would have favoured retaining regulation more centrally within the Central Bank, whereas the Progressive Democrats members of Government might have been more identified with the greenfield site. Can you enlighten us maybe as to the discussions that led to the ultimate establishment of what we had?
Ms Mary Harney
Well, to be fair, Deputy, it never broke down as between Fianna Fáil and the Progressive Democrats in relation to that matter. There were differences between, I suppose, the Department of Finance and the Central Bank on the one hand, and probably everybody else. But what concerned me was how we regulated rather than necessarily who did it.
Okay.
Ms Mary Harney
And I was mindful of the particular responsibilities of the Governor and also of resource implications. And this expertise is not easily found. It's a very complicated area. In my own Department at the time we only had the equivalent of half an actuary. So I was conscious of all of those issues. And what concerned me most was what the regulator did, rather than who actually did it.
Okay, that's fair enough. Can I ask you then in relation to the discovery, and you mentioned the reports, and we've had evidence here from witnesses of two to three people who were directly regulating, on a micro level, different institutions. How did that situation ... how was it allowed to come about? How, in light of the fact that you said you had reservations, that you had only an effectively half an actuary in your Department regulating insurance and the credit unions, how come there wasn't more strict oversight of the actual prudential regulation of financial institutions?
Ms Mary Harney
Well, certainly I wasn't aware, and I don't believe the wider Government was aware, of the resources that were being allocated. Maybe it's ... I mean, we're all talking here about eight years on and hindsight and looking back at mistakes and trying to reflect and agonise about are there things we should have seen and done differently. Certainly, if I was to say that having established a new regulatory environment, perhaps we should have looked for ongoing reports from that regulator.
Okay.
Ms Mary Harney
That didn't happen. Certainly in my part it didn't happen. I don't know whether it happened through the Department of Finance, but I was not aware of the poor level of resources that was being applied to the regulation of what is a very complex global industry.
Okay. You referenced Mr. Patterson in your comments there as well. Did you see his evidence to the inquiry?
Ms Mary Harney
I certainly watched him, yes.
I want to quote a quote which has got a lot of coverage maybe in subsequent questioning of other witnesses, from him, from his evidence on the day he was here. I'll quote him directly. He said, "None of the authority - the board - had any experience in regulation [regulating banks]." You would have had some input, I'm sure, into the nominees onto the board of the new regulatory authority. How come we could have appointed, or Government could have appointed, a board of people to regulate that had, between them, zero experience of regulation?
Ms Mary Harney
Yes, I did have some involvement. In fact, I ... if memory serves me right, I think I did suggest to the Minister of Finance that Mr. Patterson would be an ideal person to be chairperson. I had come across him briefly in business and he impressed me. That skillset is not easily found, quite honestly. These ... other than retired regulators, I'm not certain who we could have put on that had regulatory experience. There was a former CEO of an insurance company, an economist, I think. In fairness we tried to get a balance-----
A romantic novelist, was there?
Ms Mary Harney
Sorry?
A romantic novelist ended up on the board?
Ms Mary Harney
Well, you know, consumers had to be represented too, and, in fact, the whole debate, and I've read ... I've taken the opportunity - in fairness, in the context of coming to this committee - to read the Dáil debate again, and the whole emphasis in the Dáil from Deputies of all parties was on consumer protection. So it was appropriate that consumers, and we're all consumers, should be represented on the board as well. I'm not certain. I respect what Mr. Patterson had to say. I think we would have had to go outside the country. We're sometimes not good at that.
He said that he flagged it at the time with the Minister and there was no-----
Ms Mary Harney
Well, it wasn't something I was aware of that he was concerned about, to be honest with you.
Okay. But with the benefit of hindsight?
Ms Mary Harney
Of course. Look-----
A lot of things-----
Ms Mary Harney
-----with the benefit of hindsight, we appointed Mr. Elderfield and we paid him a salary substantially greater than what we were prepared to pay during those years. There's a lot of lessons we have learnt. And one lesson we must learn is that this expertise globally is in scarce supply. And, therefore, if you're going to acquire that expertise, whether it's in the form of executive staff ... and sometimes in Ireland we go for three instead of one with the expertise and the experience, we might go for three more junior people. I think what ... if there's any other lesson we should learn from the regulatory issues it is that we need the appropriate expertise, whether it's on the board of the regulator or whether it's particularly working at executive level in the regulatory office.
There was another quote that I just want to put to you from Pat Rabbitte when he was here last week. He gave his summation of issues around regulation that led to the collapse, and he said ... he described it as a "classic case [here] of regulatory capture". What do you feel on that particular, yes, on that particular view?
Ms Mary Harney
Well, one would have to say in hindsight, notwithstanding the changes we made, with the exception of the consumer issues, where I think the new regulator did have a very proactive, hands-on approach to the consumer issues, because prior to that the Central Bank, I think, referred issues around bank charges to the director of consumer affairs - it wasn't an area that they had an interest in - but notwithstanding the changes it's fair to say that I think the culture didn't change.
Okay.
Ms Mary Harney
And I would agree with Deputy Rabbitte in that respect. And maybe it is partly because we're a small country, but there was a lot of deference, perhaps, to the banks. In the first instance the failure of the banking system must rest with the bankers and the lenders. And then the auditors and the accountants. I think, to be fair, the regulator and the Central Bank come down third and fourth line of defence. They're not up there No. 1.
You don't ... well, I understand, and I think the point you're saying is that boards of directors have responsibility and, you know, the structure of the bank to their own shareholders. But we've uncovered a lot of, I suppose, evidence from different sources of a very deferential relationship that existed between the banks and those who were supposed to be regulating them, not least details of social events that took place in or around the time of the guarantee.
Do you not favour, or do you favour, a more hands on - even with the benefit of hindsight - form of regulation and do you not feel that that actually was a crucially ... a crucial failing in what happened?
Ms Mary Harney
Well, if you look at core document No. 40, which was sent to me, on page 87 there's a note there from the head of the banking unit, I think, in the Department of Finance, which quoted me as saying I wanted a more proactive regulatory environment. That is a fact; I did.
Okay.
Ms Mary Harney
I wouldn't get too hung up on the social events, Deputy, I'm more concerned about what people do. If they do their job, who they socialise with is not ... of no interest to me. But I do think we need a regulatory environment that's robust, that protects the consumer and protects the banking system. And I think we were all quite alarmed with what came out subsequently. Some reckless lending, which none of us, in our wildest dreams, could have imagined.
Okay. I've two questions that I have to ask you before I get to Mr. Gormley. Hopefully I'll have a bit of time with him. At the bottom of page 3 of your statement that you presented to the inquiry you said, "I have commented on Government's lack of awareness of the growing risks in relation to Financial Stability in the lead-up to the crisis - an omission that one hopes is unlikely to be repeated given the huge focus on regulatory implementation since then." Briefly, do you feel that enough has been done to ensure that a repeat will not happen? Briefly, please?
Ms Mary Harney
I hope so. I think their ... certainly the regulatory focus now is much more robust. There's no question about that. I think all of us, whether as Members of the Oireachtas or members of Government, will be far more questioning and will get behind the data that's supplied and use our critical faculties more. But if you're to ask me could we have another crisis, I can't put my hand on my heart and say, "No". But sitting where I sit now, I think we've done everything so far possible to avoid that, yes.
Okay. This is my final question. On the website, still, of the Department of jobs and enterprise, as it is now, when I was preparing for this I found a speech, or a press release of a speech, that you gave in 2002, 12 September 2002, at an event ... a breakfast event in a hotel in the IFSC, and I want to put a quote from it to you:
15 years after it started, the IFSC is fully on the world financial map. I would like to see if we can give a renewed public-private push to bring [international] financial services to a new level in Ireland. Let's renew the energy and commitment on all sides that got us this far. The new financial regulator ... will help give a boost, as we already see in the Chairmanship in Brian Patterson. There is a lot more we can do together. So let's set our sights high.
I want to ask you, what did you mean in terms of a boost? And, secondly, we've had a few witnesses that have outlined the clash, if you like, between the two roles of the regulator, regulation and promotion, that existed under the legislation. And you seem to be indicating, if I'm not ... if I'm correct there, that the role of the regulator was almost equally important in terms of promotion.
Ms Mary Harney
Well, in relation to the developmental role, that came secondary to stability, obviously. I think Mr. Honohan said that ... the Governor said that in his report, that it wasn't of the first order. Secondly, we established a global financial services sector here from zero and to have credibility in the global financial world you need good regulation. It's not about light regulation or no regulation; it's about strong, robust legislation. People are not going to put their funds and their money into a country where they're not confident of the regulation. So, what ... when I was talking I was talking about the new, strengthened regulatory environment. And in relation to the development of promotional role, the IDA had a strong role. As Minister for Enterprise, Trade and Employment I met with many financial services companies around the world, promoting the IFSC, and so too did the clearing house. So, I think the Central Bank's role would have been certainly down the line from that and it would, in any case, have been secondary-----
Was there an inherent conflict, though, in those two roles?
Ms Mary Harney
I know it's gone now and why it was there in the first place I'm not so certain. Perhaps there was a conflict. It's not the first piece of legislation that I am aware of where there might be this overarching clause that talks about the development role of whatever sector. But I think the Central Bank's first and primary responsibility was the stability, financial stability of the country and I don't think anybody can take from that.
Okay. There's only a minute and 20 seconds left for Mr. Gormley, sorry about that-----
-----scold you now for your manners, Deputy Phelan.
-----but thank you for your answers. Yes.
Ms Mary Harney
It was not my wish to take all of Mr. Gormley's time, I assure you.
No. I briefly want to refer Mr. Gormley to page 4 of your statement.
Quick question now, Deputy.
Mr. John Gormley
Page 4.
It's the phone call from Minister Lenihan on the night of the guarantee when you were ... an invitation, at least, was extended to you to attend the Government Buildings. Why didn't you? And again, if you had that time all over again would you have ... would you act differently now?
Mr. John Gormley
I'll answer the second part of your question first. No, I wouldn't. I have given evidence here to show you very clearly that I was across the issue. And I think it's fair to say that I was more across this issue than other members of the Cabinet, with the exception, of course, of the Minister for Finance and the Taoiseach himself. And I had discussed it with Minister Lenihan. I had, as I said, discussed it with David McWilliams. Now, Mary Harney has made an interesting point here when she talks about challenging the consensus. Well I did challenge the consensus by taking a contrarian view. David McWilliams, as you know, was right about the bust, absolutely. I wanted to get his views and Minister Lenihan had taken on board his views as well. Both of us, therefore, were on the same page and-----
Did you have a detailed understanding, though, of what this McWilliams option which you referenced-----
Mr. John Gormley
Well, if you read the David McWilliams e-mail, which I have supplied at the request of the Chairperson, he goes into quite a bit of detail. And that's why I put it to Mr. Lenihan and I said, "Are we going with the McWilliams option"? The David McWilliams option. And he said, "Yes". And that's why I was clear in my own mind that I could approve this. Now, also, bear in mind that this was an incorporeal meeting, where you're not present. I don't think it would have changed one thing by me being present. No other members of the Cabinet were present. It wouldn't have changed anything, and-----
But you were the only one like, as far as I'm aware, who was given the option on that night of-----
Mr. John Gormley
I think he extended that courtesy to me because we had discussed it, and-----
But do you think that that one-page e-mail from-----
You're using a bit of time now so, and I need you to wrap up.
I think that a one-page e-mail from Mr. McWilliams was fully ... full awareness, for you, I thought.
Mr. John Gormley
Well, the ... I ... as far as I know, the only difference ... I think David McWilliams was saying that the bond holders should not be included in the guarantee. That's the one change. The day following, he ... I don't think he was too concerned about that particular issue because again I got another e-mail from him. So that was the only difference as far as I can see.
Other than that, we had gone through it ... by the way, you know, we did have a Cabinet meeting the next day and it was actually open to any member of the Cabinet to say to Mr. Lenihan, "I don't want an incorporeal meeting, I want a full Cabinet meeting on this." That option was also open to myself. I didn't feel it was necessary, nor did I feel, having discussed it at Cabinet the next day, that it was necessary.
But you have to remember this and bear this in mind at all stages, we were told that this was a liquidity problem. We were not told that it was a solvency problem. We couldn't have known that, nor could Minister Lenihan, and, therefore, we were working on that basis. And we were, effectively, misled by the banks on that issue and that's why we progressed and that's why we made that decision. But, likewise, I would put it to you as well, Deputy, that the Opposition parties were briefed as well. We had to vote on this issue. This wasn't a decision that was made in the middle of the night really, because the legislation had to be voted on in Dáil Éireann. And the Opposition parties were briefed. They were given the same information that we were given. I don't think the Department for Finance hid anything from the Opposition parties. And, again, you were probably given misleading information because, again, you were told that this was a liquidity problem. We now know it was a solvency problem but that's what we were going on at the time.
Thank you.
Thank you.
Deputy Michael McGrath.
Thank you very much, Chair. You're very welcome, Ms Harney and Mr. Gormley. You said there, Mr. Gormley, that the Government was misled by the banks which implies belief, on your part, that the banks knew that the situation was more serious than had been presented. Is that what you're saying?
Mr. John Gormley
Well, I can't say that for certain. I mean, I ... I'm sure, Deputy, that there must have been some individuals in the banks who knew that the situation was pretty dire. And, in any event ... and you know, the financial experts will tell you, sometimes it's difficult to know when a liquidity problem becomes a solvency problem. Where is that threshold? But I do believe that there were individuals who must have known, in the banks, that there was a problem. That's my view. Do I have evidence for that? I don't.
Sure.
When you say a problem, do you mean that they were insolvent?
Mr. John Gormley
They must have known, some of them must have known that they were insolvent, yes.
Okay. But you don't have any evidence for that, it's just a belief.
Mr. John Gormley
I don't have evidence of that, Chairperson. I am just saying that is my belief based on the, sort of, cavalier attitude that was, for example ... well, I have to be careful ... I've told ... I have to be careful in what I say because there are trials taking place right now so perhaps I should not say anything more than that.
Ms Harney, do you share that view that the Government was misled?
Ms Mary Harney
I certainly remember a conversation at some point with Minister Lenihan, when he relayed to me that he just worried was he being told the truth. It was not that night, it was not that week, but it was probably shortly thereafter. He was very worried about whether he was getting the correct information or not, that's a fact. I am not in a position to judge.
Sure. Mr. Gormley, when you had the conversation with Brian Lenihan at two in the morning and he invited you in as such, and you asked him the question, "Are we going with the David McWilliams option?", how did you know that Minister Lenihan knew what the David McWilliams option meant? Had there been a discussion at Government level or a bilateral one between you and Minister Lenihan where the McWilliams option, as you put it, was thrashed out?
Mr. John Gormley
Well, as I explained in my official statement and also in my opening remarks, a meeting did take place on the Sunday. I met with the Taoiseach and with Minister Lenihan in the ante-room opposite the Cabinet room. I had told David McWilliams in advance that I would pass on his ideas. He had written an e-mail and quite detailed as you can see in the appendix. I passed that e-mail on to Minister Lenihan and I said, "Are we going to do this?" We discussed it but it was a fairly cursory acknowledgement of this. I think there was also an element of Minister Lenihan not wanting the Department to know that he had been in discussions with David McWilliams. I don't think David McWilliams was, perhaps, well got in the Department and so I was fairly circumspect in what I said but I did pass him the document, it was quite detailed. And so, to answer your question directly, yes, he absolutely knew what was meant by that.
Just to clarify, when you said, "the David McWilliams option", what did you understand to be the David McWilliams option?
Mr. John Gormley
The full guarantee of the institutions and what was outlined in his e-mail. He did not favour the idea of nationalisation. In our telephone conversation I had put it to him, and I had put it in, you know, in a broad way because I recall quite vividly that he wanted to know what the Minister had decided. Now, I was not in a position to tell him that because we hadn't actually made a Government decision at that stage, nor would I have told him in any event because I was aware of his dual role. He was giving us advice but he was also a journalist so I had to be extremely careful of what I said. But when I did talk about nationalisation he said ... and the way I put to him and I do recall, "What is wrong with nationalised banks?" That is the way I put it to him. He said, "No", absolutely, and essentially, the message was that markets don't like nationalised banks and so, therefore, nationalisation was off the cards. And he was ... I think he explained it in the e-mail but also I think he explained it in a newspaper article that he wrote for The Sunday Business Post as well, the ideas that he was putting forward, how this was to be done and that is what followed.
Okay. I have asked that page 1 of the appendix would be put up on the screen, this is the e-mail correspondence. And towards the bottom of the page there, this is an e-mail from Mr. McWilliams on 26 September to yourself Mr. Gormley, "...for the Green Party, agreeing to the present Lenihan package will be political suicide as you will never be forgiven by the electorate and the Greens will forever be besmirched with Fianna Fáil policy mistakes". What was the understanding of the Lenihan package being referred to there?
Mr. John Gormley
I think the ... he, in our conversation and it goes back to our telephone conversation, I was given the impression from David McWilliams and again in fairness to David McWilliams, he did not want me to know the extent of his contact with the Minister, but I think it was clear that Minister Lenihan at that stage was considering nationalisation and-----
Did he relay that directly to you or was that through Mr. McWilliams-----
Mr. John Gormley
No, he didn't. The Minister didn't say that to me. The Minister always played his cards close to his chest and, you know, he did not want to say that probably to me but I knew from ... and this was the peculiar situation I was in, I was hearing what the Minister was thinking from David McWilliams and that's what he said. David McWilliams is very clear in that e-mail, as you can see, that we weren't to go down that particular route; we were to go with the full guarantee.
And over the page he sets out a proposed solution, a full Government guarantee of all deposits for two years, not shareholder funds - they took a gamble, tough luck. He goes on to say that the Department of Finance is worried that people will call the Government's bluff and they will have to come up with the cash for this, "Believe me, this will not happen." So the view being put forward was that a guarantee would be cost-free and ultimately that there would be revenue to the State by way of guarantee fees of €1.5 billion per year.
Mr. John Gormley
Well, again, in fairness to Mr. McWilliams, he did not know that we were dealing with a solvency problem. He did not know that nor did I and, therefore, he was going on the assumption that this was a liquidity problem and that this was by far and away the best solution.
Just to clarify, at the top of that page under "Solution" a full Government guarantee of all deposits for two years - not shareholder funds. What did you interpret that as meaning in terms of bonds for example?
Mr. John Gormley
I took that to mean that the famous bondholders wouldn't be included in the guarantee. I think that's what I took it to mean but I didn't, I didn't get clarification from him on that.
That it would be just deposits included?
Mr. John Gormley
Yes.
Okay, so prior to his e-mail to you of 26 September, you had no inclination that Minister Lenihan may have had a preference for nationalising Anglo and Nationwide?
Mr. John Gormley
No, I did not.
Okay. So that came to you via Mr. McWilliams by way of that correspondence?
Mr. John Gormley
Yes.
Okay. And the meeting of Government on 28 September, I think Ms Harney you said that largely dealt with fiscal measures which were being planned. There was some discussion about the emerging liquidity issues in the banks, is that the case?
Ms Mary Harney
Yes, just at the very end. It was essentially about the Estimates for the upcoming budget and at the very end, the Minister for Finance, if I recall, just gave us a brief about the emerging liquidity issues in the banks.
But there was no indication of what was to come 24 hours later or so?
Ms Mary Harney
None whatever, no.
Mr. Gormley you mentioned in your statement that you met with the Taoiseach and the Minister in the ante-room opposite the Cabinet room but that was a very brief discussion, is that right?
Mr. John Gormley
That was a brief discussion. I think it was a feature of our time in government, Deputy, that we were all extremely busy and under enormous pressure and rushing from one meeting to the next. It was clear to me that the Taoiseach and the Minister for Finance had been meeting upstairs, they were rushing from there. I said, "I want to meet with you because I have something I need to pass on to you." I had given that undertaking to David McWilliams. It was a brief discussion. I actually, funnily enough, I do not recall the liquidity discussion at the Cabinet meeting but I do recall the meeting in the ante-room prior to the actual Cabinet meeting.
Can I just take you back a little bit? The financial markets had been in turmoil really since August 2007. We had queues outside Northern Rock here in Dublin in September 2007. We know that from January 2008, the Department of Finance was preparing scoping papers around the issues of financial stability, was looking at contingency planning, including nationalising banks and consideration of a guarantee evolved over the following months. What level of awareness was there within your party and at Government level as a collective body of the looming crisis and the preparations which were under way or not under way during 2008?
Mr. John Gormley
Well, I made reference to the fact that I had raised the issue with the then Finance Minister at a pre-Cabinet meeting and I recall asking Brian Cowen at the time of Northern Rock how were our banks.
And the then Minister gave me a Department for Finance answer, because I'd seen the same answer being given to the Opposition parties, I think, later on - that our banks were well-capitalised and that there was no problem.
To answer your other question: was I aware of contingency plans? No, I wasn't. I was interested in the testimony given by Kevin Cardiff to this committee because he indicated that plans had been prepared, contingency plans of some sort, over a number of months. Was this communicated to the Cabinet? No, it wasn't, and I wasn't aware of it. I only became aware of these plans when I discussed it in the week previously that something was afoot, so to speak, but Minister Lenihan said, "Look, we're dealing with this." And that was ... it certainly wasn't months in advance, as Mr. Cardiff had indicated.
So, just to clarify, were there any discussions at Government level during 2008, prior to September, of the pressures that were clearly building up in the markets, the liquidity pressures on the Irish banks, the risk to financial stability and the plans that were being made to address those issues?
Mr. John Gormley
Well, I can ... well, Mary Harney may have her views, but I don't recall specific discussions, you know, re contingency plans, re nationalisation or the other option, which was the guarantee, of course. No, I don't recall those discussions at Cabinet level.
But even at an overall level?
Mr. John Gormley
No, I don't.
A briefing on the problems that were emerging which the banks were facing?
Mr. John Gormley
I don't have any recollection of a paper being presented on that issue.
Ms Harney?
Ms Mary Harney
I think we did have discussions on what was emerging in the international marketplace but, to the best of my memory, we were assured that everything was well here, as far as our banks were concerned; that they were well-capitalised and so on. But I would agree with Mr. Gormley, I don't think there was any huge discussion of this issue. I think it all happened quite suddenly in the end.
Ms Harney, you were in government since 1997, so right throughout the period. Where do you place responsibility for the economic crash and the banking crisis?
Ms Mary Harney
Well, in relation to the banks, you'd have to start, as I said earlier, with the banks themselves and so on, and those that audited and accounted ... did the accounting of the banks. But I think I said in my opening comments, when we entered the euro, with the huge availability of cheap money, we put a lot of effort into the whole conversion process, you know, what would we ... what rate would we go in at, how would we be affected vis-à-vis the UK - we were very concerned about the competitiveness issues there and the likely impact on inflation. I think, and this is with the benefit of hindsight, I think, if we'd put a process in place to look at the threats and the opportunities and the risks, we might have been able to take mitigating factors. Could we, for example, have decided to limit the amount of credit going into construction, or to any particular borrowers? Could we have introduced legislation to deal with the 100% mortgages? These are some of the issues that we might have been prepared to look at, or to have rowed back earlier on some of the tax-related property reliefs.
Secondly, I think, as I said, I think some of the public spending, based on what I call transient taxes ... we were incurring recurring expenditure, I suppose, based on taxes from the property sector, and that was a mistake. I think benchmarking, we should have benchmarked public sector salaries to public sector salaries elsewhere, rather than to public sector ... to private sector salaries in Ireland. I think that was-----
Sure.
Ms Mary Harney
-----that was an error.
But can I ask you, irrespective of the contributory factors, ultimately, does the Government of the day-----
Ms Mary Harney
Of course.
-----have to take responsibility for-----
Ms Mary Harney
Yes, absolutely.
-----the economic crash?
Ms Mary Harney
Absolutely, yes. I think I said that earlier. I said even though we wouldn't be involved in regulation at a micro level, we have to, ultimately, take the responsibility, yes.
And finally, can I ask you, Ms Harney, the ideology and the belief system of the Progressive Democrats clearly had a significant influence on Government policy throughout all of this period. Do you believe that it was disproportionate influence, relative to the size of your party? And do you believe that the overall policy in terms of regulation, the free market, for example, reducing and lessening the tax base, that those policies were very much espoused by your party?
Ms Mary Harney
Well, Deputy, the ideology that I have comes from my background. I believe in hard work and the dignity of work. I believe in lowering taxes on work. I think the things you want to encourage in the economy should not be subjected to high taxes. I believe in a broadened tax base and even when the Commission on Taxation, that was put in place post-2007, reported, they did not suggest increasing the tax rates. We do need a wider tax base. Regulation, I think, as document ... core document 40 will say, on page 87, I was the one that was being proactive, as the official says in the note to the Minister for Finance. I think there are a lot of myths about what we stand for. I'm for regulated markets, appropriately regulated markets. You know, way back when I was a Minister of State in the Department of the Environment, we established the Environmental Protection Agency because I felt local authorities hadn't the competence or the expertise to regulate very complex industries. In Health, we introduced new regulation of the Medical Council and of pharmacies - brought in lay majorities. In the Department of Enterprise, Trade and Employment, I introduced the new Director of Corporate Enforcement. I think that's an indication of my commitment to regulation. It's not regulation for the sake of it; it's regulation that is effective.
I believe ... we believe in a philosophy that encourages enterprise, rewards work. I was the Minister that brought in the minimum wage. So, sometimes there's a lot of myths about what we stand for. I think my philosophy and my approach to politics is shared by a wide number of people in Ireland. We certainly weren't a populist party in the run-in to the 2002 election. We were cutting back on community employment because I believed, at a time of full employment, we didn't need to be moving towards 40,000 people in community employment. That was unpopular, even among some of the Government Deputies, so I think we ... we reformed the insurance industry. Again, there was a strong lobby by the legal profession against that, but insurance came down dramatically following the introduction of the PIAB. So, I hope, Deputy, that in my philosophy and my participation in Government, I pursued what I believed was in the national interest and I am proud overall of the achievements, but, of course, I regret very much the mistakes we made, collectively, as a Government, and the pain that that brought to so many of our citizens.
Thank you. Senator Marc MacSharry, please.
Thanks very much, Chairman, and welcome to Mr. Gormley and Ms Harney. Can I just get this question out of the way first, this is for both of you: did you agree with the Exchequer and National Pensions Reserve Fund being used to recapitalise the Irish financial institutions? John, or Mr. Gormley, rather, first.
Mr. John Gormley
Okay. Ideally, no, but, you know-----
You were, kind of, in a decision-making capacity, so-----
Mr. John Gormley
Yes. When you find yourself in a corner, as we did, where do you go? You're going to have to try and find the necessary means to deal with the crisis and, therefore, I accept responsibility for political decisions that were made.
At party level, did you discuss different proposals or solutions to suggest to Government?
Mr. John Gormley
Well, at party level, we would have discussed a range of measures. I should have added in my opening statement that, as a party, a small party, for the first time ever in government, we operated without a party Whip, which is quite extraordinary; we hear a lot of discussion on that. And we made decisions by consensus, so we discussed every issue and we discussed it in detail, along with our advisers, but this ... you're asking specifically-----
Yes, just on this-----
Mr. John Gormley
-----about this issue?
-----because the old clock is ticking there.
Mr. John Gormley
I don't think there was a huge amount of discussion around this because the options were very limited.
The options ... and time was short, presumably?
Mr. John Gormley
And time was short.
Okay.
Mr. John Gormley
Time ... during our period in government-----
Is it fair to say then that you weren't coming with a counter-proposal to Government on these matters?
Mr. John Gormley
I think that is fair to say, yes.
Okay, that's fine. The same questions for Ms Harney then, just-----
Ms Mary Harney
In the election manifesto in 2007, we had suggested, if memory serves me right, that we wouldn't touch the National Pensions Reserve Fund, but, however, we were in an emergency and if a family's in an emergency, you find resources wherever you have to find them. And, luckily, we had that €22 billion that we had reserved. Obviously, it was to be for future pension liability. And I don't believe there was an alternative, given what was happening in the markets at the time.
So you agreed with it?
Ms Mary Harney
Yes.
Okay, and just to say, at party level, were there any discussions within the Progressive Democrats to say, "Look, we have a counter-proposal", or-----
Ms Mary Harney
Well, Senator, I was in the unique position then that there wasn't a party to have a discussion-----
Yes, sorry.
Ms Mary Harney
-----the was no other-----
I forgot.
Ms Mary Harney
-----Independent Deputy.
Okay, okay. That's fine. So there was ... you had no counter-proposal then?
Ms Mary Harney
No.
That you were putting forward? Yes. That's fine, so. Can I just ask you ... I have a couple of stock questions that I've asked all political witnesses. One is, can either of you recall any instance where a political party, a body, a politician, a charity or anybody else lobbied or made representations to you to decrease expenditure or increase taxation? So, Mr. Gormley?
Mr. John Gormley
We were getting lobbied all the time.
To do that?
Mr. John Gormley
Well, to ... yes ... to ... you get lobbied by various groups, if you had-----
To reduce expenditure?
Mr. John Gormley
No, not to reduce expenditure-----
Well, then that's point I'm making-----
Mr. John Gormley
-----to increase expenditure-----
-----so "No" is the answer to that one. My point exactly. And on taxation then, was there many, or anybody, lobbying you to increase taxation?
Mr. John Gormley
To increase taxation?
Mr. John Gormley
No, not that I recall, Deputy.
That's great. And that's the same two questions then for Ms Harney.
Ms Mary Harney
Well, some of my economist friends may have been lobbying on the expenditure, I've no recall - by reducing it, I mean. But certainly there would have been plenty of people advocating increasing expenditure. There was an infinite demand for more and more. And, in fact, it was very hard during the boom years when we were running huge surpluses. It was very hard to say ,"No", to certain groups and to explain why it was that we couldn't just do everything. But I don't remember anybody advocating-----
Okay.
Ms Mary Harney
-----advocating reducing expenditure other than, as I say, a few select economist friends, perhaps.
That's perfect-----
Mr. John Gormley
I think I should add that, in the Green Party manifesto, we did suggest increasing the tax take, and we did have a number of options. And there were people that were lobbying us in relation to a different form of property tax, site value tax, for example.
And were they politicians?
Mr. John Gormley
No, they weren't politicians. No. Certainly not.
Can I ask just in the context of external influences on Cabinet, there's been some evidence from the chief economist in the Central Bank, for example, who was alleging political and property interest that were impeding upon his ability to get his message across within the Central Bank? In your experience, Mr. Gormley, was there any external influence of a property or political nature which brought to bear on policy as opposed to best intentions in the interest of the people?
Mr. John Gormley
Well, I do recall I had a spat with Tom Parlon at the time of NAMA because we wanted to include a windfall tax, and we did, in that legislation. He was absolutely opposed to it and we also spoke about social dividend. He felt that that had no place in the legislation. I know that he was lobbying subsequently and the windfall tax was then removed, regrettably in my view, because it was a way of dealing with the whole question of over-zoning, which we were trying to deal with at the time. So, yes, it is my view, and I think I said this in my official statement, that there are certain lobby groups which have huge access to the corridors of power. And that particular group, I think, has inordinate influence.
Yes, okay. Just very quickly. Ms Harney, you mentioned that there was a lot of pressures to sped the national reserve fund. Where were those pressures from?
Ms Mary Harney
No, sorry, I wasn't talking about the national reserve fund. I was saying there was all this pressure for more expenditure.
No, but in your statement, did you not say that?
Ms Mary Harney
No, I don't think so.
Okay, maybe there's a misprint. I'll move on. Just ... in the context there, just to finish, you were describing how you were discussing with Mr. McWilliams and I think you mentioned you were finding out from Mr. McWilliams what Mr. Lenihan was saying. Ms Harney, you mentioned that you don't remember a discussion about that, there was general discussions at Cabinet about the international situation, but nothing specific to do with our banks. I mean, to the outsider looking in, and as someone who's never participated in a Cabinet meeting, I mean, was there a sense that you were passengers to these issues or I mean-----
Final question now, Senator.
Yes. No, I did say that, yes ... that you were passengers to this issue or I mean ... is that the practice - that you depended on third parties like David McWilliams to find out what were going on in-----
Mr. John Gormley
No, I mean-----
-----in other areas or ... what way does that work?
Mr. John Gormley
No ... it was an unusual situation and it accelerated, obviously. I did not know, to answer your question directly, that there was going to be a meeting with the bankers the next day. I wasn't informed about that. But I did know that Minister Lenihan was thinking about these matters. I did discuss the issue with him. I was across the issue in the days preceding that. I think it would have been helpful but I mean, the fact is that Finance, the way they operate anyway - and I've been critical sometimes of the way the Department operates - that they often don't give you prior knowledge of what's going to be discussed. Whereas a Minister, if you are preparing a proposal, you have to go through all sorts of hoops. You know, you have to do a RIA, a regularly impact analysis, etc. The same laws don't apply to Finance. Very often, they would come to Cabinet and just put down a proposal a few minutes beforehand, which I found, frankly, unsatisfactory on occasion. But, no, were we passengers? No. Did things accelerate? Certainly. And I felt, as I said to Deputy McGrath, that, unfortunately, we were misled on the whole question of solvency.
Okay. Deputy Eoghan Murphy.
Thank you, Chairman. Thank you to both the witnesses. You're very welcome. Mr. Gormley, I just want to, if I may, at the outset, just verify a quote of yours if I may. It's from a radio interview in December 2010 with Marian Finucane. And you say: "The arrangements have been made the previous Sunday", right? And we've gone into that in quite a bit of detail. And said: "Yes, this was the expert advice to go down the guarantee route." And she then asks you: "When was this decision made?" And you said: "That was on the day before; it was a Sunday. We had a cabinet meeting. We'd gone through it in quite a bit of detail, as I said." Do you recall saying that?
Mr. John Gormley
I do recall a meeting with ... sorry, an interview with Marian Finucane, and if the impression was given that there was a Cabinet decision, I think I've clarified that here today, that I spoke to Minister Lenihan and the Taoiseach at pre-Cabinet. Mary Harney has referred to a short discussion at the end of the actual Cabinet meeting which, frankly, I don't recall. But that ... the quote that you've just gave me ... have given me there, that may be slightly misleading because the account that I've given here today is accurate.
Okay. I mean, it certainly does give that impression. And if we go in later to the interview, Marian Finucane asks again: "Can I just ask you a question? I think the rest of us thought with the two Brians, that the decision was made that night." And you responded, "Well, you couldn't just make a decision on the spur of the moment. You'd have to discuss it for days in advance. Of course not. You can't do it like that. Everybody had to be involved in what was the best thing to in these circumstances."
Mr. John Gormley
Yes. Yes. Well, that is true. We had to, you know, discuss this. I did discuss it with the two Ministers on the Sunday, and that is absolutely the case.
Okay, but is it fair to say that the impression that you gave in that interview in 2010 was that a decision had been made by Cabinet on the Sunday?
Mr. John Gormley
Well, I mean, I've seen it quoted, and I've seen it quoted in that context and, unfortunately, it has been interpreted in that way but that's not the impression. I didn't want to give the impression that the Cabinet had decided because, clearly, the Cabinet had not decided on that issue.
Okay. And "Everybody had been involved in what was the best thing to do in these circumstances ... we'd been discussing it days in advance"-----
Mr. John Gormley
That's true.
I mean, are you referring to the Cabinet meeting the day before in which you had a brief discussion with the Minister in the anteroom?
Mr. John Gormley
We had been ... well, I think the e-mails show in the evidence that I've laid before the committee is that it had been discussed in quite a bit of detail in the days beforehand. And I had been discussing it, as I said, with ... people have referred to it as a contrarian view. I discussed it with David McWilliams, I discussed it with the Minister for Finance and the Taoiseach and it had been discussed. And I think you can see from the e-mails that they're quite specific. And, you know, it's going into quite a bit of detail.
Can I just to clarify then, no decision made on the Sunday, not even informally, to go for the guarantee?
Mr. John Gormley
That was ... I've made that very clear in my opening statement and, indeed, my opening remarks, that there was no Cabinet decision in relation to it.
Okay. Can I move forward then to the Cabinet decision on the bailout, which was 27 November 2010? And the Cabinet was informed that there'd be no burden-sharing in the terms of the troika agreement. And your reaction to that, please?
Mr. John Gormley
Well, we had to take legal advice on this. I listened carefully to the advice that we were offered by the Attorney General. I think it's fair to say that ... and, you know, as Mary Harney said we're going back a period of time now and I'm trying to recollect exactly but it's often been said that we didn't resist, that we just caved in; that's not the case. Minister Lenihan did make efforts to include bondholders. He did want to, actually, to use that phrase that has become often used now, "burn bondholders." But a number of things happened.
First of all ... and this is ... I'm just ... you know, this is my recollection, we did get some support from Strauss-Kahn, who was supportive of our ideas in relation to this, but Trichet wasn't supportive and particularly then ... I'm thinking back ... there was a meeting then subsequently where Tim Geithner was there and he was not supportive. And the very clear view of the Attorney General at that stage was that they were to be treated in the same was as depositors and so, therefore, it was not possible. And that's my recollection of that.
Can I just ask from your recollection as well, when the terms of the bailout were given to the Cabinet in terms of no burden-sharing and the interest rates that were to be applied, did someone describe it as the Treaty of Versailles when what was needed was a Marshall Plan?
Mr. John Gormley
Yes.
Do you recall that exchange? And then that person being told not to say anything like that outside of the Cabinet room?
Mr. John Gormley
That does actually ring a bell and ... but I ... let me ... it does ring a bell but I can't recall. I mean, we were ... I mean, you can compare it to the Greek situation, right. People say, you know, "We ought to have stood up to these people." Well, we did stand up, but there comes a time where you have to use, you know, your political smarts and know when you're beaten. We're a small island in the Atlantic. We don't have huge power or influence. We're up against the might of these people. So what are you to do under those circumstances? Well, we said, "The only thing that we can do is to go along with this as much as it sticks in our craw." And it did. And I think it was the right decision, Deputy, because if we had gone down the Greece route, well, you see what the consequences can be. And I do remember saying to people, "You know ... and people thought I was exaggerating at the time, "You know, we are in a very difficult situation here. If we don't get this right, the ATMs will close." And people thought this was a gross exaggeration. Well, you can see now that it wasn't. The ATMs could have closed and we could have had a very serious situation, so I think we made the right decision.
I'll just allow you a supplementary there if you're not finished, Deputy. You've some ... on this same line of questioning - nothing new, now.
I just hadn't had a chance to ask Ms Harney a question, Chair.
Well, okay, there's gender parity here. I'll allow that but very, very briefly, okay. And not a whole new line of questioning.
Thank you, Chair. Ms Harney, it's just in relation to fiscal policy at the adoption of the euro, because you mentioned it in a bit of detail in your statement.
Ms Mary Harney
Yes.
And you talked about in hindsight-----
Ms Mary Harney
Yes.
-----it's clear that some significant policy adjustments were needed from about 2001 onwards and it was exactly the beginning of 2001 that the Commission and the Council censured us for incorrectly using fiscal policy and for overheating the economy. And an article at the time from the RTE said, "Harney accuses European Commission of misjudging Irish economic situation." Now, obviously, you didn't choose the headline, but, in that article, you criticise Europe for not understanding actually the budget situation in Ireland at the time. So, on reflection, was the Council correct?
Ms Mary Harney
No. I think, to be fair, the Council was taking a view towards Ireland that it didn't take towards other larger countries. I think the point I was making about the euro was a different one. I think if we had put the effort in post-joining the euro that we put in to the preparation of joining the euro, we might have been able to identify the risks earlier and to have mitigated some of the difficulties, and I regret that we didn't do that. And can I just reflect back on the question you asked, if it's in order, Mr. Gormley? From the time Chancellor Merkel and President Sarkozy made their comments at Deauville that peripheral countries' bondholders ... bonds would not be fully honoured, we were on a hiding to nothing, quite honestly. The momentum after that was just incredible. And Olli Rehn came to Ireland. And in relation to trying to get a better deal, I think the IMF were supportive, the ECB weren't, and that was our difficulty. We sought the write-down of senior debt in the banks and, to the best of my knowledge, the IMF were very supportive of that but the ECB weren't. And by the time it happened, we didn't have an alternative, quite honestly.
Okay, thank you very much. I'm just going to take some questions myself and then maybe propose we might take a short break after that then, if that's agreeable.
Mr. Gormley, just with regard to your own witness statement, you state that circa ... in and around quarter 1, 2009 ... this is on page 5 of your statement:
An immediate nationalisation was ruled out as the state would not be able to manage the loan books of all six banks at the one time. There was also still the prospect of either AIB or Bank of Ireland being solvent.
Can you advise what parties were involved in these discussions and was solvency a significant concern? Did you ever look at the possibility of liquidation?
Mr. John Gormley
Well, on that particular question and, as I said, that part of my statement is based on contemporaneous notes taken by my colleague, Eamon Ryan. He was in attendance at those meetings, I was not. And what I could do, if it's all right, Chairman-----
Yes, sure.
Mr. John Gormley
-----I do have some notes from Eamon Ryan. I could consult those in the break and come back to you with an answer but I-----
Okay, we can resume after the break on that. Just on other matters related to that. I think earlier you commented upon ... that there's nothing wrong with nationalised banks. That was a general sentiment you expressed earlier.
Mr. John Gormley
Well, no, I didn't say that. What I said was, what is actually wrong with nationalised banks? That's the question I put.
Okay, and if I can maybe just draw you back to your discourse and engagement with Mr. McWilliams in that regard. What is ... what was your view, or Mr. McWilliams' view, with regard to liquidated banks and was this issue discussed with Mr. McWilliams at all?
Mr. John Gormley
Well, I think the problem there is that the idea of ... as its ... letting Anglo go, I think, it's been ... I think, if I recall, your own party leader favoured that particular option. But, you know, I think it would have led to chaos and I think Governor Honohan said that subsequently as well - that it was not an option. I don't want to say that that was the actual David McWilliams view because the liquidation of Anglo is not something that I recall in detail as a topic. But the ... what I was trying to get at is the option of the State taking over the banks and that was not something that he favoured.
Okay. And maybe Ms Harney might come in on the next question as well. If you feel free to, just indicate to me. Just staying on that particular issue, Mr. Gormley, what options did you and Government colleagues and/or advisers discuss and what were the main influencing factors to nationalise Anglo and not to recapitalise in January 2009?
Mr. John Gormley
What were the ... again, come back to me again please?
What options did you and Government colleagues and/or advisers discuss and what were the main influencing factors to nationalise Anglo and not recapitalise in January 2009?
Mr. John Gormley
Well, again, I'm not trying to dodge your question in any way but-----
We can return after the break ... sure.
Mr. John Gormley
No, but it's ... even ... even if we come back after the break on that particular one ... I will check the notes supplied to me by Eamon Ryan, but it's clear to me even now that those meetings were attended by Eamon Ryan - those meetings in relation to Anglo. I wasn't present but I can go and check the notes and come back to you.
And sure-----
Ms Mary Harney
I'm happy to answer from my perspective if you wish.
I can indeed and I'll bring you in in a second there, Ms. Harney. And I can certainly take that on board, that Mr. Ryan was far more intimate with these matters than you would have been. But the question would be to yourself, Mr. Gormley. To your information, what was being presented to you, what did you consider the options to be and what advices were you partaking in? I know Mr. Ryan was more central to that process but you would have been in orbit to it. So maybe you could answer the question in that regard.
Mr. John Gormley
Sure. Well, the options were presented to us at ... are you talking about Cabinet meetings?
No, I'm talking about the issue to nationalise Anglo and not recapitalise it in January 2009.
Mr. John Gormley
Well, again, at that stage - and I think it was made clear in my official statement - it became very clear to us that the Anglo debts were massive, that they were insolvent. The only option at that stage - and it was a road that, I think, the Taoiseach was always reluctant to go down but it became inevitable - was to nationalise. And it was the option, I think, that nobody favoured. It was quite clear to us at that stage that we had an insolvency problem across the board and there was also ... in relation to Anglo, I do recall, it was always said to us by Minister Lenihan that it was a systemic bank and that, you know, for a number of reasons that it was linked as well to, for example, the credit unions and there was a lot of cross-securitisation and that it was linked as well to various other banks because of interbank lending.
And so that was the reason that ... for a lot of us it was the last option, and that's why we considered and that's why he gave us ... he gave us a good briefing at that time, and said to us that that was the option that we should go down.
Ms Harney?
Ms Mary Harney
I think at that point there were only two options, it was systemic and that's why it was covered by the guarantee. The only two options were nationalisation or liquidation. You clearly wouldn't want to liquidate when the Government had guaranteed the bank, that would be the worst possible time to do it so nationalisation was the only option. The bank, it was clear to the Government that the bank was insolvent, at that point.
Okay. And if I can maybe just come back to what I was speaking to yourself Ms Harney, just give me one moment there and I'll deal with it. It's in regard to, yes ... I'll just bring up some documentation ... this is just a reflection of a series of correspondence that took place between yourself and then Minister for Finance, Charlie McCreevy. And the question kind of relates to the reorganisation of the Central Bank and the creation of IFSRA and the establishment of the Irish financial regulatory office and so forth. Maybe if you could just maybe expand upon this Ms Harney that, as Minister for Enterprise, Trade and Employment, you were directly involved with the reorganisation of the Central Bank. And, in hindsight, would you do things differently now? And maybe comment upon the specific evidence as well. I know you're familiar because you asked for some additional documentation to be added yourself. You might just consider what was the general discourse going back and forth between yourself and then Minister McCreevy's office at the time?
Ms Mary Harney
Well, I think it's fair to say that the Central Bank and the Department of Finance were against any, certainly ... the greenfield option ... and then the ... I was keen to ensure that we'd better regulation, that we'd more proactive regulation and that we'd a single regulator. As I said, the Department of enterprise was responsible for insurance and credit unions and I didn't believe that that was satisfactory. We neither had the expertise nor the resources to do that. And added to that were the inquiries and then the charges, the hidden charges, the fact that the banks were misselling products to their customers and so on. So a process was put in place, chaired by Michael McDowell, senior counsel, I think there were nine members of it ... including representatives of various Government Departments, a lawyer and a number of other outside people. And they favoured, by a majority, a greenfield site.
And in the intervening period between reporting and the time the joint memo was brought to Government there were lot of discussions back and forth between my Department, both at official level and a political level, in relation to a solution or an agreement. And because the request was for the Governor to be able to give directions when anything to do with financial stability was involved, I was happy to agree with that obviously. The Government had its own responsibilities. We then came forward with a joint memo which is roughly around the two pillar approach, I think the secretary to the Government, Dermot McCarthy, was very involved in that mechanism too on behalf of the Department of the Taoiseach.
So we came forward with the two-pillar approach, under the auspices of the Central Bank. And after the legislation was passed I wasn't involved any more in ... I had no further role. If memory serves me right, I think the Secretary General of the Department of Finance may have sat on that overarching body and the authority would have reported in, both to the Department of Finance and to the, perhaps to the Oireachtas as well, I think.
But I think I said earlier, in response to Deputy Phelan, regulatory change alone, or sorry structural change alone doesn't change the culture. Now there were regulatory deficiencies at European level which have been since addressed, given we were in a monetary union. They didn't exist until relatively recently. But there's no doubt that the culture was one of deference. And although I want to emphasise the first responsibility is with the banks and thereafter their accountants, the regulator or the Central Bank are down the line from that. But I think there was neither sufficient resources applied to regulation to just have as ... as Governor Honohan, or Mr. Honohan, said in his report, I think he said there were two people responsible for each of the bigger institutions. There's no way that's possibly, that that could possibly be adequate, dealing with a very complex industry.
The kind of a narrative I just want to establish around that because ... one of ... I'd be in the Parliament when you were there yourself, as a Minister, and the one thing I admired about you was you seem to almost have a photographic memory. I might be incorrect in that regard but the way that you can kind of quote back the figures-----
Ms Mary Harney
It's not as good as it was, Chairman, but I'll be as helpful as possible.
I ... I don't suffer from the same thing ... or I don't actually have it, I suffer from the quite the opposite because I'm misnaming members of this committee at times and all the rest of it. But I tend to recall that there was a ... maybe a conflict might be too strong a word, but there seemed to have been a strong position coming from your Department and a strong position coming from Minister McCreevy's Department, and maybe you could elaborate was that actually a conflict? Was it an issue as to whether the regulator's office, because there was a lot of issues relating to consumer affairs and consumer protection, that it should be moved into your office? Was there something that you would try to appropriate the regulator's ... or some of their functions and duties, as something that is an enterprise and trade related issue? And also ... or was it that really we shouldn't be separating and fragmenting the role of the regulator? We've had testimony here from Mr. Cyril Roux recently who more or less said that what the ... in summary, that every country had principles-based regulation but it just seemed to have been operated differently in Ireland. Was there an indication of that concern, that if the regulator was kind of put out in that regards, that's something else? I mean, if you could just explain to us what the narrative of this discussion actually is between yourself and Mr. McCreevy.
Ms Mary Harney
Well to be fair I'd say it was more at official level than discussions between myself and Minister McCreevy-----
Well the broader matter.
Ms Mary Harney
-----but essentially the Department of Finance and the Central Bank took one view and everybody else probably took a different view. The Central Bank had traditionally given responsibility, or if memory serves me right and I hope it does, there was an issue around bank charges and the Central Bank referred that to the director of consumer affairs. I was anxious to ensure that there was a strong consumer focus, given what had happened. Remember, when these decisions are made they are made in an environment of what's happening at the time and, as I said earlier, I did take the opportunity to read the debate in the Oireachtas and the focus of everybody was around consumer protection and the fact that it hadn't been taken seriously heretofore.
The lesson I suppose, Chairman, is that having established a new regime we probably should have been more hands-on or more proactive in inquiring how it was progressing. But remember the backdrop then was that there were no prudential issues. There were issues raised about the expertise in the country and how limited that is, and I share that view, we are a small country. So I wasn't anxious to establish an organisation for the sake of it. What concerned me was not the shape of the body that emerged but rather what the body was going to do. And it was my genuine view, given that there was a director of corporate ... of consumer protection, a statutory consumer protection directorate, I was very happy with that.
I've seen subsequently at this committee reference was made that we didn't have a similar person for prudential regulation and perhaps the reason for that there wasn't perceived to be any issue with prudential regulation. And indeed any of the external analysis of the country, including the IMF, the OECD reports in 2006 and 2007, and the stress tests done, all gave us a very clean bill of health. That is a fact.
Okay. I just want to conclude with this matter ... sorry, yes, sure, Mr. Gormley.
Mr. John Gormley
If I have time to read a note there it might be helpful to you, and it's a note from my colleague, Eamon Ryan, and it's about the nationalisation of Anglo, which you referred to. And what Eamon Ryan said to me, because obviously he knew I was coming before the committee, he said that at a meeting of the North-South council in late November, Brian Lenihan told him about the revelations he had been told about the Maple Ten share-buying arrangement. In early January Brian Lenihan told him about the INBC-Anglo balance sheet transfer and he says as he recalled he shared the info with Dan Boyle on that occasion. The decision to nationalise Anglo was actually made in a meeting in Brian Lenihan's office which was attended by Eamon Ryan, Brian Lenihan, David Doyle, Cathy Herbert.
Again, Eamon Ryan would have talked to us subsequently about that before it went to Cabinet, so that's the information that I have in relation to that.
Okay, we might come back. Just, finally, I want to deal with two other matters. And if the whole story was a movie, the two big scenes in it would be the night of the guarantee and the entry into the bailout programme, but life isn't like that. It doesn't have big moments, it's a series of events that maybe have significant events actually through it. So can I maybe ... this is a question I put to other Government Ministers as well and ... I'd appreciate it if you could maybe just deal with the question rather than a more, longer, response. But, in general terms, did the structure or design of the banking guarantee, of the bank guarantee, along with its period of duration, have any bearing on the Irish State entering a bailout two years and two months after the bank guarantee?
Ms Mary Harney
Sorry, Chairman, I didn't hear.
Did the structure or design of the bank guarantee, along with its period of duration, have any bearing on the Irish State entering a bailout programme two years and two months after the bank guarantee?
Mr. John Gormley
Well, Chairman, you compared it to a movie. I think a narrative, a political narrative, has evolved around the guarantee, and it goes something like this: the bank guarantee was the worst decision ever made in this country, and that all our woes stem from it; two, that Fianna Fáil was up to something shady with Anglo; and, three, that the Greens didn't know what the hell was going on, right. Now, I think the evidence supplied here to you today shows I think that ... I don't have the evidence to support that narrative. The fact is that, as Governor Honohan said-----
With respect, Mr. Gormley, that's not the question I asked you-----
Mr. John Gormley
I know but I'm getting to the point. The point is-----
The guarantee was predicated on the fact-----
Mr. John Gormley
I don't agree with you. I don't agree with you because that goes down the route of saying, "This was the worst decision ever made, and, therefore, our problems stem from that, therefore, we went in ... this is the reason we went into the bailout, because of the guarantee". Our choices were extremely limited. Most of the damage was done before the guarantee - 90% of it. And, you know, as I said it was the least worst option under the circumstances and it wasn't the cause of us going-----
I'm not questioning the ... how the guarantee was arrived at, or anything like that, and I'm not raising issues as to what were the options on the night, but a guarantee of a specific design was put in place.
Mr. John Gormley
Yes.
That is a fact. The reasons and motivations for this we can continue to examine, and why it shaped the way it was, we can continue to examine. But a particular shape was put in place, and the question simply, Mr. Gormley, and I'll come to Ms Harney on this, is: did that have any bearing in the way it was shaped to the country entering a bailout programme two years and two months? Because the narrative might be this was one big event and the next thing, there's another big event. There's two years and two months, actually, in between them. Did they have any relationship to one another?
Mr. John Gormley
The fact of the matter is that I believe, and you're asking me for my opinion-----
Yes, indeed.
Mr. John Gormley
I believe the seeds of our destruction were sown before 2007, and we had no choice in relation to the guarantee. Of course, there were ... you know, every event was linked.
What I want to deal with, Mr. Gormley, is the period after the guarantee, not the period leading up to ... the guarantee was put in place; that was a fact. Can you just - either it had a relationship to entering the bailout programme later on, or it hadn't. Maybe it's more nuanced than that, you can explain that.
Mr. John Gormley
I certainly don't want to concede that, because that goes back to that narrative of the guarantee being the worst decision. We didn't have any real choices-----
The reason why I'm challenging on this is because Mr. Trichet, in his testimony before this inquiry, would relate to that theory and Mr. Trichet's testimony must be tested-----
Mr. John Gormley
Well, Mr. Trichet's-----
-----as must be every other person's testimony. Mr. Trichet is saying, when he came before ... when we met him in Kilmainham, he says, "[As] you know, we could [...] have continued on our side [...] having gone up to 100% of GDP [...] to 200% of GDP, [This is all the liquidity that was going into the banks after the guarantee] and why not 300% of GDP? [I can't do the French accent, so I'll just do the dramatics] Then what would [...] the Commission [of the] inquiry be asking for? You would say, "Were you totally crazy at the ECB to continue, when you were going [to] the wall at 100 miles [an] hour, to continue [providing] liquidity and liquidity and liquidity?"." So is Mr. Trichet right? Were we actually going into a bailout programme?
Mr. John Gormley
I think Mr. Trichet's evidence was comprehensively challenged by Mr. Cardiff when he was here, and I would certainly go along with what Mr. Cardiff said in relation to that.
Okay. Ms. Harney?
Ms Mary Harney
They're interrelated, certainly, of course. The reason for the guarantee was the banks hadn't got access to money and they were losing it pretty rapidly. The reason we subsequently ended up moving into a bailout was because of rapid increase of cost of borrowing on the markets, and I referred earlier to Chancellor Merkel and to President Sarkozy and the comments about peripheral countries. Once that statement was made, it was inevitable. I mean, the domestic view was that we'd enough money - I think Mr. Corrigan may have said this before this committee - for another six months or so, but, to be honest with you, things moved very fast around that period, so fast it was quite scary. And the bailout became inevitable. And there was a difference in the support between the IMF and the ECB around that time, I do know that.
Okay. Just one final thing, just to clear up with Ms Harney. Earlier you said that the banks were insolvent, to your view. Did you say that?
Ms Mary Harney
No. I said ... at the time of the guarantee, the issue was liquidity and the reason for all of that was reckless lending of course. Subsequently, we became aware that Anglo was insolvent and that was the reason for the nationalisation.
Okay.
Ms Mary Harney
If I used the word "insolvent" just there, I meant "liquidity" actually. Sorry.
Only for Anglo, okay. And when did you become aware that Anglo was insolvent?
Ms Mary Harney
Probably around the same time as Minister Gormley.
Which was?
Ms Mary Harney
In the run-in to the nationalisation of it.
All right. Thank you. I now propose that we take a break for about six minutes. And, in doing so, just to let the witnesses know that they're still under oath, that they can consult with their ... whatever support or legal advices that they have with ... there, and that we resume at 5.00 p.m. Is that agreed? Agreed.
Okay. With members' permission so, we'll go back into public session and continue our engagement with Mr. Gormley and Ms Harney. Is that agreed? And, in doing so, can I invite Deputy Kieran O'Donnell. Deputy, you've six minutes.
Welcome, Mr. Gormley and Ms Harney. A question for Ms Harney. With the establishment of the single ... of the whole, I suppose, regulation ... the new regulation mechanism and, prior to that, your Department was in charge of the insurance sector.
Do you believe there was a knock-on effect in terms of the regulation of the insurance sector? And I'm saying that in mind with what has happened with Quinn Insurance. You might just give me your thoughts on that.
Ms Mary Harney
Sorry, Deputy, I don't understand the question.
My question really is that ... under the Department of Enterprise, Trade and Employment, it regulated the insurance industry prior to the new financial regulatory framework being established in 2003. Do you think there were consequences, adverse consequences for the taxpayer, in the way insurance companies like Quinn Insurance were regulated under the new regulatory structure?
Ms Mary Harney
Well, the reason I was anxious to move the regulation of insurance away from the Department of Enterprise, Trade and Employment was because we didn't have the expertise or the resources. I said earlier we had the equivalent of half an actuary and I remember having very detailed discussions with officials and, particularly, the Secretary General of the Department. Clearly, we were concerned because of what had happened in 1985 with ICI, that we did not have the capability internally in the Department to deal with what was a very complex industry and also the coming together of banking and insurance. And a number of banks were involved in insurance products and it was better that they would be regulated with one pair of eyes, as it were. I think I need to be careful in relation to what happened with Quinn Insurance. Clearly, there were regulatory issues that have arisen there, and maybe issues that go beyond regulation ... very serious issues that had implications for the insurance industry in the country and the reputation of the insurance industry internationally, actually.
Well, do you believe that there was the necessary financial and technical expertise in the new Financial Regulator to be able to regulate the insurance industry?
Ms Mary Harney
I am not competent, Deputy, to answer that question. The answer is I don't know, but one thing I do know is we didn't have that competence in the Department of Enterprise, Trade and Employment and the whole purpose of moving responsibility and having a single Financial Regulator was to have a more robust, more proactive regulatory environment with the appropriate expertise. And I did say earlier - and it's a view I formed during my time in government - that sometimes because of the salary implications of bringing in experts, many, on occasion, they have to be hired from outside the country. We go for bringing in two or three people when we might just need one with the particular expertise. I don't know if that was an issue.
Well, then, finally on the point, do you believe or not that the new financial regulatory structure that was formed when you were in government in 2003 was fundamentally flawed, led to confusion in terms of people's roles and gave rise to the situation where the taxpayer ended up footing €64 billion gross in terms of the bailout of the banks?
Ms Mary Harney
I don't believe that the regulatory structure caused that. I emphasise again that I think the main responsibility must lie with those that made the bad lending decisions, the reckless lending decisions in many cases but can I say in relation to the regulator, it's been advanced here, both by Mr. Patterson who chaired the financial regulatory authority and by Patrick Honohan in his report, that the regulatory structure was not the cause of the problem.
Yes, but, on a final point, do you not feel that the Financial Regulator, their first responsibility should have been to the taxpayer?
Ms Mary Harney
Their first responsibility was to ensure that the banks and financial institutions they regulated were robustly regulated. Reference has been made in other fora to principles-based regulation, but many other countries operated a principles-based regulation and did not have the issues that we had. Clearly, there were deficiencies in the regulation; there's no question about that.
Can I ... Mr. Gormley, when did that meeting take place where the decision was taken to nationalise Anglo with Eamon Ryan, Mr. Brian Lenihan and you referenced David Drumm, sorry David Doyle?
Freudian slip there.
Okay, when was that decision taken?
Mr. John Gormley
Okay, we won't mention the war but I don't have an exact date. I will gladly come back to the committee with that date.
Ms. Harney, you were in government for 14 years - in Cabinet uninterrupted - and, Mr. Gormley, you were leader of the coalition party in government with Fianna Fáil. Lehman's collapsed on 15 September. The bank guarantee was put in place on 30 September, over two weeks later. You had received information from David McWilliams that there was a need for a bailout programme.
Mr. Gormley, did you-----
Mr. John Gormley
For a guarantee.
For a guarantee, yes. Did you not think it appropriate to bring it up at the Cabinet meeting, certainly on 28 September, about the banking crisis? And, Ms Harney, did you not think it appropriate, with your experience as being a Cabinet Minister for 14 years' duration, to not bring ... that there wouldn't ... that this issue would not have been discussed in terms of Lehman's at a Cabinet meeting, certainly after 15 September?
Mr. John Gormley
Well, you're talking about the Cabinet meeting on the Sunday, the 28th.
At a minimum.
Mr. John Gormley
Yes. Well, I did not have any indication that there was going to be a crisis meeting the next day. It wasn't on ... it wasn't on the immediate radar and therefore I didn't feel it necessary to bring it up at that stage. Now-----
In hindsight?
Mr. John Gormley
Well, you know, I don't even like talking about hindsight. What I do know is that I did trust Minister Lenihan. In my view, he ... and I discussed this with Deputy Murphy, just in the break there, he was working very long days. He was trying to do his best and I do know that, had it been necessary, he would have broached the subject. But I suppose, Deputy, you know, none of us knew that this meeting, this crisis meeting, including Minister Lenihan because I'm sure he would have informed me on the 28th, "There's going to be a major meeting tomorrow." I don't think he knew at that stage and so events moved very, very quickly the next day and, you know, I was, as I said, across the issue aware of it, but your question relates to should I have brought it up at Cabinet and, at that stage, I suppose it just ... it just wasn't there at the top of my agenda at that moment, you know? I brought it up with Minister Lenihan and the Taoiseach before Cabinet but the way it operates normally, as you know, is that it's the line Minister that brings up items at Cabinet.
Ms Mary Harney
Deputy, the Cabinet process is very structured, so it's not a question of somebody says, "And, by the way, can I put my hand up and raise a particular issue?"
I don't mean it in that sense.
Ms Mary Harney
No, I accept that. There would have been discussions amongst many of us about the emerging global situation, both with the Minister for Finance, with the Taoiseach and with others. It wasn't that we were oblivious to what was happening, I can assure you. Everybody was very much on alert. We knew the situation emerging in the banks was serious and my recollection of the meeting of 28 September is that at the very end, the Minister for Finance told us that the emerging situation in the banks was serious. The Minister sat beside me at the Cabinet, so I just want to be certain, because Mr. Gormley doesn't remember that, I might be confusing a private ... a conversation he had with me but I'm fairly certain he actually told the wider Cabinet. But I remember, on that evening, he was very concerned about the emerging situation in the banks from a liquidity point of view. There was ... even from anecdotal evidence, I knew people myself that were talking about going to take their money out and then there was a radio programme and so on, so there was a lot happening very quickly. But if the purpose of your question is to ask us were we mindful of what was happening in the international marketplace, we certainly were.
Okay, thank you very much. Next questioner is Senator Michael D'Arcy. Senator?
Thank you, Chairman. Ms Harney, Mr. Gormley, you're welcome. Thank you. Mr. Gormley, in the e-mails between yourself and Mr. McWilliams, Mr. McWilliams says, "The dept of finance is worried that people will call the government's bluff and they will have to come up with the cash for this." Was the Government guarantee a bluff and was it the most expensive bluff in Irish political history?
Mr. John Gormley
Absolutely not. It's a very serious matter and I think all of us at Cabinet were aware of our responsibilities and we acted on the best possible information. As I've said already, we were assured that this was a liquidity crisis and that's why we introduced the blanket guarantee on that basis. But to describe it as a bluff, no, certainly not.
I think Mr. McWilliams did.
Mr. John Gormley
Well, I don't know is it fair to interpret his words in that way-----
Sorry, just let me clarify for you.
Mr. John Gormley
He didn't-----
If I could-----
Mr. John Gormley
I don't think he described ... he didn't describe the guarantee as a bluff, I don't think so.
If you could actually cite the statement, it would helpful, Senator.
Yes ... sorry?
If you could cite what Mr. McWilliams said.
Sorry, it's part of the documents ... it's appendix that was-----
It's on the screen there.
Its on the screen: "The dept of finance is worried that people will call the government's bluff". So, he was stating that the Department of Finance were concerned that potentially the markets, would consider this a bluff. The NTMA, in evidence, were concerned that the markets would interpret it in a similar way and as we know, they were excluded from the conversation. Similar question for you, Ms Harney. Was it a bluff?
Ms Mary Harney
No, absolutely not. I did say in my statement that I excluded myself for the reasons I gave, from the actual decision, although I supported it when the Minister for Finance made contact with me on Monday night, my memory is it was around nine, 9.30 in the evening. I believe we had no alternative, quite honestly. And I think if we had excluded some banks, I think it would have led to enormous controversy and it would have led to legal action and it would have been very hard to justify because Anglo was systemic. It was certainly no bluff. I will acknowledge that the information on which the decision was made was very limited and on that night the view was that we had a liquidity problem, not a solvency problem.
And in the conversation between, I assume Minister Lenihan, in contacting the other members of Cabinet, did he state that it was a liquidity crisis, a liquidity problem, and not a solvency, to Ministers?
Ms Mary Harney
My memory of the discussion at the end of the Cabinet meeting on the 28th and around that time was that banks were running out of money, that they were solvent but that they were running out of money. But when Minister Lenihan contacted me that evening, I think his conversation went something like "There's a very serious situation emerging, be on hold for a call later, that we're having a meeting in the Department of the Taoiseach", that was my memory. But I was aware that a serious situation was emerging, it wasn't a surprise to me.
Okay. Can I ask, Ms Harney please, on 30 September, Morgan Kelly was on "Prime Time", he was interviewed with Brendan Keenan and he stated - this is a general run of what he stated - that the Irish liquidity crisis was as a result of the markets' understanding-----
Interference there folks. Sorry about that now, Senator, but there's somebody near you with a phone.
That the markets' understanding was the standard of the Irish loan book. The markets understood the loan book, they understood that liquidity crisis was worse in Ireland than anywhere else and there was that reason why there was no funds available. Did you hear Morgan Kelly, Ms Harney?
Ms Mary Harney
I don't ... the night of the 30th, I don't believe I did. But-----
Were you aware of his concerns?
Ms Mary Harney
I was aware of statements made by Morgan Kelly over the years, but can I say the information available to the Government, on which the Government must base its decisions, the official information, did not convey that view.
He was right and they were wrong?
Ms Mary Harney
As it happens, yes.
Could you expand on "As it happens", please?
Ms Mary Harney
Well, as I said earlier, the-----
I mean, it's a rather-----
Ms Mary Harney
Sorry?
-----glib answer to a €64 billion gross liability.
Sorry, now, let the witness decide how they will answer, Senator, if you don't mind, and I'll let the judgment be made later. Just ask the question please, without statement.
Okay.
Ms Mary Harney
Sorry, Senator, the question?
The question was, you said, "As it happens". I asked you, he was right and all the Government advice was wrong, and you said "As it happens". Could you expand upon that please?
Ms Mary Harney
Well, well ... the night, the information on which the guarantee was based clearly did not indicate there was a solvency issue. And I think other witnesses that have give evidence here before the committee who were present on the night have confirmed that. That emerged subsequently. And as the, you know, the loans got transferred to NAMA and the haircut was substantially bigger than anyone had anticipated, that is the reality of what happened, Senator, and I think many of the comments I made earlier in relation to mistakes made - perhaps we could have done things differently to have better information, to have minimised the burden on the taxpayers, to have mitigated some of the risks. But we did not have that information. And I have to say that in my experience in government, between 1997 and January 2011, my colleagues always acted in the national interest. When serious problems were brought to attention, they were dealt with, notwithstanding the consequence, political or otherwise. That has been my experience.
Can I advance the conversation-----
Last question.
-----Chairman, please? In terms of NAMA - you brought up NAMA, Ms Harney, the €42 billion discount - Minister Lenihan was at pains to stress that the discounted money would still go ... the assets and liabilities would transfer together and that the discount ... that the State would get back the discount because the individual who borrowed the money would still owe the money. How much of the €42 billion are you aware of the State will receive back of the discounted money, the haircut?
Ms Mary Harney
I don't have that figure, Senator.
Okay. Senator Sean Barrett. Senator.
Thank you, Chairman, and welcome to our two former Tánaistes. Could I ask Mr. Gormley, on page ... the bottom of page 12 and the top of page 13 where you say, on the Department of Finance, that you encountered "stern resistance ... from the Department to our suggestion that [a] ... review of the economic crisis should include a review of the Departments own performance in the years leading up to 2008." What was the nature of the stern resistance, please?
Mr. John Gormley
They didn't want to be part of that. They didn't see the need for it. And, in fact, when it subsequently happened, I was disappointed that someone who sat at the Cabinet table like myself ... I wasn't interviewed for that particular report.
Would you have put more things into the Wright report?
Mr. John Gormley
Well, the thing that I would have put in, Deputy ... Senator, rather, was the thing that disappointed me about the Department. And let me say that many of the officials in the Department did Trojan work. They worked around the clock, including Mr. Cardiff, who was unfairly maligned, in my view. But the Department calls the shots and they often, I suppose, had a practice which was like, you know, "Do as I say, not as I do". And in terms of the way that they approached Cabinet meetings, I felt that they would produce memos, as I said, at the last minute, not giving us enough time to scrutinise those memos, not having done the necessary homework themselves, whereas I was running a Department, which was a huge Department, and if I had to put something through Cabinet, every single line had to be accounted for. And that's the ... that's the problem that I encountered.
Have you anything further on the push-back against your attempt to analyse the performance of that Department up to 2008?
Mr. John Gormley
No, it was just ... we ... and I know, as I said, Eamon Ryan had assumed responsibility for dealing with those economic matters and he was the person dealing directly with them but he reported back a number of times to us that they didn't want to play ball on that issue.
On page 8, you have that "The level of emergency liquidity coming from the European Central Bank had reached [...] €130 million and market confidence in Ireland was falling". Was that number monitored regularly by the Cabinet?
Mr. John Gormley
I think I corrected that, Deputy ... or, Senator, rather.
Mr. John Gormley
I said €130 billion. I edited my-----
Yes, I'd like the smaller number as well, yes, yes. But was that number - in billions - was that monitored by the Cabinet?
Mr. John Gormley
Yes, there were a number of people-----
Mr. John Gormley
What happened during the crisis ... that it was ... Minister Lenihan and Minister Ryan, my colleague, developed a very good working relationship and their advisers developed a very good working relationship, so the two parties in government were represented by those two people and they met regularly. They developed, I think, a very good rapport and worked on those issues and, in turn, Eamon Ryan would then ... would then come back and report to us.
So the alarm bells should have gone off, if we knew that was ... it didn't just arise, €130 billion-----
Mr. John Gormley
Well-----
-----on that day.
Mr. John Gormley
Well, you know, the ... as Mary Harney has explained, it's hard to ... it's very hard to exaggerate the way that things accelerated. And we were left dealing with that crisis and we had to deal with it as quickly as possible and when it came to making those decisions, Minister Lenihan and Minister Ryan came before us and put forward the options, as I said.
Could I turn to Ms Harney briefly? And we are time constrained. Wouldn't the fact that the NTMA began to get wary of Irish banks before any other body in the public sector ... was that not a case for a greenfield site ... your original proposal, a greenfield organisation, that the one that was outside the system picked up on its antennae that Irish banks were in trouble long before the rest of the governmental structure?
Ms Mary Harney
Well, we were ... Senator, we were discussing this issue between '99 and 2001. I'm not aware the NTMA had issues at that point with the banks.
Well, it is an example of an organisation that got out of the Department of Finance and went off on its own way rather than-----
Ms Mary Harney
Oh, sorry, the example of establishing the NTMA? Yes, but, as I think I explained earlier, what concerned me was the manner in which we regulated rather than who actually did the regulation.
Yes. Mr. Gormley-----
Ms Mary Harney
And it was put forward very strongly, the views of the ECB which had to be taken into account. Clearly, we were part of a monetary union. And then a role had to be given to the Governor. And I think we were in discussions between ourselves and the Department of Finance for nearly two years before the memo was brought to Government and, to be honest, I was getting quite frustrated. And I didn't see the structure as the big issue. I felt ... and, even in hindsight, I'm not certain we would have got agreement to have a completely green field situation, I think we would have been taking a lot of people from the Central Bank. The difference with NTMA, really, was it was a completely new and expanded role when it was established, albeit with some people from the Department of Finance.
But it did have better economic intelligence in this matter?
Ms Mary Harney
Yes, but not at that point, later on. Yes, I agree.
Now, the €100,000. Was there a discussion on that, the €100,000 deposits protection when that was introduced in mid-September? I think, 19 September 2008. Was that discussed? It's probably a question to you both. Was that discussed at the Cabinet?
Ms Mary Harney
I can't recall what the form - I think it was a Saturday morning-----
I think you're right.
Ms Mary Harney
It was ... this is my memory now, sorry. I can check. My memory is it was a call from the Minister on Saturday morning or maybe late Friday night. It hadn't been changed, I think, since 1995 and there was a view that given what was happening, we needed to increase it to €100,000. It was felt on that occasion that that might have been adequate. Clearly, subsequently it proved not to be.
Mr. John Gormley
I don't have a recollection of a phone call in relation to that matter, Senator.
Thanks, Chairman, and thank you very much both.
Thank you very much. Deputy Pearse Doherty.
Go raibh maith agat, a Cathaoirleach, agus fáilte roimh an beirt seo chuig an coiste. Ms. Harney, can I start with yourself? In your witness statement, you state that there was a short discussion on the liquidity issues in the banks at the Cabinet meeting on Sunday, 28 September 2008 but the main focus of the meeting was to deal with the decisions required for the imminent budget. I know you've mentioned this, but can you just discuss the liquidity issues conveyed to you at that time? And did you think these discussions would lead to the Government announcement of a Government guarantee for the banks within 48 hours?
Ms Mary Harney
The answer to the last question is "No". My memory is that we spent the whole ... I think it was morning and afternoon, I can't quite remember the time of the day, it was a Sunday. We were discussing the Estimates. That was always a long meeting and always a difficult meeting because there was friction and tension between, say, normally the Finance Ministry and other line Ministers. So there was a long discussion. And my memory is that at the end of that meeting that the Minister for Finance said there's a serious situation emerging in the banks. I don't think the word "guarantee" or anything like that was mentioned. That's the best of my recollection.
And was there a discussion or did he just mention it?
Ms Mary Harney
No, it was ... my memory is that it was a brief comment from him at the end of the meeting, which would be the norm. The norm at a Cabinet meeting is if a line Minister has some new issue that mightn't wait until Tuesday, which was the next Cabinet meeting, or something new was emerging, the tendency would be to brief your Cabinet colleagues. There wouldn't be papers, it would just be by way of a short statement.
A short statement.
Ms Mary Harney
And that is my memory. I just want to say since Mr. Gormley can't remember that, I want to be sure he actually said it at the meeting and he didn't privately say it to me as he sat beside me but my memory is it was said at the meeting.
But no big Cabinet discussion in relation to-----
Ms Mary Harney
No. No.
Okay, so just raising an issue of concern in the future.
Ms Mary Harney
Yes.
Mr. Gormley, you mentioned in terms of the theories that are out there, you know, and the three parts, which the third part were that the Green Party was ignorant of everything that was going on. And you say that you have no evidence to suggest that that was the case. Can I ask you: did you, as leader of the Green Party ... or when did you become aware that there was legislation drafted to nationalise institutions? Were you aware of it, that it had started in the spring of 2008?
Mr. John Gormley
No, I think I've already said that the evidence of Mr. Cardiff in that regard surprised me. I did not know.
Okay, were you aware that legislation-----
Mr. John Gormley
Nor, should I say ... nor did, as far as I know, other members of the Cabinet.
Okay, yes, that's fair enough. And were you aware that legislation was drafted to guarantee the banks?
Mr. John Gormley
No, I hadn't ... I wasn't aware of that.
And outside of speaking to a journalist, in the form of Mr. McWilliams, were you aware that the Minister had been engaging with the Central Bank in relation to a guarantee, in relation to nationalising institutions prior to the phone call that you got?
Mr. John Gormley
No, I was not aware that Minister Lenihan was engaging with the Central Bank on this issue. I think I've said to you that, at that stage, Minister Lenihan was, as I said, keeping his cards close to his chest. But we did have that discussion at the pre-Cabinet meeting on the 28th, where I raised my concerns but the actual ... my knowledge of the drafting of the legislation that you referred to was not there, I just didn't ... I didn't know about it.
You're referred to in ... Mr. McWilliams's e-mail as the "kingmaker" of Government, but can I ask you: what is the evidence that you actually knew, or your party knew, what was going on in relation to the banking crisis, the nationalisation, the guarantee, all of the twists and turns that we've been investigating for the last number of months?
Mr. John Gormley
Well, the evidence is - and I've tried to be as clear with you as I can - that we had discussions with the Minister, and I said, I think, in my official statement, that these were not sit down conversations. I would have preferred if we had that, but we didn't. Minister Lenihan didn't have time, but we did discuss the options. He did say to me that he had been speaking to David McWilliams. I subsequently spoke to David McWilliams. He then sent me those particular e-mails. I think you may have put a question to Mr. McWilliams whether he discussed the issue with me. The fact is that-----
I understand ... look, I understand that and you've given that evidence. Many people have been speaking to David McWillams. Most people aren't senior members of Government during the financial crisis. But can I ask you in relation to the evidence that you've given earlier on, that you became aware that Anglo Irish Bank was insolvent some days before the nationalisation of Anglo Irish Bank, and, Ms. Harney, you've given the same evidence. How does that relayed to you in relation to the insolvency of the institution at that time?
Mr. John Gormley
It was relayed to me, as I said, by Eamon Ryan, my colleague, who was dealing with the issue and he told us subsequently that he'd had a meeting. I've already read into the record ... the Chairman asked me about this and I explained how that came about.
Okay, and Ms. Harney?
Ms Mary Harney
My memory is that Minister Lenihan called in to my office in Leinster House, on the Ministers' corridor, and he told me about the emergency situation with Anglo Irish Bank. I don't know how close that was to the actual date; my memory is it was probably the day before or something, that it was very close to when we brought the legislation.
And did he tell you that he believed that the bank was insolvent at that point in time? How do you-----
Ms Mary Harney
Well, there were a number of issues around Anglo that he discussed with me that I'm not certain I should relay here, but he was deeply concerned about it, yes.
Yes. And the key question I have is ... you've mentioned that you became aware of the insolvency of the institution and that's an important point so how-----
Ms Mary Harney
Well, I'm conscious I'm under oath, Deputy, and I want to be fair. So when I precisely became conscious that Anglo was no longer solvent, I can't be certain of that.
No, I'm not looking for the time, as such; I'm asking in terms of did somebody tell you that they believed that Anglo was not solvent anymore?
Ms Mary Harney
My discussions would have been with the Minister for Finance in that ... around that period of time but when it was, I'm not certain.
Okay, and the evidence that we've had heretofore in the committee from John Hurley, for example, from the Taoiseach, Brian Cowen, is that the issue of nationalisation of Anglo Irish Bank because the Government had decided, and notified, indeed, the ECB on 8 January, that they were going to inject capital into the bank, and, on 15 January, they decided to nationalise. But the evidence heretofore is not about insolvency, that the bank was not insolvent, but it was because of outflow of deposits and some corporate governance issues.
We're moving into kind of area here that, that I don't want to be making recalls of people later on to clarify and I'm just assisting here.
Well, I would like to test previous evidence with the witnesses-----
The test is ... I don't want to be if it ... no, I'm just insisting there.
I don't want to be ... and if you'll just assist me a second because as part of the conclusion of this inquiry they ... we would maybe need to get further clarification. So I'll just allow you a minute or two here because ... rather than us writing to you later on and all the rest of it, okay? So, Deputy.
Yes, like, for example, the Chairperson asked Mr. Hurley what happened between 8 January 2009, when the Government had notified the ECB to recapitalise Anglo, and 15 January 2009, when they made the announcement to nationalise it. And the summary of what was said at that time was it was consequences that ... in terms of ... misgivings about putting capital into Anglo, particularly in relation to some of the issues which emerged, which was corporate governance issues. This was relayed as the same thing by-----
Ms Mary Harney
Yes.
-----Mr. Cowen. But at no stage have we heard that Cabinet members or Government believed - to my knowledge - believed that Anglo was insolvent at that time, which means that there was significant loan losses in the institution. So I'm just asking ... with that in mind.
Ms Mary Harney
Well, I ... clearly, Deputy, it'd be important to me to be fair to other witnesses that may have had more knowledge of this than I have, but my memory of discussing the issues around Anglo with the Minister for Finance ... corporate governance issues featured very highly, yes. The outflow of money featured very highly, yes. But if you're asking me now to say when precisely I became aware that the institution was insolvent, and given the evidence of other witnesses, I need to be careful about that to be fair to everybody because ... I have found with all of this evidence that we're going back eight years, which in many ways is not a long time but, believe it or not, when you've been in government for quite a long time, it is a long time to try and remember the precise chronology of events.
But, Ms Harney, can I ... maybe to be helpful, the minute the Government nationalised Anglo Irish Bank, it no longer became insolvent-----
Ms Mary Harney
Of course.
-----because it was now a nationalised entity.
Ms Mary Harney
Of course.
So, are you still of the view that you had a belief at that time - whatever time it was - that at a point in time that you were informed that Anglo Irish Bank was insolvent?
Ms Mary Harney
Yes.
Okay. And, Mr. Gormley?
Mr. John Gormley
Yes, and I can't give you an exact time but I do know that concerns were raised by my colleague, Eamon Ryan. I do know that our finance spokesperson, Dan Boyle, similarly raised concerns, so much so that I think Alan Dukes was very critical of our finance person at that stage because Dan Boyle was saying that, I think - and, again, I'm aware that ... I'm trying to be as accurate as I possibly can - I think if you check the records from that time, particularly the newspaper coverage, that Dan Boyle had made a statement that it has to be nationalised because of ... as far as he was concerned, there was ... there was a real problem.
Thank you, Deputy. Senator Susan O'Keeffe.
Thanks, Chair. Mr. Gormley, were you aware at the time when Morgan Kelly produced his article in The Irish Times at the end of 2006 ... did that make an impact on you, do you recall, or, again, when he published in the ESRI bulletin in summer 2007? Do you remember?
Mr. John Gormley
I don't have a clear recollection of it at the time, 2006 is going back even further in time. I would say that he was correct in his analysis. He ... we were talking earlier on about contrarian views, he ... he called it right, as did David McWilliams.
Do you recall any conversation - after you became a Minister - of the content of that Morgan Kelly ... of his suppositions or his proposals? Did it arise at all anywhere in conversations?
Mr. John Gormley
No, but, again, I do have a recollection of the Department for Finance not being too keen on Morgan Kelly, to put it like that. I ... that's just a recollection I have but that's ... that's not providing you with hard evidence, but that's just a memory I have, yes.
Ms Harney, on the night of 29 September when you took the call from the Minister for Finance, did you effectively recuse yourself from any decision by saying that it wouldn't be appropriate for you to participate in whatever decision, and I'm quoting, "was arrived at that affected AIB or Bank of Ireland" because you and your husband jointly owned shares in those institutions?
Ms Mary Harney
That's correct, yes. But I did go on to say that I would support whatever decision ... I ... I trusted both the Taoiseach and the Minister for Finance to make the right decision.
Would it be something that happened a lot or rarely that someone might be unable to be part of the making of a decision because of a conflict of interest?
Ms Mary Harney
In my memory it happened maybe once or twice where somebody would have excluded themselves. Typically, I remember it happening on one occasion when somebody was being appointed to the Judiciary and there was a connected person, and they excluded themselves ... those kind of occasions, very rare, because any conflicts would be ... told to the Secretary General to the Government and so on. It didn't happen that often, in my experience.
Mr. Gormley, you talk on page 3 about snatched conversations with Mr. Lenihan after the Lehman's collapse. You also talk about the phone call conversation, the e-mail with David McWilliams. You go on to talk about that short and rushed meeting you had with Mr. Cowen and Mr. Lenihan on the Sunday before. You say then about your decision not to leave your house and go into Government Buildings, and finally on page 4 you talk about "the responsibility of dealing with these matters ... was then [assigned to] my colleague, [Mr.] Eamon Ryan". It could, if you look at those things, it could look like your contact with this whole affair in relation to the crisis and the management of it was quite brief, if you look at it in that way. And I'm wondering how it is that, in much of your statement, in fact, is given over to the notes from your colleague, Mr. Ryan. Now, you were the leader of the Green Party, were a member of Cabinet, and yet-----
That's it.
I'm trying to find out why your interaction with this is so small.
Mr. John Gormley
Well, you could look at it another way, and you could say that, in relation to the guarantee issue, I, notwithstanding the fact that I didn't know that legislation was being drafted ... this issue has been raised by your colleague, Deputy Doherty ... notwithstanding that, I probably had more knowledge of the issue than other members of the Cabinet. That's in relation to the guarantee. Just to move on now to the question of what happened subsequently: we were in a crisis. Things were moving very, very quickly. I was not just the leader of the Green Party, I was also in charge of a huge Department, and I'm sure if you talk to your colleague, Minister Kelly, he will tell you that it's a big Department. It was even bigger then. I was looking after more issues and you could ... you know, from libraries, fire brigades, the whole thing. I was also the leader of a party, of a small party, that was in the worst crisis you can imagine. I had to deal with the party members and that was my brief because, you have to remember, that if the Green Party decided to pull out of Government, that was the end of the Government. And so it was my duty ... and we divided up the roles, Eamon Ryan's Department was a much smaller Department and he had more ... frankly, he had more time on his hands. And so, therefore, it made sense under the circumstances to operate in this way.
Okay. I'm just thinking about the public's idea of Cabinet responsibility and collective Cabinet decision. It seems from what you've both said, in fact, that neither of you knew anything of the build-up, anything about the legislation, anything about the planning, anything about the crisis, anything about all the documents that ... now, in fairness, we've seen a lot of documents. But it seems to me that both of you arrived almost at that night with very little knowledge. Is that ... is that a fair assessment of what happened? And in that case, how many more of your Cabinet colleagues were also in that boat?
Mr. John Gormley
Do you want to answer that first?
Ms Mary Harney
Well, it was, if I could say, an emergency situation and it was happening very quickly.
But the crisis had been building for a long time.
Ms Mary Harney
Well, I think, Senator, it's reasonable that the Department of Finance had contingency plans, given what was happening in the global economy. It's also reasonable that they would not have made the wider Government aware of that for a whole host of reasons. And that would not be unusual. Line Ministers would often operate in an environment where you're putting contingency proposals in place in the event of something awful happening and you wouldn't necessarily brief the rest of the Cabinet. You would normally brief the Taoiseach, and if it had an implication for another line Minister, so that is not unusual. I think, to be fair to the Minister for Finance, he was extremely open in his dealings with me. I think he kept me as informed, as well informed, and it was right that if his Department, in consultation with the Attorney General, were putting measures in place in the event of something awful happening ... it's better that that was happening than the alternative of not doing that.
I have one clarification.
A clarification now, not a question.
Ms Mary Harney
But can I also say, Senator, that every single decision made by the Government would have been brought to the Government in an appropriate memorandum and on many occasions circulated well in advance for comment from different Ministers.
The clarification is that in the fourth quarter of 2008, Mr. Gormley, that you say that the contracts for difference, you were notified then, at that point, in the fourth quarter of 2008. I just want to ask, is that correct, and is it correct for you also, Ms Harney? Page 5 of your own statement.
Mr. John Gormley
Page 5.
You say you "were informed by Minister Brian Lenihan of the extent of losses that Sean Quinn had accumulated through the purchase of Anglo share options." Is it correct that you found out at that point?
Mr. John Gormley
That's correct. Again, and I'm not trying to be evasive in any way, you suggested that a lot of the statement was devoted to Eamon Ryan's testimony. The reason for that is, we wanted to be as helpful as possible to this committee.
I just need to come back. I know you're trying to be helpful but just clarify the point there.
Mr. John Gormley
Yes.
And Ms Harney? Do you remember?
Ms Mary Harney
To be honest with you, I don't know when I became aware of that. I'm trying to find the reference in Mr. Gormley's-----
It's the top of page 5.
Ms Mary Harney
Sorry.
I beg your pardon.
It's on the screen in front of you, if that helps.
Ms Mary Harney
To be honest, I wouldn't be able to recall at this distance exactly when I became aware of that but I certainly was briefed about it. Yes.
Do you remember if it was before or after the night of the guarantee?
Ms Mary Harney
Oh gosh, I think it may have been after but I'm not certain. I can't be certain about that, honestly.
Thank you. Deputy Higgins.
Thank you.
Mr. Gormley, around budget time, there is a practice of lobbying Ministers and the Government by organisations representing developers and builders. As Minister for the Environment, Heritage and Local Government, were you lobbied in your time? Did you influence the Minister for Finance in any aspects of the budgets that were in your time? If so, can you outline any such changes and could you say if any such changes was as a result of lobbying to your Department?
Mr. John Gormley
Well, Deputy, I said in my opening remarks that I felt that the record-keeping sometimes left something to be desired. I was aware on occasion when I would go into the Department, I would see people ... representatives of the construction industry in the Department. Nobody ever lobbied me personally. I ... it was common practice at the time that the Minister for the Environment would be invited to the CFI annual dinner. I went, I think, on the first occasion and gave a speech which was probably not to their liking, when I talked about the over-zoning and all the rest. So, I was never personally lobbied but I have no doubt that they were in the corridors of power. Very often, it made more sense for lobbyists to go directly to the Department of Finance.
Okay.
Mr. John Gormley
And I think that's what happened in many ... many occasions, you know.
Mr. Gormley, you say in page 1 of your written statement, "It’s a fact that two thirds of what is known euphemistically as the ‘fiscal adjustment’, which led to the recovery, was made by the Green Party in government." You say that "Green Party TDs and Senators voted for these cut backs and tax increases, convinced that this was the correct course of action, while also knowing that it would lead inevitably to electoral annihilation" and, finally, you said "I’m proud of the dignified way that the Greens conducted themselves during this time of adversity." Could I put to you, Mr. Gormley, a contrary view that in the general election of 2007, the harsh austerity measures were unthinkable and that no Government really would have a democratic mandate to impose such measures. And in that context, Mr. Gormley, can I ask you was the worst day in government better than the best day in opposition? Was that a siren call or was it sound advice from a partner in government?
Mr. John Gormley
I'd a funny feeling that was going to come up. And I can say, I remember Mary Harney saying that to me and I was absolutely mortified when it appeared in the newspaper. It was ... John Downey, the deputy press secretary, came to me and apologised to me that it appeared in the newspaper and then I subsequently apologised to Minister Harney. But, it actually isn't true. I can tell you that now. Some of the worst days we've ever had was when we were in government and it was unimaginable and just when you thought it couldn't get any worse, it did. So-----
And on the democratic mandate, Mr. Gormley?
Mr. John Gormley
The democratic mandate, nobody could have foreseen the collapse and, you know, this was an unprecedented situation. We were ... we were there ... we were forced to take the most unpalatable decisions but we did so trying our best to make these budgets as progressive as possible. And we had a backroom team working on that and I'm proud to say that each of those budgets was progressive, that they actually did hit the wealthier people a lot more than poorer people.
And, Deputy, can I say, you know, I think I've had a conversation with you before about this that, you know, in an ideal world, if we could clone Joe Higgins and create 90 Joe Higgins and you had a majority in government, I'm telling you now that your room for manoeuvre in government would be limited in a crisis like this. You would have to make terrible decisions like Syriza in Greece. It's something you don't want to do, but you ... it's forced on you and, you know, I wouldn't wish it on my worst enemy, but that's the situation that we were in. We had to take those decisions and I think they were the right decisions.
Well, I am afraid I am not in a space where I can debate that with you just now, Mr. Gormley, but I would not act in the way you suggest. Ms Harney, you say in your statement, "I am proud of the economic and social achievements over the period [in government].", and in the Oireachtas core documents, Vol. 2, it says, I'll quote very briefly, the Progressive Democrats 2007 election manifesto claimed that, in government, the Progressive Democrats will "Continue our successful policy-approach of significantly increasing housing supply to reduce the cost burden on homebuyers". Ms Harney, evidence on this inquiry asserts that between 1996 and 2006, coinciding largely with your time in government, saw the price of an ordinary home increase each year over those ten years by the equivalent of the average industrial wage - each year, the equivalent of the average industrial wage. How can you describe that as a successful policy?
Ms Mary Harney
Well, Deputy, I think it's fair to say living standards were raised substantially during that period. The take home pay of lower income groups and middle income groups were substantially increased. We ... even in the worst day in 2007, 2008, there were 1.7 million people in work in this economy. In the late '80s, there were 900,000 people at work. So we generated huge employment, huge opportunity, reduced both unemployment and long-term unemployment, in particular. And, yes, there were issues around the property. It was among the reasons why in that election we advocated a change in stamp duty. Two people in Dublin selling an apartment, a young couple, if they were both single with an apartment worth €300,000 each, which wasn't huge in Dublin, had to pay the equivalent of more than the average industrial wage by way of stamp duty and we advocated that too. The view taken, Deputy, was a greater supply might reduce the cost. It was the shortage of housing in particular parts of Dublin, mainly to do in which the manner in which we develop housing in this city-----
Finally-----
Ms Mary Harney
-----that led to the huge rise in prices.
Yes, finally, Ms Harney, in evidence to this inquiry, Mr. McWilliams ... referring to a "Prime Time" October 2003, where he said:
The Irish housing market is a scam. It is an enormous financial swindle that could potentially confine an entire generation of young Irish people to years of bad debt. Far from being a reflection of economic vitality and fundamental demand the housing bubble is, in the main, a vacuous financial confidence trick that has been foisted on us by an alliance of banks and [...] landowners.
Then he referred to the price of an average home close to ten times the average wage. Do you agree with his analysis now?
Ms Mary Harney
Well, Mr. McWilliams wasn't in touch with me in the same way that he was in touch with Mr. Gormley and I hadn't recognised until this meeting the extent of that engagement. I agree with some of Mr. McWilliams' analysis - not all of it but I agree with some of it. But Morgan Kelly, when he published in 2006, made the point that at that stage it was too late to stop the property bubble. So different people put forward contrarian views but the view that the Government went with, Deputy - and this is where I said earlier that we should have been more questioning - we went with the consensus that there would be a soft landing in the property market and we based our election manifestos in that election on a ... and most parties did on the basis of a 4.5%, 5% growth figure. Clearly, neither of those situations turned out to be the case.
Okay, thank you very much. We'll now move to wrapping things up. Deputy Phelan, three minutes.
Thank you, Chairman. Briefly, for both of you, was there a discussion at Cabinet prior to the guarantee of the figures from the Department of Finance that showed that the country had gone officially into recession which became known, I think, to the Department from 25 or 24 September? Was that discussed at that Sunday meeting or at any other meeting?
Mr. John Gormley
Well, my memory of that it was discussed even before then because I do recall getting a-----
Okay.
Mr. John Gormley
-----phone call from Minister Lenihan telling me that the budget will have to be brought forward, that things are very serious and we are going to have to act on it.
That's fair enough. Can I ask again, Mr. Gormley, maybe outside of the discussions with Mr. Cowen, Mr. Lenihan and the correspondence and phone calls with Mr. McWilliams, did you seek the advice of others at the time?
Mr. John Gormley
At the time? No, I don't recollect discussing the issue with other people.
Okay. For both of you, were you aware prior to the contribution of Mr. Cardiff to the inquiry that he expressed the view here in his statement and in his evidence that Minister Lenihan did not have full and frank discussions on matters concerning the banks at Cabinet because he was afraid that such matters would be leaked? Were you aware of that at the time or when did you subsequently become aware?
Mr. John Gormley
I knew that was a concern of Minister Lenihan, and I knew that was the reason why he had to be circumspect, because if it did leak it was a serious ... it would have been a serious matter.
Okay.
Mr. John Gormley
And so I can understand. But, you know, I am of the belief that he did not know that there was to be a crisis meeting with bankers on the 29th.
Ms Harney?
Ms Mary Harney
I always found Minister Lenihan to be very frank and open with me in any engagement I had with him, and generally very revealing. He did worry about leaks, obviously, for the very obvious reasons that if something inappropriate is leaked it can be self-fulfilling. I wasn't aware that Mr. Cardiff made that point to the committee, but it's probably true. Very often a line Minister would inform people that aren't of the same party in a way that they mightn't inform their colleagues, and that's not a reflection on their colleagues, it's just they want to keep things as tight as possible. I think that was the perspective he had.
Okay. Finally, Mr. Gormley, were you aware that the NTMA, on the night of the guarantee and before it, held a view that a blanket guarantee wasn't the optimum solution in their view? And do you believe that as the effective funders of the State that they should have been involved and in the room directly in those discussions on the night concerning the guarantee?
Mr. John Gormley
No, I did not know that. Nor did I have the information relating to the outside advice. I think Merrill Lynch, etc. I only became aware of that subsequently.
In light of that and, I mean, I don't want to harp on, I raised it earlier with you, but you were in Sandymount on the night. You weren't in Ballydehob, and you weren't in-----
Mr. John Gormley
Well, I wasn't actually, I was in Ringsend.
Ringsend?
Mr. John Gormley
Okay.
Possibly even closer than Sandymount, or I'm not sure, maybe Deputy Murphy might know the geography better. But in light of that fact, I mean why did you not when you were presented with the opportunity, we know that the NTMA were in the room next door to the meeting, they weren't involved, perhaps even your presence might have led to them being included in the discussion. Why did you not take that opportunity to be present?
Mr. John Gormley
Well, first of all, I didn't know that the NTMA were there. I didn't know about the advice that you have just spoken about. And, frankly, Deputy, I don't think my presence there would have changed things one iota. I mean, the presentation again is one of "the night of the guarantee". The fact is that this had to go through a process, and the AG was very clear on this, that this was legislation that had to be agreed. So it was open to people the very next day, if they had concerns, they could have raised concerns there. Likewise, as the legislation was progressing. But the fact is that we didn't have those concerns and I didn't see, you know, it as a ... it wasn't the priority for me to go in at that stage because I had, as far as I was concerned, dealt with the issue in my own mind. And I was very clear at that stage that this was the right decision, and I still hold the view that, under the circumstances, it was the least worst decision.
Thank you.
Thank you very much. Deputy McGrath.
Yes, thank you, Chair. Mr. Gormley, in your witness statement you mention a report from 2010 from NUI Maynooth in relation to ghost estates. What steps did you and the Green Party take in the 2007 to 2010 period to improve the planning system in a way that reduced the number of ghost estates that might be abandoned?
Mr. John Gormley
Well, there was quite a number of things that we did, Chairman.
I can go ... first of all, there was the planning legislation that I introduced, which was to ensure that the way councillors approached rezoning was in a completely different way. that it wouldn't give rise to these ghost estates in the future. The fact is that if you look at the amount of land that was rezoned at that stage ... at the height of the boom, I think it was 44,000 ha, when, you know, that was 32,000 ha more than was needed. And so, in the planning legislation that I introduced, we said that each council had to have a core strategy, that they had to have evidence-based zoning, that they had to get experts in, and that it just couldn't be done in the haphazard way that it had been done up until then. I also initiated a number of planning inquiries because it had come to my attention that there was corruption taking place - a number of complaints from various members of the public. Unfortunately, those inquiries were shut down. The final thing that we did, and it's important ... I really do believe it's important because you can go right back to the Kenny report, back in the '70s, which recommended a windfall tax to deal with this sort of corrupt over-zoning that we were witnessing - that's an 80% windfall tax. And then we went through a tribunal dealing with the corruption, and that tribunal recommended a windfall tax. We introduced it, and it was a good measure. It should have been retained and, unfortunately, it was ditched as well, and I find that very regrettable.
Okay. I'd like to just go back to the issue raised by Deputy Doherty, and, especially with you, Mr. Gormley, about the solvency of Anglo because it is an important point, and there was a PwC report, Project Atlas. There was one in September '08, one in November '08, and one in December '08, and then a summary of it was prepared for the regulator and the Department in February '09. It didn't raise any solvency issues; in fact, they concluded that even under the most stressed scenario, in terms of the assumptions, that the minimum capital requirements would be maintained by Anglo-----
There's interference coming there by you, Deputy McGrath, so I'll just give you a bit of time in that, but, I ... just, it's just-----
So, I'm ... and, I think, to my recollection, this is the first evidence from somebody that there was an awareness in government level of the solvency issues in January '09, so I think it's important that you're certain of that. So, can you be ... can you clarify when, to your best recollection, you were told that Anglo was insolvent?
Mr. John Gormley
I can't. As I replied to Deputy Doherty, I can't give you a precise date. I'm more than happy to consult and to send in information to you on that.
Okay.
Mr. John Gormley
I do know that Anglo themselves tried to persuade people in government that they were going concern, that everything was, to use ... it wasn't fine, but they were telling us that they could continue on. And, as I said - and I will consult afterwards - my colleague at the time, the finance spokesperson, Dan Boyle, was the one who said, no, we've ... there is a problem. Now, and that came from information that was supplied to us by Eamon Ryan, but I'm more than happy to go back, and, can I say this, Chairman? Eamon Ryan took copious notes, and those notes are now in the UCD archive. I suggest that they should be here, in front of you and your committee, because they're the best notes. In fact, at one stage other members of the Cabinet used to get a little bit irritated there were so many notes being taken. But they're there, and I think they would provide an important insight for this committee. And I would suggest that, not only do you get hold of those notes that are in the UCD archive, but that you would also interview Eamon Ryan as well.
Okay. Thank you, Mr. Gormley, and finally, Chair, if I may-----
Certainly, yes, sure.
Just very finally, on page 8 of your witness statement, Mr. Gormley, under the heading of the "3rd quarter [of] 2010", you refer to asking the Taoiseach to bring in the leaders of the Opposition in the Dáil to explain the situation and to seek a form of national co-operation as to how we could manage our way through this period. Can you clarify when that was? Was that October, November 2010, prior to the bailout negotiations? And, then you say that that did happen, that there was a meeting. You might clarify who attended that.
But then you say, presumably referring to the Opposition, "refused to enter any collaborative arrangement to manage the considerable risks that face the country." So can you clarify what was considered at that time? Was it kind of a Tallaght strategy-----
Mr. John Gormley
Yes.
-----that there would be a national consensus at a political level? Can you just clarify who was there, what was it about, what were you hoping to achieve?
Mr. John Gormley
Okay. I'd have to get you the exact date but my recollection is that the meeting took place in the Taoiseach's office. I was there, as was the leader of the Fine Gael Party, Enda Kenny, as was the leader of the Labour Party, Eamon Gilmore. I have to say I was disappointed in the response. I suppose, from a political point of view, it's understandable that the leaders of the Opposition were not interested in a type of Tallaght strategy, as you put it. What they wanted was a general election. You know, I was quite prepared at that stage to say to people "Look this is a national emergency. This is what this country is going through right now. We need to co-operate and if that means that we co-operate for a period of time and then have a general election, so be it." Now, it was not a runner - immediately, I could see - and, in fact, I heard that before we even went into the meeting that there had been a statement made to some of the newspapers to say that they weren't interested. During that meeting, my memory is that Deputy Kenny, as he was then, was quite silent - he didn't say that much. Deputy Gilmore was a little bit more aggressive in saying he wanted a general election now and that was the end of it. And ... so that's how it turned out. I was particularly disappointed then afterwards because you may recall that the Green Party then subsequently left Government and we voted for the Finance Bill from the Opposition benches. And Eamon Ryan, at that stage then, tried again and he approached Simon Coveney with an offer. And the offer there was ... it related to a motion of no confidence and Fine Gael and Labour said that they would vote ... they would withdraw their motion of no confidence and the reason for that was that we had made it very clear that we would have no option at that stage, because we had withdrawn from Government, that we would have to vote with the Opposition. And so, therefore, if they had voted, at that stage, no confidence in the Government, the Government would have fallen and the incoming Government would've had to introduce the Finance Bill.
Now, from a political point of view, I have to be quite frank with you and say that was my preference - you know, let someone else do the heavy lifting - because I was a little bit peeved at what happened previously, when I had tried to extend a hand of co-operation and it was, you know, put aside. In the end, a deal was done. I think ... if I ... I was not at that meeting. I think Eamon Ryan was at that meeting,. If I recollect correctly, perhaps Senator Doherty, as he was then, was at that meeting. And, you know, it was an arrangement that was made. We voted from the Opposition benches for a terrible Finance Bill and that sealed our fate, you know. I mean, we had to go into an election after that.
Do you regret that now?
Mr. John Gormley
Well, you know, at times of course you might regret doing that but it was, from a political view ... but it was the right thing to do for the country. And ... but you sometimes don't get kudos for doing the right thing.
Thank you, Deputy McGrath. Thank you, Mr. Gormley.
Chair, can I ask for clarification? Given the weight of importance that Mr. Gormley has given to Mr. McWilliams' correspondence ... that we just ask Mr. Gormley why it was he chose Mr. McWilliams because no one else has asked that question? Why was it Mr. McWilliams that you chose to be the one to ask for advice? Thank you, Chair.
Mr. John Gormley
Because Mr. McWilliams was ... there were very few people that called it right in relation to the bust. Mr. McWilliams did call it correctly. He was right and so I wanted to get a different perspective. I wanted to find out from someone ... I found him to be engaging, personable, quite enthusiastic and he had ... I had met with him down in my Department. He'd also been on the ministerial corridor, we had had chats. I don't say I ...I knew him very well but I ... I knew him reasonably well, on a professional level, and I listened to his advice and I found him to be, as I said, very co-operative and that's why I spoke to him.
I had had some contacts with him and I used those contacts. I didn't have contacts with other economists and, in any case, as I said, the two people that were right about the bust were Morgan Kelly and David McWilliams, as far as I can recall.
Okay, thank you very much. I'm going to bring matters to a conclusion. If, maybe in reverse order this time, if you wish, if there's any closing remarks, comments or additional things you'd like to say, Mr. Gormley and Ms Harney. Ms Harney?
Ms Mary Harney
No, Chairman. I'd like to thank the committee for their courtesy and I want to wish you well. I think the work you have ahead is important. It will certainly, hopefully, add to our ... not only our store of knowledge that we've already received from other reports, from Honohan and the other people that have ... Watson and so on, but also that I think it will hopefully improve the economic management of the country. And, I suppose, if there's any message, it is that we all need to be more questioning than perhaps we were, particularly when there's a national consensus. I think that is a time for parliamentarians, particularly members of Government, to get behind that and to be more questioning and that's something I think that we overlooked in ... during the period that we're talking about, during the run-in to the recession.
Thank you very much, Ms Harney. Mr. Gormley?
Mr. John Gormley
I would just like to add one thing. I think reference was made, at a previous hearing, to Paul Gallagher, the Attorney General-----
Yes.
Mr. John Gormley
-----and the Green Party attitude, there was reference made in Dan Boyle's book. Now, I can understand why it is that political parties would feel that the AG's office is a block; it's quite natural. You know, the AG's office goes through things line-by-line and says, "You'll have to go back." And it prolongs the legislative process. But from my own point of view, I hold Paul Gallagher in very high regard. He was of enormous assistance to me. He worked extremely hard. He's dedicated to public service. He helped me particularly on the issue I was dealing with, which was the incinerator. I was at the time ... I was told at the time that if I didn't deal with this properly and work on it and take it step-by-step in a very measured and legislative way, that they could pursue me personally. This is the ... and Paul Gallagher helped me out and I'm very grateful to him for that and I just want to put that on the record.
And finally I want to say, Chairman, I think this is an important committee. It's important that your report is very thorough, that you go through every single thing. I don't think, to be quite honest with you, that even with the best will in the world, and putting in all of these measures, that you will avoid in the future another bust. It is part of the cycle. But you can, I hope, mitigate those circumstances and ensure that, in future, we don't come down with such a thud.
Okay, with that said, thank you very much, Mr. Gormley and Ms Harney, for your closing comments. In doing so, I'd like to thank the both of you for your participation today and for your engagement with the inquiry. In thanking you again, to now formally excuse you and to suspend the meeting until 6.45 p.m.
EBS - Ms Fidelma Clarke
With the committee's permission, I'll go back into public session, is that agreed? Agreed. And we now move on to our fourth and final session of public hearings today with Ms Fidelma Clarke, former chief risk officer with EBS. And just from the outset, apologies for-----
Ms Fidelma Clarke
Not at all.
-----delaying you today, Ms Clarke, and we'll get proceedings under way as quickly as we can now.
Ms Fidelma Clarke
Thank you.
So, therefore, the Committee of Inquiry into the Banking Crisis is now resuming in public session and can I ask members and those in the public Gallery to ensure that their mobile devices are switched off. This evening we continue our hearings with senior figures from the EBS and I welcome to the meeting Ms Fidelma Clarke, former chief risk officer at EBS. Fidelma Clarke was chief risk officer of EBS Building Society from 2009 to 2012. Prior to this, she was company secretary and held a number of roles in the society in risk, credit policy and customer service. She joined AIB in December 2011 and is currently head of risk analytics, reporting to the group chief risk officer. In 2012, Fidelma was appointed as non-executive director of EBS Limited. Ms Clarke, once more, you're very welcome before the committee this evening.
Ms Fidelma Clarke
Thank you very much.
Before hearing from the witness, I wish to advise the witness that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If you are directed by the Chairman to cease giving evidence in relation to a particular matter and you continue to do so, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given. I would remind members and those present that there are currently criminal proceedings ongoing and further criminal proceedings are scheduled during the lifetime of the inquiry which overlap with the subject matter of the inquiry. Therefore, the utmost caution should be taken not to prejudice those proceedings. Members of the public are reminded that photography is prohibited in the committee room. To assist the smooth running of the inquiry, we will display certain documents on the screens here in the committee room. For those sitting in the Gallery, these documents will be displayed on the screens to your left and right. And members of the public and journalists are reminded that these documents are confidential and they should not publish any of the documents so displayed.
The witness has been directed to attend this meeting of the Joint Committee of Inquiry into the Banking Crisis. You have been furnished with booklets of core documents. These are before the committee, will be relied upon in questioning and form part of the evidence of the inquiry. So if I can now ask the Clerk to administer the oath to Ms. Clarke please.
So, once again, welcome before the committee this evening, Ms Clarke, and if I can invite you to make your opening comments please.
Ms Fidelma Clarke
Thank you. I have been asked to provide a witness statement in relation to my role as chief risk officer and company secretary of EBS Building Society. As you've said, Chairman, I was appointed chief risk officer in January 2009, reporting the to CEO, Fergus Murphy. From that time, I also had a dotted reporting line to the chairman of the board risk committee. I had been appointed company secretary in July 2008 and resigned from that position in June 2009 to concentrate on the demands of the chief risk officer role. Given the hour, I thought what might be most beneficial for the committee would be for me to drive some of the key themes from the written statement that I have submitted and, with the benefit of some time for reflection, some of the lessons learned.
The route cause of EBS's financial difficulties were set out in its restructuring plan submission to the EU Commission in May 2010, comprehensively covered by Professor Nyberg and have been discussed by this committee earlier today and also last week. These were: a decision to step up lending to the land and development sector at the height of the Irish property boom and insufficient management oversight of this lending; strong growth in EBS's residential loan book in response to competitive pressures; the fact that EBS was a moderately-capitalised business albeit, within regulatory requirements; and an over-reliance on wholesale funding. The board of EBS took the decision to enter into land and development sector in 2002 and to step up this lending in 2005. Controls put in place to mitigate risk weren't sufficient in the face of the timing of the decision and the scale of the financial crisis which ensued.
The growth in residential mortgage lending over the period 2000 to 2008 is a reflection of the strategy of the board of the society to retain EBS's mutual status and remain a relevant mortgage provider in Ireland. This necessitated moving with the market. Numerous changes to credit policy were approved, which allowed customers borrow more than they had in the past. At each stage, the options were clearly documented and considered by the executive and the board before approval. Increased risk appetite, as set out in the society's policies, was supported by a strong economic climate, improved demographics, higher income and lower tax levels - all of which improved loan affordability. Loan exposure was limited with mortgage indemnity insurance. Significant investments in underwriting systems, models and management reporting were made. The long-established management controls in place, including centralised underwriting, loan affordability assessment, mortgage indemnity insurance and independent property valuations, were insufficient to withstand the scale of the economic downturn and the significant correction in house prices.
In terms of its capital position, EBS operated within regulatory capital requirements throughout the pre-crisis years. But its tier 1 capital ratio of 7.9% at the end of 2008 was inadequate to absorb the unprecedented level of provision losses arising from the crisis. The PCAR II and PLAR exercises in Q1 2011 resulted in a required tier 1 capital ratio of 22.5%. Finally, in relation to the liabilities side of the balance sheet, the reliance on cheaper wholesale funds of all credit institutions has, I believe, been extensively commented on.
Between 1999 and 2007, EBS's loan book grew by 300%, while deposits grew by 170%. Similar to other institutions, the gaps that ... had been funded through wholesale funding and international corporate deposits. As we now know, this was an unsustainable model and new regulatory requirements in relation to loan-to-deposit, liquidity coverage and net stable funding ratios are in place to prevent a recurrence of this situation. Accountability for these failings was demonstrated to members in the stepping down of the chairman of the board and the finance director early in 2009.
In terms of the risk management of the society, Professor Nyberg expressed the view that the risk management system in EBS was not adequately resourced and seems to have lacked influence within the bank. Looking back, and with the benefit of hindsight, I agree with him, although I do not believe that this of itself contributed significantly to the overall outcome for EBS. The risk team was established in 2002, comprising three people. It's responsibilities were set by the chief risk officer. These included establishing and providing input to a credit risk committee, an operation risk committee and a capital committee over the period 2003 to 2006, documenting the society's risk governance framework, developing a risk assessment process for each function, ensuring that all of the organisation's risk policies were documented, developing an enterprise risk report for the chief risk officer with inputs from across the society on key risk trends and risk positions, delivering the Basel II programme, which included the new requirement for capital assessment, the ICAP process, an internal capital adequacy assessment process, modelling and reporting on requirements - a significant undertaking between 2004 and 2008 - also developing loan-loss provision models to meet aspects of the new international financial reporting standards and building and submitting new regulatory reports on liquidity, asset quality, large exposures and impairments.
The credit risk committee was chaired by the chief risk officer and comprised representatives from the business areas, credit underwriting, the distribution channels, and risk. Its role was to monitor risk trends and review proposed changes to policy in line with the society's approved strategies for onward recommendation to the executive and board. The risk team was not involved in strategy formulation, approval or implementation in terms of day-to-day business operations, nor was it involved in the credit approval process. This was managed by the commercial business and residential underwriting and from 2005, a commercial underwriting unit. There was a senior management credit approval committee, called the loan advances committee, made up of business, credit and senior management, and separately, a subject which the committee has touched on earlier today, a board credit approval committee, comprising non-executive directors and members of the executive.
This committee has heard there have been many regulatory developments in the area of corporate governance and risk management as a response to the financial crisis. Risk management is not confined to risk specialist or control functions. Current corporate governance for financial institutions is set out on a three-lines-of-defence model. Business units are the first line of defence and are primarily responsible for managing risks on a day-to-day basis, taking into account the institution's risk tolerance and appetite, and in line with its policies, procedures and controls. The second line of defence is a risk management function, which is independent of operations and management. Its role is to challenge decisions that affect the institution's exposure to risk and to provide comprehensive and understandable information on risks, enabling the board to understand the institution's overall risk profile. The third line of defence is an internal audit function, which assesses the adequacy of the operations of the other two lines. Today, good governance requires that a chief risk officer should be an independent senior executive with distinct responsibility for this job.
In EBS these standards commenced with my appointment as a dedicated chief risk officer and member of the executive team in 2009. From 2009, I presented a detailed risk report to the board each month with an independent assessment of the level of risk being run in various key areas and the actions management were taking to mitigate risks. The number of board risk committee meetings increased and I met regularly with the chairman of the committee to discuss the risk position and outlook for the organisation. The board credit approval committee was disbanded and board training programmes were extended. We developed a risk appetite statement setting out the board's limit of risk appetite in each area and monitored and reported on adherence to this risk appetite statement on a monthly basis.
A number of actions were taken to mitigate, where possible, the extent of the downturn in the Irish economy and property market on the society's balance sheet and to manage the business on a day-to-day basis through the global credit crunch. Lending criteria were tightened. We brought in external, experienced credit resources to advise us on how to manage our business through a downturn.
The credit function was reconfigured to manage distressed assets and those at risk of becoming distressed. From the first quarter of 2009, we conducted quarterly reviews of at-risk and impaired cases which informed provision estimates. We commissioned an external firm to review potential mortgage debt solutions in place internationally and we presented the findings of this review to the Oireachtas committee in 2009.
We completed a number of control enhancement programmes. These included enhancements to commercial property documentation and security and deeds management. It ensured that no legal discounts were applied by NAMA, nor capital add-ons applied by the regulator, as a result of missing or incomplete data or documentation. And, of course, throughout the period 2009 to 2011, we monitored funding and liquidity positions very closely and took all actions available to us to avert the risk of a run on deposits and to make contingency plans for that eventuality or possibility.
Some concluding remarks, if I may? The crisis and its aftermath have been debilitating in terms of Irish people's financial health. I fully acknowledge my share of responsibility, together with all who worked in EBS in the pre-crisis period, for that failure, however unintended. From 2009, I worked to the best of my ability with the executive team of EBS, overseen by the board, to minimise, where we could, its impact on customers, on EBS and on the economy. And I am sorry that we could not do more.
Concerns of a housing bubble at the start of the 2000s dissipated in the face of sustained economic growth and the apparent levels of increased wealth, reinforced by positive commentary from external bodies and commentators. The system misjudged both the probability of an economic and property market collapse occurring, and its impact in terms of loan losses when compounded by an international credit crunch - a one-in-100-year event. It has taken more than six years to fully realise the impact of the deterioration in asset quality which concluded with the publication of the European Central Bank's comprehensive assessment results in October of last year.
In the past, policy followed strategy. Risk appetite and risk capacity are now considerations which feed into banks' strategy-setting processes. Limits of risk appetite, in pursuit of the agreed strategy, are set out in banks' risk appetite statements. Regulatory mandated recovery plans ensure that early warning indicators inform banks where action is needed to prevent bank failure.
Excessive competition must be curbed where it threatens the stability and soundness of the banking system, a concept at the heart of conduct risk considerations. And I think the recent example of the loan-to-value cap for first-time buyers is a welcome development in this regard.
Finally, it may sound self-evident to state that banks are, at the end of the day, credit institutions. There needs to be sufficient credit expertise and credit risk evaluation at each level of the organisation, from the boardroom to the bank branches. Thank you very much.
Thank you, Ms Clarke, thank you. We will commence questioning and in doing so I'll invite Senator Barrett.
Thank you, Chairman, and I echo with the Chairman's welcome to you here this evening. Just in your own address to us, that you sent in in the core documents you said the traditional conservative approach to lending in EBS unravelled in the period 2000 to 2007. Would you like to expand on that?
Ms Fidelma Clarke
Yes, I mean, I don't think I'll be saying anything that other people who've attended the committee haven't said. Competitive pressures put institutions in a place where they made decisions to extend their credit criteria in a way they hadn't prior to that. It was informed by enormously strong economic growth from the mid-'90s, affordability was very substantially improved with the reduction in tax rates and the low interest rate environment. Also, there were a number of households where there were two incomes rather than one income as women returned to work, given the demarginalisation of the tax rates. So decisions were made very much informed by a very positive economic environment and a view that that positive economic environment would be sustained. We now know, with the benefit, of course, of hindsight, that that wasn't the case and the soft landing that people spoke about for many years in the early 2000s became a very, very hard landing at the end of the day.
There's two examples of the unravelling that you described. Book 1 at page 143 and book 1 at page 147.
The first one refers to loan approvals of €54.7 million sought for noon the following day, increasing the connected exposure to €88.7 million, and the second one is a 24-hour turnaround for approval for €23.96 million. It's hard to imagine anything further from the model of a group of teachers assisting each other with their house expenses. So, what was going on at that time?
Ms Fidelma Clarke
Well, I suppose, as I've said, I was part of a risk function. I wasn't part of the executive and I wasn't involved in the loan approval process but, clearly, what happened was that the society made a decision to step up its lending to land and development sector. To support the approval of larger loans, it had established a board credit approval committee in 2003 and I think, probably not unlike any other institution, it had a process in place whereby loans were approved within a certain period of time, generally 24 hours. It was one of the issues that the chairman of the board risk committee raised with me when I became chief risk officer, that he had felt that non-executive directors shouldn't actually be involved in credit decisions. And we made the decision, reasonably quickly, to close the board credit approval committee.
Okay. I see, on page 4 of your document to us, "Having recognised that it could not survive in its current form, EBS was [doing the things you just described]". Mr. Murphy did present to us that it could've survived and that building societies of the traditional kind have survived in the United Kingdom, for example. Did we throw out the wrong kind of organisation?
Ms Fidelma Clarke
It ... it would be nice to believe that the EBS of the 1990s, where I cut my teeth ... I joined it in 1991, I was doing a master's with Trinity and I wanted to find out the difference between an annuity and an endowment mortgage so I joined it for six months and I stayed there for a very long time thereafter. I think it would be nice to believe that that society model could have been sustained. My own personal belief is the availability of credit and the very intensive competition in the market from the early 2000s meant that had EBS decided to retain its 1990s model, if I can call it that - the one I was familiar with - I'm not sure that any board would have - and I am speculating, so let me say that - I'm not sure that any board would have voluntarily taken itself out of the market that it felt was its business to be in and that was providing mortgages to homeowners, traditionally teachers, guards and PAYE workers.
Because wouldn't the cost base have been much lower, almost, as you say, a financial introductory service of new teachers to existing teachers and guards and so on? I mean, we have some executive pay of €700,000 a year, somebody getting €1.87 million departure money and so on. I mean, did the EBS lose the run of itself in that ... in the model it was adopting compared to its traditional one?
Ms Fidelma Clarke
Well, it was a different model but it was operating in a very, very different time. I've seen the numbers in relation to remuneration. I saw them probably the first time that you did. Not everyone was being paid anything like the levels that you're seeing there so I wouldn't say that it was ubiquitous across EBS or anything like it. And, clearly, they related, in the main, to members of the executive rather than people who were at middle management or lower management.
The movement to wholesale funding away from deposits, was that regarded as a risk from what you've found looking at how the society was evolving?
Ms Fidelma Clarke
Yes. I suppose, I mean, I had the benefit ... or not the benefit but certainly the position of looking backwards when I became CRO in 2009 at what had happened before. We did a lot of backward review in preparing our submission to the ... for the restructuring plan. So it is clear - again, with the benefit of hindsight - that the availability of credit and the ... on one side, and the demand for ... availability of wholesale funding ... and the demand for credit, on the other side, coincided and all financial institutions moved away from purely funding their balance sheet with ... their lending with deposits.
I suppose in a ... in the environment in which Ireland was operating, there wouldn't have been sufficient savings to fuel the type of growth that we saw in the 2000s.
Then, just arising also, the ... November 2008, the treasury department looked for an increase in the lending lines to the other covered banks in order to invest in their unsecured debt. Was that, sort of, the green jersey agenda that was spoken of at the time?
Ms Fidelma Clarke
Forgive me, I just didn't hear which document you're referring to.
No, let me repeat that. It's November 2008, the treasury department looked for an increase in the lending lines to the other covered banks, in order to invest in their unsecured debt and to have them reciprocate. Was that the green jersey, kind of, agenda? That is in Vol. 2, page 105.
Ms Fidelma Clarke
Yes, and an item that I believe arose earlier today and also last week.
Ms Fidelma Clarke
I think ... and the reference to me is, I suppose, I was sitting at the meeting in my role as company secretary at the time. There is a paper that, I think, follows that board minute, which is from the group treasurer, and sets out the proposal to provide those lines of credit and to increase, therefore, the overall line of exposure to the sovereign. As both Alan Merriman today, I think, and Fergus Murphy said last week, there was, I believe, a view that that would ... that was not a particular risk for the society at that time. They were all for banks and institutions that were covered by the guarantee scheme and I think you'll see in the treasurer's note that what was being proposed were lines of credit that would be fully covered by the guarantee scheme within the terms of the guarantee scheme.
Also in your ... the paper that you sent us, there's an interesting item as part of the reforms when you came in, "An external firm was appointed to manage abandoned properties." With so many empty houses built during the Celtic tiger era, your experience will be of interest, I think, to me certainly.
Ms Fidelma Clarke
So, this would have been a situation whereby people who had either rented or were living in properties had left. In some instances, it might have been that they emigrated and, therefore, to protect the asset, we appointed a firm to take security, change the locks and make sure that the property was being minded.
Okay. Could I refer to ... there's a contrast, isn't there, I think, between what was called light-touch regulation but in fact, a fairly substantial level of adverse findings, over a long number of years, by the regulator where EBS is concerned. In Vol. 2, page 175, there is a letter, I think in 2003, pointing out this. And they go right up to 2008, so there seemed to be a period, a long period, where this was a problem. Page 175, I'll come to that one first, if I may. Thank you, Chairman. "The examination" ... and this one is from Dr. O'Reilly, who was the then regulator, it "raises questions about the maintenance of lending standards in your institution. ... a plan of remedial action addressing all of the issues [is due by the] end September".
And he wrote on 31 July:
We [...] request that the stated residential mortgage lending policy or institution should be reviewed and ratified by your Board at its next meeting. [The] policy should incorporate the guidance on prudent loan assessment given by the Central Bank in July 2001 [...]
So that's, you know, in a sector which has been described as light-touch, that's fairly hands-on, requiring you to do very definite things in regard to prudent lending, for example.
Ms Fidelma Clarke
Yes. So, absolutely, the regulator conducted regular - and continues to - inspections, where they come on-site, they request a number of loan files and they review them in detail, absolutely.
And on foot of that, they come up with a number of findings that you'll see through these core documents, that you'll have seen. For those not in financial services they can look, and are, extensive.
In terms of the responses, we have typically found that a number of the individual items can be answered by return so it's not the regulator inspection team doesn't see or can't find a piece of documentation when they're actually on-site. They have always been taken extremely seriously by EBS and I think they're response which I know is a draft version which follows from the letter on page 175, from the then chairman underlines that ... underlines the importance with which the society takes these findings. In this particular instance, I think there is confirmation that the policy was reviewed and ratified by the board in March 2003 and that it did take into account all of the prudent lending guidelines as set out by the regulator.
And yet as you go on to page 49 of Vol. 1, and this brings us to 2007 I think, yes it is. Where there's a very strong letter from Yvonne Madden of the Financial Regulator to Mr. McGovern, and by my count there are 85 adverse findings and 93 recommendations and, you know, around page 63 there's ... 63 and 64, there's just adverse finding on top of adverse finding - no evidence of assessment, no evidence of intention to rent a room-----
Ms Fidelma Clarke
True.
-----no evidence of assessment, no details to explain the increase, no verification of income. So, the fact that this was four years after the 2003 letter, was the society lax in responding to the regulator? What was going on? Because this ... that, and another one in 2008 that ... there's a very high level of adverse finding from the regulator and a very high level of recommendations, going over about a five-year period.
Ms Fidelma Clarke
Certainly, the society took, as I said, the findings very seriously. There ... in terms of the individual findings for individual cases, as I think I've mentioned and others have mentioned, in general they were able to be dealt with by return in terms of reviewing the loan files and providing an update on each case or a piece of documentation that maybe the inspectors, when they were on-site, couldn't find.
The operations of the society were of course continuously reviewed by both its internal audit function and the external auditors. And because EBS was involved in securitisation programmes and establishing covered bond banks, one of the, I suppose, ancillary benefits for a financial organisation at the time was that in order for loans to qualify and in order for any institution to be able to issue a bond, independent inspectors would come in and review substantially large numbers of cases. And the ... if you didn't hit a 99% or 98% tolerance rate in relation to what documentation should be on file and what was available, you wouldn't qualify in order to issue a bond. So, I don't believe that these documents represent an organisation that had very poor controls but I do believe that it was a valuable exercise on each occasion. The Central Bank, as I said, continues to do these types of inspections and banks do take them very seriously.
Could I look at page 95 in that volume, if I may? This was, I think, in the early days of diversification. It's a board minute of 31 May 2002 and there were approaches on that page - "Go for Broke" or "Toe in the Water".
And when you turn over, the commercial property market, which was what they were going into, the document itself says "Annualised [...] returns over the period 1990 to date (peaked at 38.2% in 1998, now down to just below zero)". And when you go to year-to-date performance, the third item is, "Activity in the investment property area is down on last year (not surprising in view of the negative returns)". So were the signs not there that diversifying away from a business which they're very good at, going into areas with returns below zero or negative returns, as on the ... page 96 there?
Ms Fidelma Clarke
Yes. Unfortunately, I can't give you any witness information in relation to that. It dates to a time long before my appointment to either the executive team or the review. I have seen this document in the booklet of documents. I think, though, going back to where commercial property lending started in EBS, based on what I have seen in the society's records, it commenced in the early 1990s as a result of a change in building societies legislation. And, at that time, EBS had a four or five ex-ICC members as senior executives, including the chief executive, who would have taken a decision to enter slowly into the commercial property sector and to limit the amount of lending to the commercial property sector to, I believe, 15% of the overall balance sheet. I don't believe that percentage was ever exceeded. And based on what I have seen, the intent was to create some form of diversification of risk because as a primary building society in Ireland, you had a very high level of concentration risk. All of your assets were relating to residential property in one jurisdiction, which is one of the reasons that EBS, from ... actually from the 1970s, had put mortgage indemnity insurance in place. And in the early 2000s when other institutions had other forms of types of insurance, including ... or moved away from mortgage indemnity insurance, and at a time where customers no longer wanted to pay for the bond that would need to be put in place, EBS took the decision to continue to put that insurance in place itself and to pay for it.
On page 126 - thank you - on that volume-----
Ms Fidelma Clarke
No problem.
-----there's the plan ... the "Key Business Drivers Behind the Plan" ... "Tracker mortgages will account for an increasing proportion of business - rising from 5% today to 60% by 2008." Did they misunderstand the nature of tracker mortgages, given what we now know?
Ms Fidelma Clarke
It's ... with the benefit of hindsight, tracker mortgages were clearly a product that produced a very, very low return and didn't really include a risk premium. I think no one would argue with that with the benefit of hindsight. Again, unfortunately, I wasn't a member of the executive and wasn't involved in this strategy review or presentation or discussion. Certainly, when they were first introduced and, again, in an increasingly competitive environment, they ... I believe that people felt that the risk was lower because they typically were provided to customers with very ... or at the lower end of the loan-to-value spectrum so that there was some equation of how much risk are we taking in a loan and, therefore, what price should we charge for it? But, clearly, those two things diverged, given the economic environment which ensued. And EBS was involved in tracker mortgages albeit I believe to a substantially lesser extent than other institutions, as per Professor Nyberg's report. I think he quotes EBS having an exposure to tracker mortgages of 20% vis-à-vis 50% in some of the other institutions.
Could I refer to the bonus culture, if I may? Now, that's on page 139 of Vol. 2, and it's also flagged on page 157 of Vol. 2. In 2008, €464,000 was paid in bonuses, albeit on the performance of the previous year, but the society was loss-making in 2008.
Was it ever suggested that bonuses should not be paid?
Ms Fidelma Clarke
I'm unable to help you with that unfortunately. I presume and I think what has been confirmed earlier today was that this would have been a matter that would have been reviewed by the remuneration committee at the time. I wasn't a member of either the executive or the board or certainly not the remuneration committee. All I can say is, based on my own experience, people, in the main, were not being paid bonuses of anything like this nature and in fact most salaries, including my own, would have been a fraction of some of the numbers that are on this page.
The index page for page 157, and thank you for that, in the volume, says the "need for retention bonuses for senior EBS staff - May 2011". But when you get to page 157 it's virtually entirely redacted. Were any bonuses paid?
Ms Fidelma Clarke
No bonuses were paid from the time I was a member of the executive from 2009.
It's strange that that was redacted, I thought it would be the other. But thank you for that. The first offer, I think in 2007, from AIB to buy the EBS, what was the sum that was being considered for that?
Ms Fidelma Clarke
Again, I'm sorry but I won't be able to help you with that. I wasn't a member of the executive of the board and I have no knowledge of it.
Thank you very much. Thanks, Chairman, and thanks for your assistance.
Thank you very much. Senator Michael D'Arcy.
Thank you, Chairman. Ms Clarke, you're very welcome.
Ms Fidelma Clarke
Thank you very much.
Why, as a mutual building society, did EBS see it as strategically appropriate to enter the commercial lending market?
Ms Fidelma Clarke
Again, probably a question that could be better answered by the executive or the board in place at the time. As I said, I believe that the reason that the society first got into commercial property lending was to create some form of diversification in relation to risk and also to possibly produce an income stream which was higher than the income stream you'd make from residential mortgages. But, unfortunately, I wasn't in the room and wasn't a member of the decision-making team.
You weren't a member of the board at the time, no?
Ms Fidelma Clarke
I have only been a member of the board of EBS since 2012 when I was appointed as a group non-executive director of EBS Limited.
Okay. The level of profits ... sorry, level of profit growth 25% per annum might seem ambitious in a mature market, could you expand upon that please?
Ms Fidelma Clarke
Again, difficult for me to expand upon it. I think it relates to a strategy that was put forward by the commercial business unit. I wasn't involved in the strategy formulation and wasn't in the room when it was being discussed.
Was there any consideration given to the fact that during this period the other banks in the Irish market were also seeking double-digit growth?
Ms Fidelma Clarke
I'm sorry to provide the same answer. I really would like to be of more help to the committee but I wasn't actually in the room at the time. I became a member of the executive in 2009.
The EBS increased commercial and development lending in the period from 2003 onwards. Did the board understand exactly what they were getting into at that stage?
Ms Fidelma Clarke
I would be speculating if I-----
Well, you're allowed speculate.
Ms Fidelma Clarke
Forgive me. If I spoke about the board. I think others have spoken today and last week and I, based on my knowledge, however it has been garnered, I believe the board wanted to preserve EBS as a mutual independent building society. And I think if ... and I have reread the annual report and accounts of EBS over those years and they are informative in relation to what the key areas of focus for the society were. And I suppose I'm really taking my information from there. There was a desire to do what EBS had been established to do. Provide mortgages to teachers, guards, nurses and, in the main, PAYE workers, that was EBS's core business. But through time the pressure on margins as a result of what we now know is absolutely excessive competition meant that EBS was under pressure to be able to create capital. And, I think, as Mr. Merriman has explained well earlier today, without the ability to create capital, it wouldn't have had any credit to make available to mortgage providers. And, therefore, in effect, it didn't have a business model.
And I think that influenced its view to look at whether or not it felt that there were other forms of non-core business it could get into, and I suppose, because it had entered commercial property lending in the early 1990s, it possibly felt that it had built up 15 years of experience in that area and, therefore, stepping further along the spectrum in whatever way, as we now know, was decided, was ... was appropriate at the time.
And do you think they were aware of the, the dangers that were attached to competition in that sector, was very-----
Ms Fidelma Clarke
I think that no one foresaw the extent of the downturn at that stage and had people realised the possibility of a ... I know it's called a one-in-a-100-year event, which we now actually use to inform what's called reverse stress testing in banks, so we come up with situations which will actually break the bank, and look at what would the things that a bank would need to take to prevent that, if possible, from happening. That sort of thinking wasn't in banking, I believe, in the early 2000s. And, again, I believe if people had felt that they were taking a very aggressive or, or dangerous stance that would threaten the viability of what it is they were setting out to preserve, I don't believe they'd have made that decision.
And were the skillsets ... do you think the skillsets were available within EBS?
Ms Fidelma Clarke
I think there's been a very, very substantial increase in the type of analysis that banks do in a reasonably short space of time. If you remember, Basel II, as it was called, so a new capital requirements directive which ... which effectively gave banks options in terms of their own internal modelling and capital requirements, was to say, if you've got a model internally that you use to make business decisions and you can prove that that model holds through time, we will allow you to hold an appropriate amount of capital for that. Alternatively, if you can't do that, you've to hold a standardised amount of risk. Those models were only beginning to be built in the 2000s ... The risk controls, risk functions, risk thinking, establishment of board risk committees, independence of chief risk officers, board oversight, all of those things changed very, very substantially over the past 15 years.
Were you surprised when the new CEO, Fergus Murphy, changed the direction when he joined EBS?
Ms Fidelma Clarke
I was not surprised, no. I think, as Mr. Merriman said earlier today, it was becoming evident from the end of 2007 that things were changing, certainly not to the extent of what happened. But with the collapse of Lehman's and a pressure on, on funding and liquidity beginning to be felt, and I think 2007 was the first year where there was an actual negative growth in house prices for the first time, there were signals there that thing were beginning to change and, therefore, it was not a surprise that the society looked at what the future would be and again, with a new chief executive officer in Mr. Murphy, coming to the society from ... not only from externally, but also from another jurisdiction, it would have given him, and did I believe, clear and clean eyes to look at the business model and to determine that it did need to be changed, and changed quickly.
Okay. Thank you, Chairman.
Okay, thank you very much. Deputy Eoghan Murphy.
Thank you, Chairman, and thank you, Ms Clarke, you're very welcome.
Ms Fidelma Clarke
Thank you.
Now, I'd like to look at Vol. 1 please, of the evidence books, page 41. It's a question, when exactly did you become credit risk officer? Or sorry, chief risk officer?
Ms Fidelma Clarke
I became ... I became chief risk officer on 1 January 2009.
1 January 2009?
Ms Fidelma Clarke
Correct.
Not 2007?
Ms Fidelma Clarke
No.
Okay. Here we have on ... on page 41 in ... in the volume, board meeting from 1 March 2007, and how concern from the regulator that "Alan Merriman is responsible for both the Commercial business and the Risk function".
Ms Fidelma Clarke
Yes.
And we spoke about this with Mr. Merriman at the time, and he said that the person in charge of risk at the time had access to the board and had access to management. That wasn't you then?
Ms Fidelma Clarke
I think he was referring to me as head of risk.
As head of risk, okay.
Ms Fidelma Clarke
But my reporting line was to him as chief risk officer, and I think what the regulator was referring to here - and I think it's actually also in your core documents elsewhere - it's the letter from the regulator from 2007. What the regulator was calling out was that in their opinion, at that time, you shouldn't have someone who was responsible for risk who's also responsible for managing a business line within an organisation. And if we come to where we are today in terms of good corporate governance, it's now mandated that this is an independent function, independent of all business and operations.
I think Mr. Merriman was saying that his head of risk, excuse me, was ... had access to the board and had access to management, if that person needed it. So is that an accurate reflection of the access you had in terms of decision making or making ... for you to make something aware? Could you bypass him I suppose is the question.
Ms Fidelma Clarke
I would ... I ... no, I don't believe so. I didn't have reason to.
Okay.
Ms Fidelma Clarke
Absolutely, but no, I would have, like everyone in middle management I suppose, had occasion to make presentations to the board but I was not a member of the executive nor was I member of the board at that time.
Okay and so do you think at the time that the regulator made this ... this was put forward by the regulator to the board, that the regulator was right to make this distinction, that there should be a separation of function?
Ms Fidelma Clarke
I think that corporate governance standards were changing.
Okay.
Ms Fidelma Clarke
I do think that they were right. I think, as Mr. Merriman said earlier today, he had a huge number of responsibilities. Thinking today, and we saw it emerging in 2007, but thinking today is it is beneficial for a bank to have someone who's independent of the business, to be able to challenge without any possible conflict, decisions that might be made.
So how quick was the EBS to react to these concerns then? Was it two years until your appointment that the ... this separation was made?
Ms Fidelma Clarke
So, no, one step was done in the meantime. So the first step that was done was that the commercial property business that was reporting to Mr. Merriman was changed to report to a different executive director in 2007 or early 2008.
Okay.
Ms Fidelma Clarke
But, as I've said in my own statement to you earlier, it was only in 2009 that we created a fully independent, dedicated, chief risk officer role in EBS.
Okay, thank you. Just moving on in the same book, up to page 109, this is the minutes of a board nominations committee meeting on 19 February 2009. On page 109 and turning over to page 110, and we have about two people who were invited not to reapply for re-election to the board. And just to comment on that in relation to Mr. Merriman, who was one of them, the minutes talk about accountability and about the perception of accountability. So in relation to Mr. Merriman, which was this in your view?
Ms Fidelma Clarke
It's a difficult question to ask me. As Mr. Merriman said, and I think as was well articulated in the 2008 accounts of EBS, the then chairman who had been chairman for two years set out that, given that the society was reporting losses for the first time, the society felt it needed to demonstrate accountability to its members and it wanted to do that both at board level and also at executive level. And as Mr. Merriman said earlier himself, he felt he was probably the right person from an executive level. Is any one person responsible for the decisions of the society? I don't believe so. The decisions and the risk decisions of the society and indeed any bank, are a collective responsibility, in my opinion, of the board and also of the full executive team.
Was it a mistake to let Mr. Merriman go?
Ms Fidelma Clarke
I'm not sure I'm qualified to talk about that not having been a member of either the executive or the board at the time. I know ... I heard Ms Tinney earlier say that she felt that his skills would have been useful to the society and certainly we heard from, I think, Mr. Merriman today to say that his preference would have been to stay. I think the overriding consideration was as a mutual, EBS wanted to demonstrate accountability to members first and foremost and it took the decision to put that consideration above other considerations.
Okay. And then, just that same meeting, the CEO of Haven, the subsidiary, was also invited not to stand for a second term, because essentially the business had failed?
Ms Fidelma Clarke
That is correct.
Can I just ask you about that then, why would the CEO of Haven take responsibility in that regard for a board decision to establish the subsidiary and it then to fail?
Ms Fidelma Clarke
I'm sorry, I don't quite understand your question, forgive me.
The question is: the CEO of Haven was invited not to stand because the business had failed, essentially, and there was no role for the CEO on the board any more. But the decision to set up Haven was a decision by the board.
Ms Fidelma Clarke
Well, every decision was a decision of the board. So I think this decision, in relation to whether or not to reappoint someone to the overall board, was taken in the context that, having launched a broker business and having then had to shut it down, that there was no requirement to have an additional executive director on the board of EBS from that time.
Okay. And just in relation to the joint venture that was meant to be happening, with Britannia Building Society, when did that cease to be a possibility?
Ms Fidelma Clarke
I'm not 100% sure of the time. But I think, from memory, it probably was the end of 2007 or in and around there.
So why did the EBS decide to continue with that venture? They decided to go into the idea that it would be split 50-50 with Britannia. Britannia pulls out because of the worries that they have-----
Ms Fidelma Clarke
Of course.
-----with the Irish market, yet the EBS continues with it.
Ms Fidelma Clarke
So the EBS at that stage had built up a broker-sourced book and also it had spent and invested a significant amount of money in building third-party servicing arrangements so that ... in order to service the book. And it did that based on, again, what I've read from the records, and what I was involved in from a risk perspective in reviewing, it did that in order to create a business that potentially could be sold at a later date. And, therefore, having arm's length third-party servicing would be a benefit to the model. Having invested in all of that, it was decided to continue with a view, in the future potentially, to having other options and potentially, selling it on, if appropriate, at some future date.
And what happened to Haven then?
Ms Fidelma Clarke
What happened to Haven was ... I think someone described it well at one time was, it was a good idea at the wrong time. And so the society made decisions on the basis of, it had very little credit to make available, that if it was making any credit available from 2008 and 2009, it was going to make it available to home owners and people who desired to home, own homes, in Ireland and to its core membership. So it ceased to provide credit to Haven. But the capability was held and actually AIB Bank now is using that capability in terms of its own broader business model, so Haven has ... effectively survived.
Right. And was there ever a cost put on the society for setting up Haven?
Ms Fidelma Clarke
I know there was a mention of a cost earlier on, there certainly was, but forgive me I won't be able to quote the number to you now.
Okay, that's fine, we can find it ourselves.
Ms Fidelma Clarke
Apologies.
Thank you. Thank you, Chair.
Thank you very much. Deputy Michael McGrath.
Yes, thank you, Chair, good evening, Ms Clarke. Can I just start by asking you to clarify your role before you became chief risk officer in January 2009.
Ms Fidelma Clarke
Before that, I had two roles. So I was appointed company secretary in July 2008, I had been deputy company secretary for a year prior to that. Separate to that, I was head of risk, responsible for, as I've mentioned earlier, producing enterprise risk reports for the organisation, supporting its risk committees, reviewing the risk disclosures of the society, helping conduct risk assessments-----
Okay. That was head of risk since when?
Ms Fidelma Clarke
I think that title came some time in 2004 or 2005.
Okay. Because I've been just looking at the EBS annual reports and I'm utterly confused, I have to say. For example, 2005, you are ... let me find it here now ... you're listed under "Executive Forum".
No, sorry, maybe go back to 2005. So you're under "Management and Head of Risk" in the 2005 report. The 2006 report has you under "Management" again and it just says "Risk". And then, 2007. "Executive Forum - Credit and Risk". Can you just clarify was there a change from '05, '06, '07?
Ms Fidelma Clarke
Of course. There was a change from '05-'06, so the executive forum was, I suppose, a management body that sat underneath the executive. So you had the board of EBS, we had the executive team and then you had, effectively, a senior management group and that's what the executive forum is. My responsibilities changed quite substantially over the period 2003-2008-----
Can we just stick with the structure for a moment? So you have the board of the building society. Beneath that, you had, was it group management board or executive team? Which is it?
Ms Fidelma Clarke
It was an executive team.
Executive team.
Ms Fidelma Clarke
It was called the management board.
Management board, yes.
Ms Fidelma Clarke
It was called that but that's what it was ... it was the executives.
That was what you would regard as the executive team.
Ms Fidelma Clarke
Exactly.
With the various ... a number of the directors. So, in 2006, for example, the chief executive, the director of operations in IT, director of people communications, finance director, director of membership business and so forth; so maybe six or eight people on the management or executive board.
Ms Fidelma Clarke
Correct. Some of whom are-----
And you only joined that in January 2009?
Ms Fidelma Clarke
That's right.
Okay. So then, in 2007, you're described as "Credit and Risk". So when did you get a role in terms of credit and what was that role?
Ms Fidelma Clarke
So, in 2006, the reporting line for the credit approval team was changed to me but I had no role, as I said earlier - and forgive me if I wasn't clear on the subject - I had no role in credit approval.
Okay. So can you just be specific and tell us what role you did have? You said a credit approval team reported to you from 2006?
Ms Fidelma Clarke
From a management perspective, exactly.
From a management perspective?
Ms Fidelma Clarke
Correct.
Okay. But that role for you didn't involve any input into lending decisions?
Ms Fidelma Clarke
None whatsoever.
And did you become head of credit then at any stage?
Ms Fidelma Clarke
I never was involved in any credit decision in the society, no.
But did you have a title of "Head of Credit"?
Ms Fidelma Clarke
The title "Head of Credit and Risk" stemmed from the fact that the management reporting line for the underwriting team was changed to me in 2006.
Okay. So the committee which Ms Tinney referred to earlier on - the credit committee, as such - which she says met once, to her knowledge, from mid-2005 to April 2007. Did you sit on that committee? Did that committee report to you?
Ms Fidelma Clarke
No.
Ms Fidelma Clarke
I'd no role whatsoever in the credit approval authority process from credit assessment, credit reporting, from submission to a management review committee, which we had a loan advances committee, or to the board, so none whatsoever.
Okay. So when you were assigned some credit functions, during 2006? And that's why it's reflected in the '07 annual report. What exactly were those functions in credit? You said it was from a management perspective.
Ms Fidelma Clarke
Yes. So the underwriting team reported to me from a management perspective ... so performance reviews and discussions and things like that; purely management.
Who did you report to?
Ms Fidelma Clarke
I reported throughout 2005 through to 2009 to Alan Merriman.
To the finance director.
Ms Fidelma Clarke
Who had multiple other responsibilities, absolutely, including risk.
And who else reported to him on credit decisions then? So the credit committee, let's say, which was making the decisions by incorporeal e-mails, it seems, most of the time. But ... so who reported from them? Who did they report to? Did they report to Mr. Merriman?
Ms Fidelma Clarke
No, well, they ultimately did report to Mr. Merriman because some of the credit underwriting team, they reported to me from a management perspective, and I reported to Mr. Merriman. Other people involved in the credit approval process in EBS were commercial lenders and they also reported to Mr. Merriman. But the credit approval process in EBS didn't run along management lines; it ran along a credit approval-----
Okay.
Ms Fidelma Clarke
-----structure.
It's incredibly convoluted.
Ms Fidelma Clarke
It is very difficult to explain to people, absolutely.
Yes, and I am sorry for trying to tease it out.
Ms Fidelma Clarke
No, no, I-----
I am trying to get it clear in my own mind, exactly what your role was and how credit decisions were made and how the chain of accountability-----
Ms Fidelma Clarke
Sure.
-----worked its way up to the executive team and then to the board, so-----
Ms Fidelma Clarke
It might be easiest to think of it as two separate lines.
Ms Fidelma Clarke
So there is a credit approval line that has a group of people who are designated as a credit approval forum. The people in a credit approval forum would be senior commercial and credit underwriting individuals.
Right.
Ms Fidelma Clarke
From a credit approval forum, it would move up to a loan advances committee. The loan advances committee was the senior management approval forum within the society and from the loan advances committee, the next level up was the board credit approval authority.
And was there any one person in charge of credit?
Ms Fidelma Clarke
No.
No, okay. So you had the various layers-----
Ms Fidelma Clarke
Exactly.
-----there with committees, and ultimately that fed up to Mr. Merriman from the finance ... as finance director.
Ms Fidelma Clarke
And others. There were other members of the executive who were part of the loan advances committee-----
Okay.
Ms Fidelma Clarke
-----so it didn't run along organisational structural lines. It ran along a management, senior management, board line, but it was wasn't reflected in the organisation's structure.
Okay. So your involvement in risk in 2005 and 2006, that didn't involve any input into the risk assessment of the credit strategy or of loan applications, for example.
Ms Fidelma Clarke
None whatsoever in relation to loan applications.
So what risks were you responsible for assessing?
Ms Fidelma Clarke
So in 2005 and '06, I would have been involved in looking at the Basel II programme for the bank, so I would have led out on that. In 2006, I would have had an increase in responsibility in relation to the treasury middle office-----
Right.
Ms Fidelma Clarke
-----who were substantially involved in liquidity monitoring and reporting, so I would have absorbed that responsibility. I was responsible for implementing an operational risk capability in EBS. I would have been responsible for evaluating the risk governance structure and ensuring that it was well articulated.
Okay.
Ms Fidelma Clarke
I would have been responsible for ensuring that all of the society's risk policies were documented. I would have been a member of the credit risk committee, not an approval committee ... so, sorry, if I confuse you further, but a credit risk committee.
What was the role of the credit risk committee?
Ms Fidelma Clarke
So the role of the credit risk committee was to monitor risk trends and to evaluate proposals for changes to policy within the strategy that the bank had agreed.
Right. And did the credit risk committee have an input into lending decisions?
Ms Fidelma Clarke
No, it was completely independent, so there was a credit approval process which was independent of risk.
Okay. I suppose what I am trying to understand is, you know, when a bank is assessing risk and you have a risk function-----
Ms Fidelma Clarke
Yes.
-----and the various annual reports, you know, do consider the issue of the risk of lending strategy, for example, I'm talking about, across the different banks and what I am trying to understand is how that becomes part, then, of the consideration of lending policy, how that feeds into lending policy and there doesn't seem to be any direct correlation.
Ms Fidelma Clarke
So I think it is true probably of smaller organisations that you have people who wear multiple hats and also you have organisation structures that run along a number of lines that aren't all hierarchical.
Okay. Senator Barrett already asked you about the tracker mortgage interest rate risk-----
Ms Fidelma Clarke
Yes.
-----and I think you addressed that issue, that you weren't on the board, that you had no input into that or assessing the risk from that. Just finally, Ms Clarke, you were with EBS since 1991 you said.
Ms Fidelma Clarke
Yes.
So you experienced EBS as a traditional mortgage lender-----
Ms Fidelma Clarke
Absolutely.
-----as a mutual owned by members and then you were there as it morphed into something entirely different. To what do you attribute that? What are the main causes of that transformation of the model of a building society into, effectively then, a lender to, you know, commercial property and development in land?
Ms Fidelma Clarke
Sure.
What are the main causes, in your view, and how much weight do you attach to the emergence of new entrants to the Irish banking sector and the role that they would have played?
Just give us your ... because you've a unique insight, having been there really throughout. What were the main driving factors that led to that change?
Ms Fidelma Clarke
So I'd say two, in summary.
Okay.
Ms Fidelma Clarke
So the first was the availability of credit and wholesale funding. That just pumped money into the economy. And the second one is excessive competition. And probably-----
Led by the Irish banks or led by the foreign banks who came in?
Ms Fidelma Clarke
I think foreign banks entering made Irish banks respond, which in turn put pressure on other Irish players, which led to everyone moving down a certain road.
And the fear was then "We'll be left behind, we have to join the game".
Ms Fidelma Clarke
I think ... I believe the view of the board at the time very much was absolutely ... "Our business, our raison d'etre, is to provide money to people in Ireland to buy their home and if everyone else is moving down a road and we don't move with them, we will stop being a relevant provider of mortgages in Ireland."
Thank you.
Ms Fidelma Clarke
Thank you.
Thank you very much, Deputy McGrath. I'm going to wrap things up with just a few questions myself, Ms Clarke.
Ms Fidelma Clarke
Of course.
And I'll invite just some final questions from leads and so forth. Ms Clarke, Haven, the broker market business of EBS, was a significant change for EBS.
Ms Fidelma Clarke
Yes.
And you ... I just reference, in the particular document, the "Broker Market Entry" here ... it's the "Board Update" document. It's in the core documents. Just in reference to that, did the board, in you view, have a sufficient understanding of what it was getting into and what was your view of the impact of this business on EBS later on?
Ms Fidelma Clarke
I'm sorry, I just didn't hear the end of your question.
Sorry. Haven, the broker market of EBS, was a significant change for the EBS. And the board was updated in '05 around that. But did the board, in your view, have a sufficient understanding of what it was getting into and what was your view of the impact of this business on EBS later on?
Ms Fidelma Clarke
I can't speak for the board and I wasn't in the board room.
Sure.
Ms Fidelma Clarke
The ... I think the driver, based on what I've read and what you have too, was that, I think, by 2005-2006, 40% of all mortgage lending was being done through brokers.
Okay.
Ms Fidelma Clarke
So the question was did you want to operate in 60% of a market or 100% of a market. And I think that was the primary driver behind the board's decision to ... to progress with a broker channel.
Okay. So Haven ... the Haven model obviously gave you more high street ... high street outlets, a greater footprint across the country. Is that what you're saying, yes?
Ms Fidelma Clarke
It would give you greater access to all of the mortgage lending that was being done. It wouldn't necessarily have given you greater high street presence because, of course, brokers were independent. So-----
But a street presence, I'd assume.
Ms Fidelma Clarke
Certainly a street presence-----
Sure.
Ms Fidelma Clarke
-----or an office presence anyway. So it certainly ... but, at its heart, it gave ... it gave the society access to 100% of a mortgage market where they, at that time, only had access to 60%.
And on the general ... so it became 40% of the ... of your new residential market.
Ms Fidelma Clarke
No. I think ... what I'm referring to is ... I believe by 2006, according to the core documents and the research that must have been done by the business at the time, 40% of mortgage lending was being done through brokers.
Okay. That's on the aggregate actual figure.
Ms Fidelma Clarke
In the aggregate. So if you weren't involved in the broker business, you were only operating in 60% of the market.
As somebody whose job was to assess risk, did that have the same level of risk as the business and the risk assessments that you were doing or did it create less or more stringent assessment processes of new applicants?
Ms Fidelma Clarke
So it was decided that the credit policy of ... certainly it was the intent, again, based on the documentation here, that the credit policy of the society would effectively be the same for the broker business. But there was one very important distinction and that was that the society was prepared to pay for mortgage indemnity insurance for its core business, but it was not prepared to pay for mortgage indemnity insurance for its broker business. And, therefore, the loan-to-value exposures that it would entertain for broker business were different.
Okay. So when the indemnity came through the broker model, did the broker deal with the mortgage insurance indemnities themselves?
Ms Fidelma Clarke
I don't believe brokers put any insurance in place. They wouldn't have needed to. It was the society itself that was putting the insurance in place for everyone who took out a mortgage with it.
Just explain that to me.
If a person, myself let's say instance, was to walk into EBS, the way the package would be put together is I would have to have the indemnity insurance before you would sign off on my mortgage.
Ms Fidelma Clarke
If it was the 1990s, that would have been the case. In the 2000s that was not the case.
I didn't need to get insurance from you.
Ms Fidelma Clarke
You wouldn't have even known that we were insuring your loan necessarily because we did not ask you to pay for the insurance; we paid for the insurance.
As part of the product.
Ms Fidelma Clarke
As part of the society's risk-mitigation plan.
Yes. If when a mortgage was taken out through EBS through a broker and the broker went to you and said, "Mr. Lynch's, here is his portfolio, his P60 and all the rest of it", how would the indemnity issue be managed then?
Ms Fidelma Clarke
There wouldn't have been one because the offering that the broker would have been have been able to make to you would have been for a lower loan to value where we felt we didn't need to put insurance in place.
So there was a difference in the loan to value between what the broker was able to offer and what you were able to offer directly.
Ms Fidelma Clarke
Correct.
Okay. So on no occasion did the loan to value equalled what you were giving that brokers were actually presenting.
Ms Fidelma Clarke
No, to the best of my knowledge, no.
Okay, all right, thank you.
I just want to move on to some matters relating to the lending period from 2003 onwards and just present a number of documents to you that are in your pack. EBS increased commercial and development lending significantly in the period from 2003 onwards. I'll just go through some of the slides that we have here. The first one here is actually this one that went up. Okay, you see at the top of the screen there, Ms Clarke, "A self assessment process has been completed on commercial property lending and 29 risks were identified, one of which was external. There are 6 risks that are considered high in nature". It then goes through various bullet points. Just noting the first two of them, "Concentration risks on large exposures which could provide a bad debts exposure or large redemptions". And, secondly, "Making losses due to bad lending decisions".
I'll just move on to the next slide, which the 005. What we have here at the end of the page is a whole load of product offering by the society and just how ... and the upper slide ... a demonstration of how the whole mortgage market was moving in 2006.
On to the next slide, which is 006, the highlighted section there is "Change the Stress Test on Interest Rate" and how the current policy, which was a stress test at the standard variable rate in the next column of +2% to move up to a 6% that you were exceeding to maybe be 1% above it.
And the on to... I'll just skip on to another couple of slides. This is from 2005 and it says 100% mortgages move from pilot to permanent solution. EBS are considering a number of options round 100% mortgages at the time. Option 1 is "Increase Price" and that is not considered an option. As you can see this is in red, because consideration as "Market pricing would make it difficult to charge a higher rate for this product. Most lenders are charging between 3.1% and 3.25% for this product", that's some less the standard variable rate. There is 2, "Reduce Cost", which is "Genworth have indicated that they will not reduce pricing for this cover. We may be able to negotiate some reduction base lending to state guaranteed employment sector; not agreed at this juncture."
I just want to stop there for a moment. What was Genworth's problem?
Ms Fidelma Clarke
When you say "problem", it's ... I think that reference is that Genworth had a price for its product and there was no reason for it to want to reduce it.
Were Genworth your indemnity company? Were they?
Ms Fidelma Clarke
They were, yes.
Indeed. So were ... where were Genworth coming from this? Were they seeing that the product was getting out of control or that they want ... that they had concerns with regard to how much they were now exposed with regard to the risk? Where were Genworth coming from?
Ms Fidelma Clarke
No, they weren't. I think this is a reference to them ... would they have reduced the price for an existing product that they had?
Sure.
Ms Fidelma Clarke
And the answer to that was it's unlikely.
And did they?
Ms Fidelma Clarke
But in terms of providing insurance for 100% mortgages, they did provide insurance for 100% mortgages-----
Yes.
Ms Fidelma Clarke
-----and the society, certainly the risk function, wouldn't have supported a 100% mortgage offering without insurance in place.
Yes, okay. Did Genworth's costs go up, down or remain the same?
Ms Fidelma Clarke
... very substantially.
They went up substantially, did they?
Ms Fidelma Clarke
Yes.
How much?
Ms Fidelma Clarke
I'm sorry I won't be able to give you a number for that.
10%, 20%? I'm not looking at the sum.
Ms Fidelma Clarke
Well, you see it would depend on what the take-up of the additional-----
On 100% mortgages where did Genworth go?
Ms Fidelma Clarke
I'm ... I would be ... I couldn't give you a number.
Okay, I won't pin you to a figure but you will say substantially, yes?
Ms Fidelma Clarke
Oh, absolutely.
Okay.
Ms Fidelma Clarke
You were buying a higher amount of insurance, if I could just explain it to you for one moment. So at that time, EBS was buying insurance cover for the portion of a loan between 85% and 92% or 80% to 92% if people were borrowing to the maximum of what was allowed of them. What we then did was to say is if we reluctantly are going to offer 100% mortgage, we'll now need to insure from that 85% to 100%, so you're buying a bond for a larger amount of insurance-----
Indeed.
Ms Fidelma Clarke
-----so, absolutely, the cost was higher.
And given that Genworth were the tendered or the option of insurer that you actually had, they were the only company-----
Ms Fidelma Clarke
They were our insurer.
-----you were dealing with. They were your partner in this regard.
Ms Fidelma Clarke
Yes.
Did Genworth at any time express concerns with what was coming in through Haven and other brokers in regard to the overall institution?
Ms Fidelma Clarke
They ... well, they would have had no exposure to that because they weren't providing any insurance for that part of the business.
Okay, all right. And then I'll just go to the third column, which is "Increased Return (Introduce an Unsecured Deposit Bridging Loan) ... We currently offer a deposit loan through GE Money." What is GE Money, by the way?
Ms Fidelma Clarke
It was just the name of a company.
Okay. "We are proposing offering deposit bridging product through EBS, a higher rate to increase return on capital. There are system implications and therefore we expect delivery in Q2 in 2006." That's the recommended option. Was that taken?
Ms Fidelma Clarke
It was, I believe, taken, absolutely.
Okay. All right. Can I ask you, Ms Clarke, just on the broader scheme of how the model was developing during then, did the board understand the risks attached to such lending and what could happen should it go wrong?
Ms Fidelma Clarke
I'm sorry, you're asking me, in general, for the period?
Yes, in the regard, EBS increased commercial and development lending significantly in the period from 2003 onwards. Did the board understand the risks attached to such lending and what could happen should it go wrong?
Ms Fidelma Clarke
So it's a question that I'm afraid my response will be speculation rather than witness-----
Okay.
Ms Fidelma Clarke
-----because I wasn't-----
Sure.
Ms Fidelma Clarke
-----at the board meetings where it was discussed. I wasn't a member of the board-----
All right, okay.
Ms Fidelma Clarke
-----and nor was I a member of the executive making any recommendations.
Were you familiar with any concerns at board level?
Ms Fidelma Clarke
Not at that time, no.
At what time? Was there a concern you were aware of, if any?
Ms Fidelma Clarke
Oh, I think from the end of 2007 and the beginning of 2008, of course.
You were familiar with board concerns at that time.
Ms Fidelma Clarke
I would have been more familiar with it because, as deputy company secretary from 2007, I would have been in the boardroom.
And was that reflected in the overall EBS book or was it inclusive of the subsidiaries in the brokers and all the rest that you were including?
Ms Fidelma Clarke
Yes, the broker business only launched in 2007 if memory serves, so it was closed off pretty quickly in 2009. There's no question, I believe, that there was concerns about commercial property lending, which was reduced in the second half of 2007 and, as the committee is aware, ceased altogether for land and development in March 2008 and then in July 2008 for all commercial property lending.
In terms of the strategy that the concerns were raised that you were hearing about around 2007, was the strategy itself by your observation one driven entirely by competition or was it other factors? This is the strategy to grow.
Ms Fidelma Clarke
I suppose the strategy decisions had been taken long before that, so those strategy decisions had been taken in 2002 and 2005, but certainly from my observations from 2007, mid-2007 on, there was absolutely very clear, considered, evaluation of the environment, changes in the environment and, you know, evaluations as to what could we do to try to mitigate risk and, in particular, I would say if I may-----
Sure, yes.
Ms Fidelma Clarke
Those were reflected in decisions to cease land and development lending early-----
Okay.
Ms Fidelma Clarke
-----and they were also reflected in the fact that the society set up task forces, and they were called task forces, in August-September 2008, to try to get its hands around and its arms around the potential for distressed assets both on the residential and commercial book.
And coming back then to 2003, these are the difficulties in 2007 that arose-----
Ms Fidelma Clarke
Yes.
-----but back in 2003 was the strategy driven by competition to engage, like I have demonstrated, some of the advertising that was going on? Was the strategy initially one based upon competition in the market?
Ms Fidelma Clarke
I believe the strategy was to remain a relevant mortgage provider in Ireland and retain the society's mutual status. I believe that was its strategy. I believe it made ... policy changes were made, absolutely, in support of that strategy but at its heart, the strategy of the society was to continue to provide mortgages to people in Ireland and to remain a relevant mortgage provider.
Okay, and very, very finally, just with regard to the whole process itself, how aware were you of any skill problems with EBS, who had little previous exposure to commercial lending?
Ms Fidelma Clarke
Well, certainly on the basis that I think one of the recommendations in support of the decision to approve the "Step Up" strategy on land and development in 2005 was the recruitment of people with expertise and experience in land and development lending indicated that those skills were not in the society. I think I have made reference earlier to the fact that in the 1990s, five or six of the executives and most senior people, including the chief executive officer, were ex-ICC people. They had a huge amount of expertise in, in commercial lending. I think one of the lessons learned and, you know, one of the things we can see now looking back is that because Ireland went through 15, 20 years of quite a benign economic climate, the people who'd, you know, cut their teeth in credit by lending and maybe making losses, all of those people had passed through the system by the time, you know, the mid-90s had come and that was reflected very much, I believe, in the fact that when we were trying to get our hands around the extent of this problem in 2008, 2009, 2010, we had to bring people back out of retirement from other organisations to help us or people over from England to help us to help us get our hands around how do we go about managing that.
The skillset was gone.
Ms Fidelma Clarke
The skillset, exactly, had been gone.
Thank you. I, just, Senator O'Keeffe has just indicated once to me. Just briefly, Senator, and then I am going to bring in the wrap-up.
Thank you, Ms Clarke. I appreciate that you have said that you were not involved at all in credit and I just wondered ... Ms Tinney's observations today, the detail she gave about how those final decisions were made, obviously that is not something you knew about.
Ms Fidelma Clarke
I wasn't involved in it at all, no.
Exactly. But she does go on, she does talk about the sort of feeding frenzy as the banks - I am quoting - "clambered over one another to get a piece of the action". I am just wondering, given that you were in the society at that time and you were working there for a long time-----
Ms Fidelma Clarke
Absolutely.
How would you, how would you describe that? Do you think that that's a fair description of what was going on?
Ms Fidelma Clarke
I think I would and have described it as excessive competition. Absolutely there was excessive competition in the market, which led to downward pressure on the society's core business, which led it to take decisions about what it could do to remain viable, which led it to, I believe, agree to a proposal to step up lending to a land and development sector at a time that, it transpired, was the very height of the market, unknown at the time. That is how I would describe it.
And then finally, what, if any, was your relationship with the Financial Regulator's office either in your time as the head of credit operation risk and then as the chief risk officer, because obviously we have heard testimony about the fact that, you know, they had very few people? They had two people, maybe, across two institutions, so do you consider that you would have been adequately regulated or do you think, do you know, that really, in fact, you only ever heard from them on very odd occasions?
Ms Fidelma Clarke
I would have had an ongoing interaction with the Financial Regulator, which would have increased very substantially when I became company secretary and thereafter when I became chief risk officer. So, absolutely, a lot of interaction.
But before that ... before that, I suppose, what ... my interaction with them would have been more on the ... where they came in to do an inspection and then seeing what we would ... what we would respond to them on and helping pull that response together. One of the documents we looked at earlier on was decisions in relation to credit policy from 2006 and, actually, at that time we recommended that we share our proposed changes with the regulator and we would have often invited the regulator in or ... at reasonable intervals if we felt there was something that would be of value for them to know. I do believe it was a ... from what I could see, it was, you know, there were small teams in terms of inspection teams. I think in terms of the broader structure of the Financial Regulator from top level through middle level through the inspection teams ... you know, it's hard for me to comment on the upper levels because I would have had no interaction with them.
Would you have had an inspection once a year or once every two years or-----
Ms Fidelma Clarke
It ... I believe once every two or three years.
Once every-----
Ms Fidelma Clarke
Two or three years.
Thank you.
Senator Barrett, conclusion?
Thank you very much. What was the fee for a non-executive director, say, in a recent year?
Ms Fidelma Clarke
I know it will have been reported in the annual report and accounts so that's probably the best place to go for it but it was modest.
Yes, and how much were the ... what was the audit fee then by comparison?
Ms Fidelma Clarke
I'm ... I wouldn't like to ... I wouldn't like to quote a number because I'm afraid I don't know but we could certainly provide it to you if ... of help.
Because I'd contrast ... I mean, did the auditors report anything of what we've been discussing in these number of days about the EBS?
Ms Fidelma Clarke
I think Dargan Fitzgerald appeared in front of the committee and commented that, in his opinion, their control environment was reasonable, certainly for the time that he was the auditor. And as I mentioned earlier, had the society's controls been very poor, I believe it would have been picked up by internal audit, by external audit and also by the external firms that came in to evaluate the bank's adherence to its own policies and procedures.
And yet we saw a company, you know, be sold for a ... €1-----
Ms Fidelma Clarke
Yes.
-----after all these audits. I'm surprised, as a non-auditor, that they weren't better informed about what was happening to the company when they were auditing the books.
Ms Fidelma Clarke
And, I suppose, they were auditing the production of the accounts and they were auditing the control environment. I think what we're seeing is there were no matters of enormous significance coming through from that. I think you ... there's an extract in one of the booklets from the auditor findings at the end of, I believe, 2006 or 2007. I don't think that's what brought the demise of EBS as an independent organisation.
In other areas of commercial activity, would auditors draw the attention of a shopkeeper that your newspaper stand's not doing well but you're doing really well on ice cream or do they just add up numbers and head off on their merry way, kind of thing?
Ms Fidelma Clarke
I wouldn't be an expert on the auditing profession outside of the reviews that I've been involved in in banking. Certainly, the auditors that I've dealt with - and I've dealt with almost all of the firms, one way or another, in my time - take a ... take a very rigorous and robust approach to evaluating and signing off on financial institutions' accounts.
The contrarians. This organisation seems have been particularly anxious to shut down contrarians. We've two case studies in our papers. One was here today and the other ... why was that? Would they not have diversity of ideas, good discussions and so on?
Ms Fidelma Clarke
I can't answer for the board of the society. I'm sorry. I don't think it would be appropriate.
Thank you very much. Thank you, Chair.
Okay, that's fair ... that's fair. I'm going to bring matters to a conclusion. Ms Clarke, if there's anything you'd like to say by means of closing comment or any remark, I'll take that if you wish.
Ms Fidelma Clarke
Given the lateness of the hour, I won't beg your indulgence except to say that I do believe the work of this committee is extremely important and I wish you every success.
With that said, Ms Clarke, thank you very much. In doing so, I'd also like to thank you for your participation today. Our apologies for delaying you with our late start and also thank you for your engagement with the inquiry.
With that said, I propose that the witness be excused. We will suspend for five minutes. Thank you.